UNITED
STATES
|
SECURITIES
AND EXCHANGE COMMISSION
|
Washington,
D.C. 20549
|
|
FORM
10-Q
|
|
þ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
|
THE
SECURITIES EXCHANGE ACT OF 1934
|
|
For
the Quarterly Period Ended September 30, 2007
|
|
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
|
84-0467208
|
(State
of Incorporation)
|
(I.R.S.
Employer Identification Number)
|
|
|
850
EAST ANDERSON LANE
|
|
AUSTIN,
TEXAS 78752-1602
|
(512)
836-1010
|
(Address
of Principal Executive Offices)
|
(Telephone
Number)
|
|
|
|
|
Indicate
by check mark whether the Registrant (1) has filed all reports
required to
be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934
during the preceding 12 months (or for such shorter period that
the
Registrant was required to file such reports), and (2) has been
subject to
such filing requirements for the past 90
days: Yes þ No o
|
|
|
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.
|
|
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
|
|
|
As
of November 7, 2007, the number of shares of Registrant's common
stock
outstanding was: Class A – 3,422,324 and Class B -
200,000.
|
|
|
|
|
Page
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
September
30, 2007 (Unaudited) and December 31, 2006
|
|
|
|
|
5
|
For
the Three Months Ended September 30, 2007 and 2006
(Unaudited)
|
|
|
|
|
6
|
For
the Nine Months Ended September 30, 2007 and 2006
(Unaudited)
|
|
|
|
|
7
|
For
the Three Months Ended September 30, 2007 and 2006
(Unaudited)
|
|
|
|
|
8
|
For
the Nine Months Ended September 30, 2007 and 2006
(Unaudited)
|
|
|
|
|
9
|
For
the Nine Months Ended September 30, 2007 and 2006
(Unaudited)
|
|
|
|
|
10
|
For
the Nine Months Ended September 30, 2007 and 2006
(Unaudited)
|
|
|
|
|
12
|
|
|
|
24
|
Financial
Condition and Results of Operations
|
|
|
|
|
48
|
|
|
|
48
|
|
|
|
48
|
|
|
|
48
|
|
|
|
48
|
|
|
|
49
|
|
|
|
49
|
|
|
|
50
|
|
|
|
|
|
|
|
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
Securities
held to maturity, at amortized cost
|
|
$ |
3,750,933
|
|
|
|
3,603,434
|
|
Securities
available for sale, at fair value
|
|
|
1,893,854
|
|
|
|
1,902,568
|
|
Mortgage
loans, net of allowances for possible
|
|
|
|
|
|
|
|
|
losses
($3,566 and $2,100)
|
|
|
98,852
|
|
|
|
103,325
|
|
Policy
loans
|
|
|
84,377
|
|
|
|
86,856
|
|
Derivatives
|
|
|
51,797
|
|
|
|
72,012
|
|
Other
long-term investments
|
|
|
16,965
|
|
|
|
22,822
|
|
|
|
|
|
|
|
|
|
|
Total
investments
|
|
|
5,896,778
|
|
|
|
5,791,017
|
|
|
|
|
|
|
|
|
|
|
Cash
and short-term investments
|
|
|
41,036
|
|
|
|
49,901
|
|
Deferred
policy acquisition costs
|
|
|
653,893
|
|
|
|
643,964
|
|
Deferred
sales inducements
|
|
|
101,888
|
|
|
|
93,139
|
|
Accrued
investment income
|
|
|
63,469
|
|
|
|
64,393
|
|
Federal
income tax receivable
|
|
|
10,922
|
|
|
|
-
|
|
Other
assets
|
|
|
47,197
|
|
|
|
51,029
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,815,183
|
|
|
|
6,693,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: The
condensed consolidated balance sheet at December 31, 2006, has been derived
from
the audited consolidated financial statements as of that date.
See
accompanying notes to condensed consolidated financial statements.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
(In
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future
policy benefits:
|
|
|
|
|
|
|
Traditional
life and annuity contracts
|
|
$ |
138,720
|
|
|
|
138,382
|
|
Universal
life and annuity contracts
|
|
|
5,454,962
|
|
|
|
5,395,075
|
|
Other
policyholder liabilities
|
|
|
117,342
|
|
|
|
112,449
|
|
Federal
income tax liability:
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
1,666
|
|
Deferred
|
|
|
46,366
|
|
|
|
32,207
|
|
Other
liabilities
|
|
|
77,727
|
|
|
|
80,680
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
5,835,117
|
|
|
|
5,760,459
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 5 and 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock:
|
|
|
|
|
|
|
|
|
Class
A - $1 par value; 7,500,000 shares authorized; 3,422,324
and
|
|
|
|
|
|
|
|
|
3,420,824
issued and outstanding in 2007 and 2006
|
|
|
3,422
|
|
|
|
3,421
|
|
Class
B - $1 par value; 200,000 shares authorized, issued,
|
|
|
|
|
|
|
|
|
and
outstanding in 2007 and 2006
|
|
|
200
|
|
|
|
200
|
|
Additional
paid-in capital
|
|
|
36,236
|
|
|
|
36,110
|
|
Accumulated
other comprehensive loss
|
|
|
(9,458 |
) |
|
|
(3,731 |
) |
Retained
earnings
|
|
|
949,666
|
|
|
|
896,984
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
980,066
|
|
|
|
932,984
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,815,183
|
|
|
|
6,693,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: The
condensed consolidated balance sheet at December 31, 2006, has been derived
from
the audited consolidated financial statements as of that date.
See
accompanying notes to condensed consolidated financial
statements.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
|
|
For
the Three Months Ended September 30, 2007 and
2006
|
|
(Unaudited)
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Premiums
and other revenue:
|
|
|
|
|
|
|
Traditional
life and annuity premiums
|
|
$ |
4,755
|
|
|
|
3,654
|
|
Universal
life and annuity contract revenues
|
|
|
30,025
|
|
|
|
26,923
|
|
Net
investment income
|
|
|
75,075
|
|
|
|
96,049
|
|
Other
income
|
|
|
3,786
|
|
|
|
3,064
|
|
Realized
gains (losses) on investments
|
|
|
(1,505 |
) |
|
|
190
|
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
112,136
|
|
|
|
129,880
|
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
11,337
|
|
|
|
9,212
|
|
Amortization
of deferred acquisition costs
|
|
|
25,238
|
|
|
|
24,430
|
|
Universal
life and annuity contract interest
|
|
|
38,219
|
|
|
|
59,065
|
|
Other
operating expenses
|
|
|
12,871
|
|
|
|
12,513
|
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
87,665
|
|
|
|
105,220
|
|
|
|
|
|
|
|
|
|
|
Earnings
before Federal income taxes
|
|
|
24,471
|
|
|
|
24,660
|
|
|
|
|
|
|
|
|
|
|
Provision
(benefit) for Federal income taxes:
|
|
|
|
|
|
|
|
|
Current
|
|
|
(2,836 |
) |
|
|
8,214
|
|
Deferred
|
|
|
11,685
|
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
Total
Federal income taxes
|
|
|
8,849
|
|
|
|
8,588
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
15,622
|
|
|
|
16,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share
|
|
$ |
4.31
|
|
|
|
4.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share
|
|
$ |
4.28
|
|
|
|
4.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
|
|
For
the Nine Months Ended September 30, 2007 and 2006
|
|
(Unaudited)
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Premiums
and other revenue:
|
|
|
|
|
|
|
Traditional
life and annuity premiums
|
|
$ |
14,074
|
|
|
|
11,742
|
|
Universal
life and annuity contract revenues
|
|
|
87,474
|
|
|
|
79,477
|
|
Net
investment income
|
|
|
260,033
|
|
|
|
261,059
|
|
Other
income
|
|
|
10,461
|
|
|
|
11,271
|
|
Realized
gains on investments
|
|
|
2,901
|
|
|
|
3,229
|
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
374,943
|
|
|
|
366,778
|
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
32,748
|
|
|
|
28,300
|
|
Amortization
of deferred acquisition costs
|
|
|
74,660
|
|
|
|
69,443
|
|
Universal
life and annuity contract interest
|
|
|
143,037
|
|
|
|
138,678
|
|
Other
operating expenses
|
|
|
43,354
|
|
|
|
51,611
|
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
293,799
|
|
|
|
288,032
|
|
|
|
|
|
|
|
|
|
|
Earnings
before Federal income taxes
|
|
|
81,144
|
|
|
|
78,746
|
|
|
|
|
|
|
|
|
|
|
Provision
(benefit) for Federal income taxes:
|
|
|
|
|
|
|
|
|
Current
|
|
|
6,551
|
|
|
|
28,987
|
|
Deferred
|
|
|
18,448
|
|
|
|
(2,585 |
) |
|
|
|
|
|
|
|
|
|
Total
Federal income taxes
|
|
|
24,999
|
|
|
|
26,402
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
56,145
|
|
|
|
52,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share
|
|
$ |
15.50
|
|
|
|
14.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share
|
|
$ |
15.37
|
|
|
|
14.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended September 30, 2007 and
2006
|
|
(Unaudited)
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
15,622
|
|
|
|
16,072
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss), net of effects of
|
|
|
|
|
|
|
|
|
deferred
policy acquisition costs and taxes:
|
|
|
|
|
|
|
|
|
Net
unrealized gains on securities:
|
|
|
|
|
|
|
|
|
Net
unrealized holding gains arising during period
|
|
|
4,860
|
|
|
|
15,866
|
|
Reclassification
adjustment for (gains) and losses included
|
|
|
|
|
|
|
|
|
in
net earnings
|
|
|
16
|
|
|
|
(42 |
) |
Amortization
of net unrealized gains
|
|
|
|
|
|
|
|
|
related
to transferred securities
|
|
|
25
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gains on securities
|
|
|
4,901
|
|
|
|
15,830
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
47
|
|
|
|
(317 |
) |
Benefit
plan adjustment
|
|
|
308
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
5,256
|
|
|
|
15,513
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
20,878
|
|
|
|
31,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
For
the Nine Months Ended September 30, 2007 and 2006
|
|
(Unaudited)
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
56,145
|
|
|
|
52,344
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss), net of effects of
|
|
|
|
|
|
|
|
|
deferred
policy acquisition costs and taxes:
|
|
|
|
|
|
|
|
|
Net
unrealized losses on securities:
|
|
|
|
|
|
|
|
|
Net
unrealized holding losses arising during period
|
|
|
(3,745 |
) |
|
|
(4,394 |
) |
Reclassification
adjustment for gains included in net earnings
|
|
|
(2,848 |
) |
|
|
(1,740 |
) |
Amortization
of net unrealized gains (losses)
|
|
|
|
|
|
|
|
|
related
to transferred securities
|
|
|
79
|
|
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
Net
unrealized losses on securities
|
|
|
(6,514 |
) |
|
|
(6,224 |
) |
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(139 |
) |
|
|
(152 |
) |
Benefit
plan adjustment
|
|
|
926
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss
|
|
|
(5,727 |
) |
|
|
(6,376 |
) |
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
50,418
|
|
|
|
45,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
For
the Nine Months Ended September 30, 2007 and 2006
|
|
(Unaudited)
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Common
stock:
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$ |
3,621
|
|
|
|
3,613
|
|
Shares
exercised under stock option plan
|
|
|
1
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
|
3,622
|
|
|
|
3,621
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital:
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
36,110
|
|
|
|
37,923
|
|
Shares
exercised under the stock option plan
|
|
|
126
|
|
|
|
510
|
|
Adjustment
for stock option liability classification
|
|
|
-
|
|
|
|
(1,211 |
) |
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
|
36,236
|
|
|
|
37,222
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income:
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on securities:
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
3,148
|
|
|
|
10,401
|
|
Change
in unrealized losses during period
|
|
|
(6,514 |
) |
|
|
(6,224 |
) |
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
|
(3,366 |
) |
|
|
4,177
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments:
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
3,122
|
|
|
|
3,300
|
|
Change
in translation adjustments during period
|
|
|
(139 |
) |
|
|
(152 |
) |
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
|
2,983
|
|
|
|
3,148
|
|
|
|
|
|
|
|
|
|
|
Benefit
plan liability adjustment:
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
(10,001 |
) |
|
|
(3,137 |
) |
Change
in benefit plan liability adjustment during period
|
|
|
926
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
|
(9,075 |
) |
|
|
(3,137 |
) |
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive loss at end of period
|
|
|
(9,458 |
) |
|
|
4,188
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings:
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
896,984
|
|
|
|
821,908
|
|
Cumulative
effect of change in accounting principle, net of tax
|
|
|
(2,195 |
) |
|
|
-
|
|
Net
earnings
|
|
|
56,145
|
|
|
|
52,344
|
|
Stockholder
dividends
|
|
|
(1,268 |
) |
|
|
(1,267 |
) |
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
|
949,666
|
|
|
|
872,985
