UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 2-17039
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
COLORADO 84-0467208
(State of Incorporation) (I.R.S. Employer Identification Number)
850 EAST ANDERSON LANE
AUSTIN, TEXAS 78752-1602 (512) 836-1010
(Address of Principal Executive Offices) (Telephone Number)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days:
Yes [ X ] No [ ]
As of November 11, 1996, the number of shares of Registrant's common stock
outstanding was: Class A - 3,291,338 and Class B - 200,000.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
INDEX
Part I. Financial Information: Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1996 (Unaudited) and December 31, 1995
Condensed Consolidated Statements of Operations -
For the Three Months Ended September 30, 1996 and 1995 (Unaudited)
Condensed Consolidated Statements of Operations -
For the Nine Months Ended September 30, 1996 and 1995 (Unaudited)
Condensed Consolidated Statements of Stockholders' Equity -
For the Nine Months Ended September 30, 1996 and 1995 (Unaudited)
Condensed Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 1996 and 1995 (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 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit 11 - Computation of Earnings per Share -
For the Three Months Ended September 30, 1996 and 1995 (Unaudited)
Exhibit 11 - Computation of Earnings per Share -
For the Nine Months Ended September 30, 1996 and 1995 (Unaudited)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
September 30, December 31,
ASSETS 1996 1995
Cash and investments:
Securities held to maturity,
at amortized cost $ 1,809,197 1,643,211
Securities available for sale,
at fair value 533,935 600,794
Mortgage loans, net of allowances
for possible
losses ($5,668 and $5,668) 195,437 191,674
Policy loans 145,334 147,923
Other long-term investments 23,731 30,970
Cash and short-term investments 18,402 10,024
Total cash and investments 2,726,036 2,624,596
Accrued investment income 36,978 36,127
Deferred policy acquisition costs 295,252 270,167
Other assets 12,109 21,392
Assets of discontinued operations 1,416 6,177
$ 3,071,791 2,958,459
<FN>
Note: The balance sheet at December 31, 1995, has been taken from the
audited financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
</FN>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Shares Outstanding)
(Unaudited)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
LIABILITIES:
Future policy benefits:
Traditional life and annuity products $ 172,842 174,946
Universal life and investment
annuity contracts 2,495,538 2,401,098
Other policyholder liabilities 20,997 22,833
Federal income taxes payable:
Current 1,724 413
Deferred 7,575 12,287
Other liabilities 35,299 28,718
Liabilities of discontinued operations 1,416 6,177
Total liabilities 2,735,391 2,646,472
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Common stock:
Class A - $1 par value: 7,500,000
shares authorized; 3,291,338 shares
issued and outstanding in 1996 and 1995 3,291 3,291
Class B - $1 par value: 200,000
shares authorized, issued
and outstanding in 1996 and 1995 200 200
Additional paid-in capital 24,647 24,647
Net unrealized gains on
investment securities 6,464 15,195
Retained earnings 301,798 268,654
Total stockholders' equity 336,400 311,987
$ 3,071,791 2,958,459
<FN>
Note: The balance sheet at December 31, 1995, has been taken from the
audited financial statements at that date.
See accompanying notes to condensed consolidated financial statements.
