nwlform10k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
þ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the Fiscal Year Ended December 31, 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
(Address
of Principal Executive Offices)
(512)
836-1010
(Telephone
Number)
Securities
registered pursuant to Section 12 (b) of the Act:
None
Securities
registered pursuant to Section 12 (g) of the Act:
None
(Title of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o No þ
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days: Yes þ No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated file” in Rule 12b-2 of the Exchange
Act. (Check One)
Large
accelerated filer o Accelerated
filer þ Non-accelerated
filer o Smaller
reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
The
aggregate market value of the common stock (based upon the closing price) held
by non-affiliates of the Registrant on June 29, 2007 was
$573,134,079.
As of
March 13, 2008, the number of shares of Registrant's common stock outstanding
was: Class A – 3,422,324 and Class B - 200,000.
DOCUMENTS
INCORPORATED BY REFERENCE
None
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PART
I
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Page
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Business
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4
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Risk
Factors
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9
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Unresolved
Staff Comments
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13
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Properties
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13
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Legal
Proceedings
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13
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Submission
of Matters to a Vote of Security Holders
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14
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PART
II
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Market
for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
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14
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Selected
Consolidated Financial Data
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16
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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17
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Quantitative
and Qualitative Disclosures About Market Risk
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44
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Financial
Statements and Supplementary Data
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44
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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44
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Controls
and Procedures
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44
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Other
Information
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47
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PART
III
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Directors,
and Executive Officers and Corporate Governance
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47
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Executive
Compensation
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50
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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68
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Certain
Relationships and Related Transactions, and Director
Independence
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70
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Principal
Accountant Fees and Services
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71
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PART
IV
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Exhibits
and Financial Statement Schedules
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71
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Signatures
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132
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PART
I
General
National
Western Life Insurance Company (hereinafter referred to as "National Western",
"Company", or "Registrant") is a stock life insurance company, chartered in the
State of Colorado in 1956, and doing business in forty-nine states, the District
of Columbia, and four U.S. territories or possessions. National
Western is also licensed in Haiti, and although not otherwise licensed, accepts
applications from and issues policies to residents of various countries in
Central and South America, the Caribbean, the Pacific Rim, Eastern Europe and
Asia. Such policies are underwritten, accepted, and issued in the United States
upon applications submitted by independent contractor broker-agents. The Company
provides life insurance products for the savings and protection needs of
approximately 149,000 policyholders and for the asset accumulation and
retirement needs of 124,000 annuity contractholders.
During
2007, the Company's total assets increased 2.1% to $6.8 billion at December 31,
2007 from $6.7 billion at December 31, 2006. The Company generated revenues of
$474.5 million, $521.9 million, and $441.0 million in 2007, 2006, and 2005,
respectively. In addition, National Western generated net income of $85.4
million, $76.3 million, and $77.3 million in 2007, 2006, and 2005,
respectively.
The
Company's financial information, including information in this report filed on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
amendments to the above reports, are accessible free of charge through the
Company's Internet site at www.nationalwesternlife.com
or may be viewed at the United States Securities and Exchange Commission ("SEC")
Public Reference Room in Washington, D.C. or at the SEC's Internet site at www.sec.gov.
Products
National
Western offers a broad portfolio of individual whole life, universal life and
term insurance plans, and annuities, including supplementary
riders.
Life Products. The Company's
life products provide protection for the life of the insured and, in some cases,
allow for cash value accumulation on a tax-deferred basis. These product
offerings include universal life insurance ("UL"), interest-sensitive whole
life, and traditional products such as term insurance coverage. Interest
sensitive products such as UL accept premiums that are applied to an account
value. Deducted from the account value are cost of insurance charges which vary
by age, gender, plan, and class of insurance, as well as various expense
charges. Interest is credited to account values at a fixed interest rate
generally determined in advance and guaranteed for a policy year at a time,
subject to minimum guaranteed rates specified in the policy contract. A slight
variation to this general interest crediting practice involves equity-indexed
universal life ("EIUL") policies whose credited interest may be linked in part
to an outside index such as the S&P 500Ò
Composite Stock Price Index ("S&P 500 IndexÒ")
at the election of the policyholder. These products offer both flexible and
fixed premium modes and provide policyholders with flexibility in the available
coverage, the timing and amount of premium payments and the amount of the death
benefit, provided there are sufficient policy funds to cover all policy charges
for the coming year. Traditional products generally provide for a fixed death
benefit payable in exchange for regular premium payments.
Annuity Products. Annuity
products sold include flexible premium and single premium deferred annuities,
fixed indexed annuities, and single premium immediate annuities. These products
can be tax qualified or nonqualified annuities. A fixed single premium deferred
annuity ("SPDA") provides for a single premium payment at the time of issue, an
accumulation period, and an annuity payout period commencing at some future
date. A flexible premium deferred annuity ("FPDA") provides the same features
but allows, generally with some conditions, additional payments into the
contract. Interest is credited to the account value of the annuity initially at
a current rate of interest which is guaranteed for a period of time, typically
the first year. After this period, the interest credited is subject to change
based upon market rates and product profitability subject to a minimum
guaranteed rate specified in the contract. Interest accrues during the
accumulation period generally on a tax-deferred basis to the contract holder.
After a number of years specified in the annuity contract, the owner may elect
to have the proceeds paid as a single payment or as a series of payments over a
period of time. The owner is permitted at any time during the accumulation
period to withdraw all or part of the annuity account balance subject to
contract provisions such as surrender charges and market value adjustments. A
fixed indexed deferred annuity performs essentially in the same manner as SPDAs
and FPDAs with the exception that, in addition to a fixed interest crediting
option, the contract holder has the ability to elect an interest crediting
mechanism that is linked, in part, to an outside index such as the S&P 500
IndexÒ.
A single premium immediate annuity ("SPIA") foregoes the accumulation period and
immediately commences an annuity payout period.
Distributions
of the Company's direct premium revenues and deposits by product type are
provided below.
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Years
Ended December 31,
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2007
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2006
|
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2005
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(In
thousands)
|
|
Annuities:
|
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|
|
|
|
|
|
|
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Single
premium deferred
|
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$ |
3,808 |
|
|
|
8,216 |
|
|
|
10,389 |
|
Flexible
premium deferred
|
|
|
112,472 |
|
|
|
163,415 |
|
|
|
225,941 |
|
Fixed
indexed deferred
|
|
|
316,848 |
|
|
|
303,613 |
|
|
|
298,227 |
|
Single
premium immediate
|
|
|
4,637 |
|
|
|
10,750 |
|
|
|
23,383 |
|
|
|
|
|
|
|
|
|
|
|
|
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Total
annuities
|
|
|
437,765 |
|
|
|
485,994 |
|
|
|
557,940 |
|
|
|
|
|
|
|
|
|
|
|
|
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Universal
life insurance
|
|
|
168,279 |
|
|
|
146,742 |
|
|
|
133,579 |
|
Traditional
life and other
|
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24,915 |
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18,046 |
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16,629 |
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Total
direct premiums and deposits collected
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$ |
630,959 |
|
|
|
650,782 |
|
|
|
708,148 |
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Operating
Segments
The
Company manages its business between Domestic Insurance Operations and
International Insurance Operations. For segment reporting purposes,
the Company's annuity business, which is predominantly domestic, is separately
identified.
Domestic Insurance
Operations. The Company is currently licensed to do business in all
states and the District of Columbia, except for New York. Products
marketed are annuities, universal life insurance, and traditional life
insurance, which include both term and whole life products. The
majority of domestic sales are the Company's annuities. National Western markets
and distributes its domestic products primarily through independent national
marketing organizations ("NMO"). These NMOs assist the Company in
recruiting, contracting, and managing independent agents. The
Company's agents are independent contractors who are compensated on a commission
basis. At December 31, 2007, the Company's NMO relationships had
contracted approximately 5,600 independent agents with the
Company. Over 26% of these contracted agents submitted policy
applications to the Company in the past twelve months.
International Insurance
Operations. National Western's international operations generally focus
on foreign nationals in upper socioeconomic classes. Insurance
products are issued primarily to residents of countries in Central and South
America, the Caribbean, the Pacific Rim, Eastern Europe, and Asia. Issuing
policies to residents of countries in these different regions provides
diversification that helps to minimize large fluctuations that could arise due
to various economic, political, and competitive pressures that may occur from
one country to another. Products issued to international residents
are almost entirely universal life and traditional life insurance products.
However, certain annuity and investment contracts are also available. At
December 31, 2007, the Company had 72,940 international life insurance policies
in force representing nearly $14.8 billion in face amount of
coverage.
International
applications are submitted by independent contractors, consultants and
broker-agents, many of whom have been submitting policy applications to National
Western for 20 or more years. The Company had relationships with
approximately 5,200 independent international individuals at December
31, 2007, nearly 44% of which submitted policy applications to the Company in
the past twelve months.
There are
some inherent risks of accepting international applications which are not
present within the domestic market that are reduced substantially by the Company
in several ways. As previously described, the Company accepts applications from
foreign nationals in upper socioeconomic classes who have substantial financial
resources. This targeted customer base coupled with National
Western's conservative underwriting practices have historically resulted in
claims experience, due to natural causes, similar to that in the United
States. The Company minimizes exposure to foreign currency risks by
requiring payment of premiums and claims in United States dollars. Finally, over
forty years of experience with the international products and the Company's
longstanding business relationships further serve to minimize
risks.
Geographical Distribution of
Business. The following table depicts the distribution of the Company's
premium revenues and deposits.
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Years
Ended December 31,
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2007
|
|
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2006
|
|
|
2005
|
|
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(In
thousands)
|
|
|
|
|
|
|
|
|
|
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|
United
States domestic products:
|
|
|
|
|
|
|
|
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Annuities
|
|
$ |
421,497 |
|
|
|
475,867 |
|
|
|
548,967 |
|
Life
insurance
|
|
|
60,375 |
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|
|
35,780 |
|
|
|
36,594 |
|
|
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Total
domestic products
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|
481,872 |
|
|
|
511,647 |
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585,561 |
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|
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|
|
|
|
|
|
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|
International
products:
|
|
|
|
|
|
|
|
|
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|
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Annuities
|
|
|
16,268 |
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|
10,127 |
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|
|
8,973 |
|
Life
insurance
|
|
|
132,819 |
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|
129,008 |
|
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|
113,614 |
|
|
|
|
|
|
|
|
|
|
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Total
international products
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|
|
149,087 |
|
|
|
139,135 |
|
|
|
122,587 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total
direct premiums and deposits collected
|
|
$ |
630,959 |
|
|
|
650,782 |
|
|
|
708,148 |
|
Although
many agents sell National Western's products, the Company's annuity sales in any
year typically reflect one or two NMOs whose agents sold 10% or more of the
Company’s total annuity sales. In 2007, there were two such NMOs who accounted
for 24.2% and 10.7% of total annuity sales, respectively. Similarly, domestic
life insurance sales in any year may include one or two NMOs who accounted for
10% or more of total domestic life insurance sales. In 2007, there were two NMOs
who generated 23.8% and 19.4%, respectively, of total domestic life insurance
sales. The latter NMO was also the same NMO who produced 24.2% of total annuity
sales. With the independent distribution model the Company employs, the
concentration of sales within a particular NMO is not as an acute concern as
with other distribution relationships given the underlying agents are free to
contract with the Company through any NMO the Company has a relationship with.
International life insurance sales are much more diversified by independent
consultants and contractors and in 2007 were geographically attributed to Latin
America (70%), the Pacific Rim (13%), and Eastern Europe (17%).
Segment Financial
Information. A summary of financial information for the Company's
segments is as follows:
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Domestic
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International
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|
Life
|
|
|
Life
|
|
|
|
|
|
All
|
|
|
|
|
|
|
Insurance
|
|
|
Insurance
|
|
|
Annuities
|
|
|
Others
|
|
|
Totals
|
|
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(In
thousands)
|
|
Revenues,
excluding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
realized
gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$ |
44,783 |
|
|
|
113,598 |
|
|
|
292,402 |
|
|
|
20,227 |
|
|
|
471,010 |
|
2006
|
|
|
43,222 |
|
|
|
106,613 |
|
|
|
350,665 |
|
|
|
18,697 |
|
|
|
519,197 |
|
2005
|
|
|
42,165 |
|
|
|
93,577 |
|
|
|
277,889 |
|
|
|
17,528 |
|
|
|
431,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings: (A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$ |
342 |
|
|
|
20,179 |
|
|
|
56,299 |
|
|
|
6,278 |
|
|
|
83,098 |
|
2006
|
|
|
297 |
|
|
|
12,191 |
|
|
|
56,559 |
|
|
|
5,566 |
|
|
|
74,613 |
|
2005
|
|
|
2,809 |
|
|
|
13,559 |
|
|
|
47,915 |
|
|
|
6,559 |
|
|
|
70,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
assets: (B)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$ |
399,097 |
|
|
|
796,012 |
|
|
|
5,500,226 |
|
|
|
106,039 |
|
|
|
6,801,374 |
|
2006
|
|
|
381,490 |
|
|
|
715,064 |
|
|
|
5,467,733 |
|
|
|
103,087 |
|
|
|
6,667,374 |
|
2005
|
|
|
366,939 |
|
|
|
631,477 |
|
|
|
5,256,146 |
|
|
|
94,064 |
|
|
|
6,348,626 |
|
Notes
to Table:
(A) Amounts exclude realized
gains and losses on investments, net of taxes.
(B) Amounts exclude other
unallocated assets.
Additional
information concerning these industry segments is included in Note 13, Segment
and Other Operating Information, of the accompanying consolidated financial
statements.
Competition
and Ratings
National
Western competes with hundreds of life and health insurance company groups in
the United States as well as other financial intermediaries such as banks and
securities firms who market insurance products. Competitors in our international
markets include Pan-American Life Insurance, American Fidelity Life Insurance,
and Best Meridian Insurance while domestic market competitors include, among
others, American Equity Investment Life, Sammons Financial Group, AVIVA,
Allstate, Lincoln National Life, and Old Mutual Financial Network. Competitive
factors are primarily the breadth and quality of products offered, established
positions in niche markets, pricing, relationships with distribution, commission
structures, perceived stability of the insurer, quality of underwriting and
customer service, and cost efficiency. Operating results of life insurers are
subject to fluctuations not only from this competitive environment but also due
to economic conditions, interest rate levels and changes, performance of
investments, and the maintenance of strong insurance ratings from independent
rating agencies.
In order
to compete successfully, life insurers have turned their attention toward
distribution, technology, defined end market targets, speed to the market in
terms of product development, and customer relationship management as ways of
gaining a competitive edge. The Company's management believes that it competes
primarily on the basis of its longstanding reputation for commitment in serving
international markets, its financial strength and stability, and its ability to
attract and retain distribution based upon product and
compensation.
Ratings
with respect to financial strength are an important factor in establishing the
competitive position of insurance companies. Financial strength ratings are
generally defined as a rating agency’s opinion as to a company’s financial
strength and ability to meet ongoing obligations to policyholders. Accordingly,
ratings are important to maintaining public confidence and impact the ability to
market products. The following summarizes the Company's financial strength
ratings.
Rating
Agency
|
Rating
|
|
|
Standard
& Poor's
|
A (Strong)
|
|
|
A.M.
Best
|
A- (Excellent)
|
A.M. Best
and Standard & Poor’s ratings are a consideration of the Company’s claims
paying ability and are not a rating of the Company’s investment worthiness. The
rating agencies generally review the Company's rating on an annual basis during
the second calendar quarter of the year. The above ratings were assigned during
2007 with a stable outlook from Standard & Poor’s and a positive outlook
from A.M. Best. The positive outlook from A.M. Best signifies the rating
agency’s bias toward a rating upgrade sometime in the future. However, there is
no assurance that the Company's ratings will continue for a certain period of
time. In the event the Company's ratings are downgraded, the Company's business
may be negatively impacted.
Risk
Management
Similar
to other insurers, the Company is exposed to a wide spectrum of financial,
operational, and other risks as described in Item 1A. “Risk Factors”. Effective
enterprise risk management is a key concern for identifying, monitoring,
measuring, communicating, and managing risks within limits and risk tolerances.
The Company’s Board of Directors and senior management are knowledgeable of and
accountable for key risks. The Board meets at least every other month
and regularly hears reports from the President and Chief Operating Officer, the
Chief Financial and Administrative Officer, the Chief Actuary, the Chief
Investment Officer, and the Chief Compliance Officer. In addition, the Board has
several committees which include the Audit Committee, the Investment Committee,
and the Compensation and Stock Option Committee that regularly convene to
address various aspects of risk.
The
Company maintains a system of disclosure controls and procedures, including
internal controls designed to provide reasonable assurance that assets are
safeguarded and transactions are properly authorized, executed and recorded. The
Company recognizes the importance of full and open presentation of its financial
position and operating results and to this end maintains a Disclosure Controls
and Procedures Committee comprised of senior executives who possess
comprehensive knowledge of the Company's business and
operations. This Committee is responsible for evaluating disclosure
controls and procedures and for the gathering, analyzing, and disclosing of
information as required to be disclosed under the securities laws. It
assists the Chief Executive Officer and Chief Financial Officer in their
responsibilities of making the certifications required under the securities laws
regarding the Company's disclosure controls and procedures. It
ensures that material financial information is properly communicated up the
Company's hierarchy to the appropriate person or persons and that all
disclosures are made in a timely fashion. This Committee reports
directly to the Audit Committee of the Company.
The
Company's product designs, underwriting standards and risk management techniques
are utilized to protect against disintermediation risk and greater than expected
mortality and morbidity risk. Disintermediation risk is limited through the use
of surrender charges, certain provisions not allowing discretionary withdrawals,
and market value adjustment features. Investment guidelines including duration
targets, asset allocation tolerances and return objectives help to ensure that
disintermediation risk is managed within the constraints of profitability
criteria. Prudent underwriting is applied to select and price insurance risks
and the Company regularly monitors mortality experience relative to its product
pricing assumptions. Enforcement of disciplined claims management serves to
further protect against greater than expected mortality.
A
significant aspect of the Company’s business is managing the linkage of its
asset characteristics with the anticipated behavior of its policy obligations
and liabilities, a process commonly referred to as asset-liability matching. The
Company maintains an Asset-Liability Committee (“ALCO”) consisting of senior
level members of the Company who assist and advise the Company’s Board of
Directors in monitoring the level of risk the Company is exposed to in managing
its assets and liabilities in order to attain the risk-return profile
desired. Certain members of the ALCO meet as frequently as necessary,
to review and recommend for board of director ratification, current period
interest crediting rates to policyholders based upon existing and anticipated
investment opportunities. These rates apply to new sales and to products after
an initial guaranteed period, if applicable. Rates are established after the
initial guaranteed period based upon asset portfolio yields and each product’s
required interest spread, taking into consideration current competitive market
conditions.
Substantially
all international products contain a currency clause stating that premium and
claim "dollars" refer to lawful currency of the United States. Policy
applications submitted by international insurance brokers are generally
associated with individuals in upper socioeconomic classes who desire the
stability and inflationary hedge of dollar denominated insurance products issued
by the Company. The favorable demographics of this group typically
results in a higher average policy size, and persistency and claims experience
(from natural causes) similar to that in the United States. By
accepting applications submitted on residents outside the United States, the
Company is able to further diversify its revenue, earnings, and insurance
risk.
The
Company follows the industry practice of reinsuring (ceding) portions of its
insurance risks with a variety of reinsurance companies. The use of reinsurance
allows the Company to underwrite policies larger than the risk it is willing to
retain on any single life and to continue writing a larger volume of new
business. The maximum amount of life insurance the Company normally retains is
$250,000 on any one life subject to a minimum reinsurance session of $50,000.
However, the use of reinsurance does not relieve the Company of its primary
liability to pay the full amount of the insurance benefit in the event of the
failure of a reinsurer to honor its contractual obligation. Consequently, the
Company avoids concentrating reinsurance risk with any one reinsurer and only
participates in reinsurance treaties with reputable carriers.
Regulatory
and Other Issues
Regulation. The Company's
insurance business is subject to comprehensive state regulation in each of the
states it is licensed to conduct business. The laws enforced by the various
state insurance departments provide broad administrative powers with respect to
licensing to transact business, licensing and appointing agents, approving
policy forms, regulating unfair trade and claims practices, establishing
solvency standards, fixing minimum interest rates for the accumulation of
surrender values, and regulating the type, amounts, and valuations of permitted
investments, among other things. The Company is required to file detailed annual
statements with each of the state insurance supervisory departments in which it
does business. The Company's operations and financial records are subject to
examination by these departments at regular intervals. Statutory financial
statements are prepared in accordance with accounting practices prescribed or
permitted by the Colorado Division of Insurance, the Company's principal
insurance regulator. Prescribed statutory accounting practices are largely
dictated by the Statutory Accounting Principles adopted by the National
Association of Insurance Commissioners ("NAIC").
The NAIC,
as well as state regulators, continually evaluates existing laws and regulations
pertaining to the operations of life insurers. To the extent that initiatives
result as a part of this process, they may be adopted in the various states in
which the Company is licensed to do business. It is not possible to predict the
ultimate content and timing of new statutes and regulations adopted by state
insurance departments and the related impact upon the Company's operations
although it is conceivable that they may be more restrictive.
Although
the federal government does not directly regulate the life insurance industry,
federal measures previously considered or enacted by Congress, if revisited,
could affect the insurance industry and the Company's business. These measures
include the tax treatment of life insurance companies and life insurance
products, as well as changes in individual income tax structures and rates. Even
though the ultimate impact of any of these changes, if implemented, is
uncertain, the persistency of the Company's existing products and the ability to
sell products could be materially affected.
Risk-Based Capital
Requirements. The NAIC established risk-based capital ("RBC")
requirements to help state regulators monitor the financial strength and
stability of life insurers by identifying those companies that may be
inadequately capitalized. Under the NAIC's requirements, each insurer must
maintain its total capital above a calculated threshold or take corrective
measures to achieve the threshold. The threshold of adequate capital
is based on a formula that takes into account the amount of risk each company
faces on its products and investments. The RBC formula takes into
consideration four major areas of risk which are: (i) asset risk which primarily
focuses on the quality of investments; (ii) insurance risk which encompasses
mortality and morbidity risk; (iii) interest rate risk which involves
asset-liability matching issues; and (iv) other business risks. For
each category, the RBC requirements are determined by applying specified factors
to various assets, premiums, reserves, and other items, with the factor being
higher for items with greater underlying risk and lower for items with less
risk. The Company's statutory capital and surplus at December 31,
2007, was significantly in excess of the threshold RBC
requirements.
Effects of Inflation. The
rate of inflation as measured by the change in the average consumer price index
has not had a material effect on the revenues or operating results of the
Company during the three most recent fiscal years.
Employees. The
Company had approximately 290 employees as of December 31, 2007 substantially
all of which worked in the Company’s home office in Austin, Texas. None of the
employees are subject to collective bargaining agreements governing their
employment with the Company.
Company
performance is subject to varying risk factors. This section provides an
overview of possible risk exposures at this point in time that could impact
Company performance in the future. While these scenarios do not represent
expectations of future experience, they are intended to illustrate the potential
impacts if any of the following risks were to manifest into actual
occurrences.
We
are subject to changing interest rates, market volatility, and general economic
conditions which may affect the risk and returns on both our investment
portfolio and our products.
We are
exposed to significant capital market risk related to changes in interest rates.
Substantial and sustained changes, up or down, in market interest rate levels
can materially affect the profitability of our products, the market value of our
investments, and ultimately the reported amount of stockholders’
equity.
A rise in
interest rates will increase the net unrealized loss position of our investment
portfolio and may subject the Company to disintermediation risk.
Disintermediation risk is the risk that policyholders may surrender their
contracts in a rising interest rate environment, requiring the Company to
liquidate investments in an unrealized loss position (i.e. the market value less
than the carrying value of the investments). With respect to fixed income
security investments the Company maintains in an “Available for Sale” category,
rising interest rates will cause declines in the market value of these
securities. These declines are reported in our financial statements as an
unrealized investment loss and a reduction of stockholders’ equity.
There may
be occasions where the Company could encounter difficulty selling some of its
investments due to a lack of liquidity in the marketplace. If the Company
required significant amounts of cash on short notice during such a period, it
may have difficulty selling investments at attractive prices, in a timely manner
or both.
A decline
in interest rates could expose the Company to reduced profitability due to
minimum interest rate guarantees that are required in our products by
regulation. A key component of profitability is investment spread, or the
difference between the yield on our investments and the rates we credit to
policyholders on our products. A narrowing of investment spreads could
negatively affect operating results. Although the Company has the ability to
adjust the rates credited on products in order to maintain our required
investment spread, a significant decline in interest rate levels could affect
investment yields to the point where the investment spread is compromised due to
minimum interest rate guarantees. In addition, the potential for increased
policy surrenders and cash withdrawals, competitor activities, and other factors
could further limit the Company’s ability to maintain crediting rates on its
products at levels necessary to avoid sacrificing investment
spread.
The
profitability of the Company’s equity-indexed products linked in part to market
indices is significantly affected by the cost of underlying call options
purchased to fund the credits owed to contract holders selecting this form of
interest crediting. If there are little or no gains on the call options
purchased over the expected life of these equity-indexed products, the Company
would incur expenses for credited interest over and above the option costs. In
addition, if the Company does not successfully match the terms of the underlying
call options purchased with the terms of the equity-indexed products, the index
credits could exceed call option proceeds. This would serve to reduce the
Company’s spread on the products and decrease profits.
Our
investment portfolio is subject to credit quality risks which may lessen the
value of invested assets and the Company’s book value per share.
The
Company substantially invests monies received in investment grade, fixed income
investment securities in order to meet its obligations to policyholders and
provide a return on its deployed capital. Consequently, we are subject to the
risk that issuers of these securities may default on principal and interest
payments, particularly in the event of a major downturn in economic and/or
business climate. At December 31, 2007, approximately 2% of the Company’s $5.7
billion fixed income securities portfolio was comprised of issuers who were
investment grade at the time the Company acquired them but were subsequently
downgraded for various reasons. A substantial increase in defaults from these or
other issuers could negatively impact the Company’s financial position and
results.
For the
Company’s equity-indexed products, over the counter derivative instruments are
purchased from a number of highly rated counterparties to fund the index credit
to policyholders. In the event that any of these counterparties fails to meet
their contractual obligations under these derivative instruments, the Company
would be financially at risk for providing the credits due that the counterparty
reneged on. The failure of the counterparty to perform could negatively impact
the Company’s financial position and results.
We
are subject to general domestic and international economic conditions that may
be less favorable than currently exists or is anticipated.
The
demand for financial and insurance products is subject to factors such as
consumer sentiment and behavior, business investment and government spending,
the volatility and strength of capital markets, inflation, and overall economic
climate. Further, since we accept applications from residents in North America,
Latin America, Eastern Europe and the Pacific Rim, we are exposed to economic
conditions in multiple geographic locations. Economic downturns in any of these
geographic locations characterized by political, social or economic instability,
higher unemployment, lower family income or consumer spending could negatively
affect the demand for the Company’s products. Accordingly, the Company’s overall
success depends, in part, upon the ability to succeed despite these differing
and dynamic conditions.
We
are subject to incurring difficulties in marketing and distributing our products
through our current and future distribution channels.
The
Company distributes its life and annuity products through independent
broker-agents. There is substantial competition, particularly in the Company’s
domestic market, for independent broker-agents with the demonstrated ability to
market and sell insurance products. Competition for these individuals or
organizations typically centers on products, compensation, home office support
and the insurer’s financial strength ratings. The Company’s future sales and
financial condition are dependent upon avoiding significant interruptions in
attracting and retaining independent broker-agents.
We
are subject to a downgrade in our financial strength ratings which may
negatively affect our ability to attract and retain independent distributors,
make our products less attractive to consumers, and may have an adverse effect
on our operations.
Financial
strength ratings are an important criteria in establishing the competitive
position of insurers. Ratings generally reflect the rating agencies’ view of a
particular company’s financial strength, operating performance, and ability to
meet its obligations to policyholders. However, some of the rating factors often
relate to the particular views of the rating agency, their independent economic
modeling, the general economic climate, and other circumstances outside of the
insurer’s control. Accordingly, we cannot predict with any certainty what
actions rating agencies may take. A downgrade in our financial strength rating,
or an announced potential downgrade, could affect our competitive position and
make it more difficult to market our products vis-à-vis competitors with higher
financial strength ratings. In extreme situations, a significant downgrade
action by one or more rating agency could induce existing policyholders to
cancel their policies and withdraw funds from the Company. These events could
have a material adverse effect on our financial position and
liquidity.
We
are subject to competition from new sources as well as companies having
substantially greater financial resources which could have an adverse impact
upon our business levels and profitability.
In recent
years, there has been considerable consolidation among companies in the
insurance and financial sectors resulting in large, well-capitalized entities
that offer products comparable to the Company. Frequently, these larger
organizations are not domiciled in the United States or are financial services
entities attempting to establish a position in the insurance industry. These
larger competitors often enjoy economies of scale which produce lower operating
costs and the wherewithal to absorb greater risk allowing them to price products
more competitively and, in turn, attract independent distributors. Consequently,
the Company may encounter additional product pricing pressures and be challenged
to maintain profit margin targets and profitability criteria. Because of these
competitive presences, the Company may not be able to effectively compete
without negative affects on our financial position and results.
We
are subject to regulation and changes to existing laws that may affect our
profitability or means of operations.
The
Company is subject to extensive laws and regulations which are complex and
subject to change. In addition, these laws and regulations are enforced by a
number of different authorities including, but not limited to, state insurance
regulators, the Securities and Exchange Commission, state attorney generals, and
the U.S. Department of Justice. Compliance with these laws and regulations is
time consuming and any changes may materially increase our compliance costs and
other expenses of doing business. The regulatory framework at the state and,
increasingly, federal level pertaining to insurance products and practices is
advancing and could affect not only the design of our products but our ability
to continue to sell certain products.
Life
insurer products generally offer tax advantages to policyholders via the
deferral of income tax on policy earnings during the accumulation phase of the
product, be it an annuity or a life insurance product. Taxes, if any, are
payable on income attributable to a distribution under a policy/contract for the
year in which the distribution is made. Periodically, Congress has considered
legislation that would reduce or eliminate this tax deferral advantage inherent
to the life insurance industry and subject the industry’s products to treatment
more equivalent with other investments. In the event that the tax-deferred
status of life insurance products is revised or reduced by Congress all life
insurers would be adversely impacted.
We
may be subject to unfavorable judicial developments, including the time and
expense of litigation, which potentially could affect our financial position and
results.
In the
ordinary course of business, we are involved in various legal actions common to
the life insurance industry, some of which may occasionally assert claims for
large amounts. These actions, for example, could include allegations of improper
sales practices in connection with the sale of life insurance or bad faith in
the handling of insurance claims. While we are not a party to any lawsuit that
we believe will have a material adverse effect on our financial position or
operations, given the inherent unpredictability of litigation, there can be no
assurance that such litigation, current or in the future, will not have such a
material adverse effect on the Company’s results of operation or cash flows in
any particular reporting period.
We
could be liable with respect to liabilities ceded to reinsurers if the
reinsurers fail to meet the obligations assumed by them.
The
Company cedes material amounts of insurance to other unaffiliated insurance
companies through reinsurance. However, these reinsurance arrangements do not
fully discharge the Company’s obligation to pay benefits on the reinsured
business. If a reinsurer fails to meet its obligations, the Company would be
forced to cover these claims. In addition, if a reinsurer becomes insolvent, it
may cause the Company to lose its reserve credits on the ceded business which
require the establishment of additional reserves. To mitigate the risks
associated with the use of reinsurance, the Company carefully monitors the
ratings and financial condition of its reinsurers on a regular basis and
attempts to avoid concentration of credit risks in order to diversify its risk
exposure.
We
are subject to policy claims experience which can fluctuate from period to
period and vary from past results or expectations.
The
Company’s earnings are significantly influenced by policy claims received and
will vary from period to period depending upon the amount of claims incurred. In
any given quarter or year, there is very limited predictability of claims
experience. The liability established for future policy benefits is based upon a
number of different factors. In the event our future claim experience does not
match our past results or pricing assumptions, our operating results could be
materially and adversely affected.
We are subject to assumption
inaccuracies regarding future mortality, persistency, and interest rates used in
determining deferred policy acquisition costs.
Deferred
policy acquisition costs (and deferred sales inducement amounts) are calculated
using a number of assumptions related to policy persistency, mortality and
interest rates. Amortization of deferred policy acquisition expenses is
dependent upon actual and expected profits generated by the lines of business
that incurred the related expenses. Due to the uncertainty associated with
establishing these assumptions, the Company cannot, with precision, determine
the exact pattern of profit emergence. Accordingly, actual results could differ
from the related assumptions which could have a material and adverse impact on
the Company’s operating results.
We
are dependent upon effective information technology systems and on development
and implementation of new technologies.
The
Company’s business operations are technology dependent for maintaining accurate
records, administering complex contract provisions, and complying with
increasingly demanding regulation. While systems developments can streamline
many processes and in the long term reduce the cost of doing business, these
initiatives can present short-term cost and implementation risks. Projections of
expenses, implementation time frames and the ultimate enhancement values may be
different from expectations and escalate over time. The Company also faces
rising costs and time constraints in meeting data security compliance
requirements of new and proposed regulations. These increased risks and
expanding requirements expose the Company to potential data loss and damages and
significant increases in compliance and litigation costs.
The
Company retains confidential information on its systems, including customer
information and proprietary business information. The increasing volume and
sophistication of computer viruses, hackers and other external threats may
increase the vulnerability of the Company’s systems to data breaches. Any
compromise of the security of the Company’s technology systems that results in
the disclosure of personally identifiable customer information could damage the
Company’s reputation, expose it to litigation, and result in significant
technical, legal and other expenses.
Some of
the Company’s information technology systems are older legacy-type systems and
require an ongoing commitment of resources to maintain current standards. These
legacy systems are written in older programming languages with which fewer and
fewer individuals are knowledgeable of and trained in. The Company’s success is
in large part dependent on maintaining and enhancing the effectiveness of
existing legacy systems and failure of these systems for any reason could
disrupt our operations, result in the loss of business and adversely impact our
profitability.
None.
ITEM
2. PROPERTIES
The
Company leases approximately 72,000 square feet of office space in Austin,
Texas. This lease expires in 2010 and specifies lease payments that
gradually increase over the term of the lease. Currently, lease
payments are $0.6 million per year plus taxes, insurance, maintenance, and other
operating costs. Additionally, the Company’s wholly-owned subsidiary,
The Westcap Corporation, owns two buildings adjacent to the Company’s principal
office space totaling approximately 21,000 square feet that are leased and
utilized by the Company. The Company’s affiliate, Regent Care
Building, Limited Partnership, owns a 65,000 square foot building in Reno,
Nevada, which is leased and utilized by another of the Company’s affiliates,
Regent Care Operations, Limited Partnership, for use in its nursing home
operations. Lease costs and related operating expenses for facilities
of the Company’s subsidiaries are currently not significant in relation to the
Company’s consolidated financial statements. The intercompany lease
costs related to The Westcap Corporation and the nursing home have been
eliminated for consolidated reporting purposes.
ITEM
3. LEGAL PROCEEDINGS
In the
course of an audit of a charitable tax-exempt foundation, the Internal Revenue
Service (“IRS”) raised an issue under the special provisions of the Internal
Revenue Code (“IRC”) governing tax-exempt private foundations as to certain
interest-bearing loans from the Company to another corporation in which the
tax-exempt foundation owns stock. The issue 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 on April 11, 2007 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. By letter of June 5, 2007
from the IRS to the Company, the IRS concurred that based on the results of the
Technical Advice Memorandum, there was no excise tax owed by the Company for the
years under review. 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
National Western Life. Management believes that the Company has good
and meritorious defenses and intends to continue to vigorously defend itself
against these claims. A second class action lawsuit is in discovery
with no class certification motion pending. The third class action
lawsuit was certified as a class by the trail court, but ultimately reversed by
the Texas Supreme Court. Thereupon the plaintiff filed a new motion
for class certification which was denied by the trail court. The
Plaintiff filed a notice of appeal, which has not been perfected. The
Plaintiff and the Company have since filed a joint motion informing the Court of
Appeals that the parties have reached a comprehensive settlement and that the
parties jointly request the court to dismiss the appeal and remand the case to
District Court for an agreed dismissal with prejudice to be entered by the
District Court.
The
Company is involved or may become involved in various other legal actions, in
the normal course of business, in which claims for alleged economic and punitive
damages have been or may be asserted, some for substantial amounts. Although
there can be no assurances, at the present time, the Company does not anticipate
that the ultimate liability arising from potential, pending, or threatened legal
actions, will have a material adverse effect on the financial condition or
operating results of the Company.
OF
SECURITY HOLDERS
No
matters were submitted to a vote of the Company’s security holders during the
fourth quarter of 2007.
PART
II
RELATED
STOCKHOLDER MATTERS AND ISSUER
PURCHASES
OF EQUITY SECURITIES
Market
Information
The
principal market on which the Class A common stock of the Company trades is The
NASDAQ Stock Market® under
the symbol “NWLIA”. The high and low sales prices for the Class A
common stock for each quarter during the last two years are shown in the
following table.
|
|
|
High
|
|
Low
|
|
|
|
|
|
|
2007:
|
First
Quarter
|
$
|
235.25
|
|
223.05
|
|
Second
Quarter
|
|
271.60
|
|
249.05
|
|
Third
Quarter
|
|
268.00
|
|
228.56
|
|
Fourth
Quarter
|
|
246.95
|
|
199.53
|
|
|
|
|
|
|
2006:
|
First
Quarter
|
$
|
232.29
|
|
200.00
|
|
Second
Quarter
|
|
239.65
|
|
209.00
|
|
Third
Quarter
|
|
237.36
|
|
222.59
|
|
Fourth
Quarter
|
|
243.00
|
|
224.05
|
Equity
Security Holders
The
number of stockholders of record on March 10, 2008 was as follows:
|
Class
A Common Stock
|
|
4,512
|
|
Class
B Common Stock
|
|
2
|
Dividends
During
2007, the Company paid cash dividends on its Class A and Class B common stock in
the amounts of $1,232,037 and $36,000, respectively. During 2006, the
Company paid cash dividends on its Class A and Class B common stock in the
amounts of $1,231,497 and $36,000, respectively. Payment of dividends
is within the discretion of the Company’s Board of Directors. The
Company’s general policy is to reinvest earnings internally to finance the
development of new business.
Securities
Authorized For Issuance Under Equity Compensation Plans
The
Company has one equity compensation plan that was approved by security
holders. Under the plan, 94,984 shares of the Company’s Class A
common stock may be issued upon exercise of the outstanding options at December
31, 2007. The weighted average exercise price of the outstanding
options is $128.47 per option. Excluding the outstanding options,
27,668 shares of the common stock remain available for future issuance under the
plan at December 31, 2007. The Company has no equity compensation
plans that have not been approved by security holders.
Performance
Graph
The
following graph compares the change in the Company's cumulative total
stockholder return on its common stock with the NASDAQ - U.S. Companies Index
and the NASDAQ Insurance Stock Index. The graph assumes that the value of the
Company's common stock and each index was $100 at December 31, 2002, and that
all dividends were reinvested.
Issuer
Purchases of Equity Securities
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 November and December 2007, the Company purchased 200 shares
and 400 shares from option holders at an average price of $202.92 and $207.37,
respectively. These purchased shares are reported in the Company's
condensed consolidated financial statements as authorized and
unissued.
The
following five-year financial summary includes comparative amounts derived from
the audited consolidated financial statements.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In
thousands except per share amounts)
|
|
Earnings
Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and annuity premiums
|
|
$ |
19,513 |
|
|
|
15,805 |
|
|
|
14,602 |
|
|
|
14,025 |
|
|
|
13,916 |
|
Universal
life and annuity contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues
|
|
|
119,677 |
|
|
|
106,320 |
|
|
|
96,765 |
|
|
|
89,513 |
|
|
|
80,964 |
|
Net
investment income
|
|
|
318,137 |
|
|
|
379,768 |
|
|
|
310,213 |
|
|
|
315,843 |
|
|
|
298,974 |
|
Other
income
|
|
|
13,683 |
|
|
|
17,304 |
|
|
|
9,579 |
|
|
|
11,259 |
|
|
|
7,061 |
|
Realized
gains (losses) on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investments
|
|
|
3,497 |
|
|
|
2,662 |
|
|
|
9,884 |
|
|
|
3,506 |
|
|
|
(1,647 |
) |
Total
revenues
|
|
|
474,507 |
|
|
|
521,859 |
|
|
|
441,043 |
|
|
|
434,146 |
|
|
|
399,268 |
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
41,326 |
|
|
|
35,241 |
|
|
|
39,162 |
|
|
|
34,613 |
|
|
|
37,180 |
|
Amortization
of deferred policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition
costs
|
|
|
88,413 |
|
|
|
90,358 |
|
|
|
87,955 |
|
|
|
88,733 |
|
|
|
53,829 |
|
Universal
life and investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
annuity
contract interest
|
|
|
164,391 |
|
|
|
213,736 |
|
|
|
150,692 |
|
|
|
173,315 |
|
|
|
176,374 |
|
Other
operating expenses
|
|
|
55,130 |
|
|
|
65,709 |
|
|
|
46,349 |
|
|
|
35,441 |
|
|
|
48,776 |
|
Total
expenses
|
|
|
349,260 |
|
|
|
405,044 |
|
|
|
324,158 |
|
|
|
332,102 |
|
|
|
316,159 |
|
Earnings
before Federal income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
cumulative effect of change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
principle
|
|
|
125,247 |
|
|
|
116,815 |
|
|
|
116,885 |
|
|
|
102,044 |
|
|
|
83,109 |
|
Federal
income taxes
|
|
|
39,876 |
|
|
|
40,472 |
|
|
|
39,618 |
|
|
|
34,572 |
|
|
|
27,327 |
|
Earnings
before cumulative effect of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
change
in accounting principle
|
|
|
85,371 |
|
|
|
76,343 |
|
|
|
77,267 |
|
|
|
67,472 |
|
|
|
55,782 |
|
Cumulative
effect of change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
principle, net of tax
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
54,697 |
|
|
|
- |
|
Net
earnings
|
|
$ |
85,371 |
|
|
|
76,343 |
|
|
|
77,267 |
|
|
|
122,169 |
|
|
|
55,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A
|
|
$ |
23.95 |
|
|
|
21.46 |
|
|
|
21.83 |
|
|
|
19.26 |
|
|
|
16.10 |
|
Class
B
|
|
$ |
12.12 |
|
|
|
10.84 |
|
|
|
11.00 |
|
|
|
9.68 |
|
|
|
8.09 |
|
Cumulative
effect of change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting
principle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
15.61 |
|
|
|
- |
|
Class
B
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
7.85 |
|
|
|
- |
|
Net
earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A
|
|
$ |
23.95 |
|
|
|
21.46 |
|
|
|
21.83 |
|
|
|
34.87 |
|
|
|
16.10 |
|
Class
B
|
|
$ |
12.12 |
|
|
|
10.84 |
|
|
|
11.00 |
|
|
|
17.53 |
|
|
|
8.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
6,835,326 |
|
|
|
6,693,443 |
|
|
|
6,369,008 |
|
|
|
5,991,685 |
|
|
|
5,297,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
$ |
5,823,641 |
|
|
|
5,760,459 |
|
|
|
5,495,000 |
|
|
|
5,183,013 |
|
|
|
4,617,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
$ |
1,011,685 |
|
|
|
932,984 |
|
|
|
874,008 |
|
|
|
808,672 |
|
|
|
679,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value per common share
|
|
$ |
279.29 |
|
|
|
257.67 |
|
|
|
241.89 |
|
|
|
225.62 |
|
|
|
191.69 |
|
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking
Statements
The
Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for
forward-looking statements. Certain information contained herein or
in other written or oral statements made by or on behalf of National Western
Life Insurance Company or its subsidiaries are or may be viewed as
forward-looking. Although the Company has taken appropriate care in
developing any such information, forward-looking information involves risks and
uncertainties that could significantly impact actual results. These
risks and uncertainties include, but are not limited to, matters described in
the Company’s SEC filings such as exposure to market risks, anticipated cash
flows or operating performance, future capital needs, and statutory or
regulatory related issues. However, National Western, as a matter of
policy, does not make any specific projections as to future earnings, nor does
it endorse any projections regarding future performance that may be made by
others. Whether or not actual results differ materially from
forward-looking statements may depend on numerous foreseeable and unforeseeable
events or developments. Also, the Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future developments, or otherwise.
