UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 2-17039
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
COLORADO 84-0467208
(State of Incorporation) (I.R.S. Employer Identification Number)
850 EAST ANDERSON LANE
AUSTIN, TEXAS 78752-1602 (512) 836-1010
(Address of Principal Executive Offices) (Telephone Number)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: EXEMPT
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days:
Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ x ]
The aggregate market value of the common stock (based upon the closing price)
held by non-affiliates of the Registrant at March 14, 2000, was approximately
$153,136,000.
As of March 14, 2000, the number of shares of Registrant's common stock
outstanding was: Class A - 3,300,728 and Class B - 200,000.
PART I
ITEM 1. BUSINESS
(a) General Development of Business
Life Insurance and Annuity Operations
National Western Life Insurance Company (hereinafter referred to as "National
Western," "Company," or "Registrant") is a life insurance company, chartered
in the State of Colorado in 1956, and doing business in forty-three states and
the District of Columbia. National Western also accepts applications from and
issues policies to residents of various countries in Central and South
America, the Caribbean, and the Pacific Rim. Such policies are accepted and
issued in the United States. The Company's operations are generally segmented
as follows: domestic life insurance, international life insurance, and annuity
operations. During 1999, the Company recorded approximately $479 million in
premium revenues, universal life, and investment annuity contract deposits.
New life insurance issued during 1999 approximated $1.6 billion, and the total
amount in force at year-end 1999 was $9.7 billion. As of December 31, 1999,
the Company had total consolidated assets of $3.7 billion.
Competition: The life insurance business is highly competitive, and National
Western competes with over 1,500 stock and mutual companies. Best's Agents
Guide To Life Insurance Companies, an authoritative life insurance
publication, lists companies by total admitted assets, net premiums written,
and life insurance in force. As of December 31, 1998, the most recent date for
which information is available, National Western ranked 153 in total admitted
assets, 179 in net premiums written, and 226 in life insurance in force among
over 1,500 life insurance companies domiciled in the United States.
Life insurance companies compete not only on product design and price, but on
policyowner service and marketing and sales efforts. National Western
believes that its products, premium rates, policyowner service, and marketing
efforts are generally competitive with those of other life insurance companies
selling similar types of insurance. Mutual insurance companies may have
certain competitive advantages over stock companies in that the policies
written by them are participating policies and their profits inure to the
benefit of their policyholders. The Company no longer writes participating
policies, and such policies represent a minor portion of the Company's life
insurance in force at December 31, 1999.
There has been an ongoing consolidation of companies within the life insurance
industry in recent years. It appears this consolidation process will continue
as entities acquire other insurance companies, blocks of insurance business,
or even related businesses. The reasons for the consolidations are numerous
and include, among others, strengthening market share, diversifying into other
lines of insurance, improving marketing and distribution channels, and
economies of scale. For whatever reasons, this consolidation trend in the
insurance industry will likely continue to affect competition.
In addition to competition within the life insurance industry, National
Western and other insurance companies face competition from other industries.
Banks, brokerage firms, and other financial institutions also market insurance
products or other competing products such as mutual funds. The continued
growth and popularity of mutual funds and equity holdings has attracted large
amounts of investment funds. Many mutual funds also allow tax deferred
features through individual retirement accounts, 401(k) plans, and other
qualified methods which compete directly with the Company's tax deferred
annuity products.
In 1999 Federal legislation was enacted, the Financial Services Modernization
Act, which allows affiliations of banks and insurance companies through
holding companies. Although this legislation does not allow a bank to engage
in insurance underwriting through a subsidiary of the bank, it could
significantly affect competition through increased involvement of banks in the
marketing and distribution of insurance products. Insurance companies that
are significantly larger than National Western may have a competitive
advantage, as they may be able to form affiliations more easily with large,
dominant banking institutions.
Along with the potential increased competition resulting from the new
legislation, technology and the Internet are affecting how life insurance
companies do business. As consumers become more comfortable with purchases
and transactions over the Internet, insurance companies will have to evaluate
the extent to which they need to integrate the Internet into their marketing
and distribution of products. While insurance products can be complex and
typically require more conventional sales methods, certain insurance products
are more like commodities which can be readily sold over the Internet.
Insurance companies that are able to address the needs of consumers through
the use of current technologies and the Internet may have competitive
advantages over those companies that are not able to integrate new
technologies into their businesses.
Financial strength ratings of insurance companies also directly affect
competitive positions within the industry. Most insurance companies obtain
one or more ratings from independent rating agencies. National Western is
rated "A- (excellent)" by A.M. Best Company. A.M. Best's ratings evaluate
factors affecting the overall performance of an insurance company in order to
provide an opinion of the Company's financial strength, operating performance,
and ability to meet its obligations to policyholders. Ratings range from A++
(superior) to F (in liquidation). The "A-" rating identifies companies which
have, on balance, demonstrated excellent financial strength, operating
performance, and market profile when compared to the standards established by
A.M. Best. These companies, in the opinion of A.M. Best, have a strong
ability to meet their ongoing obligations to policyholders. National Western
has also been assigned an "A+ (strong)" by Standard and Poor's Corporation. A
Standard & Poor's rating is an opinion of the financial security
characteristics of an insurance organization with respect to its ability to
pay under its insurance policies and contracts in accordance with their terms.
Ratings range from AAA (extremely strong) to CC (extremely weak) and R
(regulatory action regarding solvency).
In general, the above-described ratings are developed and based on factors
that are of more importance to policyholders, agents, and marketing
organizations than to investors. The use of these financial strength ratings
are very important in the marketing efforts for insurance companies. While
upgrades in ratings could be very positive for marketing efforts, declines in
ratings could adversely affect product sales and persistency of policies
currently in force.
Agents and Employees: National Western has 239 employees at its principal
executive office. Its insurance operations are conducted primarily through
broker-agents, which numbered 8,774 at December 31, 1999. The agency
operations are supervised by Senior Vice Presidents of domestic and
international marketing. The Company's agents are independent contractors who
are compensated on a commission basis. General agents receive overriding
first-year and renewal commissions on business written by agents under their
supervision.
Many of the domestic marketing agents are contracted through independent
marketing organizations. These organizations have well developed agent
networks and extensive experience, financial resources, and success in
marketing life insurance and annuity products. The international marketing
broker-agents are a significantly smaller group than the domestic force.
However, these broker-agents have been carefully selected and are proven
producers, many of whom have been with the Company for 20 or more years.
A significant portion of the Company's universal life and investment annuity
contracts were sold through three marketing agencies in recent years. Combined
business from these agencies accounted for approximately 29% of total direct
premium revenues and universal life and investment annuity contract deposits
for 1999. These same three marketing agencies accounted for 26% and 17% of
total direct premium revenues and universal life and investment annuity
contract deposits for 1998 and 1997, respectively.
Types of Insurance Written: National Western offers a broad portfolio of
individual whole life, universal life and term insurance plans, endowments,
and annuities, including standard supplementary riders. Annuities sold include
flexible premium deferred annuities, single premium deferred annuities, and
single premium immediate annuities. These products can be tax qualified or
nonqualified annuities. Although the Company sells equity-indexed annuities,
no variable life or annuity products are currently offered. Except for a
small employee health plan and a small number of existing individual accident
and health policies, the Company does not write any new policies in the
accident and health markets. Distributions of the Company's direct premium
revenues and deposits by types of products are provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Investment annuities:
Single premium deferred $ 129,430 131,716 195,752
Flexible premium deferred 229,623 278,605 32,702
Single premium immediate 30,510 20,682 12,533
Total annuities 389,563 431,003 240,987
Universal life insurance 69,906 69,647 65,862
Traditional life and other 19,154 20,237 21,506
Total direct premiums collected $ 478,623 520,887 328,355
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
First year and single premiums:
Investment annuities $ 375,406 412,443 218,203
Life insurance 20,479 22,145 19,045
Total first year and single 395,885 434,588 237,248
Renewal premiums:
Investment annuities 14,157 18,560 22,784
Life insurance 68,581 67,739 68,323
Total renewal 82,738 86,299 91,107
Total direct premiums collected $ 478,623 520,887 328,355
</TABLE>
The underwriting policy of the Company requires medical examination of
applicants for ordinary insurance in excess of certain prescribed limits.
These limits are graduated according to the age of the applicant and the
amount of insurance desired. The Company has no maximum for issuance of life
insurance on any one life. However, the Company's general policy is to
reinsure that portion of any risk in excess of $200,000 on the life of any one
individual. Also, following general industry practice, policies are issued on
substandard risks.
Geographical Distribution of Business: For the year 1999, insurance and
annuity policies held by residents of the State of Texas accounted for 10% of
premium revenues, universal life, and investment annuity contract deposits
from direct business, while policies held by residents of Ohio, California,
and Michigan accounted for approximately 10%, 8%, and 7%, respectively. All
other states of the United States accounted for 51% of premium revenues and
deposits from direct business. The remaining 14% of premium revenues and
deposits were derived from the Company's policies issued to foreign nationals,
primarily in Central and South America, almost all of which was for individual
life insurance. A distribution of the Company's direct premium revenues and
deposits by domestic and international markets is provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
United States domestic market:
Investment annuities $ 385,019 429,309 239,338
Life insurance 28,435 30,878 31,248
Total domestic market 413,454 460,187 270,586
International market:
Investment annuities 4,544 1,694 1,649
Life insurance 60,625 59,006 56,120
Total international market 65,169 60,700 57,769
Total direct premiums collected $ 478,623 520,887 328,355
</TABLE>
Approximately 68% of the direct life insurance premiums collected during 1999
was sold through international insurance brokers acting as independent
contractors. Foreign business is solicited by various independent brokers,
primarily in Central and South America, and forwarded to the United States for
acceptance and issuance. The Company maintains strict controls on the business
it accepts from such foreign independent brokers, as well as its underwriting
procedures for such business. Except for a small block of business, a
currency clause is included in each foreign policy stating that premium and
claim "dollars" refer to lawful currency of the United States. Traditional
and universal life products are sold in the international market to
individuals in upper socioeconomic classes. By marketing exclusively to this
group, sales typically produce a higher average policy size, strong
persistency, and claims experience similar to that in the United States.
Investments: State insurance statutes prescribe the nature, quality, and
percentage of the various types of investments which may be made by insurance
companies and generally permit investments in qualified state, municipal,
federal, and foreign government obligations, corporate bonds, preferred and
common stock, real estate, and real estate first lien mortgages where the
value of the underlying real estate exceeds the amount of the mortgage lien by
certain required percentages.
The following table shows the distribution of the Company's investments:
<TABLE>
<CAPTION>
December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Securities held to maturity 66.2% 64.7% 65.2% 67.6% 62.6%
Securities available for sale 22.1 23.4 22.6 19.0 22.9
Mortgage loans 5.7 5.6 6.3 7.0 7.3
Policy loans 3.6 4.0 4.7 5.1 5.6
Other investments 2.4 2.3 1.2 1.3 1.6
Totals 100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
The following table shows investment results for the periods indicated:
<TABLE>
<CAPTION>
Net Realized Unrealized
Invested Investment Gains (Losses) Gains
Year Assets Income (A) On Investments (Losses) (B)
(In thousands)
<S> <C> <C> <C> <C>
1999 $ 3,250,679 242,980 4,481 (22,412)
1998 3,138,084 233,844 2,384 2,218
1997 2,877,340 217,446 (1,588) 3,929
1996 2,770,931 214,302 1,612 (5,342)
1995 2,624,596 201,816 (2,415) 17,394
<FN>
Notes to Table:
(A) Net investment income is after deduction of investment expenses, but
before realized gains (losses) on investments and Federal income taxes.
(B) Unrealized gains and losses, net of effects of deferred policy acquisition
costs and taxes, relate only to those investment securities classified as
available for sale.
</FN>
</TABLE>
Regulation: The Company is subject to regulation by the supervisory agency of
each state or other jurisdiction in which it is licensed to do business. These
agencies have broad administrative powers, including the granting and
revocation of licenses to transact business, the licensing of agents, the
approval of policy forms, the form and content of mandatory financial
statements, capital, surplus, and reserve requirements, as well as the
previously mentioned regulation of the types of investments which may be made.
The Company is required to file detailed financial reports with each state or
jurisdiction in which it is licensed, and its books and records are subject to
examination by each. In accordance with the insurance laws of the various
states in which the Company is licensed and the rules and practices of the
National Association of Insurance Commissioners, examination of the Company's
records routinely takes place every three to five years. These examinations
are supervised by the Company's domiciliary state, with representatives from
other states participating. The most recent completed examination of National
Western covered the five-year period ended December 31, 1997. The examination
was conducted by the Colorado Division of Insurance. A final report
disclosing the examination results was received by the Company in February,
2000. The report contained no financial adjustments and no issues which had
an impact on the operations of the Company. However, the report did include
recommendations for improvements in the Company's facultative reinsurance
documentation and disaster recovery plans.
Regulations that affect the Company and the insurance industry are often the
result of efforts by the National Association of Insurance Commissioners
(NAIC). The NAIC is an association of state insurance commissioners,
regulators, and support staff that acts as a coordinating body for the state
insurance regulatory process. The NAIC and state insurance regulators
periodically re-examine existing laws and regulations. The NAIC has recently
completed a comprehensive process of codifying statutory accounting practices
and procedures. Other than specific individual state laws, the codification
results will be the only source of prescribed statutory accounting practices.
The Company's state of domicile, Colorado, is currently in the process of
adopting the new codified statutory accounting practices and procedures.
Insurance companies must adopt these new statutory accounting practices in
2001, which may result in significant changes to existing practices used in
the preparation of statutory financial statements. The Company will perform a
review of the entire newly codified statutory accounting practices and
procedures during 2000. This review process may not be fully completed until
the latter portion of the year. Based on a preliminary review, National
Western does not anticipate a material impact to its capital and surplus
position as a result of implementation of the new prescribed statutory
accounting procedures.
Also of particular importance, the NAIC has established risk-based capital
(RBC) requirements to help state regulators monitor the financial strength and
stability of life insurers by identifying those companies that may be
inadequately capitalized. Under the NAIC's requirements, each insurer must
maintain its total capital above a calculated threshold or take corrective
measures to achieve the threshold. The threshold of adequate capital is based
on a formula that takes into account the amount of risk each company faces on
its products and investments. The RBC formula takes into consideration four
major areas of risk which are: (i) asset risk which primarily focuses on the
quality of investments; (ii) insurance risk which encompasses mortality and
morbidity risk; (iii) interest rate risk which involves asset/liability
matching issues; and (iv) other business risks. The Company has calculated
its RBC level and has determined that its capital and surplus is significantly
in excess of the threshold requirements. Additionally, it is anticipated that
the Company's RBC level will remain significantly in excess of threshold
requirements after implementation of the new statutory accounting procedures
as described above.
In addition to RBC requirements, insurance companies are also monitored by the
NAIC through its Insurance Regulatory Information System (IRIS). IRIS
consists of two systems, the original IRIS system and the Financial Analysis
and Solvency Tracking System. The original IRIS consists of two phases. The
first is a statistical phase during which key financial ratio results are
generated from the NAIC data base, which contains financial information
obtained from insurers' statutory annual statements. The second, an
analytical phase, is a review of the annual statements and financial ratios by
experienced financial examiners. The ratios of companies are compared against
usual ranges to identify trends or areas requiring additional review or
analysis. All of the Company's ratios for 1999 were within usual ranges, with
one exception. National Western exceeded a ratio which measures the
percentage change in product mix from 1998 to 1999. Based on statutory
financial statements, the Company's 1999 change in product mix reflected a
change which exceeded the IRIS threshold. Although this ratio was slightly
above the IRIS threshold, it merely reflects the Company's increased sales of
group annuities as opposed to individual annuities in 1999 compared to the
previous year.
The RBC regulation and IRIS system developed by the NAIC are examples of its
involvement in the regulatory process. Additionally, new regulations are
routinely published by the NAIC as model acts or model laws. The NAIC
encourages adoption of these model acts by all states to provide uniformity
and consistency among state insurance regulations.
While the insurance industry is primarily regulated by state governments,
Federal regulation also affects the industry in various areas such as pension
regulations, securities laws, and Federal taxation. For example, annuity and
insurance products have certain income tax advantages for policyholders
compared to other savings investments such as certificates of deposits and
taxable bonds. Unlike many other investments, increases in the contract
values of annuity and life insurance products are not subject to income
taxation until these values are actually paid to and received by the
policyholder. At various times, the Federal government has considered
revising or eliminating this income tax deferral. Such a change, if ever
enacted, could have an adverse effect on the Company's ability to sell certain
annuity and insurance products.
Additionally, current tax law reflects an individual capital gains tax rate of
20%. Because many consumers purchase annuities and life insurance for their
tax deferral advantages over other investments or retirement products, a
reduction in the Federal income tax rate for capital gains could diminish the
appeal of life and annuity products and increase the attractiveness of
competing products. Although National Western has not experienced any negative
impact on its sales, changes could have the potential to adversely impact
Company and industry wide sales.
There have also been various proposals in past years to modify the existing
Federal income tax laws. Some proposals outline measures to implement a "flat
tax" structure that would lower the marginal tax rates for many taxpayers.
Other proposals call for eliminating the existing income tax and implementing
a "consumption based tax." Adoption of any of these new methods, particularly
a consumption based tax, could have adverse effects on the insurance industry,
as the value of annuity and life insurance products with income tax deferral
advantages would be lessened or minimized. However, it is impossible to
predict what changes, if any, will be made to the existing Federal income tax
structure and the timing of any such changes.
Discontinued Brokerage Operations
In addition to life insurance and annuity operations, the Company had a
brokerage operations segment through its wholly owned subsidiary, The Westcap
Corporation (Westcap). However, during 1995 Westcap closed its sales offices
and approved a plan to cease all brokerage operations. Declines in both sales
revenues and earnings were the principal reasons for ceasing brokerage
operations. The declines resulted primarily from adverse bond market
conditions and adverse publicity about litigation. Subsequently on April 12,
1996, Westcap and its wholly owned subsidiary, Westcap Enterprises, Inc.,
separately filed voluntary petitions for reorganization under Chapter 11 of
the U.S. Bankruptcy Code. The bankruptcy reorganization was completed in
January, 1999, National Western retained 100% continuing ownership of the
reorganized Westcap, and the subsidiary is now operating as a real estate
management company. The brokerage segment is reported as discontinued
operations throughout this report and in the accompanying financial
statements. The bankruptcy and ultimate settlement are more fully described
in Item 3, Legal Proceedings, and in Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations.
(b) Financial Information About Industry Segments
A summary of financial information for the Company's industry segments
follows:
<TABLE>
<CAPTION>
Domestic International
Life Life All
Insurance Insurance Annuities Others Totals
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenues,
excluding
realized
gains
(losses):
1999 $ 49,762 64,751 227,583 4,906 347,002
1998 51,257 62,578 214,049 3,346 331,230
1997 50,555 61,914 198,619 2,774 313,862
Segment
earnings:
(A)
1999 $ 8,209 6,798 38,068 3,238 56,313
1998 6,395 6,397 27,508 2,224 42,524
1997 5,901 7,143 28,389 1,821 43,254
Segment
assets:
(B)
1999 $ 404,234 380,154 2,844,465 39,247 3,668,100
1998 412,538 373,201 2,692,330 19,285 3,497,354
1997 405,427 359,986 2,429,998 14,058 3,209,469
<FN>
Notes to Table:
(A) These amounts exclude realized gains and losses on investments and losses
from discontinued operations, net of taxes.
(B) These amounts exclude assets of discontinued operations and other
unallocated assets.
</FN>
</TABLE>
Additional information concerning these industry segments is included in Item
1.(a).
(c) Narrative Description of Business
Included in Item 1.(a).
(d) Financial Information About Geographic Areas
Included in Item 1.(a) and Note 14, Segment and Other Operating Information,
of the accompanying financial statements.
ITEM 2. PROPERTIES
The Company leases approximately 72,000 square feet of office space in Austin,
Texas. This lease expires in 2010 and specifies lease payments that gradually
increase over the term of the lease. Currently, lease payments are $487,500
per year plus taxes, insurance, maintenance, and other operating costs.
Lease costs and related operating expenses for office facilities of the
Company's subsidiaries are not significant in relation to the Company's
consolidated financial statements.
ITEM 3. LEGAL PROCEEDINGS
The Westcap Corporation Bankruptcy Proceedings
The Chapter 11 bankruptcy reorganization of the Company's wholly owned
subsidiary, The Westcap Corporation (Westcap), 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. This suit is described in more detail below.
Westcap Related Litigation
On March 28, 1994, the Community College District No. 508, County of Cook and
State of Illinois (The City Colleges) filed a complaint in the United States
District Court for the Northern District of Illinois, Eastern Division,
against National Western Life Insurance Company (the Company or National
Western) and subsidiaries of The Westcap Corporation (Westcap), a wholly owned
subsidiary of the Company. The suit sought rescission of securities purchase
transactions by The City Colleges from Westcap between September 9, 1993, and
November 3, 1993, alleged compensatory damages, punitive damages, injunctive
relief, declaratory relief, fees, and costs. National Western was named as a
"controlling person" of the Westcap defendants. Westcap filed Chapter 11
bankruptcy, and The City Colleges filed a claim in the bankruptcy court
against Westcap. The claim was tried before the bankruptcy court, and in
September, 1997, a $56,173,000 judgment was entered against Westcap favorable
to The City Colleges. Westcap appealed this decision to the United States
District Court for the Southern District of Texas (Houston Division). On July
24, 1998, the United States District Court affirmed the orders of the
bankruptcy court with respect to their underlying conclusion that Westcap is
liable to The City Colleges under the Texas Securities Act, but the Court
vacated the orders and remanded them to the bankruptcy court to determine the
correct amount of damages in a manner consistent with the Court's opinion and
the Texas Securities Act. The bankruptcy court on November 16, 1998, entered
an order allowing a claim of The City Colleges against the Westcap estate of
$51,738,868. Westcap has appealed the bankruptcy court's and District Court's
judgment to the Fifth Circuit Court of Appeals. Oral argument on the appeal
was held on February 29, 2000, and no ruling has yet been rendered.
While Westcap is a wholly owned subsidiary of the Company, the Company is not
a party to the bankruptcy or the judgment against Westcap by the bankruptcy
court or the United States District Court. The lawsuit against the Company
was stayed in September, 1994, pending resolution of The City Colleges' claim
against Westcap. Following the judgment against Westcap in the bankruptcy
court, on December 2, 1997, the stay was lifted by the United States District
Court in Illinois, and The City Colleges filed an amended complaint seeking to
hold the Company liable for the claim allowed in the bankruptcy court against
Westcap under the "control person" provision of the Texas Securities Act. The
suit seeks approximately $56 million plus fees and costs. The maximum sought
by City Colleges will be determined by the final amount allowed The City
Colleges in the Westcap bankruptcy appeal, discussed above. The Company filed
jurisdictional and venue motions to have the case transferred to the United
States District Court for the Western District of Texas, which motions were
agreed to by the Plaintiff, and the case is now pending in the United States
District Court for the Western District of Texas, where the parties have
engaged in discovery activities. The case is set for trial in September,
2000. The Company believes it has reasonable and adequate defenses to the
suit. Although the alleged damages, if sustained, would be material to the
Company's financial statements, a reasonable estimate of any actual losses
which may result from the suit cannot be made at this time. Accordingly, no
provision for any liability that may result from this suit has been recognized
in National Western's financial statements.
Other Litigation
On September 30, 1999, National Western Life Insurance Company (the Company),
National Annuity Programs, Inc. (NAP), Robert L. Myer (Myer), and certain
affiliates of Myer executed a Definitive Compromise Settlement Agreement
(Agreement) of the declaratory judgment lawsuit pending between them in the
District Court of Travis County, Texas. The declaratory judgment action was
filed by the Company and sought court construction of a general agent manager
contract and amendments thereto (Contract) between the Company and NAP entered
into in 1983 and amended thereafter, a declaration that the contract was
enforceable, but had been breached by NAP, and for damages from NAP. The
Company alleged tortious interference by Myer with the Contract, conspiracy,
and damages. NAP and Myer had counter-claimed for declaratory judgment,
breach of contract, indemnity, fraud, statutory violations, damages, and
attorneys' fees from the Company.
By the settlement each party dismissed with prejudice all claims asserted by
them in the pending lawsuit. NAP and Myer released the Company from any claim
for any funds and other rights arising under the Contract and from all
negligence and other claims arising prior to the Agreement. The Company
released NAP, Myer, and Myer affiliates from all negligence and other claims,
excluding any claims arising under the reinsurance contract between the
Company and NAP Life Insurance Company, a Myer affiliate. The Company
acquired NAP, and Myer indemnified and held the Company harmless from all
claims of any nature asserted against NAP based on its acts or omissions prior
to the Agreement, except for claims by policyholders and agents relating to
the sale of the Company's products. The Company indemnified Myer for NAP acts
or omissions occurring after September 30, 1999. The Company will pay or
cause to be paid or released all valid claims for unpaid commissions to sub-
agents of NAP who wrote business for the Company under the Contract. The
Company completed such payments to these agents in 1999 in the aggregate
amount of $820,000.
As a result of the settlement, accrued bonus commissions relating to the NAP
contract totaling $8,482,000 were released, as they are no longer considered a
liability to NAP and will not be paid. Accordingly, the release of these
accrued commissions from liabilities in 1999 resulted in additional income of
$8,482,000, before taxes. It is anticipated that any future renewal premiums
received by the Company on currently issued and in force annuity policies
written by NAP sub-agents under the Contract could generate additional
commissions for such sub-agents. The payment of such future commissions is
subject to and conditioned upon receipt of such renewal premiums by the
Company and compliance by the sub-agents with the terms of the agents'
contracts with the Company and NAP.
By separate Commutation Agreement dated September 30, 1999, the Company and
NAP Life Insurance Company ("NAP Life"), an affiliate of Robert L. Myer,
canceled and terminated the Specific Benefit Reinsurance Agreement between
them dated March 1, 1988, whereby the Company had ceded fifty percent (50%) of
the premiums, reserves, and liabilities on a portion of its policies of
insurance. The effect of the Commutation Agreement did not have a significant
impact on the financial statements of the Company, as the cost to National
Western to terminate the agreement totaled $182,000.
National Western Life Insurance Company is also currently a defendant in
several other lawsuits, substantially all of which are in the normal course of
business. In the opinion of management, the liability, if any, which may arise
from these lawsuits would not have a material adverse effect on the Company's
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The principal market on which the common stock of the Company trades is The
Nasdaq Stock Market under the symbol NWLIA. The high and low sales prices for
the common stock for each quarter during the last two years are shown in the
following table:
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
1999: First Quarter $ 123-1/2 103
Second Quarter 105-1/2 94-1/8
Third Quarter 102-1/4 83
Fourth Quarter 87-3/4 68-5/8
1998: First Quarter $ 106-5/8 95-1/4
Second Quarter 118-7/8 101-5/8
Third Quarter 158-7/8 108
Fourth Quarter 125-1/8 108
</TABLE>
(b) Equity Security Holders
The number of stockholders of record on December 31, 1999, was as follows:
<TABLE>
<S> <C>
Class A Common Stock 5,963
Class B Common Stock 2
</TABLE>
(c) Dividends
The Company has never paid cash dividends on its common stock. Payment of
dividends is within the discretion of the Company's Board of Directors and
will depend on factors such as earnings, capital requirements, and the
operating and financial condition of the Company. Presently, the Company's
capital requirements are such that it intends to follow a policy of retaining
any earnings in order to finance the development of business and to meet
regulatory requirements for capital. A strong capital position is important
not only for the protection of existing policyholders, but also in the
successful marketing of Company products to new customers.
ITEM 6. SELECTED FINANCIAL DATA
The following five-year financial summary includes comparative amounts taken
from the audited financial statements.
Earnings Information:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997 1996 1995
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues:
Life and
annuity
premiums $ 11,310 13,165 15,812 16,611 17,390
Universal life
and investment
annuity contract
revenues 83,768 83,169 80,250 75,966 69,783
Net investment
income 242,980 233,844 217,446 214,302 201,816
Other income 8,944 1,052 354 2,718 661
Realized gains
(losses)
on investments 4,481 2,384 (1,588) 1,612 (2,415)
Total revenues 351,483 333,614 312,274 311,209 287,235
Expenses:
Policyholder
benefits 32,456 32,441 35,285 33,313 37,336
Amortization of
deferred policy
acquisition
costs 39,148 40,415 39,934 30,361 33,675
Universal life
and investment
annuity contract
interest 162,302 158,889 145,200 151,475 142,940
Other operating
expenses 27,764 35,504 27,560 25,722 27,084
Total expenses 261,670 267,249 247,979 240,871 241,035
Earnings before
Federal income
taxes and
discontinued
operations 89,813 66,365 64,295 70,338 46,200
Federal income
taxes 30,588 17,347 21,723 24,123 10,566
Earnings from
continuing
operations 59,225 49,018 42,572 46,215 35,634
Losses from
discontinued
operations - (14,125) (1,000) - (16,350)
Net earnings $ 59,225 34,893 41,572 46,215 19,284
Diluted Earnings
Per Share: (A)
Earnings from
continuing
operations $ 16.78 13.87 12.09 13.17 10.20
Losses from
discontinued
operations - (4.00) (0.28) - (4.68)
Net earnings $ 16.78 9.87 11.81 13.17 5.52
Balance Sheet
Information:
Total assets $ 3,682,828 3,518,003 3,225,563 3,120,829 2,958,459
Total liabilities $ 3,207,306 3,079,638 2,824,700 2,767,969 2,646,472
Stockholders'
equity $ 475,522 438,365 400,863 352,860 311,987
<FN>
Note to Table:
(A) - Amounts have been restated in accordance with the implementation of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
National Western Life Insurance Company is a life insurance company, chartered
in the State of Colorado in 1956, and doing business in forty-three states and
the District of Columbia. It also accepts applications from and issues
policies to residents of various Central and South American, Caribbean, and
Pacific Rim countries. A distribution of the Company's direct premium
revenues and deposits by domestic and international markets is provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
United States domestic market:
Investment annuities 80.5% 82.4% 72.9%
Life insurance 5.9 5.9 9.5
Total domestic market 86.4 88.3 82.4
International market:
Investment annuities 0.9 0.3 0.5
Life insurance 12.7 11.4 17.1
Total international market 13.6 11.7 17.6
Total direct premiums collected 100.0% 100.0% 100.0%
</TABLE>
Insurance Operations - Domestic
The Company's domestic operations concentrate marketing efforts on federal
employees, seniors, and specific employee groups in private industry, as well
as individual sales. The products marketed are annuities, universal life
insurance, and traditional life insurance, which includes both term and whole
life products. The majority of products sold are the Company's annuities,
which include single and flexible premium deferred annuities, single premium
immediate annuities, and equity-indexed annuities. Most of these annuities
can be sold as tax qualified or nonqualified products.
