10-K
1
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, 1994
[ ] 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 20, 1995, was
approximately $78,660,000.
As of March 20, 1995, the number of shares of Registrant's common stock
outstanding was: Class A - 3,288,192 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 1994, the Company recorded approximately $241
million in premium revenues, universal life, and investment annuity contract
deposits. New life insurance issued during 1994 approximated $1.2 billion
and the total amount in force at year-end 1994 was $7.7 billion. As of
December 31, 1994, the Company had total consolidated assets of
approximately $2.9 billion.
Competition: The life insurance business is highly competitive and National
Western competes with over 2,000 stock and mutual companies. Mutual
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 also writes
participating policies; however, participating policies represent only 1% of
the Company's life insurance in force at December 31, 1994. The Company
believes that its premium rates and its policies are generally competitive
with those of other life insurance companies selling similar types of
insurance.
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, 1993, the most recent date for which
information is available, National Western ranked 136 in total admitted
assets and 249 in life insurance in force among approximately 2,000 life
insurance companies domiciled in the United States.
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. The banking industry
continues to press for changes in current regulations to allow for increased
rights to market and issue annuities. Such regulation changes could result
in increased competition for National Western and the life insurance
industry.
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 231 full-time employees at its
principal executive office. Its insurance operations are conducted primarily
through broker-agents, which numbered 6,716 at December 31, 1994. 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
overwriting first year and renewal commissions on business written by agents
under their supervision. The ratio of agents' expenses to premium revenues,
universal life, and investment annuity contract deposits before deferral of
related acquisition costs were as follows:
Years Ended
December 31,
1994 1993 1992
Commissions 15% 17% 17%
Other underwriting expenses 7% 9% 7%
Totals 22% 26% 24%
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 insurance. In recent years the majority of the business written
has been flexible premium and single premium annuities and universal life
products. Except for its 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.
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. Also, following general industry practice, policies are
issued on substandard risks.
Geographical Distribution of Business: For the year 1994, insurance and
annuity policies held by residents of the State of Texas accounted for 16%
of premium revenues, universal life, and investment annuity contract
deposits from direct business, while policies held by residents of
California and Illinois accounted for approximately 12% and 4%,
respectively. All other states of the United States accounted for 46% of
premium revenues and deposits from direct business. The remaining 22% of
premium revenues, universal life, and investment annuity contract deposits
were derived from the Company's policies issued to foreign nationals.
Approximately 72% of the life insurance face amount issued by the Company
during 1994 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. A
currency clause is included in each foreign policy stating that premium and
claim "dollars" refer to lawful currency of the United States of America.
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, and
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
Invested Realized Unrealized
Assets of Net Gains (Losses) Appreciation
Calendar Insurance Investment On Increase
Year Operations Income (*) Investments (Decrease)
(In thousands)
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
1990 1,811,907 159,938 (17,071) (264)
(*) Net investment income is after deduction of investment expenses, but
before realized gains (losses) on investments and Federal income taxes.
The following table shows the percentage distribution of insurance operation
investments:
December 31,
1994 1993 1992 1991 1990
Securities held to maturity 68.5% 79.9% 77.5% 77.1% 81.7%
Securities available for sale 15.1 1.8 4.7 - -
Mortgage loans 8.1 8.4 8.1 7.8 6.4
Policy loans 6.5 6.9 7.2 7.7 8.2
Other investments 1.8 3.0 2.5 7.4 3.7
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
(the 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. In light of recent legislative
developments, the NAIC and state insurance regulators have begun
re-examining existing laws and regulations, specifically focusing on
insurance company investments and solvency issues, statutory policy
reserves, reinsurance, risk-based capital guidelines, interpretations of
existing laws, the development of new laws, 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 based on the new requirement 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.
Brokerage Operations
The Westcap Corporation, a wholly owned subsidiary of the Company, is a
brokerage firm headquartered in Houston, Texas, with 119 employees. With
branch offices in Seattle, Washington and Morris Plains, New Jersey, The
Westcap Corporation provides 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 interest in Westcap Securities, L.P.
Westcap Securities, L.P. is 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 is subject to regulation by the Securities and
Exchange Commission (SEC) and the National Association of Securities Dealers,
and it is subject to the SEC's Uniform Net Capital Rule (Rule 15c3-1), which
requires the maintenance of minimum net capital. Westcap Securities, L.P.
has elected to be subject to the Alternative Net Capital requirement which
requires 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, 1994, its most recent fiscal year-end,
Westcap Securities, L.P. had net capital of $8,423,000 which was $8,173,000
in excess of its required net capital of $250,000.
