UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
þ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the Fiscal Year Ended December 31, 2006
o 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
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84-0467208
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(State
of Incorporation)
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(I.R.S.
Employer Identification Number)
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850
EAST
ANDERSON LANE, AUSTIN, TEXAS 78752-1602
(Address
of Principal Executive Offices)
(512)
836-1010
(Telephone
Number)
Securities
registered pursuant to Section 12 (b) of the Act:
None
Securities
registered pursuant to Section 12 (g) of the Act:
None
(Title
of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or 15(d) of the Act. Yes o No þ
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 þ No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this
Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated file” in Rule 12b-2 of the Exchange Act. (Check
One)
Large
accelerated filer o Accelerated
filer þ Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
The
aggregate market value of the common stock (based upon the closing price)
held
by non-affiliates of the Registrant on June 30, 2006 was
$540,988,546.
As
of
March 9, 2007, the number of shares of Registrant's common stock outstanding
was: Class A - 3,420,824 and Class B - 200,000.
DOCUMENTS
INCORPORATED BY REFERENCE
None
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PART
I
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Page
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Business
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4
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Risk
Factors
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9
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Unresolved
Staff Comments
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11
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Properties
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12
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Legal
Proceedings
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12
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Submission
of Matters to a Vote of Security Holders
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12
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PART
II
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Market
for Registrant's Common Equity and Related Stockholder
Matters
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13
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Selected
Consolidated Financial Data
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15
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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16
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Quantitative
and Qualitative Disclosures About Market Risk
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42
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Financial
Statements and Supplementary Data
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42
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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42
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Controls
and Procedures
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42
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Other
Information
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45
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PART
III
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Directors
and Executive Officers of the Registrant
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45
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Executive
Compensation
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48
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Security
Ownership of Certain Beneficial Owners and Management
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65
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Certain
Relationships and Related Transactions
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67
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Principal
Accountant Fees and Services
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68
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PART
IV
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Exhibits
and Financial Statement Schedules
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68
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Signatures
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129
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PART
I
General
National
Western Life Insurance Company (hereinafter referred to as "National Western",
"Company", or "Registrant") is a stock life insurance company, chartered
in the
State of Colorado in 1956, and doing business in forty-nine states, the District
of Columbia, and four U.S. territories or possessions. National Western is
also
licensed in Haiti, and although not otherwise licensed, accepts applications
from and issues policies to residents of various countries in Central and
South
America, the Caribbean, the Pacific Rim, Eastern Europe and Asia. Such policies
are underwritten, accepted, and issued in the United States upon applications
submitted by independent contractor broker-agents. The Company provides life
insurance products for the savings and protection needs of approximately
149,000
policyholders and for the asset accumulation and retirement needs of 124,000
annuity contractholders.
During
2006, the Company's total assets increased 5% to $6.7 billion at December
31,
2006 from $6.4 billion at December 31, 2005. The Company generated revenues
of
$521.9 million, $441.0 million, and $434.1 million in 2006, 2005, and 2004,
respectively. In addition, National Western generated net income of $76.3
million, $77.3 million and $122.2 million (including $54.7 million from a
change
in accounting principle) in 2006, 2005, and 2004, respectively.
The
Company's financial information, including information in this report filed
on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
any
amendments to the above reports, are accessible free of charge through the
Company's Internet site at www.nationalwesternlife.com
or may
be viewed at the United States Securities and Exchange Commission ("SEC")
Public
Reference Room in Washington, D.C. or at the SEC's Internet site at www.sec.gov.
Products
National
Western offers a broad portfolio of individual whole life, universal life
and
term insurance plans, and annuities, including supplementary riders.
Life
Products.
The
Company's life products provide protection for the life of the insured and,
in
some cases, allow for cash value accumulation on a tax-deferred basis. These
product offerings include universal life insurance ("UL"), interest-sensitive
whole life, and traditional products such as term insurance coverage. Interest
sensitive products such as UL accept premiums that are applied to an account
value. Deducted from the account value are cost of insurance charges which
vary
by age, gender, plan, and class of insurance, as well as various expense
charges. Interest is credited to account values at a fixed interest rate
generally determined in advance and guaranteed for a policy year at a time,
subject to minimum guaranteed rates specified in the policy contract. A slight
variation to this general interest crediting practice involves equity-indexed
universal life ("EIUL") policies whose credited interest may be linked in
part
to an outside index such as the S&P 500Ò
Composite Stock Price Index ("S&P 500 IndexÒ")
at the
election of the policyholder. These products offer both flexible and fixed
premium modes and provide policyholders with flexibility in the available
coverage, the timing and amount of premium payments and the amount of the
death
benefit, provided there are sufficient policy funds to cover all policy charges
for the coming year. Traditional products generally provide for a fixed death
benefit payable in exchange for regular premium payments.
Annuity
Products.
Annuity
products sold include flexible premium and single premium deferred annuities,
equity-indexed annuities, and single premium immediate annuities. These products
can be tax qualified or nonqualified annuities. A fixed single premium deferred
annuity ("SPDA") provides for a single premium payment at the time of issue,
an
accumulation period, and an annuity payout period commencing at some future
date. A flexible premium deferred annuity ("FPDA") provides the same features
but allows, generally with some conditions, additional payments into the
contract. Interest is credited to the account value of the annuity initially
at
a current rate of interest which is guaranteed for a period of time, typically
the first year. After this period, the interest credited is subject to change
based upon market rates and product profitability subject to a minimum
guaranteed rate specified in the contract. Interest accrues during the
accumulation period generally on a tax-deferred basis to the contractholder.
After a number of years specified in the annuity contract, the owner may
elect
to have the proceeds paid as a single payment or as a series of payments
over a
period of time. The owner is permitted at any time during the accumulation
period to withdraw all or part of the annuity account balance subject to
contract provisions such as surrender charges and market value adjustments.
An
equity-indexed deferred annuity ("EIA") performs essentially in the same
manner
as SPDAs and FPDAs with the exception that, in addition to a fixed interest
crediting option, the contractholder has the ability to elect an interest
crediting mechanism that is linked, in part, to an outside index such as
the
S&P 500 IndexÒ.
A
single premium immediate annuity ("SPIA") foregoes the accumulation period
and
immediately commences an annuity payout period.
Distributions
of the Company's direct premium revenues and deposits by product type are
provided below.
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Years
Ended December 31,
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2006
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2005
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2004
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(In
thousands)
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Annuities:
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Single
premium deferred
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$
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8,216
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10,389
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8,156
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Flexible
premium deferred
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163,415
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225,941
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342,509
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Equity-indexed
deferred
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303,613
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298,227
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512,709
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Single
premium immediate
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10,750
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23,383
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28,653
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Total
annuities
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485,994
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557,940
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892,027
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Universal
life insurance
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146,742
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133,579
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119,554
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Traditional
life and other
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18,046
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16,629
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15,830
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Total
direct premiums and deposits collected
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$
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650,782
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708,148
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1,027,411
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Operating
Segments
The
Company manages its business between Domestic Insurance Operations and
International Insurance Operations. For segment reporting purposes, the
Company's annuity business, which is predominantly domestic, is separately
identified.
Domestic
Insurance Operations.
The
Company is currently licensed to do business in all states and the District
of
Columbia, except for New York. Products marketed are annuities, universal
life
insurance, and traditional life insurance, which include both term and whole
life products. The majority of domestic sales are the Company's annuities.
National Western markets and distributes its domestic products primarily
through
independent national marketing organizations ("NMO"). These NMOs assist the
Company in recruiting, contracting, and managing independent agents. The
Company's agents are independent contractors who are compensated on a commission
basis. At December 31, 2006, the Company's NMO relationships had contracted
approximately 10,200 independent agents with the Company. Nearly 20% of these
contracted agents submitted policy applications to the Company in the past
twelve months.
International
Insurance Operations.
National
Western's international operations focus on foreign nationals in upper
socioeconomic classes. Insurance products are issued primarily to residents
of
countries in Central and South America, the Caribbean, the Pacific Rim, Eastern
Europe, and Asia. Issuing policies to residents of countries in these different
regions provides diversification that helps to minimize large fluctuations
that
could arise due to various economic, political, and competitive pressures
that
may occur from one country to another. Products issued to international
residents are almost entirely universal life and traditional life insurance
products. However, certain annuity and investment contracts are also available.
At December 31, 2006, the Company had 68,100 international life insurance
policies in force representing nearly $13.3 billion in face amount of
coverage.
International
applications are submitted by independent contractor broker-agents, many
of whom
have been submitting policy applications to National Western for 20 or more
years. The Company had approximately 4,000 independent international
broker-agents contracted at December 31, 2006, nearly 46% of which submitted
policy applications to the Company in the past twelve months.
There
are
some inherent risks of accepting international applications which are not
present within the domestic market that are reduced substantially by the
Company
in several ways. As previously described, the Company accepts applications
from
foreign nationals in upper socioeconomic classes who have substantial financial
resources. This targeted customer base coupled with National Western's
conservative underwriting practices have historically resulted in claims
experience, due to natural causes, similar to that in the United States.
The
Company minimizes exposure to foreign currency risks by requiring payment
of
premiums and claims in United States dollars. Finally, nearly forty years
of
experience with the international products and the Company's longstanding
independent broker-agent relationships further serve to minimize
risks.
Geographical
Distribution of Business. The
following table depicts the distribution of the Company's premium revenues
and
deposits.
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Years
Ended December 31,
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2006
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2005
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2004
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(In
thousands)
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United
States domestic products:
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Annuities
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$
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475,867
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548,967
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882,530
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Life
insurance
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35,780
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36,594
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31,501
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Total
domestic products
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511,647
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585,561
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914,031
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International
products:
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Annuities
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10,127
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8,973
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9,497
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Life
insurance
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129,008
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113,614
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103,883
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Total
international products
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139,135
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122,587
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113,380
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Total
direct premiums and deposits collected
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$
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650,782
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708,148
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1,027,411
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Although
many agents sell National Western's products, the Company's annuity sales
in any
year typically reflect one or two NMOs whose agents sold 10% or more of the
Company’s total annuity sales. In 2006, there were two such NMOs who accounted
for 22.1% and 12.2% of total annuity sales, respectively. Similarly, domestic
life insurance sales in any year may include one or two NMOs who accounted
for
10% or more of total domestic life insurance sales. In 2006, there were two
NMOs
who generated 22.8% and 13.3%, respectively, of total domestic life insurance
sales. These NMOs were not the same NMOs who produced more than 10% of total
annuity sales. International life insurance sales are much more diversified
by
agency and in 2006 were geographically attributed to Latin America (75%),
the
Pacific Rim (13%), and Eastern Europe (12%).
Segment
Financial Information.
A
summary of financial information for the Company's segments is as
follows:
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Domestic
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International
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Life
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Life
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All
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Insurance
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Insurance
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Annuities
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Others
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Totals
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(In
thousands)
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Revenues,
excluding
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|
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realized
gains (losses):
|
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|
|
|
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2006
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$
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43,222
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106,613
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|
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350,665
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|
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18,697
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|
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519,197
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2005
|
|
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42,165
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|
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93,577
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|
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277,889
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|
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17,528
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|
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431,159
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2004
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|
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44,116
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|
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87,850
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|
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283,827
|
|
|
14,847
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|
|
430,640
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|
|
|
|
|
|
|
|
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|
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Segment
earnings:
(A)
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|
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2006
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$
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297
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|
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12,191
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|
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56,559
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|
|
5,566
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|
|
74,613
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2005
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|
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2,809
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|
|
13,559
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|
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47,915
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|
|
6,559
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|
|
70,842
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2004
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|
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2,522
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|
|
12,133
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|
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45,473
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|
|
5,066
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|
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65,194
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|
|
|
|
|
|
|
|
|
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|
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Segment
assets: (B)
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2006
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$
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381,490
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715,064
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5,467,733
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|
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103,087
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6,667,374
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2005
|
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366,939
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|
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631,477
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5,256,146
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|
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94,064
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|
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6,348,626
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2004
|
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361,176
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568,723
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4,960,837
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84,481
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|
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5,975,217
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Notes
to Table:
(A)
Amounts
exclude realized gains and losses on investments, net of taxes.
(B)
Amounts
exclude other unallocated assets.
Additional
information concerning these industry segments is included in Note 13, Segment
and Other Operating Information, of the accompanying consolidated financial
statements.
Competition
and Ratings
National
Western competes with over 400 life and health insurance company groups in
the
United States consisting of approximately 2,000 companies, as well as other
financial intermediaries such as banks and securities firms who market insurance
products. Competitive factors are primarily the breadth and quality of products
offered, established positions in niche markets, pricing, relationships with
distribution, commission structures, perceived stability of the insurer,
quality
of underwriting and customer service, and cost efficiency. Operating results
of
life insurers are subject to fluctuations not only from this competitive
environment but also due to economic conditions, interest rate levels and
changes, performance of investments, and the maintenance of strong insurance
ratings from independent rating agencies.
In
order
to compete successfully, life insurers have turned their attention toward
distribution, technology, defined end market targets, speed to the market
in
terms of product development, and customer relationship management as ways
of
gaining a competitive edge. The Company's management believes that it competes
primarily on the basis of its longstanding reputation for commitment in serving
international markets, its financial strength and stability, and its ability
to
attract and retain distribution based upon product and
compensation.
Ratings
with respect to financial strength are an important factor in establishing
the
competitive position of insurance companies. Ratings are important to
maintaining public confidence and impact the ability to market products.
The
following summarizes the Company's financial strength ratings.
Rating
Agency
|
Rating
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Standard
& Poor's
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A
(Strong)
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A.M.
Best
|
A-
(Excellent)
|
A.M.
Best
and Standard & Poor’s ratings are a consideration of the Company’s claims
paying ability and are not a rating of the Company’s investment worthiness. The
rating agencies generally review the Company's rating on an annual basis
during
the second calendar quarter of the year. The above ratings were assigned
with a
stable outlook during 2006. However, there is no assurance that the Company's
ratings will continue for a certain period of time or that they will not
be
changed. In the event the Company's ratings are downgraded, the Company's
business may be negatively impacted.
Risk
Management
The
Company's product designs, underwriting standards and risk management techniques
are utilized to protect against disintermediation risk and greater than expected
mortality and morbidity risk. Disintermediation risk is limited through the
use
of surrender charges, certain provisions not allowing surrender of the policy,
and market value adjustment features. Investment guidelines including duration
targets, asset allocation tolerances and return objectives help to ensure
that
disintermediation risk is managed within the constraints of profitability
criteria. Prudent underwriting is applied to select and price insurance risks
and the Company regularly monitors mortality experience relative to its product
pricing assumptions. Enforcement of disciplined claims management serves
to
further protect against greater than expected mortality.
A
significant aspect of the Company’s business is managing the linkage of its
asset characteristics with the anticipated behavior of its policy obligations
and liabilities, a process commonly referred to as asset-liability matching.
The
Company maintains an Asset-Liability Committee (“ALCO”) consisting of senior
level members of the Company who assist and advise the Company’s Board of
Directors in monitoring the level of risk the Company is exposed to in managing
its assets and liabilities in order to attain the risk-return profile desired.
Certain members of the ALCO meet as frequently as necessary, to review and
recommend for board of director ratification, current period interest crediting
rates to policyholders based upon existing and anticipated investment
opportunities. These rates apply to new sales and to products after an initial
guaranteed period, if applicable. Rates are established after the initial
guaranteed period based upon asset portfolio yields and each product’s required
interest spread, taking into consideration current competitive market
conditions.
Substantially
all international products contain a currency clause stating that premium
and
claim "dollars" refer to lawful currency of the United States. Policy
applications submitted by international insurance brokers are generally
associated with individuals in upper socioeconomic classes who desire the
stability and inflationary hedge of dollar denominated insurance products
issued
by the Company. The favorable demographics of this group typically results
in a
higher average policy size, and persistency and claims experience (from natural
causes) similar to that in the United States. By accepting applications
submitted on residents outside the United States, the Company is able to
further
diversify its revenue, earnings, and insurance risk.
The
Company follows the industry practice of reinsuring (ceding) portions of
its
insurance risks with a variety of reinsurance companies. The use of reinsurance
allows the Company to underwrite policies larger than the risk it is willing
to
retain on any single life and to continue writing a larger volume of new
business. The maximum amount of life insurance the Company normally retains
is
$250,000 on any one life subject to a minimum reinsurance session of $50,000.
However, the use of reinsurance does not relieve the Company of its primary
liability to pay the full amount of the insurance benefit in the event of
the
failure of a reinsurer to honor its contractual obligation. Consequently,
the
Company avoids concentrating reinsurance risk with any one reinsurer and
only
participates in reinsurance treaties with reputable carriers.
The
Company maintains a system of disclosure controls and procedures, including
internal controls designed to provide reasonable assurance that assets are
safeguarded and transactions are properly authorized, executed and recorded.
The
Company recognizes the importance of full and open presentation of its financial
position and operating results and to this end maintains a Disclosure Controls
and Procedures Committee comprised of senior executives who possess
comprehensive knowledge of the Company's business and operations. This Committee
is responsible for evaluating disclosure controls and procedures and for
the
gathering, analyzing, and disclosing of information as required to be disclosed
under the securities laws. It assists the Chief Executive Officer and Chief
Financial Officer in their responsibilities of making the certifications
required under the securities laws regarding the Company's disclosure controls
and procedures. It ensures that material financial information is properly
communicated up the Company's hierarchy to the appropriate person or persons
and
that all disclosures are made in a timely fashion. This Committee reports
directly to the Audit Committee of the Company.
Regulatory
and Other Issues
Regulation.
The
Company's insurance business is subject to comprehensive state regulation
in
each of the states it is licensed to conduct business. The laws enforced
by the
various state insurance departments provide broad administrative powers with
respect to licensing to transact business, licensing and appointing agents,
approving policy forms, regulating unfair trade and claims practices,
establishing solvency standards, fixing minimum interest rates for the
accumulation of surrender values, and regulating the type, amounts, and
valuations of permitted investments, among other things. The Company is required
to file detailed annual statements with each of the state insurance supervisory
departments in which it does business. The Company's operations and financial
records are subject to examination by these departments at regular intervals.
Statutory financial statements are prepared in accordance with accounting
practices prescribed or permitted by the Colorado Division of Insurance,
the
Company's principal insurance regulator. Prescribed statutory accounting
practices are largely dictated by the Statutory Accounting Principles adopted
by
the National Association of Insurance Commissioners ("NAIC").
The
NAIC,
as well as state regulators, continually evaluates existing laws and regulations
pertaining to the operations of life insurers. To the extent that initiatives
result as a part of this process, they may be adopted in the various states
in
which the Company is licensed to do business. It is not possible to predict
the
ultimate content and timing of new statutes and regulations adopted by state
insurance departments and the related impact upon the Company's operations
although it is conceivable that they may be more restrictive.
Although
the federal government does not directly regulate the life insurance industry,
federal measures previously considered or enacted by Congress, if revisited,
could affect the insurance industry and the Company's business. These measures
include the tax treatment of life insurance companies and life insurance
products, as well as changes in individual income tax structures and rates.
Even
though the ultimate impact of any of these changes, if implemented, is
uncertain, the persistency of the Company's existing products and the ability
to
sell products could be materially affected.
Risk-Based
Capital Requirements.
The NAIC
established risk-based capital ("RBC") requirements to help state regulators
monitor the financial strength and stability of life insurers by identifying
those companies that may be inadequately capitalized. Under the NAIC's
requirements, each insurer must maintain its total capital above a calculated
threshold or take corrective measures to achieve the threshold. The threshold
of
adequate capital is based on a formula that takes into account the amount
of
risk each company faces on its products and investments. The RBC formula
takes
into consideration four major areas of risk which are: (i) asset risk which
primarily focuses on the quality of investments; (ii) insurance risk which
encompasses mortality and morbidity risk; (iii) interest rate risk which
involves asset-liability matching issues; and (iv) other business risks.
For
each category, the RBC requirements are determined by applying specified
factors
to various assets, premiums, reserves, and other items, with the factor being
higher for items with greater underlying risk and lower for items with less
risk. The Company's statutory capital and surplus at December 31, 2006, was
significantly in excess of the threshold RBC requirements.
Effects
of Inflation.
The rate
of inflation as measured by the change in the average consumer price index
has
not had a material effect on the revenues or operating results of the Company
during the three most recent fiscal years.
Employees.
The
Company had approximately 273 employees as of December 31, 2006 substantially
all of which worked in the Company’s home office in Austin, Texas.
Company
performance is subject to varying risk factors. If any of the following risks
manifests into actual occurrences, the Company’s operations, financial position
or financial performance could be negatively impacted.
We
are subject to changing interest rates, market volatility, and general economic
conditions which may affect the risk and returns on both our investment
portfolio and our products.
We
are
exposed to significant capital market risk related to changes in interest
rates.
Substantial and sustained changes, up or down, in market interest rate levels
can materially affect the profitability of our products, the market value
of our
investments, and ultimately the reported amount of stockholders’ equity.
A
rise in
interest rates will increase the net unrealized loss position of our investment
portfolio and may subject the Company to disintermediation risk.
Disintermediation risk is the risk that policyholders may surrender their
contracts in a rising interest rate environment, requiring the Company to
liquidate investments in an unrealized loss position (i.e. the market value
less
than the carrying value of the investments). With respect to fixed income
security investments the Company maintains in an “Available for Sale” category,
rising interest rates will cause declines in the market value of these
securities. These declines are reported in our financial statements as an
unrealized investment loss and a reduction of stockholders’ equity.
A
decline
in interest rates could expose the Company to reduced profitability due to
minimum interest rate guarantees that are required in our products by
regulation. A key component of profitability is investment spread, or the
difference between the yield on our investments and the rates we credit to
policyholders on our products. A narrowing of investment spreads could
negatively affect operating results. Although the Company has the ability
to
adjust the rates credited on products in order to maintain our required
investment spread, a significant decline in interest rate levels could affect
investment yields to the point where the investment spread is compromised
due to
minimum interest rate guarantees. In addition, the potential for increased
policy surrenders and cash withdrawals, competitor activities, and other
factors
could further limit the Company’s ability to maintain crediting rates on its
products at levels necessary to avoid sacrificing investment
spread.
We
are subject to general domestic and international economic conditions that
may
be less favorable than currently exists or is anticipated.
The
demand for financial and insurance products is subject to factors such as
consumer sentiment and behavior, business investment and government spending,
the volatility and strength of capital markets, inflation, and overall economic
climate. Further, since we accept applications from residents in North America,
Latin America, Eastern Europe and the Pacific Rim, we are exposed to economic
conditions in multiple geographic locations. Economic downturns in any of
these
geographic locations characterized by political, social or economic instability,
higher unemployment, lower family income or consumer spending could negatively
affect the demand for the Company’s products. Accordingly, the Company’s overall
success depends, in part, upon the ability to succeed despite these differing
and dynamic conditions.
Our
investment portfolio is subject to credit quality risks which may lessen
the
value of invested assets and the Company’s book value per share.
The
Company substantially invests monies received in investment grade, fixed
income
investment securities in order to meet its obligations to policyholders and
provide a return on its deployed capital. Consequently, we are subject to
the
risk that issuers of these securities may default on principal and interest
payments, particularly in the event of a major downturn in economic and/or
business climate. At December 31, 2006, approximately 2.7% of the Company’s $5.5
billion fixed income securities portfolio was comprised of issuers who were
investment grade at the time the Company acquired them but were subsequently
downgraded for various reasons. A substantial increase in defaults from these
or
other issuers could negatively impact the Company’s financial position and
results.
For
the
Company’s equity-indexed products, over the counter derivative instruments are
purchased from a number of highly rated counterparties to fund the equity-index
credit to policyholders. In the event that any of these counterparties fails
to
meet their contractual obligations under these derivative instruments, the
Company would be financially at risk for providing the credits due that the
counterparty reneged on. The failure of the counterparty to perform could
negatively impact the Company’s financial position and results.
We
are subject to incurring difficulties in marketing and distributing our products
through our current and future distribution channels.
The
Company distributes its life and annuity products through independent
broker-agents. There is substantial competition, particularly in the Company’s
domestic market, for independent broker-agents with the demonstrated ability
to
market and sell insurance products. Competition for these individuals or
organizations typically centers on products, compensation, home office support
and the insurer’s financial strength ratings. The Company’s future sales and
financial condition are dependent upon avoiding significant interruptions
in
attracting and retaining independent broker-agents.
We
are subject to a downgrade in our financial strength ratings which may
negatively effect our ability to attract and retain independent distributors,
make our products less attractive to consumers, and may have an adverse effect
on our operations.
Financial
strength ratings have grown to become an important criteria in establishing
the
competitive position of insurers. Ratings generally reflect the rating agencies’
view of a particular company’s financial strength, operating performance, and
ability to meet its obligations to policyholders. However, some of the rating
factors often relate to the particular views of the rating agency, their
independent economic modeling, the general economic climate, and other
circumstances outside of the insurer’s control. Accordingly, we cannot predict
with any certainty what actions rating agencies may take. A downgrade in
our
financial strength rating, or an announced potential downgrade, could affect
our
competitive position and make it more difficult to market our products vis-à-vis
competitors with higher financial strength ratings. In extreme situations,
a
significant downgrade action by one or more rating agency could induce existing
policyholders to cancel their policies and withdraw funds from the Company.
These events could have a material adverse effect on our financial position
and
liquidity.
We
are subject to competition from new sources as well as companies having
substantially greater financial resources which could have an adverse impact
upon our business levels and profitability.
In
recent
years, there has been considerable consolidation among companies in the
insurance and financial sectors resulting in large, well-capitalized entities
that offer products comparable to the Company. Frequently, these larger
organizations are not domiciled in the United States or are financial services
entities attempting to establish a position in the insurance industry. These
larger competitors often enjoy economies of scale which produce lower operating
costs and the wherewithal to absorb greater risk allowing them to price products
more competitively and, in turn, attract independent distributors. Consequently,
the Company may encounter additional product pricing pressures and be challenged
to maintain profit margin targets and profitability criteria. Because of
these
competitive presences, the Company may not be able to effectively compete
without negative affects on our financial position and results.
We
are subject to regulation and changes to existing laws that may affect our
profitability or means of operations.
The
Company is subject to extensive laws and regulations which are complex and
subject to change. In addition, these laws and regulations are enforced by
a
number of different authorities including, but not limited to, state insurance
regulators, the Securities and Exchange Commission, state attorney generals,
and
the U.S. Department of Justice. Compliance with these laws and regulations
is
time consuming and any changes may materially increase our compliance costs
and
other expenses of doing business. The regulatory framework at the state and,
increasingly, federal level pertaining to insurance products and practices
is
advancing and could affect not only the design of our products but our ability
to continue to sell certain products.
Life
insurer products generally offer tax advantages to policyholders via the
deferral of income tax on policy earnings during the accumulation phase of
the
product, be it an annuity or a life insurance product. Periodically, Congress
has considered legislation that would reduce or eliminate this tax deferral
advantage inherent to the life insurance industry and subject the industry’s
products to treatment more equivalent with other investments. In the event
that
the tax-deferred status of life insurance products is revised or reduced
by
Congress all life insurers would be adversely impacted.
We
may be subject to unfavorable judicial developments, including the time and
expense of litigation, which potentially could affect our financial position
and
results.
In
the
ordinary course of business, we are involved in various legal actions common
to
the life insurance industry, some of which may occasionally assert claims
for
large amounts. These actions, for example, could include allegations of improper
sales practices in connection with the sale of life insurance or bad faith
in
the handling of insurance claims. While we are not a party to any lawsuit
that
we believe will have a material adverse effect on our financial position
or
operations, given the inherent unpredictability of litigation, there can
be no
assurance that such litigation, current or in the future, will not have such
a
material adverse effect on the Company’s results of operation or cash flows in
any particular reporting period.
We
are subject to policy claims experience which can fluctuate from period to
period and vary from past results or expectations.
The
Company’s earnings are significantly influenced by policy claims received and
will vary from period to period depending upon the amount of claims incurred.
In
any given quarter or year, there is very limited predictability of claims
experience. The liability established for future policy benefits is based
upon a
number of different factors. In the event our future claim experience does
not
match our past results or pricing assumptions, our operating results could
be
materially and adversely affected.
We
are subject to assumption inaccuracies regarding future mortality, persistency,
and interest rates used in determining deferred policy acquisition
costs.
Deferred
policy acquisition costs (and deferred sales inducement amounts) are calculated
using a number of assumptions related to policy persistency, mortality and
interest rates. Actual results could differ significantly from the related
assumptions which could have a material and adverse impact on the Company’s
operating results.
We
are dependent upon managing ever-evolving technology initiatives for effectively
managing the Company’s business.
The
Company’s business operations are technology dependent for maintaining accurate
records, administering complex contract provisions, and complying with
increasingly demanding regulation. While systems developments can streamline
many processes and in the long term reduce the cost of doing business, these
initiatives can present short-term cost and implementation risks. Projections
of
expenses, implementation time frames and the ultimate enhancement values
may be
different from expectations and escalate over time. The Company also faces
rising costs and time constraints in meeting data security compliance
requirements of new and proposed regulations. The increasing volume and
sophistication of computer viruses, hackers and other external threats may
increase the vulnerability of the Company’s systems to data breaches. These
increased risks and expanding requirements expose the Company to potential
data
loss and damages and significant increases in compliance and litigation
costs.
None.
The
Company leases approximately 72,000 square feet of office space in Austin,
Texas. This lease expires in 2010 and specifies lease payments that gradually
increase over the term of the lease. Currently, lease payments are $0.6 million
per year plus taxes, insurance, maintenance, and other operating costs.
Additionally, the Company’s wholly-owned subsidiary, The Westcap Corporation,
owns two buildings adjacent to the Company’s principal office space totaling
approximately 21,000 square feet that are leased and utilized by the Company.
The Company’s affiliate, Regent Care Building, Limited Partnership, owns a
65,000 square foot building in Reno, Nevada, which is leased and utilized
by
another of the Company’s affiliates, Regent Care Operations, Limited
Partnership, for use in its nursing home operations. Lease costs and related
operating expenses for facilities of the Company’s subsidiaries are currently
not significant in relation to the Company’s consolidated financial statements.
The intercompany lease costs related to The Westcap Corporation and the nursing
home have been eliminated for consolidated reporting purposes.
ITEM
3. LEGAL PROCEEDINGS
In
the
course of an audit of a charitable tax-exempt foundation, the Internal Revenue
Service (“IRS”) raised an issue under the special provisions of the Internal
Revenue Code (“IRC”) governing tax-exempt private foundations as to certain
interest-bearing loans from the Company to another corporation in which the
tax-exempt foundation owns stock. The issue is whether such transactions
constitute indirect self-dealing by the foundation, the result of which would
be
excise taxes on the Company by virtue of its participation in such transactions.
By letter to the Company dated August 21, 2003, the IRS proposed an initial
excise tax liability in the total amount approximating one million dollars
as a
result of such transactions. The Company disagrees with the IRS analysis.
The
Company is contesting the matter and expects to prevail on the merits. On
October 14, 2003, in response to the IRS letter, the Company requested that
this
issue instead be referred to the IRS National Office for technical advice.
The
IRS audit team agreed and the matter was referred in November of 2003 to
the IRS
National Office. Such technical advice when issued by the IRS National Office
will be in the form of a memorandum analyzing the issue which will be binding
on
the IRS audit team.
The
Company is a defendant in three class action lawsuits, and one class has
been
certified regarding an alleged violation of section 17200 of the California
Business and Professions Code. Management believes that the Company has good
and
meritorious defenses and intends to continue to vigorously defend itself
against
these claims.
The
Company is involved or may become involved in various other legal actions,
in
the normal course of business, in which claims for alleged economic and punitive
damages have been or may be asserted, some for substantial amounts. Although
there can be no assurances, at the present time, the Company does not anticipate
that the ultimate liability arising from potential, pending, or threatened
legal
actions, will have a material adverse effect on the financial condition or
operating results of the Company.
OF
SECURITY HOLDERS
No
matters were submitted to a vote of the Company’s security holders during the
fourth quarter of 2006.
PART
II
AND
RELATED STOCKHOLDER MATTERS
Market
Information
The
principal market on which the Class A common stock of the Company trades
is The
NASDAQ Stock Market®
under
the symbol “NWLIA”. The high and low sales prices for the Class A common stock
for each quarter during the last two years are shown in the following
table.
|
|
|
High
|
|
Low
|
|
|
|
|
|
|
2006:
|
First
Quarter
|
$
|
232.29
|
|
200.00
|
|
Second
Quarter
|
|
239.65
|
|
209.00
|
|
Third
Quarter
|
|
237.36
|
|
222.59
|
|
Fourth
Quarter
|
|
243.00
|
|
224.05
|
|
|
|
|
|
|
2005:
|
First
Quarter
|
$
|
175.85
|
|
166.63
|
|
Second
Quarter
|
|
197.99
|
|
160.00
|
|
Third
Quarter
|
|
213.70
|
|
194.69
|
|
Fourth
Quarter
|
|
220.00
|
|
181.95
|
Equity
Security Holders
The
number of stockholders of record on March 9, 2007 was as follows:
|
Class
A Common Stock
|
|
4,635
|
|
Class
B Common Stock
|
|
2
|
Dividends
During
2006, the Company paid cash dividends on its Class A and Class B common stock
in
the amounts of $1,231,497 and $36,000, respectively. During 2005, the Company
paid cash dividends on its Class A and Class B common stock in the amounts
of
$1,160,017 and $34,000, respectively. Payment of dividends is within the
discretion of the Company’s Board of Directors. The Company’s general policy is
to reinvest earnings internally to finance the development of new
business.
Securities
Authorized For Issuance Under Equity Compensation Plans
The
Company has one equity compensation plan that was approved by security holders.
Under the plan, 128,465 shares of the Company’s Class A common stock may be
issued upon exercise of the outstanding options at December 31, 2006. The
weighted average exercise price of the outstanding options is $123.00 per
option. Excluding the outstanding options, 26,477 shares of the common stock
remain available for future issuance under the plan at December 31, 2006.
The
Company has no equity compensation plans that have not been approved by security
holders.
Performance
Graph
The
following graph compares the change in the Company's cumulative total
stockholder return on its common stock with the NASDAQ - U.S. Companies Index
and the NASDAQ Insurance Stock Index. The graph assumes that the value of
the
Company's common stock and each index was $100 at December 31, 2001, and
that
all dividends were reinvested.
The
following five-year financial summary includes comparative amounts derived
from
the audited consolidated financial statements.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
(In
thousands except per share amounts)
|
|
Earnings
Information:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Life
and annuity premiums
|
|
$
|
15,805
|
|
|
14,602
|
|
|
14,025
|
|
|
13,916
|
|
|
13,918
|
|
Universal
life and annuity contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues
|
|
|
106,320
|
|
|
96,765
|
|
|
89,513
|
|
|
80,964
|
|
|
76,173
|
|
Net
investment income
|
|
|
379,768
|
|
|
310,213
|
|
|
315,843
|
|
|
298,974
|
|
|
236,714
|
|
Other
income
|
|
|
17,304
|
|
|
9,579
|
|
|
11,259
|
|
|
7,061
|
|
|
6,726
|
|
Realized
gains (losses) on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investments
|
|
|
2,662
|
|
|
9,884
|
|
|
3,506
|
|
|
(1,647
|
)
|
|
(16,144
|
)
|
Total
revenues
|
|
|
521,859
|
|
|
441,043
|
|
|
434,146
|
|
|
399,268
|
|
|
317,387
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
35,241
|
|
|
39,162
|
|
|
34,613
|
|
|
37,180
|
|
|
31,299
|
|
Amortization
of deferred policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition
costs
|
|
|
90,358
|
|
|
87,955
|
|
|
88,733
|
|
|
53,829
|
|
|
35,799
|
|
Universal
life and investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
annuity
contract interest
|
|
|
213,736
|
|
|
150,692
|
|
|
173,315
|
|
|
176,374
|
|
|
150,479
|
|
Other
operating expenses
|
|
|
65,709
|
|
|
46,349
|
|
|
35,441
|
|
|
48,776
|
|
|
36,938
|
|
Total
expenses
|
|
|
405,044
|
|
|
324,158
|
|
|
332,102
|
|
|
316,159
|
|
|
254,515
|
|
Earnings
before Federal income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
cumulative effect of change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
principle
|
|
|
116,815
|
|
|
116,885
|
|
|
102,044
|
|
|
83,109
|
|
|
62,872
|
|
Federal
income taxes
|
|
|
40,472
|
|
|
39,618
|
|
|
34,572
|
|
|
27,327
|
|
|
20,806
|
|
Earnings
before cumulative effect of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
change
in accounting principle
|
|
|
76,343
|
|
|
77,267
|
|
|
67,472
|
|
|
55,782
|
|
|
42,066
|
|
Cumulative
effect or change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
principle, net of tax
|
|
|
-
|
|
|
-
|
|
|
54,697
|
|
|
-
|
|
|
-
|
|
Net
earnings
|
|
$
|
76,343
|
|
|
77,267
|
|
|
122,169
|
|
|
55,782
|
|
|
42,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from operations
|
|
$
|
20.88
|
|
|
21.24
|
|
|
18.73
|
|
|
15.64
|
|
|
11.84
|
|
Cumulative
effect of change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
principle
|
|
|
-
|
|
|
-
|
|
|
15.18
|
|
|
-
|
|
|
-
|
|
Net
earnings
|
|
$
|
20.88
|
|
|
21.24
|
|
|
33.91
|
|
|
15.64
|
|
|
11.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
6,693,443
|
|
|
6,369,008
|
|
|
5,991,685
|
|
|
5,297,720
|
|
|
4,137,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
$
|
5,760,459
|
|
|
5,495,000
|
|
|
5,183,013
|
|
|
4,617,862
|
|
|
3,530,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
$
|
932,984
|
|
|
874,008
|
|
|
808,672
|
|
|
679,858
|
|
|
607,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value per common share
|
|
$
|
257.67
|
|
|
241.89
|
|
|
225.62
|
|
|
191.69
|
|
|
172.26
|
|
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking
Statements
The
Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for
forward-looking statements. Certain information contained herein or in other
written or oral statements made by or on behalf of National Western Life
Insurance Company or its subsidiaries are or may be viewed as forward-looking.
Although the Company has taken appropriate care in developing any such
information, forward-looking information involves risks and uncertainties
that
could significantly impact actual results. These risks and uncertainties
include, but are not limited to, matters described in the Company’s SEC filings
such as exposure to market risks, anticipated cash flows or operating
performance, future capital needs, and statutory or regulatory related issues.
However, National Western, as a matter of policy, does not make any specific
projections as to future earnings, nor does it endorse any projections regarding
future performance that may be made by others. Whether or not actual results
differ materially from forward-looking statements may depend on numerous
foreseeable and unforeseeable events or developments. Also, the Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future developments,
or
otherwise.
Management’s
discussion and analysis of financial condition and results of operations
(“MD&A”) of National Western Life Insurance Company for the three years
ended December 31, 2006 follows. This discussion should be read in conjunction
with the Company’s consolidated financial statements and related notes beginning
on page 74 of this report.
Overview
The
Company provides life insurance products on a global basis for the savings
and
protection needs of policyholders and annuity contracts for the asset
accumulation and retirement needs of contractholders both domestically and
internationally. The Company accepts funds from policyholders or contractholders
and establishes a liability representing future obligations to pay the policy
or
contract-holders and their beneficiaries. To ensure the Company will be able
to
pay these future commitments, the funds received as premium payments and
deposits are invested in high quality investments, primarily fixed income
securities.
Due
to
the business of accepting funds to pay future obligations in later years,
the
underlying economics and relevant factors affecting the life insurance industry
include the following:
Ÿ |
level
of premium revenues collected
|
Ÿ |
persistency
of policies and contracts
|
Ÿ |
investment
credit quality
|
Ÿ |
levels
of policy benefits and costs to acquire
business
|
Ÿ |
effect
of interest rate changes on revenues and investments including asset
and
liability matching
|
Ÿ |
adequate
levels of capital and surplus
|
The
Company monitors these factors continually as key business indicators. The
discussion below includes these indicators and presents information useful
to an
overall understanding of the Company’s business performance in 2006,
incorporating required disclosures in accordance with the rules and regulations
of the Securities and Exchange Commission.
Critical
Accounting Policies
Accounting
policies discussed below are those considered critical to an understanding
of
the Company’s financial statements.
Impairment
of Investment Securities. The
Company’s accounting policy requires that a decline in the value of a security
below its amortized cost basis be evaluated to determine if the decline is
other-than-temporary. The primary factors considered in evaluating whether
a
decline in value for fixed income and equity securities is other-than-temporary
include: (a) the length of time and the extent to which the fair value has
been
less than cost, (b) the financial conditions and near-term prospects of the
issuer, (c) whether the debtor is current on contractually obligated principal
and interest payments, and (d) the intent and ability of the Company to retain
the investment for a period of time sufficient to allow for any anticipated
recovery. In addition, certain securitized financial assets with contractual
cash flows are evaluated periodically by the Company to update the estimated
cash flows over the life of the security. If the Company determines that
the
fair value of the securitized financial asset is less than its carrying amount
and there has been a decrease in the present value of the estimated cash
flows
since the previous estimate, then an other-than-temporary impairment charge
is
recognized. When a security is deemed to be impaired a charge is recorded
as net
realized losses equal to the difference between the fair value and amortized
cost basis of the security. Once an impairment charge has been recorded,
the
fair value of the impaired investment becomes its new cost basis and the
Company
continues to review the other-than-temporarily impaired security for appropriate
valuation on an ongoing basis. Under U.S. generally accepted accounting
principles, the Company is not permitted to increase the basis of impaired
securities for subsequent recoveries in value.
Deferred
Acquisition Costs (“DAC”). The
Company is required to defer certain policy acquisition costs and amortize
them
over future periods. These costs include commissions and certain other expenses
that vary with and are primarily associated with acquiring new business.
The
deferred costs are recorded as an asset commonly referred to as deferred
policy
acquisition costs. The DAC asset balance is subsequently charged to income
over
the lives of the underlying contracts in relation to the anticipated emergence
of revenue or profits. Actual revenue or profits can vary from Company estimates
resulting in increases or decreases in the rate of amortization. The Company
regularly evaluates to determine if actual experience or other evidence suggests
that earlier estimates should be revised. Assumptions considered significant
include surrender and lapse rates, mortality, expense levels, investment
performance, and estimated interest spread. Should actual experience dictate
that the Company change its assumptions regarding the emergence of future
revenues or profits (commonly referred to as “unlocking”), the Company would
record a charge or credit to bring its DAC balance to the level it would
have
been if using the new assumptions from the inception date of each
policy.
DAC
is
also subject to periodic recoverability and loss recognition testing. These
tests ensure that the present value of future contract-related cash flows
will
support the capitalized DAC balance to be amortized in the future. The present
value of these cash flows, less the benefit reserve, is compared with the
unamortized DAC balance and if the DAC balance is greater, the deficiency
is
charged to expense as a component of amortization and the asset balance is
reduced to the recoverable amount. For more information about accounting
for DAC
see Note 1, Summary of Significant Accounting Policies, in the Notes to
Consolidated Financial Statements.
Deferred
Sales Inducements. Costs
related to sales inducements offered on sales to new customers, principally
on
investment type contracts and primarily in the form of additional credits
to the
customer’s account value or enhancements to interest credited for a specified
period, which are beyond amounts currently being credited to existing contracts,
are deferred and recorded as other assets. All other sales inducements are
expensed as incurred and included in interest credited to contract holders’
funds. Deferred sales inducements are amortized to income using the same
methodology and assumptions as DAC, and are included in interest credited
to
contract holders’ funds. Deferred sales inducements are periodically reviewed
for recoverability.
Future
Policy Benefits. Because
of the long-term nature of insurance contracts, the Company is liable for
policy
benefit payments many years into the future. The liability for future policy
benefits represents estimates of the present value of the Company’s expected
benefit payments, net of the related present value of future net premium
collections. For traditional life insurance contracts, this is determined
by
standard actuarial procedures, using assumptions as to mortality (life
expectancy), morbidity (health expectancy), persistency, and interest rates,
which are based on the Company’s experience with similar products. The
assumptions used are those considered to be appropriate at the time the policies
are issued. An additional provision is made on most products to allow for
possible adverse deviation from the assumptions assumed. For universal life
and
annuity products, the Company’s liability is the amount of the contract’s
account balance. Account balances are also subject to minimum liability
calculations as a result of minimum guaranteed interest rates in the policies.