National Western markets and distributes its domestic products primarily
through independent marketing organizations (IMOs). These IMOs assist the
Company in recruiting, contracting, and managing agents. The Company
currently has over 80 IMOs contracted for sales of life and annuity products.
Insurance Operations - International
The Company's international operations focus marketing efforts on foreign
nationals in upper socioeconomic classes with substantial financial resources.
Insurance sales are from countries in Central and South America, the
Caribbean, and the Pacific Rim. Marketing to numerous countries in these
different regions provides diversification that helps to minimize large
fluctuations in sales that can occur due to various economic, political, and
competitive pressures that may occur from one country to another. Products
sold in the international market are almost entirely universal life and
traditional life insurance products. However, certain annuity and investment
contracts are also available in this market.
International sales production is from broker-agents, many of whom have been
selling National Western products for 20 or more years. The Company continues
to expand its sales networks in specifically targeted South American and
Pacific Rim countries which have higher growth potential than other countries.
There are inherent risks of conducting international business that are not
present within the domestic market. The risks involved with international
business are reduced substantially by the Company in several ways. As
previously described, the Company focuses its marketing efforts on a specific
niche group, which is foreign nationals in upper socioeconomic classes who
have substantial financial resources. This targeted customer base coupled
with National Western's conservative, yet competitive, underwriting practices
have historically resulted in claims experience similar to that in the United
States. The Company also minimizes exposure to foreign currency risks, as
almost all foreign policies require payment of premiums and claims in United
States dollars. Finally, the Company's experience in the international market
and its strong broker-agent relationships, which in many cases exceed 20
years, help minimize risks and problems when selling products to foreign
nationals.
Other
In addition to the life insurance business, the Company had a brokerage
operations segment through its wholly owned subsidiary, The Westcap
Corporation (Westcap). However, during 1995 Westcap closed its sales offices
and approved a plan to cease all brokerage operations. Subsequently on April
12, 1996, Westcap and its wholly owned subsidiary, Westcap Enterprises, Inc.,
separately filed voluntary petitions for reorganization under Chapter 11 of
the U.S. Bankruptcy Code. The bankruptcy reorganization was completed in
January, 1999, National Western retained 100% continuing ownership of the
reorganized Westcap, and the subsidiary is now operating as a real estate
management company. Accordingly, the brokerage segment is reported as
discontinued operations throughout this report and in the accompanying
financial statements.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Investment Philosophy
The Company's investment philosophy is to maintain a diversified portfolio of
investment grade debt and equity securities that provide adequate liquidity to
meet policyholder obligations and other cash needs. The prevailing strategy
within this philosophy is the intent to hold investments in debt securities to
maturity. However, the Company manages its portfolio, which entails monitoring
and reacting to all components which affect changes in the price, value, or
credit rating of investments in debt and equity securities.
Investments in debt and equity securities are classified and reported as
either securities held to maturity or securities available for sale. The
Company does not maintain a portfolio of trading securities. The reporting
category chosen for the Company's securities investments depends on various
factors including the type and quality of the particular security and how it
will be incorporated into the Company's overall asset/liability management
strategy. At December 31, 1999, approximately 26% of the Company's total debt
and equity securities, based on fair values, were classified as securities
available for sale. These holdings provide flexibility to the Company to
react to market opportunities and conditions and to practice active management
within the portfolio to provide adequate liquidity to meet policyholder
obligations and other cash needs.
Securities the Company purchases with the intent to hold to maturity are
classified as securities held to maturity. Because the Company has strong cash
flows and matches expected maturities of assets and liabilities, the Company
has the ability to hold the securities, as it would be unlikely that forced
sales of securities would be required prior to maturity to cover payments of
liabilities. As a result, securities held to maturity are carried at amortized
cost less declines in value that are other than temporary. However, certain
situations may change the Company's intent to hold a particular security to
maturity, the most notable of which is a deterioration in the issuer's
creditworthiness. Accordingly, a security may be sold to avoid a further
decline in realizable value when there has been a significant change in the
credit risk of the issuer.
Securities that are not classified as held to maturity are reported as
securities available for sale. These securities may be sold if market or other
measurement factors change unexpectedly after the securities were acquired.
For example, opportunities arise that allow the Company to improve the
performance and credit quality of the investment portfolio by replacing an
existing security with an alternative security while still maintaining an
appropriate matching of expected maturities of assets and liabilities.
Examples of such improvements are as follows: improving the yield earned on
invested assets, improving the credit quality, changing the duration of the
portfolio, and selling securities in advance of anticipated calls or other
prepayments. Securities available for sale are reported in the Company's
financial statements at fair value. Any unrealized gains or losses resulting
from changes in the fair value of the securities are reflected in accumulated
other comprehensive income.
As an integral part of its investment philosophy, the Company performs an
ongoing process of monitoring the creditworthiness of issuers within the
investment portfolio. Review procedures are also performed on securities that
have had significant declines in fair value. The Company's objective in these
circumstances is to determine if the decline in fair value is due to changing
market expectations regarding inflation and general interest rates or other
factors. Additionally, the Company closely monitors financial, economic, and
interest rate conditions to manage prepayment and extension risks in its
mortgage-backed securities portfolio.
The Company's overall conservative investment philosophy is reflected in the
allocation of its investments, which is detailed below as of December 31,
1999 and 1998. The Company emphasizes investment grade debt securities, with
smaller holdings in mortgage loans and policy loans.
<TABLE>
<CAPTION>
Percent of Investments
1999 1998
<S> <C> <C>
Debt securities 87.8% 87.6%
Mortgage loans 5.7 5.6
Policy loans 3.6 4.0
Index options 1.0 0.8
Equity securities 0.5 0.5
Real estate 0.4 0.4
Other 1.0 1.1
Totals 100.0% 100.0%
</TABLE>
Portfolio Analysis
The Company maintains a diversified debt securities portfolio which consists
of various types of fixed income securities including primarily corporate,
mortgage-backed securities, and public utilities. Investments in
mortgage-backed securities include primarily U.S. government agency
pass-through securities and collateralized mortgage obligations (CMOs). As of
December 31, 1999, 1998, and 1997, the Company's debt securities portfolio
consisted of the following mix of securities based on amortized cost:
<TABLE>
<CAPTION>
Percent of Debt Securities
1999 1998 1997
<S> <C> <C> <C>
Corporate 55.6% 53.9% 50.1%
Mortgage-backed securities 20.9 22.5 27.9
Public utilities 13.0 13.3 13.3
Asset-backed securities 7.8 7.0 4.5
Foreign governments 1.8 1.9 2.0
States & political subdivisions 0.6 1.1 1.1
U.S. government 0.3 0.3 1.1
Totals 100.0% 100.0% 100.0%
</TABLE>
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 potential corporate investments including examination
of a company's credit and industry outlook, financial ratios and trends, and
event risks. 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 small holdings of below investment grade debt securities are
summarized below.
<TABLE>
<CAPTION>
Below Investment
Grade Debt Securities
% of
Carrying Market Invested
Value Value Assets
(In thousands except percentages)
<S> <C> <C> <C>
December 31, 1999 $ 70,900 63,864 2.2%
December 31, 1998 $ 44,974 45,317 1.4%
December 31, 1997 $ 41,149 41,969 1.4%
</TABLE>
The Company's holdings of below investment grade debt securities have
increased from $44,974,000 at December 31, 1998, to $70,900,000 at December
31, 1999. 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. At December 31, 1999,
1998, and 1997, no securities were in default and on nonaccrual status.
During 1999 the Company recorded permanent impairment writedowns totaling
$4,403,000 related to two separate securities. The writedowns were reflected
as realized losses in the accompanying financial statements. The Company is
closely monitoring these securities as well as its other below investment
grade holdings. While additional losses are not anticipated based on the
current status and condition of these securities, continued credit
deterioration of some securities is possible, which may result in further
writedowns. Recently, credit deterioration of issuers has been due primarily
to an increasing amount of acquisition activity and stock repurchase programs
which cause companies to become more leveraged and less creditworthy.
Although there is some exposure to 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>
December 31,
1999 1998
<S> <C> <C>
AAA and U.S. government 28.7% 29.7%
AA 8.8 8.0
A 34.1 34.4
BBB 25.9 26.2
BB and other below investment grade 2.5 1.7
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 20.9% at December 31, 1999. The majority
of this reduction has been achieved by shifting investments into corporate
securities, as corporate holdings have increased from 32.5% in 1994 to 55.6%
in 1999. Also, most of these additions have been noncallable corporates,
which help reduce prepayment and call risks.
As indicated above, the Company's holdings of mortgage-backed securities are
also subject to prepayment risk, as well as extension risk. Both of these
risks are addressed by specific portfolio management strategies. The Company
has substantially reduced both prepayment and extension risks by investing
primarily in collateralized mortgage obligations, which have more predictable
cash flow patterns than pass-through securities. These securities, known as
planned amortization class I (PAC I) CMOs, are designed to amortize in a more
predictable manner than other CMO classes or pass-throughs. Using this
strategy, the Company can more effectively manage and reduce prepayment and
extension risks, thereby helping to maintain the appropriate matching of the
Company's assets and liabilities.
As of December 31, 1999, 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.
The amortized cost and estimated fair values of investments in debt securities
at December 31, 1999, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
(In thousands)
<S> <C> <C>
Due in one year or less $ 30,707 30,762
Due after one year through five years 520,200 510,984
Due after five years through ten years 1,298,468 1,235,044
Due after ten years 202,752 199,103
2,052,127 1,975,893
Mortgage and asset-backed securities 828,650 810,549
Totals $ 2,880,777 2,786,442
</TABLE>
At December 31, 1999, the Company's debt and equity securities were classified
as follows:
<TABLE>
<CAPTION>
Fair Amortized Unrealized
Value Cost Gains (Losses)
(In thousands)
<S> <C> <C> <C>
Securities held to maturity:
Debt securities $ 2,084,494 2,151,924 (67,430)
Securities available for sale:
Debt securities 701,948 728,853 (26,905)
Equity securities 16,000 12,755 3,245
Totals $ 2,802,442 2,893,532 (91,090)
</TABLE>
As detailed above, debt securities classified as held to maturity comprise the
majority of the Company's securities portfolio, while equity securities
continue to be a small component of the portfolio. Unrealized losses totaling
$91,090,000 on the securities portfolio at December 31, 1999, is a reflection
of market interest rates at year-end. The fair values, or market values, of
fixed income debt securities correlate to external market interest rate
conditions. Because the interest rates are fixed on almost all of the
Company's debt securities, market values typically increase when market
interest rates decline, and decrease when market interest rates rise. This
correlation between market values and interest rates is reflected in the
tables below.
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
(In thousands except percentages)
<S> <C> <C> <C>
Fair value $ 2,786,442 2,844,590 2,588,326
Amortized cost $ 2,880,777 2,714,043 2,482,806
Fair value as a
percentage of amortized cost 96.7 % 104.8 % 104.3 %
Unrealized gains (losses)
at year-end $ (94,335) 130,547 105,520
Ten-year U.S. Treasury
bond - increase (decrease)
in yield for the year 1.8 % (1.0)% (0.7)%
</TABLE>
<TABLE>
<CAPTION>
Unrealized Gains (Losses) Increase in
At At Unrealized
December 31, December 31, Losses
1999 1998 During 1999
(In thousands)
<S> <C> <C> <C>
Securities held to maturity:
Debt securities $ (67,430) 94,987 (162,417)
Securities available for sale:
Debt securities (26,905) 35,560 (62,465)
Equity securities 3,245 3,694 (449)
Totals $ (91,090) 134,241 (225,331)
</TABLE>
As reflected above, changes in interest rates typically have a significant
impact on the market values of the Company's debt securities. The Company
would expect similar results in the future from any significant upward or
downward movement in market rates. The substantial increase in unrealized
losses during 1999 is due to a significant increase in interest rates. Market
interest rates of the ten-year U.S. Treasury bond rose approximately 180
basis points from year-end 1998. However, because the majority of the
Company's debt securities are classified as held to maturity, which are
recorded at amortized cost, changes in market values have relatively small
effects on the Company's financial statements. Also, the Company has the
intent and ability to hold these securities to maturity, and it is unlikely
that sales of such securities would be required, which would realize market
gains or losses.
Changes in fair values of securities due to changes in market interest rates
is an example of market risk. Market risk is the risk of change in market
values of financial instruments due to changes in interest rates, currency
exchange rates, commodity prices, or equity prices. The most significant
market risk exposure for National Western is interest rate risk. The Company
manages interest rate risk through on-going cash flow testing required for
insurance regulatory purposes. Computer models are used to perform cash flow
testing under various commonly used stress test interest rate scenarios to
determine if existing assets would be sufficient to meet projected liability
outflows. Management strives to closely match the durations of its assets and
liabilities. Sensitivity analysis allows the Company to measure the
potential gain or loss in fair value of its interest-sensitive instruments and
to seek to protect its economic value and achieve a predictable spread between
what is earned on invested assets and what is paid on liabilities. The
Company seeks to minimize the impact of interest risk through surrender
charges that are imposed to discourage policy surrenders. Interest rate
changes can be anticipated and risk may be limited due to management actions
regarding asset and liability instruments. However, potential changes in the
values of financial instruments indicated by hypothetical interest changes
will likely be different from actual changes experienced, and the differences
may be material.
Market risk-sensitive assets of the Company include debt securities, equity
securities which are almost entirely preferred stocks, mortgage loans, policy
loans, and index options. The Company does not maintain a securities trading
portfolio. Market risk-sensitive liabilities include policy liabilities for
deferred and immediate investment annuity contracts and supplemental
contracts. Sensitivity analysis expresses the potential gain or loss in fair
value, over a selected time period, from one or more selected hypothetical
changes in interest rates which are reasonably possible in the near term. The
following table illustrates the market risk sensitivity of the Company's
interest rate-sensitive assets. The table shows the effect of a change in
interest rates on the fair value of the portfolio. The data is prepared using
models that measure the change in fair value arising from an immediate and
sustained change in interest rates in increments of 100 basis points.
<TABLE>
<CAPTION>
Fair Values of Assets
Changes in Interest Rates in Basis Points
-200 - 100 0 + 100 + 200
(In thousands)
<S> <C> <C> <C> <C> <C>
Assets:
Debt and equity
securities $ 3,073,619 2,937,768 2,802,442 2,670,125 2,544,503
Mortgage loans 199,238 193,407 185,841 178,741 172,072
Policy loans 144,546 134,566 125,679 117,731 110,595
Index options 31,929 32,376 32,820 33,261 33,699
</TABLE>
The debt securities portfolio includes primarily noncallable corporate bonds,
mortgage-backed securities, and asset-backed securities. Expected maturities
of debt securities may differ from contractual maturities due to call or
prepayment provisions. The model assumes that prepayments on mortgage-backed
securities are influenced by agency and pool types, the level of interest
rates, loan age, refinancing incentive, month of the year, and underlying
coupon. During periods of declining interest rates, principal payments on
mortgage-backed securities and collateralized mortgage obligations increase as
the underlying mortgages are prepaid. Conversely, during periods of rising
interest rates, the rate of prepayment slows. Both of these situations can
expose the Company to the possibility of asset/liability cash flow and yield
mismatch. The model uses a proprietary method of sampling interest rate paths
along with a mortgage prepayment model to derive future cash flows. The
initial interest rates used are based on the current U.S. Treasury yield curve
as well as current mortgage rates for the various types of collateral in the
portfolio.
Mortgage loans were modeled by discounting scheduled cash flows through the
scheduled maturities of the loans, starting with interest rates currently
being offered for similar loans to borrowers with similar credit ratings.
Policy loans were modeled by discounting estimated cash flows using U.S.
Treasury Bill interest rates as the base rates at December 31, 1999. The
estimated cash flows include assumptions as to whether such loans will be
repaid by the policyholders or settled upon payment of death or surrender
benefits on the underlying insurance contracts. As a result, these
assumptions incorporate both Company experience and mortality assumptions
associated with such contracts.
In addition to the securities analyzed above, the Company invests in index
options which are derivative financial instruments used to hedge the equity
return component of the Company's equity-indexed annuities. The values of
these options are primarily impacted by equity price risk, as the options'
fair values are dependent on the performance of the S&P 500 Composite Stock
Price Index (S&P 500 Index). However, increases or decreases in investment
returns from these options are substantially offset by corresponding increases
or decreases in amounts paid to equity-indexed annuity policyholders, subject
to minimum guaranteed policy interest rates. An example of this equity price
risk is reflected in the decline in the value of the Company's index options
during the third quarter of 1999. The S&P 500 Index declined approximately
6.6%, which resulted in a net decrease in investment income totaling $13.1
million for the quarter ended September 30, 1999. Subsequently, during the
fourth quarter of 1999, the S&P 500 Index increased significantly, which
increased investment income from unrealized mark-to-market gains on the index
options and reversed the declines of the previous quarter.
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 proven to
result in higher quality mortgage loans with fewer defaults.
The Company's direct investments in real estate are not a significant portion
of its total investment portfolio, and the majority of real estate owned was
acquired through mortgage loan foreclosures. However, the Company also
participates in several real estate joint ventures and limited partnerships.
The joint ventures and partnerships invest primarily in income-producing
retail properties. While not a significant portion of the Company's
investment portfolio, these investments have produced favorable returns.
Portfolio Analysis
The Company held net investments in mortgage loans totaling $183,902,000 and
$174,921,000, or 5.7% and 5.6% of total invested assets, at December 31, 1999
and 1998, respectively. The loans are real estate mortgages, substantially all
of which are related to commercial properties and developments and have fixed
interest rates.
The diversification of the mortgage loan portfolio by geographic region of the
United States and by property type as of December 31, 1999 and 1998, was as
follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
West South Central 58.8% 57.1%
Mountain 20.5 19.4
Pacific 11.0 7.7
South Atlantic 5.1 4.8
East South Central 4.2 4.6
West North Central 0.4 3.0
All other - 3.4
Totals 100.0% 100.0%
</TABLE>
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Retail 56.1% 56.7%
Office 27.4 21.0
Hotel/Motel 7.2 7.9
Land/Lots 2.5 4.1
Nursing homes 2.4 3.0
Apartment 1.6 4.2
All other 2.8 3.1
Totals 100.0% 100.0%
</TABLE>
As of December 31, 1999, the allowance for possible losses on mortgage loans
was $4,104,000. This balance reflects a net reduction of $536,000 during 1999
which was recognized as a realized gain on investments. The allowance was
adjusted primarily as a result of the complete repayment of an impaired
mortgage loan resulting in an allowance reduction totaling $895,000, partially
offset by an unrelated general increase totaling $359,000. No additions were
made to the allowance during 1998. Management believes that the allowance for
possible losses is adequate. However, while management uses available
information to recognize losses, future additions to the allowance may be
necessary based on changes in economic conditions, particularly in the West
South Central region which includes Texas, Louisiana, Oklahoma, and Arkansas,
as this area contains the highest concentrations of the Company's mortgage
loans.
The Company currently places all loans past due three months or more on
nonaccrual status, thus recognizing no interest income on the loans. At
December 31, 1999, the Company had mortgage loan principal balances on
nonaccrual status of $3,014,000. At December 31, 1998, the Company had no
mortgage loans on nonaccrual status. The Company had mortgage loan principal
balances with restructured terms totaling $8,572,000 and $12,096,000 at
December 31, 1999 and 1998, respectively. For the year ended December 31,
1999, the reductions in interest income due to nonaccrual and restructured
mortgage loans totaled approximately $192,000. For the year ended December
31, 1998, the reductions in interest income due to nonaccrual and restructured
mortgage loans were not significant.
The contractual maturities of mortgage loan principal balances at December 31,
1999, are as follows:
<TABLE>
<CAPTION>
Principal
Due
(In thousands)
<S> <C>
Due in one year or less $ 11,869
Due after one year through five years 81,782
Due after five years through ten years 86,948
Due after ten years through fifteen years 8,649
Due after fifteen years 68
Total $ 189,316
</TABLE>
The Company owns real estate that was acquired through foreclosure and through
direct investment totaling approximately $11,388,000 and $13,553,000 at
December 31, 1999 and 1998, respectively. This small concentration of
properties represents less than one percent of the Company's entire investment
portfolio. The real estate holdings consist primarily of income-producing
properties which are being operated by the Company. The Company recognized
operating income on these properties of approximately $1,037,000 and $740,000
for the years ended December 31, 1999 and 1998, respectively. The increase in
operating income is primarily due to the sale of a property in 1999 that had
been generating operating losses. While operating income could continue to
improve again in 2000, the Company does not anticipate significant changes in
overall operating results. Additionally, exclusive of the operating results,
the sale of the property also produced a realized gain on investments totaling
$1,419,000 in 1999.
The Company monitors the conditions and market values of these properties on a
regular basis. The Company makes repairs and capital improvements to keep the
properties in good condition and will continue this maintenance as needed. No
realized losses were recognized due to declines in values of properties during
1999 or 1998.
RESULTS OF OPERATIONS
Consolidated Operations
Summary of Consolidated Operating Results
A summary of operating results, net of taxes, for the years ended December 31,
1999, 1998, and 1997 is provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands except per share data)
<S> <C> <C> <C>
Revenues:
Revenues excluding realized
gains (losses) on investments $ 347,002 331,230 313,862
Realized gains (losses)
on investments 4,481 2,384 (1,588)
Total revenues $ 351,483 333,614 312,274
Earnings:
Earnings from continuing
operations, excluding
realized gains
(losses) on investments $ 56,313 47,468 43,604
Losses from discontinued
brokerage operations - (14,125) (1,000)
Net realized gains
(losses) on investments 2,912 1,550 (1,032)
Net earnings $ 59,225 34,893 41,572
Basic Earnings Per Share:
Earnings from continuing
operations, excluding
realized gains
(losses) on investments $ 16.09 13.58 12.49
Losses from discontinued
brokerage operations - (4.04) (0.29)
Net realized gains
(losses) on investments 0.83 0.44 (0.29)
Net earnings $ 16.92 9.98 11.91
Diluted Earnings Per Share:
Earnings from continuing
operations,
excluding realized gains
(losses) on investments $ 15.96 13.43 12.38
Losses from discontinued
brokerage operations - (4.00) (0.28)
Net realized gains
(losses) on investments 0.82 0.44 (0.29)
Net earnings $ 16.78 9.87 11.81
</TABLE>
Consolidated Operating Results: For the year ended December 31, 1999, the
Company recorded net earnings of $59,225,000 compared to net earnings of
$34,893,000 and $41,572,000 for 1998 and 1997, respectively. Earnings for
1999 include additional income totaling $5,513,000, net of taxes, from the
resolution of pending litigation relating to a former general agency.
Additionally, the Company recorded realized gains on investments, net of
taxes, totaling $2,912,000 for 1999 compared to gains of $1,550,000 for 1998
and losses of $1,032,000 for 1997. The gains in 1999 were primarily from
sales and calls of investments in debt securities and a sale of investment
real estate. While earnings for 1999 were significantly higher than the
previous years, earnings for 1998 were abnormally low due to several
nonrecurring items, the most significant of which was the bankruptcy
settlement of the Company's wholly owned subsidiary, The Westcap Corporation,
totaling $14,125,000. This settlement was reflected as a loss from
discontinued brokerage operations in 1998. Losses on discontinued brokerage
operations totaled $1,000,000 in 1997.
The other nonrecurring items affecting earnings for 1998 include a lawsuit
settlement and a pension plan related transaction. Parties involved in the
Diffie, et al vs. National Western Life Insurance Company and National Annuity
Programs, Inc. class action litigation filed a joint motion in District Court
for preliminary approval of a settlement agreement among the parties. This
settlement was approved by the Court in January, 1999, and, as a result, the
Company paid $5,000,000 to settle the litigation. This amount was accrued in
the Company's financial statements in 1998, thereby reducing earnings
$3,250,000, after taxes. Also during 1998, the Company transferred pension
obligations and administrative responsibilities of its nonqualified defined
benefit plan to a pension administration firm. The financial effects of the
transaction resulted in additional pension expense in 1998 totaling
$1,653,000, net of taxes, as the amount paid upon transfer exceeded the
recorded pension liabilities as required for financial reporting purposes.
However, as a result of the transfer, substantially all future pension and
administrative liabilities and expenses under the plan are now the
responsibility of the new firm.
Excluding the nonrecurring items and related tax effects described above, 1999
earnings grew by over 9% compared to 1998. The growth in earnings is
primarily due to increases in investment income over policy contract interest
and higher realized gains on investments. Earnings for 1998, excluding the
nonrecurring items, also exceeded comparable 1997 earnings by over 17%. The
higher earnings are due primarily to increases in universal life and annuity
contract revenues, increases in investment income over policy contract
interest, and higher realized gains on investments.
Net Investment Income: A detail of net investment income is provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Investment income:
Debt securities $ 204,294 195,425 184,870
Mortgage loans 16,262 16,943 18,659
Index options 10,719 8,057 18
Policy loans 8,232 9,252 9,764
Other investment income 7,501 7,783 6,742
Total investment income 247,008 237,460 220,053
Investment expenses 4,028 3,616 2,607
Net investment income $ 242,980 233,844 217,446
</TABLE>
As indicated by the table above, net investment income increased substantially
in both 1998 and 1999. Much of this increase is attributable to growth in
invested assets from continued strong premium production. The net cash flow
from operations continued to be invested primarily in high quality debt
securities. However, increases in net investment income from index options
has also been significant, as this income has grown from $18,000 in 1997 to
$8,057,000 and $10,719,000 in 1998 and 1999, respectively.
Index options are derivative financial instruments used to hedge the equity
return component of the Company's equity-indexed annuity products, which were
first introduced for sale in 1997. Any gains or losses from the sale or
expiration of the options, as well as period-to-period changes in fair values,
are reflected as net investment income. Increases or decreases in income 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.
While net investment income for debt securities and index options continues to
grow, income for mortgage loans and policy loans continues to steadily
decline. This correlates directly to lower holdings in these investments as
the Company has placed less emphasis on these investments, particularly
mortgage loan originations, than in prior years. Much of this decline is due
to current competitive market conditions for mortgage loans.
An analysis of net investment income also involves a review of market interest
rates. Interest rates continued to decline in 1998 and 1997 from 1996 rates.
In 1999, interest rates reversed this trend by increasing significantly.
However, changes in market rates affect the Company's portfolio yield slowly
because of the relatively small volume of new investment purchases during a
year in comparison to the size of the overall investment portfolio. As a
result, although yields on new investment purchases did increase during 1999,
the Company's overall yield on average invested assets declined from 1998.
Yields were also somewhat affected by the change in the mix of the investment
portfolio. Mortgage loans have typically had significantly higher yields than
the Company's investments in debt securities. However, average mortgage loan
holdings in 1997 and 1998 have declined. Also, matured or prepaid mortgage
loans are typically replaced with loans with lower interest rates.
Detailed below is the Company's investment performance for 1999, 1998, and
1997. This analysis excludes index options, as these derivative financial
instruments are used solely for hedging purposes for the Company's equity-
indexed annuity products. Income from the options offsets interest credited
to policyholders for the equity return component on these products.
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands except percentages)
<S> <C> <C> <C>
Net investment income,
excluding index options $ 232,261 225,787 217,428
Average invested assets,
at amortized cost $ 3,177,303 2,986,350 2,798,957
Yield on average invested assets 7.31% 7.56% 7.77%
</TABLE>
Realized Gains and Losses on Investments: The Company realized gains of $4.5
million in 1999 compared to realized gains of $2.4 million in 1998 and losses
of $1.6 million in 1997. The gains in 1999 consist primarily of gains from
sales and calls of debt securities totaling $6,250,000, offset by permanent
impairment writedowns of $4,403,000. The Company also recognized gains
totaling $1,963,000 on real estate, the majority of which was from the sale of
a real estate property owned by the Company's subsidiary, NWL 806 Main, Inc.
The gains in 1998 were primarily from gains on debt securities totaling $1.3
million, substantially all of which related to securities that were called.
Realized gains in 1998 also include $300,000 related to a deficiency
settlement agreement on a mortgage loan that was foreclosed in 1994. The
losses in 1997 were primarily from net losses on debt securities totaling $1.2
million and writedowns on real estate and mortgage loans totaling $1.2
million, primarily related to a single foreclosure.
Universal Life and Investment Annuity Contract Interest: The Company closely
monitors its credited interest rates, taking into consideration such factors
as profitability goals, policyholder benefits, product marketability, and
economic market conditions. Rates are established or adjusted after careful
consideration and evaluation of these factors against established objectives.
Average credited rates, calculated based on policy reserves for the Company's
universal life and investment annuity business, have generally declined since
1996, which is consistent with declines in market interest rates. However, as
previously described for net investment income, market interest rates rose in
1999. 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. Raising policy credited rates can typically
have an impact sooner than higher market rates have on the Company's
investment portfolio yield, making it more difficult to maintain the current
interest spread. The difference between yields earned over policy credited
rates is often referred to as the interest spread.
Contract interest totaled $162.3 million, $158.9 million, and $145.2 million
in 1999, 1998, and 1997, respectively. The increase is primarily attributable
to interest totaling $20,480,000 and $12,980,000 in 1999 and 1998,
respectively, for the Company's equity-indexed annuity products. As
previously described, the Company purchases index options to provide the
potential higher interest to be credited on these products. The income
provided by the index options substantially offsets the interest credited to
the policyholders, subject to minimum guaranteed policy interest rates.
Because of this hedging program, the Company separately analyzes average
credited rates on its other products. Excluding the Company's equity-indexed
annuity products, average credited rates for 1999, 1998, and 1997 were 5.51%,
5.67%, and 5.68%, respectively. The Company's interest rate spread has been
approximately 2% in recent years, although this spread has declined slightly
in 1999 and 1998 for the reasons previously described above.
Federal Income Taxes: Federal income taxes on earnings from continuing
operations for 1999, 1998, and 1997 reflect effective tax rates of 34.1%,
26.1%, and 33.8%, respectively, which are lower than the expected Federal rate
of 35%. The 1998 and 1997 effective tax rates are significantly lower due to
tax benefits totaling $4,944,000 and $350,000, respectively, resulting from
the Company's subsidiary brokerage losses. Correspondingly, losses on
discontinued operations for 1998 and 1997 totaling $14,125,000 and $1,000,000
do not include any tax benefits relating to the brokerage subsidiary. This
tax reporting treatment is in accordance with the Company's tax allocation
agreement with its subsidiaries. On a consolidated basis, Federal income
taxes reflect consistent effective tax rates of 34.1%, 33.2%, and 34.3% for
1999, 1998, and 1997, respectively.
Discontinued Brokerage Operations: On April 12, 1996, The Westcap Corporation
and its wholly owned subsidiary, Westcap Enterprises, Inc., separately filed
voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy
Code in the United States Bankruptcy Court, Southern District of Texas,
Houston Division. As a result of brokerage losses and the resulting
bankruptcy, National Western's investment in Westcap was completely written
off during 1995. However, a $1,000,000 cash infusion was made to Westcap on
March 18, 1997, for operational expenses incurred during its bankruptcy. This
contribution was reflected as a loss from discontinued operations in 1997.
