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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to ___________
Commission File Number: 2-17039
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
COLORADO 84-0467208
(State of Incorporation) (I.R.S. Employer Identification Number)
850 EAST ANDERSON LANE
AUSTIN, TEXAS 78752-1602 (512) 836-1010
(Address of Principal Executive Offices) (Telephone Number)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: EXEMPT
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 [ X ] No [ ]
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. [ ]
The aggregate market value of the common stock (based upon the closing
price) held by non-affiliates of the Registrant at March 15, 1996, was
approximately $130,074,000.
As of March 15, 1996, the number of shares of Registrant's common stock
outstanding was: Class A - 3,291,338 and Class B - 200,000.
PART I
ITEM 1. BUSINESS
(a) General
Life Insurance Operations
National Western Life Insurance Company (hereinafter referred to as
"National Western", "Company", or "Registrant") is a life insurance company,
chartered in the State of Colorado in 1956, and doing business in
forty-three states and the District of Columbia. National Western also
accepts applications from and issues policies to residents of several
Central and South American countries. Such policies are accepted and issued
in the United States. During 1995, the Company recorded approximately $403
million in premium revenues, universal life, and investment annuity contract
deposits. New life insurance issued during 1995 approximated $1.2 billion
and the total amount in force at year-end 1995 was $7.9 billion. As of
December 31, 1995, the Company had total consolidated assets of
approximately $2.96 billion.
Competition: The life insurance business is highly competitive and National
Western competes with over 1,700 stock and mutual companies. Best's Agents
Guide To Life Insurance Companies, an authoritative life insurance
publication, lists companies by total admitted assets and life insurance in
force. As of December 31, 1994, the most recent date for which information
is available, National Western ranked 145 in total admitted assets and 227
in life insurance in force among approximately 1,700 life insurance
companies domiciled in the United States.
Life insurance companies compete not only on product design and price, but
increasingly on policyowner service and marketing and sales efforts.
National Western believes that its products, premium rates, policyowner
service, and marketing efforts are generally competitive with those of other
life insurance companies selling similar types of insurance. Mutual
insurance companies may have certain competitive advantages over stock
companies in that the policies written by them are participating policies
and their profits inure to the benefit of their policyholders. The Company
no longer writes participating policies, and such policies represent only 1%
of the Company's life insurance in force at December 31, 1995.
In addition to competition within the life insurance industry, National
Western and other insurance companies face competition from other
industries. In recent years, there has been increased interest in the
banking industry to directly market annuities. In fact, in January, 1995,
the U.S. Supreme Court ruled that national banks may compete with insurance
companies in the sale of annuities. Such regulation changes could result in
increased competition for National Western and the life insurance industry.
Competition also arises from different investment and product choices.
Annuities are often used as long-term, tax deferred investment vehicles and
in retirement planning. As a result, other investment types can be
competitive products to annuities. For example, the recent growth and
popularity of mutual funds has attracted large amounts of investment funds
over the past several years, particularly during periods of declining market
interest rates. Many mutual funds also allow tax deferred features through
individual retirement accounts, 401(k) plans, and other qualified methods.
Agents and Employees: National Western has 230 full-time employees at its
principal executive office. Its insurance operations are conducted primarily
through broker-agents, which numbered 8,330 at December 31, 1995. The agency
operations are supervised by Senior Vice Presidents of domestic and
international marketing. The Company's agents are independent contractors
who are compensated on a commission basis. General agents receive overriding
first year and renewal commissions on business written by agents under their
supervision.
Types of Insurance Written: National Western offers a broad portfolio of
individual whole life and term life insurance plans, endowments, and
annuities, including standard supplementary riders. The Company does not
market group life insurance but does offer group annuities. In recent years
the majority of the business written has been individual flexible premium
and single premium annuities and universal life products. Except for a small
employee health plan and a small number of existing individual accident and
health policies, primarily in Florida, the Company does not write any new
policies in the accident and health markets. A distribution of the
Company's direct premium revenues and deposits by type of product is
provided below:
1995 1994
Amounts in Amounts in
Thousands % Thousands %
Investment annuities 309,971 77 % 157,622 64 %
Universal life insurance 68,464 17 64,760 26
Traditional life and other 24,801 6 24,919 10
403,236 100 % 247,301 100 %
The underwriting policy of the Company is to require medical examination of
applicants for ordinary insurance in excess of certain prescribed limits.
These limits are graduated according to the age of the applicant and the
amount of insurance desired. The Company has no maximum for issuance of
life insurance on any one life. However, the Company's general policy is to
reinsure that portion of any risk in excess of $150,000 on the life of any
one individual. Effective January 1, 1996, the Company has raised this
reinsurance level to $200,000 per individual. Also, following general
industry practice, policies are issued on substandard risks.
Geographical Distribution of Business: For the year 1995, insurance and
annuity policies held by residents of the State of Texas accounted for 17%
of premium revenues, universal life, and investment annuity contract
deposits from direct business, while policies held by residents of
California, Pennsylvania, and Michigan accounted for approximately 8%, 7%,
and 6%, respectively. All other states of the United States accounted for 48%
of premium revenues and deposits from direct business. The remaining 14% of
premium revenues and deposits were derived from the Company's policies
issued to foreign nationals, primarily all of which was for individual life
insurance. A distribution of the Company's direct premium revenues and
deposits by domestic and international markets is provided below:
1995 1994
Amounts in Amounts in
Thousands % Thousands %
United States domestic market 345,829 86 % 193,455 78 %
International market 57,407 14 53,846 22
403,236 100 % 247,301 100 %
Approximately 74% of the life insurance face amount issued by the Company
during 1995 was written through international insurance brokers acting as
independent contractors. Foreign business is solicited by various
independent brokers, primarily in Central and South America, and forwarded
to the United States for acceptance and issuance. The Company maintains
strict controls on the business it accepts from such foreign independent
brokers, as well as its underwriting procedures for such business. Except
for a small block of business, a currency clause is included in each foreign
policy stating that premium and claim "dollars" refer to lawful currency of
the United States. Traditional and universal life products are sold in the
international market to individuals in upper socioeconomic classes. By
marketing exclusively to this group, sales typically produce a higher
average policy size, strong persistency, and claims experience similar to
that in the United States.
Investments: State insurance statutes prescribe the nature, quality, an
percentage of the various types of investments which may be made by
insurance companies and generally permit investments in qualified state,
municipal, federal, and foreign government obligations, corporate bonds,
preferred and common stock, real estate, and real estate first lien
mortgages where the value of the underlying real estate exceeds the amount
of the mortgage lien by certain required percentages.
The following table shows investment results for insurance operations for
the periods indicated:
Net
Unrealized
Invested Realized Appreciation
Assets of Net Gains Increase
Calendar Insurance Investment (Losses) on (Decrease)
Year Operations Income (A) Investments (B)
(In thousands)
1995 $ 2,624,596 201,816 (2,415) 17,394
1994 2,343,827 190,021 1,626 (1,942)
1993 2,237,687 180,252 3,206 (395)
1992 2,200,518 184,149 15,710 237
1991 2,025,997 176,443 9,360 527
Notes to Table:
(A) Net investment income is after deduction of investment expenses, but
before realized gains (losses) on investments and Federal income taxes.
(B) Unrealized appreciation, net of effects of deferred policy acquisition
costs and taxes, relates only to those investment securities classified as
available for sale.
The following table shows the percentage distribution of insurance operation
investments:
December 31,
1995 1994 1993 1991 1992
Securities held to maturity 62.6% 68.5% 79.9% 77.5% 77.1%
Securities available for sale 22.9 15.1 1.8 4.7 -
Mortgage loans 7.3 8.1 8.4 8.1 7.8
Policy loans 5.6 6.5 6.9 7.2 7.7
Other investments 1.6 1.8 3.0 2.5 7.4
Totals 100.0% 100.0% 100.0% 100.0% 100.0%
Regulation: The Company is subject to regulation by the supervisory agency
of each state or other jurisdiction in which it is licensed to do business.
These agencies have broad administrative powers, including the granting and
revocation of licenses to transact business, the licensing of agents, the
approval of policy forms, the form and content of mandatory financial
statements, capital, surplus, and reserve requirements, as well as the
previously mentioned regulation of the types of investments which may be
made. The Company is required to file detailed financial reports with each
state or jurisdiction in which it is licensed, and its books and records are
subject to examination by each. In accordance with the insurance laws of the
various states in which the Company is licensed and the rules and practices
of the National Association of Insurance Commissioners, examination of the
Company's records routinely takes place every three to five years. These
examinations are supervised by the Company's domiciliary state, with
representatives from other states participating. The most recent examination
of National Western was completed in 1994 and covered the six-year period
ended December 31, 1992. The states of Colorado and Delaware participated.
A final report disclosing the examination results was received by the
Company in March, 1995. The report contained no adjustments or issues which
would have a significant, negative impact on the operations of the Company.
Regulations that affect the Company and the insurance industry are often the
result of efforts by the National Association of Insurance Commissioners
(NAIC). The NAIC is an association of state insurance commissioners,
regulators and support staff that acts as a coordinating body for the state
insurance regulatory process. Recently, increased scrutiny has been placed
upon the insurance regulatory framework, and certain state legislatures have
considered or enacted laws that alter, and in many cases increase, state
authority to regulate insurance companies. The NAIC and state insurance
regulators periodically re-examine existing laws and regulations, and
recently have been specifically focusing on insurance company investments
and solvency issues, statutory policy reserves, reinsurance, risk-based
capital guidelines, and codification of prescribed statutory accounting
principles.
Of particular importance, in 1993 the NAIC established new 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.
The Company has calculated its RBC level and has determined that its capital
and surplus is significantly in excess of the threshold requirements.
The RBC regulation developed by the NAIC is an example of its involvement in
the regulatory process. New regulations are routinely published by the NAIC
as model acts or model laws. The NAIC encourages adoption of these model
acts by all states to provide uniformity and consistency among state
insurance regulations.
Discontinued Brokerage Operations
General: The Westcap Corporation (Westcap), a wholly owned subsidiary of
the Company, was a brokerage firm headquartered in Houston, Texas. Prior to
July 17, 1995, Westcap provided investment products and financial services
to a nationwide customer base. Its wholly owned subsidiaries include
Westcap Securities Investment, Inc. (Westcap Investment), Westcap Securities
Management, Inc. (Westcap Management), and Westcap Mortgage Company (Westcap
Mortgage). Westcap Investment and Westcap Management own 100% of the
partnership interests in Westcap Securities, L.P. (Westcap L.P.). Westcap
L.P. was primarily a dealer in municipal and corporate bonds and
collateralized mortgage obligations and a secondary market dealer in
obligations issued or guaranteed by the U.S. government or its agencies. The
limited partnership was subject to regulation by the Securities and Exchange
Commission (SEC) and the National Association of Securities Dealers.
Plan to Cease Brokerage Operations: Effective July 17, 1995, The Westcap
Corporation and subsidiaries discontinued all sales and trading activities
in its Houston, Texas, office. At that time, Westcap continued its
corporate operations and small sales operations in its New Jersey office.
However, in September, 1995, Westcap approved a plan to close the remaining
sales office in New Jersey and to cease all brokerage operations.
As more fully described in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, declines in both sales
revenues and earnings were the principal reasons for ceasing brokerage
operations. The declines resulted primarily from adverse bond market
conditions and adverse publicity about litigation. As a result of Westcap's
decision to cease brokerage operations, the brokerage segment is now
reported as discontinued operations throughout this report and in the
accompanying financial statements.
In anticipation of an Order Instituting Public Administrative Proceedings,
Making Findings and Imposing Remedial Sanctions (Order) being entered
pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934
by the Securities and Exchange Commission (Commission), on February 8, 1996,
Westcap L.P. submitted an offer of settlement to the Commission whereby it
consented, without admitting or denying the findings in the Order, to the
entry of an Order of the Commission making findings, revoking Westcap L.P.'s
registration with the Commission, and requiring payment to the Commission of
(i) $445,341 disgorgement, (ii) prejudgement interest of $83,879, and (iii)
civil penalty of $300,000. Such an Order was entered by the Commission on
February 14, 1996. In compliance with the Order, Westcap L.P. made payment
to the Commission of $829,220 on March 5, 1996.
(b) Financial Information About Industry Segments
A summary of financial information for the Company's two industry segments
follows:
Life Discontinued
Insurance Brokerage Adjustments Consolidated
Operations Operations (B) Amounts
(In thousands)
Gross revenues:
1995 $ 287,816 5,112 (A) (5,693) 287,235
1994 278,431 40,208 (A) (41,881) 276,758
1993 273,363 105,923 (A) (107,579) 271,707
Net earnings
(losses):
1995 $ 35,634 (16,350) - 19,284
1994 37,172 (2,936) - 34,236
1993 34,892 21,832 - 56,724
Identifiable
assets:
1995 $2,952,282 6,177 - 2,958,459
1994 2,702,184 232,057 (19,187) 2,915,054
1993 2,590,537 372,301 (21,787) 2,941,051
Notes to Table:
(A) These amounts are not reported as revenues in the accompanying
consolidated financial statements, as the segment has been discontinued.
Instead, gross revenues are reported net of expenses and taxes as a separate
line item identified as discontinued operations. This reporting
classification is used to clearly separate discontinued operations from
continuing operations of the consolidated entity.
(B) These amounts include both consolidating eliminations and adjustments
for reporting discontinued brokerage operations as described in note (A)
above.
Additional information concerning these industry segments is included in
Item 1. (a).
(c) Narrative Description of Business
Included in Item 1.(a).
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
Included in Item 1.(a).
ITEM 2. PROPERTIES
The Company leases approximately 72,000 square feet of office space in
Austin, Texas, for $477,600 per year plus taxes, insurance, maintenance, and
other operating costs. This lease expires in 2000.
The Company's brokerage subsidiary, The Westcap Corporation, leases its
office facilities in Houston, Texas, under a lease which terminates in 1997.
The total leased space is approximately 4,200 square feet. The annual lease
costs will be approximately $74,000 and $35,000 in 1996 and 1997,
respectively.
ITEM 3. LEGAL PROCEEDINGS
On March 28, 1994, the Community College District No. 508, County of Cook
and State of Illinois (The City Colleges) filed a complaint in the United
States District Court for the Northern District of Illinois, Eastern
Division, against National Western Life Insurance Company (the Company) and
subsidiaries of The Westcap Corporation. The suit seeks rescission of
securities purchase transactions by The City Colleges from Westcap between
September 9, 1993 and November 3, 1993, alleged compensatory damages,
punitive damages, injunctive relief, declaratory relief, fees, and costs.
National Western is named as a "controlling person" of the Westcap
defendants. On February 1, 1995, the complaint was amended to add a RICO
count for treble damages and claims under the Texas securities and consumer
fraud laws, and to add additional defendants. Westcap and the Company are
of the opinions that Westcap has adequate documentation to validate all such
securities purchase transactions by The City Colleges, and that Westcap and
the Company each have adequate defenses to the litigation. Although the
alleged damages would be material to the Company's and Westcap's financial
positions, a reasonable estimate of any actual losses which may result from
this suit cannot be made at this time. A judicial ruling favorable to
Westcap has been made requiring resolution of the suit against Westcap
through binding arbitration. The lawsuit against the Company was suspended
pending determination of the arbitration proceeding against Westcap.
Arbitration proceedings are currently set to begin in August, 1996.
On February 1, 1995, the San Antonio River Authority (SARA) filed a
complaint in the 285th Judicial District Court, Bexar County, Texas, against
Kenneth William Katzen (Katzen), Westcap Securities, L.P., The Westcap
Corporation (Westcap), and National Western Life Insurance Company (the
Company). The suit alleges that Katzen and Westcap sold mortgage-backed
security derivatives to SARA and misrepresented these securities to SARA.
The suit alleges violations of the Federal Securities Act, Texas Securities
Act, Deceptive Trade Practices Act, breach of fiduciary duty, fraud,
negligence, breach of contract, and seeks attorney's fees. The Company is
named as a "controlling person" of the Westcap defendants. Westcap and the
Company are of the opinions that Westcap has adequate documentation to
validate all securities purchases by SARA and that the Company and Westcap
have adequate defenses to such suit. Although the alleged damages would be
material to Westcap's financial condition, a reasonable estimate of any
actual losses which may result from this suit cannot be made at this time.
The Company and Westcap have denied all allegations and the parties have
initiated discovery. The case is set for trial on April 8, 1996.
On June 9, 1995, Charles McCutcheon, as Sheriff of Palm Beach County,
Florida, served The Westcap Corporation, Westcap Securities, Inc., Westcap
Government Securities, Inc., individual officers and directors of the
Westcap entities, and National Western Life Insurance Company as defendants
with a complaint filed in the U.S. District Court for the Southern District
of Florida. The Complaint alleges that the Westcap entities improperly sold
certain derivative securities to the Plaintiff and did not disclose the high
risk of these securities to the Plaintiff, who suffered financial losses
from the investments. The Company is sued as a "controlling person" of
Westcap, and it is alleged that the Company is responsible and liable for
the alleged wrongful conduct of Westcap. The suit seeks rescission of the
investment transactions, alleged damages, punitive and exemplary damages,
attorneys' fees, and injunction. On October 13, 1995, the U.S. District
Judge ordered arbitration of Plaintiff's claims against the Westcap entities
and stayed all proceedings pending outcome of the arbitration. Although
the alleged damages would be material to Westcap's financial condition, a
reasonable estimate of any actual losses which may result from this suit
cannot be made at this time. The Company and Westcap deny the allegations
and believe they each have adequate defenses to such suit.
On July 5, 1995, San Patricio County, Texas, filed suit in the District
Court of San Patricio County, Texas, against National Western Life Insurance
Company (the Company) and its chief executive officer, Robert L. Moody. The
suit arises from derivative investments purchased by San Patricio County
from Westcap Securities, L.P. or Westcap Government Securities, Inc.,
affiliates of The Westcap Corporation, a wholly owned subsidiary of the
Company. The suit alleges that the Westcap affiliates were controlled by
the Company and Mr. Moody and that they are responsible for the alleged
wrongful acts of the Westcap affiliates in selling the securities to the
Plaintiff. Plaintiff alleges that the Westcap affiliates violated duties
and responsibilities owed to the Plaintiff related to its investment
recommendations and the decisions made by Plaintiff, and alleges that the
Plaintiff was financially damaged by such actions of Westcap. The suit
seeks rescission of the investment transactions and actual and punitive
damages of unspecified amounts. Although the alleged damages would be
material to Westcap's financial condition, a reasonable estimate of any actual
losses which may result from this suit cannot be made at this time. The
Company believes that it has adequate defenses to such suit and denies the
allegations. The parties have initiated discovery.
On September 13, 1995, Michigan South Central Power Agency filed a
complaint in The United States District Court for the Western District of
Michigan against Westcap Securities Investment, Inc., Westcap Securities,
L.P., Westcap Securities Management, Inc., The Westcap Corporation, National
Western Life Insurance Company (the Company), and others. The suit alleges
that salesmen of Westcap sold mortgage-backed securities to the Plaintiff
and misrepresented these securities in violation of Federal and state
securities laws and common law. The Company is named as a "controlling
person" of the Westcap defendants. Westcap and the Company are of the
opinions that they have adequate defenses to the suit. Although the alleged
damages would be material to Westcap's financial condition, a reasonable
estimate of any actual losses which may result from the suit cannot be
made at this time. The Company and Westcap deny all allegations.
The Westcap Corporation and Westcap Securities, L.P. are also defendants in
several other pending lawsuits which have arisen in the ordinary course of
its business. Westcap Securities, L.P. has also been notified of several
arbitration claims filed with the National Association of Securities
Dealers. After reviewing the lawsuits and arbitration filings with outside
counsel, management believes it has adequate defenses to each of the claims.
Although the alleged damages for all of the above-described suits and
arbitration claims would be material to the financial positions of the
Company and The Westcap Corporation, a reasonable estimate of actual losses
which may result from any of these claims cannot be made at this time.
Accordingly, no provision for any liability that may result from these
actions has been recognized in the consolidated financial statements.
No other legal proceedings presently pending by or against the Company or
its subsidiaries are described, because management believes the outcome of
such litigation should not have a material adverse effect on the financial
position of the Company or its subsidiaries taken as a whole.
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 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The principal market on which the common stock of the Company is traded is
The Nasdaq Stock Market under the symbol NWLIA. The high and low sales
prices for the common stock for each quarter during the last two years are
shown in the following table:
High Low
1995: First Quarter $ 39 32
Second Quarter 44 34-3/4
Third Quarter 59 43
Fourth Quarter 61 46-1/2
1994: First Quarter $ 48 37
Second Quarter 40-1/2 33-3/4
Third Quarter 38 34-1/4
Fourth Quarter 38-1/4 30
(b) Equity Security Holders
The number of stockholders of record on December 31, 1995, was as follows:
Class A Common Stock 6,839
Class B Common Stock 2
(c) Dividends
The Company has never paid cash dividends on its common stock. Payment of
dividends is within the discretion of the Company's Board of Directors and
will depend on factors such as earnings, capital requirements, and the
operating and financial condition of the Company. Presently, the Company's
capital requirements are such that it intends to follow a policy of
retaining any earnings in order to finance the development of business and
to meet increased regulatory requirements for capital.
ITEM 6. SELECTED FINANCIAL DATA
The following five-year financial summary includes comparative amounts taken
from the audited financial statements. The results have been reclassified
to reflect The Westcap Corporation as discontinued brokerage operations.