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
$ |
980,066
|
|
|
|
918,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For
the Nine Months Ended September 30, 2007 and 2006
|
|
(Unaudited)
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
56,144
|
|
|
|
52,344
|
|
Adjustments
to reconcile net earnings to net cash
|
|
|
|
|
|
|
|
|
from
operating activities:
|
|
|
|
|
|
|
|
|
Universal
life and annuity contract interest
|
|
|
143,037
|
|
|
|
138,678
|
|
Surrender
charges and other policy revenues
|
|
|
(26,776 |
) |
|
|
(24,226 |
) |
Realized
gains on investments
|
|
|
(2,901 |
) |
|
|
(3,229 |
) |
Accrual
and amortization of investment income
|
|
|
(3,829 |
) |
|
|
(3,793 |
) |
Depreciation
and amortization
|
|
|
746
|
|
|
|
1,030
|
|
(Increase)
decrease in value of derivatives
|
|
|
26,393
|
|
|
|
(7,901 |
) |
Increase
in deferred policy acquisition and sales inducement costs
|
|
|
(9,730 |
) |
|
|
(6,479 |
) |
(Increase)
decrease in accrued investment income
|
|
|
924
|
|
|
|
(615 |
) |
(Increase)
decrease in other assets
|
|
|
582
|
|
|
|
(7,126 |
) |
Increase
(decrease) in liabilities for future policy benefits
|
|
|
338
|
|
|
|
(612 |
) |
Increase
in other policyholder liabilities
|
|
|
4,893
|
|
|
|
15,913
|
|
Increase
(decrease) in Federal income tax liability
|
|
|
6,861
|
|
|
|
987
|
|
Increase
(decrease) in other liabilities
|
|
|
(5,924 |
) |
|
|
14,941
|
|
Other
|
|
|
168
|
|
|
|
(72 |
) |
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
190,926
|
|
|
|
169,840
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sales of:
|
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
|
5,175
|
|
|
|
-
|
|
Securities
available for sale
|
|
|
28,418
|
|
|
|
21,502
|
|
Other
investments
|
|
|
33,255
|
|
|
|
32,951
|
|
Proceeds
from maturities and redemptions of:
|
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
|
106,023
|
|
|
|
199,590
|
|
Securities
available for sale
|
|
|
268,999
|
|
|
|
86,848
|
|
Purchases
of:
|
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
|
(256,014 |
) |
|
|
(254,994 |
) |
Securities
available for sale
|
|
|
(284,742 |
) |
|
|
(160,576 |
) |
Other
investments
|
|
|
(35,619 |
) |
|
|
(33,039 |
) |
Principal
payments on mortgage loans
|
|
|
21,623
|
|
|
|
8,867
|
|
Cost
of mortgage loans acquired
|
|
|
(18,480 |
) |
|
|
(3,999 |
) |
Decrease
in policy loans
|
|
|
(2,309 |
) |
|
|
(29 |
) |
Other
|
|
|
(2,006 |
) |
|
|
(247 |
) |
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(135,677 |
) |
|
|
(103,126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued
on next page)
|
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
|
|
For
the Nine Months Ended September 30, 2007 and 2006
|
|
(Unaudited)
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
Deposits
to account balances for universal life
|
|
|
|
|
|
|
and
annuity contracts
|
|
$ |
380,708
|
|
|
|
419,003
|
|
Return
of account balances on universal life
|
|
|
|
|
|
|
|
|
and
annuity contracts
|
|
|
(444,877 |
) |
|
|
(393,077 |
) |
Issuance
of common stock under stock option plan
|
|
|
127
|
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
|
|
(64,042 |
) |
|
|
26,436
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange
|
|
|
(72 |
) |
|
|
738
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and short-term investments
|
|
|
(8,865 |
) |
|
|
93,888
|
|
Cash
and short-term investments at beginning of year
|
|
|
49,901
|
|
|
|
31,355
|
|
|
|
|
|
|
|
|
|
|
Cash
and short-term investments at end of period
|
|
$ |
41,036
|
|
|
|
125,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the nine month period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
30
|
|
|
|
30
|
|
Income
taxes
|
|
|
19,155
|
|
|
|
24,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) CONSOLIDATION
AND BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles
("GAAP") for interim financial information and the instructions to Form 10-Q
and
Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for annual financial
statements. In the opinion of management, the accompanying condensed
consolidated financial statements contain all adjustments necessary to present
fairly the financial position of the Company as of September 30, 2007, and
the
results of its operations and its cash flows for the three months and nine
months ended September 30, 2007 and 2006. The results of operations
for the three months and nine months ended September 30, 2007 and 2006 are
not
necessarily indicative of the results to be expected for the full
year. For further information, refer to the consolidated financial
statements and notes included in the Company's Annual Report on Form 10-K
for
the year ended December 31, 2006 accessible free of charge through the Company's
internet site at www.nationalwesternlife.com or the
Securities and Exchange Commission internet site at
www.sec.gov.
The
accompanying condensed 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.
Certain
reclassifications have been made to the prior periods to conform to the
reporting categories used in 2007.
(2) CHANGES
IN ACCOUNTING PRINCIPLES
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") which is
effective for internal replacements occurring in fiscal years beginning after
December 15, 2006. 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. The Company has an impact related to the adoption of SOP
05-1 for contracts which have annuitized and relative to reinstatements of
contracts in that the unamortized deferred acquisition costs and deferred
sales
inducement assets must be written-off at the time of annuitization and may
not
be continued related to reinstatements. SOP 05-1 results in changes
in assumptions relative to estimated gross profits which affects unamortized
deferred acquisition costs, unearned revenue liabilities, and deferred sales
inducement balances as of the beginning of the year. The effect of
this SOP on beginning retained earnings as of January 1, 2007 was a decrease
of
$2.2 million, net of tax, as detailed below.
|
|
Amounts
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Write-off
of deferred acquisition cost
|
|
$ |
3,321
|
|
Adjustment
to deferred annuity revenue
|
|
|
56
|
|
|
|
|
3,377
|
|
|
|
|
|
|
Federal
income tax
|
|
|
(1,182 |
) |
|
|
|
|
|
Cumulative
effect of change in accounting for
|
|
|
|
|
internal
replacements and investment contracts
|
|
$ |
2,195
|
|
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 requires 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
is
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. The adoption of FIN 48 did not have a material impact on the Company's
consolidated financial statements.
On
February 16, 2006, the FASB issued SFAS No. 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 did not 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
February of 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. This Statement
permits entities to choose to measure many financial instruments and certain
other items at fair value. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing
the impact of SFAS No. 159.
(3) STOCKHOLDERS'
EQUITY
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 Company paid no cash dividends on common stock during
the nine months ended September 30, 2007 and 2006. However, the
Company declared a cash dividend on August 24, 2007 payable November 29,
2007 to
stockholders on record as of October 31, 2007. The dividends declared
were $0.36 per common share to Class A stockholders and $0.18 per common
share
to Class B stockholders. The dividend payment was approved by the
Colorado Division of Insurance. A dividend in the same amounts per
share on Class A and Class B shares was declared in August and payable
in
November of 2006.
(4) EARNINGS
PER SHARE
Basic
earnings per share of common stock are computed by dividing net income by
the
weighted-average basic common shares outstanding during the
period. Diluted earnings per share assumes the issuance of common
shares applicable to stock options in the denominator.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
available to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
before
and after assumed conversions
|
|
$ |
15,622
|
|
|
|
16,072
|
|
|
|
56,145
|
|
|
|
52,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted-average
shares
|
|
|
3,622
|
|
|
|
3,621
|
|
|
|
3,622
|
|
|
|
3,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive stock options
|
|
|
31
|
|
|
|
34
|
|
|
|
31
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjusted
weighted-average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
for assumed conversions
|
|
|
3,653
|
|
|
|
3,655
|
|
|
|
3,653
|
|
|
|
3,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
4.31
|
|
|
|
4.44
|
|
|
|
15.50
|
|
|
|
14.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
4.28
|
|
|
|
4.40
|
|
|
|
15.37
|
|
|
|
14.32
|
|
(5) 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 complies with the minimum funding provisions of the Employee Retirement
Income Security Act of 1974 ("ERISA"). The following summarizes the
components of net periodic benefit cost.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
180
|
|
|
|
175
|
|
|
|
540
|
|
|
|
518
|
|
Interest
cost
|
|
|
272
|
|
|
|
279
|
|
|
|
815
|
|
|
|
766
|
|
Expected
return on plan assets
|
|
|
(275 |
) |
|
|
(255 |
) |
|
|
(825 |
) |
|
|
(710 |
) |
Amortization
of prior service cost
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
3
|
|
Amortization
of net loss
|
|
|
80
|
|
|
|
99
|
|
|
|
240
|
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$ |
258
|
|
|
|
299
|
|
|
|
773
|
|
|
|
841
|
|
The
Company has contributed $1.8 million to the qualified plan in
2007. No further contributions are expected in 2007.
Effective
October 19, 2007, the Company’s Board of Directors approved an amendment to
freeze the Plan as of December 31, 2007. As of that date, the freeze
will cease future benefit accruals to all participants and close the Plan
to any
new participants. In addition, all participants will become
immediately 100% vested in their accrued benefits as of that
date. Using estimated assumptions the cumulative estimated minimum
required contribution for the next five years is $2.1 million at which time
the
Plan is expected to be fully funded. Future pension expense is
projected to be minimal.
The
Company also sponsors a non-qualified defined benefit plan primarily for
senior
officers. The plan provides benefits based on the participants' years of
service
and compensation. The 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 the
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 is
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.
The
following summarizes the components of net periodic benefit costs for these
non-qualified plans.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
194
|
|
|
|
574
|
|
|
|
580
|
|
|
|
1,222
|
|
Interest
cost
|
|
|
240
|
|
|
|
385
|
|
|
|
721
|
|
|
|
531
|
|
Amortization
of prior service cost
|
|
|
260
|
|
|
|
457
|
|
|
|
780
|
|
|
|
780
|
|
Amortization
of net loss
|
|
|
101
|
|
|
|
137
|
|
|
|
303
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$ |
795
|
|
|
|
1,553
|
|
|
|
2,384
|
|
|
|
2,670
|
|
The
Company expects to contribute $1.4 million to these plans in 2007. As
of September 30, 2007, the Company has contributed $1.0 million to the
plan.
(B) Defined
Benefit Postretirement Plans
The
Company sponsors two healthcare plans to provide postretirement benefits
to
certain fully-vested individuals. The following summarizes the
components of net periodic benefit costs.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
cost
|
|
$ |
36
|
|
|
|
38
|
|
|
|
106
|
|
|
|
88
|
|
Amortization
of prior service cost
|
|
|
25
|
|
|
|
26
|
|
|
|
77
|
|
|
|
77
|
|
Amortization
of net loss
|
|
|
7
|
|
|
|
-
|
|
|
|
22
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$ |
68
|
|
|
|
64
|
|
|
|
205
|
|
|
|
165
|
|
As
previously disclosed in its financial statements for the year ended December
31,
2006, the Company expects to contribute minimal amounts to the plan in
2007.
(6) SEGMENT
AND OTHER OPERATING INFORMATION
Under
Statement of Financial Accounting Standards ("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. These segments are organized
based
on product types and geographic marketing areas. A summary of segment
information for the quarters ended September 30, 2007 and 2006 is provided
below.
