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, 1997
[ ] 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 Office) (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 13, 1997, 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 -
March 31, 1997 (Unaudited) and December 31, 1996
Condensed Consolidated Statements of Earnings -
For the Three Months Ended March 31, 1997 and 1996 (Unaudited)
Condensed Consolidated Statements of Stockholders' Equity -
For the Three Months Ended March 31, 1997 and 1996 (Unaudited)
Condensed Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 1997 and 1996 (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
Signatures
Exhibit 11 - Computation of Earnings per Share -
For the Three Months Ended March 31, 1997 and 1996 (Unaudited)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
March 31, December 31,
ASSETS 1997 1996
Cash and investments:
Securities held to maturity,
at amortized cost $ 1,917,284 1,873,561
Securities available for sale,
at fair value 510,349 527,627
Mortgage loans, net of allowances for
possible losses ($4,540 and $5,988) 190,022 193,311
Policy loans 139,701 142,077
Other long-term investments 24,470 22,997
Cash and short-term investments 11,106 11,358
Total cash and investments 2,792,932 2,770,931
Accrued investment income 38,495 39,503
Deferred policy acquisition costs 298,865 295,666
Other assets 16,478 13,472
Assets of discontinued operations 1,523 1,257
$ 3,148,293 3,120,829
<FN>
Note: The balance sheet at December 31, 1996 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)
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
LIABILITIES:
Future policy benefits:
Traditional life and annuity products $ 171,799 172,565
Universal life and investment
annuity contracts 2,546,163 2,529,307
Other policyholder liabilities 26,010 24,403
Federal income taxes payable:
Current 2,387 -
Deferred 11,421 11,910
Other liabilities 31,580 28,527
Liabilities of discontinued operations 1,523 1,257
Total liabilities 2,790,883 2,767,969
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 1997 and 1996 3,291 3,291
Class B - $1 par value; 200,000 shares
authorized, issued,
and outstanding in 1997 and 1996 200 200
Additional paid-in capital 24,647 24,647
Net unrealized gains on
investment securities 6,952 9,853
Foreign currency translation adjustment 1,699 -
Retained earnings 320,621 314,869
Total stockholders' equity 357,410 352,860
$ 3,148,293 3,120,829
<FN>
Note: The balance sheet at December 31, 1996 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 EARNINGS
For the Three Months Ended March 31, 1997 and 1996
(Unaudited)
(In Thousands Except Per Share Amounts)
1997 1996
Premiums and other revenue:
Life and annuity premiums $ 3,720 4,274
Universal life and investment
annuity contract revenues 19,431 18,816
Net investment income 52,553 50,655
Other income 68 1,101
Realized gains (losses) on investments (2,856) 623
Total premiums and other revenue 72,916 75,469
Benefits and expenses:
Life and other policy benefits 9,699 8,678
Decrease in liabilities for future
policy benefits (718) (484)
Amortization of deferred policy
acquisition costs 9,702 8,361
Universal life and investment annuity
contract interest 37,720 38,835
Other insurance operating expenses 6,927 6,554
Total benefits and expenses 63,330 61,944
Earnings before Federal income taxes
and discontinued operations 9,586 13,525
Provision (benefit) for Federal income taxes:
Current 2,677 5,213
Deferred 157 (432)
Total Federal income taxes 2,834 4,781
Earnings from continuing operations 6,752 8,744
Losses from discontinued operations (1,000) -
Net earnings $ 5,752 8,744
Earnings (losses) per share of common stock:
Earnings from continuing operations $ 1.94 2.50
Losses from discontinued operations (0.29) -
Net earnings $ 1.65 2.50
<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 Three Months Ended March 31, 1997 and 1996
(Unaudited)
(In Thousands)
1997 1996
Common stock shares outstanding:
Shares outstanding at beginning of
year and end of period 3,491 3,491
Common stock:
Balance at beginning of year and
end of period $ 3,491 3,491
Additional paid-in capital:
Balance at beginning of year and
end of period 24,647 24,647
Net unrealized gains (losses) on
investment securities, net of effects of
deferred policy acquisition costs and taxes:
Balance at beginning of year 9,853 15,195