Years Ended December 31,
1995 1994 1993 1992 1991
(In thousands except per share amounts)
Revenues:
Life and annuity $ 17,390 18,938 18,624 21,365 21,525
premiums
Universal life and
investment annuity
contract revenues 69,783 64,711 67,778 56,543 44,627
Net investment income 201,816 190,021 180,252 184,149 176,443
Other income 661 1,462 1,847 616 848
Realized gains
(losses) on
investments (2,415) 1,626 3,206 15,710 9,360
Total revenues 287,235 276,758 271,707 278,383 252,803
Expenses:
Policyholder benfits 37,336 32,790 34,646 34,234 31,908
Amortization of
deferred policy
acquisition costs 33,675 32,131 33,159 25,085 16,852
Universal life and
investment annuity
contract interest 142,940 129,064 130,875 135,792 143,018
Other insurance
operating expenses 27,084 29,394 28,959 27,870 32,897
Total expenses 241,035 223,379 227,639 222,981 224,675
Federal income taxes 10,566 16,207 14,696 18,719 7,615
Earnings before
cumulative effect of
change in accounting
principle and
discontinued
operations 35,634 37,172 29,372 36,683 20,513
Cumulative effect
of change in
accounting for
income taxes - - 5,520 - -
Earnings (losses)
from discontinued
operations (16,350) (2,936) 21,832 26,728 5,245
Net earnings $ 19,284 34,236 56,724 63,411 25,758
Per Share:
Earnings before
cumulative effect
of change in
accounting
principle and
discontinued
operations $ 10.22 10.66 8.44 10.55 5.89
Cumulative effect
of change in
accounting for
income taxes - - 1.58 - -
Earnings (losses)
from discontinued
operations (4.69) (0.84) 6.27 7.68 1.52
Net earnings $ 5.53 9.82 16.29 18.23 7.41
Total assets $2,958,459 2,915,054 2,941,051 2,698,497 2,581,032
Total liabilities $2,646,472 2,639,920 2,698,333 2,512,406 2,458,589
Stockholders'
equity $ 311,987 275,134 242,718 186,091 122,443
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
National Western Life Insurance Company is a life insurance company,
chartered in the State of Colorado in 1956, and doing business in
forty-three states and the District of Columbia. It also accepts
applications from and issues policies to residents of Central and South
American countries. These policies are accepted and issued in the United
States and accounted for approximately 14% of the Company's total premium
revenues, universal life, and investment annuity contract deposits in 1995.
The primary products marketed by the Company are its universal life and
single and flexible premium annuity products.
In addition to the life insurance business, the Company has a brokerage
operations segment through its wholly owned subsidiary, The Westcap
Corporation. However, during 1995 The Westcap Corporation closed its sales
offices and approved a plan to cease all brokerage operations. Accordingly,
the brokerage segment is now reported as discontinued operations throughout
this report and in the accompanying financial statements.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Investment Philosophy
The Company's investment philosophy is to maintain a diversified portfolio
of investment grade debt and equity securities that provide adequate
liquidity to meet policyholder obligations and other cash needs. The
prevailing strategy within this philosophy is the intent to hold investments
in debt securities to maturity. However, the Company manages its portfolio,
which entails monitoring and reacting to all components which affect changes
in the price, value, or credit rating of investments in debt and equity
securities.
Investments in debt and equity securities are classified and reported into
the following categories: held to maturity, available for sale, and
trading. The reporting category chosen for the Company's securities
investments depends on various factors including the type and quality of the
particular security and how it will be incorporated into the Company's
overall asset/liability management strategy. At December 31, 1995,
approximately 26% of the Company's total debt and equity securities, based
on fair values, were classified as securities available for sale. These
holdings provide flexibility to the Company to react to market opportunities
and conditions and to practice active management within the portfolio to
provide adequate liquidity to meet policyholder obligations and other cash
needs.
Securities the Company purchases with the intent to hold to maturity are
classified as securities held to maturity. Because the Company has strong
cash flows and matches expected maturities of assets and liabilities, the
Company has the ability to hold the securities, as it would be unlikely that
forced sales of securities would be required prior to maturity to cover
payments of liabilities. As a result, securities held to maturity are
carried at amortized cost less declines in value that are other than
temporary. However, certain situations may change the Company's intent to
hold a particular security to maturity, the most notable of which is a
deterioration in the issuer's creditworthiness. Accordingly, a security may
be sold to avoid a further decline in realizable value when there has been a
significant change in the credit risk of the issuer. Securities that are held
for current resale are classified as trading securities, as the intent is
to sell them, producing a trading profit. The Company does not maintain a
portfolio of trading securities.
Securities that are not classified as either held to maturity or trading
securities are reported as securities available for sale. These securities
may be sold if market or other measurement factors change unexpectedly after
the securities were acquired. For example, opportunities arise when factors
change that allow the Company to improve the performance and credit quality
of the investment portfolio by replacing an existing security with an
alternative security while still maintaining an appropriate matching of
expected maturities of assets and liabilities. Examples of such improvements
are as follows: improving the yield earned on invested assets, improving the
credit quality, changing the duration of the portfolio, and selling
securities in advance of anticipated calls or other prepayments. Securities
available for sale are reported in the Company's financial statements at
fair value. Any unrealized gains or losses resulting from changes in the
fair value of the securities are reflected as a component of stockholders'
equity.
As an integral part of its investment philosophy, the Company performs an
ongoing process of monitoring the creditworthiness of issuers within the
investment portfolio. In addition, review procedures are performed on
securities that have had significant declines in fair value. The Company's
objective in these circumstances is to determine if the decline in fair
value is due to changing market expectations regarding inflation and general
interest rates or other factors.
Additional review procedures are performed on those fair value declines
which are caused by factors other than market expectations regarding
inflation and general interest rates. Specific conditions of the issuer and
its ability to comply with all terms of the instrument are considered in the
evaluation of the realizable value of the investment. Information reviewed
in making this evaluation would include the recent operational results and
financial position of the issuer, information about its industry, recent
press releases, and other available data. If evidence does not exist to
support a realizable value equal to or greater than the carrying value of
the investment, such decline in fair value is determined to be other than
temporary, and the carrying amount is reduced to its net realizable value.
The amount of the reduction is reported as a realized loss.
The Company's overall conservative investment philosophy is reflected in the
allocation of investments of its insurance operations which is detailed
below as of December 31, 1995 and 1994. The Company emphasizes debt
securities, with smaller holdings in mortgage loans and real estate than
industry averages.
Percent of Insurance
Operations Investments
1995 1994
Debt securities 84.5 % 82.5 %
Mortgage loans 7.3 8.1
Policy loans 5.6 6.5
Equity securities 1.0 1.1
Real Estate 0.7 0.8
Other 0.9 1.0
Totals 100.0 % 100.0 %
Portfolio Analysis
At December 31, 1995, securities held to maturity totaled $1.643 billion, or
62.6% of total invested assets. The fair value of these securities was
$1.726 billion, which reflects gross unrealized gains of $83 million. The
unrealized gains within this portfolio result from decreases in market
interest rates during 1995. The unrealized gains have no effect on the
Company's financial statements, as securities held to maturity are recorded
at amortized cost.
Securities available for sale totaled $601 million at December 31, 1995, or
22.9% of total invested assets. Equity securities, which are included in
securities available for sale, continue to be a small component of the
Company's total investment portfolio totaling only $26 million. Securities
available for sale are reported in the accompanying financial statements at
fair value, with changes in values reported as a separate component of
stockholders' equity. Net unrealized gains, net of adjustments for deferred
policy acquisition costs and Federal income taxes, on securities in the
available for sale category at December 31, 1995, totaled $12 million and
are reflected as a component of stockholders' equity.
As described in the notes in the accompanying financial statements, on July
31, 1994, the Company transferred securities with fair values totaling $805
million from securities available for sale to securities held to maturity.
On December 29, 1995, the Company made additional transfers totaling $156
million to the held to maturity category from securities available for sale.
The lower holdings of securities available for sale significantly reduces
the Company's exposure to equity volatility while still providing securities
for liquidity and asset/liability management purposes. The transfers to
held to maturity in 1994 and 1995 resulted in locking in net unrealized
gains which require subsequent amortization and had the following effects on
stockholders' equity:
Net Unrealized Gains (Losses)
as of December 31,
1995 1994
(In thousands)
Beginning unamortized gains
from transfers $ 941 -
Net unrealized gains related to
transfer of securities from
available for sale to held
to maturity 3,159 1,380
Amortization of net unrealized
gains related to transferred
securities (931) (439)
2,228 941
Ending unamortized gains
from transfers $ 3,169 941
On December 29, 1995, the Company also transferred securities totaling $284
million to the available for sale category from securities held to maturity.
This transfer resulted in an increase to stockholder's equity of $4,266,000
as of December 31, 1995, net of effects of deferred policy acquisition costs
and taxes. This transfer was made to restructure the Company's portfolio to
provide increased flexibility for both portfolio and asset/liability
management. Accounting principles typically do not allow transfers from the
held to maturity category to the available for sale category except under
certain prescribed circumstances. However, in 1995 the Financial Accounting
Standards Board permitted a one-time reassessment by companies of their
securities classifications and allowed transfers out of the held to maturity
category without regard to the prescribed circumstances. The reassessment
and any resulting transfers had to be completed by December 31, 1995.
The Company maintains a diversified debt securities portfolio which consists
of various types of fixed income securities including primarily U.S.
government, public utilities, corporate, and mortgage-backed securities.
Investments in mortgage-backed securities include U.S. government and
private issue mortgage-backed pass-through securities as well as
collateralized mortgage obligations (CMOs). As of December 31, 1995 and
1994, the Company's debt securities portfolio consisted of the following mix
of securities based on amortized cost:
Percent of
Debt Securities
1995 1994
Mortgage and asset-backed securities 40.6 % 47.6 %
Corporate 40.3 32.5
Public utilities 12.9 14.5
Foreign government 2.2 1.3
States and political subdivisions 2.2 2.5
U.S. government 1.8 1.6
Totals 100.0 % 100.0 %
The amortized cost and estimated fair values of investments in debt
securities at December 31, 1995, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Amortized Fair
Cost Value
(In thousands)
Due in one year or less $ 8,205 8,264
Due after one year through five years 109,919 112,928
Due after five years through ten years 853,549 898,249
Due after ten years 323,043 352,239
1,294,716 1,371,680
Mortgage-backed securities 885,223 929,723
Totals $ 2,179,939 2,301,403
Because expected maturities of securities may differ from contractual
maturities due to prepayments and calls, the Company takes steps to manage
and minimize such risks. In previous years, the Company has experienced
increased calls, particularly in the public utilities portfolio. As a
result, the Company has been increasing its holdings in noncallable
corporate securities. Corporate holdings as a percentage of the entire
portfolio increased from 32.5% in 1994 to 40.3% in 1995.
The Company's holdings of mortgage-backed securities are also subject to
prepayment risk, as well as extension risk. Both of these risks are
addressed by specific portfolio management strategies. The Company
substantially reduced both prepayment and extension risks by investing
primarily in collateralized mortgage obligations which have more predictable
cash flow patterns than pass-through securities. These securities, known as
planned amortization class I (PAC I) CMOs, are designed to amortize in a
more predictable manner than other CMO classes or pass-throughs. Using this
strategy, the Company can more effectively manage and reduce prepayment and
extension risks, thereby helping to maintain the appropriate matching of the
Company's assets and liabilities.
PAC I CMOs now account for approximately 90% of the total CMO portfolio as of
December 31, 1995. The CMOs that the Company purchases are modeled and
subjected to detailed, comprehensive analysis by the Company's investment
staff before any investment decision is made. The overall structure of the
entire CMO is evaluated, and an average life sensitivity analysis is
performed on the individual tranche being considered for purchase under
increasing and decreasing interest rate scenarios. This analysis provides
information used in selecting securities that fit appropriately within the
Company's investment philosophy and asset/liability management parameters.
The Company's investment mix between mortgage-backed securities and other
fixed income securities helps effectively balance prepayment, extension, and
credit risks.
In addition to managing prepayment, extension, and call risks, the Company
continues to concentrate on improving the credit quality of its investments
in debt securities. Much attention is often placed on a company's holdings
of below investment grade debt securities, as these securities generally
have greater default risk than higher rated corporate debt. These issuers
usually have high levels of indebtedness and are more sensitive to adverse
industry or economic conditions than are investment grade issuers. The
Company's small holdings of below investment grade debt securities are
summarized as follows:
Below Investment
Grade Debt Securities
% of
Carrying Market Invested
Value Value Assets
(In thousands)
December 31, 1995 $ 14,244 14,567 0.5%
December 31, 1994 $ 31,861 28,670 1.4%
December 31, 1993 $ 24,261 24,223 1.1%
The level of investments in debt securities which are in default as to
principal or interest payments is indicative of the Company's minimal
holdings of below investment grade debt securities. At December 31, 1995 and
1994, securities with principal balances totaling $3,575,000 and $2,415,000
were in default and on non-accrual status.
The Company's commitment to high-quality investments in debt securities is
also reflected by the portfolio average rating of "Aa," which is high
quality. Allocation of investments in debt securities classified in
accordance with the highest rating by a nationally recognized statistical
rating organization as of December 31, 1995, is provided below. If
securities were not rated by one of these organizations, the equivalent
classification as assigned by the National Association of Insurance
Commissioners was used.
Percent of
Debt Securities
Aaa and U.S. government 43.0 %
Aa 4.3
A 29.1
Baa 22.4
Ba and other below investment grade 0.7
Not rated 0.5
100.0 %
MORTGAGE LOANS AND REAL ESTATE
Investment Philosophy
In general, the Company seeks loans on high quality, income producing
properties such as shopping centers, freestanding retail stores, office
buildings, industrial and sales or service facilities, selected apartment
buildings, motels, and health care facilities. The location of these loans
is typically in growth areas that offer a potential for property value
appreciation. These growth areas are found primarily in major metropolitan
areas, but occasionally in selected smaller communities. The Company
currently seeks loans ranging from $500,000 to $11,000,000, with terms
ranging from three to twenty-five years, at interest rates dictated by the
marketplace.
The Company seeks to minimize the credit and default risk in its mortgage
loan portfolio through strict underwriting guidelines and diversification of
underlying property types and geographic locations. In addition to being
secured by the property, mortgage loans with leases on the underlying
property are often guaranteed by the lessee, in which case the Company
approves the loan based on the credit strength of the lessee. This
approach, implemented in 1991, has significantly improved the quality of the
Company's mortgage loan portfolio and reduced defaults.
The Company's level of mortgage loan originations declined in 1995 to
approximately $18 million. This is in comparison to originations totaling
$30 million and $33 million in 1994 and 1993, respectively. Market
conditions in 1995 included a decreasing interest rate environment and
increasing competition. As a result, mortgage loan originations declined in
1995, as the Company has maintained its strict underwriting policies and its
commitment to quality loans.
The Company's direct investments in real estate are not a significant
portion of its total investment portfolio, and the majority of real estate
owned was acquired through mortgage loan foreclosures. However, the Company
is also currently participating in several real estate joint ventures and
limited partnerships. The joint ventures and partnerships invest primarily
in income-producing retail properties. While not a significant portion of
the Company's investment portfolio, these investments have produced
favorable returns to date. The Company has no current plans to
significantly increase its investments in real estate in the foreseeable
future.
Portfolio Analysis
The Company held net investments in mortgage loans totaling $191,674,000 and
$189,632,000, or 7.3% and 8.1% of total invested assets, at December 31,
1995 and 1994. The loans are real estate mortgages, substantially all of
which are related to commercial properties and developments and have fixed
interest rates.
The diversification of the mortgage loan portfolio by geographic region of
the United States and by property type as of December 31, 1995 and 1994, was
as follows:
December 31,
1995 1994
West South Central 54.0 % 55.8 %
Mountain 12.9 12.2
Pacific 9.4 9.7
South Atlantic 9.2 8.4
East South Central 4.3 4.5
East North Central 3.9 2.9
All Other 6.3 6.5
Totals 100.0 % 100.0 %
December 31,
1995 1994
Retail 67.0 % 64.6 %
Office 15.9 16.8
Hotel/Motel 8.3 7.6
Apartment 3.1 4.5
Industrial 0.6 0.7
Residential 0.4 0.4
Other Commercial 4.7 5.4
Totals 100.0 % 100.0 %
As of December 31, 1995, the allowance for possible losses on mortgage loans
was $5,668,000. Additions to the allowance totaling $307,000 were
recognized as realized losses on investments in the Company's 1994 financial
statements. No additions were made in 1995. Management believes that the
allowance for possible losses is adequate. However, while management uses
available information to recognize losses, future additions to the allowance
may be necessary based on changes in economic conditions, particularly in
the West South Central region which includes Texas, Louisiana, Oklahoma, and
Arkansas, as this area contains the highest concentrations of the Company's
mortgage loans.
The Company currently places all loans past due three months or more on
non-accrual status, thus recognizing no interest income on the loans. At
December 31, 1995 and 1994, the Company had approximately $202,000 and
$2,292,000, respectively, of mortgage loan principal balances on non-accrual
status. In addition to the non-accrual loans, the Company had mortgage loan
principal balances with restructured terms totaling approximately
$13,355,000 and $13,123,000 at December 31, 1995 and 1994, respectively.
For the years ended December 31, 1995 and 1994, the reductions in interest
income due to non-accrual and restructured mortgage loans were not
significant.
The contractual maturities of mortgage loans at December 31, 1995, are as
follows:
Principal
Due
(In thousands)
Due in one year or less $ 10,128
Due after one year through five years 32,494
Due after five years through ten years 121,509
Due after ten years through fifteen years 26,379
Due after fifteen years 7,484
Total $ 197,994
The Company owns real estate that was acquired through foreclosure and
through direct investment totaling approximately $19,066,000 and $17,766,000
at December 31, 1995 and 1994, respectively. This small concentration of
properties represents less than one percent of the Company's entire
investment portfolio. The real estate holdings consist primarily of
income-producing properties which are being operated by the Company. The
Company recognized operating income on these properties of approximately
$404,000 for the year ended December 31, 1995, and operating losses of
approximately $62,000 for the year ended December 31, 1994. The Company
does not anticipate significant changes in these operating results in the
near future.
The Company monitors the conditions and market values of these properties on
a regular basis. Realized losses recognized due to declines in values of
properties totaled $882,000 and $318,000 for the years ended December 31,
1995 and 1994, respectively. The Company makes repairs and capital
improvements to keep the properties in good condition and will continue this
maintenance as needed.
RESULTS OF OPERATIONS
Summary of Consolidated Operations
A summary of operating results, net of taxes, for the years ended December
31, 1995, 1994, and 1993 is provided below:
Years Ended December 31,
1995 1994 1993
(In thousands except per share data)
Revenues:
Insurance revenues excluding
realized gains (losses)
on investments $ 289,650 275,132 268,501
Realized gains (losses)
on investments (2,415) 1,626 3,206
Total revenues $ 287,235 276,758 271,707
Earnings:
Earnings from insurance
operations $ 37,203 36,115 27,288
Earnings (losses) from
discontinued
brokerage operations (16,350) (2,936) 21,832
Net realized gains (losses)
on investments (1,569) 1,057 2,084
Cumulative effect of change
in accounting
for income taxes - - 5,520
Net earnings $ 19,284 34,236 56,724
Earnings Per Share:
Earnings from insurance
operations $ 10.67 10.36 7.84
Earnings (losses) from
discontinued brokerage
operations (4.69) (0.84) 6.27
Net realized gains (losses)
on investments (0.45) 0.30 0.60
Cumulative effect of change
in accounting
for income taxes - - 1.58
Net earnings $ 5.53 9.82 16.29
Significant changes and fluctuations in income and expense items between
years are described in detail for insurance and brokerage operations as
follows:
Insurance Operations
Insurance Operations Net Earnings: Earnings from insurance operations for
the year ended December 31, 1995, were $37,203,000 compared to $36,115,000
for 1994. However, 1995 earnings include a $5.7 million tax benefit
resulting from the Company's subsidiary brokerage losses. Earnings for 1994
include a comparable $2.9 million tax benefit. The tax benefits were
recognized in accordance with the Company's tax allocation agreement with
its subsidiaries. Excluding the tax benefits, earnings from insurance
operations for 1995 were down $1.7 million from 1994 due primarily to higher
life insurance benefit claims and other policy and contract related
expenses. The higher claims and policy related expenses were partially
offset by lower insurance operating expenses relating to state guaranty
association assessments.
Life and Annuity Premiums: This revenue category represents the premiums on
traditional type products. However, sales in most of the Company's markets
currently consist of non-traditional types such as universal life and
investment annuities. The Company's current plans are to continue to focus
the majority of its product development and marketing efforts on universal
life and investment annuities. As a result, no significant growth is
anticipated for these premiums in the near future.
Universal Life and Investment Annuity Contract Revenues: These revenues are
from the Company's non-traditional products, which are universal life and
investment annuities. Revenues from these types of products consist of
policy charges for the cost of insurance, policy administration fees, and
surrender charges assessed during the period. These revenues decreased from
$67.8 million in 1993 to $64.7 million in 1994 and then increased to $69.8
million in 1995. More specifically, cost of insurance, policy
administration fees, and other related revenues have steadily increased each
year due to continued sales of non-traditional products which continue to
increase the Company's policies in force. However, surrender charge
revenues were significantly higher in 1993 due to increased policy
surrenders. This accounts for the majority of the decrease in universal
life and investment annuity contract revenues in 1994. Overall revenues
were up in 1995 due to increases in cost of insurance and other related
revenues as previously described, even though surrender charge revenues were
not up significantly from 1994 and remained substantially below 1993 levels.
Actual universal life and investment annuity deposits collected for the
years ended December 31, 1995, 1994, and 1993 are detailed below. Deposits
collected on these non-traditional products are not reflected as revenues in
the Company's statements of earnings, as they are recorded directly to
policyholder liabilities upon receipt, in accordance with generally accepted
accounting principles.
Years Ended December 31,
1995 1994 1993
(In thousands)
Investment annuities $ 309,971 157,622 86,700
Universal life insurance 68,464 64,760 67,060
Totals $ 378,435 222,382 153,760
Prior to 1993, most of the Company's investment annuity production was from
the sale of two-tier annuity products. However, in the third quarter of
1992, the Company discontinued sales of all two-tier annuities due to
declines in sales and certain regulatory issues concerning two-tier
products. The Company has continued to collect additional premiums on
existing two-tier annuities, which accounts for the majority of the deposits
for investment annuities in 1993. The vast majority of the two-tier
annuities were sold by a single independent marketing organization.
