UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 2-17039
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
COLORADO 84-0467208
(State of Incorporation) (I.R.S. Employer Identification Number)
850 EAST ANDERSON LANE
AUSTIN, TEXAS 78752-1602 (512) 836-1010
(Address of Principal Executive Offices) (Telephone Number)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes [ X ] No [ ]
As of May 10, 2000, the number of shares of Registrant's common stock
outstanding was: Class A -3,300,755 and Class B - 200,000.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2000 (Unaudited) and December 31, 1999
Condensed Consolidated Statements of Earnings
For the Three Months Ended March 31, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Stockholders' Equity
For the Three Months Ended March 31, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2000 and 1999 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit 11 - Computation of Earnings per Share
For the Three Months Ended March 31, 2000 and 1999 (Unaudited)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
ASSETS 2000 1999
<S> <C> <C>
Cash and investments:
Securities held to maturity,
at amortized cost $ 2,150,109 2,151,924
Securities available for sale,
at fair value 743,190 717,948
Mortgage loans, net of allowances
for possible losses ($4,104 and $4,104) 197,559 183,902
Policy loans 116,455 117,309
Index options 32,282 32,820
Other long-term investments 47,636 32,766
Cash and short-term investments 2,886 14,010
Total cash and investments 3,290,117 3,250,679
Deferred policy acquisition costs 381,645 369,665
Accrued investment income 46,543 47,756
Other assets 18,999 14,728
$ 3,737,304 3,682,828
</FN>
Note: The balance sheet at December 31, 1999, has been taken from the audited
financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
<S> <C> <C>
LIABILITIES:
Future policy benefits:
Traditional life and annuity products $ 162,548 165,020
Universal life and investment
annuity contracts 3,014,158 2,983,060
Other policyholder liabilities 24,237 24,103
Federal income taxes payable:
Current 5,579 4,763
Deferred 728 4,659
Short-term borrowings 12,000 -
Other liabilities 39,412 25,701
Total liabilities 3,258,662 3,207,306
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Common stock:
Class A - $1 par value; 7,500,000
shares authorized; 3,300,728 shares
issued and outstanding in 2000 and 1999 3,301 3,301
Class B - $1 par value; 200,000
shares authorized, issued,
and outstanding in 2000 and 1999 200 200
Additional paid-in capital 25,028 25,028
Accumulated other comprehensive loss (12,779) (3,566)
Retained earnings 462,892 450,559
Total stockholders' equity 478,642 475,522
$ 3,737,304 3,682,828
<FN>
Note: The balance sheet at December 31, 1999, has been taken from the audited
financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
</FN
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended March 31, 2000 and 1999
(Unaudited)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Premiums and other revenue:
Life and annuity premiums $ 2,372 2,411
Universal life and investment
annuity contract revenues 20,903 21,532
Net investment income 57,740 57,852
Other income 115 150
Realized gains (losses) on investments (580) 4,805
Total premiums and other revenue 80,550 86,750
Benefits and expenses:
Life and other policy benefits 10,092 8,688
Decrease in liabilities for
future policy benefits (2,482) (241)
Amortization of deferred policy
acquisition costs 10,885 9,571
Universal life and investment
annuity contract interest 36,651 40,611
Other operating expenses 6,717 6,701
Total benefits and expenses 61,863 65,330
Earnings before Federal income taxes 18,687 21,420
Provision for Federal income taxes:
Current 5,325 5,460
Deferred 1,029 1,857
Total Federal income taxes 6,354 7,317
Net earnings $ 12,333 14,103
Basic Earnings Per Share:
Net earnings $ 3.52 4.03
Diluted Earnings Per Share:
Net earnings $ 3.51 3.99
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2000 and 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Net earnings $ 12,333 14,103
Other comprehensive income (loss),
net of effects of deferred
policy acquisition costs and taxes:
Unrealized losses on securities:
Unrealized holding losses
arising during period (1,476) (4,886)
Less: reclassification
adjustment for gains
included in net earnings - (1,671)
Amortization of net unrealized gains
related to transferred securities (69) (85)
Unrealized losses on securities
transferred during period
from held to maturity to
available for sale (8,021) -
Net unrealized losses on securities (9,566) (6,642)
Foreign currency translation adjustments 353 (9)
Other comprehensive loss (9,213) (6,651)
Comprehensive income $ 3,120 7,452
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2000 and 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Common stock:
Balance at beginning of year $ 3,501 3,498
Shares exercised under stock option plan - 1
Balance at end of period 3,501 3,499
Additional paid-in capital:
Balance at beginning of year 25,028 24,899
Shares exercised under stock option plan - 31
Balance at end of period 25,028 24,930
Accumulated other comprehensive income (loss):
Unrealized gains (losses) on securities:
Balance at beginning of year (6,412) 16,000
Change in unrealized losses during period (9,566) (6,642)
Balance at end of period (15,978) 9,358
Foreign currency translation adjustments:
Balance at beginning of year 2,846 2,634
Change in translation adjustments
during period 353 (9)
Balance at end of period 3,199 2,625
Accumulated other comprehensive income
(loss) at end of period (12,779) 11,983
Retained earnings:
Balance at beginning of year 450,559 391,334
Net earnings 12,333 14,103
Balance at end of period 462,892 405,437
Total stockholders' equity $ 478,642 445,849
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2000 and 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 12,333 14,103
Adjustments to reconcile net
earnings to net cash
from operating activities:
Universal life and investment
annuity contract interest 36,651 40,611
Surrender charges and other policy revenues (9,838) (11,066)
Realized (gains) losses on investments 580 (4,805)
Accrual and amortization of
investment income (1,012) (1,207)
Depreciation and amortization 259 265
Decrease (increase) in insurance
receivables and other assets (4,145) 4,925
Decrease in accrued investment income 1,213 336
Increase in deferred policy
acquisition costs (5,294) (5,884)
Decrease in liability for
future policy benefits (2,482) (241)
Increase (decrease) in other
policyholder liabilities 134 (473)
Increase in Federal income taxes payable 2,395 2,516
Increase (decrease) in other liabilities 13,711 (9,563)
Other 1,827 (1,073)
Net cash provided by operating activities 46,332 28,444
Cash flows from investing activities:
Proceeds from sales of:
Securities held to maturity - -
Securities available for sale - 24,446
Other investments 5,972 5,585
Proceeds from maturities and redemptions of:
Securities held to maturity 8,034 24,763
Securities available for sale 17,590 17,181
Purchases of:
Securities held to maturity (55,481) (78,744)
Securities available for sale (13,971) (53,699)
Other investments (22,420) (10,370)
Principal payments on mortgage loans 2,077 13,584
Cost of mortgage loans acquired (15,681) (8,282)
Decrease in policy loans 854 3,155
Decrease in assets of
discontinued operations - 48
Decrease in liabilities of
discontinued operations - (48)
Other (868) (50)
Net cash used in investing activities (73,894) (62,431)
<FN>
(Continued on next page)
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Three Months Ended March 31, 2000 and 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Cash flows from financing activities:
Deposits to account balances
for universal life
and investment annuity contracts $ 98,255 109,827
Return of account balances on
universal life and investment
annuity contracts (93,817) (93,688)
Increase in short-term borrowings 12,000 -
Issuance of common stock under
stock option plan - 32
Net cash provided by financing activities 16,438 16,171
Net decrease in cash and short-term investments (11,124) (17,816)
Cash and short-term investments
at beginning of year 14,010 24,508
Cash and short-term investments
at end of period $ 2,886 6,692
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of National Western Life Insurance Company and its wholly-owned
subsidiaries (the Company), The Westcap Corporation (Westcap), NWL
Investments, Inc., NWL Properties, Inc., NWL 806 Main, Inc., NWL Services,
Inc., and NWL Financial, Inc. The Westcap Corporation ceased brokerage
operations during 1995 and filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code in 1996. The bankruptcy reorganization was completed in
January, 1999 and National Western retained 100% continuing ownership of the
reorganized subsidiary. As a result, The Westcap Corporation is reflected as
discontinued operations in the accompanying financial statements for portions
of 1999 and prior years. Westcap is currently operating as a real estate
management company. All significant intercorporate transactions and accounts
have been eliminated in consolidation.