Management’s
discussion and analysis of financial condition and results of operations
(“MD&A”) of National Western Life Insurance Company for the three years
ended December 31, 2007 follows. This discussion should be read in
conjunction with the Company’s consolidated financial statements and related
notes beginning on page 76 of this report.
Overview
The
Company provides life insurance products on a global basis for the savings and
protection needs of policyholders and annuity contracts for the asset
accumulation and retirement needs of contractholders both domestically and
internationally. The Company accepts funds from policyholders or contractholders
and establishes a liability representing future obligations to pay the policy or
contract-holders and their beneficiaries. To ensure the Company will
be able to pay these future commitments, the funds received as premium payments
and deposits are invested in high quality investments, primarily fixed income
securities.
Due to
the business of accepting funds to pay future obligations in later years, the
underlying economics and relevant factors affecting the life insurance industry
include the following:
Ÿ
|
level
of premium revenues collected
|
Ÿ
|
persistency
of policies and contracts
|
Ÿ
|
investment
credit quality
|
Ÿ
|
levels
of policy benefits and costs to acquire
business
|
Ÿ
|
effect
of interest rate changes on revenues and investments including asset and
liability matching
|
Ÿ
|
adequate
levels of capital and surplus
|
The
Company monitors these factors continually as key business
indicators. The discussion that follows in this Item includes these
indicators and presents information useful to an overall understanding of the
Company’s business performance in 2007, incorporating required disclosures in
accordance with the rules and regulations of the Securities and Exchange
Commission.
Critical
Accounting Policies
Accounting
policies discussed below are those considered critical to an understanding of
the Company’s financial statements.
Impairment of Investment
Securities. The Company’s accounting policy requires that a
decline in the value of a security below its amortized cost basis be evaluated
to determine if the decline is other-than-temporary. The primary
factors considered in evaluating whether a decline in value for fixed income and
equity securities is other-than-temporary include: (a) the length of time and
the extent to which the fair value has been less than cost, (b) the financial
conditions and near-term prospects of the issuer, (c) whether the debtor is
current on contractually obligated principal and interest payments, and (d) the
intent and ability of the Company to retain the investment for a period of time
sufficient to allow for any anticipated recovery. In addition,
certain securitized financial assets with contractual cash flows are evaluated
periodically by the Company to update the estimated cash flows over the life of
the security. If the Company determines that the fair value of the
securitized financial asset is less than its carrying amount and there has been
a decrease in the present value of the estimated cash flows since the previous
estimate, then an other-than-temporary impairment charge is
recognized. When a security is deemed to be impaired a charge is
recorded as net realized losses equal to the difference between the fair value
and amortized cost basis of the security. Once an impairment charge
has been recorded, the fair value of the impaired investment becomes its new
cost basis and the Company continues to review the other-than-temporarily
impaired security for appropriate valuation on an ongoing basis.
Deferred Acquisition Costs
(“DAC”). The Company is required to defer certain policy
acquisition costs and amortize them over future periods. These costs
include commissions and certain other expenses that vary with and are primarily
associated with acquiring new business. The deferred costs are
recorded as an asset commonly referred to as deferred policy acquisition costs.
The DAC asset balance is subsequently charged to income over the lives of the
underlying contracts in relation to the anticipated emergence of revenue or
profits. Actual revenue or profits can vary from Company estimates
resulting in increases or decreases in the rate of amortization. The
Company regularly evaluates to determine if actual experience or other evidence
suggests that earlier estimates should be revised. Assumptions considered
significant include surrender and lapse rates, mortality, expense levels,
investment performance, and estimated interest spread. Should actual
experience dictate that the Company change its assumptions regarding the
emergence of future revenues or profits (commonly referred to as “unlocking”),
the Company would record a charge or credit to bring its DAC balance to the
level it would have been if using the new assumptions from the inception date of
each policy.
DAC is
also subject to periodic recoverability and loss recognition
testing. These tests ensure that the present value of future
contract-related cash flows will support the capitalized DAC balance to be
amortized in the future. The present value of these cash flows, less
the benefit reserve, is compared with the unamortized DAC balance and if the DAC
balance is greater, the deficiency is charged to expense as a component of
amortization and the asset balance is reduced to the recoverable amount. For
more information about accounting for DAC see Note 1, Summary of Significant
Accounting Policies, in the Notes to Consolidated Financial
Statements.
Deferred Sales
Inducements. Costs related to sales inducements offered on
sales to new customers, principally on investment type contracts and primarily
in the form of additional credits to the customer’s account value or
enhancements to interest credited for a specified period, which are beyond
amounts currently being credited to existing contracts, are deferred and
recorded as other assets. All other sales inducements are expensed as
incurred and included in interest credited to contract holders’
funds. Deferred sales inducements are amortized to income using the
same methodology and assumptions as DAC, and are included in interest credited
to contract holders’ funds. Deferred sales inducements are
periodically reviewed for recoverability. See the discussion of the
adoption of Statement of Position (“SOP”) 05-1, Accounting by Insurance Enterprises
for Deferred Acquisition Costs in Connection with Modifications or Exchanges of
Insurance Contracts on page 44 of this report.
Future Policy
Benefits. Because of the long-term nature of insurance
contracts, the Company is liable for policy benefit payments many years into the
future. The liability for future policy benefits represents estimates
of the present value of the Company’s expected benefit payments, net of the
related present value of future net premium collections. For
traditional life insurance contracts, this is determined by standard actuarial
procedures, using assumptions as to mortality (life expectancy), morbidity
(health expectancy), persistency, and interest rates, which are based on the
Company’s experience with similar products. The assumptions used are
those considered to be appropriate at the time the policies are
issued. An additional provision is made on most products to allow for
possible adverse deviation from the assumptions assumed. For
universal life and annuity products, the Company’s liability is the amount of
the contract’s account balance. Account balances are also subject to
minimum liability calculations as a result of minimum guaranteed interest rates
in the policies. While management and Company actuaries have used their best
judgment in determining the assumptions and in calculating the liability for
future policy benefits, there is no assurance that the estimate of the
liabilities reflected in the financial statements represents the Company’s
ultimate obligation. In addition, significantly different assumptions could
result in materially different reported amounts. A discussion of the
assumptions used to calculate the liability for future policy benefits is
reported in Note 1, Summary of Significant Accounting Policies, in the Notes to
Consolidated Financial Statements.
Revenue
Recognition. Premium income for the Company’s traditional life
insurance contracts is generally recognized as the premium becomes due from
policyholders. For annuity and universal life contracts, the amounts
collected from policyholders are considered deposits and are not included in
revenue. For these contracts, fee income consists of policy charges for policy
administration, cost of insurance charges and surrender charges assessed against
policyholders’ account balances which are recognized in the period the services
are provided.
Investment
activities of the Company are integral to its insurance operations. Since life
insurance benefits may not be paid until many years into the future, the
accumulation of cash flows from premium receipts are invested with income
reported as revenue when earned. Anticipated yields on investments are reflected
in premium rates, contract liabilities, and other product contract
features. These anticipated yields are implied in the interest
required on the Company’s net insurance liabilities (future policy benefits less
deferred acquisition costs) and contractual interest obligations in its
insurance and annuity products. The Company benefits to the extent
actual net investment income exceeds the required interest on net insurance
liabilities and manages the rates it credits on its products to maintain the
targeted excess or “spread” of investment earnings over interest credited. The
Company will continue to be required to provide for future contractual
obligations in the event of a decline in investment yield. For more information
concerning revenue recognition, investment accounting, and interest sensitivity,
please refer to Note 1, Summary of Significant Accounting Policies, and Note 3,
Investments, in the Notes to Consolidated Financial Statements and the
discussions under Investments in Item 7 of this report.
Pension Plans and Other
Postretirement Benefits. The Company sponsors a qualified
defined benefit pension plan, which was frozen effective December 31, 2007,
covering substantially all employees and three nonqualified defined benefit
plans covering certain senior officers. In addition, the Company also
has postretirement health care benefits for certain senior
officers. In accordance with prescribed accounting standards, the
Company annually reviews plan assumptions.
The
Company annually reviews its pension benefit plan assumptions which include the
discount rate, the expected long-term rate of return on plan assets, and the
compensation increase rate. The assumed discount rate is set based on
the rates of return on high quality long-term fixed income investments currently
available and expected to be available during the period to maturity of the
pension benefits. The assumed long-term rate of return on plan assets
is generally set at the rate expected to be earned based on long-term investment
policy of the plans and the various classes of the invested funds, based on the
input of the plan’s investment advisors and consulting actuary and the plan’s
historic rate of return. The compensation rate increase assumption is
generally set at a rate consistent with current and expected long-term
compensation and salary policy, including inflation. The freeze
ceased future benefit accruals to all participants and closed the Plan to any
new participants. In addition, all participants became immediately 100% vested
in their accrued benefits as of that date.
Other
postretirement benefit assumptions include future events affecting retirement
age, mortality, dependency status, per capita claims costs by age, health care
trend rates, and discount rates. Per capita claims cost by age is the
current cost of providing postretirement health care benefits for one year at
each age from the youngest age to the oldest age at which plan participants are
expected to receive benefits under the plan. Health care trend rates
involve assumptions about the annual rate(s) of change in the cost of health
care benefits currently provided by the plan, due to factors other than changes
in the composition of the plan population by age and dependency
status. These rates implicitly consider estimates of health care
inflation, changes in utilization, technological advances and changes in health
status of the participants. These assumptions involve uncertainties
and judgment, and therefore actual performance may not be reflective of the
assumptions.
Share-Based
Payments. Liability awards under a share-based payment
arrangement have been measured based on the award's fair value at the reporting
date. The Black-Scholes valuation method has been used to estimate
the fair value of the options. This fair value calculation of the
options include assumptions relative to the following:
Ÿ
|
expected
term based on contractual term and perceived future behavior relative to
exercise
|
Ÿ
|
risk-free
interest rates
|
These
assumptions are continually reviewed by the Company and adjustments may be made
based upon current facts and circumstances.
Other
significant accounting policies, although not involving the same level of
measurement uncertainties as those discussed above but nonetheless important to
an understanding of the financial statements, are described in Note 1, Summary
of Significant Accounting Policies, in the Notes to Consolidated Financial
Statements.
RESULTS
OF OPERATIONS
The
Company’s consolidated financial statements are prepared in accordance with U.S.
generally accepted accounting principles (“GAAP”). In addition, the Company
regularly evaluates operating performance using non-GAAP financial measures
which exclude or segregate derivative and realized investment gains and losses
from operating revenues and earnings. Similar measures are commonly used in the
insurance industry in order to assess profitability and results from ongoing
operations. The Company believes that the presentation of these non-GAAP
financial measures enhances the understanding of the Company’s results of
operations by highlighting the results from ongoing operations and the
underlying profitability factors of the Company’s business. The Company excludes
or segregates derivative and realized investment gains and losses because such
items are often the result of events which may or may not be at the Company’s
discretion and the fluctuating effects of these items could distort trends in
the underlying profitability of the Company’s business. Therefore, in the
following sections discussing consolidated operations and segment operations,
appropriate reconciliations have been included to report information management
considers useful in enhancing an understanding of the Company’s operations to
reportable GAAP balances reflected in the consolidated financial
statements.
Consolidated
Operations
Revenues. The
following details Company revenues.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life and annuity contract revenues
|
|
$ |
119,677 |
|
|
|
106,320 |
|
|
|
96,765 |
|
Traditional
life and annuity premiums
|
|
|
19,513 |
|
|
|
15,805 |
|
|
|
14,602 |
|
Net
investment income (excluding derivatives)
|
|
|
334,799 |
|
|
|
336,489 |
|
|
|
321,201 |
|
Other
income
|
|
|
13,683 |
|
|
|
17,304 |
|
|
|
9,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
|
487,672 |
|
|
|
475,918 |
|
|
|
442,147 |
|
Derivative
income (loss)
|
|
|
(16,662 |
) |
|
|
43,279 |
|
|
|
(10,988 |
) |
Realized
gains on investments
|
|
|
3,497 |
|
|
|
2,662 |
|
|
|
9,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
474,507 |
|
|
|
521,859 |
|
|
|
441,043 |
|
Universal life and annuity
contract revenues – Revenues for universal life and annuity contract
revenues increased 12.6% in 2007 compared to 2006. Revenues for these
products consist of policy charges for the cost of insurance, administration
charges, and surrender charges assessed against policyholder account balances,
less reinsurance premiums. Cost of insurance charges were $74.3
million in 2007 compared to $67.7 million in 2006, and $63.3 million in
2005. Administrative charges were $20.9 million, $17.1 million, and
$15.0 million for the years ended December 31, 2007, 2006, and 2005,
respectively. Surrender charges assessed against policyholder account
balances upon withdrawal were $33.4 million, in 2007 compared to $28.7 million
in 2006 and $25.1 million in 2005.
Traditional life and annuity
premiums – Traditional life and annuity premiums increased 23.5% in 2007
compared to 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.
Net investment income
- A detail of net investment income is provided below.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
Gross
investment income:
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
$ |
309,708 |
|
|
|
306,129 |
|
|
|
293,502 |
|
Mortgage
loans
|
|
|
8,513 |
|
|
|
8,480 |
|
|
|
9,676 |
|
Policy
loans
|
|
|
6,302 |
|
|
|
6,354 |
|
|
|
6,409 |
|
Short-term
investments
|
|
|
7,059 |
|
|
|
3,118 |
|
|
|
1,416 |
|
Other
investment income
|
|
|
6,087 |
|
|
|
15,289 |
|
|
|
12,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment income
|
|
|
337,669 |
|
|
|
339,370 |
|
|
|
323,562 |
|
Investment
expenses
|
|
|
2,870 |
|
|
|
2,881 |
|
|
|
2,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
(excluding
derivatives)
|
|
|
334,799 |
|
|
|
336,489 |
|
|
|
321,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
income (loss)
|
|
|
(16,662 |
) |
|
|
43,279 |
|
|
|
(10,988 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
318,137 |
|
|
|
379,768 |
|
|
|
310,213 |
|
Investment
grade debt securities generated approximately 92.5% of total investment income,
excluding derivatives in 2007. Short-term investments contributed
$7.1 million, $3.1 million, and $1.4 million for the years ended 2007, 2006, and
2005, respectively. The significant increase relative to short-term
investment income in 2007 is attributable to higher asset holdings in these
investments compared to prior years. Other investment income for 2007
includes $0.9 million related to income received on various profit participation
arrangements compared to $1.2 million recorded in 2006 and $2.8 million recorded
in 2005. In addition, proceeds of $4.3 million were received in 2006 from a
class action settlement on a disposed debt security.
Net
investment income performance is analyzed excluding derivative income (loss),
which is a common practice in the insurance industry, in order to assess
underlying profitability and results from ongoing operations. Net
investment income performance is summarized as follows:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands except percentages)
|
|
Excluding
derivatives:
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
334,799 |
|
|
|
336,489 |
|
|
|
321,201 |
|
Average
invested assets, at amortized cost
|
|
$ |
5,732,212 |
|
|
|
5,514,196 |
|
|
|
5,205,983 |
|
Yield
on average invested assets
|
|
|
5.84 |
% |
|
|
6.10 |
% |
|
|
6.17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Including
derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
318,137 |
|
|
|
379,768 |
|
|
|
310,213 |
|
Average
invested assets, at amortized cost
|
|
$ |
5,789,502 |
|
|
|
5,548,266 |
|
|
|
5,252,259 |
|
Yield
on average invested assets
|
|
|
5.50 |
% |
|
|
6.84 |
% |
|
|
5.91 |
% |
The
average invested asset decline in yield is due to the overall interest rate
level decline and the Company obtaining lower yields on newly invested funds as
well as prepayments, calls, and maturities of debt securities reinvested at
lower rates. The additional income recognized from the other invested
assets in 2006 and 2005, as previously discussed, also contributes to a higher
yield for those years. Refer to the Derivatives discussion
following this section for a more detailed explanation.
Other income - Other
income revenues consists primarily of gross income associated with nursing home
operations of $12.6 million, $11.2 million, and $8.9 million in 2007, 2006, and
2005, respectively. In addition, the Company received $0.5 million
and $5.5 million related to lawsuit settlements during 2007 and
2006.
Derivatives income
(loss) - Index options are derivative financial instruments used to fully
hedge the equity return component of the Company’s equity-indexed products,
which were first introduced for sale in 1997. In 2002, the Company
began selling an equity-indexed universal life product in addition to its fixed
indexed annuities. Any income or loss from the sale or expiration of
the options, as well as period-to-period changes in fair values, are reflected
as a component of net investment income. However, increases or decreases in
income from these options are substantially offset by corresponding increases or
decreases in amounts credited to indexed annuity and life
policyholders.
Income
and losses from index options are due to market conditions. Index
options are intended to act as hedges to match the returns on the S&P 500
Index® and the
rise or decline in this index causes index option values to likewise rise or
decline. While income from index options fluctuates with the index, the contract
interest expense to policyholder accounts for the Company’s equity-indexed
products also fluctuates in a similar manner and direction. In 2007
and 2005, the S&P 500 Index®
decreased resulting in index option losses and a reduction in contract interest
expenses. In 2006, the S&P 500 Index®
increased and the Company recorded income from index options and likewise
increased contract interest expenses.
Derivative
components included in net investment income and the corresponding contract
interest amounts are detailed below.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
Unrealized
income (loss)
|
|
$ |
(56,204 |
) |
|
|
27,108 |
|
|
|
(9,579 |
) |
Realized
income (loss)
|
|
|
39,542 |
|
|
|
16,171 |
|
|
|
(1,409 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income (loss) included in net investment income
|
|
$ |
(16,662 |
) |
|
|
43,279 |
|
|
|
(10,988 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contract interest
|
|
$ |
164,391 |
|
|
|
213,736 |
|
|
|
150,692 |
|
Realized gains on
investments - The net gains reported in 2007 of $3.5 million consisted of
gross gains of $5.4 million primarily from calls and sales of debt securities,
(including a $3.7 million gain recorded on a previously impaired debt security),
sale of real estate during the year, offset by gross losses of $1.9 million,
which includes the impairments highlighted in the table below.
In past
years, the realized losses on investments have primarily resulted from
impairment writedowns on investments in debt securities and valuation allowances
recorded on mortgage loans. The Company records impairment writedowns
when a decline in value is considered other-than-temporary and full recovery of
the investment is not expected. Impairment writedowns are summarized
in the following table.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
Impairment
or valuation writedowns:
|
|
|
|
|
|
|
|
|
|
Bonds
|
|
$ |
67 |
|
|
|
99 |
|
|
|
1,926 |
|
Mortgage
loans
|
|
|
1,467 |
|
|
|
2,100 |
|
|
|
- |
|
The
mortgage loan valuation writedown in 2007 and 2006 involves a New Orleans
property whose value was negatively impacted by Hurricane Katrina.
Benefits and Expenses. The
following details benefits and expenses.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
$ |
41,326 |
|
|
|
35,241 |
|
|
|
39,162 |
|
Amortization
of deferred policy acquisition costs
|
|
|
88,413 |
|
|
|
90,358 |
|
|
|
87,955 |
|
Universal
life and annuity contract interest
|
|
|
164,391 |
|
|
|
213,736 |
|
|
|
150,692 |
|
Other
operating expenses
|
|
|
55,130 |
|
|
|
65,709 |
|
|
|
46,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
349,260 |
|
|
|
405,044 |
|
|
|
324,158 |
|
Life and other policy
benefits - Life and other policy benefits reflect death claims of $28.5
million, $26.2 million, and $30.0 million for 2007, 2006, and 2005,
respectively.
Amortization of deferred
policy acquisition costs - Life insurance companies are required to defer
certain expenses associated with acquiring new business. The majority
of these acquisition expenses consist of commissions paid to agents,
underwriting costs, and certain marketing expenses and sales inducements. The
Company defers sales inducements in the form of first year interest bonuses on
annuity and universal life products that are directly related to the production
of new business. These charges are deferred and amortized using the
same methodology and assumptions used to amortize other capitalized acquisition
costs and the amortization is included in contract
interest. Recognition of these deferred policy acquisition costs in
the consolidated financial statements is to occur over future periods in
relation to the expected emergence of profits priced into the products
sold. This emergence of profits is based upon assumptions regarding
premium payment patterns, mortality, persistency, investment performance, and
expense patterns. Companies are required to review these assumptions
periodically to ascertain whether actual experience has deviated significantly
from that assumed. If it is determined that a significant deviation has
occurred, the emergence of profit patterns is to be "unlocked" and reset based
upon the actual experience.
Amortization
of deferred policy acquisition costs decreased to $88.4 million for the year
ended December 31, 2007 compared to $90.4 million and $88.0 million reported in
2006 and 2005. An unlocking adjustment was recorded in the current
year which resulted in a decrease of amortization by $8.6
million. This unlocking adjustment was based upon changes to (1)
future mortality assumptions reflecting current experience studies and (2)
future cost of insurance rate assumptions based on company changes to future
cost of insurance rate changes. In addition, a true-up adjustment was
also recorded at December 2007 relative to partial surrender rates, mortality
rates, credited interest rates and earned rates for the current year’s
experience resulting in a $2.7 million decrease in
amortization. Amortization for 2006 includes a true-up adjustment
relative to partial surrenders, mortality assumptions, annuitizations, credited
rates and earned rates which increased amortization in that year by
approximately $4.3 million. There was a similar adjustment in 2005
relative to amortization assumptions that resulted in increased amortization for
that year.
In
accordance with the newly adopted SOP 05-1, Accounting by Insurance Enterprises
for Deferred Acquisition Costs in Connection with Modifications or Exchanges of
Insurance Contracts, ("SOP 05-1") the Company’s amortization of these
deferred policy acquisition costs is expected to increase in 2007 and
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 described above. The difference between yields earned
on investments over policy credited rates is often referred to as the "interest
spread". Raising policy credited rates can typically have an impact sooner than
higher market rates on the Company's investment portfolio yield, making it more
difficult to maintain the current interest spread.
The
Company's approximated average credited rates are as follows:
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Excluding
equity-indexed products)
|
|
|
(Including
equity-indexed products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity
|
|
|
3.41 |
% |
|
|
3.39 |
% |
|
|
3.59 |
% |
|
|
2.84 |
% |
|
|
3.86 |
% |
|
|
2.86 |
% |
Interest
sensitive life
|
|
|
3.23 |
% |
|
|
4.30 |
% |
|
|
4.94 |
% |
|
|
4.30 |
% |
|
|
5.41 |
% |
|
|
4.63 |
% |
Contract
interest also includes the performance of the derivative component of the
Company's equity-indexed products. As previously noted, the recent market
performance of these derivative features decreased contract interest expense in
2007 and 2005, while, also decreasing the Company's investment income given the
hedge nature of the options. During 2006, the reverse was noted, as
the S&P 500 Index®
performance was up resulting in higher investment income and contract interest
expense. With these credited rates, the Company generally realized
its targeted interest spread on its products.
Other operating
expenses - Other operating expenses consist of general administrative
expenses, licenses and fees, commissions not subject to deferral, and expenses
of nursing home operations. Nursing home expenses amounted to $11.0
million, $10.2 million, and $7.6 million in 2007, 2006, and 2005,
respectively. Compensation costs related to stock options totaled
negative $1.1 million in 2007 as a result of marking the options to fair value
under the liability method of accounting. In 2006, $13.1 million was
recorded related to increase compensation costs resulting from a change to
liability classification for the Company’s stock option
plan. Compensation costs related to stock options reported
in 2005 totaled $0.9 million.
Federal Income Taxes. Federal
income taxes on earnings from continuing operations for 2007, 2006, and 2005
reflect effective tax rates of 31.8%, 34.6%, and 33.9%, respectively, which are
lower than the expected Federal rate of 35% primarily due to tax-exempt
investment income related to investments in municipal securities and
dividends-received deductions on income from stock investments.
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 from continuing operations for the years ended December 31,
2007, 2006, and 2005 is provided below. The segment earnings exclude
realized gains and losses on investments, net of taxes.
|
|
Domestic
Life
Insurance
|
|
|
International
Life
Insurance
|
|
|
Annuities
|
|
|
All
Others
|
|
|
Totals
|
|
|
|
(In
thousands)
|
|
Segment
earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$ |
342 |
|
|
|
20,179 |
|
|
|
56,299 |
|
|
|
6,278 |
|
|
|
83,098 |
|
2006
|
|
|
297 |
|
|
|
12,191 |
|
|
|
56,559 |
|
|
|
5,566 |
|
|
|
74,613 |
|
2005
|
|
|
2,809 |
|
|
|
13,559 |
|
|
|
47,915 |
|
|
|
6,559 |
|
|
|
70,842 |
|
Domestic
Life Insurance Operations
A
comparative analysis of results of operations for the Company's domestic life
insurance segment is detailed below.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
Premiums
and other revenue:
|
|
|
|
|
|
|
|
|
|
Premiums
and contract revenues
|
|
$ |
25,879 |
|
|
|
22,731 |
|
|
|
22,172 |
|
Net
investment income
|
|
|
18,863 |
|
|
|
20,462 |
|
|
|
19,958 |
|
Other
income
|
|
|
41 |
|
|
|
29 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
44,783 |
|
|
|
43,222 |
|
|
|
42,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
14,922 |
|
|
|
13,656 |
|
|
|
14,932 |
|
Amortization
of deferred policy acquisition costs
|
|
|
7,998 |
|
|
|
7,313 |
|
|
|
5,798 |
|
Universal
life insurance contract interest
|
|
|
9,463 |
|
|
|
9,168 |
|
|
|
8,842 |
|
Other
operating expenses
|
|
|
11,898 |
|
|
|
12,630 |
|
|
|
8,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
44,281 |
|
|
|
42,767 |
|
|
|
37,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings before Federal income taxes
|
|
|
502 |
|
|
|
455 |
|
|
|
4,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
income taxes
|
|
|
160 |
|
|
|
158 |
|
|
|
1,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$ |
342 |
|
|
|
297 |
|
|
|
2,809 |
|
Revenues
from domestic life insurance operations include life insurance premiums on
traditional type products and revenues from universal life
insurance. Revenues from traditional products are simply premiums
collected, while revenues from universal life insurance consist of policy
charges for the cost of insurance, policy administration fees, and surrender
charges assessed during the period. A comparative detail of premiums
and contract revenues is provided below.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life insurance revenues
|
|
$ |
23,028 |
|
|
|
18,286 |
|
|
|
16,322 |
|
Traditional
life insurance premiums
|
|
|
6,629 |
|
|
|
6,906 |
|
|
|
7,392 |
|
Reinsurance
premiums
|
|
|
(3,778 |
) |
|
|
(2,461 |
) |
|
|
(1,542 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
25,879 |
|
|
|
22,731 |
|
|
|
22,172 |
|
The
Company’s premiums and contract revenues have increased 13.8% from 2006 as
efforts have been made to promote domestic life products. It is the
Company's marketing plan to increase domestic life product sales through
increased recruiting of new distribution and the development of new life
insurance products. The Company had approximately 5,600 contracted
agents as of December 31, 2007.
In
accordance with generally accepted accounting principles, premiums collected on
universal life products are not reflected as revenues in the Company's
consolidated statements of earnings. Actual domestic universal life
premiums are detailed below.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life insurance:
|
|
|
|
|
|
|
|
|
|
First
year and single premiums
|
|
$ |
15,592 |
|
|
|
14,640 |
|
|
|
14,973 |
|
Renewal
premiums
|
|
|
16,639 |
|
|
|
14,118 |
|
|
|
14,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
32,231 |
|
|
|
28,758 |
|
|
|
29,172 |
|
Policy
benefits totaled $14.9 million, $13.7 million, and $14.9 million in 2007, 2006,
and 2005, respectively, which are consistent with Company
expectations. Net investment income decreased to $18.9 million in
2007 as compared to $20.5 million and $20.0 million in 2006 and 2005,
respectively. Other operating expense decreased in 2007 resulting
from negative stock option compensation costs recorded under liability
accounting. The costs increased significantly in 2006 due to an
increase in compensation costs resulting from the change to liability
classification for the Company’s stock option plan. Compensation
costs totaled $0.3 million, $3.0 million, and $0.2 million in 2007, 2006, and
2005, respectively.
International
Life Insurance Operations
A
comparative analysis of results of operations for the Company's international
life insurance segment is detailed below.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
Premiums
and other revenue:
|
|
|
|
|
|
|
|
|
|
Premiums
and contract revenues
|
|
$ |
88,782 |
|
|
|
78,005 |
|
|
|
70,379 |
|
Net
investment income
|
|
|
24,690 |
|
|
|
28,530 |
|
|
|
23,123 |
|
Other
income
|
|
|
126 |
|
|
|
78 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
113,598 |
|
|
|
106,613 |
|
|
|
93,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
22,810 |
|
|
|
18,161 |
|
|
|
21,232 |
|
Amortization
of deferred policy acquisition costs
|
|
|
24,959 |
|
|
|
23,075 |
|
|
|
20,389 |
|
Universal
life insurance contract interest
|
|
|
20,993 |
|
|
|
25,675 |
|
|
|
18,118 |
|
Other
operating expense
|
|
|
15,271 |
|
|
|
21,051 |
|
|
|
13,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
84,033 |
|
|
|
87,962 |
|
|
|
73,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings before Federal income taxes
|
|
|
29,565 |
|
|
|
18,651 |
|
|
|
20,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
income taxes
|
|
|
9,386 |
|
|
|
6,460 |
|
|
|
6,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$ |
20,179 |
|
|
|
12,191 |
|
|
|
13,559 |
|
As with
domestic operations, revenues from the international life insurance segment
include both premiums on traditional type products and revenues from universal
life insurance. A comparative detail of premiums and contract
revenues is provided below.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life insurance revenues
|
|
$ |
85,633 |
|
|
|
78,008 |
|
|
|
72,010 |
|
Traditional
life insurance premiums
|
|
|
15,692 |
|
|
|
11,027 |
|
|
|
9,201 |
|
Reinsurance
premiums
|
|
|
(12,543 |
) |
|
|
(11,030 |
) |
|
|
(10,832 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
88,782 |
|
|
|
78,005 |
|
|
|
70,379 |
|
International
operations have emphasized universal life policies over traditional life
insurance products. In accordance with generally accepted accounting
principles, premiums collected on universal life products are not reflected as
revenues in the Company's consolidated statements of earnings. Actual
international universal life premiums collected are detailed below.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
Universal
life insurance
|
|
|
|
|
|
|
|
|
|
First
year and single premiums
|
|
$ |
44,426 |
|
|
|
36,758 |
|
|
|
35,575 |
|
Renewal
premiums
|
|
|
91,621 |
|
|
|
81,226 |
|
|
|
68,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
136,047 |
|
|
|
117,984 |
|
|
|
104,407 |
|
The
Company's international life operations have been a significant contributor to
the Company's overall growth and represent a market niche where the Company
believes it has a competitive advantage. A productive agency force
has been developed given the Company's longstanding reputation for supporting
its international life products coupled with the instability of competing
companies in international markets. In particular, the Company has
experienced sizable growth with its equity-indexed universal life products and
has collected premiums of $76.8 million, $60.5 million, and $48.2 million for
the years ended 2007, 2006, and 2005, respectively.
A detail
of net investment income for international life insurance operations is provided
below.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
|
|
|
|
|
|
|
|
(excluding
derivatives)
|
|
$ |
26,752 |
|
|
|
25,893 |
|
|
|
23,896 |
|
Derivative
income (loss)
|
|
|
(2,062 |
) |
|
|
2,637 |
|
|
|
(773 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
24,690 |
|
|
|
28,530 |
|
|
|
23,123 |
|
Derivative
income and losses fluctuate from period to period based on the S&P 500
Index®
performance.
Life and
other policy benefits totaled $22.8 million in 2007, $18.2 million in 2006, and
$21.2 million in 2005, which are consistent with Company
expectations. Amortization of deferred policy acquisition costs were
$25.0 million, $23.1 million, and $20.4 million for 2007, 2006, and 2005,
respectively. The Company recorded an unlocking adjustment in 2007
totaling $9.0 million relative to improved mortality assumptions that results in
an increase to the deferred asset balance and a decrease in amortization
expense. In addition, a true-up adjustment of $1.7 million was also
recorded in 2007 resulting in a decrease to amortization. Offsetting
the decrease to amortization by the unlocking and true-up adjustments is an
increase in amortization 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. In 2006, a true-up of amortization assumptions resulted in
increased amortization of $1.0 million. Contract interest expense was
$20.1 million, $25.7 million, and $18.1 million, in 2007, 2006, and 2005,
respectively. The universal life contract interest fluctuations are
primarily the result of the S&P 500 Index®
performance relative to the equity-indexed universal life products and the
associated stock market gains and losses which increased or decreased the
amounts the Company credited to policyholders.
As the
international life insurance in force continues to grow, the Company anticipates
operating earnings to similarly increase. The amount of international life
insurance in force has grown from $12.2 billion at December 31, 2005 to $13.3
billion at December 31, 2006 and to $14.8 billion at December 31,
2007.
Other
operating expenses reported in 2007 were $15.3 million compared to $21.1 million
and $13.4 million in 2006 and 2005. The decrease in 2007 results from
negative compensation costs related to stock options recorded under liability
accounting. The significant increase in 2006 is due to an increase in
compensation costs resulting from the change to liability classification for the
Company’s stock option plan. Compensation costs totaled $0.4 million,
$5.1 million, and $0.4 million in 2007, 2006, and 2005,
respectively.
Annuity
Operations
The
Company's annuity operations are almost exclusively in the United
States. Although some of the Company's investment contracts are
available to international residents, current sales are small relative to total
annuity sales. A comparative analysis of results of operations for
the Company's annuity segment is detailed below.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and other revenue:
|
|
|
|
|
|
|
|
|
|
Premiums
and contract revenues
|
|
$ |
24,529 |
|
|
|
21,389 |
|
|
|
18,816 |
|
Net
investment income
|
|
|
266,953 |
|
|
|
323,326 |
|
|
|
258,485 |
|
Other
income
|
|
|
920 |
|
|
|
5,950 |
|
|
|
588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
292,402 |
|
|
|
350,665 |
|
|
|
277,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
3,594 |
|
|
|
3,424 |
|
|
|
2,998 |
|
Amortization
of deferred policy acquisition costs
|
|
|
55,456 |
|
|
|
59,970 |
|
|
|
61,768 |
|
Annuity
contract interest
|
|
|
133,935 |
|
|
|
178,893 |
|
|
|
123,732 |
|
Other
operating expenses
|
|
|
16,931 |
|
|
|
21,847 |
|
|
|
17,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
209,916 |
|
|
|
264,134 |
|
|
|
205,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings before Federal income taxes
|
|
|
82,486 |
|
|
|
86,531 |
|
|
|
72,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
income taxes
|
|
|
26,187 |
|
|
|
29,972 |
|
|
|
24,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$ |
56,299 |
|
|
|
56,559 |
|
|
|
47,915 |
|
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.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Surrender
charges
|
|
$ |
20,238 |
|
|
|
17,260 |
|
|
|
15,271 |
|
Payout
annuity and other revenues
|
|
|
4,263 |
|
|
|
4,098 |
|
|
|
3,511 |
|
Traditional
annuity premiums
|
|
|
28 |
|
|
|
31 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
24,529 |
|
|
|
21,389 |
|
|
|
18,816 |
|
In
accordance with generally accepted accounting principles, deposits collected on
annuity contracts are not reflected as revenues in the Company's consolidated
statements of earnings. Actual annuity deposits collected are
detailed below.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
indexed annuities
|
|
$ |
316,848 |
|
|
|
303,613 |
|
|
|
298,227 |
|
Other
deferred annuities
|
|
|
116,280 |
|
|
|
171,631 |
|
|
|
236,330 |
|
Immediate
annuities
|
|
|
4,637 |
|
|
|
10,750 |
|
|
|
23,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
437,765 |
|
|
|
485,994 |
|
|
|
557,940 |
|
Indexed
products are more attractive for consumers when interest rate levels remain low
as has been the market environment the past few years. Fixed indexed
annuity deposits as a percentage of total annuity deposits recorded were 72.4%,
62.5%, and 53.5% for the years ended December 31, 2007, 2006, and 2005,
respectively. Since the Company does not offer variable products or
mutual funds, fixed indexed products provide an important alternative to the
Company's existing fixed interest rate annuity products.
Other
deferred annuity deposits decreased in 2007 compared to 2006 with $116.3 million
recorded in collected deposits compared to $171.6 million,
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 fixed-rate annuity products include a first year
premium or interest rate bonus in addition to the base first year deposit
interest rate. These bonuses are credited to the policyholder account
but are deferred by the Company and amortized over future periods. The amount
deferred was approximately $20.8 million, $19.8 million, and $21.4 million for
the years ended December 31, 2007, 2006, and 2005, respectively.
A detail
of net investment income for annuity operations is provided below.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
|
|
|
|
|
|
|
|
(excluding
derivatives)
|
|
$ |
281,553 |
|
|
|
282,684 |
|
|
|
268,700 |
|
Derivative
income (loss)
|
|
|
(14,600 |
) |
|
|
40,642 |
|
|
|
(10,215 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
266,953 |
|
|
|
323,326 |
|
|
|
258,485 |
|
Derivative
income and losses fluctuate from period to period based on the S&P 500
Index®
performance.
As
previously described, derivatives are used to hedge the equity return component
of the Company's fixed indexed annuity products with any gains or losses from
the sale or expiration of the options, as well as period-to-period changes in
fair values, reflected in net investment income. The increase in net investment
income, excluding derivatives from 2005, is due to the increase in the overall
size of the asset portfolio as a result of higher sales volume. Net
investment income for 2006 included additional income from other income items as
previously discussed.
The
Company recorded an unlocking adjustment of $1.8 million and true-up adjustments
of $3.3 million in 2007 resulting in decreased amortization of deferred
acquisition costs. A true-up of assumptions in 2006 resulted in
increased amortization of deferred policy acquisition costs of $3.1
million. Amortization of deferred policy acquisition costs in 2005 of
$61.8 million includes an unlocking adjustment of $1.3 million relative to the
future spreads on certain fixed indexed annuity products; modified surrender
charges on certain annuities to reflect continuing lower new money rates; and
reduced ultimate valuation rates for pay out on annuitization under all
annuities. These adjustments in 2005 resulted in a decrease to the
deferred asset balance and an increase in amortization in that
year.
The
Company is required to periodically adjust for actual experience that varies
from that assumed. While management does not currently anticipate any impact
from unlocking in 2008, facts and circumstances may arise in the future which
require that the factors be reexamined.
Annuity
contract interest includes the equity component return associated with the
Company's fixed indexed annuities. The detail of fixed indexed annuity contract
interest compared to contract interest for all other annuities is as
follows:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
indexed annuities
|
|
$ |
50,743 |
|
|
|
88,094 |
|
|
|
28,224 |
|
All
other annuities
|
|
|
94,632 |
|
|
|
101,619 |
|
|
|
110,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
contract interest
|
|
|
145,375 |
|
|
|
189,713 |
|
|
|
138,389 |
|
Bonus
interest deferred and capitalized
|
|
|
(20,796 |
) |
|
|
(19,700 |
) |
|
|
(21,200 |
) |
Bonus
interest amortization
|
|
|
9,356 |
|
|
|
8,880 |
|
|
|
6,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contract interest
|
|
$ |
133,935 |
|
|
|
178,893 |
|
|
|
123,732 |
|
In
comparison by year, the fluctuation in reported contract interest amounts for
fixed indexed annuities is due to sales and the effect of the positive or
negative performance of the stock market on option values as noted
previously. As previously noted, contract interest reflects
variations due to the S&P 500 Index®
performance relative to the fair value of fixed indexed products.
Other
operating expenses totaled $16.9 million in 2007 compared to $21.8 million in
2006. The decrease in 2007 results from negative compensation costs
recorded under liability accounting in the current year. The 2006
expense reflects an increase of $5.0 million due to increased compensation costs
on stock options resulting from the change to liability classification for the
Company’s plan. Compensation costs were $0.4 million in 2007 and
2005.
Other
Operations
National
Western's primary business encompasses its domestic and international life
insurance operations and its annuity operations. However, the Company
also has small real estate, nursing home, and other investment operations
through its wholly-owned subsidiaries. Most of the income from the
Company's subsidiaries is from a life interest in a trust. Gross
income distributions from the trust totaled $4.1 million, pre-tax, in 2007 and
$4.5 million and $3.9 million in 2006 and 2005, respectively.
The
Company acquired a nursing home facility, which opened in late July, 2000 and is
operated by an affiliated limited partnership, whose financial operating results
are consolidated with those of the Company. Daily operations and management of
the nursing home are performed by an experienced management company through a
contract with the limited partnership. Nursing home operations generated $1.6
million, $1.0 million, and $1.3 million of operating earnings in 2007, 2006, and
2005, respectively.
INVESTMENTS
General
The
Company's investment philosophy emphasizes the careful handling of policyowners'
and stockholders' funds to achieve security of principal, to obtain the maximum
possible yield while maintaining security of principal, and to maintain
liquidity in a measure consistent with current and long-term requirements of the
Company.
The
Company's overall conservative investment philosophy is reflected in the
allocation of its investments, which is detailed below as of December 31, 2007
and 2006. The Company emphasizes investment grade debt securities,
with smaller holdings in mortgage loans and policy loans.
|
|
2007
|
|
|
2006
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Value
|
|
|
%
|
|
|
Value
|
|
|
%
|
|
|
|
(In
thousands)
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
$ |
5,659,604 |
|
|
|
95.9 |
|
|
$ |
5,484,799 |
|
|
|
94.7 |
|
Mortgage
loans
|
|
|
99,033 |
|
|
|
1.7 |
|
|
|
103,325 |
|
|
|
1.8 |
|
Policy
loans
|
|
|
83,772 |
|
|
|
1.4 |
|
|
|
86,856 |
|
|
|
1.5 |
|
Derivatives
|
|
|
25,907 |
|
|
|
0.4 |
|
|
|
72,012 |
|
|
|
1.2 |
|
Equity
securities
|
|
|
19,713 |
|
|
|
0.3 |
|
|
|
21,203 |
|
|
|
0.4 |
|
Real
estate
|
|
|
11,994 |
|
|
|
0.2 |
|
|
|
12,113 |
|
|
|
0.2 |
|
Other
|
|
|
4,568 |
|
|
|
0.1 |
|
|
|
10,709 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
5,904,591 |
|
|
|
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 utility fixed income securities. Investments in
mortgage-backed securities primarily include U.S. government agency pass-through
securities and collateralized mortgage obligations ("CMO"). As of
December 31, 2007 and 2006, the Company's debt securities portfolio consisted of
the following:
|
|
2007
|
|
|
2006
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Value
|
|
|
%
|
|
|
Value
|
|
|
%
|
|
|
|
(In
thousands)
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
$ |
2,429,753 |
|
|
|
43.0 |
|
|
$ |
2,384,762 |
|
|
|
43.5 |
|
Mortgage-backed
securities
|
|
|
1,909,405 |
|
|
|
33.7 |
|
|
|
1,817,532 |
|
|
|
33.1 |
|
Public
utilities
|
|
|
689,447 |
|
|
|
12.2 |
|
|
|
623,649 |
|
|
|
11.4 |
|
U.S.
government/agencies
|
|
|
431,303 |
|
|
|
7.6 |
|
|
|
447,573 |
|
|
|
8.2 |
|
Asset-backed
securities
|
|
|
107,019 |
|
|
|
1.9 |
|
|
|
122,101 |
|
|
|
2.2 |
|
States
& political subdivisions
|
|
|
61,794 |
|
|
|
1.1 |
|
|
|
58,627 |
|
|
|
1.1 |
|
Foreign
governments
|
|
|
30,883 |
|
|
|
0.5 |
|
|
|
30,555 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
5,659,604 |
|
|
|
100.0 |
|
|
$ |
5,484,799 |
|
|
|
100.0 |
|
The
Company's investment guidelines prescribe limitations as a percent of the total
investment portfolio by type of security and all holdings were within these
threshold limits at December 31, 2007 and 2006. Because the Company's
holdings of mortgage-backed securities are subject to prepayment and extension
risk, the Company has substantially reduced these risks by investing primarily
in collateralized mortgage obligations, which have more predictable cash flow
patterns than pass-through securities. These securities, known as
planned amortization class I ("PAC I"), very accurately defined maturity
("VADM") and sequential tranches are designed to amortize in a more predictable
manner than other CMO classes or pass-throughs. The Company does not
purchase tranches, such as PAC II and support tranches, that subject the
portfolio to greater than average prepayment risk. 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.
