UNITED
STATES
|
SECURITIES
AND EXCHANGE COMMISSION
|
Washington,
D.C. 20549
|
|
FORM
10-Q
|
|
þ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
|
THE
SECURITIES EXCHANGE ACT OF 1934
|
|
For
the Quarterly Period Ended March 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
|
(512)
836-1010
|
(Address
of Principal Executive Offices)
|
(Telephone
Number)
|
|
|
|
|
Indicate
by check mark whether the Registrant (1) has filed all reports
required to
be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934
during the preceding 12 months (or for such shorter period that
the
Registrant was required to file such reports), and (2) has been
subject to
such filing requirements for the past 90 days: Yes þ No
o
|
|
|
Indicate
by check mark whether the registrant is a large accelerated filer,
an
accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated file" in Rule 12b-2 of
the
Exchange Act.
|
|
Large
accelerated filer o Accelerated
filer þ
Non-accelerated filer o
|
|
Indicate
by check mark whether the registrant is a shell company (as defined
in
Rule 12b-2 of the Exchange Act). Yes o
No
þ
|
|
As
of May 8, 2007, the number of shares of Registrant's common stock
outstanding was: Class A - 3,422,324 and Class B -
200,000.
|
|
|
|
|
Page
|
|
|
|
3
|
|
|
|
3
|
|
|
|
|
March
31, 2007 (Unaudited) and December 31, 2006
|
3
|
|
|
|
|
For
the Three Months Ended March 31, 2007 and 2006 (Unaudited)
|
5
|
|
|
|
|
For
the Three Months Ended March 31, 2007 and 2006 (Unaudited)
|
6
|
|
|
|
|
For
the Three Months Ended March 31, 2007 and 2006 (Unaudited)
|
7
|
|
|
|
|
For
the Three Months Ended March 31, 2007 and 2006 (Unaudited)
|
8
|
|
|
|
10
|
|
|
|
|
Financial
Condition and Results of Operations
|
19
|
|
|
|
42
|
|
|
|
42
|
|
|
|
42
|
|
|
|
42
|
|
|
|
42
|
|
|
|
43
|
|
|
|
43
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
March
31,
|
|
December
31,
|
|
ASSETS
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
Securities
held to maturity, at amortized cost
|
|
$
|
3,642,261
|
|
|
3,603,434
|
|
Securities
available for sale, at fair value
|
|
|
1,929,249
|
|
|
1,902,568
|
|
Mortgage
loans, net of allowances for possible losses ($2,100)
|
|
|
105,389
|
|
|
103,325
|
|
Policy
loans
|
|
|
87,469
|
|
|
86,856
|
|
Derivatives
|
|
|
63,815
|
|
|
72,012
|
|
Other
long-term investments
|
|
|
21,991
|
|
|
22,822
|
|
|
|
|
|
|
|
|
|
Total
investments
|
|
|
5,850,174
|
|
|
5,791,017
|
|
|
|
|
|
|
|
|
|
Cash
and short-term investments
|
|
|
35,040
|
|
|
49,901
|
|
Deferred
policy acquisition costs
|
|
|
638,088
|
|
|
643,964
|
|
Deferred
sales inducements
|
|
|
94,181
|
|
|
93,139
|
|
Accrued
investment income
|
|
|
63,821
|
|
|
64,393
|
|
Other
assets
|
|
|
46,174
|
|
|
51,029
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,727,478
|
|
|
6,693,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
The condensed consolidated balance sheet at December 31, 2006,
has been
derived from the audited consolidated financial statements as of
that
date.
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
(In
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
March
31,
|
|
December
31,
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
Future
policy benefits:
|
|
|
|
|
|
Traditional
life and annuity contracts
|
|
$
|
139,166
|
|
|
138,382
|
|
Universal
life and annuity contracts
|
|
|
5,400,023
|
|
|
5,395,075
|
|
Other
policyholder liabilities
|
|
|
118,622
|
|
|
112,449
|
|
Federal
income tax liability:
|
|
|
|
|
|
|
|
Current
|
|
|
4,777
|
|
|
1,666
|
|
Deferred
|
|
|
38,269
|
|
|
32,207
|
|
Other
liabilities
|
|
|
72,544
|
|
|
80,680
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
5,773,401
|
|
|
5,760,459
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 5 and 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock:
|
|
|
|
|
|
|
|
Class
A - $1 par value; 7,500,000 shares authorized; 3,422,324
and
|
|
|
|
|
|
|
|
3,420,824
issued and outstanding in 2007 and 2006
|
|
|
3,422
|
|
|
3,421
|
|
Class
B - $1 par value; 200,000 shares authorized, issued,
|
|
|
|
|
|
|
|
and
outstanding in 2007 and 2006
|
|
|
200
|
|
|
200
|
|
Additional
paid-in capital
|
|
|
36,236
|
|
|
36,110
|
|
Accumulated
other comprehensive income (loss)
|
|
|
758
|
|
|
(3,731
|
)
|
Retained
earnings
|
|
|
913,461
|
|
|
896,984
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
954,077
|
|
|
932,984
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,727,478
|
|
|
6,693,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
The condensed consolidated balance sheet at December 31, 2006,
has been
derived from the audited consolidated financial statements as of
that
date.
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
|
|
For
the Three Months Ended March 31, 2007 and 2006
|
|
(Unaudited)
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Premiums
and other revenue:
|
|
|
|
|
|
Traditional
life and annuity premiums
|
|
$
|
4,733
|
|
|
3,991
|
|
Universal
life and annuity contract revenues
|
|
|
28,796
|
|
|
26,956
|
|
Net
investment income
|
|
|
77,026
|
|
|
98,687
|
|
Other
income
|
|
|
3,316
|
|
|
5,198
|
|
Realized
gains on investments
|
|
|
241
|
|
|
1,423
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
114,112
|
|
|
136,255
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
10,974
|
|
|
11,442
|
|
Amortization
of deferred acquisition costs
|
|
|
23,785
|
|
|
22,298
|
|
Universal
life and annuity contract interest
|
|
|
37,433
|
|
|
56,048
|
|
Other
operating expenses
|
|
|
14,116
|
|
|
25,374
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
86,308
|
|
|
115,162
|
|
|
|
|
|
|
|
|
|
Earnings
before Federal income taxes
|
|
|
27,804
|
|
|
21,093
|
|
|
|
|
|
|
|
|
|
Provision
(benefit) for Federal income taxes:
|
|
|
|
|
|
|
|
Current
|
|
|
4,314
|
|
|
11,487
|
|
Deferred
|
|
|
4,818
|
|
|
(4,439
|
)
|
|
|
|
|
|
|
|
|
Total
Federal income taxes
|
|
|
9,132
|
|
|
7,048
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
18,672
|
|
|
14,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share
|
|
$
|
5.16
|
|
|
3.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share
|
|
$
|
5.11
|
|
|
3.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
|
|
For
the Three Months Ended March 31, 2007 and 2006
|
|
(Unaudited)
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
18,672
|
|
|
14,045
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss), net of effects of
|
|
|
|
|
|
|
|
deferred
policy acquisition costs and taxes:
|
|
|
|
|
|
|
|
Net
unrealized gains (losses) on securities:
|
|
|
|
|
|
|
|
Net
unrealized holding gains (losses) arising during period
|
|
|
4,723
|
|
|
(10,466
|
)
|
Reclassification
adjustment for gains included in net earnings
|
|
|
(167
|
)
|
|
(892
|
)
|
Amortization
of net unrealized gains
|
|
|
|
|
|
|
|
related
to transferred securities
|
|
|
20
|
|
|
7
|
|
|
|
|
|
|
|
|
|
Net
unrealized gains (losses) on securities
|
|
|
4,576
|
|
|
(11,351
|
)
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(87
|
)
|
|
65
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss)
|
|
|
4,489
|
|
|
(11,286
|
)
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
23,161
|
|
|
2,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
|
|
For
the Three Months Ended March 31, 2007 and 2006
|
|
(Unaudited)
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Common
stock:
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
3,621
|
|
|
3,613
|
|
Shares
exercised under stock option plan
|
|
|
1
|
|
|
13
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
|
3,622
|
|
|
3,626
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital:
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
36,110
|
|
|
37,923
|
|
Shares
exercised under the stock option plan, net of tax benefits
|
|
|
126
|
|
|
491
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
|
36,236
|
|
|
38,414
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income:
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on securities:
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
3,148
|
|
|
10,401
|
|
Change
in unrealized gains (losses) during period
|
|
|
4,576
|
|
|
(11,351
|
)
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
|
7,724
|
|
|
(950
|
)
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments:
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
3,122
|
|
|
3,300
|
|
Change
in translation adjustments during period
|
|
|
(87
|
)
|
|
65
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
|
3,035
|
|
|
3,365
|
|
|
|
|
|
|
|
|
|
Benefit
plan liability adjustment:
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
(10,001
|
)
|
|
(3,137
|
)
|
Change
in benefit plan liability adjustment during period
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
|
(10,001
|
)
|
|
(3,137
|
)
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income (loss) at end of period
|
|
|
758
|
|
|
(722
|
)
|
|
|
|
|
|
|
|
|
Retained
earnings:
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
|
896,984
|
|
|
821,908
|
|
Cumulative
effect of change in accounting principle, net of tax
|
|
|
(2,195
|
)
|
|
-
|
|
Net
earnings
|
|
|
18,672
|
|
|
14,045
|
|
|
|
|
|
|
|
|
|
Balance
at end of period
|
|
|
913,461
|
|
|
835,953
|
|
|
|
|
|
|
|
|
|
Repurchase
of common stock
|
|
|
-
|
|
|
(1,210
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
$
|
954,077
|
|
|
876,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For
the Three Months Ended March 31, 2007 and 2006
|
|
(Unaudited)
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
earnings
|
|
$
|
18,672
|
|
|
14,045
|
|
Adjustments
to reconcile net earnings to net cash
|
|
|
|
|
|
|
|
from
operating activities:
|
|
|
|
|
|
|
|
Universal
life and annuity contract interest
|
|
|
37,433
|
|
|
56,048
|
|
Surrender
charges and other policy revenues
|
|
|
(8,600
|
)
|
|
(8,760
|
)
|
Realized
gains on investments
|
|
|
(241
|
)
|
|
(1,423
|
)
|
Accrual
and amortization of investment income
|
|
|
(996
|
)
|
|
(1,564
|
)
|
Depreciation
and amortization
|
|
|
356
|
|
|
385
|
|
(Increase)
decrease in value of derivatives
|
|
|
8,590
|
|
|
(16,014
|
)
|
Increase
in deferred policy acquisition and sales inducement costs
|
|
|
(1,290
|
)
|
|
(296
|
)
|
(Increase)
decrease in accrued investment income
|
|
|
610
|
|
|
(1,588
|
)
|
(Increase)
decrease in other assets
|
|
|
5,580
|
|
|
(4,798
|
)
|
Increase
in liabilities for future policy benefits
|
|
|
784
|
|
|
106
|
|
Increase
in other policyholder liabilities
|
|
|
6,173
|
|
|
8,335
|
|
Increase
in Federal income tax liability
|
|
|
7,788
|
|
|
6,359
|
|
Increase
(decrease) in other liabilities
|
|
|
(10,547
|
)
|
|
15,570
|
|
Other
|
|
|
(1,742
|
)
|
|
769
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
62,570
|
|
|
67,174
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Proceeds
from sales of:
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
|
5,175
|
|
|
-
|
|
Securities
available for sale
|
|
|
234
|
|
|
9,409
|
|
Other
investments
|
|
|
171
|
|
|
1,865
|
|
Proceeds
from maturities and redemptions of:
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
|
28,571
|
|
|
24,736
|
|
Securities
available for sale
|
|
|
78,592
|
|
|
18,127
|
|
Derivatives
|
|
|
8,570
|
|
|
6,849
|
|
Purchases
of:
|
|
|
|
|
|
|
|
Securities
held to maturity
|
|
|
(71,837
|
)
|
|
(85,278
|
)
|
Securities
available for sale
|
|
|
(87,912
|
)
|
|
(48,922
|
)
|
Other
investments
|
|
|
(9,576
|
)
|
|
(6,502
|
)
|
Principal
payments on mortgage loans
|
|
|
13,912
|
|
|
5,773
|
|
Cost
of mortgage loans acquired
|
|
|
(16,066
|
)
|
|
(1,733
|
)
|
Decrease
in policy loans
|
|
|
(613
|
)
|
|
109
|
|
Other
|
|
|
(938
|
)
|
|
(461
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(51,717
|
)
|
|
(76,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Continued
on next page)
|
|
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
|
|
For
the Three Months Ended March 31, 2007 and 2006
|
|
(Unaudited)
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
Deposits
to account balances for universal life
|
|
|
|
|
|
and
annuity contracts
|
|
$
|
111,937
|
|
|
127,625
|
|
Return
of account balances on universal life
|
|
|
|
|
|
|
|
and
annuity contracts
|
|
|
(137,622
|
)
|
|
(132,621
|
)
|
Issuance
of common stock under stock option plan
|
|
|
127
|
|
|
295
|
|
Repurchases
of common stock
|
|
|
-
|
|
|
(1,210
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
(25,558
|
)
|
|
(5,911
|
)
|
|
|
|
|
|
|
|
|
Effect
of foreign exchange
|
|
|
(156
|
)
|
|
222
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and short-term investments
|
|
|
(14,861
|
)
|
|
(14,543
|
)
|
Cash
and short-term investments at beginning of year
|
|
|
49,901
|
|
|
31,355
|
|
|
|
|
|
|
|
|
|
Cash
and short-term investments at end of period
|
|
$
|
35,040
|
|
|
16,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the first quarter for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
10
|
|
|
10
|
|
Income
taxes
|
|
|
1,254
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1)
CONSOLIDATION AND BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles
("GAAP") for interim financial information and the instructions to Form 10-Q
and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for annual financial statements.