Change in unrealized gains (losses)
during period (2,665) (5,524)
Amortization of net unrealized gains
related to transfers of
securities available for sale to
securities held to maturity (236) (260)
Balance at end of period 6,952 9,411
Foreign currency translation adjustment,
net of taxes:
Balance at beginning of year - -
Change in translation adjustment
during period 1,699 -
Balance at end of period 1,699 -
Retained earnings:
Balance at beginning of year 314,869 268,654
Net earnings 5,752 8,744
Balance at end of period 320,621 277,398
Total stockholders' equity $ 357,410 314,947
<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 Three Months Ended March 31, 1997 and 1996
(Unaudited)
(In Thousands)
1997 1996
Cash flows from operating activities:
Net earnings $ 5,752 8,744
Adjustments to reconcile net earnings
to net cash from operating activities:
Universal life and investment annuity
contract interest 37,720 38,835
Surrender charges and other
policy revenues (9,986) (9,937)
Realized (gains) losses on investments 2,856 (623)
Accrual and amortization of
investment income (1,683) (1,583)
Depreciation and amortization 181 180
Increase in insurance receivables
and other assets (607) (315)
Decrease in accrued investment income 1,008 1,067
Decrease (increase) in deferred
policy acquisition costs 1,322 (1,222)
Decrease in liability for future
policy benefits (718) (484)
Increase in other policyholder liabilities 1,607 1,030
Increase in Federal income taxes payable 2,702 7,532
Increase in other liabilities 3,053 15,262
Net cash provided by operating activities 43,207 58,486
Cash flows from investing activities:
Proceeds from sales of:
Securities available for sale 15 11,418
Other investments 728 599
Proceeds from maturities and
redemptions of:
Securities held to maturity 35,069 21,471
Securities available for sale 11,292 3,478
Purchases of:
Securities held to maturity (81,433) (96,694)
Securities available for sale (500) (943)
Other investments (105) (324)
Principal payments on mortgage loans 3,534 5,653
Cost of mortgage loans acquired (3,481) (3,876)
Decrease (increase) in policy loans 2,376 (1,354)
Decrease (increase) in assets of
discontinued operations (266) 1,604
Increase (decrease) in liabilities
of discontinued operations 266 (1,604)
Other (77) (38)
Net cash used in investing activities (32,582) (60,610)
<FN>
(Continued on next page)
</FN>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Three Months Ended March 31, 1997 and 1996
(Unaudited)
(In Thousands)
1997 1996
Cash flows from financing activities:
Deposits to account balances for
universal life and investment
annuity contracts $ 62,362 72,120
Return of account balances on universal
life and investment annuity contracts (73,239) (71,371)
Net cash provided by (used in)
financing activities (10,877) 749
Net decrease in cash and short-term investments (252) (1,375)
Cash and short-term investments at
beginning of year 11,358 10,024
Cash and short-term investments at
end of period $ 11,106 8,649
<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 (Westcap), NWL
Investments, Inc., NWL Properties, Inc., and NWL 806 Main, Inc. The Westcap
Corporation ceased brokerage operations during 1995 and filed for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in 1996. As a
result, The Westcap Corporation is reflected as discontinued operations in the
accompanying financial statements. 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, 1997, and the results of its
operations and its cash flows for the three months ended March 31, 1997 and
1996. The results of operations for the three months ended March 31, 1997
and 1996 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 three months
ended March 31, 1997 and 1996.
(3) DISCONTINUED BROKERAGE OPERATIONS
As previously reported, National Western Life Insurance Company's brokerage
subsidiary, The Westcap Corporation, is currently in reorganization
bankruptcy. As a result of brokerage losses and the resulting bankruptcy,
National Western Life's investment in Westcap was completely written off
during 1995. However, a $1,000,000 cash infusion was made to Westcap on March
18, 1997, for operational expenses incurred during its bankruptcy. This
contribution is reflected as losses from discontinued operations in the first
quarter of 1997. No losses from discontinued brokerage operations were
recorded in 1996.