</FN>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 1996 and 1995
(Unaudited)
(In Thousands Except Per Share Amounts)
1996 1995
Premiums and other revenue:
Life and annuity premiums $ 3,206 4,381
Universal life and investment annuity
contract revenues 19,155 17,236
Net investment income 54,778 50,317
Other income 32 26
Realized losses on investments (446) (2,030)
Total premiums and other revenue 76,725 69,930
Benefits and expenses:
Life and other policy benefits 8,902 8,813
Change in liabilities for future
policy benefits (1,009) (621)
Amortization of deferred policy
acquisition costs 5,945 7,429
Universal life and investment annuity
contract interest 37,568 37,155
Other insurance operating expenses 5,997 5,993
Total benefits and expenses 57,403 58,769
Earnings from continuing operations
before Federal income taxes 19,322 11,161
Provision (benefit) for Federal income
taxes:
Current 6,178 (1,853)
Deferred 584 1,230
Total Federal income taxes 6,762 (623)
Earnings from continuing operations 12,560 11,784
Losses from discontinued operations - (13,133)
Net earnings (losses) $ 12,560 (1,349)
Earnings (losses) per share of common stock:
Earnings from continuing operations $ 3.59 3.38
Losses from discontinued operations - (3.77)
Net earnings (losses) $ 3.59 (0.39)
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 1996 and 1995
(Unaudited)
(In Thousands Except Per Share Amounts)
1996 1995
Premiums and other revenue:
Life and annuity premiums $ 11,799 13,061
Universal life and investment annuity
contract revenues 57,998 51,390
Net investment income 159,461 149,161
Other income 1,171 611
Realized gains (losses) on investments 1,275 (1,729)
Total premiums and other revenue 231,704 212,494
Benefits and expenses:
Life and other policy benefits 26,393 29,033
Change in liabilities for future policy
benefits (1,924) (2,489)
Amortization of deferred policy
acquisition costs 21,733 24,522
Universal life and investment annuity
contract interest 115,522 107,603
Other insurance operating expenses 18,989 19,973
Total benefits and expenses 180,713 178,642
Earnings from continuing operations
before Federal income taxes 50,991 33,852
Provision (benefit) for Federal income
taxes:
Current 18,085 5,812
Deferred (238) 305
Total Federal income taxes 17,847 6,117
Earnings from continuing operations 33,144 27,735
Losses from discontinued operations (net of
Federal income taxes of $179 in 1995) - (16,350)
Net earnings $ 33,144 11,385
Earnings (losses) per share of common stock:
Earnings from continuing operations $ 9.49 7.95
Losses from discontinued operations - (4.69)
Net earnings $ 9.49 3.26
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine months Ended September 30, 1996 and 1995
(Unaudited)
(In Thousands)
1996 1995
Common stock shares outstanding:
Shares outstanding at beginning of year
and end of period 3,491 3,488
Common stock:
Balance at beginning of year and
end of period $ 3,491 3,488
Additional paid-in capital:
Balance at beginning of year and
end of period 24,647 24,475
Net unrealized gains (losses) on securities
available for sale, net of effects of
deferred policy acquisition costs and taxes:
Balance at beginning of year 15,195 (2,199)
Change in unrealized gains (losses)
during period (7,856) 10,016
Amortization of net unrealized gains
related to transfers of
securities available for sale to
securities held to maturity (875) (740)
Balance at end of period 6,464 7,077
Retained earnings:
Balance at beginning of year 268,654 249,370
Net earnings 33,144 11,385
Balance at end of period 301,798 260,755
Total stockholders' equity $ 336,400 295,795
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1996 and 1995
(Unaudited)
(In Thousands)
1996 1995
Cash flows from operating activities:
Net earnings $ 33,144 11,385
Adjustments to reconcile net
earnings to net cash
from operating activities:
Universal life and investment annuity
contract interest 115,522 107,603
Surrender charges (30,924) (25,313)
Realized (gains) losses on investments (1,275) 1,729
Accrual and amortization of
investment income (5,370) (5,543)
Depreciation and amortization 525 451
Increase in insurance receivables
and other assets (1,210) (1,176)
Increase in accrued investment income (851) (1,992)
Increase in deferred policy
acquisition costs (8,526) (11,410)
Decrease in liability for future
policy benefits (1,924) (2,489)
Increase (decrease) in other
policyholder liabilities (1,836) 1,831
Increase (decrease) in Federal income
taxes payable 11,569 (4,016)
Increase in other liabilities 6,581 2,858
Net cash provided by operating activities 115,425 73,918
Cash flows from investing activities:
Proceeds from sales of:
Securities held to maturity - 7,720
Securities available for sale 31,060 42,374
Other investments 1,608 1,048
Proceeds from maturities and
redemptions of:
Securities held to maturity 53,288 36,915
Securities available for sale 23,375 5,757
Purchases of:
Securities held to maturity (220,276) (159,837)
Securities available for sale (10,514) (130,066)
Other investments (2,724) (5,281)
Principal payments on mortgage loans 19,535 12,207
Cost of mortgage loans acquired (14,622) (14,573)
Decrease in policy loans 2,589 1,748
Decrease in assets of discontinued
operations 4,761 225,880
Decrease in liabilities of
discontinued operations (4,761) (209,153)
Other (207) (651)
Net cash used in investing activities (116,888) (185,912)
<FN>
(Continued on next page)
</FN>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Nine Months Ended September 30, 1996 and 1995
(Unaudited)
(In Thousands)
1996 1995
Cash flows from financing activities:
Deposits to account balances
for universal life
and investment annuity contracts $ 227,077 280,533
Return of account balances
on universal life
and investment annuity contracts (217,236) (179,989)
Net cash provided by financing activities 9,841 100,544
Net increase (decrease) in cash
and short-term investments 8,378 (11,450)
Cash and short-term investments at
beginning of year 10,024 17,723
Cash and short-term investments
at end of period $ 18,402 6,273
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
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, NWL Investments,
Inc., NWL Properties, Inc., and NWL 806 Main, Inc. The Westcap
Corporation ceased brokerage operations during 1995 and, as a result, is
reflected as discontinued operations in the accompanying financial
statements. All significant intercorporate transactions and accounts have
been eliminated in consolidation.
