-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OsDwsbB8SGUOswCgUBojDq+aegfw53ZMYZCq0+gjOF+E8hVs5iqYBg8L1DEmo9EQ CLxbT5e2D2VdiC+9dGVurA== 0000070684-98-000006.txt : 19980814 0000070684-98-000006.hdr.sgml : 19980814 ACCESSION NUMBER: 0000070684-98-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL WESTERN LIFE INSURANCE CO CENTRAL INDEX KEY: 0000070684 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 840467208 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 002-17039 FILM NUMBER: 98685643 BUSINESS ADDRESS: STREET 1: 850 E ANDERSON LN CITY: AUSTIN STATE: TX ZIP: 78752-1602 BUSINESS PHONE: 5128361010 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission File Number: 2-17039 NATIONAL WESTERN LIFE INSURANCE COMPANY (Exact name of Registrant as specified in its charter) COLORADO 84-0467208 (State of Incorporation) (I.R.S. Employer Identification Number) 850 EAST ANDERSON LANE AUSTIN, TEXAS 78752-1602 (512) 836-1010 (Address of Principal Executive Offices (Telephone Number) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [ X ] No [ ] As of August 10, 1998, the number of shares of Registrant's common stock outstanding was: Class A - 3,296,428 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 - June 30, 1998 (Unaudited) and December 31, 1997 Condensed Consolidated Statements of Earnings - For the Three Months Ended June 30, 1998 and 1997 (Unaudited) Condensed Consolidated Statements of Earnings - For the Six Months Ended June 30, 1998 and 1997 (Unaudited) Condensed Consolidated Statements of Comprehensive Income For the Three Months Ended June 30, 1998 and 1997 (Unaudited) Condensed Consolidated Statements of Comprehensive Income For the Six Months Ended June 30, 1998 and 1997 (Unaudited) Condensed Consolidated Statements of Stockholders' Equity - For the Six Months Ended June 30, 1998 and 1997 (Unaudited) Condensed Consolidated Statements of Cash Flows - For the Six Months Ended June 30, 1998 and 1997 (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 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K Signatures Exhibit 10(k) - First Amendment to the National Western Life Insurance Company 1995 Stock and Incentive Plan Exhibit 11 - Computation of Earnings per Share - For the Three Months Ended June 30, 1998 and 1997 (Unaudited) Exhibit 11 - Computation of Earnings per Share - For the Six Months Ended June 30, 1998 and 1997 (Unaudited) PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands)
(Unaudited) June 30, December 31, 1998 1997 ASSETS Cash and investments: Securities held to maturity, at amortized cost $ 1,945,922 1,874,643 Securities available for sale, at fair value 692,513 651,736 Mortgage loans, net of allowance for possible losses ($4,640 and $4,640) 170,166 181,878 Policy loans 128,974 133,826 Other long-term investments 32,501 27,387 Cash and short-term investments 13,104 7,870 Total cash and investments 2,983,180 2,877,340 Accrued investment income 42,796 41,050 Deferred policy acquisition costs 298,020 291,079 Other assets 14,283 15,202 Assets of discontinued operations 663 892 $ 3,338,942 3,225,563 Note: The balance sheet at December 31, 1997, has been taken from the audited financial statements at that date. Certain reclassifications have been made in accordance with the implementation of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands Except Shares Outstanding)
(Unaudited) June 30, December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 LIABILITIES: Future policy benefits: Traditional life and annuity products $ 168,795 170,423 Universal life and investment annuity contracts 2,662,157 2,580,867 Other policyholder liabilities 25,084 25,001 Federal income taxes payable: Current 3,205 2,470 Deferred 12,672 13,153 Other liabilities 41,876 31,894 Liabilities of discontinued operations 663 892 Total liabilities 2,914,452 2,824,700 COMMITMENTS AND CONTINGENCIES (Note 3) STOCKHOLDERS' EQUITY: Common stock: Class A - $1 par value; 7,500,000 shares authorized; 3,296,428 and 3,291,738 shares issued and outstanding in 1998 and 1997 3,296 3,292 Class B - $1 par value; 200,000 shares authorized, issued, and outstanding in 1998 and 1997 200 200 Additional paid-in capital 24,829 24,662 Accumulated other comprehensive income 17,084 16,268 Retained earnings 379,081 356,441 Total stockholders' equity 424,490 400,863 $ 3,338,942 3,225,563 Note: The balance sheet at December 31, 1997, has been taken from the audited financial statements at that date. Certain reclassifications have been made in accordance with the implementation of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS For the Three Months Ended June 30, 1998 and 1997 (Unaudited) (In Thousands Except Per Share Amounts)
1998 1997 Premiums and other revenue: Life and annuity premiums $ 3,457 4,551 Universal life and investment annuity contract revenues 20,291 21,250 Net investment income 57,261 54,958 Other income 276 88 Realized gains on investments 846 77 Total premiums and other revenue 82,131 80,924 Benefits and expenses: Life and other policy benefits 8,454 10,310 Decrease in liabilities for future policy benefits (536) (1,282) Amortization of deferred policy acquisition costs 11,455 11,183 Universal life and investment annuity contract interest 37,215 36,344 Other insurance operating expenses 7,087 6,445 Total benefits and expenses 63,675 63,000 Earnings before Federal income taxes 18,456 17,924 Provision (benefit) for Federal income taxes: Current 7,428 7,118 Deferred (1,242) (992) Total Federal income taxes 6,186 6,126 Net earnings $ 12,270 11,798 Basic Earnings Per Share: Net earnings $ 3.51 3.38 Diluted Earnings Per Share: Net earnings $ 3.48 3.35 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS For the Six Months Ended June 30, 1998 and 1997 (Unaudited) (In Thousands Except Per Share Amounts)
1998 1997 Premiums and other revenue: Life and annuity premiums $ 6,567 8,271 Universal life and investment annuity contract revenues 40,591 40,681 Net investment income 112,799 107,511 Other income 811 156 Realized gains (losses) on investments 1,508 (2,779) Total premiums and other revenue 162,276 153,840 Benefits and expenses: Life and other policy benefits 19,128 20,009 Decrease in liabilities for future policy benefits (1,493) (2,000) Amortization of deferred policy acquisition costs 20,400 20,885 Universal life and investment annuity contract interest 75,550 74,064 Other insurance operating expenses 14,328 13,372 Total benefits and expenses 127,913 126,330 Earnings before Federal income taxes and discontinued operations 34,363 27,510 Provision (benefit) for Federal income taxes: Current 12,645 9,795 Deferred (922) (835) Total Federal income taxes 11,723 8,960 Earnings from continuing operations 22,640 18,550 Losses from discontinued operations - (1,000) Net earnings $ 22,640 17,550 Basic Earnings Per Share: Earnings from continuing operations $ 6.48 5.32 Losses from discontinued operations - (0.29) Net earnings $ 6.48 5.03 Diluted Earnings Per Share: Earnings from continuing operations $ 6.42 5.27 Losses from discontinued operations - (0.28) Net earnings $ 6.42 4.99 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Three Months Ended June 30, 1998 and 1997 (Unaudited) (In Thousands)
1998 1997 Net earnings $ 12,270 11,798 Other comprehensive income, net of effects of deferred policy acquisition costs and taxes: Unrealized gains on securities: Unrealized holding gains arising during period 1,948 2,909 Less: reclassification adjustment for gains included in net earnings (417) (766) Amortization of net unrealized gains related to transferred securities (11) (303) Net unrealized gains on securities 1,520 1,840 Foreign currency translation adjustments (93) 237 Other comprehensive income 1,427 2,077 Comprehensive income $ 13,697 13,875 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Six Months Ended June 30, 1998 and 1997 (Unaudited) (In Thousands)
1998 1997 Net earnings $ 22,640 17,550 Other comprehensive income, net of effects of deferred policy acquisition costs and taxes: Unrealized gains (losses) on securities: Unrealized holding gains arising during period 1,602 243 Less: reclassification adjustment for gains included in net earnings (417) (765) Amortization of net unrealized gains related to transferred securities (334) (539) Net unrealized gains (losses) on securities 851 (1,061) Foreign currency translation adjustments (35) 1,936 Other comprehensive income 816 875 Comprehensive income $ 23,456 18,425 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Six Months Ended June 30, 1998 and 1997 (Unaudited) (In Thousands)
1998 1997 Common stock: Balance at beginning of year $ 3,492 3,491 Shares exercised under stock option plan 4 - Balance at end of period 3,496 3,491 Additional paid-in capital: Balance at beginning of year 24,662 24,647 Shares exercised under stock option plan 167 - Balance at end of period 24,829 24,647 Accumulated other comprehensive income: Unrealized gains (losses) on securities: Balance at beginning of year 13,782 9,853 Change in unrealized gains (losses) during period 851 (1,061) Balance at end of period 14,633 8,792 Foreign currency translation adjustments: Balance at beginning of year 2,486 - Change in translation adjustments during period (35) 1,936 Balance at end of period 2,451 1,936 Accumulated other comprehensive income at end of period 17,084 10,728 Retained earnings: Balance at beginning of year 356,441 314,869 Net earnings 22,640 17,550 Retained earnings at end of period 379,081 332,419 Total stockholders' equity $ 424,490 371,285 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 1998 and 1997 (Unaudited) (In Thousands)