While management and Company actuaries have used their best judgment in
determining the assumptions and in calculating the liability for future policy
benefits, there is no assurance that the estimate of the liabilities reflected
in the financial statements represents the Company’s ultimate obligation. In
addition, significantly different assumptions could result in materially
different reported amounts. A discussion of the assumptions used to calculate
the liability for future policy benefits is reported in Note 1, Summary of
Significant Accounting Policies, in the Notes to Consolidated Financial
Statements.
Revenue
Recognition. Premium
income for the Company’s traditional life insurance contracts is generally
recognized as the premium becomes due from policyholders. For annuity and
universal life contracts, the amounts collected from policyholders are
considered deposits and are not included in revenue. For these contracts,
fee
income consists of policy charges for policy administration, cost of insurance
charges and surrender charges assessed against policyholders’ account balances
which are recognized in the period the services are provided.
Investment
activities of the Company are integral to its insurance operations. Since
life
insurance benefits may not be paid until many years into the future, the
accumulation of cash flows from premium receipts are invested with income
reported as revenue when earned. Anticipated yields on investments are reflected
in premium rates, contract liabilities, and other product contract features.
These anticipated yields are implied in the interest required on the Company’s
net insurance liabilities (future policy benefits less deferred acquisition
costs) and contractual interest obligations in its insurance and annuity
products. The Company benefits to the extent actual net investment income
exceeds the required interest on net insurance liabilities and manages the
rates
it credits on its products to maintain the targeted excess or “spread” of
investment earnings over interest credited. The Company will continue to
be
required to provide for future contractual obligations in the event of a
decline
in investment yield. For more information concerning revenue recognition,
investment accounting, and interest sensitivity, please refer to Note 1,
Summary
of Significant Accounting Policies, and Note 3, Investments, in the Notes
to
Consolidated Financial Statements and the discussions under Investments in
Item
7 of this report.
Pension
Plans and Other Postretirement Benefits. The
Company sponsors a qualified defined benefit pension plan covering substantially
all employees and three nonqualified defined benefit plans covering certain
senior officers. In addition, the Company also has postretirement health
care
benefits for certain senior officers. In accordance with prescribed accounting
standards, the Company annually reviews plan assumptions.
The
Company annually reviews its pension benefit plan assumptions which include
the
discount rate, the expected long-term rate of return on plan assets, and
the
compensation increase rate. The assumed discount rate is set based on the
rates
of return on high quality long-term fixed income investments currently available
and expected to be available during the period to maturity of the pension
benefits. The assumed long-term rate of return on plan assets is generally
set
at the rate expected to be earned based on long-term investment policy of
the
plans and the various classes of the invested funds, based on the input of
the
plan’s investment advisors and consulting actuary and the plan’s historic rate
of return. The compensation rate increase assumption is generally set at
a rate
consistent with current and expected long-term compensation and salary policy,
including inflation. These assumptions involve uncertainties and judgment
and
therefore actual performance may not be reflective of the
assumptions.
Other
postretirement benefit assumptions include future events affecting retirement
age, mortality, dependency status, per capita claims costs by age, health
care
trend rates, and discount rates. Per capita claims cost by age is the current
cost of providing postretirement health care benefits for one year at each
age
from the youngest age to the oldest age at which plan participants are expected
to receive benefits under the plan. Health care trend rates involve assumptions
about the annual rate(s) of change in the cost of health care benefits currently
provided by the plan, due to factors other than changes in the composition
of
the plan population by age and dependency status. These rates implicitly
consider estimates of health care inflation, changes in utilization,
technological advances and changes in health status of the participants.
These
assumptions involve uncertainties and judgment, and therefore actual performance
may not be reflective of the assumptions.
Share-Based
Payments. Liability
awards under a share-based payment arrangement have been measured based on
the
award's fair value at the reporting date. The Black-Scholes valuation method
has
been used to estimate the fair value of the options. This fair value calculation
of the options include assumptions relative to the following:
Ÿ |
expected
term based on contractual term and perceived future behavior relative
to
exercise
|
Ÿ |
risk-free
interest rates
|
These
assumptions are continually reviewed by the Company and adjustments may be
made
based upon current facts and circumstances.
Other
significant accounting policies, although not involving the same level of
measurement uncertainties as those discussed above but nonetheless important
to
an understanding of the financial statements, are described in Note 1, Summary
of Significant Accounting Policies, in the Notes to Consolidated Financial
Statements.
RESULTS
OF OPERATIONS
The
Company’s consolidated financial statements are prepared in accordance with U.S.
generally accepted accounting principles (“GAAP”). In addition, the Company
regularly evaluates operating performance using non-GAAP financial measures
which exclude or segregate derivative and realized investment gains and losses
from operating revenues and earnings. Similar measures are commonly used
in the
insurance industry in order to assess profitability and results from ongoing
operations. The Company believes that the presentation of these non-GAAP
financial measures enhances the understanding of the Company’s results of
operations by highlighting the results from ongoing operations and the
underlying profitability factors of the Company’s business. The Company excludes
or segregates derivative and realized investment gains and losses because
such
items are often the result of events which may or may not be at the Company’s
discretion and the fluctuating effects of these items could distort trends
in
the underlying profitability of the Company’s business. Therefore, in the
following sections discussing consolidated operations and segment operations,
appropriate reconciliations have been included to report information management
considers useful in enhancing an understanding of the Company’s operations to
reportable GAAP balances reflected in the consolidated financial
statements.
Consolidated
Operations
Revenues. The
following details Company revenues.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Universal
life and annuity contract revenues
|
|
$
|
106,320
|
|
|
96,765
|
|
|
89,513
|
|
Traditional
life and annuity premiums
|
|
|
15,805
|
|
|
14,602
|
|
|
14,025
|
|
Net
investment income (excluding derivatives)
|
|
|
336,489
|
|
|
321,201
|
|
|
303,855
|
|
Other
income
|
|
|
17,304
|
|
|
9,579
|
|
|
11,259
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
|
475,918
|
|
|
442,147
|
|
|
418,652
|
|
Derivative
income (loss)
|
|
|
43,279
|
|
|
(10,988
|
)
|
|
11,988
|
|
Realized
gains on investments
|
|
|
2,662
|
|
|
9,884
|
|
|
3,506
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
521,859
|
|
|
441,043
|
|
|
434,146
|
|
Universal
life and annuity contract revenues
-
Revenues for universal life and annuity products consist of policy charges
for
the cost of insurance, administration charges, and surrender charges assessed
against policyholder account balances, less reinsurance premiums. The Company
has experienced modest growth in its life block of businesses. This growth
contributes to higher revenues in the form of cost of insurance charges which
were $67.7 million in 2006 compared to $63.3 million in 2005, and $60.1 million
in 2004. Administrative charges were $17.1 million, $15.0 million, and $13.0
million for the years ended December 31, 2006, 2005, and 2004, respectively.
Surrender charges assessed against policyholder account balances upon withdrawal
were $28.7 million in 2006 compared to $25.1 million in 2005 and $23.4 million
in 2004.
Traditional
life and annuity premiums
-
Traditional life insurance premiums for products such as whole life and term
life are recognized as revenues over the premium-paying period. These are
product lines that the Company has not put as much emphasis on relative to
interest sensitive products, particularly in its international life insurance
operations.
Net
investment income
- A
detail of net investment income is provided below.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Gross
investment income:
|
|
|
|
|
|
|
|
Debt
securities
|
|
$
|
306,129
|
|
|
293,502
|
|
|
276,624
|
|
Mortgage
loans
|
|
|
8,480
|
|
|
9,676
|
|
|
12,510
|
|
Policy
loans
|
|
|
6,354
|
|
|
6,409
|
|
|
6,483
|
|
Other
investment income
|
|
|
18,407
|
|
|
13,975
|
|
|
10,351
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment income
|
|
|
339,370
|
|
|
323,562
|
|
|
305,968
|
|
Investment
expenses
|
|
|
2,881
|
|
|
2,361
|
|
|
2,113
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
|
|
|
|
|
|
|
|
|
(excluding
derivatives)
|
|
|
336,489
|
|
|
321,201
|
|
|
303,855
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
income (loss)
|
|
|
43,279
|
|
|
(10,988
|
)
|
|
11,988
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$
|
379,768
|
|
|
310,213
|
|
|
315,843
|
|
Investment
grade debt securities generated approximately 91.0% of total investment income,
excluding derivatives in 2006. The mortgage loan investment balance has been
steadily declining over the past several years due to the low interest rate
environment, which has resulted in loan pre-payments and a decrease of new
loan
fundings. Other investment income for 2006 includes $1.2 million related
to
income received on various profit participation arrangements compared to
$2.8
million recorded in 2005 and $1.5 million recorded in 2004. In addition,
proceeds of $4.3 million were received in 2006 from a class action settlement
on
a disposed debt security.
Net
investment income performance is analyzed excluding derivative income (loss),
which is a common practice in the insurance industry, in order to assess
underlying profitability and results from ongoing operations. Net investment
income performance is summarized as follows:
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands except percentages)
|
|
Excluding
derivatives:
|
|
|
|
|
|
|
|
Net
investment income
|
|
$
|
336,489
|
|
|
321,201
|
|
|
303,855
|
|
Average
invested assets, at amortized cost
|
|
$
|
5,514,196
|
|
|
5,205,983
|
|
|
4,693,661
|
|
Yield
on average invested assets
|
|
|
6.10
|
%
|
|
6.17
|
%
|
|
6.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Including
derivatives:
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$
|
379,768
|
|
|
310,213
|
|
|
315,843
|
|
Average
invested assets, at amortized cost
|
|
$
|
5,548,266
|
|
|
5,252,259
|
|
|
4,731,169
|
|
Yield
on average invested assets
|
|
|
6.84
|
%
|
|
5.91
|
%
|
|
6.68
|
%
|
The
average invested asset decline in yield is due to the overall interest rate
level decline and the Company obtaining lower yields on newly invested funds.
In
addition, prepayments, calls, and maturities of higher yielding debt securities
have added to the yield decrease as these funds are reinvested at lower rates.
Refer to the Derivatives
discussion following this section for a more detailed
explanation.
Derivatives
income (loss)
- Index
options are derivative financial instruments used to fully hedge the equity
return component of the Company’s equity-indexed products, which were first
introduced for sale in 1997. In 2002, the Company began selling an
equity-indexed universal life product in addition to its equity-indexed
annuities. Any income or loss from the sale or expiration of the options,
as
well as period-to-period changes in fair values, are reflected as a component
of
net investment income. However, increases or decreases in income from these
options are substantially offset by corresponding increases or decreases
in
amounts credited to equity-indexed annuity and life policyholders.
Income
and losses from index options are due to market conditions. Index options
are
intended to act as hedges to match the returns on the S&P 500
Index®
and the
rise or decline in this index causes index option values to likewise rise
or
decline. While income from index options fluctuates with the index, the contract
interest expense to policyholder accounts for the Company’s equity-indexed
products also fluctuates in a similar manner and direction. In 2006 and 2004,
the S&P 500 Index®
increased and the Company recorded income from index options and likewise
increased contract interest expenses. In 2005, the S&P 500 Index®
decreased resulting in index option losses and a reduction in contract interest
expenses.
Derivative
components included in net investment income and the corresponding contract
interest amounts are detailed below for each date presented.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Derivatives:
|
|
|
|
|
|
|
|
Unrealized
income (loss)
|
|
$
|
27,108
|
|
|
(9,579
|
)
|
|
(13,262
|
)
|
Realized
income (loss)
|
|
|
16,171
|
|
|
(1,409
|
)
|
|
25,250
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income (loss) included in net investment income
|
|
$
|
43,279
|
|
|
(10,988
|
)
|
|
11,988
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contract interest
|
|
$
|
213,736
|
|
|
150,962
|
|
|
173,315
|
|
Other
income
- Other
income revenues consists primarily of gross income associated with nursing
home
operations of $11.2 million, $8.9 million, and $8.3 million in 2006, 2005,
and
2004, respectively. In addition, the Company received $5.5 million related
to lawsuit settlements during 2006. In 2004, a lawsuit settlement of $2.2
million was awarded to the Company relating to an investment previously owned
and is also included in other income.
Realized
gains on investments
- The
net gains reported in 2006 of $2.7 million consisted of gross gains of $5.3
million primarily from calls and sales of debt securities, sale of real estate
during the year, offset by gross losses of $2.6 million, which includes the
impairments highlighted in the table below, and from calls and sales of debt
and
equity securities.
In
past
years, the realized losses on investments have primarily resulted from
impairment writedowns on investments in debt securities and valuation allowances
recorded on mortgage loans. The Company records impairment writedowns when
a
decline in value is considered other-than-temporary and full recovery of
the
investment is not expected. Impairment writedowns are summarized in the
following table.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Impairment
or valuation writedowns:
|
|
|
|
|
|
|
|
Bonds
|
|
$
|
99
|
|
|
1,926
|
|
|
3,647
|
|
Mortgage
loans
|
|
|
2,100
|
|
|
-
|
|
|
632
|
|
The
mortgage loan valuation writedown in 2006 involves a New Orleans property
whose
value was negatively impacted by Hurricane Katrina.
Benefits
and Expenses.
The
following details benefits and expenses.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
$
|
35,241
|
|
|
39,162
|
|
|
34,613
|
|
Amortization
of deferred policy acquisition costs
|
|
|
90,358
|
|
|
87,955
|
|
|
88,733
|
|
Universal
life and annuity contract interest
|
|
|
213,736
|
|
|
150,692
|
|
|
173,315
|
|
Other
operating expenses
|
|
|
65,709
|
|
|
46,349
|
|
|
35,441
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
405,044
|
|
|
324,158
|
|
|
332,102
|
|
Life
and other policy benefits
- Life
and other policy benefits reflect death claims of $26.2 million, $30.0 million,
and $24.7 million for 2006, 2005, and 2004, respectively. The Company's
mortality experience over the past three years has generally been consistent
with its product pricing assumptions.
Amortization
of deferred policy acquisition costs
- Life
insurance companies are required to defer certain expenses associated with
acquiring new business. The majority of these acquisition expenses consist
of
commissions paid to agents, underwriting costs, and certain marketing expenses
and sales inducements. The Company defers sales inducements in the form of
first
year interest bonuses on annuity and universal life products that are directly
related to the production of new business. These charges are deferred and
amortized using the same methodology and assumptions used to amortize other
capitalized acquisition costs and the amortization is included in contract
interest. Recognition of these deferred policy acquisition costs in the
consolidated financial statements is to occur over future periods in relation
to
the expected emergence of profits priced into the products sold. This emergence
of profits is based upon assumptions regarding premium payment patterns,
mortality, persistency, investment performance, and expense patterns. Companies
are required to review these assumptions periodically to ascertain whether
actual experience has deviated significantly from that assumed. If it is
determined that a significant deviation has occurred, the emergence of profit
patterns is to be "unlocked" and reset based upon the actual
experience.
Amortization
of deferred policy acquisition costs increased to $90.4 million for the year
ended December 31, 2006 compared to $88.0 million and $88.7 million reported
in
2005 and 2004. Amortization for 2006 includes a true-up adjustment relative
to
partial surrenders, mortality assumptions, annuitizations, credited rates
and
earned rates which increased amortization in the current year by approximately
$4.3 million. There were similar adjustments in 2005 and 2004 relative to
amortization assumptions that resulted in increased amortization for those
years.
Universal
life and annuity contract interest
- The
Company closely monitors its credited interest rates on interest sensitive
policies, taking into consideration such factors as profitability goals,
policyholder benefits, product marketability, and economic market conditions.
As
long-term interest rates change, the Company's credited interest rates are
often
adjusted accordingly, taking into consideration the factors described above.
The
difference between yields earned on investments over policy credited rates
is
often referred to as the "interest spread". Raising policy credited rates
can
typically have an impact sooner than higher market rates on the Company's
investment portfolio yield, making it more difficult to maintain the current
interest spread.
The
Company's approximated average credited rates are as follows:
|
|
December
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(Excluding
equity-indexed products)
|
|
(Including
equity-indexed products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity
|
|
|
3.39
|
%
|
|
3.59
|
%
|
|
3.91
|
%
|
|
3.86
|
%
|
|
2.86
|
%
|
|
3.60
|
%
|
Interest
sensitive life
|
|
|
4.30
|
%
|
|
4.94
|
%
|
|
4.75
|
%
|
|
5.41
|
%
|
|
4.63
|
%
|
|
4.97
|
%
|
Contract
interest also includes the performance of the derivative component of the
Company's equity-indexed products. As previously noted, the recent market
performance of these derivative features decreased contract interest expense
in
2005, while also decreasing the Company's investment income given the hedge
nature of the options. During 2006 and 2004, the reverse was noted, as the
S&P 500 Index®
performance was up resulting in higher investment income and contract interest
expense. With these credited rates, the Company generally realized its targeted
interest spread on its products.
Other
operating expenses
- Other
operating expenses consist of general administrative expenses, licenses and
fees, commissions not subject to deferral, and expenses of nursing home
operations. Nursing home expenses amounted to $10.2 million, $7.6 million,
and
$7.2 million in 2006, 2005, and 2004, respectively. In 2006, $13.1 million
was
recorded related to increased compensation costs resulting from a change
in
liability classification for the Company’s stock option plan. Compensation costs
reported in 2005 and 2004 totaled $0.9 million in both years. A reduction
in
expenses of $6.5 million due to the final accounting related to a lawsuit
settlement is reflected in 2004 amounts. In addition, contractholder account
balances were increased $2.3 million in 2004 based on this final
settlement.
Federal
Income Taxes. Federal
income taxes on earnings from continuing operations for 2006, 2005, and 2004
reflect effective tax rates of 34.6%, 33.9%, and 33.9%, respectively, which
are
lower than the expected Federal rate of 35% primarily due to tax-exempt
investment income related to investments in municipal securities and
dividends-received deductions on income from stock investments.
Segment
Operations
Summary
of Segment Earnings
A
summary
of segment earnings from continuing operations for the years ended December
31,
2006, 2005, and 2004 is provided below. The segment earnings exclude realized
gains and losses on investments, net of taxes.
|
|
Domestic
Life
Insurance
|
|
International
Life
Insurance
|
|
Annuities
|
|
All
Others
|
|
Totals
|
|
|
|
(In
thousands)
|
|
Segment
earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
297
|
|
|
12,191
|
|
|
56,559
|
|
|
5,566
|
|
|
74,613
|
|
2005
|
|
|
2,809
|
|
|
13,559
|
|
|
47,915
|
|
|
6,559
|
|
|
70,842
|
|
2004
|
|
|
2,522
|
|
|
12,133
|
|
|
45,473
|
|
|
5,066
|
|
|
65,194
|
|
Domestic
Life Insurance Operations
A
comparative analysis of results of operations for the Company's domestic
life
insurance segment is detailed below.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Premiums
and other revenue:
|
|
|
|
|
|
|
|
Premiums
and contract revenues
|
|
$
|
22,731
|
|
|
22,172
|
|
|
23,324
|
|
Net
investment income
|
|
|
20,462
|
|
|
19,958
|
|
|
20,283
|
|
Other
income
|
|
|
29
|
|
|
35
|
|
|
509
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
43,222
|
|
|
42,165
|
|
|
44,116
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
13,656
|
|
|
14,932
|
|
|
15,141
|
|
Amortization
of deferred policy acquisition costs
|
|
|
7,313
|
|
|
5,798
|
|
|
9,098
|
|
Universal
life insurance contract interest
|
|
|
9,168
|
|
|
8,842
|
|
|
8,585
|
|
Other
operating expenses
|
|
|
12,630
|
|
|
8,349
|
|
|
7,479
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
42,767
|
|
|
37,921
|
|
|
40,303
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings before Federal income taxes
|
|
|
455
|
|
|
4,244
|
|
|
3,813
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
income taxes
|
|
|
158
|
|
|
1,435
|
|
|
1,291
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$
|
297
|
|
|
2,809
|
|
|
2,522
|
|
Revenues
from domestic life insurance operations include life insurance premiums on
traditional type products and revenues from universal life insurance. Revenues
from traditional products are simply premiums collected, while revenues from
universal life insurance consist of policy charges for the cost of insurance,
policy administration fees, and surrender charges assessed during the period.
A
comparative detail of premiums and contract revenues is provided
below.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Universal
life insurance revenues
|
|
$
|
18,286
|
|
|
16,322
|
|
|
16,807
|
|
Traditional
life insurance premiums
|
|
|
6,906
|
|
|
7,392
|
|
|
7,638
|
|
Reinsurance
premiums
|
|
|
(2,461
|
)
|
|
(1,542
|
)
|
|
(1,121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
22,731
|
|
|
22,172
|
|
|
23,324
|
|
In
accordance with generally accepted accounting principles, premiums collected
on
universal life products are not reflected as revenues in the Company's
consolidated statements of earnings. Actual domestic universal life premiums
are
detailed below.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Universal
life insurance:
|
|
|
|
|
|
|
|
First
year and single premiums
|
|
$
|
14,640
|
|
|
14,973
|
|
|
9,382
|
|
Renewal
premiums
|
|
|
14,118
|
|
|
14,199
|
|
|
14,510
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
28,758
|
|
|
29,172
|
|
|
23,892
|
|
The
Company's U.S. operations have typically emphasized annuity product sales
over
life product sales but recent efforts have been made to attract new independent
agents and to promote life products to improve domestic sales. It is the
Company's goal to increase domestic life product sales through increased
recruiting of new distribution and the development of new life insurance
products. The Company had approximately 10,200 contracted agents as of December
31, 2006.
Policy
benefits totaled $13.7 million, $14.9 million, and $15.1 million in 2006,
2005,
and 2004, respectively, which are consistent with Company expectations. Net
investment income remained consistent with $20.5 million, $20.0 million,
and
$20.3 million for 2006, 2005, and 2004, respectively. Other operating expenses
increased significantly in 2006 due to an increase in compensation costs
resulting from the change in liability classification for the Company’s stock
option plan. Compensation costs totaled $3.0 million, $0.2 million, and $0.2
million in 2006, 2005, and 2004, respectively.
International
Life Insurance Operations
A
comparative analysis of results of operations for the Company's international
life insurance segment is detailed below.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Premiums
and other revenue:
|
|
|
|
|
|
|
|
Premiums
and contract revenues
|
|
$
|
78,005
|
|
|
70,379
|
|
|
64,239
|
|
Net
investment income
|
|
|
28,530
|
|
|
23,123
|
|
|
22,821
|
|
Other
income
|
|
|
78
|
|
|
75
|
|
|
790
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
106,613
|
|
|
93,577
|
|
|
87,850
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
18,161
|
|
|
21,232
|
|
|
16,626
|
|
Amortization
of deferred policy acquisition costs
|
|
|
23,075
|
|
|
20,389
|
|
|
21,837
|
|
Universal
life insurance contract interest
|
|
|
25,675
|
|
|
18,118
|
|
|
18,631
|
|
Other
operating expense
|
|
|
21,051
|
|
|
13,359
|
|
|
12,418
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
87,962
|
|
|
73,098
|
|
|
69,512
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings before Federal income taxes
|
|
|
18,651
|
|
|
20,479
|
|
|
18,338
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
income taxes
|
|
|
6,460
|
|
|
6,920
|
|
|
6,205
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$
|
12,191
|
|
|
13,559
|
|
|
12,133
|
|
As
with
domestic operations, revenues from the international life insurance segment
include both premiums on traditional type products and revenues from universal
life insurance. A comparative detail of premiums and contract revenues is
provided below.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Universal
life insurance revenues
|
|
$
|
78,008
|
|
|
72,010
|
|
|
67,059
|
|
Traditional
life insurance premiums
|
|
|
11,027
|
|
|
9,201
|
|
|
8,228
|
|
Reinsurance
premiums
|
|
|
(11,030
|
)
|
|
(10,832
|
)
|
|
(11,048
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
78,005
|
|
|
70,379
|
|
|
64,239
|
|
International
operations have emphasized universal life policies over traditional life
insurance products. In accordance with generally accepted accounting principles,
premiums collected on universal life products are not reflected as revenues
in
the Company's consolidated statements of earnings. Actual international
universal life premiums collected are detailed below.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Universal
life insurance
|
|
|
|
|
|
|
|
First
year and single premiums
|
|
$
|
36,758
|
|
|
35,575
|
|
|
35,681
|
|
Renewal
premiums
|
|
|
81,226
|
|
|
68,832
|
|
|
59,981
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
117,984
|
|
|
104,407
|
|
|
95,662
|
|
The
Company's international life operations have been a significant contributor
to
the Company's overall growth and represent a market niche where the Company
believes it has a competitive advantage. A productive agency force has been
developed given the Company's longstanding reputation for supporting its
international life products coupled with the instability of competing companies
in international markets. In particular, the Company has experienced sizable
growth with its equity-indexed universal life products and has collected
premiums of $60.5 million, $48.2 million, and $37.2 million for the years
ended
2006, 2005, and 2004, respectively.
A
detail
of net investment income for international life insurance operations is provided
below.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
|
|
|
|
|
|
(excluding
derivatives)
|
|
$
|
25,893
|
|
|
23,896
|
|
|
23,260
|
|
Derivative
income (loss)
|
|
|
2,637
|
|
|
(773
|
)
|
|
(439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$
|
28,530
|
|
|
23,123
|
|
|
22,821
|
|
Derivative
income and losses fluctuate from period to period based on the S&P 500
Index®
performance.
Life
and
other policy benefits totaled $18.2 million in 2006, $21.2 million in 2005,
and
$16.6 million in 2004, which are consistent with Company expectations.
Amortization of deferred policy acquisition costs was $23.1 million, $20.4
million, and $21.8 million for 2006, 2005, and 2004, respectively. In the
first
quarter of 2006, a true-up of amortization assumptions resulted in increased
amortization of $1.0 million. Contract interest expense was $25.7 million,
$18.1
million, and $18.6 million, in 2006, 2005, and 2004, respectively. The universal
life contract interest fluctuations are primarily the result of the S&P 500
Index®
performance relative to the equity-indexed universal life products and the
associated stock market gains and losses which increased or decreased the
amounts the Company credited to policyholders.
International
sales during 2006 reflect Brazil, Taiwan, and Argentina as the top three
international countries based on premiums and contract revenues recorded.
As the
international life insurance in force continues to grow, the Company anticipates
operating earnings to similarly increase. The amount of international life
insurance in force has grown from $11.3 billion at December 31, 2004 to $12.2
billion at December 31, 2005, and to $13.3 billion at December 31,
2006.
Other
operating expenses reported in 2006 were $21.1 million compared to $13.4
million
and $12.4 million in 2005 and 2004. The significant increase in 2006 is due
to
an increase in compensation costs resulting from the change in liability
classification for the Company’s stock option plan. Compensation costs totaled
$5.1 million, $0.4 million, and $0.4 million in 2006, 2005, and 2004,
respectively.
Annuity
Operations
The
Company's annuity operations are almost exclusively in the United States.
Although some of the Company's investment contracts are available to
international residents, current sales are small relative to total annuity
sales. A comparative analysis of results of operations for the Company's
annuity
segment is detailed below.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Premiums
and other revenue:
|
|
|
|
|
|
|
|
Premiums
and contract revenues
|
|
$
|
21,389
|
|
|
18,816
|
|
|
15,975
|
|
Net
investment income
|
|
|
323,326
|
|
|
258,485
|
|
|
266,151
|
|
Other
income
|
|
|
5,950
|
|
|
588
|
|
|
1,701
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
350,665
|
|
|
277,889
|
|
|
283,827
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
3,424
|
|
|
2,998
|
|
|
2,846
|
|
Amortization
of deferred policy acquisition costs
|
|
|
59,970
|
|
|
61,768
|
|
|
57,798
|
|
Annuity
contract interest
|
|
|
178,893
|
|
|
123,732
|
|
|
146,099
|
|
Other
operating expenses
|
|
|
21,847
|
|
|
17,019
|
|
|
8,353
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
264,134
|
|
|
205,517
|
|
|
215,096
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings before Federal income taxes
|
|
|
86,531
|
|
|
72,372
|
|
|
68,731
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
income taxes
|
|
|
29,972
|
|
|
24,457
|
|
|
23,258
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$
|
56,559
|
|
|
47,915
|
|
|
45,473
|
|
Revenues
from annuity operations include primarily surrender charges and recognition
of
deferred revenues relating to immediate or payout annuities. A comparative
detail of the components of premiums and annuity contract revenues is provided
below.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Surrender
charges
|
|
$
|
17,260
|
|
|
15,271
|
|
|
13,031
|
|
Payout
annuity and other revenues
|
|
|
4,098
|
|
|
3,511
|
|
|
2,906
|
|
Traditional
annuity premiums
|
|
|
31
|
|
|
34
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
21,389
|
|
|
18,816
|
|
|
15,975
|
|
As
previously noted, the Company's earnings are dependent upon annuity contracts
persisting or remaining in force. While revenues decline with a reduction
in
surrender charges, the Company's earnings benefit. A mandated change in
accounting for two-tier annuities in 2004 had the effect of eliminating payout
annuity revenues pertaining to this product.
In
accordance with generally accepted accounting principles, deposits collected
on
annuity contracts are not reflected as revenues in the Company's consolidated
statements of earnings. Actual annuity deposits collected are detailed
below.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Equity-indexed
annuities
|
|
$
|
303,613
|
|
|
298,227
|
|
|
512,709
|
|
Other
deferred annuities
|
|
|
171,631
|
|
|
236,330
|
|
|
350,665
|
|
Immediate
annuities
|
|
|
10,750
|
|
|
23,383
|
|
|
28,653
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
485,994
|
|
|
557,940
|
|
|
892,027
|
|
The
Company experienced a substantial increase in sales relating to equity-indexed
annuities as the stock market rebounded in 2003 and 2004. These indexed products
are more attractive for consumers when interest rate levels remain low as
has
been the market environment the past few years. Equity-indexed annuity deposits
as a percentage of total annuity deposits recorded were 62.5%, 53.5%, and
57.5%
for the years ended December 31, 2006, 2005, and 2004, respectively. Since
the
Company does not offer variable products or mutual funds, equity-indexed
products provide an important alternative to the Company's existing fixed
interest rate annuity products.
Other
deferred annuity deposits decreased in 2006 compared to 2005 with $171.6
million
recorded in collected deposits compared to $236.3 million, respectively.
As a
selling inducement, many fixed-rate annuity products include a first year
premium or interest rate bonus in addition to the base first year deposit
interest rate. These bonuses are credited to the policyholder account but
are
deferred by the Company and amortized over future periods. The amount deferred
was approximately $19.7 million, $21.2 million, and $27.5 million for the
years
ended December 31, 2006, 2005, and 2004, respectively.
A
detail
of net investment income for annuity operations is provided below.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
|
|
|
|
|
|
(excluding
derivatives)
|
|
$
|
282,684
|
|
|
268,700
|
|
|
253,724
|
|
Derivative
income (loss)
|
|
|
40,642
|
|
|
(10,215
|
)
|
|
12,427
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$
|
323,326
|
|
|
258,485
|
|
|
266,151
|
|
Derivative
income and losses fluctuate from period to period based on the S&P 500
Index®
performance.
As
previously described, derivatives are used to hedge the equity return component
of the Company's equity-indexed annuity products with any gains or losses
from
the sale or expiration of the options, as well as period-to-period changes
in
fair values, reflected in net investment income. The increase in net investment
income, excluding derivatives from 2004 to 2006, is due to the increase in
the
overall size of the asset portfolio as a result of higher sales
volume.
A
true-up
of assumptions in the first quarter of 2006 resulted in increased amortization
of deferred policy acquisition costs of $3.1 million. Amortization of deferred
policy acquisition costs in 2005 of $61.8 million includes an unlocking
adjustment of $1.3 million. Adjustments were made in the assumptions relative
to
the future spreads on certain equity-index annuity products; modified surrender
charges on certain annuities to reflect continuing lower new money rates;
and
reduced ultimate valuation rates for pay out on annuitization under all
annuities. These adjustments resulted in a decrease to the deferred asset
balance and an increase in amortization.
The
Company is required to periodically adjust for actual experience that varies
from that assumed. While management does not currently anticipate any impact
from unlocking in 2007, facts and circumstances may arise in the future which
require that the factors be reexamined.
Annuity
contract interest includes the equity component return associated with the
Company's equity-indexed annuities. The detail of equity-indexed annuity
contract interest compared to contract interest for all other annuities is
as
follows:
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Equity-indexed
annuities
|
|
$
|
88,094
|
|
|
28,224
|
|
|
38,942
|
|
All
other annuities
|
|
|
101,619
|
|
|
110,165
|
|
|
129,392
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
contract interest
|
|
|
189,713
|
|
|
138,389
|
|
|
168,334
|
|
Bonus
interest deferred and capitalized
|
|
|
(19,700
|
)
|
|
(21,200
|
)
|
|
(27,491
|
)
|
Bonus
interest amortization
|
|
|
8,880
|
|
|
6,543
|
|
|
5,256
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contract interest
|
|
$
|
178,893
|
|
|
123,732
|
|
|
146,099
|
|
In
comparison by year, the fluctuation in reported contract interest amounts
for
equity-indexed annuities is due to sales and the effect of the positive or
negative performance of the stock market on option values as noted previously.
In addition, the 2004 contract interest figures include an increase of $2.3
million for certain contractholder account balances as part of a lawsuit
settlement.
Other
operating expenses totaled $21.8 million in 2006 which reflects an increase
of
$5.0 million due to increased compensation costs resulting from the change
in
liability classification for the Company’s stock option plan. Compensation costs
were $0.4 million in 2005 and 2004. Expenses for 2004 reflect a reduction
of
$6.5 million for a charge recorded in the prior year. A $9.7 million charge
was
initially recorded in 2003 relating to a litigation claim which involved
certain
annuity products, and actual settlement payments made were $3.2 million during
2004.
Other
Operations
National
Western's primary business encompasses its domestic and international life
insurance operations and its annuity operations. However, the Company also
has
small real estate, nursing home, and other investment operations through
its
wholly-owned subsidiaries. Most of the income from the Company's subsidiaries
is
from a life interest in a trust. Gross income distributions from the trust
totaled $4.5 million, pre-tax, in 2006 and $3.9 million and $3.7 million
in 2005
and 2004, respectively.
The
Company acquired a nursing home facility, which opened in late July, 2000
and is
operated by an affiliated limited partnership, whose financial operating
results
are consolidated with those of the Company. Daily operations and management
of
the nursing home are performed by an experienced management company through
a
contract with the limited partnership. Nursing home operations generated
$1.0
million, $1.3 million, and $1.1 million of operating earnings in 2006, 2005,
and
2004, respectively.
INVESTMENTS
General
The
Company's investment philosophy emphasizes the careful handling of policyowners'
and stockholders' funds to achieve security of principal, to obtain the maximum
possible yield while maintaining security of principal, and to maintain
liquidity in a measure consistent with current and long-term requirements
of the
Company.
The
Company's overall conservative investment philosophy is reflected in the
allocation of its investments, which is detailed below as of December 31,
2006
and 2005. The Company emphasizes investment grade debt securities, with smaller
holdings in mortgage loans and policy loans.
|
|
2006
|
|
2005
|
|
|
|
Carrying
|
|
|
|
Carrying
|
|
|
|
|
|
Value
|
|
%
|
|
Value
|
|
%
|
|
|
|
(In
thousands)
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
$
|
5,484,799
|
|
|
94.7
|
|
$
|
5,249,156
|
|
|
94.8
|
|
Mortgage
loans
|
|
|
103,325
|
|
|
1.8
|
|
|
110,639
|
|
|
2.0
|
|
Policy
loans
|
|
|
86,856
|
|
|
1.5
|
|
|
86,385
|
|
|
1.6
|
|
Derivatives
|
|
|
72,012
|
|
|
1.2
|
|
|
39,405
|
|
|
0.7
|
|
Equity
securities
|
|
|
21,203
|
|
|
0.4
|
|
|
20,295
|
|
|
0.4
|
|
Real
estate
|
|
|
12,113
|
|
|
0.2
|
|
|
13,436
|
|
|
0.2
|
|
Other
|
|
|
10,709
|
|
|
0.2
|
|
|
16,577
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
5,791,017
|
|
|
100.0
|
|
$
|
5,535,893
|
|
|
100.0
|
|
Debt
and Equity Securities
The
Company maintains a diversified portfolio which consists primarily of corporate,
mortgage-backed, and public utility fixed income securities. Investments
in
mortgage-backed securities include primarily U.S. government agency pass-through
securities and collateralized mortgage obligations ("CMO"). As of December
31,
2006 and 2005, the Company's debt securities portfolio consisted of the
following:
|
|
2006
|
|
2005
|
|
|
|
Carrying
|
|
|
|
Carrying
|
|
|
|
|
|
Value
|
|
%
|
|
Value
|
|
%
|
|
|
|
(In
thousands)
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
$
|
2,384,762
|
|
|
43.5
|
|
$
|
2,320,306
|
|
|
44.2
|
|
Mortgage-backed
securities
|
|
|
1,817,532
|
|
|
33.1
|
|
|
1,715,245
|
|
|
32.7
|
|
Public
utilities
|
|
|
623,649
|
|
|
11.4
|
|
|
661,333
|
|
|
12.6
|
|
U.S.
government/agencies
|
|
|
447,573
|
|
|
8.2
|
|
|
306,260
|
|
|
5.8
|
|
Asset-backed
securities
|
|
|
122,101
|
|
|
2.2
|
|
|
161,324
|
|
|
3.1
|
|
States
& political subdivisions
|
|
|
58,627
|
|
|
1.1
|
|
|
53,940
|
|
|
1.0
|
|
Foreign
governments
|
|
|
30,555
|
|
|
0.5
|
|
|
30,748
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
5,484,799
|
|
|
100.0
|
|
$
|
5,249,156
|
|
|
100.0
|
|
The
Company's investment guidelines prescribe limitations as a percent of the
total
investment portfolio by type of security and all holdings were within these
threshold limits at December 31, 2006 and 2005. During 2005 and continuing
into
2006, the Company expanded its holdings of U.S. government and private
mortgage-backed securities given attractive yields and spreads. Because the
Company's holdings of mortgage-backed securities are subject to prepayment
and
extension risk, the Company has substantially reduced these risks by investing
primarily in collateralized mortgage obligations, which have more predictable
cash flow patterns than pass-through securities. These securities, known
as
planned amortization class I ("PAC I"), very accurately defined maturity
("VADM") and sequential tranches 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.
In
addition to diversification, an important aspect of the Company's investment
approach is managing the credit quality of its investments in debt securities.
Thorough credit analysis is performed on potential corporate investments
including examination of a company's credit and industry outlook, financial
ratios and trends, and event risks. This emphasis is reflected in the high
average credit rating of the Company's portfolio with 97% held in investment
grade securities. In the table below, investments in debt securities are
classified according to credit ratings by Standard and Poor's
("S&P®"),
or
other nationally recognized statistical rating organizations if securities
were
not rated by S&P®.
|
|
2006
|
|
2005
|
|
|
|
Carrying
|
|
|
|
Carrying
|
|
|
|
|
|
Value
|
|
%
|
|
Value
|
|
%
|
|
|
|
(In
thousands)
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
and U.S. government
|
|
$
|
2,485,122
|
|
|
45.3
|
|
$
|
2,285,094
|
|
|
43.5
|
|
AA
|
|
|
284,965
|
|
|
5.2
|
|
|
202,092
|
|
|
3.9
|
|
A
|
|
|
1,330,980
|
|
|
24.3
|
|
|
1,360,716
|
|
|
25.9
|
|
BBB
|
|
|
1,237,151
|
|
|
22.5
|
|
|
1,230,799
|
|
|
23.5
|
|
BB
and other below investment grade
|
|
|
146,581
|
|
|
2.7
|
|
|
170,455
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
5,484,799
|
|
|
100.0
|
|
$
|
5,249,156
|
|
|
100.0
|
|
National
Western does not purchase below investment grade securities. Investments
held in
debt securities below investment grade are the result of subsequent downgrades
of the securities. During 2006, the Company's percentage of below investment
grade securities compared to total invested assets decreased from 3.1% to
2.5%
as of December 31, 2005 and 2006, respectively. The decrease from year to
year
is primarily due to principal payments received and settlements from bankruptcy
proceedings as well as sales, tenders and a maturity. Also, there were three
upgraded and four downgraded securities. The Company's holdings of below
investment grade securities as a percentage of total invested assets is
relatively small compared to industry averages. These holdings are summarized
below.
|
|
Below
Investment Grade Debt Securities
|
|
|
|
|
|
|
|
|
|
%
of
|
|
|
|
Amortized
|
|
Carrying
|
|
Fair
|
|
Invested
|
|
|
|
Cost
|
|
Value
|
|
Value
|
|
Assets
|
|
|
|
(In
thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
$
|
145,858
|
|
|
146,581
|
|
|
146,170
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
$
|
168,423
|
|
|
170,455
|
|
|
167,770
|
|
|
3.1
|
%
|
Holdings
in below investment grade securities by category as of December 31, 2006
are
summarized below, including 2005 fair values for comparison. The Company
is
continually monitoring developments in these industries that would affect
security valuations.
Below
Investment Grade Debt Securities
|
|
|
|
Amortized
|
|
Carrying
|
|
Fair
|
|
Fair
|
|
|
|
Cost
|
|
Value
|
|
Value
|
|
Value
|
|
Category
|
|
2006
|
|
2006
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
45,864
|
|
|
45,929
|
|
|
45,933
|
|
|
46,385
|
|
Utilities/Energy
|
|
|
27,424
|
|
|
29,039
|
|
|
29,452
|
|
|
29,659
|
|
Telecommunications
|
|
|
19,995
|
|
|
17,999
|
|
|
17,999
|
|
|
18,918
|
|
Asset-backed
|
|
|
12,605
|
|
|
12,605
|
|
|
11,930
|
|
|
10,667
|
|
Transportation
|
|
|
10,137
|
|
|
10,866
|
|
|
10,866
|
|
|
12,055
|
|
Manufacturing
|
|
|
6,019
|
|
|
8,346
|
|
|
8,323
|
|
|
7,132
|
|
Auto
Finance
|
|
|
6,173
|
|
|
6,173
|
|
|
6,200
|
|
|
5,422
|
|
Other
|
|
|
17,641
|
|
|
15,624
|
|
|
15,467
|
|
|
15,181
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
145,858
|
|
|
146,581
|
|
|
146,170
|
|
|
145,419
|
|
Generally
accepted accounting principles require that investments in debt securities
be
written down to fair value when declines in value are judged to be
other-than-temporary. Since quoted market prices are readily available and
understood by investors and creditors, they are the mandated source for fair
value estimation when available. In some instances, quoted market prices
may not
be available for securities that have limited buyer demand. When the quoted
market price is not available other valuation techniques such as discounted
cash
flow analysis and fundamental analysis may be used. Although the Company
is
required to write down securities deemed to be impaired on an
other-than-temporary basis to quoted market prices, the estimated ultimate
recovery value of the impaired security is often anticipated to be an amount
in
excess of the quoted market price. This is due to the influence that "distressed
bond" traders may have in depressing market prices in order to generate a
yield
commensurate with the investment risk of such securities. Consequently,
financial results can significantly vary from period to period for securities
written down to quoted market prices which may be subsequently redeemed at
levels consistent with expected recovery value.
As
part
of the Company's review for other-than-temporary impairments of investments,
the
Company determined during 2006 and 2005 that it held investments in several
issuers whose decline in value was considered other-than-temporary and these
holdings were written down and included as realized losses on investments
as
follows:
|
|
Par
Holdings
|
|
2006
Writedown
|
|
2005
Writedown
|
|
|
|
(In
thousands)
|
|
Issuer:
|
|
|
|
|
|
|
|
Greentree
98-6 6.630%
|
|
$
|
3,000
|
|
|
99
|
|
|
176
|
|
Entergy
New Orleans 6.750%
|
|
|
1,200
|
|
|
-
|
|
|
246
|
|
Delta
10.125%
|
|
|
-
|
|
|
-
|
|
|
1,000
|
|
Delta
9.300%
|
|
|
-
|
|
|
-
|
|
|
590
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
4,200
|
|
|
99
|
|
|
2,012
|
|
The
Company is closely monitoring its other below investment grade holdings by
reviewing investment performance indicators including information such as
issuer
operating performance, debt ratings, analyst reports and other economic factors
that may affect these specific investments. While additional losses are not
currently anticipated based on the existing status and condition of these
securities, continued credit deterioration of some securities is possible,
which
may result in further writedowns.