Westcap Mortgage was previously engaged in the business of originating and
servicing commercial and residential real estate loans. It also sold
mortgages to investors which were securitized by the Government National
Mortgage Association (GNMA). However, on December 10, 1990, the Board of
Directors of Westcap Mortgage approved a plan for the complete dissolution
and liquidation of Westcap Mortgage. Accordingly, an orderly liquidation of
the assets of Westcap Mortgage commenced in 1990 and was essentially
completed in 1992.
The Westcap Corporation's client base includes financial institutions,
public funds, private and public pensions, insurance companies and various
other types of institutional investors. Westcap offers a complete mix of
debt securities, including mortgage-backed securities, U.S government and
federal agency issues, collateralized mortgage obligations (CMOs), municipal
securities, corporate bonds and certificates of deposit. Westcap's
competition includes regional and national brokerage firms.
(b) Financial Information About Industry Segments
Information concerning the Company's two industry segments follows:
Life
Insurance Brokerage Consolidated
Operations Operations Eliminations Amounts
(In thousands)
Gross revenues:
1994 $ 278,431 40,208 (1,673) 316,966
1993 273,363 105,923 (1,656) 377,630
1992 279,882 123,094 (1,499) 401,477
Net earnings(loss):
1994 $ 37,172 (2,936) - 34,236
1993 34,892 21,832 - 56,724
1992 36,683 26,728 - 63,411
Identifiable assets:
1994 $2,702,184 232,057 (19,187) 2,915,054
1993 2,590,537 372,301 (21,787) 2,941,051
1992 2,554,850 164,002 (20,355) 2,698,497
Other 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 72,000 square feet of office space in Austin, Texas, for
$477,600 per year plus taxes, insurance, maintenance, and other operating
costs less the amortization of the deferred gain of $325,000 which arose
from the sale and lease-back of the property in 1984. This lease expires in
2000.
The Company's brokerage subsidiary, Westcap, leases its office facilities in
Houston, Texas, under a lease which terminates in 1997. The total leased
space is approximately 38,600 square feet. Westcap also leases several small
branch office spaces in various cities. The annual lease cost for all
locations through the year 1997 will range from approximately $251,000 to
$618,000.
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.
On August 5, 1994, the Sarasota-Manatee Airport Authority filed a complaint
in the United States District Court, Middle District of Florida, Tampa
Division, against National Western Life Insurance Company (the Company), The
Westcap Corporation and subsidiaries of Westcap. The suit seeks rescission
of securities purchase transactions by the Sarasota-Manatee Airport
Authority from Westcap, judgment for damages, or such other relief as the
court may deem appropriate. The Company is named as a "controlling person"
of the Westcap defendants. The Company and Westcap have answered the
complaint and denied all material allegations. Westcap and the Company are
of the opinions that Westcap has adequate documentation to validate all
such securities purchase transactions by Sarasota-Manatee Airport Authority,
and that Westcap and the Company each have adequate defenses to the
litigation. Although the alleged damages would be material to Westcap's
financial position, a reasonable estimate of any actual losses which may
result from this suit cannot be made at this time. The litigation is in
early stages of discovery.
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 there has been no
discovery at this time.
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 would be material to the financial position of
The Westcap Corporation, a reasonable estimate of actual loss 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 during the fourth quarter of fiscal 1994 to a vote
of the Company's security holders.
PART II
ITEM 5. MARKET FOR THE COMPANY'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
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
1993: First Quarter $ 61 44-1/2
Second Quarter 58 30-1/4
Third Quarter 49-1/4 38-1/2
Fourth Quarter 55-1/4 44-1/4
These quotations represent prices in the market between dealers in
securities, do not include retail markup, markdown, or commission, and do
not necessarily represent actual transactions.
