UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 2-17039
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
COLORADO 84-0467208
(State of Incorporation) (I.R.S. Employer Identification Number)
850 EAST ANDERSON LANE
AUSTIN, TEXAS 78752-1602 (512) 836-1010
(Address of Principal Executive Offices) (Telephone Number)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes [ x ] No [ ]
As of August 11, 1994, the number of shares of Registrant's common stock
outstanding was: Class A - 3,284,672 and Class B - 200,000.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1994 (Unaudited) and December 31, 1993
Condensed Consolidated Statements of Earnings -
For the Three Months Ended June 30, 1994 and 1993
(Unaudited)
Condensed Consolidated Statements of Earnings -
For the Six Months Ended June 30, 1994 and 1993
(Unaudited)
Condensed Consolidated Statements of Stockholders'
Equity -
For the Six Months Ended June 30, 1994 and 1993
(Unaudited)
Condensed Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 1994 and 1993
(Unaudited)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11 - Computation of Earnings per Common Share -
For the Three Months Ended June 30, 1994 and 1993
(Unaudited)
Exhibit 11 - Computation of Earnings per Common Share -
For the Six Months Ended June 30, 1994 and 1993
(Unaudited)
Signatures
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
June 30, December 31,
ASSETS 1994 1993
Cash and investments:
Securities held to maturity, at amortized cost $ 775,460 1,787,360
Securities available for sale, at fair
value in 1994 and aggregate market in 1993 1,103,646 39,355
Trading securities, at fair value 94,192 116,918
Mortgage loans, net of allowances for
possible losses ($6,155 and $6,849) 182,905 188,920
Policy loans 151,551 153,822
Other long-term investments 37,834 43,921
Securities purchased under agreements to
resell 235,506 186,896
Cash and short-term investments 934 32,823
Total cash and investments 2,582,028 2,550,015
Brokerage trade receivables, net of allowances
for possible losses ($1,000 and $123) 12,136 55,163
Accrued investment income 30,837 28,901
Deferred policy acquisition costs 285,620 287,711
Other assets 19,113 19,261
$2,929,734 2,941,051
<FN>
Note: The balance sheet at December 31, 1993 has been taken from the
audited financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Shares Outstanding)
(Unaudited)
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
LIABILITIES:
Future policy benefits:
Traditional life and annuity products $ 176,889 177,157
Universal life and investment annuity contracts 2,113,004 2,115,352
Other policyholder liabilities 21,875 24,211
Short-term borrowings 62,612 82,852
Securities sold not yet purchased 70,463 78,835
Securities sold under agreements to repurchase 179,577 127,971
Brokerage trade payables 12,931 39,422
Federal income tax payable:
Current - 4,823
Deferred 1,061 3,078
Other liabilities 31,164 44,632
Total liabilities 2,669,576 2,698,333
STOCKHOLDERS' EQUITY:
Common stock:
Class A - $1 par value; 7,500,000 shares authorized;
3,284,672 shares issued and outstanding
in 1994 and 1993 3,285 3,285
Class B - $1 par value; 200,000 shares authorized;
issued and outstanding in 1994 and 1993 200 200
Additional paid-in capital 24,356 24,356
Net unrealized losses on investment securities (1,522) (257)
Retained earnings 233,839 215,134
Total stockholders' equity 260,158 242,718
$ 2,929,734 2,941,051
<FN>
Note: The balance sheet at December 31, 1993 has been taken from the
audited financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended June 30, 1994 and 1993
(Unaudited)
(In Thousands Except Per Share Amounts)
1994 1993
Premiums and other revenue:
Life and annuity premiums $ 4,235 5,057
Universal life and investment annuity
contract revenues 17,121 18,161
Net investment income 47,336 46,158
Brokerage revenues 12,778 25,479
Other income 53 750
Realized gains on investments 390 799
Total premiums and other revenue 81,913 96,404
Benefits and expenses:
Life and other policy benefits 8,618 9,346
Change in liabilities for future policy benefits (203) 114
Amortization of deferred policy acquisition costs 8,679 9,377
Universal life and investment
annuity contract interest 32,173 32,626
Other insurance operating expenses 6,020 6,720
Brokerage operating expenses 10,942 17,427
Total benefits and expenses 66,229 75,610
Earnings before Federal income tax 15,684 20,794
Provision (benefit) for Federal income tax:
Current 6,084 8,584
Deferred (594) (1,536)
Total Federal income tax expense 5,490 7,048
Net earnings $ 10,194 13,746
Earnings per share of common stock:
Net earnings $ 2.93 3.95
<FN>
See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
For the Six Months Ended June 30, 1994 and 1993
(Unaudited)
(In Thousands Except Per Share Amounts)
1994 1993
Premiums and other revenue:
Life and annuity premiums $ 9,169 9,927
Universal life and investment annuity
contract revenues 33,369 34,178
Net investment income 93,100 90,961
Brokerage revenues 27,788 47,041
Other income 208 796