Losses from the discontinued brokerage operations have been reflected
separately from continuing operations of the Company in the accompanying
consolidated financial statements.
By order dated August 28, 1998, the United States Bankruptcy Court, Southern
District of Texas, Houston Division, confirmed and approved the Third Amended
Joint Consensual Plan of Reorganization (the Plan) of The Westcap Corporation
and Westcap Enterprises, Inc. Pursuant to the Plan, National Western received
credit for the $1,000,000 previously contributed to Westcap in bankruptcy in
March, 1997, and paid an additional $14,125,000 to compromise and settle (i)
all claims of Westcap against National Western, and (ii) all claims and
litigation of certain settling creditors of Westcap who have alleged federal
or state securities law "control person" violations by National Western
relating to Westcap's brokerage business, in exchange for full and complete
releases from all of such claims, litigation, and alleged violations. The
bankruptcy reorganization was completed in January, 1999, National Western
retained 100% continuing ownership of the reorganized Westcap, and the
subsidiary is now operating as a real estate management company.
Although the $14,125,000 settlement was paid by National Western on January
13, 1999, the settlement payment was reflected in the accompanying financial
statements as a loss from discontinued operations in 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, as more fully
described in Item 3, Legal Proceedings. National Western believes it has
reasonable and adequate defenses to this suit and, accordingly, no amounts
have been accrued in National Western's financial statements for potential
losses relating to such suit.
Segment Operations
Summary of Segment Earnings
A summary of segment earnings from continuing operations for the years ended
December 31, 1999, 1998, and 1997 is provided below. The segment earnings
exclude realized gains and losses on investments, net of taxes, and
discontinued brokerage operations.
<TABLE>
<CAPTION>
Domestic International
Life Life All
Insurance Insurance Annuities Others Totals
(In thousands)
<S> <C> <C> <C> <C> <C>
Segment
earnings:
1999 $ 8,209 6,798 38,068 3,238 56,313
1998 6,395 6,397 27,508 2,224 42,524
1997 5,901 7,143 28,389 1,821 43,254
</TABLE>
Domestic Life Insurance Operations
The Company's domestic life insurance operations concentrate marketing efforts
on Federal employees, seniors, and specific employee groups in private
industry, as well as individual sales. The products marketed are universal
life insurance and traditional life insurance, which includes both term and
whole life products. National Western markets and distributes its domestic
products primarily through independent agents and brokers and independent
marketing organizations (IMOs). The IMOs also assist the Company in
recruiting, contracting, and managing agents as well as providing additional
financial resources for product marketing. Geographically, the domestic life
insurance operations market products in most of the United States, which
encompasses 43 states and the District of Columbia. The states in which the
Company does not conduct business are primarily in the northeast and include
Connecticut, Delaware, Massachusetts, New Hampshire, New Jersey, New York, and
Vermont.
Earnings for the domestic life insurance operating segment were $8,209,000,
$6,395,000, and $5,901,000 for 1999, 1998, and 1997, respectively. The
increase in 1999 earnings is primarily a result of higher universal life
insurance revenues, lower other operating expenses, and lower policy benefits,
which consists substantially of life insurance death claims. The slight
increase in earnings in 1998 is due to increases in revenues and other income
and lower amortization of deferred policy acquisition costs. However, these
items were offset substantially by increases in other operating expenses and
policy benefits.
A comparative analysis of results of operations for the Company's domestic
life insurance segment is detailed below:
<TABLE>
<CAPTION>
Years Ended December 31,
Domestic Life Insurance Operations: 1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Premiums and other revenue:
Premiums and contract
revenues $ 24,668 24,296 23,639
Net investment income 25,054 26,211 26,873
Other income 40 750 43
Total premiums and other revenue 49,762 51,257 50,555
Benefits and expenses:
Policy benefits 15,547 17,932 18,232
Amortization of deferred
policy acquisition costs 3,387 2,954 5,058
Universal life insurance
contract interest 9,826 9,963 9,687
Other operating expenses 8,563 10,786 8,588
Total benefits and expenses 37,323 41,635 41,565
Segment earnings before
Federal income taxes 12,439 9,622 8,990
Federal income taxes 4,230 3,227 3,089
Segment earnings $ 8,209 6,395 5,901
</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>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Universal life insurance:
Cost of insurance $ 11,881 10,684 9,519
Surrender charges 1,815 2,040 2,161
Policy fees and other revenues 1,512 1,503 1,058
Traditional life insurance premiums 9,460 10,069 10,901
Totals $ 24,668 24,296 23,639
</TABLE>
Actual universal life insurance deposits collected for the years ended
December 31, 1999, 1998, and 1997 are detailed below. Deposits collected on
these nontraditional products are not reflected as revenues in the Company's
statements of earnings, as they are recorded directly to policyholder
liabilities upon receipt, in accordance with generally accepted accounting
principles.
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Universal life insurance:
First year and single premiums $ 5,010 6,944 5,929
Renewal premiums 14,384 14,014 14,198
Totals $ 19,394 20,958 20,127
</TABLE>
Other income for 1999, 1998, and 1997 totaled $40,000, $750,000, and $43,000,
respectively. The significant increase in 1998 was primarily due to proceeds
totaling $444,000 received from the U.S. government in 1998 related to
previous litigation involving a failed savings and loan institution. The
litigation involved the Company's previous investment in bonds of the
financial institution and subsequent losses incurred upon its failure. The
financial institution had also purchased life insurance from National Western,
the cash values of which served as collateral for the bonds.
Policy benefits were significantly lower in 1999 totaling $15.5 million
compared to $17.9 million and $18.2 million for 1998 and 1997, respectively.
These benefits consist primarily of life insurance death claims which are
subject to fluctuations from period to period.
Amortization of deferred policy acquisition costs has decreased from $5.1
million in 1997 to $3.0 million and $3.4 million in 1998 and 1999,
respectively. These expenses represent the amortization of the costs of
acquiring or producing new business, which consist primarily of agents'
commissions. The majority of such costs are amortized in direct relation to
the anticipated future gross profits of the applicable blocks of business.
Amortization is also impacted by the level of policy surrenders.
Universal life insurance contract interest has remained relatively constant at
$9.8 million, $10.0 million, and $9.7 million in 1999, 1998, and 1997,
respectively. This is consistent with the relative stable size of this block
of business along with minimal adjustments of policy credited rates.
Other operating expenses were significantly higher in 1998, totaling $10.8
million compared to $8.6 million in both 1999 and 1997. The increase in
expenses is due to higher pension expenses from the transfer of the Company's
nonqualified defined benefit plan as previously described and other increases
primarily in salaries, agent conventions, and marketing related expenses such
as travel and printing costs.
International Life Insurance Operations
The Company's international life insurance operations focus marketing efforts
on foreign nationals in upper socioeconomic classes with substantial financial
resources. Insurance sales are primarily from countries in Central and South
America, the Caribbean, and the Pacific Rim. Marketing to numerous countries
in these different regions provides diversification that helps to minimize
large fluctuations in sales that can occur due to various economic, political,
and competitive pressures that may occur from one country to another.
Historically, the top three countries in insurance sales have been Argentina,
Chile, and Peru. Products sold in the international market include both
universal life and traditional life insurance products. The Company minimizes
exposure to foreign currency risks, as almost all foreign policies require
payment of premiums and claims in United States dollars. Sales production
from the international market is from independent broker-agents, many of whom
have been selling National Western products for 20 or more years.
Earnings for the international life insurance operating segment were
$6,798,000, $6,397,000, and $7,143,000 for 1999, 1998, and 1997, respectively.
Higher 1999 earnings are due to increases in universal life insurance contract
revenues, primarily cost of insurance and surrender charge revenues. The
higher revenues were tempered by higher policy benefits and universal life
insurance contract interest. Earnings in 1998 were lower than 1999 and 1997
primarily due to higher operating expenses, reinsurance costs, and
amortization of deferred policy acquisition costs, offset significantly by
lower policy benefits. A comparative analysis of results of operations for
the Company's international life insurance segment is detailed below:
<TABLE>
<CAPTION>
International Life Years Ended December 31,
Insurance Operations: 1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Premiums and other revenue:
Premiums and contract revenues $ 43,018 40,606 40,429
Net investment income 21,692 21,940 21,451
Other income 41 32 34
Total premiums and other revenue 64,751 62,578 61,914
Benefits and expenses:
Policy benefits 16,451 14,112 17,100
Amortization of deferred
policy acquisition costs 14,647 15,836 13,608
Universal life insurance
contract interest 13,923 13,432 12,575
Other operating expenses 9,429 9,573 7,749
Total benefits and expenses 54,450 52,953 51,032
Segment earnings before
Federal income taxes 10,301 9,625 10,882
Federal income taxes 3,503 3,228 3,739
Segment earnings $ 6,798 6,397 7,143
</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. Additionally, surrender charge revenues were 27.0% higher in 1999
compared to 1998, which corresponds directly to an unusually high increase in
universal life insurance policy surrenders of 27.5%. A comparative detail of
premiums and contract revenues is provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Universal life insurance:
Cost of insurance $ 29,411 27,508 25,258
Surrender charges 8,077 6,359 6,661
Policy fees and other revenues 3,755 3,726 3,698
Traditional life insurance premiums 1,775 3,013 4,812
Totals $ 43,018 40,606 40,429
</TABLE>
Actual universal life insurance deposits collected for the years ended
December 31, 1999, 1998, and 1997 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. Deposits continue to grow, which corresponds to the previously
described increases in cost of insurance revenues.
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Universal life insurance:
First year and single premiums $ 14,084 13,575 11,412
Renewal premiums 36,428 35,114 34,323
Totals $ 50,512 48,689 45,735
</TABLE>
Policy benefits, which consist primarily of life insurance death claims, were
abnormally high in 1997 at $17.1 million compared to $16.5 million and $14.1
million for 1999 and 1998, respectively. 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. Additionally, the Company utilizes reinsurance to
help minimize its exposure to adverse mortality experience. The Company's
general policy is to reinsure amounts in excess of $200,000 on the life of any
one individual.
Universal life insurance contract interest has risen steadily from $12.6
million in 1997 to $13.4 million and $13.9 million in 1998 and 1999,
respectively. The increases in contract interest are consistent with growth
in the universal life insurance business and have been minimally affected by
adjustments of policy credited rates.
Amortization of deferred policy acquisition costs were higher in 1998,
totaling $15.8 million compared to $14.6 million and $13.6 million in 1999 and
1997, respectively. Changes in anticipated future gross profits resulted in
retrospective adjustments to deferred policy acquisition costs, which produced
higher amortization in 1998 relative to 1999 and 1997.
Other operating expenses totaled $9.4 million, $9.6 million, and $7.7 million
in 1999, 1998, and 1997, respectively. The increase in expenses is
attributable to the same reasons as previously described for domestic life
insurance operations.
Annuity Operations
The Company's annuity operations are almost exclusively in the United States.
Like the Company's domestic life insurance operations, annuities are marketed
in 43 states and the District of Columbia using independent agents, brokers,
and independent marketing organizations (IMOs). For most of these
organizations, annuity sales are much more significant than life insurance
sales 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 are flexible premium annuities
on which renewal premiums continue to be collected. However, the Company has
not sold two-tier annuities since 1992.
Earnings for the annuity operating segment were $38,068,000, $27,508,000, and
$28,389,000 for 1999, 1998, and 1997, respectively. Earnings for 1999 were up
significantly from 1998 and 1997 primarily due to income resulting from a
lawsuit settlement totaling $5,513,000, net of taxes. Earnings were also
enhanced from increases in net investment income over annuity contract
interest. Additionally, 1998 earnings were negatively impacted by a class
action lawsuit settlement totaling $3,250,000, net of taxes. A comparative
analysis of results of operations for the Company's annuity segment is
detailed below:
<TABLE>
<CAPTION>
Years Ended December 31,
Annuity Operations: 1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Premiums and other revenue:
Premiums and
contract revenues $ 27,392 31,432 31,994
Net investment income 191,328 182,347 166,348
Other income 8,863 270 277
Total premiums and
other revenue 227,583 214,049 198,619
Benefits and expenses:
Policy benefits 458 397 (47)
Amortization of deferred
policy acquisition costs 21,114 21,625 21,268
Annuity contract interest 138,553 135,494 122,938
Other operating expenses 9,772 15,145 11,223
Total benefits and expenses 169,897 172,661 155,382
Segment earnings before
Federal income taxes 57,686 41,388 43,237
Federal income taxes 19,618 13,880 14,848
Segment earnings $ 38,068 27,508 28,389
</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 down
13.6% in 1999 compared to 1998 primarily due to reductions in surrender
charges from two-tier annuities. Although total annuity policy surrenders were
actually up 4.0% from 1998 to 1999, the mix of surrender types was
significantly different. While single-tier annuity policy surrenders
increased in 1999, two-tier annuity policy surrenders, which typically have
much higher surrender charges, declined over 21%. This decline in surrenders
and related income from two-tier annuities is not unexpected and could
continue, since this is a closed block of business. The Company has not sold
two-tier annuities since 1992. A comparative detail of the components of
premiums and annuity contract revenues is provided below.
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Surrender charges:
Two-tier annuities $ 14,394 17,898 19,940
Single-tier annuities 6,951 6,799 5,185
Total surrender charges 21,345 24,697 25,125
Payout annuity and other revenues 5,972 6,652 6,770
Traditional annuity premiums 75 83 99
Totals $ 27,392 31,432 31,994
</TABLE>
Actual annuity deposits collected for the years ended December 31, 1999, 1998,
and 1997 are detailed below. Deposits collected on these nontraditional
products are not reflected as revenues in the Company's statements of
earnings, as they are recorded directly to policyholder liabilities upon
receipt, in accordance with generally accepted accounting principles.
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Deferred annuities:
Equity-indexed $ 153,503 222,486 6,004
Other 205,550 187,835 222,450
Total deferred annuities 359,053 410,321 228,454
Immediate annuities 30,510 20,682 12,533
Totals $ 389,563 431,003 240,987
</TABLE>
Although annuity sales increased significantly in 1998 from prior years, sales
in 1999 totaling $389.6 million were down 9.6%. However, this level of
production is still significantly higher than 1997 and 1996 sales. The strong
growth in 1998 was primarily attributable to the Company's new equity-indexed
annuity product, as it was first introduced in late 1997. Sales continue to
be strong in the Company's other deferred annuity products, as deposits
collected have increased from $187.8 million in 1998 to $205.6 million in
1999. Additionally, immediate annuities continue to grow, as 1999 and 1998
reflected increases of 47.5% and 65.0%, respectively.
Although sales were lower in 1999, 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.
Although sales of these annuities continue to be strong, production declined
in 1999 primarily due to volatility in the stock market. This volatility
affects both the immediate demand for these annuities and the pricing of these
products. Increased product costs from stock market volatility, particularly
costs of index options used to hedge the equity return component of these
annuities, can reduce potential credited interest to policyholders.
Net investment income for 1999, 1998, and 1997 totaled $191,328,000,
$182,347,000, and $166,348,000, respectively. The increases in investment
income of 4.9% and 9.6% in 1999 and 1998, respectively, are consistent with
the growth in annuity segment assets of 5.7% and 10.8% for the same periods.
The large increases in net investment income in 1999 and 1998 over 1997 are
due to the substantial increase in premium production, primarily from sales of
the Company's equity-indexed annuities, which resulted in increases in
invested assets. Net investment income also includes $10,719,000 and
$8,057,000 of income from index options for 1999 and 1998, respectively.
Income from index options totaled only $18,000 in 1997, as sales of equity-
indexed annuities were minimal in 1997.
Other income was relatively insignificant in 1998 and 1997, totaling $270,000
and $277,000, respectively. However, other income for 1999 totaled
$8,863,000, which includes $8.5 million in income relating to litigation
involving an independent marketing organization. As more fully described in
Item 3, Legal Proceedings, National Western Life Insurance Company, National
Annuity Programs, Inc. (NAP), and others executed a settlement agreement for a
pending declaratory judgment lawsuit. NAP was an independent marketing
general agency under contract with the Company that hired and supervised
agents marketing annuity products on behalf of the Company. The contract was
entered into in 1983 and amended in 1994. The Company alleged that during the
course of the contract NAP violated its terms and conditions, among other
things. By the settlement, each party dismisses with prejudice all claims
asserted by them in the lawsuit. The Company was also released from any
claims for any funds and other rights arising under the contract.
Additionally, the Company paid in 1999 all valid claims for unpaid commissions
to sub-agents of NAP who wrote business for the Company under the contract.
As a result of the settlement, accrued bonus commissions relating to the NAP
contract totaling $8,482,000 were released, as they are no longer considered
a liability to NAP and will not be paid. Accordingly, the release of these
accrued commissions from liabilities in 1999 resulted in additional income of
$8,482,000, before taxes. It is anticipated that any future renewal premiums
received by the Company on currently issued and in force annuity policies
written by NAP sub-agents under the Contract could generate additional
commissions for such sub-agents. The payment of such future commissions is
subject to and conditioned upon receipt of such renewal premiums by the
Company and compliance by the sub-agents with the terms of the agents'
contracts with the Company and NAP.
Annuity contract interest for 1999, 1998, and 1997 totaled $138.6 million,
$135.5 million, and $122.9 million, respectively. While general increases in
contract interest are expected due to the growth in the size of the annuity
block of business, higher interest is also due to increases in equity-indexed
annuities in force and the higher credited rates that may be paid on these
policies. The increases in 1999 and 1998 are largely due to increases in
annuities in force from sales of equity-indexed annuities and higher credited
interest that were paid on these policies. Contract interest on equity-
indexed annuities totaled $20,480,000 and $12,980,000 in 1999 and 1998,
respectively. Amounts for 1997 were insignificant, as sales of these
annuities were minimal in 1997. Although contract interest is higher due to
equity-indexed annuities, net investment income also includes an additional
$10,719,000 and $8,057,000 in 1999 and 1998 from index options which are used
to hedge the equity return component of these products. Differences between
income from index options and contract interest credited to policyholders will
occur for several reasons, 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 reserving treatments
related to minimum guaranteed interest rates.
The impact of these equity-indexed annuity issues on earnings from annuity
operations was experienced by the Company in the third and fourth quarters of
1999. Because of the volatility and large declines in the S&P 500 Index
during the third quarter of 1999, the Company recorded significant decreases
in investment income resulting from unrealized mark-to-market losses on the
options. The S&P 500 Index decline also resulted in lower interest credited
to equity-indexed annuity contracts. However, primarily because of policy
liability reserving treatments related to minimum guaranteed interest rates,
the reduction in annuity contract interest expense was much less than the
decline in investment income, which significantly reduced third quarter 1999
earnings. The Company's fourth quarter 1999 earnings were significantly
higher, largely a result of improvement in stock market conditions from the
1999 third quarter. The increased earnings in the fourth quarter essentially
offset the lower earnings performance of the third quarter, which coincides
with the fluctuations of the S&P 500 Index. For the fourth quarter of 1999,
the S&P 500 Index reversed its poor performance of the previous quarter. The
S&P 500 Index increased significantly, which increased the Company's
investment income from unrealized mark-to-market gains on index options and
produced the improved earnings performance.
In summary, the Company's equity-indexed annuity products are long-term
policies with contractual periods of either nine or fifteen years. The Company
routinely analyzes the profitability of its equity-indexed annuity products
under numerous economic scenarios, including both positive and negative equity
market conditions. Although earnings may not be level or constant from period
to period for this product due to timing of market conditions and policy
liability reserving methods, the Company anticipates the equity-indexed
annuities will be profitable over the long-term contractual periods of the
policies.
Amortization of deferred policy acquisition costs represents the amortization
of the costs of acquiring or producing new business, primarily agents'
commissions, the majority of which are amortized in direct relation to the
anticipated future gross profits of the applicable blocks of business.
Amortization is also impacted by the level of policy surrenders. Amortization
for 1999, 1998, and 1997 was relatively consistent totaling $21.1 million,
$21.6 million, and $21.3 million, respectively.
Other operating expenses totaled $9,772,000, $15,145,000, and $11,223,000 for
1999, 1998, and 1997, respectively. Expenses for 1998 were unusually high
primarily due to two nonrecurring items as previously described in the summary
of consolidated operating results. Additional pension expenses were incurred
in 1998 related to the Company's transfer of its nonqualified defined benefit
plan to a pension administration firm. Also included in 1998 expenses is a
$5,000,000 lawsuit settlement for the Diffie, et al vs. National Western Life
Insurance Company and National Annuity Programs, Inc. class action litigation.
The litigation involved various issues regarding sales of the Company's
annuities.
Other Operations
National Western's primary business encompasses its domestic and international
life insurance operations and its annuity operations. However, National
Western also has small real estate and other investment operations through the
following wholly owned subsidiaries: NWL Investments, Inc., NWL Properties,
Inc., NWL 806 Main, Inc., NWL Services, Inc., and NWL Financial, Inc. 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 to Westcap, and the subsidiary is now operating as a real
estate management company. Earnings for these other operations totaled
$3,238,000, $2,224,000, and $1,821,000 for 1999, 1998, and 1997, respectively.
Earnings were higher in 1999 primarily due to income from the real estate
properties that were transferred from National Western to Westcap.
Most of the income from the Company's subsidiaries is from a life interest in
the Libbie Shearn Moody Trust. This asset was owned by National Western Life
Insurance Company prior to 1997 but was transferred to NWL Services, Inc. in
1997. Gross income distributions from the Trust totaled $3,595,000,
$3,451,000, and $3,335,000 in 1999, 1998, and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The liquidity requirements of the Company are met primarily by funds provided
from operations. Premium deposits and revenues, investment income, and
investment maturities are the primary sources of funds, while investment
purchases and policy benefits are the primary uses of funds. Primary sources
of liquidity to meet cash needs are the Company's securities available for
sale portfolio, net cash provided by operations, and bank line of credit. The
Company's investments consist primarily of marketable debt securities that
could be readily converted to cash for liquidity needs. The Company may also
borrow up to $60 million on its bank line of credit for short-term cash needs.
A primary liquidity concern for the Company's insurance operations is the risk
of early policyholder withdrawals. Consequently, the Company closely
evaluates and manages the risk of early surrenders or withdrawals. The
Company includes provisions within annuity and universal life insurance
policies, such as surrender charges, that help limit early withdrawals. The
Company also prepares cash flow projections and performs cash flow tests under
various market interest rate scenarios to assist in evaluating liquidity needs
and adequacy. The Company currently expects available liquidity sources and
future cash flows to be adequate to meet the demand for funds.
In the past, cash flows from the Company's insurance operations have been more
than adequate to meet current needs. Cash flows from operating activities
were $118 million, $131 million, and $144 million in 1999, 1998, and 1997,
respectively. The lower cash flow in 1999 is largely a result of lawsuit and
bankruptcy settlement payments as described in detail in Item 3, Legal
Proceedings. Net cash flows from the Company's deposit product operations,
which include universal life and investment annuity products, totaled $47
million in 1999 and $113 million in 1998. However, these operations incurred
net cash outflows in 1997 totaling $51 million. The cash outflows in 1997
were due to low annuity production along with increased policy surrenders.
Although surrenders have increased, significant annuity production generated
strong positive cash flow in 1999 and 1998.
The Company also has significant cash flows from both scheduled and
unscheduled investment security maturities, redemptions, and prepayments.
These cash flows totaled $187 million, $159 million, and $144 million in 1999,
1998, and 1997, respectively. The Company again expects significant cash
flows from these sources in 2000 at levels consistent with the past two years.
Capital Resources
The Company relies on stockholders' equity for its capital resources, as there
has been no long-term debt outstanding in 1999 or recent years. The Company
does not anticipate the need for any long-term debt in the near future. There
are also no current or anticipated material commitments for capital
expenditures in 2000.
Stockholders' equity totaled $475.5 million at December 31, 1999, reflecting
an increase of $37 million from 1998. The increase in capital is primarily
from net earnings of $59 million, reduced by net unrealized losses on
investment securities totaling $22 million. The significant decline in values
of investment securities is a direct result of increased interest rates at
December 31, 1999, which lowered the market values of the Company's holdings
in its securities available for sale portfolio. Book value per share at
December 31, 1999, was $135.84, reflecting an 8.4% increase for the year.
CHANGES IN ACCOUNTING PRINCIPLES
Deposit Accounting
In October, 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-7, "Deposit Accounting:
Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk." The SOP specifies classifications for insurance and
reinsurance contracts for which deposit accounting is appropriate and
specifies accounting methods for each. For each insurance and reinsurance
contract accounted for under deposit accounting, a deposit asset or liability
should be recognized at inception and should be measured based on
consideration paid or received, less any premiums or fees to be retained by
the insurer or reinsurer, irrespective of the experience of the contract. The
Company anticipates that this SOP will not have a significant effect on its
financial statements, as the Company's current insurance and reinsurance
contracts all transfer insurance risk. SOP 98-7 is effective for all fiscal
years beginning after June 15, 1999. The Company currently plans to implement
the SOP in the first quarter of 2000.
Derivative Instruments and Hedging Activities
In June, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June, 1999, SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133," was issued deferring SFAS No.
133, which will now be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The statement defines several designations of
derivatives based on the instrument's intended use and specifies the
appropriate accounting treatment for changes in the fair value of the
derivative based on its resulting designation.
The Company currently sells equity-indexed annuities that contain an equity
return component for policyholders which is an embedded derivative instrument.
The Company purchases index options, which are also derivative instruments, to
hedge this equity return component. The index options are reported at fair
value in the Company's financial statements, which is in accordance with SFAS
No. 133 requirements. The Company also uses a fair value approach in
recording policy liabilities for the equity-indexed annuities. However, there
is currently no specific, authoritative interpretation of SFAS No. 133 with
respect to accounting for equity-indexed annuity liabilities. Additional
guidance in 2000 regarding this issue may result in a definitive method
significantly different from that currently used by the Company. As a result,
the ultimate implementation of SFAS No. 133 could have a significant effect on
the Company's results of operations. The Company expects to implement the new
statement in the first quarter of 2001.
REGULATORY AND OTHER ISSUES
Statutory Accounting Practices
Regulations that affect the Company and the insurance industry are often the
result of efforts by the National Association of Insurance Commissioners
(NAIC). The NAIC is an association of state insurance commissioners,
regulators, and support staff that acts as a coordinating body for the state
insurance regulatory process. The NAIC has recently completed a comprehensive
process of codifying statutory accounting practices and procedures. Other
than specific individual state laws, the codification results will be the only
source of prescribed statutory accounting practices. The Company's state of
domicile, Colorado, is currently in the process of adopting the new codified
statutory accounting practices and procedures. Insurance companies must
adopt these new statutory accounting practices in 2001, which may result in
significant changes to existing practices used in the preparation of statutory
financial statements. The Company will perform a review of the entire
newly codified statutory accounting practices and procedures during 2000.
This review process may not be fully completed until the latter portion
of the year. Based on a preliminary review, National Western does not
anticipate a material impact to its capital and surplus position as a result
of implementation of the new prescribed statutory accounting procedures.
Risk-Based Capital Requirements
The NAIC established risk-based capital (RBC) requirements to help state
regulators monitor the financial strength and stability of life insurers by
identifying those companies that may be inadequately capitalized. Under the
NAIC's requirements, each insurer must maintain its total capital above a
calculated threshold or take corrective measures to achieve the threshold.
The threshold of adequate capital is based on a formula that takes into
account the amount of risk each company faces on its products and investments.
The RBC formula takes into consideration four major areas of risk which are:
(i) asset risk which primarily focuses on the quality of investments; (ii)
insurance risk which encompasses mortality and morbidity risk; (iii) interest
rate risk which involves asset/liability matching issues; and (iv) other
business risks.
Due to statutory laws prohibiting public dissemination of certain RBC
information, the Company has chosen not to publish its RBC ratios or levels.
However, the Company's current statutory capital and surplus is significantly
in excess of the threshold RBC requirements.
Year 2000 Issues
The Year 2000 problem, also known as Y2K, was the result of concerns that many
computer software systems would not be able to distinguish the year 2000 from
the year 1900. The Y2K problem arose because many existing computer programs
use only the last two digits to refer to a year, resulting in these programs'
inability to recognize "00" in the date field as the year 2000. If not
corrected, many computer systems may not have been able to process date-
sensitive data accurately beyond the year 1999, resulting in possible system
failures or generation of erroneous results. National Western was cognizant
of these problems for many years, as life insurance and annuity products can
have very long life spans. Thus, many of our systems were originally
developed to process and administer our insurance products into the next
century. National Western worked to alleviate or eliminate Year 2000 problems
for many years. The Company's Year 2000 plan included staff review and
analysis of internal systems, embedded chip technology, and external vendor
interfaces.
National Western incurred no significant Y2K related issues and did not
experience any disruptions in its operations during the transition into 2000.
The Company did not encounter any significant problems with respect to its
systems, and it was not necessary to implement any contingency or business
continuity plans. Likewise, with respect to external vendors, service
providers, and other third parties, National Western did not experience any
significant Y2K related problems. Total costs incurred related to the
Company's Year 2000 plan did not exceed $250,000. Although no problems are
anticipated, the Company will continue to monitor its systems as the year
progresses.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information contained herein or in
other written or oral statements made by or on behalf of National Western Life
Insurance Company or its subsidiaries are or may be viewed as forward-looking.
Although the Company has used appropriate care in developing any such
information, forward-looking information involves risks and uncertainties that
could significantly impact actual results. These risks and uncertainties
include, but are not limited to, matters described in the Company's SEC
filings such as exposure to market risks, anticipated cash flows, future
capital needs, and 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
This information is included in Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations, in the Investments in Debt
and Equity Securities section.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is reported in Attachment A beginning on
page __. See Index to Financial Statements and Schedules on page __ for a
list of financial information included in Attachment A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in auditors or disagreements with auditors which
are reportable pursuant to Item 304 of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
The following information as of January 31, 2000, is furnished with respect to
each director. All terms expire in June of 2000.
<TABLE>
<CAPTION>
Principal Occupation During Last Five First
Name of Director Years and Directorships Elected Age
<S> <S> <C> <C>
Robert L. Moody Chairman of the Board 1963 64
(1) (3) (4) (5) and Chief Executive
Officer of the Company;
Investments, Galveston, Texas
Ross R. Moody President and Chief Operating
(1) (3) Officer of the 1981 37
Company, Austin, Texas
Arthur O. Dummer President, The Donner Company, 1980 66
(1) (2) (3) Salt Lake City, Utah
Harry L. Edwards Retired; Former President and Chief 1969 78
Operating Officer of the Company,
Austin, Texas
E. Douglas McLeod Director of Development, The Moody 1979 58
(4) Foundation, Galveston, Texas
Charles D. Milos Senior Vice President of the Company, 1981 54
(1) (3) Galveston, Texas
Frances A. Moody Executive Director, 1990 30
(4) The Moody Foundation,
Dallas, Texas, 1997 - present;
Investments, Dallas, Texas, 1992 -
1997
Russell S. Moody Investments, Austin, Texas 1988 38
(4)
Louis E. Pauls, Jr. President, Louis Pauls & Company; 1971 64
(2) Investments, Galveston, Texas
E. J. Pederson Executive Vice President, 1992 52
(2) The University of Texas
Medical Branch, Galveston, Texas
<FN>
(1) Member of Executive Committee; (2) Member of Audit Committee; (3) Member
of Investment Committee;
(4) Director of American National Insurance Company of Galveston, Texas; (5)
Director of The Moody National Bank of Galveston, Texas.