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the financial
position of the Company as of March 31, 2000, and the results of its
operations and its cash flows for the three months ended March 31, 2000 and
1999. The results of operations for the three months ended March 31, 2000
and 1999 are not necessarily indicative of the results to be expected for the
full year.
(2) STOCKHOLDERS' EQUITY
(A) Changes in Common Stock Shares Outstanding
Details of changes in shares of common stock outstanding are provided below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
(In thousands)
<S> <C> <C>
Common stock shares outstanding:
Shares outstanding at beginning of year 3,501 3,498
Shares exercised under stock option plan - 1
Shares outstanding at end of period 3,501 3,499
</TABLE>
(B) Dividends
The Company paid no cash dividends on common stock during the three months
ended March 31, 2000 and 1999.
(3) DISCONTINUED BROKERAGE OPERATIONS
The Chapter 11 bankruptcy reorganization of the Company's wholly owned
subsidiary, The Westcap Corporation, was completed in the first quarter of
1999. Pursuant to the reorganization plan, National Western retained 100%
continuing ownership of the reorganized Westcap and the subsidiary is now
operating as a real estate management company. No losses were reported for
discontinued brokerage operations in the first quarter of 1999 as the entire
$14,125,000 settlement payment was accrued and reported as a loss in the third
quarter of 1998. Any additional losses will depend on the results of The City
Colleges lawsuit filed against National Western on March 28, 1994, for alleged
federal or state securities law "control person" violations relating to
Westcap, and which is pending in the United States District Court, Western
District of Texas. National Western believes it has reasonable and adequate
defenses to this suit and, accordingly, no amounts have been accrued in
National Western's financial statements for potential losses relating to such
suit.
(4) SEGMENT AND OTHER OPERATING INFORMATION
The Company's reportable operating segments include domestic life insurance,
international life insurance, and annuities. These segments are organized
based on product types and geographic marketing areas. A summary of segment
information for the quarters ended March 31, 2000 and 1999 is provided below.
<TABLE>
<CAPTION>
Selected Segment Information:
Domestic International
Life Life All
Insurance Insurance Annuities Others Totals
(In thousands)
<S> <C> <C> <C> <C> <C>
March 31, 2000:
Selected Balance
Sheet Items:
Deferred policy
acquisition
costs $ 74,832 74,016 232,797 - 381,645
Total segment
assets 407,613 376,372 2,887,321 46,999 3,718,305
Future policy
benefits 321,785 292,380 2,562,541 - 3,176,706
Other
policyholder
liabilities 12,629 6,061 5,547 - 24,237
Condensed Income
Statements:
Premiums and
contract
revenues $ 5,930 10,686 6,659 - 23,275
Net investment
income 6,472 5,650 45,096 522 57,740
Other income - 27 88 - 115
Total
revenues 12,402 16,363 51,843 522 81,130
Policy benefits 3,893 3,650 67 - 7,610
Amortization of
deferred
policy
acquisition
costs 1,626 3,157 6,102 - 10,885
Universal life
and investment
annuity contract
interest 2,222 3,930 30,499 - 36,651
Other operating
expenses 2,086 1,994 2,637 - 6,717
Federal income
taxes 876 1,236 4,267 178 6,557
Total
expenses 10,703 13,967 43,572 178 68,420
Segment
earnings $ 1,699 2,396 8,271 344 12,710
</TABLE>
<TABLE>
<CAPTION>
Selected Segment Information:
Domestic International
Life Life All
Insurance Insurance Annuities Others Totals
(In thousands)
<S> <C> <C> <C> <C> <C>
March 31, 1999:
Selected Balance
Sheet Items:
Deferred policy
acquisition
costs $ 69,200 71,210 188,255 - 328,665
Total segment
assets 408,548 372,867 2,730,023 32,634 3,544,072
Future policy
benefits 322,094 286,277 2,416,454 - 3,024,825
Other policyholder
liabilities 12,974 6,039 4,469 - 23,482
Condensed Income
Statements:
Premiums and
contract
revenues $ 5,791 10,228 7,924 - 23,943
Net investment
income 6,331 5,443 45,896 182 57,852
Other income 16 12 122 - 150
Total revenues 12,138 15,683 53,942 182 81,945
Policy benefits 3,544 4,702 201 - 8,447
Amortization of
deferred policy
acquisition costs 932 3,279 5,360 - 9,571
Universal life
and investment
annuity contract
interest 2,449 3,433 34,729 - 40,611
Other operating
expenses 2,062 2,135 2,504 - 6,701
Federal income
taxes 1,069 724 3,781 61 5,635
Total expenses 10,056 14,273 46,575 61 70,965
Segment
earnings $ 2,082 1,410 7,367 121 10,980
</TABLE>
Reconciliations of segment information to the Company's consolidated financial
statements are provided below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
(In thousands)
<S> <C> <C>
Premiums and Other Revenue:
Premiums and contract revenues $ 23,275 23,943
Net investment income 57,740 57,852
Other income 115 150
Realized gains (losses) on investments (580) 4,805
Total consolidated premiums and other revenue $ 80,550 86,750
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
(In thousands)
<S> <C> <C>
Federal Income Taxes:
Total segment Federal income taxes $ 6,557 5,635
Taxes (benefits) on realized
gains (losses) on investments (203) 1,682
Total consolidated Federal income taxes $ 6,354 7,317
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
(In thousands)
<S> <C> <C>
Net Earnings:
Total segment earnings $ 12,710 10,980
Realized gains (losses) on investments,
net of taxes (377) 3,123
Total consolidated net earnings $ 12,333 14,103
</TABLE>
<TABLE>
<CAPTION>
March 31,
2000 1999
(In thousands)
<S> <C> <C>
Assets:
Total segment assets $ 3,718,305 3,544,072
Other unallocated assets 18,999 15,613
Total consolidated assets $ 3,737,304 3,559,685
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
National Western Life Insurance Company is a life insurance company, chartered
in the State of Colorado in 1956, and doing business in forty-three states and
the District of Columbia. 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>
Three Months Ended March 31,
2000 1999
<S> <C> <C>
United States domestic market:
Investment annuities 79.3% 82.5%
Life insurance 6.4 5.7
Total domestic market 85.7 88.2
International market:
Investment annuities 2.2 1.1
Life insurance 12.1 10.7
Total international market 14.3 11.8
Total direct premiums collected 100.0% 100.0%
</TABLE>
Insurance Operations - Domestic
The Company's domestic operations concentrate marketing efforts on federal
employees, seniors, and specific employee groups in private industry, as well
as individual sales. The products marketed are annuities, universal life
insurance, and traditional life insurance, which includes both term and whole
life products. The majority of products sold are the Company's annuities,
which include single and flexible premium deferred annuities, single premium
immediate annuities, and equity-indexed annuities. Most of these annuities
can be sold as tax qualified or nonqualified products.
National Western markets and distributes its domestic products primarily
through independent marketing organizations (IMOs). These IMOs assist the
Company in recruiting, contracting, and 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.
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 March 31, 2000, approximately 26.3% 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 March 31, 2000 and
December 31, 1999. The Company emphasizes investment grade debt securities,
with smaller holdings in mortgage loans and real estate.