Realized gains on investments 2,104 1,313
Total premiums and other revenue 165,738 184,216
Benefits and expenses:
Life and other policy benefits 16,504 19,409
Decrease in liabilities for future policy benefits (268) (506)
Amortization of deferred policy acquisition costs 17,397 18,871
Universal life and investment annuity contract interest 64,635 64,755
Other insurance operating expenses 12,049 12,719
Brokerage operating expenses 26,644 32,564
Total benefits and expenses 136,961 147,812
Earnings before Federal income tax 28,777 36,404
Provision (benefit) for Federal income tax:
Current 11,480 16,231
Deferred (1,408) (3,908)
Total Federal income tax expense 10,072 12,323
Earnings before cumulative effect of change
in accounting principle 18,705 24,081
Cumulative effect of change in accounting
for income taxes - 5,520
Net earnings $ 18,705 29,601
Earnings per share of common stock:
Earnings before cumulative effect of change
in accounting principle $ 5.37 6.92
Cumulative effect of change in accounting
for income taxes - 1.58
Net earnings $ 5.37 8.50
<FN>
See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 1994 and 1993
(Unaudited)
(In Thousands)
1994 1993
Common stock shares outstanding:
Shares outstanding at beginning of year 3,485 3,478
Shares issued for stock bonus plan - 3
Shares outstanding at end of period 3,485 3,481
Common stock:
Balance at beginning of year $ 3,485 3,478
Shares issued for stock bonus plan - 3
Balance at end of period 3,485 3,481
Additional paid-in capital:
Balance at beginning of year 24,356 24,065
Shares issued for stock bonus plan - 141
Balance at end of period 24,356 24,206
Net unrealized gains (losses) on investment
securities:
Balance at beginning of year (257) 138
Effect of change in accounting for investments
in debt and equity securities 26,610 -
Change in unrealized gains (losses) on investment
securities during the period (27,875) 682
Balance at end of period (1,522) 820
Retained earnings:
Balance at beginning of year 215,134 158,410
Net earnings 18,705 29,601
Balance at end of period 233,839 188,011
Total stockholders' equity $ 260,158 216,518
<FN>
See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1994 and 1993
(Unaudited)
(In Thousands)
1994 1993
Cash flows from operating activities:
Net earnings $ 18,705 29,601
Adjustments to reconcile net earnings to net cash
from operating activities:
Universal life and investment annuity
contract interest 64,635 64,755
Surrender charges (17,755) (18,696)
Realized gains on investments (2,104) (1,313)
Accrual and amortization of investment income (5,136) (448)
Depreciation and amortization 500 382
Decrease in insurance receivables and other assets 800 1,659
Decrease in brokerage receivables, net 16,536 4,994
Decrease (increase) in accrued investment income (1,936) 1,398
Decrease in deferred policy acquisition costs 6,876 7,963
Decrease in liability for future policy benefits (268) (506)
Increase (decrease) in other policyholder liabilites (2,336) 2,438
Decrease in Federal income tax payable (6,013) (10,008)
Decrease in other liabilities (14,423) (8,011)
Net decrease in repurchase agreements
less related liabilities (5,376) (25,712)
Decrease in trading securities 22,726 18,444
Other 1 (135)
Net cash provided by operating activities 75,432 66,805
Cash flows from investing activities:
Proceeds from sales of:
Securities available for sale 7,210 -
Investments in debt securities - 53,176
Other investments 13,567 4,418
Proceeds from maturities and redemptions of:
Securities held to maturity 20,722 -
Securities available for sale 76,877 -
Investments in debt securities - 259,237
Purchases of:
Securities held to maturity (105,573) -
Securities available for sale (51,051) -
Investments in debt securities - (346,359)
Other investments (5,887) (7,018)
Principal payments on mortgage loans 19,251 6,630
Cost of mortgage loans acquired (15,024) (10,981)
Decrease (increase) in policy loans 2,271 (409)
Other (216) (201)
Net cash used in investing activities (37,853) (41,507)
<FN>
(Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Six Months Ended June 30, 1994 and 1993
(Unaudited)
(In Thousands)
1994 1993
Cash flows from financing activities:
Increase (decrease) in short-term borrowings $ (20,240) 5,437
Deposits to account balances for universal life
and investment annuity contracts 59,054 68,084
Return of account balances on universal life
and investment annuity contracts (108,282) (113,041)
Net cash used in financing activities (69,468) (39,520)
Net decrease in cash and short-term investments (31,889) (14,222)
Cash and short-term investments at beginning of year 32,823 31,203
Cash and short-term investments at end of period $ 934 16,981
<FN>
See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. 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 and
Commercial Adjusters, Inc. In the opinion of the Company, the
accompanying consolidated financial statements contain all adjustments
necessary to present fairly the financial position of the Company as of