</FN>
</TABLE>
Family relationships among the directors are: Mr. Robert Moody and Mr. McLeod
are brothers-in-law and Mr. Robert Moody is the father of Ms. Frances Moody,
Mr. Ross Moody, and Mr. Russell Moody.
(b) Identification of Executive Officers
The following is a list of the Company's executive officers, their ages, and
their positions and offices as of January 31, 2000.
<TABLE>
<CAPTION>
Name of Officer Age Position (Year elected to position)
<S> <C> <S>
Robert L. Moody 64 Chairman of the Board and Chief Executive
Officer (1963-1968, 1971-1980, 1981), Director
Ross R. Moody 37 President and Chief Operating Officer
(1992), Director
Robert L. Busby, III 62 Senior Vice President - Chief
Administrative Officer,
Chief Financial Officer and Treasurer (1992)
Charles P. Baley 61 Senior Vice President - Information
Services (1990)
Richard M. Edwards 47 Senior Vice President - International
Marketing (1990)
Paul D. Facey 48 Senior Vice President - Chief Actuary (1992)
Charles D. Milos 54 Senior Vice President - Investment
Analyst (1990), Director
James P. Payne 55 Senior Vice President - Secretary (1998)
Arthur W. Pickering 58 Senior Vice President - Domestic
Marketing (1994)
Patricia L. Scheuer 48 Senior Vice President - Chief Investment
Officer (1992)
</TABLE>
(c) Identification of Certain Significant Employees
None.
(d) Family Relationships
There are no family relationships among the officers listed except that Mr.
Robert Moody is the father of Mr. Ross Moody. There are no arrangements or
understandings pursuant to which any officer was elected. All officers hold
office for one year and until their successors are elected and qualified,
unless otherwise specified by the Board of Directors.
(e) Business Experience
All of the executive officers listed above have served in various executive
capacities with the Company for more than five years.
(f) Involvement in Certain Legal Proceedings
There are no events pending, or during the last five years, under any
bankruptcy act, criminal proceedings, judgments, or injunctions material to
the evaluation of the ability and integrity of any director or executive
officer except as described below:
In January, 1994, a United States District Court Judge vacated and withdrew
the judgment which had been entered in Case No. H-86-4269, W. Steve Smith,
Trustee vs. Shearn Moody, Jr., et al, United States District Court for the
Southern District of Texas. The Judge also dismissed the case with prejudice.
The judgment had been entered against Robert L. Moody and The Moody National
Bank of Galveston, of which he was Chairman of the Board. Robert L. Moody is
also Chairman of the Board of National Western Life Insurance Company. The
case arose out of complex bankruptcy and related proceedings involving Robert
L. Moody's brother, Shearn Moody, Jr. Subsequently, a global settlement of
Shearn Moody, Jr.'s bankruptcy and related legal proceedings was reached and
executed. As part of the global settlement, the Bankruptcy Trustee
recommended, and other interested parties agreed not to oppose or object to,
the Judge's vacating and withdrawing the judgment and dismissing the case with
prejudice. This case and settlement did not involve the Company and had no
effect on its financial statements.
ITEM 11. EXECUTIVE COMPENSATION
(b) Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
No. of
Securities
Annual Compensation Underlying All Other
Name and Salary Bonus Options Compensation
Principal Position Year (A) (B) (C) (D)
<S> <C> <C> <C> <C> <C>
1Robert L. Moody 1999 $ 1,173,965 $ - - $ 322,229
Chairman of 1998 1,124,174 - 13,000 254,333
the Board and 1997 1,077,350 - 10,000 194,684
Chief Executive
Officer
2Ross R. Moody 1999 440,630 - - 31,299
President 1998 422,496 25,000 12,500 64,457
and Chief 1997 411,198 - 500 50,683
Operating Officer
3Arthur W. Pickering 1999 143,872 113,972 - 15,277
Senior 1998 124,735 126,526 2,500 15,049
Vice President - 1997 124,445 105,687 1,500 13,781
Domestic Marketing
4Richard M. Edwards 1999 163,301 77,909 - 14,435
Senior Vice 1998 159,064 9,605 2,500 10,110
President- 1997 150,019 9,625 1,500 9,568
International
Marketing
5Robert L. Busby, III 1999 205,025 - - 12,254
Senior Vice 1998 193,889 - 1,500 11,576
President - 1997 178,518 - 1,000 10,654
Chief
Administrative
Officer, Chief
Financial Officer
and Treasurer
<FN>
Notes to Summary Compensation Table:
(A) Salary includes directors' fees from National Western Life Insurance
Company and its subsidiaries.
(B) Bonuses include employment and performance related bonuses which are
occasionally granted.
(C) Represents stock options granted under the National Western Life
Insurance Company 1995 Stock and Incentive Plan.
(D) All other compensation includes primarily employer contributions made to
the Company's 401(k) Plan and Non-Qualified Deferred Compensation Plan on
behalf of the employee. However, this item also includes taxable income for
Robert L. Moody, related to his assignment of excess insurance on the Libbie
Shearn Moody Trust of approximately $299,000, $232,000, and $173,000 in 1999,
1998, and 1997, respectively. This item also includes various expense
allowances for Ross R. Moody in 1999, 1998, and 1997 of approximately $5,000,
$42,000, and $34,000, respectively.
</FN>
</TABLE>
(c) Option/SAR Grants Table
During 1995 the Company adopted the National Western Life Insurance Company
1995 Stock and Incentive Plan (the Plan). The purpose of the Plan is to align
the personal financial incentives of key personnel with the long-term growth
of the Company and the interests of the Company's stockholders through the
ownership and performance of the Company's Class A, $1.00 par value, common
stock, to enhance the Company's ability to retain key personnel, and to
attract outstanding prospective employees and directors. The Plan is
effective as of April 21, 1995, and will terminate on April 20, 2005, unless
terminated earlier by the Board of Directors. The number of shares of Class
A, $1.00 par value, common stock which may be issued under the Plan, or as to
which stock appreciation rights or other awards may be granted, may not exceed
300,000. These shares may be authorized and unissued shares or treasury
shares.
All of the employees of the Company and its subsidiaries are eligible to
participate in the Plan. In addition, directors of the Company, other than
Compensation and Stock Option Committee members, are eligible for restricted
stock awards, incentive awards, and performance awards. Company directors,
including members of the Compensation and Stock Option Committee, are eligible
for nondiscretionary stock options.
The Committee approved the issuance of nonqualified stock options to selected
officers of the Company during 1998 and 1997 totaling 48,500 and 21,900,
respectively. Additionally, during 1998 the Committee granted 10,000
nonqualified, nondiscretionary stock options to Company directors. No
nonqualified stock options were issued in 1999. The directors' stock options
vest 20% annually following one full year of service to the Company from the
date of grant. The officers' stock options vest 20% annually following three
full years of service to the Company from the date of grant. The exercise
prices of the stock options were set at the fair market values of the common
stock on the dates of grant.
(d) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Securities Underlying In-The-
Shares Unexercised Options Money Options
Acquired
On Value Exercise- Unexercis- Exercis- Unexercis-
Name Exercise Realized able able able able
<S> <C> <C> <C> <C> <C> <C>
1 Robert
L. Moody - $ - 13,080 49,320 $ 315,440 $ 499,260
2 Ross
R. Moody - - 3,100 22,600 58,888 180,650
3 Arthur W.
Pickering 400 15,415 500 7,100 15,250 51,550
4 Richard
M. Edwards - - 900 7,100 16,700 51,550
5 Robert L.
Busby, III 1,000 54,368 - 5,700 - 76,100
</TABLE>
(e) Long-Term Incentive Plan Awards Table
None.
(f) Defined Benefit or Actuarial Plan Disclosure
The Company currently has two employee defined benefit plans for the benefit
of its employees and officers. A brief description and formulas by which
benefits are determined for each of the plans are detailed as follows:
Qualified Defined Benefit Plan - This plan covers all full-time employees and
officers of the Company and provides benefits based on the participant's years
of service and compensation. The Company makes annual contributions to the
plan that comply with the minimum funding provisions of the Employee
Retirement Income Security Act.
Annual pension benefits for those employees who became eligible participants
prior to January 1, 1991, are calculated as the sum of the following:
(1) 50% of the participant's final 5-year average annual compensation at
December 31, 1990, less 50% of their primary social security benefit
determined at December 31, 1990; this net amount is then prorated for less
than 15 years of benefit service at normal retirement date. This result is
multiplied by a fraction which is the participant's years of benefit service
at December 31, 1990, divided by the participant's years of benefit service at
normal retirement date.
(2) 1.5% of the participant's compensation earned during each year of benefit
service after December 31, 1990.
Annual pension benefits for those employees who become eligible participants
on or subsequent to January 1, 1991, are calculated as 1.5% of their
compensation earned during each year of benefit service.
Non-Qualified Defined Benefit Plan - This plan covers those officers who were
in the position of senior vice president or above prior to 1991 and other
employees who have been designated by the President of the Company as being in
the class of persons who are eligible to participate in the plan. This plan
also provides benefits based on the participant's years of service and
compensation. However, no minimum funding standards are required.
The benefit to be paid pursuant to this Plan to a Participant who retires at
his normal retirement date shall be equal to (a) minus (b) minus (c) where:
(a) is the benefit which would have been payable at the participant's normal
retirement date under the terms of the Qualified Defined Benefit Plan as of
December 31, 1990, as if that Plan had continued without change, and,
(b) is the benefit which actually becomes payable under the terms of the
Qualified Defined Benefit Plan at the participant's normal retirement date,
and,
(c) is the actuarially equivalent life annuity which may be provided by an
accumulation of 2% of the participant's compensation for each year of service
on or after January 1, 1991, accumulated at an assumed interest rate of 8.5%
to his normal retirement date.
In no event will the benefit be greater than the benefit which would have been
payable at normal retirement date under the terms of the Qualified Defined
Benefit Plan as of December 31, 1990, as if that plan had continued without
change.
The estimated annual benefits payable to the named executive officers upon
retirement, at normal retirement age, for the Company's defined benefit plans
are as follows:
<TABLE>
<CAPTION>
Estimated Annual Benefits
Qualified Non-Qualified
Defined Defined
Name Benefit Plan Benefit Plan Totals
<S> <C> <C> <C>
1 Robert L. Moody $ 125,335 369,331 494,666
2 Ross R. Moody 87,868 - 87,868
3 Arthur W. Pickering 28,305 - 28,305
4 Richard M. Edwards 66,596 6,843 73,439
5 Robert L. Busby, III 47,907 34,238 82,145
</TABLE>
During 1998 the Company transferred the pension obligations and administrative
responsibilities of the non-qualified defined benefit plan to a pension
administration firm. Upon transfer, the Company made a payment to the firm to
cover current and future liabilities and administration of the plan. However,
as more fully described in Note 7, Pension Plans, of the accompanying
financial statements, National Western retains certain contingent liabilities
with respect to the plan.
(g) Compensation of Directors
All directors of the Company currently receive $18,000 a year and $500 for
each board meeting attended. They are also reimbursed for actual travel
expenses incurred in performing services as directors. An additional $500 is
paid for each committee meeting attended. However, a director attending
multiple meetings on the same day receives only one meeting fee. The amounts
paid pursuant to these arrangements are included in the summary compensation
table under Item 11(b). The directors and their dependents are also insured
under the Company's group insurance program.
During 1995 the Company adopted the National Western Life Insurance Company
1995 Stock and Incentive Plan (the Plan), as more fully described in Item
11(c). Directors of the Company, other than Compensation and Stock Option
Committee members, are eligible for restricted stock awards, incentive awards,
and performance awards. Nonemployee directors, including members of the
Compensation and Stock Option Committee, are eligible for nondiscretionary
stock options. On May 19, 1995, the Committee approved the issuance of 7,000
nonqualified, nondiscretionary stock options to nonemployee Company directors,
with each such director receiving 1,000 stock options. On June 19, 1998, the
stockholders approved the issuance of 10,000 nonqualified, nondiscretionary
stock options to all Company directors, with each such director receiving
1,000 stock options.
Directors of the Company's subsidiary, NWL Investments, Inc., receive $250
annually. Nonemployee directors of the Company's subsidiary, NWL Services,
Inc., receive $1,000 per board meeting attended.
(h) Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
Two of the named executive officers, Arthur W. Pickering and Richard M.
Edwards, had bonus compensation contracts with the Company during 1999. The
contracts consisted of several components in which certain levels of Company
performance relating to annuity account balances, life insurance persistency
rates, life insurance premiums, and annuity contract deposits were required
in order to earn bonuses. Compensation bonuses paid to Mr. Pickering and Mr.
Edwards are disclosed in part (b) of this item.
(i) Report on Repricing of Options/SARs
None.
(j) Compensation Committee Interlocks and Insider Participation
The Company's Board of Directors performs the functions of an executive
compensation committee. The Board is responsible for developing and
administering the policies that determine executive compensation.
Additionally, a separate Compensation and Stock Option Committee, comprised of
outside, independent directors, determines compensation for the three highest-
paid Company executives. The committee also performs various projects
relating to executive compensation at the request of the Board of Directors.
Those directors serving on the committee include Arthur O. Dummer, Harry L.
Edwards, and E. J. Pederson.
Mr. Robert Moody, Mr. Ross Moody, and Mr. Charles Milos serve as directors and
also serve as officers and employees of National Western Life Insurance
Company. Mr. Ross Moody serves as an officer and director of the Company's
wholly owned subsidiaries, The Westcap Corporation, NWL 806 Main, Inc., NWL
Investments, Inc., NWL Properties, Inc., NWL Financial, Inc., and NWL
Services, Inc. Mr. Charles Milos serves as an officer and director of The
Westcap Corporation and as an officer of NWL 806 Main, Inc., NWL Investments,
Inc., NWL Properties, Inc., NWL Financial, Inc. and NWL Services, Inc. Mr.
Robert Moody is an officer and Mr. Arthur Dummer is an officer and director of
NWL Services, Inc. Mr. Harry Edwards serves as a director and was formerly an
officer of National Western Life Insurance Company.
The Donner Company, 100% owned by Mr. Dummer, who is a director of National
Western Life Insurance Company and an officer and director of NWL Services,
Inc., was paid $80,902 in 1999 pursuant to an agreement between The Donner
Company and a reinsurance intermediary relating to a reinsurance contract
between the Company and certain life insurance reinsurers.
No compensation committee interlocks exist with other unaffiliated companies.
(k) Board Compensation Committee Report on Executive Compensation
The Company's Board of Directors determines and approves executive
compensation, along with developing and administering the policies that
determine executive compensation.
Executive compensation, including that of the chief executive officer, is
comprised primarily of a base salary. The salary is adjusted annually based on
a performance review of the individual as well as the performance of the
Company as a whole. The president and chief executive officer make
recommendations annually to the Board of Directors regarding such salary
adjustments. The review encompasses the following factors: (1) contributions
to the Company's short and long-term strategic goals, including financial
goals such as Company revenues and earnings, (2) achievement of specific goals
within the individual's realm of responsibility, (3) development of management
and employees within the Company, and (4) performance of leadership within the
industry. These policies are reviewed periodically by the Board of Directors
to ensure the support of the Company's overall business strategy and to
attract and retain key executives.
As previously described, a separate Compensation and Stock Option Committee,
comprised of outside, independent directors, determines compensation for the
three highest-paid Company executives. The committee also performs various
projects relating to executive compensation at the request of the Board of
Directors. The policies used by the Compensation and Stock Option Committee
in determining compensation are similar to those described above for all other
Company executives.
(1) Performance Graph
The following graph compares the change in the Company's cumulative total
stockholder return on its common stock with the Nasdaq - U.S. Companies Index
and the Nasdaq Insurance Stock Index. The graph assumes that the value of the
Company's common stock and each index was $100 at December 31, 1994, and that
all dividends were reinvested.
For the purpose of this electronic filing, the coordinates of the graph have
been provided below:
<TABLE>
<CAPTION>
December 31,
1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C>
National Western
Life Insurance
Company 100.0 161.2 250.4 292.1 338.1 197.5
Nasdaq Stock
Market
(US Companies) 100.0 141.3 173.9 213.1 300.2 545.7
Nasdaq Insurance
Stocks 100.0 142.0 161.9 237.5 211.6 164.3
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Set forth below is certain financial information concerning persons who are
known by the Company to own beneficially more than 5% of any class of the
Company's common stock on December 31, 1999:
<TABLE>
<CAPTION>
Amount and Nature of
Name and Address Title Beneficial Ownership Percent
of of Record and of
Beneficial Owners Class Beneficially Class
<S> <S> <C> <C>
Robert L. Moody Class A Common 1,160,896 35.17%
2302 PostOffice Class B Common 198,074 99.04%
Street, Suite 702
Galveston, Texas
Westport Asset Class A Common 359,400 10.89%
Management, Inc.
253 Riverside Avenue
Westport, Connecticut
Tweedy Browne Company Class A Common 323,345 9.80%
52 Vanderbilt Avenue
New York, New York
FMR Corp. Class A Common 170,000 5.15%
82 Devonshire Street
Boston, Massachusetts
</TABLE>
(b) Security Ownership of Management
The following table sets forth as of December 31, 1999, information concerning
the beneficial ownership of the Company's common stock by all directors, named
executive officers, and all directors and executive officers of the Company
as a group:
<TABLE>
<CAPTION>
Amount and Nature of
Title Beneficial Ownership Percent
Directors of Record and of
and Officers Class Beneficially Class
<S> <S> <C> <C>
Directors and
Named Executive
Officers:
Robert L. Moody Class A Common 1,160,896 35.17%
Class B Common 198,074 99.04%
Ross R. Moody Class A Common 625 .02%
Class B Common 482 .24%
Directors:
Arthur O. Dummer Class A Common 15 -
Class B Common - -
Harry L. Edwards Class A Common 20 -
Class B Common - -
E. Douglas McLeod Class A Common 10 -
Class B Common - -
Charles D. Milos Class A Common 528 .02%
Class B Common - -
Frances A. Moody Class A Common 2,475 .07%
Class B Common 482 .24%
Russell S. Moody Class A Common 2,475 .07%
Class B Common 482 .24%
Louis E. Pauls, Jr. Class A Common 10 -
Class B Common - -
E. J. Pederson Class A Common 100 -
Class B Common - -
Named Executive
Officers:
Robert L. Busby, III Class A Common 6 -
Class B Common - -
Richard M. Edwards Class A Common 303 .01%
Class B Common - -
Arthur W. Pickering Class A Common - -
Class B Common - -
Directors and
Executive Class A Common 1,167,941 35.38%
Officers as a Group Class B Common 199,520 99.76%
</TABLE>
(c) Changes in Control
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with Management and Others
The Donner Company, 100% owned by Mr. Arthur Dummer, who is a director of
National Western Life Insurance Company, was paid $80,902 in 1999 pursuant to
an agreement between The Donner Company and a reinsurance intermediary
relating to a reinsurance contract between the Company and certain life
insurance reinsurers.
Moody Insurance Group, Inc., was paid $348,284 in commissions in 1999 pursuant
to an agency contract with National Western Life Insurance Company. Moody
Insurance Group, Inc. is wholly owned by Mr. Robert L. Moody, Jr. Mr. Robert
L. Moody, Jr., is an employee of the Company and the son of Mr. Robert L.
Moody, who serves as a director and chief executive officer of the Company,
the brother of Mr. Ross R. Moody, who serves as a director and president of
the Company, and the brother of Mr. Russell S. Moody and Ms. Frances A. Moody,
who serve as directors of the Company. The commissions paid were based on
premiums and deposits totaling approximately $15,624,000 from sales of
National Western life insurance and annuity products by Moody Insurance Group,
Inc., and Mr. Robert L. Moody, Jr., in 1999. In addition, Mr. Robert L.
Moody, Jr., personally received $498 in commissions in 1999 pursuant to an
agency contract between himself and the Company.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management
The Company holds three mortgage loans issued to Gal-Tex Hotel Corporation,
which is owned 50% by the Libbie Shearn Moody Trust and 50% by The Moody
Foundation. The first mortgage loan in the amount of $2,166,000 was issued in
1988 and originally matured in May of 1998. It was extended during 1998 to
May of 2003 and pays interest of 8%. The loan is secured by property
consisting of a hotel located in Kingsport, Tennessee. The second mortgage
loan in the amount of $7,915,000 was issued in 1994, will mature in October of
2004, and pays interest of 8.75%. The loan is secured by property consisting
of a hotel located in Houston, Texas. The third mortgage loan in the amount
of $1,704,000 was issued in 1995, will mature in January of 2006, and pays
interest of 9%. The loan is secured by property consisting of a hotel located
in Woodstock, Virginia. Each of these loans is current as to principal and
interest payments.
The Company's wholly owned subsidiary, NWL Services, Inc., is the beneficial
owner of a life interest (1/8 share), previously owned by Mr. Robert L. Moody,
in the trust estate of Libbie Shearn Moody. The trustee of this estate is The
Moody National Bank of Galveston. The Moody National Bank is ultimately
controlled by the Three R Trust, Galveston, Texas, whose ultimate
beneficiaries are the children of Robert L. Moody, who are Robert L. Moody,
Jr., Ross R. Moody, Russell S. Moody, and Frances A. Moody. The Moody
Foundation is a private charitable foundation governed by a Board of Trustees
of three members. Mr. Robert L. Moody and Mr. Ross R. Moody are members of
the Board of Trustees.
(d) Transactions with Promoters
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) 1. Listing of Financial Statements
See Attachment A, Index to Financial Statements and Schedules, on page __ for
a list of financial statements included in this report.
(a) 2. Listing of Financial Statement Schedules
See Attachment A, Index to Financial Statements and Schedules, on page __ for
a list of financial statement schedules included in this report.
All other schedules are omitted because they are not applicable, not required,
or because the information required by the schedule is included elsewhere in
the financial statements or notes.
(a) 3. Listing of Exhibits
Exhibit 2 - Order Confirming Third Amended Joint Consensual Plan Of
Reorganization Proposed By The Debtors And The Official
Committee Of Unsecured Creditors (As Modified As Of August
28, 1998) (incorporated by reference to Exhibit 2 to the
Company's Form 8-K dated August 28, 1998).
Exhibit 3(a) - Restated Articles of Incorporation of National Western Life
Insurance Company dated April 10, 1968 (incorporated by
reference to Exhibit 3(a) to the Company's Form 10-K for the
year ended December 31, 1995).
Exhibit 3(b) - Amendment to the Articles of Incorporation of National
Western Life Insurance Company dated July 29, 1971
(incorporated by reference to Exhibit 3(b) to the Company's
Form 10-K for the year ended December 31, 1995).
Exhibit 3(c) - Amendment to the Articles of Incorporation of National
Western Life Insurance Company dated May 10, 1976
(incorporated by reference to Exhibit 3(c) to the Company's
Form 10-K for the year ended December 31, 1995).
Exhibit 3(d) - Amendment to the Articles of Incorporation of National
Western Life Insurance Company dated April 28, 1978
(incorporated by reference to Exhibit 3(d) to the Company's
Form 10-K for the year ended December 31, 1995).
Exhibit 3(e) - Amendment to the Articles of Incorporation of National
Western Life Insurance Company dated May 1, 1979
(incorporated by reference to Exhibit 3(e) to the Company's
Form 10-K for the year ended December 31, 1995).
Exhibit 3(f) - Bylaws of National Western Life Insurance Company as amended
through April 24, 1987 (incorporated by reference to Exhibit
3(f) to the Company's Form 10-K for the year ended December
31, 1995).
Exhibit 10(a) - National Western Life Insurance Company Non-Qualified Defined
Benefit Plan dated July 26, 1991 (incorporated by reference
to Exhibit 10(a) to the Company's Form 10-K for the year
ended December 31, 1995).
Exhibit 10(b) - National Western Life Insurance Company Officers' Stock Bonus
Plan effective December 31, 1992 (incorporated by reference
to the Company's Form S-8 registration dated January 27,
1994).
Exhibit 10(c) - National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan, as amended and restated, dated
March 27, 1995 (incorporated by reference to Exhibit 10(c) to
the Company's Form 10-K for the year ended December 31,
1995).
Exhibit 10(d) - First Amendment to the National Western Life Insurance
Company Non-Qualified Deferred Compensation Plan effective
July 1, 1995 (incorporated by reference to Exhibit 10(d) to
the Company's Form 10-K for the year ended December 31,
1995).
Exhibit 10(e) - National Western Life Insurance Company 1995 Stock and
Incentive Plan (incorporated by reference to Exhibit 10(e) to
the Company's Form 10-K for the year ended December 31,
1995).
Exhibit 10(f) - First Amendment to the National Western Life Insurance
Company Non-Qualified Defined Benefit Plan effective December
17, 1996 (incorporated by reference to Exhibit 10(f) to the
Company's Form 10-K for the year ended December 31, 1996).
Exhibit 10(g) - Second Amendment to the National Western Life Insurance
Company Non-Qualified Defined Benefit Plan effective December
17, 1996 (incorporated by reference to Exhibit 10(g) to the
Company's Form 10-K for the year ended December 31, 1996).
Exhibit 10(h) - Second Amendment to the National Western Life Insurance
Company Non-Qualified Deferred Compensation Plan effective
December 17, 1996 (incorporated by reference to Exhibit 10(h)
to the Company's Form 10-K for the year ended December 31,
1996).
Exhibit 10(i) - Third Amendment to the National Western Life Insurance
Company Non-Qualified Deferred Compensation Plan effective
December 17, 1996 (incorporated by reference to Exhibit 10(i)
to the Company's Form 10-K for the year ended December 31,
1996).
Exhibit 10(j) - Fourth Amendment to the National Western Life Insurance
Company Non-Qualified Deferred Compensation Plan effective
June 20, 1997 (incorporated by reference to Exhibit 10(j) to
the Company's Form 10-K for the year ended December 31,
1997).
Exhibit 10(k) - First Amendment to the National Western Life Insurance
Company 1995 Stock and Incentive Plan effective June 19, 1998
(incorporated by reference to Exhibit 10(k) to the Company's
Form 10-Q for the quarter ended June 30, 1998).
Exhibit 10(l) - Joint Motion For Preliminary Approval Of Settlement
Agreement, To Authorize Class Notice, To Enjoin Other Actions
And To Schedule Fairness Hearing (incorporated by reference
to Exhibit 10(l) to the Company's Form 8-K dated September 8,
1998).
Exhibit 10(m) - Fifth Amendment to the National Western Life Insurance
Company Non-Qualified Deferred Compensation Plan effective
July 1, 1998 (incorporated by reference to Exhibit 10(l) to
the Company's Form 10-Q for the quarter ended September 30,
1998).
Exhibit 10(n) - Sixth Amendment to the National Western Life Insurance
Company Non-Qualified Deferred Compensation Plan effective
August 7, 1998 (incorporated by reference to Exhibit 10(n) to
the Company's Form 10-K for the year ended December 31,
1998).
Exhibit 10(o) - Third Amendment to the National Western Life Insurance
Company Non-Qualified Defined Benefit Plan effective August
7, 1998 (incorporated by reference to Exhibit 10(o) to the
Company's Form 10-K for the year ended December 31, 1998).
Exhibit 10(p) - Exchange Agreement by and among National Western Life
Insurance Company, NWL Services, Inc., Alternative Benefit
Management, Inc., and American National Insurance Company
effective November 23, 1998 (incorporated by reference to
Exhibit 10(p) to the Company's Form 10-K for the year ended
December 31, 1998).
Exhibit 10(q) - Bonus Agreement by and between National Western Life
Insurance Company and Richard M. Edwards effective August 1,
1999 (filed on page __ of this report).
Exhibit 10(r) - Bonus Agreement by and between National Western Life
Insurance Company and Arthur W. Pickering effective August
10, 1999 (filed on page __ of this report).
Exhibit 21 - Subsidiaries of the Registrant (filed on page ___ of this
report).
Exhibit 27 - Financial Data Schedule (filed electronically pursuant to
Regulation S-K).
(b) Reports on Form 8-K
A report on Form 8-K dated September 30, 1999, was filed by the Company on
October 7, 1999, disclosing the execution of a settlement agreement of a
pending lawsuit between National Western Life Insurance Company, National
Annuity Programs, Inc., Robert L. Myer, and certain affiliates of Myer as
described in detail in Item 3, Legal Proceedings.
(c) Exhibits
Exhibits required by Regulation S-K are listed as to location in the Listing
of Exhibits in Item 14(a)3 above. Exhibits not referred to have been omitted
as inapplicable or not required.
