UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
þ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the Fiscal Year Ended December 31, 2009
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the
transition period from
to
Commission
File Number: 2-17039
NATIONAL
WESTERN LIFE INSURANCE COMPANY
(Exact
name of Registrant as specified in its charter)
COLORADO
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84-0467208
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(State
of Incorporation)
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(I.R.S.
Employer Identification Number)
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850 EAST
ANDERSON LANE, AUSTIN, TEXAS 78752-1602
(Address
of Principal Executive Offices)
(512)
836-1010
(Telephone
Number)
Securities
registered pursuant to Section 12 (b) of the Act:
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Name
of each exchange on which
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Title
of each class to be so registered:
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each
class is to be registered:
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Class
A Common Stock, $1.00 par value
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The
NASDAQ Stock Market LLC
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Securities
registered pursuant to Section 12 (g) of the Act:
None
(Title of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o No þ
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days: Yes þ No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated file” in Rule 12b-2 of the Exchange
Act. (Check One)
Large
accelerated filer o Accelerated
filer þ Non-accelerated
filer o Smaller
reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
The
aggregate market value of the common stock (based upon the closing price) held
by non-affiliates of the Registrant on June 30, 2009 was
$399,981,531.
As of
March 11, 2010, the number of shares of Registrant's common stock outstanding
was: Class A - 3,425,966 and Class B - 200,000.
DOCUMENTS
INCORPORATED BY REFERENCE
Documents
incorporated by reference: Portions of the registrant’s definitive
proxy statement for the annual meeting of shareholders to be held June 29, 2010,
which will be filed within 120 days after December 31, 2009 are incorporated by
reference into Part III of this report.
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PART
I
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Page
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Business
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4
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Risk
Factors
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11
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Unresolved
Staff Comments
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16
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Properties
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16
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Legal
Proceedings
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17
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Submission
of Matters to a Vote of Security Holders
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17
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PART
II
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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18
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Selected
Consolidated Financial Data
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20
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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21
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Quantitative
and Qualitative Disclosures About Market Risk
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50
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Financial
Statements and Supplementary Data
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50
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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50
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Controls
and Procedures
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51
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Other
Information
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53
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PART
III
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The
information required by Items 10 through 14 is incorporated by reference
from our definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A within 120 days after December 31,
2009.
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PART
IV
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Exhibits
and Financial Statement Schedules
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54
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Signatures
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127
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PART
I
General
National
Western Life Insurance Company (hereinafter referred to as "National Western",
"Company", or "Registrant") is a stock life insurance company, chartered in the
State of Colorado in 1956, and doing business in forty-nine states, the District
of Columbia, and four U.S. territories or possessions. National
Western is also licensed in Haiti, and although not otherwise licensed, accepts
applications from and issues policies to residents of various countries in
Central and South America, the Caribbean, the Pacific Rim, Eastern Europe and
Asia. Such policies are underwritten, accepted, and issued in the United States
upon applications submitted by independent contractors. The Company provides
life insurance products for the savings and protection needs of approximately
142,000 policyholders and for the asset accumulation and retirement needs of
121,000 annuity contract holders.
In 2009,
the Company's total assets increased to $7.5 billion at December 31, 2009, from
$6.8 billion at December 31, 2008. The Company generated revenues of $568.4
million, $411.1 million and $474.5 million in 2009, 2008 and 2007, respectively.
In addition, National Western generated net income of $45.5 million, $33.6
million and $85.4 million in 2009, 2008 and 2007, respectively.
The
Company's financial information, including information in this report filed on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
amendments to the above reports, are accessible free of charge through the
Company's Internet site at www.nationalwesternlife.com
or may be viewed at the United States Securities and Exchange Commission ("SEC")
Public Reference Room in Washington, D.C. or at the SEC's Internet site at www.sec.gov.
Products
National
Western offers a broad portfolio of individual whole life, universal life and
term insurance plans, and annuities, including supplementary
riders.
Life Products. The Company's
life products provide protection for the life of the insured and, in some cases,
allow for cash value accumulation on a tax-deferred basis. These product
offerings include universal life insurance ("UL"), interest-sensitive whole
life, and traditional products such as term insurance coverage. Interest
sensitive products such as UL accept premiums that are applied to an account
value. Deducted from the account value are costs of insurance charges which vary
by age, gender, plan, and class of insurance, as well as various expense
charges. Interest is credited to account values at a fixed interest rate
generally determined in advance and guaranteed for a policy year at a time,
subject to minimum guaranteed rates specified in the policy contract. A slight
variation to this general interest crediting practice involves equity-indexed
universal life ("EIUL") policies whose credited interest may be linked in part
to an outside index such as the S&P 500Ò
Composite Stock Price Index ("S&P 500 IndexÒ")
at the election of the policyholder. These products offer both flexible and
fixed premium modes and provide policyholders with flexibility in the available
coverage, the timing and amount of premium payments and the amount of the death
benefit, provided there are sufficient policy funds to cover all policy charges
for the coming year. Traditional products generally provide for a fixed death
benefit payable in exchange for regular premium payments.
Annuity Products. Annuity
products sold include flexible premium and single premium deferred annuities,
fixed-indexed annuities, and single premium immediate annuities. These products
can be tax qualified or nonqualified annuities. A fixed single premium deferred
annuity ("SPDA") provides for a single premium payment at the time of issue, an
accumulation period, and an annuity payout period commencing at some future
date. A flexible premium deferred annuity ("FPDA") provides the same features
but allows, generally with some conditions, additional payments into the
contract. Interest is credited to the account value of the annuity initially at
a current rate of interest which is guaranteed for a period of time, typically
the first year. After this period, the interest credited is subject to change
based upon market rates and product profitability subject to a minimum
guaranteed rate specified in the contract. Interest accrues during the
accumulation period generally on a tax-deferred basis to the contract holder.
After a number of years specified in the annuity contract, the owner may elect
to have the proceeds paid as a single payment or as a series of payments over a
period of time. The owner is permitted at any time during the accumulation
period to withdraw all or part of the annuity account balance subject to
contract provisions such as surrender charges and market value adjustments. A
fixed-indexed deferred annuity performs essentially in the same manner as SPDAs
and FPDAs with the exception that, in addition to a fixed interest crediting
option, the contract holder has the ability to elect an interest crediting
mechanism that is linked, in part, to an outside index such as the S&P 500
IndexÒ.
A single premium immediate annuity ("SPIA") foregoes the accumulation period and
immediately commences an annuity payout period.
Distributions
of the Company's direct premium revenues and deposits by product type are
provided below.
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Years
Ended December 31,
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2009
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2008
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2007
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(In
thousands)
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|
Annuities:
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|
|
|
|
|
|
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Single
premium deferred
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$ |
15,707 |
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4,417 |
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3,808 |
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Flexible
premium deferred
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309,424 |
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116,902 |
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112,472 |
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Fixed-indexed
deferred
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489,180 |
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281,649 |
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316,848 |
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Single
premium immediate
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23,266 |
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7,165 |
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4,637 |
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|
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Total
annuities
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|
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837,577 |
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410,133 |
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437,765 |
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|
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Universal
life insurance
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173,167 |
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|
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170,933 |
|
|
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168,279 |
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Traditional
life and other
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19,580 |
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20,698 |
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22,310 |
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Total
direct premiums and deposits collected
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$ |
1,030,324 |
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601,764 |
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628,354 |
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Operating
Segments
The
Company manages its business between Domestic Insurance Operations and
International Insurance Operations. For segment reporting purposes,
the Company's annuity business, which is predominantly domestic, is separately
identified. The Company also has a Corporate
segment, which consists of the assets and activities that have not been
allocated to any other operating segment.
Domestic Insurance
Operations. The Company is currently licensed to do business in all
states and the District of Columbia, except for New York. Products
marketed are annuities, universal life insurance, and traditional life
insurance, which include both term and whole life products. The
majority of domestic sales are the Company's annuities. National Western markets
and distributes its domestic products primarily through independent national
marketing organizations ("NMO"). These NMOs assist the Company in
recruiting, contracting, and managing independent agents. The
Company's agents are independent contractors who are compensated on a commission
basis. At December 31, 2009, the Company's NMO relationships had
contracted approximately 7,300 independent agents with the
Company. Nearly 31% of these contracted agents submitted policy
applications to the Company in the past twelve months. At December 31, 2009, the
Company had nearly 70,000 domestic life insurance policies in force representing
over $2.5 billion in face amount of coverage and 121,000 annuity contracts
representing account balances of $5.2 billion.
International Insurance
Operations. National Western's international operations generally focus
on foreign nationals in upper socioeconomic classes. Insurance
products are issued primarily to residents of countries in Central and South
America, the Caribbean, the Pacific Rim, Eastern Europe, and Asia. Issuing
policies to residents of countries in these different regions provides
diversification that helps to minimize large fluctuations that could arise due
to various economic, political, and competitive pressures that may occur from
one country to another. Products issued to international residents
are almost entirely universal life and traditional life insurance products.
However, certain annuity and investment contracts are also available. At
December 31, 2009, the Company had 72,000 international life insurance policies
in force representing nearly $16.2 billion in face amount of
coverage.
International
applications are submitted by independent contractors, consultants and
broker-agents, many of whom have been submitting policy applications to National
Western for 20 or more years. The Company had relationships with
approximately 4,000 independent international individuals at December 31, 2009,
over 41% of which submitted policy applications to the Company in the past
twelve months.
There are
some inherent risks of accepting international applications which are not
present within the domestic market that are reduced substantially by the Company
in several ways. As previously described, the Company accepts applications from
foreign nationals in upper socioeconomic classes who have substantial financial
resources. This targeted customer base coupled with National Western's
conservative underwriting practices have historically resulted in claims
experience, due to natural causes, similar to that in the United
States. The Company minimizes exposure to foreign currency risks by
requiring payment of premiums and claims in United States dollars. In addition,
experience with the international products for over forty years and the
Company's longstanding business relationships further serve to minimize
risks.
Geographical Distribution of
Business. The following table depicts the distribution of the Company's
premium revenues and deposits.
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Years
Ended December 31,
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2009
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|
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2008
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|
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2007
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|
|
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(In
thousands)
|
|
|
|
|
|
|
|
|
|
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|
United
States domestic products:
|
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|
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|
|
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Annuities
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|
$ |
821,361 |
|
|
|
398,312 |
|
|
|
421,497 |
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Life
insurance
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|
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58,825 |
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|
59,412 |
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57,770 |
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Total
domestic products
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880,186 |
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457,724 |
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479,267 |
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International
products:
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Annuities
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16,215 |
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11,821 |
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16,268 |
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Life
insurance
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|
|
133,923 |
|
|
|
132,219 |
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132,819 |
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|
|
|
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|
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Total
international products
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|
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150,138 |
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144,040 |
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149,087 |
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|
|
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|
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|
|
|
|
|
|
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Total
direct premiums and deposits collected
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$ |
1,030,324 |
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|
|
601,764 |
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|
628,354 |
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Although
many agents sell National Western's products, the Company's annuity sales in any
year typically reflect several NMOs whose contracted independent agents sold 10%
or more of the Company’s total annuity sales. In 2009, there were three NMOs
that accounted for more than 10% of the Company’s annuity sales with 16.8%,
11.6%, and 10.8% of the total annuity sales, respectively. Similarly, domestic
life insurance sales in any year may include several NMOs who accounted for 10%
or more of total domestic life insurance sales. In 2009, there were three NMOs
who generated 24.4%, 12.3% and 11.0%, respectively, of total domestic life
insurance sales. The NMO accounting for 24.4% of domestic life sales was also
the same NMO who produced 10.8% of total annuity sales while the NMO
contributing 12.3% of domestic life sales also contributed 16.8% of total
annuity sales. With the independent distribution model the Company employs, the
concentration of sales within a particular NMO is not as an acute concern as
with other distribution channels given that the underlying agents are free to
contract with the Company through any NMO the Company has a relationship
with.
International
life insurance sales are much more diversified by independent consultants and
contractors and in 2009 were geographically attributed to Latin America (77%),
the Pacific Rim (18%), and Eastern Europe (5%). In terms of international
countries, Brazil and Taiwan were the only two countries exceeding 10% of total
international sales with shares of 32.4% and 15.7%, respectively.