(b) Equity Security Holders
The number of stockholders of record on December 31, 1994, was as follows:
Class A Common Stock 7,160
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:
Years Ended December 31,
1994 1993 1992 1991 1990
(In thousands except per share amounts)
Revenues:
Life and annuity premiums $ 18,938 18,624 21,365 21,525 22,895
Universal life and investment
annuity contract revenues 64,711 67,778 56,543 44,627 33,777
Net investment income 190,021 180,252 184,149 176,443 159,938
Brokerage revenues 40,208 105,923 123,094 43,837 25,681
Other income 1,462 1,847 616 848 578
Realized gains (losses)
on investments 1,626 3,206 15,710 9,360 (17,071)
Total revenues 316,966 377,630 401,477 296,640 225,798
Expenses:
Policyholder benefits 32,790 34,646 34,234 31,908 31,070
Amortization of deferred
policy acquisition costs 32,131 33,159 25,085 16,852 9,263
Universal life and investment
annuity contract interest 129,064 130,875 135,792 143,018 128,150
Other insurance
operating expenses 29,394 28,959 27,870 32,897 36,455
Brokerage operating expenses 40,161 72,310 82,561 34,549 22,816
Total expenses 263,540 299,949 305,542 259,224 227,754
Provision for Federal
income taxes 19,190 26,477 32,524 11,170 1,099
Earnings (loss) before
cumulativeeffect of change
in accounting principle and
discontinued opertions 34,236 51,204 63,411 26,246 (3,055)
Cumulative effect of
change in accounting for
income taxes - 5,520 - - -
Loss from discontinued
operations - - - (488) (1,695)
Net earnings (loss) $ 34,236 56,724 63,411 25,758 (4,750)
Per Share:
Earnings (loss) before cumulative
effect of change in accounting
principle and
discontinued opertions $ 9.82 14.71 18.23 7.55 (0.88)
Cumulative effect of
change in accounting for
income taxes - 1.58 - - -
Loss from discontinued
operations - - - (0.14) (0.49)
Net earnings (loss) $ 9.82 16.29 18.23 7.41 (1.37)
Total assets $ 2,915,054 2,941,051 2,698,497 2,581,032 2,288,281
Total liabilities $ 2,639,920 2,698,333 2,512,406 2,458,589 2,192,123
Stockholders' equity $ 275,134 242,718 186,091 122,443 96,158
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 22% of the Company's total premium
revenues, universal life, and investment annuity contract deposits in 1994.
The Company ranks among the top eight percent of all life insurance
companies measured by statutory admitted assets. The primary products
marketed by the Company are its universal life and single and flexible
premium annuity products. Most of the Company's new business comes from the
development of a market and the design and marketing of a specific product
for that market.
In addition to the life insurance business, the Company has a brokerage
operations segment. The Westcap Corporation, a wholly owned subsidiary of
National Western Life Insurance Company, is 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.
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 does manage its
portfolio, which entails monitoring and reacting to all components which
affect changes in the price or value of investments in debt and equity
securities.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," as more fully described in the notes to the
financial statements. This statement addresses the accounting and reporting
for investments in debt and equity securities and requires classification of
such securities into the following categories: held to maturity, available
for sale, and trading. At December 31, 1994, approximately 18% of the
Company's total debt and equity securities 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. 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.
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 purchased by the Company's brokerage subsidiary that are held for
current resale are classified as trading securities. These securities are
typically held for short periods of time, as the intent is to sell them,
producing a trading profit. Trading securities are recorded in the Company's
financial statements at fair value. Any trading profits or losses and
unrealized gains or losses resulting from changes in the fair value of the
securities are reflected as a component of income in the Company's financial
statements.
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
individual 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.
Portfolio Analysis
At December 31, 1994, securities held to maturity totaled $1.606 billion or
62.5% of total invested assets. The fair value of these securities was
$1.488 billion which reflects gross unrealized losses of $118 million. The
unrealized losses within this portfolio result from increases in market
interest rates during 1994. These gross unrealized losses are partially
offset by $941,000 of net unrealized gains at December 31, 1994, recorded as
a separate component of stockholders' equity resulting from the transfer of
securities from available for sale to held to maturity as described in the
notes to the financial statements.
Securities available for sale totaled $354 million at December 31, 1994, or
13.8% 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. As described in the notes to the 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. The lower holdings of securities available for
sale will significantly reduce the Company's exposure to equity volatility
while still providing securities for liquidity and asset/liability
management purposes. The transfer resulted in locking in a net unrealized
gain totaling $1,380,000 as a separate component of stockholders' equity
which is subsequently being amortized. The net unrealized loss of the
remaining securities available for sale was $3,140,000 at December 31, 1994.
The Company's insurance operations do not maintain a trading securities
portfolio. All trading securities reported in the accompanying financial
statements are held by the Company's brokerage subsidiary, The Westcap
Corporation. These securities totaled $69.7 million at December 31, 1994,
or 2.7% of total invested assets. Net increases in the fair values of these
securities totaled approximately $58,000 for the year ended December 31,
1994, and have been included in earnings.
The Company's insurance operations maintain 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, 1994 and 1993, the Company's debt securities portfolio
consisted of the following mix of securities:
Percent of
Debt Securities
1994 1993
Public utilities 14.6% 16.3%
Corporate 29.6 25.9
Mortgage-backed securities 47.6 53.3
U.S. government 1.6 2.7
Foreign government 6.3 1.3
States and political 0.3 0.5
subdivisions
Totals 100.0 % 100.0%
The amortized cost and estimated fair values of investments in debt
securities at December 31, 1994, 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.