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the
financial position of the Company as of September 30, 1996, and the
results of its operations for the three months and nine months ended
September 30, 1996 and 1995 and its cash flows for the nine months ended
September 30, 1996 and 1995. The results of operations for the three months
and nine months ended September 30, 1996 and 1995 are not necessarily
indicative of the results to be expected for the full year.
(2) DIVIDENDS
The Company paid no cash dividends on common stock during the nine months
ended September 30, 1996 and 1995.
(3) DISCONTINUED BROKERAGE OPERATIONS
On April 12, 1996, The Westcap Corporation and its wholly owned
s u b sidiary, Westcap Enterprises, Inc., separately filed voluntary
petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code
in the United States Bankruptcy Court, Southern District of Texas, Houston
Division. The Westcap Corporation is the successor by merger to Westcap
Securities Investment, Inc., and Westcap Securities Management, Inc.
W e stcap Enterprises, Inc. is the successor by merger to Westcap
Securities, L.P. The Westcap Corporation is a wholly owned brokerage
subsidiary of National Western Life Insurance Company (National Western).
The plan of reorganization filed in the Bankruptcy Court provides for the
m e rger of Westcap Enterprises, Inc. into The Westcap Corporation
(Westcap), with the survivor to conduct business as a real estate
investment trust under sections 856-58 of the Federal Tax Code. National
Western has agreed to participate in the Westcap plan of reorganization by
contributing approximately $5,000,000 of cash and $5,000,000 of income
producing real estate properties in exchange for a complete settlement and
release of any claims by Westcap against National Western and a continuing
equity interest in the reorganized entity. The reorganization plan is
subject to and is pending approval by Westcap s creditors and the
Bankruptcy Court.
As previously reported, National Western's investment in Westcap was
completely written off during 1995 as losses of the subsidiary were
recognized on a consolidated basis until the subsidiary's equity was
reduced to zero. Additional losses relating to the above-mentioned
contributions will depend primarily on results of Westcap bankruptcy
proceedings.
(4) STOCK AND INCENTIVE PLAN
On April 19, 1996, the Compensation and Stock Option Committee approved
the issuance of an additional 33,000 non-qualified stock options to
selected officers of the Company. The options were granted under the
National Western Life Insurance Company 1995 Stock and Incentive Plan
(Plan).
The stock options begin to vest following three full years of service to
the Company after date of grant, with 20% of the options to vest at the
beginning of the fourth year of service, and with 20% thereof to vest at
the beginning of each of the next four years of service. The exercise
price of the stock options was set at the fair market value of the common
stock on the date of grant. Total outstanding stock options under the
Plan totaled 92,500 at September 30, 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
i n vestments in debt securities to maturity. However, the Company
continually 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 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. At September 30, 1996,
approximately 22.8% of the Company's total debt and equity securities,
based on fair values, were classified as securities available for sale.
These holdings provide flexibility to the Company to react to market
opportunities and conditions and to practice active management within the
portfolio to provide adequate liquidity to meet policyholder obligations
and other cash needs.