Due to
recent negative news relative to the mortgage industry and in particular
subprime mortgages the Company has included detailed information below related
to the exposure at December 31, 2007 in the debt securities
portfolio. The Company holds approximately $107.0 million in
asset-backed securities at December 31, 2007. This portfolio includes
$52.7 million of manufactured housing bonds and $54.3 million of home equity
loans (also referred to as subprime securities). 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.
The
mortgage-backed portfolio includes one Alt-A security with a carrying value of
$4.7 million. The Alt-A sector is a sub-sector of the jumbo prime MBS
sector. The average FICO for an Alt-A borrower is approximately 715 compared to
a score of 730 for a jumbo prime borrower. The Company’s exposure to
the Alt-A and subprime sectors is limited to investments in the senior tranches
of structured securities collateralized by Alt-A or subprime residential
mortgage loans. The asset-backed portfolio includes thirteen subprime
securities, totaling $54.7 million. The subprime sector is generally
categorized under the asset-backed sector. This sector lends to borrowers who do
not qualify for prime interest rates due to poor or insufficient credit history.
Subprime borrowers generally have FICO scores of 660 or below. The slowing
housing market, rising interest rates, and relaxed underwriting standards for
loans originated after 2005 resulted in higher delinquency rates and losses in
2007. These events caused illiquidity in the market and volatility in the market
prices of subprime securities. All of the loans classified as Alt-A
or subprime in the Company’s portfolio as of December 31, 2007 were underwritten
prior to 2005 as noted in the table below.
Investment
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
Origination
Year
|
|
Carrying
Value
|
|
|
Market
Value
|
|
|
Carrying
Value
|
|
|
Market
Value
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime:
|
|
|
|
|
|
|
|
|
|
|
|
|
1998
|
|
$ |
14,026 |
|
|
|
14,045 |
|
|
|
16,426 |
|
|
|
16,471 |
|
2002
|
|
|
1,312 |
|
|
|
1,290 |
|
|
|
1,833 |
|
|
|
1,847 |
|
2003
|
|
|
7,761 |
|
|
|
7,232 |
|
|
|
7,963 |
|
|
|
8,014 |
|
2004
|
|
|
31,186 |
|
|
|
30,278 |
|
|
|
31,728 |
|
|
|
31,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
subprime
|
|
$ |
54,285 |
|
|
|
52,845 |
|
|
|
57,950 |
|
|
|
57,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt
A:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
$ |
4,665 |
|
|
|
4,665 |
|
|
|
4,837 |
|
|
|
4,837 |
|
As of
December 31, 2007, all of the subprime securities were rated AAA. Seven of the
thirteen subprime securities owned by the Company were wrapped by bond insurers
in order to provide additional credit enhancement. These insurers were AMBAC
Assurance Corporation, MBIA Insurance Corporation, and Financial Guaranty
Insurance Company (FGIC). Subsequent to December 31, 2007, FGIC’s
rating was downgraded by Moody’s Rating Service, which also caused the two
subprime bonds that were insured by FGIC to be downgraded. Both of
the securities insured by FGIC retained investment grade ratings and the rest of
the subprime and Alt-A securities remained AAA-rated.
In
addition to diversification, an important aspect of the Company's investment
approach is managing the credit quality of its investments in debt
securities. Thorough credit analysis is performed on potential
corporate investments including examination of a company's credit and industry
outlook, financial ratios and trends, and event risks. This emphasis
is reflected in the high average credit rating of the Company's portfolio with
98.2% held in investment grade securities. In the table below,
investments in debt securities are classified according to credit ratings by
Standard and Poor's ("S&P®"), or
other nationally recognized statistical rating organizations if securities were
not rated by S&P®.
|
|
2007
|
|
|
2006
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Value
|
|
|
%
|
|
|
Value
|
|
|
%
|
|
|
|
(In
thousands)
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
and U.S. government
|
|
$ |
2,564,975 |
|
|
|
45.3 |
|
|
$ |
2,485,122 |
|
|
|
45.3 |
|
AA
|
|
|
301,469 |
|
|
|
5.3 |
|
|
|
284,965 |
|
|
|
5.2 |
|
A
|
|
|
1,399,581 |
|
|
|
24.7 |
|
|
|
1,330,980 |
|
|
|
24.3 |
|
BBB
|
|
|
1,293,358 |
|
|
|
22.9 |
|
|
|
1,237,151 |
|
|
|
22.5 |
|
BB
and other below investment grade
|
|
|
100,221 |
|
|
|
1.8 |
|
|
|
146,581 |
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
5,659,604 |
|
|
|
100.0 |
|
|
$ |
5,484,799 |
|
|
|
100.0 |
|
National
Western does not purchase below investment grade
securities. Investments held in debt securities below investment
grade are the result of subsequent downgrades of the
securities. These holdings are summarized below.
|
|
Below
Investment Grade Debt Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
%
of
|
|
|
|
Amortized
|
|
|
Carrying
|
|
|
Fair
|
|
|
Invested
|
|
|
|
Cost
|
|
|
Value
|
|
|
Value
|
|
|
Assets
|
|
|
|
(In
thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
$ |
105,067 |
|
|
|
100,221 |
|
|
|
97,618 |
|
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
$ |
145,858 |
|
|
|
146,581 |
|
|
|
146,170 |
|
|
|
2.5 |
% |
As of
December 31, 2007, the Company's percentage of below investment grade securities
compared to total invested assets totaled 1.7%. The decrease from
2006 is primarily due to principal payments received and settlements from
bankruptcy proceedings as well as sales, tenders and a maturity. The
Company's holdings of below investment grade securities as a percentage of total
invested assets is relatively small compared to industry averages.
Holdings
in below investment grade securities by category as of December 31, 2007 are
summarized below, including 2006 fair values for comparison. The Company is
continually monitoring developments in these industries that may affect security
valuation issues.
|
|
Below
Investment Grade Debt Securities
|
|
|
|
Amortized
|
|
|
Carrying
|
|
|
Fair
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
Industry
Category
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$ |
21,968 |
|
|
|
21,604 |
|
|
|
21,597 |
|
|
|
21,723 |
|
Telecommunications
|
|
|
19,998 |
|
|
|
17,244 |
|
|
|
17,244 |
|
|
|
17,999 |
|
Medical
|
|
|
13,000 |
|
|
|
12,606 |
|
|
|
11,960 |
|
|
|
12,481 |
|
Utilities/energy
|
|
|
12,415 |
|
|
|
12,416 |
|
|
|
12,332 |
|
|
|
13,888 |
|
Asset-backed
|
|
|
11,273 |
|
|
|
11,273 |
|
|
|
10,321 |
|
|
|
10,683 |
|
Auto
finance
|
|
|
6,146 |
|
|
|
6,146 |
|
|
|
5,144 |
|
|
|
6,200 |
|
Manufacturing
|
|
|
5,493 |
|
|
|
5,493 |
|
|
|
5,581 |
|
|
|
5,466 |
|
Transportation
|
|
|
2,288 |
|
|
|
2,757 |
|
|
|
2,757 |
|
|
|
3,089 |
|
Other
|
|
|
12,486 |
|
|
|
10,682 |
|
|
|
10,682 |
|
|
|
10,467 |
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
105,067 |
|
|
|
100,221 |
|
|
|
97,618 |
|
|
|
101,996 |
|
Generally
accepted accounting principles require that investments in debt securities be
written down to fair value when declines in value are judged to be
other-than-temporary. Since quoted market prices are readily
available and understood by investors and creditors, they are the mandated
source for fair value estimation when available. In some instances,
quoted market prices may not be available for securities that have limited buyer
demand. When the quoted market price is not available other valuation
techniques such as discounted cash flow analysis and fundamental analysis may be
used. Although the Company is required to write down securities
deemed to be impaired on an other-than-temporary basis to quoted market prices,
the estimated ultimate recovery value of the impaired security is often
anticipated to be an amount in excess of the quoted market
price. This is due to the influence that "distressed bond" traders
may have in depressing market prices in order to generate a yield commensurate
with the investment risk of such securities. Consequently, financial
results can significantly vary from period to period for securities written down
to quoted market prices which may be subsequently redeemed at levels consistent
with expected recovery value.
The
Company is closely monitoring its other below investment grade holdings by
reviewing investment performance indicators, including information such as
issuer operating performance, debt ratings, analyst reports and other economic
factors that may affect these specific investments. While additional
losses are not currently anticipated based on the existing status and condition
of these securities, continued credit deterioration of some securities is
possible, which may result in further writedowns.
The
Company is required to classify its investments in debt and equity securities
into one of three categories: (a) trading securities, (b) securities available
for sale, or (c) securities held to maturity. The Company purchases
securities with the intent to hold to maturity and accordingly does not maintain
a portfolio of trading securities. Of the remaining two categories,
available for sale and held to maturity, the Company makes a determination as to
which category based on various factors including the type and quality of the
particular security and how it will be incorporated into the Company's overall
asset/liability management strategy. As shown in the table below, at December
31, 2007, approximately 33.5% of the Company's total debt and equity securities,
based on fair values, were classified as securities available for
sale. These holdings provide flexibility to the Company to react to
market opportunities and conditions and to practice active management within the
portfolio to provide adequate liquidity to meet policyholder obligations and
other cash needs.
|
|
Fair
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
(Losses)
|
|
|
|
(In
thousands)
|
|
Securities
held to maturity:
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
$ |
3,774,193 |
|
|
|
3,778,603 |
|
|
|
(4,410 |
) |
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
|
1,881,001 |
|
|
|
1,892,224 |
|
|
|
(11,223 |
) |
Equity
securities
|
|
|
19,713 |
|
|
|
12,301 |
|
|
|
7,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
5,674,907 |
|
|
|
5,683,128 |
|
|
|
(8,221 |
) |
In
accordance with the provisions of SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, the Company may under certain conditions
transfer a debt security from held to maturity to available for
sale. No transfers were made in 2007 or 2006. During 2007,
one security was sold from the held to maturity portfolio due to credit
deterioration, with an amortized cost of $5.2 million, resulting in a minimal
realized gain. No held to maturity sales were made during
2006. During 2005, two securities were sold from the held to maturity
portfolio due to credit deterioration with an amortized cost of $10.0 million
resulting in a realized gain of $0.9 million.
Mortgage
Loans and Real Estate
In
general, the Company originates loans on high quality, income-producing
properties such as shopping centers, freestanding retail stores, office
buildings, industrial and sales or service facilities, selected apartment
buildings, motels, and health care facilities. The location of these
properties is typically in major metropolitan areas that offer a potential for
property value appreciation. Credit and default risk is minimized through strict
underwriting guidelines and diversification of underlying property types and
geographic locations. In addition to being secured by the property,
mortgage loans with leases on the underlying property are often guaranteed by
the lessee. This approach has proven to result in higher quality
mortgage loans with fewer defaults.
The
Company requires a minimum specified yield on mortgage loan
investments. In the loan interest rate environment of the past few
years, fewer loan opportunities have been available which met the Company's
required rate of return. As a result, the Company's portfolio has
declined.
The
Company's direct investments in real estate are not a significant portion of its
total investment portfolio as many of these investments were acquired through
mortgage loan foreclosures. The Company also participates in several
real estate joint ventures and limited partnerships that invest primarily in
income-producing retail properties. These investments have enhanced
the Company's overall investment portfolio returns.
The
Company held net investments in mortgage loans totaling $99.0 million and $103.3
million at December 31, 2007 and 2006, respectively. The
diversification of the portfolio by geographic region and by property type was
as follows:
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic
Region:
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(In
thousands)
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West
South Central
|
|
$ |
62,160 |
|
|
|
62.8 |
|
|
$ |
68,528 |
|
|
|
66.3 |
|
East
North Central
|
|
|
11,572 |
|
|
|
11.7 |
|
|
|
6,042 |
|
|
|
5.8 |
|
Pacific
|
|
|
9,970 |
|
|
|
10.1 |
|
|
|
10,684 |
|
|
|
10.3 |
|
Mountain
|
|
|
8,240 |
|
|
|
8.3 |
|
|
|
10,787 |
|
|
|
10.5 |
|
South
Atlantic
|
|
|
4,590 |
|
|
|
4.6 |
|
|
|
4,718 |
|
|
|
4.6 |
|
All
other
|
|
|
2,501 |
|
|
|
2.5 |
|
|
|
2,566 |
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
99,033 |
|
|
|
100.0 |
|
|
$ |
103,325 |
|
|
|
100.0 |
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
Type:
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
(In
thousands)
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$ |
71,893 |
|
|
|
72.6 |
|
|
$ |
70,922 |
|
|
|
68.7 |
|
Office
|
|
|
16,721 |
|
|
|
16.9 |
|
|
|
22,730 |
|
|
|
22.0 |
|
Hotel/Motel
|
|
|
6,490 |
|
|
|
6.5 |
|
|
|
6,649 |
|
|
|
6.4 |
|
Land/Lots
|
|
|
3,923 |
|
|
|
4.0 |
|
|
|
3,015 |
|
|
|
2.9 |
|
All
other
|
|
|
6 |
|
|
|
- |
|
|
|
9 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
99,033 |
|
|
|
100.0 |
|
|
$ |
103,325 |
|
|
|
100.0 |
|
The
Company does not recognize interest income on loans past due ninety days or
more. At December 31, 2007 and 2006, the Company had two mortgage
loans past due six months or more with the principal balance totaling $7.0
million for both years. Interest income not recognized for past due
loans totaled approximately $0.4 million in 2007 and 2006.
The
contractual maturities of mortgage loan principal balances at December 31, 2007
are as follows:
|
|
Principal
Due
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Due
in one year or less
|
|
$ |
1,233 |
|
Due
after one year through five years
|
|
|
54,937 |
|
Due
after five years through ten years
|
|
|
39,001 |
|
Due
after ten years through fifteen years
|
|
|
7,980 |
|
Due
after fifteen years
|
|
|
- |
|
|
|
|
|
|
Total
|
|
$ |
103,151 |
|
In the
fourth quarter of 2006, a valuation loss of $2.1 million was recorded and in
2007, an additional allowance of $1.5 million was recorded related to one
mortgage loan based on information which indicated that the Company may not
collect all amounts in accordance with the mortgage agreement. While the Company
closely manages its mortgage loan portfolio, future changes in economic
conditions can result in impairments beyond those currently
identified.
The
Company's real estate investments totaled approximately $12.0 million and $12.1
million at December 31, 2007 and 2006, respectively, and consist primarily of
income-producing properties which are being operated by a wholly-owned
subsidiary of the Company. The Company recognized operating income on
these properties of approximately $1.0 million, $0.8 million, and $1.0 million
for the years ended December 31, 2007, 2006, and 2005,
respectively. The Company monitors the conditions and market values
of these properties on a regular basis and makes repairs and capital
improvements to keep the properties in good condition. The Company recorded net
realized investment gains of $0.2 million, $0.6 million, and $6.7 million in
2007, 2006, and 2005, respectively associated with these
properties.
Market
Risk
Market
risk is the risk of change in market values of financial instruments due to
changes in interest rates, currency exchange rates, commodity prices, or equity
prices. The most significant market risk exposure for National
Western is interest rate risk. The fair values of fixed income debt securities
correlate to external market interest rate conditions. Because
interest rates are fixed on almost all of the Company's debt securities, market
values typically increase when market interest rates decline, and decrease when
market interest rates rise. However, market values may fluctuate for
other reasons, such as changing economic conditions or increasing event-risk
concerns.
The
correlation between fair values and interest rates for debt securities is
reflected in the tables below.
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands except percentages)
|
|
|
|
|
|
|
|
|
Debt
securities - fair value
|
|
$ |
5,655,194 |
|
|
|
5,448,990 |
|
Debt
securities - amortized cost
|
|
$ |
5,670,827 |
|
|
|
5,498,461 |
|
|
|
|
|
|
|
|
|
|
Fair
value as a percentage of amortized cost
|
|
|
99.72
|
% |
|
|
99.10
|
% |
Unrealized
losses at year-end
|
|
$ |
(15,633 |
) |
|
|
(49,471 |
) |
Ten-year
U.S. Treasury bond - increase (decrease)
|
|
|
|
|
|
|
|
|
in
yield for the year
|
|
|
(0.68 |
)
% |
|
|
0.31
|
% |
|
|
Unrealized
Losses
|
|
|
|
Net
Balance at
|
|
|
Net
Balance at
|
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
Change
in
|
|
|
|
2007
|
|
|
2006
|
|
|
Net
Balance
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities held to maturity
|
|
$ |
(4,410 |
) |
|
|
(35,809 |
) |
|
|
31,399 |
|
Debt
securities available for sale
|
|
|
(11,223 |
) |
|
|
(13,662 |
) |
|
|
2,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
(15,633 |
) |
|
|
(49,471 |
) |
|
|
33,838 |
|
Changes
in interest rates typically have a significant impact on the fair values of the
Company's debt securities. During 2007, market interest rates of the
ten-year U.S. Treasury bond decreased 68 basis points from year end 2006
resulting in a decrease in the unrealized loss balance of $33.8 million on a
portfolio of approximately $5.7 billion. This amount is reasonable
based upon the current market factors and the current investment portfolio
characteristics. The Company would expect similar results in the
future from a significant upward or downward movement in market
rates. However, since the majority of the Company's debt securities
are classified as held to maturity, which are recorded at amortized cost,
changes in fair values have relatively small effects on the Company's financial
results.
The
Company analyzes interest rate risk through ongoing cash flow testing required
for insurance regulatory purposes. Computer models are used to perform cash flow
testing under various commonly used stress test interest rate scenarios to
determine if existing assets would be sufficient to meet projected liability
outflows. Sensitivity analysis allows the Company to measure the
potential gain or loss in fair value of its interest-sensitive instruments and
to protect its economic value and achieve a predictable spread between what is
earned on invested assets and what is paid on liabilities. The
Company seeks to minimize the impact of interest rate risk through surrender
charges that are imposed to discourage policy surrenders and to offset
unamortized acquisition costs. Interest rate changes can be
anticipated in the computer models and the corresponding risk addressed by
management actions affecting asset and liability
instruments. However, potential changes in the values of financial
instruments indicated by hypothetical interest rate changes will likely be
different from actual changes experienced, and the differences could be
significant.
The
following table illustrates the market risk sensitivity of the Company's
interest rate-sensitive assets. The table shows the effect of a
change in interest rates on the fair value of the portfolio using models that
measure the change in fair value arising from an immediate and sustained change
in interest rates in increments of 100 basis points.
|
|
Fair
Values of Assets
|
|
|
|
Changes
in Interest Rates in Basis Points
|
|
|
|
|
-100 |
|
|
|
0 |
|
|
|
+
100 |
|
|
|
+
200 |
|
|
|
+
300 |
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
and equity securities
|
|
$ |
5,928,446 |
|
|
|
5,674,907 |
|
|
|
5,379,307 |
|
|
|
5,072,729 |
|
|
|
4,779,155 |
|
Mortgage
loans
|
|
|
104,093 |
|
|
|
100,786 |
|
|
|
97,658 |
|
|
|
94,696 |
|
|
|
91,889 |
|
Policy
loans
|
|
|
108,017 |
|
|
|
117,958 |
|
|
|
99,354 |
|
|
|
91,763 |
|
|
|
85,079 |
|
Other
loans
|
|
|
2,396 |
|
|
|
2,383 |
|
|
|
2,369 |
|
|
|
2,356 |
|
|
|
2,343 |
|
Derivatives
|
|
|
25,180 |
|
|
|
25,907 |
|
|
|
26,639 |
|
|
|
27,385 |
|
|
|
28,142 |
|
Expected
maturities of debt securities may differ from contractual maturities due to call
or prepayment provisions. The models assume that prepayments on
mortgage-backed securities are influenced by agency and pool types, the level of
interest rates, loan age, refinancing incentive, month of the year, and
underlying coupon. During periods of declining interest rates,
principal payments on mortgage-backed securities and collateralized mortgage
obligations increase as the underlying mortgages are
prepaid. Conversely, during periods of rising interest rates, the
rate of prepayment slows. Both of these situations can expose the
Company to the possibility of asset-liability cash flow and yield mismatch. The
model uses a proprietary method of sampling interest rate paths along with a
mortgage prepayment model to derive future cash flows. The initial interest
rates used are based on the current U.S. Treasury yield curve as well as current
mortgage rates for the various types of collateral in the
portfolio.
Mortgage
and other loans were modeled by discounting scheduled cash flows through the
scheduled maturities of the loans, starting with interest rates currently being
offered for similar loans to borrowers with similar credit
ratings. Policy loans were modeled by discounting estimated cash
flows using U.S. Treasury Bill interest rates as the base rates at December 31,
2007. The estimated cash flows include assumptions as to whether such loans will
be repaid by the policyholders or settled upon payment of death or surrender
benefits on the underlying insurance contracts and incorporate both Company
experience and mortality assumptions associated with such
contracts.
In
addition to the securities analyzed above, the Company invests in index options
which are derivative financial instruments used to hedge the equity return
component of the Company's indexed annuity and life products. The
values of these options are primarily impacted by equity price risk, as the
options' fair values are dependent on the performance of the S&P 500
Index®.
However, increases or decreases in investment returns from these options are
substantially offset by corresponding increases or decreases in amounts paid to
indexed policyholders, subject to minimum guaranteed policy interest
rates.
The
Company's market risk liabilities, which include policy liabilities for annuity
and supplemental contracts, are managed for interest rate risk through cash flow
testing as previously described. As part of this cash flow testing,
the Company has analyzed the potential impact on net earnings of a 100 basis
point decrease and increases in increments of 100 basis points in the U.S.
Treasury yield curve as of December 31, 2007. The potential impact on
net earnings from these interest rate changes are summarized below.
|
|
Changes
in Interest Rates in Basis Points
|
|
|
|
|
-100 |
|
|
|
+100 |
|
|
|
+200 |
|
|
|
+300
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact
on net earnings
|
|
$ |
(996 |
) |
|
|
(782 |
) |
|
|
(1,966 |
) |
|
|
(4,166 |
) |
These
estimated impacts in earnings are net of tax effects and the estimated effects
of deferred policy acquisition costs.
The above
described scenarios produce estimated changes in cash flows as well as cash flow
reinvestment projections. Estimated cash flows in the Company's model
assume cash flow reinvestments which are representative of the Company's current
investment strategy. Calls and prepayments include scheduled
maturities and those expected to occur which would benefit the security
issuers. Assumed policy surrenders consider differences and
relationships between credited interest rates and market interest rates as well
as surrender charges on individual policies. The impact to earnings
also includes the expected effects on amortization of deferred policy
acquisition costs. The model considers only annuity and supplemental
contracts in force at December 31, 2007, and does not consider new product sales
or the possible impact of interest rate changes on sales.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
Liquidity
requirements are met primarily by funds provided from operations. Premium
deposits and annuity considerations, investment income, and investment
maturities and prepayments are the primary sources of funds while investment
purchases, policy benefits in the form of claims, and payments to policyholders
and contract holders in connection with surrenders and withdrawals as well as
operating expenses are the primary uses of funds. To ensure the
Company will be able to pay future commitments, the funds received as premium
payments and deposits are invested in high quality investments, primarily fixed
income securities. Funds are invested with the intent that the income
from investments, plus proceeds from maturities, will meet the ongoing cash flow
needs of the Company. The approach of matching asset and liability
durations and yields requires an appropriate mix of
investments. Although the Company historically has not been put in
the position of liquidating invested assets to provide cash flow, its
investments consist primarily of marketable debt securities that could be
readily converted to cash for liquidity needs. The Company may also
borrow up to $40 million on its bank line of credit for short-term cash
needs.
A primary
liquidity concern is the risk of an extraordinary level of early policyholder
withdrawals. The Company includes provisions within its annuity and
universal life insurance policies, such as surrender and market value adjustment
charges, that help limit and discourage early withdrawals. The
following table sets forth withdrawal characteristics of the Company's annuity
reserves and deposit liabilities (based on statutory liability values) as of the
dates indicated.
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
|
($
Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not
subject to discretionary withdrawal
|
|
|
|
|
|
|
|
|
|
|
|
|
provisions
|
|
$ |
307,133 |
|
|
|
6.8 |
% |
|
$ |
296,651 |
|
|
|
6.6 |
% |
Subject
to discretionary withdrawal,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
with
adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With
market value adjustment
|
|
|
1,368,899 |
|
|
|
30.6 |
% |
|
|
1,390,428 |
|
|
|
31.3 |
% |
At
contract value less current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
surrender
charge of 5% or more
|
|
|
2,295,358 |
|
|
|
51.3 |
% |
|
|
2,216,531 |
|
|
|
49.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,971,390 |
|
|
|
88.7 |
% |
|
|
3,903,610 |
|
|
|
87.8 |
% |
Subject
to discretionary withdrawal at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contract
value with no surrender charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
or
surrender charge of less than 5%
|
|
|
506,247 |
|
|
|
11.3 |
% |
|
|
540,519 |
|
|
|
12.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
annuity reserves and deposit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities
|
|
$ |
4,477,637 |
|
|
|
100.0 |
% |
|
$ |
4,444,129 |
|
|
|
100.0 |
% |
The
actual amounts paid by product line in connection with surrenders and
withdrawals for the years ended December 31 are noted in the table
below.
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
Product
Line:
|
|
|
|
|
|
|
|
|
|
Traditional
Life
|
|
$ |
6,408 |
|
|
|
4,845 |
|
|
|
5,419 |
|
Universal
Life
|
|
|
34,356 |
|
|
|
30,566 |
|
|
|
31,143 |
|
Annuities
|
|
|
435,800 |
|
|
|
363,407 |
|
|
|
303,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
476,564 |
|
|
|
398,818 |
|
|
|
340,309 |
|
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 $258
million, $224 million, and $201 million in 2007, 2006, and 2005,
respectively. The Company also has significant cash flows from both
scheduled and unscheduled investment security maturities, redemptions, and
prepayments. These cash flows totaled $518 million, $399 million, and $485
million in 2007, 2006, and 2005, respectively. Cash flows from security
maturities, redemptions, and prepayments were relatively higher over the last
three years due to the decline in interest rates. These cash flow
items could be reduced if interest rates rise in 2008. Net cash flows from the
Company's universal life and annuity deposit product operations totaled inflows
(outflows) of $(93) million, $25 million, and $153 million in 2007, 2006, and
2005, respectively.
Capital
Resources
The
Company relies on stockholders' equity for its capital resources as there is no
long-term debt outstanding and the Company does not anticipate the need for any
long-term debt in the near future. As of December 31, 2007, the
Company had commitments of approximately $8.1 million which were approved by the
Company's Board of Directors for the construction of a nursing home facility in
Central Texas. The construction of the new facility began in
2007.
OFF-BALANCE
SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
It is
Company practice to not enter into off-balance sheet arrangements or to issue
guarantees to third parties, other than in the normal course of issuing
insurance contracts. Commitments related to insurance products sold
are reflected as liabilities for future policy benefits. Insurance
contracts guarantee certain performances by the Company.
Insurance
reserves are the means by which life insurance companies determine the
liabilities that must be established to assure that future policy benefits are
provided for and can be paid. These reserves are required by law and
based upon standard actuarial methodologies to ensure fulfillment of commitments
guaranteed to policyholders and their beneficiaries, even though the obligations
may not be due for many years. Refer to Note (1) in the Notes to Consolidated
Financial Statements for a discussion of reserving methods.
The table
below summarizes future estimated cash payments under existing contractual
obligations.
|
|
Payment
due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
Than
|
|
|
|
1 –
3 |
|
|
|
3 –
5 |
|
|
More
Than
|
|
|
|
Total
|
|
|
1
Year
|
|
|
Years
|
|
|
Years
|
|
|
5
Years
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease obligations (1)
|
|
$ |
2,023 |
|
|
|
846 |
|
|
|
1,177 |
|
|
|
- |
|
|
|
- |
|
Construction
commitments
|
|
|
8,096 |
|
|
|
8,096 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Life
claims payable (2)
|
|
|
50,014 |
|
|
|
50,014 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
long-term reserve liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reflected
on the balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under
GAAP (3)
|
|
|
6,910,276 |
|
|
|
649,040 |
|
|
|
1,105,566 |
|
|
|
1,342,661 |
|
|
|
3,813,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
6,970,409 |
|
|
|
707,996 |
|
|
|
1,106,743 |
|
|
|
1,342,661 |
|
|
|
3,813,009 |
|
(1) Refer
to Note 9 in the Notes to Consolidated Financial Statements relating to Company
leases.
(2) Life
claims payable include benefit and claim liabilities for which the Company
believes the amount and timing of the payment is essentially fixed and
determinable. Such amounts generally relate to incurred and reported
death and critical illness claims including an estimate of claims incurred but
not reported.
(3) Other
long-term liabilities include estimated life and annuity obligations related to
death claims, policy surrenders, policy withdrawals, maturities and annuity
payments based on mortality, lapse, annuitization, and withdrawal assumptions
consistent with the Company’s historical experience. These estimated life and
annuity obligations are undiscounted projected cash outflows that assume
interest crediting and market growth consistent with assumptions used in
amortizing deferred acquisition costs. They do not include any offsets for
future premiums or deposits. Other long-term liabilities also include
determinable payout patterns related to immediate annuities. In contrast to this
table, the majority of the Company’s liabilities for future obligations recorded
on the consolidated balance sheet do not incorporate future credited interest
and market growth. Therefore, the estimated life and annuity obligations
presented in this table significantly exceed the life and annuity liabilities
recorded in the reserves for future life and annuity obligations. Due to the
significance of the assumptions used, the actual cash outflows will differ both
in amount and timing, possibly materially, from these estimates.
ACCOUNTING
STANDARDS AND CHANGES IN ACCOUNTING
Recently
Issued Accounting Standards
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 does not currently anticipate an
impact from adopting SFAS No. 159.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements. SFAS No. 160 establishes accounting
and reporting standards for entities that have equity investments that are not
attributable directly to the parent, called noncontrolling interests or minority
interests. Specifically, SFAS No. 160 states where and how to report
noncontrolling interests in the consolidated statements of financial position
and operations, how to account for changes in noncontrolling interests and
provides disclosure requirements. The provisions of SFAS No. 160 are
effective beginning January 1, 2009. The Company is currently
evaluating the impact that the adoption of this statement will have on the
consolidated financial position, results of operations and
disclosures.
In
December 2007, the FASB issued SFAS No. 141(R), Business
Combinations. SFAS No. 141(R) establishes how an entity
accounts for the identifiable assets acquired, liabilities assumed, and any
noncontrolling interests acquired, how to account for goodwill acquired and
determines what disclosures are required as part of a business combination.
SFAS No. 141(R) applies prospectively to business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008, early adoption is
prohibited. The Company is currently evaluating the impact that the adoption of
this statement will have on the consolidated financial position, results of
operations and disclosures.
Change
in Accounting
In
September 2005, the AICPA issued Statement of Position (“SOP”) 05-1, Accounting by Insurance Enterprises
for Deferred Acquisition Costs in Connection with Modifications or Exchanges of
Insurance Contracts, 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 SFAS 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 |
|
ABOUT
MARKET RISK
The
information called for by Item 7A is set forth in the Investments section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
See
Attachment A, Index to Financial Statements and Schedules, on page
76.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There
have been no changes in auditors or disagreements with auditors which are
reportable pursuant to Item 304 of Regulation S-K.
Evaluation
of Disclosure Controls and Procedures
Disclosure
controls and procedures are designed to ensure that information to be disclosed
in reports filed or submitted under the Securities and Exchange Act of 1934 is
recorded, processed, summarized and reported within required time
periods. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed is accumulated and communicated to management, including the
Chief Executive Officer and Chief Financial Officer as appropriate, to allow
timely decisions regarding disclosure matters.
The
Company's management, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company's disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this report. Based on this evaluation, the
Company’s Chief Executive Officer and Chief Financial Officer concluded that the
Company’s disclosure controls and procedures were effective.
Management's
Report on Internal Control Over Financial Reporting
The
management of National Western Life Insurance Company ("Company") is responsible
for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) under
the Securities Exchange Act of 1934. The Company's internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
Company's financial statements for external reporting purposes in accordance
with U.S. generally accepted accounting principles. The Company's
management, including the Chief Executive Officer and Chief Financial Officer,
assessed the effectiveness of the Company's internal control over financial
reporting as of December 31, 2007. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated
Framework. Based on the Company's assessment under this
framework, management concluded that the Company maintained effective internal
control over financial reporting as of December 31, 2007.
Changes
in Internal Control Over Financial Reporting
Internal
controls over financial reporting change as the Company modifies and enhances
its systems and processes to meet business needs. Any significant
changes in controls are evaluated prior to implementation to help ensure
continued effectiveness of internal controls and the control
environment. While changes have taken place in internal controls
during the quarter ended December 31, 2007, there have been no changes that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal controls over financial reporting.
There
have been no significant changes in the Company’s internal controls or in other
factors that could significantly affect these controls subsequent to the date of
this examination.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
National
Western Life Insurance Company:
We have
audited National Western Life insurance Company’s internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). National Western Life
Insurance Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion, included in the accompanying Management’s Report on Internal Control
Over Financial Reporting on the Company's internal control over financial
reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk, our audit included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, National Western Life Insurance Company, maintained in all material
respects, effective internal control over financial reporting as of December 31,
2007, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of National
Western Life Insurance Company and subsidiaries as of December 31, 2007 and
2006, and the related consolidated statements of earnings, comprehensive income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2007, and our report dated March 17, 2008 expressed an unqualified opinion
on those consolidated financial statements.
KPMG
LLP
Austin,
Texas
March 17,
2008
There is
no information required to be disclosed on Form 8-K for the quarter ended
December 31, 2007 which has not been previously reported.
PART
III
Identification
of Directors
The
following information as of January 31, 2008, is furnished with respect to each
director. All terms expire in June of 2008.
Name
of Director
|
|
Principal
Occupation During Last Five
Years
and Directorships
|
|
First
Elected
|
|
Age
|
|
|
|
|
|
|
|
Robert
L. Moody
(1)
(3)
|
|
Chairman
of the Board and Chief Executive
Officer
of the Company
|
|
1963
|
|
72
|
|
|
|
|
|
|
|
Ross
R. Moody
(1)
(3)
|
|
President
and Chief Operating Officer of the
Company
|
|
1981
|
|
45
|
|
|
|
|
|
|
|
Harry
L. Edwards
(4)
|
|
Retired;
Former President and Chief
Operating
Officer of the Company,
Austin,
Texas
|
|
1969
|
|
86
|
|
|
|
|
|
|
|
Stephen
E. Glasgow
(2)
(4)
|
|
Partner,
G-2 Development, L.P.
Austin,
Texas
|
|
2004
|
|
45
|
|
|
|
|
|
|
|
E.
Douglas McLeod
|
|
Director
of Development, The Moody
Foundation,
Galveston, Texas
|
|
1979
|
|
66
|
|
|
|
|
|
|
|
Charles
D. Milos
(1)
(3)
|
|
Senior
Vice President of the Company
|
|
1981
|
|
62
|
|
|
|
|
|
|
|
Frances
A. Moody-Dahlberg
|
|
Executive
Director,
The
Moody Foundation,
Dallas,
Texas
|
|
1990
|
|
38
|
|
|
|
|
|
|
|
Russell
S. Moody
|
|
Investments,
League City, Texas
|
|
1988
|
|
46
|
|
|
|
|
|
|
|
Louis
E. Pauls, Jr.
(2)
|
|
President,
Louis Pauls & Company;
Investments,
Galveston, Texas
|
|
1971
|
|
72
|
|
|
|
|
|
|
|
E.
J. Pederson
(2)
(4)
|
|
Former
Executive Vice President,
The
University of Texas
Medical
Branch, Galveston, Texas
|
|
1992
|
|
60
|
(1) Member
of Executive Committee; (2) Member of Audit
Committee; (3) Member of Investment
Committee;
(4) Member
of Compensation and Stock Option Committee.
Under the
Company’s Articles of Incorporation, respective members of the Board of
Directors are elected by the Company’s two classes of common
stockholders. One-third (1/3) of the directors, plus one director for
any remaining fraction, are elected by the Class A stockholders and the
remaining directors are elected by the Class B stockholders. The
Board of Directors, as elected by the respective classes of stockholders, is as
follows.
Class
A
|
|
Class
B
|
|
|
|
Robert
L. Moody
|
|
E.
Douglas McLeod
|
Harry
L. Edwards
|
|
Charles
D. Milos
|
Stephen
E. Glasgow
|
|
Frances
A. Moody-Dahlberg
|
E.
J. Pederson
|
|
Ross
R. Moody
|
|
|
Russell
S. Moody
|
|
|
Louis
E. Pauls, Jr.
|
Committees
The
Company’s Board of Directors has the following standing committees:
Executive
Committee. The Company’s Executive Committee may exercise all
of the powers of the Board when the Board is not in session except that the
Executive Committee has no power to alter, amend, or repeal the By-Laws or take
any other action that legally may be taken only by the full Board of
Directors. The Chairmen of the Board serves as Chairman of the
Executive Committee.
Audit
Committee. The Audit Committee of the Board of Directors
consists of three non-employee directors. The committee is primarily
responsible for oversight of the Company’s financial statements and controls;
assessing and ensuring the independence, qualifications and performance of the
independent auditors; approving the independent auditor’s services and fees;
reviewing and approving all related party transactions; overseeing and directing
internal audit activities; reviewing the Company’s financial risk assessment
process and ethical, legal, and regulatory compliance programs; and reviewing
and approving the annual audited financial statements for the Company before
issuance. Mr. Louis E. Pauls, Jr. serves as Chairman of the Audit
Committee.
The
Company has at least one person that it believes is qualified to be the Audit
Committee Financial Expert. However, the Company has not designated
anyone as an Audit Committee Financial Expert at this time as the Company’s
Board of Directors has concluded that the ability of the Audit Committee to
perform its duties would not be impaired by the failure to designate one of the
committee members as an “Audit Committee Financial Expert” if its members
otherwise satisfied the NASDAQ standards and rules and regulations of the
SEC.
Investment
Committee. The Investment Committee of the Board of Directors
is comprised of three directors (and one Company officer) and has the
responsibility for oversight of the Company’s investment transactions including
compliance with investment guidelines approved by the full Board of
Directors. The Chairman of the Board serves as Chairman of the
Investment Committee.
Compensation and Stock Option
Committee. The Compensation and Stock Option Committee
consists of three outside directors and the committee has oversight
responsibility for the compensation programs for the Company’s named executive
officers as well as all other officers. Mr. Harry L. Edwards serves
as Chairman of the Compensation and Stock Option Committee. The
Committee’s report on executive compensation is included in Item 11 of this
report on Form 10-K.
Identification
of Executive Officers
The
following is a list of the Company's executive officers, their ages, and their
positions and offices as of January 31, 2008.
Name
of Officer
|
|
Age
|
|
Position
(Year elected to position)
|
|
|
|
|
|
Robert
L. Moody
|
|
72
|
|
Chairman
of the Board and Chief Executive
Officer
(1963-1968, 1971-1980, 1981), Director
|
|
|
|
|
|
Ross
R. Moody
|
|
45
|
|
President
and Chief Operating Officer (1992), Director
|
|
|
|
|
|
Scott
E. Arendale
|
|
64
|
|
Senior
Vice President - International Marketing (2006)
|
|
|
|
|
|
Paul
D. Facey
|
|
56
|
|
Senior
Vice President - Chief Actuary (1992)
|
|
|
|
|
|
S.
Christopher Johnson
|
|
39
|
|
Senior
Vice President - Chief Marketing Officer (2006)
|
|
|
|
|
|
Charles
D. Milos
|
|
62
|
|
Senior
Vice President - Mortgage Loans and Real Estate (1990),
Director
|
|
|
|
|
|
James
P. Payne
|
|
63
|
|
Senior
Vice President - Secretary (1998)
|
|
|
|
|
|
Brian
M. Pribyl
|
|
49
|
|
Senior
Vice President - Chief Financial & Administrative
Officer
and Treasurer (2001)
|
|
|
|
|
|
Patricia
L. Scheuer
|
|
56
|
|
Senior
Vice President - Chief Investment Officer
(1992)
|
There are
no arrangements or understandings pursuant to which any officer was elected. All
officers hold office for a term of one year or until their successors are
elected and qualified, unless otherwise specified by the Board of
Directors.
Identification
of Certain Significant Employees
None in
addition to the individuals identified as Executive Officers above.
Family
Relationships
Robert L.
Moody is the father of Frances A. Moody-Dahlberg, Ross R. Moody, and Russell S.
Moody, and the brother-in-law of E. Douglas McLeod.
Business
Experience
All of
the Executive Officers listed above have served in various executive capacities
with the Company for more than five years, with the exception of the
following:
Mr.
Johnson was National Promotions Director of National Fitness Corp. from 1992 to
1993; Branch Manager of Hooper Holmes/Portamedic from 1993 to 1994;
Agent/Consultant with Financial Facts & Services from 1994 to 1995; Field
Sales Manager of Financial Brokerage from 1995 to 1998; Senior Sales
Representative with Mutual of Omaha from 1998 to 1999 and Senior Regional Vice
President of Allstate - Lincoln Benefit Life from 1999 to 2006.
Mr.
Arendale was Vice President of International Sales Development with the Company
for the preceding five years prior to being promoted to his current position in
June 2006.
Involvement
in Certain Legal Proceedings
During
the past five years there have been no criminal proceedings, judgments,
injunctions or bankruptcy petitions material to an evaluation of the ability or
integrity of any of the Company's directors or executive officers.
Code
of Ethics
The
Company has adopted a Code of Ethics and Conduct for all directors, officers,
and employees. This Code is intended to comply with the requirement
of the Federal Securities Laws and the requirements of NASDAQ. The
Code of Ethics and Conduct has been posted to the Company's website at www.nationalwesternlife.com
and is available upon request.
Compensation
Discussion and Analysis
Purpose
The
Compensation and Stock Option Committee (“Compensation Committee”) is appointed
by and serves at the discretion of the Company’s Board of Directors. The Board
of Directors has determined that the Compensation Committee consist of no fewer
than three members who all, or the majority of, meet the independence
requirements of the listing standards of NASDAQ. The purpose of the Compensation
Committee is to discharge the Board of Directors’ responsibilities for reviewing
and establishing the compensation not just for the Chief Executive Officer,
Chief Financial Officer, and the other three most highly paid executive
officers, but for all of the Company’s officers. These compensation elements
include base salary, annual incentive bonuses, discretionary bonuses and awards,
stock option grants, and any other officer compensation
arrangements.