Selected
Segment Information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
Life
|
|
|
|
|
|
All
|
|
|
|
|
|
|
Insurance
|
|
|
Insurance
|
|
|
Annuities
|
|
|
Others
|
|
|
Totals
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Balance Sheet Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
policy acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs
and sales inducements
|
|
$ |
57,063
|
|
|
|
189,866
|
|
|
|
508,852
|
|
|
|
-
|
|
|
|
755,781
|
|
Total
segment assets
|
|
|
392,465
|
|
|
|
769,225
|
|
|
|
5,513,462
|
|
|
|
104,786
|
|
|
|
6,779,938
|
|
Future
policy benefits
|
|
|
318,171
|
|
|
|
541,526
|
|
|
|
4,733,985
|
|
|
|
-
|
|
|
|
5,593,682
|
|
Other
policyholder liabilities
|
|
|
10,915
|
|
|
|
17,225
|
|
|
|
89,202
|
|
|
|
-
|
|
|
|
117,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Income Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues
|
|
$ |
6,875
|
|
|
|
21,826
|
|
|
|
6,079
|
|
|
|
-
|
|
|
|
34,780
|
|
Net
investment income
|
|
|
4,774
|
|
|
|
6,460
|
|
|
|
62,833
|
|
|
|
1,008
|
|
|
|
75,075
|
|
Other
income
|
|
|
7
|
|
|
|
19
|
|
|
|
543
|
|
|
|
3,217
|
|
|
|
3,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
11,656
|
|
|
|
28,305
|
|
|
|
69,455
|
|
|
|
4,225
|
|
|
|
113,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
3,969
|
|
|
|
6,353
|
|
|
|
1,015
|
|
|
|
-
|
|
|
|
11,337
|
|
Amortization
of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
policy
acquisition costs
|
|
|
2,229
|
|
|
|
8,045
|
|
|
|
14,964
|
|
|
|
-
|
|
|
|
25,238
|
|
Universal
life and annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contract
interest
|
|
|
2,396
|
|
|
|
6,131
|
|
|
|
29,692
|
|
|
|
-
|
|
|
|
38,219
|
|
Other
operating expenses
|
|
|
2,877
|
|
|
|
3,616
|
|
|
|
3,593
|
|
|
|
2,785
|
|
|
|
12,871
|
|
Federal
income taxes (benefit)
|
|
|
42
|
|
|
|
1,457
|
|
|
|
7,314
|
|
|
|
563
|
|
|
|
9,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
11,513
|
|
|
|
25,602
|
|
|
|
56,578
|
|
|
|
3,348
|
|
|
|
97,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$ |
143
|
|
|
|
2,703
|
|
|
|
12,877
|
|
|
|
877
|
|
|
|
16,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
Life
|
|
|
|
|
|
All
|
|
|
|
|
|
|
Insurance
|
|
|
Insurance
|
|
|
Annuities
|
|
|
Others
|
|
|
Totals
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Income Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues
|
|
$ |
19,522
|
|
|
|
64,061
|
|
|
|
17,965
|
|
|
|
-
|
|
|
|
101,548
|
|
Net
investment income
|
|
|
13,967
|
|
|
|
21,075
|
|
|
|
220,263
|
|
|
|
4,728
|
|
|
|
260,033
|
|
Other
income
|
|
|
34
|
|
|
|
106
|
|
|
|
909
|
|
|
|
9,412
|
|
|
|
10,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
33,523
|
|
|
|
85,242
|
|
|
|
239,137
|
|
|
|
14,140
|
|
|
|
372,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
12,727
|
|
|
|
17,330
|
|
|
|
2,691
|
|
|
|
-
|
|
|
|
32,748
|
|
Amortization
of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
policy
acquisition costs
|
|
|
5,041
|
|
|
|
25,401
|
|
|
|
44,218
|
|
|
|
-
|
|
|
|
74,660
|
|
Universal
life and annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contract
interest
|
|
|
7,028
|
|
|
|
19,227
|
|
|
|
116,782
|
|
|
|
-
|
|
|
|
143,037
|
|
Other
operating expenses
|
|
|
9,084
|
|
|
|
12,388
|
|
|
|
13,673
|
|
|
|
8,209
|
|
|
|
43,354
|
|
Federal
income taxes (benefit)
|
|
|
(109 |
) |
|
|
3,340
|
|
|
|
18,936
|
|
|
|
1,817
|
|
|
|
23,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
33,771
|
|
|
|
77,686
|
|
|
|
196,300
|
|
|
|
10,026
|
|
|
|
317,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings (losses)
|
|
$ |
(248 |
) |
|
|
7,556
|
|
|
|
42,837
|
|
|
|
4,114
|
|
|
|
54,259
|
|
Selected
Segment Information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
Life
|
|
|
|
|
|
All
|
|
|
|
|
|
|
Insurance
|
|
|
Insurance
|
|
|
Annuities
|
|
|
Others
|
|
|
Totals
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Balance Sheet Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
policy acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs
and sales inducements
|
|
$ |
49,041
|
|
|
|
177,482
|
|
|
|
499,212
|
|
|
|
-
|
|
|
|
725,735
|
|
Total
segment assets
|
|
|
377,777
|
|
|
|
691,455
|
|
|
|
5,414,024
|
|
|
|
98,269
|
|
|
|
6,581,525
|
|
Future
policy benefits
|
|
|
312,671
|
|
|
|
479,838
|
|
|
|
4,671,975
|
|
|
|
-
|
|
|
|
5,464,484
|
|
Other
policyholder liabilities
|
|
|
9,702
|
|
|
|
21,680
|
|
|
|
85,089
|
|
|
|
-
|
|
|
|
116,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Income Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues
|
|
$ |
5,932
|
|
|
|
19,364
|
|
|
|
5,281
|
|
|
|
-
|
|
|
|
30,577
|
|
Net
investment income
|
|
|
4,545
|
|
|
|
6,771
|
|
|
|
83,900
|
|
|
|
833
|
|
|
|
96,049
|
|
Other
income
|
|
|
10
|
|
|
|
21
|
|
|
|
106
|
|
|
|
2,927
|
|
|
|
3,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
10,487
|
|
|
|
26,156
|
|
|
|
89,287
|
|
|
|
3,760
|
|
|
|
129,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
3,505
|
|
|
|
4,984
|
|
|
|
723
|
|
|
|
-
|
|
|
|
9,212
|
|
Amortization
of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
policy
acquisition costs
|
|
|
1,496
|
|
|
|
6,951
|
|
|
|
15,983
|
|
|
|
-
|
|
|
|
24,430
|
|
Universal
life and annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contract
interest
|
|
|
2,293
|
|
|
|
7,185
|
|
|
|
49,587
|
|
|
|
-
|
|
|
|
59,065
|
|
Other
operating expenses
|
|
|
2,533
|
|
|
|
3,131
|
|
|
|
4,027
|
|
|
|
2,822
|
|
|
|
12,513
|
|
Federal
income taxes
|
|
|
212
|
|
|
|
1,376
|
|
|
|
6,598
|
|
|
|
336
|
|
|
|
8,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
10,039
|
|
|
|
23,627
|
|
|
|
76,918
|
|
|
|
3,158
|
|
|
|
113,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$ |
448
|
|
|
|
2,529
|
|
|
|
12,369
|
|
|
|
602
|
|
|
|
15,948
|
|
|
|
Domestic
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
Life
|
|
|
|
|
|
All
|
|
|
|
|
|
|
Insurance
|
|
|
Insurance
|
|
|
Annuities
|
|
|
Others
|
|
|
Totals
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Income Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues
|
|
$ |
17,465
|
|
|
|
57,448
|
|
|
|
16,306
|
|
|
|
-
|
|
|
|
91,219
|
|
Net
investment income
|
|
|
14,761
|
|
|
|
18,958
|
|
|
|
223,307
|
|
|
|
4,033
|
|
|
|
261,059
|
|
Other
income
|
|
|
25
|
|
|
|
66
|
|
|
|
2,968
|
|
|
|
8,212
|
|
|
|
11,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
32,251
|
|
|
|
76,472
|
|
|
|
242,581
|
|
|
|
12,245
|
|
|
|
363,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
11,536
|
|
|
|
14,204
|
|
|
|
2,560
|
|
|
|
-
|
|
|
|
28,300
|
|
Amortization
of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
policy
acquisition costs
|
|
|
4,868
|
|
|
|
16,462
|
|
|
|
48,113
|
|
|
|
-
|
|
|
|
69,443
|
|
Universal
life and annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contract
interest
|
|
|
6,836
|
|
|
|
16,399
|
|
|
|
115,443
|
|
|
|
-
|
|
|
|
138,678
|
|
Other
operating expenses
|
|
|
9,995
|
|
|
|
14,956
|
|
|
|
18,987
|
|
|
|
7,673
|
|
|
|
51,611
|
|
Federal
income taxes (benefit)
|
|
|
(328 |
) |
|
|
4,836
|
|
|
|
19,235
|
|
|
|
1,529
|
|
|
|
25,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
32,907
|
|
|
|
66,857
|
|
|
|
204,338
|
|
|
|
9,202
|
|
|
|
313,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings (losses)
|
|
$ |
(656 |
) |
|
|
9,615
|
|
|
|
38,243
|
|
|
|
3,043
|
|
|
|
50,245
|
|
Reconciliations
of segment information to the Company's condensed consolidated financial
statements are provided below.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Premiums
and Other Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract revenues
|
|
$ |
34,780
|
|
|
|
30,577
|
|
|
|
101,548
|
|
|
|
91,219
|
|
Net
investment income
|
|
|
75,075
|
|
|
|
96,049
|
|
|
|
260,033
|
|
|
|
261,059
|
|
Other
income
|
|
|
3,786
|
|
|
|
3,064
|
|
|
|
10,461
|
|
|
|
11,271
|
|
Realized
gains (losses) on investments
|
|
|
(1,505 |
) |
|
|
190
|
|
|
|
2,901
|
|
|
|
3,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated premiums and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
revenue
|
|
$ |
112,136
|
|
|
|
129,880
|
|
|
|
374,943
|
|
|
|
366,778
|
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Federal
Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment Federal income taxes
|
|
$ |
9,376
|
|
|
|
8,522
|
|
|
|
23,984
|
|
|
|
25,272
|
|
Taxes
on realized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
investments
|
|
|
(527 |
) |
|
|
66
|
|
|
|
1,015
|
|
|
|
1,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
$ |
8,849
|
|
|
|
8,588
|
|
|
|
24,999
|
|
|
|
26,402
|
|
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Net
Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment earnings
|
|
$ |
16,600
|
|
|
|
15,948
|
|
|
|
54,259
|
|
|
|
50,245
|
|
Realized
gains (losses) on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investments,
net of taxes
|
|
|
(978 |
) |
|
|
124
|
|
|
|
1,886
|
|
|
|
2,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated net earnings
|
|
$ |
15,622
|
|
|
|
16,072
|
|
|
|
56,145
|
|
|
|
52,344
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Assets:
|
|
|
|
|
|
|
Total
segment assets
|
|
$ |
6,779,938
|
|
|
|
6,581,525
|
|
Other
unallocated assets
|
|
|
35,245
|
|
|
|
20,156
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated assets
|
|
$ |
6,815,183
|
|
|
|
6,601,681
|
|
(7) 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. 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 2007 or
2006.
Through
December 31, 2005, the Company classified the Plan as equity, 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. A summary of shares available for grant and stock
option activity is detailed below.
|
|
|
|
|
Options
Outstanding
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Shares
|
|
|
|
|
|
Average
|
|
|
|
Available
|
|
|
|
|
|
Exercise
|
|
|
|
For
Grant
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2007
|
|
|
26,477
|
|
|
|
128,465
|
|
|
$ |
123.00
|
|
Stock
Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
(31,690 |
) |
|
|
106.08
|
|
Forfeited
|
|
|
1,110
|
|
|
|
(1,110 |
) |
|
|
131.23
|
|
Expired
|
|
|
81
|
|
|
|
(81 |
) |
|
|
85.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2007
|
|
|
27,668
|
|
|
|
95,584
|
|
|
$ |
128.54
|
|
The
total
intrinsic value of options exercised was $4.6 million and $3.2 million for
the
nine months ended September 30, 2007 and 2006, respectively. The
total share-based liabilities paid were $4.3 million for the nine months
ended
September 30, 2007. The total fair value of shares vested during the
nine months ended September 30, 2007 and 2006 was $3.2 million and $2.6 million,
respectively.