Segment Financial
Information. A summary of financial information for the Company's
segments is as follows:
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Domestic
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International
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Life
|
|
|
Life
|
|
|
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All
|
|
|
|
|
|
|
Insurance
|
|
|
Insurance
|
|
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Annuities
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Others
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Totals
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(In
thousands)
|
|
Revenues,
excluding
|
|
|
|
|
|
|
|
|
|
|
|
|
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realized
gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
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2009
|
|
$ |
53,937 |
|
|
|
148,624 |
|
|
|
343,502 |
|
|
|
27,510 |
|
|
|
573,573 |
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2008
|
|
|
48,193 |
|
|
|
115,073 |
|
|
|
252,511 |
|
|
|
21,530 |
|
|
|
437,307 |
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2007
|
|
|
44,783 |
|
|
|
113,598 |
|
|
|
292,402 |
|
|
|
20,227 |
|
|
|
471,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Segment
earnings: (A)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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2009
|
|
$ |
426 |
|
|
|
14,663 |
|
|
|
25,460 |
|
|
|
8,294 |
|
|
|
48,843 |
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2008
|
|
|
717 |
|
|
|
15,350 |
|
|
|
27,842 |
|
|
|
6,781 |
|
|
|
50,690 |
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2007
|
|
|
342 |
|
|
|
20,179 |
|
|
|
56,299 |
|
|
|
6,278 |
|
|
|
83,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Segment
assets: (B)
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|
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2009
|
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$ |
383,844 |
|
|
|
1,056,087 |
|
|
|
5,955,734 |
|
|
|
107,581 |
|
|
|
7,503,246 |
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2008
|
|
|
397,413 |
|
|
|
842,119 |
|
|
|
5,369,920 |
|
|
|
127,189 |
|
|
|
6,736,641 |
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2007
|
|
|
399,097 |
|
|
|
796,012 |
|
|
|
5,500,226 |
|
|
|
106,039 |
|
|
|
6,801,374 |
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Notes
to Table:
(A) Amounts exclude realized
gains and losses on investments, net of taxes.
(B) Amounts exclude other
unallocated assets.
Additional
information concerning these industry segments is included in Note 13, Segment
and Other Operating Information, of the accompanying consolidated financial
statements.
Competition
and Ratings
National
Western competes with hundreds of life and health insurance company groups in
the United States as well as other financial intermediaries such as banks and
securities firms who market insurance products. Competitors in our international
markets include Pan-American Life Insurance, American Fidelity Life Insurance,
Manhattan Life Insurance Company and Best Meridian Insurance while domestic
market competitors include, among others, American Equity Investment Life,
Sammons Financial Group (Midland, NACOLAH), AVIVA, Allstate (Lincoln Benefit),
Lincoln National Life, Equitrust Life Insurance Company and Old Mutual Financial
Network (F&G). Competitive factors are primarily the breadth and quality of
products offered, established positions in niche markets, pricing, relationships
with distribution, commission structures, the perceived stability of the
insurer, quality of underwriting and customer service, scale and cost
efficiency. Operating results of life insurers are subject to fluctuations not
only from this competitive environment but also due to economic conditions,
interest rate levels and changes, performance of investments, and the
maintenance of strong insurance ratings from independent rating
agencies.
In order
to compete successfully, life insurers have turned their attention toward
distribution, technology, defined end market targets, speed to the market in
terms of product development, and customer relationship management as ways of
gaining a competitive edge. The Company's management believes that it competes
primarily on the basis of its longstanding reputation for commitment in serving
international markets, its financial strength and stability, and its ability to
attract and retain distribution based upon product and compensation. With respect to
international markets, the Company is of the opinion that the home office
infrastructure to support languages other than English, and the knowledge needed
to effectively underwrite risks outside of the United States is a significant
barrier to entry for potential competitors.
Ratings
with respect to financial strength are an important factor in establishing the
competitive position of insurance companies. Financial strength ratings are
generally defined as a rating agency’s opinion as to a company’s financial
strength and ability to meet ongoing obligations to policyholders. Accordingly,
ratings are important to maintaining public confidence and impact the ability to
market products. The following summarizes the Company's financial strength
ratings.
Rating
Agency
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Rating
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Outlook
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A.M.
Best
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A
(Excellent)
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Stable
|
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Standard
& Poor's
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A
(Strong)
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Negative
|
A.M. Best
and Standard & Poor’s ratings are a consideration of the Company’s claims
paying ability and are not a rating of the Company’s investment worthiness. The
rating agencies formally review the Company and its rating on an annual basis
with interim analysis performed as necessary. In June 2009, A.M. Best upgraded
the Company’s rating to “A” from “A-“. This is particularly noteworthy given the
financial crisis backdrop that has framed the past two years and the number of
companies that were negatively impacted, often significantly, in this
environment. The negative outlook from Standard & Poor’s signifies the
rating agency’s bias toward a rating downgrade sometime in the future. Both A.M.
Best and Standard & Poor’s maintain a “negative outlook” on the life
insurance industry overall which means that the rating of
many U.S. life insurance companies may be downgraded due to the impact of
negative market conditions. Generally speaking, there is no assurance
that the Company's ratings will continue for a certain period of time. In the
event the Company's ratings are subsequently downgraded, the Company's business
may be negatively impacted.
Risk
Management
Similar
to other insurers, the Company is exposed to a wide spectrum of financial,
operational, and other risks as described in Item 1A “Risk Factors”. Effective
enterprise risk management is a key concern for identifying, monitoring,
measuring, communicating, and managing risks within limits and risk tolerances.
The Company’s Board of Directors and senior management are knowledgeable of and
accountable for key risks. The Board meets at least every other month
and regularly hears reports from the President and Chief Operating Officer, the
Chief Financial Officer, the Chief Actuary, the Chief Investment Officer, and
the Chief Compliance Officer. In addition, the Board has several committees
which include the Audit Committee, the Investment Committee, and the
Compensation and Stock Option Committee that regularly convene to address
various aspects of risk.
Enterprise
Risk Management (ERM) Governance Framework
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|
Board
of Directors and Sub-Committees of the Board
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|
↕
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|
Company
Senior Management
|
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↕
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|
ERM
Committees
|
↕
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↕
|
|
↕
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Corporate
Risk Function
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Insurance
Risk
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Market
Risk
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Credit
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Operational
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Strategy
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The
Company maintains several management groups and committees that meet regularly
to monitor, discuss and manage a variety of issues and risks associated with the
business. These groups and committees include numerous areas such as regulatory
compliance, financial reporting process and controls, fraud unit investigations,
product spread management, and business strategy. Key members of senior
management are involved with these groups and committees providing direction and
oversight and serve as a reporting liaison with the Company’s Board of Directors
and sub-committees.
The
Company maintains a system of disclosure controls and procedures, including
internal controls designed to provide reasonable assurance that assets are
safeguarded and transactions are properly authorized, executed and recorded. The
Company recognizes the importance of full and open presentation of its financial
position and operating results and to this end maintains a Disclosure Controls
and Procedures Committee comprised of senior executives who possess
comprehensive knowledge of the Company's business and
operations. This Committee is responsible for evaluating disclosure
controls and procedures and for the gathering, analyzing, and disclosing of
information as required to be disclosed under the securities laws. It
assists the Chief Executive Officer and Chief Financial Officer in their
responsibilities for making the certifications required under the securities
laws regarding the Company's disclosure controls and procedures. It
ensures that material financial information is properly communicated up the
Company's hierarchy to the appropriate person or persons and that all
disclosures are made in a timely fashion. This Committee reports
directly to the Audit Committee of the Company.
The
Company's product designs, underwriting standards and risk management techniques
are utilized to protect against disintermediation risk and greater than expected
mortality and morbidity risk. Disintermediation risk is limited through the use
of surrender charges, certain provisions not allowing discretionary withdrawals,
and market value adjustment features. Investment guidelines including duration
targets, asset allocation tolerances and return objectives help to ensure that
disintermediation risk is managed within the constraints of profitability
criteria. Prudent underwriting is applied to select and price insurance risks
and the Company regularly monitors mortality experience relative to its product
pricing assumptions. Enforcement of disciplined claims management serves to
further protect against greater than expected mortality.
A
significant aspect of the Company’s business is managing the linkage of its
asset characteristics with the anticipated behavior of its policy obligations
and liabilities, a process commonly referred to as asset-liability matching. The
Company maintains an Asset-Liability Committee (“ALCO”) consisting of senior
level members of the Company who assist and advise the Company’s Board of
Directors in monitoring the level of risk the Company is exposed to in managing
its assets and liabilities in order to attain the risk-return profile
desired. Certain members of the ALCO meet as frequently as necessary,
to review and recommend for board of director ratification, current period
interest crediting rates to policyholders based upon existing and anticipated
investment opportunities. These rates apply to new sales and to products after
an initial guaranteed period, if applicable. Rates are established after the
initial guaranteed period based upon asset portfolio yields and each product’s
required interest spread, taking into consideration current competitive market
conditions.
Substantially
all international products contain a currency clause stating that premium and
claim "dollars" refer to lawful currency of the United States. Policy
applications submitted by international insurance brokers are generally
associated with individuals in upper socioeconomic classes who desire the
stability and inflationary hedge of dollar denominated insurance products issued
by the Company. The favorable demographics of this group typically
results in a higher average policy size, and persistency and claims experience
(from natural causes) similar to that in the United States. By
accepting applications submitted on residents outside the United States, the
Company is able to further diversify its revenue, earnings and insurance
risk.
Reinsurance
The
Company follows the industry practice of reinsuring (ceding) portions of its
insurance risks with a variety of reinsurance companies. We do not use financial
or surplus relief reinsurance. The use of reinsurance allows the Company to
underwrite policies larger than the risk it is willing to retain on any single
life and to continue writing a larger volume of new business. The maximum amount
of life insurance the Company normally retains is $250,000 on any one life
subject to a minimum reinsurance cession of $50,000. However, the use of
reinsurance does not relieve the Company of its primary liability to pay the
full amount of the insurance benefit in the event of the failure of a reinsurer
to honor its contractual obligation. Consequently, the Company avoids
concentrating reinsurance risk with any one reinsurer and only participates in
reinsurance treaties with reputable carriers. No reinsurer of business ceded by
the Company has failed to pay policy claims (individually or in the aggregate)
with respect to our ceded business. The Company continuously monitors the
financial strength of our reinsurers and has been able to obtain replacement
coverages from financially responsible reinsurers when making changes. The
Company’s primary reinsurers as of December 31, 2009 were as
follows.
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Amount
of In
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A.M.
Best
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Force
Ceded
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Reinsurer
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Rating
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($000’s)
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Hannover
Life Reassurance Company
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A |
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$ |
1,684,048 |
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Transamerica
Life Insurance Company
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A+ |
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1,220,040 |
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SCOR
Rueckversicherung (Cologne)
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A- |
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1,033,417 |
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SCOR
Global Life (Paris)
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A- |
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779,960 |
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Mapfre
Re (Madrid)
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A+ |
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462,236 |
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All
others
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729,687 |
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$ |
5,909,388 |
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Regulatory
and Other Issues
Regulation. The Company's
insurance business is subject to comprehensive state regulation in each of the
states it is licensed to conduct business. The laws enforced by the various
state insurance departments provide broad administrative powers with respect to
licensing to transact business, licensing and appointing agents, approving
policy forms, regulating unfair trade and claims practices, establishing
solvency standards, fixing minimum interest rates for the accumulation of
surrender values, and regulating the type, amounts, and valuations of permitted
investments, among other things. The Company is required to file detailed annual
statements with each of the state insurance supervisory departments in which it
does business. Annually, our board-appointed qualified actuary must submit an
opinion to state insurance regulators where the Company is licensed to do
business on whether the statutory assets held backing the statutory reserves are
sufficient to meet contractual obligations and related expenses of the insurer.
If an opinion cannot
be rendered noting the sufficiency of assets, the Company is required to
establish additional statutory reserves which draw from available statutory
surplus until the time such an opinion can be furnished.
The
Company's operations and financial records are subject to examination by these
departments at regular intervals. Statutory financial statements are prepared in
accordance with accounting practices prescribed or permitted by the Colorado
Division of Insurance, the Company's principal insurance regulator. Prescribed
statutory accounting practices are largely dictated by the Statutory Accounting
Principles adopted by the National Association of Insurance Commissioners
("NAIC"). The NAIC, as well as state regulators, continually evaluates existing
laws and regulations pertaining to the operations of life insurers. To the
extent that initiatives result as a part of this process, they may be adopted in
the various states in which the Company is licensed to do business. It is not
possible to predict the ultimate content and timing of new statutes and
regulations adopted by state insurance departments and the related impact upon
the Company's operations although it is conceivable that they may be more
restrictive.