To assist
the Compensation Committee with its responsibilities, it is supported by the
Company’s Human Resource, Legal and Financial departments. The Compensation
Committee may retain, and has retained, independent compensation consultants who
report directly to the members of the Compensation Committee. Meetings of the
Compensation Committee are scheduled during the year with additional meetings on
an as-necessary interim basis and include sessions without members of management
present. The Compensation Committee reports to the Board of Directors on its
actions and recommendations.
Compensation
Philosophy and Objectives
The
Company’s overall philosophy in setting compensation policies is to align pay
with performance while at the same time providing a competitive compensation
that allows the Company to retain and attract talented individuals. Within this
overall philosophy, the Compensation Committee has adopted several key
principles to help guide compensation decisions for executive
officers:
·
|
Provide
a competitive total compensation package so the Company can attract,
retain, and motivate talented
individuals;
|
·
|
Tie
compensation in part to overall Company financial performance so that
executives are held accountable through their compensation for the
performance of the business;
|
·
|
Tie
compensation in part to the Company’s stock performance through stock
options to align executives’ interests with those of the Company’s
stockholders; and
|
·
|
Maintain
a committee of the Board of Directors independent of senior management
that may engage independent compensation consultants as needed to review
and establish compensation for executive
officers.
|
Elements
of Executive Compensation
Officer
compensation arrangements, including executive officers, are reviewed and
approved annually by the Compensation Committee typically at its April meeting.
The Compensation Committee focuses primarily on the following components in
forming the total compensation package for each Company executive
officer:
·
|
Annual
cash incentive bonus based on Company performance versus predetermined
targets;
|
·
|
Discretionary
cash bonus based upon individual performance;
and
|
·
|
Long-term
incentive compensation in the form of stock
options.
|
The mix
of executive compensation elements is based upon a philosophy of correlating a
portion of executive compensation with the Company’s financial and stock
performance thus putting a segment of executive officer annual and long-term
compensation at-risk. This structure provides upside potential and downside risk
for senior executive positions in recognition that these roles have greater
influence on the Company’s performance.
To ensure
that compensation levels are reasonably competitive with market rates, the
Compensation Committee engages independent compensation consultants from
time-to-time to conduct a survey of executive compensation in a defined group of
companies comparable to the Company. The surveyed companies are selected based
on similar products and product lines, comparable financial size in terms of
assets and revenues, and other known competitive factors. This process was most
recently completed during 2005 when the Compensation Committee retained two
separate external compensation consultants to conduct an officer compensation
review. While the primary focus of the survey was upon base salaries, the
independent consultants were also asked to provide total compensation data for
the various officer positions and levels in order to target current and future
appropriate compensation levels. The Compensation Committee’s past practice has
been to generally target base salaries between the 25th and
75th
percentile range of the identified peer group.
At the
time of filing this report on Form 10-K for the year ended December 31, 2007,
the Company has again engaged independent compensation consultants (Towers
Perrin) to update the work performed in 2005 following the same criteria and
scope as was done at the time of previous study. Companies to be considered in
the benchmarking process include, among others, American Equity Investment Life,
American Fidelity Life, AVIVA, Best Meridian Insurance, Citizens Insurance
Company, Lincoln National Life, Old Mutual Financial Network, Pan-American Life,
and Sammons Financial Group. It is anticipated that the results of the
independent compensation consultants’ study will be available to the members of
the Compensation Committee for their April 2008 meeting.
In
addition to market information, the Compensation Committee also subjectively
reviews and evaluates the level of performance of the Company and of each
officer. In approving salary and incentive compensation for individuals other
than the Chief Executive Officer and the President and Chief Operating Officer,
the Compensation Committee considers recommendations from these two individuals
concerning the other Company officers incorporating such factors as individual
performance, the scope and complexity of their current responsibilities, length
of time in their current positions, value of the executive’s position to the
market, and difficulty of replacement of the officer. This evaluation focuses
most heavily on the base salary levels for each officer.
Annual Incentive
Compensation
For
certain executive officer positions, the Compensation Committee has determined
that annual incentive bonuses are an integral part of the executive’s
compensation package as the cash bonuses create a direct link between executive
compensation and individual and business performance. Consequently, there are
three bonus programs in effect which are reviewed and approved annually by the
Compensation Committee:
·
|
Executive
Officer Bonus Program
|
·
|
Domestic
Marketing Officer Bonus Program
|
·
|
International
Marketing Officer Bonus Program
|
Executive Officer Bonus
Program. Currently, the
participants in the Executive Officer Bonus Program (“Executive Bonus”) are the
Chairman and Chief Executive Officer (Mr. Robert Moody), the President and Chief
Operating Officer (Mr. Ross Moody), and the Senior Vice President, Chief
Financial & Administrative Officer (Mr. Brian Pribyl). In order to tie the
compensation under the program with the Company’s financial performance, the
Executive Bonus includes metrics associated with the Company’s annual sales
performance, expense management and profitability. In accordance with the
program, the Compensation Committee set performance targets for each metric at
various levels equating to various bonus level percentages as
follows:
Financial
Performance Metric
|
|
Bonus
% Range
|
|
|
|
Sales
|
|
0%
to 15%
|
Expense
Management
|
|
0%
to 12%
|
Profitability
|
|
0%
to 12%
|
The sum
of the achieved bonus percentages for each metric, subject to a maximum
aggregate percentage of 30%, is applied to the weighted average base salary for
each participant to determine the earned bonus amount. The bonus determination
under the program is subject to review by the Company’s independent auditors and
the profitability metric is based upon the Company’s audited financial
statements for the year. Bonus awards are generally paid in the year following
the annual financial performance metrics concurrent with the completion of the
Company’s audit of the year-end financial statements and approval of the award
amounts by the Compensation Committee. Accordingly, the Executive Bonus payments
in 2007 were primarily based upon the results achieved for 2006 financial
performance metrics established by the Compensation Committee. The bonus
percentage achieved under the program was 30% and 23% in 2007 and 2006,
respectively.
Domestic Marketing Officer Bonus
Program. Participants in
the Domestic Marketing Officer Bonus Program (“Domestic Bonus”) are all domestic
marketing officers including assistant vice presidents, vice presidents, and the
senior vice president (Mr. Chris Johnson). As these individuals are most able to
influence the outcome of the Company’s financial performance in terms of sales,
the program is heavily weighted toward this metric. The measures associated with
this program include the Company’s annual sales performance, persistency of
policies sold and expense management. These measures were incorporated into the
program to award not only the amount of sales but the quality of sales and the
management of the costs incurred to acquire the business sold. Unlike the
Executive Bonus, the Domestic Bonus metrics assume a targeted level of
performance or “par” level to which the Compensation Committee assigned a
targeted bonus percentage in order to reflect a disproportionate weighting of
the potential bonus award toward the sales metric. If the targeted level for
each metric is attained, the sum of the metrics is equal to a bonus percentage
of 100% which is applied to the weighted average base salary of each
participant. The performance metrics set by the Compensation Committee equating
to various bonus level percentages under the program are as
follows:
Financial
Performance Metric
|
|
Par
Bonus Level
|
|
Bonus
% Range
|
|
|
|
|
|
Sales
|
|
70%
|
|
0%
to no limit
|
Persistency
|
|
15%
|
|
0%
to 30%
|
Expense
Management
|
|
15%
|
|
0%
to 30%
|
The
Domestic Bonus also differs from the Executive Bonus in that the bonus
percentage is not subject to a cap and bonus amounts may be advanced quarterly
based upon the year-to-date results achieved. Sales metric amounts under the
program above the par level increase incrementally with an additional bonus
percentage added for every increment of additional sales established by the
Compensation Committee. However, if the aggregate sum of the three performance
metrics exceeds 100%, the bonus award paid at the end of the calendar year is
limited to 100% for each participant. The bonus percentage above 100% is applied
to the weighted average base salaries of all participants to create a pool which
is paid out to participants in the subsequent calendar year based upon the
recommendation of the Domestic Marketing senior vice president and subject to
approval by the President and Chief Operating Officer. The Domestic Bonus
percentage achieved under the program was 64.5% and 100.5% in 2006 and 2007,
respectively.
International Marketing Officer
Bonus Program. Participants
in the International Marketing Officer Bonus Program (“International Bonus”) are
all international marketing officers including assistant vice presidents, vice
presidents, and the senior vice president (Mr. Scott Arendale). The
International Bonus is identical in format to the Domestic Bonus with the
exception that the metric targets established by the Compensation Committee are
customized for the differences between the domestic and international lines of
business. The weighting of the three performance metrics (annual sales,
persistency of policies sold, expense management) is the same as in the Domestic
Bonus and all other features are similarly administrated. The International
Bonus percentage achieved under the program was 124.0% and 214.0% in 2006 and
2007, respectively.
Discretionary Bonus
Awards
For
officers who are not participants in any of three bonus programs, the
Compensation Committee considers from time-to-time circumstances which merit the
need to recognize outstanding performance in the form of a discretionary bonus.
Although many of these situations may be deemed within the normal
responsibilities of officers, the Compensation Committee on occasion may provide
one-time recognition bonuses to identified officers where the demands of the
situation and the results of the effort warrant such recognition. In 2006, total
discretionary bonuses awarded to officers totaled $88,000 of which $75,000 was
targeted to Mr. Charles Milos for his efforts involving the Company’s real
estate and investment properties and subsidiary operations. In 2007,
none of the $14,500 total discretionary bonuses awarded to officers was paid to
named executive officers.
Long-Term Incentive
Compensation
Under the
Company’s 1995 Stock and Incentive Plan, the Compensation Committee provides
Company officers with long-term incentive awards through grants of stock options
directly aligning the interest of the officers with stockholder interests. The
stock options have a graded five-year vesting period that begins on the third
anniversary date of the granted option in order to promote a long-term
perspective and to encourage key employees to remain at the Company. All options
to date have been granted at the fair market value of the Company’s Class A
common stock on the date of the grant. The Compensation Committee believes that
stock options are inherently performance-based and a form of at-risk
compensation since the recipient does not benefit unless the Company’s common
stock price subsequently rises.
The
Compensation Committee is responsible for determining the recipients of the
grants, when the grants should be made, and the number of shares to be granted.
The size of the awards generally reflect each officer’s position relative to
other officers in the Company with consideration to total compensation targets
obtained from the peer group information previously discussed. In addition, as
is the case with base salaries, the Compensation Committee considers the grant
recommendations of the Chairman and Chief Executive and the President and Chief
Operating Officer for other Company officers.
The
practice of the Compensation Committee has been to grant stock options awards
every three years at the time of its annual review of officer compensation. The
most recent grant was awarded in April 2004 at which time the Compensation
Committee approved the issuance of 56,750 stock options to selected
officers.
Retirement
and Other Benefits
The
Company’s executive officers are eligible to participate in the health and
welfare, 401(k) and defined benefit retirement benefit plans that are offered to
other Company employees. In addition, if eligible, executive officers may
participate in the following plans:
Group Excess Benefit
Plan
Company
officers at the senior vice president level and above, as well as those hired or
promoted to the vice president level prior to May 1, 2007, including named
executive officers, are eligible to participate in a group excess benefit plan
which supplements the Company’s core medical insurance plan. Administered by a
third party insurer, the group excess benefit plan provides coverage for
co-pays, deductibles and other out-of-pocket expenses not covered by the core
medical insurance plan. Offering such a plan to the selected Company officer
levels is viewed as a key component of the overall compensation strategy for
attracting and retaining talented executive officers. The benefits provided to
each named executive officer are reported in the “All Other Compensation Column”
of the Summary Compensation Table included in this Item 11 of the report on Form
10-K.
Non-Qualified
Defined Benefit Plan
This plan
covers those officers of the Company who were in a senior vice president
position or above prior to 1991. The plan provides retirement benefits to those
individuals affected by the revisions to the Company’s qualified defined benefit
pension plan precipitated by the limitations imposed by Internal Revenue Code
Section 401(a)(17) and 415. As of December 31, 2007 and 2006, the active
officers participating in this plan were Mr. Robert Moody and Mr. Charles Milos.
Benefits associated with this plan are disclosed in the Pension Benefits table
included in this Item 11 of the report on Form 10-K.
Non-Qualified Deferred
Compensation Plan
This plan
allows Company senior officers, including named executive officers, to defer
payment of a percentage of their compensation and to provide for up to a 2%
matching and 2% profit sharing contribution on plan compensation that exceeds
certain qualified plan limits, and additional Company discretionary matching
contribution of up to 2% of plan compensation. Company contributions are subject
to a vesting schedule based upon the officer’s years of service. Benefit
information associated with this plan is disclosed in the Non-Qualified Deferred
Compensation table included in this Item 11 of the report on Form 10-K and
Company contributions are included in the “All Other Compensation” column in the
Summary Compensation Table.
Non-Qualified Defined
Benefit Plan for Robert L. Moody
This plan
specifically covers the Company’s Chairman of the Board and Chief Executive
Officer, Mr. Robert L. Moody, and is intended to supplement the retirement
benefits of the Non-Qualified Defined Benefit Plan, mentioned above, that were
limited by the American Jobs Creation Act of 2004. Mr. Moody’s benefits
associated with this plan are disclosed in the Pension Benefits table included
in this Item 11 of the report on Form 10-K.
Non-Qualified Defined
Benefit Plan for the President of National Western Life Insurance
Company
Similar
to the previously discussed plan, this plan specifically covers the Company’s
President and Chief Operating Officer, Mr. Ross R. Moody, and is intended to
provide the retirement benefits that comply with the American Jobs Creation Act
of 2004. Mr. Moody’s benefits associated with this plan are disclosed in the
Pension Benefits table included in this Item 11 of the report on Form
10-K.
National Western Life
Insurance Company Retirement Bonus Program for Robert L.
Moody
This
program provides an annual payment to Mr. Robert L. Moody equal to 2% of his
compensation. The payment made in 2008 related to 2007 compensation is reported
in the “Non-Equity Incentive Plan Compensation” column of the Summary
Compensation Table included with Item 11 of this report on Form
10-K.
The
Company’s basic health plan and group excess benefit plan have a provision for
individuals serving in the positions of Chairman of the Board or President for
seven years or more subsequent to 1980 to continue to receive lifetime health
benefits for themselves and their dependents upon retirement. Mr. Robert L.
Moody, Mr. Harry L. Edwards, and Mr. Ross R. Moody, currently meet this
eligibility criteria.
Perquisites and Other
Personal Benefits
The
Compensation Committee periodically reviews executive officer perquisites and
other benefits based upon information supplied to it by the Company’s Human
Resources, Legal and Financial departments. In addition to base salaries and
annual and long-term bonus incentives, the Company provides its executive
officers with certain and varying perquisites and benefits.
The
perquisites and personal benefits provided to each named executive officer are
reported in the “All Other Compensation Column” of the Summary Compensation
Table included in this Item 11 of the report on Form 10-K and are described in
further detail in the footnotes to that table.
Stock Ownership
Guidelines
The
Company does not require its directors or executive officers to own a particular
amount of the Company’s common stock and accordingly has not established a set
of stock ownership guidelines. The Compensation Committee is satisfied that the
long-term incentive compensation offered to directors and officers in the form
of stock options adequately aligns this group’s interest with those of the
Company’s stockholders.
Employment
Agreements
The
Company does not utilize employment agreements with its executive officers or
other employees. The Company’s practice has been to issue offer letters to
executive officer candidates when recruited to their positions. In addition to
outlining the executive officer’s responsibilities, each offer letter specifies
the beginning base salary and eligibility for any additional compensation
programs overseen by the Compensation Committee. Accordingly, the Company does
not have any contractual obligations to its executive officers for severance
payments in connection with any termination or change-in-control.
Financial
Restatements
The
Compensation Committee has not formally adopted a policy with respect to whether
retroactive adjustments to any form of compensation paid under arrangements for
executive officers will be made where the prior payment was related to financial
results of the Company that are subsequently restated. As this situation has not
previously been experienced, the Compensation Committee believes that such an
issue is best addressed at the time it occurs and all facts and circumstances
surrounding the restatement are known.
Tax and Accounting Treatment
of Compensation
Section
162(m) of the Internal Revenue Code generally disallows a tax deduction to
public corporations for non-performance based compensation over $1 million paid
in any one year to each of the individuals who were, at the end of the year, the
corporation’s chief executive officer and the four other most highly compensated
executive officers. Except for the Chairman and Chief Executive Officer of the
Company, the levels of non-performance based salary, bonus and other
compensation paid do not typically exceed this level. As an insurance company
subject to the laws and regulations of the State of Colorado, the Company is
currently exempt from the requirements of Section 162(m) of the Internal Revenue
Code pursuant to Section 12(g)(2)(G) of the Securities Exchange Act of 1934
until such time as the Company completes a registration filing as a NASDAQ
exchange listed registrant.
The
Compensation Committee reserves the right to award compensation to executive
officers that may not qualify under Section 162(m) as deductible compensation,
however, it will continue to consider all elements of cost to the Company of
providing such compensation, including the potential impact, if any, of Section
162(m).
The
Company accounts for long-term incentive compensation in the form of stock
options to executive officers under the rules set forth within SFAS No. 123(R)
which requires the Company to estimate and expense each award of equity
compensation over the service period of the award. Other accounting rules
require that cash compensation be recorded as an expense at the time the
obligation is accrued.
Compensation
Committee Report
The
Compensation Committee has reviewed each element of executive officer
compensation and believes that the compensation philosophy and practices are
designed to serve the best interests of the Company and its stockholders. The
Compensation Committee also believes that the compensation of the Company’s
executive officers is both appropriate and consistent with the objectives set by
this committee.
The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis set forth with the Company’s management. Based on its reviews and
discussions, the Compensation Committee approved and recommended to the
Company’s Board of Directors that the Compensation Discussion and Analysis be
included in this report on Form 10-K for the year ended December 31,
2007.
Members
of the Compensation Committee
|
|
Harry
L. Edwards (Chairman)
|
Stephen
E. Glasgow
|
E.
J. Pederson
|
Summary
Compensation Table
The
following table sets forth all of the compensation awarded to, earned by, or
paid to the Company’s principal executive officer, principal financial officer,
and the three other highest paid executive officers for the years ended December
31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
Value
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
|
Deferred
|
|
|
All
Other
|
|
|
|
|
Name
and
|
|
|
|
|
|
|
Option
|
|
|
Compen-
|
|
|
Compensation
|
|
|
Compen-
|
|
|
|
|
Principal
Position
|
|
Year
|
|
Salary
(a)
|
|
|
Awards
(b)
|
|
|
sation
|
|
|
Earnings
(f)
|
|
|
sation
(g)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
L. Moody
|
|
2007
|
|
$ |
1,588,653 |
|
|
$ |
(259,064 |
) |
|
$ |
495,251 |
(c) |
|
$ |
2,733,499 |
|
|
$ |
686,181 |
|
|
$ |
5,244,520 |
|
Chairman
of the Board
|
|
2006
|
|
|
1,536,875 |
|
|
|
5,705,108 |
|
|
|
373,001 |
|
|
|
3,041,422 |
|
|
|
757,891 |
|
|
|
11,414,296 |
|
and
Chief Executive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian
M. Pribyl
|
|
2007
|
|
|
252,665 |
|
|
|
(13,538 |
) |
|
|
74,695 |
(c) |
|
|
15,239 |
|
|
|
36,405 |
|
|
|
365,466 |
|
Senior
Vice President,
|
|
2006
|
|
|
240,600 |
|
|
|
145,571 |
|
|
|
54,433 |
|
|
|
13,409 |
|
|
|
40,627 |
|
|
|
494,640 |
|
Chief
Financial and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ross
R. Moody
|
|
2007
|
|
|
565,534 |
|
|
|
(238,177 |
) |
|
|
160,520 |
(c) |
|
|
126,568 |
|
|
|
121,963 |
|
|
|
736,408 |
|
President
and Chief
|
|
2006
|
|
|
550,925 |
|
|
|
2,870,250 |
|
|
|
118,903 |
|
|
|
14,951 |
|
|
|
74,171 |
|
|
|
3,629,200 |
|
Operating
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott
E. Arendale
|
|
2007
|
|
|
150,050 |
|
|
|
5,445 |
|
|
|
178,101 |
(d) |
|
|
33,595 |
|
|
|
17,570 |
|
|
|
384,761 |
|
Senior
Vice President,
|
|
2006
|
|
|
117,456 |
|
|
|
123,872 |
|
|
|
117,085 |
|
|
|
25,853 |
|
|
|
12,354 |
|
|
|
396,620 |
|
International
Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S.
Christopher Johnson
|
|
2007
|
|
|
150,200 |
|
|
|
- |
|
|
|
150,234 |
(e) |
|
|
- |
|
|
|
45,169 |
|
|
|
345,603 |
|
Senior
Vice President,
|
|
2006
|
|
|
40,385 |
|
|
|
- |
|
|
|
42,917 |
|
|
|
- |
|
|
|
35,319 |
|
|
|
118,621 |
|
Chief
Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
Columns with no data have been omitted.
(a)
|
The
2007 amounts in this column include Company and subsidiary Board of
Director fees of $27,700 for Mr. Robert L. Moody, $3,250 for Mr. Pribyl,
and $29,950 for Mr. Ross R. Moody.
|
(b)
|
The
amounts in this column represent the dollar amount recognized for
financial statement purposes in accordance with SFAS No. 123(R) for all
stock options granted and outstanding. Negative amounts in this column
result from recording the options at fair value under liability
accounting. For a discussion of the assumptions made in the
valuation of these option awards, refer to the Notes to Consolidated
Financial Statements section of this Annual Report on Form
10-K.
|
(c)
|
The
amounts for Mr. Robert L. Moody, Mr. Ross R. Moody, and Mr. Pribyl
represent bonuses earned under the 2007 Executive Officer Bonus
Program. Also included in Mr. Robert L. Moody’s amount is
$27,373 representing the bonus earned under the NWLIC Retirement Bonus
Program for Mr. Robert L. Moody.
|
(d)
|
The
amount for Mr. Arendale represents the bonus earned, excluding pool
amount, under the 2007 International Marketing Officer Bonus Program plus
the pool amount under the 2006 International Marketing Officer Bonus
Program paid during 2007.
|
(e)
|
The
amount for Mr. Johnson represents the bonus earned, excluding pool amount,
under the 2007 Domestic Marketing Officer Bonus Program, subject to a
guaranteed minimum of $150,000 during his first year of employment with
the Company.
|
(f)
|
The
amounts in this column represent the change in the accumulated pension
benefit under the Company’s qualified defined benefit plan for Messrs.
Pribyl and Arendale and the change in the accumulated pension benefit
under the Company’s qualified and non-qualified defined benefit plans for
Messrs. Robert L. Moody and Ross R. Moody. For a discussion of the
assumptions made in the calculation of these amounts, refer to the Notes
to Consolidated Financial Statements section of this Annual Report on Form
10-K.
|
(g)
|
The
amounts in this column include the items summarized in the following
tables:
|
All
Other Compensation
|
|
|
|
Company
|
|
|
Excess
|
|
|
Company
|
|
|
Company
|
|
|
|
|
|
Total
|
|
|
|
|
|
Paid
|
|
|
Benefit
|
|
|
Contributions
|
|
|
Paid
|
|
|
|
|
|
All
Other
|
|
Name
and
|
|
|
|
Benefit
|
|
|
Claims
|
|
|
To
Savings
|
|
|
Taxes/
|
|
|
Other
|
|
|
Compen-
|
|
Principal
Position
|
|
Year
|
|
Premiums
(1)
|
|
|
Paid
(2)
|
|
|
Plans
(3)
|
|
|
Insurance
|
|
|
Perquisites
|
|
|
sation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
L. Moody
|
|
2007
|
|
$ |
4,995 |
|
|
$ |
2,021 |
|
|
$ |
4,500 |
|
|
$ |
669,135 |
(4) |
|
$ |
5,530 |
(6) |
|
$ |
686,181 |
|
Chairman
of the
|
|
2006
|
|
|
4,391 |
|
|
|
48,850 |
|
|
|
4,400 |
|
|
|
667,775 |
|
|
|
32,475 |
|
|
|
757,891 |
|
Board
and Chief
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian
M. Pribyl
|
|
2007
|
|
|
8,040 |
|
|
|
10,499 |
|
|
|
15,435 |
|
|
|
- |
|
|
|
2,431 |
(7) |
|
|
36,405 |
|
Senior
Vice President,
|
|
2006
|
|
|
7,206 |
|
|
|
15,023 |
|
|
|
14,661 |
|
|
|
- |
|
|
|
3,737 |
|
|
|
40,627 |
|
Chief
Financial and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ross
R. Moody
|
|
2007
|
|
|
3,884 |
|
|
|
64,032 |
|
|
|
34,057 |
|
|
|
- |
|
|
|
19,990 |
(8) |
|
|
121,963 |
|
President
and Chief
|
|
2006
|
|
|
3,540 |
|
|
|
5,649 |
|
|
|
32,980 |
|
|
|
- |
|
|
|
32,002 |
|
|
|
74,171 |
|
Operating
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott
E. Arendale
|
|
2007
|
|
|
4,943 |
|
|
|
- |
|
|
|
9,297 |
|
|
|
- |
|
|
|
3,330 |
(9) |
|
|
17,570 |
|
Senior
Vice President,
|
|
2006
|
|
|
4,314 |
|
|
|
- |
|
|
|
6,412 |
|
|
|
- |
|
|
|
1,628 |
|
|
|
12,354 |
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S.
Christopher
|
|
2007
|
|
|
8,170 |
|
|
|
4,597 |
|
|
|
9,490 |
|
|
|
6,512 |
(5) |
|
|
16,400 |
(10) |
|
|
45,169 |
|
Johnson
|
|
2006
|
|
|
140 |
|
|
|
4,625 |
|
|
|
2,431 |
|
|
|
4,471 |
|
|
|
23,652 |
|
|
|
35,319 |
|
Senior
Vice President,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
Company provides its officers additional compensation equivalent to the
premiums for health, dental and accidental death and dismemberment
coverage offered to all employees.
|
(2)
|
The
amounts in this column represent claims paid under the Company’s Group
Excess Benefit Program.
|
(3)
|
The
amounts in this column represent company contributions to the Company’s
qualified and non-qualified savings plans. The Company’s 401(k) plan is
available to all employees with the same contribution
criteria.
|
(4)
|
Mr.
Robert L. Moody contributed a life interest in a trust estate to the
Company as a capital contribution. The Company, in turn, issued term
policies on the life of Mr. Moody in excess of the amount of the asset
contributed which was assigned to Mr. Moody. Premiums paid on the excess
amount of $425,235 in 2007, represent additional compensation to Mr.
Moody. In addition, the Company reimburses Mr. Moody the applicable taxes
associated with this benefit which were $243,900 in
2007.
|
(5)
|
The
Company paid certain moving expenses in 2007 related to Mr. Johnson’s move
to Austin. These reimbursements were grossed-up for applicable
payroll taxes which are included in this column.
|
(6)
|
Mr.
Robert Moody’s amounts in this column include $1,153 in miscellaneous
travel and entertainment, $3,661 in membership dues and event tickets, and
$716 in various other expense items.
|
(7)
|
Mr.
Pribyl’s amounts in this column include $1,631 for guest travel on Company
business trips and $800 in gifts.
|
(8)
|
Mr.
Ross Moody’s amounts in this column include $7,225 for car usage, $2,026
in miscellaneous travel and entertainment, $4,505 in membership dues and
event tickets, $2,530 for guest travel on Company business trips, $1,600
in gifts, $1,715 for personal tax return preparation, and $389 in various
other expense items.
|
(9)
|
Mr.
Arendale’s amounts in this column include $2,530 for guest travel on
Company business trips and $800 in gifts.
|
(10)
|
Mr.
Johnson’s amounts in this column include $15,600 in moving expense
reimbursement and $800 in gifts.
|
Grants
of Plan-Based Awards
The
following table provides information regarding grants under the Company’s 2007
Executive Officer Bonus Program and International Marketing Officer Bonus
Program for the executive officers named in the Summary Compensation Table. No
stock options or equity awards were granted to the named executive officers
during 2007.
|
|
Estimated
Future Payouts
|
|
|
|
Under
Non-Equity Incentive
|
|
|
|
Plan
Awards (a)
|
|
Name
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
(b)
|
|
|
|
|
|
|
|
|
|
|
|
Robert
L. Moody
|
|
|
|
|
|
|
|
|
|
2007
Executive Officer Bonus Program:
|
|
|
|
|
|
|
|
|
|
International
life sales
|
|
$ |
31,192 |
|
|
$ |
52,090 |
|
|
$ |
77,980 |
|
Domestic
life sales
|
|
|
31,192 |
|
|
|
51,934 |
|
|
|
77,980 |
|
Annuities
sales
|
|
|
31,192 |
|
|
|
51,934 |
|
|
|
77,980 |
|
Expense
management
|
|
|
93,576 |
|
|
|
155,959 |
|
|
|
187,151 |
|
Company
profitability
|
|
|
93,576 |
|
|
|
155,959 |
|
|
|
187,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian
M. Pribyl
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Executive Officer Bonus Program:
|
|
|
|
|
|
|
|
|
|
|
|
|
International
life sales
|
|
|
4,980 |
|
|
|
8,316 |
|
|
|
12,449 |
|
Domestic
life sales
|
|
|
4,980 |
|
|
|
8,291 |
|
|
|
12,449 |
|
Annuities
sales
|
|
|
4,980 |
|
|
|
8,291 |
|
|
|
12,449 |
|
Expense
management
|
|
|
14,939 |
|
|
|
24,898 |
|
|
|
29,878 |
|
Company
profitability
|
|
|
14,939 |
|
|
|
24,898 |
|
|
|
29,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ross
R. Moody
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Executive Officer Bonus Program:
|
|
|
|
|
|
|
|
|
|
|
|
|
International
life sales
|
|
|
10,701 |
|
|
|
17,871 |
|
|
|
26,753 |
|
Domestic
life sales
|
|
|
10,701 |
|
|
|
17,818 |
|
|
|
26,753 |
|
Annuities
sales
|
|
|
10,701 |
|
|
|
17,818 |
|
|
|
26,753 |
|
Expense
management
|
|
|
32,104 |
|
|
|
53,507 |
|
|
|
64,208 |
|
Company
profitability
|
|
|
32,104 |
|
|
|
53,507 |
|
|
|
64,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott
E. Arendale
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
International Marketing Officer Bonus Program:
|
|
|
|
|
|
|
|
|
|
|
|
|
International
life sales
|
|
|
30,000 |
|
|
|
105,000 |
|
|
unlimited
|
|
International
life persistency
|
|
|
4,500 |
|
|
|
22,500 |
|
|
|
45,000 |
|
Expense
management
|
|
|
4,500 |
|
|
|
22,500 |
|
|
|
45,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S.
Christopher Johnson
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Domestic Marketing Officer Bonus Program:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
life sales
|
|
|
22,500 |
|
|
|
60,000 |
|
|
unlimited
|
|
Domestic
annuities sales
|
|
|
7,500 |
|
|
|
45,000 |
|
|
unlimited
|
|
Domestic
life persistency
|
|
|
2,250 |
|
|
|
11,250 |
|
|
|
22,500 |
|
Domestic
annuities persistency
|
|
|
2,250 |
|
|
|
11,250 |
|
|
|
22,500 |
|
Expense
management
|
|
|
4,500 |
|
|
|
22,500 |
|
|
|
45,000 |
|
Note:
Columns with no data have been omitted.
(a)
|
Amounts
that have been or are expected to be paid in 2008 pertaining to the 2007
programs are reflected in the Summary Compensation Table. The 2007 program
bonus amounts are based upon the base salary actually paid during
2007.
|
(b)
|
Although
the Executive Officer Bonus Program has stated maximums per program
component, the aggregate bonus amount cannot exceed 30% of base salaries
paid.
|
Outstanding
Equity Awards at December 31, 2007
The
following table provides information regarding outstanding stock options held by
the executive officers named in the Summary Compensation Table as of December
31, 2007. No stock options have been granted since 2004.
|
|
Option
Awards
|
|
|
|
|
|
Number
of
|
|
|
|
|
|
|
|
Number
of
|
|
|
Securities
|
|
|
|
|
|
|
|
Securities
|
|
|
Underlying
|
|
|
|
|
|
|
|
Underlying
|
|
|
Unexercised
|
|
|
Option
|
|
Option
|
|
|
Options
(#)
|
|
|
Options
(#)
|
|
|
Exercise
|
|
Expiration
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
Robert
L. Moody Grants:
|
|
|
|
|
|
|
|
|
|
|
4/20/2001
|
|
|
7,200 |
|
|
|
2,300 |
|
|
$ |
92.130 |
|
4/20/2011
|
6/22/2001
|
|
|
1,000 |
|
|
|
- |
|
|
|
95.000 |
|
6/22/2011
|
4/23/2004
|
|
|
4,000 |
|
|
|
16,000 |
|
|
|
150.000 |
|
4/23/2014
|
6/25/2004
|
|
|
600 |
|
|
|
400 |
|
|
|
150.000 |
|
6/25/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian
M. Pribyl Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/20/2001
|
|
|
- |
|
|
|
280 |
|
|
|
92.130 |
|
4/20/2011
|
4/23/2004
|
|
|
- |
|
|
|
1,600 |
|
|
|
150.000 |
|
4/23/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ross
R. Moody Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/16/1998
|
|
|
4,630 |
|
|
|
- |
|
|
|
105.250 |
|
4/16/2008
|
6/19/1998
|
|
|
1,000 |
|
|
|
- |
|
|
|
112.375 |
|
6/19/2008
|
4/20/2001
|
|
|
3,900 |
|
|
|
2,100 |
|
|
|
92.130 |
|
4/20/2011
|
6/22/2001
|
|
|
1,000 |
|
|
|
- |
|
|
|
95.000 |
|
6/22/2011
|
4/23/2004
|
|
|
2,000 |
|
|
|
8,000 |
|
|
|
150.000 |
|
4/23/2014
|
6/25/2004
|
|
|
600 |
|
|
|
400 |
|
|
|
150.000 |
|
6/25/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott
E. Arendale Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/20/2001
|
|
|
- |
|
|
|
140 |
|
|
|
92.130 |
|
4/20/2011
|
4/23/2004
|
|
|
- |
|
|
|
600 |
|
|
|
150.000 |
|
4/23/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S.
Christopher Johnson Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
Columns with no data have been omitted.
Officer
stock options vest 20% annually following three full years of service to the
Company from the date of grant. Stock options granted to members of the Board of
Directors vest 20% annually following one full year of service to the Company
from the date of grant. Accordingly, the unexercisable options shown in the
previous table are scheduled to vest during the following years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Unexercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
L. Moody
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/20/2001
|
|
|
2,300 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,300 |
|
4/23/2004
|
|
|
4,000 |
|
|
|
4,000 |
|
|
|
4,000 |
|
|
|
4,000 |
|
|
|
16,000 |
|
6/25/2004
(director)
|
|
|
200 |
|
|
|
200 |
|
|
|
- |
|
|
|
- |
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian
M. Pribyl
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/20/2001
|
|
|
280 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
280 |
|
4/23/2004
|
|
|
400 |
|
|
|
400 |
|
|
|
400 |
|
|
|
400 |
|
|
|
1,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ross
R. Moody
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/20/2001
|
|
|
2,100 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,100 |
|
4/23/2004
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
2,000 |
|
|
|
8,000 |
|
6/25/2004
(director)
|
|
|
200 |
|
|
|
200 |
|
|
|
- |
|
|
|
- |
|
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott
E. Arendale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/20/2001
|
|
|
140 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
140 |
|
4/23/2004
|
|
|
150 |
|
|
|
150 |
|
|
|
150 |
|
|
|
150 |
|
|
|
600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S.
Christopher Johnson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Exercises and Stock Vested
The
following table sets forth information regarding option exercises by the
executive officers named in the Summary Compensation Table for the year ended
December 31, 2007. The Company does not have stock award plans with stock awards
subject to vesting.
|
|
Option
Awards
|
|
|
|
Number
of
|
|
|
|
|
|
|
Shares
|
|
|
Value
Realized
|
|
Name
|
|
Exercised
|
|
|
on
Exercise
|
|
|
|
|
|
|
|
|
Robert
L. Moody
|
|
|
15,000 |
|
|
$ |
2,093,785 |
|
|
|
|
|
|
|
|
|
|
Brian
M. Pribyl
|
|
|
680 |
|
|
|
70,864 |
|
|
|
|
|
|
|
|
|
|
Ross
R. Moody
|
|
|
5,500 |
|
|
|
902,305 |
|
|
|
|
|
|
|
|
|
|
Scott
E. Arendale
|
|
|
290 |
|
|
|
42,322 |
|
|
|
|
|
|
|
|
|
|
S.
Christopher Johnson
|
|
|
- |
|
|
|
- |
|
Note:
Columns with no data have been omitted.
Pension
Benefits
The
following table provides information regarding benefits under the Company’s
Pension Plan, Non-Qualified Defined Benefit Plan, Non-qualified Defined Benefit
Plan for Robert L. Moody, and Non-Qualified Defined Benefit Plan for the
President of National Western Life Insurance Company (NWLIC).
|
|
|
|
Number
of
|
|
|
|
|
|
|
|
|
|
|
|
Years
of
|
|
|
Present
Value of
|
|
|
Payments
|
|
|
|
|
|
Credited
|
|
|
Accumulated
|
|
|
During
|
|
Name
|
|
Plan
Name
|
|
Service
|
|
|
Benefit
|
|
|
Last
Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
L. Moody
|
|
NWLIC
Pension Plan
|
|
|
44
|
|
|
$ |
1,204,228 |
|
|
$ |
151,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NWLIC
Non-Qualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
Benefit Plan
|
|
|
44
|
|
|
|
5,595,258 |
|
|
|
713,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NWLIC
Non-Qualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
Benefit Plan for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
L. Moody
|
|
|
44
|
|
|
|
11,618,552 |
|
|
|
1,318,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian
M. Pribyl
|
|
NWLIC
Pension Plan
|
|
|
7
|
|
|
|
71,898 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ross
R. Moody
|
|
NWLIC
Pension Plan
|
|
|
17
|
|
|
|
136,390 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Qualified
Defined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
Plan for the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President
of NWLIC
|
|
|
17
|
|
|
|
109,906 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott
E. Arendale
|
|
NWLIC
Pension Plan
|
|
|
14
|
|
|
|
204,900 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S.
Christopher Johnson
|
|
NWLIC
Pension Plan
|
|
|
-
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
Columns with no data have been omitted.
Pension Plan. The qualified
defined benefit plan covers substantially all employees and officers of the
Company and provides benefits based on the participant's years of service and
compensation. The Company makes annual contributions to the plan that complies
with the minimum funding provisions of the Employee Retirement Income Security
Act. Annual pension benefits for those employees who became eligible
participants prior to January 1, 1991, are generally calculated as the sum of
the following:
(1) 50%
of the participant's final 5-year average annual eligible compensation at
December 31, 1990, less 50% of their primary social security benefit determined
at December 31, 1990; this net amount is then prorated for less than 15 years of
benefit service at normal retirement date. This result is multiplied by a
fraction which is the participant's years of benefit service at December 31,
1990, divided by the participant's years of benefit service at normal retirement
date.
(2) 1.5%
of the participant's eligible compensation earned during each year of benefit
service after December 31, 1990 and through December 31, 2007.
Annual
pension benefits for those employees who become eligible participants on or
subsequent to January 1, 1991, are generally calculated as 1.5% of their
compensation earned during each year of benefit service through December 31,
2007.
On
October 19, 2007, the Company’s Board of Directors approved an amendment to
freeze the Pension Plan as of December 31, 2007. The freeze ceased
future benefit accruals to all participants and closed the Plan to any new
participants. In addition, all participants became 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.
Non-Qualified Defined Benefit
Plan. This plan covers officers of the Company who were in
the position of senior vice president or above prior to 1991. The
plan provides benefits based on the participant's years of service and
compensation. No minimum funding standards are required.
The
benefit to be paid pursuant to this plan to a participant, other than the
Chairman of the Company, who retires at his normal retirement date shall be
equal to (a) minus (b) minus (c), but the benefit may not exceed (d) minus (b)
where:
(a) is
the benefit which would have been payable at the participant's normal retirement
date under the terms of the Pension Plan as of December 31, 1990, as if that
plan had continued without change and without regard to Internal Revenue Code
Section 401(a) (17) and 415 limits, and,
(b) is
the benefit which actually becomes payable under the terms of the Pension Plan
at the participant's normal retirement date, and,
(c) is
the actuarially equivalent life annuity which may be provided by an accumulation
of 2% of the participant's compensation for each year of service on and after
January 1, 1991, accumulated at an assumed interest rate of 8.5% to the
participant's normal retirement date, and,
(d) is
the benefit which would have been payable at the participant's normal retirement
date under the terms of the Pension Plan as of December 31, 1990, as if that
plan had continued without change and without regard to Internal Revenue Code
Section 401(a)(17) and 415 limits, except that the proration over 15 years shall
instead be calculated over 30 years.
The
Chairman of the Company, Robert L. Moody, is currently receiving in-service
benefits from this plan. The benefit that Mr. Moody began receiving
as of his normal retirement date pursuant to the plan was equal to (a) minus (b)
minus (c) where:
(a) was
his years of service (up to 45), multiplied by 1.66667%, and then multiplied by
the excess of his eligible compensation over his primary social security benefit
under the terms of the Pension Plan as of December 31, 1990, as if that plan had
continued without change and without regard to Internal Revenue Code Section
401(a) (17) and 415 limits, and,
(b) was
the benefit payable to him under the terms of the Pension Plan,
and,
(c) was
the actuarially equivalent life annuity provided by an accumulation of 2% of his
compensation for each year of service on and after January 1, 1991, accumulated
at an assumed interest rate of 8.5% to his normal retirement date.
This
benefit was increased for additional service and changes in eligible
compensation through December 31, 2004. The benefit was frozen as of
December 31, 2004 in connection with plan changes required by the American Jobs
Creation Act of 2004.
Non-Qualified Defined Benefit Plan
for Robert L. Moody. This plan covers the current Chairman of
the Company, Robert L. Moody, and is intended to provide for post-2004 benefit
accruals that mirror and supplement the pre-2005 benefit accruals under the
previously discussed Non-Qualified Defined Benefit Plan, while complying with
the American Jobs Creation Act of 2004. No minimum funding standards are
required.
The
annual benefit paid to the Chairman of the Company on an in-service basis
effective July 1, 2005 was equal to (a) minus (b) minus (c) where:
(a) was
his years of service on his normal retirement date, multiplied by 1.66667%, and
then multiplied by the excess of his eligible compensation over his primary
social security benefit under the terms of the Pension Plan as of December 31,
1990, as if that plan had continued without change and without regard to
Internal Revenue Code Section 401(a) (17) and 415 limits, less the actuarially
equivalent life annuity which may be provided by an accumulation of 2% of his
compensation for each year of service on and after January 1, 1991, accumulated
at an assumed interest rate of 8.5% to his normal retirement date, and,
multiplied by the ratio of his years of service on July 1, 2005 to his years of
service on his normal retirement date, multiplied by the ratio of his eligible
compensation as of July 1, 2005 to his eligible compensation as of his normal
retirement date, and,
(b) was
the benefit payable to him under the terms of the Pension Plan as of July 1,
2005, and,
(c) was
the benefit payable to him under the terms of the Non-Qualified Defined Benefit
Plan as of December 31, 2004.
Subsequent
to July 1, 2005, the annual benefit was increased monthly for additional service
and changes in eligible compensation.
Non-Qualified Defined Benefit Plan
for the President of National Western Life Insurance Company.
This plan covers the President of the Company and is intended to provide benefit
accruals that comply with the American Jobs Creation Act of 2004. No minimum
funding standards are required.