1998 1997 Cash flows from operating activities: Net earnings $ 22,640 17,550 Adjustments to reconcile net earnings to net cash from operating activities: Universal life and investment annuity contract interest 75,550 74,064 Surrender charges and other policy revenues (19,720) (21,991) Realized (gains) losses on investments (1,508) 2,779 Accrual and amortization of investment income (4,495) (3,551) Depreciation and amortization 481 502 Decrease (increase) in insurance receivables and other assets 723 (325) Increase in accrued investment income (1,746) (787) Decrease (increase) in deferred policy acquisition costs (7,345) 3,145 Decrease in liability for future policy benefits (1,493) (2,000) Increase in other policyholder liabilities 83 95 Increase (decrease) in Federal income taxes payable (113) 3,066 Increase in other liabilities 9,982 3,715 Other (1,383) - Net cash provided by operating activities 71,656 76,262 Cash flows from investing activities: Proceeds from sales of: Securities held to maturity 2,978 - Securities available for sale - 33,468 Other investments 2,442 868 Proceeds from maturities and redemptions of: Securities held to maturity 59,489 66,893 Securities available for sale 30,782 18,457 Purchases of: Securities held to maturity (112,623) (91,068) Securities available for sale (84,815) (69,800) Other investments (7,337) (3,723) Principal payments on mortgage loans 16,116 13,896 Cost of mortgage loans acquired (3,224) (14,580) Decrease in policy loans 4,852 4,506 Decrease in assets of discontinued operations 229 193 Decrease in liabilities of discontinued operations (229) (193) Other (255) (116) Net cash used in investing activities (91,595) (41,199) (Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED For the Six Months Ended June 30, 1998 and 1997 (Unaudited) (In Thousands)
1998 1997 Cash flows from financing activities: Deposits to account balances for universal life and investment annuity contracts $ 195,073 127,857 Return of account balances on universal life and investment annuity contracts (170,071) (160,353) Issuance of common stock under stock option plan 171 - Net cash provided by (used in) financing activities 25,173 (32,496) Net increase in cash and short-term investments 5,234 2,567 Cash and short-term investments at beginning of year 7,870 11,358 Cash and short-term investments at end of period $ 13,104 13,925 See accompanying notes to condensed consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of National Western Life Insurance Company and its wholly owned subsidiaries (the Company), The Westcap Corporation (Westcap), NWL Investments, Inc., NWL Properties, Inc., NWL 806 Main, Inc., NWL Services, Inc., and NWL Financial, Inc. The Westcap Corporation ceased brokerage operations during 1995 and filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in 1996. 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 June 30, 1998, and the results of its operations for the three months and six months ended June 30, 1998 and 1997 and its cash flows for the six months ended June 30, 1998 and 1997. The results of operations for the three months and six months ended June 30, 1998 and 1997 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 six months ended June 30, 1998 and 1997. (3) DISCONTINUED BROKERAGE OPERATIONS 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. No earnings or losses were reported for discontinued operations for the six months ended June 30, 1998. However, a $1,000,000 cash infusion was made to Westcap on March 18, 1997, for operational expenses incurred during its bankruptcy. This contribution was reflected as losses from discontinued operations in the first quarter of 1997. The Westcap Corporation, the Creditors' Committee, and National Western Life filed documents with the bankruptcy court on April 30, 1998, that could lead to the settlement of all claims of the creditors of Westcap and the claims of Westcap against National Western Life, with the exception of the claims of Chicago City Colleges against National Western Life. The next step in the settlement process is the approval of such agreements by the Westcap creditors, Westcap and National Western Life, and the bankruptcy court. These parties must vote to either accept or reject the agreements by August 21, 1998. Results of this process are anticipated to be released by the bankruptcy court in September, 1998. If the plan is ultimately approved and confirmed, National Western Life's obligations could total approximately $15 million for complete releases from all claims, except for the pending claims asserted by Chicago City Colleges against National Western Life in federal court litigation. Because it remains uncertain at this time whether the agreements will be approved by all the parties, no amounts have been accrued in the Company's financial statements for potential settlements. (4) STOCK AND INCENTIVE PLAN On April 17, 1998, the Board of Directors approved the issuance of an additional 48,500 nonqualified 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). Also, on June 19, 1998, stockholders' approved an amendment to the Plan which authorized the grant of an additional 1,000 nonqualified stock options to each director. Accordingly, 10,000 options were granted in total to directors effective on such date. The officers' 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 directors' stock options vest 20% per year on each of the first five anniversary dates of the grant. The exercise prices of the stock options were set at the fair market values of the common stock on the dates of grant. (5) STOCKHOLDERS' EQUITY Detail of changes in shares of common stock outstanding is provided below:
Six Months Ended June 30, 1998 1997 (In thousands) Common stock shares outstanding: Shares outstanding at beginning of year 3,492 3,491 Shares exercised under stock option plan 4 - Shares outstanding at end of period 3,496 3,491
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL National Western Life Insurance Company is a life insurance company, chartered in the State of Colorado in 1956, and doing business in forty-three states and the District of Columbia. It also accepts applications from and issues policies to residents of various Central and South American, Caribbean, and Pacific Rim countries. A distribution of the Company's direct premium revenues and deposits by domestic and international markets is provided below:
Six Months Ended June 30, 1998 1997 United States domestic market: Investment annuities 80.4 % 73.1 % Life insurance 7.1 9.6 Total domestic market 87.5 82.7 International market: Investment annuities 0.1 0.6 Life insurance 12.4 16.7 Total international market 12.5 17.3 Total direct premiums collected 100.0 % 100.0 %
Insurance Operations - Domestic Division The Company's Domestic Division concentrates marketing efforts on federal employees, seniors, and specific employee groups in private industry, as well as individual sales. The products marketed are annuities, universal life insurance, and traditional life insurance, which includes both term and whole life products. The majority of products sold are the Company's annuities, which include single and flexible premium deferred annuities, single premium immediate annuities, and a newly introduced equity-indexed annuity. Most of these annuities can be sold as tax qualified or nonqualified products. National Western Life markets and distributes its domestic products primarily through independent marketing organizations (IMOs). These IMOs assist the Company in recruiting, contracting, and managing agents. The Company currently has over 30 IMOs contracted for sales of life and annuity products. Current marketing plans are to increase the number of IMOs under contract by adding qualified, select organizations each year that are able to meet minimum production standards. Insurance Operations - International Division The Company's International Division issues policies to foreign nationals in upper socioeconomic classes with substantial financial resources. Insurance sales are primarily on residents from Central and South America, the Caribbean, and the Pacific Rim. Providing insurance policies to residents in numerous countries in these different regions provides diversification that helps to minimize large fluctuations in sales that can occur due to various economic, political, and competitive pressures that may occur from one country to another. Products sold in the international market are almost entirely universal life and traditional life insurance products. However, certain annuity and investment contracts are also available through the International Division. The Company minimizes exposure to foreign currency risks, as almost all foreign policies require payment of premiums and claims in United States dollars. The International Division's sales production is from independent broker- agents, many of whom have been selling National Western Life products for 20 or more years. Currently marketing plans include expanding sales networks in specifically targeted South American and Pacific Rim countries