(d) Financial Statement Schedules
The financial statement schedules required by Regulation S-K are listed as to
location in Attachment A, Index to Financial Statements and Schedules, on page
__ of this report.
ATTACHMENT A
Index to Financial Statements and Schedules
Page
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1999 and 1998
Consolidated Statements of Earnings for the years ended December 31,
1999, 1998, and 1997
Consolidated Statements of Comprehensive Income for the years ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998, and 1997
Notes to Consolidated Financial Statements
Schedule I - Summary of Investments Other Than Investments in Related
Parties, December 31, 1999
Schedule V - Valuation and Qualifying Accounts for the years ended
December 31, 1999, 1998, and 1997
All other schedules are omitted because they are not applicable, not required,
or because the information required by the schedule is included elsewhere in
the financial statements or notes.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
National Western Life Insurance Company
Austin, Texas
We have audited the consolidated financial statements of National Western Life
Insurance Company and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of National
Western Life Insurance Company and subsidiaries at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
KPMG LLP
Austin, Texas
March 3, 2000
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Cash and investments:
Securities held to maturity,
at amortized cost
(fair value: $2,084,494 and $2,124,715) $ 2,151,924 2,029,728
Securities available for sale, at fair
value (cost: $741,608 and $696,333) 717,948 735,587
Mortgage loans, net of allowance for
possible losses ($4,104 and $4,640) 183,902 174,921
Policy loans 117,309 124,441
Index options 32,820 23,900
Other long-term investments 32,766 24,999
Cash and short-term investments 14,010 24,508
Total cash and investments 3,250,679 3,138,084
Deferred policy acquisition costs 369,665 314,493
Accrued investment income 47,756 44,777
Other assets 14,728 20,601
Assets of discontinued operations - 48
$ 3,682,828 3,518,003
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(In thousands except share amounts)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
<S> <C> <C>
LIABILITIES:
Future policy benefits:
Traditional life and annuity products $ 165,020 167,248
Universal life and investment
annuity contracts 2,983,060 2,812,230
Other policyholder liabilities 24,103 23,955
Federal income taxes payable:
Current 4,763 5,221
Deferred 4,659 9,646
Other liabilities 25,701 61,290
Liabilities of discontinued operations - 48
Total liabilities 3,207,306 3,079,638
COMMITMENTS AND CONTINGENCIES (Notes 4,
7, 9, and 16)
STOCKHOLDERS' EQUITY:
Common stock:
Class A - $1 par value; 7,500,000
shares authorized; 3,300,728
and 3,298,128 shares issued and
outstanding in 1999 and 1998 3,301 3,298
Class B - $1 par value; 200,000 shares
authorized, issued
and outstanding in 1999 and 1998 200 200
Additional paid-in capital 25,028 24,899
Accumulated other comprehensive income (loss) (3,566) 18,634
Retained earnings 450,559 391,334
Total stockholders' equity 475,522 438,365
$ 3,682,828 3,518,003
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
For the Years Ended December 31, 1999, 1998, and 1997
(In thousands except per share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Premiums and other revenue:
Life and annuity premiums $ 11,310 13,165 15,812
Universal life and
investment annuity
contract revenues 83,768 83,169 80,250
Net investment income 242,980 233,844 217,446
Other income 8,944 1,052 354
Realized gains (losses)
on investments 4,481 2,384 (1,588)
Total premiums and other revenue 351,483 333,614 312,274
Benefits and expenses:
Life and other policy benefits 34,775 35,646 37,361
Decrease in liabilities for
future policy benefits (2,319) (3,205) (2,076)
Amortization of deferred
policy acquisition costs 39,148 40,415 39,934
Universal life and investment
annuity contract interest 162,302 158,889 145,200
Other operating expenses 27,764 35,504 27,560
Total benefits and expenses 261,670 267,249 247,979
Earnings before Federal income taxes
and discontinued operations 89,813 66,365 64,295
Federal income taxes 30,588 17,347 21,723
Earnings from continuing operations 59,225 49,018 42,572
Losses from discontinued operations - (14,125) (1,000)
Net earnings $ 59,225 34,893 41,572
Basic Earnings Per Share:
Earnings from continuing
operations $ 16.92 14.02 12.20
Losses from discontinued
operations - (4.04) (0.29)
Net earnings $ 16.92 9.98 11.91
Diluted Earnings Per Share:
Earnings from continuing
operations $ 16.78 13.87 12.09
Losses from discontinued
operations - (4.00) (0.28)
Net earnings $ 16.78 9.87 11.81
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 1999, 1998, and 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net earnings $ 59,225 34,893 41,572
Other comprehensive income
(loss), net of effects of
deferred policy acquisition
costs and taxes:
Unrealized gains (losses)
on Securities:
Unrealized holding
gains (losses)
arising during period (20,051) 3,315 5,675
Reclassification adjustment
for net gains
included in net earnings (2,111) (581) (690)
Amortization of net
unrealized gains
related to transferred
securities (250) (516) (1,056)
Net unrealized gains
(losses) on securities (22,412) 2,218 3,929
Foreign currency
translation adjustments 212 148 2,486
Other comprehensive income (loss) (22,200) 2,366 6,415
Comprehensive income $ 37,025 37,259 47,987
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998, and 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Common stock:
Balance at beginning of year $ 3,498 3,492 3,491
Shares exercised under
stock option plan 3 6 1
Balance at end of year 3,501 3,498 3,492
Additional paid-in capital:
Balance at beginning of year 24,899 24,662 24,647
Shares exercised under
stock option plan 129 237 15
Balance at end of year 25,028 24,899 24,662
Accumulated other comprehensive
income (loss):
Unrealized gains (losses)
on securities:
Balance at beginning of year 16,000 13,782 9,853
Change in unrealized gains
(losses) during period (22,412) 2,218 3,929
Balance at end of year (6,412) 16,000 13,782
Foreign currency translation
adjustments:
Balance at beginning of year 2,634 2,486 -
Change in translation
adjustments during period 212 148 2,486
Balance at end of year 2,846 2,634 2,486
Accumulated other comprehensive
income (loss) at end of year (3,566) 18,634 16,268
Retained earnings:
Balance at beginning of year 391,334 356,441 314,869
Net earnings 59,225 34,893 41,572
Balance at end of year 450,559 391,334 356,441
Total stockholders' equity $ 475,522 438,365 400,863
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998, and 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating
activities:
Net earnings $ 59,225 34,893 41,572
Adjustments to reconcile
net earnings to net
cash provided
by operating activities:
Universal life and investment
annuity contract interest 162,302 158,889 145,200
Surrender charges and
other policy revenues (37,811) (40,267) (42,149)
Realized (gains)
losses on investments (4,481) (2,384) 1,588
Accrual and amortization
of investment income (4,505) (7,763) (6,256)
Depreciation and amortization 1,028 997 900
Decrease (increase) in
other assets 1,357 71 (11)
Increase in accrued
investment income (2,979) (3,727) (1,547)
Decrease (increase) in
deferred policy acquisition costs (26,289) (24,438) 989
Decrease in liabilities
for future policy benefits (2,319) (3,205) (2,076)
Increase (decrease)
in other policyholder liabilities 148 (1,046) 598
Increase (decrease) in
Federal income taxes payable 6,503 (2,189) 2,195
Increase (decrease)
in other liabilities (35,589) 29,396 3,367
Decrease (increase) in
value of index options 2,330 (7,682) (18)
Other (527) (730) -
Net cash provided
by operating activities 118,393 130,815 144,352
Cash flows from investing activities:
Proceeds from sales of:
Securities held to maturity - 2,978 1,993
Securities available for sale 56,126 - 50,706
Other investments 2,180 4,640 2,109
Proceeds from maturities
and redemptions of:
Securities held to maturity 114,448 99,495 105,162
Securities available for sale 56,782 59,035 38,529
Index options 16,201 403 -
Purchases of:
Securities held to maturity (231,136) (266,580) (115,095)
Securities available for sale (152,595) (124,142) (191,168)
Other investments (38,715) (20,071) (5,950)
Principal payments on
mortgage loans 40,145 37,805 40,987
Cost of mortgage loans acquired (45,348) (29,572) (31,654)
Decrease in policy loans 7,132 9,385 8,251
Decrease in assets of
discontinued operations 48 844 365
Decrease in liabilities
of discontinued operations (48) (844) (365)
Other (1,107) (892) (234)
Net cash used in investing
activities (175,887) (227,516) (96,364)
<FN>
(Continued on next page)
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Years Ended December 31, 1999, 1998, and 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash flows from financing
activities:
Deposits to account balances
for universal life and
investment annuity contracts $ 410,666 455,709 267,515
Return of account balances
on universal life and
investment annuity contracts (363,802) (342,613) (319,007)
Issuance of common stock
under stock option plan 132 243 16
Net cash provided by (used in)
financing activities 46,996 113,339 (51,476)
Net increase (decrease) in cash and
short-term investments (10,498) 16,638 (3,488)
Cash and short-term investments at
beginning of year 24,508 7,870 11,358
Cash and short-term investments
at end of year $ 14,010 24,508 7,870
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 190 340 326
Income taxes 24,084 19,536 19,395
Noncash investing activities:
Foreclosed mortgage loans $ - - 2,320
Mortgage loans originated
to facilitate
the sale of real estate 3,000 1,032 1,556
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of National Western Life Insurance Company and
its wholly owned subsidiaries (the Company), The Westcap Corporation, NWL
Investments, Inc., NWL Properties, Inc., NWL 806 Main, Inc., NWL Services,
Inc., and NWL Financial, Inc. The Westcap Corporation ceased brokerage
operations during 1995 and filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code in 1996. As a result, The Westcap Corporation is
reflected as discontinued operations in the accompanying financial statements.
The bankruptcy reorganization was completed in January, 1999, National Western
retained 100% continuing ownership of the reorganized Westcap, and the
subsidiary is now operating as a real estate management company. All
significant intercorporate transactions and accounts have been eliminated in
consolidation.
(B) Basis of Presentation - The accompanying consolidated financial statements
have been prepared in conformity with generally accepted accounting principles
which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosures of contingent assets
and liabilities, and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Significant estimates included in the accompanying financial statements
include (1) contingent liabilities related to litigation, (2) recoverability
of deferred policy acquisition costs, (3) estimated losses related to
discontinued operations, and (4) valuation allowances for mortgage loans.
National Western Life Insurance Company also files financial statements with
insurance regulatory authorities which are prepared on the basis of statutory
accounting practices which are significantly different from financial
statements prepared in accordance with generally accepted accounting
principles. These differences are described in detail in the statutory
information section of this note.
(C) Investments - Investments in debt securities the Company purchases with
the intent to hold to maturity are classified as securities held to maturity.
The Company has the ability to hold the securities, as it would be unlikely
that forced sales of securities would be required prior to maturity to cover
payments of liabilities. As a result, securities held to maturity are carried
at amortized cost less declines in value that are other than temporary.
Investments in debt and equity securities that are not classified as
securities held to maturity are reported as securities available for sale.
Securities available for sale are reported in the accompanying financial
statements at individual fair value. Any valuation changes resulting from
changes in the fair value of the securities are reflected as a component of
stockholders' equity in accumulated other comprehensive income. These
unrealized gains or losses in stockholders' equity are reported net of taxes
and adjustments to deferred policy acquisition costs.
Transfers of securities between categories are recorded at fair value at the
date of transfer. The unrealized holding gains or losses for securities
transferred from available for sale to held to maturity are included in
accumulated other comprehensive income and amortized into earnings over the
remaining life of the security as an adjustment to yield in a manner
consistent with the amortization or accretion of premium or discount on the
associated security.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to yield using the effective interest method.
Realized gains and losses for securities available for sale and securities
held to maturity are included in earnings and are derived using the specific
identification method for determining the cost of securities sold. A decline
in the fair value below cost that is deemed other than temporary is charged to
earnings, resulting in the establishment of a new cost basis for the security.
Mortgage loans and other long-term investments are stated at cost, less
unamortized discounts and allowances for possible losses. Policy loans are
stated at their aggregate unpaid balances. Real estate is stated at the lower
of cost or fair value less estimated costs to sell.
(D) Cash Equivalents - For purposes of the statements of cash flows, the
Company considers all short-term investments with a maturity at date of
purchase of three months or less to be cash equivalents.
(E) Derivative Financial Instruments - The Company purchases over-the-counter
index options, which are derivative financial instruments, to hedge the equity
return component of its equity-indexed annuity products. The index options
act as hedges to match closely the returns on the S&P 500 Composite Stock
Price Index which may be paid to policyholders. As a result, changes to
policyholders' liabilities are substantially offset by changes in the value of
the options. Cash is exchanged upon purchase of the index options, and no
principal or interest payments are made by either party during the option
periods. Upon maturity or expiration of the options, cash is paid to the
Company based on the S&P 500 performance and terms of the contract.
The index options are reported at fair value in the accompanying financial
statements. The changes in the values of the index options and the changes in
the policyholder liabilities are both reflected in the statement of earnings.
Any gains or losses from the sale or expiration of the options, as well as
period-to-period changes in values, are reflected as net investment income in
the statement of earnings.
Although there is credit risk in the event of nonperformance by counterparties
to the index options, the Company does not expect any counterparties to fail
to meet their obligations, given their high credit ratings. In addition,
credit support agreements are in place with substantially all counterparties,
which further reduces the Company's credit exposure. At December 31, 1999
and 1998, the fair values of index options owned by the Company totaled
$32,820,000 and $23,900,000, respectively.
(F) Insurance Revenues and Expenses - Premiums on traditional life insurance
products are recognized as revenues as they become due or, for short duration
contracts, over the contract periods. Benefits and expenses are matched with
premiums in arriving at profits by providing for policy benefits over the
lives of the policies and by amortizing acquisition costs over the
premium-paying periods of the policies. For universal life and investment
annuity contracts, revenues consist of policy charges for the cost of
insurance, policy administration, and surrender charges assessed during the
period. Expenses for these policies include interest credited to policy
account balances and benefit claims incurred in excess of policy account
balances. The related deferred policy acquisition costs are amortized in
relation to the present value of expected gross profits on the policies.
(G) Federal Income Taxes - Federal income taxes are accounted for under the
asset and liability method. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date. A valuation allowance for deferred tax assets is provided
if all or some portion of the deferred tax asset may not be realized. An
increase or decrease in a valuation allowance that results from a change in
circumstances that affects the realizability of the related deferred tax asset
is included in income.
(H) Depreciation of Property, Equipment, and Leasehold Improvements -
Depreciation is based on the estimated useful lives of the assets and is
calculated on the straight-line and accelerated methods. Leasehold
improvements are amortized over the lesser of the economic useful life of the
improvement or the term of the lease.
(I) Classification - Certain reclassifications have been made to the prior
years to conform to the reporting categories used in 1999.
(J) Statutory Information - National Western Life Insurance Company, domiciled
in Colorado, prepares its statutory financial statements in accordance with
accounting practices prescribed or permitted by the Colorado Division of
Insurance. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners (NAIC), as
well as state laws, regulations, and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed. Such practices may differ from state to state and may even differ
from company to company within a state. However, the NAIC has recently
completed a comprehensive process of codifying statutory accounting practices
and procedures. Other than specific individual state laws, the codification
results will be the only source of prescribed statutory accounting practices.
The Company's state of domicile, Colorado, is currently in the process of
adopting the new codified statutory accounting practices and procedures.
Insurance companies must adopt these new statutory accounting practices in
2001, which may result in significant changes to existing practices used in
the preparation of statutory financial statements. The Company will perform
a review of the entire newly codified statutory accounting practices and
procedures during 2000. Based on a preliminary review, National Western does
not anticipate a material impact to its capital and surplus position as a
result of implementation of the new prescribed statutory accounting
procedures.
The following are major differences between generally accepted accounting
principles and current prescribed or permitted statutory accounting practices.
1. The Company accounts for universal life and investment annuity contracts
based on the provisions of Statement of Financial Accounting Standards (SFAS)
No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments." The basic effect of the statement with respect to certain
long-duration contracts is that deposits for universal life and investment
annuity contracts are not reflected as revenues, and surrenders and certain
other benefit payments are not reflected as expenses. However, statutory
accounting practices do reflect such items as revenues and expenses.
A summary of direct premiums and deposits collected is provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Direct premiums and deposits
collected:
Investment annuity deposits $ 389,563 431,003 240,987
Universal life
insurance deposits 69,906 69,647 65,862
Traditional life and other
premiums 19,154 20,237 21,506
Totals $ 478,623 520,887 328,355
</TABLE>
2. Any gains or losses from the sale or expiration of index options, as well
as period-to-period changes in values, are reflected as net investment income
in the statement of earnings under generally accepted accounting principles.
For statutory accounting purposes prior to 1999, period-to-period changes in
values of index options were recorded directly to capital and surplus, and
gains or losses from sales or expirations were reported in income as realized
gains or losses on investments. Effective January 1, 1999, the statutory
accounting treatment for index options is the same as generally accepted
accounting principles.
3. For statutory accounting purposes, litigation settlements are often
recorded as direct reductions of capital and surplus. However, litigation
settlements are recorded in the statement of earnings for generally accepted
accounting principles.
4. Under generally accepted accounting principles, commissions and certain
expenses related to policy issuance and underwriting, all of which generally
vary with and are related to the production of new business, are deferred. For
traditional products, these costs are amortized over the premium-paying period
of the related policies in proportion to the ratio of the premium earned to
the total premium revenue anticipated, using the same assumptions as to
interest, mortality, and withdrawals as were used in calculating the liability
for future policy benefits. For universal life and investment annuity
contracts, these costs are amortized in relation to the present value of
expected gross profits on these policies. The Company evaluates the
recoverability of deferred policy acquisition costs on an annual basis. In
this evaluation, the Company considers estimated future gross profits or
future premiums, as applicable for the type of contract. The Company also
considers expected mortality, interest earned and credited rates, persistency,
and expenses. Statutory accounting practices require commissions and related
costs to be expensed as incurred.
A summary of information relative to deferred policy acquisition costs is
provided in the table below:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Deferred policy acquisition
costs, beginning of year $ 314,493 291,079 295,666
Policy acquisition costs deferred:
Agents' commissions 62,932 62,717 37,069
Other 2,505 2,136 1,876
Total costs deferred 65,437 64,853 38,945
Amortization of deferred
policy acquisition costs (39,148) (40,415) (39,934)
Adjustments for unrealized gains and
losses on investment securities 28,883 (1,024) (3,598)
Deferred policy acquisition
costs, end of year $ 369,665 314,493 291,079
</TABLE>
5. Under generally accepted accounting principles, the liability for future
policy benefits on traditional products has been calculated by the net level
method using assumptions as to future mortality (based on the 1965-1970 and
1975-1980 Select and Ultimate mortality tables), interest ranging from 4% to
8%, and withdrawals based on Company experience. For universal life and
investment annuity contracts, the liability for future policy benefits
represents the account balance. For statutory accounting purposes,
liabilities for future policy benefits for life insurance policies are
calculated by the net level premium method or the commissioners reserve
valuation method. Future policy benefit liabilities for annuities are
calculated based on the continuous commissioners annuity reserve valuation
method and provisions of Actuarial Guidelines 33 and 35.
6. Deferred Federal income taxes are provided for temporary differences which
are recognized in the financial statements in a different period than for
Federal income tax purposes. Deferred taxes are not recognized in statutory
accounting practices. Also, for statutory accounting purposes, the Company
has recorded Federal income tax receivables as permitted by the Colorado
Division of Insurance. The Federal income tax receivables related to
subsidiary losses have been recorded directly to surplus and were not recorded
in results of operations.
7. For statutory accounting purposes, debt securities are recorded at
amortized cost, except for securities in or near default, which are reported
at market value.
8. Investments in subsidiaries are recorded at admitted asset value for
statutory purposes, whereas the financial statements of the subsidiaries have
been consolidated with those of the Company under generally accepted
accounting principles.
9. The asset valuation reserve and interest maintenance reserve, which are
investment valuation reserves prescribed by statutory accounting practices,
have been eliminated, as they are not required under generally accepted
accounting principles.
10. The recorded value of the life interest in the Libbie Shearn Moody Trust
(the Trust) is reported at its initial valuation, net of accumulated
amortization, under generally accepted accounting principles. The initial
valuation was based on the assumption that the Trust would provide certain
income to the Company at an assumed interest rate and is being amortized over
53 years, the life expectancy of Mr. Robert L. Moody at the date he
contributed the life interest to the Company. For statutory accounting
purposes, the life interest has been valued at $26,400,000, which was computed
as the present value of the estimated future income to be received from the
Trust. However, this amount was amortized to a valuation of $12,775,000 over
a seven-year period ended December 31, 1999, in accordance with Colorado
Division of Insurance permitted accounting requirements. Prescribed statutory
accounting practices provide no accounting guidance for such asset. The
statutory admitted value of this life interest at December 31, 1999, is
$12,775,000 in comparison to a carrying value of $4,056,000 in the
accompanying consolidated financial statements.
11. Reconciliations of statutory stockholders' equity, as included in the
annual statements filed with the Colorado Division of Insurance, to the
respective amounts as reported in the accompanying consolidated financial
statements prepared under generally accepted accounting principles are as
follows:
<TABLE>
<CAPTION>
Stockholders' Equity
as of December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Statutory equity $ 363,526 310,991 300,589
Adjustments:
Difference in valuation
of investment in
the Libbie Shearn Moody Trust (8,719) (10,374) (12,032)
Deferral of policy
acquisition costs 369,665 314,493 291,079
Adjustment of future
policy benefits (251,887) (232,919) (217,040)
Deferred Federal income
taxes payable (4,659) (9,646) (13,153)
Adjustment of securities
available for sale to fair value (23,580) 38,840 34,957
Reversal of asset
valuation reserve 16,870 19,756 11,654
Reversal of interest
maintenance reserve 14,314 10,140 9,630
Reinstatement of
nonadmitted assets 2,598 3,257 2,535
Valuation allowances
on investments (1,560) (5,458) (6,571)
Adjustment for consolidation (338) 221 375
Other, net (708) (936) (1,160)
Generally accepted accounting
principles equity $ 475,522 438,365 400,863
</TABLE>
12. Reconciliations of statutory net earnings, as included in the annual
statements filed with the Colorado Division of Insurance, to the respective
amounts as reported in the accompanying consolidated financial statements
prepared under generally accepted accounting principles are as follows:
<TABLE>
<CAPTION>
Net Earnings for the
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Statutory net earnings $ 24,335 23,973 33,771
Adjustments:
Subsidiary earnings
(losses)before deferred
Federal income taxes 5,836 (11,346) 2,372
Deferral of policy
acquisition costs 26,289 24,438 (989)
Adjustment of future
policy benefits (18,968) (15,879) 3,470
Amortization of investment
in the Libbie
Shearn Moody Trust (291) (289) (286)
Benefit (provision) for
deferred Federal income taxes (6,966) 4,781 2,211
Valuation allowances
and permanent
impairment writedowns
on investments (3,004) 1,253 1,816
Unrealized gains on
index options
recorded in statutory
surplus prior to 1999 - 7,682 18
Lawsuit settlements recorded
in statutory surplus 5 (4,756) (90)
Tax benefit (expense) recorded
in statutory surplus 1,342 5,320 (1,685)
Increase in interest
maintenance reserve 4,174 510 1,793
Statutory realized loss on
The Westcap Corporation
preferred stock previously
recorded in surplus 24,775 - -
Other, net 1,698 (794) (829)
Generally accepted accounting
principles net earnings $ 59,225 34,893 41,572
</TABLE>
(2) DEPOSITS WITH REGULATORY AUTHORITIES
The following assets were on deposit with state and other regulatory
authorities as required by law at the end of each year:
<TABLE>
<CAPTION>
December 31,
1999 1998
(In thousands)
<S> <C> <C>
Debt securities $ 17,847 17,912
Certificates of deposit 260 260
Totals $ 18,107 18,172
</TABLE>
(3) INVESTMENTS
(A) Investment Income
The major components of net investment income are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Investment income:
Debt securities $ 204,294 195,425 184,870
Mortgage loans 16,262 16,943 18,659
Index options 10,719 8,057 18
Policy loans 8,232 9,252 9,764
Other investment income 7,501 7,783 6,742
Total investment income 247,008 237,460 220,053
Investment expenses 4,028 3,616 2,607
Net investment income $ 242,980 233,844 217,446
</TABLE>
Investments of the following amounts were not income producing for the
preceding twelve months:
<TABLE>
<CAPTION>
December 31,
1999 1998
(In thousands)
<S> <C> <C>
Equity securities $ 3,752 3,127
Real estate 946 319
Totals $ 4,698 3,446
</TABLE>
The Company had mortgage loans totaling $3,014,000 that were on nonaccrual
status as of December 31, 1999. No mortgage loans were on nonaccrual status
during 1998 or 1997. Also, the Company had no investments in debt securities
that were on nonaccrual status during 1999, 1998, or 1997. Reductions in
interest income associated with nonperforming mortgage loans totaled $192,000
in 1999.
(B) Mortgage Loans and Real Estate
Concentrations of credit risk arising from mortgage loans exist in relation to
certain groups of customers. A group concentration arises when a number of
counterparties have similar economic characteristics that would cause their
ability to meet contractual obligations to be similarly affected by changes in
economic or other conditions. The Company does not have a significant
exposure to any individual customer or counterparty. The major concentrations
of mortgage loan credit risk for the Company arise by geographic location in
the United States and by property type as detailed below.
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
West South Central 58.8% 57.1%
Mountain 20.5 19.4
Pacific 11.0 7.7
South Atlantic 5.1 4.8
All other 4.6 11.0
Totals 100.0% 100.0%
</TABLE>
<TABLE>
<CAPTION>
December 31,
1999 1998
<S> <C> <C>
Retail 56.1% 56.7%
Office 27.4 21.0
Hotel/Motel 7.2 7.9
Land/lots 2.5 4.1
All other 6.8 10.3
Totals 100.0% 100.0%
</TABLE>
As of December 31, 1999, mortgage loans with book values totaling
approximately $3,014,000 were considered impaired. As of December 31, 1998,
no mortgage loans were considered impaired. For the years ended December 31,
1999 and 1997, average investments in impaired mortgage loans were $1,616,000
and $676,000, respectively. There were no investments in impaired mortgage
loans for the year ended December 31, 1998. Interest income recognized on
impaired loans during the impaired period for the years ended December 31,
1999 and 1997, was not significant. Impaired loans are typically placed on
nonaccrual status, and no interest income is recognized. However, if cash is
received on the impaired loan, it is applied to principal and interest on past
due payments, beginning with the most delinquent payment.
Detailed below are changes in the allowance for mortgage loan losses for
1999, 1998, and 1997:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 4,640 4,640 5,988
Net changes recorded as realized
investment (gains) losses (536) - 1,133
Releases due to foreclosures - - (2,481)
Balance at end of year $ 4,104 4,640 4,640
</TABLE>
At December 31, 1999 and 1998, the Company owned investment real estate
totaling $11,388,000 and $13,553,000 which is reflected in other long-term
investments in the accompanying financial statements. The Company records
real estate at the lower of cost or fair value less estimated costs to sell.
Real estate values are monitored and evaluated at least annually by the use of
independent appraisals or internal valuations. Decreases in market values
affecting carrying values are recorded in a valuation allowance which is
reflected in realized gains or losses on investments. For the years ended
December 31, 1999 and 1998, there were no impairment losses on real estate due
to decreases in market value. For the year ended December 31, 1997,
impairment losses on real estate due to decreases in market values totaled
$46,000.
(C) Investment Gains and Losses
The table below presents realized gains and losses and changes in unrealized
gains and losses on investments for 1999, 1998, and 1997:
<TABLE>
<CAPTION>
Changes in
Realized Unrealized
Investment Investment
Gains Gains (Losses)
(Losses) From Prior Year
(In thousands)
<S> <C> <C> <C>
Year Ended December 31, 1999:
Securities held to maturity $ (1,454) (162,417)
Securities available for sale 3,248 (22,412)
Other 2,687 -
Totals $ 4,481 (184,829)
Year Ended December 31, 1998:
Securities held to maturity $ 797 19,754
Securities available for sale 893 2,218
Other 694 -
Totals $ 2,384 21,972
Year Ended December 31, 1997:
Securities held to maturity $ 1,791 51,947
Securities available for sale 1,061 3,929
Other (4,440) -
Totals $ (1,588) 55,876
</TABLE>
(D) Debt and Equity Securities
The tables below present amortized cost and fair values of securities held to
maturity and securities available for sale at December 31, 1999:
<TABLE>
<CAPTION>
Securities Held to Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury and
other U.S.
government
corporations
and agencies $ 3,612 105 - 3,717
States and
political
subdivisions 6,741 617 35 7,323
Foreign governments 51,450 136 215 51,371
Public utilities 323,310 989 11,125 313,174
Corporate 1,284,420 4,376 52,112 1,236,684
Mortgage-backed 382,975 3,237 5,510 380,702
Asset-backed 99,416 58 7,951 91,523
Totals $ 2,151,924 9,518 76,948 2,084,494
</TABLE>
<TABLE>
<CAPTION>
Securities Available for Sale
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury
and other U.S.
government
corporations
and agencies $ 3,243 69 - 3,312
States and
political
subdivisions 11,771 - 1,046 10,725
Public utilities 51,013 827 1,517 50,323
Corporate 316,567 2,179 19,482 299,264
Mortgage-backed 219,549 3,410 4,857 218,102
Asset-backed 126,710 - 6,488 120,222
Equity securities 12,755 3,976 731 16,000
Totals $ 741,608 10,461 34,121 717,948
</TABLE>
The tables below present amortized cost and fair values of securities held to
maturity and securities available for sale at December 31, 1998:
<TABLE>
<CAPTION>
Securities Held to Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury
and other U.S.
government
corporations
and agencies $ 3,706 359 - 4,065
States and
political
subdivisions 27,001 2,322 - 29,323
Foreign governments 51,389 4,254 - 55,643
Public utilities 302,484 20,197 3,346 319,335
Corporate 1,159,758 61,252 6,364 1,214,646
Mortgage-backed 410,818 16,287 28 427,077
Asset-backed 74,572 392 338 74,626
Totals $ 2,029,728 105,063 10,076 2,124,715
</TABLE>
<TABLE>
<CAPTION>
Securities Available for Sale
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury
and other U.S.
government
corporations
and agencies $ 3,231 233 - 3,464
States and
political
subdivisions 3,000 11 - 3,011
Public utilities 59,699 4,771 72 64,398
Corporate 303,196 18,341 2,904 318,633
Mortgage-backed 199,985 11,322 1,019 210,288
Asset-backed 115,204 5,480 603 120,081
Equity securities 12,018 3,799 105 15,712
Totals $ 696,333 43,957 4,703 735,587
</TABLE>
The amortized cost and fair values of investments in debt securities at
December 31, 1999, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Securities Securities
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
(In thousands)
<S> <C> <C> <C> <C>
Due in 1 year or less $ 10,002 10,010 20,705 20,752
Due after 1
year through 5 years 41,425 37,569 478,775 473,415
Due after 5
years through 10 years 271,655 255,655 1,026,813 979,389
Due after 10 years 59,512 60,390 143,240 138,713
382,594 363,624 1,669,533 1,612,269
Mortgage and asset-
backed securities 346,259 338,324 482,391 472,225
Totals $ 728,853 701,948 2,151,924 2,084,494
</TABLE>
The Company uses the specific identification method in computing realized
gains and losses. Proceeds from sales of securities available for sale during
1999 and 1997 totaled $56,126,000 and $50,706,000, respectively. There were
no sales of securities available for sale during 1998. Gross gains and gross
losses realized on those sales are detailed below:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Gross realized gains $ 4,055 - 1,029
Gross realized losses - - -
Net realized gains $ 4,055 - 1,029
</TABLE>
The Company did not sell any held to maturity securities during 1999. In
1998, the Company sold one held to maturity security due to significant credit
deterioration of the issuing company. Amortized cost of the security totaled
$2,981,000, and a realized loss of $3,000 was recognized on the sale. In
1997, the Company sold one held to maturity security, also due to significant
credit deterioration of the issuing company. Amortized cost of the security
totaled $1,987,000, and a realized gain of $6,000 was recognized on the sale.
The Company held in its investment portfolio below investment grade debt
securities totaling $70,900,000, $44,974,000, and $41,149,000 at December 31,
1999, 1998, and 1997, respectively. These amounts represent approximately 2.2%
of total invested assets in 1999, and 1.4% in 1998 and 1997. Below
investment grade securities generally have greater default risk than higher
rated corporate debt. The issuers of these securities are usually more
sensitive to adverse industry or economic conditions than are investment grade
issuers.
Except for U.S. government agency mortgage-backed securities, the Company had
no investments in any entity in excess of 10% of stockholders' equity at
December 31, 1999.
(E) Transfers of Securities
At July 31, 1994, the Company transferred debt securities with fair values
totaling $805 million from securities available for sale to securities held to
maturity. On December 29, 1995, the Company made additional transfers
totaling $156 million to the held to maturity category from securities
available for sale. Lower holdings of securities available for sale
significantly reduce the Company's exposure to equity volatility while still
providing securities for liquidity and asset/liability management purposes.