Estimated
Amortized Fair
Cost Value
(In thousands)
Due in one year or less $ 4,375 4,424
Due after one year through five years 76,947 73,030
Due after five years through ten years 549,683 503,104
Due after ten years 387,817 365,164
1,018,822 945,722
Mortgage-backed securities 925,276 870,332
Totals $ 1,944,098 1,816,054
As market interest rates declined in 1992 and into 1993, the Company's
portfolio experienced increased calls and principal prepayments. The
increase in calls was primarily in the Company's utilities holdings. The
Company responded with an active approach in managing future call risk by
investing the call proceeds in a more diverse group of companies with
increased call protection. As a result, the Company's utilities holdings as
a percentage of the entire portfolio was reduced from 26.6% in 1992 to 14.6%
in 1994.
The Company's holdings of mortgage-backed securities are also subject to
prepayment risk, and principal prepayments did increase during 1993 due to
the decline in market interest rates. However, as market interest rates
increased in 1994, extension risk become more of a factor than prepayment
risk. The Company has 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.
During 1993, the Company increased its holdings of planned amortization
class I (PAC I) CMOs which are designed to amortize in a more predictable
manner than other CMO classes or pass-throughs. Due to this strategy,
the Company continues to manage and reduce prepayment and extension risks,
thereby helping to maintain the appropriate matching of the Company's assets
and liabilities.
PAC I CMOs account for over 85% of the total CMO portfolio as of December
31, 1994. 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, which
are summarized as follows, have increased slightly from 1992 primarily due
to several corporate issuers that had ratings downgraded.
Below Investment
Grade Debt Securities
% of
Carrying Market Invested
Value Value Assets
(In thousands)
December 31, 1994 $ 31,861 28,670 1.2%
December 31, 1993 24,261 24,223 1.0%
December 31, 1992 16,259 14,700 0.7%
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, 1994 and
1993, securities with principal balances totaling $2,415,000 and $3,151,000
were in default and on non-accrual status.
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, 1994 and 1993. The Company emphasizes debt
securities with smaller holdings in mortgage loans and real estate than
industry averages.
Percent of Insurance
Operations Investments
1994 1993
Debt securities 82.5 % 80.3 %
Mortgage loans 8.1 8.4
Policy loans 6.5 6.9
Equity securities 1.1 1.4
Real Estate 0.8 1.0
Other 1.0 2.0
Totals 100.0 % 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 continues to improve the quality of its mortgage loan portfolio
through strict underwriting guidelines and diversification of underlying
property types and geographic locations. In addition to all mortgage loans
being secured by the property, the majority of loans originated since 1991
are amortized over the term of the lease on the property, which is
guaranteed by the lessee, and are approved based on the credit strength of
the lessee. This approach also enables the Company to choose the locale in
which the property securing the loan is located. In addition, the Company's
underwriting guidelines require a loan-to-value ratio of 75% or less.
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. The
joint ventures invest primarily in income-producing retail properties.
While not a significant portion of the Company's investment portfolio, the
joint ventures 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 $189,632,000 and
$188,920,000, or 7.4% of total invested assets, at December 31, 1994 and
1993. 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, 1994 and 1993, was
as follows:
December 31,
1994 1993
West South Central 55.8 % 51.3 %
Mountain 12.2 15.2
Pacific 9.7 10.0
South Atlantic 8.4 6.8
East South Central 4.5 6.8
West North Central 3.0 4.8
All Other 6.4 5.1
Totals 100.0 % 100.0 %
December 31,
1994 1993
Retail 64.6 % 66.7 %
Office 16.8 17.9
Hotel/Motel 7.6 3.1
Apartment 4.5 5.8
Industrial 0.7 0.8
Residential 0.4 0.5
Other Commercial 5.4 5.2
Totals 100.0 % 100.0 %
As of December 31, 1994, the allowance for possible losses on mortgage loans
was approximately $5,929,000. Additions to the allowance totaling $307,000
and $2,152,000 were recognized as realized losses on investments in the
Company's 1994 and 1993 financial statements. 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.