Subsequent to discontinuing the two-tier annuity sales, the Company set
goals to not only develop new annuity products to replace the lost two-tier
production, but to diversify and strengthen distribution channels to avoid
dependence on its primary independent marketing organization. The Company
achieved this by developing new annuity products in 1994 and by contracting
new marketing organizations with extensive experience, financial resources,
and success in marketing annuities. The combination of new products,
primarily a single premium deferred annuity, and new marketing organizations
started to produce results in the latter half of 1994 as annuity production
began to increase significantly. This increased production has continued
into 1995 with annuity deposits increasing from $158 million in 1994 to $310
million in 1995, reflecting a 97% increase.
The majority of the Company's universal life insurance production is from
the international market, primarily Central and South American countries.
The Company has seen increased competition in the Central and South American
market in recent years causing production growth to slow. However, the
Company has been accepting policies from foreign nationals for almost thirty
years and has developed strong relationships with carefully selected brokers
in the foreign countries. This experience and strong broker relations have
enabled the Company to meet the increased competition with new product
enhancements and marketing efforts. Such efforts have resulted in increased
universal life production once again in 1995. Deposits for universal life
for both international and domestic markets are up 5.7% in 1995 from $64.8
million in 1994 to $68.5 million in 1995.
Net Investment Income: During 1995, net investment income increased 6.2%
from 1994 while total invested assets increased 12.0% for the same period.
The increase in invested assets was primarily due to the increased annuity
production as previously described. The growth in net investment income
lagged the growth in invested assets for several reasons. Interest rates
declined significantly throughout 1995, resulting in investments in lower
yielding securities. Also, net investment income was up significantly in
1994 due to yield and amortization adjustments on mortgage-backed securities
as more fully described below. There were no significant corresponding
adjustments in 1995.
Net investment income increased 5.4% from $180.3 million in 1993 to $190.0
million in 1994. Net investment income was up primarily due to yield and
amortization adjustments on mortgage-backed securities and increases in
invested assets. The yield and amortization adjustments were made in
accordance with Statement of Financial Accounting Standards No. 91,
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases." The adjustments are
made to reflect changes in mortgage-backed securities prepayment levels,
caused by changes in market interest rates, which affect average lives,
yields, and amortization periods of the securities.
Other Income: The Company received proceeds from lawsuit settlements
totaling $1,050,000 in 1993 which has been reflected in other income. In
1984, certain employee participants in the Company's "Builders, Contractors,
and Employees Retirement Trust and Pension Plan" (the Plan) and other
plaintiffs filed a civil lawsuit against the Company and other defendants
with respect to various Plan matters, all as previously disclosed in the
Company's annual reports on Form 10-K. The Company settled the lawsuit in
1991 with payments to the Internal Revenue Service and participants in the
Plan. Subsequent to this settlement, the Company filed suit against the law
firm which assisted in the development of the Plan. The Company also filed
suit, for recovery of damages incurred, against an insurance company
providing liability coverage for trustees of the Plan. Both suits were
settled, with the Company receiving the proceeds as described above.
Also, as previously disclosed in the Company's annual reports on Form 10-K,
the Company was a defendant in a lawsuit seeking recovery of certain values
of life insurance policies pledged as collateral for debentures totaling
$8,000,000. In early 1991, a court ruled that the collateral assignment was
not enforceable. As a result, the Company recorded a loss of $8,000,000 in
1990, as the debentures were no longer deemed collateralized by the
insurance policies and their market value was zero due to the insolvency of
the issuer. The Company appealed the court ruling and also recorded a
corresponding $8,000,000 liability for the potential payment of this claim.
The Company had been accruing an additional liability for interest on this
$8,000,000 balance. This lawsuit was settled in September, 1993, resulting
in an $11,500,000 payment by the Company. The Company's total accrued
liability for this claim exceeded the payment by approximately $670,000
which has been reflected as other income in 1993. The Company also received
proceeds from a settlement totaling $955,000 for recovery of damages
incurred related to this lawsuit. These settlement proceeds have been
reflected as other income in 1994.
Realized Gains and Losses on Investments: The Company recorded realized
losses totaling $2.4 million in 1995 compared to realized gains of $1.6
million and $3.2 million in 1994 and 1993, respectively. The losses in 1995
were primarily from sales of investments in debt securities, the majority of
which were from the Company's remaining investments in principal exchange
rate linked securities. The Company made the decision to realize these
losses to obtain tax benefits related to the losses which were scheduled to
expire on December 31, 1995. The gains and losses in 1995, 1994, and 1993
are net of write-downs on real estate and mortgage loans totaling $882,000,
$625,000, and $3,360,000, respectively. The 1993 gains are also net of
write-downs for permanent impairments on investments in debt securities
totaling $6,329,000.
Life and Other Policy Benefits: Expenses in 1995 and 1993 were
significantly higher at $39.8 million and $36.3 million than 1994 expenses
which totaled only $32.1 million. The significant fluctuation in expenses
is due to higher life insurance benefit claims and high policy surrenders on
traditional insurance products in both 1995 and 1993. Life insurance
benefit claims, which accounted for the majority of the fluctuation, totaled
$24.6 million, $19.1 million, and $21.3 million in 1995, 1994, and 1993,
respectively. The 1995 and 1993 expenses were abnormally high due to
adverse claims experience. Throughout the Company's history, it has
experienced both periods of higher and lower benefit claims in comparison to
Company averages. Years 1995 and 1993 reflect such periods, as benefits were
significantly higher. Such deviations are not uncommon in the life
insurance industry and, over extended periods of time, tend to be offset by
periods of more favorable claims experience.
Amortization of Deferred Policy Acquisition Costs: This expense item
represents the amortization of the costs of acquiring or producing new
business, which consists primarily of agents' commissions. The majority of
such costs are amortized in direct relation to the anticipated future gross
profits of the applicable blocks of business. Amortization is also impacted
by the level of policy surrenders. Amortization for 1995, 1994, and 1993
has been relatively consistent at $33.7 million, $32.1 million, and $33.2
million, respectively. The higher amortization in 1995 and 1993 correlates
to increased policy surrenders in those years.
Universal Life and Investment Annuity Contract Interest: Prior to 1995,
interest expense declined steadily as amounts totaled $129.1 million, $130.9
million, and $135.8 million for 1994, 1993, and 1992, respectively. This
decline was due to the lowering of credited interest rates on most universal
life and investment annuity products throughout these years. Additional
interest costs related to increasing business was not significant, as the
policy liabilities remained relatively constant over those years. However,
in the latter part of 1994, annuity production began to increase
significantly, which continued through 1995. This increase in annuity
deposits resulted in corresponding increases in policy liabilities and
significantly higher interest costs in 1995. Also, the Company's new
annuity products typically credit significantly higher interest rates in the
first policy year, again resulting in higher 1995 interest costs.
The Company closely monitors its credited interest rates, taking into
consideration such factors as profitability goals, policyholder benefits,
product marketability, and economic market conditions. Rates are
established or adjusted after careful consideration and evaluation of these
factors against established objectives.
Other Insurance Operating Expenses: These expenses totaled $27.1 million,
$29.4 million, and $29.0 million for 1995, 1994, and 1993, respectively.
Although these expenses are relatively comparable between years, these
amounts include significant expenses for guaranty association assessments.
National Western Life Insurance Company is subject to state guaranty
association assessments in all states in which it is licensed to do
business. These associations generally guarantee certain levels of benefits
payable to resident policyholders of insolvent insurance companies. Most
states allow premium tax credits for all or a portion of such assessments,
thereby allowing potential recovery of these payments over a period of
years. However, several states do not allow such credits. In December,
1995 and 1994, the National Organization of Life and Health Insurance
Guaranty Associations published revised assessment data on nationwide life
and health insurance company insolvencies. Based on this information, the
Company revised its estimates for assessment liabilities relating to such
insolvencies. The Company will continue to monitor and revise its estimates
for assessments as additional information becomes available, which could
result in additional expense charges. Other insurance operating expenses
related to state guaranty association assessments totaled $2,371,000,
$4,869,000, and $4,583,000 for the years ended December 31, 1995, 1994, and
1993, respectively. The lower assessment expenses in 1995 are the primary
reason for the lower overall insurance operating expenses for the same
period.
Discontinued Brokerage Operations
Effective July 17, 1995, The Westcap Corporation, a wholly owned brokerage
subsidiary of National Western Life Insurance Company, discontinued all
sales and trading activities in its Houston, Texas, office. At that time,
The Westcap Corporation (Westcap) continued its corporate operations and
small sales operations in its New Jersey office. However, in September,
1995, Westcap approved a plan to close the remaining sales office in New
Jersey and to cease all brokerage operations.
Declines in both sales revenues and earnings were the principal reasons for
ceasing operations. Increasing market interest rates and resulting adverse
bond market conditions during 1994 and 1995 compared to previous years had a
negative impact on the entire bond brokerage industry. These conditions,
coupled with adverse publicity about litigation related to sales of
collateralized mortgage obligation (CMO) products, led to the declines in
sales and earnings. The publicity surrounding these claims made it
extremely difficult to keep Westcap's customer base and sales force in
place. Additionally, because much publicity characterizes CMOs as
derivatives, adverse publicity about derivatives impacted the market for
CMOs and decreased Westcap's prospects for future sales.
In connection with the plan to cease brokerage operations, Westcap's assets
are being carried at their estimated fair value, and its liabilities include
estimated costs to dispose of assets and estimated future costs to cease
operations. As a result of the plan and in accordance with generally
accepted accounting principles, the assets and liabilities of Westcap have
been reclassified in the accompanying consolidated balance sheets to
separately identify them as assets and liabilities of the discontinued
operations.
In previous years, Westcap has contributed significantly to the consolidated
earnings of National Western Life Insurance Company. However, more
recently, brokerage operations have produced losses due to the reasons cited
above. A summary of net earnings and losses from brokerage operations since
1992 is provided below.
Amounts in Per
Thousands Share
Years ended December 31:
1995 $ (16,350) $ (4.69)
1994 (2,936) (0.84)
1993 21,832 6.27
1992 26,728 7.68
Losses from the discontinued brokerage operations have been reflected
separately from continuing operations of the Company in the accompanying
consolidated financial statements. The 1995 losses disclosed above include
estimated future operating losses as well as estimated costs to cease
brokerage operations totaling $6,381,000 and have resulted in the complete
write-off of the Company's investment in Westcap on a consolidated basis.
Consolidated Federal Income Taxes
Federal Income Taxes: Federal income taxes for 1995 on earnings from
continuing operations reflect an effective tax rate of 23%. The 1995
taxes are lower than the expected statutory rate of 35% due to a $5.7
million tax benefit resulting from the Company's subsidiary brokerage
losses. Correspondingly, losses on discontinued operations for 1995
totaling $16,350,000 do not include any tax benefits relating to the
brokerage subsidiary. This tax reporting treatment is in accordance with
the Company's tax allocation agreement with its subsidiaries. However, on a
consolidated basis, the Federal income taxes reflect the expected effective
tax rate of 35% for 1995.
Federal income taxes for 1994 on earnings from continuing operations also
reflect a low effective tax rate, as such taxes also include a tax benefit
totaling $2.9 million resulting from the Company's subsidiary brokerage
losses. Losses on discontinued operations for 1994 totaling $2,936,000
include Federal income taxes of $2,983,000. Again, the tax reporting
treatment is in accordance with the tax allocation agreement previously
described, and on a consolidated basis, Federal income taxes reflect an
effective tax rate of 35% for 1994.
The Federal corporate tax rate was increased from 34% to 35% beginning in
1993. The total increase in 1993 Federal income taxes resulting from the
change in rates was approximately $1,018,000.
Cumulative Effect of Change in Accounting for Income Taxes: In February,
1992, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes." SFAS No. 109 requires a change from the deferred method of
accounting for income taxes of Accounting Principles Board Opinion 11 to the
asset and liability method of accounting for income taxes. Under the asset
and liability method of SFAS No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
The Company adopted SFAS No. 109 effective January 1, 1993. The cumulative
effect of this change in accounting for income taxes of $5,520,000 was
determined as of January 1, 1993, and is reported separately in the
statement of earnings for the year ended December 31, 1993.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The liquidity requirements of the Company are met primarily by funds
provided from operations. Premium deposits and revenues, investment income,
and investment maturities are the primary sources of funds, while investment
purchases and policy benefits are the primary uses of funds. Primary
sources of liquidity to meet cash needs are the Company's securities
available for sale portfolio, net cash provided by operations, and bank line
of credit. The Company's investments consist primarily of marketable debt
securities that could be readily converted to cash for liquidity needs.
The Company may also borrow up to $60 million on its bank line of credit
for short-term cash needs.
A primary liquidity concern for the Company's life insurance operations is
the risk of early policyholder withdrawals. Consequently, the Company
closely evaluates and manages the risk of early surrenders or withdrawals.
The Company includes provisions within annuity and universal life insurance
policies, such as surrender charges, that help limit early withdrawals. The
Company also prepares cash flow projections and performs cash flow tests
under various market interest rate scenarios to assist in evaluating
liquidity needs and adequacy. The Company currently expects available
liquidity sources and future cash flows to be adequate to meet the demand
for funds.
In the past, cash flows from the Company's insurance operations have been
more than adequate to meet current needs. Cash flows from operating
activities were $99 million, $117 million, and $136 million in 1995, 1994,
and 1993, respectively. Lower earnings from brokerage operations is the
primary reason for the decrease in cash flows in 1995 and 1994.
Additionally, net cash flows from the Company's deposit product operations,
which includes universal life and investment annuity products, totaled $99
million in 1995. These operations incurred net cash outflows in 1994 and
1993 totaling $17 million and $99 million, respectively. The increase in
cash flows in 1995 is due to increased annuity production as previously
described in "Results of Operations." The Company expects this increased
annuity production will continue through 1996, thereby enhancing cash flows.
The Company also has significant cash flows from both scheduled and
unscheduled investment security maturities, redemptions, and prepayments.
These cash flows totaled $69 million, $133 million, and $486 million in
1995, 1994, and 1993, respectively. The Company again expects significant
cash flows from these sources in 1996 at levels similar to 1995 and 1994.
Capital Resources
The Company relies on stockholders' equity for its capital resources, as
there has been no long-term debt outstanding in 1995 or recent years. The
Company does not anticipate the need for any long-term debt in the near
future. There are also no current or anticipated material commitments for
capital expenditures in 1996.
Stockholders' equity totaled $312 million at December 31, 1995, reflecting
an increase of $37 million from 1994. The increase in capital is primarily
from net earnings of $19 million and the change in net unrealized gains on
investment securities totaling $17 million in 1995. The decrease in market
interest rates during 1995 resulted in the significant increase in
unrealized gains. Book value per share at December 31, 1995, was $89.36,
reflecting a 13% increase for the year.
CHANGES IN ACCOUNTING PRINCIPLES
In January, 1995, the FASB issued SFAS No. 120, "Accounting and Reporting by
Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain
Long-Duration Participating Contracts." Also, the AICPA has established
accounting for certain participating life insurance contracts of mutual life
insurance enterprises in its Statement of Position (SOP) 95-1, "Accounting
for Certain Insurance Activities of Mutual Life Insurance Enterprises," that
should be applied to those contracts that meet the conditions in this
statement. This statement also permits stock life insurance enterprises to
apply the provisions of the SOP to participating life insurance contracts
that meet certain conditions. SFAS No. 120 is effective for financial
statements issued for fiscal years beginning after December 15, 1995. Due
to the Company's small level of participating life insurance contracts, this
statement will have no significant effects on the Company's financial
statements.
The FASB issued SFAS No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," in March, 1995. The
statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Measurement of an impairment
loss for long-lived assets and identifiable intangibles that an entity
expects to hold and use should be based on the fair value of the asset. The
statement also requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less costs to sell.
The Company's real estate investments are the only significant assets that
will be subject to this statement. As the Company already records
foreclosed real estate at the lower of cost or fair value less estimated
costs to sell, the implementation of this statement will not have a
significant effect on the Company's financial statements. The statement
will be implemented in the first quarter of 1996.
In October, 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans. It defines
a fair value based method of accounting for employee stock options or
similar equity instruments. However, it also allows an entity to continue
to measure compensation cost for plans using the intrinsic value based
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Entities electing to continue applying the accounting
methods in Opinion 25 must make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting defined
in SFAS No. 123 had been applied.
Under the fair value based method, compensation cost is measured at the
grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period. For stock options,
fair value is determined using an option pricing model that takes into
account various information and assumptions regarding the Company's stock
and options. Under the intrinsic value based method, compensation cost is
the excess, if any, of the quoted market price of the stock at grant date or
other measurement date over the amount an employee must pay to acquire the
stock.
The Company anticipates that it will continue to apply the accounting
methods prescribed by Opinion 25 for its existing stock and incentive plan.
Therefore, the implementation of this statement will not affect the
Company's results of operations. However, as required by this statement,
disclosure information will be provided in the Company' financial statements
reflecting costs that would have been recorded under the fair value based
method. The statement will be implemented in 1996.
CURRENT REGULATORY ISSUES
Actuarial Guideline 33
In December, 1995, the National Association of Insurance Commissioners
adopted for statutory accounting practices Actuarial Guideline 33,
previously referred to as Actuarial Guideline GGG. This reserve guideline,
which has not been adopted by any states at this time, helps define the
minimum reserves for policies with multiple benefit streams, such as
two-tier annuities.
As of December 31, 1995, the Company's statutory reserving practices for
two-tier annuities follow an agreement reached in 1993 with its state of
domicile, Colorado. This agreement requires the Company to phase-in a
different reserve basis by the end of 1996. The agreement states the
acceptable difference between the target reserve and the statutory reserve
held by the Company will meet the following schedule:
December 31, 1995 $5,000,000
December 31, 1996 -
The Company has met the above scheduled difference for December 31, 1995.
However, in 1995, the Company entered into discussions with the Colorado
Division of Insurance (the Division) to implement Actuarial Guideline 33 and
to phase it in over a three-year period as allowed by the guideline. In
January, 1996, the Division approved the proposal for this three-year
phase-in. The effect on the Company's statutory financial statements will
not be significant, since the previous agreement with the Division was
similar to the final guideline. Also, the guideline does not affect the
Company's policy reserves which are prepared under generally accepted
accounting principles as reported in the accompanying consolidated financial
statements.
Risk Based Capital Requirements
In 1993, the National Association of Insurance Commissioners (NAIC)
established new 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.
There continues to be some public pressure for insurance companies to
publish their RBC ratios or levels. However, the legality of publishing
such information is uncertain. The American Institute of Certified Public
Accountants (AICPA) released an exposure draft of a Statement of Position
(SOP) which included requirements that insurance companies disclose certain
information about their RBC levels. This requirement was deleted from the
final SOP version due to questions raised about the legality of such
disclosures. Instead, the AICPA decided to consider a separate SOP at a
later date on RBC disclosures, after the legal issues are resolved. Due to
these unanswered legal issues, the Company has chosen not to publish its RBC
ratios or levels. However, the Company's current statutory capital and
surplus is significantly in excess of the threshold RBC requirements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is reported in Attachment A beginning
on page ____. See Index to Financial Statements and Schedules on page ___
for a list of financial information included in Attachment A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in auditors or disagreements with auditors which
are reportable pursuant to Item 304 of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) Identification of Directors
The following information as of January 31, 1996, is furnished with respect
to each director. All terms expire in June of 1996.
Principal Occupation During Last First
Name of Director Five Years and Directorships Elected Age
Robert L. Moody Chairman of the Board and Chief 1964 60
(1) (3) (4) (5) Executive Officer of the Company;
Investments, Galveston, Texas
Ross R. Moody President and Chief Operating 1981 33
(1) (3) Officer of the Company,
4/92-present; Vice President -
Office of the President of
the Company, 4/91 - 4/92
Austin, Texas
Arthur O. Dummer President, The Donner Company 1980 62
(1) (2) (3) Salt Lake City, Utah
Harry L. Edwards Retired; Former President and Chief 1969 74
Operating Officer of the Company
until 7/90, Austin, Texas
E. Douglas McLeod Director of Development, Moody 1979 54
(4) Foundation, Galveston, Texas
Charles D. Milos, Jr. Senior Vice President of the 1981 50
(1) (3) Company, Galveston, Texas
Frances A. Moody Investments, Dallas, Texas, 1990 26
(4) 1992 - present; Student, Southern
Methodist
University, Dallas, Texas,
1987-1992
Russell S. Moody Investments, Austin, Texas 1988 34
(4)
Louis E. Pauls, Jr. President, Louis Pauls & Company; 1971 60
(2) Investments, Galveston, Texas
E. J. Pederson Executive Vice President, 1992 48
(2) The University of Texas
Medical Branch, Galveston,
Texas
(1) Member of Executive Committee; (2) Member of Audit Committee; (3)
Member of Investment Committee; (4) Director of American National Insurance
Company of Galveston, Texas; (5) Director of The Moody National Bank of G
alveston, Texas.
Family relationships among the directors are: Mr. Robert Moody and Mr.
McLeod are brothers-in-law and Mr. Robert Moody is the father of Ms. Frances
Moody, Mr. Ross Moody, and Mr. Russell Moody.
(b) Identification of Executive Officers
The following is a list of the Company's executive officers, their ages, and
their positions and offices as of January 31, 1996.