The
annual benefit to be paid to the President of the Company who retires at his
normal retirement date shall be equal to (a) minus (b) minus (c)
where:
(a)
equals his years of service (up to 45), multiplied by 1.66667%, and then
multiplied by the excess of his eligible compensation over his primary social
security benefit under the terms of the Pension Plan as of December 31, 1990, as
if that plan had continued without change and without regard to Internal Revenue
Code Section 401(a) (17) and 415 limits, and,
(b)
equals the actuarially equivalent life annuity provided by an accumulation of 2%
of his compensation for each year of service on and after his date of hire,
accumulated at an assumed interest rate of 8.5% to his normal retirement date,
and,
(c)
equals the benefit actually payable to him under the terms of the Pension
Plan.
The plan
provides for a monthly in-service benefit if the President of the Company
continues employment after his normal retirement date.
Non-Qualified
Deferred Compensation
The
following table provides information regarding the Company’s non-qualified
deferred compensation plan for the executive officers named in the Summary
Compensation Table as of December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
Executive
|
|
|
Registrant
|
|
|
Aggregate
|
|
|
|
|
|
Balance
|
|
|
|
Contributions
|
|
|
Contributions
|
|
|
Earnings
|
|
|
Aggregate
|
|
|
at
Last
|
|
|
|
in
Last
|
|
|
in
Last
|
|
|
in
Last
|
|
|
Withdrawals/
|
|
|
Fiscal
|
|
Name
|
|
Fiscal
Year
|
|
|
Fiscal
Year (a)
|
|
|
Fiscal
Year (b)
|
|
|
Distributions
|
|
|
Year-End
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
L. Moody
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
10,236 |
|
|
$ |
60,681 |
|
|
$ |
115,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian
M. Pribyl
|
|
|
10,290 |
|
|
|
6,435 |
|
|
|
7,858 |
|
|
|
- |
|
|
|
123,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ross
R. Moody
|
|
|
26,970 |
|
|
|
25,057 |
|
|
|
17,943 |
|
|
|
- |
|
|
|
633,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott
E. Arendale
|
|
|
20,143 |
|
|
|
3,099 |
|
|
|
53 |
|
|
|
- |
|
|
|
35,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S.
Christopher
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Johnson
|
|
|
15,817 |
|
|
|
7,787 |
|
|
|
(760 |
) |
|
|
- |
|
|
|
28,595 |
|
Note:
Columns with no data have been omitted.
(a)
|
Registrant
contributions are reflected in the “All Other Compensation” column in the
Summary Compensation Table and are not additional earned
compensation.
|
(b)
|
The
investment options under the plan consist of a selection of mutual funds
identical to those available to all employees through the 401(k)
plan.
|
(c)
|
Balances
in the plan are settled in cash upon the termination event selected by the
officer and distributed either in a lump sum or in annual installments.
Deferred amounts represent unsecured obligations of the
Company.
|
Potential
Payments Upon Termination or Change in Control
The
Company has no contract, agreement, plan or arrangement, written or unwritten,
that provides for payment to any officer at, following, or in connection with
any termination, severance, retirement or a constructive termination, or a
change in control of the Company or a change in any officer’s
responsibilities.
Director
Compensation
The
following table sets forth the compensation for 2007 for those individuals who
served as members of the Company’s Board of Directors during 2007 (excluding
named executive officers whose director compensation is included in the Summary
Compensation Table).
|
|
|
|
|
|
|
|
Change
in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
Fees
Earned
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
or
Paid
|
|
|
Option
|
|
|
Compensation
|
|
|
All
Other
|
|
|
|
|
Name
|
|
in
Cash
|
|
|
Awards
(a)
|
|
|
Earnings
|
|
|
Compensation
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harry
L. Edwards
|
|
$ |
26,200 |
|
|
$ |
5,337 |
|
|
$ |
(20,588 |
) |
(b)
|
$ |
8,052 |
(c) |
|
$ |
19,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen
E. Glasgow
|
|
|
35,700 |
|
|
|
(15,725 |
) |
|
|
- |
|
|
|
19,878 |
(d) |
|
|
39,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E.
Douglas McLeod
|
|
|
25,200 |
|
|
|
(64,139 |
) |
|
|
- |
|
|
|
1,256 |
(e) |
|
|
(37,683 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell
S. Moody
|
|
|
25,200 |
|
|
|
(7,444 |
) |
|
|
- |
|
|
|
1,256 |
(e) |
|
|
19,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frances
A. Moody-Dahlberg
|
|
|
25,200 |
|
|
|
(64,139 |
) |
|
|
- |
|
|
|
800 |
(f) |
|
|
(38,139 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Louis
E. Pauls Jr.
|
|
|
30,700 |
|
|
|
(59,401 |
) |
|
|
- |
|
|
|
7,102 |
(g) |
|
|
(21,599 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E.
J. Pederson
|
|
|
30,700 |
|
|
|
(15,725 |
) |
|
|
- |
|
|
|
1,256 |
(e) |
|
|
16,231 |
|
Note:
Columns with no data have been omitted.
(a)
|
The
amounts in this column represent the dollar amount recognized for
financial statement purposes in accordance with SFAS No. 123(R) for all
stock options granted and outstanding. Negative amounts in this
column result from recording the options at fair value under liability
accounting. For a discussion of the assumptions made in the
valuation of these option awards, refer to the Notes to Consolidated
Financial Statements section of this Annual Report on Form
10-K.
|
(b)
|
The
amount in this column for Mr. Edwards is negative due to his receiving
current distributions.
|
(c)
|
The
amount shown for Mr. Edwards includes $7,216 of claims paid under the
Company’s Group Excess Benefit Plan, $800 in gifts, and $36 for the
taxable value of supplemental life insurance coverage.
|
(d)
|
The
amount shown for Mr. Glasgow includes $4,741 of claims paid under the
Company’s Group Excess Benefit Plan, $14,337 for the taxable value of
health and supplemental life coverage, and $800 in
gifts.
|
(e)
|
The
amounts shown for Messrs. McLeod, Russell S. Moody, and Pederson represent
$456 for the taxable value of supplemental life coverage and $800 in
gifts.
|
(f)
|
The
amount shown for Ms. Moody-Dahlberg is $800 in gifts.
|
(g)
|
The
amount shown for Mr. Pauls includes $488 of claims paid under the
Company’s Group Excess Benefit Plan, $5,814 for the taxable value of
health and supplemental life coverage, and $800 in
gifts.
|
All
directors of the Company currently receive $22,200 a year and $500 for each
board meeting attended. They are also reimbursed for actual travel expenses
incurred in performing services as directors. An additional $500 is paid for
each committee meeting attended. However, a director attending multiple meetings
on the same day receives only one meeting fee. The amounts paid pursuant to
these arrangements are included in the Summary Compensation Table of this Item.
The directors and their dependents are also eligible to participate in the
Company's group insurance program.
Directors
of the Company, other than Compensation and Stock Option Committee members, are
eligible for restricted stock awards, incentive awards, and performance awards
under the National Western Life Insurance Company 1995 Stock and Incentive
Plan. Company directors, including members of the Compensation and
Stock Option Committee, are eligible for nondiscretionary stock
options.
Directors
of the Company's subsidiary, NWL Investments, Inc., receive $250
annually. Nonemployee directors of the Company's subsidiary, NWL
Services, Inc., receive $1,000 per board meeting attended. Directors
of the Company's downstream subsidiaries, Regent Care General Partner, Inc., and
Regent Care Operations General Partner, Inc., receive $250 per board meeting
attended. Directors of the Company's downstream subsidiary, Regent
Care Limited Partner, Inc., receive $500 per board meeting
attended.
Compensation
Committee Interlocks and Insider Participation
The
Compensation Committee of the Company’s Board of Directors is composed of Harry
L. Edwards, Stephen E. Glasgow, and E. J. Pederson, none of whom were officers
or employees of the Company during 2007. Mr. Edwards was formerly an officer of
National Western Life Insurance Company. Mr. Glasgow and Mr. Pederson
currently meet the independent criteria in the NASDAQ listing standards and the
regulations of the Securities and Exchange Commission.
During
2007, the following executive officers served as a Board of Director of the
Company and/or one or more its subsidiaries as follows:
(1)
|
Mr.
Robert L. Moody, Mr. Ross R. Moody, and Mr. Charles D. Milos served as
directors and also served as officers and employees of National Western
Life Insurance Company.
|
(2)
|
Mr.
Ross Moody served as an officer and director of the Company's wholly-owned
subsidiaries, The Westcap Corporation, NWL Investments, Inc., NWL
Financial, Inc., NWL Services, Inc., Regent Care Limited Partner, Inc.,
and Regent Care Operations Limited Partner, Inc., served as an officer of
Westcap Holdings, LLC, a limited liability company whose sole member is
The Westcap Corporation, and served as a manger of Regent Care San Marcos
Holdings, LLC, a limited liability company whose sole member is National
Western Life Insurance Company.
|
(3)
|
Mr.
Milos served as an officer and director of The Westcap Corporation, Regent
Care General Partner, Inc., and Regent Care Operations General Partner,
Inc., and as an officer of NWL Investments, Inc., NWL Financial, Inc., NWL
Services, Inc., Regent Care Limited Partner, Inc., Regent Care Operations
Limited Partner, Inc., Westcap Holdings, LLC, a limited liability company
whose sole member is The Westcap Corporation, and Regent Care San Marcos
A-1, LLC, Regent Care San Marcos A-2, LLC, Regent Care San Marcos B-1,
LLC, and Regent Care San Marcos B-2, LLC, all of which are limited
liability companies whose sole member is Regent Care San Marcos Holdings,
LLC.
|
(4)
|
Mr.
Robert Moody was an officer of NWL Services, Inc., and Regent Care Limited
Partner, Inc.
|
None of
the Company’s executive officers serves as a member of the compensation
committee of any company that has an executive officer serving on the Company’s
Board of Directors. In addition, none of the Company’s executive officers serve
as a member of the board of directors of any company that has an executive
officer serving as a member of the Company’s Compensation
Committee.
BENEFICIAL
OWNERS AND MANAGEMENT AND
RELATED
STOCKHOLDER MATTERS
Security
Ownership of Certain Beneficial Owners
Set forth
below is certain financial information concerning persons who are known by the
Company to own beneficially more than 5% of any class of the Company's common
stock on December 31, 2007.
Name
and Address
|
|
Title
|
|
Amount
and Nature
|
|
Percent
|
of
|
|
of
|
|
of
|
|
of
|
Beneficial
Owners
|
|
Class
|
|
Beneficial
Ownership
|
|
Class
|
|
|
|
|
|
|
|
Robert
L. Moody
|
|
Class
A Common
|
|
1,159,096
|
|
33.87%
|
2302
Post Office Street, Suite 702
|
|
Class
B Common
|
|
198,074
|
|
99.04%
|
Galveston,
Texas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third
Avenue Management, LLC
|
|
Class
A Common
|
|
302,971
|
|
8.85%
|
622
Third Avenue
|
|
|
|
|
|
|
New
York, New York
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FMR
Corp.
|
|
Class
A Common
|
|
193,119
|
|
5.64%
|
82
Devonshire Street
|
|
|
|
|
|
|
Boston,
Massachusetts
|
|
|
|
|
|
|
Article
Four of the Articles of Incorporation of the Company provides that the Class A
stockholders have the exclusive right to elect one-third (1/3) of the members of
the Board of Directors, plus one director for any remaining fraction, and the
Class B stockholders have the exclusive right to elect the remaining members of
the Board of Directors. In view of Robert L. Moody's ownership of
more than 99% of the Class B stock outstanding, as well as Mr. Moody's ownership
of approximately 34% of the Class A stock outstanding (see Security Ownership
table above), Mr. Moody holds the voting power to elect a majority of the
members of the Board of Directors. The Company is considered to be a
controlled company, and Mr. Moody is the controlling stockholder.
Security
Ownership of Management
The
following table sets forth as of December 31, 2007, information concerning the
beneficial ownership of the Company's common stock by all directors, named
executive officers, and all directors and executive officers of the Company as a
group.
|
|
|
|
|
|
Percent
|
Directors
|
|
Title
|
|
Amount
and Nature of
|
|
of
|
and
Officers
|
|
of
Class
|
|
Beneficial
Ownership
|
|
Class
|
|
|
|
|
|
|
|
Directors
and Named Executive Officers:
|
|
|
|
|
Robert
L. Moody
|
|
Class
A Common
|
|
1,159,096
|
|
|
33.87%
|
|
|
Class
B Common
|
|
198,074
|
|
|
99.04%
|
|
|
|
|
|
|
|
|
Ross
R. Moody
|
|
Class
A Common*
|
|
625
|
|
|
.02%
|
|
|
Class
B Common*
|
|
482
|
|
|
.24%
|
|
|
|
|
|
|
|
|
Charles
D. Milos
|
|
Class
A Common
|
|
2,028
|
|
|
.06%
|
|
|
Class
B Common
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Directors:
|
|
|
|
|
|
|
-
|
Harry
L. Edwards
|
|
Class
A Common
|
|
20
|
|
|
-
|
|
|
Class
B Common
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Stephen
E. Glasgow
|
|
Class
A Common
|
|
-
|
|
|
-
|
|
|
Class
B Common
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
E.
Douglas McLeod
|
|
Class
A Common
|
|
10
|
|
|
-
|
|
|
Class
B Common
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Frances
A. Moody-Dahlberg
|
|
Class
A Common
|
|
1,850
|
|
|
.05%
|
|
|
Class
A Common*
|
|
625
|
|
|
.02%
|
|
|
Class
B Common*
|
|
482
|
|
|
.24%
|
|
|
|
|
|
|
|
|
Russell
S. Moody
|
|
Class
A Common
|
|
1,850
|
|
|
.05%
|
|
|
Class
A Common*
|
|
625
|
|
|
.02%
|
|
|
Class
B Common*
|
|
482
|
|
|
.24%
|
|
|
|
|
|
|
|
|
Louis
E. Pauls, Jr.
|
|
Class
A Common
|
|
10
|
|
|
-
|
|
|
Class
B Common
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
E.
J. Pederson
|
|
Class
A Common
|
|
100
|
|
|
-
|
|
|
Class
B Common
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Named
Executive Officers:
|
|
|
|
|
|
Scott
E. Arendale
|
|
Class
A Common
|
|
-
|
|
|
-
|
|
|
Class
B Common
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
S.
Christopher Johnson
|
|
Class
A Common
|
|
-
|
|
|
-
|
|
|
Class
B Common
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Brian
M. Pribyl
|
|
Class
A Common
|
|
-
|
|
|
-
|
|
|
Class
B Common
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Directors
and Executive
|
|
Class
A Common
|
|
1,161,749
|
|
|
33.95%
|
Officers
as a Group
|
|
Class
B Common
|
|
198,556
|
|
|
99.28%
|
* Shares
are owned indirectly through the Three R Trusts. The Three R Trusts are four
Texas trusts for the benefit of the children of Mr. Robert L. Moody (Robert L.
Moody, Jr., Ross R. Moody, Russell S. Moody, and Frances A.
Moody-Dahlberg). The Three R Trusts own a total of 2,500 Class A
common stock shares and 1,926 Class B common stock shares.
Changes
in Control
None.
TRANSACTIONS
AND DIRECTOR INDEPENDENCE
Transactions
with Management and Others
Robert L.
Moody, Jr. ("Mr. Moody, Jr.") is the son of Robert L. Moody, the Company's
Chairman and Chief Executive Officer, and is the brother of Ross R. Moody, the
Company's President and Chief Operating Officer, and of Russell S. Moody and
Frances A. Moody-Dahlberg who serve as directors of National
Western.
Mr.
Moody, Jr. wholly owns an insurance marketing organization that maintains agency
contracts with National Western pursuant to which agency commissions are paid in
accordance with the Company's standard commission schedules. Mr. Moody, Jr. also
maintains an independent agent contract with National Western for policies
personally sold under which commissions are paid in accordance with standard
commission schedules. In 2007, commissions paid under these agency contracts
aggregated approximately $210,600. In conjunction with these agency
contracts, Mr. Moody, Jr. may be eligible to attend Company sales conferences
and functions based upon meeting published minimum levels of qualifying sales
production. In his capacity as an insurance marketing organization with the
Company, Mr. Moody, Jr. also received product development fees of $11,600
associated with a product line of the Company, $28,000 for consulting fees, and
a marketing development allowance of $9,000 for the Company’s business efforts
in Puerto Rico in 2007.
Mr.
Moody, Jr. further serves as the agent of record for several of the Company's
benefit plans including the self-insured health plan for which Mr. Moody, Jr.
provides utilization review services through a wholly-owned utilization review
company. In 2007, amounts paid to Mr. Moody, Jr. as commissions and
service fees pertaining to the Company's benefit plans approximated
$65,500.
During
2007, management fees totaling $846,000 were paid to Regent Management Services,
Limited Partnership ("RMS") for services provided to a downstream nursing home
subsidiary of National Western. RMS is 1% owned by general partner
RCC Management Services, Inc. ("RCC"), and 99% owned by limited partner, Three R
Trusts. RCC is 100% owned by the Three R Trusts. The Three
R Trusts are four Texas trusts for the benefit of the children of Robert L.
Moody (Robert L. Moody, Jr., Ross R. Moody, Russell S. Moody, and Frances A.
Moody-Dahlberg). Charles D. Milos, Senior Vice President-Mortgage
Loans and Real Estate, and a director of the Company, is a director and Vice
President of RCC. Ellen C. Otte, Assistant Secretary of the Company,
is a director and secretary of RCC.
The
Company holds a common stock investment totaling approximately 9.4% of the
issued and outstanding shares of Moody Bancshares, Inc. at December 31,
2007. Moody Bancshares, Inc. owns 100% of the outstanding shares of
Moody Bank Holding Company, Inc., which owns approximately 98% of the
outstanding shares of The Moody National Bank of Galveston ("MNB"). The Company
utilizes MNB for certain bank custodian services as well as for certain
administrative services with respect to the Company's defined benefit and
contribution plans. Robert L. Moody serves as Chairman of the Board and Chief
Executive Officer of MNB. The ultimate controlling person of MNB is the Three R
Trusts. During 2007, fees totaling $193,000 were paid to MNB with respect to
these services.
Indebtedness
of Management
The
Company held a loan in the amount of $4.2 million, including accrued interest,
with a contractual interest rate of 7% during 2007 issued to TMNY,
LLC. As of December 31, 2006, Robert L. Moody owned 20.5% of TMNY,
LLC. This loan matured and was paid in full during 2007.
NWL
Services, Inc., a wholly-owned subsidiary of the Company, is the beneficial
owner of a life interest (1/8 share) in the net income of the trust estate of
Libbie Shearn Moody, grandmother of Robert L. Moody. Income
distributions from the trust estate were $4.1 million in 2007. The
trustee of this estate is MNB.
Review,
Approval or Ratification of Transactions with Related Persons
In
accordance with the Company’s Audit Committee Charter, related party
transactions must be reviewed and approved by the Audit Committee of the Board
of Directors, both at inception and on an ongoing basis. Periodic
reports of potential related party transactions are brought to the attention of
the Audit Committee by management and the Audit Committee reviews the
information on a case by case basis to determine if any transaction is a related
party transaction. The standard of review for any related party
transaction is that the transaction must be fair to the Company and the
transaction must be no more favorable to the related party than a similar arm’s
length transaction with a non-related party.
While the
Company has not adopted written procedures for review of, or written standards
for approval of, these transactions, the policies and procedures followed are
evidenced by the Audit Committee Charter, memorandums, and documentation of
review and approvals.
Director
Independence
The
Company’s Board of Directors has determined that Messrs. Glasgow, Pauls, and
Pederson are each an “Independent Director” under NASDAQ Global Market
Marketplace Rules. The Board of Directors has also determined that
all, or the majority of, members of the Audit Committee and the Compensation and
Stock Option Committee meet the independence requirements prescribed by NASDAQ
and the Securities and Exchange Commission.
The
following table represents aggregate fees approved by the Audit Committee for
the audits of the fiscal years ended December 31, 2007 and 2006 by KPMG LLP, the
Company's principal accounting firm.
|
|
Fiscal
Years Ended
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
Financial
statement audit fees
|
|
$ |
659 |
|
|
|
608 |
|
Benefit
plans audit fee
|
|
|
- |
|
|
|
- |
|
Tax
fees
|
|
|
- |
|
|
|
- |
|
All
other fees
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Total
fees
|
|
$ |
659 |
|
|
|
608 |
|
Audit
Fees Pre-approval Policy
The Audit
Committee has adopted a formal policy concerning approval of audit and non-audit
services to be provided by the independent auditor to the
Company. The policy requires that all services the Company's
independent auditor may provide to the Company, including audit services and
permitted audit-related and non-auditor services, be pre-approved by the
Committee. The Committee approved all audit and non-audit services provided by
KPMG LLP during 2007.
PART
IV
(a)
1. Listing of Financial Statements
See
Attachment A, Index to Financial Statements and Schedules, on page 76 for a list
of financial statements included in this report.
(a)
2. Listing of Financial Statement Schedules
See
Attachment A, Index to Financial Statements and Schedules, on page 76 for a list
of financial statement schedules included in this report.
All other
schedules are omitted because they are not applicable, not required, or because
the information required by the schedule is included elsewhere in the financial
statements or notes.
(a)
3. Listing of Exhibits
The
exhibits listed below, as part of Form 10-K, are numbered in accordance with the
numbering used in Item 601 of regulation S-K of The Securities and Exchange
Commission.
Exhibit
2
|
-
|
Order
Confirming Third Amended Joint Consensual Plan Of Reorganization Proposed
By The Debtors And The Official Committee Of Unsecured Creditors (As
Modified As Of August 28, 1998) (incorporated by reference to Exhibit 2 to
the Company's Form 8-K dated August 28, 1998).
|
|
|
|
Exhibit
3(a)
|
-
|
Restated
Articles of Incorporation of National Western Life Insurance Company dated
April 10, 1968 (incorporated by reference to Exhibit 3(a) to the Company's
Form 10-K for the year ended December 31, 1995).
|
|
|
|
Exhibit
3(b)
|
-
|
Amendment
to the Articles of Incorporation of National Western Life Insurance
Company dated July 29, 1971 (incorporated by reference to Exhibit 3(b) to
the Company's Form 10-K for the year ended December 31,
1995).
|
|
|
|
Exhibit
3(c)
|
-
|
Amendment
to the Articles of Incorporation of National Western Life Insurance
Company dated May 10, 1976 (incorporated by reference to Exhibit 3(c) to
the Company's Form 10-K for the year ended December 31,
1995).
|
|
|
|
Exhibit
3(d)
|
-
|
Amendment
to the Articles of Incorporation of National Western Life Insurance
Company dated April 28, 1978 (incorporated by reference to Exhibit 3(d) to
the Company's Form 10-K for the year ended December 31,
1995).
|
|
|
|
Exhibit
3(e)
|
-
|
Amendment
to the Articles of Incorporation of National Western Life Insurance
Company dated May 1, 1979 (incorporated by reference to Exhibit 3(e) to
the Company's Form 10-K for the year ended December 31,
1995).
|
|
|
|
Exhibit
3(f)
|
-
|
Bylaws
of National Western Life Insurance Company as amended through April 24,
1987 (incorporated by reference to Exhibit 3(f) to the
Company's Form 10-K for the year ended December 31,
1995).
|
|
|
|
Exhibit
3ii(g)
|
|
Bylaws
of National Western Life Insurance Company dated August 24, 2007
(incorporated by reference to Exhibit 3ii(g) to the Company’s Form 10-Q
September 30, 2007).
|
|
|
|
Exhibit
10(a)
|
-
|
National
Western Life Insurance Company Non-Qualified Defined Benefit Plan dated
July 26, 1991 (incorporated by reference to Exhibit 10(a) to the Company's
Form 10-K for the year ended December 31, 1995).
|
|
|
|
Exhibit
10(c)
|
-
|
National
Western Life Insurance Company Non-Qualified Deferred Compensation Plan,
as amended and restated, dated March 27, 1995 (incorporated by reference
to Exhibit 10(c) to the Company's Form 10-K for the year ended December
31, 1995).
|
|
|
|
Exhibit
10(d)
|
-
|
First
Amendment to the National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan effective July 1, 1995 (incorporated by
reference to Exhibit 10(d) to the Company's Form 10-K for the year ended
December 31, 1995).
|
|
|
|
Exhibit
10(e)
|
-
|
National
Western Life Insurance Company 1995 Stock and Incentive Plan (incorporated
by reference to Exhibit 10(e) to the Company's Form 10-K for the year
ended December 31, 1995).
|
|
|
|
Exhibit
10(f)
|
-
|
First
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan effective December 17, 1996 (incorporated by
reference to Exhibit 10(f) to the Company's Form 10-K for the year ended
December 31, 1996).
|
|
|
|
Exhibit
10(g)
|
-
|
Second
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan effective December 17, 1996 (incorporated by
reference to Exhibit 10(g) to the Company's Form 10-K for the year ended
December 31, 1996).
|
|
|
|
Exhibit
10(h)
|
-
|
Second
Amendment to the National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan effective December 17, 1996 (incorporated by
reference to Exhibit 10(h) to the Company's Form 10-K for the year ended
December 31, 1996).
|
|
|
|
Exhibit
10(i)
|
-
|
Third
Amendment to the National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan effective December 17, 1996 (incorporated by
reference to Exhibit 10(i) to the Company's Form 10-K for the year ended
December 31, 1996).
|
|
|
|
Exhibit
10(j)
|
-
|
Fourth
Amendment to the National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan effective June 20, 1997 (incorporated by
reference to Exhibit 10(j) to the Company's Form 10-K for the year ended
December 31, 1997).
|
|
|
|
Exhibit
10(k)
|
-
|
First
Amendment to the National Western Life Insurance Company 1995 Stock and
Incentive Plan effective June 19, 1998 (incorporated by reference to
Exhibit 10(k) to the Company's Form 10-Q for the quarter ended June 30,
1998).
|
|
|
|
Exhibit
10(m)
|
-
|
Fifth
Amendment to the National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan effective July 1, 1998 (incorporated by
reference to Exhibit 10(m) to the Company's Form 10-Q for the quarter
ended September 30, 1998).
|
|
|
|
Exhibit
10(n)
|
-
|
Sixth
Amendment to the National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan effective August 7, 1998 (incorporated by
reference to Exhibit 10(n) to the Company's Form 10-K for the year ended
December 31, 1998).
|
|
|
|
Exhibit
10(o)
|
-
|
Third
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan effective August 7, 1998 (incorporated by
reference to Exhibit 10(o) to the Company's Form 10-K for the
year ended December 31, 1998).
|
|
|
|
Exhibit
10(p)
|
-
|
Exchange
Agreement by and among National Western Life Insurance Company, NWL
Services, Inc., Alternative Benefit Management, Inc., and American
National Insurance Company effective November 23, 1998 (incorporated by
reference to Exhibit 10(p) to the Company's Form 10-K for the year ended
December 31, 1998).
|
|
|
|
Exhibit
10(s)
|
-
|
Seventh
Amendment to the National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan effective August 7, 1998 (incorporated by
reference to Exhibit 10(s) to the Company's Form 10-K for the year ended
December 31, 2000).
|
|
|
|
Exhibit
10(u)
|
-
|
Eighth
Amendment to the National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan effective December 1, 2000 (incorporated by
reference to Exhibit 10(u) to the Company's Form 10-K for the year ended
December 31, 2000).
|
|
|
|
Exhibit
10(v)
|
-
|
Fourth
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan effective December 1, 2000 (incorporated by reference
to Exhibit 10(v) to the Company's Form 10-K for the year ended December
31, 2000).
|
|
|
|
Exhibit
10(w)
|
-
|
Second
Amendment to the National Western Life Insurance Company 1995 Stock and
Incentive Plan (incorporated by reference to Exhibit 10(w) to the
Company's Form 10-Q for the quarter ended September 30,
2001).
|
|
|
|
Exhibit
10(z)
|
-
|
Fifth
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan effective January 1, 2001 (incorporated by reference
to Exhibit 10(z) to the Company's Form 10-K for the year ended December
31, 2001).
|
|
|
|
Exhibit
10(ae)
|
-
|
Sixth
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan effective August 23, 2002 (incorporated by reference
to Exhibit 10(ae) to the Company's Form 10-Q for the quarter ended
September 30, 2002).
|
|
|
|
Exhibit
10(af)
|
-
|
Seventh
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan effective October 18, 2002 (incorporated by reference
to Exhibit 10(af) to the Company's Form 10-Q for the quarter ended
September 30, 2002).
|
|
|
|
Exhibit
10(ai)
|
-
|
Eighth
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan effective January 1, 2003 (incorporated by reference
to Exhibit 10(ai) to the Company's Form 10-K for the year ended December
31, 2002).
|
|
|
|
Exhibit
10(am)
|
-
|
Ninth
amendment to the National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan effective November 1, 2003 (incorporated by
reference to Exhibit 10(am) to the Company's Form 10-K for the year ended
December 31, 2003).
|
|
|
|
Exhibit
10(an)
|
-
|
Ninth
amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan effective December 5, 2003 (incorporated by reference
to Exhibit 10(an) to the Company's Form 10-K for the year ended December
31, 2003.)
|
|
|
|
Exhibit
10(ar)
|
-
|
Third
Amendment to the National Western Life Insurance Company 1995 Stock and
Incentive Plan (incorporated by reference to Exhibit 10(ar) to the
Company's Form 10-Q for the quarter ended September 30,
2004).
|
|
|
|
Exhibit
10(as)
|
-
|
Amendment
to the National Western Life Insurance Company Group Excess Benefit Plan
effective December 15, 2004 (incorporated by reference to Exhibit 10(as)
to the Company's Form 10-K for the year ended December 31,
2004.).
|
|
|
|
Exhibit
10(at)
|
-
|
The
National Western Life Insurance Company Employee Health Plan was amended
and restated effective August 20, 2004 (incorporated by reference to
Exhibit 10(at) to the Company's Form 10-K for the year ended December 31,
2004.)
|
|
|
|
Exhibit
10(au)
|
-
|
Tenth
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan effective December 31, 2004 (incorporated by
reference to Exhibit 10(au) to the Company's Form 10-K for the year ended
December 31, 2004.).
|
|
|
|
Exhibit
10(av)
|
-
|
Bonus
program by and between National Western Life Insurance Company and
Executive Officers of National Western Life Insurance Company for the year
ending December 31, 2005 (incorporated by reference to Exhibit 10(av) to
the Company's Form 10-Q for the quarter ended March 31,
2005).
|
|
|
|
Exhibit
10(aw)
|
-
|
Bonus
program by and between National Western Life Insurance Company and
Domestic Marketing officers of National Western Life Insurance Company for
the year ending December 31, 2005 (incorporated by reference to Exhibit
10(aw) to the Company's Form 10-Q for the quarter ended March 31,
2005).
|
|
|
|
Exhibit
10(ax)
|
-
|
Bonus
program by and between National Western Life Insurance Company and
International Marketing Officers of National Western Life Insurance
Company for the year ending December 31, 2005 (incorporated by reference
to Exhibit 10(ax) to the Company's Form 10-Q for the quarter ended March
31, 2005).
|
|
|
|
Exhibit
10(az)
|
-
|
National
Western Life Insurance Company Non-Qualified Defined Benefit Plan for
Robert L. Moody (Exhibit 10 to 8-K dated July 1, 2005).
|
|
|
|
Exhibit
10(ba)
|
-
|
First
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan for Robert L. Moody (Exhibit 10 to 8-K dated August
22, 2005).
|
|
|
|
Exhibit
10(bb)
|
-
|
Second
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan for Robert L. Moody (Exhibit 10 to 8-K dated December
15, 2005).
|
|
|
|
Exhibit
10(bc)
|
-
|
Tenth
Amendment to the National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan (Exhibit 10 to 8-K dated December 15,
2005).
|
|
|
|
Exhibit
10(bd)
|
-
|
National
Western Life Insurance Company Retirement Bonus Program for Robert L.
Moody (Exhibit 10 to 8-K dated December 15, 2005).
|
|
|
|
Exhibit
10(be)
|
-
|
Eleventh
Amendment to the National Western Life Insurance Company Non-Qualified
Defined Benefit Plan (Exhibit 10 to 8-K dated December 15,
2005).
|
|
|
|
Exhibit
10(bf)
|
-
|
Non-Qualified
Defined Benefit Plan for the President of the National Western Life
Insurance Company (Exhibit 10 to 8-K dated December 15,
2005).
|
|
|
|
Exhibit
10(bg)
|
-
|
National
Western Life Insurance Company 2006 Executive Officer Bonus Program
(Exhibit 10 to 8-K dated February 17, 2006).
|
|
|
|
Exhibit
10(bh)
|
-
|
National
Western Life Insurance Company 2006 Executive Officer Bonus Program (as
amended) (Exhibit 10 to 8-K dated April 21, 2006).
|
|
|
|
Exhibit
10(bi)
|
-
|
2006
International Marketing Officer Bonus Program (Exhibit 10 to 8-K dated
June 23, 2006).
|
|
|
|
Exhibit
10(bj)
|
-
|
2006
Domestic Marketing Officer Bonus Program (Exhibit 10 to 8-K dated June 23,
2006).
|
|
|
|
Exhibit
10(bk)
|
-
|
National
Western Life Insurance Company Harvest Nonqualified Deferred Compensation
Plan (Exhibit 10 to 8-K dated June 23, 2006).
|
|
|
|
Exhibit
10(bl)
|
-
|
Amendment
No. 16 to Loan Agreement (Exhibit 10 to 8-K dated July 31,
2006).
|
|
|
|
Exhibit
21
|
-
|
Subsidiaries
of the Registrant.
|
|
|
|
Exhibit
23(a)
|
-
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
|
Exhibit
31(a)
|
-
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
Exhibit
31(b)
|
-
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
Exhibit
32(a)
|
-
|
Certifications
of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
(b)
Exhibits
Exhibits
required by Regulation S-K are listed as to location in the Listing of Exhibits
in Item 15.(a)3. above. Exhibits not referred to have been omitted as
inapplicable or not required.
(c)
Financial Statement Schedules
The
financial statement schedules required by Regulation S-K are listed as to
location in Attachment A, Index to Financial Statements and Schedules, on page
76 of this report.
ATTACHMENT
A
Index
to Financial Statements and Schedules
|
|
|
|
|
|
Page
|
|
|
|
|
|
77
|
|
|
|
|
|
78
|
|
|
|
|
|
80
|
|
|
|
|
|
81
|
|
|
|
|
|
82
|
|
|
|
|
|
83
|
|
|
|
|
|
85
|
|
|
|
|
|
130
|
|
|
|
|
|
131
|
|
|
|
All other
schedules are omitted because they are not applicable, not required, or because
the information required by the schedule is included elsewhere in the
consolidated financial statements or notes.
The Board
of Directors and Stockholders
National
Western Life Insurance Company
Austin,
Texas
We have
audited the accompanying consolidated balance sheets of National Western Life
Insurance Company and subsidiaries (the "Company") as of December 31, 2007 and
2006 and the related consolidated statements of earnings, comprehensive income,
stockholders' equity and cash flows for each of the years in the three year
period ended December 31, 2007. In connection with our audits of the
consolidated financial statements, we have also audited the 2007 financial
statement schedule I and the 2007, 2006, and 2005 financial statement schedule
V. These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of National Western Life
Insurance Company and subsidiaries as of December 31, 2007 and 2006 and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 2007 in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), National Western Life Insurance Company's
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 17, 2008 expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial
reporting.
As
discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for deferred acquisition cost in connection
with modifications or exchanges of insurance contracts in 2007 and pension and
other postretirement obligations in 2006.
KPMG
LLP
Austin,
Texas
March 17,
2008
|
CONSOLIDATED
BALANCE SHEETS
|
December
31, 2007 and 2006
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
2007
|
|
2006
|
|
|
|
|
|
Investments:
|
|
|
|
|
Securities
held to maturity, at amortized cost
|
|
|
|
|
(fair
value: $3,774,193 and $3,567,625)
|
$
|
3,778,603
|
|
3,603,434
|
Securities
available for sale, at fair value
|
|
|
|
|
(cost:
$1,904,499 and $1,907,454)
|
|
1,900,714
|
|
1,902,568
|
Mortgage
loans, net of allowance for possible losses
|
|
|
|
|
($3,567
and $2,100)
|
|
99,033
|
|
103,325
|
Policy
loans
|
|
83,772
|
|
86,856
|
Derivatives
|
|
25,907
|
|
72,012
|
Other
long-term investments
|
|
16,562
|
|
22,822
|
|
|
|
|
|
Total
Investments
|
|
5,904,591
|
|
5,791,017
|
|
|
|
|
|
Cash
and short-term investments
|
|
45,206
|
|
49,901
|
Deferred
policy acquisition costs
|
|
664,805
|
|
643,964
|
Deferred
sales inducements
|
|
104,029
|
|
93,139
|
Accrued
investment income
|
|
65,034
|
|
64,393
|
Federal
income tax receivable
|
|
10,010
|
|
-
|
Other
assets
|
|
41,651
|
|
51,029
|
|
|
|
|
|
|
$
|
6,835,326
|
|
6,693,443
|
See
accompanying notes to consolidated financial statements.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
December
31, 2007 and 2006
|
|
(In thousands except share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future
policy benefits:
|
|
|
|
|
|
|
Traditional
life and annuity contracts
|
|
$ |
138,672 |
|
|
|
138,382 |
|
Universal
life and annuity contracts
|
|
|
5,441,871 |
|
|
|
5,395,075 |
|
Other
policyholder liabilities
|
|
|
120,400 |
|
|
|
112,449 |
|
Federal
income tax liability:
|
|
|
|
|
|
|
|
|
Current
|
|
|
- |
|
|
|
1,666 |
|
Deferred
|
|
|
61,720 |
|
|
|
32,207 |
|
Other
liabilities
|
|
|
60,978 |
|
|
|
80,680 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
5,823,641 |
|
|
|
5,760,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Notes 4, 7, and 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock:
|
|
|
|
|
|
|
|
|
Class
A - $1 par value; 7,500,000 shares authorized; 3,422,324
|
|
|
|
|
|
|
|
|
and
3,420,824 shares 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
|
|
|
(7,065 |
) |
|
|
(3,731 |
) |
Retained
earnings
|
|
|
978,892 |
|
|
|
896,984 |
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
1,011,685 |
|
|
|
932,984 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,835,326 |
|
|
|
6,693,443 |
|
See
accompanying notes to consolidated financial statements.
|
|
CONSOLIDATED
STATEMENTS OF EARNINGS
|
|
For
the Years Ended December 31, 2007, 2006, and 2005
|
|
(In
thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Premiums
and other revenue:
|
|
|
|
|
|
|
|
|
|
Life
and annuity premiums
|
|
$ |
19,513 |
|
|
|
15,805 |
|
|
|
14,602 |
|
Universal
life and annuity contract revenues
|
|
|
119,677 |
|
|
|
106,320 |
|
|
|
96,765 |
|
Net
investment income
|
|
|
318,137 |
|
|
|
379,768 |
|
|
|
310,213 |
|
Other
income
|
|
|
13,683 |
|
|
|
17,304 |
|
|
|
9,579 |
|
Realized
gains on investments
|
|
|
3,497 |
|
|
|
2,662 |
|
|
|
9,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
474,507 |
|
|
|
521,859 |
|
|
|
441,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
41,326 |
|
|
|
35,241 |
|
|
|
39,162 |
|
Amortization
of deferred policy acquisition costs
|
|
|
88,413 |
|
|
|
90,358 |
|
|
|
87,955 |
|
Universal
life and annuity contract interest
|
|
|
164,391 |
|
|
|
213,736 |
|
|
|
150,692 |
|
Other
operating expenses
|
|
|
55,130 |
|
|
|
65,709 |
|
|
|
46,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
349,260 |
|
|
|
405,044 |
|
|
|
324,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before Federal income taxes
|
|
|
125,247 |
|
|
|
116,815 |
|
|
|
116,885 |
|
Federal
income taxes
|
|
|
39,876 |
|
|
|
40,472 |
|
|
|
39,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
85,371 |
|
|
|
76,343 |
|
|
|
77,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share (Note 11):
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A
|
|
$ |
24.24 |
|
|
|
21.69 |
|
|
|
22.06 |
|
Class
B
|
|
$ |
12.12 |
|
|
|
10.84 |
|
|
|
11.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A
|
|
$ |
23.95 |
|
|
|
21.46 |
|
|
|
21.83 |
|
Class
B
|
|
$ |
12.12 |
|
|
|
10.84 |
|
|
|
11.00 |
|
See
accompanying notes to consolidated financial statements.
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
|
|
For
the Years Ended December 31, 2007, 2006, and 2005
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
85,371 |
|
|
|
76,343 |
|
|
|
77,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income, net of effects of
|
|
|
|
|
|
|
|
|
|
|
|
|
deferred
costs and taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized holding gains (losses) arising
|
|
|
|
|
|
|
|
|
|
|
|
|
during
period
|
|
|
1,035 |
|
|
|
(4,542 |
) |
|
|
(13,597 |
) |
Reclassification
adjustment for net gains
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in net earnings
|
|
|
(3,103 |
) |
|
|
(2,736 |
) |
|
|
(1,254 |
) |
Amortization
of net unrealized losses
|
|
|
|
|
|
|
|
|
|
|
|
|
related
to transferred securities
|
|
|
104 |
|
|
|
25 |
|
|
|
18 |
|
Unrealized
gains on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
transferred
during period from held to
|
|
|
|
|
|
|
|
|
|
|
|
|
maturity
to available for sale
|
|
|
- |
|
|
|
- |
|
|
|
202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized losses on securities
|
|
|
(1,964 |
) |
|
|
(7,253 |
) |
|
|
(14,631 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(44 |
) |
|
|
(178 |
) |
|
|
130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of net prior service cost and
|
|
|
|
|
|
|
|
|
|
|
|
|
net
gain
|
|
|
1,235 |
|
|
|
- |
|
|
|
- |
|
Net
loss arising during the period
|
|
|
(2,561 |
) |
|
|
- |
|
|
|
- |
|
Change
in pension liability
|
|
|
- |
|
|
|
(1,166 |
) |
|
|
(354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss
|
|
|
(3,334 |
) |
|
|
(8,597 |
) |
|
|
(14,855 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
82,037 |
|
|
|
67,746 |
|
|
|
62,412 |
|
See
accompanying notes to consolidated financial statements.
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
For
the Years Ended December 31, 2007, 2006, and 2005
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock:
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$ |
3,621 |
|
|
|
3,613 |
|
|
|
3,584 |
|
Shares
exercised under stock option plan
|
|
|
1 |
|
|
|
8 |
|
|
|
29 |
|
Balance
at end of year
|
|
|
3,622 |
|
|
|
3,621 |
|
|
|
3,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
36,110 |
|
|
|
37,923 |
|
|
|
33,834 |
|
Shares
exercised under stock option plan,
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax benefits
|
|
|
126 |
|
|
|
503 |
|
|
|
3,094 |
|
Adjustment
for stock option liability classification
|
|
|
- |
|
|
|
(2,316 |
) |
|
|
- |
|
Stock
option expense
|
|
|
- |
|
|
|
- |
|
|
|
995 |
|
Balance
at end of year
|
|
|
36,236 |
|
|
|
36,110 |
|
|
|
37,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
3,148 |
|
|
|
10,401 |
|
|
|
25,032 |
|
Change
in unrealized losses during period
|
|
|
(1,964 |
) |
|
|
(7,253 |
) |
|
|
(14,631 |
) |
Balance
at end of year
|
|
|
1,184 |
|
|
|
3,148 |
|
|
|
10,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
3,122 |
|
|
|
3,300 |
|
|
|
3,170 |
|
Change
in translation adjustments during period
|
|
|
(44 |
) |
|
|
(178 |
) |
|
|
130 |
|
Balance
at end of year
|
|
|
3,078 |
|
|
|
3,122 |
|
|
|
3,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
plan liability adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
(10,001 |
) |
|
|
(3,137 |
) |
|
|
(2,783 |
) |
Change
in benefit liability during the period
|
|
|
(1,326 |
) |
|
|
(1,166 |
) |
|
|
(354 |
) |
Adjustment
to initially apply FASB
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
No. 158, net of tax
|
|
|
- |
|
|
|
(5,698 |
) |
|
|
- |
|
Balance
at end of year
|
|
|
(11,327 |
) |
|
|
(10,001 |
) |
|
|
(3,137 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
income
(loss) at end of year
|
|
|
(7,065 |
) |
|
|
(3,731 |
) |
|
|
10,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
896,984 |
|
|
|
821,908 |
|
|
|
745,835 |
|
Net
earnings
|
|
|
85,371 |
|
|
|
76,343 |
|
|
|
77,267 |
|
Cumulative
effect of change in accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
principle
for SOP 05-1, net of tax
|
|
|
(2,195 |
) |
|
|
- |
|
|
|
- |
|
Stockholder
dividends
|
|
|
(1,268 |
) |
|
|
(1,267 |
) |
|
|
(1,194 |
) |
Balance
at end of year
|
|
|
978,892 |
|
|
|
896,984 |
|
|
|
821,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
$ |
1,011,685 |
|
|
|
932,984 |
|
|
|
874,008 |
|
See
accompanying notes to consolidated financial statements.