The Creditors' Committee, the debtor Westcap, and National Western Life are
currently engaged in discussions relating to the possible settlement of all
claims by the creditors against Westcap and the claims of Westcap against
National Western Life. However, no prediction can be made at this time as to
the outcome of such settlement discussions. Any additional losses from
discontinued operations will depend primarily on results of Westcap bankruptcy
proceedings and settlement discussions. Any future settlements of the Company
with Westcap would be reduced by the $1,000,000 contribution described above.
(4) STOCK AND INCENTIVE PLAN
On April 11, 1997, the Board of Directors approved the issuance of an
additional 21,900 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 114,400 at
March 31, 1997.
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 investments in debt securities to
maturity. However, the Company closely 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, 1997, approximately 21.1% of the Company's total debt
and equity securities, based on fair values, were classified as securities
available for sale. These holdings provide flexibility to the Company to
react to market opportunities and conditions and to practice active management
within the portfolio to provide adequate liquidity to meet policyholder
obligations and other cash needs.
Securities the Company purchases with the intent to hold to maturity are
classified as securities held to maturity. Because the Company has strong cash
flows and matches expected maturities of assets and liabilities, the Company
has the ability to hold the securities, as it would be unlikely that forced
sales of securities would be required prior to maturity to cover payments of
liabilities. As a result, securities held to maturity are carried at amortized
cost less declines in value that are other than temporary. However, certain
situations may change the Company's intent to hold a particular security to
maturity, the most notable of which is a deterioration in the issuer's
creditworthiness. Accordingly, a security may be sold to avoid a further
decline in realizable value when there has been a significant change in the
credit risk of the issuer.
Securities that are not classified as held to maturity are reported as
securities available for sale. These securities may be sold if market or other
measurement factors change unexpectedly after the securities 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 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. 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, 1997 and
December 31, 1996. The Company emphasizes debt securities, with smaller
holdings in mortgage loans and real estate.
Percent of Investments
March 31, December 31,
1997 1996
Debt securities 86.3% 86.0%
Mortgage loans 6.8 7.0
Policy loans 5.0 5.1
Equity securities 0.6 0.6
Real estate 0.6 0.6
Other 0.7 0.7
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 securities.
Investments in mortgage-backed securities include primarily collateralized
mortgage obligations (CMOs), but also include some U.S. government and private
issue mortgage-backed pass-through securities.
At March 31, 1997, the Company's debt and equity securities were classified as
follows:
Gross
Unrealized
Fair Amortized Gains
Value Cost (Losses)
(In thousands)
Securities held to maturity:
Debt securities $ 1,907,383 1,917,284 (9,901)
Securities available for sale:
Debt securities 493,896 484,369 9,527
Equity securities 16,453 13,440 3,013
Totals $ 2,417,732 2,415,093 2,639
As detailed above, debt securities classified as held to maturity comprise the
majority of the Company's securities portfolio, while equity securities
continue to be a small component of the portfolio. Gross unrealized gains
totaling $2,639,000 on the securities portfolio at March 31, 1997, is a
reflection of market interest rates at quarter-end. The fair values, or
market values, of fixed income debt securities correlate to external market
interest rate conditions. Because the interest rates are fixed on almost all
of the Company's debt securities, market values typically increase when market
interest rates decline, and decrease when market interest rates rise. An
analysis of gross unrealized gains and losses on the Company's securities
portfolio for the quarter ended March 31, 1997 is detailed below:
Change in
Gross Unrealized Unrealized
Gains (Losses) Gains
At At (Losses)
March 31, December 31, During 1st
1997 1996 Quarter 1997
(In thousands)
Securities held to maturity:
Debt securities $ (9,901) 23,286 (33,187)
Securities available for sale:
Debt securities 9,527 18,458 (8,931)
Equity securities 3,013 2,277 736
Totals $ 2,639 44,021 (41,382)
Market interest rates of the ten year U.S. Treasury bond were approximately 50
basis points higher at March 31, 1997, than at December 31, 1996. As
reflected in the table above, such changes in interest rates have a
significant impact on the market values of the Company's debt securities. The
Company would expect similar results in the future from any significant upward
or downward movement in market rates. However, because the majority of the
Company's debt securities are classified as held to maturity, which are
recorded at amortized cost, the 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.