Name of Officer Age Position (Year elected to position)
Robert L. Moody 60 Chairman of the Board and Chief Executive
Officer (1964-1968, 1971-1980, 1981), Director
Ross R. Moody 33 President and Chief Operating Officer (1992),
Director
Robert L. Busby, II 58 Senior Vice President - Chief Administrative
Officer, Chief Financial Officer and
Treasurer (1992)
Charles P. Baley 57 Senior Vice President - Data Processing
(1990)
Richard M. Edwards 43 Senior Vice President - International
Marketing (1990)
Paul D. Facey 44 Senior Vice President - Chief Actuary (1992)
Charles D. Milos, Jr. 50 Senior Vice President - Investment Analyst
(1990), Director
Arthur W. Pickering 54 Senior Vice President - Domestic Marketing
(1994)
Patricia L. Scheuer 44 Senior Vice President - Chief Investment
Officer (1992)
Larry D. White 50 Senior Vice President - Policyowner Services
(1990)
Robert J. Antonowich 49 Vice President - Marketing (1995)
Carol Jackson 60 Vice President - Human Resources (1990)
Vincent L. Kasch 34 Vice President - Controller and Assistant
Treasurer (1992)
James A. Kincl 66 Vice President - Salary Savings (1986)
Doris Kruse 50 Vice President - Policy Benefits (1990)
James R. Naiser 53 Vice President - Systems Development (1984)
James P. Payne 51 Vice President - Secretary (1994)
Al R. Steger 53 Vice President - Risk Selection (1992)
B. Ben Taylor 53 Vice President - Actuarial Services (1990)
(c) Identification of Certain Significant Employees
None.
(d) Family Relationships
There are no family relationships among the officers listed except that Mr.
Robert Moody is the father of Mr. Ross Moody. There are no arrangements or
understandings pursuant to which any officer was elected. All officers hold
office for one year and until their successors are elected and qualified,
unless otherwise specified by the Board of Directors.
(e) Business Experience
All of the executive officers listed above have served in various executive
capacities with the Company for more than five years, with the exception of
the following:
Mr. Ross Moody was a corporate financial analyst with Drexel Burnham Lambert
from 1986 to 1987 and was a graduate student at the Harvard Business School
from 1987 to 1989. He also served as Director of Administrative Services for
American National Insurance Company from 1989 to 1991.
Mr. Facey was Superintendent, Marketing, for Northern Life Assurance Company
of Canada from 1973-1985. From 1985-1987, he was Assistant Vice President,
Marketing and Actuarial Services for Gerling Global Life Insurance Company
in Toronto, Canada, and from 1987 until March, 1992 was Director of
Actuarial Services for Variable Annuity Life Insurance Company of Houston,
Texas.
Mr. Pickering was Agency Vice President of the Western Division with Integon
Life Insurance Company from 1981 to 1987. From 1987 to 1990, he served as
Regional Vice President of United Pacific Life Insurance Company. In 1990,
he began work for Conseco/Western National Life Insurance Company as Vice
President Marketing until May, 1994.
Ms. Scheuer was a Management Consultant for Deloitte, Haskins & Sells from
1983-1984. From 1984-1988, she was Senior Financial Analyst with the Texas
Public Utility Commission. From 1988 until August, 1992, she was the Fixed
Income Portfolio Manager for the Texas Permanent School Fund.
Mr. Antonowich was Regional Vice President of Security Life of Denver
Insurance Company from 1982 to 1991. From 1991 to December, 1993, he was
Vice President, Marketing, of Guarantee Mutual Life Company, and from 1994
to June, 1995, he was Senior Vice President, Sales, of Lamar Life Insurance
Company.
Mr. Kasch was Staff Accountant with Arthur Young & Company from 1984-1985.
From 1985 until January, 1991, he was Senior Accountant and Audit Manager
for KPMG Peat Marwick.
Mr. Payne was staff attorney with the Kansas Insurance Department from 1972
to 1975. From 1975-1983, he was Vice President, Secretary & General Counsel
for Lone Star Life Insurance Company; from 1983-1990, he was Vice President,
Secretary and General Counsel for Reserve Life Insurance Company; from
1990-1991 he was President and CEO of Great Republic Insurance Company; and
from 1991-1993 he was Vice President - Government Relations for United
American Insurance Company. From 1993 until October, 1994, he was in
private practice in Dallas, Texas.
Mr. Steger was Assistant Vice President-Chief Underwriter of Tower Life, San
Antonio, Texas from 1971 until December, 1991.
(f) Involvement in Certain Legal Proceedings
There are no events pending, or during the last five years, under any
bankruptcy act, criminal proceedings, judgments, or injunctions material to
the evaluation of the ability and integrity of any director or executive
officer except as described below:
In January, 1994, a United States District Court Judge vacated and withdrew
the judgment which had been entered in Case No. H-86-4269, W. Steve Smith,
Trustee vs. Shearn Moody, Jr., et al, United States District Court for the
Southern District of Texas. The Judge also dismissed the case with
prejudice. The judgment had been entered against Robert L. Moody and The
Moody National Bank of Galveston, of which he was Chairman of the Board.
Robert L. Moody is also Chairman of the Board of National Western Life
Insurance Company. The case arose out of complex bankruptcy and related
proceedings involving Robert L. Moody's brother, Shearn Moody, Jr.
Subsequently, a global settlement of Shearn Moody, Jr.'s bankruptcy and
related legal proceedings was reached and executed. As part of the global
settlement, the Bankruptcy Trustee recommended, and other interested parties
agreed not to oppose or object to, the Judge's vacating and withdrawing the
judgment and dismissing the case with prejudice. This case and settlement
did not involve the Company and had no effect on its financial statements.
ITEM 11. EXECUTIVE COMPENSATION
(b) Summary Compensation Table
Long Term
Compensation
No. of
Annual Restricted Securities All Other
Compensation Stock Underlying Compen-
Name and Salary Bonus Awards Options sation
Principal Position Year (A) (B) (C) (D) (E)
1 Robert L. Moody 1995 967,696 91,616 - 25,000 111,533
Chairman of the 1994 890,216 56,886 - - 19,016
Board and Chief 1993 836,476 145,693 139,103 - 18,185
Executive Officer
Ross R. Moody 1995 361,427 19,768 - 9,000 20,866
President and 1994 311,977 12,267 - - 14,543
Chief Operating 1993 275,697 75,417 30,005 - 15,651
Officer
3 Arthur W. Pickering 1995 109,181 77,654 - 2,500 14,845
Senior Vice 1994 64,654 61,250 - - 70,340
President - 1993 - - - - -
Domestic Marketing
4 Robert L. Busby, III 1995 160,690 8,008 - 4,000 9,068
Senior Vice 1994 151,877 9,969 - - 9,773
President-Chief 1993 136,882 12,727 12,155 - 9,346
Administrative
Officer, Chief
Financial Officer
and Treasurer
5 Charles D. Milos, Jr. 1995 132,323 5,992 - 2,500 7,161
Senior Vice 1994 128,815 3,718 - - 7,561
President- 1993 119,643 53,523 9,095 - 7,245
Investment Analyst
Notes to Summary Compensation Table:
(A) Salary includes directors' fees from National Western Life Insurance
Company and its subsidiaries.
(B) Bonuses include the following:
(1) Stock Bonus Plan - During 1993 the Company implemented a one-time stock
bonus plan for all officers of the Company. Class A common stock restricted
shares totaling 13,496 were granted to officers based on their individual
performance and contribution to the Company. The shares are subject to
vesting requirements as reflected in the following schedule:
January 1, 1993 25%
December 31, 1993 25%
December 31, 1994 25%
December 31, 1995 25%
The resulting compensation from the vesting of shares has been included in
the applicable year in the bonus column. All of the 13,496 shares that were
granted have been issued and are outstanding as of December 31, 1995.
(2) Westcap Bonuses - Ross R. Moody and Charles D. Milos, Jr., are directors
of the Company's brokerage subsidiary, The Westcap Corporation. The
directors received bonuses for such services in 1993.
(3) Other Bonuses - Employment and performance related bonuses are
occasionally granted. Arthur W. Pickering received such bonuses in 1995 and
1994 and Robert L. Busby, III received such bonuses in 1994.
(C) Restricted stock awards include common stock shares that were granted
as part of the stock bonus plan described in (1) above but had not vested as
of December 31, 1993. Restricted stock holdings at December 31, 1993, for
all officers totaled 6,666 shares with a market value of $296,637.
Restricted stock holdings for the named executive officers were as follows
at December 31, 1993:
Shares Value
Robert L. Moody 3,273 $ 145,649
Ross R. Moody 706 31,417
Robert L. Busby, III 286 12,727
Charles D. Milos, Jr. 214 9,523
Of the remaining 6,666 unvested shares at December 31, 1993, 3,146 and 3,520
of such shares vested on December 31, 1995 and 1994, respectively, and are
reflected as bonuses in those years.
(D) Represents stock options granted under the National Western Life
Insurance Company 1995 Stock and Incentive Plan.
(E) All other compensation includes primarily employer contributions made
to the Company's 401(k) Plan and Non-Qualified Deferred Compensation Plan on
behalf of the employee.
(c) Option/SAR Grants Table
During 1995 the Company adopted the National Western Life Insurance Company
1995 Stock and Incentive Plan (the Plan). The Plan is effective as of April
21, 1995, and will terminate on April 20, 2005, unless terminated earlier by
the Board of Directors. The number of shares of Class A, $1.00 par value,
common stock which may be issued under the Plan, or as to which stock
appreciation rights or other awards may be granted, may not exceed 300,000.
These shares may be authorized and unissued shares or treasury shares.
All of the employees of the Company and its subsidiaries are eligible to
participate in the Plan. In addition, directors of the Company, other than
Compensation and Stock Option Committee members, are eligible for restricted
stock awards, incentive awards, and performance awards. Non-employee
directors, including members of the Compensation and Stock Option Committee,
are eligible for non-discretionary stock options. On May 19, 1995, the
Committee approved the issuance of 52,500 non-qualified stock options to
selected officers of the Company. The Committee also granted 7,000
non-qualified, non-discretionary stock options to non-employee Company
directors. The stock options begin to vest following three full years of
service to the Company after date of grant, with 20% of the options to vest
at the beginning of the fourth year of service, and with 20% thereof to vest
at the beginning of each of the next four years of service. The exercise
price of the stock options was set at the fair market value of the common
stock on the date of grant, May 19, 1995, which was $38.125 per share.
Stock options granted to the named executive officers during 1995 are as
follows:
Potential
Realizable
% of Value at Assumed
Total Annual
Number of Options Rates of Stock
Securities Granted to Price Appreciation
Underlying Employee for Option Term
Options in Fiscal Exercise Exporation
Name Granted Year Price Date 5% 10%
1 Robert L. Moody 25,000 47.6% $38.125 4-20-05 $599,411 $1,519,033
2 Ross R. Moody 9,000 17.1 38.125 4-20-05 215,788 546,852
3 Arthur W. Pickering 2,500 4.8 38.125 4-20-05 59,941 151,903
4 Robert L. Busby III 4,000 7.6 38.125 4-20-05 95,906 243,045
5 Charles D. Milos 2,500 4.8 38.125 4-20-05 59,941 151,903
(d) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value
Table
None.
(e) Long-Term Incentive Plan Awards Table
None.
(f) Defined Benefit or Actuarial Plan Disclosure
The Company currently has two employee defined benefit plans for the benefit
of its employees and officers. A brief description and formulas by which
benefits are determined for each of the plans are detailed as follows:
Qualified Defined Benefit Plan - This plan covers all full-time employees
and officers of the Company and provides benefits based on the participants'
years of service and compensation. The Company makes annual contributions to
the plan that comply with the minimum funding provisions of the Employee
Retirement Income Security Act.
Annual pension benefits for those employees who became eligible participants
prior to January 1, 1991, are calculated as the sum of the following:
(1) 50% of the participant's final 5-year average annual compensation at
December 31, 1990, less 50% of their primary social security benefit
determined at December 31, 1990; this net amount is then prorated for less
than 15 years of benefit service at normal retirement date. This result is
multiplied by a fraction which is the participant's years of benefit service
at December 31, 1990, divided by the participant's years of benefit service
at normal retirement date.
(2) 1.5% of the participant's compensation earned during each year of
benefit service after December 31, 1990.
Annual pension benefits for those employees who become eligible participants
on or subsequent to January 1, 1991, are calculated as 1.5% of their
compensation earned during each year of benefit service.
Non-Qualified Defined Benefit Plan - This plan covers those officers in the
position of senior vice president or above and other employees who have been
designated by the President of the Company as being in the class of persons
who are eligible to participate in the plan. This plan also provides
benefits based on the participants' years of service and compensation.
However, no minimum funding standards are required.
The benefit to be paid pursuant to this Plan to a Participant who retires at
his normal retirement date shall be equal to (a) less (b) less (c) where:
(a) is the benefit which would have been payable at the participant's normal
retirement date under the terms of the Qualified Defined Benefit Plan as of
December 31, 1990, as if that Plan had continued without change, and,
(b) is the benefit which actually becomes payable under the terms of the
Qualified Defined Benefit Plan at the participant's normal retirement date,
and,
(c) is the actuarially equivalent life annuity which may be provided by an
accumulation of 2% of the participant's compensation for each year of
service on or after January 1, 1991, accumulated at an assumed interest rate
of 8.5% to his normal retirement date.
In no event will the benefit be greater than the benefit which would have
been payable at normal retirement date under the terms of the Qualified
Defined Benefit Plan as of December 31, 1990, as if that plan had continued
without change.
The estimated annual benefits payable to the named executive officers upon
retirement, at normal retirement age, for the Company's defined benefit
plans are as follows:
Estimated Annual Benefits
Qualified Non-Qualified
Defined Defined
Name Benefit Plan Benefit Plan Totals
1 Robert L. Moody $ 125,335 317,317 442,652
2 Ross R. Moody 83,243 - 83,243
3 Arthur W. Pickering 26,906 - 26,906
4 Robert L. Busby, III 47,132 18,599 65,731
5 Charles D. Milos, Jr. 44,032 - 44,032
(g) Compensation of Directors
All directors of the Company currently receive $12,000 a year and $500 for
each board meeting attended. They are also reimbursed for actual travel
expenses incurred in performing services as directors. An additional $500 is
paid for each committee meeting attended. However, a director attending
multiple meetings on the same day receives only one meeting fee. The amounts
paid pursuant to these arrangements are included in the summary compensation
table under Item 11(b). The directors and their dependents are also insured
under the Company's group insurance program.
During 1995 the Company adopted the National Western Life Insurance Company
1995 Stock and Incentive Plan ( the Plan), as more fully described in Item
11(c). Directors of the Company, other than Compensation and Stock Option
Committee members, are eligible for restricted stock awards, incentive
awards, and performance awards. Non-employee directors, including members
of the Compensation and Stock Option Committee, are eligible for
non-discretionary stock options. On May 19, 1995, the Committee approved
the issuance of 7,000 non-qualified, non-discretionary stock options to
non-employee Company directors, with each such director receiving 1,000
stock options. Directors who are also employees of the Company were granted
stock options as disclosed in the table in Item 11(c).
Directors of the Company's subsidiary, NWL Investments, Inc., receive $250
annually. Directors' fees for the Company's subsidiary, The Westcap
Corporation, have been suspended indefinitely. No fees were paid in 1995.
(h) Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
None.
(i) Report on Repricing of Options/SARs
None.
(j) Compensation Committee Interlocks and Insider Participation
The Company's Board of Directors determines and approves executive
compensation. Mr. Robert Moody, Mr. Ross Moody, and Mr. Milos serve as
directors and also serve as officers and employees of the Company. The
Donner Company, 100% owned by Mr. Dummer, who is a director of National
Western Life Insurance Company, was paid $60,474 in 1995 pursuant to an
agreement between The Donner Company and a reinsurance intermediary relating
to a reinsurance contract between the Company and certain life insurance
reinsurers. No compensation committee interlocks exist with other
unaffiliated companies.
(k) Board Compensation Committee Report on Executive Compensation
The Company's Board of Directors performs the functions of an executive
compensation committee. The Board is responsible for developing and
administering the policies that determine executive compensation.
Executive compensation, including that of the chief executive officer, is
comprised primarily of a base salary. The salary is adjusted annually based
on a performance review of the individual as well as the performance of the
Company as a whole. The president and chief executive officer make
recommendations annually to the Board of Directors regarding such salary
adjustments. The review encompasses the following factors:
- - contributions to the Company's short and long-term strategic
goals, including financial goals such as Company revenues and
earnings
- - achievement of specific goals within the individual's realm of
responsibility
- - development of management and employees within the Company
- - performance of leadership within the industry
The policies discussed above are reviewed periodically by the Board of
Directors to ensure the support of the Company's overall business strategy
and to attract and retain key executives.
A separate Compensation and Stock Option Committee, comprised of outside,
independent directors, determines compensation for the three highest paid
Company executives. The committee also performs various projects relating
to executive compensaion at the request of the Board of Directors. Those
directors serving on the committee include the following:
Arthur O. Dummer
Harry L. Edwards
E. J. Pederson
The policies used by the Compensation and Stock Option Committee in
determining compensation are similar to those described above for all other
Company executives.
(1) 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 investment in the Company's common stock and each index was $100 at
December 31, 1990, and that all dividends were reinvested.
For the purpose of this electronic filing, the graph has been filed
separately under the Securities and Exchange Commission filing Form SE dated
March 29, 1996. The coordinates of the graph are as follows:
12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95
National Western Life 100.00 482.6 817.4 773.9 604.3 973.9
NASDAQ U.S. Companies
Index 100.00 160.5 186.9 214.5 209.7 296.5
NASDAQ Insurance Stock
Index 100.00 141.0 190.8 204.1 192.1 272.9
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Set forth below is certain financial information concerning persons who are
known by the Company to own beneficially more than 5% of any class of the
Company's common stock on December 31, 1995:
Title Name and Address Amount and Nature of Percent
of of Beneficial Ownership of
Class Beneficial Owners Record and Class
Beneficially
Class A Common Robert L. Moody 1,160,896 35.27
2302 Postoffice
Street Suite 702
Galveston, Texas
Class A Common Westport Asset 326,700 9.93
Management, Inc.
253 Riverside Avenue
Westport, Connecticut
Class A Common Tweedy Browne Company 288,128 8.75
52 Vanderbilt Avenue
New York, New York
Class B Common Robert L. Moody 198,074 99.04
(same as above)
(b) Security Ownership of Management
The following table sets forth as of December 31, 1995, information
concerning the beneficial ownership of the Company's common stock by all
directors, named officers, and all directors and officers of the Company as
a group:
Title Amount and Nature of Percent
Directors of Beneficial Ownership of
and Officers Class Record and Class
Beneficially
Directors and Named Officers:
Robert L. Moody Class A Common 1,160,896 35.27
Class B Common 198,074 99.04
Ross R. Moody Class A Common 2,828 0.09
Class B Common 482 0.24
Charles D. Milos, Jr. Class A Common 528 0.02
Class B Common - -
Directors:
Arthur O. Dummer Class A Common 10 -
Class B Common - -
Harry L. Edwards Class A Common 20 -
Class B Common - -
E. Douglas McLeod Class A Common 10 -
Class B Common - -
Frances A. Moody Class A Common 2,475 0.08
Class B Common 482 0.24
Russell S. Moody Class A Common 2,475 0.08
Class B Common 482 0.24
Louis E. Pauls, Jr. Class A Common 10 -
Class B Common - -
E. J. Pederson Class A Common 100 -
Class B Common - -
Named Officers:
Robert L. Busby, III Class A Common 688 0.02
Class B Common - -
Arthur W. Pickering Class A Common - -
Class B Common - -
All Directors and
Executive Officers Class A Common 1,173,121 35.64
as a Group Class B Common 199,520 99.76
(c) Changes in Control
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with Management and Others
The Donner Company, 100% owned by Mr. Arthur Dummer, who is a director of
National Western Life Insurance Company, was paid $60,474 in 1995 pursuant
to an agreement between The Donner Company and a reinsurance intermediary
relating to a reinsurance contract between the Company and certain life
insurance reinsurers.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management
Seal Fleet, Inc.
The Company holds a corporate note for $500,000 which was originally issued
by Oceanographic and Seismic Services, Inc. (Oceanographic). Oceanographic
was later merged into Seal Fleet, Inc. The original note was renewed in 1976
and is a 20-year debenture due in August, 1996, with interest of 8%
annually.
The Company also holds a corporate note for $2,168,232 issued in 1990 by
Seal (GP), Inc., which is a subsidiary of Seal Fleet, Inc. The note is due in
June, 2000, with interest of 12% payable monthly and is secured by first
preferred ship mortgages. The note was modified during 1992 reducing the
interest rate from 12% to 10%. However, the additional 2% interest will be
payable upon maturity of the note.
Seal Fleet, Inc., has two classes of stock outstanding, Class A and B. The
Class B shares elect a majority of the Board of Directors of Seal Fleet,
Inc. All of the Class B shares and 212,655 (9%) of the Class A shares of
Seal Fleet, Inc., are owned by the Three R Trust, Galveston, Texas. This
Trust was created by Robert L. Moody as Settlor for the benefit of his
children. Three of his children, Mr. Ross R. Moody, Mr. Russell S. Moody,
and Ms. Frances A. Moody are beneficiaries of the Three R Trust and are also
directors of National Western Life Insurance Company. The Trustee of the
Trust is Irwin M. Herz, Jr., of Galveston, Texas. Mr. Herz personally owns
10,932 (.5%) shares of the Class A stock of Seal Fleet, Inc. Mr. Herz is a
lawyer representing the Company, Mr. Moody, and several of Mr. Moody's
affiliated interests. Through its Trustee, Mr. Herz, the Three R Trust is
considered to be the controlling stockholder of Seal Fleet, Inc. Louis
Pauls, Jr., and Russell S. Moody, directors of the Company, are also
directors of Seal Fleet, Inc.
Seal Fleet, Inc., and its subsidiaries own, operate, or lease supply and
equipment boats for off-shore oil and gas well drilling rigs. The
consolidated audited financial statements of Seal Fleet, Inc., and its
subsidiaries for the fiscal year ending December 31, 1995, reflected total
assets of $10,394,000, net losses of $116,000, and negative stockholders'
equity of $3,621,000.