The
Company is required to classify its investments in debt and equity securities
into one of three categories: (a) trading securities, (b) securities available
for sale, or (c) securities held to maturity. The Company purchases securities
with the intent to hold to maturity and accordingly does not maintain a
portfolio of trading securities. Of the remaining two categories, available
for
sale and held to maturity, the Company makes a determination as to which
category based 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. As shown in the table below, at December
31, 2006, approximately 35% 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.
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Unrealized
Gains
(Losses)
|
|
|
|
(In
thousands)
|
|
Securities
held to maturity:
|
|
|
|
|
|
|
|
Debt
securities
|
|
$
|
3,567,625
|
|
|
3,603,434
|
|
|
(35,809
|
)
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
|
1,881,365
|
|
|
1,895,027
|
|
|
(13,662
|
)
|
Equity
securities
|
|
|
21,203
|
|
|
12,427
|
|
|
8,776
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
5,470,193
|
|
|
5,510,888
|
|
|
(40,695
|
)
|
In
accordance with the provisions of SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities,
the
Company may under certain conditions transfer a debt security from held to
maturity to available for sale. No transfers were made in 2006. For the twelve
months ended December 31, 2005, the Company transferred debt securities due
to
credit deterioration from the held to maturity portfolio to the available
for
sale portfolio in the amount of $7.0 million. The unrealized gains associated
with the security transferred in 2005 totaled $0.2 million as recorded as
a
component of accumulated other comprehensive income, net of deferred acquisition
costs and taxes. During 2005, two securities were sold from the held to maturity
portfolio due to credit deterioration, with amortized cost of $10.0 million
resulting in a realized gain of $0.9 million. No held to maturity sales were
made during 2006.
Mortgage
Loans and Real Estate
In
general, the Company originates 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 properties
is typically in major metropolitan areas that offer a potential for property
value appreciation. Credit and default risk is minimized 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.
This approach has proven to result in higher quality mortgage loans with
fewer
defaults.
The
Company requires a minimum specified yield on mortgage loan investments.
In the
loan interest rate environment of the past few years, fewer loan opportunities
have been available which met the Company's required rate of return. As a
result, the Company's portfolio has declined.
The
Company's direct investments in real estate are not a significant portion
of its
total investment portfolio as many of these investments were acquired through
mortgage loan foreclosures. The Company also participates in several real
estate
joint ventures and limited partnerships that invest primarily in
income-producing retail properties. These investments have enhanced the
Company's overall investment portfolio returns.
The
Company held net investments in mortgage loans totaling $103.3 million and
$110.6 million at December 31, 2006 and 2005, respectively. The diversification
of the portfolio by geographic region and by property type was as
follows:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
Region:
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
(In
thousands)
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West
South Central
|
|
$
|
68,528
|
|
|
66.3
|
|
$
|
68,413
|
|
|
61.8
|
|
Mountain
|
|
|
10,787
|
|
|
10.5
|
|
|
15,831
|
|
|
14.3
|
|
Pacific
|
|
|
10,684
|
|
|
10.3
|
|
|
11,342
|
|
|
10.3
|
|
South
Atlantic
|
|
|
4,718
|
|
|
4.6
|
|
|
4,838
|
|
|
4.4
|
|
All
other
|
|
|
8,608
|
|
|
8.3
|
|
|
10,215
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
103,325
|
|
|
100.0
|
|
$
|
110,639
|
|
|
100.0
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Property
Type:
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
(In
thousands)
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
70,922
|
|
|
68.7
|
|
$
|
75,545
|
|
|
68.3
|
|
Office
|
|
|
22,730
|
|
|
22.0
|
|
|
24,536
|
|
|
22.2
|
|
Land/Lots
|
|
|
3,015
|
|
|
2.9
|
|
|
3,725
|
|
|
3.4
|
|
Hotel/Motel
|
|
|
6,649
|
|
|
6.4
|
|
|
6,797
|
|
|
6.1
|
|
All
other
|
|
|
9
|
|
|
-
|
|
|
36
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
103,325
|
|
|
100.0
|
|
$
|
110,639
|
|
|
100.0
|
|
The
Company does not recognize interest income on loans past due ninety days
or
more. At December 31, 2006, the Company had two mortgage loans past due six
months or more with the principal balance totaling $7.0 million. At December
31,
2005 and 2004, the Company had no mortgage loan principal balances past due
three months or more. Interest income not recognized for past due loans totaled
approximately $0.4 million in 2006.
The
contractual maturities of mortgage loan principal balances at December 31,
2006
are as follows:
|
|
Principal
Due
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Due
in one year or less
|
|
$
|
7,784
|
|
Due
after one year through five years
|
|
|
51,324
|
|
Due
after five years through ten years
|
|
|
34,948
|
|
Due
after ten years through fifteen years
|
|
|
11,826
|
|
Due
after fifteen years
|
|
|
-
|
|
|
|
|
|
|
Total
|
|
$
|
105,882
|
|
In
the
fourth quarter of 2006, a valuation loss of $2.1 million was recorded related
to
a mortgage loan based on information which indicated that the Company may
not
collect all amounts in accordance with the mortgage agreement. In the fourth
quarter of 2004, an impairment loss of $0.6 million and an additional allowance
of $0.4 million was recorded related to a mortgage loan based on information
which indicated that the Company may not collect all amounts in accordance
with
the mortgage agreement. This allowance was reversed in the first quarter
of 2005
upon the sale of the loan. While the Company closely manages its mortgage
loan
portfolio, future changes in economic conditions can result in impairments
beyond those currently identified.
The
Company's real estate investments totaled approximately $12.1 million and
$13.4
million at December 31, 2006 and 2005, respectively, and consist primarily
of
income-producing properties which are being operated by a wholly-owned
subsidiary of the Company. The Company recognized operating income on these
properties of approximately $0.8 million, $1.0 million, and $1.6 million
for the
years ended December 31, 2006, 2005, and 2004, respectively. The Company
monitors the conditions and market values of these properties on a regular
basis
and makes repairs and capital improvements to keep the properties in good
condition. The Company recorded net realized investment gains of $0.6 million,
$6.7 million, and $2.2 million in 2006, 2005, and 2004, respectively associated
with these properties.
Market
Risk
Market
risk is the risk of change in market values of financial instruments due
to
changes in interest rates, currency exchange rates, commodity prices, or
equity
prices. The most significant market risk exposure for National Western is
interest rate risk. The fair values of fixed income debt securities correlate
to
external market interest rate conditions. Because interest rates are fixed
on
almost all of the Company's debt securities, market values typically increase
when market interest rates decline, and decrease when market interest rates
rise. However, market values may fluctuate for other reasons, such as changing
economic conditions or increasing event-risk concerns.
The
correlation between fair values and interest rates for debt securities is
reflected in the tables below.
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands except percentages)
|
|
|
|
|
|
|
|
Debt
securities - fair value
|
|
$
|
5,448,990
|
|
|
5,248,425
|
|
Debt
securities - amortized cost
|
|
$
|
5,498,461
|
|
|
5,238,120
|
|
|
|
|
|
|
|
|
|
Fair
value as a percentage of amortized cost
|
|
|
99.10
|
%
|
|
100.20
|
%
|
Unrealized
gains (losses) at year-end
|
|
$
|
(49,471
|
)
|
|
10,305
|
|
Ten-year
U.S. Treasury bond - increase in
|
|
|
|
|
|
|
|
yield
for the year
|
|
|
0.31
|
%
|
|
0.17
|
%
|
|
|
Unrealized
Gains (Losses)
|
|
|
|
Net
Balance at
|
|
Net
Balance at
|
|
|
|
|
|
December
31,
|
|
December
31,
|
|
Change
in
|
|
|
|
2006
|
|
2005
|
|
Net
Balance
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Debt
securities held to maturity
|
|
$
|
(35,809
|
)
|
|
(731
|
)
|
|
(35,078
|
)
|
Debt
securities available for sale
|
|
|
(13,662
|
)
|
|
11,036
|
|
|
(24,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
(49,471
|
)
|
|
10,305
|
|
|
(59,776
|
)
|
Changes
in interest rates typically have a significant impact on the fair values
of the
Company's debt securities. During 2006, market interest rates of the ten-year
U.S. Treasury bond increased 31 basis points from year end 2005 resulting
in an
unrealized loss change of $59.8 million on a portfolio of approximately $5.5
billion. This amount is reasonable based upon the current market factors
and the
current investment portfolio characteristics. The Company would expect similar
results in the future from a significant upward or downward movement in market
rates. However, since the majority of the Company's debt securities are
classified as held to maturity, which are recorded at amortized cost, changes
in
fair values have relatively small effects on the Company's financial
results.
The
Company analyzes interest rate risk through ongoing cash flow testing required
for insurance regulatory purposes. Computer models are used to perform cash
flow
testing under various commonly used stress test interest rate scenarios to
determine if existing assets would be sufficient to meet projected liability
outflows. Sensitivity analysis allows the Company to measure the potential
gain
or loss in fair value of its interest-sensitive instruments and to protect
its
economic value and achieve a predictable spread between what is earned on
invested assets and what is paid on liabilities. The Company seeks to minimize
the impact of interest rate risk through surrender charges that are imposed
to
discourage policy surrenders and to offset unamortized acquisition costs.
Interest rate changes can be anticipated in the computer models and the
corresponding risk addressed by management actions affecting asset and liability
instruments. However, potential changes in the values of financial instruments
indicated by hypothetical interest rate changes will likely be different
from
actual changes experienced, and the differences could be
significant.
The
following table illustrates the market risk sensitivity of the Company's
interest rate-sensitive assets. The table shows the effect of a change in
interest rates on the fair value of the portfolio using models that measure
the
change in fair value arising from an immediate and sustained change in interest
rates in increments of 100 basis points.
|
|
Fair
Values of Assets
|
|
|
|
Changes
in Interest Rates in Basis Points
|
|
|
|
-100
|
|
0
|
|
+
100
|
|
+
200
|
|
+
300
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
and equity securities
|
|
$
|
5,716,211
|
|
|
5,470,193
|
|
|
5,178,913
|
|
|
4,878,236
|
|
|
4,591,580
|
|
Mortgage
loans
|
|
|
109,418
|
|
|
105,919
|
|
|
102,603
|
|
|
99,457
|
|
|
96,471
|
|
Policy
loans
|
|
|
134,998
|
|
|
120,120
|
|
|
107,477
|
|
|
96,685
|
|
|
87,428
|
|
Other
loans
|
|
|
3,190
|
|
|
3,152
|
|
|
3,114
|
|
|
3,076
|
|
|
3,039
|
|
Derivatives
|
|
|
70,413
|
|
|
72,012
|
|
|
73,613
|
|
|
75,214
|
|
|
76,815
|
|
Expected
maturities of debt securities may differ from contractual maturities due
to call
or prepayment provisions. The models assume that prepayments on mortgage-backed
securities are influenced by agency and pool types, the level of interest
rates,
loan age, refinancing incentive, month of the year, and underlying coupon.
During periods of declining interest rates, principal payments on
mortgage-backed securities and collateralized mortgage obligations increase
as
the underlying mortgages are prepaid. Conversely, during periods of rising
interest rates, the rate of prepayment slows. Both of these situations can
expose the Company to the possibility of asset-liability cash flow and yield
mismatch. The model uses a proprietary method of sampling interest rate paths
along with a mortgage prepayment model to derive future cash flows. The initial
interest rates used are based on the current U.S. Treasury yield curve as
well
as current mortgage rates for the various types of collateral in the
portfolio.
Mortgage
and other loans were modeled by discounting scheduled cash flows through
the
scheduled maturities of the loans, starting with interest rates currently
being
offered for similar loans to borrowers with similar credit ratings. Policy
loans
were modeled by discounting estimated cash flows using U.S. Treasury Bill
interest rates as the base rates at December 31, 2006. The estimated cash
flows
include assumptions as to whether such loans will be repaid by the policyholders
or settled upon payment of death or surrender benefits on the underlying
insurance contracts and incorporate both Company experience and mortality
assumptions associated with such contracts.
In
addition to the securities analyzed above, the Company invests in index options
which are derivative financial instruments used to hedge the equity return
component of the Company's equity-indexed annuity and life products. The
values
of these options are primarily impacted by equity price risk, as the options'
fair values are dependent on the performance of the S&P 500
Index®.
However, increases or decreases in investment returns from these options
are
substantially offset by corresponding increases or decreases in amounts paid
to
equity-indexed policyholders, subject to minimum guaranteed policy interest
rates.
The
Company's market risk liabilities, which include policy liabilities for annuity
and supplemental contracts, are managed for interest rate risk through cash
flow
testing as previously described. As part of this cash flow testing, the Company
has analyzed the potential impact on net earnings of a 100 basis point decrease
and increases in increments of 100 basis points in the U.S. Treasury yield
curve
as of December 31, 2006. The potential impact on net earnings from these
interest rate changes are summarized below.
|
|
Changes
in Interest Rates in Basis Points
|
|
|
|
-100
|
|
+100
|
|
+200
|
|
+300
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Impact
on net earnings
|
|
$
|
(221
|
)
|
|
544
|
|
|
475
|
|
|
1,937
|
|
These
estimated impacts in earnings are net of tax effects and the estimated effects
of deferred policy acquisition costs.
The
above
described scenarios produce estimated changes in cash flows as well as cash
flow
reinvestment projections. Estimated cash flows in the Company's model assume
cash flow reinvestments which are representative of the Company's current
investment strategy. Calls and prepayments include scheduled maturities and
those expected to occur which would benefit the security issuers. Assumed
policy
surrenders consider differences and relationships between credited interest
rates and market interest rates as well as surrender charges on individual
policies. The impact to earnings also includes the expected effects on
amortization of deferred policy acquisition costs. The model considers only
annuity and supplemental contracts in force at December 31, 2006, and does
not
consider new product sales or the possible impact of interest rate changes
on
sales.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
Liquidity
requirements are met primarily by funds provided from operations. Premium
deposits and annuity considerations, investment income, and investment
maturities and prepayments are the primary sources of funds while investment
purchases, policy benefits in the form of claims, and payments to policyholders
and contract holders in connection with surrenders and withdrawals as well
as
operating expenses are the primary uses of funds. To ensure the Company will
be
able to pay future commitments, the funds received as premium payments and
deposits are invested in high quality investments, primarily fixed income
securities. Funds are invested with the intent that the income from investments,
plus proceeds from maturities, will meet the ongoing cash flow needs of the
Company. The approach of matching asset and liability durations and yields
requires an appropriate mix of investments. Although the Company historically
has not been put in the position of liquidating invested assets to provide
cash
flow, its investments consist primarily of marketable debt securities that
could
be readily converted to cash for liquidity needs. The Company may also borrow
up
to $40 million on its bank line of credit for short-term cash
needs.
A
primary
liquidity concern is the risk of an extraordinary level of early policyholder
withdrawals. The Company includes provisions within its annuity and universal
life insurance policies, such as surrender and market value adjustment charges,
that help limit and discourage early withdrawals. The following table sets
forth
withdrawal characteristics of the Company's annuity reserves and deposit
liabilities (based on statutory liability values) as of the dates
indicated.
|
|
December
31, 2006
|
|
December
31, 2005
|
|
|
|
|
|
%
of
|
|
|
|
%
of
|
|
|
|
Amount
|
|
Total
|
|
Amount
|
|
Total
|
|
|
|
($
Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Not
subject to discretionary withdrawal
|
|
|
|
|
|
|
|
|
|
provisions
|
|
$
|
296,651
|
|
|
6.6
|
%
|
$
|
282,134
|
|
|
6.6
|
%
|
Subject
to discretionary withdrawal,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
with
adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With
market value adjustment
|
|
|
1,390,428
|
|
|
31.3
|
%
|
|
1,341,631
|
|
|
31.5
|
%
|
At
contract value less current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
surrender
charge of 5% or more
|
|
|
2,216,531
|
|
|
49.9
|
%
|
|
2,106,363
|
|
|
49.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,903,610
|
|
|
87.8
|
%
|
|
3,730,128
|
|
|
87.6
|
%
|
Subject
to discretionary withdrawal at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contract
value with no surrender charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
or
surrender charge of less than 5%
|
|
|
540,519
|
|
|
12.2
|
%
|
|
528,977
|
|
|
12.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
annuity reserves and deposit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities
|
|
$
|
4,444,129
|
|
|
100.0
|
%
|
$
|
4,259,105
|
|
|
100.0
|
%
|
The
actual amounts paid by product line in connection with surrenders and
withdrawals for the years ended December 31 are noted in the table
below.
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Product
Line:
|
|
|
|
|
|
|
|
Traditional
Life
|
|
$
|
4,845
|
|
|
5,419
|
|
|
6,774
|
|
Universal
Life
|
|
|
30,566
|
|
|
31,143
|
|
|
30,409
|
|
Annuities
|
|
|
363,407
|
|
|
303,747
|
|
|
296,039
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
398,818
|
|
|
340,309
|
|
|
333,222
|
|
The
above
contractual withdrawals, as well as the level of surrenders experienced,
were
generally consistent with the Company's assumptions in asset-liability
management, and the associated cash outflows did not have an adverse impact
on
overall liquidity. Individual life insurance policies are less susceptible
to
withdrawal than annuity reserves and deposit liabilities because policyholders
may incur surrender charges and undergo a new underwriting process in order
to
obtain a new insurance policy. Cash flow projections and tests under various
market interest rate scenarios are also performed to assist in evaluating
liquidity needs and adequacy. The Company currently expects available liquidity
sources and future cash flows to be more than adequate to meet the demand
for
funds.
In
the
past, cash flows from the Company's insurance operations have been sufficient
to
meet current needs. Cash flows from operating activities were $224 million,
$201
million, and $146 million in 2006, 2005, and 2004, respectively. The Company
also has significant cash flows from both scheduled and unscheduled investment
security maturities, redemptions, and prepayments. These cash flows totaled
$399
million, $485 million, and $440 million in 2006, 2005, and 2004, respectively.
Cash flows from security maturities, redemptions, and prepayments were
relatively higher over the last three years due to the decline in interest
rates. These cash flow items could be reduced if interest rates rise in 2007.
Net cash flows from the Company's universal life and annuity deposit product
operations totaled inflows of $25 million, $153 million, and $497 million
in
2006, 2005, and 2004, respectively.
Capital
Resources
The
Company relies on stockholders' equity for its capital resources as there
is no
long-term debt outstanding and the Company does not anticipate the need for
any
long-term debt in the near future. As of December 31, 2006, the Company had
commitments of approximately $8.0 million which were approved by the Company's
Board of Directors for the construction of a nursing home facility in Central
Texas. The construction of the new facility is expected to begin in
2007.
OFF-BALANCE
SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
It
is not
Company practice to enter into off-balance sheet arrangements nor is it Company
policy to issue guarantees to third parties, other than in the normal course
of
issuing insurance contracts. Commitments related to insurance products sold
are
reflected as liabilities for future policy benefits. Insurance contracts
guarantee certain performances by the Company.
Insurance
reserves are the means by which life insurance companies determine the
liabilities that must be established to assure that future policy benefits
are
provided for and can be paid. These reserves are required by law and based
upon
standard actuarial methodologies to ensure fulfillment of commitments guaranteed
to policyholders and their beneficiaries, even though the obligations may
not be
due for many years. Refer to Note (1) in the Notes to Consolidated Financial
Statements for a discussion of reserving methods.
The
table
below summarizes future estimated cash payments under existing contractual
obligations.
|
|
Payment
due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
Than
|
|
1
-
3
|
|
3
-
5
|
|
More
Than
|
|
|
|
Total
|
|
1
Year
|
|
Years
|
|
Years
|
|
5
Years
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease obligations (1)
|
|
$
|
2,325
|
|
|
808
|
|
|
1,300
|
|
|
217
|
|
|
-
|
|
Loan
commitments
|
|
|
13,800
|
|
|
13,800
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Life
claims payable (2)
|
|
|
43,025
|
|
|
43,025
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
long-term reserve liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reflected
on the balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under
GAAP (3)
|
|
|
370,453
|
|
|
72,988
|
|
|
108,289
|
|
|
55,158
|
|
|
134,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
429,603
|
|
|
130,621
|
|
|
109,589
|
|
|
55,375
|
|
|
134,018
|
|
(1) Refer
to Note 9 in the Notes to Consolidated Financial Statements relating to Company
leases.
(2) Life
claims payable include benefit and claim liabilities for which the Company
believes the amount and timing of the payment is essentially fixed and
determinable. Such amounts generally relate to incurred and reported death
and
critical illness claims including an estimate of claims incurred but not
reported.
(3) Other
long-term liabilities includes obligations that are reported within the
Company's reserve liabilities that reflect determinable payout patterns related
to immediate annuities. The above amounts are undiscounted whereas the amounts
included in future policy benefit liabilities are discounted in accordance
with
GAAP. Liabilities for future policy benefits and other policyholder liabilities
of approximately $5.2 billion as of December 31, 2006 have been excluded
from
the contractual obligations table. These excluded liabilities include future
policy benefits relating to life insurance products, deferred annuities,
and
universal life products. Amounts excluded from the table are comprised of
policies or contracts where (a) the Company is not currently making payments
and
will not make payments in the future until the occurrence of a payment
triggering event, such as death or (b) the occurrence of a payment triggering
event, such as a surrender of a policy or contract, which is outside of the
control of the Company. The timing of these payments is not reasonably fixed
and
determinable. These uncertainties are considered in the Company's
asset-liability management program as previously noted.
ACCOUNTING
STANDARDS AND CHANGES IN ACCOUNTING
Recently
Issued Accounting Standards
In
May of
2005, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 154, Accounting
Changes and Error Correction.
This
standard is a replacement of Accounting Policy Board Opinion No. 20,
Accounting
Changes,
and FASB
Standard No. 3, Reporting
Accounting Changes in Interim Financial Statements.
Under
the new standard, any voluntary changes in accounting principles are to be
adopted via a retrospective application of the accounting principle in the
financial statements presented and an opinion obtained from the auditors
that
the new principle is preferred. In addition, adoption of a change in accounting
principle required by the issuance of a new accounting standard will also
require retroactive restatement, unless the new standard includes explicit
transition guidelines. This standard was effective for fiscal years beginning
after December 15, 2005. Adoption of this standard did not have an impact
on the consolidated financial statements of the Company.
In
March
2004, the Emerging Issues Task Force ("EITF") reached a final consensus on
Issue
03-1,
The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments.
This
Issue establishes impairment models for determining whether to record impairment
losses associated with investments in certain equity and debt securities
and
requires expanded disclosures related to securities with unrealized losses.
It
also requires income to be accrued on a level-yield basis following an
impairment of debt securities, where reasonable estimates of the timing and
amount of future cash flows can be made. The Company's current policy has
generally been to record income only as cash is received following an impairment
of a debt security. The application of this Issue was required for reporting
periods beginning after June 15, 2004. In September 2004, the FASB approved
FASB Staff Position EITF 03-1-1, which deferred the effective date for the
recognition and measurement guidance contained in EITF 03-1 until certain
issues
were resolved. On November 3, 2005, the FASB issued FASB Staff Position ("FSP")
Nos. SFAS 115-1 and SFAS 124-1 titled The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments.
This
FSP nullifies certain requirements of EITF 03-1 and carries forward certain
requirements and disclosures. The guidance in this FSP is to be applied to
reporting periods beginning after December 15, 2005. The Company has adopted
the
disclosure provisions and has included the required disclosures. The Company
adopted FSP Nos. SFAS 115-1 and SFAS 124-1 as of the beginning of fiscal
year
2006, and the FSP did not have a material impact on the consolidated financial
statements of the Company.
The
Company adopted Statement No. 123(R), Share-Based
Payment ("SFAS
123(R)") as of January 1, 2006. However, because the Company began recognizing
stock-based employee compensation cost using the fair value based method
of
accounting in 2003, the adoption did not have a material impact on the
consolidated financial statements of the Company.
In
September 2005, the AICPA issued Statement of Position 05-1,
Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection
with Modifications or Exchanges of Insurance Contracts ("SOP
05-1").
SOP 05-1
provides guidance on accounting by insurance enterprises for deferred
acquisition costs on internal replacements of insurance and investment contracts
other than those specifically described in FASB No. 97. SOP 05-1 defines
an
internal replacement as a modification in product benefits, features, rights,
or
coverages that occurs by the exchange of a contract for a new contract, or
by
amendment, endorsement, or rider to a contract, or by the election of a feature
or coverage within a contract. SOP 05-1 is effective for internal replacements
occurring in fiscal years beginning after December 15, 2006, with earlier
adoption encouraged. The Company will have an impact related to the adoption
of
SOP 05-1 related to contracts which have annuitized and relative to
reinstatements of contracts in that the unamortized deferred acquisition
costs
and deferred sales inducement assets must be released at the time of
annuitization and may not be continued related to reinstatements. The effect
of
this SOP on beginning retained earnings as of January 1, 2007 is expected
to be
a decrease of $2.2 million, net of tax.
The
FASB
issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109 ("FIN
48"), dated June, 2006. The interpretation requires public companies to
recognize the tax benefits of uncertain tax positions only where the position
is
"more likely than not" to be sustained assuming examination by tax authorities.
The amount recognized would be the amount that represents the largest amount
of
tax benefit that is greater than 50% likely of being ultimately realized.
A
liability would be recognized for any benefit claimed, or expected to be
claimed, in a tax return in excess of the benefit recorded in the financial
statements, along with any interest and penalty (if applicable) on the excess.
FIN 48 will require a tabular reconciliation of the change in the aggregate
unrecognized tax benefits claimed, or expected to be claimed, in tax returns and
disclosure relating to accrued interest and penalties for unrecognized tax
benefits. Discussion will also be required for those uncertain tax positions
where it is reasonably possible that the estimate of the tax benefit will
change
significantly in the next 12 months. FIN 48 is effective for fiscal years
beginning after December 15, 2006. Adoption of FIN 48 is not expected to
have a
material impact on the Company's consolidated financial statements.
On
February 16, 2006, the FASB issued SFAS 155, Accounting
for Certain Hybrid Financial Instruments,
which
amends SFAS No. 133,
Accounting for Derivatives and Hedging Activities,
and
SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.
Hybrid
financial instruments are single financial instruments that contain an embedded
derivative. Under SFAS No. 155, entities can elect to record certain hybrid
financial instruments at fair value as individual financial instruments.
Prior
to this amendment, certain hybrid financial instruments were required to
be
separated into two instruments - a derivative and host - and generally only
the
derivative was recorded at fair value. SFAS No. 155 also requires that
beneficial interests in securitized assets be evaluated for either freestanding
or embedded derivatives. SFAS No. 155 is effective for all financial instruments
acquired or issued after January 1, 2007. SFAS No. 155 is not expected to
have a material effect on the Company's consolidated financial statements
on the
date of adoption.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements.
This
Statement defines fair value, establishes a framework for measuring fair
value
in generally accepted accounting principles, and requires additional disclosures
about fair value measurements. This Statement does not require any new fair
value measurements, but the application of this Statement could change current
practices in determining fair value. The Company plans to adopt this guidance
effective January 1, 2008. The Company is currently assessing the impact of
SFAS No. 157 on the Company's consolidated financial position and results
of operations.
In
September 2006, the FASB issued SFAS No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement
Plans
an
amendment of FASB Statements No. 87, 88, 106 and 132(R). This statement
requires an employer on a prospective basis to recognize the overfunded or
underfunded status of its defined benefit pension and postretirement plans
as an
asset or liability in its statement of financial position and to recognize
changes in that funded status in the year in which the changes occur through
comprehensive income. This requirement, along with the required disclosures,
is
effective for fiscal years ending after December 15, 2006. SFAS
No. 158 also requires an employer on a prospective basis to measure the
funded status of its plans as of its fiscal year-end, and is effective for
fiscal years ending after December 15, 2008. The incremental effect of
the adoption of SFAS No. 158 was to increase other liabilities $8.8 million,
decrease deferred Federal income taxes $3.1 million and increase accumulated
other comprehensive loss $5.7 million.
In
September 2006, the staff of the SEC issued Staff Accounting Bulletin ("SAB")
No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements.
The
interpretations in this SAB express the staff's views regarding the process
of
quantifying financial statement misstatements. Specifically, the SEC staff
believes that registrants must quantify the impact on current period financial
statements of correcting all misstatements, including both those occurring
in
the current period and the effect of reversing those that have accumulated
from
prior periods. This SAB should be applied beginning with the first fiscal
year
ending after November 15, 2006, with early adoption encouraged. The
adoption of SAB No. 108 did not impact the financial position and
results of operations of the Company.
Change
in Accounting
None
ABOUT
MARKET RISK
The
information called for by Item 7A is set forth in the Investments section
of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
See
Attachment A, Index to Financial Statements and Schedules, on page
74.
ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There
have been no changes in auditors or disagreements with auditors which are
reportable pursuant to Item 304 of Regulation S-K.
Evaluation
of Disclosure Controls and Procedures
Disclosure
controls and procedures are designed to ensure that information to be disclosed
in reports filed or submitted under the Securities and Exchange Act of 1934
is
recorded, processed, summarized and reported within required time periods.
Disclosure controls and procedures include, without limitation, controls
and
procedures designed to ensure that information required to be disclosed is
accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer as appropriate, to allow timely decisions
regarding disclosure matters.
The
Company's management, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company's disclosure controls and procedures (as such term is defined in
Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of
the end
of the period covered by this report. Based on this evaluation, the Company’s
Chief Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective.
Management's
Report on Internal Control Over Financial Reporting
The
management of National Western Life Insurance Company ("Company") is responsible
for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) under
the Securities Exchange Act of 1934. The Company's internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
Company's financial statement for external reporting purposes in accordance
with
U.S. generally accepted accounting principles. The Company's management,
including the Chief Executive Officer and Chief Financial Officer, assessed
the
effectiveness of the Company's internal control over financial reporting
as of
December 31, 2006. In making this assessment, management used the criteria
set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal
Control - Integrated Framework.
Based on
the Company's assessment under this framework, management concluded that
the
Company maintained effective internal control over financial reporting as
of
December 31, 2006.
The
Company’s assessment of its effectiveness of internal control over financial
reporting as of December 31, 2006 has been attested to by KPMG, LLP, an
independent registered public accounting firm, as stated in their report
on page
44.
Changes
in Internal Control Over Financial Reporting
Internal
controls over financial reporting change as the Company modified and enhances
its systems and processes to meet business needs. Any significant changes
in
controls are evaluated prior to implementation to help ensure continued
effectiveness of internal controls and the control environment. While changes
have taken place in internal controls during the quarter ended December 31,
2006, there have been no changes that have materially affected, or are
reasonably likely to materially affect, the Company’s internal controls over
financial reporting.
By
letter
dated May 16, 2006 addressed to the Audit Committee of National Western Life
Insurance Company, the Company's independent auditors, KPMG LLP ("KPMG"),
provided notice that as part of their review of the Company's condensed
consolidated interim financial statements as of March 31, 2006 and for the
three
months ended, they noted a control deficiency they considered to be a material
weakness. The control deficiency noted by KPMG involved the Company's
application of SFAS No. 123(R), Share-Based
Payment,
specifically the Company's level of technical expertise in this area, with
respect to the Company's stock option plan and its recent implementation
of a
limited stock buy-back program.
The
Company subsequently addressed KPMG's material weakness notice by obtaining
additional clarification from an independent third party regarding the guidance
of SFAS No. 123(R) and its application to the Company's stock option plan
and
limited stock buy-back program. Additional remediation procedures were
implemented enhancing the Company's existing controls including oversight
by the
Company's Disclosure Controls and Procedures Committee corresponding to Company
planned efforts relative to the implementation and application of new accounting
standards.
There
have been no significant changes in the Company’s internal controls or in other
factors that could significantly affect these controls subsequent to the
date of
this examination.
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
National
Western Life Insurance Company:
We
have
audited management's assessment, included in the accompanying Management's
Report on Internal Control Over Financial Reporting, that
National Western Life insurance Company maintained effective internal control
over financial reporting as of December 31, 2006, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). National
Western Life Insurance Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment
of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed
to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or
timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management's assessment that National Western Life Insurance Company
maintained effective internal control over financial reporting as of December
31, 2006, is fairly stated, in all material respects, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Also,
in
our opinion, National Western Life Insurance Company maintained, in all material
respects, effective internal control over financial reporting as of December
31,
2006, based on,
criteria
established in Internal Control—Integrated Framework issued by the Committee
of
Sponsoring Organizations of the Treadway Commission (COSO).
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of National
Western Life Insurance Company and subsidiaries as of December 31, 2006 and
2005, and the related consolidated statements of earnings, comprehensive
income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2006, and our report dated March 15, 2007 expressed an
unqualified opinion on those consolidated financial statements.
KPMG
LLP
Austin,
Texas
March
15,
2007
There
is
no information required to be disclosed on Form 8-K for the quarter ended
December 31, 2006 which has not been previously reported.
PART
III
Identification
of Directors
The
following information as of January 31, 2007, is furnished with respect to
each
director. All terms expire in June of 2007.
Name
of Director
|
|
Principal
Occupation During Last Five
Years
and Directorships
|
|
First
Elected
|
|
Age
|
|
|
|
|
|
|
|
Robert
L. Moody
(1)
(3)
|
|
Chairman
of the Board and Chief Executive
Officer
of the Company
|
|
1963
|
|
71
|
|
|
|
|
|
|
|
Ross
R. Moody
(1)
(3)
|
|
President
and Chief Operating Officer of the
Company
|
|
1981
|
|
44
|
|
|
|
|
|
|
|
Harry
L. Edwards
(4)
|
|
Retired;
Former President and Chief
Operating
Officer of the Company,
Austin,
Texas
|
|
1969
|
|
85
|
|
|
|
|
|
|
|
Stephen
E. Glasgow
(2)
(4)
|
|
Partner,
G-2 Development, L.P.
Austin,
Texas
|
|
2004
|
|
44
|
|
|
|
|
|
|
|
E.
Douglas McLeod
|
|
Director
of Development, The Moody
Foundation,
Galveston, Texas
|
|
1979
|
|
65
|
|
|
|
|
|
|
|
Charles
D. Milos
(1)
(3)
|
|
Senior
Vice President of the Company
|
|
1981
|
|
61
|
|
|
|
|
|
|
|
Frances
A. Moody-Dahlberg
|
|
Executive
Director,
The
Moody Foundation,
Dallas,
Texas
|
|
1990
|
|
37
|
|
|
|
|
|
|
|
Russell
S. Moody
|
|
Investments,
League City, Texas
|
|
1988
|
|
45
|
|
|
|
|
|
|
|
Louis
E. Pauls, Jr.
(2)
|
|
President,
Louis Pauls & Company;
Investments,
Galveston, Texas
|
|
1971
|
|
71
|
|
|
|
|
|
|
|
E.
J. Pederson
(2)
(4)
|
|
Former
Assistant to the President,
The
University of Texas
Medical
Branch, Galveston, Texas
|
|
1992
|
|
59
|
(1) Member
of Executive Committee; (2) Member of Audit
Committee; (3) Member of Investment
Committee;
(4) Member
of Compensation and Stock Option Committee.
Under
the
Company’s Articles of Incorporation, respective members of the Board of
Directors are elected by the Company’s two classes of common stockholders.
One-third (1/3) of the directors, plus one director for any remaining fraction,
are elected by the Class A stockholders and the remaining directors are elected
by the Class B stockholders. The Board of Directors, as elected by the
respective classes of stockholders, is as follows.
Class
A
|
|
Class
B
|
|
|
|
Robert
L. Moody
|
|
E.
Douglas McLeod
|
Harry
L. Edwards
|
|
Charles
D. Milos
|
Stephen
E. Glasgow
|
|
Frances
A. Moody-Dahlberg
|
E.
J. Pederson
|
|
Ross
R. Moody
|
|
|
Russell
S. Moody
|
|
|
Louis
E. Pauls, Jr.
|
Committees
The
Company’s Board of Directors has the following standing committees:
Executive
Committee. The
Company’s Executive Committee may exercise all of the powers of the Board when
the Board is not in session except that the Executive Committee has no power
to
alter, amend, or repeal the By-Laws or take any other action that legally
may be
taken only by the full Board of Directors. The Chairmen of the Board serves
as
Chairman of the Executive Committee.
Audit
Committee. The
Audit
Committee of the Board of Directors consists of three non-employee directors.
The committee is primarily responsible for oversight of the Company’s financial
statements and controls; assessing and ensuring the independence, qualifications
and performance of the independent auditors; approving the independent auditors
services and fees; reviewing and approving all related party transactions;
overseeing and directing internal audit activities; reviewing the Company’s
financial risk assessment process and ethical, legal, and regulatory compliance
programs; and reviewing and approving the annual audited financial statements
for the Company before issuance. Mr. Louis E. Pauls, Jr. serves as Chairman
of
the Audit Committee.
The
Company has at least one person that it believes is qualified to be the Audit
Committee Financial Expert. However, the Company has not designated anyone
as an
Audit Committee Financial Expert at this time as the Company’s Board of
Directors has concluded that the ability of the Audit Committee to perform
its
duties would not be impaired by the failure to designate one of the committee
members as an “Audit Committee Financial Expert” if its members otherwise
satisfied the NASDAQ standards and rules and regulations of the
SEC.
Investment
Committee. The
Investment Committee of the Board of Directors is comprised of three directors
(and one Company officer) and has the responsibility for oversight of the
Company’s investment transactions including compliance with investment
guidelines approved by the full Board of Directors. The Chairman of the Board
serves as Chairman of the Investment Committee.
Compensation
and Stock Option Committee. The
Compensation and Stock Option Committee consists of three outside directors
and
the committee has oversight responsibility for the compensation programs
for the
Company’s named executive officers as well as all other officers. Mr. Harry L.
Edwards serves as Chairman of the Compensation and Stock Option Committee.
The
Committee’s report on executive compensation is included in Item 11 of this
report on Form 10-K.
Identification
of Executive Officers
The
following is a list of the Company's executive officers, their ages, and
their
positions and offices as of January 31, 2007.
Name
of Officer
|
|
Age
|
|
Position
(Year elected to position)
|
|
|
|
|
|
Robert
L. Moody
|
|
71
|
|
Chairman
of the Board and Chief Executive
Officer
(1963-1968, 1971-1980, 1981), Director
|
|
|
|
|
|
Ross
R. Moody
|
|
44
|
|
President
and Chief Operating Officer (1992), Director
|
|
|
|
|
|
Scott
E. Arendale
|
|
63
|
|
Senior
Vice President - International Marketing (2006)
|
|
|
|
|
|
Paul
D. Facey
|
|
55
|
|
Senior
Vice President - Chief Actuary (1992)
|
|
|
|
|
|
S.
Christopher Johnson
|
|
38
|
|
Senior
Vice President - Chief Marketing Officer (2006)
|
|
|
|
|
|
Charles
D. Milos
|
|
61
|
|
Senior
Vice President - Mortgage Loans and Real Estate (1990),
Director
|
|
|
|
|
|
James
P. Payne
|
|
62
|
|
Senior
Vice President - Secretary (1998)
|
|
|
|
|
|
Brian
M. Pribyl
|
|
48
|
|
Senior
Vice President - Chief Financial & Administrative
Officer
and Treasurer (2001)
|
|
|
|
|
|
Patricia
L. Scheuer
|
|
55
|
|
Senior
Vice President - Chief Investment Officer
(1992)
|
There
are
no arrangements or understandings pursuant to which any officer was elected.
All
officers hold office for a term of one year or until their successors are
elected and qualified, unless otherwise specified by the Board of
Directors.
Identification
of Certain Significant Employees
None
in
addition to the individuals identified as Executive Officers above.
Family
Relationships
Robert
L.
Moody is the father of Frances A. Moody-Dahlberg, Ross R. Moody, and Russell
S.
Moody, and the brother-in-law of E. Douglas McLeod.
Business
Experience
All
of
the Executive Officers listed above have served in various executive capacities
with the Company for more than five years, with the exception of the
following:
Mr.
Johnson was National Promotions Director of National Fitness Corp. from 1992
to
1993; Branch Manager of Hooper Holmes/Portamedic from 1993 to 1994;
Agent/Consultant with Financial Facts & Services from 1994 to 1995; Field
Sales Manager of Financial Brokerage from 1995 to 1998; Senior Sales
Representative with Mutual of Omaha from 1998 to 1999 and Senior Regional
Vice
President of Allstate - Lincoln Benefit Life from 1999 to 2006.
Mr.
Arendale was Vice President of International Sales Development with the Company
for the preceding five years prior to being promoted to his current position
in
June 2006.
Involvement
in Certain Legal Proceedings
During
the past five years there have been no criminal proceedings, judgments,
injunctions or bankruptcy petitions material to an evaluation of the ability
or
integrity of any of the Company's directors or executive officers.
Code
of Ethics
The
Company has adopted a Code of Ethics and Conduct for all directors, officers,
and employees. This Code is intended to comply with the requirement of the
Federal Securities Laws and the requirements of NASDAQ. The Code of Ethics
and
Conduct has been posted to the Company's website at www.nationalwesternlife.com
and is
available upon request.
Compensation
Discussion and Analysis
Purpose
The
Compensation and Stock Option Committee (“Compensation Committee”) is appointed
by and serves at the discretion of the Company’s Board of Directors. The Board
of Directors has determined that the Compensation Committee consist of no
fewer
than three members who all, or the majority of, meet the independence
requirements of the listing standards of NASDAQ. The purpose of the Compensation
Committee is to discharge the Board of Directors’ responsibilities for reviewing
and establishing the compensation not just for the Chief Executive Officer,
Chief Financial Officer, and the other three most highly paid executive
officers, but for all of the Company’s officers. These compensation elements
include base salary, annual incentive bonuses, discretionary bonuses and
awards,
stock option grants, and any other officer compensation
arrangements.
To
assist
the Compensation Committee with its responsibilities, it is supported by
the
Company’s Human Resource, Legal and Financial departments. The Compensation
Committee may retain, and has retained, independent compensation consultants
who
report directly to the members of the Compensation Committee. Meetings of
the
Compensation Committee are scheduled during the year with additional meetings
on
an as-necessary interim basis and include sessions without members of management
present. The Compensation Committee reports to the Board of Directors on
its
actions and recommendations.
Compensation
Philosophy and Objectives
The
Company’s overall philosophy in setting compensation policies is to align pay
with performance while at the same time providing a competitive compensation
that allows the Company to retain and attract talented individuals. Within
this
overall philosophy, the Compensation Committee has adopted several key
principles to help guide compensation decisions for executive
officers:
· |
Provide
a competitive total compensation package so the Company can attract,
retain, and motivate talented
individuals;
|
· |
Tie
compensation in part to overall Company financial performance so
that
executives are held accountable through their compensation for the
performance of the business;
|
· |
Tie
compensation in part to the Company’s stock performance through stock
options to align executives’ interests with those of the Company’s
stockholders; and
|
· |
Maintain
a committee of the Board of Directors independent of senior management
that may engage independent compensation consultants as needed to
review
and establish compensation for executive
officers.
|
Elements
of Executive Compensation
Officer
compensation arrangements, including executive officers, are reviewed and
approved annually by the Compensation Committee at its April meeting. The
Compensation Committee focuses primarily on the following components in forming
the total compensation package for each Company executive officer:
· |
Annual
cash incentive bonus based on Company performance versus predetermined
targets;
|
· |
Discretionary
cash bonus based upon individual performance;
and
|
· |
Long-term
incentive compensation in the form of stock
options.
|
The
mix
of executive compensation elements is based upon a philosophy of correlating
a
portion of executive compensation with the Company’s financial and stock
performance thus putting a segment of executive officer annual and long-term
compensation at-risk. This structure provides upside potential and downside
risk
for senior executive positions in recognition that these roles have greater
influence on the Company’s performance.