Each
state has insurance guaranty association laws under which insurers doing
business in a state can be assessed contributions, up to prescribed limits, in
order to cover contractual benefit obligations of insolvent insurance companies.
The state guaranty associations levy assessments on each insurer on the basis of
their proportionate share of the premiums written in the lines of business in
which the insolvent insurer had been engaged. Some states permit the member
insurers to recover the assessments paid through full or partial premium tax
offsets.
The Company’s business is
also affected by U.S. federal, state and local tax laws. Although the
federal government does not directly regulate the life insurance industry,
federal measures previously considered or enacted by Congress, if revisited,
could affect the insurance industry and the Company's business. These measures
include the tax treatment of life insurance companies and life insurance
products, as well as changes in individual income tax structures and rates. Even
though the ultimate impact of any of these changes, if implemented, is
uncertain, the persistency of the Company's existing products and the ability to
sell products could be materially affected.
Risk-Based Capital
Requirements. In order to enhance the regulation of insurer solvency, the
NAIC established risk-based capital ("RBC") requirements to help state
regulators monitor the financial strength and stability of life insurers by
identifying those companies that may be inadequately capitalized. Under the
NAIC's requirements, each insurer must maintain its total capital above a
calculated threshold or take corrective measures to achieve the
threshold. The threshold of adequate capital is based on a formula
that takes into account the amount of risk each company faces on its products
and investments. The RBC formula takes into consideration four major
areas of risk which are: (i) asset risk which primarily focuses on the quality
of investments; (ii) insurance risk which encompasses mortality and morbidity
risk; (iii) interest rate risk which involves asset-liability matching issues;
and (iv) other business risks. For each category, the RBC
requirements are determined by applying specified factors to various assets,
premiums, reserves, and other items, with the factor being higher for items with
greater underlying risk and lower for items with less risk. The standards
require life insurers to submit a report to state regulators on an annual basis
regarding their risk-based capital. The Company's statutory capital and surplus
at December 31, 2009, was significantly in excess of the threshold RBC
requirements.
Effects of Inflation. The
rate of inflation as measured by the change in the average consumer price index
has not had a material effect on the revenues or operating results of the
Company during the three most recent fiscal years.
Employees. The
Company had 294 employees as of December 31, 2009 substantially all of which
worked in the Company’s home office in Austin, Texas. None of the employees are
subject to collective bargaining agreements governing their employment with the
Company.
Company
performance is subject to varying risk factors. This section provides an
overview of possible risk exposures at this point in time that could impact
Company performance in the future. While these scenarios do not represent
expectations of future experience, they are intended to illustrate the potential
impacts if any of the following risks were to manifest into actual
occurrences.
Current
difficult conditions globally and in the U.S. economy may materially adversely
affect our business and results of operations.
The
Company’s results from operations are materially affected by economic conditions
both in the U.S. and elsewhere around the world. The stress experienced by
financial markets beginning in the second half of 2007 continued throughout 2008
and into 2009. Consumer confidence declined as home values and the stock market
decreased and unemployment and energy costs increased. The volatility and
disruption in the financial markets reached unfamiliar levels such that the
availability and cost of credit was materially impacted. The market for fixed
income securities experienced decreased liquidity, increased price volatility,
credit downgrades, and an increasing probability of default. Consequently, these
securities became less liquid, more difficult to value, and potentially harder
to dispose of if situations dictate. Although there is evidence that market
conditions may have stopped their decline and begun to improve, these events
have had an adverse effect on the value of our investment portfolio and may
continue to do so in the event of prolonged economic challenges such as a global
credit crisis.
Demand
for our products and ultimately the profitability of our business may be
adversely affected by such factors as lower consumer spending, negative investor
sentiment, higher unemployment, lower corporate earnings and business
investment, lackluster consumer confidence, and ongoing volatility in capital
markets. We may also experience a higher incidence of claims, lapses or
surrenders of policies. Our policyholders may opt to defer or stop paying
insurance premiums. Adverse changes as detailed above could negatively affect
our net income and have a material effect on our business, results of operations
and financial condition.
Our
investment portfolio is subject to several risks which may lessen the value of
invested assets and the amounts credited to policyholders.
The
Company substantially invests monies received in investment grade, fixed income
investment securities in order to meet its obligations to policyholders and
provide a return on its deployed capital. Consequently, we are subject to the
risk that issuers of these securities may default on principal and interest
payments, particularly in the event of an ongoing downturn in the economic
and/or business climate. At December 31, 2009, approximately 3% of the Company’s
$6.2 billion fixed income securities portfolio was comprised of issuers who were
investment grade at the time the Company acquired them but were subsequently
downgraded for various reasons. A substantial increase in defaults from these or
other issuers could negatively impact the Company’s financial position and
results.
For the
Company’s fixed-indexed products, over the counter derivative instruments are
purchased from a number of highly rated counterparties to fund the index credit
to policyholders. In the event that any of these counterparties fails to meet
their contractual obligations under these derivative instruments, the Company
would be financially at risk for providing the credits due that the counterparty
reneged on. The failure of the counterparty to perform could negatively impact
the Company’s financial strength and reduce the Company’s
profitability.
The
determination of valuation and impairments of fixed income securities include
estimations and assumptions that are subjective and prone to differing
interpretations and could materially impact our results of operations or
financial condition.
The
determination of whether to impair an investment is based upon our evaluation of
known and inherent risks which we revise as conditions change and new
information becomes available. During periods of market disruption and
volatility, it becomes more difficult to evaluate securities particularly if
trading becomes less frequent or market data becomes less observable. As a
result, valuations may include inputs and assumptions that are less observable
or require greater estimation and judgment as well as valuation methods which
are more complex. We also consider a wide range of factors about security
issuers in evaluating the cause of a decline in the estimated fair value of a
security and in assessing the prospects for recovery. The decision on whether to
record an other-than-temporary impairment is determined by our assessment of the
financial condition and prospects of a particular issuer, projections of future
cash flows and recoverability as well as our ability and intent to hold the
securities to recovery or maturity. Our conclusions concerning the
recoverability of any particular security’s market price could ultimately prove
to be invalid as facts and circumstances change. Consequently, there can be no
assurance that we have accurately assessed the level of impairments in our
financial statements or that additional impairments may not need to be taken in
the future.
We
are subject to changing interest rates and credit spreads, market volatility,
and general economic conditions which may affect the risk and returns on both
our investment portfolio and our products.
We are
exposed to significant capital market risk related to changes in interest rates.
Substantial and sustained changes, up or down, in market interest rate levels
can materially affect the profitability of our products, the market value of our
investments, and ultimately the reported amount of stockholders’
equity.
A rise in
interest rates will increase the net unrealized loss position of our investment
portfolio and may subject the Company to disintermediation risk.
Disintermediation risk is the risk that policyholders may surrender their
contracts in a rising interest rate environment, requiring the Company to
liquidate investments in an unrealized loss position (i.e. the market value less
than the carrying value of the investments). With respect to fixed income
security investments the Company maintains in an “Available for Sale” category,
rising interest rates will cause declines in the market value of these
securities. These declines are reported in our financial statements as an
unrealized investment loss and a reduction of stockholders’ equity.
There may
be occasions, especially in the current climate, where the Company could
encounter difficulty selling some of its investments due to a lack of liquidity
in the marketplace. If the Company required significant amounts of cash on short
notice during such a period, it may have difficulty selling investments at
attractive prices, in a timely manner or both.
A decline
in interest rates could expose the Company to reduced profitability due to
minimum interest rate guarantees that are required in our products by
regulation. A key component of profitability is investment spread, or the
difference between the yield on our investments and the rates we credit to
policyholders on our products. A narrowing of investment spreads (“spread
compression”) could negatively affect operating results. Although the Company
has the ability to adjust the rates credited on products in order to maintain
our required investment spread, a significant decline in interest rate levels
could affect investment yields to the point where the investment spread is
compromised due to minimum interest rate guarantees. In addition, the potential
for increased policy surrenders and cash withdrawals, competitor activities, and
other factors could further limit the Company’s ability to maintain crediting
rates on its products at levels necessary to avoid sacrificing investment
spread.
The
profitability of the Company’s fixed-indexed products linked in part to market
indices is significantly affected by the cost of underlying call options
purchased to fund the credits owed to contract holders selecting this form of
interest crediting. If there are little or no gains on the call options
purchased over the expected life of these fixed-indexed products, the Company
would incur expenses for credited interest over and above the option costs. In
addition, if the Company does not successfully match the terms of the underlying
call options purchased with the terms of the fixed-indexed products, the index
credits could exceed call option proceeds. This would serve to reduce the
Company’s spread on the products and decrease profits.
We
are subject to incurring difficulties in marketing and distributing our products
through our current and future distribution channels.
The
Company distributes its life and annuity products through independent
broker-agents. There is substantial competition, particularly in the Company’s
domestic market, for independent broker-agents with the demonstrated ability to
market and sell insurance products. Competition for these individuals or
organizations typically centers on company reputation, products, compensation,
home office support and the insurer’s financial strength ratings. The Company’s
future sales and financial condition are dependent upon avoiding significant
interruptions in attracting and retaining independent
broker-agents.
We
are subject to a downgrade in our financial strength ratings which may
negatively affect our ability to attract and retain independent distributors,
make our products less attractive to consumers, and may have an adverse effect
on our operations.
Financial
strength ratings are an important criteria in establishing the competitive
position of insurers. Ratings generally reflect the rating agencies’ view of a
particular company’s financial strength, operating performance, and ability to
meet its obligations to policyholders. However, some of the rating factors often
relate to the particular views of the rating agency, their independent economic
modeling, the general economic climate, and other circumstances outside of the
insurer’s control. Accordingly, we cannot predict with any certainty what
actions rating agencies may take. A downgrade in our financial strength rating,
or an announced potential downgrade, could affect our competitive position and
make it more difficult to market our products vis-à-vis competitors with higher
financial strength ratings. In extreme situations, a significant downgrade
action by one or more rating agency could induce existing policyholders to
cancel their policies and withdraw funds from the Company. Currently, the major
rating agencies, including A.M. Best and Standard &
Poor’s, maintain negative outlooks on the U.S. life insurance
industry primarily based upon expectations for larger than normal investment
credit losses and reduced financial flexibility. Accordingly, these rating
agencies could revise their benchmarks regarding levels of capital, earnings,
and other metrics that align with particular rating levels and impact their
rating assessments of U.S. life insurance companies. These events could have a
material adverse effect on our financial position and liquidity.
We
are subject to competition from new sources as well as companies having
substantially greater financial resources, higher ratings, and more expansive
product offerings which could have an adverse impact upon our business levels
and profitability.
Our
ability to compete is based upon a variety of factors including financial
strength ratings, competitive products, service, scale, and distribution
capacity. In recent years, there has been considerable consolidation among
companies in the insurance and financial sectors resulting in large,
well-capitalized entities that offer products comparable to the Company.
Frequently, these larger organizations are not domiciled in the United States or
are financial services entities attempting to establish a position in the
insurance industry. These larger competitors often enjoy economies of scale
which produce lower operating costs and the wherewithal to absorb greater risk
allowing them to price products more competitively and, in turn, attract
independent distributors. Consequently, the Company may encounter additional
product pricing pressures and be challenged to maintain profit margin targets
and profitability criteria. Because of these competitive presences, the Company
may not be able to effectively compete without negative affects on our financial
position and results.
We
are subject to regulation and changes to existing laws that may affect our
profitability or means of operations.
The
Company is subject to extensive laws and regulations which are complex and
subject to change. In addition, these laws and regulations are enforced by a
number of different authorities including, but not limited to, state insurance
regulators, the Securities and Exchange Commission (SEC), state attorney
generals, and the U.S. Department of Justice. Compliance with these laws and
regulations is time consuming and any changes may materially increase our
compliance costs and other expenses of doing business. The regulatory framework
at the state and, increasingly, federal level pertaining to insurance products
and practices is advancing and could affect not only the design of our products
but our ability to continue to sell certain products.
Life
insurer products generally offer tax advantages to policyholders via the
deferral of income tax on policy earnings during the accumulation phase of the
product, be it an annuity or a life insurance product. Taxes, if any, are
payable on income attributable to a distribution under a policy/contract for the
year in which the distribution is made. Periodically, Congress has considered
legislation that would reduce or eliminate this tax deferral advantage inherent
to the life insurance industry and subject the industry’s products to treatment
more equivalent with other investments. In the event that the tax-deferred
status of life insurance products is revised or reduced by Congress all life
insurers would be adversely impacted.