Gal-Tex Hotel Corporation
The Company also holds three mortgage loans issued to Gal-Tex Hotel
Corporation, which is owned 50% by the Libbie Shearn Moody Trust and 50% by
The Moody Foundation. The first mortgage loan in the amount of $3,040,000
was issued in 1988, will mature in May of 1998, and pays interest of 10.5%.
The loan is secured by property consisting of a hotel located in Kingsport,
Tennessee. The second mortgage loan in the amount of $8,796,000 was issued
in 1994, will mature in October of 2004, and pays interest of 8.75%. The
loan is secured by property consisting of a hotel located in Houston, Texas.
The third mortgage loan in the amount of $2,000,000 was issued in 1995, will
mature in January of 2006, and pays interest of 9%. The loan is secured by
property consisting of a hotel located in Woodstock, Virginia.
The Company is the beneficial owner of a life interest (1/8 share),
previously owned by Mr. Robert L. Moody, in the trust estate of Libbie
Shearn Moody. The trustee of this estate is The Moody National Bank of
Galveston. The Moody Foundation is a private charitable foundation governed
by a Board of Trustees of three members. Mr. Robert L. Moody and Mr. Ross
R. Moody are members of the Board of Trustees.
(d) Transactions with Promoters
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) 1. Listing of Financial Statements
See Attachment A, Index to Financial Statements and Schedules, on page
______ for a list of financial statements included in this report.
(a) 2. Listing of Financial Statement Schedules
See Attachment A, Index to Financial Statements and Schedules, on page ____
for a list of financial statement schedules included in this report.
All other schedules are omitted because they are not applicable, not
required or because the information required by the schedule is included
elsewhere in the financial statements or notes.
(a) 3. Listing of Exhibits
Exhibit 3(a) - Restated Articles of Incorporation of National Western
Life Insurance Company dated April 10, 1968 (filed on page _____
of this report).
Exhibit 3(b) - Amendment to the Articles of Incorporation of National
Western Life Insurance Company dated July 29, 1971 (filed on page
____ of this report).
Exhibit 3(c) - Amendment to the Articles of Incorporation of National
Western Life Insurance Company dated May 10, 1976 (filed on page
____ of this report).
Exhibit 3(d) - Amendment to the Articles of Incorporation of National
Western Life Insurance Company dated April 28, 1978 (filed on page
____ of this report).
Exhibit 3(e) - Amendment to the Articles of Incorporation of National
Western Life Insurance Company dated May 1, 1979 (filed on page
____ of this report).
Exhibit 3(f) - Bylaws of National Western Life Insurance Company as
amended through April 24, 1987 (filed on page ____ of this
report).
Exhibit 10(a) - National Western Life Insurance Company Non-Qualified
Defined Benefit Plan dated July 26, 1991 (filed on page ____ of
this report).
Exhibit 10(b) - National Western Life Insurance Company Officers' Stock
Bonus Plan effective December 31, 1992 (incorporated by reference
to the Company's Form S-8 registration dated January 27, 1994).
Exhibit 10(c) - National Western Life Insurance Company Non-Qualified
Deferred Compensation Plan, as amended and restated, dated
March 27, 1995 (filed on Page _____ of this report).
Exhibit 10(d) - First Amendment to the National Western Life Insurance
Company Non-Qualified Deferred Compensation Plan effective July 1,
1995 (filed on page _____ of this report).
Exhibit 10(e) - National Western Life Insurance Company 1995 Stock and
Incentive Plan (filed on page _____ of this report).
Exhibit 21 - Subsidiaries of the Registrant (filed on page _____ of
this report).
Exhibit 27 - Financial Data Schedule (filed electronically pursuant
to Regulation S-K).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1995.
(c) Exhibits
Exhibits required by Regulation S-K are listed as to location in the Listing
of Exhibits in Item 14(a)3 above. Exhibits not referred to have been
omitted as inapplicable or not required.
(d) Financial Statement Schedules
The financial statement schedules required by Regulation S-K are listed as
to location in Attachment A, Index to Financial Statements and Schedules, on
page ____ of this report.
ATTACHMENT A
Index to Financial Statements and Schedules
Page
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1995 and 1994
Consolidated Statements of Earnings for the years ended December 31,
1995, 1994, and 1993
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1994, and 1993
Consolidated Statements of Cash Flows for the years ended December
31, 1995, 1994, and 1993
Notes to Consolidated Financial Statements
Schedule I - Summary of Investments Other Than Investments in Related
Parties, December 31, 1995
Schedule V - Valuation and Qualifying Accounts for the years ended
December 31, 1995, 1994, and 1993
All other schedules are omitted because they are not applicable, not required
or because the information required by the schedule is included elsewhere
in the financial statements or notes.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
National Western Life Insurance Company
Austin, Texas
We have audited the consolidated financial statements of National Western
Life Insurance Company and subsidiaries as listed in the accompanying index.
In connection with our audits of the consolidated financial statements, we
also have audited the financial statement schedules as listed in the
accompanying index. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of National
Western Life Insurance Company and subsidiaries at December 31, 1995 and
1994, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1995, in conformity
with generally accepted accounting principles. Also in our opinion, the
related financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in
all material respects, the information set forth therein.
As discussed in Note 3, the Company changed its method of accounting for
investments in debt and equity securities in 1994 to adopt the provisions of
the Financial Accounting Standards Board's Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." As discussed in Note 5, the Company changed its method
of accounting for income taxes in 1993 to adopt the provisions of SFAS No.
109, "Accounting for Income Taxes."
KPMG Peat Marwick LLP
Austin, Texas
March 1, 1996
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
(In thousands)
ASSETS 1995 1994
Cash and investments:
Securities held to maturity, at
amortized cost
(fair value: $1,726,469 and $1,488,063) $ 1,643,211 1,605,813
Securities available for sale, at
fair value (cost: $561,127 and $366,024) 600,794 354,300
Mortgage loans, net of allowance for
possible losses ($5,668 and $5,929) 191,674 189,632
Policy loans 147,923 151,487
Other long-term investments 30,970 24,872
Cash and short-term investments 10,024 17,723
Total cash and investments 2,624,596 2,343,827
Accrued investment income 36,127 31,630
Deferred policy acquisition costs 270,167 291,274
Other assets 21,392 16,266
Assets of discontinued operations 6,177 232,057
$ 2,958,459 2,915,054
See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
(In thousands except per share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
LIABILITIES:
Future policy benefits:
Traditional life and annuity products $ 174,946 177,429
Universal life and investment annuity
contracts 2,401,098 2,194,264
Other policyholder liabilities 22,833 23,183
Federal income taxes payable:
Current 413 -
Deferred 12,287 1,996
Other liabilities 28,718 27,718
Liabilities of discontinued operations 6,177 215,330
Total liabilities 2,646,472 2,639,920
COMMITMENTS AND CONTINGENCIES
(Notes 4, 7, 9, and 15)
STOCKHOLDERS' EQUITY:
Common stock:
Class A - $1 par value; 7,500,000
shares authorized; 3,291,338
and 3,288,192 shares issued and
outstanding in 1995 and 1994 3,291 3,288
Class B - $1 par value; 200,000 shares
authorized, issued and outstanding
in 1995 and 1994 200 200
Additional paid-in capital 24,647 24,475
Net unrealized gains (losses) on
investment securities 15,195 (2,199)
Retained earnings 268,654 249,370
Total stockholders' equity 311,987 275,134
$ 2,958,459 2,915,054
See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
For the Years Ended December 31, 1995, 1994, and 1993
(In thousands except per share amounts)
1995 1994 1993
Premiums and other revenue:
Life and annuity premiums $ 17,390 18,938 18,624
Universal life and investment
annuity contract revenues 69,783 64,711 67,778
Net investment income 201,816 190,021 180,252
Other income 661 1,462 1,847
Realized gains (losses) on
investments (2,415) 1,626 3,206
Total premiums and other revenue 287,235 276,758 271,707
Benefits and expenses:
Life and other policy benefits 39,823 32,132 36,257
Increase (decrease) in liabilities
for future policy benefits (2,487) 658 (1,611)
Amortization of deferred policy
acquisition costs 33,675 32,131 33,159
Universal life and investment
annuity contract interest 142,940 129,064 130,875
Other insurance operating expenses 27,084 29,394 28,959
Total benefits and expenses 241,035 223,379 227,639
Earnings before Federal income taxes,
cumulative effect of change in
accounting principle, and
discontinued operations 46,200 53,379 44,068
Provision (benefit) for Federal
income taxes:
Current 9,640 16,300 20,006
Deferred 926 (93) (5,310)
Total Federal income taxes 10,566 16,207 14,696
Earnings before cumulative effect of
change in accounting principle and
discontinued operations 35,634 37,172 29,372
Cumulative effect of change in
accounting for income taxes - - 5,520
Earnings from continuing operations 35,634 37,172 34,892
(Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS, CONTINUED
For the Years Ended December 31, 1995, 1994, and 1993
(In thousands except per share amounts)
1995 1994 1993
Discontinued operations:
Earnings (losses) from operations
of discontinued brokerage
operations (net of Federal income
taxes of $2,983 and $11,781 in
1994 and 1993) $ (9,969) (2,936) 21,832
Estimated loss on disposal of
discontinued brokerage
operations (6,381) - -
Earnings (losses) from
discontinued operations (16,350) (2,936) 21,832
Net earnings $ 19,284 34,236 56,724
Earnings per share of common stock:
Earnings before cumulative effect
of change in accounting principle
and discontinued operations $ 10.22 10.66 8.44
Cumulative effect of change in
accounting for income taxes - - 1.58
Earnings (losses) from
discontinued operations (4.69) (0.84) 6.27
Net earnings $ 5.53 9.82 16.29
See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1995, 1994, and 1993
(In thousands)
1995 1994 1993
Common stock shares outstanding:
Shares outstanding at beginning
of year 3,488 3,485 3,478
Shares issued for stock
bonus plan 3 3 7
Shares outstanding at end of year 3,491 3,488 3,485
Common stock:
Balance at beginning of year $ 3,488 3,485 3,478
Shares issued for stock
bonus plan 3 3 7
Balance at end of year 3,491 3,488 3,485
Additional paid-in capital:
Balance at beginning of year 24,475 24,356 24,065
Shares issued for stock
bonus plan 172 119 291
Balance at end of year 24,647 24,475 24,356
Net unrealized gains (losses) on
securities available for sale,
net of effects of deferred
policy acquisition costs and taxes:
Balance at beginning of year (2,199) (257) 138
Effect of change in accounting
for investments in debt and
equity securities - 26,610 -
Change in unrealized gains
(losses) during year 15,166 (29,493) (395)
Net unrealized gains related to
transfer of securities from
available for sale to held
to maturity 3,159 1,380 -
Amortization of net unrealized
gains related to transferred
securities (931) (439) -
Balance at end of year 15,195 (2,199) (257)
Retained earnings:
Balance at beginning of year 249,370 215,134 158,410
Net earnings 19,284 34,236 56,724
Balance at end of year 268,654 249,370 215,134
Total stockholders' equity $ 311,987 275,134 242,718
See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1995, 1994, and 1993
(In thousands)
1995 1994 1993
Cash flows from operating activities:
Net earnings $ 19,284 34,236 56,724
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Universal life and investment
annuity contract interest 142,940 129,064 130,875
Surrender charges (34,936) (33,016) (36,563)
Realized (gains) losses on
investments 2,415 (1,626) (3,206)
Accrual and amortization of
investment income (7,129) (10,722) 30
Depreciation and amortization 620 649 482
Decrease (increase) in other
assets 940 3,771 (3,184)
Decrease (increase) in accrued
investment income (4,497) (3,468) 959
Decrease (increase) in deferred
policy acquisition costs (12,018) 2,354 11,475
Increase (decrease) in liability
for future policy benefits (2,487) 658 (1,611)
Increase (decrease) in other
policyholder liabilities (350) (1,028) 3,149
Decrease in Federal income
taxes payable (4,180) (9,222) (11,096)
Increase (decrease) in other
liabilities (1,781) 4,972 (12,314)
Other 176 121 (74)
Net cash provided by operating 98,997 116,743 135,646
activities
Cash flows from investing activities:
Proceeds from sales of:
Securities held to maturity 10,659 - -
Securities available for sale 44,440 9,114 -
Investments in debt securities - - 77,869
Other investments 1,645 22,531 8,835
Proceeds from maturities and
redemptions of:
Securities held to maturity 54,720 76,174 -
Securities available for sale 13,942 57,270 -
Investments in debt securities - - 485,818
Purchases of:
Securities held to maturity (212,192) (155,892) -
Securities available for sale (130,066) (116,923) -
Investments in debt securities - - (576,403)
Other investments (5,941) (3,548) (18,588)
Principal payments on
mortgage loans 15,952 29,431 16,971
Cost of mortgage loans acquired (18,125) (30,093) (33,393)
Decrease in policy loans 3,564 2,335 4,394
Decrease (increase) in assets of
discontinued operations 225,880 140,244 (208,299)
Increase (decrease) in liabilities
of discontinued operations (209,153) (136,590) 206,799
Other (851) (245) (244)
Net cash used in investing activities (205,526) (106,192) (36,241)
(Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Years Ended December 31, 1995, 1994, and 1993
(In thousands)
1995 1994 1993
Cash flows from financing activities:
Deposits to account balances for
universal life and investment
annuity contracts $ 343,588 190,687 122,545
Return of account balances on
universal life and investment
annuity contracts (244,758) (207,823) (221,658)
Net cash provided by (used in)
financing activities 98,830 (17,136) (99,113)
Net increase (decrease) in cash and
short-term investments (7,699) (6,585) 292
Cash and short-term investments at
beginning of year 17,723 24,308 24,016
Cash and short-term investments at
end of year $ 10,024 17,723 24,308
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 3,740 9,134 4,468
Income taxes 15,129 26,332 32,992
Non-cash investing activities:
Foreclosed mortgage loans $ 961 2,557 6,678
Mortgage loans originated to
facilitate the sale of
real estate 1,105 2,655 2,684
See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of National Western Life Insurance Company
and its wholly owned subsidiaries (the Company), The Westcap Corporation,
NWL Investments, Inc., NWL Properties, Inc., NWL 806 Main, Inc., and
Commercial Adjusters, Inc. Commercial Adjusters, Inc., was dissolved in
October, 1994, and all remaining assets and liabilities were assumed by
National Western Life Insurance Company. The Westcap Corporation ceased
brokerage operations during 1995 and, as a result, is reflected as
discontinued operations in the accompanying financial statements. All
significant intercorporate transactions and accounts have been eliminated in
consolidation.
(B) Basis of Presentation - The accompanying consolidated financial
statements have been prepared in conformity with generally accepted
accounting principles which requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities, and the reported amounts
of revenues and expenses during the reporting periods. Actual results could
differ from those estimates. Significant estimates included in the
accompanying financial statements include (1) contingent liabilities related
to litigation, (2) recoverability of deferred policy acquisition costs,
(3) estimated losses related to discontinued operations, and (4) valuation
allowances for mortgage loans.
National Western Life Insurance Company also files financial statements
with insurance regulatory authorities which are prepared on the
basis of statutory accounting practices which are significantly
different from financial statements prepared in accordance with
generally accepted accounting principles. These differences are
described in detail in the statutory information section of this note.
(C) Investments - Investments in debt securities the Company purchases with
the intent to hold to maturity are classified as securities held to
maturity. The Company has the ability to hold the securities, as it would be
unlikely that forced sales of securities would be required prior to maturity
to cover payments of liabilities. As a result, securities held to maturity
are carried at amortized cost less declines in value that are other than
temporary.
Investments in debt and equity securities that are not classified as
securities held to maturity are reported as securities available for sale.
Securities available for sale are reported in the accompanying financial
statements at individual fair value. Any valuation changes resulting from
changes in the fair value of the securities are reflected as a component of
stockholders' equity. These unrealized gains or losses in stockholders'
equity are reported net of taxes and adjustments to deferred policy
acquisition costs.
Transfers of securities between categories are recorded at fair value at the
date of transfer. Unrealized holding gains or losses associated with
transfers of securities held to maturity to securities available for sale
are recorded as a separate component of stockholders' equity. The
unrealized holding gains or losses included as a separate component of
equity for securities transferred from available for sale to held to
maturity are maintained and amortized into earnings over the remaining life
of the security as an adjustment to yield in a manner consistent with the
amortization or accretion of premium or discount on the associated security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest
method. Realized gains and losses for securities available for sale and
securities held to maturity are included in earnings and are derived using
the specific identification method for determining the cost of securities
sold. For securities available for sale or securities held to maturity, a
decline in the fair value below cost that is deemed other than temporary is
charged to earnings, resulting in the establishment of a new cost basis for
the security.
Mortgage loans and other long-term investments are stated at cost, less
unamortized discounts and allowances for possible losses. Policy loans are
stated at their aggregate unpaid balances. Real estate acquired by
foreclosure is stated at the lower of cost or fair value less estimated
costs to sell.
(D) Cash Equivalents - For purposes of the statements of cash flows, the
Company considers all short-term investments with a maturity at date of
purchase of three months or less to be cash equivalents.
(E) Insurance Revenues and Expenses - Premiums on traditional life insurance
products are recognized as revenues as they become due or, for short
duration contracts, over the contract periods. Benefits and expenses are
matched with premiums in arriving at profits by providing for policy
benefits over the lives of the policies and by amortizing acquisition costs
over the premium-paying periods of the policies. For universal life and
investment annuity contracts, revenues consist of policy charges for the
cost of insurance, policy administration, and surrender charges assessed
during the period. Expenses for these policies include interest credited to
policy account balances and benefit claims incurred in excess of policy
account balances. The related deferred policy acquisition costs are
amortized in relation to the present value of expected gross profits on the
policies.
(F) Federal Income Taxes - Federal income taxes are accounted for under the
asset and liability method. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. A valuation allowance for deferred tax
assets is provided if all or some portion of the deferred tax asset may not
be realized. An increase or decrease in a valuation allowance that results
from a change in circumstances that affects the realizability of the related
deferred tax asset is included in income.
(G) Depreciation of Property, Equipment, and Leasehold Improvements -
Depreciation is based on the estimated useful lives of the assets and is
calculated on the straight-line and accelerated methods. Leasehold
improvements are amortized over the lesser of the economic useful life of
the improvement or the term of the lease.
(H) Earnings Per Share - Earnings per share of common stock are based on the
weighted average number of such shares outstanding during each year. The
weighted average shares outstanding were 3,488,205 and 3,484,682, and
3,481,233 for the years ended December 31, 1995, 1994, and 1993,
respectively.
(I) Classification - Certain reclassifications have been made to the prior
years to conform to the reporting categories used in 1995. The most
significant of these reclassifications relate to The Westcap Corporation and
its discontinued brokerage operations. All assets, liabilities, results of
operations, and cash flows of The Westcap Corporation for 1994 and 1993 have
been reclassified and reported separately as discontinued operations in the
accompanying financial statements.
(J) Statutory Information - National Western Life Insurance Company,
domiciled in Colorado, prepares its statutory financial statements in
accordance with accounting practices prescribed or permitted by the Colorado
Division of Insurance. Prescribed statutory accounting practices include a
variety of publications of the National Association of Insurance
Commissioners (NAIC), as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass
all accounting practices not so prescribed. Such practices may differ from
state to state, may differ from company to company within a state, and may
change in the future. The NAIC currently is in the process of codifying
statutory accounting practices, the result of which is expected to
constitute the only source of prescribed statutory accounting practices.
Accordingly, that project will likely change, to some extent, prescribed
statutory accounting practices and may result in changes to the accounting
practices that insurance companies use to prepare their statutory financial
statements. The following are major differences between generally accepted
accounting principles and prescribed or permitted statutory accounting
practices.
1. The Company accounts for universal life and investment annuity contracts
based on the provisions of Statement of Financial Accounting Standards
(SFAS) No. 97, "Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and Losses from the
Sale of Investments." The basic effect of the statement with respect to
certain long-duration contracts is that deposits for universal life and
investment annuity contracts are not reflected as revenues, and surrenders
and certain other benefit payments are not reflected as expenses. However,
statutory accounting practices do reflect such items as revenues and
expenses.
2. Commissions and certain expenses related to policy issuance and
underwriting, all of which generally vary with and are related to the
production of new business, have been deferred. For traditional products,
these costs are being amortized over the premium-paying period of the
related policies in proportion to the ratio of the premium earned to the
total premium revenue anticipated, using the same assumptions as to
interest, mortality, and withdrawals as were used in calculating the
liability for future policy benefits. For universal life and investment
annuity contracts, these costs are amortized in relation to the present
value of expected gross profits on these policies. The Company evaluates
the recoverability of deferred policy acquisition costs on an annual basis.
In this evaluation, the Company considers estimated future gross profits or
future premiums, as applicable for the type of contract. The Company also
considers expected mortality, interest earned and credited rates, persistency,
and expenses. Statutory accounting practices require commissions and
related costs to be expensed as incurred.
A summary of information relative to deferred policy acquisition costs and
premiums and deposits follows:
Years Ended December 31,
1995 1994 1993
(In thousands)
Costs deferred:
Agents' commissions $ 42,904 27,177 19,038
Other 2,790 2,600 2,646
$ 45,694 29,777 21,684
Amounts amortized $ 33,675 32,131 33,159
Direct traditional life
and other premiums $ 24,801 24,919 26,070
Universal life insurance deposits $ 68,464 64,760 67,060
Investment annuity deposits $ 309,971 157,622 86,700
3. Under generally accepted accounting principles, the liability for future
policy benefits on traditional products has been calculated by the net level
method using assumptions as to future mortality (based on the 1965-1970 and
1975-1980 Select and Ultimate mortality tables), interest ranging from 4% to
8%, and withdrawals based on Company experience. For universal life and
investment annuity contracts, the liability for future policy benefits
represents the account balance.
4. Deferred Federal income taxes are provided for temporary differences
which are recognized in the financial statements in a different period than
for Federal income tax purposes. Deferred taxes are not recognized in
statutory accounting practices. Also, for statutory accounting purposes,
the Company has recorded Federal income tax receivables as permitted by the
Colorado Division of Insurance. The Federal income tax receivables related
to subsidiary losses have been recorded directly to surplus and were not
recorded in results of operations. Prescribed statutory accounting
practices do not address the accounting for tax receivables.