which have higher growth potential than other countries. In accordance with these plans, two new equity-indexed investment products similar to the Domestic Division's new equity-indexed annuity were introduced in early 1998. While National Western Life increases its sales efforts in the international arena, the Company remains committed to its conservative, yet competitive, underwriting practices which historically have resulted in claims experience similar to that in the United States. Other In addition to the life insurance business, the Company had a brokerage operations segment through its wholly owned subsidiary, The Westcap Corporation (Westcap). However, during 1995 Westcap closed its sales offices and approved a plan to cease all brokerage operations. Subsequently on April 12, 1996, Westcap and its wholly owned subsidiary, Westcap Enterprises, Inc., separately filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The brokerage segment is now reported as discontinued operations throughout this report and in the accompanying financial statements. INVESTMENTS IN DEBT AND EQUITY SECURITIES Investment Philosophy The Company's investment philosophy is to maintain a diversified portfolio of investment grade debt and equity securities that provide adequate liquidity to meet policyholder obligations and other cash needs. The prevailing strategy within this philosophy is the intent to hold investments in debt securities to maturity. However, the Company manages its portfolio, which entails monitoring and reacting to all components which affect changes in the price, value, or credit rating of investments in debt and equity securities. Investments in debt and equity securities are classified and reported as either securities held to maturity or securities available for sale. The Company does not maintain a portfolio of trading securities. The reporting category chosen for the Company's securities investments depends on various factors including the type and quality of the particular security and how it will be incorporated into the Company's overall asset/liability management strategy. At June 30, 1998, approximately 25.4% of the Company's total debt and equity securities, based on fair values, were classified as securities available for sale. These holdings provide flexibility to the Company to react to market opportunities and conditions and to practice active management within the portfolio to provide adequate liquidity to meet policyholder obligations and other cash needs. Securities the Company purchases with the intent to hold to maturity are classified as securities held to maturity. Because the Company has strong cash flows and matches expected maturities of assets and liabilities, the Company has the ability to hold the securities, as it would be unlikely that forced sales of securities would be required prior to maturity to cover payments of liabilities. As a result, securities held to maturity are carried at amortized cost less declines in value that are other than temporary. However, certain situations may change the Company's intent to hold a particular security to maturity, the most notable of which is a deterioration in the issuer's creditworthiness. Accordingly, a security may be sold to avoid a further decline in realizable value when there has been a significant change in the credit risk of the issuer. Securities that are not classified as held to maturity are reported as securities available for sale. These securities may be sold if market or other measurement factors change unexpectedly after the securities were acquired. For example, opportunities arise that allow the Company to improve the performance and credit quality of the investment portfolio by replacing an existing security with an alternative security while still maintaining an appropriate matching of expected maturities of assets and liabilities. Examples of such improvements are as follows: improving the yield earned on invested assets, improving the credit quality, changing the duration of the portfolio, and selling securities in advance of anticipated calls or other prepayments. Securities available for sale are reported in the Company's financial statements at fair value. Any unrealized gains or losses resulting from changes in the fair value of the securities are reflected as components of stockholders' equity and other comprehensive income. As an integral part of its investment philosophy, the Company performs an ongoing process of monitoring the creditworthiness of issuers within the investment portfolio. Review procedures are also performed on securities that have had significant declines in fair value. The Company's objective in these circumstances is to determine if the decline in fair value is due to changing market expectations regarding inflation and general interest rates or other factors. Additionally, the Company closely monitors financial, economic, and interest rate conditions to manage prepayment and extension risks in its mortgage-backed securities portfolio. The Company's overall conservative investment philosophy is reflected in the allocation of its investments which is detailed below as of June 30, 1998 and December 31, 1997. The Company emphasizes investment grade debt securities, with smaller holdings in mortgage loans and real estate.
Percent of Investments June 30, December 31, 1998 1997 Debt securities 88.0 % 87.3 % Mortgage loans 5.7 6.3 Policy loans 4.3 4.7 Equity securities 0.5 0.5 Real estate 0.4 0.5 Other 1.1 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 corporate, mortgage-backed securities, and public utilities. Investments in mortgage-backed securities include U.S. government agency and private issue pass-through securities and collateralized mortgage obligations (CMOs). At June 30, 1998, the Company's debt and equity securities were classified as follows:
Gross Fair Amortized Unrealized Value Cost Gains (In thousands) Securities held to maturity: Debt securities $ 2,031,614 1,945,922 85,692 Securities available for sale: Debt securities 677,967 645,298 32,669 Equity securities 14,546 10,769 3,777 Totals $ 2,724,127 2,601,989 122,138
As detailed above, debt securities comprise almost the entire securities portfolio, as equity securities represent only a small component. Gross unrealized gains totaling $122,138,000 on the securities portfolio at June 30, 1998, are 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 on the Company's securities portfolio for the quarter ended June 30, 1998 is detailed below:
Change in Gross Unrealized Gains Unrealized At At Gains June 30, March 31, During 2nd 1998 1998 Quarter 1998 (In thousands) Securities held to maturity: Debt securities $ 85,692 74,100 11,592 Securities available for sale: Debt securities 32,669 28,719 3,950 Equity securities 3,777 3,688 89 Totals $ 122,138 106,507 15,631
Changes in interest rates typically have a significant impact on the market values of the Company's debt securities, as reflected above. Unrealized gains at June 30, 1998, increased over $15 million from March 31, 1998, as market interest rates of the ten year U.S. Treasury bond declined approximately 20 basis points during the quarter. Because the majority of the Company's debt securities are classified as held to maturity, which are recorded at amortized cost, changes in market values have relatively small effects on the Company's financial statements. Also, the Company has the intent and ability to hold these securities to maturity, and it is unlikely that sales of such securities would be required which would realize market gains or losses. 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 noncallable, which helps reduce prepayment and call risks. At June 30, 1998, corporate and public utility securities represented over 67% of the entire debt securities portfolio. Mortgage-backed securities are also an important component of the Company's debt securities portfolio, representing 25% of the portfolio at June 30, 1998. Although holdings of mortgage-backed securities are subject to prepayment and extension risks, both of these risks are addressed by specific portfolio management strategies which add stability to the Company's cash flow management. 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 June 30, 1998, CMOs represent about 90% of the Company's mortgage-backed securities. Furthermore, PAC I CMOs account for approximately 90% of this CMO portfolio. The CMOs in the Company's portfolio have been modeled and subjected to detailed, comprehensive analysis by the Company's investment staff. The overall structure of the CMO as well as the individual tranche being considered for purchase have been evaluated to ensure that the security fits appropriately within the Company's investment philosophy and asset/liability management parameters. The Company's investment mix between mortgage-backed securities and other fixed income securities helps effectively balance prepayment, extension, and credit risks. In addition to managing prepayment, extension, and call risks, the Company closely manages the credit quality of its investments in debt securities. Thorough credit analysis is performed on potential corporate investments including examinations of a company's credit and industry outlook, financial ratios and trends, and event risks. 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.