<TABLE>
<CAPTION>
Percent of Investments
March 31, December 31,
2000 1999
<S> <C> <C>
Debt securities 87.4% 87.8%
Mortgage loans 6.0 5.7
Policy loans 3.5 3.6
Index options 1.0 1.0
Equity securities 0.5 0.5
Real estate 0.6 0.4
Other 1.0 1.0
Totals 100.0% 100.0%
</TABLE>
Portfolio Analysis
The Company maintains a diversified debt securities portfolio which consists
of various types of fixed income securities including primarily corporate,
mortgage-backed securities, and public utilities. Investments in
mortgage-backed securities include primarily U.S. government agency
pass-through securities and collateralized mortgage obligations (CMOs).
An important aspect of the Company's investment philosophy is managing the
credit quality of its investments in debt securities. Thorough credit
analysis is performed on existing and potential corporate investments
including examination of a company's credit and industry outlook, financial
strength, effectiveness of management, and event risks. In the past few
years, credit analysis has become one of the most critical activities of the
Company's portfolio management.
National Western continues to follow its conservative investment philosophy by
minimizing its holdings of below investment grade debt securities, as these
securities generally have greater default risk than higher rated corporate
debt. These issuers usually are more sensitive to adverse industry or economic
conditions than are investment grade issuers. The Company's holdings of below
investment grade debt securities, which are lower than industry averages, are
summarized below.
<TABLE>
<CAPTION>
Below Investment
Grade Debt Securities
% of
Amortized Carrying Market Invested
Cost Value Value Assets
(In thousands except percentages)
<S> <C> <C> <C> <C>
March 31, 2000 $ 110,312 87,810 79,174 2.7%
December 31, 1999 $ 73,607 70,900 63,864 2.2%
December 31, 1998 $ 46,453 44,974 45,317 1.4%
</TABLE>
Although National Western purchases only investment grade debt securities, a
growing number of companies have become more leveraged due to an environment
of heightened acquisition activity and large share repurchase programs.
Therefore, continued monitoring of credit quality after the purchase of a
company's debt securities is crucial in order for National Western to maintain
a high quality portfolio with a low percentage of below investment grade debt
securities. While the Company's holdings of below investment grade debt
securities remain low, these holdings have increased from $44,974,000 at
December 31, 1998, to $87,810,000 at March 31, 2000. This increase is due to
downgrades of investment grade debt securities as opposed to purchases of such
holdings. Historically, the Company's strong credit risk management and
commitment to quality has resulted in minimal defaults in the debt securities
portfolio. At March 31, 2000 and December 31, 1999, no securities were in
default and on nonaccrual status.
During the third and fourth quarters of 1999, the Company recorded permanent
impairment writedowns totaling $4,403,000 related to two separate securities.
The writedowns were reflected as realized losses. One of these securities was
classified as available for sale and the other as held to maturity. The
Company subsequently transferred the held to maturity security to securities
available for sale during the first quarter of 2000. Three additional debt
securities experienced significant credit deterioration during the first
quarter of 2000. As a result of the significant deterioration of the issuing
companies' creditworthiness, National Western also transferred these three
securities from held to maturity to available for sale. 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. Amortized cost, net of writedowns, of the four transferred
securities totaled $49,528,000 and unrealized losses resulting from recording
the securities at fair value, before effects of taxes and deferred policy
acquisitions costs, totaled $20,376,000. The unrealized losses were recorded
as a component of accumulated other comprehensive loss in the accompanying
financial statements.
Although there is loss exposure related to its below investment grade debt
securities, the Company is firmly committed to minimizing credit risks and
maintaining a high quality portfolio. This commitment is reflected in the
high average credit rating of the Company's portfolio. In the table below,
investments in debt securities are classified according to credit ratings by
Standard and Poor's (S&P), a nationally recognized statistical rating
organization (NRSRO). If securities were not rated by S&P, the equivalent
rating of another NRSRO or the National Association of Insurance Commissioners
was used.
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
<S> <C> <C>
AAA and U.S. government 29.0% 28.7%
AA 7.3 8.8
A 34.5 34.1
BBB 26.2 25.9
BB and other below
investment grade 3.0 2.5
100.0% 100.0%
</TABLE>
Another important part of the Company's investment philosophy is managing the
cash flow stability of the portfolio. Because expected maturities of
securities may differ from contractual maturities due to prepayments,
extensions, and calls, the Company takes steps to manage and minimize these
risks. The Company continues to reduce its exposure to prepayment and
extension risks by lowering its holdings of mortgage-backed securities. This
strategy began in 1994 when mortgage-backed securities totaled 47.6% of the
entire portfolio, but now total only 20.9% at March 31, 2000. The majority of
this reduction has been achieved by shifting investments into corporate
securities and public utilities, as these holdings have increased from 47.0%
at December 31, 1994 to 68.9% at March 31, 2000. Also, most of these
additions have been noncallable corporates, which help reduce prepayment and
call risks.
As indicated above, the Company's holdings of mortgage-backed securities are
also subject to prepayment risk, as well as extension risk. Both of these
risks are addressed by specific portfolio management strategies. The Company
has substantially reduced both prepayment and extension risks by investing
primarily in collateralized mortgage obligations, which have more predictable
cash flow patterns than pass-through securities. These securities, known as
planned amortization class I (PAC I) CMOs, are designed to amortize in a more
predictable manner than other CMO classes or pass-throughs. Using this
strategy, the Company can more effectively manage and reduce prepayment and
extension risks, thereby helping to maintain the appropriate matching of the
Company's assets and liabilities.
As of March 31, 2000, CMOs represent approximately 98% of the Company's
mortgage-backed securities. The CMOs in the Company's portfolio have been
modeled and subjected to detailed, comprehensive analysis by the Company's
investment staff. The overall structure of the CMO as well as the individual
tranche being considered for purchase have been evaluated to ensure that the
security fits appropriately within the Company's investment philosophy and
asset/liability management parameters. The Company's investment mix between
mortgage-backed securities and other fixed income securities helps effectively
balance prepayment, extension, and credit risks.
At March 31, 2000, the Company's debt and equity securities were classified as
follows:
<TABLE>
<CAPTION>
Unrealized
Fair Amortized Gains
Value Cost (Losses)
(In thousands)
<S> <C> <C> <C>
Securities held to maturity:
Debt securities $ 2,081,639 2,150,109 (68,470)
Securities available
for sale:
Debt securities 727,213 775,291 (48,078)
Equity securities 15,977 12,755 3,222
Totals $ 2,824,829 2,938,155 (113,326)
</TABLE>
As detailed above, debt securities classified as held to maturity comprise the
majority of the Company's securities portfolio, while equity securities are a
small component of the portfolio. Unrealized losses totaling $113,326,000 on
the securities portfolio at March 31, 2000, are a reflection of market
conditions at quarter-end. The fair values, or market values, of fixed income
debt securities generally correlate to external market interest rate
conditions. Because the interest rates are fixed on almost all of the
Company's debt securities, market values typically increase when market
interest rates decline, and decrease when market interest rates rise.
However, market values may fluctuate for other reasons, such as changing
economic conditions or increasing event-risk concerns. An analysis of
unrealized gains and losses on the Company's securities portfolio for the
quarter ended March 31, 2000, is detailed below:
<TABLE>
<CAPTION>
Change in
Unrealized
Unrealized Gains (Losses) Gains
At At (Losses)
March 31, December 31, During 1st
2000 1999 Quarter 2000
(In thousands)
<S> <C> <C> <C>
Securities held to maturity:
Debt securities $ (68,470) (67,430) (1,040)
Securities available
for sale:
Debt securities (48,078) (26,905) (21,173)
Equity securities 3,222 3,245 (23)
Totals $ (113,326) (91,090) (22,236)
</TABLE>
Unrealized losses at March 31, 2000, increased 24% from year-end 1999 even
though market interest rates of the ten year U.S. Treasury bond actually
decreased approximately 44 basis points during the quarter. With market
interest rates declining, it would be expected that market values of debt
securities would increase. However, market values actually decreased because
of the substantial widening of the yield premium for corporate bonds over
comparable Treasury securities. Approximately 69% of National Western's bond
portfolio consists of corporate bonds, including public utilities. The
increase of the yield premium has primarily been event-risk driven as
companies increase their leverage through stock buyback programs and
acquisitions. Because the majority of the Company's debt securities are
classified as held to maturity, which are recorded at amortized cost, changes
in market values have relatively small effects on the Company's financial
statements. Also, the Company has the intent and ability to hold these
securities to maturity, and it is unlikely that sales of such securities would
be required which would realize market gains or losses.