June 30, 1994, and the results of its operations for the three months
and six months ended June 30, 1994 and 1993 and its cash flows for the six
months ended June 30, 1994 and 1993.
2. The results of operations for the three months and six months ended
June 30, 1994 and 1993 are not necessarily indicative of the results to
be expected for the full year.
3. The Company paid no cash dividends on common stock during the six
months ended June 30, 1994 and 1993.
4. In May, 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement addresses the
accounting and reporting for investments in equity securities that have
readily determinable fair values and for all investments in debt
securities. Those investments are to be classified in three categories and
accounted for as follows:
(a) Debt securities that the enterprise has the positive intent and ability
to hold to maturity are classified as held-to-maturity securities and
reported at amortized cost.
(b) Debt and equity securities that are bought and held principally for
the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
(c) Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses,
net of taxes and adjustments to deferred policy acquisition costs, excluded
from earnings and reported in a separate component of stockholders' equity.
Previous accounting policy was similar to the requirements of the new
statement. Significant differences were that securities available for sale
were reported at the lower of aggregate cost or market value, whereas SFAS
No. 115 requires reporting of these securities on an individual fair value
basis. Also, SFAS No. 115 provides stricter requirements and guidance on
the classification of securities among the three reporting categories.
Effective January 1, 1994, the Company adopted SFAS No. 115. Approximately
60% of the Company's insurance operations debt securities are now reported
as securities available for sale with the remainder classified as
securities held to maturity. The Company's relatively small holdings of
equity securities are also reported as securities available for sale.
Trading securities are composed entirely of securities from the Company's
brokerage operations. There was no change in accounting policy for the
trading securities as they were already being recorded at fair value with
fair value changes reflected in earnings.
Upon adoption of the new statement, certain related balance sheet accounts,
deferred federal income tax payable and deferred policy acquisition costs,
were adjusted as if the unrealized gains had actually been realized. For
the Company's universal life and investment annuity contracts, deferred
policy acquisition costs are amortized in relation to the present value of
expected gross profits on these policies. Accordingly, under SFAS No. 115,
deferred policy acquisition costs are adjusted for the impact on estimated
gross profits of net unrealized gains and losses on securities. The
implementation of the new statement had no effect on net earnings of the
Company. However, stockholders' equity was adjusted as follows as of
January 1, 1994:
January 1,
1994
(In thousands)
Fair value adjustment to investments in
debt and equity securities $ 93,788
Less:
Decrease in deferred policy
acquisition costs (52,849)
Increase in deferred federal income taxes (14,329)
Effect of change in accounting for investments
in debt and equity securities $ 26,610
Net unrealized losses on investment securities included in stockholders'
equity at June 30, 1994 and December 31, 1993 are as follows:
June 30, December 31,
1994 1993
(In thousands)
Gross unrealized gains $ 24,994 1,708
Gross unrealized losses (32,120) (2,176)
Adjustments for:
Deferred policy acquisition cots 4,784 -
Deferred Federal income taxes 820 211
Net unrealized losses on
investment securities $ (1,522) (257)
5. The Company's brokerage subsidiary, The Westcap Corporation, incurred
trading losses during March, 1994, totaling $4,394,000, net of taxes and
related expenses. These trading losses have been recorded in the
consolidated financial statements for the three months ended March 31,
1994, and six months ended June 30, 1994. As a result of these losses, the
Company has purchased an additional $4,400,000 of preferred stock of The
Westcap Corporation in 1994 and has agreed to provide a $3,000,000 line of
credit to Westcap. This infusion of capital was important in order for
Westcap to maintain its normal capital position, which is well in excess of
required financial operating ratios.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Investment Philosophy
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
effective January 1, 1994, as more fully described in the notes to the
financial statements. This statement addresses the accounting and
reporting for investments in debt and equity securities and required
classification of such securities into the following categories: held to
maturity, available for sale, and trading. 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.