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,
extensions, and calls, the Company takes steps to manage and minimize such
risks. The Company continues to invest primarily in corporate debt
securities, many of which are non-callable, which helps reduce prepayment and
call risks. At March 31, 1997, corporate and public utility securities
represented over 60% of the entire debt securities portfolio.
While mortgage-backed securities are still an important component of the
Company's debt securities portfolio, holdings of these securities have been
reduced significantly over the past several years. This change in the
portfolio mix has provided even more stability in the Company's cash flow
management. Although holdings of mortgage-backed securities are subject to
prepayment and extension risks, both of these risks are addressed by specific
portfolio management strategies. The Company substantially reduces both
prepayment and extension risks of mortgage-backed securities 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, 1997, CMOs represent over 90% of the Company's mortgage-backed
securities, and PAC I CMOs account for approximately 90% of this CMO
portfolio. 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
closely manages the credit quality of its investments in debt securities. The
Company continues to follow its conservative investment philosophy by
minimizing its holdings of below investment grade debt securities, as these
securities generally have greater default risk than higher rated corporate
debt. These issuers usually are more sensitive to adverse industry or
economic conditions than are investment grade issuers. The Company's small
holdings of below investment grade debt securities are summarized below. The
increase in below investment grade debt securities from 1995 is primarily due
to investment grade issuers that were downgraded to below investment grade
status.
Below Investment
Grade Debt Securities
% of
Carrying Market Invested
Value Value Assets
(In thousands)
March 31, 1997 $ 39,666 39,942 1.4%
December 31, 1996 $ 38,696 38,784 1.4%
December 31, 1995 $ 14,244 14,567 0.5%
The Company's strong credit risk management and commitment to quality has
resulted in minimal defaults in the debt securities portfolio in recent years.
In fact, at March 31, 1997, no securities 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 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, and the majority of real estate owned was
acquired through mortgage loan foreclosures. However, the Company also
participates in several real estate joint ventures and limited partnerships.
The joint ventures and partnerships invest primarily in income-producing
retail properties. While not a significant portion of the Company's
investment portfolio, the investments have produced favorable returns to date.
Portfolio Analysis
The Company held net investments in mortgage loans totaling $190,022,000 and
$193,311,000, or 6.8% and 7.0% of total invested assets, at March 31, 1997,
and December 31, 1996, 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, 1997 and December 31,
1996, was as follows:
March 31, December 31,
1997 1996
West South Central 50.2% 51.4%
Mountain 15.8 15.0
Pacific 11.4 11.2
South Atlantic 8.9 8.7
Other 13.7 13.7
Totals 100.0% 100.0%
March 31, December 31,
1997 1996
Retail 65.0% 64.4%
Office 17.1 18.9
Hotel/Motel 7.9 7.8
Apartment 4.0 3.9
Other 6.0 5.0
Totals 100.0% 100.0%
During the quarter ended March 31, 1997, the Company foreclosed on a mortgage
loan resulting in a charge-off of approximately $2,408,000 against the
allowance for possible losses. Subsequent to the charge-off, approximately
$1,033,000 was added to the allowance to increase the balance to an adequate
level based on management's analysis. The addition to the allowance was
recognized as a realized loss on investments in the accompanying financial
statements. The allowances for possible losses on mortgage loans now totals
$4,540,000 at March 31, 1997. 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
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 March 31, 1997 and 1996, 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 $17,361,000 and $15,209,000 at March
31, 1997, and December 31, 1996, 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 gains on these properties of approximately $189,000 and $114,000 for
the three months ended March 31, 1997, and 1996. 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 March 31, 1997 and 1996,
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 three months ended March 31, 1997 and
1996 is provided below:
Three Months Ended March 31,
1997 1996
(In thousands except
per share data)
Revenues:
Insurance revenues excluding
realized gains (losses) on investments $ 75,772 74,846
Realized gains (losses) on investments (2,856) 623
Total revenues $ 72,916 75,469
Earnings:
Earnings from insurance operations $ 8,608 8,339
Losses from discontinued
brokerage operations (1,000) -
Net realized gains (losses) on investments (1,856) 405
Net earnings $ 5,752 8,744
Earnings Per Share:
Earnings from insurance operations $ 2.47 2.39
Losses from discontinued
brokerage operations (0.29) -
Net realized gains (losses) on investments (0.53) 0.11
Net earnings $ 1.65 2.50
Significant changes and fluctuations in income and expense items between the
three months ended March 31, 1997 and 1996 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 March 31, 1997, were $8,608,000 compared to $8,339,000 for
the first quarter of 1996. Although insurance revenues continue to grow, first
quarter 1997 earnings were relatively stable compared to 1996, primarily due
to higher life insurance benefit claims, which fluctuate from quarter to
quarter, and higher policy acquisition costs. Also, first quarter 1996
earnings included nonrecurring income totaling $552,000, net of taxes, from a
lawsuit settlement.