Below Investment Grade Debt Securities % of Carrying Market Invested Value Value Assets (In thousands) June 30, 1998 $ 44,860 45,861 1.5% December 31, 1997 $ 41,149 41,969 1.4% December 31, 1996 $ 38,696 38,784 1.4%
The Company's strong credit risk management and commitment to quality has resulted in minimal defaults in the debt securities portfolio in recent years. At June 30, 1998, no securities were in default and on nonaccrual 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. While mortgage loans remain an important component of the Company's investment portfolio, loans as a percentage of the portfolio have been declining in recent years. Competition for high quality mortgage loans in a declining interest rate environment has impacted the Company's level of mortgage loan originations, and the Company is unwilling to compromise its strict underwriting guidelines to maintain specific mortgage loan levels. 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, which are not a significant portion of the Company's investment portfolio, invest primarily in income-producing retail properties. Portfolio Analysis The Company held net investments in mortgage loans totaling $170,166,000 and $181,878,000, or 5.7% and 6.3% of total invested assets, at June 30, 1998, and December 31, 1997, 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 June 30, 1998 and December 31, 1997, was as follows:
June 30, December 31, 1998 1997 West South Central 55.5% 54.9% Mountain 12.0 11.3 South Atlantic 10.7 11.4 Pacific 8.4 8.0 East South Central 5.5 5.2 East North Central 2.5 3.9 Other 5.4 5.3 Totals 100.0% 100.0%
June 30, December 31, 1998 1997 Retail 60.6% 62.2% Office 17.4 16.6 Hotel/Motel 8.3 7.9 Apartment 4.4 4.1 Land/Lots 3.4 3.3 Nursing Homes 3.2 3.2 Other 2.7 2.7 Totals 100.0% 100.0%
As of June 30, 1998, the allowance for possible losses on mortgage loans was $4,640,000. No additions were made to the allowance in the second quarter of 1998. Although management believes that the current balance is adequate, future additions to the allowance may be necessary based on changes in economic conditions, particularly in the West South Central region which includes Texas, Louisiana, Oklahoma, and Arkansas, as this area contains the highest concentrations of the Company's mortgage loans. The Company currently places all loans past due three months or more on nonaccrual status, thus recognizing no interest income on the loans. 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 six months ended June 30, 1998 and 1997, the reductions in interest income due to nonaccrual and restructured mortgage loans were not significant. The Company owns real estate that was acquired through foreclosure and through direct investment totaling approximately $13,817,000 and $15,027,000 at June 30, 1998, and December 31, 1997, 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 $222,000 and $76,000 for the three months ended June 30, 1998 and 1997. The Company monitors the conditions and market values of these properties on a regular basis. No significant realized losses were recognized due to declines in values of properties for the three months ended June 30, 1998 and 1997, 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 and six months ended June 30, 1998 and 1997 is provided below:
Three Months Ended June 30, Six Months Ended June 30, 1998 1997 1998 1997 (In thousands except per share data) Revenues: Insurance revenues excluding realized gains (losses) on investments $ 81,285 80,847 160,768 156,619 Realized gains (losses) on investments 846 77 1,508 (2,779) Total revenues $ 82,131 80,924 162,276 153,840 Earnings: Earnings from insurance operations $ 11,720 11,748 21,660 20,356 Losses from discontinued brokerage operations - - - (1,000) Net realized gains (losses) on investments 550 50 980 (1,806) Net earnings $ 12,270 11,798 22,640 17,550 Basic Earnings Per Share: Earnings from insurance operations $ 3.35 3.36 6.20 5.83 Losses from discontinued brokerage operations - - - (0.29) Net realized gains (losses) on investments 0.16 0.02 0.28 (0.51) Net earnings $ 3.51 3.38 6.48 5.03 Diluted Earnings Per Share: Earnings from insurance operations $ 3.32 3.34 6.14 5.78 Losses from discontinued brokerage operations - - - (0.28) Net realized gains (losses) on investments 0.16 0.01 0.28 (0.51) Net earnings $ 3.48 3.35 6.42 4.99
Significant changes and fluctuations in income and expense items between the three months ended June 30, 1998 and 1997 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 June 30, 1998, were $11,720,000 compared to $11,748,000 for the second quarter of 1997. Although net investment income and universal life insurance revenues continue to grow, second quarter 1998 earnings were comparable to 1997 earnings primarily due to lower annuity surrender charge revenues. However, surrender charge revenues were significantly higher in the second quarter of 1997 than in any other quarter of 1997 or 1998. Also, much of the increase in net investment income was offset by increases in universal life and annuity contract credited interest as is expected with interest sensitive products. A significant portion of the increase in net investment income was due to yield and amortization adjustments on mortgage-backed securities resulting from lower market interest rates. Life and Annuity Premiums: This revenue category represents the premiums on traditional type products. However, sales in most of the Company's markets continue to consist of nontraditional types such as universal life and investment annuities. The Company's current plans are to continue to focus the majority of its product development and marketing efforts on universal life and investment annuities. As a result, as in past years, no significant growth is anticipated for these premiums in the near future, and actual declines in this category are likely. Universal Life and Investment Annuity Contract Revenues: These revenues are from the Company's nontraditional 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 decreased from $21,250,000 for the quarter ended June 30, 1997, to $20,291,000 for the same 1998 period. The lower revenues are due to decreases in surrender charge revenues totaling $1,953,000 for two-tier annuities and universal life insurance. Policy surrenders were 19.7% and 17.3% lower for two-tier annuities and universal life, respectively, for the second quarter of 1998 compared to the same period of 1997. However, surrenders were significantly higher in the second quarter of 1997 than in any other quarter of 1997 or 1998. Partially offsetting the decline in surrender charge revenues were increases in cost of insurance revenues. These revenues increased $768,000 as the Company's universal life insurance in force continues to grow. Policy fees and other revenues consist primarily of policy administration fee charges on universal life products and recognition of deferred revenues relating to immediate annuities. Annuitizations result in transfers of policies from deferred to immediate or payout status. The deferred revenues related to the immediate annuities are amortized into income during the payout period. A comparative detail of the components of universal life and investment annuity contract revenues is provided below:
Three Months Ended June, 30 1998 1997 (In thousands) Surrender charges: Two-tier annuities $ 4,434 5,951 Universal life insurance 1,894 2,330 Single-tier annuities 1,718 1,446 Total surrender charges 8,046 9,727 Cost of insurance revenues 9,335 8,567 Policy fees and other revenues 2,910 2,956 Totals $ 20,291 21,250
Actual universal life and investment annuity deposits collected for the quarters ended June 30, 1998 and 1997, are detailed below. Deposits collected on these nontraditional products are not reflected as revenues in the Company's statements of earnings, as they are recorded directly to policyholder liabilities upon receipt, in accordance with generally accepted accounting principles.