The
following table summarizes information about stock options outstanding at
September 30, 2007.
|
|
Options
Outstanding
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
Number
|
|
Remaining
|
|
Options
|
|
|
Outstanding
|
|
Contractual
Life
|
|
Exercisable
|
Exercise
prices:
|
|
|
|
|
|
|
$ 105.25
|
|
7,130
|
|
1.0
years
|
|
7,130
|
112.38
|
|
4,800
|
|
1.2
years
|
|
4,800
|
92.13
|
|
20,154
|
|
4.1
years
|
|
13,286
|
95.00
|
|
7,000
|
|
4.2
years
|
|
7,000
|
150.00
|
|
56,500
|
|
7.1
years
|
|
13,100
|
|
|
|
|
|
|
|
Totals
|
|
95,584
|
|
|
|
45,316
|
|
|
|
|
|
|
|
Aggregate
intrinsic value
|
|
|
|
|
|
|
(in
thousands)
|
$
|
12,179
|
|
|
$
|
6,455
|
The
aggregate intrinsic value in the table above is based on the closing stock
price
of $255.96 per share on September 30, 2007.
In
estimating the fair value of the options outstanding at September 30, 2007,
the
Company employed the Black-Scholes option pricing model with assumptions
as
detailed below.
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Expected
term of options
|
|
2
to 6 years
|
|
|
2
to 6 years
|
Expected
volatility:
|
|
|
|
|
|
Range
|
|
16.21%
to 23.19%
|
|
|
15.31%
to 24.73%
|
Weighted-average
|
|
|
19.55% |
|
|
|
19.73% |
Expected
dividends
|
|
$ |
0.36
|
|
|
|
-
|
Risk-free
rate:
|
|
|
|
|
|
|
|
Range
|
|
3.95%
to 4.35%
|
|
|
4.49%
to 4.85%
|
Weighted-average
|
|
|
4.12% |
|
|
|
4.61% |
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 $2.6 million and $12.7 million for the nine months ended September
30,
2007 and 2006, respectively. The related tax benefit recognized was
$0.9 million and $4.4 million for the nine months ended September 30, 2007
and
2006, 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
September 30, 2007, the total compensation cost related to nonvested options
not
yet recognized was $2.1 million. This amount is expected to be
recognized over a weighted-average period of 1.2 years. The Company
recognizes compensation cost over the graded vesting periods.
For
the
nine months ended September 30, 2007 and 2006, the total cash received from
the
exercise of options under the Plan was $0.1 million and $0.5 million,
respectively.
(8) FEDERAL
INCOME TAXES
During
the second quarter of 2007, upon the completion of a detailed review of the
deferred tax items, the Company identified a $2.3 million error in the net
deferred tax liability. The error, which occurred during various periods
prior
to 2005, was corrected in the second quarter of 2007 and resulted in a decrease
in the net deferred tax liability and deferred tax expense. The
adjustment was not material to the current period or any prior period financial
statements.
(9) 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 was 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 disagreed with the IRS analysis.
The
Company contested and 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 was subsequently issued by the IRS National Office in the form of
a
memorandum analyzing the issue which concluded that such loans do not constitute
indirect self-dealing. This technical advice memorandum is binding on
the IRS audit team.
The
Company is a defendant in three class action lawsuits. The Court has
certified a class consisting of certain California policyholders age 65 and
older alleging violations under California Business and Professions Code
section
17200. The court has additionally certified a subclass of 36
policyholders alleging fraud against their agent, and vicariously, against
NWL. 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
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 is or may be viewed as
forward-looking. Although the Company has used 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 filings with the Securities and Exchange Commission ("SEC")
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.
OVERVIEW
Insurance
Operations - Domestic
The
Company is currently licensed to do business in all states except for New
York. Products marketed are annuities, universal life insurance,
fixed indexed annuities and indexed universal life, and traditional life
insurance, which include both term and whole life products. The
Company’s domestic sales have historically been more heavily weighted toward
annuity products, which include single and flexible premium deferred annuities,
single premium immediate annuities, and fixed indexed annuities. Most
of these annuities can be sold as tax qualified or nonqualified
products. At September 30, 2007, the Company maintained approximately
121,300 annuity policies in force.
National
Western markets and distributes its domestic products primarily through
independent national marketing organizations ("NMOs"). These NMOs assist
the
Company in recruiting, contracting, and managing independent agents. The
Company
currently has approximately 5,800 independent agents
contracted. Roughly 26% of these contracted agents have submitted
policy applications to the Company in the past twelve months.
Insurance
Operations - International
The
Company'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, Eastern
Europe, Asia and the Pacific Rim. 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 September 30, 2007, the Company had approximately 71,000
international life insurance policies in force representing approximately
$14.2
billion in face amount of coverage.
International
applications are submitted by independent contractor consultants and
broker-agents. The Company has approximately 4,900 independent international
consultants and brokers currently contracted, 44% of which have 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 the Company'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, claims and other benefits almost
entirely in United States dollars. Finally, the Company's forty years
of experience with the international products and its longstanding independent
consultant and broker-agents relationships further serve to minimize
risks.
SALES
Life
Insurance
The
following table sets forth information regarding the Company's life insurance
sales activity as measured by annualized first year premiums. While the figures
shown below are in accordance with industry practice and represent the amount
of
new business sold during the periods indicated, they are considered a non-GAAP
financial measure. The Company believes sales are a measure of distribution
productivity and are a leading indicator of future revenue trends. However,
revenues are driven by sales in prior periods as well as in the current period
and therefore, a reconciliation of sales to revenues is not meaningful or
determinable.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life
|
|
$ |
2,544
|
|
|
|
1,858
|
|
|
|
6,695
|
|
|
|
5,329
|
|
Traditional
life
|
|
|
1,454
|
|
|
|
969
|
|
|
|
4,946
|
|
|
|
3,105
|
|
Fixed
indexed life
|
|
|
6,397
|
|
|
|
4,673
|
|
|
|
16,176
|
|
|
|
12,875
|
|
|
|
|
10,395
|
|
|
|
7,500
|
|
|
|
27,817
|
|
|
|
21,309
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life
|
|
|
1,826
|
|
|
|
2,074
|
|
|
|
3,158
|
|
|
|
3,231
|
|
Traditional
life
|
|
|
66
|
|
|
|
109
|
|
|
|
194
|
|
|
|
259
|
|
Fixed
indexed life
|
|
|
1,962
|
|
|
|
1,233
|
|
|
|
4,817
|
|
|
|
2,659
|
|
|
|
|
3,854
|
|
|
|
3,416
|
|
|
|
8,169
|
|
|
|
6,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
14,249
|
|
|
|
10,916
|
|
|
|
35,986
|
|
|
|
27,458
|
|
Life
insurance sales as measured by annualized first year premiums increased 31%
in
the third quarter of 2007 as compared to the third quarter of 2006 and also
increased 31% for the first nine months of 2007 versus 2006. Both of the
Company's life lines of business, international and domestic, posted increases
over the comparable results in the third quarter of 2007 with international
sales up 39% and domestic sales 13% greater.
Company
management has placed considerable emphasis on building domestic life insurance
sales as a strategic focus and in response to comments from outside rating
agencies reviewing the Company. Domestic operations have generally focused
more
heavily on annuity sales than on life insurance sales. The Company spent
the
greater part of 2003 and 2004 revamping its domestic life operations by changing
the way it contracts distribution for life business, eliminating products
and
distribution that have not contributed significantly to earnings, and creating
new and competitive products. A single premium universal life ("SPUL") product
was launched at the end of 2003 beginning a diversification of the Company's
product portfolio away from smaller dollar face amount policies. The Company
released its first fixed equity-indexed universal life ("EIUL") product for
its
domestic markets at the end of the third quarter of 2005 and began receiving
applications. This product accounted for 59% of domestic life insurance sales
in
the first nine months of 2007 and management anticipates this share to continue
throughout the remainder of the year. With the introduction of the EIUL and
SPUL
products and the discontinued marketing of smaller premium and volume life
insurance policies, the Company has seen an increase in the average amount
of
per policy coverage purchased in its domestic markets as shown in the following
table:
|
|
Average
New Policy Face Amount
|
|
|
|
Domestic
|
|
|
International
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2003
|
|
$ |
76,100
|
|
|
|
219,600
|
|
Year
ended December 31, 2004
|
|
|
101,700
|
|
|
|
234,500
|
|
Year
ended December 31, 2005
|
|
|
137,900
|
|
|
|
245,900
|
|
Year
ended December 31, 2006
|
|
|
315,800
|
|
|
|
254,700
|
|
Nine
months ended September 30, 2007
|
|
|
388,000
|
|
|
|
247,000
|
|
The
Company's international life business consists of applications submitted
from
residents in various regions outside of the United States, the volume of
which
typically varies based upon changes in the socioeconomic climates of these
regions. Historically, the Company has experienced a simultaneous combination
of
rising and declining sales in various countries; however, the appeal of the
Company's dollar-denominated life insurance products overcomes many of the
local
and national difficulties. Applications submitted from residents of Latin
America and the Pacific Rim perennially have comprised the majority of the
Company's international life insurance sales. Over the past few years, effort
has been directed toward the sale of a traditional endowment form of life
insurance product for residents of Eastern European and the Commonwealth
of
Independent States (former Soviet Union). More recently, the Company's universal
life product offerings have been made available to residents of these countries.
While business is still in a formative phase, sales from these countries
have
gradually become a larger percentage of overall international sales as shown
below.
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
Percentage
of International Sales:
|
|
|
|
|
|
|
Latin
America
|
|
|
68.7 |
% |
|
|
75.2 |
% |
Pacific
Rim
|
|
|
13.7
|
|
|
|
11.7
|
|
Eastern
Europe
|
|
|
17.6
|
|
|
|
13.1
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Year-to-date,
the Company has recorded sales to residents outside of the United States
in over
thirty different countries with Brazil (33%), Taiwan (13%), and Kazakhstan
(9%)
making up the largest markets.
The
table
below sets forth information regarding the Company's life insurance in force
for
each date presented.
|
|
Insurance
In Force as of September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($
in thousands)
|
|
Universal
life:
|
|
|
|
|
|
|
Number
of policies
|
|
|
74,120
|
|
|
|
77,160
|
|
Face
amounts
|
|
$ |
8,020,940
|
|
|
|
8,034,930
|
|
|
|
|
|
|
|
|
|
|
Traditional
life:
|
|
|
|
|
|
|
|
|
Number
of policies
|
|
|
52,180
|
|
|
|
53,440
|
|
Face
amounts
|
|
$ |
1,802,340
|
|
|
|
1,752,000
|
|
|
|
|
|
|
|
|
|
|
Fixed-indexed
life:
|
|
|
|
|
|
|
|
|
Number
of policies
|
|
|
22,880
|
|
|
|
18,700
|
|
Face
amounts
|
|
$ |
5,161,250
|
|
|
|
3,937,350
|
|
|
|
|
|
|
|
|
|
|
Rider
face amounts
|
|
$ |
1,946,640
|
|
|
|
1,695,190
|
|
|
|
|
|
|
|
|
|
|
Total
life insurance:
|
|
|
|
|
|
|
|
|
Number
of policies
|
|
|
149,180
|
|
|
|
149,300
|
|
Face
amounts
|
|
$ |
16,931,170
|
|
|
|
15,419,470
|
|
Annuities
The
following table sets forth information regarding the Company's annuity sales
activity as measured by single and annualized first year premiums. Similar
to
life insurance sales, these figures are considered a non-GAAP financial measure
but are shown in accordance with industry practice and depict the Company's
sales productivity.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
indexed annuities
|
|
$ |
90,895
|
|
|
|
85,997
|
|
|
|
245,163
|
|
|
|
224,763
|
|
Other
deferred annuities
|
|
|
22,680
|
|
|
|
36,650
|
|
|
|
80,569
|
|
|
|
130,625
|
|
Immediate
annuities
|
|
|
782
|
|
|
|
2,160
|
|
|
|
3,274
|
|
|
|
9,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
114,357
|
|
|
|
124,807
|
|
|
|
329,006
|
|
|
|
365,298
|
|
Annuity
sales for the third quarter of 2007 were 8% lower than the comparable period
in
2006 and were 10% lower of the first nine months of the year, continuing
a trend
that began in the first quarter of 2004. Annuity sales in the first quarter
of
2004 represented the tail end of the increase in fixed annuity sales that
began
in 2003 when the Company achieved nearly $1.2 billion in sales. Annuity sales
began trending lower due to a combination of declining interest rates, investors
returning to alternative investment vehicles and the Company managing its
targeted levels of risk and statutory capital and surplus. During the past
several years interest rate levels have experienced an infrequent occurrence
in
which the yield curve is inverted, that is, longer term interest rate levels
were below shorter term interest rate levels. In such an environment, consumers
opt for short term investment vehicles such as bank certificates of deposits
rather than longer term choices which include fixed rate annuities.