Securities the Company purchases with the intent to hold to maturity are
classified as securities held to maturity. Because the Company has strong
cash flows and matches expected maturities of assets and liabilities, the
Company has the ability to hold the securities, as it would be unlikely
that forced sales of securities would be required prior to maturity to
cover payments of liabilities. As a result, securities held to maturity
are carried at amortized cost less declines in value that are other than
temporary. However, certain situations may change the Company's intent to
hold a particular security to maturity, the most notable of which is a
deterioration in the issuer's creditworthiness. Accordingly, a security
may be sold to avoid a further decline in realizable value when there has
been a significant change in the credit risk of the issuer.
Securities that are held for current resale are classified as trading
securities, as the intent is to sell them, producing a trading profit.
The Company does not maintain a portfolio of trading securities.
Securities that are not classified as either held to maturity or trading
securities 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
s e curity 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 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
investment portfolio. In addition, 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 other factors.
The Company's overall conservative investment philosophy is reflected in
the allocation of investments of its insurance operations which is
detailed below as of September 30, 1996 and December 31, 1995. The
Company emphasizes debt securities, with smaller holdings in mortgage
loans and real estate than industry averages.
Allocation
of Investments
September 30, December 31,
1996 1995
Debt securities 85.2% 84.5%
Mortgage loans 7.2 7.3
Policy loans 5.3 5.6
Equity securities 0.7 1.0
Real estate 0.6 0.7
Other 1.0 0.9
Totals 100.0% 100.0%
Portfolio Analysis
The Company maintains 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
s e curities. Investments in mortgage-backed securities include U.S.
government and private issue mortgage-backed pass-through securities as
well as collateralized mortgage obligations (CMOs).
At September 30, 1996, securities held to maturity totaled $1.809 billion
or 66.4% of total invested assets. The fair value of these securities was
$1.808 billion which reflects gross unrealized losses of about $1 million
as of September 30, 1996. However, this reflects a $10 million unrealized
gain during the third quarter of 1996, due primarily to decreases in
market interest rates. Market interest rates fell slightly during the
quarter ended September 30, 1996, compared to a rise in interest rates
during the second quarter of 1996.
Securities available for sale totaled $533.9 million at September 30,
1996. 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 $20 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, net of taxes and adjustments to deferred policy acquisition costs.
Net unrealized gains on these securities totaled $4.2 million at September
30, 1996, reflecting an increase of $300,000 from June 30, 1996, due to
decreasing market interest rates as previously described.
An important aspect 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 and
calls, the Company takes steps to manage and minimize such risks. More
specifically, the Company has been increasing its holdings in noncallable
corporate securities during 1995 and 1996. Corporate holdings as a
percentage of the entire portfolio now represent over 40% in 1996.
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
substantially reduces both prepayment and extension risks by investing
p r i marily 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.
PAC I CMOs account for approximately 91% of the total CMO portfolio as of
September 30, 1996. 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.
The Company's investment mix between mortgage-backed securities and other
fixed income securities helps effectively balance prepayment, extension,
and credit risks.
In addition to managing prepayment, extension, and call risks, the Company
continues to maintain a high credit quality portfolio. Much 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. These issuers usually have high levels of
indebtedness and are more sensitive to adverse industry or economic
conditions than are investment grade issuers. The Company's small holdings
of below investment grade debt securities, which are summarized as
follows, have increased slightly from 1995 primarily due to several
corporate issuers that had ratings downgraded.
Below Investment
Grade Debt Securities
% of
Carrying Market Invested
Value Value Assets
(In thousands)
September 30, 1996 $ 18,249 18,180 0.7%
December 31, 1995 $ 14,244 14,567 0.5%
December 31, 1994 $ 31,861 28,670 1.4%
The level of investments in debt securities which are in default as to
principal or interest payments is indicative of the Company's high quality
portfolio. At September 30, 1996, and December 31, 1995, securities with
principal balances totaling $2,945,000 and $3,575,000, respectively, were
in default and on non-accrual status.
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 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 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, implemented in 1991, has significantly improved the quality
of the Company's mortgage loan portfolio and reduced defaults.