In
the opinion of management, the accompanying condensed consolidated financial
statements contain all adjustments necessary to present fairly the financial
position of the Company as of March 31, 2007, and the results of its operations
and its cash flows for the three months ended March 31, 2007 and 2006. The
results of operations for the three months ended March 31, 2007 and 2006
are not
necessarily indicative of the results to be expected for the full year. For
further information, refer to the consolidated financial statements and notes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2006 accessible free of charge through the Company's internet site at
www.nationalwesternlife.com
or the
Securities and Exchange Commission internet site at www.sec.gov.
The
accompanying condensed consolidated financial statements include the accounts
of
National Western Life Insurance Company and its wholly-owned subsidiaries
("Company"), The Westcap Corporation, NWL Investments, Inc., NWL Services,
Inc.,
and NWL Financial, Inc. All significant intercorporate transactions and accounts
have been eliminated in consolidation.
Certain
reclassifications have been made to the prior periods to conform to the
reporting categories used in 2007.
(2)
CHANGES IN ACCOUNTING PRINCIPLES
In
September 2005, the AICPA issued Statement of Position 05-1,
Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection
with Modifications or Exchanges of Insurance Contracts ("SOP
05-1") which is
effective for internal replacements occurring in fiscal years beginning after
December 15, 2006.
SOP
05-1
provides guidance on accounting by insurance enterprises for deferred
acquisition costs on internal replacements of insurance and investment contracts
other than those specifically described in FASB No. 97. SOP 05-1 defines
an
internal replacement as a modification in product benefits, features, rights,
or
coverages that occurs by the exchange of a contract for a new contract, or
by
amendment, endorsement, or rider to a contract, or by the election of a feature
or coverage within a contract. The Company has an impact related to the adoption
of SOP 05-1 for contracts which have annuitized and relative to reinstatements
of contracts in that the unamortized deferred acquisition costs and deferred
sales inducement assets must be written-off at the time of annuitization
and may
not be continued related to reinstatements. SOP 05-1 results in changes in
assumptions relative to estimated gross profits which affects unamortized
deferred acquisition costs, unearned revenue liabilities, and deferred sales
inducement balances as of the beginning of the year. The effect of this SOP
on
beginning retained earnings as of January 1, 2007 was a decrease of $2.2
million, net of tax, as detailed below.
|
|
Amounts
|
|
|
|
(In
thousands)
|
|
|
|
|
|
Write-off
of deferred acquisition cost
|
|
$
|
3,321
|
|
Adjustment
to deferred annuity revenue
|
|
|
56
|
|
|
|
|
3,377
|
|
|
|
|
|
|
Federal
income tax
|
|
|
(1,182
|
)
|
|
|
|
|
|
Cumulative
effect of change in accounting for
|
|
|
|
|
internal
replacements and investment contracts
|
|
$
|
2,195
|
|
The
FASB
issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109 ("FIN
48"), dated June, 2006. The interpretation requires public companies to
recognize the tax benefits of uncertain tax positions only where the position
is
"more likely than not" to be sustained assuming examination by tax authorities.
The amount recognized would be the amount that represents the largest amount
of
tax benefit that is greater than 50% likely of being ultimately realized.
A
liability would be recognized for any benefit claimed, or expected to be
claimed, in a tax return in excess of the benefit recorded in the financial
statements, along with any interest and penalty (if applicable) on the excess.
FIN 48 requires a tabular reconciliation of the change in the aggregate
unrecognized tax benefits claimed, or expected to be claimed, in tax returns
and
disclosure relating to accrued interest and penalties for unrecognized tax
benefits. Discussion is required for those uncertain tax positions where
it is
reasonably possible that the estimate of the tax benefit will change
significantly in the next 12 months. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The adoption of FIN 48 did not have a
material impact on the Company's consolidated financial statements.
On
February 16, 2006, the FASB issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments,
which
amends SFAS No. 133,
Accounting for Derivatives and Hedging Activities,
and
SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.
Hybrid
financial instruments are single financial instruments that contain an embedded
derivative. Under SFAS No. 155, entities can elect to record certain hybrid
financial instruments at fair value as individual financial instruments.
Prior
to this amendment, certain hybrid financial instruments were required to
be
separated into two instruments - a derivative and host - and generally only
the
derivative was recorded at fair value. SFAS No. 155 also requires that
beneficial interests in securitized assets be evaluated for either freestanding
or embedded derivatives. SFAS No. 155 is effective for all financial instruments
acquired or issued after January 1, 2007. SFAS No. 155 did not have a
material effect on the Company's consolidated financial statements on the
date
of adoption.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements.
This
Statement defines fair value, establishes a framework for measuring fair
value
in generally accepted accounting principles, and requires additional disclosures
about fair value measurements. This Statement does not require any new fair
value measurements, but the application of this Statement could change current
practices in determining fair value. The Company plans to adopt this guidance
effective January 1, 2008. The Company is currently assessing the impact of
SFAS No. 157 on the Company's consolidated financial position and results
of operations.
In
February of 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities.
This
Statement permits entities to choose to measure many financial instruments
and
certain other items at fair value. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing the
impact
of SFAS No. 159.
(3)
STOCKHOLDERS' EQUITY
The
Company is restricted by state insurance laws as to dividend amounts which
may
be paid to stockholders without prior approval from the Colorado Division
of
Insurance. The Company paid no cash dividends on common stock during the
three
months ended March 31, 2007 and 2006, as it generally follows a policy of
retaining any earnings in order to finance the development of business and
to
meet regulatory requirements for capital.
(4)
EARNINGS PER SHARE
Basic
earnings per share of common stock are computed by dividing net income by
the
weighted-average basic common shares outstanding during the period. Diluted
earnings per share assumes the issuance of common shares applicable to stock
options in the denominator.
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Numerator
for basic and diluted earnings per share:
|
|
|
|
|
|
Earnings
available to common stockholders
|
|
|
|
|
|
before
and after assumed conversions
|
|
$
|
18,672
|
|
|
14,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Basic
earnings per share -
|
|
|
|
|
|
|
|
weighted-average
shares
|
|
|
3,621
|
|
|
3,618
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive stock options
|
|
|
35
|
|
|
37
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share -
|
|
|
|
|
|
|
|
adjusted
weighted-average
|
|
|
|
|
|
|
|
shares
for assumed conversions
|
|
|
3,656
|
|
|
3,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
5.16
|
|
|
3.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
5.11
|
|
|
3.84
|
|
(5)
PENSION AND OTHER POSTRETIREMENT PLANS
(A)
Defined Benefit Pension Plans
The
Company sponsors a qualified defined benefit pension plan covering substantially
all employees. The plan provides benefits based on the participants' years
of
service and compensation. The Company makes annual contributions to the plan
that complies with the minimum funding provisions of the Employee Retirement
Income Security Act of 1974 ("ERISA"). The following summarizes the components
of net periodic benefit cost.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
173
|
|
|
171
|
|
Interest
cost
|
|
|
255
|
|
|
244
|
|
Expected
return on plan assets
|
|
|
(237
|
)
|
|
(228
|
)
|
Amortization
of prior service cost
|
|
|
1
|
|
|
1
|
|
Amortization
of net loss
|
|
|
88
|
|
|
83
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$
|
280
|
|
|
271
|
|
The
Company expects to contribute $1.8 million to the plan in 2007. As of March
31,
2007, the Company has contributed $0.3 million to the plan.
The
Company also sponsors a non-qualified defined benefit plan primarily for
senior
officers. The plan provides benefits based on the participants' years of
service
and compensation. The pension obligations and administrative responsibilities
of
the plan are maintained by a pension administration firm, which is a subsidiary
of American National Insurance Company ("ANICO"). ANICO has guaranteed the
payment of pension obligations under the plan. However, the Company has a
contingent liability with respect to the pension plan should these entities
be
unable to meet their obligations under the existing agreements. Also, the
Company has a contingent liability with respect to the plan in the event
that a
plan participant continues employment with the Company beyond age seventy,
the
aggregate average annual participant salary increases exceed 10% per year,
or
any additional employees become eligible to participate in the plan. If any
of
these conditions are met, the Company would be responsible for any additional
pension obligations resulting from these items. Amendments were made to the
plan
to allow an additional employee to participate and to change the benefit
formula
for the Chairman of the Company. As previously mentioned, these additional
obligations are a liability to the Company. Effective December 31, 2004,
this
plan was frozen with respect to the continued accrual of benefits of the
Chairman and the President of the Company in order to comply with law changes
under the American Jobs Creation Act of 2004 ("Act").
Effective
July 1, 2005, the Company established a second non-qualified defined benefit
plan for the benefit of the Chairman of the Company. This plan is intended
to
provide for post-2004 benefit accruals that mirror and supplement the pre-2005
benefit accruals under the previously discussed non-qualified plan, while
complying with the requirements of the Act.
Effective
November 1, 2005, the Company established a third non-qualified defined benefit
plan for the benefit of the President of the Company. This plan is intended
to
provide for post-2004 benefit accruals that supplement the pre-2005 benefit
accruals under the first non-qualified plan as previously discussed, while
complying with the requirements of the Act.
The
following summarizes the components of net periodic benefit costs for these
non-qualified plans.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
407
|
|
|
324
|
|
Interest
cost
|
|
|
177
|
|
|
73
|
|
Amortization
of prior service cost
|
|
|
260
|
|
|
162
|
|
Amortization
of net loss
|
|
|
46
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$
|
890
|
|
|
559
|
|
The
Company expects to contribute $1.4 million to these plans in 2007. As of
March
31, 2007, the Company has contributed $0.3 million to the plan.
(B)
Defined Benefit Postretirement Plans
The
Company sponsors two healthcare plans to provide postretirement benefits
to
certain fully-vested individuals. The following summarizes the components
of net
periodic benefit costs.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Interest
cost
|
|
$
|
29
|
|
|
25
|
|
Amortization
of prior service cost
|
|
|
26
|
|
|
26
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$
|
55
|
|
|
51
|
|
As
previously disclosed in its financial statements for the year ended December
31,
2006, the Company expects to contribute minimal amounts to the plan in
2007.
(6)
SEGMENT AND OTHER OPERATING INFORMATION
Under
Statement of Financial Accounting Standards ("SFAS") No. 131,
Disclosures About Segments of an Enterprise and Related
Information,
the
Company defines its reportable operating segments as domestic life insurance,
international life insurance, and annuities. These segments are organized
based
on product types and geographic marketing areas. A summary of segment
information for the quarters ended March 31, 2007 and 2006 is provided
below.