The
Company's mix of annuity sales has shifted the past few years. With a stronger
performance in the equity market, sales of fixed indexed annuity products
became
more prevalent beginning in 2004 and have continued thus far in 2007. Over
the
past several years sales of fixed indexed products have consistently accounted
for more than one-half of all annuity sales and were 75% during the first
nine
months of 2007. For all fixed indexed products, the Company purchases over
the
counter options to hedge the equity return feature. The options are purchased
relative to the issuance of the annuity contracts in such a manner to minimize
timing risk. Generally, the index return during the indexing period (if the
underlying index increases), becomes a component in a formula (set forth
in the
annuity), the result of which is credited as interest to contract holders
electing the index formula crediting method at the beginning of the indexing
period. The formula result can never be less than zero. The Company does
not
deliberately mismatch or under hedge for the equity feature of these
products.
The
sizable increase in annuity sales volume the past several years has required
a
greater level of asset/liability analysis. The Company monitors its
asset/liability matching within the self-constraints of desired capital levels
and risk tolerance. Despite the amounts of new business, the company's capital
level remains substantially above industry averages and regulator
targets.
The
following table sets forth information regarding annuities in force for each
date presented.
|
|
Annuities
in Force as of September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($
in thousand)
|
|
|
|
|
|
|
|
|
Fixed
indexed annuities
|
|
|
|
|
|
|
Number
of policies
|
|
|
32,000
|
|
|
|
29,690
|
|
GAAP
annuity reserves
|
|
$ |
1,937,730
|
|
|
|
1,730,620
|
|
|
|
|
|
|
|
|
|
|
Other
deferred annuities
|
|
|
|
|
|
|
|
|
Number
of policies
|
|
|
75,970
|
|
|
|
81,260
|
|
GAAP
annuity reserves
|
|
$ |
2,540,270
|
|
|
|
2,690,100
|
|
|
|
|
|
|
|
|
|
|
Immediate
annuities
|
|
|
|
|
|
|
|
|
Number
of policies
|
|
|
13,320
|
|
|
|
12,850
|
|
GAAP
annuity reserves
|
|
$ |
253,050
|
|
|
|
248,270
|
|
|
|
|
|
|
|
|
|
|
Total
annuities
|
|
|
|
|
|
|
|
|
Number
of policies
|
|
|
121,290
|
|
|
|
123,800
|
|
GAAP
annuity reserves
|
|
$ |
4,731,050
|
|
|
|
4,668,990
|
|
Critical
Accounting Estimates
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
Policy 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.
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 used. 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.
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 included in
the
Company's Annual Report on Form 10-K for the year ended December 31, 2006,
and
the discussions under Investments in Item 3 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 healthcare
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, healthcare
trend rates, and discount rates. Per capita claims cost by age is the
current cost of providing postretirement healthcare 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. Healthcare trend rates
involve assumptions about the annual rate(s) of change in the cost of healthcare
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 healthcare
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.
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 the Company's
Annual Report on Form 10-K for the year ended December 31, 2006.
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 derivatives 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 derivatives 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.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
life and annuity premiums
|
|
$ |
4,755
|
|
|
|
3,654
|
|
|
|
14,074
|
|
|
|
11,742
|
|
Universal
life and annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contract
revenues
|
|
|
30,025
|
|
|
|
26,923
|
|
|
|
87,474
|
|
|
|
79,477
|
|
Net
investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(excluding
derivatives)
|
|
|
82,821
|
|
|
|
80,217
|
|
|
|
249,095
|
|
|
|
247,379
|
|
Other
income
|
|
|
3,786
|
|
|
|
3,064
|
|
|
|
10,461
|
|
|
|
11,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
|
121,387
|
|
|
|
113,858
|
|
|
|
361,104
|
|
|
|
349,869
|
|
Derivative
income (loss)
|
|
|
(7,746 |
) |
|
|
15,832
|
|
|
|
10,938
|
|
|
|
13,680
|
|
Realized
gains (losses) on investments
|
|
|
(1,505 |
) |
|
|
190
|
|
|
|
2,901
|
|
|
|
3,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
112,136
|
|
|
|
129,880
|
|
|
|
374,943
|
|
|
|
366,778
|
|
Traditional
life and annuity premiums - Traditional life and annuity premiums increased
30.1% and 19.9% for the three and nine months ended September 30, 2007 compared
to the same period in 2006. Increasing life sales has been a
strategic focus over the past several years. Traditional life
insurance premiums for products such as whole life and term life are recognized
as revenues over the premium-paying period.
Universal
life and annuity contract revenues - Revenues for universal life and annuity
contract revenues increased 11.5% for the three months ended September 30,
2007
and 10.1% for the first nine months of the current year compared to 2006
and
consist of policy charges for the cost of insurance, administration charges,
and
surrender charges assessed against policyholder account
balances. Revenues in the form of cost of insurance charges were
$18.7 million and $54.8 million for the three and nine months of 2007 compared
to $17.1 million and $50.2 million for the three and nine months ended September
30, 2006. Surrender charges assessed against policyholder account
balances upon withdrawal increased to $8.4 million and $24.3 million for
the
three and nine months of 2007 versus $7.2 million and $21.9 million for the
three and nine months ended September 30, 2006.
Net
investment income - A detail of net investment income is provided
below.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
$ |
77,843
|
|
|
|
76,037
|
|
|
|
231,418
|
|
|
|
229,151
|
|
Mortgage
loans
|
|
|
2,206
|
|
|
|
1,837
|
|
|
|
6,540
|
|
|
|
6,513
|
|
Policy
loans
|
|
|
1,582
|
|
|
|
1,564
|
|
|
|
4,698
|
|
|
|
4,711
|
|
Short-term
investments
|
|
|
1,622
|
|
|
|
882
|
|
|
|
5,284
|
|
|
|
1,493
|
|
Other
invested assets
|
|
|
556
|
|
|
|
660
|
|
|
|
3,565
|
|
|
|
7,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment income
|
|
|
83,809
|
|
|
|
80,980
|
|
|
|
251,505
|
|
|
|
249,638
|
|
Investment
expenses
|
|
|
988
|
|
|
|
763
|
|
|
|
2,410
|
|
|
|
2,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(excluding
derivatives)
|
|
|
82,821
|
|
|
|
80,217
|
|
|
|
249,095
|
|
|
|
247,379
|
|
Derivative
income (loss)
|
|
|
(7,746 |
) |
|
|
15,832
|
|
|
|
10,938
|
|
|
|
13,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
75,075
|
|
|
|
96,049
|
|
|
|
260,033
|
|
|
|
261,059
|
|
Short-term
investments contributed $1.6 million and $5.3 million to income for the three
months and nine months ended September 30, 2007 compared to $0.9 million
and
$1.5 million for the same period in 2006. This increase in 2007 is
attributable to higher asset holdings in these investments compared to
2006. Income from other invested assets for the nine months ended
September 30, 2006 includes a profit participation interest of $1.6 million
and
residual profits of $1.1 million from the sale of equity loans contributing
to
higher income year to date. Derivative gains and losses are recorded
as a component of investment income but may fluctuate substantially from
period
to period based on the performance of the S&P 500® Composite
Stock
Price Index ("S&P 500 Index®"). See
the discussion that follows this section relating to index options and
derivatives.
To
ensure
the Company will be able to pay future commitments to policyholders and provide
a financial return, the funds received as premium payments and deposits are
invested in high quality investments, primarily debt securities. The
income from these investments is closely monitored by the Company due to
its
significant impact on the business.
Net
investment income performance is summarized as follows:
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
Excluding
derivatives:
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
249,095
|
|
|
|
247,379
|
|
Average
invested assets, at amortized cost
|
|
$ |
5,715,069
|
|
|
|
5,430,366
|
|
Annual
yield on average invested assets
|
|
|
5.81 |
% |
|
|
6.07 |
% |
|
|
|
|
|
|
|
|
|
Including
derivatives:
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
260,033
|
|
|
|
261,059
|
|
Average
invested assets, at amortized cost
|
|
$ |
5,769,681
|
|
|
|
5,462,464
|
|
Annual
yield on average invested assets
|
|
|
6.01 |
% |
|
|
6.37 |
% |
The
higher yield in 2006 compared to 2007 is due to the additional income recognized
from the other invested assets of $2.7 million as previously
described. Net investment income performance is analyzed excluding
the derivative income which is a common practice in the insurance industry
in
order to assess underlying profitability and results from ongoing
operations.
Other
income - Other income primarily pertains to the Company's operations
involving a nursing home. Revenues associated with this operation
were $9.4 million and $8.2 million for the nine months ended September 30,
2007
and 2006, respectively. In addition, included in other income for the
nine months ended September 30, 2006 is $2.6 million resulting from lawsuit
settlements.
Derivative
income (loss) - Index options are derivative financial instruments used to
fully hedge the equity return component of the Company's fixed-indexed products.
Index options are intended to act as hedges to match closely the returns
on the
S&P 500 Index®. With an
increase or decline in this index, the index option values likewise increase
or
decline. 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 fixed-indexed annuity and life
policyholders.
Derivative
components included in net investment income and the corresponding contract
interest amounts are detailed below for each date presented.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
income (loss)
|
|
$ |
(27,754 |
) |
|
|
14,807
|
|
|
|
(26,393 |
) |
|
|
7,902
|
|
Realized
income
|
|
|
20,008
|
|
|
|
1,025
|
|
|
|
37,331
|
|
|
|
5,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income (loss) included
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
net investment income
|
|
$ |
(7,746 |
) |
|
|
15,832
|
|
|
|
10,938
|
|
|
|
13,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contract interest
|
|
$ |
38,219
|
|
|
|
59,065
|
|
|
|
143,037
|
|
|
|
138,678
|
|
Realized
gains (losses) on investments - The
third
quarter loss in 2007 is due to an additional valuation allowance related
to one
mortgage loan. Net gains for the nine months ended September 30, 2007
include a gain of $3.7 million in the second quarter from a sale of a previously
impaired bond. The gains in 2006 are primarily due to sales of
collateralized bond obligation holdings from the debt securities portfolio
which
had previously been impaired.
Benefits
and Expenses. The following details benefits and
expenses.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
$ |
11,337
|
|
|
|
9,212
|
|
|
|
32,748
|
|
|
|
28,300
|
|
Amortization
of deferred policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition
costs
|
|
|
25,238
|
|
|
|
24,430
|
|
|
|
74,660
|
|
|
|
69,443
|
|
Universal
life and annuity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contract
interest
|
|
|
38,219
|
|
|
|
59,065
|
|
|
|
143,037
|
|
|
|
138,678
|
|
Other
operating expenses
|
|
|
12,871
|
|
|
|
12,513
|
|
|
|
43,354
|
|
|
|
51,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
87,665
|
|
|
|
105,220
|
|
|
|
293,799
|
|
|
|
288,032
|
|
Life
and other policy benefits - Death claims increased from $7.5 million and
$21.7 million during the three and nine months of the third quarter of 2006
to
$8.0 million and $23.6 million for the same period ended September 30,
2007. While death claim amounts are subject to variation from period
to period, the Company's mortality experience has generally been consistent
with
its product pricing assumptions.