The Company's direct investments in real estate are not a significant
portion of its total investment portfolio, and the majority of real estate
owned was acquired through mortgage loan foreclosures. However, the
Company is also currently participating in several real estate joint
ventures and limited partnerships. The joint ventures and partnerships
invest primarily in income-producing retail properties. While not a
significant portion of the Company's investment portfolio, the investments
have produced favorable returns to date and increased investment income
significantly for the quarter ended September 30, 1996. NWL Investments
I, L.P. sold several of these interests in real estate joint ventures on
September 30, 1996. The sales resulted in additional investment income
totaling approximately $2,300,000 for the third quarter of 1996.
Portfolio Analysis
The Company held net investments in mortgage loans totaling $195,437,000
and $191,674,000, or 7.2% and 7.3% of total invested assets, at September
30, 1996, and December 31, 1995, respectively. The loans are real estate
mortgages, substantially all of which are related to commercial properties
and developments and have fixed interest rates.
The diversification of the mortgage loan portfolio by geographic regions
of the United States and by property type as of September 30, 1996 and
December 31, 1995, was as follows:
September 30, December 31,
1996 1995
West South Central 53.0% 54.0%
Mountain 15.0 12.9
South Atlantic 8.7 9.2
Other 23.3 23.9
Totals 100.0% 100.0%
September 30, December 31,
1996 1995
Retail 63.5% 67.0%
Office 19.8 15.9
Hotel/Motel 7.8 8.3
Other 8.9 8.8
Totals 100.0% 100.0%
As of September 30, 1996, the allowance for possible losses on mortgage
loans was $5,668,000. No additions were made to the allowance in the
quarter ended September 30, 1996, 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 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
non-accrual status and no interest income is recognized during this
period. 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 September 30,
1996 and 1995, the reductions in interest income due to non-accrual and
restructured mortgage loans were not significant.
The Company owns real estate that was acquired through foreclosure and
through direct investment totaling approximately $15,752,000 and
$19,066,000 at September 30, 1996, and December 31, 1995, 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 gains on these
properties of approximately $114,000 and $45,000 for the three months
ended September 30, 1996, and 1995. 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 September 30,
1996 and 1995, respectively. The Company makes repairs and capital
improvements to keep the properties in good condition and will continue
this maintenance as needed.
RESULTS OF OPERATIONS
Summary of Consolidated Operations
A summary of operating results for the periods ended September 30, 1996
and 1995 is provided below:
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
(In thousands except per share data)
Revenues:
Insurance revenues
excluding realized
gains (losses)
on investments $ 77,171 71,960 230,429 214,223
Realized gains
(losses)
on investments (446) (2,030) 1,275 (1,729)
Total revenues $ 76,725 69,930 231,704 212,494
Earnings:
Earnings from
insurance operations $ 12,850 13,103 32,315 28,858
Losses from
discontinued
brokerage operations - (13,133) - (16,350)
Net realized
gains (losses)
on investments (290) (1,319) 829 (1,123)
Net earnings
(losses) $ 12,560 (1,349) 33,144 11,385
Earnings Per Share:
Earnings from
insurance operations $ 3.68 3.76 9.26 8.27
Losses from
discontinued
brokerage operations - (3.77) - (4.69)
Net realized
gains (losses)
on investments (0.09) (0.38) 0.23 (0.32)
Net earnings
(losses) $ 3.59 (0.39) 9.49 3.26
Significant changes and fluctuations in income and expense items between
the three months ended September 30, 1996 and 1995 are described in detail
for insurance operations and discontinued brokerage operations as follows:
Insurance Operations
Insurance Operations Net Earnings: Earnings from insurance operations for
the quarter ended September 30, 1996, were $12,850,000 compared to
$13,103,000 for the third quarter of 1995. However, the 1995 earnings
include a $4.5 million tax benefit resulting from the Company's subsidiary
brokerage operations. Excluding the tax benefit, 1996 third quarter earnings
increased $4,247,000 over comparable 1995 earnings. This increase in
earnings was primarily due to higher net investment income and revenues from
universal life and annuity products. Increases in net investment income
totaling $1.5 million, net of taxes, were from non-recurring gains from
several of the Company s investments in real estate joint ventures.