Selected
Segment Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
International
|
|
|
|
|
|
|
|
|
|
Life
|
|
Life
|
|
|
|
All
|
|
|
|
|
|
Insurance
|
|
Insurance
|
|
Annuities
|
|
Others
|
|
Totals
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Balance Sheet Items:
|
|
|
|
|
|
|
|
|
|
Deferred
policy acquisition
|
|
|
|
|
|
|
|
|
|
|
|
costs
and sales inducements
|
|
$
|
52,491
|
|
|
180,409
|
|
|
499,369
|
|
|
-
|
|
|
732,269
|
|
Total
segment assets
|
|
|
388,103
|
|
|
723,250
|
|
|
5,487,541
|
|
|
103,794
|
|
|
6,702,688
|
|
Future
policy benefits
|
|
|
316,880
|
|
|
509,015
|
|
|
4,713,294
|
|
|
-
|
|
|
5,539,189
|
|
Other
policyholder liabilities
|
|
|
10,812
|
|
|
18,605
|
|
|
89,205
|
|
|
-
|
|
|
118,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Income Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues
|
|
$
|
6,333
|
|
|
21,671
|
|
|
5,525
|
|
|
-
|
|
|
33,529
|
|
Net
investment income
|
|
|
4,678
|
|
|
5,762
|
|
|
65,753
|
|
|
833
|
|
|
77,026
|
|
Other
income
|
|
|
14
|
|
|
45
|
|
|
228
|
|
|
3,029
|
|
|
3,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
11,025
|
|
|
27,478
|
|
|
71,506
|
|
|
3,862
|
|
|
113,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy
benefits
|
|
|
6,141
|
|
|
3,677
|
|
|
1,156
|
|
|
-
|
|
|
10,974
|
|
Amortization
of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition
costs
|
|
|
1,864
|
|
|
8,163
|
|
|
13,758
|
|
|
-
|
|
|
23,785
|
|
Universal
life and investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
annuity
contract interest
|
|
|
2,320
|
|
|
5,252
|
|
|
29,861
|
|
|
-
|
|
|
37,433
|
|
Other
operating expenses
|
|
|
2,712
|
|
|
4,310
|
|
|
4,481
|
|
|
2,613
|
|
|
14,116
|
|
Federal
income taxes
|
|
|
(660
|
)
|
|
1,995
|
|
|
7,303
|
|
|
410
|
|
|
9,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
12,377
|
|
|
23,397
|
|
|
56,559
|
|
|
3,023
|
|
|
95,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings (losses)
|
|
$
|
(1,352
|
)
|
|
4,081
|
|
|
14,947
|
|
|
839
|
|
|
18,515
|
|
|
|
Domestic
|
|
International
|
|
|
|
|
|
|
|
|
|
Life
|
|
Life
|
|
|
|
All
|
|
|
|
|
|
Insurance
|
|
Insurance
|
|
Annuities
|
|
Others
|
|
Totals
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Balance Sheet Items:
|
|
|
|
|
|
|
|
|
|
Deferred
policy acquisition
|
|
|
|
|
|
|
|
|
|
|
|
costs
and sales inducements
|
|
$
|
46,656
|
|
|
170,959
|
|
|
504,707
|
|
|
-
|
|
|
722,322
|
|
Total
segment assets
|
|
|
372,095
|
|
|
653,254
|
|
|
5,303,082
|
|
|
96,410
|
|
|
6,424,841
|
|
Future
policy benefits
|
|
|
310,572
|
|
|
456,038
|
|
|
4,594,157
|
|
|
-
|
|
|
5,360,767
|
|
Other
policyholder liabilities
|
|
|
11,786
|
|
|
18,357
|
|
|
78,749
|
|
|
-
|
|
|
108,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Income Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues
|
|
$
|
5,834
|
|
|
19,384
|
|
|
5,729
|
|
|
-
|
|
|
30,947
|
|
Net
investment income
|
|
|
5,196
|
|
|
7,014
|
|
|
85,998
|
|
|
479
|
|
|
98,687
|
|
Other
income
|
|
|
8
|
|
|
23
|
|
|
2,707
|
|
|
2,460
|
|
|
5,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
11,038
|
|
|
26,421
|
|
|
94,434
|
|
|
2,939
|
|
|
134,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy
benefits
|
|
|
4,954
|
|
|
5,381
|
|
|
1,107
|
|
|
-
|
|
|
11,442
|
|
Amortization
of deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition
costs
|
|
|
1,401
|
|
|
4,941
|
|
|
15,956
|
|
|
-
|
|
|
22,298
|
|
Universal
life and investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
annuity
contract interest
|
|
|
2,270
|
|
|
5,941
|
|
|
47,837
|
|
|
-
|
|
|
56,048
|
|
Other
operating expenses
|
|
|
5,262
|
|
|
8,118
|
|
|
9,761
|
|
|
2,233
|
|
|
25,374
|
|
Federal
income taxes
|
|
|
(949
|
)
|
|
680
|
|
|
6,584
|
|
|
235
|
|
|
6,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
12,938
|
|
|
25,061
|
|
|
81,245
|
|
|
2,468
|
|
|
121,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings (losses)
|
|
$
|
(1,900
|
)
|
|
1,360
|
|
|
13,189
|
|
|
471
|
|
|
13,120
|
|
Reconciliations
of segment information to the Company's condensed consolidated financial
statements are provided below.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
Premiums
and Other Revenue:
|
|
|
|
|
|
Premiums
and contract revenues
|
|
$
|
33,529
|
|
|
30,947
|
|
Net
investment income
|
|
|
77,026
|
|
|
98,687
|
|
Other
income
|
|
|
3,316
|
|
|
5,198
|
|
Realized
gains on investments
|
|
|
241
|
|
|
1,423
|
|
|
|
|
|
|
|
|
|
Total
consolidated premiums and other revenue
|
|
$
|
114,112
|
|
|
136,255
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
Federal
Income Taxes:
|
|
|
|
|
|
Total
segment Federal income taxes
|
|
$
|
9,048
|
|
|
6,550
|
|
Taxes
on realized gains on investments
|
|
|
84
|
|
|
498
|
|
|
|
|
|
|
|
|
|
Total
consolidated Federal income taxes
|
|
$
|
9,132
|
|
|
7,048
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
Net
Earnings:
|
|
|
|
|
|
Total
segment earnings
|
|
$
|
18,515
|
|
|
13,120
|
|
Realized
gains on investments, net of taxes
|
|
|
157
|
|
|
925
|
|
|
|
|
|
|
|
|
|
Total
consolidated net earnings
|
|
$
|
18,672
|
|
|
14,045
|
|
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
Assets:
|
|
|
|
|
|
Total
segment assets
|
|
$
|
6,702,688
|
|
|
6,424,841
|
|
Other
unallocated assets
|
|
|
24,790
|
|
|
18,351
|
|
|
|
|
|
|
|
|
|
Total
consolidated assets
|
|
$
|
6,727,478
|
|
|
6,443,192
|
|
(7) SHARE-BASED
PAYMENTS
The
Company has a stock and incentive plan ("Plan") which provides for the grant
of
any or all of the following types of awards to eligible employees: (1) stock
options, including incentive stock options and nonqualified stock options;
(2)
stock appreciation rights, in tandem with stock options or freestanding;
(3)
restricted stock; (4) incentive awards; and (5) performance awards. The Plan
began on April 21, 1995, and was to terminate on April 20, 2005, unless
terminated earlier by the Board of Directors. The Plan was amended on June
25,
2004 to extend the termination date to April 20, 2010. The number of shares
of
Class A, $1.00 par value, common stock which may be issued under the Plan,
or as
to which stock appreciation rights or other awards may be granted, may not
exceed 300,000. These shares may be authorized and unissued shares. The Company
has only issued nonqualified stock options.
All
of
the employees of the Company and its subsidiaries are eligible to participate
in
the Plan. In addition, directors of the Company, other than Compensation
and
Stock Option Committee members, are eligible for restricted stock awards,
incentive awards, and performance awards. Company directors, including members
of the Compensation and Stock Option Committee, are eligible for
nondiscretionary stock options. The directors' stock options vest 20% annually
following one full year of service to the Company from the date of grant.
The
officers' stock options vest 20% annually following three full years of service
to the Company from the date of grant. Options issued expire after ten years.
No
awards were issued in 2007 or 2006.
Through
December 31, 2005, the Company classified the Plan as equity 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. A summary of
shares
available for grant and stock option activity is detailed below.
|
|
|
|
Options
Outstanding
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Shares
|
|
|
|
Average
|
|
|
|
Available
|
|
|
|
Exercise
|
|
|
|
For
Grant
|
|
Shares
|
|
Price
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2007
|
|
|
26,477
|
|
|
128,465
|
|
$
|
123.00
|
|
Stock
Options:
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
(17,020
|
)
|
|
100.38
|
|
Forfeited
|
|
|
1,110
|
|
|
(1,110
|
)
|
|
131.23
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2007
|
|
|
27,587
|
|
|
110,335
|
|
$
|
126.40
|
|
The
total
intrinsic value of options exercised was $2.4 million and $1.9 million for
the
three months ended March 31, 2007 and 2006, respectively. The total share-based
liabilities paid were $2.2 million for the three months ended March 31, 2007.
The total fair value of shares vested during the three months ended March
31,
2007 was $0.3 million.
The
following table summarizes information about stock options outstanding at
March
31, 2007.
|
|
Options
Outstanding
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Number
|
|
Remaining
|
|
Options
|
|
|
|
Outstanding
|
|
Contractual
Life
|
|
Exercisable
|
|
Exercise
prices:
|
|
|
|
|
|
|
|
$ 85.13
|
|
|
81
|
|
|
0.1
years
|
|
|
81
|
|
105.25
|
|
|
9,130
|
|
|
1.0
years
|
|
|
9,130
|
|
112.38
|
|
|
6,800
|
|
|
1.2
years
|
|
|
6,800
|
|
92.13
|
|
|
26,574
|
|
|
4.1
years
|
|
|
12,198
|
|
95.00
|
|
|
7,200
|
|
|
4.2
years
|
|
|
7,200
|
|
150.00
|
|
|
60,550
|
|
|
7.1
years
|
|
|
3,800
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
110,335
|
|
|
|
|
|
39,209
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
intrinsic value
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
$
|
13,064
|
|
|
|
|
$
|
5,488
|
|
The
aggregate intrinsic value in the table above is based on the closing stock
price
of $244.80 per share on March 31, 2007.
In
estimating the fair value of the options outstanding at March 31, 2007 and
2006,
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
|
|
|
15.63%
to 23.72
|
%
|
|
17.36%
to 24.28
|
%
|
Weighted-average
|
|
|
19.36
|
%
|
|
20.09
|
%
|
Expected
dividends
|
|
|
-
|
|
|
-
|
|
Risk-free
rate:
|
|
|
|
|
|
|
|
Range
|
|
|
4.57%
to 4.95
|
%
|
|
4.99%
to 5.06
|
%
|
Weighted-average
|
|
|
4.67
|
%
|
|
5.02
|
%
|
The
Company reviewed the contractual term relative to the options as well as
perceived future behavior patterns of exercise. Volatility is based on
historical volatility over the expected term.
The
pre-tax compensation cost recognized in the financial statements related
to the
Plan was $1.3 million and $12.5 million for the three months ended March
31,
2007 and 2006, respectively. The related tax benefit recognized was $0.4
million
and $4.4 million for the three months ended March 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.
As
of
March 31, 2007, the total compensation cost related to nonvested options
not yet
recognized was $0.3 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.
For
the
three months ended March 31, 2007 and 2006, the total cash received from
the
exercise of options under the Plan was $0.1 million and $0.2 million,
respectively.
(8)
LEGAL PROCEEDINGS
In
the
course of an audit of a charitable tax-exempt foundation, the Internal Revenue
Service (“IRS”) raised an issue under the special provisions of the Internal
Revenue Code (“IRC”) governing tax-exempt private foundations as to certain
interest-bearing loans from the Company to another corporation in which the
tax-exempt foundation owns stock. The issue is whether such transactions
constitute indirect self-dealing by the foundation, the result of which would
be
excise taxes on the Company by virtue of its participation in such transactions.
By letter to the Company dated August 21, 2003, the IRS proposed an initial
excise tax liability in the total amount approximating one million dollars
as a
result of such transactions. The Company disagrees with the IRS analysis.
The
Company is contesting the matter and expects to prevail on the merits. On
October 14, 2003, in response to the IRS letter, the Company requested that
this
issue instead be referred to the IRS National Office for technical advice.
The
IRS audit team agreed and the matter was referred in November of 2003 to
the IRS
National Office. Such technical advice has now been issued by the IRS National
Office in the form of a memorandum analyzing the issue which concludes that
such
loans do not constitute indirect self-dealing. This technical advice memorandum
is binding on the IRS audit team.
The
Company is a defendant in three class action lawsuits, and one class has
been
certified regarding an alleged violation of section 17200 of the California
Business and Professions Code. Management believes that the Company has good
and
meritorious defenses and intends to continue to vigorously defend itself
against
these claims.
The
Company is involved or may become involved in various other legal actions,
in
the normal course of business, in which claims for alleged economic and punitive
damages have been or may be asserted, some for substantial amounts. Although
there can be no assurances, at the present time, the Company does not anticipate
that the ultimate liability arising from potential, pending, or threatened
legal
actions, will have a material adverse effect on the financial condition or
operating results of the Company.
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING
STATEMENTS
The
Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for
forward-looking statements. Certain information contained herein or in other
written or oral statements made by or on behalf of National Western Life
Insurance Company or its subsidiaries is or may be viewed as forward-looking.
Although the Company has used appropriate care in developing any such
information, forward-looking information involves risks and uncertainties
that
could significantly impact actual results. These risks and uncertainties
include, but are not limited to, matters described in the Company's filings
with
the Securities and Exchange Commission ("SEC") such as exposure to market
risks,
anticipated cash flows or operating performance, future capital needs, and
statutory or regulatory related issues. However National Western, as a matter
of
policy, does not make any specific projections as to future earnings, nor
does
it endorse any projections regarding future performance that may be made
by
others. Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable events or
developments. Also, the Company undertakes no obligation to publicly update
or
revise any forward-looking statements, whether as a result of new information,
future developments, or otherwise.
OVERVIEW
Insurance
Operations - Domestic
The
Company is currently licensed to do business in all states except for New
York.
Products marketed are annuities, universal life insurance, equity-indexed
annuities and universal life, and traditional life insurance, which include
both
term and whole life products. The Company’s domestic sales have historically
been more heavily weighted toward annuity products, which include single
and
flexible premium deferred annuities, single premium immediate annuities,
and
equity-indexed annuities. Most of these annuities can be sold as tax qualified
or nonqualified products. At March 31, 2007, the Company maintained
approximately 123,000 annuity policies in force.