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, fixed maturities 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 purchased by the Company's brokerage subsidiary that are held
for current resale are classified as trading securities. These securities
are typically held for short periods of time as the intent is to sell them
producing a trading profit. Trading securities are recorded in the
Company's financial statements at fair value. Any trading profits or losses
and unrealized gains or losses resulting from changes in the fair value of
the securities are reflected as a component of income in the Company's
financial statements.
Securities that are not classified as either held to maturity or trading
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 when factors
change 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 individual fair value. Any unrealized gains or losses
resulting from changes in the fair value of the securities are reflected as
a component of stockholders' equity.
As an integral part of its investment philosophy, the Company performs an
ongoing process of monitoring the creditworthiness of issuers within the
entire investment portfolio. Review procedures are 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 credit-related factors.
Additional review procedures are performed on those fair value declines
which are caused by factors other than market expectations regarding
inflation and general interest rates. Specific conditions of the issuer and
its ability to comply with all terms of the instrument are considered in
the evaluation of the realizable value of the investment. Information
reviewed in making this evaluation would include the recent operational
results and financial position of the issuer, information about its
industry, recent press releases and other available data. If evidence does
not exist to support a realizable value equal to or greater than the
carrying value of the investment, such decline in fair value is determined
to be other than temporary, and the carrying amount is reduced to its net
realizable value. The amount of the reduction is reported as a realized
loss.
Portfolio Analysis
At June 30, 1994, securities held to maturity totaled $775 million or 30.0%
of total invested assets. The fair value of these securities was $729
million which reflects gross unrealized losses of $46 million. The
unrealized losses within this portfolio result from the recent increases in
market interest rates.
Securities available for sale totaled $1.104 billion at June 30, 1994, or
42.7% of total invested assets. Equity securities, which are included in
securities available for sale, continue to be a small component of the
Company's total investment portfolio totaling only $28 million. Securities
available for sale are reported in the accompanying financial statements at
fair value with changes in values reported as a separate component of
stockholders' equity. The fair value of this portfolio declined $14.5
million during the quarter ended June 30, 1994, net of effects of deferred
federal income taxes and adjustments to deferred policy acquisition costs.
This decline is also reflective of the recent increase in market interest
rates. The net unrealized loss of this portfolio was $1.5 million at June
30, 1994.
The Company's insurance operations do not maintain a trading securities
portfolio. All trading securities reported in the accompanying financial
statements are held by the Company's brokerage subsidiary, The Westcap
Corporation. These securities totaled $94.2 million at June 30, 1994, or
3.6% of total invested assets. Net increases in the fair values of these
securities totaled approximately $1.5 million for the quarter ended June 30,
1994, and havebeen included in earnings.
The Company's insurance operations maintain a diversified debt securities
portfolio which consists of various types of fixed income securities
including primarily U.S. government, public utilities, corporate and
mortgage-backed securities. Investments in mortgage-backed securities
include U.S. government and private issue mortgage-backed pass-through
securities as well as collateralized mortgage obligations (CMOs).
Mortgage-backed securities are subject to prepayment risk which can affect
portfolio yields. However, the Company substantially reduced its
prepayment risk in 1993 by investing primarily in collateralized mortgage
obligations which have more predictable cash flow patterns than
pass-through securities. The Company increased its holdings of planned
amortization class I (PAC I) CMOs which are designed to amortize in a more
predictable manner than other CMO classes or pass-throughs. This is
achieved by redirecting prepayments to other CMO classes. Due to this
strategy and the recent increase in market interest rates, the Company has
experienced lower principal prepayments in the first six months of 1994.