Three Months Ended June 30, 1998 1997 (In thousands) Investment annuities: First year and single premiums $ 108,491 51,351 Renewal premiums 4,916 6,516 Total annuities 113,407 57,867 Universal life insurance: First year and single premiums 5,788 4,075 Renewal premiums 12,639 12,798 Total universal life insurance 18,427 16,873 Totals $ 131,834 74,740
Annuities sold include flexible premium deferred annuities, single premium deferred annuities, and single premium immediate annuities. These products can be tax qualified or nonqualified annuities. In recent years the majority of annuities sold have been nonqualified 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. Although annuity sales declined in 1996 and 1997 from previous levels, the Company experienced significant growth in annuity production once again in the first and second quarters of 1998. The growth is primarily attributable to the Company's new equity-indexed annuity. In fact, the growth has been dramatic as annuity production increased 96% from $57,867,000 for the second quarter of 1997 to $113,407,000 for the same period of 1998. This growth is almost entirely from the Company's new equity-indexed annuity. The Company diversified its annuity products offered to customers by introducing an equity-indexed annuity in late 1997. This product is a flexible premium deferred annuity which combines the features associated with traditional fixed annuities, with the option to have interest rates that are linked in part to an equity index, the S&P 500 Composite Stock Price Index. This new annuity is a long-term contract designed as a planning vehicle for retirement security. Significant initial sales totaling $81,790,000 in the first six months of 1998 indicate that this product is attractive to customers, as it has guaranteed minimum interest rates, coupled with the potential for significantly higher returns based on an equity index component. Also, because the Company does not offer variable products or mutual funds, this new product provides a key equity-based alternative to the Company's existing fixed annuity products. The Company has implemented an investment hedging program to offset the potential higher returns required to be paid on these products. Specifically, the Company purchases index options from highly rated banks and brokerage firms. These index options act as hedges to match closely the returns based on the S&P 500 Composite Stock Price Index which may be paid to policyholders. Universal life insurance premiums showed significant growth in the second quarter of 1998. Universal life premiums totaled $18,427,000 for the quarter ended June 30, 1998, compared to $16,873,000 for the same period of 1997, reflecting an increase of 9.2%. This growth is primarily from domestic life insurance sales as the Company's increased marketing efforts and additional personnel are producing positive results. While the increase in second quarter universal life insurance premiums is primarily from the domestic market, the majority of the Company's life insurance production continues to come from the international market, primarily Central and South American countries. While the Company continues to see economic and competitive pressures in the Central and South American market, which has resulted in relatively flat insurance production over the past few years, first year universal life insurance premiums showed modest growth in the second quarter of 1998. 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 pressures with continued strong production and successful marketing efforts. While international life insurance production remains consistent, the Company's goal is to increase sales in this market. To accomplish this goal, the Company has continued to modify its market, distribution, and product strategies. For example, the Company just introduced two new equity-indexed investment products similar to the equity-indexed annuity sold in the domestic market. These new products are targeted primarily to specific South American countries for pension and retirement planning needs. The Company also plans to modify the current portfolio of international universal life products to better meet the needs in expanded market niches. For example, new life insurance products will be developed for large policy cases and with low minimum premiums specifically for business cases. Net Investment Income: Net investment income increased 4.2% from the second quarter of 1997, due primarily to corresponding increases in invested assets for the same period and due to yield and amortization adjustments on mortgage- backed securities resulting from lower market interest rates. This adjustment totaled $985,000. The increase in invested assets was primarily from debt securities. While overall investment income increases, the Company continues to experience declines in investment income from mortgage loans which is consistent with decreases in mortgage loans as previously described. A detail of net investment income is provided below:
Three Months Ended June 30, 1998 1997 (In thousands) Investment income: Debt securities $ 48,828 46,180 Mortgage loans 4,311 4,845 Policy loans 2,300 2,506 Other 2,636 2,354 Total investment income 58,075 55,885 Investment expenses 814 927 Net investment income $ 57,261 54,958
Realized Gains on Investments: The Company recorded realized gains of $846,000 in 1998 compared to realized gains of $77,000 in 1997. The gains in 1998 were primarily from calls of investments in debt securities. The 1997 gains are net of an increase in the mortgage loan allowance for losses totaling $100,000. No significant writedowns on investments were recorded in 1998. Life and Other Policy Benefits: Expenses in 1998 and 1997 were $8.5 million and $10.3 million, respectively. The significant decrease in expenses is due to a decrease in surrenders of traditional products and lower life insurance benefit claims. Mortality claims were $728,000 lower in the second quarter of 1998 than in 1997. Traditional product surrenders also decreased $959,000 in 1998 over the comparable 1997 period. However, much of this decrease in surrender expense is offset by corresponding changes in liabilities for future policy benefits. A comparative detail of life and other policy benefits is provided below:
Three Months Ended June 30, 1998 1997 (In thousands) Life insurance benefit claims $ 5,231 5,959 Surrenders of traditional products 2,824 3,783 Other policy benefits 399 568 Totals $ 8,454 10,310
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 1998 was $11,455,000 compared to $11,183,000 for 1997. Universal Life and Investment Annuity Contract Interest: Interest expense was up from $36,344,000 in 1997 to $37,215,000 in 1998. Increases in annuity production, resulting in corresponding increases in policy liabilities, was the primary reason for the higher expenses. Most of the increase in annuity production in the second quarter of 1998 was from sales of equity-indexed annuities. Significant changes and fluctuations in income and expense items between the six months ended June 30, 1998 and 1997 are described in detail for insurance operations and discontinued brokerage operations as follows: Insurance Operations Insurance Operations Net Earnings: Earnings from insurance operations increased $1,304,000, or $0.36 per diluted share, compared to the first six months of 1997. Earnings for the six months ended June 30, 1998, benefited from increases in net investment income and other income, combined with lower amortization of deferred policy acquisition costs. Universal Life and Investment Annuity Contract Revenues: These revenues decreased slightly from $40,681,000 for the six months ended June 30, 1997, to $40,591,000 for the same 1998 period. Cost of insurance revenues continue to increase as the Company's universal life insurance in force consistently grows. However, surrender charge revenues decreased, offsetting this income growth. Surrender charge revenues declined due to lower two-tier annuity and universal life insurance policy surrenders as previously described for the three months ended June 30, 1998.
Six Months Ended June 30, 1998 1997 (In thousands) Surrender charges: Two-tier annuities $ 9,264 10,358 Universal life insurance 3,861 4,927 Single-tier annuities 3,209 2,368 Total surrender charges 16,334 17,653 Cost of insurance revenues 18,533 16,998 Policy fees and other revenues 5,724 6,030 Totals $ 40,591 40,681
Actual universal life and investment annuity deposits collected for the six months ended June 30, 1998 and 1997, are detailed below. Deposits collected on these nontraditional products are not reflected as revenues in the Company's statements of earnings, as they are recorded directly to policyholder liabilities upon receipt, in accordance with generally accepted accounting principles.