National
Western markets and distributes its domestic products primarily through
independent national marketing organizations ("NMOs"). These NMOs assist
the
Company in recruiting, contracting, and managing independent agents. The
Company
currently has approximately 9,100 independent agents contracted. Roughly
19% of
these contracted agents have submitted policy applications to the Company
in the
past twelve months.
Insurance
Operations - International
The
Company's international operations focus on foreign nationals in upper
socioeconomic classes. Insurance products are issued primarily to residents
of
countries in Central and South America, the Caribbean, Eastern Europe, Asia
and
the Pacific Rim. Issuing policies to residents of countries in these different
regions provides diversification that helps to minimize large fluctuations
that
could arise due to various economic, political, and competitive pressures
that
may occur from one country to another. Products issued to international
residents are almost entirely universal life and traditional life insurance
products. However, certain annuity and investment contracts are also available.
At March 31, 2007, the Company had approximately 68,900 international life
insurance policies in force representing approximately $13.4 billion in face
amount of coverage.
International
applications are submitted by independent contractor consultants and
broker-agents. The Company has approximately 4,300 independent international
consultants and brokers currently contracted, 45% of which have submitted
policy
applications to the Company in the past twelve months.
There
are
some inherent risks of accepting international applications which are not
present within the domestic market that are reduced substantially by the
Company
in several ways. As previously described, the Company accepts applications
from
foreign nationals in upper socioeconomic classes who have substantial financial
resources. This targeted customer base coupled with the Company's conservative
underwriting practices have historically resulted in claims experience, due
to
natural causes, similar to that in the United States. The Company minimizes
exposure to foreign currency risks by requiring payment of premiums, claims
and
other benefits almost entirely in United States dollars. Finally, the Company's
nearly forty years of experience with the international products and its
longstanding independent consultant and broker-agents relationships further
serve to minimize risks.
SALES
Life
Insurance
The
following table sets forth information regarding the Company's life insurance
sales activity as measured by annualized first year premiums. While the figures
shown below are in accordance with industry practice and represent the amount
of
new business sold during the periods indicated, they are considered a non-GAAP
financial measure. The Company believes sales are a measure of distribution
productivity and are a leading indicator of future revenue trends. However,
revenues are driven by sales in prior periods as well as in the current period
and therefore, a reconciliation of sales to revenues is not meaningful or
determinable.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
International:
|
|
|
|
|
|
Universal
life
|
|
$
|
1,644
|
|
|
1,906
|
|
Traditional
life
|
|
|
1,727
|
|
|
1,219
|
|
Equity-indexed
life
|
|
|
4,727
|
|
|
4,135
|
|
|
|
|
8,098
|
|
|
7,260
|
|
|
|
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
|
Universal
life
|
|
|
373
|
|
|
695
|
|
Traditional
life
|
|
|
75
|
|
|
64
|
|
Equity-indexed
life
|
|
|
1,422
|
|
|
408
|
|
|
|
|
1,870
|
|
|
1,167
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
9,968
|
|
|
8,427
|
|
Life
insurance sales as measured by annualized first year premiums increased 18%
in
the first quarter of 2007 as compared to the first quarter of 2006. Both
of the
Company's life lines of business, international and domestic, posted increases
over the comparable results in the first quarter of 2006 with international
sales up 12% and domestic sales 60% greater.
Company
management has placed considerable emphasis on building domestic life insurance
sales as a strategic focus and in response to comments from outside rating
agencies reviewing the Company. Domestic operations have generally focused
more
heavily on annuity sales than on life insurance sales. The Company spent
the
greater part of 2003 and 2004 revamping its domestic life operations by changing
the way it contracts distribution for life business, eliminating products
and
distribution that have not contributed significantly to earnings, and creating
new and competitive products. A single premium universal life ("SPUL") product
was launched at the end of 2003 beginning a diversification of the Company's
product portfolio away from smaller dollar face amount policies. The Company
released its first equity-indexed universal life ("EIUL") product for its
domestic markets at the end of the third quarter of 2005 and began receiving
applications. This product accounted for 76% of domestic life insurance sales
in
the first three months of 2007 and management anticipates this share to continue
throughout the remainder of the year. With the introduction of the EIUL and
SPUL
products and the discontinued marketing of smaller premium and volume life
insurance policies, the Company has seen an increase in the average amount
of
per policy coverage purchased in its domestic markets as shown in the following
table:
|
|
Average
New Policy Face Amount
|
|
|
|
Domestic
|
|
International
|
|
|
|
|
|
Year
ended December 31, 2003
|
|
$
|
76,100
|
|
|
219,600
|
|
Year
ended December 31, 2004
|
|
|
101,700
|
|
|
234,500
|
|
Year
ended December 31, 2005
|
|
|
137,900
|
|
|
245,900
|
|
Year
ended December 31, 2006
|
|
|
315,800
|
|
|
254,700
|
|
Three
months ended March 31, 2007
|
|
|
353,200
|
|
|
217,600
|
|
The
Company's international life business consists of applications submitted
from
residents in various regions outside of the United States, the volume of
which
typically varies based upon changes in the socioeconomic climates of these
regions. Historically, the Company has experienced a simultaneous combination
of
rising and declining sales in various countries; however, the appeal of the
Company's dollar-denominated life insurance products overcomes many of the
local
and national difficulties. Applications submitted from residents of Latin
America and the Pacific Rim perennially have comprised the majority of the
Company's international life insurance sales. Over the past few years, effort
has been directed toward the sale of a traditional endowment form of life
insurance product for residents of Eastern European and the Commonwealth
of
Independent States (former Soviet Union). More recently, the Company's universal
life product offerings have been made available to residents of these countries.
While business is still be in a formative phase, sales from these countries
have
gradually become a larger percentage of overall international sales as shown
below.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
Percentage
of International Sales:
|
|
|
|
|
|
Latin
America
|
|
|
60.6
|
%
|
|
70.4
|
%
|
Pacific
Rim
|
|
|
18.6
|
|
|
14.6
|
|
Eastern
Europe
|
|
|
20.8
|
|
|
15.0
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Year-to-date,
the Company has recorded sales to residents outside of the United States
in over
thirty different countries with Brazil (27%), Taiwan (18%), and Kazakhstan
(13%)
making up the largest markets.
The
table
below sets forth information regarding the Company's life insurance in force
for
each date presented.
|
|
Insurance
In Force as of March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
($
in thousands)
|
|
Universal
life:
|
|
|
|
|
|
Number
of policies
|
|
75,550
|
|
78,920
|
|
Face
amounts
|
|
$
|
8,007,830
|
|
|
8,077,810
|
|
|
|
|
|
|
|
|
|
Traditional
life:
|
|
|
|
|
|
|
|
Number
of policies
|
|
|
52,880
|
|
|
54,490
|
|
Face
amounts
|
|
$
|
1,756,000
|
|
|
1,736,000
|
|
|
|
|
|
|
|
|
|
Equity-indexed
life:
|
|
|
|
|
|
|
|
Number
of policies
|
|
|
20,630
|
|
|
16,520
|
|
Face
amounts
|
|
$
|
4,519,930
|
|
|
3,411,650
|
|
|
|
|
|
|
|
|
|
Rider
face amounts
|
|
$
|
1,817,290
|
|
|
1,603,430
|
|
|
|
|
|
|
|
|
|
Total
life insurance:
|
|
|
|
|
|
|
|
Number
of policies
|
|
|
149,060
|
|
|
149,930
|
|
Face
amounts
|
|
$
|
16,101,050
|
|
|
14,828,890
|
|
Annuities
The
following table sets forth information regarding the Company's annuity sales
activity as measured by single and annualized first year premiums. Similar
to
life insurance sales, these figures are considered a non-GAAP financial measure
but are shown in accordance with industry practice and depict the Company's
sales productivity.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Equity-indexed
annuities
|
|
$
|
68,684
|
|
|
59,522
|
|
Other
deferred annuities
|
|
|
27,657
|
|
|
46,693
|
|
Immediate
annuities
|
|
|
1,722
|
|
|
4,079
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
98,063
|
|
|
110,294
|
|
Annuity
sales for the first three months of 2007 were 11% lower than the comparable
period in 2006 continuing a trend that began in the first quarter of 2004.
Annuity sales in the first quarter of 2004 represented the tail end of the
increase in fixed annuity sales that began in 2003 when the Company achieved
nearly $1.2 billion in sales. Annuity sales began trending lower due to a
combination of declining interest rates, investors returning to alternative
investment vehicles and the Company managing its targeted levels of risk
and
statutory capital and surplus. During the past couple of years interest rate
levels have experienced an infrequent occurrence where the yield curve is
inverted, that is, longer term interest rate levels were below shorter term
interest rate levels. In such an environment, consumers opt for short term
investment vehicles such as bank certificates of deposits rather than longer
term choices which include fixed rate annuities.
The
Company's mix of annuity sales has shifted the past few years. With a stronger
performance in the equity market, sales of equity-indexed annuity products
became more prevalent beginning in 2004 and have continued thus far in 2007.
Over the past several years sales of equity-indexed products have consistently
accounted for more than one-half of all annuity sales and were 70% in the
first
quarter of 2007. For all equity-indexed products, the Company purchases over
the
counter options to fully hedge the equity return feature. The options are
purchased relative to the issuance of the annuity contracts in such a manner
to
minimize timing risk. Generally, the index return during the indexing period
(if
the underlying index increases), less any asset fees and participation rate
limits, is credited to the contract holders electing the equity feature at
the
beginning of the contract year. The Company does not deliberately mismatch
or
under hedge for the equity feature of these products.
The
sizable increase in annuity sales volume the past several years has required
a
greater level of asset/liability analysis. The Company monitors its
asset/liability matching within the self-constraints of desired capital levels.
Despite the amounts of new business, the company's capital level remains
substantially above industry averages and regulator targets.
The
following table sets forth information regarding annuities in force for each
date presented.
|
|
Annuities
in Force as of March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
($
in thousand)
|
|
|
|
|
|
|
|
Equity-indexed
annuities
|
|
|
|
|
|
Number
of policies
|
|
31,000
|
|
27,730
|
|
GAAP
annuity reserves
|
|
$
|
1,834,094
|
|
|
1,624,965
|
|
|
|
|
|
|
|
|
|
Other
deferred annuities
|
|
|
|
|
|
|
|
Number
of policies
|
|
|
79,020
|
|
|
83,250
|
|
GAAP
annuity reserves
|
|
$
|
2,627,803
|
|
|
2,719,428
|
|
|
|
|
|
|
|
|
|
Immediate
annuities
|
|
|
|
|
|
|
|
Number
of policies
|
|
|
12,990
|
|
|
12,450
|
|
GAAP
annuity reserves
|
|
$
|
248,420
|
|
|
246,786
|
|
|
|
|
|
|
|
|
|
Total
annuities
|
|
|
|
|
|
|
|
Number
of policies
|
|
|
123,010
|
|
|
123,430
|
|
GAAP
annuity reserves
|
|
$
|
4,710,317
|
|
|
4,591,179
|
|
|
|
|
|
|
|
|
|
Critical
Accounting Estimates
Accounting
policies discussed below are those considered critical to an understanding
of
the Company's financial statements.
Impairment
of Investment Securities. The
Company's accounting policy requires that a decline in the value of a security
below its amortized cost basis be evaluated to determine if the decline is
other-than-temporary. The primary factors considered in evaluating whether
a
decline in value for fixed income and equity securities is other-than-temporary
include: (a) the length of time and the extent to which the fair value has
been
less than cost, (b) the financial conditions and near-term prospects of the
issuer, (c) whether the debtor is current on contractually obligated principal
and interest payments, and (d) the intent and ability of the Company to retain
the investment for a period of time sufficient to allow for any anticipated
recovery. In addition, certain securitized financial assets with contractual
cash flows are evaluated periodically by the Company to update the estimated
cash flows over the life of the security. If the Company determines that
the
fair value of the securitized financial asset is less than its carrying amount
and there has been a decrease in the present value of the estimated cash
flows
since the previous estimate, then an other-than-temporary impairment charge
is
recognized. When a security is deemed to be impaired a charge is recorded
as net
realized losses equal to the difference between the fair value and amortized
cost basis of the security. Once an impairment charge has been recorded,
the
fair value of the impaired investment becomes its new cost basis and the
Company
continues to review the other-than-temporarily impaired security for appropriate
valuation on an ongoing basis. Under U.S. generally accepted accounting
principles, the Company is not permitted to increase the basis of impaired
securities for subsequent recoveries in value.
Deferred
Policy Acquisition Costs ("DAC"). The
Company is required to defer certain policy acquisition costs and amortize
them
over future periods. These costs include commissions and certain other expenses
that vary with and are primarily associated with acquiring new business.
The
deferred costs are recorded as an asset commonly referred to as deferred
policy
acquisition costs. The DAC asset balance is subsequently charged to income
over
the lives of the underlying contracts in relation to the anticipated emergence
of revenue or profits. Actual revenue or profits can vary from Company estimates
resulting in increases or decreases in the rate of amortization. The Company
regularly evaluates to determine if actual experience or other evidence suggests
that earlier estimates should be revised. Assumptions considered significant
include surrender and lapse rates, mortality, expense levels, investment
performance, and estimated interest spread. Should actual experience dictate
that the Company change its assumptions regarding the emergence of future
revenues or profits (commonly referred to as "unlocking"), the Company would
record a charge or credit to bring its DAC balance to the level it would
have
been if using the new assumptions from the inception date of each
policy.