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For
the Years Ended December 31, 2007, 2006, and 2005
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
85,371 |
|
|
|
76,343 |
|
|
|
77,267 |
|
Adjustments
to reconcile net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
to
net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life and annuity contract interest
|
|
|
164,391 |
|
|
|
213,736 |
|
|
|
150,692 |
|
Surrender
charges and other policy revenues
|
|
|
(36,191 |
) |
|
|
(31,363 |
) |
|
|
(27,676 |
) |
Realized
gains on investments
|
|
|
(3,497 |
) |
|
|
(2,662 |
) |
|
|
(9,884 |
) |
Accrual
and amortization of investment income
|
|
|
(5,223 |
) |
|
|
(5,443 |
) |
|
|
(4,114 |
) |
Depreciation
and amortization
|
|
|
1,031 |
|
|
|
1,516 |
|
|
|
1,513 |
|
Decrease
(increase) in value of derivatives
|
|
|
56,204 |
|
|
|
(27,108 |
) |
|
|
9,579 |
|
Increase
in deferred policy acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
and
sales inducement costs
|
|
|
(28,090 |
) |
|
|
(13,740 |
) |
|
|
(14,476 |
) |
Increase
in accrued investment income
|
|
|
(641 |
) |
|
|
(3,110 |
) |
|
|
(3,011 |
) |
Decrease
(increase) in other assets
|
|
|
7,113 |
|
|
|
(10,016 |
) |
|
|
(4,969 |
) |
Increase
(decrease) in liabilities for future
|
|
|
|
|
|
|
|
|
|
|
|
|
policy
benefits
|
|
|
300 |
|
|
|
(905 |
) |
|
|
(1,721 |
) |
Increase
in other policyholder liabilities
|
|
|
7,952 |
|
|
|
11,892 |
|
|
|
25,320 |
|
Increase
in Federal income tax liability
|
|
|
20,607 |
|
|
|
2,770 |
|
|
|
1,593 |
|
Increase
(decrease) in other liabilities
|
|
|
(10,511 |
) |
|
|
11,739 |
|
|
|
175 |
|
Other
|
|
|
(914 |
) |
|
|
371 |
|
|
|
802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
257,902 |
|
|
|
224,020 |
|
|
|
201,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sales of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
|
5,175 |
|
|
|
- |
|
|
|
9,867 |
|
Securities
available for sale
|
|
|
34,982 |
|
|
|
36,428 |
|
|
|
29,211 |
|
Other
investments
|
|
|
5,684 |
|
|
|
13,672 |
|
|
|
22,739 |
|
Proceeds
from maturities and redemptions of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
|
136,752 |
|
|
|
258,051 |
|
|
|
330,920 |
|
Securities
available for sale
|
|
|
338,486 |
|
|
|
104,435 |
|
|
|
125,225 |
|
Derivatives
|
|
|
43,216 |
|
|
|
37,010 |
|
|
|
29,329 |
|
Purchases
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
|
(313,580 |
) |
|
|
(327,126 |
) |
|
|
(596,191 |
) |
Securities
available for sale
|
|
|
(363,041 |
) |
|
|
(312,584 |
) |
|
|
(301,898 |
) |
Other
investments
|
|
|
(53,608 |
) |
|
|
(44,090 |
) |
|
|
(40,372 |
) |
Principal
payments on mortgage loans
|
|
|
22,562 |
|
|
|
11,680 |
|
|
|
23,727 |
|
Cost
of mortgage loans acquired
|
|
|
(19,578 |
) |
|
|
(6,326 |
) |
|
|
(9,038 |
) |
Decrease
(increase) in policy loans
|
|
|
(2,801 |
) |
|
|
(471 |
) |
|
|
2,064 |
|
Other
|
|
|
(3,216 |
) |
|
|
(1,600 |
) |
|
|
(469 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(168,967 |
) |
|
|
(230,921 |
) |
|
|
(374,886 |
) |
(Continued
on next page)
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS, CONTINUED
|
|
For
the Years Ended December 31, 2007, 2006, and 2005
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Stockholders
dividends
|
|
$ |
(1,268 |
) |
|
|
(1,267 |
) |
|
|
(1,194 |
) |
Deposits
to account balances for universal life
|
|
|
|
|
|
|
|
|
|
|
|
|
and
annuity contracts
|
|
|
510,647 |
|
|
|
547,469 |
|
|
|
611,594 |
|
Return
of account balances on universal life
|
|
|
|
|
|
|
|
|
|
|
|
|
and
annuity contracts
|
|
|
(603,450 |
) |
|
|
(521,988 |
) |
|
|
(458,765 |
) |
Issuance
of common stock under stock option plan
|
|
|
127 |
|
|
|
511 |
|
|
|
2,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
(93,944 |
) |
|
|
24,725 |
|
|
|
154,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange
|
|
|
314 |
|
|
|
722 |
|
|
|
374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and short-term
|
|
|
|
|
|
|
|
|
|
|
|
|
investments
|
|
|
(4,695 |
) |
|
|
18,546 |
|
|
|
(18,839 |
) |
Cash
and short-term investments at beginning of year
|
|
|
49,901 |
|
|
|
31,355 |
|
|
|
50,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and short-term investments at end of year
|
|
$ |
45,206 |
|
|
|
49,901 |
|
|
|
31,355 |
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
41 |
|
|
|
41 |
|
|
|
40 |
|
Income
taxes
|
|
|
19,298 |
|
|
|
34,726 |
|
|
|
37,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loans originated to facilitate
|
|
|
|
|
|
|
|
|
|
|
|
|
the
sale of real estate
|
|
$ |
- |
|
|
|
900 |
|
|
|
900 |
|
See
accompanying notes to consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Principles of Consolidation.
The accompanying consolidated financial statements include the accounts
of National Western Life Insurance Company and its wholly owned subsidiaries
("Company"), The Westcap Corporation, NWL Investments, Inc., NWL Services, Inc.,
and NWL Financial, Inc. All significant intercorporate transactions
and accounts have been eliminated in consolidation.
(B) Basis of
Presentation. The accompanying consolidated financial
statements have been prepared in conformity with U.S. generally accepted
accounting principles ("GAAP") which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities, and the reported amounts of
revenues and expenses during the reporting periods. Actual
results could differ from those estimates. Significant estimates in the
accompanying consolidated financial statements include (1) liabilities for
future policy benefits, (2) valuation of derivative instruments, (3)
recoverability and amortization of deferred policy acquisition costs, (4)
valuation allowances for deferred tax assets, (5) other-than-temporary
impairment losses on debt securities, and (6) valuation allowances for mortgage
loans and real estate.
The
Company also files financial statements with insurance regulatory authorities
which are prepared on the basis of statutory accounting practices prescribed or
permitted by the Colorado Division of Insurance which are significantly
different from consolidated financial statements prepared in accordance with
GAAP. These differences are described in detail in the statutory
information section of this note.
(C) Investments. Investments
in debt securities the Company purchases with the intent to hold to maturity are
classified as securities held to maturity. The Company has the ability to hold
the securities, as it would be unlikely that forced sales of securities would be
required prior to maturity to cover payments of liabilities. As a result,
securities held to maturity are carried at amortized cost less declines in fair
value that are deemed other-than-temporary.
Investments
in debt and equity securities that are not classified as securities held to
maturity are reported as securities available for sale. Securities available for
sale are reported in the accompanying consolidated financial statements at fair
value. Any valuation changes resulting from changes in the fair value
of the securities are reflected as a component of stockholders' equity in
accumulated other comprehensive income or loss. These unrealized
gains or losses in stockholders' equity are reported net of taxes and
adjustments to deferred policy acquisition costs.
Transfers
of securities between categories are recorded at fair value at the date of
transfer. The unrealized holding gains or losses for securities
transferred from available for sale to held to maturity are included in
accumulated other comprehensive income or loss and amortized into earnings over
the remaining life of the security as an adjustment to yield in a manner
consistent with the amortization or accretion of premium or discount on the
associated security.
Premiums
and discounts are amortized or accreted over the life of the related security as
an adjustment to yield using the effective interest method. For
mortgage-backed and asset-backed securities, the effective interest method is
used based on anticipated prepayments and the estimated economic life of the
securities. When estimates of prepayments change, the effective yield
is recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the
amount that would have existed had the new effective yield been applied at the
time of acquisition. This adjustment is reflected in net investment
income.
Realized
gains and losses for securities available for sale and securities held to
maturity are included in earnings and are derived using the specific
identification method for determining the cost of securities sold. A
decline in the fair value below cost that is deemed other-than-temporary is
charged to earnings, resulting in the establishment of a new cost basis for the
security.
Mortgage
loans and other long-term investments are stated at cost, less unamortized
discounts, deferred fees, and allowances for possible losses. Policy loans are
stated at their aggregate unpaid balances. Real estate is stated at the lower of
cost or fair value less estimated costs to sell.
Impaired
loans are those loans where it is probable that all amounts due according to
contractual terms of the loan agreement will not be collected. The
Company has identified these loans through its normal loan review
procedures. Impaired loans include (1) nonaccrual loans, (2) loans
which are 90 days or more past due, unless they are well secured and are in the
process of collection, and (3) other loans which management believes are
impaired. Impaired loans are measured based on (1) the present value
of expected future cash flows discounted at the loan's effective interest rate,
(2) the loan's observable market price, or (3) the fair value of the collateral
if the loan is collateral dependent. Substantially all of the
Company's impaired loans are measured at the fair value of the
collateral. In limited cases, the Company may use other methods to
determine the level of impairment of a loan if such loan is not collateral
dependent.
(D) Cash and Short-Term Investments.
For purposes of the consolidated statements of cash flows, the Company
considers all short-term investments with a maturity at the date of purchase of
three months or less to be cash equivalents.
(E) Derivatives.
Equity-indexed products combine features associated with
traditional fixed annuities and universal life contracts, with the option to
have interest rates linked in part to an equity index like the S&P 500
Index®. The
equity return component of such policy contracts is identified separately and
accounted for as embedded derivatives. The remaining portions of
these policy contracts are considered the host contracts and are recorded
separately as fixed annuity or universal life contracts. The host contracts are
accounted for under debt instrument type accounting. The host
contracts are recorded as discounted debt instruments that are accreted, using
the effective yield method, to their minimum account values at their projected
maturities or termination dates.
The
Company purchases over-the-counter indexed options, which are derivative
financial instruments, to hedge the equity return component of its indexed
annuity and life products. The indexed options act as hedges to match
closely the returns on the S&P 500®
Composite Stock Price Index ("S&P 500 Index®"). The
amounts which may be credited to policyholders are linked, in part, to the
returns of the S&P 500 Index®. As a
result, changes to policyholders' liabilities are substantially offset by
changes in the value of the options. Cash is exchanged upon purchase of the
indexed options and no principal or interest payments are made by either party
during the option periods. Upon maturity or expiration of the options, cash is
paid to the Company based on the S&P 500 Index®
performance and terms of the contract.
The
Company does not elect hedging accounting relative to derivative
instruments. The
derivatives are reported at fair value in the accompanying consolidated
financial statements. The changes in the values of the indexed
options and the changes in the policyholder liabilities are both reflected in
the statement of earnings. Any gains or losses from the sale or
expiration of the options, as well as period-to-period changes in values, are
reflected as net investment income in the statement of earnings. Any
changes relative to the embedded derivatives associated with policy contracts
are reflected in contract interest in the statement of earnings.
Although
there is credit risk in the event of nonperformance by counterparties to the
indexed options, the Company does not expect any counterparties to fail to meet
their obligations, given their high credit ratings. In addition,
credit support agreements are in place with all counterparties for option
holdings in excess of specific limits, which may further reduce the Company's
credit exposure. At December 31, 2007 and 2006, the fair values of
indexed options owned by the Company totaled $25.9 million and $72.0 million,
respectively.
(F) Insurance Revenues and Expenses.
Premiums on traditional life insurance products are recognized as
revenues as they become due from policyholders. Benefits and expenses are
matched with premiums in arriving at profits by providing for policy benefits
over the lives of the policies and by amortizing acquisition costs over the
premium-paying periods of the policies. For universal life and annuity
contracts, revenues consist of policy charges for the cost of insurance, policy
administration, and surrender charges assessed during the
period. Expenses for these policies include interest credited to
policy account balances, benefit claims incurred in excess of policy account
balances and amortization of deferred policy acquisition costs and sales
inducements.
Under
GAAP, commissions, sales inducements, and certain expenses related to policy
issuance and underwriting, all of which generally vary with and are related to
the production of new business, are deferred. For traditional products, these
costs are amortized over the premium-paying period of the related policies in
proportion to the ratio of the premium earned to the total premium revenue
anticipated, using the same assumptions as to interest, mortality, and
withdrawals as were used in calculating the liability for future policy
benefits. For universal life and annuity contracts, these costs are amortized in
relation to the present value of expected gross profits on these
policies. The Company evaluates the recoverability of deferred policy
acquisition and sales inducement costs on a quarterly basis. In this
evaluation, the Company considers estimated future gross profits or future
premiums, as applicable for the type of contract. The Company also
considers expected mortality, interest earned and credited rates, persistency,
and expenses.
A summary
of information relative to deferred policy acquisition costs is provided in the
table below.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
policy acquisition costs, beginning of year
|
|
$ |
643,964 |
|
|
|
620,129 |
|
|
|
582,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy
acquisition costs deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agents'
commissions
|
|
|
109,323 |
|
|
|
97,662 |
|
|
|
96,224 |
|
Other
|
|
|
7,180 |
|
|
|
6,436 |
|
|
|
6,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs deferred
|
|
|
116,503 |
|
|
|
104,098 |
|
|
|
102,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred policy acquisition costs
|
|
|
(88,413 |
) |
|
|
(90,358 |
) |
|
|
(87,955 |
) |
Adjustments
for unrealized gains and
|
|
|
|
|
|
|
|
|
|
|
|
|
(losses)
on investment securities
|
|
|
(3,928 |
) |
|
|
10,095 |
|
|
|
23,436 |
|
Adoption
of SOP 05-1
|
|
|
(3,321 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
policy acquisition costs, end of year
|
|
$ |
664,805 |
|
|
|
643,964 |
|
|
|
620,129 |
|
A summary
of information relative to deferred sales inducement costs is provided in the
table below.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Deferred
sales inducement costs, beginning of year
|
|
$ |
93,139 |
|
|
|
80,450 |
|
|
|
62,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
inducement costs deferred
|
|
|
20,837 |
|
|
|
19,813 |
|
|
|
21,426 |
|
Amortization
of sales inducement
|
|
|
(9,460 |
) |
|
|
(9,101 |
) |
|
|
(6,484 |
) |
Adjustments
for unrealized gains and
|
|
|
|
|
|
|
|
|
|
|
|
|
(losses)
on investment securities
|
|
|
(487 |
) |
|
|
1,977 |
|
|
|
3,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
sales inducement costs, end of year
|
|
$ |
104,029 |
|
|
|
93,139 |
|
|
|
80,450 |
|
Amortization
of deferred policy acquisition costs decreased to $88.4 million for the year
ended December 31, 2007 compared to $90.4 million and $88.0 million reported in
2006 and 2005. An unlocking adjustment was recorded in the current
year which resulted in a decrease of amortization by $8.6
million. This unlocking adjustment was based upon changes to (1)
future mortality assumptions reflecting current experience studies and (2)
future cost of insurance rate assumptions based on company changes to future
cost of insurance rate changes. In addition, a true-up adjustment was
also recorded at December 2007 relative to partial surrender rates, mortality
rates, credited interest rates and earned rates for the current year’s
experience resulting in a $2.7 million decrease in
amortization. Amortization for 2006 includes a true-up adjustment
relative to partial surrenders, mortality assumptions, annuitizations, credited
rates and earned rates which increased amortization in that year by
approximately $4.3 million. There was a similar adjustment in 2005
relative to amortization assumptions that resulted in increased amortization for
that year.
Under
GAAP, the liability for future policy benefits on traditional products has been
calculated under SFAS No. 60 using assumptions as to future mortality (based on
the 1965-1970 and 1975-1980 Select and Ultimate mortality tables), interest
ranging from 4% to 8%, and withdrawals based on Company experience. For
universal life and annuity contracts, the liability for future policy benefits
represents the account balance. Equity-indexed products combine features
associated with traditional fixed annuities and universal life contracts, with
the option to have interest rates linked in part to an equity index like the
S&P 500 Index®. In
accordance with SFAS No. 133, the equity return component of such policy
contracts must be identified separately and accounted for as embedded
derivatives. The remaining portions of these policy contracts are
considered the host contracts and are recorded separately as fixed annuity or
universal life contracts. The host contracts are accounted for under provisions
of SFAS No. 97 that requires debt instrument type accounting. The
host contracts are recorded as discounted debt instruments that are accreted,
using the effective yield method, to their minimum account values at their
projected maturities or termination dates. The embedded derivatives are recorded
at fair values.
(G) Deferred Federal Income Taxes.
Federal income taxes are accounted for under the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance for deferred tax assets is
provided if all or some portion of the deferred tax asset may not be
realized. An increase or decrease in a valuation allowance that
results from a change in circumstances that affects the realizability of the
related deferred tax asset is included in income in the period the change
occurs.
(H) Depreciation of Property,
Equipment, and Leasehold Improvements. Depreciation is based on the
estimated useful lives of the assets and is calculated on the straight-line and
accelerated methods. Leasehold improvements are amortized over the
lesser of the economic useful life of the improvement or the term of the
lease.
(I) Statutory Information.
Domiciled in Colorado, the Company prepares its statutory financial
statements in accordance with accounting practices prescribed or permitted by
the Colorado Division of Insurance. The Colorado Division of
Insurance has adopted the provisions of the National Association of Insurance
Commissioners' ("NAIC") Statutory Accounting Practices as the basis for its
statutory practices.
The
following are major differences between GAAP and accounting practices prescribed
or permitted by the Colorado Division of Insurance.
1. The
Company accounts for universal life and annuity contracts based on the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 97, Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains
and Losses from the Sale of Investments. The basic effect of
the statement with respect to certain long-duration contracts is that deposits
for universal life and annuity contracts are not reflected as revenues, and
surrenders and certain other benefit payments are not reflected as
expenses. However, only those contracts with no insurance risk
qualify for such treatment under statutory accounting practices. For
all other contracts, statutory accounting practices do reflect such items as
revenues and expenses.
A summary
of direct premiums and deposits collected is provided below.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Annuity
deposits
|
|
$ |
437,765 |
|
|
|
485,994 |
|
|
|
557,940 |
|
Universal
life insurance deposits
|
|
|
168,279 |
|
|
|
146,742 |
|
|
|
133,579 |
|
Traditional
life and other premiums
|
|
|
24,915 |
|
|
|
18,046 |
|
|
|
16,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
630,959 |
|
|
|
650,782 |
|
|
|
708,148 |
|
2. Statutory
accounting practices require commissions and related costs to be expensed as
incurred, where as for GAAP, these items are deferred and
amortized.
3.
For statutory accounting purposes, liabilities for future policy benefits for
life insurance policies are calculated by the net level premium method or the
commissioners reserve valuation method. Future policy benefit
liabilities for annuities are calculated based on the continuous commissioners
annuity reserve valuation method and provisions of Actuarial Guidelines 33 and
35.
4. Deferred
Federal income taxes are provided for temporary differences which are recognized
in the consolidated financial statements in a different period than for Federal
income tax purposes. Deferred taxes are also recognized in statutory
accounting practices; however, there are limitations as to the amount of
deferred tax assets that may be reported as admitted assets. The
change in the deferred taxes is recorded in surplus, rather than as a component
of income tax expense.
5. For
statutory accounting purposes, debt securities are recorded at amortized cost,
except for securities in or near default, which are reported at fair
value. Under GAAP, they are carried at amortized cost or fair value
based on their classification as either held to maturity or available for
sale.
6. Investments
in subsidiaries are recorded at admitted asset value for statutory purposes,
whereas the financial statements of the subsidiaries have been consolidated with
those of the Company under GAAP.
7. Compensation
costs related to the Company’s stock option plan are not recognized under
statutory accounting.
8. Pension
liabilities and net periodic benefit costs are recognized for statutory
accounting however in accordance with GAAP a liability or asset is recognized
for the under or over funded status of the plans and does include a non-vested
component. Statutory accounting only includes vested
benefits.
9. The
asset valuation reserve and interest maintenance reserve, which are investment
valuation reserves prescribed by statutory accounting practices, have been
eliminated, as they are not required under GAAP.
10. The
recorded value of the life interest in the Libbie Shearn Moody Trust ("Trust")
is reported at its initial valuation, net of accumulated amortization, under
GAAP. The initial valuation was based on the assumption that the Trust would
provide certain income to the Company at an assumed interest rate and is being
amortized over 53 years, the life expectancy of Mr. Robert L. Moody at the date
he contributed the life interest to the Company. For statutory accounting
purposes, the life interest has been valued at $26.4 million, which was computed
as the present value of the estimated future income to be received from the
Trust. However, this amount was amortized to a valuation of $12.8 million over a
seven-year period ended December 31, 1999, in accordance with Colorado Division
of Insurance permitted accounting requirements. Prescribed statutory
accounting practices provide no accounting guidance for such asset. The
statutory admitted value of this life interest at December 31, 2007, is $12.8
million in comparison to a carrying value of $1.6 million in the accompanying
consolidated financial statements.
11. Reconciliations
of statutory capital and surplus, as included in the annual statements filed
with the Colorado Division of Insurance, to total stockholders' equity as
reported in the accompanying consolidated financial statements prepared under
GAAP are as follows:
|
|
Stockholders'
Equity
|
|
|
|
as
of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
Statutory
capital and surplus
|
|
$ |
710,935 |
|
|
|
673,262 |
|
Adjustments:
|
|
|
|
|
|
|
|
|
Difference
in valuation of investment in
|
|
|
|
|
|
|
|
|
the
Libbie Shearn Moody Trust
|
|
|
(11,155 |
) |
|
|
(10,840 |
) |
Deferral
of policy acquisition costs and
|
|
|
|
|
|
|
|
|
sales
inducements
|
|
|
768,834 |
|
|
|
737,103 |
|
Adjustment
of future policy benefits
|
|
|
(421,847 |
) |
|
|
(459,838 |
) |
Difference
in deferred Federal income taxes
|
|
|
(69,128 |
) |
|
|
(39,467 |
) |
Adjustment
of securities available for sale to fair value
|
|
|
(11,492 |
) |
|
|
(16,217 |
) |
Reversal
of asset valuation reserve
|
|
|
41,030 |
|
|
|
42,624 |
|
Reversal
of interest maintenance reserve
|
|
|
4,534 |
|
|
|
6,607 |
|
Reinstatement
of other nonadmitted assets
|
|
|
17,767 |
|
|
|
20,491 |
|
Valuation
allowances on investments
|
|
|
771 |
|
|
|
1,669 |
|
Difference
in pension liability
|
|
|
(10,878 |
) |
|
|
(10,622 |
) |
Liability
for stock options
|
|
|
(7,713 |
) |
|
|
(13,215 |
) |
Other,
net
|
|
|
27 |
|
|
|
1,427 |
|
|
|
|
|
|
|
|
|
|
GAAP
equity
|
|
$ |
1,011,685 |
|
|
|
932,984 |
|
12. Reconciliations
of statutory net earnings, as included in the annual statements filed with the
Colorado Division of Insurance, to the respective amounts as reported in the
accompanying consolidated financial statements prepared under GAAP are as
follows:
|
|
Net
Earnings for the
|
|
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
net earnings
|
|
$ |
32,290 |
|
|
|
72,585 |
|
|
|
60,074 |
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiary
earnings before deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
income taxes and intercompany eliminations
|
|
|
11,070 |
|
|
|
7,555 |
|
|
|
12,321 |
|
Net
deferral of policy acquisition and
|
|
|
|
|
|
|
|
|
|
|
|
|
sales
inducement costs
|
|
|
36,303 |
|
|
|
24,533 |
|
|
|
29,716 |
|
Adjustment
of future policy benefits
|
|
|
37,991 |
|
|
|
(10,555 |
) |
|
|
(18,568 |
) |
Provision
for deferred Federal income taxes
|
|
|
(32,254 |
) |
|
|
(1,761 |
) |
|
|
(5,494 |
) |
Valuation
allowances and other-than-temporary
|
|
|
|
|
|
|
|
|
|
|
|
|
impairment
writedowns on investments
|
|
|
216 |
|
|
|
1,123 |
|
|
|
222 |
|
Decrease
in interest maintenance reserve
|
|
|
(2,261 |
) |
|
|
(2,217 |
) |
|
|
(1,179 |
) |
Stock
option compensation expense
|
|
|
1,143 |
|
|
|
(13,076 |
) |
|
|
(995 |
) |
Asset-backed
securities amortization adjustment
|
|
|
- |
|
|
|
- |
|
|
|
595 |
|
Other,
net
|
|
|
873 |
|
|
|
(1,844 |
) |
|
|
575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
net earnings
|
|
$ |
85,371 |
|
|
|
76,343 |
|
|
|
77,267 |
|
(J) Stock Compensation.
Under the fair value based method, compensation cost is measured at
the grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. For stock
options, fair value is determined using an option pricing model that takes into
account various information and assumptions regarding the Company's stock and
options. Under the intrinsic value based method, compensation cost is
the excess, if any, of the quoted market price of the stock at grant date or
other measurement date over the amount an employee must pay to acquire the
stock.
The
Company adopted Statement No. 123(R), Share-Based Payment ("SFAS
123(R)") as of January 1, 2006. However, because the Company began recognizing
stock-based employee compensation cost using the fair value based method of
accounting in 2003, the adoption did not have an impact on the consolidated
financial statements of the Company.
Effective
March 10, 2006, the Company began accounting for its share-based compensation
under the liability classification and measuring the compensation cost using the
fair value method at each reporting date.
(K) New Accounting
Pronouncements. 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 an 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 an effect on the Company's consolidated financial statements on the date of
adoption.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and requires additional disclosures
about fair value measurements. This Statement does not require any new fair
value measurements, but the application of this Statement could change current
practices in determining fair value. The Company plans to adopt this guidance
effective January 1, 2008. The Company is currently assessing the impact of
SFAS No. 157 on the Company's consolidated financial position and results
of operations.
In
September 2006, the FASB issued SFAS No. 158, Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106 and 132(R). This statement requires an employer
on a prospective basis to recognize the overfunded or underfunded status of its
defined benefit pension and postretirement plans as an asset or liability in its
statement of financial position and to recognize changes in that funded status
in the year in which the changes occur through comprehensive income. This
requirement, along with the required disclosures, is effective for fiscal years
ending after December 15, 2006. SFAS No. 158 also requires an employer
on a prospective basis to measure the funded status of its plans as of its
fiscal year-end, and is effective for fiscal years ending after
December 15, 2008.
Following
is the incremental impact of applying SFAS No. 158 on individual line items in
the consolidated balance sheet at December 31, 2006.
|
|
Before
|
|
|
|
|
|
After
|
|
|
|
Application
of
|
|
|
|
|
|
Application
of
|
|
|
|
Statement
158
|
|
|
Adjustments
|
|
|
Statement
158
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
$ |
71,914 |
|
|
|
8,766 |
|
|
|
80,680 |
|
Federal
income tax liability, deferred
|
|
|
35,275 |
|
|
|
(3,068 |
) |
|
|
32,207 |
|
Total
liabilities
|
|
|
5,754,761 |
|
|
|
5,698 |
|
|
|
5,760,459 |
|
Accumulated
other comprehensive income
|
|
|
1,967 |
|
|
|
(5,698 |
) |
|
|
(3,731 |
) |
Total
stockholders’ equity
|
|
|
938,682 |
|
|
|
(5,698 |
) |
|
|
932,984 |
|
In
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 does not currently anticipate an
impact from adopting SFAS No. 159.
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 160, Noncontrolling Interests in
Consolidated Financial Statements. SFAS 160 establishes accounting
and reporting standards for entities that have equity investments that are not
attributable directly to the parent, called noncontrolling interests or minority
interests. Specifically, SFAS 160 states where and how to report
noncontrolling interests in the consolidated statements of financial position
and operations, how to account for changes in noncontrolling interests and
provides disclosure requirements. The provisions of SFAS 160 are effective
beginning January 1, 2009. The Company is currently evaluating
the impact that the adoption of this statement will have on the consolidated
financial position, results of operations and disclosures.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 141(R), Business
Combinations. SFAS 141(R) establishes how an entity
accounts for the identifiable assets acquired, liabilities assumed, and any
noncontrolling interests acquired, how to account for goodwill acquired and
determines what disclosures are required as part of a business combination.
SFAS 141(R) applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008, early adoption is
prohibited. The Company is currently evaluating the impact that the adoption of
this statement will have on the consolidated financial position, results of
operations and disclosures.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company's present or future
consolidated financial statements.
Change
in Accounting
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 SFAS 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 |
|
(2)
DEPOSITS WITH REGULATORY AUTHORITIES
The
following assets were on deposit with state and other regulatory authorities as
required by law at the end of each year.
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
Debt
securities held to maturity
|
|
$ |
13,640 |
|
|
|
13,757 |
|
Debt
securities available for sale
|
|
|
692 |
|
|
|
612 |
|
Short-term
investments
|
|
|
502 |
|
|
|
501 |
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
14,834 |
|
|
|
14,870 |
|
(3)
INVESTMENTS
(A)
Investment Income
The major
components of net investment income are as follows:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
Gross
investment income:
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
$ |
309,708 |
|
|
|
306,129 |
|
|
|
293,502 |
|
Mortgage
loans
|
|
|
8,513 |
|
|
|
8,480 |
|
|
|
9,676 |
|
Policy
loans
|
|
|
6,302 |
|
|
|
6,354 |
|
|
|
6,409 |
|
Derivative
gains (losses)
|
|
|
(16,662 |
) |
|
|
43,279 |
|
|
|
(10,988 |
) |
Short-term
investments
|
|
|
7,059 |
|
|
|
3,118 |
|
|
|
1,416 |
|
Other
investment income
|
|
|
6,087 |
|
|
|
15,289 |
|
|
|
12,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment income
|
|
|
321,007 |
|
|
|
382,649 |
|
|
|
312,574 |
|
Investment
expenses
|
|
|
2,870 |
|
|
|
2,881 |
|
|
|
2,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
318,137 |
|
|
|
379,768 |
|
|
|
310,213 |
|
As of
December 31, 2007 and 2006 mortgage loans totaling $3.3 million and $4.8 million
were on non-accrual status, respectively. The Company had no mortgage
loans on non-accrual status as of December 31, 2005. Interest income
not recognized for past due loans totaled approximately $0.4 million in 2006 and
2007. There were no reductions in interest income in
2005. The Company had real estate investments that were non-income
producing for the preceding twelve months totaling $1.8 million and $1.7 million
at December 31, 2007 and 2006, respectively.
The
Company had investments in debt securities with carrying values totaling $0.6
million and $1.0 million as of December 31, 2007 and 2006, respectively that
have not produced income for the preceding 12 months. Reductions in
interest income associated with nonperforming investments in debt securities
totaled $0.3 million, $0.1 million, and $1.0 million in 2007, 2006, and 2005,
respectively.
(B)
Mortgage Loans and Real Estate
Concentrations
of credit risk arising from mortgage loans exist in relation to certain groups
of borrowers. A group concentration arises when a number of
counterparties have similar economic characteristics that would cause their
ability to meet contractual obligations to be similarly affected by changes in
economic or other conditions. The Company does not have a significant
exposure to any individual customer or counterparty.
Mortgage
loans with carrying values totaling $3.3 million and $4.8 million were
considered impaired as of December 31, 2007 and 2006,
respectively. No mortgage loans were considered impaired as of
December 31, 2005. For the years ended December 31, 2007, 2006, and
2005, average investments in impaired mortgage loans were $3.1 million, $0.3
million, and $0.1 million, respectively. Interest income recognized
on impaired loans for the years ended December 31, 2007 and 2006, was $469,000
and $76,000, respectively and none for the year ended December 31, 2005.
Impaired loans are typically placed on nonaccrual status, and no interest income
is recognized. However, if cash is received on the impaired loan, it
is applied to principal and interest on past due payments, beginning with the
most delinquent payment.
At
December 31, 2007 and 2006, the Company owned investment real estate totaling
$12.0 million and $12.1 million, respectively, which is reflected in other
long-term investments in the accompanying consolidated financial
statements. The Company records real estate at the lower of cost or
fair value less estimated costs to sell. Real estate values are
monitored and evaluated at least annually by the use of independent appraisals
or internal evaluations. Changes in market values affecting carrying
values are recorded as a valuation allowance which is reflected in realized
gains or losses on investments. The Company recorded a net gain on
real estate as a result of releasing allowances related to properties sold
totaling $0.1 million, $0.1 million, and $0.7 million for the years ended
December 31, 2007, 2006, and 2005, respectively.
(C)
Investment Gains and Losses
The table
below presents realized gains and losses for 2007, 2006, and 2005.
|
|
Realized
|
|
|
|
Investments
|
|
|
|
Gains
|
|
|
|
(Losses)
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Year
Ended December 31, 2007:
|
|
|
|
Securities
held to maturity
|
|
$ |
19 |
|
Securities
available for sale
|
|
|
4,654 |
|
Real
estate
|
|
|
72 |
|
Mortgage
loans and other
|
|
|
(1,248 |
) |
|
|
|
|
|
Totals
|
|
$ |
3,497 |
|
|
|
|
|
|
Year
Ended December 31, 2006:
|
|
|
|
|
Securities
held to maturity
|
|
$ |
26 |
|
Securities
available for sale
|
|
|
4,110 |
|
Real
estate
|
|
|
626 |
|
Mortgage
loans and other
|
|
|
(2,100 |
) |
|
|
|
|
|
Totals
|
|
$ |
2,662 |
|
|
|
|
|
|
Year
Ended December 31, 2005:
|
|
|
|
|
Securities
held to maturity
|
|
$ |
628 |
|
Securities
available for sale
|
|
|
2,176 |
|
Real
estate
|
|
|
6,713 |
|
Mortgage
loans and other
|
|
|
367 |
|
|
|
|
|
|
Totals
|
|
$ |
9,884 |
|
(D)
Debt and Equity Securities
The
tables below present amortized cost and fair values of securities held to
maturity and securities available for sale at December 31, 2007.
|
|
Securities
Held to Maturity
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In
thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and other U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
government
corporations
|
|
|
|
|
|
|
|
|
|
|
|
|
and
agencies
|
|
$ |
426,236 |
|
|
|
3,365 |
|
|
|
495 |
|
|
|
429,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States
and political subdivisions
|
|
|
13,287 |
|
|
|
24 |
|
|
|
40 |
|
|
|
13,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
governments
|
|
|
19,944 |
|
|
|
390 |
|
|
|
- |
|
|
|
20,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
397,639 |
|
|
|
9,272 |
|
|
|
4,838 |
|
|
|
402,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
1,194,260 |
|
|
|
16,984 |
|
|
|
19,039 |
|
|
|
1,192,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
|
1,646,432 |
|
|
|
9,340 |
|
|
|
17,463 |
|
|
|
1,638,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed
|
|
|
80,805 |
|
|
|
692 |
|
|
|
2,602 |
|
|
|
78,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
3,778,603 |
|
|
|
40,067 |
|
|
|
44,477 |
|
|
|
3,774,193 |
|
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In
thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and other U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
government
corporations
|
|
|
|
|
|
|
|
|
|
|
|
|
and
agencies
|
|
$ |
5,000 |
|
|
|
67 |
|
|
|
- |
|
|
|
5,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States
and political subdivisions
|
|
|
48,280 |
|
|
|
1,134 |
|
|
|
907 |
|
|
|
48,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
governments
|
|
|
10,473 |
|
|
|
466 |
|
|
|
- |
|
|
|
10,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
293,308 |
|
|
|
2,568 |
|
|
|
4,068 |
|
|
|
291,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
1,242,402 |
|
|
|
18,730 |
|
|
|
25,639 |
|
|
|
1,235,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
|
266,534 |
|
|
|
1,739 |
|
|
|
5,300 |
|
|
|
262,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed
|
|
|
26,227 |
|
|
|
412 |
|
|
|
425 |
|
|
|
26,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
12,275 |
|
|
|
8,851 |
|
|
|
1,413 |
|
|
|
19,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
1,904,499 |
|
|
|
33,967 |
|
|
|
37,752 |
|
|
|
1,900,714 |
|
The
tables below present amortized cost and fair values of securities held to
maturity and securities available for sale at December 31, 2006.
|
|
Securities
Held to Maturity
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In
thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and other U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
government
corporations
|
|
|
|
|
|
|
|
|
|
|
|
|
and
agencies
|
|
$ |
401,662 |
|
|
|
614 |
|
|
|
8,641 |
|
|
|
393,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States
and political subdivisions
|
|
|
13,282 |
|
|
|
18 |
|
|
|
145 |
|
|
|
13,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
governments
|
|
|
19,921 |
|
|
|
219 |
|
|
|
95 |
|
|
|
20,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
349,994 |
|
|
|
7,952 |
|
|
|
6,094 |
|
|
|
351,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
1,171,088 |
|
|
|
13,406 |
|
|
|
21,061 |
|
|
|
1,163,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
|
1,552,611 |
|
|
|
3,827 |
|
|
|
25,693 |
|
|
|
1,530,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed
|
|
|
94,876 |
|
|
|
1,037 |
|
|
|
1,153 |
|
|
|
94,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
3,603,434 |
|
|
|
27,073 |
|
|
|
62,882 |
|
|
|
3,567,625 |
|
|
|
Securities
Available for Sale
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
(In
thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury and other U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
government
corporations
|
|
|
|
|
|
|
|
|
|
|
|
|
and
agencies
|
|
$ |
45,893 |
|
|
|
17 |
|
|
|
- |
|
|
|
45,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States
and political subdivisions
|
|
|
43,090 |
|
|
|
2,353 |
|
|
|
98 |
|
|
|
45,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
governments
|
|
|
10,526 |
|
|
|
162 |
|
|
|
54 |
|
|
|
10,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
277,691 |
|
|
|
2,146 |
|
|
|
6,181 |
|
|
|
273,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
1,221,165 |
|
|
|
18,420 |
|
|
|
25,911 |
|
|
|
1,213,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
|
269,685 |
|
|
|
1,203 |
|
|
|
5,966 |
|
|
|
264,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed
|
|
|
26,977 |
|
|
|
369 |
|
|
|
122 |
|
|
|
27,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
12,427 |
|
|
|
8,927 |
|
|
|
151 |
|
|
|
21,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
1,907,454 |
|
|
|
33,597 |
|
|
|
38,483 |
|
|
|
1,902,568 |
|
Due to
the Company's investment policy of investing in high quality securities with the
primary intention of holding these securities until the stated maturity, the
portfolio has exposure to interest rate risk. Interest rate risk is
the risk that funds are invested today at a market interest rate and in the
future interest rates rise causing the current market price on that investment
to be lower. This risk is not a significant factor relative to the
Company's buy and hold portfolio, since the original intention was to receive
the stated interest rate and principal at maturity to match liability
requirements of policyholders. Also, the Company takes steps to
manage these risks. For example, the Company purchases the type of
mortgage-backed securities that have more predictable cash flow
patterns.
In
addition, the Company is exposed to credit risk which is continually monitored
relating to security holdings. Credit risk is the risk that an issuer
of a security will not be able to fulfill their obligations relative to a
security payment schedule. The Company has reviewed relative
information for all issuers in an unrealized loss position at December 31, 2007
including market pricing history, credit ratings, analyst reports as well as
data provided by issuers themselves to conclude on each specific issuer and make
the determination relating to other-than-temporary impairment. For
the securities that have not been impaired at December 31, 2007, the Company has
the ability and intent to hold these securities until recovery in fair value and
expects to receive all amounts due relative to principal and
interest.
The
Company held in its investment portfolio below investment grade debt securities
totaling $100.2 million and $146.6 million at December 31, 2007 and 2006,
respectively. These amounts represent 1.7% and 2.5% of total invested assets for
December 31, 2007 and 2006, respectively. Below investment grade
holdings are the result of downgrades subsequent to purchase, as the Company
only invests in high quality securities with ratings quoted as investment
grade. Below investment grade securities generally have greater
default risk than higher rated corporate debt. The issuers of these
securities are usually more sensitive to adverse industry or economic conditions
than are investment grade issuers. For the years ended December 31,
2007 2006, and 2005, the Company recorded realized losses totaling $0.1 million,
$0.1 million, and $2.0 million, respectively, for other-than-temporary
impairment writedowns on investments in debt securities.
The
following table shows the gross unrealized losses and fair values of the
Company's investments by investment category and length of time the individual
securities have been in a continuous unrealized loss position at December 31,
2007.
|
|
Less
than 12 Months
|
|
|
12
Months or Greater
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In
thousands)
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agencies
|
|
$ |
- |
|
|
|
- |
|
|
|
44,207 |
|
|
|
495 |
|
|
|
44,207 |
|
|
|
495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions
|
|
|
- |
|
|
|
- |
|
|
|
51,265 |
|
|
|
947 |
|
|
|
51,265 |
|
|
|
947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
governments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
64,761 |
|
|
|
487 |
|
|
|
278,788 |
|
|
|
8,420 |
|
|
|
343,549 |
|
|
|
8,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
183,923 |
|
|
|
3,131 |
|
|
|
1,049,803 |
|
|
|
41,545 |
|
|
|
1,233,726 |
|
|
|
44,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
|
39,181 |
|
|
|
164 |
|
|
|
1,049,492 |
|
|
|
22,598 |
|
|
|
1,088,673 |
|
|
|
22,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed
|
|
|
18,780 |
|
|
|
877 |
|
|
|
34,537 |
|
|
|
2,152 |
|
|
|
53,317 |
|
|
|
3,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
|
306,645 |
|
|
|
4,659 |
|
|
|
2,508,092 |
|
|
|
76,157 |
|
|
|
2,814,737 |
|
|
|
80,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
- |
|
|
|
- |
|
|
|
12,247 |
|
|
|
1,413 |
|
|
|
12,247 |
|
|
|
1,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
impaired
securities
|
|
$ |
306,645 |
|
|
|
4,659 |
|
|
|
2,520,339 |
|
|
|
77,570 |
|
|
|
2,826,984 |
|
|
|
82,229 |
|
Debt securities. The gross
unrealized losses for debt securities are made up of 334 individual issues, or
49% of the total debt securities held by the Company. The market value of these
bonds as a percent of amortized cost averages 97.2%. Of the 334 securities, 269,
or approximately 80%, fall in the 12 months or greater aging category; of the
334 debt securities, 315 were rated investment grade at December 31,
2007. Additional information on debt securities by investment
category is summarized below.