Insurance
companies that do business in a particular state are subject to assessment up to
certain prescribed limits by that state’s insurance guaranty association to
provide funds to help pay for policyholder losses or liabilities of insolvent
insurance companies. As the amount and timing of assessments by state insurance
guaranty associations is outside of the Company’s control, the liabilities
provided for these potential assessments in our financial statements may differ
from the amounts ultimately assessed.
In
January 2009, the SEC published its newly adopted rule 151A, Indexed Annuities and Certain Other
Insurance Contracts. This rule defines “indexed annuities to
be securities and thus subject to regulation by the SEC and under federal
securities laws”. Currently indexed annuities sold by life insurance
companies are regulated by the States as Insurance products and Section 3(a)(8)
of the Securities Act of 1933 provides an exemption for certain “annuity
contracts,” “optional annuity contracts,” and other insurance
contracts. The new rule was not effective until January 12, 2011, but
is currently subject to legal challenges by National Western and other companies
regarding the validity. The SEC, in briefing regarding appropriate
remedies, has “determined to consent to” a two year stay of Rule 151A’s
effective date to run from the date of publication of a reissued or retained
Rule 151A in the Federal Register. In the event rule 151A is not
overturned, it could have a material effect on our business, results of
operations and financial condition.
We
may be subject to unfavorable judicial developments, including the time and
expense of litigation, which potentially could affect our financial position and
results.
In the
ordinary course of business, we are involved in various legal actions common to
the life insurance industry, some of which may occasionally assert claims for
large amounts. Companies in the life insurance and annuity lines of business
have encountered litigation, including class action lawsuits, pertaining to
allegations of improper sales practices in connection with the sale of life
insurance, improper design of products, bad faith in the handling of insurance
claims, and other similar pleas. In addition, life insurance companies are
subject to risk of errors and misconduct of the agents selling their products
for fraud, non-compliance with policies and recommending products or
transactions that are not suitable in a particular situation. Given the inherent
unpredictability of litigation, there can be no assurance that such litigation,
current or in the future, will not have such a material adverse effect on the
Company’s results of operation or cash flows in any particular reporting
period.
We
could be liable with respect to liabilities ceded to reinsurers if the
reinsurers fail to meet the obligations assumed by them.
The
Company cedes material amounts of insurance to other unaffiliated insurance
companies through reinsurance. However, these reinsurance arrangements do not
fully discharge the Company’s obligation to pay benefits on the reinsured
business. If a reinsurer fails to meet its obligations, the Company would be
forced to cover these claims. In addition, if a reinsurer becomes insolvent, it
may cause the Company to lose its reserve credits on the ceded business which
require the establishment of additional reserves. To mitigate the risks
associated with the use of reinsurance, the Company carefully monitors the
ratings and financial condition of its reinsurers on a regular basis and
attempts to avoid concentration of credit risks by spreading its business among
several reinsurers in order to diversify its risk exposure.
We
are subject to policy claims experience which can fluctuate from period to
period and vary from past results or expectations.
The
Company’s earnings are significantly influenced by policy claims received and
will vary from period to period depending upon the amount of claims incurred. In
any given quarter or year, there is very limited predictability of claims
experience. The liability established for future policy benefits is based upon a
number of different factors. Our mortality experience could be adversely
impacted by a catastrophic event such as a natural disaster, terrorist attack or
pandemic event. In the event our future claim experience does not match our past
results or pricing assumptions, our operating results could be materially and
adversely affected.
We are subject to assumption
inaccuracies regarding future mortality, persistency, and interest rates used in
determining deferred policy acquisition costs which may require us to accelerate
our amortization.
Deferred
policy acquisition costs (and deferred sales inducement amounts) are calculated
using a number of assumptions related to policy persistency, mortality and
interest rates. They represent costs that vary with and are primarily related to
the acquisition of new insurance and annuity contracts. Amortization of deferred
policy acquisition expenses is dependent upon actual and expected profits
generated by the lines of business that incurred the related expenses and are
amortized over the expected lives of the corresponding contracts. The deferred
policy acquisition costs recorded on the balance sheet are tested to determine
if they are recoverable under current assumptions. The estimates and assumptions
used to amortize deferred policy acquisition costs proportional to expected
gross profits are also regularly reviewed. Due to the uncertainty associated
with establishing these assumptions, the Company cannot, with precision,
determine the exact pattern of profit emergence. Increases in actual or future
withdrawals or surrenders or investment losses, often associated with severe
economic recessions, could result in an acceleration of amortization.
Accordingly, actual results could differ from the related assumptions which
could have a material and adverse impact on the Company’s operating
results.
We
are dependent upon effective information technology systems and on development
and implementation of new technologies.
The
Company’s business operations are technology dependent for maintaining accurate
records, administering complex contract provisions, and complying with
increasingly demanding regulation. While systems developments can streamline
many processes and in the long term reduce the cost of doing business, these
initiatives can present short-term cost and implementation risks. Projections of
expenses, implementation time frames and the ultimate enhancement values may be
different from expectations and escalate over time. The Company also faces
rising costs and time constraints in meeting data security compliance
requirements of new and proposed regulations. These increased risks and
expanding requirements expose the Company to potential data loss and damages and
significant increases in compliance and litigation costs.
The
Company relies on its computer systems to conduct business and produce financial
statements. While policies, procedures and back-up plans designed to prevent or
minimize the effect of incapacity or failure are maintained, the Company’s
computer systems may be vulnerable to disruptions or breaches as a result of
natural disasters, man-made disasters, criminal activity or other events beyond
the Company’s control. The failure or incapacity of any of the Company’s
computer systems could disrupt operations and adversely impact our
profitability.
The
Company retains confidential information on its systems, including customer
information and proprietary business information. The increasing volume and
sophistication of computer viruses, hackers and other external threats may
increase the vulnerability of the Company’s systems to data breaches. Any
compromise of the security of the Company’s technology systems that results in
the disclosure of personally identifiable customer information could damage the
Company’s reputation, expose it to litigation, and result in significant
technical, legal and other expenses.
Some of
the Company’s information technology systems are older legacy-type systems and
require an ongoing commitment of resources to maintain current standards. These
legacy systems are written in older programming languages with which fewer and
fewer individuals are knowledgeable of and trained in. The Company’s success is
in large part dependent on maintaining and enhancing the effectiveness of
existing legacy systems and failure of these systems for any reason could
disrupt our operations, result in the loss of business and adversely impact our
profitability.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
The
Westcap Corporation, a wholly owned subsidiary, owns the Company’s principal
office location in Austin, Texas and two buildings adjacent to it, totaling
approximately 93,000 square feet that are leased and utilized by the
Company. The Company’s affiliate, Regent Care Building, LP, owns a
65,000 square foot building in Reno, Nevada, which is leased and utilized by
another of the Company’s affiliates, Regent Care Operations, LP, for use in its
nursing home operations. The Company’s subsidiary, Regent Care San
Marcos Holdings, LLC, completed construction of a 74,000 square foot building in
San Marcos, Texas in 2009 used in nursing home operations. Lease
costs and related operating expenses for facilities of the Company’s
subsidiaries are currently not significant in relation to the Company’s
consolidated financial statements. The intercompany lease costs
related to The Westcap Corporation and the nursing homes have been eliminated
for consolidated reporting purposes.
ITEM 3. LEGAL PROCEEDINGS
The
Company was a defendant in a class action lawsuit initially filed on September
17, 2004, in the Superior Court of the State of California for the County of Los
Angeles. The California state court certified a class consisting of
certain California policyholders age 65 and older alleging violations under
California Business and Professions Code section 17200. The court
additionally certified a subclass of 36 policyholders alleging fraud against
their agent, and vicariously against the Company. The California
Insurance Department had intervened in this case asserting that the Company has
violated California insurance laws. The parties to this case had been
involved in court-ordered mediation and ongoing negotiations. On
February 22, 2010, the Company reported in a Form 8-K filing a settlement
agreement with the plaintiffs and plaintiff in intervention providing a
settlement benefit of approximately $17 million. The settlement
agreement is subject to final court approval.
The
Company is a defendant in a second class action lawsuit pending as of June 12,
2006, in the U.S. District Court for the Southern District of
California. The case is titled In Re National Western Life Insurance
Deferred Annuities Litigation and is in the discovery phase. The
complaint asserts claims for RICO violations, Financial Elder Abuse, Violation
of Cal. Bus. & Prof. Code 17200, et seq, Violation of Cal. Bus. & Prof.
Code 17500, et seq, Breach of Fiduciary Duty, Aiding and Abetting Breach of
Fiduciary Duty, Fraudulent Concealment, Cal. Civ. Code 1710, et seq, Breach of
the Duty of Good Faith and Fair Dealing, and Unjust Enrichment and Imposition of
Constructive Trust. The Company believes that it has meritorious
defenses in this case and intends to vigorously defend itself against the
asserted claims.
The
Company is the named Defendant in the case of Sheila Newman vs. National Western
Life Insurance Company which alleged mishandling of policyholder funds by
an agent. On February 3, 2010, the 415th
Judicial District Court of Parker County in Weatherford, Texas, entered a Final
Judgment against the Company of approximately $208,000 for actual damages,
attorney’s fees for preparation of trial, and prejudgment interest on the actual
damages. In addition, the Final Judgment included $150 million for
exemplary damages. The Company will continue to vigorously defend this case by
filing an appeal of the Final Judgment with the proper Court of Appeals in
Texas. The Company believes the Final Judgment is inconsistent with
current state and federal laws and intends to establish on appeal that it is not
liable for the Plaintiff’s actual or exemplary damages.
The
Company is involved or may become involved in various other legal actions, in
the normal course of its 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 such
other potential, pending, or threatened legal actions will have a material
adverse effect on the financial condition or operating results of the
Company.
The
amounts provided in the financial statements at December 31, 2009 for the
foregoing represent estimates made by the Company based upon current information
and are subject to change as facts and circumstances change and
develop.
In
January 2009, the SEC published its newly adopted rule 151A, Indexed Annuities and Certain Other
Insurance Contracts. This rule defines “indexed annuities to
be securities and thus subject to regulation by the SEC under federal securities
laws”. Currently indexed annuities sold by life insurance companies
are regulated by the States as insurance products and Section 3(a)(8) of the
Securities Act of 1933 provides an exemption for certain “annuity contracts,”
“optional annuity contracts,” and other insurance contracts. The
Company and others subsequently filed suit in the U.S. Court of Appeals for the
District of Columbia to overturn this rule. As a result, the court
requested the SEC to make additional findings and to resubmit the
rule. The new rule was scheduled to be effective January 12, 2011,
but is currently subject to legal challenges by National Western and other
companies regarding its validity. The SEC, in briefing regarding
appropriate remedies, has “determined to consent to” a two year stay of Rule
151A’s effective date to run from the date of publication of a reissued or
retained Rule 151A in the Federal Register. In the event rule 151A is
not overturned, it could have a material effect on our business, results of
operations and financial condition.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE
OF
SECURITY HOLDERS
No
matters were submitted to a vote of the Company’s security holders during the
fourth quarter of 2009.
PART
II
ITEM 5. MARKET FOR REGISTRANT’S COMMON
EQUITY,
RELATED
STOCKHOLDER MATTERS AND ISSUER
PURCHASES
OF EQUITY SECURITIES
Market
Information
The
principal market on which the Class A common stock of the Company trades is The
NASDAQ - Stock Market® under
the symbol “NWLI”. The high and low sales prices for the Class A
common stock for each quarter during the last two years are shown in the
following table.
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
2009:
|
First
Quarter
|
|
$ |
161.80 |
|
|
|
58.30 |
|
|
Second
Quarter
|
|
|
138.25 |
|
|
|
108.00 |
|
|
Third
Quarter
|
|
|
181.25 |
|
|
|
115.45 |
|
|
Fourth
Quarter
|
|
|
195.98 |
|
|
|
165.29 |
|
|
|
|
|
|
|
|
|
|
|
2008:
|
First
Quarter
|
|
$ |
221.67 |
|
|
|
173.55 |
|
|
Second
Quarter
|
|
|
259.97 |
|
|
|
199.00 |
|
|
Third
Quarter
|
|
|
258.46 |
|
|
|
193.20 |
|
|
Fourth
Quarter
|
|
|
275.00 |
|
|
|
111.06 |
|
Equity
Security Holders
The
number of stockholders of record on March 11, 2010 was as follows:
Class
A Common Stock
|
|
|
4,317 |
|
Class
B Common Stock
|
|
|
2 |
|
Dividends
During
2009, the Company paid cash dividends on its Class A and Class B common stock in
the amounts of $1,233,348 and $36,000, respectively. During 2008, the
Company also paid cash dividends on its Class A and Class B common stock in the
amounts of $1,233,348 and $36,000, respectively. Payment of dividends
is within the discretion of the Company’s Board of Directors. The
Company’s general policy is to reinvest earnings internally to finance the
development of new business.