DAC
is
also subject to periodic recoverability and loss recognition testing. These
tests ensure that the present value of future contract-related cash flows
will
support the capitalized DAC balance to be amortized in the future. The present
value of these cash flows, less the benefit reserve, is compared with the
unamortized DAC balance and if the DAC balance is greater, the deficiency
is
charged to expense as a component of amortization and the asset balance is
reduced to the recoverable amount.
Deferred
Sales Inducements.
Costs
related to sales inducements offered on sales to new customers, principally
on
investment type contracts and primarily in the form of additional credits
to the
customer's account value or enhancements to interest credited for a specified
period, which are beyond amounts currently being credited to existing contracts,
are deferred and recorded as other assets. All other sales inducements are
expensed as incurred and included in interest credited to contract holders'
funds. Deferred sales inducements are amortized to income using the same
methodology and assumptions as DAC, and are included in interest credited
to
contract holders' funds. Deferred sales inducements are periodically reviewed
for recoverability.
Future
Policy Benefits. Because
of the long-term nature of insurance contracts, the Company is liable for
policy
benefit payments many years into the future. The liability for future policy
benefits represents estimates of the present value of the Company's expected
benefit payments, net of the related present value of future net premium
collections. For traditional life insurance contracts, this is determined
by
standard actuarial procedures, using assumptions as to mortality (life
expectancy), morbidity (health expectancy), persistency, and interest rates,
which are based on the Company's experience with similar products. The
assumptions used are those considered to be appropriate at the time the policies
are issued. An additional provision is made on most products to allow for
possible adverse deviation from the assumptions 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.
Revenue
Recognition. Premium
income for the Company's traditional life insurance contracts is generally
recognized as the premium becomes due from policyholders. For annuity and
universal life contracts, the amounts collected from policyholders are
considered deposits and are not included in revenue. For these contracts,
fee
income consists of policy charges for policy administration, cost of insurance
charges and surrender charges assessed against policyholders' account balances
which are recognized in the period the services are provided.
Investment
activities of the Company are integral to its insurance operations. Since
life
insurance benefits may not be paid until many years into the future, the
accumulation of cash flows from premium receipts are invested with income
reported as revenue when earned. Anticipated yields on investments are reflected
in premium rates, contract liabilities, and other product contract features.
These anticipated yields are implied in the interest required on the Company's
net insurance liabilities (future policy benefits less deferred acquisition
costs) and contractual interest obligations in its insurance and annuity
products. The Company benefits to the extent actual net investment income
exceeds the required interest on net insurance liabilities and manages the
rates
it credits on its products to maintain the targeted excess or "spread" of
investment earnings over interest credited. The Company will continue to
be
required to provide for future contractual obligations in the event of a
decline
in investment yield. For more information concerning revenue recognition,
investment accounting, and interest sensitivity, please refer to Note 1,
Summary
of Significant Accounting Policies, and Note 3, Investments, in the Notes
to
Consolidated Financial Statements included in the Company's Annual Report
on
Form 10-K for the year ended December 31, 2006, and the discussions under
Investments in Item 3 of this report.
Pension
Plans and Other Postretirement Benefits. The
Company sponsors a qualified defined benefit pension plan covering substantially
all employees and three nonqualified defined benefit plans covering certain
senior officers. In addition, the Company also has postretirement healthcare
benefits for certain senior officers. In accordance with prescribed accounting
standards, the Company annually reviews plan assumptions.
The
Company annually reviews its pension benefit plan assumptions which include
the
discount rate, the expected long-term rate of return on plan assets, and
the
compensation increase rate. The assumed discount rate is set based on the
rates
of return on high quality long-term fixed income investments currently available
and expected to be available during the period to maturity of the pension
benefits. The assumed long-term rate of return on plan assets is generally
set
at the rate expected to be earned based on long-term investment policy of
the
plans and the various classes of the invested funds, based on the input of
the
plan's investment advisors and consulting actuary and the plan's historic
rate
of return. The compensation rate increase assumption is generally set at
a rate
consistent with current and expected long-term compensation and salary policy,
including inflation. These assumptions involve uncertainties and judgment
and
therefore actual performance may not be reflective of the
assumptions.
Other
postretirement benefit assumptions include future events affecting retirement
age, mortality, dependency status, per capita claims costs by age, healthcare
trend rates, and discount rates. Per capita claims cost by age is the current
cost of providing postretirement healthcare benefits for one year at each
age
from the youngest age to the oldest age at which plan participants are expected
to receive benefits under the plan. Healthcare trend rates involve assumptions
about the annual rate(s) of change in the cost of healthcare benefits currently
provided by the plan, due to factors other than changes in the composition
of
the plan population by age and dependency status. These rates implicitly
consider estimates of healthcare inflation, changes in utilization,
technological advances and changes in health status of the participants.
These
assumptions involve uncertainties and judgment, and therefore actual performance
may not be reflective of the assumptions.
Other
significant accounting policies, although not involving the same level of
measurement uncertainties as those discussed above but nonetheless important
to
an understanding of the financial statements, are described in the Company's
annual report on Form 10-K for the year ended December 31, 2006.
RESULTS
OF OPERATIONS
The
Company's consolidated financial statements are prepared in accordance with
U.S.
generally accepted accounting principles ("GAAP"). In addition, the Company
regularly evaluates operating performance using non-GAAP financial measures
which exclude or segregate derivatives and realized investment gains and
losses
from operating revenues and earnings. Similar measures are commonly used
in the
insurance industry in order to assess profitability and results from ongoing
operations. The Company believes that the presentation of these non-GAAP
financial measures enhances the understanding of the Company's results of
operations by highlighting the results from ongoing operations and the
underlying profitability factors of the Company's business. The Company excludes
or segregates derivatives and realized investment gains and losses because
such
items are often the result of events which may or may not be at the Company's
discretion and the fluctuating effects of these items could distort trends
in
the underlying profitability of the Company's business. Therefore, in the
following sections discussing consolidated operations and segment operations
appropriate reconciliations have been included to report information management
considers useful in enhancing an understanding of the Company's operations
to
reportable GAAP balances reflected in the consolidated financial
statements.
Consolidated
Operations
Revenues.
The
following details Company revenues.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Traditional
life and annuity premiums
|
|
$
|
4,733
|
|
|
3,991
|
|
Universal
life and annuity contract revenues
|
|
|
28,796
|
|
|
26,956
|
|
Net
investment income (excluding derivatives)
|
|
|
81,621
|
|
|
83,511
|
|
Other
income
|
|
|
3,316
|
|
|
5,198
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
|
118,466
|
|
|
119,656
|
|
Derivative
income (loss)
|
|
|
(4,595
|
)
|
|
15,176
|
|
Realized
gains on investments
|
|
|
241
|
|
|
1,423
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
114,112
|
|
|
136,255
|
|
Traditional
life and annuity premiums
-
Traditional life and annuity premiums increased 18.6% in the first three
months
of 2007 compared to the same period in 2006. Traditional life insurance premiums
for products such as whole life and term life are recognized as revenues
over
the premium-paying period.
Universal
life and annuity contract revenues
-
Revenues for universal life and annuity contract revenues increased 6.8%
for the
three months in 2007 compared to 2006 and consist of policy charges for the
cost
of insurance, administration charges, and surrender charges assessed against
policyholder account balances. Revenues in the form of cost of insurance
charges
were $17.9 million in the first quarter of 2007 compared to $16.5 million
for
the quarter ended March 31, 2006. Surrender charges assessed against
policyholder account balances upon withdrawal decreased to $7.6 million in
the
first quarter of 2007 versus $7.7 million in 2006.
Net
investment income
- A
detail of net investment income is provided below.
|
|
Three
Months Ended March 31,
|
|
%
of Total
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
investment income:
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
$
|
76,316
|
|
|
76,125
|
|
|
92.7
|
%
|
|
90.1
|
%
|
Mortgage
loans
|
|
|
2,208
|
|
|
2,638
|
|
|
2.7
|
|
|
3.1
|
|
Policy
loans
|
|
|
1,645
|
|
|
1,580
|
|
|
2.0
|
|
|
1.9
|
|
Other
invested assets
|
|
|
2,121
|
|
|
4,184
|
|
|
2.6
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment income
|
|
|
82,290
|
|
|
84,527
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Investment
expenses
|
|
|
669
|
|
|
1,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(excluding
derivatives)
|
|
|
81,621
|
|
|
83,511
|
|
|
|
|
|
|
|
Derivative
income (loss)
|
|
|
(4,595
|
)
|
|
15,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$
|
77,026
|
|
|
98,687
|
|
|
|
|
|
|
|
Income
from other invested assets for the three months ended March 31, 2006 includes
a
profit participation interest of $1.6 million and residual profits of $1.1
million from the sale of equity loans during the quarter. Derivative income
and
losses are recorded as a component of investment income but may fluctuate
substantially from period to period based on the performance of the S&P
500®
Composite Stock Price Index ("S&P 500 Index®").
See
the discussion that follows this section relating to index options and
derivatives.
To
ensure
the Company will be able to pay future commitments to policyholders and provide
a financial return, the funds received as premium payments and deposits are
invested in high quality investments, primarily debt securities. The income
from
these investments is closely monitored by the Company due to its significant
impact on the business.
Net
investment income performance is summarized as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Excluding
derivatives:
|
|
|
|
|
|
Net
investment income
|
|
$
|
81,621
|
|
|
83,511
|
|
Average
invested assets, at amortized cost
|
|
$
|
5,673,090
|
|
|
5,431,222
|
|
Annual
yield on average invested assets
|
|
|
5.75
|
%
|
|
6.15
|
%
|
|
|
|
|
|
|
|
|
Including
derivatives:
|
|
|
|
|
|
|
|
Net
investment income
|
|
$
|
77,026
|
|
|
98,687
|
|
Average
invested assets, at amortized cost
|
|
$
|
5,750,193
|
|
|
5,448,962
|
|
Annual
yield on average invested assets
|
|
|
5.36
|
%
|
|
7.24
|
%
|
The
yield
on average invested assets decreased from 6.15% in 2006 to 5.75% in
2007,
excluding derivatives. The higher yield in 2006 compared to 2007 is
due to the
additional income recognized from the other invested assets of $2.7
million as
previously described. Net investment income performance is analyzed
excluding
the derivative income which is a common practice in the insurance industry
in
order to assess underlying profitability and results from ongoing
operations.
Derivative
income (loss)
- Index
options are derivative financial instruments used to fully hedge the equity
return component of the Company's equity-indexed products. Index options
are
intended to act as hedges to match closely the returns on the S&P 500
Index®.
With an
increase or decline in this index, the index option values likewise increase
or
decline. Any income or loss from the sale or expiration of the options, as
well
as period-to-period changes in fair values, are reflected as a component
of net
investment income. However, increases or decreases in income from these options
are substantially offset by corresponding increases or decreases in amounts
credited to equity-indexed annuity and life policyholders.
Derivative
components included in net investment income and the corresponding contract
interest amounts are detailed below for each date presented.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
Unrealized
income (loss)
|
|
$
|
(8,590
|
)
|
|
16,014
|
|
Realized
income (loss)
|
|
|
3,995
|
|
|
(838
|
)
|
|
|
|
|
|
|
|
|
Total
income (loss) included in net investment income
|
|
$
|
(4,595
|
)
|
|
15,176
|
|
|
|
|
|
|
|
|
|
Total
contract interest
|
|
$
|
37,433
|
|
|
56,048
|
|
Other
income
- Other
income primarily pertains to the Company's operations involving a nursing
home.
Revenues associated with this operation were $3.0 million and $2.5 million
for
the three months ended March 31, 2007 and 2006, respectively. Included in
other
income for the three months ended March 31, 2006 is $2.6 million resulting
from
partial lawsuit settlements.
Realized
gains on investments
-
Realized investment gains of $0.2 million and $1.4 million were recorded
in the
first quarters of 2007 and 2006, respectively. The gains in 2006 are primarily
due to sales of collaterialized bond obligation holdings from the debt
securities portfolio which had previously been impaired.
Benefits
and Expenses. The
following details benefits and expenses.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
$
|
10,974
|
|
|
11,442
|
|
Amortization
of deferred acquisition costs
|
|
|
23,785
|
|
|
22,298
|
|
Universal
life and annuity contract interest
|
|
|
37,433
|
|
|
56,048
|
|
Other
operating expenses
|
|
|
14,116
|
|
|
25,374
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
86,308
|
|
|
115,162
|
|
Life
and other policy benefits
- Death
claims decreased from $8.9 million during the first quarter of 2006 to $7.7
million for the quarter ended March 31, 2007. While death claim amounts are
subject to variation from period to period, the Company's mortality experience
has generally been consistent with its product pricing assumptions.