5. For statutory accounting purposes, debt securities are recorded at
amortized cost, except for securities in or near default which are reported
at market value.
6. Investments in subsidiaries are recorded at admitted asset value for
statutory purposes, whereas the financial statements of the subsidiaries
have been consolidated with those of the Company under generally accepted
accounting principles.
7. The asset valuation reserve and interest maintenance reserve, which are
investment valuation reserves prescribed by statutory accounting practices,
have been eliminated, as they are not required under generally accepted
accounting principles.
8. The recorded value of the life interest in the Libbie Shearn Moody Trust
(the Trust) is reported at its initial valuation, net of accumulated
amortization. The initial valuation was based on the assumption that the
Trust would provide certain income to the Company at an assumed interest
rate and is being amortized over 53 years, the life expectancy of Mr. Robert
L. Moody at the date he contributed the life interest to the Company. For
statutory accounting purposes, the life interest has been valued at
$26,400,000, which was computed as the present value of the estimated future
income to be received from the Trust. However, this amount is being
amortized to a valuation of $12,774,000 over a seven-year period in
accordance with Colorado Division of Insurance permitted accounting
requirements. Prescribed statutory accounting practices provide no
accounting guidance for such asset. The statutory admitted value of this
life interest at December 31, 1995, is $20,561,000 in comparison to a
carrying value of $5,206,000 in the accompanying consolidated financial
statements.
Reconciliations of statutory stockholders' equity, as included in the annual
statements filed with the Colorado Division of Insurance, to the respective
amounts as reported in the accompanying consolidated financial statements
prepared under generally accepted accounting principles are as follows:
Stockholders' Equity
as of December 31,
1995 1994 1993
(In thousands)
Statutory equity $ 236,884 212,063 182,876
Adjustments:
Difference in valuation of
investment in the Libbie
Shearn Moody Trust (15,355) (17,021) (17,911)
Deferral of policy
acquisition costs 270,167 291,274 287,711
Adjustment of future
policy benefits (218,352) (206,027) (205,357)
Deferred Federal income
taxes payable (12,287) (1,996) (3,078)
Adjust securities available for
sale to fair value 48,880 (10,469) (1,080)
Reversal of asset valuation
reserve 4,002 10,197 13,225
Reversal of interest maintenance
reserve 5,991 4,922 2,222
Reinstatement of non-admitted
assets 2,429 2,468 3,134
Valuation allowances on
investments (10,862) (10,573) (15,566)
Adjustment for consolidation 102 102 (3,664)
Other, net 388 194 206
Generally accepted accounting
principles equity $ 311,987 275,134 242,718
Reconciliations of statutory net earnings, as included in the annual
statements filed with the Colorado Division of Insurance, to the respective
amounts as reported in the accompanying consolidated financial statements
prepared under generally accepted accounting principles are as follows:
Net Earnings for the
Years Ended December 31,
1995 1994 1993
(In thousands)
Statutory net earnings $ 28,343 32,513 46,013
Subsidiary earnings (losses) before
deferred Federal income taxes (17,594) (3,806) 20,879
Consolidated statutory net earnings 10,749 28,707 66,892
Adjustments:
Deferral of policy acquisition
costs 12,018 (2,354) (11,475)
Adjustment of future policy
benefits (12,325) (671) 11,816
Amortization of investment in
Trust (280) (279) (275)
Benefit (provision) for deferred
Federal income taxes (715) 108 5,675
Valuation allowances and permanent
impairment write-downs on
investments 3,901 5,238 5,238
Lawsuit settlements recorded as
surplus adjustments for
statutory accounting (200) 955 1,620
Subsidiary stock dividends - (1,366) (20,442)
Increase (decrease) in interest
maintenance reserve 1,069 2,700 (8,364)
Cumulative effect of change in
accounting for income taxes - - 5,520
Other, net 5,067 1,198 519
Generally accepted accounting
principles net earnings $ 19,284 34,236 56,724
(2) DEPOSITS WITH REGULATORY AUTHORITIES
The following assets were on deposit with state and other regulatory
authorities as required by law at the end of each year:
December 31,
1995 1994
(In thousands)
Debt securities $ 28,184 62,413
Certificates of deposit 210 210
Totals $ 28,394 62,623
(3) INVESTMENTS
(A) Investment Income
The major components of net investment income are as follows:
Years Ended December 31,
1995 1994 1993
(In thousands)
Investment income:
Debt securities $ 165,879 154,417 144,218
Mortgage loans 19,644 19,839 18,450
Policy loans 11,018 10,546 11,962
Other investment income 7,764 7,982 8,412
Total investment income 204,305 192,784 183,042
Investment expenses 2,489 2,763 2,790
Net investment income $ 201,816 190,021 180,252
Investments of the following amounts were non-income producing for the
preceding twelve months:
December 31,
1995 1994
(In thousands)
Debt securities $ 2,209 4,924
Equity securities 1,896 1,549
Real estate 2,175 2,160
Totals $ 6,280 8,633
As of December 31, 1995 and 1994, investments in debt securities and
mortgage loans with principal balances totaling $3,778,000 and $8,314,000
were on non-accrual status. During 1995, 1994, and 1993, reductions in
interest income associated with non-performing investments in debt
securities and mortgage loans were as follows:
Years Ended December 31,
1995 1994 1993
(In thousands)
Interest at contract rate $ 340 647 1,029
Interest income recognized 4 184 123
Interest income not accrued $ 336 463 906
(B) Investment Concentrations
Concentrations of credit risk arising from mortgage loans exist in relation
to certain groups of customers. A group concentration arises when a number
of counterparties have similar economic characteristics that would cause
their ability to meet contractual obligations to be similarly affected by
changes in economic or other conditions. The Company does not have a
significant exposure to any individual customer or counterparty. The major
concentrations of mortgage loan credit risk for the Company arise by
geographic location in the United States and by property type as detailed
below.
December 31,
1995 1994
West South Central 54.0% 55.8%
Mountain 12.9 12.2
Pacific 9.4 9.7
All other 23.7 22.3
Totals 100.0 % 100.0 %
December 31,
1995 1994
Retail 67.0 % 64.6 %
Office 15.9 16.8
Hotel/Motel 8.3 7.6
All other 8.8 11.0
Totals 100.0 % 100.0 %
The Company held in its investment portfolio below investment grade debt
securities totaling $14,244,000 and $31,861,000 at December 31, 1995 and
1994, respectively. This represents approximately 0.5% and 1.4% of total
invested assets. These below investment grade debt securities often
have common characteristics in that they are usually unsecured and are
often subordinated to other creditors of the borrower or issuer.
Additionally, the issuers of the below investment grade debt
securities usually have high levels of indebtedness and are more sensitive
to adverse economic conditions.
At December 31, 1995 and 1994, the Company held $4,966,000 and $8,948,000 of
residual interests in collateralized mortgage obligations (CMOs) in its
investment portfolio. Investments in residual interests of CMOs are
securities that entitle the Company to the excess cash flows arising from
the difference between the cash flows required to make principal and
interest payments on the related CMOs and the actual cash flows received on
the underlying U.S. agency collateral included in the CMO portfolios. Total
cash flows to be received by the Company from the residual interests could
differ from the projected cash flows resulting in changes in yield or losses
if prepayments vary from projections on the collateral underlying the CMOs.
At December 31, 1995 and 1994, the Company had real estate totaling
$19,066,000 and $17,766,000, net of estimated selling costs, which is
reflected in other long-term investments in the accompanying financial
statements.
The Company had no investments in any entity, except for U.S. government
agency securities, in excess of 10% of stockholders' equity at December 31,
1995.
(C) Investment Gains and Losses
The table below presents realized gains and losses and increases or
decreases in unrealized gains on investments:
Net Realized Increase
Investment (Decrease)
Gains in Unrealized
(Losses) Investment Gains
(In thousands)
Year Ended December 31, 1995:
Securities held to maturity $ 600 201,008
Securities available for sale (2,599) 15,166
Other (416) -
Totals $ (2,415) 216,174
Year Ended December 31, 1994:
Securities held to maturity $ 1,632 (239,104)
Securities available for sale (881) (29,493)
Other 875 -
Totals $ 1,626 (268,597)
Year Ended December 31, 1993:
Securities held to maturity $ 3,937 78,960
Securities available for sale 1,541 (395)
Other (2,272) -
Totals $ 3,206 78,565
The tables below present amortized cost and fair values of securities held
to maturity and securities available for sale at December 31, 1995:
Securities Held to Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
Debt securities:
U.S. Treasury and
other U.S. government
corporations and
agencies $ 35,764 262 - 36,026
States and political
subdivisions 47,574 3,737 - 51,311
Foreign governments 48,286 3,030 - 51,316
Public utilities 227,449 12,358 278 239,529
Corporate 774,134 43,724 438 817,420
Mortgage-backed 510,004 21,391 528 530,867
Totals $ 1,643,211 84,502 1,244 1,726,469
Securities Available for Sale
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
Debt securities:
U.S. Treasury and
other U.S. government
corporations and
agencies $ 2,948 363 - 3,311
Public utilities 54,677 3,543 790 57,430
Corporate 103,884 11,618 165 115,337
Mortgage-backed 375,219 25,259 1,622 398,856
Equity securities 24,399 2,434 973 25,860
Totals $ 561,127 43,217 3,550 600,794
The tables below present amortized cost and fair values of securities held
to maturity and securities available for sale at December 31, 1994:
Securities Held to Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
Debt securities:
U.S. Treasury and
other U.S. government
corporations and
agencies $ 24,595 44 886 23,753
States and political
subdivisions 47,532 480 3,527 44,485
Foreign governments 25,407 - 1,517 23,890
Public utilities 272,478 722 22,807 250,393
Corporate 538,914 1,728 43,200 497,442
Mortgage-backed 696,887 5,759 54,546 648,100
Totals $ 1,605,813 8,733 126,483 1,488,063
Securities Available for Sale
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
Debt securities:
U.S. Treasury and
other U.S. government
corporations and
agencies $ 7,353 59 2,467 4,945
Public utilities 10,263 155 918 9,500
Corporate 92,280 881 1,847 91,314
Mortgage-backed 228,389 2,413 8,570 222,232
Equity securities 27,739 1,382 2,812 26,309
Totals $ 366,024 4,890 16,614 354,300
The amortized cost and fair values of investments in debt securities at
December 31, 1995, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Securities Securities
Held to Maturity Available for Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
(In thousands)
Due in 1 year or less $ 7,923 7,978 282 286
Due after 1 year through
5 years 93,335 95,280 16,584 17,648
Due after 5 years through
10 years 773,979 812,622 79,570 85,627
Due after 10 years 257,970 279,722 65,073 72,517
1,133,207 1,195,602 161,509 176,078
Mortgage-backed securities 510,004 530,867 375,219 398,856
Totals $ 1,643,211 1,726,469 536,728 574,934
Proceeds from sales of securities available for sale during 1995 and 1994
totaled $44,440,000 and $9,114,000, respectively. Gross gains of $1,153,000
and $654,000 and gross losses of $3,752,000 and $1,535,000 were realized on
those sales during 1995 and 1994, respectively. Proceeds from sales of
investments in debt securities during 1993 were $77,869,000. Gross gains of
$12,966,000 and gross losses of $1,283,000 were realized on those sales,
respectively. The Company uses the specific identification method in
computing realized gains and losses.
The Company sold three held to maturity securities during 1995 due to
significant credit deterioration of the issuing companies. Amortized cost
of the securities sold totaled $10,727,000, and realized losses of $68,000
were recognized on the sales.
(D) Changes in Accounting Principles
In May, 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement addresses the
accounting and reporting for investments in equity securities that have
readily determinable fair values and for all investments in debt securities
as previously described in note 1. The Company adopted SFAS No. 115
effective January 1, 1994. Upon adoption, approximately 60% of the
Company's insurance operations debt securities were reported as securities
available for sale, with the remainder classified as securities held to
maturity. The Company's relatively small holdings of equity securities were
also reported as securities available for sale.
Upon adoption of the new statement, certain related balance sheet accounts,
deferred Federal income taxes payable and deferred policy acquisition costs,
were adjusted as if the unrealized gains on the securities classified as
available for sale had actually been realized. For the Company's universal
life and investment annuity contracts, deferred policy acquisition costs are
amortized in relation to the present value of expected gross profits on
these policies. Accordingly, under SFAS No. 115, deferred policy
acquisition costs are adjusted for the impact on estimated gross profits of
net unrealized gains and losses on securities. The implementation of the
new statement had no effect on net earnings of the Company. However,
stockholders' equity was adjusted as follows as of January 1, 1994:
January 1,
1994
(In thousands)
Fair value adjustment to investments in
debt and equity securities $ 93,788
Less:
Decrease in deferred policy acquisition costs (52,849)
Increase in deferred Federal income taxes (14,329)
Effect of change in accounting for investments
in debt and equity securities $ 26,610
At July 31, 1994, the Company transferred debt securities with fair values
totaling $805 million from securities available for sale to securities held
to maturity. On December 29, 1995, the Company made additional transfers
totaling $156 million to the held to maturity category from securities
available for sale. The lower holdings of securities available for sale
significantly reduces the Company's exposure to equity volatility while
still providing securities for liquidity and asset/liability management
purposes. The transfers of securities were recorded at fair values in
accordance with SFAS No. 115. This statement requires that the unrealized
holding gain or loss at the date of the transfer continue to be reported in
a separate component of stockholders' equity but shall be amortized over the
remaining life of the security as an adjustment of yield in a manner
consistent with the amortization of any premium or discount. The
amortization of an unrealized holding gain or loss reported in equity will
offset or mitigate the effect on interest income of the amortization of the
premium or discount for the held-to-maturity securities. The transfer of
securities from available for sale to held to maturity had no effect on net
earnings of the Company. However, stockholders' equity was adjusted as
follows:
Net Unrealized Gains (Losses)
as of December 31,
1995 1994
(In thousands)
Beginning unamortized gains from transfers $ 941 -
Net unrealized gains related to transfer of
securities from available for sale to
held to maturity 3,159 1,380
Amortization of net unrealized gains related
to transferred securities (931) (439)
2,228 941
Ending unamortized gains from transfers $ 3,169 941
Also on December 29, 1995, the Company transferred securities totaling $284
million to the available for sale category from securities held to maturity.
This transfer resulted in an increase to stockholder's equity of $4,266,000
as of December 31, 1995, net of effects of deferred policy acquisition costs
and taxes. This transfer was made to restructure the Company's portfolio
to provide increased flexibility for both portfolio and asset/liability
management. Accounting principles typically do not allow transfers from the
held to maturity category to the available for sale category except under
certain prescribed circumstances. However, in 1995 the Financial Accounting
Standards Board permitted a one-time reassessment by companies of their
securities classifications and allowed transfers out of the held to maturity
category without regard to the prescribed circumstances. The reassessment
and any resulting transfers had to be completed by December 31, 1995.
Net unrealized gains (losses) on investment securities included in
stockholders' equity at December 31, 1995 and 1994 are as follows:
December 31,
1995 1994
(in thousands)
Gross unrealized gains $ 43,217 4,890
Gross unrealized losses (3,550) (16,614)
Adjustments for:
Deferred policy acquisition costs (21,166) 6,893
Deferred Federal income taxes (6,475) 1,691
12,026 (3,140)
Net unrealized gain related to securities
transferred to held to maturity 3,169 941
Net unrealized gains (losses)
on investment securities $ 15,195 (2,199)
The Financial Accounting Standards Board (FASB) issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," in May, 1993. In
October, 1994, the FASB also issued SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures," which amends
SFAS No. 114. These statements address the accounting by creditors for
impairment of certain loans and related financial statement disclosures.
The Company adopted both SFAS No. 114 and No. 118 effective January 1, 1995.
As the Company was already providing for impairment of loans through an
allowance for possible losses, the implementation of this statement had no
significant effect on the Company's results of operations or stockholders'
equity. However, additional disclosures are required by these statements
which are provided below.
As of December 31, 1995 and 1994, impaired mortgage loans were as follows:
1995 1994
(In thousands)
Impaired loans with allowance for losses $ - 861
Allowance for losses - (261)
Impaired loans with no allowance for losses - 379
Net impaired loans $ - 979
For the years ended December 31, 1995 and 1994, average investments in
impaired mortgage loans were $234,000 and $997,000, respectively. Interest
income recognized on impaired loans during the years ended December 31, 1995
and 1994, was not significant. Impaired loans are typically placed on
non-accrual status and no interest income is recognized. However, if cash
is received on the impaired loan, it is applied to principal and interest on
past due payments, beginning with the most delinquent payment. Detailed
below are the changes in the allowance for mortgage loan losses for the
years ended December 31, 1995 and 1994.
1995 1994
(In thousands)
Balance at beginning of year $ 5,929 6,849
Net additions charged to realized
investment gains and losses - 307
Releases due primarily to foreclosures (261) (1,227)
Balance at end of year $ 5,668 5,929
In March, 1995, the FASB issued SFAS No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." The
statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Measurement of an impairment
loss for long-lived assets and identifiable intangibles that an entity
expects to hold and use should be based on the fair value of the asset. The
statement also requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less costs to sell.
The Company's real estate investments are the only significant assets that
will be subject to this statement. As the Company already records
foreclosed real estate at the lower of cost or fair value less estimated
costs to sell, the implementation of this statement will not have a
significant effect on the Company's financial statements. The statement
will be implemented in the first quarter of 1996.
(4) REINSURANCE
The Company is party to several reinsurance agreements. The Company's
general policy is to reinsure that portion of any risk in excess of $150,000
on the life of any one individual. Total life insurance in force was $7.94
billion and $7.71 billion at December 31, 1995 and 1994, respectively. Of
these amounts, life insurance in force totaling $1.27 billion and $1.05
billion was ceded to reinsurance companies, primarily on a yearly renewable
term basis, at December 31, 1995 and 1994, respectively.
In accordance with the reinsurance contracts, reinsurance receivables
including amounts related to claims incurred but not reported and
liabilities for future policy benefits totaled $5,646,000 and $6,480,000 at
December 31, 1995 and 1994, respectively. Premium revenues were reduced by
$7,420,000, $6,040,000, and $7,450,000 for reinsurance premiums incurred
during 1995, 1994, and 1993, respectively. Benefit expenses were reduced by
$5,812,000, $3,295,000, and $6,943,000 for reinsurance recoveries during
1995, 1994, and 1993, respectively. A contingent liability exists with
respect to reinsurance, as the Company remains liable if the reinsurance
companies are unable to meet their obligations under the existing
agreements.
(5) FEDERAL INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes," which requires an asset and liability method of
accounting. The cumulative effect of this change in accounting for
income taxes of $5,520,000 was determined as of January 1, 1993, and is
reported separately in the consolidated statement of earnings for the year
ended December 31, 1993.
Total Federal income taxes were allocated as follows:
Years Ended December 31,
1995 1994 1993
(In thousands)
Earnings from continuing operations $ 10,566 16,207 14,696
Discontinued operations - 2,983 11,781
Stockholders' equity for net
unrealized gains and losses
on securities available for sale 9,365 (974) (211)
Total Federal income taxes $ 19,931 18,216 26,266
The provisions for Federal income taxes attributable to income from
continuing operations vary from amounts computed by applying the statutory
income tax rate to earnings before Federal income taxes. The reasons for the
differences, and the tax effects thereof, are as follows:
Years Ended December 31,
1995 1994 1993
(In thousands)
Income tax expense at
statutory rate $ 16,170 18,683 15,424
Dividends-received deduction (298) (333) (420)
Amortization of life interest in the
Libbie Shearn Moody Trust 98 97 96
Payment (recovery) of non-deductible
excise tax - 53 (368)
Adjustment to deferred tax assets and
liabilities for enacted changes
in tax rates - - 98
Tax benefit of discontinued
operations (5,669) (2,864) -
Other 265 571 (134)
Provision for Federal income taxes $ 10,566 16,207 14,696
The significant components of deferred income tax expense (benefit)
attributable to earnings from continuing operations for the years ended
December 31, 1995, 1994, and 1993, are as follows:
Years Ended December 31,
1995 1994 1993
(In thousands)
Deferred tax expense (benefit),
exclusive of adjustments for
changes in tax rates $ 926 (93) (5,408)
Adjustments to deferred tax
assets and liabilities for
enacted changes in tax rates - - 98
Total deferred tax expense (benefit) $ 926 (93) (5,310)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1995, 1994, and 1993, are presented below:
December 31,
1995 1994
(In thousands)
Deferred tax assets:
Future policy benefits, excess of
financial accounting liability
over tax liability $ 86,358 81,849
Mortgage loans, principally due
to valuation allowances for
financial accounting purposes 2,212 2,242
Real estate, principally due to
write-downs for financial
accounting purposes 2,089 2,382
Accrued and unearned investment
income recognized for tax purposes
and deferred for financial
accounting purposes 2,311 2,299
Accrued operating expenses recorded
for financial accounting purposes
not currently tax deductible 2,766 2,451
Accrued liabilities of discontinued
operations not currently tax deductible 1,368 -
Net unrealized losses on securities
availabe for sale - 1,184
Other 595 733
Total gross deferred tax assets 97,699 93,140
Less valuation allowance - -
Net deferred tax assets 97,699 93,140
Deferred tax liabilities:
Deferred policy acquisition costs,
principally expensed for tax
purposes (95,650) (92,884)
Debt securities, principally due
to deferred market discount for tax (4,482) -
Real estate, principally due to
differences in tax and financial
accounting for depreciation (1,622) (1,964)
Net unrealized gains on securities
available for sale (8,181) -
Other (51) (288)
Total gross deferred tax liabilities (109,986) (95,136)
Net deferred tax liabilities $ (12,287) (1,996)
There was no valuation allowance for deferred tax assets at December 31,
1995 and 1994. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income, and tax
planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it
is more likely than not that the Company will realize the benefits of these
deductible differences.