Changes in fair values of securities due to changes in market interest rates
is an example of market risk. Market risk is the risk of change in market
values of financial instruments due to changes in interest rates, currency
exchange rates, commodity prices, or equity prices. The most significant
market risk exposure for National Western is interest rate risk. The Company
manages interest rate risk through on-going cash flow testing required for
insurance regulatory purposes. Computer models are used to perform cash flow
testing under various commonly used stress test interest rate scenarios to
determine if existing assets would be sufficient to meet projected liability
outflows. Management strives to closely match the durations of its assets and
liabilities. Sensitivity analysis allows the Company to measure the
potential gain or loss in fair value of its interest-sensitive instruments and
to seek to protect its economic value and achieve a predictable spread between
what is earned on invested assets and what is paid on liabilities. The
Company seeks to minimize the impact of interest risk through surrender
charges that are imposed to discourage policy surrenders. Interest rate
changes can be anticipated and risk may be limited due to management actions
regarding asset and liability instruments. However, potential changes in the
values of financial instruments indicated by hypothetical interest changes
will likely be different from actual changes experienced, and the differences
may be material.
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
Company performed detailed sensitivity analysis at December 31, 1999, for its
interest rate-sensitive assets. Based on the recent change in market
conditions in the first quarter of 2000, the changes in market values of the
Company's debt securities fell somewhat outside the expected range of results
of this analysis. The deviation from the expected results was due to the
volatility in the corporate bond market as previously described above.
In addition to the securities described above, the Company invests in index
options which are derivative financial instruments used to hedge the equity
return component of the Company's equity-indexed annuities. The values of
these options are primarily impacted by equity price risk, as the options'
fair values are dependent on the performance of the S&P 500 Composite Stock
Price Index. However, increases or decreases in investment returns from these
options are substantially offset by corresponding increases or decreases in
amounts paid to equity-indexed annuity policyholders, subject to minimum
guaranteed policy interest rates.
The Company's market risk liabilities, which include policy liabilities for
investment annuity and supplemental contracts, are managed for interest rate
risk through cash flow testing as previously described. As part of this cash
flow testing, the Company has analyzed the potential impact on net earnings of
both a 100 basis point increase and decrease in the U.S. Treasury yield curve
as of December 31, 1999. A 100 basis point interest rate decline would
decrease net earnings for 2000 by approximately $300,000, based on the
Company's projections. A 100 basis point increase in interest rates would
increase net earnings by approximately $200,000, based on the Company's
projections. These estimated impacts to earnings are net of tax effects
determined at a tax rate of 35% and are also net of the estimated effects of
deferred policy acquisition costs.
The Company has modeled these scenarios, as a change in market interest rates
could pose potential risks to the current profitability levels of this
business. These movements in interest rates are also reasonably possible
near-term scenarios given the current interest rate environment. The risks
from such changes are primarily due to changes in interest rate spreads, which
are the differences between investment income earned and credited interest
paid to policyholders. Also, the changes in interest rates can effect the
level of surrenders and timing of cash flows related to policy liabilities.
The above-described scenarios produce estimated changes in cash flows as well
as cash flow reinvestment projections. Estimated cash flows in the Company's
model assume cash flow reinvestments which are representative of the Company's
current investment strategy. Calls and prepayments include scheduled
maturities and those expected to occur which would benefit the security
issuers. Assumed policy surrenders consider differences and relationships
between credited interest rates and market interest rates as well as surrender
charges on individual policies. The impact to earnings also includes the
expected effects on amortization of deferred policy acquisition costs. The
model considers only investment annuity and supplemental contracts in-force at
December 31, 1999, and does not consider new product sales or the possible
impact of interest rate changes on sales.
MORTGAGE LOANS AND REAL ESTATE
Investment Philosophy
In general, the Company seeks loans on high quality, income producing
properties such as shopping centers, freestanding retail stores, office
buildings, industrial and sales or service facilities, selected apartment
buildings, motels, and health care facilities. The location of these loans is
typically in growth areas that offer a potential for property value
appreciation. These growth areas are found primarily in major metropolitan
areas, but occasionally in selected smaller communities.
The Company seeks to minimize the credit and default risk in its mortgage loan
portfolio through strict underwriting guidelines and diversification of
underlying property types and geographic locations. In addition to being
secured by the property, mortgage loans with leases on the underlying property
are often guaranteed by the lessee, in which case the Company approves the
loan based on the credit strength of the lessee. This approach has resulted
in higher quality mortgage loans with fewer defaults.
The Company's direct investments in real estate are not a significant portion
of its total investment portfolio. Many of these investments were acquired
through mortgage loan foreclosures. However, the Company also participates in
several real estate joint ventures and limited partnerships. The joint
ventures and partnerships invest primarily in income-producing retail
properties. These investments have typically enhanced the Company's
investment portfolio returns.
Portfolio Analysis
The Company held net investments in mortgage loans totaling $197,559,000 and
$183,902,000, or 6.0% and 5.7% of total invested assets, at March 31, 2000,
and December 31, 1999, respectively. The loans are real estate mortgages,
substantially all of which are related to commercial properties and
developments and have fixed interest rates.
The diversification of the mortgage loan portfolio by geographic regions of
the United States and by property type as of March 31, 2000, and December 31,
1999, was as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
<S> <C> <C>
Geographic Region:
West South Central 55.7% 58.8%
Mountain 23.9 20.5
Pacific 10.1 11.0
South Atlantic 4.7 5.1
East South Central 3.9 4.2
Other 1.7 0.4
Totals 100.0% 100.0%
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
<S> <C> <C>
Property Type:
Retail 58.1% 56.1%
Office 25.3 27.4
Hotel/Motel 6.7 7.2
Land/Lots 3.8 2.5
Nursing Homes 2.1 2.4
Apartment 1.5 1.6
Other 2.5 2.8
Totals 100.0% 100.0%
</TABLE>
As of March 31, 2000, the allowance for possible losses on mortgage loans was
$4,104,000. No additions were made to the allowance in the first quarter of
2000. Although management believes that the current balance is adequate,
future additions to the allowance may be necessary based on changes in
economic conditions, particularly in the West South Central region which
includes Texas, Louisiana, Oklahoma, and Arkansas, as this area contains the
highest concentrations of the Company's mortgage loans.
The Company currently places all loans past due three months or more on
nonaccrual status, thus recognizing no interest income on the loans. The
Company had mortgage loan principal balances on nonaccrual status totaling
$3,047,000 and $3,014,000 at March 31, 2000 and December 31, 1999,
respectively. Also, the Company will at times restructure mortgage loans
under certain conditions which may involve changes in interest rates, payment
terms, or other modifications. For the three months ended March 31, 2000, the
reductions in interest income due to nonaccrual and restructured mortgage
loans were approximately $79,000. For the three months ended March 31, 1999,
the reductions in interest income due to nonaccrual and restructured mortgage
loans were not significant.
The Company owns real estate that was acquired through foreclosure and through
direct investment totaling $19,386,000 and $11,388,000 at March 31, 2000, and
December 31, 1999, respectively. This small concentration of properties
represents less than one percent of the Company's entire investment portfolio.