Amortization
of deferred acquisition costs
- Life
insurance companies are required to defer certain expenses associated with
acquiring new business. The majority of these acquisition expenses consist
of
commissions paid to agents, underwriting costs, and certain marketing expenses
and sales inducements. The Company defers sales inducements in the form of
first
year interest bonuses on annuity and universal life products that are directly
related to the production of new business. These charges are deferred and
amortized using the same methodology and assumptions used to amortize other
capitalized acquisition costs and the amortization is included in contract
interest. Recognition of these deferred policy acquisition costs in the
financial statements occurs over future periods in relation to the emergence
of
profits priced into the products sold. This emergence of profits is based
upon
assumptions regarding premium payment patterns, mortality, persistency,
investment performance, and expense patterns. Companies are required to review
these assumptions periodically to ascertain whether actual experience has
deviated significantly from that assumed. If it is determined that a significant
deviation has occurred, the emergence of profits pattern is to be "unlocked"
and
reset based upon the actual experience. While the Company is required to
evaluate its emergence of profits continually, management believes that the
current amortization patterns of deferred policy acquisition costs are
reflective of actual experience.
Amortization
of deferred policy acquisition costs increased to $23.8 million in the first
quarter of 2007 compared to $22.3 million reported in 2006. In accordance
with
the newly adopted SOP 05-1, the Company’s amortization of these deferred costs
is expected to increase in the future. Under this pronouncement, annuitizations
and certain internal replacements of contracts result in the associated
unamortized deferred acquisition costs, unearned revenue liabilities, and
deferred sales inducement assets being written off.
Universal
life and annuity contract interest
- The
Company closely monitors its credited interest rates on interest sensitive
policies, taking into consideration such factors as profitability goals,
policyholder benefits, product marketability, and economic market conditions.
As
long term interest rates change, the Company's credited interest rates are
often
adjusted accordingly, taking into consideration the factors as described
above.
The difference between yields earned over policy credited rates is often
referred to as the "interest spread". Raising policy credited rates can
typically have more of an immediate impact than higher market rates on the
Company's investment portfolio yield, making it more difficult to maintain
the
current interest spread.
The
Company's approximated average credited rates are as follows:
|
|
March
31,
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(Excluding
derivative products)
|
|
(Including
derivative products)
|
|
|
|
|
|
|
|
|
|
|
|
Annuity
|
|
|
3.30
|
%
|
|
3.85
|
%
|
|
2.53
|
%
|
|
4.18
|
%
|
Interest
sensitive life
|
|
|
3.42
|
%
|
|
4.34
|
%
|
|
4.43
|
%
|
|
5.25
|
%
|
Contract
interest also includes the performance of the equity-index component of the
Company's derivative products as noted which resulted in losses of $4.6 million
and income of $15.2 million in the first three months of 2007 and 2006,
respectively. As previously noted, the recent market performance of these
equity-index features is included in contract interest expense while also
impacting the Company's investment income given the hedge nature of the options
purchased for these products.
Other
operating expenses
- Other
operating expenses consist of general administrative expenses, licenses and
fees, and commissions not subject to deferral. Like revenues from other income,
nursing home operation expenses are included in other operating expenses
in the
amount of $2.6 million and $2.2 million for the first quarters of 2007 and
2006,
respectively. Other operating expenses for the first quarter of 2006 includes
additional compensation cost of $12.5 million as a result of implementation
of
liability accounting under SFAS 123(R) for the Company's stock option plan.
Implementation of liability accounting resulted in a current charge for option
costs related to outstanding vested and unvested options. Compensation cost
recorded in the first quarter of 2007 totaled $1.3 million.
Federal
Income Taxes. Federal
income taxes on earnings from continuing operations reflect effective tax
rates
of 32.8% and 33.4% for the first quarter of 2007 and 2006, respectively,
which
are lower than the expected Federal rate of 35%. The effective tax rate is
lower
than the Federal rate of 35% primarily due to tax-exempt investment income
related to municipal securities and dividends-received deductions on income
from
stocks.
Segment
Operations
Summary
of Segment Earnings
A
summary
of segment earnings (losses) for the quarters ended March 31, 2007 and 2006
is
provided below. The segment earnings exclude realized gains and losses on
investments, net of taxes.
|
|
Domestic
|
|
International
|
|
|
|
|
|
|
|
|
|
Life
|
|
Life
|
|
|
|
All
|
|
|
|
|
|
Insurance
|
|
Insurance
|
|
Annuities
|
|
Others
|
|
Totals
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2007
|
|
$
|
(1,352
|
)
|
|
4,081
|
|
|
14,947
|
|
|
839
|
|
|
18,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2006
|
|
$
|
(1,900
|
)
|
|
1,360
|
|
|
13,189
|
|
|
471
|
|
|
13,120
|
|
Domestic
Life Insurance Operations
A
comparative analysis of results of operations for the Company's domestic
life
insurance segment is detailed below.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
Premiums
and other revenue:
|
|
|
|
|
|
Premiums
and contract revenues
|
|
$
|
6,333
|
|
|
5,834
|
|
Net
investment income
|
|
|
4,678
|
|
|
5,196
|
|
Other
income
|
|
|
14
|
|
|
8
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
11,025
|
|
|
11,038
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
6,141
|
|
|
4,954
|
|
Amortization
of deferred policy acquisition costs
|
|
|
1,864
|
|
|
1,401
|
|
Universal
life insurance contract interest
|
|
|
2,320
|
|
|
2,270
|
|
Other
operating expenses
|
|
|
2,712
|
|
|
5,262
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
13,037
|
|
|
13,887
|
|
|
|
|
|
|
|
|
|
Segment
earnings (losses) before Federal income taxes
|
|
|
(2,012
|
)
|
|
(2,849
|
)
|
|
|
|
|
|
|
|
|
Provision
(benefit) for Federal income taxes
|
|
|
(660
|
)
|
|
(949
|
)
|
|
|
|
|
|
|
|
|
Segment
losses
|
|
$
|
(1,352
|
)
|
|
(1,900
|
)
|
Revenues
from domestic life insurance operations include life insurance premiums on
traditional type products and revenues from universal life insurance. Revenues
from traditional products are simply premiums collected, while revenues from
universal life insurance consist of policy charges for the cost of insurance,
policy administration fees, and surrender charges assessed during the period.
A
comparative detail of premiums and contract revenues is provided
below.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Universal
life insurance revenues
|
|
$
|
5,190
|
|
|
4,468
|
|
Traditional
life insurance premiums
|
|
|
1,712
|
|
|
1,748
|
|
Reinsurance
premiums
|
|
|
(569
|
)
|
|
(382
|
)
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
6,333
|
|
|
5,834
|
|
The
Company's U.S. operations have typically emphasized annuity product sales
over
life product sales but recent efforts have been made to attract new independent
agents and to promote life products to improve domestic sales. It is the
Company's goal to increase domestic life product sales through increased
recruiting of new distribution and the development of new life insurance
products. The Company had approximately 9,100 contracted agents as of March
31,
2007.
Premiums
collected on universal life products are not reflected as revenues in the
Company's statements of earnings in accordance with GAAP. Actual universal
life
premiums collected are detailed below.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
Universal
life insurance:
|
|
|
|
|
|
First
year and single premiums
|
|
$
|
2,841
|
|
|
3,872
|
|
Renewal
premiums
|
|
|
4,177
|
|
|
3,592
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
7,018
|
|
|
7,464
|
|
Other
operating expenses were $2.7 million and $5.3 million for the three months
ended
March 31, 2007 and 2006. The decrease in 2007 primarily results from an
additional expense in 2006 due to an increase in compensation costs under
SFAS
123(R) as a result of the implementation of liability accounting.
International
Life Insurance Operations
A
comparative analysis of results of operations for the Company's international
life insurance segment is detailed below.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
Premiums
and other revenue:
|
|
|
|
|
|
Premiums
and contract revenues
|
|
$
|
21,671
|
|
|
19,384
|
|
Net
investment income
|
|
|
5,762
|
|
|
7,014
|
|
Other
income
|
|
|
45
|
|
|
23
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
27,478
|
|
|
26,421
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
3,677
|
|
|
5,381
|
|
Amortization
of deferred policy acquisition costs
|
|
|
8,163
|
|
|
4,941
|
|
Universal
life insurance contract interest
|
|
|
5,252
|
|
|
5,941
|
|
Other
operating expenses
|
|
|
4,310
|
|
|
8,118
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
21,402
|
|
|
24,381
|
|
|
|
|
|
|
|
|
|
Segment
earnings before Federal income taxes
|
|
|
6,076
|
|
|
2,040
|
|
|
|
|
|
|
|
|
|
Provision
for Federal income taxes
|
|
|
1,995
|
|
|
680
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$
|
4,081
|
|
|
1,360
|
|
As
with
domestic operations, revenues from the international life insurance segment
include both premiums on traditional type products and revenues from universal
life insurance. A comparative detail of premiums and contract revenues is
provided below.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Universal
life insurance revenues
|
|
$
|
20,687
|
|
|
19,437
|
|
Traditional
life insurance premiums
|
|
|
3,577
|
|
|
2,746
|
|
Reinsurance
premiums
|
|
|
(2,593
|
)
|
|
(2,799
|
)
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
21,671
|
|
|
19,384
|
|
International
operations have emphasized universal life policies over traditional life
insurance products. Premiums collected on universal life products are not
reflected as revenues in the Company's statements of earnings in accordance
with
GAAP. Actual universal life premiums collected are detailed below.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
Universal
life insurance:
|
|
|
|
|
|
First
year and single premiums
|
|
$
|
8,929
|
|
|
8,539
|
|
Renewal
premiums
|
|
|
20,503
|
|
|
19,009
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
29,432
|
|
|
27,548
|
|
The
Company's international life operations have been a significant part of the
Company's business which is based upon a long standing reputation in the
international market. The Company reported increased sales of equity-indexed
universal life products for international life operations with premiums
approximating $16.0 million and $12.7 million for the first quarter of 2007
and
2006, respectively. As previously noted, net investment income and contract
interest include a decrease due to the S&P 500 Index®
performance relative to equity-indexed products in the current quarter of
2007
compared to the same period in 2006.
A
detail
of net investment income for international life insurance operations is provided
below.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Net
investment income
|
|
|
|
|
|
(excluding
derivatives)
|
|
$
|
6,286
|
|
|
6,322
|
|
Derivative
income (loss)
|
|
|
(524
|
)
|
|
692
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$
|
5,762
|
|
|
7,014
|
|
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 $12.4 billion at March 31, 2006, to $13.4
billion at March 31, 2007.
Amortization
of deferred policy acquisition costs increased approximately 65% comparing
the
first three months of 2007 to the same period in 2006. This increase is due
primarily to the application of SOP 05-1 as previously discussed. Amortization
expense increases due to the requirement to write-off deferred balances on
contracts that are considered substantially changed under this new guidance.
The
balances were previously carried and amortized over the projected life of
the
contract.
Other
operating expenses were $4.3 million and $8.1 million for the three months
ended
March 31, 2007 and 2006. The decrease in 2007 primarily results from an
additional expense in 2006 due to an increase in compensation costs under
SFAS
123(R) as a result of the implementation of liability
accounting.
Annuity
Operations
The
Company's annuity operations are almost exclusively in the United States.
Although some of the Company's investment contracts are available to
international residents, current sales are small relative to total annuity
sales. A comparative analysis of results of operations for the Company's
annuity
segment is detailed below.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
Premiums
and other revenue:
|
|
|
|
|
|
Premiums
and contract revenues
|
|
$
|
5,525
|
|
|
5,729
|
|
Net
investment income
|
|
|
65,753
|
|
|
85,998
|
|
Other
income
|
|
|
228
|
|
|
2,707
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
71,506
|
|
|
94,434
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
1,156
|
|
|
1,107
|
|
Amortization
of deferred policy acquisition costs
|
|
|
13,758
|
|
|
15,956
|
|
Annuity
contract interest
|
|
|
29,861
|
|
|
47,837
|
|
Other
operating expenses
|
|
|
4,481
|
|
|
9,761
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
49,256
|
|
|
74,661
|
|
|
|
|
|
|
|
|
|
Segment
earnings before Federal income taxes
|
|
|
22,250
|
|
|
19,773
|
|
|
|
|
|
|
|
|
|
Provision
for Federal income taxes
|
|
|
7,303
|
|
|
6,584
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$
|
14,947
|
|
|
13,189
|
|
Revenues
from annuity operations include primarily surrender charges and recognition
of
deferred revenues relating to immediate or payout annuities. A comparative
detail of the components of premiums and annuity contract revenues is provided
below.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Surrender
charges
|
|
$
|
4,392
|
|
|
4,549
|
|
Payout
annuity and other revenues
|
|
|
1,126
|
|
|
1,173
|
|
Traditional
annuity premiums
|
|
|
7
|
|
|
7
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
5,525
|
|
|
5,729
|
|
The
Company's earnings are dependent upon annuity contracts persisting or remaining
in force. While premium and contract revenues decline with a reduction in
surrender charges, the Company's investment earnings benefit as more policies
remain in force.