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, surrender charges, policy administration
fees, and other miscellaneous revenues. These revenues increased from
$18,816,000 for the quarter ended March 31, 1996, to $19,431,000 for the same
1997 period. Increases in cost of insurance and other revenues resulted in
the majority of the increase in these contract revenues. Although total life
and annuity surrenders were comparable between the first quarters of 1997 and
1996, surrender charge revenues declined in 1997 primarily due to lower two-
tier annuity surrenders. The Company's two-tier annuities typically have
higher surrender charges compared to other National Western Life annuity and
life insurance products.
Three Months Ended March 31,
1997 1996
(In thousands)
Cost of insurance revenues $ 8,431 7,884
Surrender charges 7,926 8,554
Policy fees and other revenues 3,074 2,378
Totals $ 19,431 18,816
Actual universal life and investment annuity deposits collected for the
quarters ended March 31, 1997 and 1996, 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 March 31,
1997 1996
(In thousands)
Investment annuities:
First year and single premiums $ 51,995 56,997
Renewal premiums 6,105 8,124
Total annuities 58,100 65,121
Universal life insurance:
First year and single premiums 2,964 4,381
Renewal premiums 10,743 11,497
Total universal life insurance 13,707 15,878
Totals $ 71,807 80,999
Subsequent to discontinuing two-tier annuity sales, the Company developed new
annuity products in 1994 and diversified its distribution system by
contracting new marketing organizations with extensive experience, financial
resources, and success in marketing life and annuity products. The new
products and new marketing organizations resulted in significant increases in
annuity production in 1994 and 1995. However, annuity production slowed in
1996 and has continued to decrease in the first quarter of 1997, but sales
still continue to be higher under this more diversified distribution system.
Annuities sold include flexible premium deferred annuities, single premium
deferred annuities, and single premium immediate annuities. These products
can be tax-qualified or non-qualified annuities. In recent years the majority
of annuities sold have been non-qualified single premium 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 were flexible
premium annuities on which renewal premiums continue to be collected.
The majority of the Company's universal life insurance production is from the
international market, primarily Central and South American countries. The
Company continues to see increased competition in the Central and South
American market which has reduced sales. However, the Company has been
accepting policies from foreign nationals for over 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 challenges of the increased competition. The Company's
strategic plans for the international market include the continued development
of additional life insurance products to complement the universal life
portfolio and acceptance of new broker/agents from existing agencies in Latin
America.
Sales of life insurance have also declined in the U.S. domestic market. In
response to this decline, the Company is committed to allocating additional
resources to increase domestic life insurance sales and to enhancing and
developing new life insurance products. Additional resources include both
personnel additions and increased marketing efforts.