The real estate holdings consist primarily of income-producing properties
which are being operated by the Company. The Company recognized operating
income on these properties of approximately $187,000 and $283,000 for the
three months ended March 31, 2000 and 1999. Also during the first quarter of
1999, the Company sold a real estate property resulting in a realized gain on
investments totaling $1,419,000.
The Company monitors the conditions and market values of these properties on a
regular basis. No significant realized losses were recognized due to declines
in values of properties for the three months ended March 31, 2000 and 1999,
respectively. The Company makes repairs and capital improvements to keep the
properties in good condition and will continue this maintenance as needed.
During the first quarter of 2000, the Company acquired a nursing home facility
through an affiliated limited partnership. The acquisition, which totaled
approximately $6.6 million, was made by a newly formed limited partnership,
the partners of which are downstream subsidiaries of National Western. This
investment resulted in an increase in real estate owned from December 31,
1999, as reflected above. The nursing home facility, which is expected to
open in the second quarter of 2000, will also be operated by an affiliated
limited partnership and the financial operating results will be consolidated
with those of the Company. Daily operations and management of the nursing
home will be performed by an experienced management company through a
contract with the limited partnership. Initial first year start up expenses
could generate minimum operating losses of approximately $400,000, before
taxes.
RESULTS OF OPERATIONS
Consolidated Operations
Summary of Consolidated Operating Results
A summary of operating results for the three months ended March 31, 2000 and
1999 is provided below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
(In thousands except per share data)
<S> <C> <C>
Revenues:
Revenues, excluding realized
gains (losses) on investments $ 81,130 81,945
Realized gains (losses) on investments (580) 4,805
Total revenues $ 80,550 86,750
Earnings:
Earnings from operations $ 12,710 10,980
Net realized gains (losses) on investments (377) 3,123
Net earnings $ 12,333 14,103
Basic Earnings Per Share:
Earnings from operations $ 3.63 3.14
Net realized gains (losses) on investments (0.11) 0.89
Net earnings $ 3.52 4.03
Diluted Earnings Per Share:
Earnings from operations $ 3.61 3.11
Net realized gains (losses) on investments (0.10) 0.88
Net earnings $ 3.51 3.99
</TABLE>
Consolidated Operating Results: Earnings from operations, excluding net
realized gains and losses on investments, totaled $12,710,000 for the quarter
ended March 31, 2000, compared to $10,980,000 for the first quarter of 1999.
The higher earnings in 2000 are primarily related to the growth in the
Company's interest sensitive blocks of business. Additionally, while life
insurance benefit claims were significantly higher in the first quarter of
2000, this increase was largely offset by reductions in traditional policy
liabilities. The Company is also benefitting from lower agent bonus
commissions as a result of a litigation settlement in 1999, which terminated
future bonus commissions on certain annuities in-force.
Revenues, excluding realized gains and losses on investments, were relatively
consistent totaling $81,130,000 and $81,945,000 for the quarters ended March
31, 2000 and 1999, respectively. Increases in universal life cost of
insurance revenues were offset by lower policy surrender charge revenues and
lower income related to index options, which are used to hedge the Company's
equity-indexed annuity products.
The Company recorded realized losses on investments, net of taxes, totaling
$377,000 for the quarter ended March 31, 2000, compared to gains of $3,123,000
for the first quarter of 1999. The first quarter 2000 losses were primarily
related to investments in debt securities. The 1999 gains were primarily from
sales and calls of investments in debt securities totaling $1,687,000, net of
taxes. Also included in 1999 was a net gain totaling $922,000 from the sale
of investment real estate owned by one of the Company's subsidiaries, NWL 806
Main, Inc.
As previously reported, the bankruptcy reorganization of the Company's wholly
owned subsidiary, The Westcap Corporation, was completed in the first quarter
of 1999. Pursuant to the reorganization plan, National Western retained 100%
continuing ownership of the reorganized Westcap and the subsidiary is now
operating as a real estate management company. No losses were reported for
discontinued brokerage operations in the first quarter of 1999 as the entire
$14,125,000 settlement payment was accrued and reported as a loss in the third
quarter of 1998.
Net Investment Income: Net investment income decreased slightly from the
first quarter of 1999, totaling $57,740,000 and $57,852,000 for the quarter
ended March 31, 2000 and 1999, respectively. While investment income from
debt securities continues to increase with corresponding increases in invested
assets, the essentially flat total investment income growth is primarily due
to index options. Declines in fair values of index options used to hedge the
equity return component of the Company's equity-indexed annuity products
resulted in lower investment income for the first quarter of 2000. The index
options, which act as hedges to match closely the returns on the S&P 500
Index, are reported at fair value in the accompanying financial statements.
The changes in the values of the index options and the credited interest on
policyholder liabilities for equity-indexed annuities are both reflected in
the statement of earnings. The reduction to investment income from index
options for the quarter ended March 31, 2000, totaling $1,725,000 is composed
of a $1,978,000 decline in fair value of options, offset partially by
$253,000 of actual income realized as a result of option expirations.
Comparative income from index options totaled $1,575,000 for the
quarter ended March 31, 1999. This significant decline is directly
attributable to the decline in the S&P 500 Index over the same period. While
net investment income was lower due to these options, this reduction was
partially offset by lower annuity contract interest expense as the credited
return on the Company's equity-indexed annuities are also based on the same
S&P 500 Index.
The decrease in investment income was tempered somewhat by reduced investment
expenses. Investment expenses were lower in 2000 compared to 1999 primarily
due to the implementation of a new cost allocation study in the first quarter
of 2000. Accordingly, the lower investment expenses were offset by a
corresponding higher allocation of costs to other operating expenses in the
accompanying financial statements. A detail of net investment income is
provided below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
(In thousands)
<S> <C> <C>
Investment income:
Debt securities $ 52,661 50,379
Mortgage loans 4,281 4,248
Policy loans 2,027 2,111
Index options (1,725) 1,575
Other investment income 1,170 832
Total investment income 58,414 59,145
Investment expenses 674 1,293
Net investment income $ 57,740 57,852
</TABLE>
Realized Gains and Losses on Investments: The Company recorded realized losses
of $580,000 and realized gains of $4,805,000 in the first quarters of 2000 and
1999, respectively. As previously described, the 2000 losses were primarily
related to investments in debt securities. The 1999 gains were primarily from
sales and calls of investments in debt securities totaling $2,595,000 and a
gain of $1,419,000 from the sale of investment real estate.
Life and Other Policy Benefits: These expenses in 2000 and 1999 were
$10.1 million and $8.7 million, respectively. The significant increase is due
to higher life insurance benefit claims. Mortality claims experience
fluctuates from period to period, and such deviations are not uncommon in the
life insurance industry. However, 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. Most of the increase in life insurance benefit claims in the
first quarter of 2000 was related to traditional policies which was largely
offset by reductions in traditional policy liabilities. As reflected in the
accompanying financial statements, the decrease in liabilities for future
policy benefits totaled $2,482,000 and $241,000 for the quarters ended March
31, 2000 and 1999, respectively. A comparative detail of life and other
policy benefits is provided below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
(In thousands)
<S> <C> <C>
Life insurance benefit claims $ 6,596 5,524
Surrenders of traditional products 2,984 2,460
Other policy benefits 512 704
Totals $ 10,092 8,688
</TABLE>
Universal Life and Investment Annuity Contract Interest: The Company closely
monitors its credited interest rates, taking into consideration such factors
as profitability goals, policyholder benefits, product marketability, and
economic market conditions. Rates are established or adjusted after careful
consideration and evaluation of these factors against established objectives.
As market interest rates fluctuate, the Company's credited interest rates are
often adjusted accordingly, while also taking into consideration other factors
as described above. Contract interest totaled $36.7 million and $40.6 million
for the quarters ended March 31, 2000 and 1999, respectively. This decline is
primarily related to the Company's equity-indexed annuities. Because the S&P
500 Index declined significantly during the first quarter of 2000, the related
contract interest of the equity-indexed annuities also declined.