Deposits
collected on annuity contracts are not reflected as revenues in the Company's
statements of earnings in accordance with GAAP. Actual annuity deposits
collected for the three months ended March 31, 2007 and 2006 are detailed
below.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Equity-indexed
annuities
|
|
$
|
63,453
|
|
|
64,340
|
|
Other
deferred annuities
|
|
|
32,686
|
|
|
46,009
|
|
Immediate
annuities
|
|
|
1,774
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
97,913
|
|
|
113,349
|
|
Sales
of
equity-indexed annuities were consistent comparing March 31, 2006 quarter
end
deposits collected to the first quarter of 2007. Equity-indexed product sales
typically follow the stock market in that sales are higher when confidence
is
high in the stock market and low if the stock market is showing poor
performance. Since the Company does not offer variable products or mutual
funds,
these equity-indexed products provide an interest crediting alternative to
the
Company's existing fixed annuity products and have continued to be a significant
portion of the Company’s annuity business.
Other
deferred annuity deposits decreased during the quarter ended March 31, 2007
versus March 31, 2006 with $32.7 million collected as compared to $46.0 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 of the deferred products include a first year interest bonus
in
addition to a base interest rate. These bonus rates are deferred in conjunction
with other capitalized policy acquisition costs. The amount deferred and
amortized over future periods amounted to approximately $4.2 million and
$4.7
million during the first quarter of 2007 and 2006, respectively.
A
detail
of net investment income for annuity operations is provided below.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Net
investment income
|
|
|
|
|
|
(excluding
derivatives)
|
|
$
|
69,824
|
|
|
71,514
|
|
Derivative
income (loss)
|
|
|
(4,071
|
)
|
|
14,484
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$
|
65,753
|
|
|
85,998
|
|
Net
investment income excluding derivatives decreased from $71.5 million to $69.8
million for the three months ended March 31, 2006 and 2007, respectively.
Derivative income and loss fluctuate from period to period based on the S&P
500 Index®
performance.
Other
income for the quarter ended March 31, 2006 includes $2.6 million relating
to
lawsuit settlements.
The
Company is required to periodically adjust deferred policy acquisition
amortization factors for actual experience that varies from assumptions.
In the
first quarter of 2006, a true-up of assumptions based upon actual results
increased amortization for the current period.
Annuity
contract interest includes the equity component return associated with the
Company's equity-indexed annuities. The detail of equity-indexed annuity
contract interest compared to contract interest for all other annuities is
as
follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Equity-indexed
annuities
|
|
$
|
7,841
|
|
|
21,485
|
|
All
other annuities
|
|
|
23,857
|
|
|
28,782
|
|
|
|
|
|
|
|
|
|
Gross
contract interest
|
|
|
31,698
|
|
|
50,267
|
|
Bonus
interest deferred and capitalized
|
|
|
(4,165
|
)
|
|
(4,721
|
)
|
Bonus
interest amortization
|
|
|
2,328
|
|
|
2,291
|
|
|
|
|
|
|
|
|
|
Total
contract interest
|
|
$
|
29,861
|
|
|
47,837
|
|
As
previously noted, contract interest reflects a decrease due to the S&P 500
Index®
performance relative to equity-indexed products, decreasing in the current
quarter of 2007 compared to the same period in 2006.
Other
operating expenses were $4.5 million and $9.8 million during the quarters
ended
March 31, 2007 and 2006, respectively. The decrease in 2007 primarily results
from an additional expense in 2006 as a result of implementing liability
accounting related to the Company's stock option plan under SFAS 123(R)
accounting guidance.
Other
Operations
National
Western's primary business encompasses its domestic and international life
insurance operations and its annuity operations. However, National Western
also
has small real estate, nursing home, and other investment operations through
its
wholly-owned subsidiaries. Nursing home operations generated $0.4 million
and
$0.2 million of operating earnings in the first quarters of 2007 and 2006,
respectively.
INVESTMENTS
General
The
Company's investment philosophy emphasizes the prudent handling of policyowners'
and stockholders' funds to achieve security of principal, to obtain the maximum
possible yield while maintaining security of principal, and to maintain
liquidity in a measure consistent with current and long-term requirements
of the
Company.
The
Company's overall conservative investment philosophy is reflected in the
allocation of its investments, which is detailed below as of March 31, 2007
and
December 31, 2006. The Company emphasizes investment grade debt securities,
with
smaller holdings in mortgage loans and policy loans.
|
|
Composition
of Investments
|
|
|
|
March
31, 2007
|
|
December
31, 2006
|
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
(In
thousands)
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
$
|
5,548,398
|
|
|
94.8
|
|
$
|
5,484,799
|
|
|
94.7
|
|
Mortgage
loans
|
|
|
105,389
|
|
|
1.8
|
|
|
103,325
|
|
|
1.8
|
|
Policy
loans
|
|
|
87,469
|
|
|
1.5
|
|
|
86,856
|
|
|
1.5
|
|
Derivatives
|
|
|
63,815
|
|
|
1.1
|
|
|
72,012
|
|
|
1.2
|
|
Equity
securities
|
|
|
23,112
|
|
|
0.4
|
|
|
21,203
|
|
|
0.4
|
|
Real
estate
|
|
|
12,110
|
|
|
0.2
|
|
|
12,113
|
|
|
0.2
|
|
Other
|
|
|
9,881
|
|
|
0.2
|
|
|
10,709
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
5,850,174
|
|
|
100.0
|
|
$
|
5,791,017
|
|
|
100.0
|
|
Debt
and Equity Securities
The
Company maintains a diversified portfolio which consists primarily of corporate,
mortgage-backed, and public utilities fixed income securities. Investments
in
mortgage-backed securities include primarily U.S. government agency pass-through
securities and collateralized mortgage obligations ("CMO"). As of March 31,
2007
and December 31, 2006, the Company's debt securities portfolio consisted
of the
following:
|
|
Composition
of Debt Securities
|
|
|
|
March
31, 2007
|
|
December
31, 2006
|
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
(In
thousands)
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
$
|
2,446,846
|
|
|
44.1
|
|
$
|
2,384,762
|
|
|
43.5
|
|
Mortgage-backed
securities
|
|
|
1,851,412
|
|
|
33.4
|
|
|
1,817,532
|
|
|
33.1
|
|
Public
utilities
|
|
|
624,211
|
|
|
11.3
|
|
|
623,649
|
|
|
11.4
|
|
U.S.
government/agencies
|
|
|
417,328
|
|
|
7.5
|
|
|
447,573
|
|
|
8.2
|
|
Asset-backed
securities
|
|
|
118,628
|
|
|
2.1
|
|
|
122,101
|
|
|
2.2
|
|
States
& political subdivisions
|
|
|
59,339
|
|
|
1.1
|
|
|
58,627
|
|
|
1.1
|
|
Foreign
governments
|
|
|
30,634
|
|
|
0.5
|
|
|
30,555
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
5,548,398
|
|
|
100.0
|
|
$
|
5,484,799
|
|
|
100.0
|
|
The
Company has expanded its holdings of U.S. government and private mortgage-backed
securities over the past several years given attractive yields and spreads.
Because the Company's holdings of mortgage-backed securities are subject
to
prepayment and extension risk, the Company has substantially reduced these
risks
by investing primarily in collateralized mortgage obligations, which have
more
predictable cash flow patterns than pass-through securities. These securities,
known as planned amortization class I ("PAC I") and sequential tranches are
designed to amortize in a more predictable manner than other CMO classes
or
pass-throughs. Using this strategy, the Company can more effectively manage
and
reduce prepayment and extension risks, thereby helping to maintain the
appropriate matching of the Company's assets and liabilities.
In
addition to diversification, an important aspect of the Company's investment
approach is managing the credit quality of its investments in debt securities.
As of March 31, 2007, 97.6% of the Company's debt securities were investment
grade quality. Thorough credit analysis is performed on potential corporate
investments including examination of a company's credit and industry outlook,
financial ratios and trends, and event risks. This emphasis is reflected
in the
high average credit rating of the Company's portfolio. In 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®
.
|
|
March
31, 2007
|
|
December
31, 2006
|
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
(In
thousands)
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
and U.S. government
|
|
$
|
2,507,723
|
|
|
45.2
|
|
$
|
2,485,122
|
|
|
45.3
|
|
AA
|
|
|
292,098
|
|
|
5.3
|
|
|
284,965
|
|
|
5.2
|
|
A
|
|
|
1,340,245
|
|
|
24.1
|
|
|
1,330,980
|
|
|
24.3
|
|
BBB
|
|
|
1,277,192
|
|
|
23.0
|
|
|
1,237,151
|
|
|
22.5
|
|
BB
and other below investment grade
|
|
|
131,140
|
|
|
2.4
|
|
|
146,581
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
5,548,398
|
|
|
100.0
|
|
$
|
5,484,799
|
|
|
100.0
|
|
The
Company does not purchase below investment grade securities. Investments
held in
debt securities below investment grade are the result of subsequent downgrades
of the securities. During the first quarter of 2007, the Company's percentage
of
below investment grade securities decreased primarily as a result of the
sale of
one security, the call of one security and the maturity of two securities
along
with the upward fluctuation in market pricing. The Company's holdings of
below
investment grade securities as a percentage of total invested assets is
relatively small compared to industry averages. These holdings are summarized
below.
|
|
Below
Investment Grade Debt Securities
|
|
|
|
|
|
|
|
Estimated
|
|
%
of
|
|
|
|
Amortized
|
|
Carrying
|
|
Fair
|
|
Invested
|
|
|
|
Cost
|
|
Value
|
|
Value
|
|
Assets
|
|
|
|
(In
thousands except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2007
|
|
$
|
127,336
|
|
|
131,140
|
|
|
131,904
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
$
|
145,858
|
|
|
146,581
|
|
|
146,170
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
$
|
168,423
|
|
|
170,455
|
|
|
167,770
|
|
|
3.1
|
%
|
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. Holdings in below investment grade securities
by category are summarized below.
|
|
Below
Investment Grade Debt Securities as of March 31, 2007
|
|
|
|
Amortized
|
|
Carrying
|
|
Fair
|
|
Fair
|
|
|
|
Cost
|
|
Value
|
|
Value
|
|
Value
|
|
|
|
2007
|
|
2007
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$
|
38,965
|
|
|
39,018
|
|
|
39,060
|
|
|
39,033
|
|
Utilities/Energy
|
|
|
22,415
|
|
|
24,281
|
|
|
24,835
|
|
|
24,451
|
|
Telecommunication
|
|
|
19,996
|
|
|
18,458
|
|
|
18,458
|
|
|
17,999
|
|
Asset-backed
|
|
|
12,249
|
|
|
12,249
|
|
|
11,540
|
|
|
11,611
|
|
Transportation
|
|
|
9,039
|
|
|
9,900
|
|
|
9,900
|
|
|
9,725
|
|
Manufacturing
|
|
|
6,020
|
|
|
9,880
|
|
|
9,919
|
|
|
8,323
|
|
Auto
finance
|
|
|
6,167
|
|
|
6,167
|
|
|
6,005
|
|
|
6,200
|
|
Other
|
|
|
12,485
|
|
|
11,187
|
|
|
11,187
|
|
|
10,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
127,336
|
|
|
131,140
|
|
|
130,904
|
|
|
127,809
|
|
The
Company is required to classify its investments in debt and equity securities
into one of three categories: (a) trading securities, (b) securities available
for sale, or (c) securities held to maturity. The Company purchases securities
with the intent to hold to maturity and accordingly does not maintain a
portfolio of trading securities. Of the remaining two categories, available
for
sale and held to maturity, the Company makes a determination based on various
factors including the type and quality of the particular security and how
it
will be incorporated into the Company's overall asset/liability management
strategy. As shown in the table below, at March 31, 2007, approximately 35%
of
the Company's total debt and equity securities, based on fair values, were
classified as securities available for sale. This slight increase in available
for sale securities is a result of short-term investments in bonds. These
holdings provide the Company flexibility to react to market opportunities
and
conditions and to practice active management within the portfolio to provide
adequate liquidity to meet policyholder obligations and other cash
needs.
|
|
Fair
|
|
Amortized
|
|
Unrealized
|
|
|
|
Value
|
|
Cost
|
|
Gains
(Losses)
|
|
|
|
(In
thousands)
|
|
Securities
held to maturity:
|
|
|
|
|
|
|
|
Debt
securities
|
|
$
|
3,626,477
|
|
|
3,642,261
|
|
|
(15,784
|
)
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
|
1,906,137
|
|
|
1,908,921
|
|
|
(2,784
|
)
|
Equity
securities
|
|
|
23,112
|
|
|
13,606
|
|
|
9,506
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
5,555,726
|
|
|
5,564,788
|
|
|
(9,062
|
)
|
In
accordance with SFAS No. 115, Accounting
for Certain Debt and Equity Securities,
during
the first quarter of 2007 one security was sold from the held to maturity
portfolio due to significant credit deterioration. The amortized cost of
the
bond was $5.2 million and resulted in a realized gain of $19,000. No securities
were sold during the first quarter of 2006. No securities were transferred
from
the held to maturity portfolio during the first quarter of 2007 or
2006.