Net Investment Income: Net investment income increased 3.7% from the first
quarter of 1996, due primarily to corresponding increases in invested assets
for the same period. The increase in invested assets and related investment
income was primarily from debt securities. A detail of net investment income
is provided below:
Three Months Ended March 31,
1997 1996
(In thousands)
Investment income:
Debt securities $ 45,666 42,860
Mortgage loans 4,666 4,898
Policy loans 2,342 2,771
Other investment income 509 934
Total investment income 53,183 51,463
Investment expenses 630 808
Net investment income $ 52,553 50,655
Other Income: Other income totaled only $68,000 in 1997 compared to
$1,101,000 in 1996. The higher income in 1996 was due to proceeds received
from a lawsuit settlement totaling $850,000. The lawsuit related to the
Company's previous investment in a mortgage loan.
Realized Gains and Losses on Investments: The Company recorded realized losses
of $2,856,000 in 1997 compared to realized gains of $623,000 in 1996. The
losses in 1997 were primarily from net losses on debt securities totaling $1.9
million. The Company also incurred losses totaling $1.1 million on mortgage
loans relating to a foreclosure during the first quarter of 1997. The gains
in 1996 were primarily from debt securities that were called and from sales of
real estate.
Life and Other Policy Benefits: Expenses in 1997 and 1996 were $9.7 million
and $8.7 million, respectively. The significant increase in expenses 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. Over extended periods of time, higher claims
experience tends to be offset by periods of lower claims experience. Also,
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.
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 and types of policy surrenders. Amortization for 1997 was
$9,702,000 compared to $8,361,000 for 1996. The higher amortization in 1997
was impacted by changes in timing and 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 federal rate. However, the 1997 taxes
reflect a significantly lower effective tax rate of 30%. Federal income taxes
for the three months ended March 31, 1997, include a tax benefit of $350,000
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
As more fully described in note 3 to the accompanying financial statements,
National Western Life Insurance Company's brokerage subsidiary, The Westcap
Corporation, is currently in reorganization bankruptcy. A $1,000,000 cash
infusion was made by the Company to Westcap on March 18, 1997, for operational
expenses incurred during its bankruptcy. This contribution was reflected as
losses from discontinued operations in the first quarter of 1997. No losses
from discontinued brokerage operations were recorded in 1996. Additional
losses from discontinued operations will depend primarily on results of
Westcap bankruptcy proceedings and settlement discussions. Any future
settlements of the Company with Westcap would be reduced by the $1,000,000
contribution described above.
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 $43.2 million and $58.5 million for the three months ended March 31, 1997
and 1996, respectively. Additionally, net cash flows from the Company's
deposit product operations, which includes universal life and investment
annuity products, totaled $749,000 for the first quarter of 1996, but
reflected a net cash outflow in the first quarter of 1997 totaling $10.9
million. The decrease in cash flows from the deposit product operations was
due primarily to lower universal life insurance and annuity deposits.
The Company also has significant cash flows from both scheduled and
unscheduled investment security maturities, redemptions, and prepayments.
These cash flows totaled $46.4 million and $24.9 million for the quarters
ended March 31, 1997 and 1996, respectively. The Company again expects
significant cash flows from these sources throughout the remainder of 1997.
Capital Resources
The Company relies on stockholders' equity for its capital resources, as there
has been no long-term debt outstanding in 1997 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 1997.
Stockholders' equity totaled $357.4 million at March 31, 1997, reflecting an
increase of $4.6 million from December 31, 1996. The increase in capital is
primarily from net earnings of $5.8 million and a foreign currency translation
adjustment of $1.7 million, offset by a decline in net unrealized gains on
investment securities totaling $2.9 million during the first quarter of 1997.
The increase in market interest rates during the first quarter of 1997
resulted in the decrease in unrealized gains. Book value per share at March
31, 1997, was $102.37.
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 21 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, 1997.
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 13, 1997 /S/ Ross R. Moody
Ross R. Moody
President,
Chief Operating Officer,
and Director
Date: May 13, 1997 /S/ Robert L. Busby, III
Robert L. Busby, III
Senior Vice President -
Chief Administrative
Officer,
Chief Financial Officer
and Treasurer
Date: May 13, 1997 /S/ Vincent L. Kasch
Vincent L. Kasch
Vice President - Controller
and Assistant Treasurer