Correspondingly, the income from index options used to hedge these annuities
also declined, substantially offsetting the lower contract interest.
Other Operating Expenses: Other operating expenses totaled $6,717,000 and
$6,701,000 for the quarters ended March 31, 2000 and 1999, respectively.
While these total expenses are consistent between quarters, as previously
described, the Company implemented a new cost allocation study in the first
quarter of 2000. This resulted in lower investment expenses and corresponding
higher other operating expenses. The amount of this reallocation totaled
approximately $650,000. However, the higher cost allocation to other
operating expenses was substantially offset by lower agent commissions. The
Company is benefitting from lower agent bonus commissions as a result of a
litigation settlement in 1999, which terminated future bonus commissions on
certain annuities in-force.
Federal Income Taxes: Federal income taxes include no unusual items as
effective tax rates for the quarters ended March 31, 2000 and 1999 were 34.0%
and 34.2%, respectively.
Segment Operations
Summary of Segment Earnings
A summary of segment earnings for the quarters ended March 31, 2000 and 1999
is provided below. The segment earnings exclude realized gains and losses on
investments, net of taxes.
<TABLE>
<CAPTION>
Domestic International
Life Life All
Insurance Insurance Annuities Others Totals
(In thousands)
<S> <C> <C> <C> <C> <C>
Segment
earnings:
March 31, 2000 $ 1,699 2,396 8,271 344 12,710
March 31, 1999 $ 2,082 1,410 7,367 121 10,980
</TABLE>
Domestic Life Insurance Operations
The Company's domestic life insurance operations concentrate marketing efforts
on federal employees, seniors, and specific employee groups in private
industry, as well as individual sales. The products marketed are universal
life insurance and traditional life insurance, which includes both term and
whole life products. National Western markets and distributes its domestic
products primarily through independent agents and brokers and independent
marketing organizations (IMOs). The IMOs also assist the Company in
recruiting, contracting, and supervising agents as well as providing
additional financial resources for product marketing. Geographically, the
domestic life insurance operations market products in most of the United
States, which encompasses 43 states and the District of Columbia. The states
in which the Company does not conduct business are primarily in the northeast
and include Connecticut, Delaware, Massachusetts, New Hampshire, New Jersey,
New York, and Vermont.
Earnings for the domestic life insurance operating segment were $1,699,000 and
$2,082,000 for the three months ended March 31, 2000 and 1999, respectively.
The decrease in earnings in 2000 is primarily due to higher amortization of
deferred policy acquisition costs and modest increases in policy benefits.
These increases were partially offset by higher premiums and contract revenues
and net investment income during the first quarter of 2000.
A comparative analysis of results of operations for the Company's domestic
life insurance segment is detailed below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
(In thousands)
<S> <C> <C>
Domestic Life Insurance Operations:
Premiums and other revenue:
Premiums and contract revenues $ 5,930 5,791
Net investment income 6,472 6,331
Other income - 16
Total premiums and other revenue 12,402 12,138
Benefits and expenses:
Policy benefits 3,893 3,544
Amortization of deferred policy
acquisition costs 1,626 932
Universal life insurance
contract interest 2,222 2,449
Other operating expenses 2,086 2,062
Total benefits and expenses 9,827 8,987
Segment earnings before Federal income taxes 2,575 3,151
Federal income taxes 876 1,069
Segment earnings $ 1,699 2,082
</TABLE>
Revenues from domestic life insurance operations include life insurance
premiums on traditional type products and revenues from universal life
insurance. The Company's current marketing efforts focus more on universal
life insurance, and, as a result, revenues from these products continue to
increase over traditional products. Revenues from traditional products are
simply premiums collected, while revenues from universal life insurance
consist of policy charges for the cost of insurance, policy administration
fees, and surrender charges assessed during the period. A comparative detail
of premiums and contract revenues is provided below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
(In thousands)
<S> <C> <C>
Universal life insurance:
Cost of insurance $ 3,023 2,837
Surrender charges 482 406
Policy fees and other revenues 443 308
Traditional life insurance premiums 1,982 2,240
Totals $ 5,930 5,791
</TABLE>
Actual universal life insurance deposits collected for the quarters ended
March 31, 2000 and 1999 are detailed below. Deposits collected on these
nontraditional products are not reflected as revenues in the Company's
statements of earnings, as they are recorded directly to policyholder
liabilities upon receipt, in accordance with generally accepted accounting
principles.
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
(In thousands)
<S> <C> <C>
Universal life insurance:
First year and single premiums $ 1,610 1,105
Renewal premiums 3,668 3,769
Totals $ 5,278 4,874
</TABLE>
Policy benefits were higher in the first quarter of 2000 totaling $3,893,000
compared to $3,544,000 for the comparable 1999 period. The increase was due
to significantly higher life insurance benefit claims, which was largely
offset by reductions in traditional policy liabilities. Mortality claims
experience fluctuates from period to period, and such deviations are not
uncommon in the life insurance industry.
Universal life insurance contract interest decreased to $2,222,000 in 2000
compared to $2,449,000 in 1999. This is consistent with the relative stable
to declining size of this block of business.
Amortization of deferred policy acquisition costs increased from $932,000 in
1999 to $1,626,000 in 2000. These expenses represent the amortization of the
costs of acquiring or producing new business, which consists primarily of
agents' commissions. The majority of such costs are amortized in direct
relation to the anticipated future gross profits of the applicable blocks of
business. Amortization is also impacted by the level of policy surrenders,
lapses, and benefit claims. The significant increase in amortization for the
first quarter of 2000 is partially due to high lapses in a small block of
universal life policies.
International Life Insurance Operations
The Company's international life insurance operations focus marketing efforts
on foreign nationals in upper socioeconomic classes with substantial financial
resources. Insurance sales are primarily on insureds from countries in
Central and South America, the Caribbean, and the Pacific Rim. Marketing to
numerous countries in these different regions provides diversification that
helps to minimize large fluctuations in sales that can occur due to various
economic, political, and competitive pressures that may occur from one country
to another. Historically, the top three countries in insurance sales have
often been Argentina, Chile, and Peru. Products sold in the international
market include both universal life and traditional life insurance products.
The Company minimizes exposure to foreign currency risks, as almost all
foreign policies require payment of premiums and claims in United States
dollars. Sales production from the international market is from independent
broker-agents, many of whom have been selling National Western products for 20
or more years.
Earnings for the international life insurance operating segment were
$2,396,000 and $1,410,000 for the quarters ended March 31, 2000 and 1999,
respectively. Earnings in 2000 were higher primarily due to increases in
universal life insurance revenues and lower policy benefits. The higher
earnings were also somewhat enhanced by slightly higher net investment income.
A comparative analysis of results of operations for the Company's
international life insurance segment is detailed below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
(In thousands)
<S> <C> <C>
International Life Insurance Operations:
Premiums and other revenue:
Premiums and contract revenues $ 10,686 10,228
Net investment income 5,650 5,443
Other income 27 12
Total premiums and other revenue 16,363 15,683
Benefits and expenses:
Policy benefits 3,650 4,702
Amortization of deferred policy
acquisition costs 3,157 3,279
Universal life insurance
contract interest 3,930 3,433
Other operating expenses 1,994 2,135
Total benefits and expenses 12,731 13,549
Segment earnings before
Federal income taxes 3,632 2,134
Federal income taxes 1,236 724
Segment earnings $ 2,396 1,410
</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, while traditional life insurance premiums were also higher during the
first quarter of 2000. These increases were minimally affected by small
decreases in surrender charges and policy fees and other revenues. A
comparative detail of premiums and contract revenues is provided below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
(In thousands)
<S> <C> <C>
Universal life insurance:
Cost of insurance $ 7,616 7,221
Surrender charges 1,891 1,956
Policy fees and other revenues 803 898
Traditional life insurance premiums 376 153
Totals $ 10,686 10,228
</TABLE>
Actual universal life insurance deposits collected for the quarters ended
March 31, 2000 and 1999 are detailed below. Deposits collected on these
nontraditional products are not reflected as revenues in the Company's
statements of earnings, as they are recorded directly to policyholder
liabilities upon receipt, in accordance with generally accepted accounting
principles.