Life and Annuity Premiums: This revenue category represents the premiums
on traditional type products. The decrease in premiums in 1996 compared to
1995 resulted primarily from an experience-rated adjustment totaling
approximately $1,300,000 in reinsurance premiums on the Company's accidental
death benefit life insurance business.
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. These revenues increased
from $17,236,000 for the quarter ended September 30, 1995, to $19,155,000
for the same 1996 period. Increases totaling $1,223,000 in surrender
charge revenues provided the majority of the increase in these contract
revenues. Increases in cost of insurance revenues, primarily from
increased universal life insurance in force, totaled $436,000.
Actual universal life and investment annuity deposits collected for the
quarters ended September 30, 1996, 1995, and 1994, are detailed below.
Deposits collected on these non-traditional 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.
Three Months Ended September 30,
1996 1995 1994
(In thousands)
Investment annuities $ 61,815 76,211 43,102
Universal life insurance 16,414 16,748 16,915
Totals $ 78,229 92,959 60,017
Prior to 1993, most of the Company's investment annuity production was
from the sale of two-tier annuity products. However, in the third quarter
of 1992, the Company discontinued sales of all two-tier annuities due to
declines in sales and certain regulatory issues concerning two-tier
products. The vast majority of the two-tier annuities were sold by a
single independent marketing organization.
Subsequent to discontinuing the two-tier annuity sales, the Company set
goals to not only develop new annuity products to replace the lost
two-tier production, but to diversify and strengthen distribution channels
to avoid dependence on one primary independent marketing organization.
The Company achieved this by developing new annuity products in 1994 and
by contracting new marketing organizations with extensive experience,
financial resources, and success in marketing life and annuity products.
The combination of new products, primarily a single premium deferred
annuity, and new marketing organizations started to produce results in the
latter half of 1994 as annuity production began to increase significantly.
This increased production continued throughout 1995. Although annuity
deposits have slowed in 1996, production continues to be significantly
higher under the more diversified distribution system.
The majority of the Company's universal life insurance production is from
the international market, primarily Central and South American countries.
The Company has seen increased competition in the Central and South
American market in recent years causing production growth to slow.
However, the Company has been accepting policies from foreign nationals
for almost thirty years and has developed strong relationships with
carefully selected brokers in the foreign countries. This experience and
strong broker relations have enabled the Company to meet the increased
competition with new product enhancements and marketing efforts. The
Company's strategic plans for the international market include development
of additional life insurance products to complement the universal life
portfolio and the continued acceptance of new broker/agents from existing
agencies in Latin America.
Net Investment Income: Net investment income increased 8.9% from the
third quarter of 1995. The increase was from increases in invested assets
and from gains from real estate joint ventures. NWL Investments I, L.P.
sold several real estate joint venture interests on September 30, 1996.
The sales resulted in additional investment income totaling approximately
$2,300,000 for the third quarter of 1996.
Realized Gains (Losses) on Investments: The Company had realized losses of
$446,000 and $2,030,000 in 1996 and 1995, respectively. The realized
losses resulted primarily from sales of investments in debt securities and
preferred stock. The Company made the decision to realize losses in 1995
in order to obtain tax benefits related to the losses which were scheduled
to expire on December 31, 1995. The losses were primarily from sales of
the Company's remaining investments in principal exchange rate linked
securities. The 1996 losses were also realized for similar tax planning
purposes. No significant writedowns on investments were recorded in 1996
or 1995.
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. 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. Amortization was about $1.5
million lower in 1996 compared to 1995 primarily due to changes in the
timing and increases in the levels of anticipated future gross profits for
certain blocks of business.
Federal Income Taxes: Federal income taxes for 1996 reflect an effective
tax rate of 35% which is the current statutory rate. However, Federal
income taxes for the three months ended September 30, 1995, reflect a tax
benefit of $623,000 although earnings from continuing operations before
taxes totaled $11,161,000 for the same period. This result is due to a
$4.5 million tax benefit resulting from the Company's subsidiary brokerage
operations losses. This tax benefit was reflected in earnings from
continuing operations in accordance with the Company's tax allocation
agreement with its subsidiaries.