PAC I tranches continue to account for over 80% of the total CMO portfolio
as of June 30, 1994. The CMOs that the Company purchases are modeled and
subjected to detailed, comprehensive analysis by the Company's investment
staff before any investment decision is made. The overall structure of the
entire CMO is evaluated, and an average life sensitivity analysis is
performed on the individual tranche being considered for purchase under
increasing and decreasing interest rate scenarios. This analysis provides
information used in selecting securities that fit appropriately within the
Company's investment philosophy and asset/liability management parameters.
Based on investment philosophy and current asset/liability analysis, the
Company is limiting it holdings in CMOs to its present level of
approximately 37% of invested assets of the insurance operations. The
Company's investment mix between mortgage-backed securities and other fixed
income securities helps effectively balance prepayment, extension and
credit risks.
The Company also experienced increased calls in 1993 primarily in public
utilities holdings. The Company responded in 1993 with an active approach
in managing future call risk by investing the call proceeds in a more
diverse group of companies with increased call protection. As a result,
the Company's utilities holdings as a percentage of the entire portfolio
was reduced significantly . The Company's restructuring of this portion of
the portfolio has been a factor in the reduction of calls in the six months
ended June 30, 1994.
The Company continues to minimize credit risk within its portfolio by
maintaining high quality investments in debt securities. Attention is
often placed on a company's holdings of below investment grade debt
securities, as these securities generally have greater default risk than
higher rated corporate debt. The issuers of such below investment grade
securities usually have high levels of indebtedness and are more sensitive
to adverse industry or economic conditions than are investment grade
securities issuers. The Company's small holdings of below investment grade
debt securities are summarized as follows:
Below Investment
Grade Debt Securities
% of
Carrying Market Invested
Value Value Assets
(In thousands)
June 30, 1994 $ 22,280 22,201 0.9%
December 31, 1993 $ 24,261 24,223 1.0%
The level of investments in debt securities which are in default as to
principal or interest payments is indicative of the Company's minimal
holdings of below investment grade debt securities. At June 30, 1994, and
December 31, 1993, securities with principal balances totaling only
$3,151,000 were in default and on non-accrual status.
MORTGAGE LOANS AND REAL ESTATE
Investment Philosophy
The Company continues to improve the quality of its mortgage loan portfolio
through strict underwriting guidelines and diversification of underlying
property types and geographic locations. In addition to all mortgage
loans being secured by the property, the majority of loans originated since
1991 are amortized over the term of the lease on the property, which is
guaranteed by the lessee, and are approved based on the credit strength of
the lessee. This approach also enables the Company to choose the locale in
which the property securing the loan is located. In addition, the
Company's underwriting guidelines require a loan-to-value ratio of 75% or
less.
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
currently seeks loans ranging from $500,000 to $11,000,000, with terms
ranging from three to twenty-five years, at interest rates dictated by the
marketplace.
The Company's direct investments in real estate are not a significant
portion of its total investment portfolio. The majority of real estate
owned was acquired through mortgage loan foreclosures. The Company has no
current plans to significantly increase its investments in real estate in
the foreseeable future.
Portfolio Analysis
The Company held net investments in mortgage loans totaling $182,905,000
and $188,920,000, or 7.1% and 7.4% of total invested assets, at June 30,
1994, and December 31, 1993, respectively. The loans are real estate
mortgages substantially all of which are related to commercial properties
and developments and have fixed interest rates.
As of June 30, 1994, the allowance for possible losses on mortgage loans
was $6,155,000. No additions were made to the allowance in the quarter
ended June 30, 1994, as management believes that the current balance 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 region which includes Texas,
Louisiana, Oklahoma, and Arkansas.