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
(In thousands)
<S> <C> <C>
Universal life insurance:
First year and single premiums $ 3,123 2,569
Renewal premiums 8,343 8,486
Totals $ 11,466 11,055
</TABLE>
Policy benefits were significantly lower in 2000 totaling $3,650,000 compared
to $4,702,000 in 1999. The decrease in expenses was due to lower life
insurance benefit claims.
Universal life insurance contract interest increased from $3,433,000 in 1999
to $3,930,000 in 2000. The increase in contract interest is consistent with
growth in the universal life insurance business.
Annuity Operations
The Company's annuity operations are almost exclusively in the United States.
Like the Company's domestic life insurance operations, annuities are marketed
in 43 states and the District of Columbia using independent agents, brokers,
and independent marketing organizations (IMOs). For most of these
organizations, annuity sales are much more significant 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 is flexible premium annuities
on which renewal premiums continue to be collected. However, the Company has
not sold two-tier annuities since 1992.
Earnings for the annuity operating segment were $8,271,000 and $7,367,000 for
the quarters ended March 31, 2000 and 1999, respectively. Earnings for 2000
were up from 1999 primarily due to increased investment income over annuity
contract interest. Reducing this increase in earnings are lower premiums and
contract revenues and higher amortization of deferred policy acquisition
costs.
A comparative analysis of results of operations for the Company's annuity
segment is detailed below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
(In thousands)
<S> <C> <C>
Annuity Operations:
Premiums and other revenue:
Premiums and contract revenues $ 6,659 7,924
Net investment income 45,096 45,896
Other income 88 122
Total premiums and other revenue 51,843 53,942
Benefits and expenses:
Policy benefits 67 201
Amortization of deferred policy
acquisiton costs 6,102 5,360
Annuity contract interest 30,499 34,729
Other operating expenses 2,637 2,504
Total benefits and expenses 39,305 42,794
Segment earnings before
Federal income taxes 12,538 11,148
Federal income taxes 4,267 3,781
Segment earnings $ 8,271 7,367
</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
19.4% in 2000 compared to 1999 primarily due to reductions in surrender
charges from two-tier annuities. Although total annuity policy surrenders were
actually only down 2.2% from 1999 to 2000, the mix of surrender types was
significantly different. While single-tier annuity policy surrenders
increased 24% in 2000, two-tier annuity policy surrenders, which typically
have much higher surrender charges, declined over 32%. 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>
Three Months Ended March 31,
2000 1999
(In thousands)
<S> <C> <C>
Surrender charges:
Two-tier annuities $ 3,052 4,643
Single-tier annuities 2,167 1,829
Total surrender charges 5,219 6,472
Payout annuity and other revenues 1,426 1,434
Traditional annuity premiums 14 18
Totals $ 6,659 7,924
</TABLE>
Actual annuity deposits collected for the quarters ended March 31, 2000 and
1999 are detailed below. Deposits collected on these nontraditional products
are not reflected as revenues in the Company's statements of earnings, as they
are recorded directly to policyholder liabilities upon receipt, in accordance
with generally accepted accounting principles.
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
(In thousands)
<S> <C> <C>
Deferred annuities:
Equity-indexed $ 34,239 45,630
Other 51,357 51,818
Total deferred annuities 85,596 97,448
Immediate annuities 7,725 7,624
Totals $ 93,321 105,072
</TABLE>
Although total annuity deposits for the quarter ended March 31, 2000, were
lower than the comparable 1999 period, the decline is primarily attributable
to equity-indexed annuities. Sales of the Company's other deferred annuity
products and immediate annuities were virtually the same for the first
quarters of 2000 and 1999.
While sales were lower in 2000, equity-indexed annuities are a major portion
of the Company's total annuity production. The Company's equity-indexed
annuities are flexible premium deferred annuities which combine the features
associated with traditional fixed annuities, with the option to have interest
rates that are linked in part to an equity index, the S&P 500 Index. These
annuities are long-term contracts designed as planning vehicles for retirement
security. These annuities are attractive to customers, as they have
guaranteed minimum interest rates, coupled with the potential for
significantly higher returns based on an equity index component. Also,
because the Company does not offer variable products or mutual funds, these
products provide a key equity-based alternative to the Company's existing
fixed annuity products. In conjunction with the sale of these annuities, the
Company uses an investment hedging program to offset the potential higher
returns that could be paid on these products. Specifically, the Company
purchases index options from highly rated banks and brokerage firms. These
index options act as hedges to match closely the returns based on the S&P 500
Index which may be paid to policyholders.
Sales of equity-indexed annuities declined during the year ended December 31,
1999, primarily due to volatility in the stock market. This volatility
affects both the immediate demand for these annuities and the pricing of these
products. Increased product costs from stock market volatility, particularly
costs of index options used to hedge the equity return component of these
annuities, can reduce potential credited interest to policyholders. The lower
production level has continued in the first quarter of 2000, which is
consistent with volatility in the stock market, although first quarter 2000
sales were higher than the fourth quarter of 1999.
Net investment income for the first quarters of 2000 and 1999 totaled
$45,096,000 and $45,896,000, respectively. As previously described in Summary
of Consolidated Operating Results, the decrease in net investment income is
due to lower income from index options. Declines in fair values of index
options used to hedge the equity return component of the Company's equity-
indexed annuity products resulted in lower investment income for the first
quarter of 2000. The decline is directly attributable to the decline in the
S&P 500 Index over the same period.
Annuity contract interest was $30.5 million in 2000 compared to $34.7 million
in 1999. The decrease is due to lower interest credited on equity-indexed
annuities due to the decline in the S&P 500 Index. Contract interest on
equity-indexed annuities totaled $1,874,000 and $4,726,000 for the quarters
ended March 31, 2000 and 1999, respectively. While 2000 contract interest is
lower due to equity-indexed annuities, net investment income from index
options for 2000 was also $3,300,000 lower than the comparable 1999 first
quarter. Although index options are used as hedges, differences between
income from index options and contract interest credited to policyholders will
occur for several reasons, some of which may only be timing differences
between the recognition of income and expenses. One reason is that the costs
of the index options are essentially amortized against net investment income
as the options are marked to fair value each reporting period. The costs of
options are covered by additional income earned on debt securities purchased
with equity-indexed annuity premiums. Other differences are due to asset fees
charged against policyholder contract interest, surrenders and death benefits
on annuities within the annual hedging period, and inherent differences
between index option fair values and policy liability reserving treatments
related to minimum guaranteed interest rates.
Amortization of deferred policy acquisition costs represents the amortization
of the costs of acquiring or producing new business, primarily agents'
commissions, the majority of which are amortized in direct relation to the
anticipated future gross profits of the applicable blocks of business.
Amortization is also impacted by the level and type of policy surrenders.
Amortization for 2000 and 1999 was $6,102,000 and $5,360,000, respectively.
Other operating expenses totaled $2,637,000 for the first quarter of 2000
compared to $2,504,000 for the comparable 1999 period. As previously
described in Summary of Consolidated Operating Results, the Company
implemented a new cost allocation study in the first quarter of 2000. This
resulted in lower investment expenses and corresponding higher other operating
expenses. However, the higher cost allocation to other operating expenses was
substantially offset by lower agent commissions. The Company is benefitting
from lower agent bonus commissions as a result of a litigation settlement in
1999, which terminated future bonus commissions on certain annuities in-force.