Securities
Authorized For Issuance Under Equity Compensation Plans
The
Company has two equity compensation plans that were approved by security
holders. Under the two plans, a total of 104,577 shares of the
Company’s Class A common stock may be issued upon exercise of the outstanding
options at December 31, 2009. The weighted average exercise price of
the outstanding options is $174.24 per option. Excluding the
outstanding options, 292,400 shares of the common stock remain available for
future issuance under the plans at December 31, 2009.
Performance
Graph
The
following graph compares the change in the Company's cumulative total
stockholder return on its common stock with the NASDAQ - U.S. Companies Index
and the NASDAQ - Insurance Stock Index. The graph assumes that the value of the
Company's common stock and each index was $100 at December 31, 2004, and that
all dividends were reinvested.
Issuer
Purchases of Equity Securities
Effective
March 10, 2006, the Company adopted and implemented a limited stock buy-back
program associated with the Company's 1995 Stock Option and Incentive Plan
("Plan") which provides Option Holders the additional alternative of selling
shares acquired through the exercise of options directly back to the Company.
Option Holders may elect to sell such acquired shares back to the Company at any
time within ninety (90) days after the exercise of options at the prevailing
market price as of the date of notice of election.
Effective
August 22, 2008 the Company adopted and implemented another limited stock
buy-back program substantially similar to the 2006 program for shares issued
under the 2008 Incentive Plan.
During
November 2009, 235 shares were purchased from Option Holders at an average price
of $92.13. Purchased shares are reported in the Company's
consolidated financial statements as authorized and unissued.
ITEM
6. SELECTED CONSOLIDATED FINANCIAL DATA
The
following five-year financial summary includes comparative amounts derived from
the audited consolidated financial statements.
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In
thousands except per share amounts)
|
|
Earnings
Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and annuity premiums
|
|
$ |
17,043 |
|
|
|
17,752 |
|
|
|
19,513 |
|
|
|
15,805 |
|
|
|
14,602 |
|
Universal
life and annuity contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revenues
|
|
|
145,651 |
|
|
|
133,424 |
|
|
|
119,677 |
|
|
|
106,320 |
|
|
|
96,765 |
|
Net
investment income
|
|
|
393,531 |
|
|
|
273,362 |
|
|
|
318,137 |
|
|
|
379,768 |
|
|
|
310,213 |
|
Other
income
|
|
|
17,348 |
|
|
|
12,769 |
|
|
|
13,683 |
|
|
|
17,304 |
|
|
|
9,579 |
|
Realized
gains (losses) on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investments
|
|
|
(5,167 |
) |
|
|
(26,228 |
) |
|
|
3,497 |
|
|
|
2,662 |
|
|
|
9,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
568,406 |
|
|
|
411,079 |
|
|
|
474,507 |
|
|
|
521,859 |
|
|
|
441,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
48,997 |
|
|
|
39,759 |
|
|
|
41,326 |
|
|
|
35,241 |
|
|
|
39,162 |
|
Amortization
of deferred policy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition
costs
|
|
|
115,163 |
|
|
|
127,161 |
|
|
|
88,413 |
|
|
|
90,358 |
|
|
|
87,955 |
|
Universal
life and investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
annuity
contract interest
|
|
|
242,816 |
|
|
|
138,960 |
|
|
|
164,391 |
|
|
|
213,736 |
|
|
|
150,692 |
|
Other
operating expenses
|
|
|
92,192 |
|
|
|
55,630 |
|
|
|
55,130 |
|
|
|
65,709 |
|
|
|
46,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expenses
|
|
|
499,168 |
|
|
|
361,510 |
|
|
|
349,260 |
|
|
|
405,044 |
|
|
|
324,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before Federal income taxes
|
|
|
69,238 |
|
|
|
49,569 |
|
|
|
125,247 |
|
|
|
116,815 |
|
|
|
116,885 |
|
Federal
income taxes
|
|
|
23,754 |
|
|
|
15,927 |
|
|
|
39,876 |
|
|
|
40,472 |
|
|
|
39,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
45,484 |
|
|
|
33,642 |
|
|
|
85,371 |
|
|
|
76,343 |
|
|
|
77,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A
|
|
$ |
12.90 |
|
|
|
9.54 |
|
|
|
24.24 |
|
|
|
21.69 |
|
|
|
22.06 |
|
Class
B
|
|
$ |
6.45 |
|
|
|
4.77 |
|
|
|
12.12 |
|
|
|
10.84 |
|
|
|
11.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A
|
|
$ |
12.87 |
|
|
|
9.48 |
|
|
|
23.95 |
|
|
|
21.46 |
|
|
|
21.83 |
|
Class
B
|
|
$ |
6.45 |
|
|
|
4.77 |
|
|
|
12.12 |
|
|
|
10.84 |
|
|
|
11.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
7,518,735 |
|
|
|
6,786,480 |
|
|
|
6,835,326 |
|
|
|
6,693,443 |
|
|
|
6,369,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
$ |
6,404,682 |
|
|
|
5,800,267 |
|
|
|
5,823,641 |
|
|
|
5,760,459 |
|
|
|
5,495,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
$ |
1,114,053 |
|
|
|
986,213 |
|
|
|
1,011,685 |
|
|
|
932,984 |
|
|
|
874,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book
value per common share
|
|
$ |
307.24 |
|
|
|
271.99 |
|
|
|
279.29 |
|
|
|
257.67 |
|
|
|
241.89 |
|
ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking
Statements
The
Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for
forward-looking statements. Certain information contained herein or
in other written or oral statements made by or on behalf of National Western
Life Insurance Company or its subsidiaries are or may be viewed as
forward-looking. Although the Company has taken appropriate care in
developing any such information, forward-looking information involves risks and
uncertainties that could significantly impact actual results. These
risks and uncertainties include, but are not limited to, matters described in
the Company’s SEC filings such as exposure to market risks, anticipated cash
flows or operating performance, future capital needs, and statutory or
regulatory related issues. However, National Western, as a matter of
policy, does not make any specific projections as to future earnings, nor does
it endorse any projections regarding future performance that may be made by
others. Whether or not actual results differ materially from
forward-looking statements may depend on numerous foreseeable and unforeseeable
events or developments. Also, the Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future developments, or otherwise.
Management’s
discussion and analysis of financial condition and results of operations
(“MD&A”) of National Western Life Insurance Company for the three years
ended December 31, 2009 follows. This discussion should be read in
conjunction with the Company’s consolidated financial statements and related
notes beginning on page 60 of this report.
Overview
The
Company provides life insurance products on a global basis for the savings and
protection needs of policyholders and annuity contracts for the asset
accumulation and retirement needs of contract holders both domestically and
internationally. The Company accepts funds from policyholders or contract
holders and establishes a liability representing future obligations to pay the
policy or contract holders and their beneficiaries. To ensure the
Company will be able to pay these future commitments, the funds received as
premium payments and deposits are invested in high quality investments,
primarily fixed income securities.
Due to
the business of accepting funds to pay future obligations in later years and the
underlying economics, the relevant factors affecting the Company’s business and
profitability include the following:
Ÿ
|
the
level of sales and premium revenues
collected
|
Ÿ
|
persistency
of policies and contracts
|
Ÿ
|
returns
on investments sufficient to produce acceptable spread margins over
interest crediting rates
|
Ÿ
|
investment
credit quality which minimizes the risk of default or
impairment
|
Ÿ
|
levels
of policy benefits and costs to acquire
business
|
Ÿ
|
the
level of operating expenses
|
Ÿ
|
effect
of interest rate changes on revenues and investments including asset and
liability matching
|
Ÿ
|
maintaining
adequate levels of capital and
surplus
|
Ÿ
|
actual
levels of surrenders, withdrawals, claims and interest spreads and changes
in assumptions for amortization of deferred policy acquisition expenses
and deferred sales inducements
|
Ÿ
|
changes
in the fair value of derivative index options and embedded derivatives
pertaining to fixed-index life and annuity
products
|
The
Company monitors these factors continually as key business
indicators. The discussion that follows in this Item 7 includes these
indicators and presents information useful to an overall understanding of the
Company’s business performance in 2009, incorporating required disclosures in
accordance with the rules and regulations of the Securities and Exchange
Commission.
Critical
Accounting Policies
Accounting
policies discussed below are those considered critical to an understanding of
the Company’s financial statements.
Impairment of Investment
Securities. The Company’s accounting policy requires that a
decline in the value of a security below its amortized cost basis be evaluated
to determine if the decline is other-than-temporary. The primary
factors considered in evaluating whether a decline in value for fixed income and
equity securities is other-than-temporary include: (a) the length of time and
the extent to which the fair value has been less than cost, (b) the reasons for
the decline in value (credit event, interest rate related, credit spread
widening), (c) the overall financial condition as well as the near-term
prospects of the issuer, (d) whether the debtor is current on contractually
obligated principal and interest payments, and (e) the Company does not intend
to sell the investment prior to 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
purchase or prior impairment, then an other-than-temporary impairment charge is
recognized. The Company would recognize impairment of securities due
to changing interest rates or market dislocations only if the Company intended
to sell the securities prior to recovery. When a security is deemed
to be impaired a charge is recorded equal to the difference between the fair
value and amortized cost basis of the security. In compliance with
GAAP guidance the estimated credit versus the non-credit components are
bifurcated, and the non-credit component reclassified as unrealized losses in
other comprehensive income. 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. However, the new cost
basis of an impaired security is not adjusted for subsequent increases in
estimated fair value.
Deferred Policy Acquisition Costs
(“DPAC”). 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 DPAC 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 does regular evaluations of its universal life and annuity contracts 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 DPAC balance to the level it would have been if using the
new assumptions from the inception date of each policy.
DPAC 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 DPAC balance to be
amortized in the future. The present value of these cash flows, less
the benefit reserve, is compared with the unamortized DPAC balance and if the
DPAC balance is greater, the deficiency is charged to expense as a component of
amortization and the asset balance is reduced to the recoverable amount. For
more information about accounting for DPAC see Note 1, Summary of Significant
Accounting Policies, of the consolidated financial statements.
Deferred Sales
Inducements. Costs related to sales inducements offered on
sales to new customers, principally on investment type contracts and primarily
in the form of additional credits to the customer’s account value or
enhancements to interest credited for a specified period, which are beyond
amounts currently being credited to existing contracts, are deferred and
recorded as other assets. All other sales inducements are expensed as
incurred and included in interest credited to contract holders’
funds. Deferred sales inducements are amortized to income using the
same methodology and assumptions as DPAC, and are included in interest credited
to contract holders’ funds. Deferred sales inducements are
periodically reviewed for recoverability. For more information about
accounting for DPAC see Note 1, Summary of
Significant Accounting Policies, of the consolidated financial
statements.
Future Policy
Benefits. Because of the long-term nature of insurance
contracts, the Company is liable for policy benefit payments many years into the
future. The liability for future policy benefits represents estimates
of the present value of the Company’s expected benefit payments, net of the
related present value of future net premium collections. For
traditional life insurance contracts, this is determined by standard actuarial
procedures, using assumptions as to mortality (life expectancy), morbidity
(health expectancy), persistency, and interest rates, which are based on the
Company’s experience with similar products. The assumptions used are
those considered to be appropriate at the time the policies are
issued. An additional provision is made on most products to allow for
possible adverse deviation from the assumptions assumed. For
universal life and annuity products, the Company’s liability is the amount of
the contract’s account balance. Account balances are also subject to
minimum liability calculations as a result of minimum guaranteed interest rates
in the policies. While management and Company actuaries have used their best
judgment in determining the assumptions and in calculating the liability for
future policy benefits, there is no assurance that the estimate of the
liabilities reflected in the financial statements represents the Company’s
ultimate obligation. In addition, significantly different assumptions could
result in materially different reported amounts. A discussion of the
assumptions used to calculate the liability for future policy benefits is
reported in Note 1, Summary of Significant Accounting Policies, in the Notes to
Consolidated Financial Statements.