Prior to the Tax Reform Act of 1984 (1984 Act), a portion of a life
insurance company's income was not subject to tax until it was distributed
to stockholders, at which time it was taxed at the regular corporate tax
rate. In accordance with the 1984 Act, this income, referred to as
policyholders' surplus, would not increase, yet any amounts distributed
would be taxable at the regular corporate rate. The balance of this account
as of December 31, 1995, is approximately $2,446,000. No provision for
income taxes has been made on this untaxed income, as management is of the
opinion that no distribution to stockholders will be made from
policyholders' surplus in the foreseeable future. Should the balance in the
policyholders' surplus account at December 31, 1995, become taxable, the
Federal income taxes computed at present rates would be approximately
$856,000.
The Company files a consolidated Federal income tax return with its
subsidiaries. Allocation of the consolidated tax liability is based on
separate return calculations pursuant to the "wait-and-see" method as
described in sections 1.1552-1(a)(2) and 1.1502-33(d)(2)(i) of the current
Treasury Regulations. Under this method, consolidated group members are not
given current credit for net losses until future net taxable income is
generated to realize such credits. In accordance with this consolidated tax
sharing agreement, tax benefits resulting from discontinued brokerage
operation losses totaling $5,669,000 and $2,864,000 for 1995 and 1994 were
included in earnings from continuing operations.
(6) TRANSACTIONS WITH CONTROLLING STOCKHOLDER AND AFFILIATES
(A) Life Interest in Libbie Shearn Moody Trust
The Company is the beneficial owner of a life interest (1/8 share), in the
trust estate of Libbie Shearn Moody which was previously owned by Mr. Robert
L. Moody, Chairman of the Board of Directors of the Company. The Company
has issued term insurance policies on the life of Mr. Robert L. Moody which
are reinsured through agreements with unaffiliated insurance companies. The
Company is the beneficiary of these policies for an amount equal to the
statutory admitted value of the Trust, which was $20,561,000 at December 31,
1995. The excess of $27,000,000 face amount of the reinsured policies over
the statutory admitted value of the Trust has been assigned to Mr. Robert L.
Moody. The recorded net asset values in the accompanying consolidated
financial statements for the Company's life interest in the Trust are as
follows:
December 31,
1995 1994
(In thousands)
Original valuation of life interest at
February 26, 1960 $ 13,793 13,793
Less accumulated amortization (8,587) (8,307)
Net asset value of life interest in the Trust $ 5,206 5,486
Income from the Trust and related expenses reflected in the accompanying
consolidated statements of earnings are summarized as follows:
Years Ended December 31,
1995 1994 1993
(In thousands)
Income distributions $ 3,085 2,937 2,596
Deduct:
Amortization (280) (279) (275)
Reinsurance premiums (212) (188) (162)
Net income from life interest
in the Trust $ 2,593 2,470 2,159
(B) Common Stock
Mr. Robert L. Moody, Chairman of the Board of Directors, owns 198,074 of the
total outstanding shares of the Company's Class B common stock and 1,160,896
of the Class A common stock.
Holders of the Company's Class A common stock elect one-third of the Board
of Directors of the Company, and holders of the Class B common stock elect
the remainder. Any cash or in-kind dividends paid on each share of Class B
common stock shall be only one-half of the cash or in-kind dividends paid on
each share of Class A common stock. Also, in the event of liquidation of the
Company, the Class A stockholders shall first receive the par value of their
shares; then the Class B stockholders shall receive the par value of their
shares; and the remaining net assets of the Company shall be divided between
the stockholders of both Class A and Class B common stock, based on the
number of shares held.
(7) PENSION PLANS
The Company has a qualified noncontributory pension plan covering
substantially all full-time employees. The plan provides benefits based on
the participants' years of service and compensation. The Company makes
annual contributions to the plan that comply with the minimum funding
provisions of the Employee Retirement Income Security Act. A summary of plan
information is as follows:
Pension costs (credits) include the following components:
Years Ended December 31,
1995 1994 1993
(In thousands)
Service cost-benefits earned
during the period $ 143 218 156
Interest cost on projected benefit 510 498 481
obligations
Actual return on plan assets (962) 112 (321)
Net amortization and deferral 427 (622) (258)
Net pension cost $ 118 206 58
The following sets forth the plan's funded status and related amounts
recognized in the Company's balance sheet as of:
December 31,
1995 1994
(In thousands)
Actuarial present value of benefit
obligations:
Accumulated benefit obligations,
including vested benefits of
$7,562,000 and $5,565,000,
respectively $ (7,961) (5,906)
Projected benefit obligations for service
rendered to date $ (8,199) (6,317)
Plan assets at fair market value primarily
consisting of equity and fixed
income securities 6,557 5,513
Projected benefit obligations in excess
of plan assets (1,642) (804)
Unrecognized net transitional asset at
January 1, 1987 being recognized over
employees' average remaining
service of 15 years (319) (374)
Prior service cost not yet recognized in net
periodic pension cost (236) (266)
Unrecognized net losses from past experience
different from that assumed 2,174 1,058
Adjustment to recognize minimum liability (1,381) (7)
Accrued pension cost $ (1,404) (393)
The discount rate used in determining the actuarial present value of the
projected benefit obligations was 7.0% for 1995 and 8.75% for 1994. The
projected increase in future compensation levels was based on a rate of 5.0%
and 6.0% for 1995 and 1994, respectively. The projected long-term rate of
return on plan assets was 8.5% for 1995 and 1994.
The Company also has a non-qualified defined benefit plan primarily for
senior officers. The plan provides benefits based on the participants' years
of service and compensation. No minimum funding standards are required.
However, at the option of the Company, contributions may be funded into the
National Western Life Insurance Company Non-Qualified Plans Trust. There are
currently no plan assets in the trust. A summary of plan information is as
follows:
Pension costs include the following components:
Years Ended December 31,
1995 1994 1993
(In thousands)
Service cost-benefits earned
during the period $ 71 91 63
Interest cost on projected benefit
obligations 153 158 98
Net amortization and deferral 78 129 68
Net pension cost $ 302 378 229
The following sets forth the plan's funded status and related amounts
recognized in the Company's balance sheet as of:
December 31,
1995 1994
(In thousands)
Actuarial present value of benefit
obligations:
Accumulated benefit obligations,
including vested benefits of
$1,545,000 and $640,000,
respectively $ (1,550) (670)
Projected benefit obligations for service
rendered to date (2,532) (1,749)
Plan assets at fair market value - -
Projected benefit obligations in excess of
plan assets (2,532) (1,749)
Unrecognized net transitional obligation at
January 1, 1991, being recognized over
employees' average remaining service
of 12 years 598 677
Unrecognized net losses from past experience
different from that assumed 582 22
Adjustment to recognize minimum liability (198) -
Accrued pension cost $ (1,550) (1,050)
The discount rate used in determining the actuarial present value of the
projected benefit obligations was 7.0% for 1995 and 8.75% for 1994. The
projected increase in future compensation levels was based on a rate of 5.0%
and 6.0% for 1995 and 1994, respectively.
In addition to the defined benefit plans, the Company has a qualified 401(k)
plan for substantially all full-time employees and a non-qualified deferred
compensation plan primarily for senior officers. The Company makes annual
contributions to the 401(k) plan of two percent of each employee's
compensation. Additional Company matching contributions of up to two percent
of each employee's compensation are also made each year based on the
employee's personal level of salary deferrals to the plan. All Company
contributions are subject to a vesting schedule based on the employee's
years of service. For the years ended December 31, 1995 and 1994, Company
contributions totaled $201,000 and $198,000.
The non-qualified deferred compensation plan was established to allow
eligible employees to defer the payment of a percentage of their
compensation and to provide for additional Company contributions. Company
contributions are subject to a vesting schedule based on the employee's
years of service. For the years ended December 31, 1995 and 1994, Company
contributions totaled $55,000 and $45,000, respectively.
(8) SHORT-TERM BORROWINGS
The Company has available a $60 million bank line of credit primarily for
cash management purposes relating to investment transactions. The Company is
required to maintain a collateral security deposit in trust with the bank
equal to 120% of any outstanding liability. The Company had no outstanding
liabilities or collateral security deposits with the bank at December 31,
1995 and 1994. The average interest rate on borrowings for the year ended
December 31, 1994 was 4.45%. The Company had no borrowings on the line of
credit during 1995.
(9) COMMITMENTS AND CONTINGENCIES
(A) Current Regulatory Issues
In December, 1995, the National Association of Insurance Commissioners
adopted for statutory accounting practices Actuarial Guideline 33,
previously referred to as Actuarial Guideline GGG. This reserve guideline,
which has not been adopted by any states at this time, helps define the
minimum reserves for policies with multiple benefit streams, such as
two-tier annuities.
As of December 31, 1995, the Company's statutory reserving practices for
two-tier annuities follow an agreement reached in 1993 with its state of
domicile, Colorado. This agreement requires the Company to phase-in a
different reserve basis by the end of 1996. The agreement states the
acceptable difference between the target reserve and the statutory reserve
held by the Company will meet the following schedule:
December 31, 1995 $5,000,000
December 31, 1996 -
The Company has met the above scheduled difference for December 31, 1995.
However, in 1995, the Company entered into discussions with the Colorado
Division of Insurance (the Division) to implement Actuarial Guideline 33 and
to phase it in over a three-year period as allowed by the guideline. In
January, 1996, the Division approved the proposal for this three-year
phase-in. The effect on the Company's statutory financial statements will
not be significant, since the previous agreement with the Division was
similar to the final guideline. Also, the guideline does not affect the
Company's policy reserves which are prepared under generally accepted
accounting principles as reported in the accompanying consolidated financial
statements.
(B) Legal Proceedings
On March 28, 1994, the Community College District No. 508, County of Cook
and State of Illinois (The City Colleges) filed a complaint in the United
States District Court for the Northern District of Illinois, Eastern
Division, against National Western Life Insurance Company (the Company) and
subsidiaries of The Westcap Corporation. The suit seeks rescission of
securities purchase transactions by The City Colleges from Westcap between
September 9, 1993 and November 3, 1993, alleged compensatory damages,
punitive damages, injunctive relief, declaratory relief, fees, and costs.
National Western is named as a "controlling person" of the Westcap
defendants. On February 1, 1995, the complaint was amended to add a RICO
count for treble damages and claims under the Texas securities and consumer
fraud laws, and to add additional defendants. Westcap and the Company are
of the opinions that Westcap has adequate documentation to validate all such
securities purchase transactions by The City Colleges, and that Westcap and
the Company each have adequate defenses to the litigation. Although the
alleged damages would be material to the Company's and Westcap's financial
positions, a reasonable estimate of any actual losses which may result from
this suit cannot be made at this time. A judicial ruling favorable to
Westcap has been made requiring resolution of the suit against Westcap
through binding arbitration. The lawsuit against the Company was suspended
pending determination of the arbitration proceeding against Westcap.
Arbitration proceedings are currently set to begin in August, 1996.
On February 1, 1995, the San Antonio River Authority (SARA) filed a
complaint in the 285th Judicial District Court, Bexar County, Texas, against
Kenneth William Katzen (Katzen), Westcap Securities, L.P., The Westcap
Corporation (Westcap), and National Western Life Insurance Company (the
Company). The suit alleges that Katzen and Westcap sold mortgage-backed
security derivatives to SARA and misrepresented these securities to SARA.
The suit alleges violations of the Federal Securities Act, Texas Securities
Act, Deceptive Trade Practices Act, breach of fiduciary duty, fraud,
negligence, breach of contract, and seeks attorney's fees. The Company is
named as a "controlling person" of the Westcap defendants. Westcap and the
Company are of the opinions that Westcap has adequate documentation to
validate all securities purchases by SARA and that the Company and Westcap
have adequate defenses to such suit. Although the alleged damages would be
material to Westcap's financial condition, a reasonable estimate of any
actual losses which may result from this suit cannot be made at this time.
The Company and Westcap have denied all allegations and the parties have
initiated discovery. The case is set for trial on April 8, 1996.
On June 9, 1995, Charles McCutcheon, as Sheriff of Palm Beach County,
Florida, served The Westcap Corporation, Westcap Securities, Inc., Westcap
Government Securities, Inc., individual officers and directors of the
Westcap entities, and National Western Life Insurance Company as defendants
with a complaint filed in the U.S. District Court for the Southern District
of Florida. The Complaint alleges that the Westcap entities improperly sold
certain derivative securities to the Plaintiff and did not disclose the high
risk of these securities to the Plaintiff, who suffered financial losses
from the investments. The Company is sued as a "controlling person" of
Westcap, and it is alleged that the Company is responsible and liable for
the alleged wrongful conduct of Westcap. The suit seeks rescission of the
investments, alleged damages, punitive and exemplary damages, attorneys'
fees, and injunction. On October 13, 1995, the U.S. District Judge ordered
arbitration of Plaintiff's claims against the Westcap entities and stayed
all proceedings pending outcome of the arbitration. Although the alleged
damages would be material to Westcap's financial condition, a reasonable
estimate of any actual losses which may result from this suit cannot be
made at this time. The Company and Westcap deny the allegations and
believe they each have adequate defenses to such suit.
On July 5, 1995, San Patricio County, Texas, filed suit in the District
Court of San Patricio County, Texas, against National Western Life Insurance
Company (the Company) and its chief executive officer, Robert L. Moody. The
suit arises from derivative investments purchased by San Patricio County
from Westcap Securities, L.P. or Westcap Government Securities, Inc.,
affiliates of The Westcap Corporation, a wholly owned subsidiary of the
Company. The suit alleges that the Westcap affiliates were controlled by
the Company and Mr. Moody and that they are responsible for the alleged
wrongful acts of the Westcap affiliates in selling the securities to the
Plaintiff. Plaintiff alleges that the Westcap affiliates violated duties
and responsibilities owed to the Plaintiff related to its investment
recommendations and the decisions made by Plaintiff, and alleges that the
Plaintiff was financially damaged by such actions of Westcap. The suit
seeks rescission of the investments and actual and punitive damages of
unspecified amounts. Although the alleged damages would be material to
Westcap's financial condition, a reasonable estimate of any actual losses
which may result from this suit cannot be made at this time. The Company
believes that it has adequate defenses to such suit and denies the
allegations. The parties have initiated discovery.
On September 13, 1995, Michigan South Central Power Agency filed a
complaint in The United States District Court for the Western District of
Michigan against Westcap Securities Investment, Inc., Westcap Securities,
L.P., Westcap Securities Management, Inc., The Westcap Corporation, National
Western Life Insurance Company (the Company), and others. The suit alleges
that salesmen of Westcap sold mortgage-backed securities to the Plaintiff
and misrepresented these securities in violation of Federal and state
securities laws and common law. The Company is named as a "controlling
person" of the Westcap defendants. Westcap and the Company are of the
opinions that they have adequate defenses to the suit. Although the alleged
damages would be material to Westcap's financial condition, a reasonable
estimate of any actual losses which may result from the suit cannot be
made at this time. The Company and Westcap deny all allegations.
The Westcap Corporation and Westcap Securities, L.P. are also defendants in
several other pending lawsuits which have arisen in the ordinary course of
its business. Westcap Securities, L.P. has also been notified of several
arbitration claims filed with the National Association of Securities
Dealers. After reviewing the lawsuits and arbitration filings with outside
counsel, management believes it has adequate defenses to each of the claims.
Although the alleged damages for all of the above-described suits and
arbitration claims would be material to the financial positions of the
Company and The Westcap Corporation, a reasonable estimate of actual losses
which may result from any of these claims cannot be made at this time.
Accordingly, no provision for any liability that may result from these
actions has been recognized in the consolidated financial statements.
National Western Life Insurance Company is also currently a defendant in
several other lawsuits, substantially all of which are in the normal course
of business. In the opinion of management, the liability, if any, which may
rise from these lawsuits would not have a material adverse effect on the
Company's financial condition. The Company settled several lawsuits during
1994 and 1993. Other income totaling $955,000 and $1,720,000 from these
settlements has been reflected in the accompanying statements of earnings
for the years ended December 31, 1994 and 1993, respectively.
(C) Financial Instruments
In order to meet the financing needs of its customers in the normal course
of business, the Company is a party to financial instruments with
off-balance sheet risk. These financial instruments are commitments to
extend credit which involve elements of credit and interest rate risk in
excess of the amounts recognized in the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amounts, assuming that the amounts are fully
advanced and that collateral or other security is of no value. The Company
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The Company
controls the credit risk of these transactions through credit approvals,
limits, and monitoring procedures.
The Company had commitments to extend credit relating to mortgage loans
totaling $211,000 at December 31, 1995. Commitments to extend credit are
legally binding agreements to lend to a customer that generally have fixed
expiration dates or other termination clauses and may require payment of a
fee. These commitments do not necessarily represent future liquidity
requirements, as some of the commitments could expire without being drawn
upon. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The Company also had commitments to purchase investment
securities totaling $4,710,000 at December 31, 1995.
(D) Guaranty Association Assessments
National Western Life Insurance Company is subject to state guaranty
association assessments in all states in which it is licensed to do
business. These associations generally guarantee certain levels of benefits
payable to resident policyholders of insolvent insurance companies. Many
states allow premium tax credits for all or a portion of such assessments,
thereby allowing potential recovery of these payments over a period of
years. However, several states do not allow such credits.
The Company estimates its liabilities for guaranty association assessments
by using the latest information available from the National Organization of
Life and Health Insurance Guaranty Associations. The Company will continue
to monitor and revise its estimates for assessments as additional
information becomes available which could result in changes to the estimated
liabilities. Other insurance operating expenses related to state guaranty
association assessments totaled $2,371,000, $4,869,000, and $4,583,000 for
the years ended December 31, 1995, 1994, and 1993, respectively.
(10) STOCKHOLDERS' EQUITY
(A) Dividend Restrictions
The Company is restricted by state insurance laws as to dividend amounts
which may be paid to stockholders without prior approval from the Colorado
Division of Insurance. The restrictions are based on statutory earnings and
surplus levels of the Company. The maximum dividend payment which may be
made without prior approval in 1996 is $28,992,000. The Company has never
paid cash dividends on its common stock, as it follows a policy of retaining
any earnings in order to finance the development of business and to meet
increased regulatory requirements for capital.
(B) Regulatory Capital Requirements
The Colorado Division of Insurance imposes minimum risk-based capital
requirements on insurance companies that were developed by the National
Association of Insurance Commissioners (NAIC). The formulas for determining
the amount of risk-based capital (RBC) specify various weighting factors
that are applied to statutory financial balances or various levels of
activity based on the perceived degree of risk. Regulatory compliance is
determined by a ratio of the Company's regulatory total adjusted capital to
its authorized control level RBC, as defined by the NAIC. Companies below
specific trigger points or ratios are classified within certain levels, each
of which requires specified corrective action. The Company's current
statutory capital and surplus is significantly in excess of the threshold
RBC requirements.
(C) Stock Bonus Plan
During 1993 the Company implemented a one-time stock bonus plan for all
officers of the Company. Class A common stock restricted shares totaling
13,496 were granted to officers based on their individual performance and
contribution to the Company. The shares are subject to vesting requirements
as reflected in the following schedule:
January 1, 1993 25%
December 31, 1993 25%
December 31, 1994 25%
December 31, 1995 25%
All of the 13,496 shares that were granted have been issued and are
outstanding as of December 31, 1995.
(D) Stock and Incentive Plan
During 1995 the Company adopted the National Western Life Insurance Company
1995 Stock and Incentive Plan (the Plan). The Plan provides for the grant
of any or all of the following types of awards to eligible employees: (1)
stock options, including incentive stock options and non-qualified stock
options; (2) stock appreciation rights, in tandem with stock options or
freestanding; (3) restricted stock; (4) incentive awards; and (5)
performance awards.
The Plan is effective as of April 21, 1995, and will terminate on April 20,
2005, unless terminated earlier by the Board of Directors. The number of
shares of Class A, $1.00 par value, common stock which may be issued under
the Plan, or as to which stock appreciation rights or other awards may be
granted, may not exceed 300,000. These shares may be authorized and
unissued shares or treasury shares.
All of the employees of the Company and its subsidiaries are eligible to
participate in the Plan. In addition, directors of the Company, other than
Compensation and Stock Option Committee members, are eligible for restricted
stock awards, incentive awards, and performance awards. Non-employee
directors, including members of the Compensation and Stock Option Committee,
are eligible for non-discretionary stock options. On May 19, 1995, the
Committee approved the issuance of 52,500 non-qualified stock options to
selected officers of the Company. The Committee also granted 7,000
non-qualified, non-discretionary stock options to non-employee Company
directors. The stock options begin to vest following three full years of
service to the Company after date of grant, with 20% of the options to vest
at the beginning of the fourth year of service, and with 20% thereof to vest
at the beginning of each of the next four years of service. The exercise
price of the stock options was set at the fair market value of the common
stock on the date of grant, May 19, 1995, which was $38.125 per share.
In October, 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans. It defines
a fair value based method of accounting for employee stock options or
similar equity instruments. However, it also allows an entity to continue
to measure compensation cost for plans using the intrinsic value based
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Entities electing to continue applying the accounting
methods in Opinion 25 must make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting defined
in SFAS No. 123 had been applied.
Under the fair value based method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. For stock options,
fair value is determined using an option pricing model that takes into
account various information and assumptions regarding the Company's stock
and options. Under the intrinsic value based method, compensation cost is
the excess, if any, of the quoted market price of the stock at grant date or
other measurement date over the amount an employee must pay to acquire the
stock.
The Company anticipates that it will continue to apply the accounting
methods prescribed by Opinion 25 for its existing stock and incentive plan.
Therefore, the implementation of this statement will not affect the
Company's results of operations. However, as required by this statement,
disclosure information will be provided in the Company's financial statements
reflecting costs that would have been recorded under the fair value based
method. The statement will be implemented in 1996.