Discontinued Brokerage Operations
No earnings or losses were reported for discontinued brokerage operations
for the third quarter of 1996 as National Western's investment in The
Westcap Corporation was written-off in 1995, and there have been no
significant changes in estimated costs to cease operations. Losses from
discontinued operations totaled $13,133,000, or $3.77 per share, for the
quarter ended September 30, 1995.
As described in note 3 to the accompanying financial statements, Westcap
and its wholly owned subsidiary separately filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code on April 12,
1996. National Western has agreed to participate in the Westcap plan of
reorganization by contributing approximately $5,000,000 of cash and
$5,000,000 of income producing real estate properties in exchange for a
complete settlement and release of any claims by Westcap against National
Western and a continuing equity interest in the reorganized entity.
Additional losses relating to the contributions will depend primarily on
results of Westcap bankruptcy proceedings.
Significant changes and fluctuations in income and expense items between
the nine months ended September 30, 1996 and 1995 are described in detail
for insurance and brokerage operations as follows:
Insurance Operations
Insurance Operations Net Earnings: Earnings from insurance operations
increased $3,457,000, or $0.99 per share, compared to the first nine
months of 1995. However, 1995 earnings were also higher due to a $5.6
million tax benefit resulting from the Company s subsidiary brokerage
operations. Excluding the tax benefit, earnings for the nine months ended
September 30, 1996, increased $9,057,000 over comparable 1995 earnings.
The significant increase in earnings is attributable to a number of
factors including: (a) increases in universal life and annuity contract
revenues primarily from surrender charge revenues, (b) increases in net
investment income including non-recurring gains from real estate joint
ventures, (c) decreases in benefits and expenses including lower life
insurance benefit claims, lower operating expenses, and lower amortization
of deferred policy acquisition costs, and (d) non-recurring income from a
lawsuit settlement.
Universal Life and Investment Annuity Contract Revenues: For the nine
months ended September 30, 1996, these revenues increased $6,608,000
compared to the 1995 period. Increases totaling $4,764,000 in surrender
charge revenues resulted in the majority of the increase in these contract
revenues. Increases in cost of insurance revenues, primarily from
increased universal life insurance in force, totaled $1,035,000.
Actual universal life and investment annuity deposits collected for the
nine months ended September 30, 1996, 1995, and 1994, are detailed below.
Deposits collected on these non-traditional 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.
Nine Months Ended September 30,
1996 1995 1994
(In thousands)
Investment annuities $ 204,296 254,837 86,746
Universal life insurance 49,855 51,773 47,941
Totals $ 254,151 306,610 134,687
Net Investment Income: Net investment income increased $10,300,000 from
$149,161,000 in 1995 to $159,461,000 in 1996, primarily due to the same
reasons as previously described for the three months ended September 30,
1996.
Other Income: Other income increased significantly from $611,000 in 1995
to $1,171,000 in 1996. The increase was due to proceeds received in 1996
from a lawsuit settlement totaling $850,000. The lawsuit related to the
Company's previous investment in a mortgage loan.
Realized Gains (Losses) on Investments: The Company recognized realized
gains of $1,275,000 in 1996 compared to realized losses of $1,729,000 in
1995. The 1996 realized gains, resulting primarily from sales of real
estate and investments in debt securities, include no significant write-
downs. The 1995 realized losses were primarily from write-downs and sales
of investments in debt securities. The losses were realized for tax
purposes as previously described for the three months ended September 30,
1995.
Life and Other Policy Benefits: Expenses in 1996 and 1995 were $26.4
million and $29.0 million, respectively. The significant decrease in
expenses is due to lower life insurance benefit claims. The 1995 expenses
were abnormally high due to adverse claims experience in the first
quarter. Throughout the Company's history, it has experienced both
periods of higher and lower benefit claims in comparison to Company
averages. The first quarter of 1995 reflects such a period as benefit
claims were significantly higher. Such deviations are not uncommon in the
life insurance industry and, over extended periods of time, tend to be
offset by periods of lower claims experience.
Amortization of Deferred Policy Acquisition Costs: Amortization was down
$2,789,000 from $24,522,000 in 1995 to $21,733,000 in 1996 for the same
reasons as previously described for the three months ended September 30,
1996.