The Company currently places all loans past due three months or more on a
non-accrual status, thus recognizing no interest income on the loans. At
December 31, 1994 and 1993, the Company had approximately $2,292,000 and
$4,191,000, respectively, of mortgage loan principal balances on a
non-accrual status. For the years ended December 31, 1994 and 1993, the
approximate reduction in interest income associated with non-accrual loans
was as follows:
Years Ended
December 31,
1994 1993
(In thousands)
Interest income at contract rate $ 370 758
Interest income recognized 184 113
Interest income not accrued $ 186 645
In addition to the non-accrual loans, the Company had mortgage loan
principal balances with restructured terms totaling approximately
$13,123,000 and $14,257,000 at December 31, 1994 and 1993, respectively. For
the years ended December 31, 1994 and 1993, the approximate reduction in
interest income associated with restructured loans was as follows:
Years Ended
December 31,
1994 1993
(In thousands)
Interest income under original terms $ 1,448 1,564
Interest income recognized 1,289 1,378
Reduction in interest income $ 159 186
The contractual maturities of mortgage loans at December 31, 1994, are
as follows:
Principal
Due
(In thousands)
Due in one year or less $ 8,638
Due after one year through five years 35,063
Due after five years through ten years 116,234
Due after ten years through fifteen years 28,125
Due after fifteen years 7,977
Total $ 196,037
The Company owns real estate that was acquired through foreclosure and
through direct investment totaling approximately $17,766,000 and $22,672,000
at December 31, 1994 and 1993, 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 losses on these properties of approximately
$62,000 for the year ended December 31, 1994 and operating income of
approximately $607,000 for the year ended December 31, 1993. 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 $318,000 and $1,208,000 for the years ended December 31,
1994 and 1993, respectively. The Company makes repairs and capital
improvements to keep the properties in good condition and will continue this
maintenance as needed. However, the amounts expended for this maintenance
have not had a significant impact on the Company's liquidity and capital
resources, and such maintenance is not foreseen to have a significant impact
in the near future.
RESULTS OF OPERATIONS
Summary of Consolidated Operations
A summary of operating results, net of taxes, for the years ended December
31, 1994, 1993 and 1992 is provided below:
Years Ended December 31,
1994 1993 1992
(In thousands except per share data)
Revenues:
Insurance revenues excluding realized
gains on investments $ 275,132 268,501 262,673
Brokerage revenues 40,208 105,923 123,094
Realized gains on investments 1,626 3,206 15,710
Total revenues $ 316,966 377,630 401,477
Earnings:
Earnings from insurance operations $ 36,115 27,288 26,314
Earnings (loss) from
brokerage operations (2,936) 21,832 26,728
Net realized gains on investments 1,057 2,084 10,369
Cumulative effect of change in
accounting for income taxes - 5,520 -
Net earnings $ 34,236 56,724 63,411
Earnings Per Share:
Earnings from insurance operations $ 10.36 7.84 7.57
Earnings (loss) from
brokerage operations (0.84) 6.27 7.68
Net realized gains on investments 0.30 0.60 2.98
Cumulative effect of change in
accounting for income taxes - 1.58 -
Net earnings $ 9.82 16.29 18.23
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: Performance continues to improve as the
Company recorded earnings from insurance operations for 1994 totaling
$36,115,000 which represents an increase of $8,827,000, or 32%, over 1993
earnings. Increased net investment income, prudent interest and operating
expense management, and favorable policy benefit expense experience all
contributed to the positive results for 1994 as more fully described below.
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. Although 1994 reflects a small increase in these
revenues, the Company will continue to focus the majority of its product
development and marketing efforts on universal life and investment
annuities.
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 increased from
$56.5 million in 1992 to $67.8 million in 1993 and declined somewhat to
$64.7 million in 1994. 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. Although surrender charge
revenues were relatively comparable for 1992 and 1994, these revenues were
significantly higher in 1993 due to increased policy surrenders. This
accounts for the majority of the significant increase in universal life and
investment annuity contract revenues in 1993.
Actual universal life and investment annuity deposits collected for the
years ended December 31, 1994, 1993 and 1992 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,
1994 1993 1992
(In thousands)
Investment annuities $ 157,622 86,700 172,332
Universal life insurance 64,760 67,060 70,896
Totals $ 222,382 153,760 243,228
As detailed above, the decline in deposits collected in 1993 is primarily
related to investment annuities. Much of this decline is due to the
discontinuance of the Company's two-tier annuity products in 1992 and
increased competition due to market interest rate conditions. However, the
Company has continued to develop new annuity and life products and has
continued to contract new independent marketing organizations to further
strengthen and diversify distribution channels for the sale of such
products. The Company also significantly increased annuity marketing
efforts in the second quarter of 1994 through personnel and agent additions
and product developments. As a result of these efforts, annuity deposits
have increased over $70 million, or 81%, from 1993.
Net Investment Income: 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. The
increase in invested assets for insurance operations is primarily due to
increases in investment annuity deposits as previously described.
During 1992, net investment income increased 4.4% which was consistent with
the growth in investments. However, net investment income declined from
$184.1 million in 1992 to $180.3 million in 1993. This is reflective of
both slower investment growth and the decline in the Company's investment
portfolio yield due primarily to the overall drop in market interest rates.
In 1993, both cash from operations and investment proceeds from increased
principal prepayments and calls on debt securities were reinvested at lower
yields due to market conditions, thereby producing lower investment income.