Six Months Ended June 30, 1998 1997 (In thousands) Investment annuities: First year and single premiums $ 172,135 103,346 Renewal premiums 10,746 12,621 Total annuities 182,881 115,967 Universal life insurance: First year and single premiums 10,106 7,039 Renewal premiums 23,937 23,541 Total universal life insurance 34,043 30,580 Totals $ 216,924 146,547
Annuity sales increased $66,914,000, or 58%, for the six months ended June 30, 1998, compared to the same period of 1997. This increase is almost entirely from sales of equity-indexed annuities. Universal life insurance premiums also increased significantly from $30,580,000 to $34,043,000 for the six months ended June 30, 1997 and 1998, respectively. This reflects growth of 11.3% and is primarily from increased sales in the domestic life insurance market. Net Investment Income: Net investment income increased 4.9% from $107,511,000 in 1997 to $112,799,000 in 1998, primarily due to the reasons as previously described for the three months ended June 30, 1998. However, net investment income for the six months ended June 30, 1998, also increased due to other investment income from index options used to hedge the equity return component of the Company's equity-indexed annuity products. This increase was primarily attributable to the first quarter of 1998 based on market fluctuations of the S&P 500 Composite Stock Price Index. A detail of net investment income is provided below:
Six Months Ended June 30, 1998 1997 (In thousands) Investment income: Debt securities $ 96,164 91,846 Mortgage loans 8,799 9,511 Policy loans 4,725 4,848 Other 4,513 2,863 Total investment income 114,201 109,068 Investment expenses 1,402 1,557 Net investment income $ 112,799 107,511
Other Income: Other income increased significantly from $156,000 in 1997 to $811,000 in 1998. The increase was primarily due to proceeds received from the U.S. government in the first quarter of 1998 related to previous litigation involving a failed savings and loan institution. The litigation related to the Company's previous investment in bonds of the financial institution and subsequent losses incurred upon its failure. Realized Gains and Losses on Investments: The Company recorded realized gains of $1,508,000 in 1998 compared to realized losses of $2,779,000 in 1997. The gains in 1998 were primarily from calls of investments in debt securities. The losses in 1997 were primarily from net losses on debt securities totaling $2.0 million. The Company also incurred net losses totaling $849,000 on mortgage loans primarily relating to a foreclosure during the first quarter of 1997. Life and Other Policy Benefits: Expenses in 1998 and 1997 were $19.1 million and $20.0 million, respectively. The significant decrease in expenses is due primarily to lower traditional product surrenders as previously described for the three months ended June 30, 1998. The lower surrenders were offset slightly by higher life insurance benefit claims for the six months ended June 30, 1998. Amortization of Deferred Policy Acquisition Costs: Amortization was consistent between six months periods at $20,400,000 in 1998 compared to $20,885,000 in 1997. Universal Life and Investment Annuity Contract Interest: Interest expense was up from $74.1 million in 1997 to $75.6 million in 1998. As previously described for the three months ended June 30, 1998, increases in annuity production, primarily equity-indexed annuities, was the primary reason for the higher expenses. Other Insurance Operating Expenses: Included in 1998 expenses is a $200,000 lawsuit settlement payment by National Western Life to San Patricio County. The lawsuit arose from derivative investments purchased by San Patricio County from affiliates of The Westcap Corporation. As part of the settlement, National Western Life received a general release of all claims asserted with no admission of liability. Federal Income Taxes: Federal income taxes for 1998 reflect an effective tax rate of 34.1%, slightly lower than the current federal tax rate of 35%. However, the 1997 taxes reflect a lower effective tax rate of 32.6%. Federal income taxes for the six months ended June 30, 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, resulting in the lower effective tax rate. 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. No earnings or losses were reported for discontinued brokerage operations for the six months ended June 30, 1998. However, 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. 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 $71.7 million and $76.3 million for the six months ended June 30, 1998 and 1997, respectively. Additionally, net cash flows from the Company's deposit product operations, which includes universal life and investment annuity products, totaled $25.2 million for the first six months of 1998, but reflected a net cash outflow totaling $32.5 million for the same period of 1997. The increase in cash flows from the deposit product operations was due primarily to increases in sales of the Company's new equity-indexed annuity. The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $90.3 million and $85.4 million for the six months ended June 30, 1998 and 1997, respectively. The Company expects significant cash flows to continue from these sources throughout the remainder of 1998. Capital Resources The Company relies on stockholders' equity for its capital resources, as there has been no long-term debt outstanding in 1998 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 1998. Stockholders' equity totaled $424.5 million at June 30, 1998, reflecting an increase of $23.6 million from December 31, 1997. The increase in capital is primarily from net earnings of $22.6 million and an increase in net unrealized gains on investment securities totaling $851,000 during the first six months of 1998. Book value per share at June 30, 1998, was $121.41. YEAR 2000 ISSUES The "Year 2000" problem arose because many existing computer programs use only the last two digits to refer to a year, resulting in these programs' inability to recognize "00" in the date field as the year 2000. If not corrected, many computer systems may be unable to process date sensitive data accurately beyond the year 1999, resulting in possible system failures or generation of erroneous results. Because of the potential financial and operational problems this could present, the Company has conducted a review of its computer systems to identify systems that could be affected by the "Year 2000" issue. The Company is primarily utilizing its own resources to correct, reprogram, and test internally developed and maintained systems. The Company anticipates this process will be substantially completed prior to year-end 1998. Computer systems purchased from software developers are also being reviewed for "Year 2000" compliance. These systems are either already "Year 2000" compliant or the software developers are in the process of completing the required programing changes. Additionally, the Company is reviewing possible implications from its major service providers, which include investment trust, banking, and telephone services. This review has been substantially completed and the Company does not anticipate significant problems from these services related to "Year 2000" issues. The Company has reviewed potential costs to modify its existing systems, and such costs are not expected to exceed $200,000. A significant amount of any such costs will not be incremental costs to the Company, as internal information technology resources are primarily being used and will continue to be utilized and reallocated as needed. Also, for externally developed systems under licensing contracts, costs are primarily borne by the software developer. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Pending Litigation On March 28, 1994, the Community College District No. 508, County of Cook and State of Illinois (The City Colleges) filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division, against National Western Life Insurance Company (the Company or National Western) and subsidiaries of The Westcap Corporation (Westcap), a wholly owned subsidiary of the Company. The suit sought rescission of securities purchase transactions by The City Colleges from Westcap between September 9, 1993, and November 3, 1993, alleged compensatory damages, punitive damages, injunctive relief, declaratory relief, fees, and costs. National Western was named as a "controlling person" of the Westcap defendants. Westcap filed Chapter 11 bankruptcy, and The City Colleges filed a claim in the bankruptcy court against Westcap. The claim was tried before the bankruptcy court and in September, 1997, a $56,173,000 judgment was entered against Westcap favorable to The City Colleges. Westcap appealed this decision to the United States District Court for the Southern District of Texas (Houston Division). On July 24, 1998, the United States District Court affirmed the orders of the bankruptcy court with respect to their underlying conclusion that Westcap is liable to The City Colleges under the Texas Securities Act, but the Court vacated the orders and remanded them to the bankruptcy court to determine the correct amount of damages in a manner consistent with the Court's opinion and the Texas Securities Act. It is expected