Amortization
of deferred 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 financial statements occurs over future periods in relation
to the
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 profits
pattern is to be "unlocked" and reset based upon the actual
experience. While the Company is required to evaluate its emergence
of profits continually, management believes that the current amortization
patterns of deferred policy acquisition costs are reflective of actual
experience.
In
accordance with the newly adopted SOP 05-1, the Company’s amortization of these
deferred policy acquisition costs is expected to increase in the
future. Under this pronouncement, annuitizations and certain internal
replacements of contracts result in the associated unamortized deferred
acquisition costs, unearned revenue liabilities, and deferred sales inducement
assets being written off.
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 as described above. The
difference between yields earned over policy credited rates is often referred
to
as the "interest spread". Raising policy credited rates can typically
have more of an immediate impact 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:
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Excluding
derivative products)
|
|
|
(Including
derivative products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity
|
|
|
3.43 |
% |
|
|
3.36 |
% |
|
|
3.30 |
% |
|
|
3.34 |
% |
Interest
sensitive life
|
|
|
3.32 |
% |
|
|
4.26 |
% |
|
|
5.00 |
% |
|
|
4.88 |
% |
Contract
interest also includes the performance of the fixed-index component of
the
Company's derivative products as noted which resulted in losses of $7.7
million
and income of $10.9 million in the three months ended September 30, 2007
and
2006, respectively, and income of $15.8 million and $13.7 million for the
nine
months ended September 30, 2007 and 2006, respectively. As previously noted,
the
recent market performance of these fixed-index features is included in
contract
interest expense while also being a component of the Company's investment
income
given the hedge nature of the options purchased for these products.
Other
operating expenses - Other operating expenses consist of general
administrative expenses, licenses and fees, and commissions not subject
to
deferral. Like revenues from other income, nursing home operation
expenses are included in other operating expenses in the amount of $2.8
million
and $8.2 million for the three and nine months ended September 30, 2007
and $2.8
million and $7.7 million for the same period in 2006. Compensation cost
recorded
in the three and nine months ended September 30, 2007 totaled $0.1 million
and
$2.7 million. Other operating expenses for the nine months ended September
30,
2006 included compensation cost of $13.7 million as a result of implementation
of liability classification under SFAS 123(R) for the Company's stock option
plan. Implementation of liability classification resulted in a
current charge for option costs related to outstanding vested and unvested
options.
Federal
Income Taxes. Federal income taxes on earnings from continuing
operations reflect effective tax rates of 30.8% and 33.5% for the first nine
months of 2007 and 2006, respectively. The effective tax rate is
lower than the Federal rate of 35% primarily due to tax-exempt investment
income
related to municipal securities and dividends-received deductions on income
from
stocks.
During
the second quarter of 2007, upon the completion of a detailed review of the
deferred tax items, the Company identified a $2.3 million error in the net
deferred tax liability. The error, which occurred during various periods
prior
to 2005, was corrected in the second quarter of 2007 and resulted in a decrease
in the net deferred tax liability and deferred tax expense. The
adjustment was not material to the current period or any prior period financial
statements.
Segment
Operations
Summary
of Segment Earnings
A
summary
of segment earnings for the three months and nine months ended September
30,
2007 and 2006 is provided below. The segment earnings exclude
realized gains and losses on investments, net of taxes.
|
|
Domestic
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
Life
|
|
|
|
|
|
All
|
|
|
|
|
|
|
Insurance
|
|
|
Insurance
|
|
|
Annuities
|
|
|
Others
|
|
|
Totals
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2007
|
|
$ |
143
|
|
|
|
2,703
|
|
|
|
12,877
|
|
|
|
877
|
|
|
|
16,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2006
|
|
$ |
448
|
|
|
|
2,529
|
|
|
|
12,369
|
|
|
|
602
|
|
|
|
15,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2007
|
|
$ |
(248 |
) |
|
|
7,556
|
|
|
|
42,837
|
|
|
|
4,114
|
|
|
|
54,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2006
|
|
$ |
(656 |
) |
|
|
9,615
|
|
|
|
38,243
|
|
|
|
3,043
|
|
|
|
50,245
|
|
Domestic
Life Insurance Operations
A
comparative analysis of results of operations for the Company's domestic
life
insurance segment is detailed below.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and other revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract revenues
|
|
$ |
6,875
|
|
|
|
5,932
|
|
|
|
19,522
|
|
|
|
17,465
|
|
Net
investment income
|
|
|
4,774
|
|
|
|
4,545
|
|
|
|
13,967
|
|
|
|
14,761
|
|
Other
income
|
|
|
7
|
|
|
|
10
|
|
|
|
34
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
11,656
|
|
|
|
10,487
|
|
|
|
33,523
|
|
|
|
32,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
3,969
|
|
|
|
3,505
|
|
|
|
12,727
|
|
|
|
11,536
|
|
Amortization
of deferred policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition
costs
|
|
|
2,229
|
|
|
|
1,496
|
|
|
|
5,041
|
|
|
|
4,868
|
|
Universal
life insurance contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
|
|
|
2,396
|
|
|
|
2,293
|
|
|
|
7,028
|
|
|
|
6,836
|
|
Other
operating expenses
|
|
|
2,877
|
|
|
|
2,533
|
|
|
|
9,084
|
|
|
|
9,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
11,471
|
|
|
|
9,827
|
|
|
|
33,880
|
|
|
|
33,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings (losses) before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
income taxes
|
|
|
185
|
|
|
|
660
|
|
|
|
(357 |
) |
|
|
(984 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
(benefit) for Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
42
|
|
|
|
212
|
|
|
|
(109 |
) |
|
|
(328 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings (losses)
|
|
$ |
143
|
|
|
|
448
|
|
|
|
(248 |
) |
|
|
(656 |
) |
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.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life insurance revenues
|
|
$ |
5,857
|
|
|
|
4,714
|
|
|
|
16,272
|
|
|
|
13,371
|
|
Traditional
life insurance premiums
|
|
|
1,760
|
|
|
|
1,617
|
|
|
|
5,396
|
|
|
|
5,286
|
|
Reinsurance
premiums
|
|
|
(742 |
) |
|
|
(399 |
) |
|
|
(2,146 |
) |
|
|
(1,192 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
6,875
|
|
|
|
5,932
|
|
|
|
19,522
|
|
|
|
17,465
|
|
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.
Premiums
collected on universal life products are not reflected as revenues in the
Company's statements of earnings in accordance with GAAP. Actual
universal life premiums collected are detailed below.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
First
year and single premiums
|
|
$ |
4,279
|
|
|
|
4,244
|
|
|
|
10,650
|
|
|
|
10,463
|
|
Renewal
premiums
|
|
|
3,825
|
|
|
|
3,620
|
|
|
|
11,883
|
|
|
|
10,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
8,104
|
|
|
|
7,864
|
|
|
|
22,533
|
|
|
|
21,091
|
|
Amortization
of deferred policy acquisition costs increased by $0.7 million for the
three
months ended September 30, 2007 due to a true-up in the current period
related
to surrender rates, portfolio rates, mortality, expenses and credited
rates. Other operating expenses for the nine months ended September
30, 2006 include an additional expense related to compensation costs from
the
implementation of liability classification under SFAS 123(R).
International
Life Insurance Operations
A
comparative analysis of results of operations for the Company's international
life insurance segment is detailed below.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and other revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract revenues
|
|
$ |
21,826
|
|
|
|
19,364
|
|
|
|
64,061
|
|
|
|
57,448
|
|
Net
investment income
|
|
|
6,460
|
|
|
|
6,771
|
|
|
|
21,075
|
|
|
|
18,958
|
|
Other
income
|
|
|
19
|
|
|
|
21
|
|
|
|
106
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
28,305
|
|
|
|
26,156
|
|
|
|
85,242
|
|
|
|
76,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
6,353
|
|
|
|
4,984
|
|
|
|
17,330
|
|
|
|
14,204
|
|
Amortization
of deferred policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition
costs
|
|
|
8,045
|
|
|
|
6,951
|
|
|
|
25,401
|
|
|
|
16,462
|
|
Universal
life insurance contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
|
|
|
6,131
|
|
|
|
7,185
|
|
|
|
19,227
|
|
|
|
16,399
|
|
Other
operating expenses
|
|
|
3,616
|
|
|
|
3,131
|
|
|
|
12,388
|
|
|
|
14,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
24,145
|
|
|
|
22,251
|
|
|
|
74,346
|
|
|
|
62,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings before Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
4,160
|
|
|
|
3,905
|
|
|
|
10,896
|
|
|
|
14,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Federal income taxes
|
|
|
1,457
|
|
|
|
1,376
|
|
|
|
3,340
|
|
|
|
4,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$ |
2,703
|
|
|
|
2,529
|
|
|
|
7,556
|
|
|
|
9,615
|
|
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.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life insurance revenues
|
|
$ |
21,555
|
|
|
|
19,729
|
|
|
|
63,212
|
|
|
|
58,165
|
|
Traditional
life insurance premiums
|
|
|
3,646
|
|
|
|
2,560
|
|
|
|
10,619
|
|
|
|
8,021
|
|
Reinsurance
premiums
|
|
|
(3,375 |
) |
|
|
(2,925 |
) |
|
|
(9,770 |
) |
|
|
(8,738 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
21,826
|
|
|
|
19,364
|
|
|
|
64,061
|
|
|
|
57,448
|
|
International
operations have emphasized universal life policies over traditional life
insurance products. Premiums collected on universal life products are
not reflected as revenues in the Company's statements of earnings in accordance
with GAAP. Actual universal life premiums collected are detailed
below.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
First
year and single premiums
|
|
$ |
11,423
|
|
|
|
9,473
|
|
|
|
31,121
|
|
|
|
26,405
|
|
Renewal
premiums
|
|
|
23,335
|
|
|
|
20,854
|
|
|
|
66,269
|
|
|
|
59,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
34,758
|
|
|
|
30,327
|
|
|
|
97,390
|
|
|
|
85,761
|
|
The
Company's international life operations have been a significant part of the
Company's business which is based upon a long standing reputation in the
international market. The Company reported increased sales of
fixed-indexed universal life products for international life operations with
premiums approximating $19.8 million and $54.1 million for the three and
nine
months ended September 30, 2007 and $16.3 million and $43.0 million for the
same
periods in 2006. As previously noted, net investment income and
contract interest include an increase due to the S&P 500 Index® performance
relative to fixed-indexed products in the three and nine months of 2007 compared
to the same period in 2006.
A
detail
of net investment income for international life insurance operations is provided
below.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
(excluding
derivatives)
|
|
$ |
6,812
|
|
|
|
5,954
|
|
|
|
19,782
|
|
|
|
18,508
|
|
Derivative
income (loss)
|
|
|
(352 |
) |
|
|
817
|
|
|
|
1,293
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
6,460
|
|
|
|
6,771
|
|
|
|
21,075
|
|
|
|
18,958
|
|
Amortization
of deferred policy acquisition costs increased approximately 54% comparing
the
first nine months of 2007 to the same period in 2006. This increase
is due primarily to the application of SOP 05-1 which requires the write-off
of
deferred balances on contracts that are considered substantially changed
under
this new guidance. These balances were previously carried and
amortized over the projected life of the contract.
Other
operating expenses for the nine months ended September 30, 2006, include
an
additional expense from an increase in compensation costs under SFAS 123(R)
as a
result of the implementation of liability classification for stock
options.