Additionally, in 1993 and 1992 investment income was impacted due to
reductions in the yields of the Company's remaining holdings of residual
interests in collateralized mortgage obligations (CMO residuals). Holdings
of principal exchange rate linked securities (PERLS) were also reduced
substantially throughout 1992 which decreased yields. Although the
reductions in holdings of the CMO residuals and PERLS did decrease portfolio
yields, the exposure to exchange rate and prepayment risks was
significantly reduced. Remaining holdings of these securities totaled
approximately $16.9 million at December 31, 1994.
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 on Investments: The Company had realized gains of $1.6
million, $3.2 million and $15.7 million in 1994, 1993 and 1992,
respectively. The decrease in 1994 and 1993 from the previous year is
attributable to the prevailing strategy within the Company's investment
philosophy which is the intent to hold debt securities to maturity. The
gains in the three years are net of write-downs on real estate and mortgage
loans totaling $625,000, $3,360,000, and $3,325,000. The gains also are net
of write-downs for permanent impairments on securities held to maturity of
$6,329,000 and $5,000,000 in 1993 and 1992, respectively. The write-downs
in 1993 and 1992 for securities held to maturity relate primarily to
holdings of PERLS and CMO residuals. The Company made substantial reductions
in the holdings of these securities in 1993 and 1992, thereby reducing the
exposure to potential future losses.
Life and Other Policy Benefits: The decrease in these expenses is largely
related to reductions in policy surrenders on traditional insurance products
in 1994 and 1993 in comparison to 1992. Also, 1993 life insurance benefit
claims were significantly higher than the Company's prior experience.
However, the 1994 claims declined to a level more consistent with previous
claims history.
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 for 1994 was
$32,131,000 compared to $33,159,000 and $25,085,000 for 1993 and 1992,
respectively. The increase in amortization from 1992 correlates to
increased earnings from insurance operations.
Universal Life and Investment Annuity Contract Interest: Interest expense
has declined steadily as amounts totaled $129.1 million, $130.9 million and
$135.8 million for 1994, 1993 and 1992, respectively. This decline is 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 has not been significant as the policy
liabilities have remained relatively constant over the past three years
except for the recent increase in investment annuity deposits in the latter
part of 1994. 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 $29.4 million,
$29.0 million and $27.9 million for 1994, 1993 and 1992, respectively.
Although these expenses are relatively comparable between years, there were
several items of significance which are described as follows:
(a) Commission expenses on insurance product sales were approximately
$2,500,000 higher in 1992 due to higher premium volumes.
(b) 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,
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
significantly increased its estimates in 1994 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
$4,869,000, $4,583,000 and $1,877,000 for the years ended December 31, 1994,
1993 and 1992, respectively.
Brokerage Operations
Brokerage Net Earnings (Loss): 1994 net losses from the Company's
wholly owned subsidiary, The Westcap Corporation, totaled $2,936,000
compared to net earnings of $21,832,000 and $26,728,000 in 1993 and 1992,
respectively. As described in detail below, adverse bond market conditions
were the major factor for lower production and the resulting loss in 1994 for
the subsidiary.
Brokerage Revenues: Revenues for 1994, 1993 and 1992 were $40.2 million,
$105.9 million and $123.1 million, respectively. The significant level of
brokerage revenues in 1993 and 1992 is attributable to several factors. The
steady decline in market interest rates in these years was very positive for
brokerage firms. Also, The Westcap Corporation specializes in
mortgage-backed securities, and many of their customers experienced
significant prepayments within their portfolios. This contributed to
increased sales for the brokerage firm as the investors reinvested the
proceeds. Other contributing factors were the firm's ability to attract an
experienced sales force and increases in the overall size of the force.
While The Westcap Corporation experienced significantly increased revenues
in 1993 and 1992, the entire brokerage industry, including Westcap, was
impacted significantly by increasing interest rate conditions during 1994.
The increase in market interest rates had a negative impact on sales for
Westcap, and the bond brokerage industry in general, resulting in the
significant decline in revenues in 1994.
Brokerage Expenses: Expenses for 1994, 1993 and 1992 were $40.2 million,
$72.3 million and $82.6 million, respectively. The majority of these
expenses relate to commission compensation and vary directly with brokerage
revenues. Accordingly, the expenses directly correspond to the level of
brokerage revenues for the same periods. However, as brokerage revenues
decrease, the ratio of brokerage expenses to such revenues increases. This
is because fixed and administrative costs are covered at certain levels of
revenues, leaving only the variable cost of commissions. To adjust to the
reduced volume of business due to the current adverse bond market
conditions, Westcap has taken appropriate steps in 1995 to reduce
administrative and operating costs.