The transfers of securities were recorded at fair values in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." This statement requires
that the unrealized holding gain or loss at the date of the transfer continue
to be reported in a separate component of stockholders' equity but shall be
amortized over the remaining life of the security as an adjustment of yield in
a manner consistent with the amortization of any premium or discount. The
amortization of an unrealized holding gain or loss reported in equity will
offset or mitigate the effect on interest income of the amortization of the
premium or discount for the held to maturity securities. The transfer of
securities from available for sale to held to maturity had no effect on net
earnings of the Company. However, stockholders' equity was adjusted as
follows:
<TABLE>
<CAPTION>
Net Unrealized Gains (Losses)
as of December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Beginning unamortized
gains from transfers $ 1,029 1,545 2,601
Amortization of net unrealized
gains related to transferred
securities, net of effects of
deferred policy acquisition
costs and taxes (250) (516) (1,056)
Ending unamortized gains from transfers $ 779 1,029 1,545
</TABLE>
Net unrealized gains and losses on investment securities included in
stockholders' equity at December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
(In thousands)
<S> <C> <C>
Gross unrealized gains $ 10,461 43,957
Gross unrealized losses (34,121) (4,703)
Adjustments for:
Deferred policy acquisition costs 12,597 (16,222)
Deferred Federal income taxes 3,872 (8,061)
(7,191) 14,971
Net unrealized gains related to securities
transferred to held to maturity 779 1,029
Net unrealized gains (losses)
on investment securities $ (6,412) 16,000
</TABLE>
(F) Change in Accounting Principles
In June, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June, 1999, SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133," was issued deferring SFAS No.
133, which will now be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The statement defines several designations of
derivatives based on the instrument's intended use and specifies the
appropriate accounting treatment for changes in the fair value of the
derivative based on its resulting designation.
The Company currently sells equity-indexed annuities that contain an equity
return component for policyholders which is an embedded derivative instrument.
The Company purchases index options, which are also derivative instruments, to
hedge this equity return component. The index options are reported at fair
value in the Company's financial statements, which is in accordance with SFAS
No. 133 requirements. The Company also uses a fair value approach in
recording policy liabilities for the equity-indexed annuities. However, there
is currently no specific, authoritative interpretation of SFAS No. 133 with
respect to accounting for equity-indexed annuity liabilities. Additional
guidance in 2000 regarding this issue may result in a definitive method
significantly different from that currently used by the Company. As a result,
the ultimate implementation of SFAS No. 133 could have a significant effect on
the Company's results of operations. The Company expects to implement the new
statement in the first quarter of 2001.
(4) REINSURANCE
(A) Summary of Significant Reinsurance Information
The Company is party to several reinsurance agreements. The Company's general
policy is to reinsure that portion of any risk in excess of $200,000 on the
life of any one individual. Total life insurance in force was $9.75 billion
and $9.40 billion at December 31, 1999 and 1998, respectively. Of these
amounts, life insurance in force totaling $1.68 billion and $1.47 billion was
ceded to reinsurance companies, primarily on a yearly renewable term basis, at
December 31, 1999 and 1998, respectively.
In accordance with the reinsurance contracts, reinsurance receivables
including amounts related to claims incurred but not reported and liabilities
for future policy benefits totaled $2,473,000 and $4,269,000 at December 31,
1999 and 1998, respectively. Premium revenues were reduced by $7,904,000,
$7,245,000, and $5,719,000 for reinsurance premiums incurred during 1999,
1998, and 1997, respectively. Benefit expenses were reduced by $3,350,000,
$3,013,000, and $5,396,000 for reinsurance recoveries during 1999, 1998, and
1997, respectively. A liability exists with respect to reinsurance, as the
Company remains liable if the reinsurance companies are unable to meet their
obligations under the existing agreements.
(B) Change in Accounting Principles
In October, 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-7, "Deposit Accounting:
Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk." The SOP specifies classifications for insurance and
reinsurance contracts for which deposit accounting is appropriate and
specifies accounting methods for each. For each insurance and reinsurance
contract accounted for under deposit accounting, a deposit asset or liability
should be recognized at inception and should be measured based on
consideration paid or received, less any premiums or fees to be retained by
the insurer or reinsurer, irrespective of the experience of the contract. The
Company anticipates that this SOP will not have a significant effect on its
financial statements, as the Company's current insurance and reinsurance
contracts all transfer insurance risk. SOP 98-7 is effective for all fiscal
years beginning after June 15, 1999. The Company currently plans to implement
the SOP in the first quarter of 2000.
(5) FEDERAL INCOME TAXES
Total Federal income taxes for 1999, 1998, and 1997 were allocated as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Taxes on earnings from
continuing operations:
Current $ 23,622 22,128 23,934
Deferred 6,966 (4,781) (2,211)
Taxes on earnings from
continuing operations 30,588 17,347 21,723
Taxes on components of
stockholders' equity:
Net unrealized gains and losses on
securities available for sale (12,068) 1,196 2,115
Foreign currency
translation adjustments 115 80 1,338
Total Federal income taxes $ 18,635 18,623 25,176
</TABLE>
The provisions for Federal income taxes attributable to earnings from
continuing operations vary from amounts computed by applying the statutory
income tax rate to earnings before Federal income taxes. The reasons for the
differences and the corresponding tax effects are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Income tax expense at statutory rate $ 31,435 23,228 22,503
Tax-exempt income (1,096) (931) (822)
Amortization of life interest in the
Libbie Shearn Moody Trust 102 101 100
Non-deductible travel and entertainment 92 108 101
Tax benefits from discontinued operations - (4,944) (350)
Other 55 (215) 191
Taxes on earnings from
continuing operations $ 30,588 17,347 21,723
</TABLE>
There were no deferred taxes attributable to enacted tax rate changes for the
years ended December 31, 1999, 1998, and 1997.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1999 and 1998, are presented below:
<TABLE>
<CAPTION>
December 31,
1999 1998
(In thousands)
<S> <C> <C>
Deferred tax assets:
Future policy benefits, excess of financial
accounting liabilities over tax liabilities $ 105,802 100,023
Mortgage loans, principally due to valuation
allowances for financial accounting purposes 1,247 1,506
Real estate, principally due to writedowns
for financial accounting purposes 1,424 1,615
Accrued and unearned investment income
recognized for tax purposes and deferred for
financial accounting purposes 768 634
Accrued operating expenses recorded for financial
accounting purposes not currently tax deductible 1,724 5,440
Net operating loss carryforward 153 1,509
Net unrealized losses on securities
available for sale 3,452 -
Other 293 36
Total gross deferred tax assets 114,863 110,763
Less valuation allowance - -
Net deferred tax assets 114,863 110,763
Deferred tax liabilities:
Deferred policy acquisition costs, principally
expensed for tax purposes (112,563) (104,383)
Securities, principally due to deferred
market discount for tax (4,540) (5,132)
Real estate, principally due to
differences in tax and
financial accounting for depreciation (874) (851)
Net unrealized gains on securities
available for sale - (8,616)
Foreign currency translation adjustment (1,533) (1,418)
Other (12) (9)
Total gross deferred tax liabilities (119,522) (120,409)
Net deferred tax liabilities $ (4,659) (9,646)
</TABLE>
There was no valuation allowance for deferred tax assets at December 31, 1999
and 1998. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods in which the deferred tax assets
are deductible, management believes it is more likely than not that the
Company will realize the benefits of these deductible differences.
Prior to the Tax Reform Act of 1984 (1984 Act), a portion of a life insurance
company's income was not subject to tax until it was distributed to
stockholders, at which time it was taxed at the regular corporate tax rate.
In accordance with the 1984 Act, this income, referred to as policyholders'
surplus, would not increase, yet any amounts distributed would be taxable at
the regular corporate rate. The balance of this account as of December 31,
1999, is approximately $2,446,000. No provision for income taxes has been
made on this untaxed income, as management is of the opinion that no
distribution to stockholders will be made from policyholders' surplus in the
foreseeable future. Should the balance in the policyholders' surplus account
at December 31, 1999, become taxable, the Federal income taxes computed at
present rates would be approximately $856,000.
The Company files a consolidated Federal income tax return with its
subsidiaries. Allocation of the consolidated tax liability is based on
separate return calculations pursuant to the "wait-and-see" method as
described in sections 1.1552-1(a)(2) and 1.1502-33(d)(2)(i) of the current
Treasury Regulations. Under this method, consolidated group members are not
given current credit for net losses until future net taxable income is
generated to realize such credits. In accordance with this consolidated tax
sharing agreement, tax benefits resulting from discontinued brokerage
operation losses totaling $4,944,000 in 1998 and $350,000 in 1997 were
included in earnings from continuing operations.
(6) TRANSACTIONS WITH CONTROLLING STOCKHOLDER AND AFFILIATES
(A) Life Interest in Libbie Shearn Moody Trust
The Company's wholly owned subidiary, NWL Services, Inc., is the beneficial
owner of a life interest (1/8 share) in the trust estate of Libbie Shearn
Moody (the Trust) which was previously owned by Mr. Robert L. Moody, Chairman
of the Board of Directors of the Company. The Company has issued term
insurance policies on the life of Mr. Robert L. Moody which are reinsured
through agreements with unaffiliated insurance companies. NWL Services, Inc.,
is the beneficiary of these policies for an amount equal to the statutory
admitted value of the Trust, which was $12,775,000 at December 31, 1999. The
excess of $27,000,000 face amount of the reinsured policies over the statutory
admitted value of the Trust has been assigned to Mr. Robert L. Moody. The
recorded net asset values in the accompanying consolidated financial
statements for the life interest in the Trust are as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
(In thousands)
<S> <C> <C>
Original valuation of life interest
at February 26, 1960 $ 13,793 13,793
Less accumulated amortization (9,737) (9,446)
Net asset value of life interest in the Trust $ 4,056 4,347
</TABLE>
Income from the Trust and related expenses reflected in the accompanying
consolidated statements of earnings are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Income distributions $ 3,595 3,451 3,335
Deduct:
Amortization (291) (289) (286)
Reinsurance premiums (340) (300) (266)
Net income from life
interest in the Trust $ 2,964 2,862 2,783
</TABLE>
(B) Common Stock
Mr. Robert L. Moody, Chairman of the Board of Directors, owns 198,074 of the
total outstanding shares of the Company's Class B common stock and 1,160,896
of the Class A common stock.
Holders of the Company's Class A common stock elect one-third of the Board of
Directors of the Company, and holders of the Class B common stock elect the
remainder. Any cash or in-kind dividends paid on each share of Class B common
stock shall be only one-half of the cash or in-kind dividends paid on each
share of Class A common stock. Also, in the event of liquidation of the
Company, the Class A stockholders shall first receive the par value of their
shares; then the Class B stockholders shall receive the par value of their
shares; and the remaining net assets of the Company shall be divided between
the stockholders of both Class A and Class B common stock, based on the number
of shares held.
(7) PENSION PLANS
(A) Defined Benefit Plans
The Company has a qualified defined benefit pension plan covering
substantially all full-time employees. The plan provides benefits based on the
participants' years of service and compensation. The Company makes annual
contributions to the plan that comply with the minimum funding provisions of
the Employee Retirement Income Security Act. During 1998 the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits." This statement
revises employers' disclosures about pension and other postretirement benefit
plans, but it does not change the measurement or recognition of those plans.
A detail of plan disclosures in accordance with SFAS No. 132 is provided
below:
The following summarizes the changes in benefit obligations for the years
ended:
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Benefit obligations at
beginning of year $ 10,291 9,408 8,332
Service cost 414 363 286
Interest cost 717 647 620
Actuarial (gain) loss (812) 386 661
Benefits paid (660) (513) (491)
Benefit obligations at end of year $ 9,950 10,291 9,408
</TABLE>
The following summarizes the changes in the fair value of plan assets,
primarily consisting of equity and fixed income securities, for the years
ended:
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Fair value of plan assets
at beginning of year $ 10,301 9,265 7,899
Actual return on plan assets 1,198 1,549 1,437
Employer contribution - - 420
Benefits paid (660) (513) (491)
Fair value of plan assets
at end of year $ 10,839 10,301 9,265
</TABLE>
The following sets forth the plan's funded status and the related amounts
recognized in the Company's financial statements as of:
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Funded status $ 889 10 (143)
Unrecognized net actuarial (gain) loss (340) 964 1,503
Unrecognized transition assets (99) (154) (209)
Unrecognized prior service cost (116) (146) (176)
Prepaid benefit cost $ 334 674 975
</TABLE>
The following are the weighted-average assumptions as of:
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
<S> <C> <C> <C>
Discount rate 7.75% 6.75% 7.00%
Expected return on plan assets 7.50 7.50 7.50
Rate of compensation increase 4.50 4.50 4.50
</TABLE>
Net periodic benefit costs include the following components for the years
ended:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Service cost $ 414 363 286
Interest cost 717 647 620
Expected return on plan assets (730) (674) (594)
Amortization of unrecognized
transition assets (55) (55) (55)
Amortization of prior service cost (30) (30) (30)
Recognized net actuarial loss 24 50 81
Net periodic benefit cost $ 340 301 308
</TABLE>
The Company also sponsors a nonqualified defined benefit plan primarily for
senior officers. The plan provides benefits based on the participants' years
of service and compensation. During 1998 the Company transferred the pension
obligations and administrative responsibilities of the plan to a pension
administration firm. Upon transfer, the Company paid $4,880,000 to cover
current and future liabilities and administration of the plan. Pension
expense for 1998, up to the time of transfer, was $324,000. The financial
effects of the transaction resulted in additional pension expense during 1998
totaling $2,543,000, as the amount paid upon transfer exceeded the pension
liabilities recorded for financial statement purposes in accordance with SFAS
No. 87 and SFAS No. 132.
The obligations under the plan are now the responsibility of the new pension
administration firm, which is a subsidiary of American National Insurance
Company (ANICO). ANICO has also guaranteed the payment of pension obligations
under the plan. However, National Western has a contingent liability with
respect to the pension plan should these entities be unable to meet their
obligations under the existing agreements. Also, National Western has a
contingent liability with respect to the plan in the event that a plan
participant continues employment with National Western beyond age seventy, the
aggregate average annual participant salary increases exceed 10% per year, or
any additional employees become eligible to participate in the plan. If any
of these conditions are met, National Western would be responsible for any
additional pension obligations resulting from these items.
(B) Defined Contribution Plans
In addition to the defined benefit plans, the Company has a qualified 401(k)
plan for substantially all full-time employees and a nonqualified deferred
compensation plan primarily for senior officers. The Company makes annual
contributions to the 401(k) plan of two percent of each employee's
compensation. Additional Company matching contributions of up to two percent
of each employee's compensation are also made each year based on the
employee's personal level of salary deferrals to the plan. All Company
contributions are subject to a vesting schedule based on the employee's years
of service. For the years ended December 31, 1999, 1998, and 1997, Company
contributions totaled $272,000, $270,000, and $250,000, respectively.
The nonqualified deferred compensation plan was established to allow eligible
employees to defer the payment of a percentage of their compensation and to
provide for additional Company contributions. Company contributions are
subject to a vesting schedule based on the employee's years of service. For
the years ended December 31, 1999, 1998, and 1997, Company contributions
totaled $79,000, $60,000, and $36,000, respectively.
(8) SHORT-TERM BORROWINGS
The Company has available a $60 million bank line of credit primarily for cash
management purposes relating to investment transactions. The Company is
required to maintain a collateral security deposit in trust with the bank
equal to 120% of any outstanding liability. The Company had no outstanding
liabilities or collateral security deposits with the bank at December 31, 1999
and 1998. The Company had no borrowings on the line of credit during 1998.
The weighted average interest rates on borrowings for the years ended December
31, 1999 and 1997 were 5.88%, and 6.42%, respectively. Actual borrowings and
interest expense for 1999 and 1997 were minimal.
(9) COMMITMENTS AND CONTINGENCIES
(A) Legal Proceedings
The Westcap Corporation Bankruptcy Proceedings
The Chapter 11 bankruptcy reorganization of the Company's wholly owned
subsidiary, The Westcap Corporation (Westcap), 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. This suit is described in more detail below.
Westcap Related Litigation
On March 28, 1994, the Community College District No. 508, County of Cook and
State of Illinois (The City Colleges) filed a complaint in the United States
District Court for the Northern District of Illinois, Eastern Division,
against National Western Life Insurance Company (the Company or National
Western) and subsidiaries of The Westcap Corporation (Westcap), a wholly owned
subsidiary of the Company. The suit sought rescission of securities purchase
transactions by The City Colleges from Westcap between September 9, 1993, and
November 3, 1993, alleged compensatory damages, punitive damages, injunctive
relief, declaratory relief, fees, and costs. National Western was named as a
"controlling person" of the Westcap defendants. Westcap filed Chapter 11
bankruptcy, and The City Colleges filed a claim in the bankruptcy court
against Westcap. The claim was tried before the bankruptcy court, and in
September, 1997, a $56,173,000 judgment was entered against Westcap favorable
to The City Colleges. Westcap appealed this decision to the United States
District Court for the Southern District of Texas (Houston Division). On July
24, 1998, the United States District Court affirmed the orders of the
bankruptcy court with respect to their underlying conclusion that Westcap is
liable to The City Colleges under the Texas Securities Act, but the Court
vacated the orders and remanded them to the bankruptcy court to determine the
correct amount of damages in a manner consistent with the Court's opinion and
the Texas Securities Act. The bankruptcy court on November 16, 1998, entered
an order allowing a claim of The City Colleges against the Westcap estate of
$51,738,868. Westcap has appealed the bankruptcy court's and District Court's
judgment to the Fifth Circuit Court of Appeals. Oral argument on the appeal
was held on February 29, 2000, and no ruling has yet been rendered.
While Westcap is a wholly owned subsidiary of the Company, the Company is not
a party to the bankruptcy or the judgment against Westcap by the bankruptcy
court or the United States District Court. The lawsuit against the Company
was stayed in September, 1994, pending resolution of The City Colleges' claim
against Westcap. Following the judgment against Westcap in the bankruptcy
court, on December 2, 1997, the stay was lifted by the United States District
Court in Illinois, and The City Colleges filed an amended complaint seeking to
hold the Company liable for the claim allowed in the bankruptcy court against
Westcap under the "control person" provision of the Texas Securities Act. The
suit seeks approximately $56 million plus fees and costs. The maximum sought
by City Colleges will be determined by the final amount allowed The City
Colleges in the Westcap bankruptcy appeal, discussed above. The Company filed
jurisdictional and venue motions to have the case transferred to the United
States District Court for the Western District of Texas, which motions were
agreed to by the Plaintiff, and the case is now pending in the United States
District Court for the Western District of Texas, where the parties have
engaged in discovery activities. The case is set for trial in September,
2000. The Company believes it has reasonable and adequate defenses to the
suit. Although the alleged damages, if sustained, would be material to the
Company's financial statements, a reasonable estimate of any actual losses
which may result from the suit cannot be made at this time. Accordingly, no
provision for any liability that may result from this suit has been recognized
in National Western's financial statements.
On July 5, 1995, San Patricio County, Texas, filed suit in the District Court
of San Patricio County, Texas, against National Western Life Insurance Company
(the Company) and its chief executive officer, Robert L. Moody. The suit
arose from derivative investments purchased by San Patricio County from
Westcap Securities, L.P., or Westcap Government Securities, Inc., affiliates of
The Westcap Corporation. The suit alleged that the Westcap affiliates were
controlled by the Company and Mr. Moody and that they were responsible for the
alleged wrongful acts of the Westcap affiliates in selling the securities to
the Plaintiff. Plaintiff alleged that the Westcap affiliates violated duties
and responsibilities owed to the Plaintiff related to the investment
recommendations and decisions made by Plaintiff, and alleged that the
Plaintiff was financially damaged by such actions of Westcap. The suit was
settled effective March 9, 1998, with a payment of $200,000 by National
Western to San Patricio County and with no admission of liability. In
exchange for the payment, National Western and Robert L. Moody received a
general release of all claims asserted, including all claims that have been
asserted against Westcap Securities, L.P., or could have been asserted in
another court against Westcap Securities, L.P., and the lawsuit was dismissed.
The $200,000 settlement payment was recorded as other operating expenses in
1998.
Class Action Litigation
National Western Life Insurance Company (the Company or National Western) and
National Annuity Programs, Inc. (NAP), were sued in the District Court of
Travis County, Texas, by a former agent of the Company, eight plaintiffs, and
fourteen intervenors, being present and past annuity policyholders of the
Company, and on behalf of an asserted class of annuity policyholders of the
Company, and alleged that, in the sale of certain Company annuities to the
plaintiffs and intervenors, the Company and NAP (i) had violated the Texas
Deceptive Trade Practices-Consumer Protection Act, statutes in the Texas
Insurance Code, and certain rules and regulations of the Texas Department of
Insurance; (ii) committed common law fraud; (iii) were negligent; (iv) had
breached a duty of good faith and fair dealing; (v) made negligent
misrepresentations; (vi) committed a civil conspiracy to commit fraud; and
(vii) breached policy contracts. The plaintiffs sought (i) certification of
one or more classes; and (ii) recovery of unspecified actual damages, monies
paid by plaintiffs, attorneys' fees, prejudgment and postjudgment interests
and costs, increased or treble damages, punitive damages, and general relief
as awarded by the Court. NAP was an independent marketing general agency
under contract with the Company that hired and supervised the agents marketing
the annuity products on behalf of the Company.
On September 8, 1998, National Western, NAP, and the policyholder plaintiffs,
intervenors, and class-representatives in this class action litigation filed
with the Court a joint motion for preliminary approval of a Settlement
Agreement among the parties. The parties requested the Court to review the
Settlement Agreement and make a preliminary determination that it was fair,
adequate, and reasonable to the members of the proposed classes and that the
proposed classes were capable of being certified for settlement purposes, to
approve the form of the notices of the settlement to the classes, and to set a
class certification and fairness hearing on the settlement.
In exchange for a final order and judgment dismissing with prejudice the
claims asserted against National Western and NAP by all members of the
settlement classes, National Western agreed to contribute approximately $5
million to the proposed settlement, and NAP agreed to contribute $750,000.
Additionally, National Western agreed to pay the costs of notice to the class
and administration of the settlement claims process, to guarantee minimum
interest rates of 3% and 5% in the future on certain settlement options under
specified annuity policies which are the subject matter of the litigation, and
to provide additional incidental settlement benefits, all as detailed in the
motion and Settlement Agreement.
National Western proceeded with notification of class members and preliminary
administration of the claims process during late 1998 and January, 1999.
Costs for this process totaling $250,000 were accrued as other operating
expenses as of December 31, 1998, in the accompanying financial statements.
On January 20, 1999, the Court held a "fairness hearing" and approved the
Settlement Agreement. As a result, National Western also accrued the
estimated $5,000,000 settlement as other operating expenses as of December 31,
1998. The actual settlement payments totaling $5,000,000 were made during
1999.
Other Litigation
On September 30, 1999, National Western Life Insurance Company (the Company),
National Annuity Programs, Inc. (NAP), Robert L. Myer (Myer), and certain
affiliates of Myer executed a Definitive Compromise Settlement Agreement
(Agreement) of the declaratory judgment lawsuit pending between them in the
District Court of Travis County, Texas. The declaratory judgment action was
filed by the Company and sought court construction of a general agent manager
contract and amendments thereto (Contract) between the Company and NAP entered
into in 1983 and amended thereafter, a declaration that the contract was
enforceable, but had been breached by NAP, and for damages from NAP. The
Company alleged tortious interference by Myer with the Contract, conspiracy,
and damages. NAP and Myer had counter-claimed for declaratory judgment,
breach of contract, indemnity, fraud, statutory violations, damages, and
attorneys' fees from the Company.
By the settlement each party dismissed with prejudice all claims asserted by
them in the pending lawsuit. NAP and Myer released the Company from any claim
for any funds and other rights arising under the Contract and from all
negligence and other claims arising prior to the Agreement. The Company
released NAP, Myer, and Myer affiliates from all negligence and other claims,
excluding any claims arising under the reinsurance contract between the
Company and NAP Life Insurance Company, a Myer affiliate. The Company
acquired NAP, and Myer indemnified and held the Company harmless from all
claims of any nature asserted against NAP based on its acts or omissions prior
to the Agreement, except for claims by policyholders and agents relating to
the sale of the Company's products. The Company indemnified Myer for NAP acts
or omissions occurring after September 30, 1999. The Company will pay or
cause to be paid or released all valid claims for unpaid commissions to sub-
agents of NAP who wrote business for the Company under the Contract. The
Company completed such payments to these agents in 1999 in the aggregate
amount of $820,000.
As a result of the settlement, accrued bonus commissions relating to the NAP
contract totaling $8,482,000 were released, as they are no longer considered a
liability to NAP and will not be paid. Accordingly, the release of these
accrued commissions from liabilities in 1999 resulted in additional income of
$8,482,000, before taxes. It is anticipated that any future renewal premiums
received by the Company on currently issued and in force annuity policies
written by NAP sub-agents under the Contract could generate additional
commissions for such sub-agents. The payment of such future commissions is
subject to and conditioned upon receipt of such renewal premiums by the
Company and compliance by the sub-agents with the terms of the agents'
contracts with the Company and NAP.
By separate Commutation Agreement dated September 30, 1999, the Company and
NAP Life Insurance Company ("NAP Life"), an affiliate of Robert L. Myer,
canceled and terminated the Specific Benefit Reinsurance Agreement between
them dated March 1, 1988, whereby the Company had ceded fifty percent (50%) of
the premiums, reserves, and liabilities on a portion of its policies of
insurance. The effect of the Commutation Agreement did not have a significant
impact on the financial statements of the Company, as the cost to National
Western to terminate the agreement totaled $182,000.
National Western Life Insurance Company is also currently a defendant in
several other lawsuits, substantially all of which are in the normal course of
business. In the opinion of management, the liability, if any, which may arise
from these lawsuits would not have a material adverse effect on the Company's
financial position.
(B) Financial Instruments
In order to meet the financing needs of its customers in the normal course of
business, the Company is a party to financial instruments with off-balance
sheet risk. These financial instruments are commitments to extend credit which
involve elements of credit and interest rate risk in excess of the amounts
recognized in the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amounts, assuming that the amounts are fully
advanced and that collateral or other security is of no value. The Company
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The Company controls
the credit risk of these transactions through credit approvals, limits, and
monitoring procedures.
The Company had commitments to extend credit relating to mortgage loans
totaling $7,575,000 at December 31, 1999. Commitments to extend credit are
legally binding agreements to lend to a customer that generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. Commitments do not necessarily represent future liquidity requirements,
as some could expire without being drawn upon. The Company evaluates each
customer's creditworthiness on a case-by-case basis.
(C) Guaranty Association Assessments
National Western Life Insurance Company is subject to state guaranty
association assessments in all states in which it is licensed to do business.
These associations generally guarantee certain levels of benefits payable to
resident policyholders of insolvent insurance companies. Many states allow
premium tax credits for all or a portion of such assessments, thereby allowing
potential recovery of these payments over a period of years. However, several
states do not allow such credits.
The Company estimates its liabilities for guaranty association assessments by
using the latest information available from the National Organization of Life
and Health Insurance Guaranty Associations. The Company monitors and revises
its estimates for assessments as additional information becomes available
which could result in changes to the estimated liabilities. Guaranty
association assessment expenses were significantly lower in 1999 and 1998 than
in 1997 and prior years. The reductions are due to changes in estimated
liabilities, changes in estimated recoverable capitalized assessments, and
assessment refunds received from states during 1999 and 1998. Other operating
expenses related to state guaranty association assessments totaled $104,000
and $952,000 for the years ended December 31, 1999 and 1997, respectively.
The previously described changes and refunds resulted in a net credit in other
operating expenses for guaranty association assessments totaling $365,000 for
1998.
(D) Leases
The Company leases its executive office building and various computer and
other office related equipment. Rental expenses for these leases for the
years ended December 31, 1999, 1998, and 1997 were $920,000, $745,000, and
$743,000, respectively.
Total annual lease obligations as of December 31, 1999, are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
2000 $ 1,053
2001 1,095
2002 916
2003 551
2004 592
2005 and thereafter 3,378
Total $ 7,585
</TABLE>
(10) STOCKHOLDERS' EQUITY
(A) Changes in Common Stock Shares Outstanding
Details of changes in shares of common stock outstanding are provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Common stock shares outstanding:
Shares outstanding at
beginning of year 3,498 3,492 3,491
Shares exercised under
stock option plan 3 6 1
Shares outstanding at end of year 3,501 3,498 3,492
</TABLE>
(B) Dividend Restrictions
The Company is restricted by state insurance laws as to dividend amounts which
may be paid to stockholders without prior approval from the Colorado Division
of Insurance. The restrictions are based on statutory earnings and surplus
levels of the Company. The maximum dividend payment which may be made without
prior approval in 2000 is $49,566,000. The Company has never paid cash
dividends on its common stock, as it follows a policy of retaining any
earnings in order to finance the development of business and to meet
regulatory requirements for capital.
(C) Regulatory Capital Requirements
The Colorado Division of Insurance imposes minimum risk-based capital
requirements on insurance companies that were developed by the National
Association of Insurance Commissioners (NAIC). The formulas for determining
the amount of risk-based capital (RBC) specify various weighting factors that
are applied to statutory financial balances or various levels of activity
based on the perceived degree of risk. Regulatory compliance is determined by
a ratio of the Company's regulatory total adjusted capital to its authorized
control level RBC, as defined by the NAIC. Companies below specific trigger
points or ratios are classified within certain levels, each of which requires
specified corrective action. The Company's current statutory capital and
surplus is significantly in excess of the threshold RBC requirements.
(D) Stock and Incentive Plan
The Company has a stock and incentive plan which provides for the grant of any
or all of the following types of awards to eligible employees: (1) stock
options, including incentive stock options and nonqualified stock options;
(2) stock appreciation rights, in tandem with stock options or freestanding;
(3) restricted stock; (4) incentive awards; and (5) performance awards.
The plan began on April 21, 1995, and will terminate on April 20, 2005, unless
terminated earlier by the Board of Directors. The number of shares of Class
A, $1.00 par value, common stock which may be issued under the plan, or as to
which stock appreciation rights or other awards may be granted, may not exceed
300,000. These shares may be authorized and unissued shares or treasury
shares.
All of the employees of the Company and its subsidiaries are eligible to
participate in the plan. In addition, directors of the Company, other than
Compensation and Stock Option Committee members, are eligible for restricted
stock awards, incentive awards, and performance awards. Company directors,
including members of the Compensation and Stock Option Committee, are eligible
for nondiscretionary stock options.