Universal Life and Investment Annuity Contract Interest: Interest expense
was up $7,919,000 from $107,603,000 in 1995 to $115,522,000 in 1996.
Increases in annuity production, resulting in corresponding increases in
policy liabilities, are the primary reasons for the higher expenses.
Other Insurance Operating Expenses: Other insurance operating expenses
were down $984,000 in 1996 due primarily to lower state guaranty fund
assessment expenses.
Federal Income Taxes: Federal income taxes for 1996 reflect an effective
tax rate of 35% which is the current statutory rate. However, the 1995
taxes reflect a significantly lower effective tax rate of 18%. Federal
income taxes for the nine months ended September 30, 1995, include tax
benefits of $5.6 million resulting from the Company's subsidiary brokerage
operations losses. The tax benefits were reflected in earnings from
continuing operations in accordance with the Company's tax allocation
agreement with its subsidiaries.
Discontinued Brokerage Operations
Consistent with the results reported for the first three quarters of 1996,
no earnings or losses were reported for discontinued brokerage operations
for the nine months ended September 30, 1996, as National Western's
investment in The Westcap Corporation was written-off in 1995, and there
have been no significant changes in estimated costs to cease operations.
Losses from discontinued operations totaled $16,350,000, or $4.69 per
share, for the nine months ended September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The liquidity requirements of the Company are met primarily by funds
provided from operations. Premium deposits and revenues, investment
income, and investment maturities are the primary sources of funds, while
investment purchases and policy benefits are the primary uses of funds.
Primary sources of liquidity to meet cash needs are the Company's
securities available for sale portfolio, net cash provided by operations,
and bank line of credit. The Company's investments consist primarily of
marketable debt securities that could be readily converted to cash for
liquidity needs. The Company may also borrow up to $60 million on its
bank line of credit for short-term cash needs.
A primary liquidity concern for the Company's 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 $115.4 million and $73.9 million for the nine months ended
September 30, 1996 and 1995, respectively. Additionally, net cash flows
from the Company's deposit product operations, which includes universal
life and investment annuity products, totaled $9.8 million and $100.5
million for the nine months ended September 30, 1996 and 1995,
respectively. The decrease in cash flows in 1996 was due primarily to
lower universal life and annuity deposits and higher policy surrenders.
The Company also has significant cash flows from both scheduled and
unscheduled investment security maturities, redemptions, and prepayments.
These cash flows totaled $76.7 million and $42.7 million for the nine
months ended September 30, 1996 and 1995, respectively. The Company again
expects significant cash flows from these sources throughout the remainder
of 1996.
Capital Resources
The Company relies on stockholders' equity for its capital resources, as
there has been no long-term debt outstanding in 1996 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 1996.
Stockholders' equity totaled $336.4 million at September 30, 1996,
reflecting an increase of $24.4 million from December 31, 1995. The
increase in capital is primarily from net earnings of $33.1 million,
offset by a decline in net unrealized gains on investment securities
totaling $8.7 million during the first nine months of 1996. The overall
increase in market interest rates since December 31, 1995, resulted in the
significant decrease in unrealized gains. Book value per share at
September 30, 1996, was $96.35.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 12, 1996, The Westcap Corporation and its wholly owned subsidiary,
Westcap Enterprises, Inc., separately filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United
States Bankruptcy Court, Southern District of Texas, Houston Division as
more fully described in note 3 to the accompanying financial statements.
Other than the proceedings described above and those previously described
in the Company's 1995 Form 10-K, no other legal proceedings presently
pending by or against the Company or its subsidiaries are described,
because management believes the outcome of such litigation should not have
a material adverse effect on the financial position of the Company or its
subsidiaries taken as a whole.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 - Computation of Earnings Per Share (filed on pages __ and __
of this report).
Exhibit 27 - Financial Data Schedule (filed electronically pursuant to
Regulation S-K).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Western Life Insurance Company
(Registrant)
Date: November 11, 1996 /S/ Ross R. Moody
Ross R. Moody
President and Chief
Operating Officer
Date: November 11, 1996 /S/ Robert L. Busby, III
Robert L. Busby, III
Senior Vice President -
Chief Administrative
Officer, Chief Financial
Officer and Treasurer