Consolidated Federal Income Taxes
Federal Income Tax Expense: 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 FASB issued 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. Prior periods'
financial statements have not been restated to apply the provisions of SFAS
No. 109.
LIQUIDITY AND CAPITAL RESOURCES
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 unexpected cash needs are the Company's
securities available for sale portfolio, net cash provided by operations and
$60 million bank line of credit. The Company's brokerage subsidiary also
uses revolving lines of credit to complement any funds generated from
operations. These lines of credit are used primarily for clearing functions
for all securities transactions with its customers.
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.
The Company had no long-term debt during 1994 or 1993. There are no present
material commitments for capital expenditures in 1995, and the Company does
not anticipate incurring any such commitments in the remainder of 1995.
CHANGES IN ACCOUNTING PRINCIPLES
SFAS No. 112, "Employers' Accounting for Postemployment Benefits," was issued
by the Financial Accounting Standards Board (FASB) in November, 1992. This
statement establishes accounting standards for employers who provide
benefits to former or inactive employees after employment but before
retirement. Postemployment benefits include all types of benefits provided
to former or inactive employees, their beneficiaries and covered dependents.
The statement is effective for fiscal years beginning after December 15,
1993. As the Company provides insignificant postemployment benefits,
implementation of this statement had no significant impact on the results of
operations of the Company.
The 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 statements are applicable to all
creditors and to all loans, uncollateralized as well as collateralized, with
certain exceptions and also apply to all loans that are restructured in a
troubled debt restructuring involving a modification of terms. The
statements require that impaired loans be measured based on the present
value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral
dependent.
Both SFAS No. 114 and No. 118 apply to financial statements for fiscal years
beginning after December 15, 1994. The Company will implement the
statements in the first quarter of 1995. The Company is currently providing
for impairment of loans through an allowance for possible losses, and the
implementation of this statement is not expected to have a significant
effect on the level of this allowance. As a result, there should be no
significant net impact on the Company's results of operations
stockholders' equity.
In May, 1993, the FASB also issued 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.
Those investments are to be classified in three categories and accounted for
as follows:
(a) Debt securities that the enterprise has the positive intent and ability
to hold to maturity are classified as held-to-maturity securities and
reported at amortized cost.
(b) Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
(c) Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of stockholders'
equity.
Previous accounting policy was similar to the requirements of the new
statement. Significant differences were that securities available for sale
were reported at the lower of aggregate cost or market value, whereas SFAS
No. 115 requires reporting of these securities on an individual fair value
basis. Also, SFAS No. 115 provides stricter requirements and guidance on
the classification of securities among the three reporting categories.
The Company adopted SFAS No. 115 effective January 1, 1994, resulting in an
increase to stockholders' equity of $26,610,000 on that date. There was no
effect on net earnings of the Company. The implementation of SFAS No. 115
and subsequent effects on stockholders' equity during 1994 is more fully
described in the accompanying notes to consolidated financial statements.
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." This statement extends the
requirements of SFAS No. 60, "Accounting and Reporting by Insurance
Enterprises," No. 97, "Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and Losses from the
Sale of Investments," and No. 113, "Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts," to mutual life insurance
enterprises. 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 should have no
significant effects on the Company's financial statements.
CURRENT REGULATORY ISSUES
Actuarial Guideline GGG
In December, 1994, the NAIC adopted for statutory accounting practices
Actuarial Guideline GGG for determining minimum reserves for annuity
contracts with multiple benefit streams often referred to as two-tier
annuities. The guideline will be effective December 31, 1995, and will
apply to all contracts issued on or after January 1, 1981, and allowance is
made for a three-year phase-in period. However, the Company's statutory
reserving practices for two-tier annuities follow an agreement reached with
its state of domicile, Colorado.
The Colorado Division of Insurance (the Division) issued a Notice in 1987
which defined the basis of reserving for two-tier annuities and utilized a
single interest rate for all benefit streams. Based on the Colorado Notice
and the uncertainty of the implementation of Actuarial Guideline GGG, the
Company added $7,000,000 in 1992 and $6,000,000 in 1993 to its existing
statutory annuity reserves. These additional reserves were agreed upon and
approved by the Colorado Division of Insurance.
During 1993, the Division conducted an Association Financial Examination of
the Company for the six-year period ended December 31, 1992. One of the
results of the examination was an agreement between the Division and the
Company concerning the permitted statutory reserving basis for two-tier
annuities. The agreement includes a plan to meet a target reserve by
December 31, 1996. The agreement states the acceptable difference between
the target reserve and the statutory reserve held by the Company. The
difference will meet the following schedule:
December 31, 1994 $13,600,000
December 31, 1995 5,000,000
December 31, 1996 -
The Company has met the above scheduled difference for December 31, 1994.