The Company currently places all loans past due three months or more on a
non-accrual status, thus recognizing no interest income on the loans. At
June 30, 1994, and December 31, 1993, the Company had approximately
$1,288,000 and $4,191,000, respectively, of mortgage loan principal
balances on a non-accrual status. For the three months ended June 30, 1994
and 1993, the approximate reduction in interest income associated with
non-accrual loans was as follows:
Three Months Ended
June 30,
1994 1993
(In thousands)
Interest income at contract rate $ 35 194
Interest income recognized 15 10
Interest income not accrued $ 20 184
In addition to the non-accrual loans, the Company had mortgage loans with
restructured terms totaling approximately $17,337,000 and $14,257,000 at
June 30, 1994, and December 31, 1993, respectively. For the three months
ended June 30, 1994 and 1993, the approximate reduction in interest income
associated with restructured loans was as follows:
Three Months Ended
June 30,
1994 1993
(In thousands)
Interest income under original terms $ 468 454
Interest income recognized 416 383
Reduction in interest income $ 52 71
The Company owns real estate that was acquired through foreclosure and
through direct investment totaling approximately $23,315,000 and
$22,672,000 at June 30, 1994, and December 31, 1993, 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 small operating losses on these properties
of approximately $157,000 and $71,000 for the three months ended June 30,
1994 and 1993, respectively. The Company does not anticipate significant
changes in these operating results in the near future.
The Company monitors the conditions and market values of these properties
on a regular basis. No significant realized losses were recognized due to
declines in values of properties for the three months ended June 30, 1994
and 1993, respectively. The Company makes repairs and capital improvements
to keep the properties in good condition and will continue this maintenance
as needed. However, the amounts expended for this maintenance have not had
a significant impact on the Company's liquidity and capital resources , and
such maintenance is not foreseen to have a significant impact in the near
future.
RESULTS OF OPERATIONS
The significant changes and fluctuations between the three months ended
June 30, 1994 and 1993 are described in detail as follows:
Premium Revenues: This revenue category represents the premiums on
traditional type products. However, sales in most of the Company's markets
have moved toward non-traditional types such as universal life and
investment annuities. This move in market direction has resulted in a
decrease in revenues in this category over the past several years. Also,
higher than anticipated reinsurance premium expenses reduced premium
revenues for the quarter in comparison to the prior year.
Universal Life and Investment Annuity Contract Revenues: These revenues are
from the Company's non-traditional products which are universal life and
investment annuities. Revenues from these types of products consist of
policy charges for the cost of insurance, policy administration fees and
surrender charges assessed during the period. The decrease from 1993 is
primarily due to lower policy surrenders resulting in reduced surrender
charge revenues.
In addition to the decrease in surrender charge revenues described above,
the Company has experienced a decline in universal life and investment
annuity deposits over the past several years. Much of the decline is due
to the discontinuance of the Company's two-tier annuity products in 1992
and increased competition due to market interest rate conditions. However,
the Company continues to develop new annuity and life products and
continues to contract with new independent marketing organizations to
further strengthen and diversify distribution channels for the sale of such
products. The Company also increased annuity marketing efforts in the
second quarter of 1994 through personnel additions and product enhancements
which have shown positive results to date.
Net Investment Income: Net investment income increased $1, 178,000 from
$46,158,000 in 1993 to $47,336,000 in 1994. The majority of the increase
resulted from additional amortization of discounts on investments in debt
securities.
Brokerage Revenues and Expenses: Second quarter 1994 net earnings from the
Company's brokerage subsidiary, The Westcap Corporation, totaled $1,194,000
or $0.34 per share compared to $5,303,000 or $1.52 per share for the second
quarter of 1993. Adverse bond market conditions due to increasing market
interest rates resulted in lower earnings for the subsidiary.
Other Income: Other income was higher in 1993 as it includes non-recurring
proceeds from a lawsuit settlement totaling $750,000.
Realized Gains on Investments: The Company had realized gains of $390,000
in 1994 compared to $799,000 in 1993. The 1994 realized gains consist
primarily of gains on investments in debt securities called for redemption.
The 1993 gains are net of write-downs totaling $2,382,000 relating to real
estate, mortgage loans and investments in debt securities. No significant
write-downs were recorded in 1994.
Life and Other Policy Benefits: Expenses for 1994 and 1993 were $8.6
million and $9.3 million, respectively. The decrease in expenses is due to
lower life insurance benefit claims.
Other Insurance Operating Expenses: Other insurance operating expenses
declined 10.4% in 1994 due to lower commissions and reduced state guaranty
fund assessments.
The significant changes and fluctuations between the six months ended
June 30, 1994 and 1993 are described in detail as follows:
Universal Life and Investment Annuity Contract Revenues: Consistent with
the second quarter 1994 results described above, universal life and
investment annuity contract revenues have declined slightly from 1993 due
to lower policy surrenders resulting in reduced surrender charge revenues.