Base
Salaries
To
ensure
that compensation levels are reasonably competitive with market rates, the
Compensation Committee engages independent compensation consultants from
time-to-time to conduct a survey of executive compensation in a defined group
of
companies comparable to the Company. The surveyed companies are selected
based
on similar products and product lines, comparable financial size in terms
of
assets and revenues, and other known competitive factors. This process was
most
recently conducted during 2005 when the Compensation Committee retained two
separate external compensation consultants to conduct an officer compensation
review. While the primary focus of the survey was upon base salaries, the
independent consultants were also asked to provide total compensation data
for
the various officer positions and levels in order to target current and future
appropriate compensation levels. The Compensation Committee’s past practice has
been to generally target base salaries between the 25th
and
50th
percentile range of the identified peer group.
In
addition to market information, the Compensation Committee also subjectively
reviews and evaluates the level of performance of the Company and of each
officer. In approving salary and incentive compensation for individuals other
than the Chief Executive Officer and the President and Chief Operating Officer,
the Compensation Committee considers recommendations from these two individuals
concerning the other Company officers incorporating such factors as individual
performance, the scope and complexity of their current responsibilities,
length
of time in their current positions, value of the executive’s position to the
market, and difficulty of replacement of the officer. This evaluation focuses
most heavily on the base salary levels for each officer.
Annual
Incentive Compensation
For
certain executive officer positions, the Compensation Committee has determined
that annual incentive bonuses are an integral part of the executive’s
compensation package as the cash bonuses create a direct link between executive
compensation and individual and business performance. Consequently, there
are
three bonus programs in effect which are reviewed and approved annually by
the
Compensation Committee:
· |
Executive
Officer Bonus Program
|
· |
Domestic
Marketing Officer Bonus Program
|
· |
International
Marketing Officer Bonus Program
|
Executive
Officer Bonus Program.
Currently, the participants in the Executive Officer Bonus Program (“Executive
Bonus”) are the Chairman and Chief Executive Officer (Mr. Robert Moody), the
President and Chief Operating Officer (Mr. Ross Moody), and the Senior Vice
President, Chief Financial & Administrative Officer (Mr. Brian Pribyl). In
order to tie the compensation under the program with the Company’s financial
performance, the Executive Bonus includes metrics associated with the Company’s
annual sales performance, expense management and profitability. In accordance
with the program, the Compensation Committee set performance targets for
each
metric at various levels equating to various bonus level percentages as
follows:
Financial
Performance Metric
|
|
Bonus
% Range
|
|
|
|
Sales
|
|
0%
to 15%
|
Expense
Management
|
|
0%
to 12%
|
Profitability
|
|
0%
to 12%
|
The
sum
of the achieved bonus percentages for each metric, subject to a maximum
aggregate percentage of 30%, is applied to the weighted average base salary
for
each participant to determine the earned bonus amount. The bonus determination
under the program is subject to review by the Company’s independent auditors and
the profitability metric is based upon the Company’s audited financial
statements for the year. Bonus awards are generally paid in the year following
the annual financial performance metrics concurrent with the completion of
the
Company’s audit of the year-end financial statements and approval of the award
amounts by the Compensation Committee. Accordingly, the Executive Bonus payments
in 2006 were based upon the results achieved for 2005 financial performance
metrics established by the Compensation Committee. The bonus percentage achieved
under the program was 20.5%.
Domestic
Marketing Officer Bonus Program.
Participants in the Domestic Marketing Officer Bonus Program (“Domestic Bonus”)
are all domestic marketing officers including assistant vice presidents,
vice
presidents, and the senior vice president. As these individuals are most
able to
influence the outcome of the Company’s financial performance in terms of sales,
the program is heavily weighted toward this metric. The measures associated
with
this program include the Company’s annual sales performance, persistency of
policies sold and expense management. These measures were incorporated into
the
program to award not only the amount of sales but the quality of sales and
the
management of the costs incurred to acquire the business sold. Unlike the
Executive Bonus, the Domestic Bonus metrics assume a targeted level of
performance or “par” level to which the Compensation Committee assigned a
targeted bonus percentage in order to reflect a disproportionate weighting
of
the potential bonus award toward the sales metric. If the targeted level
for
each metric is attained, the sum of the metrics is equal to a bonus percentage
of 100% which is applied to the weighted average base salary of each
participant. The performance metrics set by the Compensation Committee equating
to various bonus level percentages under the program are as
follows:
Financial
Performance Metric
|
|
Par
Bonus Level
|
|
Bonus
% Range
|
|
|
|
|
|
Sales
|
|
70%
|
|
0%
to no limit
|
Persistency
|
|
15%
|
|
0%
to 30%
|
Expense
Management
|
|
15%
|
|
0%
to 30%
|
The
Domestic Bonus also differs from the Executive Bonus in that the bonus
percentage is not subject to a cap and bonus amounts may be advanced quarterly
based upon the year-to-date results achieved. Sales metric amounts under
the
program above the par level increase incrementally with an additional bonus
percentage added for every increment of additional sales established by the
Compensation Committee. However, if the aggregate sum of the three performance
metrics exceeds 100%, the bonus award paid at the end of the calendar year
is
limited to 100% for each participant. The bonus percentage above 100% is
applied
to the weighted average base salaries of all participants to create a pool
which
is paid out to participants in the subsequent calendar year based upon the
recommendation of the Domestic Marketing senior vice president and subject
to
approval by the President and Chief Operating Officer. The Domestic Bonus
percentage achieved under the program was 49.0% and 64.5% in 2005 and 2006,
respectively.
International
Marketing Officer Bonus Program.
Participants in the International Marketing Officer Bonus Program
(“International Bonus”) are all international marketing officers including
assistant vice presidents, vice presidents, and the senior vice president
(Mr.
Arendale). The International Bonus is identical in format to the Domestic
Bonus
with the exception that the metric targets established by the Compensation
Committee are customized for the differences between the domestic and
international lines of business. The weighting of the three performance metrics
(annual sales, persistency of policies sold, expense management) is the same
as
in the Domestic Bonus and all other features are similarly administrated.
The
International Bonus percentage achieved under the program was 70.0% and 124.0%
in 2005 and 2006, respectively.
Discretionary
Bonus Awards
For
officers who are not participants in any of three bonus programs, the
Compensation Committee considers from time-to-time circumstances which merit
the
need to recognize outstanding performance in the form of a discretionary
bonus.
Although many of these situations may be deemed within the normal
responsibilities of officers, the Compensation Committee on occasion may
provide
one-time recognition bonuses to identified officers where the demands of
the
situation and the results of the effort warrant such recognition. In 2006,
total
discretionary bonuses awarded to officers totaled $88,000 of which $75,000
was
targeted to Mr. Charles Milos for his efforts involving the Company’s real
estate and investment properties and subsidiary operations.
Long-Term
Incentive Compensation
Under
the
Company’s 1995 Stock and Incentive Plan, the Compensation Committee provides
Company officers with long-term incentive awards through grants of stock
options
directly aligning the interest of the officers with stockholder interests.
The
stock options have a graded five-year vesting period that begins on the third
anniversary date of the granted option in order to promote a long-term
perspective and to encourage key employees to remain at the Company. All
options
to date have been granted at the fair market value of the Company’s Class A
common stock on the date of the grant. The Compensation Committee believes
that
stock options are inherently performance-based and a form of at-risk
compensation since the recipient does not benefit unless the Company’s common
stock price subsequently rises.
The
Compensation Committee is responsible for determining the recipients of the
grants, when the grants should be made, and the number of shares to be granted.
The size of the awards generally reflect each officer’s position relative to
other officers in the Company with consideration to total compensation targets
obtained from the peer group information previously discussed. In addition,
as
is the case with base salaries, the Compensation Committee considers the
grant
recommendations of the Chairman and Chief Executive and the President and
Chief
Operating Officer for other Company officers.
The
practice of the Compensation Committee has been to grant stock options awards
every three years at the time of its annual review of officer compensation.
The
most recent grant was awarded in April 2004 at which time the Compensation
Committee approved the issuance of 56,750 stock options to selected
officers.
Retirement
and Other Benefits
The
Company’s executive officers are eligible to participate in the health and
welfare, 401(k) and defined benefit retirement benefit plans that are offered
to
other Company employees. In addition, if eligible, executive officers may
participate in the following plans:
Group
Excess Benefit Plan
Company
officers at the vice president level and above, including named executive
officers, are eligible to participate in a group excess benefit plan which
supplements the Company’s core medical insurance plan. Administered by a third
party insurer, the group excess benefit plan provides coverage for co-pays,
deductibles and other out-of-pocket expenses not covered by the core medical
insurance plan. Offering such a plan to the selected Company officer levels
is
viewed as a key component of the overall compensation strategy for attracting
and retaining talented executive officers. The benefits provided to each
named
executive officer are reported in the “All Other Compensation Column” of the
Summary Compensation Table included in this Item 11 of the report on Form
10-K.
Non-Qualified
Defined Benefit Plan
This
plan
covers those officers of the Company who were in a senior vice president
position or above prior to 1991. The plan provides retirement benefits to
those
individuals affected by the revisions to the Company’s qualified defined benefit
pension plan precipitated by the limitations imposed by Internal Revenue
Code
Section 401(a)(17) and 415. As of December 31, 2006, the active officers
participating in this plan were Mr. Robert Moody and Mr. Charles Milos. Benefits
associated with this plan are disclosed in the Pension Benefits table included
in this Item 11 of the report on Form 10-K.
Non-Qualified
Deferred Compensation Plan
This
plan
allows Company senior officers, including named executive officers, to defer
payment of a percentage of their compensation and to provide for up to a
2%
matching and 2% profit sharing contribution on plan compensation that exceeds
certain qualified plan limits, and an additional Company discretionary matching
contributions of up to 2% of plan compensation. Company contributions are
subject to a vesting schedule based upon on the officer’s years of service.
Benefit information associated with this plan is disclosed in the Non-Qualified
Deferred Compensation for 2006 table included in this Item 11 of the report
on
Form 10-K and Company contributions are included in the “All Other Compensation”
column in the Summary Compensation Table.
Non-Qualified
Defined Benefit Plan for Robert L. Moody
This
plan
specifically covers the Company’s Chairman of the Board and Chief Executive
Officer, Mr. Robert L. Moody, and is intended to supplement the retirement
benefits of the Non-Qualified Defined Benefit Plan, mentioned above, that
were
limited by the American Jobs Creation Act of 2004. Mr. Moody’s benefits
associated with this plan are disclosed in the Pension Benefits table included
in this Item 11 of the report on Form 10-K.
Non-Qualified
Defined Benefit Plan for the President of National Western Life Insurance
Company
Similar
to the previously discussed plan, this plan specifically covers the Company’s
President and Chief Operating Officer, Mr. Ross R. Moody, and is intended
to
provide the retirement benefits that comply with the American Jobs Creation
Act
of 2004. Mr. Moody’s benefits associated with this plan are disclosed in the
Pension Benefits table included in this Item 11 of the report on Form
10-K.
National
Western Life Insurance Company Retirement Bonus Program for Robert L.
Moody
This
program provides an annual payment to Mr. Robert L. Moody equal to 2% of
his
compensation. The payment made in 2007 related to 2006 compensation is reported
in the “Non-Equity Incentive Plan Compensation” column of the Summary
Compensation Table included with Item 11 of this report on Form
10-K.
Postretirement
Benefits
The
Company’s basic health plan and group excess benefit plan have a provision for
individuals serving in the positions of Chairman of the Board or President
for
seven years or more subsequent to 1980 to continue to receive lifetime health
benefits for themselves and their dependents upon retirement. Mr. Robert
L.
Moody and Mr. Ross R. Moody, named executive officers, currently meet this
eligibility criteria.
Perquisites
and Other Personal Benefits
The
Compensation Committee periodically reviews executive officer perquisites
and
other benefits based upon information supplied to it by the Company’s Human
Resources, Legal and Financial departments. In addition to base salaries
and
annual and long-term bonus incentives, the Company provides its executive
officers with certain and varying perquisites and benefits.
The
perquisites and personal benefits provided to each named executive officer
are
reported in the “All Other Compensation Column” of the Summary Compensation
Table included in this Item 11 of the report on Form 10-K and are described
in
further detail in the footnotes to that table.
Stock
Ownership Guidelines
The
Company does not require its directors or executive officers to own a particular
amount of the Company’s common stock and accordingly has not established a set
of stock ownership guidelines. The Compensation Committee is satisfied that
the
long-term incentive compensation offered to directors and officers in the
form
of stock options adequately aligns this group’s interest with those of the
Company’s stockholders.
Employment
Agreements
The
Company does not utilize employment agreements with its executive officers
or
other employees. The Company’s practice has been to issue offer letters to
executive officer candidates when recruited to their positions. In addition
to
outlining the executive officer’s responsibilities, each offer letter specifies
the beginning base salary and eligibility for any additional compensation
programs overseen by the Compensation Committee. Accordingly, the Company
does
not have any contractual obligations to its executive officers for severance
payments in connection with any termination or change-in-control.
Financial
Restatements
The
Compensation Committee has not formally adopted a policy with respect to
whether
retroactive adjustments to any form of compensation paid under arrangements
for
executive officers will be made where the prior payment was related to financial
results of the Company that are subsequently restated. As this situation
has not
previously been experienced, the Compensation Committee believes that such
an
issue is best addressed at the time it occurs and all facts and circumstances
surrounding the restatement are known.
Tax
and Accounting Treatment of Compensation
Section
162(m) of the Internal Revenue Code generally disallows a tax deduction to
public corporations for non-performance based compensation over $1 million
paid
in any one year to each of the individuals who were, at the end of the year,
the
corporation’s chief executive officer and the four other most highly compensated
executive officers. Except for the Chairman and Chief Executive Officer of
the
Company, the levels of non-performance based salary, bonus and other
compensation paid do not typically exceed this level. As an insurance company
subject to the laws and regulations of the State of Colorado, the Company
is
exempt from the requirements of Section 162(m) of the Internal Revenue Code
pursuant to Section 12(g)(2)(G) of the Securities Exchange Act of 1934 until
such time as the Company completes a registration filing as a NASDAQ exchange
listed registrant.
The
Compensation Committee reserves the right to award compensation to executive
officers that may not qualify under Section 162(m) as deductible compensation,
however, it will continue to consider all elements of cost to the Company
of
providing such compensation, including the potential impact, if any, of Section
162(m).
The
Company accounts for long-term incentive compensation in the form of stock
options to executive officers under the rules SFAS 123(R) which requires
the
Company to estimate and expense each award of equity compensation over the
service period of the award. Other accounting rules require that cash
compensation be recorded as an expense at the time the obligation is accrued.
Compensation
Committee Report
The
Compensation Committee has reviewed each element of executive officer
compensation and believes that the compensation philosophy and practices
are
designed to serve the best interests of the Company and its stockholders.
The
Compensation Committee also believes that the compensation of the Company’s
executive officers is both appropriate and consistent with the objectives
set by
this committee.
The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis set forth with the Company’s management. Based on its reviews and
discussions, the Compensation Committee approved and recommended to the
Company’s Board of Directors that the Compensation Discussion and Analysis be
included in this report on Form 10-K for the year ended December 31,
2006.
|
Members
of the Compensation Committee
|
|
|
|
Harry
L. Edwards (Chairman)
|
|
Stephen
E. Glasgow
|
|
E.
J. Pederson
|
Summary
Compensation Table
The
following table sets forth all of the compensation awarded to, earned by,
or
paid to the Company’s principal executive officer, principal financial officer,
and the three other highest paid executive officers for the year ended December
31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
Change
in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
Value
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
Deferred
|
|
All
Other
|
|
|
|
Name
and
|
|
|
|
|
|
|
|
Option
|
|
Compen-
|
|
Compensation
|
|
Compen-
|
|
|
|
Principal
Position
|
|
Year
|
|
Salary
(a)
|
|
Bonus
|
|
Awards
(c)
|
|
sation
|
|
Earnings
(f)
|
|
sation
(g)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
L. Moody
|
|
|
2006
|
|
$
|
1,536,875
|
|
$
|
-
|
|
$
|
5,705,108
|
|
$
|
373,001(d
|
)
|
$
|
3,041,422
|
|
$
|
757,891
|
|
$
|
11,414,296
|
|
Chairman
of the Board
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
Chief Executive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian
M. Pribyl
|
|
|
2006
|
|
|
240,600
|
|
|
-
|
|
|
145,571
|
|
|
54,433(d
|
)
|
|
13,409
|
|
|
40,627
|
|
|
494,640
|
|
Senior
Vice President,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Financial and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ross
R. Moody
|
|
|
2006
|
|
|
550,925
|
|
|
-
|
|
|
2,870,250
|
|
|
118,903(d
|
)
|
|
14,951
|
|
|
74,171
|
|
|
3,629,200
|
|
President
and Chief
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
D. Milos
|
|
|
2006
|
|
|
232,732
|
|
|
75,000(b
|
)
|
|
1,054,108
|
|
|
-
|
|
|
77,788
|
|
|
43,167
|
|
|
1,482,795
|
|
Senior
Vice President,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
Loans &
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott
E. Arendale
|
|
|
2006
|
|
|
117,456
|
|
|
-
|
|
|
123,872
|
|
|
117,085(e
|
)
|
|
25,853
|
|
|
12,354
|
|
|
396,620
|
|
Senior
Vice President,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
Columns with no data have been omitted.
(a)
|
The
amounts in this column include Company and subsidiary Board of
Director
fees of $28,700 for Mr. Robert L. Moody, $3,250 for Mr. Pribyl,
$33,450
for Mr. Ross R. Moody, and $31,700 for Mr. Milos.
|
(b)
|
Mr.
Milos received a discretionary bonus award in 2006 in recognition
of his
performance with respect to the Company’s real estate and investment
properties and subsidiary operations.
|
(c)
|
The
amounts in this column represent the dollar amount recognized for
financial statement purposes in 2006 in accordance with SFAS 123(R)
for
all stock options granted and outstanding. For a discussion of
the
assumptions made in the valuation of these option awards, refer
to the
Notes to Consolidated Financial Statements section of this Annual
Report
on Form 10-K.
|
(d)
|
The
amounts for Mr. Robert L. Moody, Mr. Ross R. Moody, and Mr. Pribyl
represent amounts earned under the 2006 Executive Officer Bonus
Program.
These amounts will be paid in 2007. Included in Mr. Robert L. Moody’s
amount is $26,425 paid in conjunction with the NWLIC Retirement
Bonus
Program for Robert L. Moody.
|
(e)
|
The
amount for Mr. Arendale represents the amount earned under the
2006
International Marketing Officer Bonus Program. This amount will
be paid in
2007.
|
(f)
|
The
amounts in this column represent the change in the accumulated
pension
benefit during 2006 under the Company’s qualified defined benefit plan for
Messrs. Ross R. Moody, Pribyl and Arendale and the change in the
accumulated pension benefit during 2006 under the Company’s qualified and
non-qualified defined benefit plans for Messrs. Robert L. Moody
and Milos.
For a discussion of the assumptions made in the calculation of
these
amounts, refer to the Notes to Consolidated Financial Statements
section
of this Annual Report on Form 10-K.
|
(g)
|
The
amounts in this column include the items summarized in the following
tables:
|
All
Other Compensation
|
|
Company
|
|
Excess
|
|
Company
|
|
Company
|
|
|
|
Total
|
|
|
|
Paid
|
|
Benefit
|
|
Contributions
|
|
Paid
|
|
|
|
All
Other
|
|
Name
and
|
|
Benefit
|
|
Claims
|
|
To
Savings
|
|
Taxes/
|
|
Other
|
|
Compen-
|
|
Principal
Position
|
|
Premiums
(1)
|
|
Paid
(2)
|
|
Plans
(3)
|
|
Insurance
(4)
|
|
Perquisites
|
|
sation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
L. Moody
|
|
$
|
4,391
|
|
$
|
48,850
|
|
$
|
4,400
|
|
$
|
667,775
|
|
$
|
32,475(5
|
)
|
$
|
757,891
|
|
Chairman
of the Board and Chief
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian
M. Pribyl
|
|
|
7,206
|
|
|
15,023
|
|
|
14,661
|
|
|
-
|
|
|
3,737(6
|
)
|
|
40,627
|
|
Senior
Vice President, Chief
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ross
R. Moody
|
|
|
3,540
|
|
|
5,649
|
|
|
32,980
|
|
|
-
|
|
|
32,002(7
|
)
|
|
74,171
|
|
President
and Chief Operating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
D. Milos
|
|
|
7,286
|
|
|
15,692
|
|
|
13,754
|
|
|
-
|
|
|
6,435(8
|
)
|
|
43,167
|
|
Senior
Vice President, Mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
& Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott
E. Arendale
|
|
|
4,314
|
|
|
-
|
|
|
6,412
|
|
|
-
|
|
|
1,628(9
|
)
|
|
12,354
|
|
Senior
Vice President,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
Company provides its officers additional compensation equivalent
to the
premiums for health, dental and accidental death and disbursement
coverage
offered to all employees.
|
(2)
|
The
amounts in this column represent claims paid under the Company’s Group
Excess Benefit Program.
|
(3)
|
The
amounts in this column represent company contributions to the Company’s
qualified and non-qualified savings plans. The Company’s 401(k) plan is
available to all employees with the same contribution
criteria.
|
(4)
|
Mr.
Robert L. Moody contributed a life interest in a trust estate to
the
Company as a capital contribution. The Company, in turn, issued
term
policies on the life of Mr. Moody in excess of the amount of the
asset
contributed which was assigned to Mr. Moody. Premiums paid on the
excess
amount which were $424,371 in 2006 represent additional compensation
to
Mr. Moody. In addition, the Company reimburses Mr. Moody the applicable
taxes associated with this benefit which were $243,404.
|
(5)
|
Mr.
Robert Moody’s amounts in this column include $7,862 for car usage,
$19,456 in miscellaneous travel and entertainment, $4,198 in membership
dues and event tickets, and $959 in various other expense
items.
|
(6)
|
Mr.
Pribyl’s amounts in this column include $2,374 for guest travel on Company
business trips, $563 in entertainment, and $800 in
gifts.
|
(7)
|
Mr.
Ross Moody’s amounts in this column include $6,988 for car usage, $11,503
in miscellaneous travel and entertainment, $6,049 in membership
dues and
event tickets, $1,600 in gifts, $1,875 for personal tax return
preparation, and $3,987 in various other expense items.
|
(8)
|
Mr.
Milos’ amounts in this column include $721 for car usage, $1,600 in gifts,
$2,542 for guest travel on Company business trips, and $1,572 in
miscellaneous travel and entertainment.
|
(9)
|
Mr.
Arendale’s amounts in this column include $828 for guest travel on Company
business trips and $800 in gifts.
|
Grants
of Plan-Based Awards
The
following table provides information regarding grants under the Company’s 2006
Executive Officer Bonus Program and International Marketing Officer Bonus
Program for the executive officers named in the Summary Compensation Table.
No
stock options or equity awards were granted to the named executive officers
during 2006.
|
|
Estimated
Future Payouts
|
|
|
|
Under
Non-Equity Incentive
|
|
|
|
Plan
Awards (a)
|
|
Name
|
|
Threshold
|
|
Target
|
|
Maximum
(b)
|
|
|
|
|
|
|
|
|
|
Robert
L. Moody
|
|
|
|
|
|
|
|
2006
Executive Officer Bonus Program:
|
|
|
|
|
|
|
|
International
life sales
|
|
$
|
30,137
|
|
$
|
50,329
|
|
$
|
75,343
|
|
Domestic
life sales
|
|
|
30,137
|
|
|
50,178
|
|
|
75,343
|
|
Annuities
sales
|
|
|
30,137
|
|
|
50,178
|
|
|
75,343
|
|
Expense
management
|
|
|
90,411
|
|
|
150,685
|
|
|
180,822
|
|
Company
profitability
|
|
|
90,411
|
|
|
150,685
|
|
|
180,822
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian
M. Pribyl
|
|
|
|
|
|
|
|
|
|
|
2006
Executive Officer Bonus Program:
|
|
|
|
|
|
|
|
|
|
|
International
life sales
|
|
|
4,733
|
|
|
7,905
|
|
|
11,833
|
|
Domestic
life sales
|
|
|
4,733
|
|
|
7,881
|
|
|
11,833
|
|
Annuities
sales
|
|
|
4,733
|
|
|
7,881
|
|
|
11,833
|
|
Expense
management
|
|
|
14,200
|
|
|
23,667
|
|
|
28,400
|
|
Company
profitability
|
|
|
14,200
|
|
|
23,667
|
|
|
28,400
|
|
|
|
|
|
|
|
|
|
|
|
|
Ross
R. Moody
|
|
|
|
|
|
|
|
|
|
|
2006
Executive Officer Bonus Program:
|
|
|
|
|
|
|
|
|
|
|
International
life sales
|
|
|
10,339
|
|
|
17,267
|
|
|
25,849
|
|
Domestic
life sales
|
|
|
10,339
|
|
|
17,215
|
|
|
25,849
|
|
Annuities
sales
|
|
|
10,339
|
|
|
17,215
|
|
|
25,849
|
|
Expense
management
|
|
|
31,018
|
|
|
51,697
|
|
|
62,037
|
|
Company
profitability
|
|
|
31,018
|
|
|
51,697
|
|
|
62,037
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott
E. Arendale
|
|
|
|
|
|
|
|
|
|
|
2006
International Marketing Officer Bonus Program:
|
|
|
|
|
|
|
|
|
|
|
Life
sales
|
|
|
23,417
|
|
|
81,960
|
|
|
unlimited
|
|
Persistency
|
|
|
3,513
|
|
|
17,563
|
|
|
35,126
|
|
Expense
management
|
|
|
3,513
|
|
|
17,563
|
|
|
35,126
|
|
Note:
Columns with no data have been omitted.
(a)
|
Amounts
that have been or are expected to be paid in 2007 pertaining to
the 2006
programs are reflected in the Summary Compensation Table. The 2006
program
bonus amounts are based upon the base salary actually paid during
2006.
|
(b)
|
Although
the Executive Officer Bonus Program has stated maximums per program
component, the aggregate bonus amount cannot exceed 30% of base
salaries
paid.
|
Outstanding
Equity Awards at December 31, 2006
The
following table provides information regarding outstanding stock options
held by
the executive officers named in the Summary Compensation Table as of December
31, 2006. No stock options have been granted since 2004.
|
|
Option
Awards
|
|
|
|
|
|
Number
of
|
|
|
|
|
|
|
|
Number
of
|
|
Securities
|
|
|
|
|
|
|
|
Securities
|
|
Underlying
|
|
|
|
|
|
|
|
Underlying
|
|
Unexercised
|
|
Option
|
|
Option
|
|
|
|
Options
(#)
|
|
Options
(#)
|
|
Exercise
|
|
Expiration
|
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
Price
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
Robert
L. Moody Grants:
|
|
|
|
|
|
|
|
|
|
4/16/1998
|
|
|
12,000
|
|
|
-
|
|
$
|
105.250
|
|
|
4/16/2008
|
|
6/19/1998
|
|
|
1,000
|
|
|
-
|
|
|
112.375
|
|
|
6/19/2008
|
|
4/20/2001
|
|
|
6,900
|
|
|
4,600
|
|
|
92.130
|
|
|
4/20/2011
|
|
6/22/2001
|
|
|
1,000
|
|
|
-
|
|
|
95.000
|
|
|
6/22/2011
|
|
4/23/2004
|
|
|
-
|
|
|
20,000
|
|
|
150.000
|
|
|
4/23/2014
|
|
6/25/2004
|
|
|
400
|
|
|
600
|
|
|
150.000
|
|
|
6/25/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian
M. Pribyl Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/20/2001
|
|
|
-
|
|
|
560
|
|
|
92.130
|
|
|
4/20/2011
|
|
4/23/2004
|
|
|
-
|
|
|
2,000
|
|
|
150.000
|
|
|
4/23/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ross
R. Moody Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5/1/1997
|
|
|
81
|
|
|
-
|
|
|
85.125
|
|
|
5/1/2007
|
|
4/16/1998
|
|
|
5,630
|
|
|
-
|
|
|
105.250
|
|
|
4/16/2008
|
|
6/19/1998
|
|
|
1,000
|
|
|
-
|
|
|
112.375
|
|
|
6/19/2008
|
|
4/20/2001
|
|
|
6,300
|
|
|
4,200
|
|
|
92.130
|
|
|
4/20/2011
|
|
6/22/2001
|
|
|
1,000
|
|
|
-
|
|
|
95.000
|
|
|
6/22/2011
|
|
4/23/2004
|
|
|
-
|
|
|
10,000
|
|
|
150.000
|
|
|
4/23/2014
|
|
6/25/2004
|
|
|
400
|
|
|
600
|
|
|
150.000
|
|
|
6/25/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
D. Milos Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5/1/1997
|
|
|
1,500
|
|
|
-
|
|
|
85.125
|
|
|
5/1/2007
|
|
4/16/1998
|
|
|
2,500
|
|
|
-
|
|
|
105.250
|
|
|
4/16/2008
|
|
6/19/1998
|
|
|
1,000
|
|
|
-
|
|
|
112.375
|
|
|
6/19/2008
|
|
4/20/2001
|
|
|
780
|
|
|
520
|
|
|
92.130
|
|
|
4/20/2011
|
|
6/22/2001
|
|
|
1,000
|
|
|
-
|
|
|
95.000
|
|
|
6/22/2011
|
|
4/23/2004
|
|
|
-
|
|
|
2,000
|
|
|
150.000
|
|
|
4/23/2014
|
|
6/25/2004
|
|
|
400
|
|
|
600
|
|
|
150.000
|
|
|
6/25/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott
E. Arendale Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/20/2001
|
|
|
-
|
|
|
280
|
|
|
92.130
|
|
|
4/20/2011
|
|
4/23/2004
|
|
|
-
|
|
|
750
|
|
|
150.000
|
|
|
4/23/2014
|
|
Note:
Columns with no data have been omitted.
Officer
stock options vest 20% annually following three full years of service to
the
Company from the date of grant. Stock options granted to members of the Board
of
Directors vest 20% annually following one full year of service to the Company
from the date of grant. Accordingly, the unexercisable options shown in the
previous table are scheduled to vest during the following years:
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
Unexercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
L. Moody
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/20/2001
|
|
|
2,300
|
|
|
2,300
|
|
|
- |
|
|
- |
|
|
- |
|
|
4,600
|
|
4/23/2004
|
|
|
4,000
|
|
|
4,000
|
|
|
4,000
|
|
|
4,000
|
|
|
4,000
|
|
|
20,000
|
|
6/25/2004
(director)
|
|
|
200
|
|
|
200
|
|
|
200
|
|
|
|
|
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian
M. Pribyl
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/20/2001
|
|
|
280
|
|
|
280
|
|
|
- |
|
|
- |
|
|
- |
|
|
560
|
|
4/23/2004
|
|
|
400
|
|
|
400
|
|
|
400
|
|
|
400
|
|
|
400
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ross
R. Moody
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/20/2001
|
|
|
2,100
|
|
|
2,100
|
|
|
- |
|
|
- |
|
|
- |
|
|
4,200
|
|
4/23/2004
|
|
|
2,000
|
|
|
2,000
|
|
|
2,000
|
|
|
2,000
|
|
|
2,000
|
|
|
10,000
|
|
6/25/2004
(director)
|
|
|
200
|
|
|
200
|
|
|
200
|
|
|
- |
|
|
- |
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
D. Milos
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/20/2001
|
|
|
260
|
|
|
260
|
|
|
- |
|
|
- |
|
|
- |
|
|
520
|
|
4/23/2004
|
|
|
400
|
|
|
400
|
|
|
400
|
|
|
400
|
|
|
400
|
|
|
2,000
|
|
6/25/2004
(director)
|
|
|
200
|
|
|
200
|
|
|
200
|
|
|
- |
|
|
- |
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott
E. Arendale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/20/2001
|
|
|
140
|
|
|
140
|
|
|
- |
|
|
- |
|
|
- |
|
|
280
|
|
4/23/2004
|
|
|
150
|
|
|
150
|
|
|
150
|
|
|
150
|
|
|
150
|
|
|
750
|
|
Option
Exercises and Stock Vested
The
following table sets forth information regarding option exercises by the
executive officers named in the Summary Compensation Table for the year ended
December 31, 2006. The Company does not have stock award plans with stock
awards
subject to vesting.
|
|
Option
Awards
|
|
|
|
Number
of
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Acquired
on
|
|
Value
Realized
|
|
Name
|
|
Exercise
|
|
on
Exercise
|
|
|
|
|
|
|
|
Robert
L. Moody
|
|
|
16,125
|
|
$
|
2,333,093
|
|
|
|
|
|
|
|
|
|
Brian
M. Pribyl
|
|
|
280
|
|
|
37,972
|
|
|
|
|
|
|
|
|
|
Ross
R. Moody
|
|
|
1,529
|
|
|
204,258
|
|
|
|
|
|
|
|
|
|
Charles
D. Milos
|
|
|
1,400
|
|
|
232,245
|
|
|
|
|
|
|
|
|
|
Scott
E. Arendale
|
|
|
520
|
|
|
67,780
|
|
Note:
Columns with no data have been omitted.
Pension
Benefits
The
following table provides information regarding benefits under the Company’s
Pension Plan, Non-Qualified Defined Benefit Plan, Non-qualified Defined Benefit
Plan for Robert L. Moody, and Non-Qualified Defined Benefit Plan for the
President of National Western Life Insurance Company (NWLIC).
|
|
|
|
Number
of
|
|
|
|
|
|
|
|
|
|
Years
of
|
|
Present
Value of
|
|
Payments
|
|
|
|
|
|
Credited
|
|
Accumulated
|
|
During
|
|
Name
|
|
Plan
Name
|
|
Service
|
|
Benefit
|
|
Last
Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
|
Robert
L. Moody
|
|
|
NWLIC
Pension Plan
|
|
|
43
|
|
$
|
1,220,476
|
|
$
|
148,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NWLIC
Non-Qualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
Benefit Plan
|
|
|
43
|
|
|
5,798,229
|
|
|
713,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NWLIC
Non-Qualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
Benefit Plan for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
L. Moody
|
|
|
43
|
|
|
8,665,835
|
|
|
918,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian
M. Pribyl
|
|
|
NWLIC
Pension Plan
|
|
|
6
|
|
|
56,659
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ross
R. Moody
|
|
|
NWLIC
Pension Plan
|
|
|
16
|
|
|
119,728
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Qualified
Defined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
Plan for the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President
of NWLIC
|
|
|
16
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
D. Milos
|
|
|
NWLIC
Pension Plan
|
|
|
24
|
|
|
353,910
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NWLIC
Non-Qualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
Benefit Plan
|
|
|
24
|
|
|
221,113
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott
E. Arendale
|
|
|
NWLIC
Pension Plan
|
|
|
13
|
|
|
171,305
|
|
|
-
|
|
Note:
Columns with no data have been omitted.
Pension
Plan. The
qualified defined benefit plan covers substantially all employees and officers
of the Company and provides benefits based on the participant's years of
service
and compensation. The Company makes annual contributions to the plan that
complies with the minimum funding provisions of the Employee Retirement Income
Security Act. Annual pension benefits for those employees who became eligible
participants prior to January 1, 1991, are generally calculated as the sum
of
the following:
(1) 50%
of the participant's final 5-year average annual eligible compensation at
December 31, 1990, less 50% of their primary social security benefit determined
at December 31, 1990; this net amount is then prorated for less than 15 years
of
benefit service at normal retirement date. This result is multiplied by a
fraction which is the participant's years of benefit service at December
31,
1990, divided by the participant's years of benefit service at normal retirement
date.
(2) 1.5%
of the participant's eligible compensation earned during each year of benefit
service after December 31, 1990.
Annual
pension benefits for those employees who become eligible participants on
or
subsequent to January 1, 1991, are generally calculated as 1.5% of their
compensation earned during each year of benefit service.
Non-Qualified
Defined Benefit Plan. This
plan
covers officers of the Company who were in the position of senior vice president
or above prior to 1991. The plan provides benefits based on the participant's
years of service and compensation. No minimum funding standards are
required.
The
benefit to be paid pursuant to this plan to a participant, other than the
Chairman of the Company, who retires at his normal retirement date shall
be
equal to (a) minus (b) minus (c), but the benefit may not exceed (d) minus
(b)
where:
(a)
is
the benefit which would have been payable at the participant's normal retirement
date under the terms of the Pension Plan as of December 31, 1990, as if that
plan had continued without change and without regard to Internal Revenue
Code
Section 401(a) (17) and 415 limits, and,
(b)
is
the benefit which actually becomes payable under the terms of the Pension
Plan
at the participant's normal retirement date, and,
(c)
is
the actuarially equivalent life annuity which may be provided by an accumulation
of 2% of the participant's compensation for each year of service on and after
January 1, 1991, accumulated at an assumed interest rate of 8.5% to the
participant's normal retirement date, and,
(d)
is
the benefit which would have been payable at the participant's normal retirement
date under the terms of the Pension Plan as of December 31, 1990, as if that
plan had continued without change and without regard to Internal Revenue
Code
Section 401(a)(17) and 415 limits, except that the proration over 15 years
shall
instead be calculated over 30 years.
The
Chairman of the Company, Robert L. Moody, is currently receiving in-service
benefits from this plan. The benefit that Mr. Moody began receiving as of
his
normal retirement date pursuant to the plan was equal to (a) minus (b) minus
(c)
where:
(a)
was
his years of service (up to 45), multiplied by 1.66667%, and then multiplied
by
the excess of his eligible compensation over his primary social security
benefit
under the terms of the Pension Plan as of December 31, 1990, as if that plan
had
continued without change and without regard to Internal Revenue Code Section
401(a) (17) and 415 limits, and,
(b)
was
the benefit payable to him under the terms of the Pension Plan,
and,
(c)
was
the actuarially equivalent life annuity provided by an accumulation of 2%
of his
compensation for each year of service on and after January 1, 1991, accumulated
at an assumed interest rate of 8.5% to his normal retirement date.
This
benefit was increased for additional service and changes in eligible
compensation through December 31, 2004. The benefit was frozen as of December
31, 2004 in connection with plan changes required by the American Jobs Creation
Act of 2004.
Non-Qualified
Defined Benefit Plan for Robert L. Moody. This
plan
covers the current Chairman of the Company, Robert L. Moody, and is intended
to
provide for post-2004 benefit accruals that mirror and supplement the pre-2005
benefit accruals under the previously discussed Non-Qualified Defined Benefit
Plan, while complying with the American Jobs Creation Act of 2004. No minimum
funding standards are required.
The
annual benefit paid to the Chairman of the Company on an in-service basis
effective July 1, 2005 was equal to (a) minus (b) minus (c) where:
(a)
was
his years of service on his normal retirement date, multiplied by 1.66667%,
and
then multiplied by the excess of his eligible compensation over his primary
social security benefit under the terms of the Pension Plan as of December
31,
1990, as if that plan had continued without change and without regard to
Internal Revenue Code Section 401(a) (17) and 415 limits, less the actuarially
equivalent life annuity which may be provided by an accumulation of 2% of
his
compensation for each year of service on and after January 1, 1991, accumulated
at an assumed interest rate of 8.5% to his normal retirement date, and,
multiplied by the ratio of his years of service on July 1, 2005 to his years
of
service on his normal retirement date, multiplied by the ratio of his eligible
compensation as of July 1, 2005 to his eligible compensation as of his normal
retirement date, and,
(b)
was
the benefit payable to him under the terms of the Pension Plan as of July
1,
2005, and,
(c)
was
the benefit payable to him under the terms of the Non-Qualified Defined Benefit
Plan as of December 31, 2004.
Subsequent
to July 1, 2005, the annual benefit was increased monthly for additional
service
and changes in eligible compensation.
Non-Qualified
Defined Benefit Plan for the President of National Western Life Insurance
Company. This
plan
covers the President of the Company and is intended to provide benefit accruals
that comply with the American Jobs Creation Act of 2004. No minimum funding
standards are required.
The
annual benefit to be paid to the President of the Company who retires at
his
normal retirement date shall be equal to (a) minus (b) minus (c)
where:
(a)
equals his years of service (up to 45), multiplied by 1.66667%, and then
multiplied by the excess of his eligible compensation over his primary social
security benefit under the terms of the Pension Plan as of December 31, 1990,
as
if that plan had continued without change and without regard to Internal
Revenue
Code Section 401(a) (17) and 415 limits, and,
(b)
equals the actuarially equivalent life annuity provided by an accumulation
of 2%
of his compensation for each year of service on and after his date of hire,
accumulated at an assumed interest rate of 8.5% to his normal retirement
date,
and,
(c)
equals the benefit actually payable to him under the terms of the Pension
Plan.
The
plan
provides for a monthly in-service benefit if the President of the Company
continues employment after his normal retirement date.
Non-Qualified
Deferred Compensation
The
following table provides information regarding the Company’s non-qualified
deferred compensation plan for the executive officers named in the Summary
Compensation Table as of December 31, 2006.
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
Executive
|
|
Registrant
|
|
Aggregate
|
|
|
|
Balance
|
|
|
|
Contributions
|
|
Contributions
|
|
Earnings
|
|
Aggregate
|
|
at
Last
|
|
|
|
in
Last
|
|
in
Last
|
|
in
Last
|
|
Withdrawals/
|
|
Fiscal
|
|
Name
|
|
Fiscal
Year
|
|
Fiscal
Year (a)
|
|
Fiscal
Year (b)
|
|
Distributions
|
|
Year-End
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
L. Moody
|
|
$
|
-
|
|
$
|
-
|
|
$
|
20,486
|
|
$
|
49,306
|
|
$
|
166,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian
M. Pribyl
|
|
|
9,774
|
|
|
5,861
|
|
|
10,784
|
|
|
-
|
|
|
101,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ross
R. Moody
|
|
|
26,048
|
|
|
24,180
|
|
|
58,641
|
|
|
-
|
|
|
572,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
D. Milos
|
|
|
10,416
|
|
|
5,421
|
|
|
47,252
|
|
|
-
|
|
|
436,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott
E. Arendale
|
|
|
10,512
|
|
|
1,543
|
|
|
823
|
|
|
-
|
|
|
12,878
|
|
Note:
Columns with no data have been omitted.
(a)
|
Registrant
contributions are reflected in the “All Other Compensation” column in the
Summary Compensation Table and are not additional earned
compensation.
|
(b)
|
The
investment options under the plan consist of a selection of mutual
funds
identical to those available to all employees through the 401(k)
plan.
|
(c)
|
Balances
in the plan are settled in cash upon the termination event selected
by the
officer and distributed either in a lump sum or in annual installments.
Deferred amounts represent unsecured obligations of the
Company.
|
Potential
Payments Upon Termination or Change in Control
The
Company has no contract, agreement, plan or arrangement, written or unwritten,
that provides for payment to any officer at, following, or in connection
with
any termination, severance, retirement or a constructive termination, or
a
change in control of the Company or a change in any officer’s
responsibilities.
Director
Compensation
The
following table sets forth the compensation for 2006 for those individuals
who
served as members of the Company’s Board of Directors during 2006 (excluding
named executive officers whose director compensation is included in the Summary
Compensation Table).
|
|
|
|
|
|
Change
in
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
|
Value
and
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
Fees
Earned
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
or
Paid
|
|
Option
|
|
Compensation
|
|
All
Other
|
|
|
|
Name
|
|
in
Cash
|
|
Awards
(a)
|
|
Earnings
|
|
Compensation
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harry
L. Edwards
|
|
$
|
26,200
|
|
$
|
63,944
|
|
$
|
(21,344)(b
|
)
|
$
|
26,909(c
|
)
|
$
|
95,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen
E. Glasgow
|
|
|
37,200
|
|
|
51,338
|
|
|
-
|
|
|
11,864(d
|
)
|
|
100,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E.
Douglas McLeod
|
|
|
25,200
|
|
|
296,369
|
|
|
-
|
|
|
3,009
|
|
|
324,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell
S. Moody
|
|
|
25,200
|
|
|
296,369
|
|
|
-
|
|
|
3,625
|
|
|
325,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frances
A. Moody-Dahlberg
|
|
|
25,200
|
|
|
296,369
|
|
|
-
|
|
|
1,211
|
|
|
322,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Louis
E. Pauls Jr.
|
|
|
31,200
|
|
|
272,454
|
|
|
-
|
|
|
11,563(e
|
)
|
|
315,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E.