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.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and other revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract revenues
|
|
$ |
6,079
|
|
|
|
5,281
|
|
|
|
17,965
|
|
|
|
16,306
|
|
Net
investment income
|
|
|
62,833
|
|
|
|
83,900
|
|
|
|
220,263
|
|
|
|
223,307
|
|
Other
income
|
|
|
543
|
|
|
|
106
|
|
|
|
909
|
|
|
|
2,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
69,455
|
|
|
|
89,287
|
|
|
|
239,137
|
|
|
|
242,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other benefits
|
|
|
1,015
|
|
|
|
723
|
|
|
|
2,691
|
|
|
|
2,560
|
|
Amortization
of deferred policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition
costs
|
|
|
14,964
|
|
|
|
15,983
|
|
|
|
44,218
|
|
|
|
48,113
|
|
Annuity
contract interest
|
|
|
29,692
|
|
|
|
49,587
|
|
|
|
116,782
|
|
|
|
115,443
|
|
Other
operating expenses
|
|
|
3,593
|
|
|
|
4,027
|
|
|
|
13,673
|
|
|
|
18,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
49,264
|
|
|
|
70,320
|
|
|
|
177,364
|
|
|
|
185,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings before Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
20,191
|
|
|
|
18,967
|
|
|
|
61,773
|
|
|
|
57,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Federal income taxes
|
|
|
7,314
|
|
|
|
6,598
|
|
|
|
18,936
|
|
|
|
19,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$ |
12,877
|
|
|
|
12,369
|
|
|
|
42,837
|
|
|
|
38,243
|
|
Revenues
from annuity operations primarily include 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.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surrender
charges
|
|
$ |
4,969
|
|
|
|
4,320
|
|
|
|
14,703
|
|
|
|
13,176
|
|
Payout
annuity and other revenues
|
|
|
1,100
|
|
|
|
952
|
|
|
|
3,239
|
|
|
|
3,107
|
|
Traditional
annuity premiums
|
|
|
10
|
|
|
|
9
|
|
|
|
23
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
6,079
|
|
|
|
5,281
|
|
|
|
17,965
|
|
|
|
16,306
|
|
The
Company's earnings are dependent upon annuity contracts persisting or remaining
in force. While premium and contract revenues decline with a
reduction in surrender charges, the Company's investment earnings benefit
as
more policies remain in force.
Deposits
collected on annuity contracts are not reflected as revenues in the Company's
statements of earnings in accordance with GAAP. Actual annuity deposits
collected for the nine months ended September 30, 2007 and 2006 are detailed
below.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-indexed
annuities
|
|
$ |
87,815
|
|
|
|
82,599
|
|
|
|
239,819
|
|
|
|
229,590
|
|
Other
deferred annuities
|
|
|
25,394
|
|
|
|
44,398
|
|
|
|
87,424
|
|
|
|
137,939
|
|
Immediate
annuities
|
|
|
611
|
|
|
|
1,384
|
|
|
|
3,012
|
|
|
|
7,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
113,820
|
|
|
|
128,381
|
|
|
|
330,255
|
|
|
|
375,174
|
|
Sales
of
fixed-indexed annuities increased 6.3% and 4.5% comparing September 30,
2007 three and nine months deposits compared to the same period of
2006. Fixed-indexed product sales typically follow the stock market
in that sales are higher when confidence is high in the stock market and
lower
if the stock market is showing poor performance. Since the Company
does not offer variable products or mutual funds, these fixed-indexed products
provide an interest crediting alternative to the Company's existing fixed
annuity products and have continued to be a significant portion of the Company’s
annuity business.
Other
deferred annuity deposits decreased as of September 30, 2007 versus
September 30, 2006 with $25.4 million and $87.4 million collected as compared
to
$44.4 million and $137.9 million for the three and nine months,
respectively. These product sales have been trending lower over the
past few years due to low interest rates and investor preferences. As
a selling inducement, many of the deferred products include a first year
interest bonus in addition to a base interest rate. These bonus rates
are deferred in conjunction with other capitalized policy acquisition
costs. The amount deferred and amortized over future periods amounted
to approximately $5.6 million and $15.7 million for the three and nine months
ended September 30, 2007 and $4.9 million and $15.6 million in 2006,
respectively.
A
detail
of net investment income for annuity operations is provided below.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Net
investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
(excluding
derivatives)
|
|
$ |
70,228
|
|
|
|
68,885
|
|
|
|
210,618
|
|
|
|
210,077
|
|
Derivative
income (loss)
|
|
|
(7,395 |
) |
|
|
15,015
|
|
|
|
9,645
|
|
|
|
13,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
62,833
|
|
|
|
83,900
|
|
|
|
220,263
|
|
|
|
223,307
|
|
Derivative
income and loss fluctuate from period to period based on the S&P 500
Index®
performance.
Other
income reported for the nine months ended September 30, 2006 includes $2.6
million relating to lawsuit settlements.
The
Company is required to periodically adjust deferred policy acquisition
amortization factors for actual experience that varies from
assumptions. In the third quarters of 2007 and 2006, a true-up of
assumptions based upon actual results increased amortization for the nine
months
ended September 30, by $2.3 million and $2.0 million,
respectively. Amounts reported for three and nine months totaled
$15.0 million and $44.2 million for 2007 and $16.0 million and $48.1 million
for
the same period in 2006.
Annuity
contract interest includes any equity component interest associated with
the
Company's fixed-indexed annuities. The detail of fixed-indexed
annuity contract interest compared to contract interest for all other annuities
is as follows:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-indexed
annuities
|
|
$ |
9,350
|
|
|
|
27,993
|
|
|
|
53,110
|
|
|
|
48,577
|
|
All
other annuities
|
|
|
23,728
|
|
|
|
24,856
|
|
|
|
71,550
|
|
|
|
75,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
contract interest
|
|
|
33,078
|
|
|
|
52,849
|
|
|
|
124,660
|
|
|
|
124,402
|
|
Bonus
interest deferred and capitalized
|
|
|
(5,560 |
) |
|
|
(4,883 |
) |
|
|
(15,653 |
) |
|
|
(15,582 |
) |
Bonus
interest amortization
|
|
|
2,174
|
|
|
|
1,621
|
|
|
|
7,775
|
|
|
|
6,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contract interest
|
|
$ |
29,692
|
|
|
|
49,587
|
|
|
|
116,782
|
|
|
|
115,443
|
|
As
previously noted, contract interest reflects variations due to the S&P 500
Index®
performance relative to the fair values of fixed-indexed products, increasing
and decreasing in 2007 compared to the same period in 2006.
Other
operating expenses during the nine months ended September 30, 2006,
include an additional expense from implementing liability
classification related to the Company's stock option plan under SFAS 123(R)
accounting guidance.
Other
Operations
National
Western's primary business encompasses its domestic and international life
insurance operations and its annuity operations. However, National
Western also has small real estate, nursing home, and other investment
operations through its wholly-owned subsidiaries. Nursing home
operations generated $1.2 million and $0.5 million of operating earnings
in the
first nine months of 2007 and 2006, respectively.
INVESTMENTS
General
The
Company's investment philosophy emphasizes the prudent 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 September 30,
2007
and December 31, 2006. The Company emphasizes investment grade debt
securities, with smaller holdings in mortgage loans and policy
loans.
|
|
Composition
of Investments
|
|
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(In
thousands)
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
$ |
5,623,778
|
|
|
|
95.4
|
|
|
$ |
5,484,799
|
|
|
|
94.7
|
|
Mortgage
loans
|
|
|
98,852
|
|
|
|
1.7
|
|
|
|
103,325
|
|
|
|
1.8
|
|
Policy
loans
|
|
|
84,377
|
|
|
|
1.4
|
|
|
|
86,856
|
|
|
|
1.5
|
|
Derivatives
|
|
|
51,797
|
|
|
|
0.9
|
|
|
|
72,012
|
|
|
|
1.2
|
|
Equity
securities
|
|
|
21,009
|
|
|
|
0.4
|
|
|
|
21,203
|
|
|
|
0.4
|
|
Real
estate
|
|
|
12,103
|
|
|
|
0.2
|
|
|
|
12,113
|
|
|
|
0.2
|
|
Other
|
|
|
4,862
|
|
|
|
-
|
|
|
|
10,709
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
5,896,778
|
|
|
|
100.0
|
|
|
$ |
5,791,017
|
|
|
|
100.0
|
|
Debt
and Equity Securities
The
Company maintains a diversified portfolio which consists primarily of corporate,
mortgage-backed, and public utilities fixed income securities. Investments
in
mortgage-backed securities include primarily U.S. government agency pass-through
securities and collateralized mortgage obligations ("CMOs"). As of September
30,
2007 and December 31, 2006, the Company's debt securities portfolio consisted
of
the following:
|
|
Composition
of Debt Securities
|
|
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(In
thousands)
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
$ |
2,401,924
|
|
|
|
42.7
|
|
|
$ |
2,384,762
|
|
|
|
43.5
|
|
Mortgage-backed
securities
|
|
|
1,910,242
|
|
|
|
34.0
|
|
|
|
1,817,532
|
|
|
|
33.1
|
|
Public
utilities
|
|
|
667,467
|
|
|
|
11.9
|
|
|
|
623,649
|
|
|
|
11.4
|
|
U.S.
government/agencies
|
|
|
438,640
|
|
|
|
7.8
|
|
|
|
447,573
|
|
|
|
8.2
|
|
Asset-backed
securities
|
|
|
110,266
|
|
|
|
2.0
|
|
|
|
122,101
|
|
|
|
2.2
|
|
States
& political subdivisions
|
|
|
64,616
|
|
|
|
1.1
|
|
|
|
58,627
|
|
|
|
1.1
|
|
Foreign
governments
|
|
|
30,623
|
|
|
|
0.5
|
|
|
|
30,555
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
5,623,778
|
|
|
|
100.0
|
|
|
$ |
5,484,799
|
|
|
|
100.0
|
|
The
Company has expanded its holdings of U.S. government and private mortgage-backed
securities over the past several years 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") 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.
Within
the debt securities portfolio, the Company holds approximately $110.3 million
in
asset-backed securities at September 30, 2007, which include manufactured
housing bonds and home equity loans. The Company does not have any holdings
in
collaterized bond obligations (CBOs), collateralized debt obligations (CDOs),
or
collateralized loan obligations (CLOs). Principal risks in holding asset-backed
securities are structural, credit and capital market risks. Structural risks
include the securities’ priority in the issuer’s capital structure, the adequacy
of and ability to realize proceeds from collateral and the potential for
prepayments. Credit risks include corporate credit risks or consumer credit
risks for financing such as subprime mortgages. Capital market risks include
the
general level of interest rates and the liquidity for these securities in
the
marketplace. As of September 30, 2007, the Company held investments in
asset-backed securities collateralized by subprime mortgages with a carrying
value of $55 million, less than 1% of invested assets. None of these securities
are rated below “AAA” and over 50% are insured. In addition, all of the subprime
related asset-backed securities were purchased prior to 2005, the commencement
of the period during which management believes the quality of underwriting
was
lessened. In light of the high credit quality of these securities, the Company
does not expect to incur any material losses despite the recent increase
in
default rates and market concern over future performance of this asset class.
The Company also does not have investments in bond funds with subprime
exposure.
In
addition to diversification, an important aspect of the Company's investment
approach is managing the credit quality of its investments in debt
securities. As of September 30, 2007, 98% of the Company's debt
securities were investment grade quality. 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. In addition, the Company is monitoring
the bond portfolio in reference to the possibility of leveraged buyouts that
would likely result in lower credit quality ratings. 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®
.