Other Operations
National Western's primary business encompasses its domestic and international
life insurance operations and its annuity operations. However, National
Western also has small real estate and other investment operations through the
following wholly owned subsidiaries: NWL Investments, Inc., NWL Properties,
Inc., NWL 806 Main, Inc., NWL Services, Inc., and NWL Financial, Inc. Also,
during January, 1999, the Company's wholly owned subsidiary, The Westcap
Corporation, completed its Chapter 11 bankruptcy reorganization. With the
reorganization complete, National Western transferred its investment real
estate holdings totaling approximately $11,589,000 to Westcap, and the
subsidiary is now operating as a real estate management company. Earnings for
these other operations totaled $344,000 and $121,000 for the first quarters of
2000 and 1999, respectively.
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. Dividend distributions from the Trust are declared semi-annually in
June and December each year. Because the asset is a life interest, these
distributions are only accrued in the Company's financial statements when
declared. Semi-annual distributions in recent years typically exceed $1.7
million.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The liquidity requirements of the Company are met primarily by funds provided
from operations. Premium deposits and revenues, investment income, and
investment maturities are the primary sources of funds, while investment
purchases and policy benefits are the primary uses of funds. Primary sources
of liquidity to meet cash needs are the Company's securities available for
sale portfolio, net cash provided by operations, and a bank line of credit.
The Company's investments consist primarily of marketable debt securities that
could be readily converted to cash for liquidity needs. The Company may also
borrow up to $60 million on its bank line of credit for short-term cash needs.
A primary liquidity concern for the Company's life insurance operations is the
risk of early policyholder withdrawals. Consequently, the Company closely
evaluates and manages the risk of early surrenders or withdrawals. The
Company includes provisions within annuity and universal life insurance
policies, such as surrender charges, that help limit early withdrawals. The
Company also prepares cash flow projections and performs cash flow tests under
various market interest rate scenarios to assist in evaluating liquidity needs
and adequacy. The Company currently expects available liquidity sources and
future cash flows to be adequate to meet the demand for funds.
In the past, cash flows from the Company's insurance operations have been more
than adequate to meet current needs. Cash flows from operating activities
were $46.3 million and $28.4 million for the three months ended March 31, 2000
and 1999, respectively. Net cash flows from the Company's financing
activities, which includes universal life and investment annuity deposit
product operations, totaled $16.4 million and $16.1 million in the first
quarters of 2000 and 1999, respectively. While annuity production declined in
2000 due to lower equity-indexed annuity sales, surrenders remained relatively
stable. Cash flows from financing activities also include $12.0 million from
utilization of the Company's line of credit short-term borrowing facility.
The borrowings were used for cash management purposes related to the
settlement of routine investment transactions.
The Company also has significant cash flows from both scheduled and
unscheduled investment security maturities, redemptions, and prepayments.
These cash flows totaled $25.6 million and $41.9 million for the quarters
ended March 31, 2000 and 1999, respectively. The Company again expects
significant cash flows from these sources throughout the remainder of 2000.
Capital Resources
The Company relies on stockholders' equity for its capital resources, as there
has been no long-term debt outstanding in 2000 or recent years. The Company
does not anticipate the need for any long-term debt in the near future. There
are also no current or anticipated material commitments for capital
expenditures in 2000.
Stockholders' equity totaled $478.6 million at March 31, 2000, reflecting an
increase of $3.1 million from December 31, 1999. The increase in capital is
primarily from net earnings of $12.3 million, offset by an increase in net
unrealized losses on investment securities totaling $9.6 million during the
first quarter of 2000. The increase in unrealized losses was due to market
interest rate conditions and transfers of securities from held to maturity to
available for sale. As previously described in Investments in Debt and Equity
Securities, the debt securities transfers were executed due to significant
credit deterioration of the issuing companies. Book value per share at March
31, 2000, was $136.73.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information contained herein or in
other written or oral statements made by or on behalf of National Western Life
Insurance Company or its subsidiaries are or may be viewed as forward-looking.
Although the Company has used appropriate care in developing any such
information, forward-looking information involves risks and uncertainties that
could significantly impact actual results. These risks and uncertainties
include, but are not limited to, matters described in the Company's SEC
filings such as exposure to market risks, anticipated cash flows or operating
performance, future capital needs, and statutory or regulatory related issues.
However, National Western, as a matter of policy, does not make any specific
projections as to future earnings, nor does it endorse any projections
regarding future performance that may be made by others. Whether or not
actual results differ materially from forward-looking statements may depend on
numerous foreseeable and unforeseeable events or developments. Also, the
Company undertakes no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future
developments, or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
This information is included in Item 2, Management's Discussion and Analysis
of Financial Condition and Results of Operations, in the Investments in Debt
and Equity Securities section.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 -Computation of Earnings Per Share (filed on page __ of this
report).
Exhibit 27 -Financial Data Schedule (filed electronically pursuant to
Regulation S-K).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Registrant)
Date: May 10, 2000 /S/ Ross R. Moody
Ross R. Moody
President, Chief Operating Officer,
and Director
(Authorized Officer)
Date: May 10, 2000 /S/ Robert L. Busby, III
Robert L. Busby, III
Senior Vice President -
Chief Administrative Officer,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: May 10, 2000 /S/ Vincent L. Kasch
Vincent L. Kasch
Vice President - Controller
and Assistant Treasurer
(Principal Accounting Officer)
EXHIBIT 11
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
For the Three Months Ended March 31, 2000 and 1999
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Numerator for basic and diluted
earnings per share:
Earnings available to
common stockholders before
before and after
assumed conversions:
Net earnings $ 12,333 14,103
Denominator:
Basic earnings per share -
weighted-average shares 3,501 3,498
Effect of dilutive stock options 17 37
Diluted earnings per share -
adjusted weighted-average
shares for assumed conversions 3,518 3,535
Basic earnings per share:
Net earnings $ 3.52 4.03
Diluted earnings per share:
Net earnings $ 3.51 3.99
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
National Western Life Insurance Company and subsidiaries consolidated
financial statements and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 727,213
<DEBT-CARRYING-VALUE> 2,150,109
<DEBT-MARKET-VALUE> 2,081,639
<EQUITIES> 15,977
<MORTGAGE> 197,559
<REAL-ESTATE> 19,386
<TOTAL-INVEST> 3,290,117
<CASH> 2,886
<RECOVER-REINSURE> 7,137
<DEFERRED-ACQUISITION> 381,645
<TOTAL-ASSETS> 3,737,304
<POLICY-LOSSES> 3,176,706
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 13,961
<POLICY-HOLDER-FUNDS> 10,276
<NOTES-PAYABLE> 12,000
0
0
<COMMON> 3,501
<OTHER-SE> 475,141
<TOTAL-LIABILITY-AND-EQUITY> 3,737,304
23,275<F1>
<INVESTMENT-INCOME> 57,740
<INVESTMENT-GAINS> (580)
<OTHER-INCOME> 115
<BENEFITS> 44,261<F2>
<UNDERWRITING-AMORTIZATION> 10,885
<UNDERWRITING-OTHER> 6,717
<INCOME-PRETAX> 18,687
<INCOME-TAX> 6,354
<INCOME-CONTINUING> 12,333
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,333
<EPS-BASIC> 3.52
<EPS-DILUTED> 3.51
<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 $2,372 revenues from traditional contracts subject to FAS 60
accounting treatment and $20,903 revenues from universal life and investment
annuity contracts subject to FAS 97 accounting treatment.
<F2>Consists of $10,092 benefits paid to policyholders, $(2,482) decrease in
reserves on traditional contracts and $36,651 interest on univeral life
and investment annuity contracts.
</FN>
</TABLE>