The Committee approved the issuance of nonqualified stock options to selected
officers of the Company during 1998 and 1997 totaling 48,500 and 21,900,
respectively. Additionally, during 1998 the Committee granted 10,000
nonqualified, nondiscretionary stock options to Company directors. No
nonqualified stock options were issued in 1999. The directors' stock options
vest 20% annually following one full year of service to the Company from the
date of grant. The officers' stock options vest 20% annually following three
full years of service to the Company from the date of grant. The exercise
prices of the stock options were set at the fair market values of the common
stock on the dates of grant. A summary of shares available for grant and
stock option activity is detailed below:
<TABLE>
<CAPTION>
Options Outstanding
Shares Weighted-
Available Average
For Grant Shares Exercise Price
<S> <C> <C> <C>
Balance at December 31, 1996 207,500 92,500 $ 47.71
Stock Options:
Granted (21,900) 21,900 85.13
Exercised - (400) 38.13
Forfeited 100 (100) 75.06
Balance at December 31, 1997 185,700 113,900 54.92
Stock Options:
Granted (58,500) 58,500 106.47
Exercised - (6,390) 38.13
Forfeited 250 (250) 105.25
Balance at December 31, 1998 127,450 165,760 73.68
Stock Options:
Exercised - (2,600) 50.40
Forfeited 1,000 (1,000) 105.25
Balance at December 31, 1999 128,450 162,160 $ 73.86
</TABLE>
Vested and exercisable options at December 31, 1999, 1998, and 1997 totaled
26,170, 7,910, and 2,400, respectively. The weighted-average exercise price
for these options was $49.92 at December 31, 1999 and $38.13 at December 31,
1998 and 1997.
The following table summarizes information about stock options outstanding at
December 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding
Weighted-
Number Average Options
Outstanding Remaining Life Exercisable
<S> <C> <C> <C>
Exercise prices:
$ 38.13 51,110 5.4 years 18,210
65.00 32,200 6.3 years 5,960
85.13 21,600 7.3 years -
105.25 47,250 8.3 years -
112.38 10,000 8.5 years 2,000
Totals 162,160 26,170
</TABLE>
In October, 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." This statement establishes financial accounting and reporting
standards for stock-based employee compensation plans. It defines a fair
value based method of accounting for employee stock options or similar equity
instruments. However, it also allows an entity to continue to measure
compensation cost for plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees."
Under the fair value based method, compensation cost is measured at the grant
date based on the fair value of the award and is recognized over the service
period, which is usually the vesting period. For stock options, fair value is
determined using an option pricing model that takes into account various
information and assumptions regarding the Company's stock and options. Under
the intrinsic value based method, compensation cost is the excess, if any, of
the quoted market price of the stock at grant date or other measurement date
over the amount an employee must pay to acquire the stock.
The Company has elected to continue to apply the accounting methods prescribed
by APB Opinion No. 25 for its existing stock and incentive plan. No
compensation costs have been recorded for the Company's existing plan using
the intrinsic value based method. However, if compensation expense for the
stock options had been determined using the fair value based method under SFAS
No. 123, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands except per share amounts)
<S> <C> <C> <C>
Net earnings:
As reported $ 59,225 34,893 41,572
Pro forma $ 58,542 34,241 41,211
Basic earnings per share:
As reported $ 16.92 9.98 11.91
Pro forma $ 16.73 9.80 11.80
Diluted earnings per share:
As reported $ 16.78 9.87 11.81
Pro forma $ 16.59 9.69 11.70
</TABLE>
The fair value of the options used in estimating the pro forma amounts above
were estimated on the date of grant using an option pricing model with the
weighted-average assumptions as detailed below:
<TABLE>
<CAPTION>
Options Granted in
Years Ended December 31,
1998 1997
<S> <C> <C>
Risk-free interest rates 5.1% 5.4%
Dividend yields - -
Volatility factors 29.0% 32.1%
Weighted-average expected life 7 years 7 years
Weighted-average fair value per share $44.29 $39.08
</TABLE>
(11) EARNINGS PER SHARE
In February, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." This
statement changes the computation, presentation, and disclosure requirements
for earnings per share (EPS). SFAS No. 128 replaces the presentation of
primary and fully diluted EPS with basic and diluted EPS, respectively. Basic
EPS excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.
The Company adopted SFAS No. 128 effective December 31, 1997. In accordance
with the statement, prior period earnings per share data was restated. The
following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands except per share amounts)
<S> <C> <C> <C>
Numerator for basic and diluted
earnings per share:
Earnings from continuing operations
available to common stockholders
before and after assumed conversions $ 59,225 49,018 42,572
Denominator:
Basic earnings per share -
weighted-average shares 3,500 3,495 3,491
Effect of dilutive stock options 29 40 30
Diluted earnings per share -
adjusted weighted-average shares
for assumed conversions 3,529 3,535 3,521
Basic earnings per share $ 16.92 14.02 12.20
Diluted earnings per share $ 16.78 13.87 12.09
</TABLE>
(12) COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," in the first quarter of 1998. SFAS No.
130 establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. This statement
requires that an enterprise (a) classify items of other comprehensive income
by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position.
SFAS No. 130 affects the Company's reporting presentation of certain items
such as foreign currency translation adjustments and unrealized gains and
losses on investment securities. These items are now a component of other
comprehensive income, as reported in the accompanying financial statements.
Prior period financial statements have been reclassified for comparative
purposes in accordance with SFAS No. 130. Components of other comprehensive
income and related taxes are provided below for 1999, 1998, and 1997.
<TABLE>
<CAPTION>
Amounts Amounts
Before (Taxes) Net of
Taxes Benefits Taxes
(In thousands)
<S> <C> <C> <C>
1999:
Unrealized gains (losses) on
securities, net of effects
of deferred policy acquisition costs of
$28,883:
Unrealized holding gains (losses)
arising during period $ (30,847) 10,796 (20,051)
Reclassification adjustment for
(gains) losses included in
net earnings (3,248) 1,137 (2,111)
Amortization of net unrealized gains
related to transferred securities (385) 135 (250)
Net unrealized gains
(losses) on securities (34,480) 12,068 (22,412)
Foreign currency translation adjustments 327 (115) 212
Other comprehensive income $ (34,153) 11,953 (22,200)
1998:
Unrealized gains (losses) on
securities, net of effects
of deferred policy acquisition costs of
$1,024:
Unrealized holding gains (losses)
arising during period $ 5,100 (1,785) 3,315
Reclassification adjustment for
(gains) losses included in
net earnings (893) 312 (581)
Amortization of net unrealized gains
related to transferred securities (793) 277 (516)
Net unrealized gains
(losses) on securities 3,414 (1,196) 2,218
Foreign currency translation adjustments 228 (80) 148
Other comprehensive income $ 3,642 (1,276) 2,366
</TABLE>
<TABLE>
<CAPTION>
Amounts Amounts
Before (Taxes) Net of
Taxes Benefits Taxes
(In thousands)
<S> <C> <C> <C>
1997:
Unrealized gains (losses) on
securities, net of effects
of deferred policy acquisition costs of
$3,598:
Unrealized holding gains (losses)
arising during period $ 8,730 (3,055) 5,675
Reclassification adjustment for
(gains) losses included in
net earnings (1,061) 371 (690)
Amortization of net unrealized gains
related to transferred securities (1,625) 569 (1,056)
Net unrealized gains
(losses) on securities 6,044 (2,115) 3,929
Foreign currency translation adjustments 3,824 (1,338) 2,486
Other comprehensive income $ 9,868 (3,453) 6,415
</TABLE>
(13) UNAUDITED QUARTERLY FINANCIAL DATA
Quarterly results of operations for 1999 are summarized as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands except per share data)
<S> <C> <C> <C> <C>
1999:
Revenues $ 86,750 89,743 77,026 97,964
Net earnings $ 14,103 12,198 12,586 20,338
Basic earnings per share:
Net earnings $ 4.03 3.49 3.60 5.81
Diluted earnings per share:
Net earnings $ 3.99 3.46 3.57 5.77
</TABLE>
The fourth quarter net earnings in 1999 reflect the following significant
items:
Net earnings were $20,338,000 for the quarter ended December 31, 1999,
compared to $10,482,000 for the fourth quarter of 1998. Earnings for the 1999
fourth quarter were affected by the Company's equity-indexed annuity business.
These annuities combine features associated with traditional fixed annuities,
such as guaranteed minimum interest rates, with the option to have interest
rates linked in part to an equity index, the S&P 500 Index. To offset the
potential higher returns required to be paid on these products, the Company
purchases index options in addition to traditional debt security investments.
Index options, which are recorded at market value each reporting period, act
as hedges to match closely the returns based on the S&P 500 Index.
The Company's fourth quarter 1999 earnings are largely a result of improvement
in stock market conditions from the 1999 third quarter. The increased
earnings in the 1999 fourth quarter essentially offset the significantly lower
earnings performance of the 1999 third quarter, which coincides with the
fluctuations of the S&P 500 Index. Because of the volatility and large
declines in the S&P 500 Index during the third quarter of 1999, the Company
recorded significant decreases in investment income resulting from unrealized
mark-to-market losses on index options. This produced significantly lower
earnings in the third quarter of 1999. The S&P 500 Index decline also
resulted in lower interest credited to equity-indexed annuity contracts.
However, primarily because of policy liability reserving treatments related to
minimum guaranteed interest rates, the reduction in annuity contract interest
expense was much less than the decline in investment income. For the fourth
quarter of 1999, the S&P 500 Index reversed its poor performance of the
previous quarter. The S&P 500 Index increased significantly, which increased
the Company's investment income from unrealized mark-to-market gains on index
options and produced the improved earnings performance for the fourth quarter
of 1999.
Quarterly results of operations for 1998 are summarized as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands except per share data)
<S> <C> <C> <C> <C>
1998:
Revenues $ 80,145 82,131 76,575 94,763
Earnings from
continuing operations $ 10,370 12,270 15,896 10,482
Losses from
discontinued operations - - (14,125) -
Net earnings $ 10,370 12,270 1,771 10,482
Basic earnings per share:
Earnings from
continuing operations $ 2.97 3.51 4.55 3.00
Losses from
discontinued operations - - (4.04) -
Net earnings $ 2.97 3.51 0.51 3.00
Diluted earnings per share:
Earnings from
continuing operations $ 2.94 3.48 4.48 2.96
Losses from
discontinued operations - - (3.98) -
Net earnings $ 2.94 3.48 0.50 2.96
</TABLE>
The fourth quarter net earnings in 1998 reflect the following significant
items:
Net earnings for the quarter ended December 31, 1998, were $10,482,000
compared to $14,493,000 for the fourth quarter of 1997. Included in results
for the quarter are two nonrecurring charges which significantly lowered the
Company's earnings. As more fully described in Note 9, Commitments and
Contingencies, the Diffie, et al vs. National Western Life Insurance Company
and National Annuity Programs, Inc., class action litigation was settled in
January, 1999, with the Company agreeing to pay $5,000,000 in the settlement.
This amount was accrued in the accompanying financial statements in the fourth
quarter of 1998, thereby reducing earnings $3,250,000, after taxes. Also
during the fourth quarter of 1998, the Company transferred pension obligations
and administrative responsibilities of its nonqualified defined benefit plan
to a pension administration firm. The financial effects of the transaction
resulted in additional pension expense in the fourth quarter totaling
$1,653,000, net of taxes, as described in detail in Note 7, Pension Plans.
(14) SEGMENT AND OTHER OPERATING INFORMATION
(A) Operating Segment Information
In previous years the Company reported two industry segments, life insurance
operations and brokerage operations. For the year ended December 31, 1998,
the Company implemented Statement of Financial Accounting Standards (SFAS) No.
131, "Disclosures About Segments of an Enterprise and Related Information,"
and redefined its reportable operating segments as domestic life insurance,
international life insurance, and annuities. The Company's segments are
organized based on product types and geographic marketing areas.
A summary of segment information, prepared in accordance with SFAS No. 131, is
provided below:
Selected Segment Information:
<TABLE>
<CAPTION>
Domestic International
Life Life All
Insurance Insurance Annuities Others Totals
(In thousands)
<S> <C> <C> <C> <C> <C>
1999:
Selected Balance
Sheet Items:
Deferred policy
acquisition
costs $ 73,519 74,928 221,218 - 369,665
Total segment
assets 404,234 380,154 2,844,465 39,247 3,668,100
Future policy
benefits 319,862 295,225 2,532,993 - 3,148,080
Other policyholder
liabilities 12,597 5,754 5,752 - 24,103
Condensed Income
Statements:
Premiums and
contract
revenues $ 24,668 43,018 27,392 - 95,078
Net investment
income 25,054 21,692 191,328 4,906 242,980
Other income 40 41 8,863 - 8,944
Total revenues 49,762 64,751 227,583 4,906 347,002
Policy benefits 15,547 16,451 458 - 32,456
Amortization of
deferred policy
acquisition costs 3,387 14,647 21,114 - 39,148
Universal life
and investment
annuity contract
interest 9,826 13,923 138,553 - 162,302
Other operating
expenses 8,563 9,429 9,772 - 27,764
Federal income
taxes 4,230 3,503 19,618 1,668 29,019
Total expenses 41,553 57,953 189,515 1,668 290,689
Segment earnings $ 8,209 6,798 38,068 3,238 56,313
</TABLE>
<TABLE>
<CAPTION>
Domestic International
Life Life All
Insurance Insurance Annuities Others Totals
(In thousands)
<S> <C> <C> <C> <C> <C>
1998:
Selected Balance
Sheet Items:
Deferred policy
acquisition
costs $ 68,034 70,710 175,749 - 314,493
Total segment
assets 412,538 373,201 2,692,330 19,285 3,497,354
Future policy
benefits 323,975 284,428 2,371,075 - 2,979,478
Other policyholder
liabilities 12,880 6,219 4,856 - 23,955
Condensed Income
Statements:
Premiums and
contract
revenues $ 24,296 40,606 31,432 - 96,334
Net investment
income 26,211 21,940 182,347 3,346 233,844
Other income 750 32 270 - 1,052
Total revenues 51,257 62,578 214,049 3,346 331,230
Policy benefits 17,932 14,112 397 - 32,441
Amortization of
deferred policy
acquisition
costs 2,954 15,836 21,625 - 40,415
Universal life
and investment
annuity contract
interest 9,963 13,432 135,494 - 158,889
Other operating
expenses 10,786 9,573 15,145 - 35,504
Federal income
taxes 3,227 3,228 13,880 1,122 21,457
Total expenses 44,862 56,181 186,541 1,122 288,706
Segment earnings $ 6,395 6,397 27,508 2,224 42,524
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1997:
Selected Balance
Sheet Items:
Deferred policy
acquisition
costs $ 65,505 69,935 155,639 - 291,079
Total segment
assets 405,427 359,986 2,429,998 14,058 3,209,469
Future policy
benefits 321,269 274,117 2,155,904 - 2,751,290
Other policyholder
liabilities 10,960 9,959 4,082 - 25,001
Condensed Income
Statements:
Premiums and
contract
revenues $ 23,639 40,429 31,994 - 96,062
Net investment
income 26,873 21,451 166,348 2,774 217,446
Other income 43 34 277 - 354
Total revenues 50,555 61,914 198,619 2,774 313,862
Policy benefits 18,232 17,100 (47) - 35,285
Amortization of
deferred policy
acquisition
costs 5,058 13,608 21,268 - 39,934
Universal life
and investment
annuity contract
interest 9,687 12,575 122,938 - 145,200
Other operating
expenses 8,588 7,749 11,223 - 27,560
Federal income
taxes 3,089 3,739 14,848 953 22,629
Total expenses 44,654 54,771 170,230 953 270,608
Segment earnings $ 5,901 7,143 28,389 1,821 43,254
</TABLE>
Reconciliations of segment information to the Company's consolidated financial
statements are provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Premiums and Other Revenue:
Premiums and contract revenues $ 95,078 96,334 96,062
Net investment income 242,980 233,844 217,446
Other income 8,944 1,052 354
Realized gains (losses) on investments 4,481 2,384 (1,588)
Total consolidated premiums
and other revenue $ 351,483 333,614 312,274
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Federal Income Taxes:
Total segment Federal income taxes $ 29,019 21,457 22,629
Taxes on realized gains
(losses) on investments 1,569 834 (556)
Tax benefits from discontinued operations - (4,944) (350)
Total taxes on earnings
from continuing operations $ 30,588 17,347 21,723
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Net Earnings:
Total segment earnings $ 56,313 42,524 43,254
Realized gains (losses) on investments,
net of taxes 2,912 1,550 (1,032)
Losses from discontinued operations - (14,125) (1,000)
Tax benefits from
discontinued operations - 4,944 350
Total consolidated net earnings $ 59,225 34,893 41,572
</TABLE>
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Assets:
Total segment assets $ 3,668,100 3,497,354 3,209,469
Assets of discontinued operations - 48 892
Other unallocated assets 14,728 20,601 15,202
Total consolidated assets $ 3,682,828 3,518,003 3,225,563
</TABLE>
(B) Geographic Information
A significant portion of the Company's premiums and contract revenues are from
countries other than the United States. Premiums and contract revenues
detailed by country are provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
United States $ 52,732 56,341 56,122
Argentina 8,761 9,052 9,706
Peru 8,201 8,293 8,227
Chile 6,892 6,227 5,451
Haiti 5,543 4,941 4,430
Columbia 3,888 3,612 3,781
Other foreign countries 16,965 15,113 14,064
Revenues, excluding reinsurance premiums 102,982 103,579 101,781
Reinsurance premiums (7,904) (7,245) (5,719)
Total premiums and contract revenues $ 95,078 96,334 96,062
</TABLE>
Premiums and contract revenues are attributed to countries based on the
location of the policyholder. The Company has no significant assets, other
than financial instruments, located in countries other than the United States.
(C) Major Agency Relationships
A significant portion of the Company's premiums and deposits were sold through
three marketing agencies in recent years. Combined business from these
agencies accounted for approximately 29% of total direct premium revenues and
universal life and investment annuity contract deposits for 1999. These same
three marketing agencies accounted for 26% and 17% of total direct premiums
and deposits for 1998 and 1997, respectively.
(15) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Investment securities: Fair values for investments in debt and equity
securities are based on quoted market prices, where available. For securities
not actively traded, fair values are estimated using values obtained from
various independent pricing services and the Securities Valuation Office of
the National Association of Insurance Commissioners. In the cases where prices
are unavailable from these sources, prices are estimated by discounting
expected future cash flows using a current market rate applicable to the
yield, credit quality, and maturity of the investments.
Cash and short-term investments: The carrying amounts reported in the balance
sheet for these instruments approximate their fair values.
Mortgage loans: The fair values of performing mortgage loans are estimated by
discounting scheduled cash flows through the scheduled maturities of the
loans, using interest rates currently being offered for similar loans to
borrowers with similar credit ratings. Fair values for significant
nonperforming loans are based on recent internal or external appraisals. If
appraisals are not available, estimated cash flows are discounted using a rate
commensurate with the risk associated with the estimated cash flows.
Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific
borrower information.
Policy loans: The fair values for policy loans are calculated by discounting
estimated cash flows using U.S. Treasury bill rates as of December 31, 1999
and 1998. The estimated cash flows include assumptions as to whether such
loans will be repaid by the policyholders or settled upon payment of death or
surrender benefits on the underlying insurance contracts. As a result, these
assumptions incorporate both Company experience and mortality assumptions
associated with such contracts.
Index options: Fair values for index options are based on quoted market
prices.
Life interest in Libbie Shearn Moody Trust: The fair value of the life
interest is estimated based on assumptions as to future dividends from the
Trust over the life expectancy of Mr. Robert L. Moody. These estimated cash
flows were discounted at a rate consistent with uncertainties relating to the
amount and timing of future cash distributions. However, the Company has
limited the fair value to the statutory admitted value of the Trust, as this
is the maximum amount to be received by the Company in the event of Mr.
Moody's premature death.
Investment annuity and supplemental contracts: Fair values of the Company's
liabilities for deferred investment annuity contracts are estimated to be the
cash surrender values of each contract. The cash surrender value represents
the policyholder's account balance less applicable surrender charges. The fair
values of liabilities for immediate investment annuity contracts and
supplemental contracts with and without life contingencies are estimated by
discounting estimated cash flows using U.S. Treasury bill rates as of December
31, 1999 and 1998.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. This includes the Company's
traditional and universal life products. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure
to changing interest rates through the matching of investment maturities with
amounts due under insurance and investment contracts.
The carrying amounts and fair values of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
Carrying Fair Carrying Fair
Values Values Values Values
(In thousands)
<S> <C> <C> <C> <C>
ASSETS
Investments in debt and
equity securities:
Securities held
to maturity $ 2,151,924 2,084,494 2,029,728 2,124,715
Securities available
for sale 717,948 717,948 735,587 735,587
Cash and short-term
investments 14,010 14,010 24,508 24,508
Mortgage loans 183,902 185,841 174,921 186,161
Policy loans 117,309 125,679 124,441 150,583
Index options 32,820 32,820 23,900 23,900
Life interest in Libbie
Shearn Moody Trust 4,056 12,775 4,347 14,721
Assets of discontinued
operations - cash - - 41 41
LIABILITIES
Deferred investment
annuity contracts $ 2,269,445 1,973,403 2,127,007 1,863,552
Immediate investment
annuity and
supplemental contracts 240,136 234,739 219,406 229,738
</TABLE>
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instruments. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
(16) DISCONTINUED BROKERAGE OPERATIONS
Effective July 17, 1995, The Westcap Corporation (Westcap), a wholly owned
brokerage subsidiary of National Western Life Insurance Company, discontinued
all sales and trading activities in its Houston, Texas, office. In September,
1995, Westcap approved a plan to close its remaining sales office in New
Jersey and to cease all brokerage operations. Subsequently, on April 12,
1996, The Westcap Corporation and its wholly owned subsidiary, Westcap
Enterprises, Inc., separately filed voluntary petitions for reorganization
under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy
Court, Southern District of Texas, Houston Division.
In accordance with generally accepted accounting principles, the assets and
liabilities of Westcap have been reclassified in the accompanying consolidated
balance sheets to separately identify them as assets and liabilities of
discontinued operations. Losses from discontinued brokerage operations have
also been reflected separately from continuing operations of the Company. The
1995 losses from discontinued operations resulted in the complete write-off of
National Western Life Insurance Company's investment in Westcap on a
consolidated basis. However, a $1,000,000 cash infusion was made to Westcap
on March 18, 1997, for operational expenses incurred during its bankruptcy.
This contribution was reflected as a loss from discontinued operations in
1997.
By order dated August 28, 1998, the United States Bankruptcy Court, Southern
District of Texas, Houston Division, confirmed and approved the Third Amended
Joint Consensual Plan of Reorganization (the Plan) of The Westcap Corporation
and Westcap Enterprises, Inc. Pursuant to the Plan, National Western received
credit for the $1,000,000 previously contributed to Westcap in bankruptcy in
March, 1997, and paid an additional $14,125,000 to compromise and settle
various claims and litigation.
The $14,125,000 was paid by National Western on January 13, 1999. However,
the settlement payment was accrued in other liabilities as of December 31,
1998, and reflected as a 1998 loss from discontinued operations in the
accompanying financial statements. As part of the bankruptcy reorganization,
National Western retained 100% continuing ownership of the reorganized
Westcap, and the subsidiary is now operating as a real estate management
company.
<TABLE>
<CAPTION>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1999
(In thousands)
(1) Market Balance Sheet
Type of Investment Cost Value Amount
<S> <C> <C> <C>
Fixed maturity bonds:
Securities held to maturity:
United States government
and government
agencies and authorities $ 3,612 3,717 3,612
States, municipalities,
and political subdivisions 6,741 7,323 6,741
Foreign governments 51,450 51,371 51,450
Public utilities 323,310 313,174 323,310
Corporate 1,284,420 1,236,684 1,284,420
Mortgage-backed 382,975 380,702 382,975
Asset-backed 99,416 91,523 99,416
Total securities held
to maturity 2,151,924 2,084,494 2,151,924
Securities available for sale:
United States government
and government
agencies and authorities 3,243 3,312 3,312
States, municipalities,
and political subdivisions 11,771 10,725 10,725
Public utilities 51,013 50,323 50,323
Corporate 316,567 299,264 299,264
Mortgage-backed 219,549 218,102 218,102
Asset-backed 126,710 120,222 120,222
Total securities available
for sale 728,853 701,948 701,948
Total fixed maturity bonds 2,880,777 2,786,442 2,853,872
Equity securities:
Securities available for sale:
Common stocks:
Public utilities 192 423 423
Banks, trust and
insurance
companies 195 3,711 3,711
Industrial
and other 86 84 84
Preferred stocks 12,282 11,782 11,782
Total equity securities 12,755 16,000 16,000
Index options 32,820 32,820
Mortgage loans (2) 176,221 172,117
Policy loans 117,309 117,309
Other long-term investments (3) 34,834 32,766
Cash and short-term investments 14,010 14,010
Total investments other than
investments in related parties $ 3,268,726 3,238,894
<FN>
Notes:
(1) Bonds are shown at amortized cost, mortgage loans are shown at unpaid
principal balances before allowances for possible losses of $4,104,000, and
real estate is stated at cost before allowances for possible losses of
$2,068,000.
(2) Mortgage loans with related parties totaling $11,785,000 have been
excluded.
(3) Real estate acquired by foreclosure included in other long-term
investments is as follows: cost $2,369,000; balance sheet amount $1,705,000.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1999, 1998, and 1997
(In thousands)
<TABLE>
<CAPTION>
(1)
Balance at Charged to Balance at
Beginning Costs and (2) (3) End of
Description of Period Expenses Reductions Transfers Period
<S> <C> <C> <C> <C> <C>
Valuation accounts
deducted
from applicable
assets:
Allowance for
possible
losses on mortgage
loans:
December 31, 1999 $ 4,640 (536) - - 4,104
December 31, 1998 $ 4,640 - - - 4,640
December 31, 1997 $ 5,988 1,133 (2,408) (73) 4,640
Allowance for
possible
losses on real
estate:
December 31, 1999 $ 2,068 - - - 2,068
December 31, 1998 $ 2,222 - (154) - 2,068
December 31, 1997 $ 2,288 46 (185) 73 2,222
<FN>
Notes:
(1) These amounts were recorded to realized (gains) losses on investments.
(2) These amounts were related to charge-off of assets against the allowances.
(3) These amounts were transferred to real estate.
</FN>
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NATIONAL WESTERN LIFE INSURANCE COMPANY
Date: March 29, 2000 /S/ Robert L. Moody
By: Robert L. Moody, Chairman of
the Board,Chief Executive
Officer, and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title (Capacity) Date
/S/ Robert L. Moody Chairman of the Board, March 29, 2000
Robert L. Moody Chief Executive Officer, and Director
(Principal Executive Officer)
/S/ Ross R. Moody President, Chief Operating Officer, March 29, 2000
Ross R. Moody and Director
/S/ Robert L. Busby, III Senior Vice President - March 29, 2000
Robert L. Busby, III Chief Administrative
Officer, Chief Financial Officer
and Treasurer
(Principal Financial Officer)
/S/ Vincent L. Kasch Vice President - Controller and March 29, 2000
Vincent L. Kasch Assistant Treasurer
(Principal Accounting Officer)
/S/ Arthur O. Dummer Director March 29, 2000
Arthur O. Dummer
/S/ Harry L. Edwards Director March 29, 2000
Harry L. Edwards
/S/ E. Douglas McLeod Director March 29, 2000
E. Douglas McLeod
/S/ Charles D. Milos Director March 29, 2000
Charles D. Milos
Director March 29, 2000
Frances A. Moody
Director March 29, 2000
Russell S. Moody
/S/ Louis E. Pauls, Jr. Director March 29, 2000
Louis E. Pauls, Jr.
/S/ E.J. Pederson Director March 29, 2000
E.J. Pederson
EXHIBIT 10(q) - MATERIAL CONTRACTS
BONUS AGREEMENT
This Bonus Agreement is entered into this 1st day of August, 1999, by and
between National Western Life Insurance Company of 850 East Anderson Lane,
Austin, TX 78752-1602 ("NWL" or "we") and Richard M. Edwards 6528 Heron Drive,
Austin, TX 78759 ("you" or "your").
WHEREAS, Richard M. Edwards is employed by NWL as Senior Vice President-
International Marketing and has supervision over all international marketing
efforts of NWL; and
WHEREAS, the parties desire to establish a bonus compensation arrangement as
an incentive for Richard M. Edwards to meet certain production and production-
related standards.
NOW THEREFORE, the parties agree as follows:
I. NWL will pay you four different and independent bonuses, as set forth
below, under the following terms and conditions:
A. Bonus 1 - First Year Life Persistency Rate Bonus
1. NWL will pay you a bonus based on the 12/31/99 Persistency
Percentage of the 13th month persistency calculations for
international life insurance policies. The data source for
determining the company Persistency Percentage rate shall be the
report entitled "Company Persistency Report-International-
Without Annuities", which is provided by the NWL Information
Services Department, using "Premiums- 13 Month Persistency."
2. The Persistency Percentage will then determine the amount of the
bonus as follows (only one section shall apply):
a. No bonus shall be paid if the Persistency Percentage is below
93%.
b. If the Persistency Percentage is equal to 93%, then the bonus
shall be $9,000.
c. If the Persistency Percentage is greater than 93% but less than
96%, then the bonus shall be $9,000 plus $750 for each 1% over
93%, or a pro-rata amount thereof for percentages stated as
other than whole percentages.
d. If the Persistency Percentage is equal to 96%, then the bonus
shall be $11,250.
e. If the Persistency Percentage is greater than 96% but less than
99%, then the bonus shall be $11,250 plus $2,250 for each 1%
over 96%, or a pro-rata amount thereof for percentages stated
as other than whole percentages.
f. If the Persistency Percentage is equal to 99%, then the bonus
shall be $18,000.
g. If the Persistency Percentage is greater than 99%, then the
bonus shall be $18,000 plus $4,220 for each additional 1% that
the Persistency Percentage exceeds 99%, or a pro-rata share
thereof for percentages stated as other than whole percentages.
3. The assumptions that will be used in the calculation of the First-
Year Life Persistency Rate Bonus is as follows:
a. That the "Company Persistency Report-International-Without
Annuities" is the same report used for agency convention
qualification purposes;
b. That the above mentioned report does not reflect true one-year
persistency, but reflects the persistency of policies written
in the most recent 12 months; and
c. That the 13 Month Persistency Percentage will be calculated as
of 12/31/99, based on premiums.
B. Bonus 2 - Second-Year Life Persistency Rate Bonus
1. NWL will pay you a bonus based on the 12/31/99 Persistency
Percentage of the 24th month persistency calculations for
international life insurance policies. The data source for
determining the company Persistency Percentage rate shall be the
report entitled "Company Persistency Report-International-Without
Annuities", which is provided by the NWL Information Services
Department, using "Premiums-24 Month Persistency".