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(In
thousands)
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
and U.S. government
|
|
$ |
2,576,275
|
|
|
|
45.8
|
|
|
$ |
2,485,122
|
|
|
|
45.3
|
|
AA
|
|
|
304,296
|
|
|
|
5.4
|
|
|
|
284,965
|
|
|
|
5.2
|
|
A
|
|
|
1,342,781
|
|
|
|
23.9
|
|
|
|
1,330,980
|
|
|
|
24.3
|
|
BBB
|
|
|
1,289,290
|
|
|
|
22.9
|
|
|
|
1,237,151
|
|
|
|
22.5
|
|
BB
and other below investment grade
|
|
|
111,136
|
|
|
|
2.0
|
|
|
|
146,581
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
5,623,778
|
|
|
|
100.0
|
|
|
$ |
5,484,799
|
|
|
|
100.0
|
|
The
Company 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 the first nine months of 2007, the Company's
percentage of below investment grade securities decreased from 2.7% of the
portfolio to 2.0%. 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
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
%
of
|
|
|
|
Amortized
|
|
|
Carrying
|
|
|
Fair
|
|
|
Invested
|
|
|
|
Cost
|
|
|
Value
|
|
|
Value
|
|
|
Assets
|
|
|
|
(In
thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2007
|
|
$ |
114,396
|
|
|
|
111,136
|
|
|
|
109,341
|
|
|
|
1.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
$ |
145,858
|
|
|
|
146,581
|
|
|
|
146,170
|
|
|
|
2.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
$ |
168,423
|
|
|
|
170,455
|
|
|
|
167,770
|
|
|
|
3.1 |
% |
The
Company closely monitors 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. Holdings in below investment grade
securities by category are summarized below.
|
|
Below
Investment Grade Debt Securities as of September 30,
|
|
|
|
Amortized
|
|
|
Carrying
|
|
|
Fair
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$ |
21,965
|
|
|
|
21,780
|
|
|
|
21,799
|
|
|
|
21,723
|
|
Utilities/Energy
|
|
|
21,444
|
|
|
|
22,664
|
|
|
|
22,890
|
|
|
|
23,259
|
|
Telecommunication
|
|
|
19,998
|
|
|
|
17,532
|
|
|
|
17,532
|
|
|
|
17,999
|
|
Auto
finance
|
|
|
13,000
|
|
|
|
12,493
|
|
|
|
11,668
|
|
|
|
12,481
|
|
Asset-backed
|
|
|
11,570
|
|
|
|
11,571
|
|
|
|
10,706
|
|
|
|
10,944
|
|
Medical
|
|
|
6,153
|
|
|
|
6,153
|
|
|
|
5,722
|
|
|
|
6,200
|
|
Manufacturing
|
|
|
5,492
|
|
|
|
5,492
|
|
|
|
5,573
|
|
|
|
5,466
|
|
Transportation
|
|
|
2,288
|
|
|
|
2,767
|
|
|
|
2,767
|
|
|
|
3,109
|
|
Other
|
|
|
12,486
|
|
|
|
10,684
|
|
|
|
10,684
|
|
|
|
10,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
114,396
|
|
|
|
111,136
|
|
|
|
109,341
|
|
|
|
111,648
|
|
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 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 September
30, 2007, approximately 33.9% of the Company's total debt and equity securities,
based on fair values, were classified as securities available for
sale. This slight increase in available for sale securities is a
result of short-term investments in bonds. These holdings provide the
Company flexibility 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
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
(Losses)
|
|
|
|
(In
thousands)
|
|
Securities
held to maturity:
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
$ |
3,699,411
|
|
|
|
3,750,933
|
|
|
|
(51,522 |
) |
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
|
1,872,845
|
|
|
|
1,901,219
|
|
|
|
(28,374 |
) |
Equity
securities
|
|
|
21,009
|
|
|
|
12,203
|
|
|
|
8,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
5,593,265
|
|
|
|
5,664,355
|
|
|
|
(71,090 |
) |
In
accordance with SFAS No. 115, Accounting for Certain Debt and Equity
Securities, during the first nine months of 2007 one security was sold from
the held to maturity portfolio due to significant credit
deterioration. The amortized cost of the bond was $5.2 million and
resulted in a realized gain of $19,000. No securities were sold
during the first nine months of 2006. No securities were transferred
from the held to maturity portfolio during the first nine months of 2007
or
2006.
Proceeds
from sales of securities available for sale totaled $15.2 million and $0.1
million during the third quarter of 2007 and 2006, respectively, which resulted
in realized losses of $0.3 million in 2007 and minimal realized gains in
2006. For the nine months ended September 30, 2007 and 2006, proceeds
from sales of securities available for sale totaled $28.4 million and $21.5
million, respectively. These sales resulted in gains of $4.3 million
and $1.7 million, respectively.
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.
|
|
September
30,
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities - fair value
|
|
$ |
5,572,256
|
|
|
|
5,459,172
|
|
|
|
5,448,990
|
|
Debt
securities - amortized cost
|
|
$ |
5,652,152
|
|
|
|
5,598,374
|
|
|
|
5,498,461
|
|
Fair
value as a percentage of amortized cost
|
|
|
98.59 |
% |
|
|
97.51 |
% |
|
|
99.10 |
% |
Unrealized
losses
|
|
$ |
(79,896 |
) |
|
|
(139,201 |
) |
|
|
(49,471 |
) |
Ten-year
U.S. Treasury bond – increase (decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
in yield for the quarter
|
|
|
(0.44 |
)% |
|
|
0.38 |
% |
|
|
|
|
|
|
Unrealized
Losses Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qtr
|
|
|
YTD
|
|
|
|
At
|
|
|
At
|
|
|
At
|
|
|
Change
in
|
|
|
Change
in
|
|
|
|
September
30,
|
|
|
June
30,
|
|
|
December
31,
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
Losses
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities held to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
maturity
|
|
$ |
(51,522 |
) |
|
|
(95,719 |
) |
|
|
(35,809 |
) |
|
|
44,197
|
|
|
|
(15,713 |
) |
Debt
securities available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
sale
|
|
|
(28,374 |
) |
|
|
(43,482 |
) |
|
|
(13,662 |
) |
|
|
15,108
|
|
|
|
(14,712 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
(79,896 |
) |
|
|
(139,201 |
) |
|
|
(49,471 |
) |
|
|
59,305
|
|
|
|
(30,425 |
) |
Changes
in interest rates typically have a significant impact on the fair values
of the
Company's debt securities. Market interest rates of the ten-year U.S. Treasury
bond decreased approximately 44 basis points from the second quarter of 2007,
decreasing the unrealized loss to $80.0 million on a portfolio of approximately
$5.6 billion. The Company would expect similar results in the future
from any 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,
as the
Company has the ability and intent to hold these securities, changes in fair
values due to interest rate risk have relatively small effects on the Company's
consolidated balance sheet.
The
Company manages interest rate risk through on-going 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 risk through surrender charges
that are imposed to discourage policy surrenders. 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
Company performed detailed sensitivity analysis as of December 31, 2006,
for its
interest rate-sensitive assets and liabilities. The changes in market
values of the Company's debt securities in the third quarter of 2007 were
reasonable given the expected range of results of this
analysis.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
Liquidity
requirements are met primarily by funds provided from operations. Premium
deposits and revenues, investment income, and investment maturities are the
primary sources of funds while investment purchases, policy benefits, and
operating expenses are the primary uses of funds. The Company
historically has not been put in the position of liquidating invested assets
to
provide cash flow. However, 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 for life insurers 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
charges, that help limit and discourage early withdrawals.
The
actual amounts paid by product line in connection with surrenders and
withdrawals for the periods ended September 30 are noted in the table
below.
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
Line:
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
Life
|
|
$ |
2,036
|
|
|
|
1,359
|
|
|
|
4,753
|
|
|
|
3,416
|
|
Universal
Life
|
|
|
9,691
|
|
|
|
7,564
|
|
|
|
25,758
|
|
|
|
23,073
|
|
Annuities
|
|
|
103,523
|
|
|
|
89,585
|
|
|
|
318,653
|
|
|
|
271,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
115,250
|
|
|
|
98,508
|
|
|
|
349,164
|
|
|
|
297,661
|
|
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 $190.9
million and $169.8 million for the nine months ended September 30, 2007 and
2006, respectively. The Company also has significant cash flows from both
scheduled and unscheduled investment security maturities, redemptions, and
prepayments. These cash flows totaled $375.0 million and $286.4
million for the nine months ended September 30, 2007 and 2006,
respectively. These cash flow items could be reduced if interest
rates rise. Net cash inflows (outflows) from the Company's universal
life and investment annuity deposit product operations totaled $(64.2) million
and $25.9 million during the nine months ended September 30, 2007 and 2006,
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 September 30, 2007, the
Company had commitments of approximately $8.9 million remaining to be funded
of
a $12.0 million commitment which was 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 began 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 included in the Company's Annual Report on Form 10-K
for
the year ended December 31, 2006 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
|
|
|
8,882
|
|
|
|
8,882
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Life
claims payable (2)
|
|
|
46,029
|
|
|
|
46,029
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
long-term reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities
reflected on the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
balance
sheet under GAAP (3)
|
|
|
370,453
|
|
|
|
72,988
|
|
|
|
108,289
|
|
|
|
55,158
|
|
|
|
134,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
427,689
|
|
|
|
128,707
|
|
|
|
109,589
|
|
|
|
55,375
|
|
|
|
134,018
|
|
(1) Refer
to Note 9 in the Notes to Consolidated Financial Statements relating to leases
in the Company’s Annual Report on Form 10-K.
(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 reserve liabilities include 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 September
30,
2007 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.
CHANGES
IN ACCOUNTING PRINCIPLES AND CRITICAL ACCOUNTING POLICIES
Changes
in Accounting Principles
Refer
to
Note 2 of the Notes to Condensed Consolidated Financial
Statements.
REGULATORY
AND OTHER ISSUES
Statutory
Accounting Practices
Regulations
that affect the Company and the insurance industry are often the result of
efforts by the National Association of Insurance Commissioners
("NAIC"). The NAIC routinely publishes new regulations as model acts
or laws which states subsequently adopt as part of their insurance
regulations. Currently, the Company is not aware of any NAIC
regulatory matter material to its operations or reporting of financial
results.
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. Statutory laws prohibit public
dissemination of certain RBC information. However, the Company's
current statutory capital and surplus is significantly in excess of the
threshold RBC requirements.
ABOUT
MARKET RISK
This
information is included in Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations, in the Investments in Debt
and
Equity Securities section.
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 such evaluation, the
Company's Chief Executive Officer and Chief Finanical Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective in recording, processing, summarizing, and reporting,
on a timely basis, information required to be disclosed by the Company in
the
reports that it files or submits under the Exchange Act.
There
have been no changes in the Company's internal controls over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
the
quarter ended September 30, 2007 that have materially affected, or are
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
Refer
to
Note 9 "Legal Proceedings" of the accompanying financial statements included
in
this Form 10-Q.
There
have been no changes relative to the risk factors disclosed in the Company's
Annual Report on Form 10-K for the year ended December 31,
2006.
Effective
March 10, 2006, the Company adopted and implemented a limited stock buy-back
program associated with the Company's 1995 Stock Option and Incentive Plan
("Plan") 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.
During
the months ended August and September 2007, the Company purchased 6,350 shares
and 1,780 shares from option holders at an average price of $261.96 and $247.98,
respectively. These purchased shares are reported in the Company's
condensed consolidated financial statements as authorized and
unissued.
(a)
Exhibits
Exhibit
3 ii (g)
|
-
|
National
Western Life Insurance Company Bylaws changes effective August
24,
2007.
|
|
|
|
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)
|
-
|
Certification
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.
|
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
|
|
|
|
|
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY
|
(Registrant)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date: November
8, 2007
|
|
|
/S/
Ross R. Moody
|
|
|
|
|
|
Ross
R. Moody
|
|
|
|
|
|
President,
Chief Operating Officer,
|
|
|
|
|
|
and
Director
|
|
|
|
|
|
(Authorized
Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date: November
8, 2007
|
|
|
/S/
Brian M. Pribyl
|
|
|
|
|
|
Brian
M. Pribyl
|
|
|
|
|
|
Senior
Vice President,
|
|
|
|
|
|
Chief
Financial & Administrative
|
|
|
|
|
|
Officer
and Treasurer
|
|
|
|
|
|
(Principal
Financial Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date: November
8, 2007
|
|
|
/S/
Kay E. Osbourn
|
|
|
|
|
|
Kay
E. Osbourn
|
|
|
|
|
|
Vice
President,
|
|
|
|
|
|
Controller
and Assistant Treasurer
|
|
|
|
|
|
(Principal
Accounting Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|