J. Pederson
|
|
|
31,200
|
|
|
76,168
|
|
|
-
|
|
|
1,256
|
|
|
108,624
|
|
Note:
Columns with no data have been omitted.
(a)
|
The
amounts in this column represent the dollar amount recognized for
financial statement purposes in 2006 in accordance with SFAS No.
123(R)
for all stock options granted and outstanding. For a discussion
of the
assumptions made in the valuation of these option awards, refer
to the
Notes to Consolidated Financial Statements section of this Annual
Report
on Form 10-K.
|
(b)
|
The
amount in this column for Mr. Edwards is negative due to his receiving
current distributions.
|
(c)
|
The
amount shown for Mr. Edwards includes $24,737 of claims paid under
the
Company’s Group Excess Benefit Plan, $800 in gifts, and $36 for the
taxable portion of supplemental life insurance coverage and $1,336
in
other perquisites.
|
(d)
|
The
amount shown for Mr. Glasgow includes $1,539 of claims paid under
the
Company’s Group Excess Benefit Plan, $5,335 for the taxable portion of
health and supplemental life coverage, and $4,990 in other
perquisites.
|
(e)
|
The
amount shown for Mr. Pauls includes $3,429 of claims paid under
the
Company’s Group Excess Benefit Plan, $4,915 for the taxable portion of
health and supplemental life coverage, and $3,219 in other
perquisites.
|
All
directors of the Company currently receive $22,200 a year and $500 for each
board meeting attended. They are also reimbursed for actual travel expenses
incurred in performing services as directors. An additional $500 is paid
for
each committee meeting attended. However, a director attending multiple meetings
on the same day receives only one meeting fee. The amounts paid pursuant
to
these arrangements are included in the summary compensation table of this
item.
The directors and their dependents are also eligible to participate in the
Company's group insurance program.
Directors
of the Company, other than Compensation and Stock Option Committee members,
are
eligible for restricted stock awards, incentive awards, and performance awards
under the National Western Life Insurance Company 1995 Stock and Incentive
Plan.
Company directors, including members of the Compensation and Stock Option
Committee, are eligible for nondiscretionary stock options. On June 25, 2004,
the stockholders approved the issuance of 10,000 nonqualified stock options
to
Company directors, with each director receiving 1,000 stock
options.
Directors
of the Company's subsidiary, NWL Investments, Inc., receive $250 annually.
Nonemployee directors of the Company's subsidiary, NWL Services, Inc., receive
$1,000 per board meeting attended. Directors of the Company's downstream
subsidiaries, Regent Care General Partner, Inc., and Regent Care Operations
General Partner, Inc., receive $250 per board meeting attended. Directors
of the
Company's downstream subsidiary, Regent Care Limited Partner, Inc., receive
$500
per board meeting attended.
Compensation
Committee Interlocks and Insider Participation
The
Compensation Committee of the Company’s Board of Directors is composed of Harry
L. Edwards, Stephen E. Glasgow, and E. J. Pederson, none of whom were officers
or employees of the Company during 2006. Mr. Edwards was formerly an officer
of
National Western Life Insurance Company. Mr. Glasgow and Mr. Pederson currently
meet the independent criteria in the NASDAQ listing standards and the
regulations of the Securities and Exchange Commission.
During
2006, the following executive officers served as a Board of Director of the
Company and/or one or more its subsidiaries as follows:
(1) |
Mr.
Robert L. Moody, Mr. Ross R. Moody, and Mr. Charles D. Milos served
as
directors and also served as officers and employees of National Western
Life Insurance Company.
|
(2) |
Mr.
Ross Moody served as an officer and director of the Company's wholly-owned
subsidiaries, The Westcap Corporation, NWL Investments, Inc., NWL
Financial, Inc., NWL Services, Inc., Regent Care Limited Partner,
Inc.,
and Regent Care Operations Limited Partner, Inc., and served as an
officer
of Westcap Holdings, LLC, a limited liability company whose sole
member is
The Westcap Corporation.
|
(3) |
Mr.
Milos served as an officer and director of The Westcap Corporation,
Regent
Care General Partner, Inc., and Regent Care Operations General Partner,
Inc., and as an officer of NWL Investments, Inc., NWL Financial,
Inc., NWL
Services, Inc., Regent Care Limited Partner, Inc., Regent Care Operations
Limited Partner, Inc., and Westcap Holdings, LLC, a limited liability
company whose sole member is The Westcap
Corporation.
|
(4) |
Mr.
Robert Moody was an officer of NWL Services, Inc., and Regent Care
Limited
Partner, Inc.
|
None
of
the Company’s executive officers serves as a member of the compensation
committee of any company that has an executive officer serving on the Company’s
Board of Directors. In addition, none of the Company’s executive officers serve
as a member of the board of directors of any company that has an executive
officer serving as a member of the Company’s Compensation
Committee.
BENEFICIAL
OWNERS AND MANAGEMENT
Security
Ownership of Certain Beneficial Owners
Set
forth
below is certain financial information concerning persons who are known by
the
Company to own beneficially more than 5% of any class of the Company's common
stock on December 31, 2006.
Name
and Address
|
|
Title
|
|
Amount
and Nature
|
|
Percent
|
of
|
|
of
|
|
of
|
|
of
|
Beneficial
Owners
|
|
Class
|
|
Beneficial
Ownership
|
|
Class
|
|
|
|
|
|
|
|
Robert
L. Moody
|
|
Class
A Common
|
|
1,159,096
|
|
33.88%
|
2302
Post Office Street, Suite 702
|
|
Class
B Common
|
|
198,074
|
|
99.04%
|
Galveston,
Texas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FMR
Corp.
|
|
Class
A Common
|
|
241,938
|
|
7.07%
|
82
Devonshire Street
|
|
|
|
|
|
|
Boston,
Massachusetts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
Avenue Management, LLC
|
|
Class
A Common
|
|
180,456
|
|
5.28%
|
622
Third Avenue
|
|
|
|
|
|
|
New
York, New York
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Westport
Asset Management, Inc.
|
|
Class
A Common
|
|
171,976
|
|
5.03%
|
253
Riverside Avenue
|
|
|
|
|
|
|
Westport,
Connecticut
|
|
|
|
|
|
|
Article
Four of the Articles of Incorporation of the Company provides that the Class
A
stockholders have the exclusive right to elect one-third (1/3) of the members
of
the Board of Directors, plus one director for any remaining fraction, and
the
Class B stockholders have the exclusive right to elect the remaining members
of
the Board of Directors. In view of Robert L. Moody's ownership of more than
99%
of the Class B stock outstanding, as well as Mr. Moody's ownership of
approximately 34% of the Class A stock outstanding (see Security Ownership
table
above), Mr. Moody holds the voting power to elect a majority of the members
of
the Board of Directors. The Company is considered to be a controlled company,
and Mr. Moody is the controlling stockholder.
Security
Ownership of Management
The
following table sets forth as of December 31, 2006, information concerning
the
beneficial ownership of the Company's common stock by all directors, named
executive officers, and all directors and executive officers of the Company
as a
group.
|
|
Title
|
|
Amount
and Nature
|
|
Percent
|
Directors
|
|
of
|
|
of
|
|
of
|
and
Officers
|
|
Class
|
|
Beneficial
Ownership
|
|
Class
|
|
|
|
|
|
|
|
Directors
and Named Executive Officers:
|
|
|
|
|
Robert
L. Moody
|
|
Class
A Common
|
|
1,159,096
|
|
|
33.88%
|
|
|
Class
B Common
|
|
198,074
|
|
|
99.04%
|
|
|
|
|
|
|
|
|
Ross
R. Moody
|
|
Class
A Common*
|
|
625
|
|
|
.02%
|
|
|
Class
B Common*
|
|
482
|
|
|
.24%
|
|
|
|
|
|
|
|
|
Charles
D. Milos
|
|
Class
A Common
|
|
528
|
|
|
.02%
|
|
|
Class
B Common
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Directors:
|
|
|
|
|
|
|
|
Harry
L. Edwards
|
|
Class
A Common
|
|
20
|
|
|
-
|
|
|
Class
B Common
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Stephen
E. Glasgow
|
|
Class
A Common
|
|
-
|
|
|
-
|
|
|
Class
B Common
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
E.
Douglas McLeod
|
|
Class
A Common
|
|
10
|
|
|
-
|
|
|
Class
B Common
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Frances
A. Moody-Dahlberg
|
|
Class
A Common
|
|
1,850
|
|
|
.05%
|
|
|
Class
A Common*
|
|
625
|
|
|
.02%
|
|
|
Class
B Common*
|
|
482
|
|
|
.24%
|
|
|
|
|
|
|
|
|
Russell
S. Moody
|
|
Class
A Common
|
|
1,850
|
|
|
.05%
|
|
|
Class
A Common*
|
|
625
|
|
|
.02%
|
|
|
Class
B Common*
|
|
482
|
|
|
.24%
|
|
|
|
|
|
|
|
|
Louis
E. Pauls, Jr.
|
|
Class
A Common
|
|
10
|
|
|
-
|
|
|
Class
B Common
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
E.
J. Pederson
|
|
Class
A Common
|
|
100
|
|
|
-
|
|
|
Class
B Common
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Named
Executive Officers:
|
|
|
|
|
|
Scott
E. Arendale
|
|
Class
A Common
|
|
-
|
|
|
-
|
|
|
Class
B Common
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
S.
Christopher Johnson
|
|
Class
A Common
|
|
-
|
|
|
-
|
|
|
Class
B Common
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Brian
M. Pribyl
|
|
Class
A Common
|
|
-
|
|
|
-
|
|
|
Class
B Common
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Directors
and Executive
|
|
Class
A Common
|
|
1,165,339
|
|
|
34.07%
|
Officers
as a Group
|
|
Class
B Common
|
|
199,520
|
|
|
99.76%
|
*
Shares
are owned indirectly through the Three R Trusts. The Three R Trusts are four
Texas trusts for the benefit of the children of Mr. Robert L. Moody (Robert
L.
Moody, Jr., Ross R. Moody, Russell S. Moody, and Frances A. Moody-Dahlberg).
The
Three R Trusts own a total of 2,500 Class A common stock shares and 1,926
Class
B common stock shares.
Changes
in Control
None.
Transactions
with Management and Others
Robert
L.
Moody, Jr. ("Mr. Moody, Jr.") is the son of Robert L. Moody, the Company's
Chairman and Chief Executive Officer, and is the brother of Ross R. Moody,
the
Company's President and Chief Operating Officer, and of Russell S. Moody
and
Frances A. Moody-Dahlberg who serve as directors of National Western. Prior
to
January 1, 2006, Mr. Moody, Jr. was employed by the Company in an agency
marketing position for which he was paid an annual salary of $14,000 and
was
eligible to participate in the Company's benefit plans. Mr. Moody, Jr. resigned
as an employee effective December 31, 2005.
In
addition, Mr. Moody, Jr. wholly owns an insurance marketing organization
that
maintains agency contracts with National Western pursuant to which agency
commissions are paid in accordance with the Company's standard commission
schedules. Mr. Moody, Jr. also maintains an independent agent contract with
National Western for policies personally sold under which commissions are
paid
in accordance with standard commission schedules. In 2006, commissions paid
under these agency contracts aggregated approximately $181,500. In conjunction
with these agency contracts, Mr. Moody, Jr. may be eligible to attend Company
sales conferences and functions based upon meeting published minimum levels
of
qualifying sales production. In his capacity as an insurance marketing
organization with the Company, Mr. Moody, Jr. also receives product development
fees associated with a product line of the Company which amounted to $28,000
in
2006 and a marketing development allowance of $16,800 for the Company’s business
efforts in Puerto Rico.
Mr.
Moody, Jr. further serves as the agent of record for several of the Company's
benefit plans including the self-insured health plan for which Mr. Moody,
Jr.
provides utilization review services through a wholly-owned utilization review
company. In 2006, amounts paid to Mr. Moody, Jr. as commissions and service
fees
pertaining to the Company's benefit plans approximated $54,500.
During
2006, management fees totaling $470,000 were paid to Regent Management Services,
Limited Partnership ("RMS") for services provided to a downstream nursing
home
subsidiary of National Western. RMS is 1% owned by general partner RCC
Management Services, Inc. ("RCC"), and 99% owned by limited partner, Three
R
Trusts. RCC is 100% owned by the Three R Trusts. The Three R Trusts are four
Texas trusts for the benefit of the children of Robert L. Moody (Robert L.
Moody, Jr., Ross R. Moody, Russell S. Moody, and Frances A. Moody-Dahlberg).
Charles D. Milos, Senior Vice President-Mortgage Loans and Real Estate, and
a
director of the Company, is a director and Vice President of RCC. Ellen C.
Otte,
Assistant Secretary of the Company, is a director and secretary of
RCC.
The
Company holds a common stock investment totaling approximately 9.4% of the
issued and outstanding shares of Moody Bancshares, Inc. at December 31, 2006.
Moody Bancshares, Inc. owns 100% of the outstanding shares of Moody Bank
Holding
Company, Inc., which owns approximately 98% of the outstanding shares of
The
Moody National Bank of Galveston ("MNB"). The Company utilizes MNB for certain
bank custodian services as well as for certain administrative services with
respect to the Company's defined benefit and contribution plans. Robert L.
Moody
serves as Chairman of the Board and Chief Executive Officer of MNB. The ultimate
controlling person of MNB is the Three R Trusts. During 2006, fees totaling
$187,000 were paid to MNB with respect to these services.
Indebtedness
of Management
The
Company holds a loan in the amount of $4.2 million, including accrued interest,
with a contractual interest rate of 7% at December 31, 2006 issued to TMNY,
LLC.
As of the reporting date, Robert L. Moody owned 20.5% of TMNY, LLC. The stated
maturity on this loan is December 29, 2007.
NWL
Services, Inc., a wholly-owned subsidiary of the Company, is the beneficial
owner of a life interest (1/8 share) in the net income of the trust estate
of
Libbie Shearn Moody. Income distributions from the trust estate were $4.5
million in 2006. The trustee of this estate is MNB.
Review,
Approval or Ratification of Transactions with Related
Persons
In
accordance with the Company’s Audit Committee Charter, related party
transactions must be reviewed and approved by the Audit Committee of the
Board
of Directors, both at inception and on an ongoing basis. Periodic reports
of
potential related party transactions are brought to the attention of the
Audit
Committee by management and the Audit Committee reviews the information on
a
case by case basis to determine if any transaction is a related party
transaction. The standard of review for any related party transaction is
that
the transaction must be fair to the Company and the transaction must be no
more
favorable to the related party than a similar arm’s length transaction with a
non-related party.
While
the
Company has not adopted written procedures for review of, or written standards
for approval of, these transactions, the policies and procedures followed
are
evidenced by the Audit Committee Charter, memorandums, and documentation
of
review and approvals.
Director
Independence
The
Company’s Board of Directors has determined that Messrs. Glasgow, Pauls, and
Pederson are each an “Independent Director” under NASDAQ Global Market
Marketplace Rules. The Board of Directors has also determined that all, or
the
majority of, members of the Audit Committee and the Compensation and Stock
Option Committee meet the independence requirements prescribed by NASDAQ
and the
Securities and Exchange Commission.
The
following table represents aggregate fees approved by the Audit Committee
for
the audits of the fiscal years ended December 31, 2006 and 2005 by KPMG LLP,
the
Company's principal accounting firm.
|
|
Fiscal
Years Ended
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Financial
statement audit fees
|
|
$
|
608
|
|
|
590
|
|
Benefit
plans audit fee
|
|
|
-
|
|
|
-
|
|
Tax
fees
|
|
|
-
|
|
|
-
|
|
All
other fees
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
fees
|
|
$
|
608
|
|
|
590
|
|
Audit
Fees Pre-approval Policy
The
Audit
Committee has adopted a formal policy concerning approval of audit and non-audit
services to be provided by the independent auditor to the Company. The policy
requires that all services the Company's independent auditor may provide
to the
Company, including audit services and permitted audit-related and non-auditor
services, be pre-approved by the Committee. The Committee approved all audit
and
non-audit services provided by KPMG LLP during 2006.
PART
IV
(a)
1. Listing of Financial Statements
See
Attachment A, Index to Financial Statements and Schedules, on page 74 for
a list
of financial statements included in this report.
(a)
2. Listing of Financial Statement Schedules
See
Attachment A, Index to Financial Statements and Schedules, on page 74 for
a list
of financial statement schedules included in this report.
All
other
schedules are omitted because they are not applicable, not required, or because
the information required by the schedule is included elsewhere in the financial
statements or notes.
(a)
3. Listing of Exhibits
The
exhibits listed below, as part of Form 10-K, are numbered in accordance with
the
numbering used in Item 601 of regulation S-K of The Securities and Exchange
Commission.
Exhibit
2
|
-
|
Order
Confirming Third Amended Joint Consensual Plan Of Reorganization
Proposed
By The Debtors And The Official Committee Of Unsecured Creditors
(As
Modified As Of August 28, 1998) (incorporated by reference to
Exhibit 2 to
the Company's Form 8-K dated August 28, 1998).
|
|
|
|
Exhibit
3(a)
|
-
|
Restated
Articles of Incorporation of National Western Life Insurance
Company dated
April 10, 1968 (incorporated by reference to Exhibit 3(a) to
the Company's
Form 10-K for the year ended December 31, 1995).
|
|
|
|
Exhibit
3(b)
|
-
|
Amendment
to the Articles of Incorporation of National Western Life Insurance
Company dated July 29, 1971 (incorporated by reference to Exhibit
3(b) to
the Company's Form 10-K for the year ended December 31,
1995).
|
|
|
|
Exhibit
3(c)
|
-
|
Amendment
to the Articles of Incorporation of National Western Life Insurance
Company dated May 10, 1976 (incorporated by reference to Exhibit
3(c) to
the Company's Form 10-K for the year ended December 31,
1995).
|
|
|
|
Exhibit
3(d)
|
-
|
Amendment
to the Articles of Incorporation of National Western Life Insurance
Company dated April 28, 1978 (incorporated by reference to Exhibit
3(d) to
the Company's Form 10-K for the year ended December 31,
1995).
|
|
|
|
Exhibit
3(e)
|
-
|
Amendment
to the Articles of Incorporation of National Western Life Insurance
Company dated May 1, 1979 (incorporated by reference to Exhibit
3(e) to
the Company's Form 10-K for the year ended December 31,
1995).
|
|
|
|
Exhibit
3(f)
|
-
|
Bylaws
of National Western Life Insurance Company as amended through
April 24,
1987 (incorporated by reference to Exhibit 3(f) to the Company's
Form 10-K
for the year ended December 31, 1995).
|
|
|
|
Exhibit
10(a)
|
-
|
National
Western Life Insurance Company Non-Qualified Defined Benefit
Plan dated
July 26, 1991 (incorporated by reference to Exhibit 10(a) to
the Company's
Form 10-K for the year ended December 31, 1995).
|
|
|
|
Exhibit
10(c)
|
-
|
National
Western Life Insurance Company Non-Qualified Deferred Compensation
Plan,
as amended and restated, dated March 27, 1995 (incorporated by
reference
to Exhibit 10(c) to the Company's Form 10-K for the year ended
December
31, 1995).
|
|
|
|
Exhibit
10(d)
|
-
|
First
Amendment to the National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan effective July 1, 1995 (incorporated
by
reference to Exhibit 10(d) to the Company's Form 10-K for the
year ended
December 31, 1995).
|
|
|
|
Exhibit
10(e)
|
-
|
National
Western Life Insurance Company 1995 Stock and Incentive Plan
(incorporated
by reference to Exhibit 10(e) to the Company's Form 10-K for
the year
ended December 31, 1995).
|
|
|
|
Exhibit
10(f)
|
-
|
First
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan effective December 17, 1996 (incorporated
by
reference to Exhibit 10(f) to the Company's Form 10-K for the
year ended
December 31, 1996).
|
Exhibit
10(g)
|
-
|
Second
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan effective December 17, 1996 (incorporated
by
reference to Exhibit 10(g) to the Company's Form 10-K for the
year ended
December 31, 1996).
|
|
|
|
Exhibit
10(h)
|
-
|
Second
Amendment to the National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan effective December 17, 1996 (incorporated
by
reference to Exhibit 10(h) to the Company's Form 10-K for the
year ended
December 31, 1996).
|
|
|
|
Exhibit
10(i)
|
-
|
Third
Amendment to the National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan effective December 17, 1996 (incorporated
by
reference to Exhibit 10(i) to the Company's Form 10-K for the
year ended
December 31, 1996).
|
|
|
|
Exhibit
10(j)
|
-
|
Fourth
Amendment to the National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan effective June 20, 1997 (incorporated
by
reference to Exhibit 10(j) to the Company's Form 10-K for the
year ended
December 31, 1997).
|
|
|
|
Exhibit
10(k)
|
-
|
First
Amendment to the National Western Life Insurance Company 1995
Stock and
Incentive Plan effective June 19, 1998 (incorporated by reference
to
Exhibit 10(k) to the Company's Form 10-Q for the quarter ended
June 30,
1998).
|
|
|
|
Exhibit
10(m)
|
-
|
Fifth
Amendment to the National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan effective July 1, 1998 (incorporated
by
reference to Exhibit 10(m) to the Company's Form 10-Q for the
quarter
ended September 30, 1998).
|
|
|
|
Exhibit
10(n)
|
-
|
Sixth
Amendment to the National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan effective August 7, 1998 (incorporated
by
reference to Exhibit 10(n) to the Company's Form 10-K for the
year ended
December 31, 1998).
|
|
|
|
Exhibit
10(o)
|
-
|
Third
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan effective August 7, 1998 (incorporated by
reference
to Exhibit 10(o) to the Company's Form 10-K for the year ended
December
31, 1998).
|
|
|
|
Exhibit
10(p)
|
-
|
Exchange
Agreement by and among National Western Life Insurance Company,
NWL
Services, Inc., Alternative Benefit Management, Inc., and American
National Insurance Company effective November 23, 1998 (incorporated
by
reference to Exhibit 10(p) to the Company's Form 10-K for the
year ended
December 31, 1998).
|
|
|
|
Exhibit
10(s)
|
-
|
Seventh
Amendment to the National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan effective August 7, 1998 (incorporated
by
reference to Exhibit 10(s) to the Company's Form 10-K for the
year ended
December 31, 2000).
|
|
|
|
Exhibit
10(u)
|
-
|
Eighth
Amendment to the National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan effective December 1, 2000 (incorporated
by
reference to Exhibit 10(u) to the Company's Form 10-K for the
year ended
December 31, 2000).
|
|
|
|
Exhibit
10(v)
|
-
|
Fourth
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan effective December 1, 2000 (incorporated
by reference
to Exhibit 10(v) to the Company's Form 10-K for the year ended
December
31, 2000).
|
|
|
|
Exhibit
10(w)
|
-
|
Second
Amendment to the National Western Life Insurance Company 1995
Stock and
Incentive Plan (incorporated by reference to Exhibit 10(w) to
the
Company's Form 10-Q for the quarter ended September 30,
2001).
|
|
|
|
Exhibit
10(z)
|
-
|
Fifth
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan effective January 1, 2001 (incorporated
by reference
to Exhibit 10(z) to the Company's Form 10-K for the year ended
December
31, 2001).
|
Exhibit
10(ae)
|
-
|
Sixth
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan effective August 23, 2002 (incorporated
by reference
to Exhibit 10(ae) to the Company's Form 10-Q for the quarter
ended
September 30, 2002).
|
|
|
|
Exhibit
10(af)
|
-
|
Seventh
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan effective October 18, 2002 (incorporated
by reference
to Exhibit 10(af) to the Company's Form 10-Q for the quarter
ended
September 30, 2002).
|
|
|
|
Exhibit
10(ai)
|
-
|
Eighth
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan effective January 1, 2003 (incorporated
by reference
to Exhibit 10(ai) to the Company's Form 10-K for the year ended
December
31, 2002).
|
|
|
|
Exhibit
10(am)
|
-
|
Ninth
amendment to the National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan effective November 1, 2003 (incorporated
by
reference to Exhibit 10(am) to the Company's Form 10-K for the
year ended
December 31, 2003).
|
|
|
|
Exhibit
10(an)
|
-
|
Ninth
amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan effective December 5, 2003 (incorporated
by reference
to Exhibit 10(an) to the Company's Form 10-K for the year ended
December
31, 2003.)
|
|
|
|
Exhibit
10(ao)
|
-
|
Bonus
program by and between National Western Life Insurance Company
and
Domestic Marketing officers of National Western Life Insurance
Company for
the year ending December 31, 2004 (incorporated by reference
to Exhibit
10(ao) to the Company's Form 10-Q for the quarter ended March
31,
2004).
|
|
|
|
Exhibit
10(ap)
|
-
|
Bonus
program by and between National Western Life Insurance Company
and
International Marketing Officers of National Western Life Insurance
Company for the year ending December 31, 2004 (incorporated by
reference
to Exhibit 10(ap) to the Company's Form 10-Q for the quarter
ended March
31, 2004).
|
|
|
|
Exhibit
10(aq)
|
-
|
Bonus
program by and between National Western Life Insurance Company
and certain
Executive officers of National Western Life Insurance Company
for the year
ending December 31, 2004 (incorporated by reference to Exhibit
10(aq) to
the Company's Form 10-Q for the quarter ended June 30,
2004).
|
|
|
|
Exhibit
10(ar)
|
-
|
Third
Amendment to the National Western Life Insurance Company 1995
Stock and
Incentive Plan (incorporated by reference to Exhibit 10(ar) to
the
Company's Form 10-Q for the quarter ended September 30,
2004).
|
|
|
|
Exhibit
10(as)
|
-
|
Amendment
to the National Western Life Insurance Company Group Excess Benefit
Plan
effective December 15, 2004 (incorporated by reference to Exhibit
10(as)
to the Company's Form 10-K for the year ended December 31,
2004.).
|
|
|
|
Exhibit
10(at)
|
-
|
The
National Western Life Insurance Company Employee Health Plan
was amended
and restated effective August 20, 2004 (incorporated by reference
to
Exhibit 10(at) to the Company's Form 10-K for the year ended
December 31,
2004.)
|
|
|
|
Exhibit
10(au)
|
-
|
Tenth
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan effective December 31, 2004 (incorporated
by
reference to Exhibit 10(au) to the Company's Form 10-K for the
year ended
December 31, 2004.).
|
|
|
|
Exhibit
10(av)
|
-
|
Bonus
program by and between National Western Life Insurance Company
and
Executive Officers of National Western Life Insurance Company
for the year
ending December 31, 2005 (incorporated by reference to Exhibit
10(av) to
the Company's Form 10-Q for the quarter ended March 31, 2005).
|
|
|
|
|
|
|
Exhibit
10(aw)
|
-
|
Bonus
program by and between National Western Life Insurance Company
and
Domestic Marketing officers of National Western Life Insurance
Company for
the year ending December 31, 2005 (incorporated by reference
to Exhibit
10(aw) to the Company's Form 10-Q for the quarter ended March
31, 2005).
|
|
|
|
Exhibit
10(ax)
|
-
|
Bonus
program by and between National Western Life Insurance Company
and
International Marketing Officers of National Western Life Insurance
Company for the year ending December 31, 2005 (incorporated by
reference
to Exhibit 10(ax) to the Company's Form 10-Q for the quarter
ended March
31, 2005).
|
|
|
|
Exhibit
10(az)
|
-
|
National
Western Life Insurance Company Non-Qualified Defined Benefit
Plan for
Robert L. Moody (Exhibit 10 to 8-K dated July 1, 2005).
|
|
|
|
Exhibit
10(ba)
|
-
|
First
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan for Robert L. Moody (Exhibit 10 to 8-K dated
August
22, 2005).
|
|
|
|
Exhibit
10(bb)
|
-
|
Second
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan for Robert L. Moody (Exhibit 10 to 8-K dated
December
15, 2005).
|
|
|
|
Exhibit
10(bc)
|
-
|
Tenth
Amendment to the National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan (Exhibit 10 to 8-K dated December
15,
2005).
|
|
|
|
Exhibit
10(bd)
|
-
|
National
Western Life Insurance Company Retirement Bonus Program for Robert
L.
Moody (Exhibit 10 to 8-K dated December 15, 2005).
|
|
|
|
Exhibit
10(be)
|
-
|
Eleventh
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan (Exhibit 10 to 8-K dated December 15,
2005).
|
|
|
|
Exhibit
10(bf)
|
-
|
Non-Qualified
Defined Benefit Plan for the President of the National Western
Life
Insurance Company (Exhibit 10 to 8-K dated December 15,
2005).
|
|
|
|
Exhibit
10(bg)
|
-
|
National
Western Life Insurance Company 2006 Executive Officer Bonus Program
(Exhibit 10 to 8-K dated February 17, 2006).
|
|
|
|
Exhibit
10(bh)
|
-
|
National
Western Life Insurance Company 2006 Executive Officer Bonus Program
(as
amended) (Exhibit 10 to 8-K dated April 21, 2006).
|
|
|
|
Exhibit
10(bi)
|
-
|
2006
International Marketing Officer Bonus Program (Exhibit 10 to
8-K dated
June 23, 2006).
|
|
|
|
Exhibit
10(bj)
|
-
|
2006
Domestic Marketing Officer Bonus Program (Exhibit 10 to 8-K dated
June 23,
2006).
|
|
|
|
Exhibit
10(bk)
|
-
|
National
Western Life Insurance Company Harvest Nonqualified Deferred
Compensation
Plan (Exhibit 10 to 8-K dated June 23, 2006).
|
|
|
|
Exhibit
10(bl)
|
-
|
Amendment
No. 16 to Loan Agreement (Exhibit 10 to 8-K dated July 31,
2006).
|
|
|
|
Exhibit
21
|
-
|
Subsidiaries
of the Registrant.
|
|
|
|
Exhibit
23(a)
|
-
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
|
Exhibit
31(a)
|
-
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
Exhibit
31(b)
|
-
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
Exhibit
32(a)
|
-
|
Certifications
of Chief Executive Officer and Chief Financial Officer pursuant
to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
(b)
Exhibits
Exhibits
required by Regulation S-K are listed as to location in the Listing of
Exhibits
in Item 15.(a)3. above. Exhibits not referred to have been omitted as
inapplicable or not required.
(c)
Financial Statement Schedules
The
financial statement schedules required by Regulation S-K are listed as
to
location in Attachment A, Index to Financial Statements and Schedules,
on page
74 of this report.
ATTACHMENT
A
Index
to Financial Statements and Schedules
|
|
|
|
|
|
Page
|
|
|
|
|
|
75
|
|
|
|
|
|
76
|
|
|
|
|
|
78
|
|
|
|
|
|
79
|
|
|
|
|
|
80
|
|
|
|
|
|
81
|
|
|
|
|
|
83
|
|
|
|
|
|
127
|
|
|
|
|
|
128
|
|
|
|
All
other
schedules are omitted because they are not applicable, not required, or because
the information required by the schedule is included elsewhere in the
consolidated financial statements or notes.
The
Board
of Directors and Stockholders
National
Western Life Insurance Company
Austin,
Texas
We
have
audited the accompanying consolidated balance sheets of National Western
Life
Insurance Company and subsidiaries (the "Company") as of December 31, 2006
and
2005 and the related consolidated statements of earnings, comprehensive income,
stockholders' equity and cash flows for each of the years in the three year
period ended December 31, 2006. In connection with our audits of the
consolidated financial statements, we have also audited the 2006 financial
statement schedule I and the 2006, 2005, and 2004 financial statement schedule
V. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an
opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the consolidated financial position of National
Western Life Insurance Company and subsidiaries as of December 31, 2006 and
2005
and the results of their operations and their cash flows for each of the
years
in the three year period ended December 31, 2006 in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of National Western Life
Insurance Company's internal control over financial reporting as of December
31,
2006, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 15, 2007 expressed an unqualified opinion
on
management's assessment of, and the effective operation of, internal control
over financial reporting.
As
discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for two-tiered annuity products in
2004.
KPMG
LLP
Austin,
Texas
March
15,
2007
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
December
31, 2006 and 2005
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
Securities
held to maturity, at amortized cost
|
|
|
|
|
|
(fair
value: $3,567,625 and $3,523,993)
|
|
$
|
3,603,434
|
|
|
3,524,724
|
|
Securities
available for sale, at fair value
|
|
|
|
|
|
|
|
(cost:
$1,907,454 and $1,726,252)
|
|
|
1,902,568
|
|
|
1,744,727
|
|
Mortgage
loans, net of allowance for possible losses
|
|
|
103,325
|
|
|
110,639
|
|
($2,100
and $0)
|
|
|
|
|
|
|
|
Policy
loans
|
|
|
86,856
|
|
|
86,385
|
|
Derivatives
|
|
|
72,012
|
|
|
39,405
|
|
Other
long-term investments
|
|
|
22,822
|
|
|
30,013
|
|
|
|
|
|
|
|
|
|
Total
Investments
|
|
|
5,791,017
|
|
|
5,535,893
|
|
|
|
|
|
|
|
|
|
Cash
and short-term investments
|
|
|
49,901
|
|
|
31,355
|
|
Deferred
policy acquisition costs
|
|
|
643,964
|
|
|
620,129
|
|
Deferred
sales inducements
|
|
|
93,139
|
|
|
80,450
|
|
Accrued
investment income
|
|
|
64,393
|
|
|
61,283
|
|
Federal
income tax receivable
|
|
|
-
|
|
|
2,107
|
|
Other
assets
|
|
|
51,029
|
|
|
37,791
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,693,443
|
|
|
6,369,008
|
|
See
accompanying notes to consolidated financial statements.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
December
31, 2006 and 2005
|
|
(In
thousands except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
Future
policy benefits:
|
|
|
|
|
|
Traditional
life and annuity contracts
|
|
$
|
138,382
|
|
|
139,309
|
|
Universal
life and annuity contracts
|
|
|
5,395,075
|
|
|
5,176,610
|
|
Other
policyholder liabilities
|
|
|
112,449
|
|
|
100,557
|
|
Federal
income tax liability:
|
|
|
|
|
|
|
|
Current
|
|
|
1,666
|
|
|
-
|
|
Deferred
|
|
|
32,207
|
|
|
37,735
|
|
Other
liabilities
|
|
|
80,680
|
|
|
40,789
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
5,760,459
|
|
|
5,495,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Notes 4, 7, and 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock:
|
|
|
|
|
|
|
|
Class
A - $1 par value; 7,500,000 shares authorized; 3,420,824
|
|
|
|
|
|
|
|
and
3,413,199 shares issued and outstanding in 2006 and 2005
|
|
|
3,421
|
|
|
3,413
|
|
Class
B - $1 par value; 200,000 shares authorized, issued,
|
|
|
|
|
|
|
|
and
outstanding in 2006 and 2005
|
|
|
200
|
|
|
200
|
|
Additional
paid-in capital
|
|
|
36,110
|
|
|
37,923
|
|
Accumulated
other comprehensive income (loss)
|
|
|
(3,731
|
)
|
|
10,564
|
|
Retained
earnings
|
|
|
896,984
|
|
|
821,908
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
932,984
|
|
|
874,008
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,693,443
|
|
|
6,369,008
|
|
See
accompanying notes to consolidated financial statements.
|
|
CONSOLIDATED
STATEMENTS OF EARNINGS
|
|
For
the Years Ended December 31, 2006, 2005, and 2004
|
|
(In
thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Premiums
and other revenue:
|
|
|
|
|
|
|
|
Life
and annuity premiums
|
|
$
|
15,805
|
|
|
14,602
|
|
|
14,025
|
|
Universal
life and annuity contract revenues
|
|
|
106,320
|
|
|
96,765
|
|
|
89,513
|
|
Net
investment income
|
|
|
379,768
|
|
|
310,213
|
|
|
315,843
|
|
Other
income
|
|
|
17,304
|
|
|
9,579
|
|
|
11,259
|
|
Realized
gains on investments
|
|
|
2,662
|
|
|
9,884
|
|
|
3,506
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
521,859
|
|
|
441,043
|
|
|
434,146
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
35,241
|
|
|
39,162
|
|
|
34,613
|
|
Amortization
of deferred policy acquisition costs
|
|
|
90,358
|
|
|
87,955
|
|
|
88,733
|
|
Universal
life and annuity contract interest
|
|
|
213,736
|
|
|
150,692
|
|
|
173,315
|
|
Other
operating expenses
|
|
|
65,709
|
|
|
46,349
|
|
|
35,441
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
405,044
|
|
|
324,158
|
|
|
332,102
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before Federal income taxes and cumulative
|
|
|
|
|
|
|
|
|
|
|
effect
of change in accounting principle
|
|
|
116,815
|
|
|
116,885
|
|
|
102,044
|
|
Federal
income taxes
|
|
|
40,472
|
|
|
39,618
|
|
|
34,572
|
|
Earnings
before cumulative effect of change in
|
|
|
|
|
|
|
|
|
|
|
accounting
principle
|
|
|
76,343
|
|
|
77,267
|
|
|
67,472
|
|
Cumulative
effect of change in accounting
|
|
|
|
|
|
|
|
|
|
|
principle,
net of $29,452 of Federal income taxes
|
|
|
-
|
|
|
-
|
|
|
54,697
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
76,343
|
|
|
77,267
|
|
|
122,169
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
Earnings
before cumulative effect of change
|
|
|
|
|
|
|
|
|
|
|
in
accounting principle
|
|
$
|
21.09
|
|
|
21.45
|
|
|
18.93
|
|
Cumulative
effect of change in accounting principle
|
|
|
-
|
|
|
-
|
|
|
15.34
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
21.09
|
|
|
21.45
|
|
|
34.27
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
Earnings
before cumulative effect of change
|
|
|
|
|
|
|
|
|
|
|
in
accounting principle
|
|
$
|
20.88
|
|
|
21.24
|
|
|
18.73
|
|
Cumulative
effect of change in accounting principle
|
|
|
-
|
|
|
-
|
|
|
15.18
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
20.88
|
|
|
21.24
|
|
|
33.91
|
|
See
accompanying notes to consolidated financial statements.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
|
|
For
the Years Ended December 31, 2006, 2005, and 2004
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
76,343
|
|
|
77,267
|
|
|
122,169
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income, net of effects of
|
|
|
|
|
|
|
|
|
|
|
deferred
costs and taxes:
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on securities:
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized holding gains (losses) arising
|
|
|
|
|
|
|
|
|
|
|
during
period
|
|
|
(4,542
|
)
|
|
(13,597
|
)
|
|
1,603
|
|
Reclassification
adjustment for net (gains)
|
|
|
|
|
|
|
|
|
|
|
losses
included in net earnings
|
|
|
(2,736
|
)
|
|
(1,254
|
)
|
|
550
|
|
Amortization
of net unrealized losses
|
|
|
|
|
|
|
|
|
|
|
related
to transferred securities
|
|
|
25
|
|
|
18
|
|
|
245
|
|
Unrealized
gains on securities
|
|
|
|
|
|
|
|
|
|
|
transferred
during period from held to
|
|
|
|
|
|
|
|
|
|
|
maturity
to available for sale
|
|
|
-
|
|
|
202
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gains (losses) on securities
|
|
|
(7,253
|
)
|
|
(14,631
|
)
|
|
2,565
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(178
|
)
|
|
130
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
plan liability adjustment:
|
|
|
|
|
|
|
|
|
|
|
Change
in minimum pension liability
|
|
|
(1,166
|
)
|
|
(354
|
)
|
|
(472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss)
|
|
|
(8,597
|
)
|
|
(14,855
|
)
|
|
1,966
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
67,746
|
|
|
62,412
|
|
|
124,135
|
|
See
accompanying notes to consolidated financial statements.
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
For
the Years Ended December 31, 2006, 2005, and 2004
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Common
stock:
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
3,613
|
|
|
3,584
|
|
|
3,547
|
|
Shares
exercised under stock option plan
|
|
|
8
|
|
|
29
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
|
3,621
|
|
|
3,613
|
|
|
3,584
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital:
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
37,923
|
|
|
33,834
|
|
|
29,192
|
|
Shares
exercised under stock option plan,
|
|
|
|
|
|
|
|
|
|
|
net
of tax benefits
|
|
|
503
|
|
|
3,094
|
|
|
3,663
|
|
Adjustment
for stock option liability classification
|
|
|
(2,316
|
)
|
|
-
|
|
|
-
|
|
Stock
option expense
|
|
|
-
|
|
|
995
|
|
|
979
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
|
36,110
|
|
|
37,923
|
|
|
33,834
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on securities:
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
10,401
|
|
|
25,032
|
|
|
22,467
|
|
Change
in unrealized gains (losses) during period
|
|
|
(7,253
|
)
|
|
(14,631
|
)
|
|
2,565
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
|
3,148
|
|
|
10,401
|
|
|
25,032
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments:
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
3,300
|
|
|
3,170
|
|
|
3,297
|
|
Change
in translation adjustments during period
|
|
|
(178
|
)
|
|
130
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
|
3,122
|
|
|
3,300
|
|
|
3,170
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
plan liability adjustment:
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
(3,137
|
)
|
|
(2,783
|
)
|
|
(2,311
|
)
|
Change
in minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
adjustment
during period
|
|
|
(1,166
|
)
|
|
(354
|
)
|
|
(472
|
)
|
Adjustment
to initially apply FASB
|
|
|
|
|
|
|
|
|
|
|
Statement
No. 158, net of tax
|
|
|
(5,698
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
|
(10,001
|
)
|
|
(3,137
|
)
|
|
(2,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive
|
|
|
|
|
|
|
|
|
|
|
income
at end of year
|
|
|
(3,731
|
)
|
|
10,564
|
|
|
25,419
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings:
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
821,908
|
|
|
745,835
|
|
|
623,666
|
|
Net
earnings
|
|
|
76,343
|
|
|
77,267
|
|
|
122,169
|
|
Stockholder
dividends
|
|
|
(1,267
|
)
|
|
(1,194
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
|
896,984
|
|
|
821,908
|
|
|
745,835
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
$
|
932,984
|
|
|
874,008
|
|
|
808,672
|
|
See
accompanying notes to consolidated financial statements.