2. The Persistency Percentage will then determine the amount of the
bonus as follows (only one section shall apply):
a. No bonus shall be paid if the Persistency Percentage is below
89%.
b. If the Persistency Percentage is equal to 89%, then the bonus
shall be $9,000.
c. If the Persistency Percentage is greater than 89% but less than
92%, then the bonus shall be $9,000 plus $750 for each 1% over
89%, or a pro-rata amount thereof for percentages stated as
other than whole percentages.
d. If the Persistency Percentage is equal to 92%, then the bonus
shall be $11,250.
e. If the Persistency Percentage is greater than 92% but less than
95%, then the bonus shall be $11,250 plus $2,250 for each 1%
over 92%, or a pro-rata amount thereof for percentages stated
as other than whole percentages.
f. If the Persistency Percentage is equal to 95%, then the bonus
shall be $18,000.
g. If the Persistency Percentage is greater than 95%, then the
bonus shall be $18,000 plus $4,220 for each additional 1% that
the Persistency Percentage exceeds 95%, or a pro-rata share
thereof for percentages stated as other than whole
percentages.
3. The assumptions that will be used in the calculation of the Second-
Year Life Persistency Rate Bonus is as follows:
a. That the "Company Persistency Report-International-Without
Annuities" is the same report used for agency convention
qualification purposes;
b. That the above mentioned report does not reflect true two-year
persistency, but reflects the persistency of policies written
in the most recent 24 months; and
c. That the 24 Month Persistency Percentage will be calculated as
of 12/31/99, based on premiums.
C. Bonus 3 - Collected International Life First-Year Premiums Bonus
1. NWL will pay you a bonus based on Collected International Life
First-Year Premiums. The data source used for determining the Total
Collected Premiums will be the report No. UT69-003, International
U.L. and International Non-U.L., using the fields "First Year
Premium" and "Single Premium".
2. The Total Collected Premiums shall be calculated as follows:
There are two components of the Total Collected Premiums: the
International First Year Premiums and the International Single
Premiums.
a. International First Year Premiums shall be determined by adding
both the International U.L. and the International Non-U.L.
"First Year Premium" from the UT69-003 Report as of 12/31/99.
b. International Single Premiums shall be determined by adding
both the International U.L. and the International Non-U.L.
"Single Premium" from the UT69-003 Report as of 12/31/99.
The International Single Premiums will then be multiplied by 5% to
determine the amount of International Single Premiums to be
included in the bonus calculation. This amount will then be added
to the International First-Year Premiums to determine the Total
Collected Premiums.
3. The Total Collected Premium will then determine the amount of the
bonus as follows (only one section shall apply):
a. No bonus will be paid if the Total Collected Premium is less
than $12 million.
b. If the Total Collected Premium equals $12 million, then the
bonus shall be $42,000.
c. If the Total Collected Premium is greater than $12 million but
less than $15 million, then the bonus shall be $42,000 plus
$350 for each additional $100,000 over $12 million, or a pro-
rata share thereof.
d. If the Total Collected Premium equals $15 million, then the
bonus shall be $52,500.
e. If the Total Collected Premium is greater than $15 million but
less than $18 million, then the bonus shall be $52,500 plus
$1,050 for each additional $100,000 over $15 million, or a pro-
rata share thereof.
f. If the Total Collected Premium is equal to $18 million, then
the bonus shall be $84,000.
g. If the Total Collected Premium is greater than $18 million,
then the bonus shall be $84,000 plus $1,425 for each additional
$100,000 over $18 million, or a pro-rata amount thereof.
4. The assumptions made in calculation of this bonus are as follows:
a. That 100% of the International First-Year Life Insurance
Premium is included;
b. That 5% of the International Single Premium Life Insurance is
included;
c. That the Total Collected Premium includes no renewal life
insurance premiums;
d. That this bonus is based on international life insurance
premiums only and excludes all domestic premiums; and
e. That this bonus is calculated for the calendar year 1999, as of
12/31/99.
D. Bonus 4 - Collected International Investment Contract First-Year and
Single Deposit Bonus
1. NWL will pay you a bonus based on collected International
Investment Contract and annuity first-year and single deposits and
premiums. The data source for determining the Total Collected
Deposits will be the report New Business Market Summary - Report #5.
2. The Total Collected Deposits shall be the International Annuity Paid
Premium YTD as determined from the New Business Market Summary -
Report #5.
3. The Total Collected Deposits shall then be multiplied by .0005 which
result will be the amount of the bonus.
4. The assumptions made in calculation of this bonus are as follows:
a. That the bonus is based on first-year and single deposits only.
b. That this bonus is based on International Investment Contract
and annuity first-year and single deposits and premiums only
and excludes all domestic premiums or deposits.
c. That this bonus includes no renewal premiums or deposits or any
premiums or deposits after first year.
d. That this bonus is determined as of 12/31/99 and is based on
1999 premiums and deposits only.
II. All bonus performance is based on production produced between January 1,
1999 and December 31, 1999.
III. All bonuses will be calculated after December 31,1999, based on reports
as of December 31, 1999.
IV. All bonuses will be calculated and paid, if amounts are due, as soon as
reasonably possible after January 1, 2000, but no later than February 1, 2000.
V. During the year 1999, if you request or have requested, NWL may make or may
have made advances to you against such bonuses in amounts determined by NWL.
Any advances to you will offset any bonuses due. Amounts of bonus compensation
that exceed the advances will be due and owing to you and will be paid by
February 1, 2000. Any amounts of advances that exceed bonuses due will result
in an amount due and owing by you, and such amounts will be paid by you on or
before February 1, 2000. Any amount of advances due and owing by you and not
paid by you to NWL by February 1, 2000, will be deducted by NWL from your
future compensation. You expressly agree to such deductions from your
compensation, including salary.
This does not limit NWL's right to initiate litigation against you to recover
any debt owed by you to NWL. If the parties cannot agree on a payment schedule
and if it is necessary for NWL to file suit against you to recover such debts,
you agree to pay to NWL its attorneys fees and court costs incurred in
collecting said debts.
As of August 31, 1999, NWL has advanced to you a total of $772 relating to
your 1999 bonus. This entire amount shall be designated as an earned advance
on your year-end 1999 bonus.
You have also received bonuses in 1998 based on specific paid annualized life
premium production during that year. More specifically, you were paid a bonus
equal to 1.5% of the 1998 international first year paid annualized life
premiums in excess of a minimum threshold of $9,000,000. This bonus for 1998
totaled $76,703 (($14,113,528 - $9,000,000) x 1.5%). The total paid
annualized life premiums on which bonuses were paid as of December 31, 1998,
totaled $5,113,528 ($14,113,528 less $9,000,000 threshold). The parties agree
that an amount equal to $3,835 will be designated as an unearned 1998 bonus and
this amount will be deducted from your 1999 earned bonuses.
VI. The term of this contract is from January 1, 1999 to December 31, 1999.
Under no circumstances will this bonus agreement automatically renew for the
following year. Both you and NWL must sign a separate agreement if renewal of
this agreement is desired.
VII. In order to qualify for the bonus and be paid the bonus, you must be
employed by NWL on the date that the bonus is actually paid by NWL.
During the year 1999, if your employment with NWL is terminated for any reason
other than your voluntary termination or "termination for cause" by NWL, NWL
will, following year-end, determine whether or not any bonus would have been
due for 1999. If NWL decides that such a bonus would have been due,
considering all off-sets and deductions that might be imposed under this
agreement, NWL will pay a pro-rata portion of the bonus to you, or if you are
not living at that time then to your spouse, or if you and your spouse are not
living at that time, then to your children.
The pro-rata portion will be determined by dividing the total number of days
of 1999 up to your date of termination, by the total number of days in 1999,
and multiplying that result times the bonus as described above in the
preceding paragraph.
"Termination for cause" means termination for inappropriate or unsatisfactory
work performance, work habits, conduct, behavior or demeanor including, but
not limited to, the examples listed in the Code of Conduct that is
incorporated in NWL's Employee Handbook.
VIII. Nothing in this agreement limits NWL's authority to make ALL decisions
concerning products, including, but not limited to, profitability issues,
commission and overwrite amounts, publications, advertising, compliance,
market conduct, underwriting, and availability.
IX. This agreement shall not be amended, modified, or altered in any manner
except in a writing signed by both parties. This agreement shall be governed,
interpreted and construed according to the laws of the State of Texas.
X. This agreement constitutes the complete and exclusive agreement of the
parties with respect to your Bonus Compensation and supersedes any prior
understandings or written or oral agreements between the parties respecting
this subject matter.
XI. This Bonus Agreement is binding upon signing. There are no conditions
precedent or subsequent, other than the conditions specifically mentioned in
this contract, that must occur before this contract becomes binding upon both
parties. There are no representations other than those expressly included in
this agreement relating to bonus compensation of Richard M. Edwards.
EXECUTED at Austin, Texas, on August _____, 1999.
NATIONAL WESTERN LIFE INSURANCE COMPANY
By: /S/ Ross R. Moody
Ross R. Moody, President
/S/ Richard M. Edwards
Richard M. Edwards
Senior Vice President-International Marketing
I acknowledge that I have read, understand and agree to the above terms
in section V relating to advances. Furthermore, I agree that these terms shall
also apply to any advances already made to me during the year 1999 prior to
signing this agreement. I agree to repay any debt owed by me to NWL by
February 1, 2000. In default of such repayment, I authorize NWL to deduct the
debt created by advances from my salary or any other compensation in amounts
and at times determined by NWL.
/S/ Richard M. Edwards
Richard M. Edwards
EXHIBIT 10(r) - MATERIAL CONTRACTS
BONUS AGREEMENT
This Bonus Agreement is entered into this 10th day of August, 1999, by and
between National Western Life Insurance Company of 850 East Anderson Lane,
Austin, TX 78752-1602 ("NWL" or "we") and Arthur W. Pickering of 4921 China
Garden Dr., Austin, TX 78730 ("you" or "your").
WHEREAS, Arthur W. Pickering is employed by NWL as Senior Vice President-
Domestic Marketing and has supervision over all domestic marketing efforts of
NWL; and
WHEREAS, the parties desire to establish a bonus compensation arrangement as
an incentive for Arthur W. Pickering to meet certain production and
production-related standards.
NOW THEREFORE, the parties agree as follows:
I. NWL will pay you five different and independent bonuses, as set forth
below, under the following terms and conditions:
A. Bonus 1 - Single Tier Domestic Annuity Account Balance Bonus
1. NWL will pay you a bonus based on the positive percentage increase
in the Single Tier Annuity Account Balance between 12/31/98 and
12/31/99, as set forth in the Annuity Account Value/Reserve Report-
Domestic Bonus as prepared by the NWL Actuarial Department. The
data sources for this report are three computer runs entitled
"SUMCNGGG", "NWSC50", and "IA20RES".
The Percentage Increase shall be determined by subtracting the total
account balance at 12/31/98 ($1,204,046,683) from the total account
balance at 12/31/99, then dividing a positive result by the total
account balance on 12/31/98.
2. The Percentage Increase will then determine the amount of the bonus
as follows (only one section shall apply):
a. No bonus will be paid if the Percentage Increase is less than
10%.
b. If the Percentage increase is equal to 10%, then the bonus
shall be $18,000.
c. If the Percentage Increase is greater than 10% but less than
20%, then the bonus shall be $18,000 plus $450 for each 1%
increase over 10%, or a pro-rata share thereof for percentages
stated as other than whole percentages.
d. If the Percentage Increase is equal to 20%, then the bonus
shall be $22,500.
e. If the Percentage Increase is greater than 20% but less than
30%, then the bonus shall be $22,500 plus $1,350 for each 1%
increase over 20%, or a pro-rata share thereof for percentages
stated as other than whole percentages.
f. If the Percentage Increase is equal to 30%, then the bonus
shall be $36,000.
g. If the Percentage Increase is greater than 30%, then the bonus
shall be $36,000 plus $1,688 for each additional 1% increase
over 30% , or a pro-rata share thereof for percentages stated
as other than whole percentages.
3. The assumptions that will be used in the calculation of the Single
Tier Domestic Annuity Account Balance Bonus are as follows:
a. That the Account Balance refers to the account value on
interest sensitive annuities that are non two-tier annuities,
variously described in policies as account balance,
accumulation amount or fund value, plus the statutory reserves
for payout annuities;
b. That the computer run "SUMCNGGG" will be used to determine
account balances for single-tiered deferred annuities,
excluding equity indexed annuities;
c. That the computer run "NWSC50" will be used to determine
statutory reserves for deferred and immediate payout annuities;
d. That the computer run "IA20RES" will be used to determine
account balances for equity indexed annuities;
e. That the calculations include domestic policies only;
f. That the calculations include single tier deferred annuities
and exclude two-tier annuities;
g. That the calculations include single tier payout and immediate
annuities and exclude two-tier payout and immediate annuities;
and
h. That the methodology remains the same for the year during all
representative times used in calculation of the bonus.
i. Copies of the computer runs "SUMCNGGG", "NWSC50" and "IA20RES",
along with the Annuity Account Value/Reserve Report-Domestic
Bonus, will be provided to you on a monthly basis.
B. Bonus 2 - First Year Life Persistency Rate Bonus
1. NWL will pay you a bonus based on the 12/31/99 Persistency
Percentage of the 13th month persistency calculations for domestic
life insurance policies. The data source for determining the company
Persistency Percentage rate shall be the report entitled "Company
Persistency Report-Domestic-Without Annuities", which is provided
by the NWL Information Services Department, using "Premiums-13
Month Persistency".
2. The Persistency Percentage will then determine the amount of the
bonus as follows (only one section shall apply):
a. No bonus shall be paid if the Persistency Percentage is below
92%.
b. If the Persistency Percentage is equal to 92%, then the bonus
shall be $9,000.
c. If the Persistency Percentage is greater than 92% but less than
95%, then the bonus shall be $9,000 plus $750 for each 1% over
92%, or a pro-rata amount thereof for percentages stated as
other than whole percentages.
d. If the Persistency Percentage is equal to 95%, then the bonus
shall be $11,250.
e. If the Persistency Percentage is greater than 95% but less than
98%, then the bonus shall be $11,250 plus $2,250 for each 1%
over 95%, or a pro-rata amount thereof for percentages stated
as other than whole percentages.
f. If the Persistency Percentage is equal to 98%, then the bonus
shall be $18,000.
g. If the Persistency Percentage is greater than 98%, then the
bonus shall be $18,000 plus $4,220 for each additional 1% that
the Persistency Percentage exceeds 98%, or a pro-rata share
thereof for percentages stated as other than whole percentages.
3. The assumptions that will be used in the calculation of the First-
Year Life Persistency Rate Bonus are as follows:
a. That the "Company Persistency Report-Domestic-Without
Annuities" is the same report used for agency convention
qualification purposes;
b. That the above mentioned report does not reflect true one-year
persistency, but reflects the persistency of policies written
in the most recent 12 months; and
c. That the 13 Month Persistency Percentage will be calculated as
of 12/31/99, based on premiums.
C. Bonus 3 - Second-Year Life Persistency Rate Bonus
1. NWL will pay you a bonus based on the 12/31/99 Persistency
Percentage of the 24th month persistency calculations for domestic
life insurance policies. The data source for determining the company
Persistency Percentage rate shall be the report entitled "Company
Persistency Report-Domestic-Without Annuities", which is provided
by the NWL Information Services Department, using "Premiums-24
Month Persistency".
2. The Persistency Percentage will then determine the amount of the
bonus as follows (only one section shall apply):
a. No bonus shall be paid if the Persistency Percentage is below
89%.
b. If the Persistency Percentage is equal to 89%, then the bonus
shall be $9,000.
c. If the Persistency Percentage is greater than 89% but less than
92%, then the bonus shall be $9,000 plus $750 for each 1% over
89%, or a pro-rata amount thereof for percentages stated as
other than whole percentages.
d. If the Persistency Percentage is equal to 92%, then the bonus
shall be $11,250.
e. If the Persistency Percentage is greater than 92% but less than
95%, then the bonus shall be $11,250 plus $2,250 for each 1%
over 92%, or a pro-rata amount thereof for percentages stated
as other than whole percentages.
f. If the Persistency Percentage is equal to 95%, then the bonus
shall be $18,000.
g. If the Persistency Percentage is greater than 95%, then the
bonus shall be $18,000 plus $4,220 for each additional 1% that
the Persistency Percentage exceeds 95%, or a pro-rata share
thereof for percentages stated as other than whole
percentages.
3. The assumptions that will be used in the calculation of the Second-
Year Life Persistency Rate Bonus are as follows:
a. That the "Company Persistency Report-Domestic-Without
Annuities" is the same report used for agency convention
qualification purposes;
b. That the above mentioned report does not reflect true two-year
persistency, but reflects the persistency of policies written
in the most recent 24 months; and
c. That the 24 Month Persistency Percentage will be calculated as
of 12/31/99, based on premiums.
D. Bonus 4 - Collected Domestic Life First-Year Premiums Bonus
1. NWL will pay you a bonus based on Collected Domestic Life First-Year
Premiums. The data source used for determining the Total Collected
Premiums will be the report No. UT69-003, Composite Totals-Life,
International U.L. and International Non-U.L., using the fields
"First Year Premium" and "Single Premium".
2. The Total Collected Premiums shall be calculated as follows:
There are two components of the Total Collected Premiums: the
Domestic First Year Premiums and the Domestic Single Premiums.
a. Domestic First Year Premiums shall be determined by subtracting
both the International U.L. and the International Non-U.L.
"First Year Premium" from the Composite Totals- Life "First
Year Premium" as of 12/31/99, as stated in the UT69-003 Report.
b. Domestic Single Premiums shall be determined by subtracting
both the International U.L. and the International Non-U.L.
"Single Premium" from the Composite Totals-Life "Single
Premium" as of 12/31/99, as stated in the UT69-003 Report.
The Domestic Single Premiums will then be multiplied by 5% to
determine the amount of Domestic Single Premiums to be included in
the bonus calculation. This amount will then be added to the
Domestic First-Year Premiums to determine the Total Collected
Premiums.
3. The Total Collected Premium will then determine the amount of the
bonus as follows (only one section shall apply):
a. No bonus will be paid if the Total Collected Premium is less
than $6.8 million.
b. If the Total Collected Premium equals $6.8 million, then the
bonus shall be $42,000.
c. If the Total Collected Premium is greater than $6.8 million but
less than $8.5 million, then the bonus shall be $42,000 plus
$618 for each additional $100,000 over $6.8 million, or a pro-
rata share thereof.
d. If the Total Collected Premium equals $8.5 million, then the
bonus shall be $52,500.
e. If the Total Collected Premium is greater than $8.5 million but
less than $10.2 million, then the bonus shall be $52,500 plus
$1,853 for each additional $100,000 over $8.5 million, or a
pro-rata share thereof.
f. If the Total Collected Premium is equal to $10.2 million, then
the bonus shall be $84,000.
g. If the Total Collected Premium is greater than $10.2 million,
then the bonus shall be $84,000 plus $2,500 for each additional
$100,000 over $10.2 million, or a pro-rata amount thereof.
4. The assumptions made in calculation of this bonus are as follows:
a. That 100% of the Domestic First-Year Life Insurance Premium is
included;
b. That 5% of the Domestic Single Premium Life Insurance is
included, which currently includes Benefactor only;
c. That the Total Collected Premium includes no renewal life
insurance premiums;
d. That this bonus is not contingent on the bonus for Collected
Domestic Annuity First-Year and Single Premiums;
e. That this bonus is based on domestic life insurance premiums
only and excludes all international premiums; and
f. That this bonus is calculated for the calendar year 1999, as of
12/31/99.
E. Bonus 5 - Collected Domestic Annuity First-Year and Single Premiums Bonus
1. NWL will pay you a bonus based on the amount of collected premiums
for Domestic Annuity First-Year and Single Premiums. The data source
used for determining this bonus is the report No. UT69-003,
Composite Totals-Annuity, using the fields "First-Year Premium",
"Single Premium", and the New Business Market Summary-
International, Report #5, using the field, "Annuity, YTD Paid
Premium".
The Total Collected Annuity Premiums shall be determined by adding
the First Year Annuity Premium and Single Annuity Premium as stated
in UT69-003, less the International Annuity Premiums as stated in
the New Business Market Summary.
2. The Total Collected Annuity Premiums shall then determine the amount
of the bonus as follows (only one section shall apply):
a. No bonus will be paid if the Total Collected Annuity Premium is
less than $272 million.
b. If the Total Collected Annuity Premium is equal to $272
million, then the bonus shall be $42,000.
c. If the Total Collected Annuity premium is greater than $272
million but less than $340 million, then the bonus shall be
$42,000 plus $154 for each additional $1 million over $272
million, or a pro-rata share thereof.
d. If the Total Collected Annuity Premium is equal to $340
million, then the bonus shall be $52,500.
e. If the Total Collected Annuity Premium is greater than $340
million but less than $408 million, then the bonus shall be
$52,500 plus $463 for each additional $1 million over $340
million, or a pro-rata share thereof.
f. f the Total Collected Annuity Premium is equal to $408 million,
then the bonus shall be $84,000.
g. If the Total Collected Annuity Premium is greater than $408
million, then the bonus shall be $84,000 plus $600 for each
additional $1 million over $408 million, or a pro-rata share
thereof.
3. The assumptions made in the calculation of this bonus are as
follows:
a. That the bonus is based on First-Year and Single Annuity
Premiums only;
b. That the bonus calculation does not include two tier annuities
or renewal premiums;
c. That this bonus is based on domestic annuity premiums only and
excludes all international premiums;
d. That this bonus is not contingent on Bonus 4; and
e. That this bonus is calculated for the calendar year 1999, as of
12/31/99.
II. All bonus performance is based on production produced between January 1,
1999 and December 31, 1999.
III. All bonuses will be calculated after December 31, 1999, based on reports
as of December 31, 1999.
IV. All bonuses will be calculated and paid, if amounts are due, as soon as
reasonably possible after January 1, 2000, but no later than February 1, 2000.
V. During the year 1999, if you request or have requested, NWL may make or may
have made advances to you against such bonuses in amounts determined by NWL.
Any advances to you will offset any bonuses due. Amounts of bonus compensation
that exceed the advances will be due and owing to you and will be paid by
February 1, 2000. Any amounts of advances that exceed bonuses due will result
in an amount due and owing by you, and such amounts will be paid by you on or
before February 1, 2000. Any amount of advances due and owing by you and not
paid by you to NWL by February 1, 2000, will be deducted by NWL from your
future compensation. You expressly agree to such deductions from your
compensation, including salary.
This does not limit NWL's right to initiate litigation against you to recover
any debt owed by you to NWL. If the parties cannot agree on a payment schedule
and if it is necessary for NWL to file suit against you to recover such debts,
you agree to pay to NWL its attorneys fees and court costs incurred in
collecting said debts.
VI. The term of this contract is from January 1, 1999 to December 31, 1999.
Under no circumstances will this bonus agreement automatically renew for the
following year. Both you and NWL must sign a separate agreement if renewal of
this agreement is desired.
VII. In order to qualify for the bonus and be paid the bonus, you must be
employed by NWL on the date that the bonus is actually paid by NWL.
VIII. Nothing in this agreement limits NWL's authority to make ALL decisions
concerning products, including, but not limited to, profitability issues,
commission and overwrite amounts, publications, advertising, compliance,
market conduct, underwriting, and availability.
IX. This agreement shall not be amended, modified, or altered in any manner
except in a writing signed by both parties. This agreement shall be governed,
interpreted and construed according to the laws of the State of Texas.
X. This agreement constitutes the complete and exclusive agreement of the
parties with respect to your Bonus Compensation and supersedes any prior
understandings or written or oral agreements between the parties respecting
this subject matter.
XI. This Bonus Agreement is binding upon signing. There are no conditions
precedent or subsequent, other than the conditions specifically mentioned in
this contract, that must occur before this contract becomes binding upon both
parties. There are no representations other than those expressly included in
this agreement relating to bonus compensation of Arthur W. Pickering.
EXECUTED at Austin, Texas, on August _____, 1999.
NATIONAL WESTERN LIFE INSURANCE COMPANY
By: /S/ Ross R. Moody
Ross R. Moody, President
/S/Arthur W. Pickering
Arthur W. Pickering
Senior Vice President- Domestic Marketing
I acknowledge that I have read, understand and agree to the above terms in
section V relating to advances. Furthermore, I agree that these terms shall
also apply to any advances already made to me during the year 1999 prior to
signing this agreement. I agree to repay any debt owed by me to NWL by
February 1, 2000. In default of such repayment, I authorize NWL to deduct the
debt created by advances from my salary or any other compensation in amounts
and at times determined by NWL.
/S/ Arthur W. Pickering
Arthur W. Pickering
1999 Amendment to Bonus Agreement
I. This amendment modifies Section V, relating to advances of bonus
compensation, of the Bonus Agreement between NWL and Arthur W. Pickering.
This amendment only addresses the calculation of advances and the method to
determine the offset described in that section. This amendment does not
effect the deadline for payment by either party or the provisions relating to
deduction of debt from future compensation, nor shall it be construed to limit
NWL's right to debt recovery as set forth in Section V.
The term "year-end bonus" refers to the total bonus for the 1999 calendar
year, as calculated under the provisions of the Bonus Agreement, to be paid on
or before February 1, 2000.
II. As of August 6, 1999, NWL has advanced to you a total of $79,698. Of
this amount $77,198 shall be designated as an earned advance on your year-end
bonus, and $2,500 shall be designated as an unearned advance on your year-end
bonus.
III. From August 1999 to November 1999, if you so request, NWL will make
monthly bonus advances to you based on the following calculations:
Bonus 1
If the Single Tier Annuity Account Balance at the end of the applicable
month is greater than or equal to the figure stated below in a) through
d), then NWL will pay you a $1500 earned advance on your year-end bonus,
plus a $1500 earned advance for each previous month in 1999 excluding the
months of January through July, less any earned advances for previous
months already paid. The data source used for determining this bonus will
be the Annuity Account Value/Reserve Report-Domestic Bonus as prepared
by the NWL Actuarial Department, based on the computer runs "SUMCNGGG",
"NWSC50", and "IA20RES".
a) August $1,284,316,462
b) September $1,294,350,184
c) October $1,304,383,906
d) November $1,314,417,629
Bonus 2
If the First Year Persistency Percentage for the applicable month is
equal to or greater than 92%, then NWL will pay you a $750 earned advance
on your year-end bonus. The data source for this calculation will be the
report entitled "Company Persistency Report-Domestic-Without
Annuities", as provided by the NWL Information Services Department, using
the field "Premiums-13 Month Persistency".
Bonus 3
If the Second Year Persistency Percentage for the applicable month is
equal to or greater than 89%, then NWL will pay you a $750 earned advance
on your year-end bonus. The data source for this calculation will be the
report entitled "Company Persistency Report-Domestic-Without
Annuities", as provided by the NWL Information Services Department, using
the field "Premiums-24 Month Persistency".
Bonus 4
If the Total Collected Domestic Life First Year Premiums for the
applicable month is equal to or greater than $566,667, then NWL will pay
you a $3,500 earned advance on your year-end bonus. The data source used
for determining this bonus will be the report No. UT69-003, Composite
Totals-Life, International U.L. and International Non-U.L, using the
fields "First Year Premium" and "Single Premium".
Bonus 5
If the Total Collected Domestic Annuity First Year and Single Premiums
for the applicable month is equal to or greater than $22,667,000, then
NWL will pay you a $3,500 earned advance on your year-end bonus. The data
source used for determining this bonus will be the report No. UT69-003,
Composite Totals-Annuity, using the fields "First-Year Premium", "Single
Premium", and the New Business Market Summary-International, Report #5,
using the field "Annuity, YTD Paid Premium".
IV. Monthly bonus advances will be determined using the same method as
specified in the Bonus Agreement for that particular bonus, with any necessary
adjustments for calculation on a monthly basis. All assumptions remain the
same for the monthly advance (with the exception of dates) as for that
particular bonus in the Bonus Agreement.
V. At our discretion, NWL may make advances on your year-end bonus above the
earned advances specified in Section III of this Amendment. Any advances over
these amounts shall be designated as "unearned advances".
VI. All payments designated either as earned or unearned advances shall be
credited against your year-end bonus, as determined by the Bonus Agreement.
VII. (A) Any earned advance, although credited against your year-end bonus,
shall not create a debt owed by you to us in the event that the earned advance
bonus exceeds the actual year-end bonus as determined by the Bonus Agreement.
(B) Any unearned advance shall be credited against your year-end bonus
and shall create a debt owed by you to us in the event that the total of the
earned and unearned advances exceeds the actual year-end bonus as determined
by the Bonus Agreement.
EXECUTED at Austin, Texas, on August ______, 1999.
NATIONAL WESTERN LIFE INSURANCE COMPANY
By: /S/ Ross R. Moody
Ross R. Moody, President
/S/ Arthur W. Pickering
Arthur W. Pickering
Senior Vice President- Domestic Marketing
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of %
Name of Subsidiary Incorporation Owner Ownership
<S> <S> <S> <C>
The Westcap Corporation Delaware National Western Life 100%
Insurance Company
NWL Investments, Inc. Texas National Western Life 100%
Insurance Company
NWL Properties, Inc. Texas National Western Life 100%
Insurance Company
NWL 806 Main, Inc. Texas National Western Life 100%
Insurance Company
NWL Services, Inc. Nevada National Western Life 100%
Insurance Company
NWL Financial, Inc. Nevada National Western Life 100%
Insurance Company
National Annuity Texas NWL Properties, Inc. 100%
Programs, Inc.
</TABLE>
The subsidiaries conduct business under the same corporate names as detailed
above.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
National Western Life Insurance Company and subsidiaries consolidated
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 701,948
<DEBT-CARRYING-VALUE> 2,151,924
<DEBT-MARKET-VALUE> 2,084,494
<EQUITIES> 16,000
<MORTGAGE> 183,902
<REAL-ESTATE> 11,388
<TOTAL-INVEST> 3,250,679
<CASH> 14,010
<RECOVER-REINSURE> 2,473
<DEFERRED-ACQUISITION> 369,665
<TOTAL-ASSETS> 3,682,828
<POLICY-LOSSES> 3,148,080
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 13,993
<POLICY-HOLDER-FUNDS> 10,110
<NOTES-PAYABLE> 0
0
0
<COMMON> 3,501
<OTHER-SE> 472,021
<TOTAL-LIABILITY-AND-EQUITY> 3,682,828
95,078<F1>
<INVESTMENT-INCOME> 242,980
<INVESTMENT-GAINS> 4,481
<OTHER-INCOME> 8,944
<BENEFITS> 194,758<F2>
<UNDERWRITING-AMORTIZATION> 39,148
<UNDERWRITING-OTHER> 27,764
<INCOME-PRETAX> 89,813
<INCOME-TAX> 30,588
<INCOME-CONTINUING> 59,225
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,225
<EPS-BASIC> 16.92
<EPS-DILUTED> 16.78
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Consists of $11,310 revenues from traditional contracts subject to FAS 60
accounting treatment and $83,768 revenues from universal life and investment
annuity contracts subject to FAS 97 accounting treatment.
<F2>Consists of $34,775 benefits paid to policyholders. $(2,319) decrease in
reserves on traditional contracts and $162,302 interest on universal life
and investment annuity contracts.
</FN>
</TABLE>