that Westcap will appeal the District Court's judgment to the Fifth Circuit Court of Appeals. While Westcap is a wholly owned subsidiary of the Company, the Company is not a party to the bankruptcy or the judgment against Westcap by the bankruptcy court or the United States District Court. The lawsuit against the Company was stayed in September, 1994, pending resolution of The City Colleges' claim against Westcap. Following the judgment against Westcap in the bankruptcy court, on December 2, 1997, the stay was lifted by the United States District Court in Illinois, and The City Colleges filed an amended complaint seeking to hold the Company liable for the claim allowed in the bankruptcy court against Westcap under the "control person" provision of the Texas Securities Act. The suit seeks approximately $56 million plus fees and costs. The Company filed jurisdictional and venue motions to have the case transferred to the United States District Court for the Western District of Texas, which motions were agreed to by the Plaintiff, and the case in now pending in the United States District Court for the Western District of Texas, where the parties are engaged in discovery activities. The Company believes it has reasonable and adequate defenses to the suit. Although the alleged damages, if sustained, would be material to the Company's financial statements, a reasonable estimate of any actual losses which may result from the suit cannot be made at this time. The Westcap Corporation Bankruptcy Proceedings The Westcap Corporation, which is currently in Chapter 11 bankruptcy, the Creditors' Committee, and National Western Life filed documents with the bankruptcy court on April 30, 1998, that could lead to the settlement of all claims of the creditors of Westcap and the claims of Westcap against National Western Life, with the exception of the claims of The City Colleges against National Western Life. The next step in the settlement process is the approval of such agreements by the Westcap creditors, Westcap and National Western Life, and the bankruptcy court. These parties must vote to either accept or reject the agreements by August 21, 1998. Results of this process are anticipated to be released by the bankruptcy court in September, 1998. If the plan is ultimately approved and confirmed, National Western Life's obligations could total approximately $15 million for complete releases from all claims, except for the pending claims asserted by The City Colleges against National Western Life in federal court litigation. Because it remains uncertain at this time whether the agreements will be approved by all the parties, no amounts have been accrued in the Company's financial statements for potential settlements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 19, 1998, the stockholders voted upon the following matters at the annual stockholders meeting: (a) The election of Class A directors to serve one-year terms. The results of the voting were as follows:
For Against Robert L. Moody 2,562,939 22,524 Arthur O. Dummer 2,559,531 25,932 Harry L. Edwards 2,559,636 25,827 E. J. Pederson 2,565,470 19,993
(b) The election of Class B directors to serve one-year terms. The results of the voting were as follows:
For Against E. Douglas McLeod 200,000 - Charles D. Milos, Jr. 200,000 - Frances A. Moody 200,000 - Ross R. Moody 200,000 - Russell S. Moody 200,000 - Louis E. Pauls, Jr. 200,000 -
(c) The adoption of the First Amendment to the National Western Life Insurance Company 1995 Stock and Incentive Plan. The results of the voting were as follows: For - 2,524,308; Against - 53,816; Abstain - 7,339. The amendment to the plan provides additional stock options for directors of National Western Life. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 10(k) - First Amendment to the National Western Life Insurance Company 1995 Stock and Incentive Plan effective June 19, 1998 (filed on page __ of this report.). 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 June 30, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. National Western Life Insurance Company (Registrant) Date: August 10, 1998 /S/ Ross R. Moody Ross R. Moody President, Chief Operating Officer, and Director (Authorized Officer) Date: August 10, 1998 /S/ Robert L. Busby, III Robert L. Busby, III Senior Vice President - Chief Administrative Officer, Chief Financial Officer and Treasurer (Principal Financial Officer) Date: August 10, 1998 /S/ Vincent L. Kasch Vincent L. Kasch Vice President - Controller and Assistant Treasurer (Principal Accounting Officer) EX-10.K 2 EXHIBIT 10(k) - MATERIAL CONTRACTS FIRST AMENDMENT TO THE NATIONAL WESTERN LIFE INSURANCE COMPANY 1995 STOCK AND INCENTIVE PLAN Paragraph VII(h) of the 1995 Stock and Incentive Plan has been amended to read as follows: "(h) Fixed Grants to Directors. Each individual who was a non-employee Director of the Company on the date of approval of the Plan received an Option to purchase 1,000 shares of Common Stock at the Fair Market Value thereof on the date of the grant. Each individual who is a Director of the Company on the date of the approval of this First Amendment shall receive an Option to purchase an additional 1,000 shares of Common Stock at the Fair Market Value thereof at the date of grant of the Option. Each additional individual person who thereafter becomes a new Director of the Company shall, on completion of three (3) years of continuous service following election to such office, receive an Option to purchase 1,000 shares of Common Stock at the Fair Market Value thereof at the date of grant of the Option, and each such person, upon completion of five (5) years of continuous service as a Director of the Company, shall receive an Option to purchase an additional 1,000 shares of Common Stock at the Fair Market Value thereof at the date of grant of the Option. However, in no event shall a Director receive options to purchase any such Director shares that in the aggregate total more than 2,000 shares under the Plan. Each Option granted under this paragraph VII(h) shall (i) not constitute an Incentive Stock Option, (ii) not have Stock Appreciation Rights granted in connection therewith, (iii) have a term of ten years, (iv) vest twenty percent (20%) per year on each of the first five anniversary dates of the grant thereof for Directors subject to acceleration and vesting pursuant to paragraph XII(c), and (v) cease to be exercisable after the date which is three months after the termination of such individual's service as a Director (provided that such exercise period shall be extended to one year in the event of the death of the Director). Any Director holding Options granted under this paragraph VII(h) who is a member of the Committee shall not participate in any action of the Committee with respect to any claim or dispute involving any such Director." EX-11 3 EXHIBIT 11 NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE For the Three Months Ended June 30, 1998 and 1997 (Unaudited) (In Thousands Except Per Share Data)
1998 1997 Numerator for basic and diluted earnings per share: Earnings available to common stockholders before and after assumed conversions: Net earnings $ 12,270 11,798 Denominator: Basic earnings per share - weighted-average shares 3,494 3,491 Effect of dilutive stock options 37 28 Diluted earnings per share - adjusted weighted-average shares for assumed conversions 3,531 3,519 Basic earnings per share: Net earnings $ 3.51 3.38 Diluted earnings per share: Net earnings $ 3.48 3.35
EXHIBIT 11 NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE For the Six Months Ended June 30, 1998 and 1997 (Unaudited) (In Thousands Except Per Share Data)
1998 1997 Numerator for basic and diluted earnings per share: Earnings available to common stockholders before and after assumed conversions: Earnings from continuing operations $ 22,640 18,550 Losses from discontinued operations - (1,000) Net earnings $ 22,640 17,550 Denominator: Basic earnings per share - weighted-average shares 3,493 3,491 Effect of dilutive stock options 35 28 Diluted earnings per share - adjusted weighted-average shares for assumed conversions 3,528 3,519 Basic earnings per share: Earnings from continuing operations $ 6.48 5.32 Losses from discontinued operations - (0.29) Net earnings $ 6.48 5.03 Diluted earnings per share: Earnings from continuing operations $ 6.42 5.27 Losses from discontinued operations - (0.28) Net earnings $ 6.42 4.99
EX-27 4
7 This schedule contains summary financial information extracted from the National Western Life Insurance Company and subsidiaries consolidated financial statements and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 677,967 1,945,922 2,031,614 14,546 170,166 13,817 2,983,180 13,104 4,514 298,020 3,338,942 2,830,952 0 15,701 9,383 2,609 0 0 3,496 420,994 3,338,942 47,158 112,799 1,508 811 93,185 20,400 14,328 34,363 11,723 22,640 0 0 0 22,640 6.48 6.42 0 0 0 0 0 0 0 Consists of $6,567 revenues from traditional contracts subject to FAS 60 accounting treatment and $40,591 revenues from universal life and investment annuity contracts subject to FAS 97 accounting treatment. Consists of $19,128 benefits paid to policyholders, $(1,493) decrease in reserves on traditional contracts and $75,550 interest on universal life and investment annuity contracts.