Revenue
Recognition. Premium income for the Company’s traditional life
insurance contracts is generally recognized as the premium becomes due from
policyholders. For annuity and universal life contracts, the amounts
collected from policyholders are considered deposits and are not included in
revenue. For these contracts, fee income consists of policy charges for policy
administration, cost of insurance charges and surrender charges assessed against
policyholders’ account balances which are recognized in the period the services
are provided.
Investment
activities of the Company are integral to its insurance operations. Since life
insurance benefits may not be paid until many years into the future, the
accumulation of cash flows from premium receipts are invested with income
reported as revenue when earned. Anticipated yields on investments are reflected
in premium rates, contract liabilities, and other product contract
features. These anticipated yields are implied in the interest
required on the Company’s net insurance liabilities (future policy benefits less
deferred acquisition costs) and contractual interest obligations in its
insurance and annuity products. The Company benefits to the extent
actual net investment income exceeds the required interest on net insurance
liabilities and manages the rates it credits on its products to maintain the
targeted excess or “spread” of investment earnings over interest credited. The
Company will continue to be required to provide for future contractual
obligations in the event of a decline in investment yield. For more information
concerning revenue recognition, investment accounting, and interest sensitivity,
please refer to Note 1, Summary of Significant Accounting Policies, Note 3,
Investments, in the Notes to Consolidated Financial Statements, and the
discussions under Investments in Item 7 of this report.
Pension Plans and Other
Postretirement Benefits. The Company sponsors a qualified
defined benefit pension plan, which was frozen effective December 31, 2007,
covering substantially all employees, and three nonqualified defined benefit
plans covering certain senior officers. In addition, the Company has
postretirement health care benefits for certain senior officers. The
freeze of the qualified benefit pension plan ceased future benefit accruals to
all participants and closed the Plan to any new participants. In addition, all
participants became immediately 100% vested in their accrued benefits as of that
date. In accordance with prescribed accounting standards, the Company
annually reviews plan assumptions.
The
Company annually reviews its pension benefit plans 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 the long-term
investment policy of the plans, the various classes of the invested funds, input
of the plan’s investment advisors and consulting actuary, and the plan’s
historic rate of return. The compensation rate increase assumption is
generally set at a rate consistent with current and expected long-term
compensation and salary policy, including inflation. These
assumptions involve uncertainties and judgment, and therefore actual performance
may not be reflective of the assumptions.
Other
postretirement benefit assumptions include future events affecting retirement
age, mortality, dependency status, per capita claims costs by age, health care
trend rates, and discount rates. Per capita claims cost by age is the
current cost of providing postretirement health care benefits for one year at
each age from the youngest age to the oldest age at which plan participants are
expected to receive benefits under the plan. Health care trend rates
involve assumptions about the annual rate(s) of change in the cost of health
care benefits currently provided by the plan, due to factors other than changes
in the composition of the plan population by age and dependency
status. These rates implicitly consider estimates of health care
inflation, changes in utilization, technological advances, and changes in health
status of the participants.
Share-Based
Payments. Liability awards under a share-based payment
arrangement have been measured based on the awards’ fair value at the reporting
date. The Black-Scholes valuation method is used to estimate the fair
value of the options. This fair value calculation of the options
include assumptions relative to the following:
Ÿ
|
expected
term based on contractual term and perceived future behavior relative to
exercise
|
Ÿ
|
risk-free
interest rates
|
These
assumptions are continually reviewed by the Company and adjustments may be made
based upon current facts and circumstances.
Other
significant accounting policies, although not involving the same level of
measurement uncertainties as those discussed above, but nonetheless important to
an understanding of the financial statements, are described in Note 1, Summary
of Significant Accounting Policies, in the Notes to Consolidated Financial
Statements.
Impact
of Recent Business Environment
The
financial markets began experiencing stress during the second half of 2007 which
significantly increased during 2008 and on into the first half of 2009.
Volatility and disruption in the financial markets caused the availability and
cost of credit to be materially affected. Consumer confidence declined in the
face of depressed home prices, increasing foreclosures, and higher unemployment.
Eventually, these factors precipitated a severe recession in many ways akin to
the Great Depression.
This
combination of economic conditions began to negatively impact our sales in 2008,
particularly in the domestic life and international life segments. Although the
financial markets and the economy began to show improvement in the latter half
of 2009, international life insurance sales, as measured by placed annualized
target premium, declined 15% from 2008 levels and domestic life insurance sales
dropped 74%. Economic indicators are currently pointing toward the economy as
having emerged from the trough of the recession and possibly toward a line of
growth in the immediate future. However, high unemployment, massive Federal
government budget deficits, instability in the European economic markets, and
the threat of looming inflation make the prospects of future economic stability
and prosperity anything but certain. Consequently, demand for our life insurance
products may continue to be adversely impacted during this period of economic
uncertainty. It is also uncertain what impact, if any, the current environment
may have upon the incidence of claims, policy lapses, or surrenders of
policies.
The
economic backdrop did not have a similar influence on our annuity product sales.
Annuity sales in 2009 increased 106% over the levels attained in 2008. Several
factors may explain this outcome including: (1) during uncertain economic
periods, consumers follow a flight to safety toward lower risk assets such as
annuity products; (2) the Company’s strong financial position, upgrade in
financial strength rating from A.M. Best during the year and ample capital
resources enhanced our presence in the annuity marketplace with independent
distributors and end market consumers; and (3) many of the Company’s competitors
incurred reductions in their capital base due to a deterioration in the quality
of their investment portfolios, including investment impairments and losses,
which caused them to curtail sales activity and recruitment of independent
distribution. Despite the growth in annuity sales, it is unclear what effect
ongoing economic challenges may have upon future business levels.
The fixed
income markets, our primary investment source, have experienced a high level of
turmoil and constrained market liquidity conditions. Recently, there have been
some improvements in this market although the low interest rate environment and
tightening of interest spreads over U.S. treasury investment rates present a
different set of tests. Credit downgrades of fixed income instruments by rating
agencies were fairly prevalent during the first nine months of calendar 2009
with the fourth quarter producing much less activity in this regard. Market
analysts generally anticipate events of default to continue into 2010 with
moderation occurring during the second half of the year. The Company has
experienced minimal impairment and degradation of quality in its fixed income
holdings thus far although future events may not produce the same success in
this regard.
These
volatile market conditions have also increased the difficulty of valuing certain
securities as trading is less frequent and/or market data is less observable.
Certain securities that were in active markets with significant observable data
became illiquid due to the current financial environment resulting in valuations
that require greater estimation and judgment as well as valuation methods which
are more complex. Such valuations may not ultimately be realizable in a market
transaction and may change very rapidly as market conditions change and
valuation assumptions need to be modified. Some market sectors remain dislocated
with market valuations not indicative of true economic value.
Credit
spreads (difference between bond yields and risk-free interest rates) on fixed
maturity securities increased markedly during 2008 given the market conditions
but tightened throughout 2009 and on into 2010. While the increase in credit
spreads in 2008 and early in 2009 generated higher yields making our products
more attractive to consumers, the subsequent spread tightening caused investment
yields to fall dramatically. The lower investment yields not only cause the
Company’s products to appear less appealing to consumers but also require
skillful management of the Company’s earnings margin relative to minimum
interest guarantee levels. It also caused us to hold a higher amount of cash and
short-term investments at very low interest rates while portfolio managers
searched for investment securities meeting the Company’s criteria for quality,
diversification, duration and yield.
Our
operating strategy is to maintain capital levels substantially above regulatory
and rating agency requirements. While not significant, our capital levels
incurred declinations for impairment losses on investments during 2008 and 2009.
Despite these modest reductions in capital, the Company maintains resources more
than adequate to fund future growth and absorb abnormal periods of cash
outflows.
RESULTS
OF OPERATIONS
The
Company’s consolidated financial statements are prepared in accordance with U.S.
generally accepted accounting principles (“GAAP”). In addition, the Company
regularly evaluates operating performance using non-GAAP financial measures
which exclude or segregate derivative and realized investment gains and losses
from operating revenues. Similar measures are commonly used in the insurance
industry in order to assess profitability and results from ongoing operations.
The Company believes that the presentation of these non-GAAP financial measures
enhances the understanding of the Company’s results of operations by
highlighting the results from ongoing operations and the underlying
profitability factors of the Company’s business. The Company excludes or
segregates derivative and realized investment gains and losses because such
items are often the result of events which may or may not be at the Company’s
discretion and the fluctuating effects of these items could distort trends in
the underlying profitability of the Company’s business. Therefore, in the
following sections discussing consolidated operations and segment operations,
appropriate reconciliations have been included to report information management
considers useful in enhancing an understanding of the Company’s operations to
reportable GAAP balances reflected in the consolidated financial
statements.
Consolidated
Operations
Revenues. The
following details Company revenues:
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life and annuity contract charges
|
|
$ |
145,651 |
|
|
|
133,424 |
|
|
|
119,677 |
|
Traditional
life and annuity premiums
|
|
|
17,043 |
|
|
|
17,752 |
|
|
|
19,513 |
|
Net
investment income (excluding derivatives)
|
|
|
348,186 |
|
|
|
339,038 |
|
|
|
334,799 |
|
Other
revenues
|
|
|
17,348 |
|
|
|
12,769 |
|
|
|
13,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
|
528,228 |
|
|
|
502,983 |
|
|
|
487,672 |
|
Derivative
income (loss)
|
|
|
45,345 |
|
|
|
(65,676 |
) |
|
|
(16,662 |
) |
Net
realized investment (losses) gains
|
|
|
(5,167 |
) |
|
|
(26,228 |
) |
|
|
3,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$ |
568,406 |
|
|
|
411,079 |
|
|
|
474,507 |
|
Universal life and annuity
contract revenues - Revenues for universal life and annuity contract
revenues increased 9.2% in 2009 compared to 2008. Revenues for these
products consist of policy charges for the cost of insurance, administration
charges, and surrender charges assessed against policyholder account balances,
less reinsurance premiums. Cost of insurance charges were $83.6
million in 2009 compared to $82.9 million in 2008 and $74.3 million in
2007. Administrative charges were $25.4 million, $25.0 million and
$20.9 million for the years ended December 31, 2009, 2008 and 2007,
respectively. Surrender charges assessed against policyholder account
balances upon withdrawal were $50.0 million in 2009 compared to $39.1 million in
2008 and $33.4 million in 2007.
Traditional life and annuity
premiums - Traditional life and annuity premiums decreased 4.0% in 2009
compared to 2008. Traditional life insurance premiums for products
such as whole life and term life are recognized as revenues over the
premium-paying period. The Company’s life insurance sales focus has
been primarily centered around universal life products. Universal
life products, especially the Company’s equity indexed universal life products,
offer the opportunity for consumers to acquire life insurance protection and
receive credited interest linked in part to an outside market index such as the
S&P 500 Index®.
Net investment income (with
and without derivatives) - A detail of net investment income is provided
below.
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Gross
investment income:
|
|
|
|
|
|
|
|
|
|
Debt
securities
|
|
$ |
332,207 |
|
|
|
321,234 |
|
|
|
315,271 |
|
Mortgage
loans
|
|
|
6,346 |
|
|
|
7,223 |
|
|
|
8,513 |
|
Policy
loans
|
|
|
5,901 |
|
|
|
6,096 |
|
|
|
6,302 |
|
Short-term
investments
|
|
|
116 |
|
|
|
956 |
|
|
|
1,496 |
|
Other
investments
|
|
|
6,982 |
|
|
|
5,934 |
|
|
|
6,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment income
|
|
|
351,552 |
|
|
|
341,443 |
|
|
|
337,669 |
|
Less: investment
expenses
|
|
|
3,366 |
|
|
|
2,405 |
|
|
|
2,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
(excluding
derivatives)
|
|
|
348,186 |
|
|
|
339,038 |
|
|
|
334,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
income (loss)
|
|
|
45,345 |
|
|
|
(65,676 |
) |
|
|
(16,662 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
393,531 |
|
|
|
273,362 |
|
|
|
318,137 |
|
Investment
grade debt securities generated approximately 95.4% of net investment income,
excluding derivatives, in 2009. The decrease in short-term investment
income in 2009 is attributable to the very low interest rates available on money
market funds during all of 2009. Interest income earned on other
investments increased due to new investments in collateralized loans made during
the second half of 2009.