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For
the Years Ended December 31, 2006, 2005, and 2004
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
76,343
|
|
|
77,267
|
|
|
122,169
|
|
Adjustments
to reconcile net earnings
|
|
|
|
|
|
|
|
|
|
|
to
net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Universal
life and annuity contract interest
|
|
|
213,736
|
|
|
150,692
|
|
|
173,315
|
|
Surrender
charges and other policy revenues
|
|
|
(31,363
|
)
|
|
(27,676
|
)
|
|
(26,024
|
)
|
Realized gains
on investments
|
|
|
(2,662
|
)
|
|
(9,884
|
)
|
|
(3,506
|
)
|
Accrual
and amortization of investment income
|
|
|
(5,443
|
)
|
|
(4,114
|
)
|
|
(8,373
|
)
|
Depreciation
and amortization
|
|
|
1,516
|
|
|
1,513
|
|
|
1,665
|
|
Decrease
(increase) in value of derivatives
|
|
|
(27,108
|
)
|
|
9,579
|
|
|
13,262
|
|
Increase
in deferred policy acquisition
|
|
|
|
|
|
|
|
|
|
|
and
sales inducement costs
|
|
|
(13,740
|
)
|
|
(14,476
|
)
|
|
(57,278
|
)
|
Increase
in accrued investment income
|
|
|
(3,110
|
)
|
|
(3,011
|
)
|
|
(4,293
|
)
|
Decrease
(increase) in other assets
|
|
|
(10,016
|
)
|
|
(4,969
|
)
|
|
2,438
|
|
Decrease
in liabilities for future policy benefits
|
|
|
(905
|
)
|
|
(1,721
|
)
|
|
(1,523
|
)
|
Increase
in other policyholder liabilities
|
|
|
11,892
|
|
|
25,320
|
|
|
12,738
|
|
Increase
in Federal income tax liability
|
|
|
2,770
|
|
|
1,593
|
|
|
30,554
|
|
Increase
(decrease) in other liabilities
|
|
|
11,739
|
|
|
175
|
|
|
(15,793
|
)
|
Lawsuit
settlement payable
|
|
|
-
|
|
|
-
|
|
|
(9,700
|
)
|
Cumulative
effect of change in accounting
|
|
|
|
|
|
|
|
|
|
|
principle,
before taxes
|
|
|
-
|
|
|
-
|
|
|
(84,149
|
)
|
Other
|
|
|
371
|
|
|
802
|
|
|
515
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
224,020
|
|
|
201,090
|
|
|
146,017
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sales of:
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
|
-
|
|
|
9,867
|
|
|
8,749
|
|
Securities
available for sale
|
|
|
36,428
|
|
|
29,211
|
|
|
49,801
|
|
Other
investments
|
|
|
13,672
|
|
|
22,739
|
|
|
5,427
|
|
Proceeds
from maturities and redemptions of:
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
|
258,051
|
|
|
330,920
|
|
|
322,956
|
|
Securities
available for sale
|
|
|
104,435
|
|
|
125,225
|
|
|
97,507
|
|
Derivatives
|
|
|
37,010
|
|
|
29,329
|
|
|
19,186
|
|
Purchases
of:
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
|
(327,126
|
)
|
|
(596,191
|
)
|
|
(813,489
|
)
|
Securities
available for sale
|
|
|
(312,584
|
)
|
|
(301,898
|
)
|
|
(352,638
|
)
|
Other
investments
|
|
|
(44,090
|
)
|
|
(40,372
|
)
|
|
(30,128
|
)
|
Principal
payments on mortgage loans
|
|
|
11,680
|
|
|
23,727
|
|
|
41,780
|
|
Cost
of mortgage loans acquired
|
|
|
(6,326
|
)
|
|
(9,038
|
)
|
|
(13,116
|
)
|
Decrease
(increase) in policy loans
|
|
|
(471
|
)
|
|
2,064
|
|
|
1,309
|
|
Other
|
|
|
(1,600
|
)
|
|
(469
|
)
|
|
(673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(230,921
|
)
|
|
(374,886
|
)
|
|
(663,329
|
)
|
(Continued
on next page)
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS, CONTINUED
|
|
For
the Years Ended December 31, 2006, 2005, and 2004
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Stockholders
dividends
|
|
$
|
(1,267
|
)
|
|
(1,194
|
)
|
|
-
|
|
Deposits
to account balances for universal life
|
|
|
|
|
|
|
|
|
|
|
and
annuity contracts
|
|
|
547,469
|
|
|
611,594
|
|
|
936,425
|
|
Return
of account balances on universal life
|
|
|
|
|
|
|
|
|
|
|
and
annuity contracts
|
|
|
(521,988
|
)
|
|
(458,765
|
)
|
|
(439,667
|
)
|
Issuance
of common stock under stock option plan
|
|
|
511
|
|
|
2,948
|
|
|
2,514
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
24,725
|
|
|
154,583
|
|
|
499,272
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange
|
|
|
722
|
|
|
374
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and short-term
|
|
|
|
|
|
|
|
|
|
|
investments
|
|
|
18,546
|
|
|
(18,839
|
)
|
|
(18,016
|
)
|
Cash
and short-term investments at beginning of year
|
|
|
31,355
|
|
|
50,194
|
|
|
68,210
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and short-term investments at end of year
|
|
$
|
49,901
|
|
|
31,355
|
|
|
50,194
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
41
|
|
|
40
|
|
|
48
|
|
Income
taxes
|
|
|
34,726
|
|
|
37,800
|
|
|
33,078
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
investing activities:
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans originated to facilitate
|
|
|
|
|
|
|
|
|
|
|
the
sale of real estate
|
|
$
|
900
|
|
|
900
|
|
|
1,360
|
|
See
accompanying notes to consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A)
Principles of Consolidation. The
accompanying consolidated financial statements include the accounts of National
Western Life Insurance Company and its wholly owned subsidiaries ("Company"),
The Westcap Corporation, NWL Investments, Inc., NWL Services, Inc., and NWL
Financial, Inc. All significant intercorporate transactions and accounts
have
been eliminated in consolidation.
(B)
Basis of Presentation.
The
accompanying consolidated financial statements have been prepared in conformity
with U.S. generally accepted accounting principles ("GAAP") which require
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities, disclosures of contingent assets and liabilities,
and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. Significant estimates in
the
accompanying consolidated financial statements include (1) liabilities for
future policy benefits, (2) valuation of derivative instruments, (3)
recoverability and amortization of deferred policy acquisition costs, (4)
valuation allowances for deferred tax assets, (5) other-than-temporary
impairment losses on debt securities, and (6) valuation allowances for mortgage
loans and real estate.
The
Company also files financial statements with insurance regulatory authorities
which are prepared on the basis of statutory accounting practices prescribed
or
permitted by the Colorado Division of Insurance which are significantly
different from consolidated financial statements prepared in accordance with
GAAP. These differences are described in detail in the statutory information
section of this note.
(C)
Investments. Investments
in debt securities the Company purchases with the intent to hold to maturity
are
classified as securities held to maturity. 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
fair
value that are deemed other-than-temporary.
Investments
in debt and equity securities that are not classified as securities held
to
maturity are reported as securities available for sale. Securities available
for
sale are reported in the accompanying consolidated financial statements at
fair
value. Any valuation changes resulting from changes in the fair value of
the
securities are reflected as a component of stockholders' equity in accumulated
other comprehensive income or loss. These unrealized gains or losses in
stockholders' equity are reported net of taxes and adjustments to deferred
policy acquisition costs.
Transfers
of securities between categories are recorded at fair value at the date of
transfer. The unrealized holding gains or losses for securities transferred
from
available for sale to held to maturity are included in accumulated other
comprehensive income or loss and amortized into earnings over the remaining
life
of the security as an adjustment to yield in a manner consistent with the
amortization or accretion of premium or discount on the associated
security.
Premiums
and discounts are amortized or accreted over the life of the related security
as
an adjustment to yield using the effective interest method. For mortgage-backed
and asset-backed securities, the effective interest method is used based
on
anticipated prepayments and the estimated economic life of the securities.
When
estimates of prepayments change, the effective yield is recalculated to reflect
actual payments to date and anticipated future payments. The net investment
in
the securities is adjusted to the amount that would have existed had the
new
effective yield been applied at the time of acquisition. This adjustment
is
reflected in net investment income.
Realized
gains and losses for securities available for sale and securities held to
maturity are included in earnings and are derived using the specific
identification method for determining the cost of securities sold. A decline
in
the fair value below cost that is deemed other-than-temporary is charged
to
earnings, resulting in the establishment of a new cost basis for the
security.
Mortgage
loans and other long-term investments are stated at cost, less unamortized
discounts, deferred fees, and allowances for possible losses. Policy loans
are
stated at their aggregate unpaid balances. Real estate is stated at the lower
of
cost or fair value less estimated costs to sell.
Impaired
loans are those loans where it is probable that all amounts due according
to
contractual terms of the loan agreement will not be collected. The Company
has
identified these loans through its normal loan review procedures. Impaired
loans
include (1) nonaccrual loans, (2) loans which are 90 days or more past due,
unless they are well secured and are in the process of collection, and (3)
other
loans which management believes are impaired. Impaired loans are measured
based
on (1) the present value of expected future cash flows discounted at the
loan's
effective interest rate, (2) the loan's observable market price, or (3) the
fair
value of the collateral if the loan is collateral dependent. Substantially
all
of the Company's impaired loans are measured at the fair value of the
collateral. In limited cases, the Company may use other methods to determine
the
level of impairment of a loan if such loan is not collateral
dependent.
(D)
Cash and Short-Term Investments. For
purposes of the consolidated statements of cash flows, the Company considers
all
short-term investments with a maturity at the date of purchase of three months
or less to be cash equivalents.
(E)
Derivatives. Equity-indexed
products combine features associated with traditional fixed annuities and
universal life contracts, with the option to have interest rates linked in
part
to an equity index like the S&P 500 Index®.
The
equity return component of such policy contracts is identified separately
and
accounted for as embedded derivatives. The remaining portions of these policy
contracts are considered the host contracts and are recorded separately as
fixed
annuity or universal life contracts. The host contracts are accounted for
under
debt instrument type accounting. The host contracts are recorded as discounted
debt instruments that are accreted, using the effective yield method, to
their
minimum account values at their projected maturities or termination
dates.
The
Company purchases over-the-counter indexed options, which are derivative
financial instruments, to hedge the equity return component of its
equity-indexed annuity and life products. The indexed options act as hedges
to
match closely the returns on the S&P 500®
Composite Stock Price Index ("S&P 500 Index®").
The
amounts which may be credited to policyholders are linked, in part, to the
returns of the S&P 500 Index®.
As a
result, changes to policyholders' liabilities are substantially offset by
changes in the value of the options. Cash is exchanged upon purchase of the
indexed options and no principal or interest payments are made by either
party
during the option periods. Upon maturity or expiration of the options, cash
is
paid to the Company based on the S&P 500 Index®
performance and terms of the contract.
The
Company does not elect hedging accounting relative to derivative
instruments. The
derivatives are reported at fair value in the accompanying consolidated
financial statements. The changes in the values of the indexed options and
the
changes in the policyholder liabilities are both reflected in the statement
of
earnings. Any gains or losses from the sale or expiration of the options,
as
well as period-to-period changes in values, are reflected as net investment
income in the statement of earnings. Any changes relative to the embedded
derivatives associated with policy contracts are reflected in contract interest
in the statement of earnings.
Although
there is credit risk in the event of nonperformance by counterparties to
the
indexed options, the Company does not expect any counterparties to fail to
meet
their obligations, given their high credit ratings. In addition, credit support
agreements are in place with all counterparties for option holdings in excess
of
specific limits, which may further reduce the Company's credit exposure.
At
December 31, 2006 and 2005, the fair values of indexed options owned by the
Company totaled $72.0 million and $39.4 million, respectively.
(F)
Insurance Revenues and Expenses. Premiums
on traditional life insurance products are recognized as revenues as they
become
due from policyholders. Benefits and expenses are matched with premiums in
arriving at profits by providing for policy benefits over the lives of the
policies and by amortizing acquisition costs over the premium-paying periods
of
the policies. For universal life and annuity contracts, revenues consist
of
policy charges for the cost of insurance, policy administration, and surrender
charges assessed during the period. Expenses for these policies include interest
credited to policy account balances and benefit claims incurred in excess
of
policy account balances. The related deferred policy acquisition and sales
inducement costs are amortized in relation to the present value of expected
gross profits on the policies.
Under
GAAP, commissions, sales inducements, and certain expenses related to policy
issuance and underwriting, all of which generally vary with and are related
to
the production of new business, are deferred. For traditional products, these
costs are amortized over the premium-paying period of the related policies
in
proportion to the ratio of the premium earned to the total premium revenue
anticipated, using the same assumptions as to interest, mortality, and
withdrawals as were used in calculating the liability for future policy
benefits. For universal life and annuity contracts, these costs are amortized
in
relation to the present value of expected gross profits on these policies.
The
Company evaluates the recoverability of deferred policy acquisition and sales
inducement costs on a quarterly basis. In this evaluation, the Company considers
estimated future gross profits or future premiums, as applicable for the
type of
contract. The Company also considers expected mortality, interest earned
and
credited rates, persistency, and expenses.
A
summary
of information relative to deferred policy acquisition costs is provided
in the
table below.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Deferred
policy acquisition costs, beginning of year
|
|
$
|
620,129
|
|
|
582,218
|
|
|
558,455
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy
acquisition costs deferred:
|
|
|
|
|
|
|
|
|
|
|
Agents'
commissions
|
|
|
97,662
|
|
|
96,224
|
|
|
139,095
|
|
Other
|
|
|
6,436
|
|
|
6,206
|
|
|
6,916
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs deferred
|
|
|
104,098
|
|
|
102,430
|
|
|
146,011
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred policy acquisition costs
|
|
|
(90,358
|
)
|
|
(87,955
|
)
|
|
(88,733
|
)
|
Adjustments
for unrealized gains and
|
|
|
|
|
|
|
|
|
|
|
losses
on investment securities
|
|
|
10,095
|
|
|
23,436
|
|
|
1,541
|
|
Deferred
costs written off due to change in
|
|
|
|
|
|
|
|
|
|
|
accounting
principle
|
|
|
-
|
|
|
-
|
|
|
(35,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
policy acquisition costs, end of year
|
|
$
|
643,964
|
|
|
620,129
|
|
|
582,218
|
|
A
summary
of information relative to deferred sales inducement costs is provided in
the
table below.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Deferred
sales inducement costs, beginning of year
|
|
$
|
80,450
|
|
|
62,240
|
|
|
40,940
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
inducement costs deferred
|
|
|
19,813
|
|
|
21,426
|
|
|
28,189
|
|
Amortization
of sales inducement
|
|
|
(9,101
|
)
|
|
(6,484
|
)
|
|
(5,256
|
)
|
Adjustments
for unrealized gains and
|
|
|
|
|
|
|
|
|
|
|
(losses)
on investment securities
|
|
|
1,977
|
|
|
3,268
|
|
|
(1,633
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
sales inducement costs, end of year
|
|
$
|
93,139
|
|
|
80,450
|
|
|
62,240
|
|
Under
GAAP, the liability for future policy benefits on traditional products has
been
calculated under SFAS No. 60 using assumptions as to future mortality (based
on
the 1965-1970 and 1975-1980 Select and Ultimate mortality tables), interest
ranging from 4% to 8%, and withdrawals based on Company experience. For
universal life and annuity contracts, the liability for future policy benefits
represents the account balance. Equity-indexed products combine features
associated with traditional fixed annuities and universal life contracts,
with
the option to have interest rates linked in part to an equity index like
the
S&P 500 Index®.
In
accordance with SFAS No. 133, the equity return component of such policy
contracts must be identified separately and accounted for as embedded
derivatives. The remaining portions of these policy contracts are considered
the
host contracts and are recorded separately as fixed annuity or universal
life
contracts. The host contracts are accounted for under provisions of SFAS
No. 97
that requires debt instrument type accounting. The host contracts are recorded
as discounted debt instruments that are accreted, using the effective yield
method, to their minimum account values at their projected maturities or
termination dates. The embedded derivatives are recorded at fair values.
(G)
Deferred Federal Income Taxes. Federal
income taxes are accounted for under the asset and liability method. Under
this
method, deferred tax assets and liabilities are recognized for the future
tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax
assets and liabilities of a change in tax rates is recognized in income in
the
period that includes the enactment date. A valuation allowance for deferred
tax
assets is provided if all or some portion of the deferred tax asset may not
be
realized. An increase or decrease in a valuation allowance that results from
a
change in circumstances that affects the realizability of the related deferred
tax asset is included in income in the period the change occurs.
(H)
Depreciation of Property, Equipment, and Leasehold Improvements.
Depreciation
is based on the estimated useful lives of the assets and is calculated on
the
straight-line and accelerated methods. Leasehold improvements are amortized
over
the lesser of the economic useful life of the improvement or the term of
the
lease.
(I)
Classification. Certain
reclassifications have been made to the prior years to conform to the reporting
categories used in 2006.
(J)
Statutory Information. Domiciled
in Colorado, the Company prepares its statutory financial statements in
accordance with accounting practices prescribed or permitted by the Colorado
Division of Insurance. The Colorado Division of Insurance has adopted the
provisions of the National Association of Insurance Commissioners' ("NAIC")
Statutory Accounting Practices as the basis for its statutory practices.
The
following are major differences between GAAP and accounting practices prescribed
or permitted by the Colorado Division of Insurance.
1. The
Company accounts for universal life and annuity contracts based on the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 97,
Accounting
and Reporting by Insurance Enterprises for Certain Long-Duration Contracts
and
for Realized Gains and Losses from the Sale of Investments.
The
basic effect of the statement with respect to certain long-duration contracts
is
that deposits for universal life and annuity contracts are not reflected
as
revenues, and surrenders and certain other benefit payments are not reflected
as
expenses. However, only those contracts with no insurance risk qualify for
such
treatment under statutory accounting practices. For all other contracts,
statutory accounting practices do reflect such items as revenues and
expenses.
A
summary
of direct premiums and deposits collected is provided below.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Annuity
deposits
|
|
$
|
485,994
|
|
|
557,940
|
|
|
892,027
|
|
Universal
life insurance deposits
|
|
|
146,742
|
|
|
133,579
|
|
|
119,554
|
|
Traditional
life and other premiums
|
|
|
18,046
|
|
|
16,629
|
|
|
15,830
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
650,782
|
|
|
708,148
|
|
|
1,027,411
|
|
2. Statutory
accounting practices require commissions and related costs to be expensed
as
incurred, where as for GAAP, these items are deferred and amortized.
3.
For statutory accounting purposes, liabilities for future policy benefits
for
life insurance policies are calculated by the net level premium method or
the
commissioners reserve valuation method. Future policy benefit liabilities
for
annuities are calculated based on the continuous commissioners annuity reserve
valuation method and provisions of Actuarial Guidelines 33 and 35.
4. Deferred
Federal income taxes are provided for temporary differences which are recognized
in the consolidated financial statements in a different period than for Federal
income tax purposes. Deferred taxes are also recognized in statutory accounting
practices; however, there are limitations as to the amount of deferred tax
assets that may be reported as admitted assets. The change in the deferred
taxes
is recorded in surplus, rather than as a component of income tax
expense.
5. For
statutory accounting purposes, debt securities are recorded at amortized
cost,
except for securities in or near default, which are reported at fair value.
Under GAAP, they are carried at amortized cost or fair value based on their
classification as either held to maturity or available for sale.
6. Investments
in subsidiaries are recorded at admitted asset value for statutory purposes,
whereas the financial statements of the subsidiaries have been consolidated
with
those of the Company under GAAP.
7. Compensation
costs related to the Company’s stock option plan are not recognized under
statutory accounting.
8. Pension
liabilities and net periodic benefit costs are recognized for statutory
accounting however in accordance with GAAP a liability or asset is recognized
for the under or over funded status of the plans and does include a non-vested
component. Statutory accounting only includes vested
benefits.
9. The
asset valuation reserve and interest maintenance reserve, which are investment
valuation reserves prescribed by statutory accounting practices, have been
eliminated, as they are not required under GAAP.
10. The
recorded value of the life interest in the Libbie Shearn Moody Trust ("Trust")
is reported at its initial valuation, net of accumulated amortization, under
GAAP. The initial valuation was based on the assumption that the Trust would
provide certain income to the Company at an assumed interest rate and is
being
amortized over 53 years, the life expectancy of Mr. Robert L. Moody at the
date
he contributed the life interest to the Company. For statutory accounting
purposes, the life interest has been valued at $26.4 million, which was computed
as the present value of the estimated future income to be received from the
Trust. However, this amount was amortized to a valuation of $12.8 million
over a
seven-year period ended December 31, 1999, in accordance with Colorado Division
of Insurance permitted accounting requirements. Prescribed statutory accounting
practices provide no accounting guidance for such asset. The statutory admitted
value of this life interest at December 31, 2006, is $12.8 million in comparison
to a carrying value of $1.9 million in the accompanying consolidated financial
statements.
11. Reconciliations
of statutory capital and surplus, as included in the annual statements filed
with the Colorado Division of Insurance, to total stockholders' equity as
reported in the accompanying consolidated financial statements prepared under
GAAP are as follows:
|
|
Stockholders'
Equity
|
|
|
|
as
of December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Statutory
capital and surplus
|
|
$
|
673,262
|
|
|
598,468
|
|
Adjustments:
|
|
|
|
|
|
|
|
Difference
in valuation of investment in
|
|
|
|
|
|
|
|
the
Libbie Shearn Moody Trust
|
|
|
(10,840
|
)
|
|
(10,528
|
)
|
Deferral
of policy acquisition costs and
|
|
|
|
|
|
|
|
sales
inducements
|
|
|
737,103
|
|
|
700,579
|
|
Adjustment
of future policy benefits
|
|
|
(459,838
|
)
|
|
(452,872
|
)
|
Difference
in deferred Federal income taxes
|
|
|
(39,467
|
)
|
|
(44,867
|
)
|
Adjustment
of securities available for sale to fair value
|
|
|
(16,217
|
)
|
|
10,940
|
|
Reversal
of asset valuation reserve
|
|
|
42,624
|
|
|
46,555
|
|
Reversal
of interest maintenance reserve
|
|
|
6,607
|
|
|
8,824
|
|
Reinstatement
of other nonadmitted assets
|
|
|
20,491
|
|
|
17,250
|
|
Valuation
allowances on investments
|
|
|
1,669
|
|
|
(929
|
)
|
Difference
in pension liability
|
|
|
(10,622
|
)
|
|
-
|
|
Liability
for stock options
|
|
|
(13,215
|
)
|
|
-
|
|
Other,
net
|
|
|
1,427
|
|
|
588
|
|
|
|
|
|
|
|
|
|
GAAP
equity
|
|
$
|
932,984
|
|
|
874,008
|
|
12. Reconciliations
of statutory net earnings, as included in the annual statements filed with
the
Colorado Division of Insurance, to the respective amounts as reported in
the
accompanying consolidated financial statements prepared under GAAP are as
follows:
|
|
Net
Earnings for the
|
|
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Statutory
net earnings
|
|
$
|
72,585
|
|
|
60,074
|
|
|
54,216
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
Subsidiary
earnings before deferred
|
|
|
|
|
|
|
|
|
|
|
Federal
income taxes and intercompany eliminations
|
|
|
7,555
|
|
|
12,321
|
|
|
8,264
|
|
Net
deferral of policy acquisition and
|
|
|
|
|
|
|
|
|
|
|
sales
inducement costs
|
|
|
24,533
|
|
|
29,716
|
|
|
45,239
|
|
Adjustment
of future policy benefits
|
|
|
(10,555
|
)
|
|
(18,568
|
)
|
|
42,921
|
|
Provision
for deferred Federal income taxes
|
|
|
(1,761
|
)
|
|
(5,494
|
)
|
|
(29,583
|
)
|
Valuation
allowances and other-than-temporary
|
|
|
|
|
|
|
|
|
|
|
impairment
writedowns on investments
|
|
|
1,123
|
|
|
222
|
|
|
1,022
|
|
Increase
(decrease) in interest maintenance reserve
|
|
|
(2,217
|
)
|
|
(1,179
|
)
|
|
881
|
|
Stock
option compensation expense
|
|
|
(13,076
|
)
|
|
(995
|
)
|
|
(979
|
)
|
Asset-backed
securities amortization adjustment
|
|
|
-
|
|
|
595
|
|
|
2,739
|
|
Deferred
tax from capital loss carryforward
|
|
|
|
|
|
|
|
|
|
|
recognized
for statutory accounting
|
|
|
-
|
|
|
-
|
|
|
(3,096
|
)
|
Other,
net
|
|
|
(1,844
|
)
|
|
575
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
net earnings
|
|
$
|
76,343
|
|
|
77,267
|
|
|
122,169
|
|
(K)
Stock Compensation. SFAS
No.
123, Accounting
for Stock-Based Compensation
established financial accounting and reporting standards for stock-based
employee compensation plans. It defines a fair value based method of accounting
for employee stock options or similar equity instruments. However, it also
allows an entity to continue to measure compensation cost for plans using
the
intrinsic value based method of accounting prescribed by Accounting Principles
Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees.
In
December, 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS
No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure.
This
statement amends SFAS No. 123 to provide alternative methods of transition
for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. SFAS No. 148 is effective for fiscal years ending
after
December 15, 2002.
Under
the
fair value based method, compensation cost is measured at the grant date
based
on the fair value of the award and is recognized over the service period,
which
is usually the vesting period. For stock options, fair value is determined
using
an option pricing model that takes into account various information and
assumptions regarding the Company's stock and options. Under the intrinsic
value
based method, compensation cost is the excess, if any, of the quoted market
price of the stock at grant date or other measurement date over the amount
an
employee must pay to acquire the stock.
The
Company adopted Statement No. 123(R), Share-Based
Payment ("SFAS
123(R)") as of January 1, 2006. However, because the Company began recognizing
stock-based employee compensation cost using the fair value based method
of
accounting in 2003, the adoption did not have a material impact on the
consolidated financial statements of the Company.
Effective
March 10, 2006, the Company began accounting for its share-based compensation
under the liability classification and measuring the compensation cost using
the
fair value method at each reporting date.
(L) New
Accounting Pronouncements. In
March
2004, the Emerging Issues Task Force ("EITF") reached a final consensus on
Issue
03-1,
The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments.
This
Issue establishes impairment models for determining whether to record impairment
losses associated with investments in certain equity and debt securities
and
requires expanded disclosures related to securities with unrealized losses.
It
also requires income to be accrued on a level-yield basis following an
impairment of debt securities, where reasonable estimates of the timing and
amount of future cash flows can be made. The Company's current policy has
generally been to record income only as cash is received following an impairment
of a debt security. The application of this Issue was required for reporting
periods beginning after June 15, 2004. In September 2004, the FASB approved
FASB Staff Position EITF 03-1-1, which deferred the effective date for the
recognition and measurement guidance contained in EITF 03-1 until certain
issues
were resolved. On November 3, 2005, the FASB issued FASB Staff Position ("FSP")
Nos. SFAS 115-1 and SFAS 124-1 titled The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments.
This
FSP nullifies certain requirements of EITF 03-1 and carries forward certain
requirements and disclosures. The guidance in this FSP is to be applied to
reporting periods beginning after December 15, 2005. The Company has adopted
the
disclosure provisions and has included the required disclosures. The Company
adopted FSP Nos. SFAS 115-1 and SFAS 124-1 as of the beginning of fiscal
year
2006, and the FSP did not have a material impact on the consolidated financial
statements of the Company.
In
September 2005, the AICPA issued Statement of Position 05-1,
Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection
with Modifications or Exchanges of Insurance Contracts ("SOP
05-1").
SOP 05-1
provides guidance on accounting by insurance enterprises for deferred
acquisition costs on internal replacements of insurance and investment contracts
other than those specifically described in FASB No. 97. SOP 05-1 defines
an
internal replacement as a modification in product benefits, features, rights,
or
coverages that occurs by the exchange of a contract for a new contract, or
by
amendment, endorsement, or rider to a contract, or by the election of a feature
or coverage within a contract. SOP 05-1 is effective for internal replacements
occurring in fiscal years beginning after December 15, 2006, with earlier
adoption encouraged. The Company will have an impact related to the adoption
of
SOP 05-1 related to contracts which have annuitized and relative to
reinstatements of contracts in that the unamortized deferred acquisition
costs
and deferred sales inducement assets must be released at the time of
annuitization and may not be continued related to reinstatements. The effect
of
this SOP on beginning retained earnings as of January 1, 2007 is expected
to be
a decrease of $2.2 million, net of tax.
The
FASB
issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109 ("FIN
48"), dated June, 2006. The interpretation requires public companies to
recognize the tax benefits of uncertain tax positions only where the position
is
"more likely than not" to be sustained assuming examination by tax authorities.
The amount recognized would be the amount that represents the largest amount
of
tax benefit that is greater than 50% likely of being ultimately realized.
A
liability would be recognized for any benefit claimed, or expected to be
claimed, in a tax return in excess of the benefit recorded in the financial
statements, along with any interest and penalty (if applicable) on the excess.
FIN 48 will require a tabular reconciliation of the change in the aggregate
unrecognized tax benefits claimed, or expected to be claimed, in tax returns
and
disclosure relating to accrued interest and penalties for unrecognized tax
benefits. Discussion will also be required for those uncertain tax positions
where it is reasonably possible that the estimate of the tax benefit will
change
significantly in the next 12 months. FIN 48 is effective for fiscal years
beginning after December 15, 2006. Adoption of FIN 48 is not expected to
have a
material impact on the Company's consolidated financial statements.
On
February 16, 2006, the FASB issued SFAS 155, Accounting
for Certain Hybrid Financial Instruments,
which
amends SFAS 133,
Accounting for Derivatives and Hedging Activities,
and
SFAS 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.
Hybrid
financial instruments are single financial instruments that contain an embedded
derivative. Under SFAS 155, entities can elect to record certain hybrid
financial instruments at fair value as individual financial instruments.
Prior
to this amendment, certain hybrid financial instruments were required to
be
separated into two instruments - a derivative and host - and generally only
the
derivative was recorded at fair value. SFAS 155 also requires that beneficial
interests in securitized assets be evaluated for either freestanding or embedded
derivatives. SFAS 155 is effective for all financial instruments acquired
or
issued after January 1, 2007. SFAS 155 is not expected to have a material
effect on the Company's consolidated financial statements on the date of
adoption.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements.
This
Statement defines fair value, establishes a framework for measuring fair
value
in generally accepted accounting principles, and requires additional disclosures
about fair value measurements. This Statement does not require any new fair
value measurements, but the application of this Statement could change current
practices in determining fair value. The Company plans to adopt this guidance
effective January 1, 2008. The Company is currently assessing the impact of
SFAS No. 157 on the Company's consolidated financial position and results
of operations.
In
September 2006, the FASB issued SFAS No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement
Plans
an
amendment of FASB Statements No. 87, 88, 106 and 132(R). This statement
requires an employer on a prospective basis to recognize the overfunded or
underfunded status of its defined benefit pension and postretirement plans
as an
asset or liability in its statement of financial position and to recognize
changes in that funded status in the year in which the changes occur through
comprehensive income. This requirement, along with the required disclosures,
is
effective for fiscal years ending after December 15, 2006. SFAS
No. 158 also requires an employer on a prospective basis to measure the
funded status of its plans as of its fiscal year-end, and is effective for
fiscal years ending after December 15, 2008.
Following
is the incremental impact of applying SFAS No. 158 on individual line items
in
the consolidated balance sheet at December 31, 2006.
|
|
Before
|
|
|
|
After
|
|
|
|
Application
of
|
|
|
|
Application
of
|
|
|
|
Statement
158
|
|
Adjustments
|
|
Statement
158
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
$
|
71,914
|
|
|
8,766
|
|
|
80,680
|
|
Federal
income tax liability, deferred
|
|
|
35,275
|
|
|
(3,068
|
)
|
|
32,207
|
|
Total
liabilities
|
|
|
5,754,761
|
|
|
5,698
|
|
|
5,760,459
|
|
Accumulated
other comprehensive income
|
|
|
1,967
|
|
|
(5,698
|
)
|
|
(3,731
|
)
|
Total
stockholders’ equity
|
|
|
938,682
|
|
|
(5,698
|
)
|
|
932,984
|
|
In
September 2006, the staff of the SEC issued Staff Accounting Bulletin ("SAB")
No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements.
The
interpretations in this SAB express the staff's views regarding the process
of
quantifying financial statement misstatements. Specifically, the SEC staff
believes that registrants must quantify the impact on current period financial
statements of correcting all misstatements, including both those occurring
in
the current period and the effect of reversing those that have accumulated
from
prior periods. This SAB should be applied beginning with the first fiscal
year
ending after November 15, 2006, with early adoption encouraged. The
adoption of SAB No. 108 did not impact the financial position and
results of operations of the Company.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company's present or future
consolidated financial statements.
(2)
DEPOSITS WITH REGULATORY AUTHORITIES
The
following assets were on deposit with state and other regulatory authorities
as
required by law at the end of each year.
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Debt
securities held to maturity
|
|
$
|
13,757
|
|
|
14,146
|
|
Debt
securities available for sale
|
|
|
612
|
|
|
606
|
|
Short
term investments
|
|
|
501
|
|
|
223
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
14,870
|
|
|
14,975
|
|
(3)
INVESTMENTS
(A)
Investment Income
The
major
components of net investment income are as follows:
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Gross
investment income:
|
|
|
|
|
|
|
|
Debt
securities
|
|
$
|
306,129
|
|
|
293,502
|
|
|
276,624
|
|
Mortgage
loans
|
|
|
8,480
|
|
|
9,676
|
|
|
12,510
|
|
Policy
loans
|
|
|
6,354
|
|
|
6,409
|
|
|
6,483
|
|
Derivative
gains (losses)
|
|
|
43,279
|
|
|
(10,988
|
)
|
|
11,988
|
|
Other
investment income
|
|
|
18,407
|
|
|
13,975
|
|
|
10,351
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment income
|
|
|
382,649
|
|
|
312,574
|
|
|
317,956
|
|
Investment
expenses
|
|
|
2,881
|
|
|
2,361
|
|
|
2,113
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$
|
379,768
|
|
|
310,213
|
|
|
315,843
|
|
As
of
December 31, 2006 and 2004 mortgage loans totaling $4.8 million and $0.6
million
were on non-accrual status, respectively. The Company had no mortgage loans
on
non-accrual status as of December 31, 2005. Interest income not recognized
for
past due loans totaled approximately $0.4 million in 2006. There were no
reductions in interest income in 2005, however reductions of $0.4 million
and
$0.01 million associated with non-performing mortgage loans were noted in
2006
and 2004, respectively. The Company had real estate investments that were
non-income producing for the preceding twelve months totaling $2.9 million
and
$1.9 million at December 31, 2006 and 2005, respectively.
The
Company had investments in debt securities with carrying values totaling
$1.0
million and $7.6 million as of December 31, 2006 and 2005, respectively that
have not produced income for the preceding 12 months. Reductions in interest
income associated with nonperforming investments in debt securities totaled
$0.1
million, $1.0 million, and $1.1 million in 2006, 2005, and 2004,
respectively.
(B)
Mortgage Loans and Real Estate
Concentrations
of credit risk arising from mortgage loans exist in relation to certain groups
of borrowers. A group concentration arises when a number of counterparties
have
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or
other
conditions. The Company does not have a significant exposure to any individual
customer or counterparty. The major concentrations of mortgage loan credit
risk
for the Company arise by geographic location in the United States and by
property type as detailed below.
|
|
December
31, 2006
|
|
December
31, 2005
|
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
(In
thousands)
|
|
|
|
(In
thousands)
|
|
|
|
Geographic
Region:
|
|
|
|
|
|
|
|
|
|
West
South Central
|
|
$
|
68,528
|
|
|
66.3
|
|
$
|
68,413
|
|
|
61.8
|
|
Mountain
|
|
|
10,787
|
|
|
10.5
|
|
|
15,831
|
|
|
14.3
|
|
Pacific
|
|
|
10,684
|
|
|
10.3
|
|
|
11,342
|
|
|
10.3
|
|
South
Atlantic
|
|
|
4,718
|
|
|
4.6
|
|
|
4,838
|
|
|
4.4
|
|
All
other
|
|
|
8,608
|
|
|
8.3
|
|
|
10,215
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
103,325
|
|
|
100.0
|
|
$
|
110,639
|
|
|
100.0
|
|
|
|
December
31, 2006
|
|
December
31, 2005
|
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
(In
thousands)
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
Type:
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
70,922
|
|
|
68.7
|
|
$
|
75,545
|
|
|
68.3
|
|
Office
|
|
|
22,730
|
|
|
22.0
|
|
|
24,536
|
|
|
22.2
|
|
Land/Lots
|
|
|
3,015
|
|
|
2.9
|
|
|
3,725
|
|
|
3.4
|
|
Hotel/Motel
|
|
|
6,649
|
|
|
6.4
|
|
|
6,797
|
|
|
6.1
|
|
All
other
|
|
|
9
|
|
|
-
|
|
|
36
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
103,325
|
|
|
100.0
|
|
$
|
110,639
|
|
|
100.0
|
|
Mortgage
loans with carrying values totaling $4.8 million were considered impaired
as of
December 31, 2006. No mortgage loans were considered impaired as of December
31,
2005. For the years ended December 31, 2006, 2005, and 2004, average investments
in impaired mortgage loans were $0.3 million, $0.1 million, and $4.7 million,
respectively. Interest income recognized on impaired loans for the years
ended
December 31, 2006 and 2004, was $76,000 and $0.9 million, respectively and
none
for the year ended December 31, 2005. Impaired loans are typically placed
on
nonaccrual status, and no interest income is recognized. However, if cash
is
received on the impaired loan, it is applied to principal and interest on
past
due payments, beginning with the most delinquent payment.
At
December 31, 2006 and 2005, the Company owned investment real estate totaling
$12.1 million and $13.4 million, respectively, which is reflected in other
long-term investments in the accompanying consolidated financial statements.
The
Company records real estate at the lower of cost or fair value less estimated
costs to sell. Real estate values are monitored and evaluated at least annually
by the use of independent appraisals or internal evaluations. Changes in
market
values affecting carrying values are recorded as a valuation allowance which
is
reflected in realized gains or losses on investments. For the year ended
December 31, 2004, the Company recorded a net gain on real estate due to
increases in market values totaling $0.8 million. Additional gains totaling
$0.7
million and $0.6 million were recorded for the year ended December 31, 2005
and
2004, respectively, as a result of releasing allowances related to properties
sold.
(C)
Investment Gains and Losses
The
table
below presents realized gains and losses and changes in unrealized gains
and
losses on investments for 2006, 2005, and 2004. Changes in unrealized gains
and
losses on investment securities available for sale are net of the effects
of
deferred costs and taxes.
|
|
|
|
Change
in
|
|
|
|
Realized
|
|
Unrealized
|
|
|
|
Investments
|
|
Investment
|
|
|
|
Gains
|
|
Gains
(Losses)
|
|
|
|
(Losses)
|
|
From
Prior Year
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Year
Ended December 31, 2006:
|
|
|
|
|
|
Securities
held to maturity
|
|
$
|
26
|
|
|
(35,078
|
)
|
Securities
available for sale
|
|
|
4,110
|
|
|
(7,253
|
)
|
Real
estate
|
|
|
626
|
|
|
-
|
|
Other
|
|
|
(2,100
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,662
|
|
|
(42,331
|
)
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2005:
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
$
|
628
|
|
|
(93,709
|
)
|
Securities
available for sale
|
|
|
2,176
|
|
|
(14,631
|
)
|
Real
estate
|
|
|
6,713
|
|
|
-
|
|
Other
|
|
|
367
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
9,884
|
|
|
(108,340
|
)
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2004:
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
$
|
2,490
|
|
|
(10,353
|
)
|
Securities
available for sale
|
|
|
(846
|
)
|
|
2,565
|
|
Other
|
|
|
1,862
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,506
|
|
|
(7,788
|
)
|
(D)
Debt and Equity Securities
The
tables below present amortized cost and fair values of securities held to
maturity and securities available for sale at December 31, 2006.
|
|
Securities
Held to Maturity
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
(In
thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and other U.S.
|
|
|
|
|
|
|
|
|
|
government
corporations
|
|
|
|
|
|
|
|
|
|
and
agencies
|
|
$
|
401,662
|
|
|
614
|
|
|
8,641
|
|
|
393,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States
and political subdivisions
|
|
|
13,282
|
|
|
18
|
|
|
145
|
|
|
13,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
governments
|
|
|
19,921
|
|
|
219
|
|
|
95
|
|
|
20,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
349,994
|
|
|
7,952
|
|
|
6,094
|
|
|
351,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
1,171,088
|
|
|
13,406
|
|
|
21,061
|
|
|
1,163,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
|
1,552,611
|
|
|
3,827
|
|
|
25,693
|
|
|
1,530,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed
|
|
|
94,876
|
|
|
1,037
|
|
|
1,153
|
|
|
94,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,603,434
|
|
|
27,073
|
|
|
62,882
|
|
|
3,567,625
|
|
|
|
Securities
Available for Sale
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
(In
thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and other U.S.
|
|
|
|
|
|
|
|
|
|
government
corporations
|
|
|
|
|
|
|
|
|
|
and
agencies
|
|
$
|
45,893
|
|
|
17
|
|
|
-
|
|
|
45,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States
and political subdivisions
|
|
|
43,090
|
|
|
2,353
|
|
|
98
|
|
|
45,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
governments
|
|
|
10,526
|
|
|
162
|
|
|
54
|
|
|
10,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
277,691
|
|
|
2,146
|
|
|
6,181
|
|
|
273,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
1,221,165
|
|
|
18,420
|
|
|
25,911
|
|
|
1,213,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
|
269,685
|
|
|
1,203
|
|
|
5,966
|
|
|
264,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed
|
|
|
26,977
|
|
|
369
|
|
|
122
|
|
|
27,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
12,427
|
|
|
8,927
|
|
|
151
|
|
|
21,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,907,454
|
|
|
33,597
|
|
|
38,483
|
|
|
1,902,568
|
|
The
tables below present amortized cost and fair values of securities held to
maturity and securities available for sale at December 31, 2005.
|
|
Securities
Held to Maturity
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
(In
thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and other U.S.
|
|
|
|
|
|
|
|
|
|
government
corporations
|
|
|
|
|
|
|
|
|
|
and
agencies
|
|
$
|
306,260
|
|
|
575
|
|
|
6,573
|
|
|
300,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States
and political subdivisions
|
|
|
13,220
|
|
|
87
|
|
|
39
|
|
|
13,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
governments
|
|
|
19,899
|
|
|
608
|
|
|
-
|
|
|
20,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
419,996
|
|
|
13,300
|
|
|
2,359
|
|
|
430,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
1,186,392
|
|
|
23,687
|
|
|
15,579
|
|
|
1,194,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
|
1,450,375
|
|
|
6,165
|
|
|
19,932
|
|
|
1,436,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed
|
|
|
128,582
|
|
|
1,581
|
|
|
2,252
|
|
|
127,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,524,724
|
|
|
46,003
|
|
|
46,734
|
|
|
3,523,993
|
|
|
|
Securities
Available for Sale
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
(In
thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
States
and political subdivisions
|
|
$
|
39,397
|
|
|
1,740
|
|
|
417
|
|
|
40,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
governments
|
|
|
10,576
|
|
|
277
|
|
|
4
|
|
|
10,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
240,541
|
|
|
3,599
|
|
|
2,803
|
|
|
241,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
1,123,539
|
|
|
26,783
|
|
|
16,408
|
|
|
1,133,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
|
268,104
|
|
|
1,926
|
|
|
5,160
|
|
|
264,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed
|
|
|
31,239
|
|
|
1,611
|
|
|
108
|
|
|
32,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
12,856
|
|
|
7,633
|
|
|
194
|
|
|
20,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,726,252
|
|
|
43,569
|
|
|
25,094
|
|
|
1,744,727
|
|
Due
to
the Company's investment policy of investing in high quality securities with
the
primary intention of holding these securities until the stated maturity,
the
portfolio does have exposure to interest rate risk. Interest rate risk is
the
risk that funds are invested today at a market interest rate and in the future
interest rates rise causing the current market price on that investment to
be
lower. This risk is not a significant factor relative to the Company's buy
and
hold portfolio, since the original intention was to receive the stated interest
rate and principal at maturity to match liability requirements of policyholders.
Also, the Company takes steps to manage these risks. For example, the Company
purchases the type of mortgage-backed securities that have more predictable
cash
flow patterns.
In
addition, the Company is exposed to credit risk which is continually monitored
relating to security holdings. Credit risk is the risk that an issuer of
a
security will not be able to fulfill their obligations relative to a security
payment schedule. The Company has reviewed relative information for all issuers
in an unrealized loss position at December 31, 2006 including market pricing
history, credit ratings, analyst reports as well as data provided by issuers
themselves to conclude on each specific issuer and make the determination
relating to other-than-temporary impairment. For the securities that have
not
been impaired at December 31, 2006, the Company has the ability and intent
to
hold these securities until recovery in fair value and expects to receive
all
amounts due relative to principal and interest.
The
Company held in its investment portfolio below investment grade debt securities
totaling $146.6 million and $170.5 million at December 31, 2006 and 2005,
respectively. These amounts represent 2.5% and 3.1% of total invested assets
for
December 31, 2006 and 2005, respectively. Below investment grade holdings
are
the result of downgrades subsequent to purchase, as the Company only invests
in
high quality securities with ratings quoted as investment grade. Below
investment grade securities generally have greater default risk than higher
rated corporate debt. The issuers of these securities are usually more sensitive
to adverse industry or economic conditions than are investment grade issuers.
For the years ended December 31, 2006, 2005, and 2004, the Company recorded
realized losses totaling $0.1 million, $2.0 million, and $3.6 million,
respectively, for other-than-temporary impairment writedowns on investments
in
debt securities.