(11) FOREIGN SALES AND SIGNIFICANT AGENCY RELATIONSHIPS
Total direct premium revenues and universal life and annuity contract
deposits related to insurance written in foreign countries, primarily
Central and South America, were approximately $57,407,000, $53,846,000, and
$57,450,000, for the years ended December 31, 1995, 1994, and 1993,
respectively.
A significant portion of the Company's universal life and investment annuity
contracts are written through one agency. Such business accounted for
approximately 11%, 20%, and 44% of total direct premium revenues and
universal life and investment annuity contract deposits for 1995, 1994, and
1993, respectively.
(12) SEGMENT INFORMATION
A summary of financial information for the Company's two industry segments
follows:
Life Discontinued
Insurance Brokerage (B) Consolidated
Operations Operations Adjustments Amounts
(In thousands)
Gross revenues:
1995 $ 287,816 5,112 (A) (5,693) 287,235
1994 278,431 40,208 (A) (41,881) 276,758
1993 273,363 105,923 (A) (107,579) 271,707
Net earnings (losses):
1995 $ 35,634 (16,350) - 19,284
1994 37,172 (2,936) - 34,236
1993 34,892 21,832 - 56,724
Identifiable assets:
1995 $ 2,952,282 6,177 - 2,958,459
1994 2,702,184 232,057 (19,187) 2,915,054
1993 2,590,537 372,301 (21,787) 2,941,051
Notes to Table:
(A) These amounts are not reported as revenues in the accompanying
consolidated financial statements, as the segment has been discontinued.
Instead, gross revenues are reported net of expenses and taxes as a separate
line item identified as discontinued operations. This reporting
classification is used to clearly separate discontinued operations from
continuing operations of the consolidated entity.
(B) These amounts include both consolidating eliminations and adjustments
for reporting discontinued brokerage operations as described in note (A)
above.
(13) UNAUDITED QUARTERLY FINANCIAL DATA
Quarterly results of operations are summarized as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands except per share data)
1995:
Revenues $ 70,506 72,058 69,930 74,741
Earnings from continuing
operations $ 7,057 8,894 11,784 7,899
Losses from discontinued
operations (1,733) (1,484) (13,133) -
Net earnings (losses) $ 5,324 7,410 (1,349) 7,899
Per Share:
Earnings from continuing
operations $ 2.03 2.54 3.38 2.27
Losses from discontinued
operations (0.50) (0.42) (3.77) -
Net earnings (losses) $ 1.53 2.12 (0.39) 2.27
1994:
Revenues $ 68,815 69,135 70,723 68,085
Earnings from continuing
operations $ 8,961 9,000 11,459 7,752
Earnings (losses) from
discontinued operations (450) 1,194 288 (3,968)
Net earnings $ 8,511 10,194 11,747 3,784
Per Share:
Earnings from continuing
operations $ 2.57 2.59 3.29 2.21
Earnings (losses) from
discontinued operations (0.13) 0.34 0.08 (1.13)
Net earnings $ 2.44 2.93 3.37 1.08
The fourth quarter net earnings in 1995 reflect the following significant
items:
Continuing Operations: Earnings from insurance operations, excluding net
realized gains and losses on investments, for the quarter ended December 31,
1995, were $8,345,000 compared to $8,311,000 for the fourth quarter of 1994.
However, fourth quarter 1994 earnings included a $2.9 million tax benefit
resulting from the Company's subsidiary brokerage losses, whereas 1995
fourth quarter earnings do not include such a benefit because the total 1995
tax benefit had been recognized as of September 30, 1995. The tax benefit
was recognized in accordance with the Company's tax allocation agreement
with its subsidiaries. Excluding the tax benefit, 1995 fourth quarter
earnings were up $2.9 million over the comparable 1994 quarter.
Contributing to the increased earnings were insurance revenues, excluding
realized gains and losses on investments, which were up $6,482,000, or 9.4%,
from the 1994 fourth quarter. The increase in revenues was offset somewhat
by higher life insurance benefit claims and other policy and contract
related expenses.
Discontinued Operations: Third quarter 1995 losses from discontinued
brokerage operations included estimated future operating losses, as well as
estimated costs to cease brokerage operations, and resulted in the complete
write-off of the Company's investment in Westcap on a consolidated basis.
Accordingly, no earnings or losses were reported for the discontinued
operations for the fourth quarter of 1995, as the investment in Westcap was
previously written-off and there have been no significant changes in
estimated costs to close the brokerage operations.
The fourth quarter net earnings in 1994 reflect the following significant
items:
Continuing Operations: Other insurance operating expenses were up
significantly, as fourth quarter 1994 expenses included a charge of
$2,636,000, net of taxes, or $0.76 per share, for state guaranty fund
assessments relating to insolvent insurance companies.
Discontinued Operations: Fourth quarter 1994 net losses from the Company's
discontinued brokerage operations, The Westcap Corporation, totaled
$3,968,000, or $1.13 per share, compared to net earnings of $7,309,000, or
$2.10 per share, for the fourth quarter of 1993. Volatile bond market
conditions due to increasing market interest rates was the major factor for
lower production, coupled with adverse publicity about litigation which led
to the decline in sales and earnings.
(14) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Investment securities: Fair values for investments in debt and equity
securities are based on quoted market prices, where available. For
securities not actively traded, fair values are estimated using values
obtained from various independent pricing services and the Securities
Valuation Office of the National Association of Insurance Commissioners. In
the cases where prices are unavailable from these sources, prices are
estimated by discounting expected future cash flows using a current market
rate applicable to the yield, credit quality, and maturity of the
investments.
Cash and short-term investments: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Mortgage loans: The fair value of performing mortgage loans is estimated by
discounting scheduled cash flows through the scheduled maturities of the
loans, using interest rates currently being offered for similar loans to
borrowers with similar credit ratings. Fair value for significant
nonperforming loans is based on recent internal or external appraisals. If
appraisals are not available, estimated cash flows are discounted using a
rate commensurate with the risk associated with the estimated cash flows.
Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific
borrower information.
Policy loans: The fair value for policy loans is calculated by discounting
estimated cash flows using U.S. Treasury bill rates as of December 31, 1995
and 1994. The estimated cash flows include assumptions as to whether such
loans will be repaid by the policyholders or settled upon payment of death
or surrender benefits on the underlying insurance contracts. As a result,
these assumptions incorporate both Company experience and mortality
assumptions associated with such contracts.
Life interest in Libbie Shearn Moody Trust: The fair value of the life
interest is estimated based on assumptions as to future dividends from the
Trust over the life expectancy of Mr. Robert L. Moody. These estimated cash
flows were discounted at a rate consistent with uncertainties relating to
the amount and timing of future cash distributions. However, the Company has
limited the fair value to the statutory admitted value of the Trust, as this
is the maximum amount to be received by the Company in the event of Mr.
Moody's premature death.
Assets of discontinued operations: These assets consist of cash, trading
securities, and securities purchased under agreements to resell. Trading
securities are based on quoted market prices. The carrying amount and fair
value of securities purchased under agreements to resell are the amounts at
which the securities will be subsequently resold as specified in the
respective agreements.
Investment and supplemental contracts: Fair value of the Company's
liabilities for deferred investment annuity contracts is estimated to be
the cash surrender value of each contract. The cash surrender value
represents the policyholder's account balance less applicable surrender
charges. The fair value of liabilities for immediate investment annuity
contracts and supplemental contracts with and without life contingencies is
estimated by discounting estimated cash flows using U.S. Treasury bill rates
as of December 31, 1995 and 1994.
Fair value for the Company's insurance contracts other than investment
contracts is not required to be disclosed. This includes the Company's
traditional and universal life products. However, the fair values of
liabilities under all insurance contracts are taken into consideration in
the Company's overall management of interest rate risk, which minimizes
exposure to changing interest rates through the matching of investment
maturities with amounts due under insurance and investment contracts.
Liabilities of discontinued operations: These liabilities consist of
short-term borrowings, securities sold not yet purchased, and securities
sold under agreements to repurchase. The carrying amount of the Company's
borrowings approximates its fair value due to the short duration of the
borrowing periods. Securities sold not yet purchased are carried at fair
values determined in the same manner as investment securities described
above. The carrying amounts and fair values of securities sold under
agreements to repurchase are the amounts at which the securities will be
subsequently repurchased as specified in the respective agreements.
The carrying amounts and fair values of the Company's financial instruments
are as follows:
December 31, 1995 December 31, 1994
Carrying Fair Carrying Fair
Value Value Value Value
(In thousands)
ASSETS
Investments in debt and
equity securities:
Securities held to
maturity $ 1,643,211 1,726,469 1,605,813 1,488,063
Securities available
for sale 600,794 600,794 354,300 354,300
Cash and short-term
investments 10,024 10,024 17,723 17,723
Mortgage loans 191,674 202,512 189,632 200,696
Policy loans 147,923 171,816 151,487 147,858
Life interest in Libbie
Shearn Moody Trust 5,206 20,561 5,486 22,507
Assets of discontinued
operations:
Cash 5,646 5,646 3,524 3,524
Trading securities - - 69,666 69,666
Securities purchased
under agreements
to resell - - 153,971 153,971
LIABILITIES
Deferred investment
annuity contracts $ 1,843,793 1,607,360 1,681,797 1,458,303
Immediate investment
annuity and
supplemental contracts 137,254 145,644 117,234 116,943
Liabilities of
discontinued operations:
Short-term borrowings - - 29,698 29,698
Securities sold not
yet purchased - - 87,336 87,336
Securities sold under
agreements
to repurchase - - 91,781 91,781
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instruments. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
(15) DISCONTINUED BROKERAGE OPERATIONS
(A) Plan to Cease Brokerage Operations
Effective July 17, 1995, The Westcap Corporation (Westcap), a wholly owned
brokerage subsidiary of National Western Life Insurance Company,
discontinued all sales and trading activities in its Houston, Texas, office.
In September, 1995, Westcap approved a plan to close its remaining sales
office in New Jersey and to cease all brokerage operations.
In connection with the plan, as of December 31, 1995, Westcap's assets are
being carried at their estimated fair value, and its liabilities include
estimated costs to dispose of assets and estimated future costs to cease
operations. These estimated costs consist primarily of operating and legal
expenses based on a reasonable time period to cease operations. The
preparation of Westcap's 1995 financial statements required assumptions by
management that included assumptions regarding the fair value of assets and
expenses to be incurred. Variations between these assumptions and actual
results could result in a change in the estimated fair value of assets
recorded in Westcap's 1995 financial statements. However, management
believes that, based on information currently available, any differences in
recoveries on its assets in the future from the existing carrying values
thereof will not have a material effect on the financial statements.
As a result of the plan and in accordance with generally accepted accounting
principles, the assets and liabilities of Westcap have been reclassified in
the accompanying consolidated balance sheets to separately identify them as
assets and liabilities of the discontinued operations. Earnings and losses
from the discontinued brokerage operations have also been reflected
separately from continuing operations of the Company in the accompanying
consolidated financial statements. The 1995 losses from discontinued
operations include estimated future operating losses as well as estimated
costs to cease brokerage operations totaling $6,381,000 and have resulted in
the complete write-off of National Western Life Insurance Company's
investment in Westcap on a consolidated basis.
(B) Summary Financial Statements and Significant Disclosures
A summary of Westcap's financial statements for the years ended September
30, 1995, 1994, and 1993 is provided below. Westcap's fiscal year-end is
September 30. Although reported in detail below, these assets and
liabilities have been aggregated and reported as assets and liabilities of
discontinued operations in the accompanying financial statements. Likewise,
all revenues and expenses have been netted and reported separately in the
accompanying financial statements as earnings or losses from discontinued
operations.
September 30,
1995 1994 1993
(In thousands)
Assets:
Cash $ 5,646 3,524 8,514
Receivables from customers
and brokers - 675 55,163
Trading securities - 69,666 116,918
Securities purchased under
agreements to resell - 153,971 186,896
Other assets 531 4,221 4,810
$ 6,177 232,057 372,301
Liabilities and Stockholder's Equity:
Short-term borrowings $ - 29,698 82,852
Payables to customers and brokers - 3,692 39,422
Securities sold not yet purchased - 87,336 78,835
Securities sold under agreements
to repurchase - 91,781 127,971
Other liabilities 7,430 2,823 22,840
Stockholder's equity (1,253) 16,727 20,381
$ 6,177 232,057 372,301
Revenues $ 5,112 40,208 105,923
Expenses 22,715 43,144 84,091
Net earnings (losses) $ (17,603) (2,936) 21,832
The following disclosures refer to the assets, liabilities, and operations
items of Westcap as detailed above.
Significant Accounting Policies: Trading securities are carried at fair
value. Unrealized gains and losses on trading securities are included in
revenues.
Securities purchased under agreements to resell and securities sold under
agreements to repurchase are treated as financing transactions,
collateralized by negotiable securities, and carried at the amounts at which
the securities will be subsequently resold or repurchased as specified in
the respective agreements.
Receivables from and payables to customers and brokers and dealers represent
the contract value of securities which have not been delivered or received
as of settlement date. The receivables from customers and brokers and
dealers are collateralized by securities held by or due to subsidiaries of
The Westcap Corporation.
Securities transactions and related revenues and expenses, except trading
profits, are recorded on a settlement date basis. Trading profits are
recorded on a trade date basis. Other revenues and expenses related to
securities transactions executed but not yet settled as of year-end were not
material to the financial position and results of operations of Westcap.
Capital Requirements: The Westcap Corporation conducted its brokerage
operations through a limited partnership, Westcap Securities, L.P. (Westcap
L.P.). Westcap L.P. was subject to the Securities and Exchange Commission's
Uniform Net Capital Rule (Rule 15c3-1), which required the maintenance of
minimum net capital. The limited partnership elected to be subject to the
Alternative Net Capital requirement which required the partnership to, at
all times, maintain net capital equal to the greater of $250,000 or 2% of
aggregate debit items computed in accordance with the formula for the
determination of Reserve Requirements for Brokers and Dealers. At September
30, 1995, Westcap L.P. had a net capital deficit of $1,499,000 which was
$1,749,000 below its required net capital of $250,000.
In anticipation of an Order Instituting Public Administrative Proceedings,
Making Findings and Imposing Remedial Sanctions (Order) being entered
pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934
by the Securities and Exchange Commission (Commission), on February 8, 1996,
Westcap L.P. submitted an offer of settlement to the Commission whereby it
consented, without admitting or denying the findings in the Order, to the
entry of an Order of the Commission making findings, revoking Westcap L.P.'s
registration with the Commission, and requiring payment to the Commission of
(i) $445,341 disgorgement, (ii) prejudgement interest of $83,879, and (iii)
civil penalty of $300,000. Such an Order was entered by the Commission on
February 14, 1996. In compliance with the Order, Westcap L.P. made payment
to the Commission of $829,220 on March 5, 1996.
Short-Term Borrowings: Certain subsidiaries of The Westcap Corporation have
arrangements with a financial institution whereby the institution performs
clearing functions for all securities transactions with customers and
brokers and dealers. These arrangements include revolving line of credit
agreements which bear interest at variable rates based on Federal funds
rates and are due on demand. Borrowings under these arrangements are
guaranteed by Westcap and collateralized by trading securities and certain
customers' and brokers' and dealers' unpaid securities, which at September
30, 1994, had aggregate market values of approximately $35,354,000. There
were no short-term borrowings outstanding at September 30, 1995. The
average interest rates on borrowings for the years ended September 30, 1995
and 1994, were 6.26% and 4.60%, respectively.
Securities Purchased under Agreements to Resell and Securities Sold under
Agreements to Repurchase: At September 30, 1994, securities purchased under
agreements to resell by Westcap were collateralized by U.S. Government and
agencies' securities with market values of approximately $152,753,000.
These agreements had maturity dates ranging from one to ninety days and
weighted average interest rates of 4.2%. There were no securities purchased
under agreement to resell at September 30, 1995. During the years ended
September 30, 1995 and 1994, the maximum month-end balance of outstanding
agreements was $136,906,000 and $270,854,000, and the average amount of
outstanding agreements was $68,876,000 and $197,327,000, respectively.
Risks arise from the possible inability of counterparties to meet the terms
of their agreements and from movements in securities' values.
At September 30, 1994, securities sold under agreements to repurchase by
Westcap were collateralized by U.S. Government and agencies' securities with
market values of approximately $93,025,000. These agreements had maturity
dates ranging from one to ninety days and weighted average interest rates of
4.8%. There were no securities sold under agreements to repurchase at
September 30, 1995. During the years ended September 30, 1995 and 1994, the
maximum month-end balance of outstanding agreements was $125,864,000 and
$245,564,000, and the average amount of outstanding agreements was
$54,322,000 and $169,187,000, respectively.
When-Issued and Forward Contracts: In the normal course of business,
Westcap entered into when-issued and forward contracts principally related to
mortgage-backed and U.S. Government securities issues. These contracts are
for delayed delivery of securities in which the seller agrees to make
delivery at a specified future date of a specified instrument, at a
specified price. These securities issues may have settlement dates ranging
from several weeks to several months after trade date. Revenues and
expenses related to such contracts are recognized on settlement date. Risks
arise from the possible inability of counterparties to meet the terms of
their contracts and from movements in securities values and interest rates.
At September 30, 1994, the approximate amount of unsettled when-issued and
forward purchase and sale contracts were $73,009,000 and $73,431,000,
respectively. These contracts principally related to obligations of the
U.S. Government and its agencies. There were no unsettled when-issued and
forward purchase and sale contracts at September 30, 1995.
During the year ended September 30, 1994, Westcap adopted the provisions of
SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments," which requires disclosure of certain fair
value information regarding derivative financial instruments. During 1994,
the average fair value of when-issued purchase and sale contracts were
approximately $4,789,000 and $2,602,000, respectively. At September 30,
1994, the fair value of when-issued and forward purchase and sale contracts
were approximately $68,146,000 and $68,632,000, respectively. For the year
ended September 30, 1994, Westcap recognized a net gain of approximately
$12,079,000 from such transactions. There were no significant transactions
during 1995 in when-issued purchase and sale contracts.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1995
(In thousands)
Balance
(1) Market Sheet
Type of Investment Cost Value Amount
Fixed maturity bonds:
Securities held to maturity:
United States government and
government agencies and
authorities $ 35,764 36,026 35,764
States, municipalities, and
political subdivisions 47,574 51,311 47,574
Foreign governments 48,286 51,316 48,286
Public utilities 227,449 239,529 227,449
Corporates 771,716 815,002 771,716
Mortgage-backed 510,004 530,867 510,004
Total securities held to
maturity 1,640,793 1,724,051 1,640,793
Securities available for sale:
United States government and
government agencies and
authorities 2,948 3,311 3,311
Public utilities 54,677 57,430 57,430
Corporates 103,884 115,337 115,337
Mortgage-backed 375,219 398,856 398,856
Total securities available
for sale 536,728 574,934 574,934
Total fixed maturity bonds 2,177,521 2,298,985 2,215,727
Equity securities:
Securities available for sale:
Common stocks:
Public utilities 192 263 263
Banks, trust and
insurance companies 195 1,716 1,716
Industrial and other 87 198 198
Preferred stocks 23,925 23,683 23,683
Total equity securities 24,399 25,860 25,860
Mortgage loans 183,506 177,838
Policy loans 147,923 147,923
Other long-term investments 33,122 (2) 30,970
Cash and short-term investments 10,024 10,024
Total investments other than
investments in related parties $ 2,576,495 2,608,342
(Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I, CONTINUED
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1995
(In thousands)
Notes to Schedule I
(1) Fixed maturity bonds are shown at amortized cost, mortgage loans are
shown at unpaid principal balances before allowances for possible losses of
$5,668,000, and real estate is stated at cost before allowances for possible
losses of $2,152,000. The following investments in related parties have been
excluded: fixed maturity bonds - $2,418,000 and mortgage loans -
$13,836,000.
(2) Real estate acquired by foreclosure included in other long-term
investments totaled approximately $6,260,000.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1995, 1994, and 1993
(In thousands)
(1)
Balance Charged Balance
at to at
Beginning Costs and (2) (3) End of
Description of Period Expenses Reductions Transfer Period
Valuation accounts
deducted from
applicable assets:
Allowance for possible
losse on brokerage
trade receivables:
December 31, 1995 $ 1,000 - (1,000) - -
December 31, 1994 $ 123 877 - - 1,000
December 31, 1993 $ 125 - (2) - 123
Allowance for possible
losses on mortgage loans:
December 31, 1995 $ 5,929 - (261) - 5,668
December 31, 1994 $ 6,849 307 (927) (300) 5,929
December 31, 1993 $ 6,000 2,152 (702) (601) 6,849
Allowance for possible
losses on real estate:
December 31, 1995 $ 1,803 882 (533) - 2,152
December 31, 1994 $ 1,556 318 (371) 300 1,803
December 31, 1993 $ 9,950 1,208 (10,203) 601 1,556
(1) Except for expenses related to brokerage trade receivables, which were
charged to discontinued operations, these amounts were charged to realized
gains and losses on investments.
(2) These amounts were related to charge off of assets against the
allowances.
(3) These amounts were transferred to real estate.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Registrant)
/S/ Robert L. Moody /S/ Ross R. Moody
By: Robert L. Moody By: Ross R. Moody
Chairman of the Board, Chief President, Chief Operating
Executive Officer, Director Officer, Director
/S/ Robert L. Busby, III
By: Robert L. Busby, III
Senior Vice President -
Chief Administrative Officer,
Chief Financial Officer
and Treasurer
March 28, 1996
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
/S/ Arthur O. Dummer
Arthur O. Dummer, Frances A. Moody,
Director Director
/S/ Harry L. Edwards
Harry L. Edwards, Russell S. Moody,
Director Director
/S/ E. Douglas McLeod /S/ Louis E. Pauls, Jr.
E. Douglas McLeod, Louis E. Pauls, Jr.,
Director Director
/S/ Charles D. Milos, Jr.
Charles D. Milos, Jr., E. J. Pederson,
Director Director
March 28, 1996
Date