Net
investment income performance is analyzed excluding derivative income (loss),
which is a common practice in the insurance industry, in order to assess
underlying profitability and results from ongoing operations. Net
investment income performance is summarized as follows:
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands except percentages)
|
|
Excluding derivatives:
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
348,186 |
|
|
|
339,038 |
|
|
|
334,799 |
|
Average
invested assets, at amortized cost
|
|
$ |
6,056,042 |
|
|
|
5,762,688 |
|
|
|
5,732,212 |
|
Yield
on average invested assets
|
|
|
5.75 |
% |
|
|
5.88 |
% |
|
|
5.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Including derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
393,531 |
|
|
|
273,362 |
|
|
|
318,137 |
|
Average
invested assets, at amortized cost
|
|
$ |
6,083,722 |
|
|
|
5,814,439 |
|
|
|
5,789,502 |
|
Yield
on average invested assets
|
|
|
6.47 |
% |
|
|
4.70 |
% |
|
|
5.50 |
% |
The
average invested asset yield, excluding derivatives, decreased in 2009 due to
the Company obtaining lower yields on newly invested cash
inflows. The Company invests substantially most of its net cash flows
in debt securities whose yields fell during 2009 with the decline in U.S.
Treasury yields. Although the Company’s average credit spread on debt
securities purchased for insurance operations widened to approximately 270 basis
points during 2009 from 240 basis points in 2008, the overall drop in interest
rate levels more than offset the incremental spread on new
investments. The average invested asset yield, including derivatives,
increased due to the recovery in the equity markets during
2009. Refer to the derivatives discussion following this section for
a more detailed explanation.
Other revenues -
Other revenues consists primarily of gross income associated with nursing home
operations of $15.7 million, $12.5 million and $12.6 million in 2009, 2008 and
2007, respectively. In addition, the Company received $0.5 million
related to lawsuit settlements during 2007.
Derivative income
(loss) - Index options are derivative financial instruments used to fully
hedge the equity return component of the Company’s fixed-indexed products, which
were first introduced for sale in 1997. In 2002, the Company began
selling a fixed-indexed universal life product in addition to its fixed-indexed
annuities. Any income or loss from the sale or expiration of the
options, as well as period-to-period changes in fair values, are reflected as a
component of net investment income.
Income
and losses from index options are due to market conditions. Index
options are intended to act as hedges to match the returns on the product’s
underlying reference index and the rise or decline in the index causes option
values to likewise rise or decline. The Company does not elect hedge accounting
relative to these derivative instruments. While income from index
options fluctuates with the underlying index, the contract interest expense to
policyholder accounts for the Company’s fixed-indexed products also fluctuates
in a similar manner and direction. In 2009, the reference indices
increased and the Company recorded income from index options and likewise
increased contract interest expenses. In 2008 and 2007, the reference
indices decreased resulting in index option losses and a reduction in contract
interest expenses.
The table
below summarized the derivate income (loss) amounts and total contract interest
by year.
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
Unrealized
income (loss)
|
|
$ |
93,085 |
|
|
|
(17,480 |
) |
|
|
(56,204 |
) |
Realized
income (loss)
|
|
|
(47,740 |
) |
|
|
(48,196 |
) |
|
|
39,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income (loss) included in net investment income
|
|
$ |
45,345 |
|
|
|
(65,676 |
) |
|
|
(16,662 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contract interest
|
|
$ |
242,816 |
|
|
|
138,960 |
|
|
|
164,391 |
|
Net realized investment
(losses) gains - Realized losses on investments have primarily resulted
from impairment write-downs on investments in debt securities and valuation
allowances recorded on mortgage loans. The net losses reported in 2009 of $5.2
million consisted of gross gains of $2.2 million primarily from calls and sales
of debt securities, offset by gross losses of $7.4 million, which includes
other-than-temporary impairment losses.
The
Company records impairment write-downs when a decline in value is considered to
be other-than-temporary and full recovery of the investment is not
expected. Impairment write-downs are summarized in the following
table.
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Impairment
or valuation write-downs:
|
|
|
|
|
|
|
|
|
|
Bonds
|
|
$ |
5,105 |
|
|
|
21,803 |
|
|
|
67 |
|
Equities
|
|
|
416 |
|
|
|
5,412 |
|
|
|
- |
|
Mortgage
loans
|
|
|
1,461 |
|
|
|
1,020 |
|
|
|
1,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,982 |
|
|
|
28,235 |
|
|
|
1,534 |
|
Due to
events providing evidence of a significant deterioration in the issuers’ credit
worthiness, one security was transferred from the held to maturity to the
available for sale classification, and was ultimately sold.
The
equity impairments represent mark-to-market write-downs on various equity
holdings. In addition, the 2008 amount includes Fannie Mae and
Freddie Mac preferred stock impairments of $4.6 million.
The
mortgage loan valuation writedown in 2009 relates to a property located in
Steubenville, Ohio. The writedown in 2008 principally involves a
property located in Ft. Smith, Arkansas. The 2007 mortgage loan
valuation writedown involves a New Orleans, Louisiana property whose value was
negatively impacted by Hurricane Katrina.
Benefits and Expenses. The
following details benefits and expenses.
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
$ |
48,997 |
|
|
|
39,759 |
|
|
|
41,326 |
|
Amortization
of deferred policy acquisition costs
|
|
|
115,163 |
|
|
|
127,161 |
|
|
|
88,413 |
|
Universal
life and annuity contract interest
|
|
|
242,816 |
|
|
|
138,960 |
|
|
|
164,391 |
|
Other
operating expenses
|
|
|
92,192 |
|
|
|
55,630 |
|
|
|
55,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
499,168 |
|
|
|
361,510 |
|
|
|
349,260 |
|
Life and other policy
benefits - Life and other policy benefits include death claims of $30.2
million, $29.6 million and $28.5 million for 2009, 2008 and 2007,
respectively.
The
Company is implementing new actuarial reserving systems that will enhance its
ability to provide estimates used in establishing future policy liabilities,
monitor the deferred acquisition cost asset and the deferred sales inducement
asset as well as support other actuarial processes within the Company. The
implementation of these new reserving systems for specific blocks of business
began in the second quarter of 2009 and is expected to be completed in
2010. As the Company applies these new systems to a line of business,
current reserving assumptions are reviewed and updated as appropriate. During
the year ended December 31, 2009, loss recognition testing was performed on
certain products that were converted to the new reserving system. As a result of
the loss recognition testing, unlocking of historical assumptions resulted in an
increase of $11.6 million in reserves and policy benefit expenses.
Amortization of deferred
policy acquisition costs - Life insurance companies are required to defer
certain expenses associated with acquiring new business. The majority
of these acquisition expenses consist of commissions paid to agents,
underwriting costs, and certain marketing expenses and sales inducements. The
Company defers sales inducements in the form of first year interest bonuses on
annuity and universal life products that are directly related to the production
of new business. These charges are deferred and amortized using the
same methodology and assumptions used to amortize other capitalized acquisition
costs and the amortization is included in contract
interest. Recognition of these deferred policy acquisition costs in
the consolidated financial statements occurs over future periods in relation to
the expected emergence of profits priced into the products sold. This
emergence of profits is based upon assumptions regarding premium payment
patterns, mortality, persistency, investment performance, and expense patterns.
Companies are required to review universal life and annuity contract assumptions
periodically to ascertain whether actual experience has deviated significantly
from that assumed. If it is determined that a significant deviation has
occurred, the emergence of profit patterns is to be "unlocked" and reset based
upon the actual experience.
An
unlocking adjustment was recorded in 2009 which resulted in an increase of
amortization of $5.2 million. This unlocking adjustment was based
upon changes to future mortality assumptions reflecting current experience
studies and assumption changes regarding the level of future policy maintenance
expenses. An unlocking adjustment was also recorded in 2008 which
resulted in an increase of amortization by $8.1 million. This
unlocking adjustment was based upon assumption changes to future annuitizations
and full surrenders reflecting current experience studies. An
unlocking adjustment was recorded in 2007 which resulted in a decrease in
amortization of $10.4 million. This unlocking adjustment was based
upon changes to future mortality assumptions reflecting current experience
studies and assumption changes to future cost of insurance
rates. While the Company is required to evaluate its emergence of
profits continually, management believes that the current amortization patterns
of deferred policy acquisition costs are reflective of actual
experience.
In
accordance with GAAP guidance the Company writes off deferred acquisition costs,
unearned revenue liabilities, and deferred sales inducement assets upon internal
replacement of certain contracts as well as annuitizations of deferred
annuities.
The
Company is required to periodically adjust for actual experience that varies
from that assumed. True-up adjustments were recorded in 2009, 2008
and 2007 relative to partial surrender rates, mortality rates, credited interest
rates and earned rates for the current year’s experience resulting in $8.4
million, $16.2 million, and $1.0 million increases in amortization,
respectively.
Universal life and annuity
contract interest - The Company closely monitors credited interest rates
on interest sensitive policies, taking into consideration such factors as
profitability goals, policyholder benefits, product marketability, and economic
market conditions. As long-term interest rates change, the Company's
credited interest rates are often adjusted accordingly, taking into
consideration the factors described above. The difference between yields earned
on investments over policy credited rates is often referred to as the "interest
spread". Raising policy credited rates can typically have an impact sooner than
higher market rates on the Company's investment portfolio yield, making it more
difficult to maintain the current interest spread.
The
Company's approximated average credited rates were as follows:
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Excluding
equity-indexed products)
|
|
|
(Including
equity-indexed products)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity
|
|
|
2.83 |
% |
|
|
3.01 |
% |
|
|
3.41 |
% |
|
|
4.11 |
% |
|
|
2.42 |
% |
|
|
2.84 |
% |
Interest
sensitive life
|
|
|
3.80 |
% |
|
|
3.92 |
% |
|
|
3.23 |
% |
|
|
6.83 |
% |
|
|
3.39 |
% |
|
|
4.28 |
% |
Contract
interest includes the performance of the derivative component of the Company's
equity-indexed products. As previously noted, the recent market performance of
these derivative features increased contract interest expense in 2009 and 2007,
and decreased contract interest expense in 2008, with corresponding offsetting
effects in the Company's investment income given the hedge nature of the
options. With these credited rates, the Company generally realized
its targeted interest spread on its products.
Other operating
expenses - Other operating expenses consist of general administrative
expenses, legal costs, licenses and fees, commissions not subject to deferral,
and expenses of nursing home operations. As discussed previously in
Item 3. Legal Proceedings, and in reports on Form 8-K which the Company issued
on February 9, 2010 and February 22, 2010, the Company is currently involved in
various legal actions in the normal course of its business. In
accordance with generally accepted accounting principles, the Company accrued
$23.0 million during the year ended December 31, 2009 for potential future costs
pertaining to these various matters.
During
2009, the Company started or accelerated major information system initiatives to
enhance actuarial, accounting, policy acquisition, and policy administration
processes. Non-capitalizable expenses associated with these various
system development efforts were approximately $1.5 million higher than amounts
incurred in 2008. Deprecation expense increased $0.9 million in
association with new system implementations.
Guaranty
fund assessment expenses increased to $0.5 million in 2009 from $0.3 million and
$(0.2) million in 2008 and 2007, respectively.
Nursing
home expenses amounted to $14.9 million, $11.4 million and $11.0 million in
2009, 2008 and 2007, respectively. The higher level of expenses
during 2009 is primarily related to the start-up of operations of the Company’s
second nursing home during 2009.
Compensation
costs related to stock options totaled $1.6 million in 2009, $(1.4) million in
2008 and $(1.1) million in 2007 as a result of marking the options to fair value
under the liability method of accounting.
Federal income
taxes -
Federal income taxes on earnings from continuing operations for 2009, 2008 and
2007 reflect effective tax rates of 34.3%, 32.1% and 31.8%, respectively, which
are lower than the expected Federal rate of 35% primarily due to tax-exempt
investment income related to investments in municipal securities and
dividends-received deductions on income from stock investments.
During
2008, the Company was notified that its 2005 tax return amendment, which was
filed September 2007, was being audited by the IRS. The audit is
currently in progress. Adjustments to the amended return, if any, are
not expected to have a material effect on the financial condition or operating
results of the Company.
During
the second quarter of 2007, upon the completion of a detailed review of deferred
tax items, the Company identified a $2.3 million error in the net deferred tax
liability. The error, which occurred during various periods prior to 2005, was
corrected in the second quarter of 2007 and resulted in a decrease in the net
deferred tax liability and deferred tax expense. The adjustment was
not material to 2007 or any prior period financial statements.