U.S. treasury and U.S. government
corporations and agencies. The unrealized losses on these
investments are the results of two securities. The contractual terms
of these investments do not permit the issuer to settle the securities at a
price less than par, and the Company has the ability and intent to hold these
investments until a recovery of fair value, which may be
maturity. Both of these securities are rated AAA. The
Company does not consider these investments to be other than temporarily
impaired at December 31, 2007.
State and political
subdivisions. The unrealized losses on these investments are
the result of holdings in eighteen securities. Of these securities,
sixteen are rated AAA, one is rated A+ and one is rated BB+. Based on
these facts and the Company's intent to hold to maturity, no
other-than-temporary loss was recognized as of December 31, 2007.
Foreign
government. No securities had a gross unrealized
loss.
Public
utilities. The market value as a percent of the amortized cost
is above 92% for each individual security. Of the 54 securities, all
are rated BBB or above except two, one is priced at 100% of par and the
other at 99.5% of par. At this time, the Company does not consider
any of these unrealized losses as other-than-temporary.
Corporate bonds. A total of
152 securities fall into this category with only eleven rated below investment
grade. Of the 141 that are investment grade, all but four securities have a
market value as a percent of amortized cost of at least 90%. Of the remaining
securities all have been reviewed based on the monitoring procedures described
previously including review of credit ratings, analyst reports, and issuer
information and are not considered other-than-temporarily impaired at December
31, 2007.
Mortgage-backed securities.
These securities are all rated AAA and priced at 91% of par or above. The
Company generally purchased these investments at a discount relative to their
face amount and it is expected that the securities will not be settled at a
price less than the stated par. Because the decline in market value
is attributable to changes in interest rates and not credit quality, and because
the Company has the ability and intent to hold these securities until a recovery
of fair value, which may be maturity, the Company does not consider these
investments to be other-than-temporarily impaired at December 31,
2007.
Asset-backed securities. Of
these securities, ten are rated AAA and are priced above 88% of par and are
not considered impaired. The other six securities are all monitored under EITF
99-20 and SFAS No. 115-1 impairment guidance and based on the cash flow analysis
only one security was impaired during the fourth quarter of 2007.
Equity
securities. The gross unrealized losses for equity securities
are made up of thirty-three individual issues. These holdings are
reviewed for impairment quarterly. As of December 31, 2007, one
equity security was impaired.
The
following table shows the gross unrealized losses and fair values of the
Company's investments by investment category and length of time the individual
securities have been in a continuous unrealized loss position at December 31,
2006.
|
|
Less
than 12 Months
|
|
|
12
Months or Greater
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
Debt
Securities:
|
|
(In
thousands)
|
|
U.S.
government
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agencies
|
|
$ |
84,630 |
|
|
|
544 |
|
|
|
260,838 |
|
|
|
8,097 |
|
|
|
345,468 |
|
|
|
8,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions
|
|
|
9,945 |
|
|
|
55 |
|
|
|
11,579 |
|
|
|
188 |
|
|
|
21,524 |
|
|
|
243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
governments
|
|
|
11,861 |
|
|
|
108 |
|
|
|
3,234 |
|
|
|
41 |
|
|
|
15,095 |
|
|
|
149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
111,575 |
|
|
|
946 |
|
|
|
264,522 |
|
|
|
11,329 |
|
|
|
376,097 |
|
|
|
12,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
394,499 |
|
|
|
5,937 |
|
|
|
955,626 |
|
|
|
41,035 |
|
|
|
1,350,125 |
|
|
|
46,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
|
313,895 |
|
|
|
4,130 |
|
|
|
1,033,452 |
|
|
|
27,529 |
|
|
|
1,347,347 |
|
|
|
31,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed
|
|
|
12,809 |
|
|
|
52 |
|
|
|
29,052 |
|
|
|
1,223 |
|
|
|
41,861 |
|
|
|
1,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
|
939,214 |
|
|
|
11,772 |
|
|
|
2,558,303 |
|
|
|
89,442 |
|
|
|
3,497,517 |
|
|
|
101,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
1,633 |
|
|
|
18 |
|
|
|
2,372 |
|
|
|
133 |
|
|
|
4,005 |
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
impaired
securities
|
|
$ |
940,847 |
|
|
|
11,790 |
|
|
|
2,560,675 |
|
|
|
89,575 |
|
|
|
3,501,522 |
|
|
|
101,365 |
|
The
amortized cost and fair value of investments in debt securities at December 31,
2007, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
|
|
Debt
Securities
|
|
|
Debt
Securities
|
|
|
|
Available
for Sale
|
|
|
Held
to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
in 1 year or less
|
|
$ |
184,744 |
|
|
|
185,186 |
|
|
|
111,437 |
|
|
|
112,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
after 1 year through 5 years
|
|
|
266,492 |
|
|
|
275,411 |
|
|
|
347,653 |
|
|
|
359,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
after 5 years through 10 years
|
|
|
1,038,149 |
|
|
|
1,022,240 |
|
|
|
1,332,063 |
|
|
|
1,327,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
after 10 years
|
|
|
110,078 |
|
|
|
108,977 |
|
|
|
260,213 |
|
|
|
258,226 |
|
|
|
|
1,599,463 |
|
|
|
1,591,814 |
|
|
|
2,051,366 |
|
|
|
2,056,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
and asset-backed securities
|
|
|
292,761 |
|
|
|
289,187 |
|
|
|
1,727,237 |
|
|
|
1,717,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,892,224 |
|
|
|
1,881,001 |
|
|
|
3,778,603 |
|
|
|
3,774,193 |
|
The
Company uses the specific identification method in computing realized gains and
losses. Proceeds from sales of securities available for sale during
2007, 2006, and 2005 totaled $35.0 million, $36.4 million, and $29.2 million,
respectively. Gross gains and losses realized on those sales are detailed
below.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Gross
realized gains
|
|
$ |
4,897 |
|
|
|
4,587 |
|
|
|
3,930 |
|
Gross
realized losses
|
|
|
(365 |
) |
|
|
(433 |
) |
|
|
(255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized gains
|
|
$ |
4,532 |
|
|
|
4,154 |
|
|
|
3,675 |
|
Due to
significant credit deterioration, bonds from the held to maturity portfolio were
sold during 2007 and 2005. The amortized cost of these bonds sold
totaled $5.2 million and $10.0 million, which resulted in realized gains of $0.2
million and $0.9 million for 2007 and 2005, respectively. No held to
maturity securities were transferred or sold during 2006. Due to a
significant decline in credit quality, the Company transferred debt securities
totaling $7.0 million in 2005 from the held to maturity portfolio to the
available for sale portfolio. Net unrealized gains of $0.2 million in 2005,
related to these transferred securities are included as a separate component of
accumulated other comprehensive income.
Except
for U.S. government agency mortgage-backed securities, the Company had no other
investments in any entity in excess of 10% of stockholders' equity at December
31, 2007 or 2006.
(E)
Transfers of Securities
On
January 1, 2001, the Company made transfers totaling $112 million to the held to
maturity category from securities available for sale. Lower holdings
of securities available for sale significantly reduce the Company's exposure to
equity volatility while still providing securities for liquidity and
asset/liability management purposes. The transfers of securities were
recorded at fair values in accordance with SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. This Statement requires that
the unrealized holding gain or loss at the date of the transfer continue to be
reported in a separate component of stockholders' equity and be amortized over
the remaining life of the security as an adjustment of yield in a manner
consistent with the amortization of any premium or discount. The
amortization of an unrealized holding gain or loss reported in equity will
offset or mitigate the effect on interest income of the amortization of the
premium or discount for the held to maturity securities. The transfer
of securities from available for sale to held to maturity had no effect on net
earnings of the Company. However, stockholders' equity was adjusted
as follows:
|
|
Net
Unrealized Gains (Losses)
|
|
|
|
as
of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
unamortized losses from transfers
|
|
$ |
(79 |
) |
|
|
(104 |
) |
|
|
(122 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of net unrealized losses related
|
|
|
|
|
|
|
|
|
|
|
|
|
to
transferred securities, net of effects of
|
|
|
|
|
|
|
|
|
|
|
|
|
deferred
costs and taxes
|
|
|
104 |
|
|
|
25 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
unamortized gains (losses) from transfers
|
|
$ |
25 |
|
|
|
(79 |
) |
|
|
(104 |
) |
(F) Net
Unrealized Gains on Available for Sale Securities
Net
unrealized gains on investment securities included in stockholders' equity at
December 31, 2007 and 2006, are as follows:
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
Gross
unrealized gains
|
|
$ |
33,967 |
|
|
|
33,597 |
|
Gross
unrealized losses
|
|
|
(37,752 |
) |
|
|
(38,483 |
) |
Adjustments
for:
|
|
|
|
|
|
|
|
|
Deferred
costs
|
|
|
5,568 |
|
|
|
9,849 |
|
Deferred
Federal income tax expense
|
|
|
(624 |
) |
|
|
(1,736 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
1,159 |
|
|
|
3,227 |
|
Net
unrealized gains (losses) related to securities
|
|
|
|
|
|
|
|
|
transferred
to held to maturity
|
|
|
25 |
|
|
|
(79 |
) |
|
|
|
|
|
|
|
|
|
Net
unrealized gains on investment securities
|
|
$ |
1,184 |
|
|
|
3,148 |
|
(4)
REINSURANCE
Effective
January 1, 2004, the Company began reinsuring any risk on any one life in excess
of $250,000, subject to a minimum session of $50,000. The Company's
general policy prior to December 31, 2003 was to reinsure that portion of any
risk in excess of $200,000 on the life of any one individual. The
Company is party to several reinsurance agreements. Total life
insurance in force was $17.6 billion and $15.9 billion at December 31, 2007 and
2006, respectively. Of these amounts, life insurance in force
totaling $5.0 billion and $4.1 billion was ceded to reinsurance companies,
primarily on a yearly renewable term basis, at December 31, 2007 and 2006,
respectively. In accordance with the reinsurance contracts,
reinsurance receivables including amounts related to claims incurred but not
reported and liabilities for future policy benefits totaled $9.6 million and
$16.5 million at December 31, 2007 and 2006, respectively. Premiums and contract
revenues were reduced by $16.3 million, $13.5 million, and $12.3 million for
reinsurance premiums incurred during 2007, 2006, and 2005, respectively. Benefit
expenses were reduced by $8.5 million, $17.7 million, and $8.2 million, for
reinsurance recoveries during 2007, 2006, and 2005, respectively. A contingent
liability exists with respect to reinsurance, as the Company remains liable if
the reinsurance companies are unable to meet their obligations under the
existing agreements. The Company does not assume
reinsurance.
(5)
FEDERAL INCOME TAXES
Total
Federal income taxes for 2007, 2006, and 2005 were allocated as
follows:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
(benefits) on earnings from continuing operations:
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
7,622 |
|
|
|
38,711 |
|
|
|
32,874 |
|
Deferred
|
|
|
32,254 |
|
|
|
1,761 |
|
|
|
6,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
on earnings
|
|
|
39,876 |
|
|
|
40,472 |
|
|
|
39,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
(benefits) on components of stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gains and losses on
|
|
|
|
|
|
|
|
|
|
|
|
|
securities
available for sale
|
|
|
(1,056 |
) |
|
|
(3,905 |
) |
|
|
(7,879 |
) |
Foreign
currency translation adjustments
|
|
|
(24 |
) |
|
|
(96 |
) |
|
|
70 |
|
Change
in benefit liability
|
|
|
(714 |
) |
|
|
(5,385 |
) |
|
|
(191 |
) |
Tax
benefit from exercise of stock options
|
|
|
- |
|
|
|
- |
|
|
|
(1,170 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Federal income taxes
|
|
$ |
38,082 |
|
|
|
31,086 |
|
|
|
30,448 |
|
The
provisions for Federal income taxes attributable to earnings from continuing
operations vary from amounts computed by applying the statutory income tax rate
to earnings before Federal income taxes. The reasons for the differences and the
corresponding tax effects are as follows:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense at statutory rate
|
|
$ |
43,837 |
|
|
|
40,885 |
|
|
|
40,910 |
|
Tax-exempt
income
|
|
|
(2,005 |
) |
|
|
(2,003 |
) |
|
|
(1,719 |
) |
Deferred
tax liability correction
|
|
|
(2,389 |
) |
|
|
- |
|
|
|
- |
|
Other
|
|
|
433 |
|
|
|
1,590 |
|
|
|
427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
on earnings from continuing operations
|
|
$ |
39,876 |
|
|
|
40,472 |
|
|
|
39,618 |
|
There
were no deferred taxes attributable to enacted tax rate changes for the years
ended December 31, 2007, 2006, and 2005.
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.
The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2007 and 2006
are presented below.
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Future
policy benefits, excess of financial
|
|
|
|
|
|
|
accounting
liabilities over tax liabilities
|
|
$ |
172,619 |
|
|
|
188,466 |
|
Debt
securities writedowns for financial
|
|
|
|
|
|
|
|
|
accounting
purposes
|
|
|
3,872 |
|
|
|
8,043 |
|
Capital
loss carryforward
|
|
|
- |
|
|
|
508 |
|
Pension
liabilities
|
|
|
6,099 |
|
|
|
5,385 |
|
Real
estate, principally due to writedowns
|
|
|
|
|
|
|
|
|
for
financial accounting purposes
|
|
|
- |
|
|
|
1,129 |
|
Accrued
operating expenses recorded for financial
|
|
|
|
|
|
|
|
|
accounting
purposes not currently tax deductible
|
|
|
5,396 |
|
|
|
6,877 |
|
Mortgage
loans, principally due to valuation
|
|
|
|
|
|
|
|
|
allowances
for financial accounting purposes
|
|
|
1,248 |
|
|
|
735 |
|
Accrued
and unearned investment income
|
|
|
|
|
|
|
|
|
recognized
for tax purposes and deferred for
|
|
|
|
|
|
|
|
|
financial
accounting purposes
|
|
|
193 |
|
|
|
160 |
|
Other
|
|
|
1,223 |
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
Total
gross deferred tax assets
|
|
|
190,650 |
|
|
|
211,393 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred
policy acquisition and sales inducement
|
|
|
|
|
|
|
|
|
costs,
principally expensed for tax purposes
|
|
|
(240,294 |
) |
|
|
(229,978 |
) |
Net
unrealized gains on securities available for sale
|
|
|
(639 |
) |
|
|
(1,695 |
) |
Debt
securities, principally due to deferred
|
|
|
|
|
|
|
|
|
market
discount for tax
|
|
|
(4,903 |
) |
|
|
(2,520 |
) |
Foreign
currency translation adjustments
|
|
|
(3,216 |
) |
|
|
(3,297 |
) |
Fixed
assets, due to different bases
|
|
|
(3,110 |
) |
|
|
(3,275 |
) |
Real
estate, principally due to differences in tax and
|
|
|
|
|
|
|
|
|
financial
accounting for depreciation
|
|
|
- |
|
|
|
(176 |
) |
Other
|
|
|
(208 |
) |
|
|
(2,659 |
) |
|
|
|
|
|
|
|
|
|
Total
gross deferred tax liabilities
|
|
|
(252,370 |
) |
|
|
(243,600 |
) |
|
|
|
|
|
|
|
|
|
Net
deferred tax liabilities
|
|
$ |
(61,720 |
) |
|
|
(32,207 |
) |
There was
no valuation allowance for deferred tax assets at December 31, 2007 and
2006. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred
tax liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely than
not that the Company will realize the benefits of these deductible
differences.
As
discussed in Note 1, the Company adopted FIN 48 in 2007. In connection with the
adoption, the Company assessed whether it had any significant uncertain tax
positions and determined that there were none. Accordingly, no reserve for
uncertain tax positions was recorded. Should the accrual of any interest or
penalties relative to unrecognized tax benefits be necessary, it is the
Company's policy to record such accruals in its income tax accounts; no such
accruals exist as of December 31, 2007. The Company and its corporate
subsidiaries file a consolidated U.S. federal income tax return, which is
subject to examination for all years after 2003.
The
Company files a consolidated Federal income tax return with its
subsidiaries. Allocation of the consolidated tax liability is based
on separate return calculations pursuant to the "wait-and-see" method as
described in sections 1.1552-1(a)(1) and 1.1502-33(d)(2) of the current Treasury
Regulations. Under this method, consolidated group members are not
given current credit for net losses until future net taxable income is generated
to realize such credits.
(6)
TRANSACTIONS WITH CONTROLLING STOCKHOLDER AND AFFILIATES
(A)
Life Interest in Libbie Shearn Moody Trust
The
Company's wholly-owned subsidiary, NWL Services, Inc., is the beneficial owner
of a life interest (1/8 share) in the net income of the trust estate of Libbie
Shearn Moody ("Trust") which was previously owned by Robert L. Moody, Chairman
of the Board of Directors of the Company. The Company has issued term
insurance policies on the life of Mr. Moody which are reinsured through
agreements with unaffiliated insurance companies. The Company is the
beneficiary of these policies for an amount equal to the statutory admitted
value of the Trust, which was $12.8 million at December 31, 2007. The excess of
the $27.0 million face amount of the reinsured policies over the statutory
admitted value of the Trust has been assigned to Mr. Moody. The recorded net
asset values in the accompanying consolidated financial statements for the life
interest in the Trust are as follows:
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
Original
valuation of life interest at February 26, 1960
|
|
$ |
13,793 |
|
|
|
13,793 |
|
Less
accumulated amortization
|
|
|
(12,173 |
) |
|
|
(11,858 |
) |
|
|
|
|
|
|
|
|
|
Carrying
basis at year end
|
|
$ |
1,620 |
|
|
|
1,935 |
|
Income
from the Trust and related expenses reflected in the accompanying consolidated
statements of earnings are summarized as follows:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Income
distributions
|
|
$ |
4,057 |
|
|
|
4,500 |
|
|
|
3,915 |
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
(314 |
) |
|
|
(312 |
) |
|
|
(308 |
) |
Reinsurance
premiums
|
|
|
(807 |
) |
|
|
(807 |
) |
|
|
(807 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income from life interest in the Trust
|
|
$ |
2,936 |
|
|
|
3,381 |
|
|
|
2,800 |
|
(B)
Common Stock
Robert L.
Moody, Chairman of the Board of Directors, owns 198,074 of the total outstanding
shares of the Company's Class B common stock and 1,159,096 of the Class A common
stock as of December 31, 2007.
Holders
of the Company's Class A common stock elect one-third of the Board of Directors
of the Company, and holders of the Class B common stock elect the remainder. Any
cash or in-kind dividends paid on each share of Class B common stock shall be
only one-half of the cash or in-kind dividends paid on each share of Class A
common stock. Also, in the event of liquidation of the Company, the Class A
stockholders shall first receive the par value of their shares; then the Class B
stockholders shall receive the par value of their shares; and the remaining net
assets of the Company shall be divided between the stockholders of both Class A
and Class B common stock, based on the number of shares held.
(7)
PENSION AND OTHER POSTRETIREMENT PLANS
(A)
Defined Benefit Pension Plans
The
Company sponsors a qualified defined benefit pension plan covering substantially
all employees. The plan provides benefits based on the participants' years of
service and compensation. The Company makes annual contributions to the plan
that comply with the minimum funding provisions of the Employee Retirement
Income Security Act of 1974 ("ERISA"). On October 19, 2007, the Company’s Board
of Directors approved an amendment to freeze the Pension Plan as of December 31,
2007. The freeze ceased future benefit accruals to all participants
and closed the Plan to any new participants. In addition, all participants
became 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. Fair values of plan assets and liabilities
are measured as of December 31 for the respective year. A detail of
plan disclosures is provided below.
Obligations
and Funded Status
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Changes
in projected benefit obligations:
|
|
|
|
|
|
|
Projected
benefit obligations at beginning of year
|
|
$ |
18,257 |
|
|
|
17,452 |
|
Service
cost
|
|
|
720 |
|
|
|
691 |
|
Interest
cost
|
|
|
1,086 |
|
|
|
1,021 |
|
Plan
curtailment
|
|
|
(801 |
) |
|
|
- |
|
Actuarial
(gain) loss
|
|
|
797 |
|
|
|
(67 |
) |
Benefits
paid
|
|
|
(1,445 |
) |
|
|
(840 |
) |
|
|
|
|
|
|
|
|
|
Projected
benefit obligations at end of year
|
|
|
18,614 |
|
|
|
18,257 |
|
|
|
|
|
|
|
|
|
|
Changes
in plan assets:
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
|
14,153 |
|
|
|
12,808 |
|
Actual
return on plan assets
|
|
|
699 |
|
|
|
1,175 |
|
Contributions
|
|
|
1,819 |
|
|
|
1,010 |
|
Benefits
paid
|
|
|
(1,445 |
) |
|
|
(840 |
) |
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at end of year
|
|
|
15,226 |
|
|
|
14,153 |
|
|
|
|
|
|
|
|
|
|
Funded
status at end of year
|
|
$ |
(3,388 |
) |
|
|
(4,104 |
) |
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
Amounts
recognized in the Company's consolidated
|
|
|
|
|
|
|
financial
statements:
|
|
|
|
|
|
|
Assets
|
|
$ |
- |
|
|
|
- |
|
Liabilities
|
|
|
(3,388 |
) |
|
|
(4,104 |
) |
|
|
|
|
|
|
|
|
|
Net
amount recognized
|
|
$ |
(3,388 |
) |
|
|
(4,104 |
) |
Amounts
recognized in accumulated other
|
|
|
|
|
|
|
comprehensive
income:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
5,608 |
|
|
|
5,532 |
|
Prior
service cost
|
|
|
31 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
Net
amount recognized
|
|
$ |
5,639 |
|
|
|
5,567 |
|
The
accumulated benefit obligation was $18.6 million and $17.0 million at December
31, 2007 and 2006, respectively.
Components
of Net Periodic Benefit Cost
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
Components
of net periodic benefit costs:
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
720 |
|
|
|
691 |
|
|
|
685 |
|
Interest
cost
|
|
|
1,086 |
|
|
|
1,021 |
|
|
|
974 |
|
Expected
return on plan assets
|
|
|
(1,100 |
) |
|
|
(947 |
) |
|
|
(910 |
) |
Amortization
of prior service cost
|
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
Amortization
of net loss
|
|
|
321 |
|
|
|
352 |
|
|
|
331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
|
1,031 |
|
|
|
1,121 |
|
|
|
1,084 |
|
Other
changes in plan assets and benefit obligations
|
|
|
|
|
|
|
|
|
|
recognized
in other comprehensive income:
|
|
|
|
|
|
|
|
|
|
Net
(gain) loss
|
|
|
396 |
|
|
|
(295 |
) |
|
|
|
|
Amortization
of prior service cost
|
|
|
(4 |
) |
|
|
(4 |
) |
|
|
|
|
Amortization
of net gain
|
|
|
(320 |
) |
|
|
(352 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
recognized in other comprehensive income
|
|
|
72 |
|
|
|
(651 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
recognized in net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
and
other comprehensive income
|
|
$ |
1,103 |
|
|
|
470 |
|
|
|
|
|
The
estimated net loss that will be amortized from accumulated other comprehensive
income into net periodic benefit cost over 2008 will be based on the average
expected future service of plan participants. The estimated prior
service cost that will be amortized from accumulated other comprehensive income
into net periodic benefit cost over 2008 will be minimal.
Assumptions
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Weighted-average
assumptions used to determine
|
|
|
|
|
|
|
benefit
obligations:
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.00
|
% |
|
|
6.00
|
% |
Rate
of compensation increase
|
|
|
4.50
|
% |
|
|
4.50
|
% |
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
assumptions used to determine
|
|
|
|
|
|
|
|
|
|
net
periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.00
|
% |
|
|
6.00
|
% |
|
|
6.00
|
% |
Expected
long-term return on plan assets
|
|
|
7.50
|
% |
|
|
7.50
|
% |
|
|
7.50
|
% |
Rate
of compensation increase
|
|
|
4.50
|
% |
|
|
4.50
|
% |
|
|
4.50
|
% |
The
assumed long-term rate of return on plan assets is generally set at the rate
expected to be earned based on the long-term investment policy of the plan and
the various classes of invested funds, based on the input of the plan's
investment advisors and consulting actuary and the plan's historic rate of
return. As of December 31, 2007, the plan's average 10-year and
inception-to-date returns were 5.50% and 7.73%, respectively.
Plan
Assets
The
plan's weighted-average asset allocations by asset category are as
follows:
|
|
December
31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Asset
Category
|
|
|
|
|
|
|
Equity
securities
|
|
59%
|
|
60%
|
|
57%
|
Debt
securities
|
|
35%
|
|
35%
|
|
34%
|
Cash
and cash equivalents
|
|
6%
|
|
5%
|
|
9%
|
|
|
|
|
|
|
|
Total
|
|
100%
|
|
100%
|
|
100%
|
The
Company has established and maintains an investment policy statement for the
assets held in the plan's trust. The investment strategies are of a
long-term nature and are designed to meet the following objectives:
·
|
ensure
that funds are available to pay benefits as they become
due
|
·
|
set
forth an investment structure detailing permitted assets and expected
allocation ranges among classes
|
·
|
insure
that plan assets are managed in accordance with
ERISA
|
The
investment policy statement sets forth the following acceptable ranges for each
asset's class.
Asset
Category
|
|
Acceptable
Range
|
Equity
securities
|
|
55-65%
|
Debt
securities
|
|
30-40%
|
Cash
|
|
0-15%
|
Deviations
from these ranges are permitted if such deviations are consistent with the duty
of prudence under ERISA. Investments in natural resources, venture
capital, precious metals, futures and options, real estate, and other vehicles
which do not have readily available objective valuations are not
permitted. Short sales, use of margin or leverage, and investment in
commodities and art objects are also prohibited.
The
investment policy statement is reviewed annually to insure that the objectives
are met considering any changes in benefit plan design, market conditions, or
other material considerations.
Contributions
The
Company expects to contribute $1.1 million to the plan in 2008.
Estimated
Future Benefit Payments
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in thousands):
2008
|
|
$ |
1,097 |
|
2009
|
|
|
1,141 |
|
2010
|
|
|
1,198 |
|
2011
|
|
|
1,268 |
|
2012
|
|
|
1,290 |
|
2013-2017
|
|
|
6,442 |
|
The
Company also sponsors three non-qualified defined benefit pension plans. The
first plan covers certain senior officers and provides benefits based on the
participants' years of service and compensation. The primary pension
obligations and administrative responsibilities of the plan are maintained by a
pension administration firm, which is a subsidiary of American National
Insurance Company ("ANICO"). ANICO has guaranteed the payment of pension
obligations under the plan. However, the Company has a contingent
liability with respect to the pension plan should these entities be unable to
meet their obligations under the existing agreements. Also, the Company has a
contingent liability with respect to the plan in the event that a plan
participant continues employment with the Company beyond age seventy, the
aggregate average annual participant salary increases exceed 10% per year, or
any additional employees become eligible to participate in the
plan. If any of these conditions are met, the Company would be
responsible for any additional pension obligations resulting from these
items. Amendments were made to this plan to allow an additional
employee to participate and to change the benefit formula for the Chairman of
the Company. As previously mentioned, these additional obligations
are a liability to the Company. Effective December 31, 2004, this
plan was frozen with respect to the continued accrual of benefits of the
Chairman and the President of the Company in order to comply with law changes
under the American Jobs Creation Act of 2004 ("Act").
Effective
July 1, 2005, the Company established a second non-qualified defined benefit
plan for the benefit of the Chairman of the Company. This plan is
intended to provide for post-2004 benefit accruals that mirror and supplement
the pre-2005 benefit accruals under the previously discussed non-qualified plan,
while complying with the requirements of the Act.
Effective
November 1, 2005, the Company established a third non-qualified defined benefit
plan for the benefit of the President of the Company. This plan in
intended to provide for post-2004 benefit accruals that supplement the pre-2005
benefit accruals under the first non-qualified plan as previously discussed,
while complying with the requirements of the Act.
A detail
of plan disclosures related to the amendments of the original plan and the
additional two plans is provided below:
Obligations
and Funded Status
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Changes
in projected benefit obligations:
|
|
|
|
|
|
|
Projected
benefit obligations at beginning of year
|
|
$ |
13,696 |
|
|
|
8,970 |
|
Service
cost
|
|
|
773 |
|
|
|
1,631 |
|
Interest
cost
|
|
|
962 |
|
|
|
708 |
|
Actuarial
loss
|
|
|
3,257 |
|
|
|
3,525 |
|
Benefits
paid
|
|
|
(1,584 |
) |
|
|
(1,138 |
) |
|
|
|
|
|
|
|
|
|
Projected
benefit obligations at end of year
|
|
|
17,104 |
|
|
|
13,696 |
|
|
|
|
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
|
- |
|
|
|
- |
|
Contributions
|
|
|
1,584 |
|
|
|
1,138 |
|
Benefits
paid
|
|
|
(1,584 |
) |
|
|
(1,138 |
) |
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at end of year
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Funded
status at end of year
|
|
$ |
(17,104 |
) |
|
|
(13,696 |
) |
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Amounts
recognized in the Company's consolidated
|
|
|
|
|
|
|
financial
statements:
|
|
|
|
|
|
|
Assets
|
|
$ |
- |
|
|
|
- |
|
Liabilities
|
|
|
(17,104 |
) |
|
|
(13,696 |
) |
|
|
|
|
|
|
|
|
|
Net
amount recognized
|
|
$ |
(17,104 |
) |
|
|
(13,696 |
) |
Amounts
recognized in accumulated other
|
|
|
|
|
|
|
comprehensive
income:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
6,532 |
|
|
|
3,679 |
|
Prior
service cost
|
|
|
3,591 |
|
|
|
4,630 |
|
|
|
|
|
|
|
|
|
|
Net
amount recognized
|
|
$ |
10,123 |
|
|
|
8,309 |
|
The
accumulated benefit obligation was $13.7 million and $10.5 million at December
31, 2007 and 2006, respectively.
Components
of Net Periodic Benefit Cost
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
773 |
|
|
|
1,631 |
|
|
|
1,295 |
|
Interest
cost
|
|
|
962 |
|
|
|
708 |
|
|
|
292 |
|
Amortization
of prior service cost
|
|
|
1,039 |
|
|
|
1,040 |
|
|
|
647 |
|
Amortization
of net loss
|
|
|
404 |
|
|
|
182 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
|
3,178 |
|
|
|
3,561 |
|
|
|
2,234 |
|
Other
changes in plan assets and benefit obligations
|
|
|
|
|
|
|
|
|
|
recognized
in other comprehensive income:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
3,257 |
|
|
|
3,525 |
|
|
|
|
|
Amortization
of prior service cost
|
|
|
(1,039 |
) |
|
|
(1,040 |
) |
|
|
|
|
Amortization
of net gain
|
|
|
(404 |
) |
|
|
(182 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
recognized in other comprehensive income
|
|
|
1,814 |
|
|
|
2,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
recognized in net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
and
other comprehensive income
|
|
$ |
4,992 |
|
|
|
5,864 |
|
|
|
|
|
The
estimated net loss that will be amortized from accumulated other comprehensive
income into net periodic benefit cost over 2008 will be based on the average
expected future service of plan participants. The estimated prior
service cost that will be amortized from accumulated other comprehensive income
into net periodic benefit cost over 2008 will be $1.0
million.
Assumptions
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Weighted-average
assumptions used to determine
|
|
|
|
|
|
|
benefit
obligations:
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.00 |
% |
|
|
6.00 |
% |
Rate
of compensation increase
|
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
assumptions used to determine
|
|
|
|
|
|
|
|
|
|
net
periodic benefit costs:
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.00 |
% |
|
|
6.00 |
% |
|
|
6.00 |
% |
Expected
long-term return on plan assets
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Rate
of compensation increase
|
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
4.00 |
% |
The plan
is unfunded and therefore no assumption has been made related to the expected
long-term return on plan assets.
Plan
Assets
The plan
is unfunded and therefore had no assets at December 31, 2007 or
2006.
Contributions
The
Company expects to contribute $1.7 million to the plan in 2008.
Estimated
Future Benefit Payments
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in thousands):
2008
|
|
$ |
1,708 |
|
2009
|
|
|
1,866 |
|
2010
|
|
|
1,863 |
|
2011
|
|
|
1,859 |
|
2012
|
|
|
1,859 |
|
2013-2017
|
|
|
9,296 |
|
(B)
Defined Contribution Pension Plans
In
addition to the defined benefit pension plans, the Company sponsors a qualified
401(k) plan for substantially all employees and a non-qualified deferred
compensation plan primarily for senior officers. The Company makes
annual contributions to the 401(k) plan of two percent of each employee's
compensation. Additional Company matching contributions of up to two percent of
each employee's compensation are also made each year based on the employee's
personal level of salary deferrals to the plan. All Company contributions are
subject to a vesting schedule based on the employee's years of service. For the
years ended December 31, 2007, 2006, and 2005, Company contributions totaled
$432,000, $423,000, and $410,000, respectively.
The
non-qualified deferred compensation plan was established to allow eligible
employees to defer the payment of a percentage of their compensation and to
provide for additional Company contributions. Company contributions are subject
to a vesting schedule based on the employee's years of service. For the years
ended December 31, 2007, 2006, and 2005, Company contributions totaled $61,000,
$32,000, and $50,000, respectively.
(C) Defined
Benefit Postretirement Plans
The
Company sponsors two health care plans that were amended in 2004 to provide
postretirement benefits to certain fully-vested individuals. The
plans are unfunded. The Company uses a December 31 measurement date
for the plans. A detail of plan disclosures related to these plans is
provided below:
Obligations
and Funded Status
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Changes
in projected benefit obligations:
|
|
|
|
|
|
|
Projected
benefit obligations at beginning of year
|
|
$ |
2,053 |
|
|
|
1,746 |
|
Interest
cost
|
|
|
141 |
|
|
|
117 |
|
Actuarial
gain
|
|
|
287 |
|
|
|
244 |
|
Benefits
paid
|
|
|
(31 |
) |
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
Projected
benefit obligations at end of year
|
|
|
2,450 |
|
|
|
2,053 |
|
|
|
|
|
|
|
|
|
|
Changes
in plan assets:
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
|
- |
|
|
|
- |
|
Contributions
|
|
|
31 |
|
|
|
54 |
|
Benefits
paid
|
|
|
(31 |
) |
|
|
(54 |
) |
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at end of year
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Funded
status at end of year
|
|
$ |
(2,450 |
) |
|
|
(2,053 |
) |
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Amounts
recognized in the Company's consolidated
|
|
|
|
|
|
|
financial
statements:
|
|
|
|
|
|
|
Assets
|
|
$ |
- |
|
|
|
- |
|
Liabilities
|
|
|
(2,450 |
) |
|
|
(2,053 |
) |
|
|
|
|
|
|
|
|
|
Net
amount recognized
|
|
$ |
(2,450 |
) |
|
|
(2,053 |
) |
Amounts
recognized in accumulated other
|
|
|
|
|
|
|
comprehensive
income:
|
|
|
|
|
|
|
Net
gain
|
|
$ |
478 |
|
|
|
221 |
|
Prior
service cost
|
|
|
1,186 |
|
|
|
1,289 |
|
|
|
|
|
|
|
|
|
|
Net
amount recognized
|
|
$ |
1,664 |
|
|
|
1,510 |
|
Components
of Net Periodic Benefit Cost
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
Interest
cost
|
|
$ |
141 |
|
|
|
117 |
|
|
|
100 |
|
Amortization
of prior service costs
|
|
|
103 |
|
|
|
103 |
|
|
|
103 |
|
Amortization
of net loss
|
|
|
29 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
|
273 |
|
|
|
220 |
|
|
|
203 |
|
Other
change in plan assets and benefit obligations
|
|
|
|
|
|
|
|
|
|
recognized
in other comprehensive income:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
287 |
|
|
|
244 |
|
|
|
|
|
Amortization
of prior service cost
|
|
|
(103 |
) |
|
|
(103 |
) |
|
|
|
|
Amortization
of net gain
|
|
|
(29 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
recognized in other comprehensive income
|
|
|
155 |
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
recognized in net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
and
other comprehensive income
|
|
$ |
428 |
|
|
|
361 |
|
|
|
|
|
The
estimated net loss that will be amortized from accumulated other comprehensive
income into net periodic benefit cost over 2008 will be based on the average
expected future service of plan participants. The estimated prior
service cost that will be amortized from accumulated other comprehensive income
into net periodic benefit cost over 2008 will be $0.1
million.
Assumptions
A
weighted-average discount rate assumption of 6% was used to determine benefit
obligations and net periodic benefit cost as of and for the years ended December
31, 2007 and 2006. No assumption was made related to the expected
long-term return on plan assets as the plan is unfunded.
For
measurement purposes, an 8% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 2008 and future years.
Assumed
health care trend rates have a significant effect on the amounts reported for
the health care plans. A 1% point change in assumed health care cost
trend rates would have the following effects for the years ended December
31:
|
|
2007
|
|
|
2006
|
|
|
|
1%
Point
|
|
|
1%
Point
|
|
|
1%
Point
|
|
|
1%
Point
|
|
|
|
Increase
|
|
|
Decrease
|
|
|
Increase
|
|
|
Decrease
|
|
|
|
(In
thousands)
|
|
Effect
on total of service and interest
|
|
|
|
|
|
|
|
|
|
|
|
|
cost
components
|
|
$ |
32 |
|
|
|
(24) |
|
|
|
27
|
|
|
|
(20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
on postretirement benefit obligation
|
|
$ |
560 |
|
|
|
(428)
|
|
|
|
468
|
|
|
|
(357)
|
|
Plan
Assets
The plans
are unfunded and therefore had no assets at December 31, 2007 and
2006.
Contributions
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in thousands):
2008
|
|
$ |
75 |
|
2009
|
|
|
81 |
|
2010
|
|
|
88 |
|
2011
|
|
|
95 |
|
2012
|
|
|
102 |
|
2013-2017
|
|
|
648 |
|
The
Company expects to recognize $1.1 million of net prior service cost and $0.8
million of net loss as net periodic benefit cost in 2008 for the defined benefit
plans.
(8)
SHORT-TERM BORROWINGS
The
Company has available a $40 million bank line of credit primarily for cash
management purposes relating to investment transactions. The Company
is required to maintain a collateral security deposit in trust with the
sponsoring bank equal to 120% of any outstanding liability. The Company had no
outstanding liabilities or collateral security deposits with the bank at
December 31, 2007 or 2006.
(9)
COMMITMENTS AND CONTINGENCIES
(A)
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 on April 11, 2007 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. By letter of June 5, 2007
from the IRS to the Company, the IRS concurred that based on the results of the
Technical Advice Memorandum, there was no excise tax owed by the Company for the
years under review. 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
National Western Life. Management believes that the Company has good
and meritorious defenses and intends to continue to vigorously defend itself
against these claims. A second class action lawsuit is in discovery
with no class certification motion pending. The third class action
lawsuit was certified as a class by the trail court, but ultimately reversed by
the Texas Supreme Court. Thereupon the plaintiff filed a new motion
for class certification which was denied by the trail court. The
Plaintiff filed a notice of appeal, which has not been perfected. The
Plaintiff and the Company have since filed a joint motion informing the Court of
Appeals that the parties have reached a comprehensive settlement and that the
parties jointly request the court to dismiss the appeal and remand the case to
District Court for an agreed dismissal with prejudice to be entered by the
District Court.
The
Company is involved or may become involved in various other legal actions, in
the normal course of business, in which claims for alleged economic and punitive
damages have been or may be asserted, some for substantial amounts. Although
there can be no assurances, at the present time, the Company does not anticipate
that the ultimate liability arising from potential, pending, or threatened legal
actions, will have a material adverse effect on the financial condition or
operating results of the Company.
(B)
Financial Instruments
In order
to meet the financing needs of its customers in the normal course of business,
the Company is a party to financial instruments with off-balance sheet risk.
These financial instruments are commitments to extend credit which involve
elements of credit and interest rate risk in excess of the amounts recognized in
the consolidated balance sheet.
The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual amounts, assuming that the amounts are fully
advanced and that collateral or other security is of no value. Commitments to
extend credit are legally binding agreements to lend to a customer that
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Commitments do not necessarily represent future
liquidity requirements, as some could expire without being drawn upon. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The Company controls
the credit risk of these transactions through credit approvals, limits, and
monitoring procedures. The Company had no commitments to extend
credit relating to mortgage loans at December 31, 2007. The Company evaluates
each customer's creditworthiness on a case-by-case basis. In
addition, the Company had commitments at December 31, 2007, of approximately
$12.0 million which were approved by the Company’s Board of Directors for the
construction of a nursing home facility in Central Texas with approximately $8.1
million remaining to be funded.
(C)
Guaranty Association Assessments
The
Company is subject to state guaranty association assessments in all states in
which it is licensed to do business. These associations generally
guarantee certain levels of benefits payable to resident policyholders of
insolvent insurance companies. Many states allow premium tax credits for all or
a portion of such assessments, thereby allowing potential recovery of these
payments over a period of years. However, several states do not allow
such credits.
The
Company estimates its liabilities for guaranty association assessments by using
the latest information available from the National Organization of Life and
Health Insurance Guaranty Associations. The Company monitors and
revises its estimates for assessments as additional information becomes
available which could result in changes to the estimated
liabilities. As of December 31, 2007 and 2006, liabilities for
guaranty association assessments totaled $1.3 million and $1.7 million,
respectively. Other operating expenses related to state guaranty association
assessments were minimal for the years ended December 31, 2007, 2006, and
2005.
(D)
Leases
The
Company leases its executive office building and various computer and other
office related equipment under operating leases. Rental expenses for these
leases were $0.9 million for the years ended December 31, 2007, 2006, and
2005. Total future annual lease obligations as of December 31, 2007,
are as follows (in thousands):
2008
|
|
$ |
846 |
|
2009
|
|
|
846 |
|
2010 |
|
|
331 |
|
2011
and thereafter, in aggregate
|
|
|
- |
|
|
|
|
|
|
Total
|
|
$ |
2,023 |
|
(E) Compensation
Plan
Effective
January 1, 2006, the Company implemented a Non-Qualified Deferred Compensation
Plan to provide incentive bonuses to eligible agents. Agents qualify
for participation by meeting certain sales goals each year. Company
contributions are subject to a vesting schedule based on the agents’ years of
qualification in the plan. The Company expects to contribute $0.5
million to the plan in 2008.
(10)
STOCKHOLDERS' EQUITY
(A)
Changes in Common Stock Shares Outstanding
Details
of changes in shares of common stock outstanding are provided
below.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock shares outstanding:
|
|
|
|
|
|
|
|
|
|
Shares
outstanding at beginning of year
|
|
|
3,621 |
|
|
|
3,613 |
|
|
|
3,584 |
|
Shares
exercised under stock option plan
|
|
|
1 |
|
|
|
8 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
outstanding at end of year
|
|
|
3,622 |
|
|
|
3,621 |
|
|
|
3,613 |
|
(B)
Dividend Restrictions
The
Company is restricted by state insurance laws as to dividend amounts which may
be paid to stockholders without prior approval from the Colorado Division of
Insurance. The restrictions are based on statutory earnings and
surplus levels of the Company. The maximum dividend payment which may
be made without prior approval in 2008 was $70.7 million. On August
24, 2007, the Board of Directors of the Company declared a cash dividend to
stockholders on record as of October 31, 2007 and payable November 29,
2007. The dividends approved were $0.36 per common share to Class A
stockholders and $0.18 per common share to Class B stockholders.
(C)
Regulatory Capital Requirements
The
Colorado Division of Insurance imposes minimum risk-based capital requirements
on insurance companies that were developed by the National Association of
Insurance Commissioners ("NAIC"). The formulas for determining the
amount of risk-based capital ("RBC") specify various weighting factors that are
applied to statutory financial balances or various levels of activity based on
the perceived degree of risk. Regulatory compliance is determined by
a ratio of the Company's regulatory total adjusted capital to its authorized
control level RBC, as defined by the NAIC. Companies below specific
trigger points or ratios are classified within certain levels, each of which
requires specified corrective action. The Company's current statutory
capital and surplus is significantly in excess of all RBC
requirements.