The
following table shows the gross unrealized losses and fair values of the
Company's investments by investment category and length of time the individual
securities have been in a continuous unrealized loss position at December
31,
2006.
|
|
Less
than 12 Months
|
|
12
Months or Greater
|
|
Total
|
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
|
|
(In
thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
$
|
84,630
|
|
|
544
|
|
|
260,838
|
|
|
8,097
|
|
|
345,468
|
|
|
8,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions
|
|
|
9,945
|
|
|
55
|
|
|
11,579
|
|
|
188
|
|
|
21,524
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
governments
|
|
|
11,861
|
|
|
108
|
|
|
3,234
|
|
|
41
|
|
|
15,095
|
|
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
111,575
|
|
|
946
|
|
|
264,522
|
|
|
11,329
|
|
|
376,097
|
|
|
12,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
394,499
|
|
|
5,937
|
|
|
955,626
|
|
|
41,035
|
|
|
1,350,125
|
|
|
46,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
|
313,895
|
|
|
4,130
|
|
|
1,033,452
|
|
|
27,529
|
|
|
1,347,347
|
|
|
31,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed
|
|
|
12,809
|
|
|
52
|
|
|
29,052
|
|
|
1,223
|
|
|
41,861
|
|
|
1,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
|
939,214
|
|
|
11,772
|
|
|
2,558,303
|
|
|
89,442
|
|
|
3,497,517
|
|
|
101,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
1,633
|
|
|
18
|
|
|
2,372
|
|
|
133
|
|
|
4,005
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
impaired
securities
|
|
$
|
940,847
|
|
|
11,790
|
|
|
2,560,675
|
|
|
89,575
|
|
|
3,501,522
|
|
|
101,365
|
|
Debt
securities. The
gross
unrealized losses for debt securities are made up of 414 individual issues,
or
57% of the total debt securities held by the Company. The market value of
these
bonds as a percent of amortized cost averages above 97.2%. Of the 414
securities, 160, or approximately 39%, fall in the 12 months or greater aging
category; of the debt securities 397 were rated investment grade at December
31,
2006. Additional information on debt securities by investment category is
summarized below.
U.S.
treasury and U.S. government corporations and agencies. The
unrealized losses on these investments were caused by interest rate volatility.
The contractual terms of these investments do not permit the issuer to settle
the securities at a price less than par, and the Company has the ability
and
intent to hold these investments until a recovery of fair value, which may
be
maturity. All of these securities are rated AAA. The Company does not consider
these investments to be other than temporarily impaired at December 31,
2006.
State
and political subdivisions. The
unrealized losses on these investments are the result of holdings in eight
securities. Of these securities, seven are in an unrealized loss position
for
greater than 12 months, for which the market value as a percent of book value
is
98.4%. Based on these facts and the Company's intent to hold to maturity,
no
other-than-temporary loss was recognized as of December 31, 2006.
Foreign
government.
Only two
securities are reflected in this category. One investment grade bond purchased
at a premium is in the greater than 12 months category but is priced above
$100.00. The other security in an unrealized loss position is also investment
grade and priced above $98. At this time the Company considers this unrealized
loss as temporary.
Public
utilities. The
market value as a percent of the amortized cost is above 93% for each individual
security except one security priced at approximately $88; however, this security
has been in this position for less than 12 months and is considered investment
grade. Of the 61 securities, all are rated BBB or above except one, which,
though rated below investment grade, is priced at $100.00. At this time,
the
Company does not consider any of these unrealized losses as
other-than-temporary.
Corporate
bonds. A
total
of 170 securities fall into this category with only eleven rated below
investment grade. Of the 159 that are investment grade, all have a market
value
as a percent of amortized cost of at least 91%. Of those rated below investment
grade, one security has been written down due to other-than-temporary
impairment. Of the remaining securities all have been reviewed based on the
monitoring procedures described previously including review of credit ratings,
analyst reports, and issuer information and are not considered
other-than-temporarily impaired at December 31, 2006.
Mortgage-backed
securities.
These
securities are all rated AAA and priced at $91.00 or above. The Company
generally purchased these investments at a discount relative to their face
amount and it is expected that the securities will not be settled at a price
less than the stated par. Because the decline in market value is attributable
to
changes in interest rates and not credit quality, and because the Company
has
the ability and intent to hold these securities until a recovery of fair
value,
which may be maturity, the Company does not consider these investments to
be
other-than-temporarily impaired at December 31, 2006.
Asset-backed
securities. Of
these
securities, six are priced above $94.00 and are not considered impaired.
The
other three securities are all monitored under SOP 03-3 and SFAS No. 115-1
impairment guidance and based on the cash flow analysis only one security
was
impaired during the third quarter of 2006.
Equity
securities.
The
gross unrealized losses for equity securities are made up of nine individual
issues. These holdings are reviewed for impairment quarterly. As of December
31,
2006, no impairment is deemed necessary.
The
following table shows the gross unrealized losses and fair values of the
Company's investments by investment category and length of time the individual
securities have been in a continuous unrealized loss position at December
31,
2005.
|
|
Less
than 12 Months
|
|
12
Months or Greater
|
|
Total
|
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Value
|
|
Losses
|
|
Debt
Securities:
|
|
(In
thousands)
|
|
U.S.
government agencies
|
|
$
|
163,178
|
|
|
2,416
|
|
|
111,876
|
|
|
4,157
|
|
|
275,054
|
|
|
6,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions
|
|
|
10,187
|
|
|
137
|
|
|
2,181
|
|
|
319
|
|
|
12,368
|
|
|
456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
governments
|
|
|
3,279
|
|
|
4
|
|
|
-
|
|
|
-
|
|
|
3,279
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
215,032
|
|
|
3,028
|
|
|
70,832
|
|
|
2,134
|
|
|
285,864
|
|
|
5,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
618,353
|
|
|
13,761
|
|
|
412,537
|
|
|
18,226
|
|
|
1,030,890
|
|
|
31,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
|
616,184
|
|
|
9,396
|
|
|
426,583
|
|
|
15,696
|
|
|
1,042,767
|
|
|
25,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed
|
|
|
14,208
|
|
|
46
|
|
|
25,191
|
|
|
2,314
|
|
|
39,399
|
|
|
2,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
|
1,640,421
|
|
|
28,788
|
|
|
1,049,200
|
|
|
42,846
|
|
|
2,689,621
|
|
|
71,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
375
|
|
|
26
|
|
|
3,236
|
|
|
168
|
|
|
3,611
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
impaired
securities
|
|
$
|
1,640,796
|
|
|
28,814
|
|
|
1,052,436
|
|
|
43,014
|
|
|
2,693,232
|
|
|
71,828
|
|
The
amortized cost and fair value of investments in debt securities at December
31,
2006, by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call
or
prepay obligations with or without call or prepayment penalties.
|
|
Debt
Securities
|
|
Debt
Securities
|
|
|
|
Available
for Sale
|
|
Held
to Maturity
|
|
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Due
in 1 year or less
|
|
$
|
195,683
|
|
|
197,102
|
|
|
76,322
|
|
|
76,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
after 1 year through 5 years
|
|
|
243,602
|
|
|
252,564
|
|
|
357,777
|
|
|
370,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
after 5 years through 10 years
|
|
|
1,056,278
|
|
|
1,034,803
|
|
|
1,185,874
|
|
|
1,167,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
after 10 years
|
|
|
102,802
|
|
|
104,750
|
|
|
335,974
|
|
|
327,270
|
|
|
|
|
1,598,365
|
|
|
1,589,219
|
|
|
1,955,947
|
|
|
1,942,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
and asset-backed securities
|
|
|
296,662
|
|
|
292,146
|
|
|
1,647,487
|
|
|
1,625,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,895,027
|
|
|
1,881,365
|
|
|
3,603,434
|
|
|
3,567,625
|
|
The
Company uses the specific identification method in computing realized gains
and
losses. Proceeds from sales of securities available for sale during 2006,
2005,
and 2004 totaled $36.4 million, $29.2 million, and $49.8 million, respectively.
Gross gains and losses realized on those sales are detailed below.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Gross
realized gains
|
|
$
|
4,587
|
|
|
3,930
|
|
|
2,600
|
|
Gross
realized losses
|
|
|
(433
|
)
|
|
(255
|
)
|
|
(451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gains
|
|
$
|
4,154
|
|
|
3,675
|
|
|
2,149
|
|
No
held
to maturity securities were transferred or sold during 2006. Due to a
significant decline in credit quality, the Company transferred debt securities
totaling $7.0 million in 2005 and $35.9 million in 2004 from held to maturity
to
the available for sale portfolio. Net unrealized gains of $0.2 million in
both
2005 and 2004, related to these transferred securities are included as a
separate component of accumulated other comprehensive income. Due to significant
credit deterioration, bonds from the held to maturity portfolio were sold
during
2005 and 2004. The amortized cost of these bonds sold totaled $10.0 million
and
$8.1 million, which resulted in realized gains of $0.9 million and $0.6 million
for 2005 and 2004, respectively.
Except
for U.S. government agency mortgage-backed securities, the Company had no
other
investments in any entity in excess of 10% of stockholders' equity at December
31, 2006 or 2005.
(E)
Transfers of Securities
On
January 1, 2001, the Company made transfers totaling $112 million to the
held to
maturity category from securities available for sale. Lower holdings of
securities available for sale significantly reduce the Company's exposure
to
equity volatility while still providing securities for liquidity and
asset/liability management purposes. The transfers of securities were recorded
at fair values in accordance with SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities.
This
Statement requires that the unrealized holding gain or loss at the date of
the
transfer continue to be reported in a separate component of stockholders'
equity
and be amortized over the remaining life of the security as an adjustment
of
yield in a manner consistent with the amortization of any premium or discount.
The amortization of an unrealized holding gain or loss reported in equity
will
offset or mitigate the effect on interest income of the amortization of the
premium or discount for the held to maturity securities. The transfer of
securities from available for sale to held to maturity had no effect on net
earnings of the Company. However, stockholders' equity was adjusted as
follows:
|
|
Net
Unrealized Gains (Losses)
|
|
|
|
as
of December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Beginning
unamortized losses from transfers
|
|
$
|
(104
|
)
|
|
(122
|
)
|
|
(367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of net unrealized losses related
|
|
|
|
|
|
|
|
|
|
|
to
transferred securities, net of effects of
|
|
|
|
|
|
|
|
|
|
|
deferred
costs and taxes
|
|
|
25
|
|
|
18
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
unamortized losses from transfers
|
|
$
|
(79
|
)
|
|
(104
|
)
|
|
(122
|
)
|
(F)
Net Unrealized Gains on Available for Sale Securities
Net
unrealized gains on investment securities included in stockholders' equity
at
December 31, 2006 and 2005, are as follows:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Gross
unrealized gains
|
|
$
|
33,597
|
|
|
43,569
|
|
Gross
unrealized losses
|
|
|
(38,483
|
)
|
|
(25,094
|
)
|
Adjustments
for:
|
|
|
|
|
|
|
|
Deferred
costs
|
|
|
9,849
|
|
|
(2,314
|
)
|
Deferred
Federal income tax expense
|
|
|
(1,736
|
)
|
|
(5,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
3,227
|
|
|
10,505
|
|
Net
unrealized losses related to securities
|
|
|
|
|
|
|
|
transferred
to held to maturity
|
|
|
(79
|
)
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
Net
unrealized gains on investment securities
|
|
$
|
3,148
|
|
|
10,401
|
|
(4)
REINSURANCE
Effective
January 1, 2004, the Company began reinsuring any risk on any one life in
excess
of $250,000, subject to a minimum session of $50,000. The Company's general
policy prior to December 31, 2003 was to reinsure that portion of any risk
in
excess of $200,000 on the life of any one individual. The Company is party
to
several reinsurance agreements. Total life insurance in force was $15.9 billion
and $14.7 billion at December 31, 2006 and 2005, respectively. Of these amounts,
life insurance in force totaling $4.1 billion and $3.5 billion was ceded
to
reinsurance companies, primarily on a yearly renewable term basis, at December
31, 2006 and 2005, respectively. In accordance with the reinsurance contracts,
reinsurance receivables including amounts related to claims incurred but
not
reported and liabilities for future policy benefits totaled $16.5 million
and
$9.7 million at December 31, 2006 and 2005, respectively. Premiums and contract
revenues were reduced by $13.5 million, $12.3 million, and $13.0 million
for
reinsurance premiums incurred during 2006, 2005, and 2004, respectively.
Benefit
expenses were reduced by $17.7 million, $8.2 million, and $6.4 million, for
reinsurance recoveries during 2006, 2005, and 2004, respectively. A contingent
liability exists with respect to reinsurance, as the Company remains liable
if
the reinsurance companies are unable to meet their obligations under the
existing agreements. The Company does not assume reinsurance.
(5)
FEDERAL INCOME TAXES
Total
Federal income taxes for 2006, 2005, and 2004 were allocated as
follows:
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Taxes
(benefits) on earnings from continuing operations:
|
|
|
|
|
|
|
|
Current
|
|
$
|
38,711
|
|
|
32,874
|
|
|
34,441
|
|
Deferred
|
|
|
1,761
|
|
|
6,744
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
on earnings before cumulative effect of
|
|
|
|
|
|
|
|
|
|
|
change
in accounting principle
|
|
|
40,472
|
|
|
39,618
|
|
|
34,572
|
|
Taxes
on cumulative effect of change in accounting
|
|
|
|
|
|
|
|
|
|
|
principle
|
|
|
-
|
|
|
-
|
|
|
29,452
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
on earnings
|
|
|
40,472
|
|
|
39,618
|
|
|
64,024
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
(benefits) on components of stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gains and losses on
|
|
|
|
|
|
|
|
|
|
|
securities
available for sale
|
|
|
(3,905
|
)
|
|
(7,879
|
)
|
|
1,381
|
|
Foreign
currency translation adjustments
|
|
|
(96
|
)
|
|
70
|
|
|
(69
|
)
|
Minimum
pension liability adjustment
|
|
|
(5,385
|
)
|
|
(191
|
)
|
|
(254
|
)
|
Tax
benefit from exercise of stock options
|
|
|
-
|
|
|
(1,170
|
)
|
|
(1,186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
Federal income taxes
|
|
$
|
31,086
|
|
|
30,448
|
|
|
63,896
|
|
The
provisions for Federal income taxes attributable to earnings from continuing
operations vary from amounts computed by applying the statutory income tax
rate
to earnings before Federal income taxes. The reasons for the differences
and the
corresponding tax effects are as follows:
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Income
tax expense at statutory rate
|
|
$
|
40,885
|
|
|
40,910
|
|
|
35,715
|
|
Tax-exempt
income
|
|
|
(2,003
|
)
|
|
(1,719
|
)
|
|
(1,594
|
)
|
Other
|
|
|
1,590
|
|
|
427
|
|
|
451
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
on earnings from continuing operations
|
|
$
|
40,472
|
|
|
39,618
|
|
|
34,572
|
|
There
were no deferred taxes attributable to enacted tax rate changes for the years
ended December 31, 2006, 2005, and 2004.
The
tax
effects of temporary differences that give rise to significant portions of
the
deferred tax assets and deferred tax liabilities at December 31, 2006 and
2005
are presented below.
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Deferred
tax assets:
|
|
|
|
|
|
Future
policy benefits, excess of financial
|
|
|
|
|
|
accounting
liabilities over tax liabilities
|
|
$
|
188,466
|
|
|
187,388
|
|
Debt
securities writedowns for financial
|
|
|
|
|
|
|
|
accounting
purposes
|
|
|
8,043
|
|
|
8,436
|
|
Capital
loss carryforward
|
|
|
508
|
|
|
152
|
|
Pension
liabilities
|
|
|
5,812
|
|
|
1,689
|
|
Real
estate, principally due to writedowns
|
|
|
|
|
|
|
|
for
financial accounting purposes
|
|
|
1,129
|
|
|
1,409
|
|
Accrued
operating expenses recorded for financial
|
|
|
|
|
|
|
|
accounting
purposes not currently tax deductible
|
|
|
6,450
|
|
|
746
|
|
Mortgage
loans, principally due to valuation
|
|
|
|
|
|
|
|
allowances
for financial accounting purposes
|
|
|
735
|
|
|
-
|
|
Accrued
and unearned investment income
|
|
|
|
|
|
|
|
recognized
for tax purposes and deferred for
|
|
|
|
|
|
|
|
financial
accounting purposes
|
|
|
160
|
|
|
223
|
|
Other
|
|
|
90
|
|
|
464
|
|
|
|
|
|
|
|
|
|
Total
gross deferred tax assets
|
|
|
211,393
|
|
|
200,507
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Deferred
policy acquisition and sales inducement
|
|
|
|
|
|
|
|
costs,
principally expensed for tax purposes
|
|
|
(229,978
|
)
|
|
(223,576
|
)
|
Net
unrealized gains on securities available for sale
|
|
|
(1,695
|
)
|
|
(5,600
|
)
|
Debt
securities, principally due to deferred
|
|
|
|
|
|
|
|
market
discount for tax
|
|
|
(2,520
|
)
|
|
(3,492
|
)
|
Foreign
currency translation adjustments
|
|
|
(3,297
|
)
|
|
(2,781
|
)
|
Fixed
assets, due to different basis’s
|
|
|
(3,275
|
)
|
|
(2,264
|
)
|
Real
estate, principally due to differences in tax and
|
|
|
|
|
|
|
|
financial
accounting for depreciation
|
|
|
(176
|
)
|
|
(529
|
)
|
Other
|
|
|
(2,659
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
gross deferred tax liabilities
|
|
|
(243,600
|
)
|
|
(238,242
|
)
|
|
|
|
|
|
|
|
|
Net
deferred tax liabilities
|
|
$
|
(32,207
|
)
|
|
(37,735
|
)
|
There
was
no valuation allowance for deferred tax assets at December 31, 2006 and 2005.
In
assessing the realizability of deferred tax assets, management considers
whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods
in
which those temporary differences become deductible. Management considers
the
scheduled reversal of deferred tax liabilities, projected future taxable
income,
and tax planning strategies in making this assessment. Based upon the level
of
historical taxable income and projections for future taxable income over
the
periods in which the deferred tax assets are deductible, management believes
it
is more likely than not that the Company will realize the benefits of these
deductible differences.
The
Company files a consolidated Federal income tax return with its subsidiaries.
Allocation of the consolidated tax liability is based on separate return
calculations pursuant to the "wait-and-see" method as described in sections
1.1552-1(a)(1) and 1.1502-33(d)(2) of the current Treasury Regulations. Under
this method, consolidated group members are not given current credit for
net
losses until future net taxable income is generated to realize such
credits.
(6)
TRANSACTIONS WITH CONTROLLING STOCKHOLDER AND AFFILIATES
(A)
Life Interest in Libbie Shearn Moody Trust
The
Company's wholly-owned subsidiary, NWL Services, Inc., is the beneficial
owner
of a life interest (1/8 share) in the net income of the trust estate of Libbie
Shearn Moody ("Trust") which was previously owned by Robert L. Moody, Chairman
of the Board of Directors of the Company. The Company has issued term insurance
policies on the life of Mr. Moody which are reinsured through agreements
with
unaffiliated insurance companies. The Company is the beneficiary of these
policies for an amount equal to the statutory admitted value of the Trust,
which
was $12.8 million at December 31, 2006. The excess of the $27.0 million face
amount of the reinsured policies over the statutory admitted value of the
Trust
has been assigned to Mr. Moody. The recorded net asset values in the
accompanying consolidated financial statements for the life interest in the
Trust are as follows:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Original
valuation of life interest at February 26, 1960
|
|
$
|
13,793
|
|
|
13,793
|
|
Less
accumulated amortization
|
|
|
(11,858
|
)
|
|
(11,546
|
)
|
|
|
|
|
|
|
|
|
Carrying
basis at year end
|
|
$
|
1,935
|
|
|
2,247
|
|
Income
from the Trust and related expenses reflected in the accompanying consolidated
statements of earnings are summarized as follows:
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Income
distributions
|
|
$
|
4,500
|
|
|
3,915
|
|
|
3,738
|
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
(312
|
)
|
|
(308
|
)
|
|
(306
|
)
|
Reinsurance
premiums
|
|
|
(807
|
)
|
|
(807
|
)
|
|
(701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income from life interest in the Trust
|
|
$
|
3,381
|
|
|
2,800
|
|
|
2,731
|
|
(B)
Common Stock
Robert
L.
Moody, Chairman of the Board of Directors, owns 198,074 of the total outstanding
shares of the Company's Class B common stock and 1,159,096 of the Class A
common
stock as of December 31, 2006.
Holders
of the Company's Class A common stock elect one-third of the Board of Directors
of the Company, and holders of the Class B common stock elect the remainder.
Any
cash or in-kind dividends paid on each share of Class B common stock shall
be
only one-half of the cash or in-kind dividends paid on each share of Class
A
common stock. Also, in the event of liquidation of the Company, the Class
A
stockholders shall first receive the par value of their shares; then the
Class B
stockholders shall receive the par value of their shares; and the remaining
net
assets of the Company shall be divided between the stockholders of both Class
A
and Class B common stock, based on the number of shares held.
(7)
PENSION AND OTHER POSTRETIREMENT PLANS
(A)
Defined Benefit Pension Plans
The
Company sponsors a qualified defined benefit pension plan covering substantially
all employees. The plan provides benefits based on the participants' years
of
service and compensation. The Company makes annual contributions to the plan
that comply with the minimum funding provisions of the Employee Retirement
Income Security Act of 1974 ("ERISA"). Fair values of plan assets and
liabilities are measured as of December 31 for the respective year. A detail
of
plan disclosures is provided below.
Obligations
and Funded Status
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Changes
in projected benefit obligations:
|
|
|
|
|
|
Projected
benefit obligations at beginning of year
|
|
$
|
17,452
|
|
|
16,398
|
|
Service
cost
|
|
|
691
|
|
|
685
|
|
Interest
cost
|
|
|
1,021
|
|
|
974
|
|
Actuarial
loss
|
|
|
(67
|
)
|
|
258
|
|
Benefits
paid
|
|
|
(840
|
)
|
|
(863
|
)
|
|
|
|
|
|
|
|
|
Projected
benefit obligations at end of year
|
|
|
18,257
|
|
|
17,452
|
|
|
|
|
|
|
|
|
|
Changes
in plan assets:
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
|
12,808
|
|
|
11,779
|
|
Actual
return on plan assets
|
|
|
1,175
|
|
|
274
|
|
Contributions
|
|
|
1,010
|
|
|
1,618
|
|
Benefits
paid
|
|
|
(840
|
)
|
|
(863
|
)
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at end of year
|
|
|
14,153
|
|
|
12,808
|
|
|
|
|
|
|
|
|
|
Funded
status at end of year
|
|
$
|
(4,104
|
)
|
|
(4,644
|
)
|
|
|
December
31,
|
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Amounts
recognized in the Company's consolidated
|
|
|
|
financial
statements:
|
|
|
|
Assets
|
|
$
|
-
|
|
Liabilities
|
|
|
(4,104
|
)
|
|
|
|
|
|
Net
amount recognized
|
|
$
|
(4,104
|
)
|
Amounts
recognized in accumulated other
|
|
|
|
comprehensive
income:
|
|
|
|
Net
loss
|
|
$
|
5,532
|
|
Prior
service cost
|
|
|
35
|
|
|
|
|
|
|
Net
amount recognized
|
|
$
|
5,567
|
|
The
accumulated benefit obligation was $17.0 million and $16.1 million at December
31, 2006 and 2005, respectively.
Components
of Net Periodic Benefit Cost
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Components
of net periodic benefit costs:
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
691
|
|
|
685
|
|
|
591
|
|
Interest
cost
|
|
|
1,021
|
|
|
974
|
|
|
925
|
|
Expected
return on plan assets
|
|
|
(947
|
)
|
|
(910
|
)
|
|
(834
|
)
|
Amortization
of prior service cost
|
|
|
4
|
|
|
4
|
|
|
4
|
|
Amortization
of net loss
|
|
|
352
|
|
|
331
|
|
|
283
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$
|
1,121
|
|
|
1,084
|
|
|
969
|
|
Assumptions
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Weighted-average
assumptions used to determine
|
|
|
|
|
|
benefit
obligations:
|
|
|
|
|
|
Discount
rate
|
|
|
6.00
|
%
|
|
6.00
|
%
|
Rate
of compensation increase
|
|
|
4.50
|
%
|
|
4.50
|
%
|
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Weighted-average
assumptions used to determine
|
|
|
|
|
|
|
|
net
periodic benefit cost:
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.00
|
%
|
|
6.00
|
%
|
|
6.25
|
%
|
Expected
long-term return on plan assets
|
|
|
7.50
|
%
|
|
7.50
|
%
|
|
7.50
|
%
|
Rate
of compensation increase
|
|
|
4.50
|
%
|
|
4.50
|
%
|
|
4.50
|
%
|
The
assumed long-term rate of return on plan assets is generally set at the rate
expected to be earned based on long-term investment policy of the plan and
the
various classes of invested funds, based on the input of the plan's investment
advisors and consulting actuary and the plan's historic rate of return. As
of
December 31, 2006, the plan's average 10-year and inception-to-date returns
were
6.74% and 7.87%, respectively.
Plan
Assets
The
plan's weighted-average asset allocations by asset category are as
follows:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Asset
Category
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
60
|
%
|
|
57
|
%
|
|
58
|
%
|
Debt
securities
|
|
|
35
|
%
|
|
34
|
%
|
|
34
|
%
|
Cash
and cash equivalents
|
|
|
5
|
%
|
|
9
|
%
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
The
Company has established and maintains an investment policy statement for
the
assets held in the plan's trust. The investment strategies are of a long-term
nature and are designed to meet the following objectives:
· |
ensure
that funds are available to pay benefits as they become
due
|
· |
set
forth an investment structure detailing permitted assets and expected
allocation ranges among classes
|
· |
insure
that plan assets are managed in accordance with
ERISA
|
The
investment policy statement sets forth the following acceptable ranges for
each
asset's class.
Asset
Category
|
|
Acceptable
Range
|
Equity
securities
|
|
55-65%
|
Debt
securities
|
|
30-40%
|
Cash
|
|
0-15%
|
Deviations
from these ranges are permitted if such deviations are consistent with the
duty
of prudence under ERISA. Investments in natural resources, venture capital,
precious metals, futures and options, real estate, and other vehicles which
do
not have readily available objective valuations are not permitted. Short
sales,
use of margin or leverage, and investment in commodities and art objects
are
also prohibited.
The
investment policy statement is reviewed annually to insure that the objectives
are met considering any changes in benefit plan design, market conditions,
or
other material considerations.
Contributions
The
Company expects to contribute $1.8 million to the plan in 2007.
Estimated
Future Benefit Payments
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in thousands):
2007
|
$
|
942
|
2008
|
|
1,021
|
2009
|
|
1,067
|
2010
|
|
1,139
|
2011
|
|
1,235
|
2012-2016
|
|
6,610
|
The
Company also sponsors three non-qualified defined benefit pension plans.
The
first plan covers certain senior officers and provides benefits based on
the
participants' years of service and compensation. The primary pension obligations
and administrative responsibilities of the plan are maintained by a pension
administration firm, which is a subsidiary of American National Insurance
Company ("ANICO"). ANICO has guaranteed the payment of pension obligations
under
the plan. However, the Company has a contingent liability with respect to
the
pension plan should these entities be unable to meet their obligations under
the
existing agreements. Also, the Company has a contingent liability with respect
to the plan in the event that a plan participant continues employment with
the
Company beyond age seventy, the aggregate average annual participant salary
increases exceed 10% per year, or any additional employees become eligible
to
participate in the plan. If any of these conditions are met, the Company
would
be responsible for any additional pension obligations resulting from these
items. Amendments were made to this plan to allow an additional employee
to
participate and to change the benefit formula for the Chairman of the Company.
As previously mentioned, these additional obligations are a liability to
the
Company. Effective December 31, 2004, this plan was frozen with respect to
the
continued accrual of benefits of the Chairman and the President of the Company
in order to comply with law changes under the American Jobs Creation Act
of 2004
("Act").
Effective
July 1, 2005, the Company established a second non-qualified defined benefit
plan for the benefit of the Chairman of the Company. This plan is intended
to
provide for post-2004 benefit accruals that mirror and supplement the pre-2005
benefit accruals under the previously discussed non-qualified plan, while
complying with the requirements of the Act.
Effective
November 1, 2005, the Company established a third non-qualified defined benefit
plan for the benefit of the President of the Company. This plan in intended
to
provide for post-2004 benefit accruals that supplement the pre-2005 benefit
accruals under the first non-qualified plan as previously discussed, while
complying with the requirements of the Act.
A
detail
of plan disclosures related to the amendments of the original plan and the
additional two plans is provided below:
Obligations
and Funded Status
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Changes
in projected benefit obligations:
|
|
|
|
|
|
Projected
benefit obligations at beginning of year
|
|
$
|
8,970
|
|
|
3,525
|
|
Service
cost
|
|
|
1,631
|
|
|
1,295
|
|
Interest
cost
|
|
|
708
|
|
|
292
|
|
Plan
amendments
|
|
|
-
|
|
|
4,629
|
|
Actuarial
loss
|
|
|
3,525
|
|
|
(210
|
)
|
Benefits
paid
|
|
|
(1,138
|
)
|
|
(561
|
)
|
|
|
|
|
|
|
|
|
Projected
benefit obligations at end of year
|
|
|
13,696
|
|
|
8,970
|
|
|
|
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
|
-
|
|
|
-
|
|
Contributions
|
|
|
1,138
|
|
|
561
|
|
Benefits
paid
|
|
|
(1,138
|
)
|
|
(561
|
)
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at end of year
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Funded
status at end of year
|
|
$
|
(13,696
|
)
|
|
(8,970
|
)
|
|
|
December
31,
|
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Amounts
recognized in the Company's consolidated
|
|
|
|
financial
statements:
|
|
|
|
Assets
|
|
$
|
-
|
|
Liabilities
|
|
|
(13,696
|
)
|
|
|
|
|
|
Net
amount recognized
|
|
$
|
(13,696
|
)
|
Amounts
recognized in accumulated other
|
|
|
|
comprehensive
income:
|
|
|
|
Net
loss
|
|
$
|
3,679
|
|
Prior
service cost
|
|
|
4,630
|
|
|
|
|
|
|
Net
amount recognized
|
|
$
|
8,309
|
|
The
accumulated benefit obligation was $10.5 million and $6.0 million at December
31, 2006 and 2005, respectively.
Components
of Net Periodic Benefit Cost
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
1,631
|
|
|
1,295
|
|
|
422
|
|
Interest
cost
|
|
|
708
|
|
|
292
|
|
|
178
|
|
Amortization
of prior service cost
|
|
|
1,040
|
|
|
647
|
|
|
291
|
|
Amortization
of net loss
|
|
|
182
|
|
|
-
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$
|
3,561
|
|
|
2,234
|
|
|
896
|
|
Assumptions
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Weighted-average
assumptions used to determine
|
|
|
|
|
|
benefit
obligations:
|
|
|
|
|
|
Discount
rate
|
|
|
6.00
|
%
|
|
6.00
|
%
|
Rate
of compensation increase
|
|
|
4.00
|
%
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Weighted-average
assumptions used to determine
|
|
|
|
|
|
|
|
net
periodic benefit costs:
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.00
|
%
|
|
6.00
|
%
|
|
6.25
|
%
|
Expected
long-term return on plan assets
|
|
|
n/a
|
|
|
n/a
|
|
|
n/a
|
|
Rate
of compensation increase
|
|
|
4.00
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
The
plan
is unfunded and therefore no assumption has been made related to the expected
long-term return on plan assets.
Plan
Assets
The
plan
is unfunded and therefore had no assets at December 31, 2006 or
2005.
Contributions
The
Company expects to contribute $1.4 million to the plan in 2007.
Estimated
Future Benefit Payments
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in thousands):
2007
|
$
|
1,456
|
2008
|
|
1,710
|
2009
|
|
1,896
|
2010
|
|
1,892
|
2011
|
|
1,888
|
2012-2016
|
|
9,442
|
The
Company expects to recognize $1.1 million of net prior service cost and
$0.5
million of net loss as net periodic pension cost in 2007 for the defined
benefit plans.
(B)
Defined Contribution Pension Plans
In
addition to the defined benefit pension plans, the Company sponsors a qualified
401(k) plan for substantially all employees and a non-qualified deferred
compensation plan primarily for senior officers. The Company makes annual
contributions to the 401(k) plan of two percent of each employee's compensation.
Additional Company matching contributions of up to two percent of each
employee's compensation are also made each year based on the employee's personal
level of salary deferrals to the plan. All Company contributions are subject
to
a vesting schedule based on the employee's years of service. For the years
ended
December 31, 2006, 2005, and 2004, Company contributions totaled $423,000,
$410,000, and $398,000, respectively.
The
non-qualified deferred compensation plan was established to allow eligible
employees to defer the payment of a percentage of their compensation and
to
provide for additional Company contributions. Company contributions are subject
to a vesting schedule based on the employee's years of service. For the years
ended December 31, 2006, 2005, and 2004, Company contributions totaled $32,000,
$50,000, and $78,000, respectively.
(C) Defined
Benefit Postretirement Plans
The
Company sponsors two health care plans that were amended in 2004 to provide
postretirement benefits to certain fully-vested individuals. The plans are
unfunded. The Company uses a December 31 measurement date for the plans.
A
detail of plan disclosures related to these plans is provided
below:
Obligations
and Funded Status
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
Changes
in projected benefit obligations:
|
|
|
|
|
|
Projected
benefit obligations at beginning of year
|
|
$
|
1,746
|
|
|
1,671
|
|
Interest
cost
|
|
|
117
|
|
|
100
|
|
Actuarial
gain
|
|
|
244
|
|
|
(8
|
)
|
Benefits
paid
|
|
|
(54
|
)
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
Projected
benefit obligations at end of year
|
|
|
2,053
|
|
|
1,746
|
|
|
|
|
|
|
|
|
|
Changes
in plan assets:
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
|
-
|
|
|
-
|
|
Contributions
|
|
|
54
|
|
|
17
|
|
Benefits
paid
|
|
|
(54
|
)
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at end of year
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Funded
status at end of year
|
|
$
|
(2,053
|
)
|
|
(1,746
|
)
|
|
|
December
31,
|
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Amounts
recognized in the Company's consolidated
|
|
|
|
financial
statements:
|
|
|
|
Assets
|
|
$
|
-
|
|
Liabilities
|
|
|
(2,053
|
)
|
|
|
|
|
|
Net
amount recognized
|
|
$
|
(2,053
|
)
|
Amounts
recognized in accumulated other
|
|
|
|
comprehensive
income:
|
|
|
|
Net
gain
|
|
$
|
221
|
|
Prior
service cost
|
|
|
1,289
|
|
|
|
|
|
|
Net
amount recognized
|
|
$
|
1,510
|
|
Components
of Net Periodic Benefit Cost
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
Interest
cost
|
|
$
|
117
|
|
|
100
|
|
Amortization
of prior service costs
|
|
|
103
|
|
|
103
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$
|
220
|
|
|
203
|
|
Assumptions
A
weighted-average discount rate assumption of 6% was used to determine benefit
obligations and net periodic benefit cost as of and for the years ended December
31, 2006 and 2005. No assumption was made related to the expected long-term
return on plan assets as the plan is unfunded.
For
measurement purposes, an 8% annual rate of increase in the per capita cost
of
covered health care benefits was assumed for 2007 and future years.
Assumed
health care trend rates have a significant effect on the amounts reported
for
the health care plans. A 1% point change in assumed health care cost trend
rates
would have the following effects for the years ended December 31:
|
|
2006
|
|
2005
|
|
|
|
1%
Point
|
|
1%
Point
|
|
1%
Point
|
|
1%
Point
|
|
|
|
Increase
|
|
Decrease
|
|
Increase
|
|
Decrease
|
|
|
|
(In
thousands)
|
|
Effect
on total of service and interest
|
|
|
|
|
|
|
|
|
|
cost
components
|
|
$
|
27
|
|
|
(20
|
)
|
|
28
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
on postretirement benefit obligation
|
|
$
|
468
|
|
|
(357
|
)
|
|
503
|
|
|
(346
|
)
|
Plan
Assets
The
plans
are unfunded and therefore had no assets at December 31, 2006 and
2005.
Contributions
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in thousands):
2007
|
|
$
|
24
|
2008
|
|
|
26
|
2009
|
|
|
28
|
2010
|
|
|
30
|
2011
|
|
|
33
|
2012-2016
|
|
|
207
|
The
Company expects to recognize $1.1 million of net prior service cost and $0.5
million of net loss as net periodic benefit cost in 2007 for the defined
benefit plans.
(8)
SHORT-TERM BORROWINGS
The
Company has available a $40 million bank line of credit primarily for cash
management purposes relating to investment transactions. The Company is required
to maintain a collateral security deposit in trust with the sponsoring bank
equal to 120% of any outstanding liability. The Company had no outstanding
liabilities or collateral security deposits with the bank at December 31,
2006
or 2005.
(9)
COMMITMENTS AND CONTINGENCIES
(A)
Legal Proceedings
The
Company reached a settlement agreement with a class of plaintiffs who had
challenged bonus interest rates on certain Company annuity products. The
Company
vigorously defended the case and denied liability for the claims asserted
by the
plaintiff in reaching the settlement. The fairness of the settlement agreement
was granted final approval by the Court on February 18, 2004. There were
no
objectors and the order approving the settlement is final and non-appealable.
The settlement resulted in a $9.7 million pre-tax charge against 2003 earnings
from operations, which represented the maximum settlement fund liability.
During
2004, final payments were made to policyholders that opted to participate
in
this settlement resulting in cash payments totaling $3.2 million pre-tax
and an
increase of $2.3 million to existing contractholder account balances. Thus,
final settlement totaled approximately $5.5 million pre-tax compared to the
$9.7
million initially recorded.
On
August
26, 2004, the Company entered into an agreement to settle a lawsuit concerning
an investment made by the Company more than ten years ago. The investment
was
sold in 1997. As the result of this settlement, the Company received $2.2
million, which is included in the Company's revenues and pre-tax earnings
for
the quarter ending September 30, 2004; the lawsuit has been dismissed with
prejudice. The lawsuit had been pending for several years, and the costs
incurred by the Company in prosecuting the lawsuit have previously been included
in the Company's financial statements as such costs were incurred under the
category "other operating expenses".
In
the
course of an audit of a charitable tax-exempt foundation, the Internal Revenue
Service ("IRS") raised an issue under the special provisions of the Internal
Revenue Code ("IRC") governing tax-exempt private foundations as to certain
interest-bearing loans from the Company to another corporation in which the
tax-exempt foundation owns stock. The issue is whether such transactions
constitute indirect self-dealing by the foundation, the result of which would
be
excise taxes on the Company by virtue of its participation in such transactions.
By letter to the Company dated August 21, 2003, the IRS proposed an initial
excise tax liability in the total amount approximating one million dollars
as a
result of such transactions. The Company disagrees with the IRS analysis.
The
Company is contesting the matter and expects to prevail on the merits. On
October 14, 2003, in response to the IRS letter, the Company requested that
this
issue instead be referred to the IRS National Office for technical advice.
The
IRS audit team agreed and the matter was referred in November of 2003 to
the IRS
National Office. Such technical advice when issued by the IRS National Office
will be in the form of a memorandum analyzing the issue which will be binding
on
the IRS audit team.
The
Company has been a plaintiff in various lawsuits and has entered into agreements
to settle some of these lawsuits or a portion of these lawsuits. As a result
of
these settlements, the Company received $5.5 million, which is included in
the
Company’s revenues and pre-tax earnings for the year ended December 31,
2006.
The
Company is a defendant in three class action lawsuits, and one class has
been
certified regarding an alleged violation of section 17200 of the California
Business and Professions Code. Management believes that the Company has good
and
meritorious defenses and intends to continue to vigorously defend itself
against
these claims.
The
Company is involved or may become involved in various other legal actions,
in
the normal course of business, in which claims for alleged economic and punitive
damages have been or may be asserted, some for substantial amounts. Although
there can be no assurances, at the present time, the Company does not anticipate
that the ultimate liability arising from potential, pending, or threatened
legal
actions, will have a material adverse effect on the financial condition or
operating results of the Company.
(B)
Financial Instruments
In
order
to meet the financing needs of its customers in the normal course of business,
the Company is a party to financial instruments with off-balance sheet risk.
These financial instruments are commitments to extend credit which involve
elements of credit and interest rate risk in excess of the amounts recognized
in
the consolidated balance sheet.
The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual amounts, assuming that the amounts are fully
advanced and that collateral or other security is of no value. Commitments
to
extend credit are legally binding agreements to lend to a customer that
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Commitments do not necessarily represent future
liquidity requirements, as some could expire without being drawn upon. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The Company controls
the credit risk of these transactions through credit approvals, limits, and
monitoring procedures. The Company had commitments to extend credit relating
to
mortgage loans totaling $5.8 million at December 31, 2006. The Company evaluates
each customer's creditworthiness on a case-by-case basis. In addition, the
Company had commitments at December 31, 2006, of approximately $8.0 million
which were approved by the Company’s Board of Directors for the construction of
a nursing home facility in Central Texas.
(C)
Guaranty Association Assessments
The
Company is subject to state guaranty association assessments in all states
in
which it is licensed to do business. These associations generally guarantee
certain levels of benefits payable to resident policyholders of insolvent
insurance companies. Many states allow premium tax credits for all or a portion
of such assessments, thereby allowing potential recovery of these payments
over
a period of years. However, several states do not allow such credits.
The
Company estimates its liabilities for guaranty association assessments by
using
the latest information available from the National Organization of Life and
Health Insurance Guaranty Associations. The Company monitors and revises
its
estimates for assessments as additional information becomes available which
could result in changes to the estimated liabilities. As of December 31,
2006
and 2005, liabilities for guaranty association assessments totaled $1.7 million
and $2.1 million, respectively. Other operating expenses related to state
guaranty association assessments were minimal for the years ended December
31,
2006, 2005, and 2004.
(D)
Leases
The
Company leases its executive office building and various computer and other
office related equipment under operating leases. Rental expenses for these
leases for the years ended December 31, 2006, 2005, and 2004 were $0.9 million,
$0.9 million, and $1.0 million, respectively. Total future annual lease
obligations as of December 31, 2006, are as follows (in thousands):
2007
|
|
$
|
808
|
|
2008
|
|
|
650
|
|
2009
|
|
|
650
|
|
2010
|
|
|
217
|
|
2011
|
|
|
-
|
|
2012
and thereafter, in aggregate
|
|
|
-
|
|
|
|
|
|
|
Total
|
|
$
|
2,325
|
|
(E)
Compensation Plan
Effective
January 1, 2006, the Company implemented a Non-Qualified Deferred Compensation
Plan to provide incentive bonuses to eligible agents. Agents qualify for
participation by meeting certain sales goals each year. Company contributions
are subject to a vesting schedule based on the agents’ years of qualification in
the plan. The Company expects to contribute $0.4 million to the plan in
2007.
(10)
STOCKHOLDERS' EQUITY
(A)
Changes in Common Stock Shares Outstanding
Details
of changes in shares of common stock outstanding are provided
below.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Common
stock shares outstanding:
|
|
|
|
|
|
|
|
Shares
outstanding at beginning of year
|
|
|
3,613
|
|
|
3,584
|
|
|
3,547
|
|
Shares
exercised under stock option plan
|
|
|
8
|
|
|
29
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
outstanding at end of year
|
|
|
3,621
|
|
|
3,613
|
|
|
3,584
|
|
(B)
Dividend Restrictions
The
Company is restricted by state insurance laws as to dividend amounts which
may
be paid to stockholders without prior approval from the Colorado Division
of
Insurance. The restrictions are based on statutory earnings and surplus levels
of the Company. The maximum dividend payment which may be made without prior
approval in 2007 is $70.1 million. On August 18, 2006, the Board of Directors
of
the Company declared a cash dividend to stockholders on record October 31,
2006
and payable November 29, 2006. The dividends approved were $0.36 per common
share to Class A stockholders and $0.18 per common share to Class B
stockholders.