Proceeds
from sales of securities available for sale totaled $0.2 million and $9.4
million during the first quarter of 2007 and 2006, respectively, which resulted
in realized gains of $0.1 million and $1.4 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, hotels, and healthcare facilities. The location of these loans
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 leasee. This
approach has proven to result in higher quality mortgage loans with fewer
defaults. The Company held net investments in mortgage loans totaling $105.4
million and $103.3 million at March 31, 2007 and December 31, 2006,
respectively.
The
Company does not recognize interest income on impaired loans which are deemed
to
be uncollectible. Interest income not recognized totaled $0.4 million in
2007,
relating to an impaired loan. There was no interest income unrecognized for
the
three months ended March 31, 2006.
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's real estate investments totaled approximately $12.1 million at
March
31, 2007 and December 31, 2006, and consist primarily of income-producing
properties which are being operated by a wholly-owned subsidiary of the Company.
The Company monitors the condition and market values of these properties
on a
regular basis and makes repairs and capital improvements to keep the properties
in good condition. There were no writedowns in the first quarters of 2007
or
2006 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.
|
|
March
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands except percentages)
|
|
|
|
|
|
|
|
Debt
securities - fair value
|
|
$
|
5,532,614
|
|
|
5,448,990
|
|
Debt
securities - amortized cost
|
|
$
|
5,551,182
|
|
|
5,498,461
|
|
Fair
value as a percentage of amortized cost
|
|
|
99.67
|
%
|
|
99.10
|
%
|
Unrealized
losses
|
|
$
|
(18,568
|
)
|
|
(49,471
|
)
|
Ten-year
U.S. Treasury bond - decrease
|
|
|
|
|
|
|
|
in
yield for the quarter
|
|
|
(0.06
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Loss Balance
|
|
|
|
|
|
At
|
|
At
|
|
Change
in
|
|
|
|
March
31,
|
|
December
31,
|
|
Unrealized
|
|
|
|
2007
|
|
2006
|
|
Losses
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Debt
securities held to maturity
|
|
$
|
(15,784
|
)
|
|
(35,809
|
)
|
|
20,025
|
|
Debt
securities available for sale
|
|
|
(2,784
|
)
|
|
(13,662
|
)
|
|
10,878
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
(18,568
|
)
|
|
(49,471
|
)
|
|
30,903
|
|
Changes
in interest rates typically have a significant impact on the fair values
of the
Company's debt securities. Market interest rates of the ten-year U.S. Treasury
bond decreased approximately 6 basis points from year-end 2006 reducing the
unrealized loss to $18.6 million on a portfolio of approximately $5.6 billion.
The Company would expect similar results in the future from any significant
upward or downward movement in market rates. However, since the majority
of the
Company's debt securities are classified as held to maturity, which are recorded
at amortized cost, changes in fair values have relatively small effects on
the
Company's consolidated balance sheet.
The
Company manages interest rate risk through on-going cash flow testing required
for insurance regulatory purposes. Computer models are used to perform cash
flow
testing under various commonly used stress test interest rate scenarios to
determine if existing assets would be sufficient to meet projected liability
outflows. Sensitivity analysis allows the Company to measure the potential
gain
or loss in fair value of its interest-sensitive instruments and to protect
its
economic value and achieve a predictable spread between what is earned on
invested assets and what is paid on liabilities. The Company seeks to minimize
the impact of interest risk through surrender charges that are imposed to
discourage policy surrenders. Interest rate changes can be anticipated in
the
computer models and the corresponding risk addressed by management actions
affecting asset and liability instruments. However, potential changes in
the
values of financial instruments indicated by hypothetical interest rate changes
will likely be different from actual changes experienced, and the differences
could be significant.
The
Company performed detailed sensitivity analysis as of December 31, 2006,
for its
interest rate-sensitive assets and liabilities. The changes in market values
of
the Company's debt securities in the first quarter of 2007 were reasonable
given
the expected range of results of this analysis.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
Liquidity
requirements are met primarily by funds provided from operations. Premium
deposits and revenues, investment income, and investment maturities are the
primary sources of funds while investment purchases, policy benefits, and
operating expenses are the primary uses of funds. The Company historically
has
not been put in the position of liquidating invested assets to provide cash
flow. However, investments consist primarily of marketable debt securities
that
could be readily converted to cash for liquidity needs. The Company may also
borrow up to $40 million on its bank line of credit for short-term cash
needs.
A
primary
liquidity concern for life insurers is the risk of an extraordinary level
of
early policyholder withdrawals. The Company includes provisions within its
annuity and universal life insurance policies, such as surrender charges,
that
help limit and discourage early withdrawals.
The
actual amounts paid by product line in connection with surrenders and
withdrawals for the quarters ended March 31 are noted in the table
below.
|
|
Three
Months Ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
Product
Line:
|
|
|
|
|
|
Traditional
Life
|
|
$
|
990
|
|
|
915
|
|
Universal
Life
|
|
|
8,047
|
|
|
7,018
|
|
Annuities
|
|
|
91,979
|
|
|
90,532
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
101,016
|
|
|
98,465
|
|
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 $62.6 million
and
$67.2 million for the three months ended March 31, 2007 and 2006, respectively.
The Company also has significant cash flows from both scheduled and unscheduled
investment security maturities, redemptions, and prepayments. These cash
flows
totaled $115.7 million and $49.7 million for the three months ended March
31,
2007 and 2006, respectively. These cash flow items could be reduced if interest
rates rise. Net cash inflows (outflows) from the Company's universal life
and
investment annuity deposit product operations totaled $25.7 million and ($5.0)
million during the three months ended March 31, 2007 and 2006,
respectively.
Capital
Resources
The
Company relies on stockholders' equity for its capital resources as there
is no
long-term debt outstanding and the Company does not anticipate the need for
any
long-term debt in the near future. As of March 31, 2007, the Company had
commitments of approximately $8.0 million which were approved by the Company's
Board of Directors for the construction of a nursing home facility in Central
Texas. The construction of the new facility is expected to begin in
2007.
OFF-BALANCE
SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
It
is not
Company practice to enter into off-balance sheet arrangements nor is it Company
policy to issue guarantees to third parties, other than in the normal course
of
issuing insurance contracts. Commitments related to insurance products sold
are
reflected as liabilities for future policy benefits. Insurance contracts
guarantee certain performances by the Company.
Insurance
reserves are the means by which life insurance companies determine the
liabilities that must be established to assure that future policy benefits
are
provided for and can be paid. These reserves are required by law and based
upon
standard actuarial methodologies to ensure fulfillment of commitments guaranteed
to policyholders and their beneficiaries, even though the obligations may
not be
due for many years. Refer to Note (1) in the Notes to Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2006 for a discussion of reserving methods.
The
table
below summarizes future estimated cash payments under existing contractual
obligations.
|
|
Payment
Due by Period
|
|
|
|
|
|
Less
Than
|
|
1
-
3
|
|
3
-
5
|
|
More
Than
|
|
|
|
Total
|
|
1
Year
|
|
Years
|
|
Years
|
|
5
Years
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease obligations (1)
|
|
$
|
2,325
|
|
|
808
|
|
|
1,300
|
|
|
217
|
|
|
-
|
|
Loan
commitments
|
|
|
8,000
|
|
|
8,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Life
claims payable (2)
|
|
|
49,102
|
|
|
49,102
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
long-term reserve liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reflected
on the balance sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under
GAAP (3)
|
|
|
370,453
|
|
|
72,988
|
|
|
108,289
|
|
|
55,158
|
|
|
134,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
429,880
|
|
|
130,898
|
|
|
109,589
|
|
|
55,375
|
|
|
134,018
|
|
(1)
Refer
to Note 9 in the Notes to Consolidated Financial Statements relating to leases
in the Company’s Annual Report on Form 10-K.
(2)
Life
claims payable include benefit and claim liabilities for which the Company
believes the amount and timing of the payment is essentially fixed and
determinable. Such amounts generally relate to incurred and reported death
and
critical illness claims including an estimate of claims incurred but not
reported.
(3)
Other
long-term reserve liabilities include obligations that are reported within
the
Company's reserve liabilities that reflect determinable payout patterns related
to immediate annuities. The above amounts are undiscounted whereas the amounts
included in future policy benefit liabilities are discounted in accordance
with
GAAP. Liabilities for future policy benefits and other policyholder liabilities
of approximately $5.2 billion as of March 31, 2007 have been excluded from
the
contractual obligations table. These excluded liabilities include future
policy
benefits relating to life insurance products, deferred annuities, and universal
life products. Amounts excluded from the table are comprised of policies
or
contracts where (a) the Company is not currently making payments and will
not
make payments in the future until the occurrence of a payment triggering
event,
such as death or (b) the occurrence of a payment triggering event, such as
a
surrender of a policy or contract, which is outside of the control of the
Company. The timing of these payments is not reasonably fixed and determinable.
These uncertainties are considered in the Company's asset/liability management
program as previously noted.
CHANGES
IN ACCOUNTING PRINCIPLES AND CRITICAL ACCOUNTING POLICIES
Changes
in Accounting Principles
Refer
to
Note 2 of the Notes to Condensed Consolidated Financial Statements.
REGULATORY
AND OTHER ISSUES
Statutory
Accounting Practices
Regulations
that affect the Company and the insurance industry are often the result of
efforts by the National Association of Insurance Commissioners ("NAIC").
The
NAIC routinely publishes new regulations as model acts or laws which states
subsequently adopt as part of their insurance regulations. Currently, the
Company is not aware of any NAIC regulatory matter material to its operations
or
reporting of financial results.
Risk-Based
Capital Requirements
The
NAIC
established risk-based capital ("RBC") requirements to help state regulators
monitor the financial strength and stability of life insurers by identifying
those companies that may be inadequately capitalized. Under the NAIC's
requirements, each insurer must maintain its total capital above a calculated
threshold or take corrective measures to achieve the threshold. The threshold
of
adequate capital is based on a formula that takes into account the amount
of
risk each company faces on its products and investments. The RBC formula
takes
into consideration four major areas of risk which are: (i) asset risk which
primarily focuses on the quality of investments; (ii) insurance risk which
encompasses mortality and morbidity risk; (iii) interest rate risk which
involves asset/liability matching issues; and (iv) other business risks.
Statutory laws prohibit public dissemination of certain RBC information.
However, the Company's current statutory capital and surplus is significantly
in
excess of the threshold RBC requirements.
ABOUT
MARKET RISK
This
information is included in Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations, in the Investments in Debt
and
Equity Securities section.
The
Company's management, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company's disclosure controls and procedures (as such term is defined in
Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of
the end
of the period covered by this report. Based on such evaluation, the Company's
Chief Executive Officer and Chief Finanical Officer have concluded that,
as of
the end of such period, the Company's disclosure controls and procedures
are
effective in recording, processing, summarizing, and reporting, on a timely
basis, information required to be disclosed by the Company in the reports
that
it files or submits under the Exchange Act.
There
have been no changes in the Company's internal controls over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
the
quarter ended March 31, 2007 that have materially affected, or are reasonably
likely to materially affect, the Company's internal controls over financial
reporting.
Refer
to
Note 7 "Legal Proceedings" of the accompanying financial statements included
in
this Form 10-Q.
There
have been no changes relative to the risk factors disclosed in the Company's
Annual Report on Form 10-K for the year ended December 31,
2006.
Effective
March 10, 2006, the Company adopted and implemented a limited stock buy-back
program associated with the Company's 1995 Stock Option and Incentive Plan
("Plan") which provides Option Holders the additional alternative of selling
shares acquired through the exercise of options directly back to the Company.
Option Holders may elect to sell such acquired shares back to the Company
at any
time within ninety (90) days after the exercise of options at the prevailing
market price as of the date of notice of election.
During
the month ended March, 2007, the Company purchased 15,520 shares from option
holders at an average price of $244.73. These purchased shares are reported
in
the Company's condensed consolidated financial statements as authorized and
unissued.
ITEM
6. EXHIBITS
(a)
Exhibits
Exhibit
31(a)
|
-
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
Exhibit
31(b)
|
-
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
Exhibit
32(a)
|
-
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant
to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
|
|
|
|
|
|
NATIONAL
WESTERN LIFE INSURANCE COMPANY
|
(Registrant)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
May 9, 2007
|
|
|
/S/
Ross R. Moody
|
|
|
|
|
Ross
R. Moody
|
|
|
|
|
President,
Chief Operating Officer,
|
|
|
|
|
and
Director
|
|
|
|
|
(Authorized
Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
May 9, 2007
|
|
|
/S/
Brian M. Pribyl
|
|
|
|
|
Brian
M. Pribyl
|
|
|
|
|
Senior
Vice President,
|
|
|
|
|
Chief
Financial & Administrative
|
|
|
|
|
Officer
and Treasurer
|
|
|
|
|
(Principal
Financial Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
May 9, 2007
|
|
|
/S/
Kay E. Osbourn
|
|
|
|
|
Kay
E. Osbourn
|
|
|
|
|
Vice
President,
|
|
|
|
|
Controller
and Assistant Treasurer
|
|
|
|
|
(Principal
Accounting Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|