Segment
Operations
Summary
of Segment Earnings
A summary
of segment earnings from continuing operations for the years ended December 31,
2009, 2008 and 2007 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$ |
426 |
|
|
|
14,663 |
|
|
|
25,460 |
|
|
|
8,294 |
|
|
|
48,843 |
|
2008
|
|
|
717 |
|
|
|
15,350 |
|
|
|
27,842 |
|
|
|
6,781 |
|
|
|
50,690 |
|
2007
|
|
|
342 |
|
|
|
20,179 |
|
|
|
56,299 |
|
|
|
6,278 |
|
|
|
83,098 |
|
Domestic
Life Insurance Operations
A
comparative analysis of results of operations for the Company's domestic life
insurance segment is detailed below.
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Premiums
and other revenue:
|
|
|
|
|
|
|
|
|
|
Premiums
and contract charges
|
|
$ |
34,414 |
|
|
|
27,919 |
|
|
|
25,879 |
|
Net
investment income
|
|
|
19,498 |
|
|
|
20,254 |
|
|
|
18,863 |
|
Other
revenues
|
|
|
25 |
|
|
|
20 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
53,937 |
|
|
|
48,193 |
|
|
|
44,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
13,884 |
|
|
|
14,478 |
|
|
|
14,922 |
|
Amortization
of deferred policy acquisition costs and deferred sales
inducements
|
|
|
16,423 |
|
|
|
12,416 |
|
|
|
7,998 |
|
Universal
life insurance contract interest
|
|
|
9,014 |
|
|
|
9,171 |
|
|
|
9,463 |
|
Other
operating expenses
|
|
|
13,968 |
|
|
|
11,057 |
|
|
|
11,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
53,289 |
|
|
|
47,122 |
|
|
|
44,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings before Federal income taxes
|
|
|
648 |
|
|
|
1,071 |
|
|
|
502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
income taxes
|
|
|
222 |
|
|
|
354 |
|
|
|
160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$ |
426 |
|
|
|
717 |
|
|
|
342 |
|
Revenues
from domestic life insurance operations include life insurance premiums on
traditional type products and contract revenues from universal life
insurance. Revenues from traditional products are simply premiums
collected, while revenues from universal life insurance consist of policy
charges for the cost of insurance, policy administration fees, and surrender
charges assessed during the period. A comparative detail of premiums
and contract revenues is provided below.
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life insurance revenues
|
|
$ |
32,993 |
|
|
|
26,978 |
|
|
|
23,028 |
|
Traditional
life insurance premiums
|
|
|
6,378 |
|
|
|
5,849 |
|
|
|
6,629 |
|
Reinsurance
premiums
|
|
|
(4,957 |
) |
|
|
(4,908 |
) |
|
|
(3,778 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
34,414 |
|
|
|
27,919 |
|
|
|
25,879 |
|
The
Company’s premiums and contract revenues increased 23% from 2008 coinciding with
sales growth in recent years of domestic life products. It is the
Company's marketing plan to increase domestic life product sales through
increased recruiting, new distribution and the development of new life insurance
products. The Company had approximately 7,300 contracted agents as of
December 31, 2009, an increase of 3,000 contracted agents from December 31,
2008.
In
accordance with generally accepted accounting principles, premiums collected on
universal life products are not reflected as revenues in the Company's
consolidated statements of earnings. Actual domestic universal life
premiums are detailed below.
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life insurance:
|
|
|
|
|
|
|
|
|
|
First
year and single premiums
|
|
$ |
13,640 |
|
|
|
15,272 |
|
|
|
15,592 |
|
Renewal
premiums
|
|
|
21,978 |
|
|
|
19,948 |
|
|
|
16,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
35,618 |
|
|
|
35,220 |
|
|
|
32,231 |
|
Net
investment income decreased slightly to $19.5 million in 2009 as compared to
$20.3 million in 2008 and $18.9 million in 2007, due to lower investment yields
from debt security investment purchases backing the obligations of the line of
business.
Policy
benefits in 2009, 2008 and 2007 were consistent with Company
expectations. Other operating expenses were $2.9 million higher in
2009 reflecting the factors discussed in the other operating expense section of
consolidated operations above.
During
the current year, unlocking of the projected universal life per policy
maintenance expense and projected mortality assumptions decreased the DPAC asset
balance and increased life DPAC amortization by $2.7 million. Current
year true-up adjustments increased amortization expense by $1.9
million. No unlocking adjustments were recorded in
2008. True-up adjustments increased DPAC amortization $1.4 million
for the year. During 2007, the Company recorded an unlocking
adjustment for changes in mortality assumptions which reduced the DPAC asset and
increased DPAC amortization expense by $2.2 million. True-up
adjustments increased DPAC amortization expense by $0.6 million.
International
Life Insurance Operations
A
comparative analysis of results of operations for the Company's international
life insurance segment is detailed below.
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Premiums
and other revenue:
|
|
|
|
|
|
|
|
|
|
Premiums
and contract charges
|
|
$ |
104,016 |
|
|
|
97,661 |
|
|
|
88,782 |
|
Net
investment income
|
|
|
44,540 |
|
|
|
17,350 |
|
|
|
24,690 |
|
Other
revenues
|
|
|
68 |
|
|
|
62 |
|
|
|
126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
148,624 |
|
|
|
115,073 |
|
|
|
113,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
19,522 |
|
|
|
21,292 |
|
|
|
22,810 |
|
Amortization
of deferred policy acquisition costs and deferred sales
inducements
|
|
|
41,849 |
|
|
|
37,525 |
|
|
|
24,959 |
|
Universal
life insurance contract interest
|
|
|
45,868 |
|
|
|
16,803 |
|
|
|
20,993 |
|
Other
operating expenses
|
|
|
19,048 |
|
|
|
16,502 |
|
|
|
15,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
126,287 |
|
|
|
92,122 |
|
|
|
84,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings before Federal income taxes
|
|
|
22,337 |
|
|
|
22,951 |
|
|
|
29,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
income taxes
|
|
|
7,674 |
|
|
|
7,601 |
|
|
|
9,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$ |
14,663 |
|
|
|
15,350 |
|
|
|
20,179 |
|
In
general, as the amount of international life insurance in force grows, the
Company anticipates operating earnings to increase as well. The amount of
international life insurance in force grew from $14.8 billion at December 31,
2007 to $15.9 billion at December 31, 2008. However, international
life insurance in force declined slightly to $15.7 billion at December 31, 2009,
in reaction to the U.S. financial market crisis.
As with
domestic operations, revenues from the international life insurance segment
include both premiums on traditional type products and revenues from universal
life insurance. A comparative detail of premiums and contract
revenues is provided below.
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life insurance revenues
|
|
$ |
106,601 |
|
|
|
98,458 |
|
|
|
85,633 |
|
Traditional
life insurance premiums
|
|
|
13,113 |
|
|
|
14,727 |
|
|
|
15,692 |
|
Reinsurance
premiums
|
|
|
(15,698 |
) |
|
|
(15,524 |
) |
|
|
(12,543 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
104,016 |
|
|
|
97,661 |
|
|
|
88,782 |
|
International
operations have emphasized universal life policies over traditional life
insurance products. In accordance with generally accepted accounting
principles, premiums collected on universal life products are not reflected as
revenues in the Company's consolidated statements of earnings. Actual
international universal life premiums collected are detailed below.
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Universal
life insurance
|
|
|
|
|
|
|
|
|
|
First
year and single premiums
|
|
$ |
35,147 |
|
|
|
39,257 |
|
|
|
44,426 |
|
Renewal
premiums
|
|
|
102,403 |
|
|
|
96,456 |
|
|
|
91,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
137,550 |
|
|
|
135,713 |
|
|
|
136,047 |
|
The
Company's international life operations historically have been a significant
factor in the Company's overall earnings performance and represent a market
niche where the Company believes it has a competitive advantage. A
productive agency force has been developed given the Company's longstanding
reputation for supporting its international life products coupled with the
instability of competing companies in international markets. In
particular, the Company has experienced growth with its fixed-indexed universal
life products and has collected related premiums of $81.9 million, $78.5 million
and $76.8 million for the years ended 2009, 2008 and 2007,
respectively.
The
appealing feature to a consumer purchasing a fixed-indexed universal life policy
is the interest crediting component linked in part to an equity index. With the
growth in this block of business, the period-to-period changes in fair values of
the underlying options used to hedge this interest crediting feature have had an
increasingly greater impact on net investment and contract interest. A detail of
net investment income for international life insurance operations is provided
below.
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
|
|
|
|
|
|
|
|
(excluding
derivatives)
|
|
$ |
34,130 |
|
|
|
28,687 |
|
|
|
26,519 |
|
Derivative
income (loss)
|
|
|
10,410 |
|
|
|
(11,337 |
) |
|
|
(1,829 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
44,540 |
|
|
|
17,350 |
|
|
|
24,690 |
|
In 2009,
the Company recorded an unlocking adjustment of $2.5 million relative to changes
in projected universal life per policy maintenance expenses, and projected
mortality assumptions, that reduced the DPAC asset and increased amortization
expense. True-up adjustments of $1.5 million were also recorded that
increased amortization expense. Amortization of deferred policy acquisition
costs in 2008, were impacted as the Company recorded true-up adjustments that
reduced the DPAC asset and increased amortization by $3.7
million. The Company recorded an unlocking adjustment benefit in 2007
totaling $9.0 million relative to improved mortality assumptions that resulted
in an increase to the DPAC asset balance and a decrease in amortization
expense. In addition, a true-up adjustment of $1.7 million was also
recorded in 2007 resulting in a decrease to amortization. Offsetting
the decrease to 2007 amortization for the unlocking and true-up adjustments was
an increase in amortization due primarily to the application of new GAAP
guidance in 2007 which required the write-off of deferred balances on contracts
considered substantially changed. These balances were previously
carried and amortized over the projected life of the contract.
Contract
interest expense includes fluctuations that are the result of underlying equity
indices performance relative to the equity-indexed universal life
products. The associated stock market gains (losses) increase
(decrease) the amounts the Company credits to policyholders. With the
recovery in the equity markets during 2009, the segment reported significant
increases in net investment income and contract interest expense. For
more details about the Company’s use of index options to hedge equity indices
performance refer to the derivative income (loss) discussion in the Consolidated
Operations section of Item 7.
Other
operating expenses reported in 2009 were 15.4% higher compared to 2008,
reflecting the factors discussed in the other operating expense section of
Consolidated Operations previously.
Annuity
Operations
The
Company's annuity operations are almost exclusively in the United
States. Although some of the Company's investment contracts are
available to international residents, current sales are small relative to total
annuity sales. A comparative analysis of results of operations for
the Company's annuity segment is detailed below.
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
and other revenue:
|
|
|
|
|
|
|
|
|
|
Premiums
and contract charges
|
|
$ |
24,264 |
|
|
|
25,596 |
|
|
|
24,529 |
|
Net
investment income
|
|
|
317,703 |
|
|
|
226,683 |
|
|
|
266,953 |
|
Other
revenues
|
|
|
1,535 |
|
|
|
232 |
|
|
|
920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
premiums and other revenue
|
|
|
343,502 |
|
|
|
252,511 |
|
|
|
292,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and other policy benefits
|
|
|
15,666 |
|
|
|
3,990 |
|
|
|
3,594 |
|
Amortization
of deferred policy acquisition costs and deferred sales
inducements
|
|
|
56,891 |
|
|
|
77,219 |
|
|
|
55,456 |
|
Annuity
contract interest
|
|
|
187,934 |
|
|
|
112,986 |
|
|
|
133,935 |
|
Other
operating expenses
|
|
|
44,227 |
|
|
|
16,685 |
|
|
|
16,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
304,718 |
|
|
|
210,880 |
|
|
|
209,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings before Federal income taxes
|
|
|
38,784 |
|
|
|
41,631 |
|
|
|
82,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
income taxes
|
|
|
13,324 |
|
|
|
13,789 |
|
|
|
26,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
earnings
|
|
$ |
25,460 |
|
|
|
27,842 |
|
|
|
56,299 |
|
Revenues
from annuity operations primarily include surrender charges and recognition of
deferred revenues relating to immediate or payout annuities. A
comparative detail of the components of premiums and annuity contract revenues
is provided below.
|
|
Years
Ended December 31,
|
|
|
|
2009
|
|