(C)
Regulatory Capital Requirements
The
Colorado Division of Insurance imposes minimum risk-based capital requirements
on insurance companies that were developed by the National Association of
Insurance Commissioners ("NAIC"). The formulas for determining the amount
of
risk-based capital ("RBC") specify various weighting factors that are applied
to
statutory financial balances or various levels of activity based on the
perceived degree of risk. Regulatory compliance is determined by a ratio
of the
Company's regulatory total adjusted capital to its authorized control level
RBC,
as defined by the NAIC. Companies below specific trigger points or ratios
are
classified within certain levels, each of which requires specified corrective
action. The Company's current statutory capital and surplus is significantly
in
excess of all RBC requirements.
(D)
Share-Based Payments
The
Company has a stock and incentive plan ("Plan") which provides for the grant
of
any or all of the following types of awards to eligible employees: (1) stock
options, including incentive stock options and nonqualified stock options;
(2)
stock appreciation rights, in tandem with stock options or freestanding;
(3)
restricted stock; (4) incentive awards; and (5) performance awards. The Plan
began on April 21, 1995, and was to terminate on April 20, 2005, unless
terminated earlier by the Board of Directors. The Plan was amended on June
25,
2004 to extend the termination date to April 20, 2010. The number of shares
of
Class A, $1.00 par value, common stock which may be issued under the Plan,
or as
to which stock appreciation rights or other awards may be granted, may not
exceed 300,000. These shares may be authorized and unissued shares or treasury
shares. The Company has only issued nonqualified stock options.
All
of
the employees of the Company and its subsidiaries are eligible to participate
in
the Plan. In addition, directors of the Company, other than Compensation
and
Stock Option Committee members, are eligible for restricted stock awards,
incentive awards, and performance awards. Company directors, including members
of the Compensation and Stock Option Committee, are eligible for
nondiscretionary stock options. The directors' stock options vest 20% annually
following one full year of service to the Company from the date of grant.
The
officers' stock options vest 20% annually following three full years of service
to the Company from the date of grant. Options issued expire after ten years.
No
awards were issued in 2006 or 2005.
Through
December 31, 2005, the Company classified the Plan as equity awards, and
as
such, utilized the grant date fair value method to measure compensation.
Effective March 10, 2006, as more fully described below, the Company's Plan
classification was changed to liability and accordingly, the Company began
using
the current fair value method to measure compensation cost. Nonqualified
stock
options were not issued in 2006 or 2005. The Committee approved the issuance
of
nonqualified stock options to selected officers of the Company during 2004
totaling 56,750. Additionally, during 2004 the Committee granted 10,000
nonqualified, nondiscretionary stock options to Company directors. The
directors' stock options vest 20% annually following one full year of service
to
the Company from the date of grant. The officers' stock options vest 20%
annually following three full years of service to the Company from the date
of
grant. The exercise prices of the stock options were set at the fair market
values of the common stock on the dates of grant. A summary of shares available
for grant and stock option activity is detailed below.
|
|
|
|
Options
Outstanding
|
|
|
|
Shares
|
|
|
|
Weighted-
|
|
|
|
Available
|
|
|
|
Average
|
|
|
|
For
Grant
|
|
Shares
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003
|
|
|
85,507
|
|
|
159,173
|
|
$
|
82.67
|
|
Stock
Options:
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(66,750
|
)
|
|
66,750
|
|
|
150.00
|
|
Exercised
|
|
|
-
|
|
|
(37,530
|
)
|
|
66.55
|
|
Forfeited
|
|
|
1,530
|
|
|
(1,530
|
)
|
|
94.83
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
|
20,287
|
|
|
186,863
|
|
|
109.86
|
|
Stock
Options:
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
(28,984
|
)
|
|
67.38
|
|
Forfeited
|
|
|
920
|
|
|
(920
|
)
|
|
123.58
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
21,207
|
|
|
156,959
|
|
|
117.62
|
|
Stock
Options:
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
(23,224
|
)
|
|
81.83
|
|
Forfeited
|
|
|
5,270
|
|
|
(5,270
|
)
|
|
144.29
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
26,477
|
|
|
128,465
|
|
$
|
123.00
|
|
The
total
intrinsic value of options exercised was $3.3 million, $3.3 million, and
$3.4
million for the years ended December 31, 2006, 2005, and 2004, respectively.
The
total share-based liabilities paid were $2.2 million for the year ended
2006.
A
summary
of vested and exercisable options and weighted-average exercise prices is
detailed below.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Vested
and exercisable options
|
|
|
56,229
|
|
|
68,023
|
|
|
77,489
|
|
Weighted-average
exercise prices
|
|
$
|
103.47
|
|
|
96.21
|
|
|
83.55
|
|
The
following table summarizes information about stock options outstanding at
December 31, 2006.
|
|
Options
Outstanding
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
Number
|
|
Remaining
|
|
Options
|
|
|
Outstanding
|
|
Contractual
Life
|
|
Exercisable
|
Exercise
prices:
|
|
|
|
|
|
|
$
|
85.13
|
|
1,581
|
|
0.3
years
|
|
1,581
|
|
105.25
|
|
20,630
|
|
1.3
years
|
|
20,630
|
|
112.38
|
|
6,800
|
|
1.5
years
|
|
6,800
|
|
92.13
|
|
30,954
|
|
4.3
years
|
|
16,218
|
|
95.00
|
|
7,200
|
|
4.5
years
|
|
7,200
|
|
150.00
|
|
61,300
|
|
7.4
years
|
|
3,800
|
|
|
|
|
|
|
|
Totals
|
|
128,465
|
|
|
|
56,229
|
|
|
|
|
|
|
|
Aggregate
intrinsic value
|
|
|
|
|
|
|
(in
thousands)
|
$
|
13,764
|
|
|
$
|
7,122
|
The
aggregate intrinsic value in the table above is based on the closing stock
price
of $230.14 per share on December 31, 2006.
In
estimating the fair value of the options outstanding at December 31, the
Company
employed the Black-Scholes option pricing model with assumptions as detailed
below.
Expected
term of options
|
|
2
to 6 years
|
Expected
volatility:
|
|
|
Range
|
|
15.60%
to 24.43%
|
Weighted-average
|
|
19.81%
|
Expected
dividends
|
|
-
|
Risk-free
rate:
|
|
|
Range
|
|
4.69%
to 5.01%
|
Weighted-average
|
|
4.8%
|
The
Company reviewed the contractual term relative to the options as well as
perceived future behavior patterns of exercise. Volatility is based on
historical volatility over the expected term.
The
pre-tax compensation cost recognized in the financial statements related
to the
Plan was $13.1 million, $0.9 million, and $0.9 million for the years ended
December 31, 2006, 2005, and 2004, respectively. The related tax benefit
recognized was $4.6 million and $0.2 million for the years ended December
31,
2006 and 2005, respectively.
Effective
March 10, 2006, the Company adopted and implemented a limited stock buy-back
program which provides option holders the additional alternative of selling
shares acquired through the exercise of options directly back to the Company.
Option holders may elect to sell such acquired shares back to the Company
at any
time within ninety (90) days after the exercise of options at the prevailing
market price as of the date of notice of election. The buy-back program did
not
alter the terms and conditions of the Plan, however the program necessitated
a
change in accounting from the equity classification to the liability
classification. The modification affected 35 plan participants who had options
outstanding on the date of modification and resulted in $11.7 million of
total
incremental pre-tax compensation cost due to the change from the equity to
liability classification.
As
of
December 31, 2006, the total compensation cost related to nonvested options
not
yet recognized was $2.9 million. This amount is expected to be recognized
over a
weighted-average period of 2 years. The Company recognizes compensation cost
over the graded vesting periods.
As
of
December 31, 2006 and 2005, the total cash received from the exercise of
options
under the Plan was $0.5 million and $2.0 million, respectively.
The
Plan
offers two alternatives to option holders for exercising options. In the
first
alternative, option holders have the choice of either holding shares acquired
through exercising options, selling the acquired shares in the open market,
or
requesting a broker-assisted cashless exercise of all or part of the options
exercised. A broker-assisted cashless exercise simultaneously executes the
exercise of the options and the sale of acquired shares in the open market
with
the net proceeds payable to the option holder.
In
the
second alternative, option holders have the option of selling shares acquired
through the exercise of options directly back to the Company. Option holders
may
elect to sell such acquired shares back to the Company at any time within
ninety
(90) days after the exercise of options at the prevailing market price as
of the
date set forth in the notice of election.
(11)
EARNINGS PER SHARE
Earnings
per share amounts for the Company are presented using two different
computations. Basic earnings per share excludes dilutive effects of certain
securities or contracts, such as stock options, and is computed by dividing
income available to common stockholders by the weighted-average number of
common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in
the
issuance of common stock that then shared in the earnings of the entity.
Stock
options not included in the weighted average number of diluted shares because
such shares would have been anti-dilutive were immaterial. The following
table
sets forth the computations of basic and diluted earnings per
share.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands except per share amounts)
|
|
Numerator
for Basic and Diluted Earnings Per Share:
|
|
|
|
|
|
|
|
Earnings
from continuing operations
|
|
|
|
|
|
|
|
available
to common stockholders
|
|
|
|
|
|
|
|
before
and after assumed conversions:
|
|
|
|
|
|
|
|
Earnings
before cumulative effect of change
|
|
|
|
|
|
|
|
in
accounting principle
|
|
$
|
76,343
|
|
|
77,267
|
|
|
67,472
|
|
Cumulative
effect of change in accounting principle
|
|
|
-
|
|
|
-
|
|
|
54,697
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
76,343
|
|
|
77,267
|
|
|
122,169
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share -
|
|
|
|
|
|
|
|
|
|
|
weighted-average
shares
|
|
|
3,620
|
|
|
3,603
|
|
|
3,565
|
|
Effect
of dilutive stock options
|
|
|
36
|
|
|
35
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share -
|
|
|
|
|
|
|
|
|
|
|
adjusted
weighted-average shares
|
|
|
|
|
|
|
|
|
|
|
for
assumed conversions
|
|
|
3,656
|
|
|
3,638
|
|
|
3,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
Earnings
before cumulative effect of change
|
|
|
|
|
|
|
|
|
|
|
in
accounting principle
|
|
$
|
21.09
|
|
|
21.45
|
|
|
18.93
|
|
Cumulative
effect of change in accounting principle
|
|
|
-
|
|
|
-
|
|
|
15.34
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
21.09
|
|
|
21.45
|
|
|
34.27
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
Earnings
before cumulative effect of change
|
|
|
|
|
|
|
|
|
|
|
in
accounting principle
|
|
$
|
20.88
|
|
|
21.24
|
|
|
18.73
|
|
Cumulative
effect of change in accounting principle
|
|
|
-
|
|
|
-
|
|
|
15.18
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
20.88
|
|
|
21.24
|
|
|
33.91
|
|
(12)
COMPREHENSIVE INCOME
SFAS
No.
130, Reporting
Comprehensive Income
establishes standards for reporting and display of comprehensive income and
its
components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. This Statement requires that all items
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with
the same prominence as other financial statements. This statement requires
that
an enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position.
SFAS
No.
130 affects the Company's reporting presentation of certain items such as
foreign currency translation adjustments, unrealized gains and losses on
investment securities, and minimum pension liabilities. These items are
reflected as components of other comprehensive income, as reported in the
accompanying consolidated financial statements. Components of other
comprehensive income and the related tax effect are provided below for 2006,
2005, and 2004.
|
|
Amounts
|
|
Tax
|
|
Amounts
|
|
|
|
Before
|
|
(Expense)
|
|
Net
of
|
|
|
|
Taxes
|
|
Benefit
|
|
Taxes
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on securities, net of effects
|
|
|
|
|
|
|
|
of
deferred costs of $(12,702):
|
|
|
|
|
|
|
|
Net
unrealized holding losses
|
|
|
|
|
|
|
|
arising
during period
|
|
$
|
(6,988
|
)
|
|
2,446
|
|
|
(4,542
|
)
|
Reclassification
adjustment for net
|
|
|
|
|
|
|
|
|
|
|
gains
included in net earnings
|
|
|
(4,209
|
)
|
|
1,473
|
|
|
(2,736
|
)
|
Amortization
of net unrealized losses
|
|
|
|
|
|
|
|
|
|
|
related
to transferred securities
|
|
|
39
|
|
|
(14
|
)
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized losses on securities
|
|
|
(11,158
|
)
|
|
3,905
|
|
|
(7,253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(274
|
)
|
|
96
|
|
|
(178
|
)
|
Minimum
pension liability adjustment
|
|
|
(1,793
|
)
|
|
627
|
|
|
(1,166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss)
|
|
$
|
(13,225
|
)
|
|
4,628
|
|
|
(8,597
|
)
|
2005:
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on securities, net of effects
|
|
|
|
|
|
|
|
of
deferred costs of $(26,704):
|
|
|
|
|
|
|
|
Net
unrealized holding gains
|
|
|
|
|
|
|
|
arising
during period
|
|
$
|
(20,919
|
)
|
|
7,322
|
|
|
(13,597
|
)
|
Reclassification
adjustment for net
|
|
|
|
|
|
|
|
|
|
|
losses
included in net earnings
|
|
|
(1,930
|
)
|
|
676
|
|
|
(1,254
|
)
|
Amortization
of net unrealized losses
|
|
|
|
|
|
|
|
|
|
|
related
to transferred securities
|
|
|
28
|
|
|
(10
|
)
|
|
18
|
|
Unrealized
gains on securities transferred
|
|
|
|
|
|
|
|
|
|
|
during
period from held to maturity
|
|
|
|
|
|
|
|
|
|
|
to
available for sale
|
|
|
311
|
|
|
(109
|
)
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gains on securities
|
|
|
(22,510
|
)
|
|
7,879
|
|
|
(14,631
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
200
|
|
|
(70
|
)
|
|
130
|
|
Minimum
pension liability adjustment
|
|
|
(545
|
)
|
|
191
|
|
|
(354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
$
|
(22,855
|
)
|
|
8,000
|
|
|
(14,855
|
)
|
|
|
Amounts
|
|
Tax
|
|
Amounts
|
|
|
|
Before
|
|
(Expense)
|
|
Net
of
|
|
|
|
Taxes
|
|
Benefit
|
|
Taxes
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
2004:
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on securities, net of effects
|
|
|
|
|
|
|
|
of
deferred costs of $92:
|
|
|
|
|
|
|
|
Net
unrealized holding gains
|
|
|
|
|
|
|
|
arising
during period
|
|
$
|
2,467
|
|
|
(864
|
)
|
|
1,603
|
|
Reclassification
adjustment for net
|
|
|
|
|
|
|
|
|
|
|
losses
included in net earnings
|
|
|
846
|
|
|
(296
|
)
|
|
550
|
|
Amortization
of net unrealized losses
|
|
|
|
|
|
|
|
|
|
|
related
to transferred securities
|
|
|
377
|
|
|
(132
|
)
|
|
245
|
|
Unrealized
losses on securities transferred
|
|
|
|
|
|
|
|
|
|
|
during
period from held to maturity
|
|
|
|
|
|
|
|
|
|
|
to
available for sale
|
|
|
256
|
|
|
(89
|
)
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gains on securities
|
|
|
3,946
|
|
|
(1,381
|
)
|
|
2,565
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(196
|
)
|
|
69
|
|
|
(127
|
)
|
Minimum
pension liability adjustment
|
|
|
(726
|
)
|
|
254
|
|
|
(472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
$
|
3,024
|
|
|
(1,058
|
)
|
|
1,966
|
|
(13)
SEGMENT AND OTHER OPERATING INFORMATION
(A)
Operating Segment Information
Under
SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information,
the
Company defines its reportable operating segments as domestic life insurance,
international life insurance, and annuities. The Company's segments are
organized based on product types and geographic marketing areas. In addition,
the Company regularly evaluates operating performance using non-GAAP financial
measures which exclude or segregate realized investment gains and losses
from
operating revenues and earnings. The Company believes that the presentation
of
these non-GAAP financial measures enhances the understanding of the Company's
results of operations by highlighting the results from ongoing operations
and
the underlying profitability factors of the Company's business. The Company
excludes or segregates realized investment gains and losses because such
items
are often the result of events which may or may not be at the Company's
discretion and the fluctuating effects of these items could distort trends
in
the underlying profitability of the Company's business.
A
summary
of segment information, prepared in accordance with SFAS No. 131, is provided
below.
|
|
Domestic
|
|
International
|
|
|
|
|
|
|
|
|
|
Life
|
|
Life
|
|
|
|
All
|
|
|
|
|
|
Insurance
|
|
Insurance
|
|
Annuities
|
|
Others
|
|
Totals
|
|
|
|
(In
thousands)
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Balance Sheet Items:
|
|
|
|
|
|
|
|
|
|
Deferred
policy acquisition
|
|
|
|
|
|
|
|
|
|
|
|
costs
and sales inducements
|
|
$
|
50,966
|
|
|
182,268
|
|
|
503,870
|
|
|
-
|
|
|
737,104
|
|
Total
segment assets
|
|
|
381,490
|
|
|
715,064
|
|
|
5,467,733
|
|
|
103,087
|
|
|
6,667,374
|
|
Future
policy benefits
|
|
|
314,039
|
|
|
498,997
|
|
|
4,720,421
|
|
|
-
|
|
|
5,533,457
|
|
Other
policyholder liabilities
|
|
|
7,796
|
|
|
18,480
|
|
|
86,173
|
|
|
-
|
|
|
112,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Income Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues
|
|
$
|
22,731
|
|
|
78,005
|
|
|
21,389
|
|
|
-
|
|
|
122,125
|
|
Net
investment income
|
|
|
20,462
|
|
|
28,530
|
|
|
323,326
|
|
|
7,450
|
|
|
379,768
|
|
Other
income
|
|
|
29
|
|
|
78
|
|
|
5,950
|
|
|
11,247
|
|
|
17,304
|
|
Total
revenues
|
|
|
43,222
|
|
|
106,613
|
|
|
350,665
|
|
|
18,697
|
|
|
519,197
|
|
Life
and other policy benefits
|
|
|
13,656
|
|
|
18,161
|
|
|
3,424
|
|
|
-
|
|
|
35,241
|
|
Amortization
of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
policy
acquisition costs
|
|
|
7,313
|
|
|
23,075
|
|
|
59,970
|
|
|
-
|
|
|
90,358
|
|
Universal
life and investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
annuity
contract interest
|
|
|
9,168
|
|
|
25,675
|
|
|
178,893
|
|
|
-
|
|
|
213,736
|
|
Other
operating expenses
|
|
|
12,630
|
|
|
21,051
|
|
|
21,847
|
|
|
10,181
|
|
|
65,709
|
|
Federal
income taxes
|
|
|
158
|
|
|
6,460
|
|
|
29,972
|
|
|
2,950
|
|
|
39,540
|
|
Total
expenses
|
|
|
42,925
|
|
|
94,422
|
|
|
294,106
|
|
|
13,131
|
|
|
444,584
|
|
Segment
earnings
|
|
$
|
297
|
|
|
12,191
|
|
|
56,559
|
|
|
5,566
|
|
|
74,613
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Balance Sheet Items:
|
|
|
|
|
|
|
|
|
|
Deferred
policy acquisition
|
|
|
|
|
|
|
|
|
|
|
|
costs
and sales inducements
|
|
$
|
46,055
|
|
|
164,989
|
|
|
489,535
|
|
|
-
|
|
|
700,579
|
|
Total
segment assets
|
|
|
366,939
|
|
|
631,477
|
|
|
5,256,146
|
|
|
94,064
|
|
|
6,348,626
|
|
Future
policy benefits
|
|
|
307,730
|
|
|
444,513
|
|
|
4,563,676
|
|
|
-
|
|
|
5,315,919
|
|
Other
policyholder liabilities
|
|
|
10,135
|
|
|
16,936
|
|
|
73,486
|
|
|
-
|
|
|
100,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Income Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues
|
|
$
|
22,172
|
|
|
70,379
|
|
|
18,816
|
|
|
-
|
|
|
111,367
|
|
Net
investment income
|
|
|
19,958
|
|
|
23,123
|
|
|
258,485
|
|
|
8,647
|
|
|
310,213
|
|
Other
income
|
|
|
35
|
|
|
75
|
|
|
588
|
|
|
8,881
|
|
|
9,579
|
|
Total
revenues
|
|
|
42,165
|
|
|
93,577
|
|
|
277,889
|
|
|
17,528
|
|
|
431,159
|
|
Life
and other policy benefits
|
|
|
14,932
|
|
|
21,232
|
|
|
2,998
|
|
|
-
|
|
|
39,162
|
|
Amortization
of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
policy
acquisition costs
|
|
|
5,798
|
|
|
20,389
|
|
|
61,768
|
|
|
-
|
|
|
87,955
|
|
Universal
life and investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
annuity
contract interest
|
|
|
8,842
|
|
|
18,118
|
|
|
123,732
|
|
|
-
|
|
|
150,692
|
|
Other
operating expenses
|
|
|
8,349
|
|
|
13,359
|
|
|
17,019
|
|
|
7,622
|
|
|
46,349
|
|
Federal
income taxes
|
|
|
1,435
|
|
|
6,920
|
|
|
24,457
|
|
|
3,347
|
|
|
36,159
|
|
Total
expenses
|
|
|
39,356
|
|
|
80,018
|
|
|
229,974
|
|
|
10,969
|
|
|
360,317
|
|
Segment
earnings
|
|
$
|
2,809
|
|
|
13,559
|
|
|
47,915
|
|
|
6,559
|
|
|
70,842
|
|
|
|
Domestic
|
|
International
|
|
|
|
|
|
|
|
|
|
Life
|
|
Life
|
|
|
|
All
|
|
|
|
|
|
Insurance
|
|
Insurance
|
|
Annuities
|
|
Others
|
|
Totals
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004:
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Balance Sheet Items:
|
|
|
|
|
|
|
|
|
|
Deferred
policy acquisition
|
|
|
|
|
|
|
|
|
|
|
|
costs
and sale inducements
|
|
$
|
46,007
|
|
|
145,756
|
|
|
452,695
|
|
|
-
|
|
|
644,458
|
|
Total
segment assets
|
|
|
361,176
|
|
|
568,723
|
|
|
4,960,837
|
|
|
84,481
|
|
|
5,975,217
|
|
Future
policy benefits
|
|
|
301,552
|
|
|
405,490
|
|
|
4,319,816
|
|
|
-
|
|
|
5,026,858
|
|
Other
policyholder liabilities
|
|
|
10,139
|
|
|
9,748
|
|
|
55,350
|
|
|
-
|
|
|
75,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Income Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues
|
|
$
|
23,324
|
|
|
64,239
|
|
|
15,975
|
|
|
-
|
|
|
103,538
|
|
Net
investment income
|
|
|
20,283
|
|
|
22,821
|
|
|
266,151
|
|
|
6,588
|
|
|
315,843
|
|
Other
income
|
|
|
509
|
|
|
790
|
|
|
1,701
|
|
|
8,259
|
|
|
11,259
|
|
Total
revenues
|
|
|
44,116
|
|
|
87,850
|
|
|
283,827
|
|
|
14,847
|
|
|
430,640
|
|
Life
and other policy benefits
|
|
|
15,141
|
|
|
16,626
|
|
|
2,846
|
|
|
-
|
|
|
34,613
|
|
Amortization
of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
policy
acquisition costs
|
|
|
9,098
|
|
|
21,837
|
|
|
57,798
|
|
|
-
|
|
|
88,733
|
|
Universal
life and investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
annuity
contract interest
|
|
|
8,585
|
|
|
18,631
|
|
|
146,099
|
|
|
-
|
|
|
173,315
|
|
Other
operating expenses
|
|
|
7,479
|
|
|
12,418
|
|
|
8,353
|
|
|
7,191
|
|
|
35,441
|
|
Federal
income taxes
|
|
|
1,291
|
|
|
6,205
|
|
|
23,258
|
|
|
2,590
|
|
|
33,344
|
|
Total
expenses
|
|
|
41,594
|
|
|
75,717
|
|
|
238,354
|
|
|
9,781
|
|
|
365,446
|
|
Segment
earnings
|
|
$
|
2,522
|
|
|
12,133
|
|
|
45,473
|
|
|
5,066
|
|
|
65,194
|
|
Reconciliations
of segment information to the Company's consolidated financial statements
are
provided below.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Premiums
and Other Revenue:
|
|
|
|
|
|
|
|
Premiums
and contract revenues
|
|
$
|
122,125
|
|
|
111,367
|
|
|
103,538
|
|
Net
investment income
|
|
|
379,768
|
|
|
310,213
|
|
|
315,843
|
|
Other
income
|
|
|
17,304
|
|
|
9,579
|
|
|
11,259
|
|
Realized
gains on investments
|
|
|
2,662
|
|
|
9,884
|
|
|
3,506
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated premiums and other revenue
|
|
$
|
521,859
|
|
|
441,043
|
|
|
434,146
|
|
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Federal
Income Taxes:
|
|
|
|
|
|
|
|
Total
segment Federal income taxes
|
|
$
|
39,540
|
|
|
36,159
|
|
|
33,344
|
|
Taxes
on realized gains on investments
|
|
|
932
|
|
|
3,459
|
|
|
1,228
|
|
Taxes
on cumulative effect of change in
|
|
|
|
|
|
|
|
|
|
|
accounting
principle
|
|
|
-
|
|
|
-
|
|
|
29,452
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
taxes on consolidated net earnings
|
|
$
|
40,472
|
|
|
39,618
|
|
|
64,024
|
|
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Net
Earnings:
|
|
|
|
|
|
|
|
Total
segment earnings
|
|
$
|
74,613
|
|
|
70,842
|
|
|
65,194
|
|
Realized
gains on investments, net of taxes
|
|
|
1,730
|
|
|
6,425
|
|
|
2,278
|
|
Cumulative
effect of change in accounting
|
|
|
|
|
|
|
|
|
|
|
principle,
net of taxes
|
|
|
-
|
|
|
-
|
|
|
54,697
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated net earnings
|
|
$
|
76,343
|
|
|
77,267
|
|
|
122,169
|
|
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
Total
segment assets
|
|
$
|
6,667,374
|
|
|
6,348,626
|
|
|
5,975,217
|
|
Other
unallocated assets
|
|
|
26,069
|
|
|
20,382
|
|
|
16,468
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated assets
|
|
$
|
6,693,443
|
|
|
6,369,008
|
|
|
5,991,685
|
|
(B)
Geographic Information
A
significant portion of the Company's premiums and contract revenues are from
countries other than the United States. Premiums and contract revenues detailed
by country are provided below.
|
|
Years
Ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
48,561
|
|
|
42,403
|
|
|
40,420
|
|
Brazil
|
|
|
16,851
|
|
|
12,731
|
|
|
10,125
|
|
Taiwan
|
|
|
9,052
|
|
|
8,398
|
|
|
7,240
|
|
Argentina
|
|
|
8,811
|
|
|
8,881
|
|
|
9,067
|
|
Chile
|
|
|
8,324
|
|
|
8,338
|
|
|
7,973
|
|
Peru
|
|
|
7,844
|
|
|
7,905
|
|
|
7,953
|
|
Other
foreign countries
|
|
|
36,173
|
|
|
35,085
|
|
|
32,929
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
excluding reinsurance premiums
|
|
|
135,616
|
|
|
123,741
|
|
|
115,707
|
|
Reinsurance
premiums
|
|
|
(13,491
|
)
|
|
(12,374
|
)
|
|
(12,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
premiums and contract revenues
|
|
$
|
122,125
|
|
|
111,367
|
|
|
103,538
|
|
Premiums
and contract revenues are attributed to countries based on the location of
the
policyholder. The Company has no significant assets, other than financial
instruments, located in countries other than the United States.
(C)
Major Agency Relationships
A
significant portion of the Company's premiums and deposits were sold through
two
independent marketing agencies in recent years. Combined business from these
agencies accounted for approximately 21%, 24%, and 32% of total direct premium
revenues and universal life and annuity contract deposits in 2006, 2005,
and
2004, respectively.
(14)
FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS
No.
107, Disclosures
About Fair Values Of Financial Instruments,
requires disclosures of fair value information about financial instruments,
whether or not recognized in a company's balance sheet, for which it is
practicable to estimate a value. The following methods and assumptions were
used
by the Company in estimating its fair value disclosures for financial
instruments:
Investment
securities. Fair
values for investments in debt and equity securities are based on quoted
market
prices, where available. For securities not actively traded, fair values
are
estimated using values obtained from various independent pricing services.
In
the cases where prices are unavailable from these sources, values are estimated
by discounting expected future cash flows using a current market rate applicable
to the yield, credit quality, and maturity of the investments.
Cash
and short-term investments. The
carrying amounts reported in the balance sheet for these instruments approximate
their fair values.
Mortgage
and other loans. The
fair
values of performing mortgage and other loans are estimated by discounting
scheduled cash flows through the scheduled maturities of the loans, using
interest rates currently being offered for similar loans to borrowers with
similar credit ratings. Fair values for significant nonperforming loans are
based on recent internal or external appraisals. If appraisals are not
available, estimated cash flows are discounted using a rate commensurate
with
the risk associated with the estimated cash flows. Assumptions regarding
credit
risk, cash flows, and discount rates are judgmentally determined using available
market information and specific borrower information.
Policy
loans. The
fair
values for policy loans are calculated by discounting estimated cash flows
using
U.S. Treasury bill rates as of December 31, 2006 and 2005. The estimated
cash
flows include assumptions as to whether such loans will be repaid by the
policyholders or settled upon payment of death or surrender benefits on the
underlying insurance contracts. As a result, these assumptions incorporate
both
Company experience and mortality assumptions associated with such
contracts.
Derivatives.
Fair
values for indexed options are based on independent counterparty market
prices.
Life
interest in Libbie Shearn Moody Trust. The
fair
value of the life interest is estimated based on assumptions as to future
distributions from the Trust over the life expectancy of Mr. Robert L. Moody.
These estimated cash flows were discounted at a rate consistent with
uncertainties relating to the amount and timing of future cash distributions.
However, the Company has limited the fair value to the statutory admitted
value
of the Trust, as this is the maximum amount to be received from insurance
proceeds in the event of Mr. Moody's premature death.
Annuity
and supplemental contracts. Fair
values of the Company's liabilities for deferred annuity contracts are estimated
to be the cash surrender values of each contract. The cash surrender value
represents the policyholder's account balance less applicable surrender charges.
The fair values of liabilities for immediate annuity contracts and supplemental
contracts with and without life contingencies are estimated by discounting
estimated cash flows using U.S. Treasury bill rates as of December 31, 2006
and
2005.
Fair
values for the Company's insurance contracts other than annuity contracts
are
not required to be disclosed. This includes the Company's traditional and
universal life products. However, the fair values of liabilities under all
insurance contracts are taken into consideration in the Company's overall
management of interest rate risk, which minimizes exposure to changing interest
rates through the matching of investment maturities with amounts due under
insurance and annuity contracts.
The
carrying amounts and fair values of the Company's financial instruments are
as
follows:
|
|
December
31, 2006
|
|
December
31, 2005
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
|
Values
|
|
Values
|
|
Values
|
|
Values
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Investments
in debt and equity securities:
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
$
|
3,603,434
|
|
|
3,567,625
|
|
|
3,524,724
|
|
|
3,523,993
|
|
Securities
available for sale
|
|
|
1,902,568
|
|
|
1,902,568
|
|
|
1,744,727
|
|
|
1,744,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and short-term investments
|
|
|
49,901
|
|
|
49,901
|
|
|
31,355
|
|
|
31,355
|
|
Mortgage
loans
|
|
|
103,325
|
|
|
105,919
|
|
|
110,639
|
|
|
114,574
|
|
Policy
loans
|
|
|
86,856
|
|
|
120,120
|
|
|
86,385
|
|
|
111,034
|
|
Other
loans
|
|
|
3,048
|
|
|
3,152
|
|
|
6,929
|
|
|
7,261
|
|
Derivatives
|
|
|
72,012
|
|
|
72,012
|
|
|
39,405
|
|
|
39,405
|
|
Life
interest in Libbie Shearn
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moody
Trust
|
|
|
1,935
|
|
|
12,775
|
|
|
2,247
|
|
|
12,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
annuity contracts
|
|
$
|
4,469,843
|
|
|
3,671,116
|
|
|
4,314,972
|
|
|
3,588,411
|
|
Immediate
annuity and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
supplemental
contracts
|
|
|
309,306
|
|
|
295,546
|
|
|
294,635
|
|
|
286,800
|
|
Fair
value estimates are made at a specific point in time based on relevant market
information and information about the financial instruments. These estimates
do
not reflect any premium or discount that could result from offering for sale
at
one time the Company's entire holdings of a particular financial instrument.
Because no market exists for a portion of the Company's financial instruments,
fair value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective
in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
(15)
RELATED PARTY TRANSACTIONS
Robert
L.
Moody, Jr. ("Mr. Moody, Jr.") is the son of Robert L. Moody, the Company's
Chairman and Chief Executive Officer, and is the brother of Ross R. Moody,
the
Company's President and Chief Operating Officer, and of Russell S. Moody
and
Frances A. Moody-Dahlberg who serve as directors of National Western. Prior
to
January 1, 2006, Mr. Moody, Jr. was employed by the Company in an agency
marketing position for which he was paid an annual salary of $14,000 and
was
eligible to participate in the Company's benefit plans. Mr. Moody, Jr. resigned
as an employee effective December 31, 2005.
In
addition, Mr. Moody, Jr. wholly owns an insurance marketing organization
that
maintains agency contracts with National Western pursuant to which agency
commissions are paid in accordance with the Company's standard commission
schedules. Mr. Moody, Jr. also maintains an independent agent contract with
National Western for policies personally sold under which commissions are
paid
in accordance with standard commission schedules. In 2006, commissions paid
under these agency contracts aggregated approximately $181,500. In conjunction
with these agency contracts, Mr. Moody, Jr. may be eligible to attend Company
sales conferences and functions based upon meeting published minimum levels
of
qualifying sales production. In his capacity as an insurance marketing
organization with the Company, Mr. Moody, Jr. also receives product development
fees associated with a product line of the Company which amounted to $28,000
in
2006 and a marketing development allowance of $16,800 for the Company’s business
efforts in Puerto Rico.
Mr.
Moody, Jr. further serves as the agent of record for several of the Company's
benefit plans including the self-insured health plan for which Mr. Moody,
Jr.
provides utilization review services through a wholly-owned utilization review
company. In 2006, amounts paid to Mr. Moody, Jr. as commissions and service
fees
pertaining to the Company's benefit plans approximated $54,500.
During
2006, management fees totaling $470,000 were paid to Regent Management Services,
Limited Partnership ("RMS") for services provided to a downstream nursing
home
subsidiary of National Western. RMS is 1% owned by general partner RCC
Management Services, Inc. ("RCC"), and 99% owned by limited partner, Three
R
Trusts. RCC is 100% owned by the Three R Trusts. The Three R Trusts are four
Texas trusts for the benefit of the children of Robert L. Moody (Robert L.
Moody, Jr., Ross R. Moody, Russell S. Moody, and Frances A. Moody-Dahlberg).
Charles D. Milos, Senior Vice President-Mortgage Loans and Real Estate, and
director of the Company, is a director and Vice President of RCC. Ellen C.
Otte,
Assistant Secretary of the Company, is a director and secretary of
RCC.
The
Company holds a loan in the amount of $4.2 million at December 31, 2006 issued
to TMNY, LLC. As of the reporting date, Robert L. Moody owned 20.5% of TMNY,
LLC. The stated maturity on this loan is December 29, 2007.
The
Company holds a common stock investment totaling approximately 9.4% of the
issued and outstanding shares of Moody Bancshares, Inc. at December 31, 2006,
the latest available financial information. Moody Bancshares, Inc. owns 100%
of
the outstanding shares of Moody Bank Holding Company, Inc., which owns
approximately 98% of the outstanding shares of The Moody National Bank of
Galveston ("MNB"). The Company utilizes MNB for certain bank custodian services
as well as for certain administrative services with respect to the Company's
defined benefit and contribution plans. Robert L. Moody serves as Chairman
of
the Board and Chief Executive Officer of MNB. The ultimate owner of MNB is
the
Three R Trusts. Fees totaling $187,000, $188,000, and $147,000 were paid
to MNB
with respect to these services in 2006, 2005, and 2004,
respectively.
(16)
UNAUDITED QUARTERLY FINANCIAL DATA
Quarterly
results of operations for 2006 are summarized as follows:
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
(In
thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
136,255
|
|
|
100,643
|
|
|
129,880
|
|
|
155,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
$
|
14,045
|
|
|
22,227
|
|
|
16,072
|
|
|
23,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
3.88
|
|
|
6.13
|
|
|
4.44
|
|
|
6.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
3.84
|
|
|
6.07
|
|
|
4.40
|
|
|
6.56
|
|
Quarterly
results of operations for 2005 are summarized as follows:
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
(In
thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
93,376
|
|
|
117,997
|
|
|
120,027
|
|
|
109,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
$
|
16,202
|
|
|
24,098
|
|
|
20,169
|
|
|
16,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
4.51
|
|
|
6.70
|
|
|
5.59
|
|
|
4.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
4.47
|
|
|
6.64
|
|
|
5.53
|
|
|
4.60
|
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
SUMMARY
OF INVESTMENTS
OTHER
THAN INVESTMENTS IN RELATED PARTIES
December
31, 2006
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Fair
|
|
Balance
Sheet
|
|
Type
of Investment
|
|
Cost
|
|
Value
|
|
Amount
|
|
Fixed
maturity bonds:
|
|
|
|
|
|
|
|
Securities
held to maturity:
|
|
|
|
|
|
|
|
United
States government and government
|
|
|
|
|
|
|
|
agencies
and authorities
|
|
$
|
401,662
|
|
|
393,635
|
|
|
401,662
|
|
States,
municipalities, and political subdivisions
|
|
|
13,282
|
|
|
13,155
|
|
|
13,282
|
|
Foreign
governments
|
|
|
19,921
|
|
|
20,045
|
|
|
19,921
|
|
Public
utilities
|
|
|
349,994
|
|
|
351,852
|
|
|
349,994
|
|
Corporate
|
|
|
1,171,088
|
|
|
1,163,433
|
|
|
1,171,088
|
|
Mortgage-backed
|
|
|
1,552,611
|
|
|
1,530,745
|
|
|
1,552,611
|
|
Asset-backed
|
|
|
94,876
|
|
|
94,760
|
|
|
94,876
|
|
Total
securities held to maturity
|
|
|
3,603,434
|
|
|
3,567,625
|
|
|
3,603,434
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
United
States government and government
|
|
|
|
|
|
|
|
|
|
|
agencies
and authorities
|
|
|
45,893
|
|
|
45,910
|
|
|
45,910
|
|
States,
municipalities, and political subdivisions
|
|
|
43,090
|
|
|
45,345
|
|
|
45,345
|
|
Foreign
Government
|
|
|
10,526
|
|
|
10,634
|
|
|
10,634
|
|
Public
utilities
|
|
|
277,691
|
|
|
273,656
|
|
|
273,656
|
|
Corporate
|
|
|
1,221,165
|
|
|
1,213,674
|
|
|
1,213,674
|
|
Mortgage-backed
|
|
|
269,685
|
|
|
264,922
|
|
|
264,922
|
|
Asset-backed
|
|
|
26,977
|
|
|
27,224
|
|
|
27,224
|
|
Total
securities available for sale
|
|
|
1,895,027
|
|
|
1,881,365
|
|
|
1,881,365
|
|
Total
fixed maturity bonds
|
|
|
5,498,461
|
|
|
5,448,990
|
|
|
5,484,799
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
Common
stocks:
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
878
|
|
|
1,288
|
|
|
1,288
|
|
Banks,
trust and insurance companies (2)
|
|
|
165
|
|
|
260
|
|
|
260
|
|
Corporate
|
|
|
3,281
|
|
|
5,070
|
|
|
5,070
|
|
Preferred
stocks
|
|
|
7,908
|
|
|
7,968
|
|
|
7,968
|
|
Total
equity securities
|
|
|
12,232
|
|
|
14,586
|
|
|
14,586
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
43,216
|
|
|
|
|
|
72,012
|
|
Mortgage
loans (3)
|
|
|
95,551
|
|
|
|
|
|
95,551
|
|
Policy
loans
|
|
|
86,856
|
|
|
|
|
|
86,856
|
|
Other
long-term investments (4)
|
|
|
24,090
|
|
|
|
|
|
22,822
|
|
Total
investments other than
|
|
|
|
|
|
|
|
|
|
|
investments
in related parties
|
|
$
|
5,760,406
|
|
|
|
|
|
5,776,626
|
|
Notes:
(1)
Bonds
are shown at amortized cost, mortgage loans are shown at unpaid principal
balances before allowances for possible losses, and real estate is stated
at
cost before allowances for possible losses.
(2)
Equity securities with related parties having a cost of $0.2 million and
balance
sheet amount of $6.6 million have been excluded.
(3)
Mortgage loans with related parties totaling $7.8 million have been
excluded.
(4)
Real
estate acquired by foreclosure included in other long-term investments is
as
follows: cost $1.4 million; balance sheet amount $1.1 million.
|
|
SCHEDULE
V
|
|
VALUATION
AND QUALIFYING ACCOUNTS
|
|
For
the Years Ended December 31, 2006, 2005, and 2004
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
Balance
at
|
|
Charged
to
|
|
|
|
|
|
Balance
at
|
|
|
|
Beginning
|
|
Costs
and
|
|
|
|
|
|
End
of
|
|
Description
|
|
of
Period
|
|
Expenses
|
|
Reductions
|
|
Transfers
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
accounts deducted
|
|
|
|
|
|
|
|
|
|
|
|
from
applicable assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for possible
|
|
|
|
|
|
|
|
|
|
|
|
losses
on mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
$
|
-
|
|
|
2,100
|
|
|
-
|
|
|
-
|
|
|
2,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
$
|
368
|
|
|
(368
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2004
|
|
$
|
660
|
|
|
(292
|
)
|
|
-
|
|
|
-
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for possible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
losses
on real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
$
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
$
|
1,397
|
|
|
(658
|
)
|
|
-
|
|
|
-
|
|
|
739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2004
|
|
$
|
2,785
|
|
|
(1,388
|
)
|
|
-
|
|
|
-
|
|
|
1,397
|
|
Notes:
(1)
These
amounts were recorded to realized (gains) losses on investments.
Pursuant
to the requirements of Section 13 or 15(d) 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:
March 14, 2007
|
|
/S/
Robert L. Moody
|
|
|
By: Robert
L. Moody, Chairman of the Board and
|
|
|
Chief
Executive Officer
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in
the
capacities and on the dates indicated.
Signature
|
|
Title
(Capacity)
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
/S/
Robert L. Moody
|
|
Chairman
of the Board and
|
|
March
14, 2007
|
Robert
L. Moody
|
|
Chief
Executive Officer, and Director
|
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/S/
Ross R. Moody
|
|
President
and Chief Operating Officer, and Director
|
|
March
14, 2007
|
Ross
R. Moody
|
|
|
|
|
|
|
|
|
|
/S/
Brian M. Pribyl
|
|
Senior
Vice President - Chief Financial &
|
|
March
14, 2007
|
Brian
M. Pribyl
|
|
Administrative
Officer, and Treasurer
|
|
|
|
|
(Principal
Financial Officer)
|
|
|
|
|
|
|
|
/S/
Kay E. Osbourn
|
|
Vice
President, Controller & Assistant Treasurer
|
|
March
14, 2007
|
Kay
E. Osbourn
|
|
(Principal
Accounting Officer)
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/S/
Harry L. Edwards
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Director
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March
14, 2007
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Harry
L. Edwards
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/S/
Stephen E. Glasgow
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Director
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March
14, 2007
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Stephen
E. Glasgow
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Director
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March
14, 2007
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E.
Douglas McLeod
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/S/
Charles D. Milos
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Director
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March
14, 2007
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Charles
D. Milos
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Director
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March
14, 2007
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Frances
A. Moody-Dahlberg
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/S/
Russell S. Moody
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Director
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March
14, 2007
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Russell
S. Moody
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/S/
Louis E. Pauls, Jr.
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Director
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March
14, 2007
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Louis
E. Pauls, Jr.
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/S/
E.J. Pederson
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Director
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March
14, 2007
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E.J.
Pederson
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