EX-27 5
7 This schedule contains summary financial information extracted from the National Western Life Insurance Company and subsidiaries consolidated financial statements and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 574,934 1,643,211 1,726,469 25,860 191,674 19,066 2,624,596 10,024 1,339 270,167 2,958,459 2,576,044 0 12,908 9,925 2,781 0 0 3,491 308,496 2,958,459 87,173 201,816 (2,415) 661 180,276 33,675 27,084 46,200 10,566 35,634 (16,350) 0 0 19,284 5.53 5.52 0 0 0 0 0 0 0 Consists of $17,390 revenues from traditional contracts subject to FAS 60 accounting treatment and $69,783 revenues from universal life and investment annuity contracts subject to FAS 97 accounting treatment. Consists of $39,823 benefits paid to policyholders, $(2,487) decrease in reserves on traditional contracts and $142,940 interest on universal life and investment annuity contracts.
EX-27 6
7 This schedule contains summary financial information extracted from the National Western Life Insurance Company and subsidiaries consolidated financial statements and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 542,864 1,718,570 1,735,383 25,559 190,780 18,194 2,665,531 8,649 1,255 282,861 3,006,434 2,605,207 0 13,979 9,884 0 0 0 3,491 311,456 3,006,434 23,090 50,655 623 1,101 47,029 8,361 6,554 13,525 4,781 8,744 0 0 0 8,744 2.50 2.49 0 0 0 0 0 0 0 Consists of $4,274 revenues from traditional contracts subject to FAS 60 accounting treatment and $18,816 revenues from universal life and investment annuity contracts subject to FAS 97 accounting treatment. Consists of $8,678 benefits paid to policyholders, $(484) decrease in reserves on traditional contracts and $38,835 interest on universal life and investment annuity contracts.
EX-27 7
7 This schedule contains summary financial information extracted from the National Western Life Insurance Company and subsidiaries consolidated financial statements and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 511,087 1,769,759 1,759,030 23,311 200,641 15,972 2,685,663 7,500 2,378 291,742 3,042,131 2,641,292 0 24,755 9,874 0 0 0 3,491 320,323 3,042,131 47,436 104,683 1,721 1,139 94,530 15,788 12,992 31,669 11,085 20,584 0 0 0 20,584 5.90 5.87 0 0 0 0 0 0 0 Consists of $8,593 revenues from traditional contracts subject to FAS 60 accounting treatment and $38,843 revenues from universal life and investment annuity contracts subject to FAS 97 accounting treatment. Consists of $17,491 benefits paid to policyholders, $(915) decrease in reserves on traditional contracts and $77,954 interest on universal life and investment annuity contracts.
EX-27 8
7 This schedule contains summary financial information extracted from the National Western Life Insurance Company and subsidiaries consolidated financial statements and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 513,787 1,809,197 1,808,262 20,148 195,437 15,752 2,726,036 18,402 3,250 295,252 3,071,791 2,668,380 0 11,145 9,852 0 0 0 3,491 332,909 3,071,791 69,797 159,461 1,275 1,171 139,991 21,733 18,989 50,991 17,847 33,144 0 0 0 33,144 9.49 9.45 0 0 0 0 0 0 0 Consists of $11,799 revenues from traditional contracts subject to FAS 60 accounting treatment and $57,998 revenues from universal life and investment annuity contracts subject to FAS 97 accounting treatment. Consists of $26,393 benefits paid to policyholders, $(1,924) decrease in reserves on traditional contracts and $115,522 interest on universal life and investment annuity contracts.
EX-27 9
7 This schedule contains summary financial information extracted from the National Western Life Insurance Company and subsidiaries consolidated financial statements and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 510,008 1,873,561 1,896,847 17,619 193,311 15,209 2,770,931 11,358 216 295,666 3,120,829 2,701,872 0 14,562 9,841 2,716 0 0 3,491 349,369 3,120,829 92,577 214,302 1,612 2,718 184,788 30,361 25,722 70,338 24,123 46,215 0 0 0 46,215 13.24 13.17 0 0 0 0 0 0 0 Consists of $16,611 revenues from traditional contracts subject to FAS 60 accounting treatment and $75,966 revenues from universal life and investment annuity contracts subject to FAS 97 accounting treatment. Consists of $35,354 benefits paid to policyholders, $(2,041) decrease in reserves on traditional contracts and $151,475 interest on universal life and investment annuity contracts.
EX-27 10
7 This schedule contains summary financial information extracted from the National Western Life Insurance Company and subsidiaries consolidated financial statements and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 493,896 1,917,284 1,907,383 16,453 190,022 17,361 2,792,932 11,106 1,341 298,865 3,148,293 2,717,962 0 16,336 9,674 2,699 0 0 3,491 353,919 3,148,293 23,151 52,553 (2,856) 68 46,701 9,702 6,927 9,586 2,834 6,752 (1,000) 0 0 5,752 1.65 1.64 0 0 0 0 0 0 0 Consists of $3,720 revenues from traditional contracts subject to FAS 60 accounting treatment and $19,431 revenues from universal life and investment annuity contracts subject to FAS 97 accounting treatment. Consists of $9,699 benefits paid to policyholders, $(718) decrease in reserves on traditional contracts and $37,720 interest on universal life and investment annuity contracts.
EX-27 11
7 This schedule contains summary financial information extracted from the National Western Life Insurance Company and subsidiaries consolidated financial statements and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 531,274 1,894,787 1,913,814 15,852 190,705 17,238 2,811,884 13,925 2,719 294,026 3,163,774 2,719,396 0 14,966 9,532 2,682 0 0 3,491 367,794 3,163,774 48,952 107,511 (2,779) 156 92,073 20,885 13,372 27,510 8,960 18,550 (1,000) 0 0 17,550 5.03 4.99 0 0 0 0 0 0 0 Consists of $8,271 revenues from traditional contracts subject to FAS 60 accounting treatment and $40,681 revenues from universal life and investment annuity contracts subject to FAS 97 accounting treatment. Consists of $20,009 benefits paid to policyholders, $(2,000) decrease in reserves on traditional contracts and $74,064 interest on universal life and investment annuity contracts.
EX-27 12
7 This schedule contains summary financial information extracted from the National Western Life Insurance Company and subsidiaries consolidated financial statements and is qualified in its entirety by refernce to such financial statements. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 604,017 1,878,334 1,934,324 13,208 182,312 16,343 2,846,999 6,224 2,121 290,480 3,192,974 2,737,554 0 16,193 9,356 2,664 0 0 3,491 380,777 3,192,974 71,666 160,419 (2,371) 220 137,455 30,670 19,750 42,059 13,980 28,079 (1,000) 0 0 27,079 7.76 7.70 0 0 0 0 0 0 0 Consists of $11,682 revenues from traditional contracts subject to FAS 60 accounting treatment and $59,984 revenues from universal life and investment annuity contracts subject to FAS 97 accounting treatment. Consists of $29,371 benefits paid to policyholders, $(2,096) decrease in reserves on traditional contracts and $110,180 interest on universal life and investment annuity contracts.
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