(D)
Share-Based Payments
The
Company has a stock and incentive plan ("Plan") which provides for the grant of
any or all of the following types of awards to eligible
employees: (1) stock options, including incentive stock options and
nonqualified stock options; (2) stock appreciation rights,
in tandem with stock options or
freestanding; (3) restricted stock;
(4) incentive awards; and (5) performance
awards. The Plan began on April 21, 1995, and was to terminate on
April 20, 2005, unless terminated earlier by the Board of
Directors. The Plan was amended on June 25, 2004 to extend the
termination date to April 20, 2010. The number of shares of Class A,
$1.00 par value, common stock which may be issued under the Plan, or as to which
stock appreciation rights or other awards may be granted, may not exceed
300,000. These shares may be authorized and unissued shares or
treasury shares. The Company has only issued nonqualified stock
options.
All of
the employees of the Company and its subsidiaries are eligible to participate in
the Plan. In addition, directors of the Company, other than
Compensation and Stock Option Committee members, are eligible for restricted
stock awards, incentive awards, and performance awards. Company
directors, including members of the Compensation and Stock Option Committee, are
eligible for nondiscretionary stock options. The directors' stock options vest
20% annually following one full year of service to the Company from the date of
grant. The officers' and employees’ 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 awards, and as
such, utilized the grant date fair value method to measure
compensation. Effective March 10, 2006, as more fully described
below, the Company's Plan classification was changed to liability and
accordingly, the Company began using the current fair value method to measure
compensation cost. For the years ended December 31, 2007 and 2006,
the liability balance was $7.7 million and $13.2 million,
respectively. A summary of shares available for grant and stock
option activity is detailed below.
|
|
|
|
|
Options
Outstanding
|
|
|
|
Shares
|
|
|
|
|
|
Weighted-
|
|
|
|
Available
|
|
|
|
|
|
Average
|
|
|
|
For
Grant
|
|
|
Shares
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
26,477 |
|
|
|
128,465 |
|
|
$ |
123.00 |
|
Stock
Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
- |
|
|
|
(32,290 |
) |
|
|
106.72 |
|
Forfeited
|
|
|
1,110 |
|
|
|
(1,110 |
) |
|
|
131.23 |
|
Expired
|
|
|
81 |
|
|
|
(81 |
) |
|
|
85.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
27,668 |
|
|
|
94,984 |
|
|
$ |
128.47 |
|
The total
intrinsic value of options exercised was $4.6 million, $3.3 million, and $3.3
million for the years ended December 31, 2007, 2006, and 2005,
respectively. The total share-based liabilities paid were $4.4
million and $2.2 million for the years ended 2007 and 2006,
respectively. For the years ended December 31, 2007 and 2006, the
total cash received from the exercise of options under the Plan was $0.1 million
and $0.5 million, respectively. The total fair value of shares vested
during 2007 and 2006 was $3.2 million and $2.6 million,
respectively.
The
following table summarizes information about stock options outstanding at
December 31, 2007.
|
|
Options
Outstanding
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Options
|
|
|
|
Outstanding
|
|
|
Contractual
Life
|
|
|
Exercisable
|
|
Exercise
prices:
|
|
|
|
|
|
|
|
|
|
$
105.25 |
|
|
7,130 |
|
|
|
0.3
years |
|
|
7,130 |
|
112.38
|
|
|
4,800 |
|
|
|
0.5
years |
|
|
|
4,800 |
|
92.13
|
|
|
20,054 |
|
|
|
3.3
years |
|
|
|
13,186 |
|
95.00
|
|
|
7,000 |
|
|
|
3.5
years |
|
|
|
7,000 |
|
150.00
|
|
|
56,000 |
|
|
|
6.4
years |
|
|
|
12,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
94,984 |
|
|
|
|
|
|
|
44,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
intrinsic value
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
$ |
7,494 |
|
|
|
|
|
|
$ |
4,213 |
|
The
aggregate intrinsic value in the table above is based on the closing stock price
of $207.37 per share on December 31, 2007.
In
estimating the fair value of the options outstanding at December 31, the Company
employed the Black-Scholes option pricing model with assumptions as detailed
below.
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Expected
term of options
|
|
2
to 6 years
|
|
|
2
to 6 years
|
|
Expected
volatility:
|
|
|
|
|
|
|
Range
|
|
18.84%
to 27.56
|
%
|
|
15.60%
to 24.43
|
%
|
Weighted-average
|
|
|
22.25 |
% |
|
|
19.81 |
% |
Expected
dividend yield
|
|
|
0.17 |
% |
|
|
- |
|
Risk-free
rate:
|
|
|
|
|
|
|
|
|
Range
|
|
3.02%
to 3.68
|
%
|
|
4.69%
to 5.01
|
%
|
Weighted-average
|
|
|
3.28 |
% |
|
|
4.79 |
% |
The
Company reviewed the contractual term relative to the options as well as
perceived future behavior patterns of exercise. Volatility is based
on the Company's historical volatility over the expected term.
The
pre-tax compensation cost recognized in the financial statements related to the
Plan was $(1.1) million, $13.1 million, and $0.9 million for the years ended
December 31, 2007, 2006, and 2005, respectively. The related tax
(expense)/benefit recognized was $(0.4) million and $4.6 million for the years
ended December 31, 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.
For the
years ended December 31, 2007 and 2006, the total compensation cost related to
nonvested options not yet recognized was $1.1 million and $2.9
million. This amount is expected to be recognized over a
weighted-average period of 2 years. The Company recognizes
compensation cost over the graded vesting periods.
(11)
EARNINGS PER SHARE
Earnings
per share amounts for the Company are presented using two different
computations. Basic earnings per share excludes dilutive effects of
certain securities or contracts, such as stock options, and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Stock options not included in the weighted-average number of diluted
shares because such shares would have been anti-dilutive were
immaterial. In prior years, earnings per share were presented as one
class of stock. In the current year, the Company determined that U.S.
GAAP requires a two-class presentation for the Company’s two classes of common
stock (Note 6B). Accordingly, the earnings per share for both Class A
and Class B are now being presented. Prior year amounts have been
adjusted to reflect the two-class presentation. The following table
sets forth the computations of basic and diluted earnings per
share.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Class
A
|
|
|
Class
B
|
|
|
Class
A
|
|
|
Class
B
|
|
|
Class
A
|
|
|
Class
B
|
|
|
|
(In
thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for Basic and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
85,371 |
|
|
|
|
|
|
76,343 |
|
|
|
|
|
|
77,267 |
|
|
|
|
Dividends
– Class A shares
|
|
|
(1,232 |
) |
|
|
|
|
|
(1,231 |
) |
|
|
|
|
|
(1,160 |
) |
|
|
|
Dividends
– Class B shares
|
|
|
(36 |
) |
|
|
|
|
|
(36 |
) |
|
|
|
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed
income
|
|
$ |
84,103 |
|
|
|
|
|
|
75,076 |
|
|
|
|
|
|
76,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
of net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
$ |
1,232 |
|
|
|
36 |
|
|
|
1,231 |
|
|
|
36 |
|
|
|
1,160 |
|
|
|
34 |
|
Allocation
of undistributed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
|
|
|
81,715 |
|
|
|
2,388 |
|
|
|
72,944 |
|
|
|
2,132 |
|
|
|
73,908 |
|
|
|
2,165 |
|
Cumulative
effect of change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
accounting principle
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
82,947 |
|
|
|
2,424 |
|
|
|
74,175 |
|
|
|
2,168 |
|
|
|
75,068 |
|
|
|
2,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted-average
shares
|
|
|
3,422 |
|
|
|
200 |
|
|
|
3,421 |
|
|
|
200 |
|
|
|
3,413 |
|
|
|
200 |
|
Effect
of dilutive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
options
|
|
|
42 |
|
|
|
- |
|
|
|
36 |
|
|
|
- |
|
|
|
35 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjusted
weighted-average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
for assumed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversions
|
|
|
3,464 |
|
|
|
200 |
|
|
|
3,457 |
|
|
|
200 |
|
|
|
3,448 |
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share
|
|
$ |
24.24 |
|
|
|
12.12 |
|
|
|
21.69 |
|
|
|
10.84 |
|
|
|
22.06 |
|
|
|
11.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share
|
|
$ |
23.95 |
|
|
|
12.12 |
|
|
|
21.46 |
|
|
|
10.84 |
|
|
|
21.83 |
|
|
|
11.00 |
|
(12)
COMPREHENSIVE INCOME
SFAS No.
130, Reporting Comprehensive
Income establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. This Statement requires that
all items required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This statement
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial
position.
SFAS No.
130 affects the Company's reporting presentation of certain items such as
foreign currency translation adjustments, unrealized gains and losses on
investment securities, and minimum pension liabilities. These items
are reflected as components of other comprehensive income, as reported in the
accompanying consolidated financial statements. Components of other
comprehensive income and the related tax effect are provided below for 2007,
2006, and 2005.
|
|
Amounts
|
|
|
Tax
|
|
|
Amounts
|
|
|
|
Before
|
|
|
(Expense)
|
|
|
Net
of
|
|
|
|
Taxes
|
|
|
Benefit
|
|
|
Taxes
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on securities, net of effects
|
|
|
|
|
|
|
|
|
|
of
deferred costs of $4,415:
|
|
|
|
|
|
|
|
|
|
Net
unrealized holding gains
|
|
|
|
|
|
|
|
|
|
arising
during period
|
|
$ |
1,593 |
|
|
|
(558 |
) |
|
|
1,035 |
|
Reclassification
adjustment for net
|
|
|
|
|
|
|
|
|
|
|
|
|
gains
included in net earnings
|
|
|
(4,773 |
) |
|
|
1,670 |
|
|
|
(3,103 |
) |
Amortization
of net unrealized losses
|
|
|
|
|
|
|
|
|
|
|
|
|
related
to transferred securities
|
|
|
160 |
|
|
|
(56 |
) |
|
|
104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized losses on securities
|
|
|
(3,020 |
) |
|
|
1,056 |
|
|
|
(1,964 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(68 |
) |
|
|
24 |
|
|
|
(44 |
) |
Pension
liability adjustment
|
|
|
(2,040 |
) |
|
|
714 |
|
|
|
(1,326 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss)
|
|
$ |
(5,128 |
) |
|
|
1,794 |
|
|
|
(3,334 |
) |
|
|
Amounts
|
|
|
Tax
|
|
|
Amounts
|
|
|
|
Before
|
|
|
(Expense)
|
|
|
Net
of
|
|
|
|
Taxes
|
|
|
Benefit
|
|
|
Taxes
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on securities, net of effects
|
|
|
|
|
|
|
|
|
|
of
deferred costs of $12,702:
|
|
|
|
|
|
|
|
|
|
Net
unrealized holding losses
|
|
|
|
|
|
|
|
|
|
arising
during period
|
|
$ |
(6,988 |
) |
|
|
2,446 |
|
|
|
(4,542 |
) |
Reclassification
adjustment for net
|
|
|
|
|
|
|
|
|
|
|
|
|
gains
included in net earnings
|
|
|
(4,209 |
) |
|
|
1,473 |
|
|
|
(2,736 |
) |
Amortization
of net unrealized losses
|
|
|
|
|
|
|
|
|
|
|
|
|
related
to transferred securities
|
|
|
39 |
|
|
|
(14 |
) |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized losses on securities
|
|
|
(11,158 |
) |
|
|
3,905 |
|
|
|
(7,253 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(274 |
) |
|
|
96 |
|
|
|
(178 |
) |
Pension
liability adjustment
|
|
|
(1,793 |
) |
|
|
627 |
|
|
|
(1,166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss)
|
|
$ |
(13,225 |
) |
|
|
4,628 |
|
|
|
(8,597 |
) |
|
|
Amounts
|
|
|
Tax
|
|
|
Amounts
|
|
|
|
Before
|
|
|
(Expense)
|
|
|
Net
of
|
|
|
|
Taxes
|
|
|
Benefit
|
|
|
Taxes
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on securities, net of effects
|
|
|
|
|
|
|
|
|
|
of
deferred costs of $(26,704):
|
|
|
|
|
|
|
|
|
|
Net
unrealized holding losses
|
|
|
|
|
|
|
|
|
|
arising
during period
|
|
$ |
(20,919 |
) |
|
|
7,322 |
|
|
|
(13,597 |
) |
Reclassification
adjustment for net
|
|
|
|
|
|
|
|
|
|
|
|
|
gains
included in net earnings
|
|
|
(1,930 |
) |
|
|
676 |
|
|
|
(1,254 |
) |
Amortization
of net unrealized losses
|
|
|
|
|
|
|
|
|
|
|
|
|
related
to transferred securities
|
|
|
28 |
|
|
|
(10 |
) |
|
|
18 |
|
Unrealized
gains on securities transferred
|
|
|
|
|
|
|
|
|
|
|
|
|
during
period from held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
to
available for sale
|
|
|
311 |
|
|
|
(109 |
) |
|
|
202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gains on securities
|
|
|
(22,510 |
) |
|
|
7,879 |
|
|
|
(14,631 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
200 |
|
|
|
(70 |
) |
|
|
130 |
|
Pension
liability adjustment
|
|
|
(545 |
) |
|
|
191 |
|
|
|
(354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss)
|
|
$ |
(22,855 |
) |
|
|
8,000 |
|
|
|
(14,855 |
) |
(13)
SEGMENT AND OTHER OPERATING INFORMATION
(A)
Operating Segment Information
Under
SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information, the Company
defines its reportable operating segments as domestic life insurance,
international life insurance, and annuities. The Company's segments
are organized based on product types and geographic marketing
areas. In addition, the Company regularly evaluates operating
performance using non-GAAP financial measures which exclude or segregate
realized investment gains and losses from operating revenues and
earnings. The Company believes that the presentation of these
non-GAAP financial measures enhances the understanding of the Company's results
of operations by highlighting the results from ongoing operations and the
underlying profitability factors of the Company's business. The
Company excludes or segregates realized investment gains and losses because such
items are often the result of events which may or may not be at the Company's
discretion and the fluctuating effects of these items could distort trends in
the underlying profitability of the Company's business.
A summary
of segment information, prepared in accordance with SFAS No. 131, is provided
below.
|
|
Domestic
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
Life
|
|
|
|
|
|
All
|
|
|
|
|
|
|
Insurance
|
|
|
Insurance
|
|
|
Annuities
|
|
|
Others
|
|
|
Totals
|
|
|
|
(In
thousands)
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Balance Sheet Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
policy acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs
and sales inducements
|
|
$ |
58,883 |
|
|
|
204,322 |
|
|
|
505,629 |
|
|
|
- |
|
|
|
768,834 |
|
Total
segment assets
|
|
|
399,097 |
|
|
|
796,012 |
|
|
|
5,500,226 |
|
|
|
106,039 |
|
|
|
6,801,374 |
|
Future
policy benefits
|
|
|
320,287 |
|
|
|
556,893 |
|
|
|
4,703,363 |
|
|
|
- |
|
|
|
5,580,543 |
|
Other
policyholder liabilities
|
|
|
9,641 |
|
|
|
16,729 |
|
|
|
94,030 |
|
|
|
- |
|
|
|
120,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Income Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues
|
|
$ |
25,879 |
|
|
|
88,782 |
|
|
|
24,529 |
|
|
|
- |
|
|
|
139,190 |
|
Net
investment income
|
|
|
18,863 |
|
|
|
24,690 |
|
|
|
266,953 |
|
|
|
7,631 |
|
|
|
318,137 |
|
Other
income
|
|
|
41 |
|
|
|
126 |
|
|
|
920 |
|
|
|
12,596 |
|
|
|
13,683 |
|
Total
revenues
|
|
|
44,783 |
|
|
|
113,598 |
|
|
|
292,402 |
|
|
|
20,227 |
|
|
|
471,010 |
|
Life
and other policy benefits
|
|
|
14,922 |
|
|
|
22,810 |
|
|
|
3,594 |
|
|
|
- |
|
|
|
41,326 |
|
Amortization
of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
policy
acquisition costs
|
|
|
7,998 |
|
|
|
24,959 |
|
|
|
55,456 |
|
|
|
- |
|
|
|
88,413 |
|
Universal
life and investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
annuity
contract interest
|
|
|
9,463 |
|
|
|
20,993 |
|
|
|
133,935 |
|
|
|
- |
|
|
|
164,391 |
|
Other
operating expenses
|
|
|
11,898 |
|
|
|
15,271 |
|
|
|
16,931 |
|
|
|
11,030 |
|
|
|
55,130 |
|
Federal
income taxes
|
|
|
160 |
|
|
|
9,386 |
|
|
|
26,187 |
|
|
|
2,919 |
|
|
|
38,652 |
|
Total
expenses
|
|
|
44,441 |
|
|
|
93,419 |
|
|
|
236,103 |
|
|
|
13,949 |
|
|
|
387,912 |
|
Segment
earnings
|
|
$ |
342 |
|
|
|
20,179 |
|
|
|
56,299 |
|
|
|
6,278 |
|
|
|
83,098 |
|
|
|
Domestic
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
Life
|
|
|
|
|
|
All
|
|
|
|
|
|
|
Insurance
|
|
|
Insurance
|
|
|
Annuities
|
|
|
Others
|
|
|
Totals
|
|
|
|
(In
thousands)
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Balance Sheet Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
policy acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs
and sales inducements
|
|
$ |
50,965 |
|
|
|
182,268 |
|
|
|
503,870 |
|
|
|
- |
|
|
|
737,103 |
|
Total
segment assets
|
|
|
381,490 |
|
|
|
715,064 |
|
|
|
5,467,733 |
|
|
|
103,087 |
|
|
|
6,667,374 |
|
Future
policy benefits
|
|
|
314,039 |
|
|
|
498,997 |
|
|
|
4,720,421 |
|
|
|
- |
|
|
|
5,533,457 |
|
Other
policyholder liabilities
|
|
|
7,796 |
|
|
|
18,480 |
|
|
|
86,173 |
|
|
|
- |
|
|
|
112,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Income Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues
|
|
$ |
22,731 |
|
|
|
78,005 |
|
|
|
21,389 |
|
|
|
- |
|
|
|
122,125 |
|
Net
investment income
|
|
|
20,462 |
|
|
|
28,530 |
|
|
|
323,326 |
|
|
|
7,450 |
|
|
|
379,768 |
|
Other
income
|
|
|
29 |
|
|
|
78 |
|
|
|
5,950 |
|
|
|
11,247 |
|
|
|
17,304 |
|
Total
revenues
|
|
|
43,222 |
|
|
|
106,613 |
|
|
|
350,665 |
|
|
|
18,697 |
|
|
|
519,197 |
|
Life
and other policy benefits
|
|
|
13,656 |
|
|
|
18,161 |
|
|
|
3,424 |
|
|
|
- |
|
|
|
35,241 |
|
Amortization
of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
policy
acquisition costs
|
|
|
7,313 |
|
|
|
23,075 |
|
|
|
59,970 |
|
|
|
- |
|
|
|
90,358 |
|
Universal
life and investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
annuity
contract interest
|
|
|
9,168 |
|
|
|
25,675 |
|
|
|
178,893 |
|
|
|
- |
|
|
|
213,736 |
|
Other
operating expenses
|
|
|
12,630 |
|
|
|
21,051 |
|
|
|
21,847 |
|
|
|
10,181 |
|
|
|
65,709 |
|
Federal
income taxes
|
|
|
158 |
|
|
|
6,460 |
|
|
|
29,972 |
|
|
|
2,950 |
|
|
|
39,540 |
|
Total
expenses
|
|
|
42,925 |
|
|
|
94,422 |
|
|
|
294,106 |
|
|
|
13,131 |
|
|
|
444,584 |
|
Segment
earnings
|
|
$ |
297 |
|
|
|
12,191 |
|
|
|
56,559 |
|
|
|
5,566 |
|
|
|
74,613 |
|
|
|
Domestic
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
Life
|
|
|
|
|
|
All
|
|
|
|
|
|
|
Insurance
|
|
|
Insurance
|
|
|
Annuities
|
|
|
Others
|
|
|
Totals
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Balance Sheet Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
policy acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
costs
and sales inducements
|
|
$ |
46,055 |
|
|
|
164,989 |
|
|
|
489,535 |
|
|
|
- |
|
|
|
700,579 |
|
Total
segment assets
|
|
|
366,939 |
|
|
|
631,477 |
|
|
|
5,256,146 |
|
|
|
94,064 |
|
|
|
6,348,626 |
|
Future
policy benefits
|
|
|
307,730 |
|
|
|
444,513 |
|
|
|
4,563,676 |
|
|
|
- |
|
|
|
5,315,919 |
|
Other
policyholder liabilities
|
|
|
10,135 |
|
|
|
16,936 |
|
|
|
73,486 |
|
|
|
- |
|
|
|
100,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Income Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues
|
|
$ |
22,172 |
|
|
|
70,379 |
|
|
|
18,816 |
|
|
|
- |
|
|
|
111,367 |
|
Net
investment income
|
|
|
19,958 |
|
|
|
23,123 |
|
|
|
258,485 |
|
|
|
8,647 |
|
|
|
310,213 |
|
Other
income
|
|
|
35 |
|
|
|
75 |
|
|
|
588 |
|
|
|
8,881 |
|
|
|
9,579 |
|
Total
revenues
|
|
|
42,165 |
|
|
|
93,577 |
|
|
|
277,889 |
|
|
|
17,528 |
|
|
|
431,159 |
|
Life
and other policy benefits
|
|
|
14,932 |
|
|
|
21,232 |
|
|
|
2,998 |
|
|
|
- |
|
|
|
39,162 |
|
Amortization
of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
policy
acquisition costs
|
|
|
5,798 |
|
|
|
20,389 |
|
|
|
61,768 |
|
|
|
- |
|
|
|
87,955 |
|
Universal
life and investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
annuity
contract interest
|
|
|
8,842 |
|
|
|
18,118 |
|
|
|
123,732 |
|
|
|
- |
|
|
|
150,692 |
|
Other
operating expenses
|
|
|
8,349 |
|
|
|
13,359 |
|
|
|
17,019 |
|
|
|
7,622 |
|
|
|
46,349 |
|
Federal
income taxes
|
|
|
1,435 |
|
|
|
6,920 |
|
|
|
24,457 |
|
|
|
3,347 |
|
|
|
36,159 |
|
Total
expenses
|
|
|
39,356 |
|
|
|
80,018 |
|
|
|
229,974 |
|
|
|
10,969 |
|
|
|
360,317 |
|
Segment
earnings
|
|
$ |
2,809 |
|
|
|
13,559 |
|
|
|
47,915 |
|
|
|
6,559 |
|
|
|
70,842 |
|
Reconciliations
of segment information to the Company's consolidated financial statements are
provided below.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
Premiums and Other
Revenue:
|
|
|
|
|
|
|
|
|
|
Premiums
and contract revenues
|
|
$ |
139,190 |
|
|
|
122,125 |
|
|
|
111,367 |
|
Net
investment income
|
|
|
318,137 |
|
|
|
379,768 |
|
|
|
310,213 |
|
Other
income
|
|
|
13,683 |
|
|
|
17,304 |
|
|
|
9,579 |
|
Realized
gains on investments
|
|
|
3,497 |
|
|
|
2,662 |
|
|
|
9,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated premiums and other revenue
|
|
$ |
474,507 |
|
|
|
521,859 |
|
|
|
441,043 |
|
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
Federal Income
Taxes:
|
|
|
|
|
|
|
|
|
|
Total
segment Federal income taxes
|
|
$ |
38,652 |
|
|
|
39,540 |
|
|
|
36,159 |
|
Taxes
on realized gains on investments
|
|
|
1,224 |
|
|
|
932 |
|
|
|
3,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
taxes on consolidated net earnings
|
|
$ |
39,876 |
|
|
|
40,472 |
|
|
|
39,618 |
|
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
Net
Earnings:
|
|
|
|
|
|
|
|
|
|
Total
segment earnings
|
|
$ |
83,098 |
|
|
|
74,613 |
|
|
|
70,842 |
|
Realized
gains on investments, net of taxes
|
|
|
2,273 |
|
|
|
1,730 |
|
|
|
6,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated net earnings
|
|
$ |
85,371 |
|
|
|
76,343 |
|
|
|
77,267 |
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Total
segment assets
|
|
$ |
6,801,374 |
|
|
|
6,667,374 |
|
|
|
6,348,626 |
|
Other
unallocated assets
|
|
|
33,952 |
|
|
|
26,069 |
|
|
|
20,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
consolidated assets
|
|
$ |
6,835,326 |
|
|
|
6,693,443 |
|
|
|
6,369,008 |
|
(B)
Geographic Information
A
significant portion of the Company's premiums and contract revenues are from
countries other than the United States. Premiums and contract revenues detailed
by country are provided below.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
61,637 |
|
|
|
48,561 |
|
|
|
42,403 |
|
Brazil
|
|
|
20,161 |
|
|
|
16,851 |
|
|
|
12,731 |
|
Taiwan
|
|
|
10,098 |
|
|
|
9,052 |
|
|
|
8,398 |
|
Argentina
|
|
|
8,987 |
|
|
|
8,811 |
|
|
|
8,881 |
|
Chile
|
|
|
8,465 |
|
|
|
8,324 |
|
|
|
8,338 |
|
Venezuela
|
|
|
7,925 |
|
|
|
6,905 |
|
|
|
6,420 |
|
Other
foreign countries
|
|
|
38,238 |
|
|
|
37,112 |
|
|
|
36,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
excluding reinsurance premiums
|
|
|
155,511 |
|
|
|
135,616 |
|
|
|
123,741 |
|
Reinsurance
premiums
|
|
|
(16,321 |
) |
|
|
(13,491 |
) |
|
|
(12,374 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
premiums and contract revenues
|
|
$ |
139,190 |
|
|
|
122,125 |
|
|
|
111,367 |
|
Premiums
and contract revenues are attributed to countries based on the location of the
policyholder. The Company has no significant assets, other than financial
instruments, located in countries other than the United States.
(C)
Major Agency Relationships
A
significant portion of the Company's premiums and deposits were sold through two
independent marketing agencies in recent years. Combined business from these
agencies accounted for approximately 22%, 21%, and 24% of total direct premium
revenues and universal life and annuity contract deposits in 2007, 2006, and
2005, respectively.
(14)
FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No.
107, Disclosures About Fair
Values Of Financial Instruments, requires disclosures of fair value
information about financial instruments, whether or not recognized in a
company's balance sheet, for which it is practicable to estimate a value. The
following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Investment
securities. Fair values for investments in debt and equity
securities are based on quoted market prices, where available. For securities
not actively traded, fair values are estimated using values obtained from
various independent pricing services. In the cases where prices are unavailable
from these sources, values are estimated by discounting expected future cash
flows using a current market rate applicable to the yield, credit quality, and
maturity of the investments.
Cash and short-term
investments. The carrying amounts reported in the balance
sheet for these instruments approximate their fair values.
Mortgage and other loans. The
fair values of performing mortgage and other loans are estimated by discounting
scheduled cash flows through the scheduled maturities of the loans, using
interest rates currently being offered for similar loans to borrowers with
similar credit ratings. Fair values for significant nonperforming loans are
based on recent internal or external appraisals. If appraisals are not
available, estimated cash flows are discounted using a rate commensurate with
the risk associated with the estimated cash flows. Assumptions
regarding credit risk, cash flows, and discount rates are judgmentally
determined using available market information and specific borrower
information.
Policy loans. The
fair values for policy loans are calculated by discounting estimated cash flows
using U.S. Treasury bill rates as of December 31, 2007 and 2006. The estimated
cash flows include assumptions as to whether such loans will be repaid by the
policyholders or settled upon payment of death or surrender benefits on the
underlying insurance contracts. As a result, these assumptions incorporate both
Company experience and mortality assumptions associated with such
contracts.
Derivatives. Fair values for
indexed options are based on counterparty market prices.
Life interest in Libbie Shearn Moody
Trust. The fair value of the life interest is estimated based
on assumptions as to future distributions from the Trust over the life
expectancy of Mr. Robert L. Moody. These estimated cash flows were discounted at
a rate consistent with uncertainties relating to the amount and timing of future
cash distributions. However, the Company has limited the fair value to the
statutory admitted value of the Trust, as this is the maximum amount to be
received from insurance proceeds in the event of Mr. Moody's premature
death.
Annuity and supplemental
contracts. Fair values of the Company's liabilities for
deferred annuity contracts are estimated to be the cash surrender values of each
contract. The cash surrender value represents the policyholder's account balance
less applicable surrender charges. The fair values of liabilities for immediate
annuity contracts and supplemental contracts with and without life contingencies
are estimated by discounting estimated cash flows using U.S. Treasury bill rates
as of December 31, 2007 and 2006.
Fair
values for the Company's insurance contracts other than annuity contracts are
not required to be disclosed. This includes the Company's traditional and
universal life products. However, the fair values of liabilities under all
insurance contracts are taken into consideration in the Company's overall
management of interest rate risk, which minimizes exposure to changing interest
rates through the matching of investment maturities with amounts due under
insurance and annuity contracts.
The
carrying amounts and fair values of the Company's financial instruments are as
follows:
|
|
December
31, 2007
|
|
|
December
31, 2006
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Values
|
|
|
Values
|
|
|
Values
|
|
|
Values
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in debt and equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
$ |
3,778,603 |
|
|
|
3,774,193 |
|
|
|
3,603,434 |
|
|
|
3,567,625 |
|
Securities
available for sale
|
|
|
1,900,714 |
|
|
|
1,900,714 |
|
|
|
1,902,568 |
|
|
|
1,902,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and short-term investments
|
|
|
45,206 |
|
|
|
45,206 |
|
|
|
49,901 |
|
|
|
49,901 |
|
Mortgage
loans
|
|
|
99,033 |
|
|
|
100,786 |
|
|
|
103,325 |
|
|
|
105,919 |
|
Policy
loans
|
|
|
83,772 |
|
|
|
117,958 |
|
|
|
86,856 |
|
|
|
120,120 |
|
Other
loans
|
|
|
2,327 |
|
|
|
2,383 |
|
|
|
3,048 |
|
|
|
3,152 |
|
Derivatives
|
|
|
25,907 |
|
|
|
25,907 |
|
|
|
72,012 |
|
|
|
72,012 |
|
Life
interest in Libbie Shearn
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Moody
Trust
|
|
|
1,620 |
|
|
|
12,775 |
|
|
|
1,935 |
|
|
|
12,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
annuity contracts
|
|
$ |
4,442,799 |
|
|
|
4,096,947 |
|
|
|
4,469,843 |
|
|
|
3,671,116 |
|
Immediate
annuity and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
supplemental
contracts
|
|
|
320,539 |
|
|
|
311,694 |
|
|
|
309,306 |
|
|
|
295,546 |
|
Fair
value estimates are made at a specific point in time based on relevant market
information and information about the financial instruments. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for a portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
(15)
RELATED PARTY TRANSACTIONS
Robert L.
Moody, Jr. ("Mr. Moody, Jr.") is the son of Robert L. Moody, the Company's
Chairman and Chief Executive Officer, and is the brother of Ross R. Moody, the
Company's President and Chief Operating Officer, and of Russell S. Moody and
Frances A. Moody-Dahlberg who serve as directors of National
Western. Prior to January 1, 2006, Mr. Moody, Jr. was employed by the
Company in an agency marketing position for which he was paid an annual salary
of $14,000 and was eligible to participate in the Company's benefit
plans. Mr. Moody, Jr. resigned as an employee effective December 31,
2005.
In
addition, Mr. Moody, Jr. wholly owns an insurance marketing organization that
maintains agency contracts with National Western pursuant to which agency
commissions are paid in accordance with the Company's standard commission
schedules. Mr. Moody, Jr. also maintains an independent agent contract with
National Western for policies personally sold under which commissions are paid
in accordance with standard commission schedules. In 2007, commissions paid
under these agency contracts aggregated approximately $210,600. In conjunction
with these agency contracts, Mr. Moody, Jr. may be eligible to attend Company
sales conferences and functions based upon meeting published minimum levels of
qualifying sales production. In his capacity as an insurance marketing
organization with the Company, Mr. Moody, Jr. also received product development
fees associated with a product line of the Company which amounted to $11,600,
$28,000 for consulting fees, and a marketing development allowance of $9,000 for
the Company’s business efforts in Puerto Rico in 2007. Mr. Moody, Jr. received
fees in 2006 and 2005 of $226,300 and $199,000, respectively.
Mr.
Moody, Jr. further serves as the agent of record for several of the Company's
benefit plans including the self-insured health plan for which Mr. Moody, Jr.
provides utilization review services through a wholly-owned utilization review
company. In 2007, 2006, and 2005, amounts paid to Mr. Moody, Jr.
as commissions and service fees pertaining to the Company's benefit plans
approximated $65,500, $54,500, and $47,900, respectively.
During
2007, management fees totaling $846,000 were paid to Regent Management Services,
Limited Partnership ("RMS") for services provided to a downstream nursing home
subsidiary of National Western. RMS is 1% owned by general partner
RCC Management Services, Inc. ("RCC"), and 99% owned by limited partner, Three R
Trusts. RCC is 100% owned by the Three R Trusts. The Three
R Trusts are four Texas trusts for the benefit of the children of Robert L.
Moody (Robert L. Moody, Jr., Ross R. Moody, Russell S. Moody, and Frances A.
Moody-Dahlberg). Charles D. Milos, Senior Vice President-Mortgage
Loans and Real Estate, and director of the Company, is a director and Vice
President of RCC. Ellen C. Otte, Assistant Secretary of the Company,
is a director and secretary of RCC.
The
Company held a loan in the amount of $4.2 million issued to TMNY, LLC during
2007. As of December 31, 2006, Robert L. Moody owned 20.5% of TMNY,
LLC. This loan matured and was paid in full during 2007.
The
Company holds a common stock investment totaling approximately 9.4% of the
issued and outstanding shares of Moody Bancshares, Inc. at December 31, 2007,
the latest available financial information. Moody Bancshares, Inc.
owns 100% of the outstanding shares of Moody Bank Holding Company, Inc., which
owns approximately 98% of the outstanding shares of The Moody National Bank of
Galveston ("MNB"). The Company utilizes MNB for certain bank custodian services
as well as for certain administrative services with respect to the Company's
defined benefit and contribution plans. Robert L. Moody serves as Chairman of
the Board and Chief Executive Officer of MNB. The ultimate owner of
MNB is the Three R Trusts. Fees totaling $193,000, $187,000, and $188,000 were
paid to MNB with respect to these services in 2007, 2006, and 2005,
respectively.
(16)
UNAUDITED QUARTERLY FINANCIAL DATA
Quarterly
results of operations for 2007 are summarized as follows:
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In
thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
114,112 |
|
|
|
148,695 |
|
|
|
112,136 |
|
|
|
99,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
$ |
18,672 |
|
|
|
21,851 |
|
|
|
15,622 |
|
|
|
29,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A
|
|
$ |
5.30 |
|
|
|
6.20 |
|
|
|
4.44 |
|
|
|
8.30 |
|
Class
B
|
|
$ |
2.65 |
|
|
|
3.10 |
|
|
|
2.22 |
|
|
|
4.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A
|
|
$ |
5.23 |
|
|
|
6.12 |
|
|
|
4.38 |
|
|
|
8.22 |
|
Class
B
|
|
$ |
2.65 |
|
|
|
3.10 |
|
|
|
2.22 |
|
|
|
4.15 |
|
Quarterly
results of operations for 2006 are summarized as follows:
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In
thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
136,255 |
|
|
|
100,643 |
|
|
|
129,880 |
|
|
|
155,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
$ |
14,045 |
|
|
|
22,227 |
|
|
|
16,072 |
|
|
|
23,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A
|
|
$ |
3.99 |
|
|
|
6.30 |
|
|
|
4.56 |
|
|
|
6.82 |
|
Class
B
|
|
$ |
1.99 |
|
|
|
3.14 |
|
|
|
2.28 |
|
|
|
3.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A
|
|
$ |
3.95 |
|
|
|
6.23 |
|
|
|
4.52 |
|
|
|
6.75 |
|
Class
B
|
|
$ |
1.99 |
|
|
|
3.14 |
|
|
|
2.28 |
|
|
|
3.41 |
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
SUMMARY
OF INVESTMENTS
OTHER
THAN INVESTMENTS IN RELATED PARTIES
December
31, 2007
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
|
Fair
|
|
|
Balance
Sheet
|
|
Type
of Investment
|
|
Cost
|
|
|
Value
|
|
|
Amount
|
|
Fixed
maturity bonds:
|
|
|
|
|
|
|
|
|
|
|
Securities
held to maturity:
|
|
|
|
|
|
|
|
|
|
|
United
States government and government
|
|
|
|
|
|
|
|
|
|
|
agencies
and authorities
|
|
$ |
426,236 |
|
|
|
429,106 |
|
|
|
426,236 |
|
States,
municipalities, and political subdivisions
|
|
|
13,287 |
|
|
|
13,271 |
|
|
|
13,287 |
|
Foreign
governments
|
|
|
19,944 |
|
|
|
20,334 |
|
|
|
19,944 |
|
Public
utilities
|
|
|
397,639 |
|
|
|
402,073 |
|
|
|
397,639 |
|
Corporate
|
|
|
1,194,260 |
|
|
|
1,192,205 |
|
|
|
1,194,260 |
|
Mortgage-backed
|
|
|
1,646,432 |
|
|
|
1,638,309 |
|
|
|
1,646,432 |
|
Asset-backed
|
|
|
80,805 |
|
|
|
78,895 |
|
|
|
80,805 |
|
Total
securities held to maturity
|
|
|
3,778,603 |
|
|
|
3,774,193 |
|
|
|
3,778,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States government and government
|
|
|
|
|
|
|
|
|
|
|
|
|
agencies
and authorities
|
|
|
5,000 |
|
|
|
5,067 |
|
|
|
5,067 |
|
States,
municipalities, and political subdivisions
|
|
|
48,280 |
|
|
|
48,507 |
|
|
|
48,507 |
|
Foreign
Government
|
|
|
10,473 |
|
|
|
10,939 |
|
|
|
10,939 |
|
Public
utilities
|
|
|
293,308 |
|
|
|
291,808 |
|
|
|
291,808 |
|
Corporate
|
|
|
1,242,402 |
|
|
|
1,235,493 |
|
|
|
1,235,493 |
|
Mortgage-backed
|
|
|
266,534 |
|
|
|
262,973 |
|
|
|
262,973 |
|
Asset-backed
|
|
|
26,227 |
|
|
|
26,214 |
|
|
|
26,214 |
|
Total
securities available for sale
|
|
|
1,892,224 |
|
|
|
1,881,001 |
|
|
|
1,881,001 |
|
Total
fixed maturity bonds
|
|
|
5,670,827 |
|
|
|
5,655,194 |
|
|
|
5,659,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
utilities
|
|
|
906 |
|
|
|
1,458 |
|
|
|
1,458 |
|
Banks,
trust and insurance companies (2)
|
|
|
120 |
|
|
|
118 |
|
|
|
118 |
|
Corporate
|
|
|
3,799 |
|
|
|
4,940 |
|
|
|
4,940 |
|
Preferred
stocks
|
|
|
7,255 |
|
|
|
6,051 |
|
|
|
6,051 |
|
Total
equity securities
|
|
|
12,080 |
|
|
|
12,567 |
|
|
|
12,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
53,314 |
|
|
|
|
|
|
|
25,907 |
|
Mortgage
loans (3)
|
|
|
91,373 |
|
|
|
|
|
|
|
91,373 |
|
Policy
loans
|
|
|
83,772 |
|
|
|
|
|
|
|
83,772 |
|
Other
long-term investments (4)
|
|
|
18,413 |
|
|
|
|
|
|
|
16,562 |
|
Total
investments other than
|
|
|
|
|
|
|
|
|
|
|
|
|
investments
in related parties
|
|
$ |
5,929,779 |
|
|
|
|
|
|
|
5,889,785 |
|
Notes:
(1) Bonds
are shown at amortized cost, mortgage loans are shown at unpaid principal
balances before allowances for possible losses, and real estate is stated at
cost before allowances for possible losses.
(2)
Equity securities with related parties having a cost of $0.2 million and balance
sheet amount of $7.1 million have been excluded.
(3)
Mortgage loans with related parties totaling $7.7 million have been
excluded.
(4) Real
estate acquired by foreclosure included in other long-term investments is as
follows: cost $1.8 million; balance sheet amount $1.5 million.
|
|
SCHEDULE
V
|
|
VALUATION
AND QUALIFYING ACCOUNTS
|
|
For
the Years Ended December 31, 2007, 2006, and 2005
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at
|
|
|
Charged
to
|
|
|
|
|
|
|
|
|
Balance
at
|
|
|
|
Beginning
|
|
|
Costs
and
|
|
|
|
|
|
|
|
|
End
of
|
|
Description
|
|
of
Period
|
|
|
Expenses
|
|
|
Reductions
|
|
|
Transfers
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
accounts deducted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
applicable assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for possible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
losses
on mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
$ |
2,100 |
|
|
|
1,467 |
|
|
|
- |
|
|
|
- |
|
|
|
3,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
$ |
- |
|
|
|
2,100 |
|
|
|
- |
|
|
|
- |
|
|
|
2,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
$ |
368 |
|
|
|
(368 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for possible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
losses
on real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
$ |
1,397 |
|
|
|
(658 |
) |
|
|
- |
|
|
|
- |
|
|
|
739 |
|
Notes:
(1) These
amounts were recorded to realized (gains) losses on investments.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
NATIONAL
WESTERN LIFE INSURANCE COMPANY
(Registrant)
Date:
March 14, 2008
|
|
/S/
Robert L. Moody
|
|
|
By: Robert
L. Moody, Chairman of the Board and
|
|
|
Chief
Executive Officer
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature
|
|
Title
(Capacity)
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
/S/
Robert L. Moody
|
|
Chairman
of the Board and
|
|
March
14, 2008
|
Robert
L. Moody
|
|
Chief
Executive Officer, and Director
|
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/S/
Ross R. Moody
|
|
President
and Chief Operating Officer, and Director
|
|
March
14, 2008
|
Ross
R. Moody
|
|
|
|
|
|
|
|
|
|
/S/
Brian M. Pribyl
|
|
Senior
Vice President - Chief Financial &
|
|
March
14, 2008
|
Brian
M. Pribyl
|
|
Administrative
Officer, and Treasurer
|
|
|
|
|
(Principal
Financial Officer)
|
|
|
|
|
|
|
|
/S/
Kay E. Osbourn
|
|
Vice
President, Controller & Assistant Treasurer
|
|
March
14, 2008
|
Kay
E. Osbourn
|
|
(Principal
Accounting Officer)
|
|
|
|
|
|
|
|
|
|
Director
|
|
March
14, 2008
|
Harry
L. Edwards
|
|
|
|
|
|
|
|
|
|
/S/
Stephen E. Glasgow
|
|
Director
|
|
March
14, 2008
|
Stephen
E. Glasgow
|
|
|
|
|
|
|
|
|
|
/S/
E. Douglas McLeod |
|
Director
|
|
March
14, 2008
|
E.
Douglas McLeod
|
|
|
|
|
|
|
|
|
|
/S/
Charles D. Milos
|
|
Director
|
|
March
14, 2008
|
Charles
D. Milos
|
|
|
|
|
|
|
|
|
|
/S/
Frances A. Moody-Dahlberg |
|
Director
|
|
March
14, 2008
|
Frances
A. Moody-Dahlberg
|
|
|
|
|
|
|
|
|
|
/S/
Russell S. Moody
|
|
Director
|
|
March
14, 2008
|
Russell
S. Moody
|
|
|
|
|
|
|
|
|
|
/S/
Louis E. Pauls, Jr.
|
|
Director
|
|
March
14, 2008
|
Louis
E. Pauls, Jr.
|
|
|
|
|
|
|
|
|
|
/S/
E.J. Pederson
|
|
Director
|
|
March
14, 2008
|
E.J.
Pederson
|
|
|
|
|