Net Investment Income: Net investment income increased $2,139,000, or
2.4%, in 1994 primarily from additional amortization of discounts on
investments in debt securities. Rising market interest rates during the
six month period ended June 30, 1994, has had a minimal effect on
investment income.
Brokerage Revenues and Expenses: Net earnings from The Westcap Corporation
for the six month period ended June 30, 1994, totaled $744,000 or $0.21 per
share compared to $9,543,000 or $2.74 per share for the same period of
1993. The significant decrease in brokerage earnings is due to trading
losses incurred during March, 1994, totaling $4,394,000, net of taxes and
related expenses, and adverse bond market conditions due to increasing
market interest rates as previously described.
Realized Gains on Investments: Realized gains on investments of $2.1
million were recorded in 1994 as compared to $1.3 million for the same
period of 1993. The 1993 gains are net of write-downs relating to real
estate, mortgage loans and investments in debt securities totaling
$4,382,000. The 1994 gains, resulting primarily from debt securities
redemptions, include no significant writedowns.
Life and Other Policy Benefits: Benefit expenses decreased 15.0% due to
lower life insurance benefit claims as previously described for the three
month period. These expenses declined in 1994 to a level which is more
consistent with prior Company experience . Comparative 1993 expenses were
abnormally high due to adverse claims experience.
Amortization of Deferred Policy Acquisition Costs: This expense item
represents the amortization of the costs of acquiring or producing new
business which consists primarily of agents commissions. Such costs are
amortized in direct relation to the anticipated future gross profits of the
applicable blocks of business. Amortization for 1994 was $17,397,000
compared to $18,871,000 for 1993. The decrease in amortization in 1994
directly correlates to the decrease in policy surrenders and surrender
charge revenues.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the Company are met primarily by funds
provided from the life insurance operations. Policy 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. The Company's brokerage subsidiary uses revolving lines of credit
to complement any funds generated from operations. These lines of credit
are used primarily for clearing functions for all securities transactions
with its customers. National Western also has a $60 million bank line of
credit. The line of credit is primarily used for cash management purposes
relating to investment transactions.
Most of the Company's assets, other than policy loans and deferred policy
acquisition costs, are invested in bonds and other securities,
substantially all of which are readily marketable. Although there is no
present need or intent to dispose of such investments, the Company could
liquidate portions of the investments should the need arise. Additionally,
the Company has use of the line of credit for short-term liquidity needs
for periods not exceeding 30 days. The Company expects future cash flows to
be adequate to meet the demands for funds.
The Company had no long-term debt during 1994 or 1993. There are no present
material commitments for capital expenditures in 1994, and the Company does
not anticipate incurring any such commitments through the remainder of
1994.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Part 1 - Exhibit 11: Computation of Earnings Per Common Share
(b) Reports on Form 8-K: There were no reports on Form 8-K filed
during the quarter ended June 30, 1994.
EXHIBIT 11
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
For the Three Months Ended June 30, 1994 and 1993
(Unaudited)
(In Thousands Except Per Share Data)
1994 1993
Earnings applicable to common shares:
Net earnings $ 10,194 13,746
Weighted average common shares outstanding 3,485 3,481
Earnings per common share:
Net earnings $ 2.93 3.95
EXHIBIT 11
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
For the Six Months Ended June 30, 1994 and 1993
(Unaudited)
(In Thousands Except Per Share Data)
1994 1993
Earnings applicable to common shares:
Earnings before cumulative effect of
change in accounting principle $ 18,705 24,081
Cumulative effect of change in
accounting for income taxes - 5,520
Net earnings 18,705 29,601
Weighted average common shares outstanding 3,485 3,481
Earnings per common share:
Earnings before cumulative effect of
change in accounting principle $ 5.37 6.92
Cumulative effect of change in
accounting for income taxes - 1.58
Net earnings $ 5.37 8.50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Western Life Insurance Company
(Registrant)
Date: August 11, 1994 /S/ Ross R. Moody
Ross R. Moody
President and Chief Operating Officer
Date: August 11, 1994 /S/ Robert L. Busby, III
Robert L. Busby, III
Senior Vice President -
Chief Administrative Officer,
Chief Financial Officer
and Treasurer