In fact, at December 31, 1994, the difference was less than that required,
and it is anticipated that the Company will not require any additional
statutory reserves in order to meet the above schedule of differences. This
agreement 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 is currently 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) recently 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 has 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 shown on Attachment "A" on pages __
through __.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in auditors or disagreements with auditors on
accounting and financial disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) Identification of Directors
The following information as of January 31, 1995, is furnished with respect
to each director. All terms expire in June of 1995.
Principal Occupation During Last Five First
Name of Director Years and Directorships Elected Age
Robert L. Moody Chairman of the Board and Chief 1964 59
Executive
(1) (3) (4) (5) Officer of the Company;
Investments, Galveston, Texas
Ross R. Moody President and Chief Operating 1981 32
Officer of the
(1) (3) Company, 4/92-present;
Vice President - Office of the
President of
the Company, 4/91 - 4/92;
Director of Administrative
Services, American National
Insurance Company,
Galveston, Texas 1989-1991
Arthur O. Dummer President, The Donner Company 1980 61
(1) (2) (3) Salt Lake City, Utah
Harry L. Edwards Retired; Former President and 1969 73
Chief Operating Officer of the
Company until 7/90, Austin, Texas
E. Douglas McLeod Director of Development, Moody 1979 53
(4) Foundation, Galveston, Texas
Charles D. Milos,Jr. Senior Vice President of the 1981 49
(1) (3) Company, Galveston, Texas
Frances A. Moody Investments, Dallas, Texas, 1990 25
(4) 1992 - present; Student,
Southern Methodist
University, Dallas, Texas,
1987-92
Russell S. Moody Investments, Austin, Texas 1988 33
(4)
Louis E. Pauls, Jr. President, Louis Pauls & Company; 1971 59
(2) Investments, Galveston, Texas
E. J. Pederson Executive Vice President, 1992 47
(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 Galveston,
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, 1995.
Name of Officer Age Position (Year elected to position)
Robert L. Moody 59 Chairman of the Board and Chief Executive
Officer (1964-1968, 1971-1980, 1981),
Director
Ross R. Moody 32 President and Chief Operating Officer
(1992), Director
Robert L. Busby,III 57 Senior Vice President - Chief
Administrative Officer,
Chief Financial Officer and Treasurer
(1992)
Charles P. Baley 56 Senior Vice President - Data Processing
(1990)
Richard M. Edwards 42 Senior Vice President - International
Marketing (1990)
Paul D. Facey 43 Senior Vice President - Chief Actuary (1992)
Charles D. Milos, Jr. 49 Senior Vice President - Investment Analyst
(1990), Director
Arthur W. Pickering 53 Senior Vice President - Domestic Marketing (1994)
Patricia L. Scheuer 43 Senior Vice President - Chief Investment
Officer (1992)
Larry D. White 49 Senior Vice President - Policyowner
Services (1990)
Carol Jackson 59 Vice President - Human Resources (1990)
Vincent L. Kasch 33 Vice President - Controller and Assistant
Treasurer (1992)
James A. Kincl 65 Vice President - Salary Savings (1986)
Doris Kruse 49 Vice President - Policy Benefits (1990)
James R. Naiser 52 Vice President - Systems Development (1984)
James P. Payne 50 Vice President - Secretary (1994)
Al R. Steger 52 Vice President - Risk Selection (1992)
B. Ben Taylor 52 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. 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.
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.
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. 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
Annual Compensation Restricted All Other
Name and Salary Bonus Stock Awards Compensation
Principal Position Year (A) (B) (C) (D)
(1) Robert L. Moody 1994 $ 890,216 56,886 - $ 19,016
Chairman of the
Board and Chief 1993 836,476 145,693 139,103 18,185
Executive Officer 1992 825,017 - - 16,500
(2) Ross R. Moody 1994 311,977 12,267 - 14,543
President and Chief 1993 275,697 75,417 30,005 15,651
Operating Officer 1992 198,129 25,000 - 11,558
(3) Robert L. Busby, III 1994 151,877 9,969 - 9,773
Senior Vice 1993 136,882 12,727 12,155 9,346
President - Chief 1992 123,458 - - 7,407
Administrative
Officer, Chief
Financial Officer
and Treasurer
(4) Paul D. Facey 1994 122,850 18,267 - 8,675
Senior Vice 1993 114,377 8,366 7,990 8,082
President - 1992 81,502 15,000 - 4,116
Chief Actuary
(5) Charles D. Milos,Jr. 1994 128,815 3,718 - 7,561
Senior Vice 1993 119,643 53,523 9,095 7,245
President- 1992 113,979 25,000 - 6,569
Investment Analyst
(A) Salary includes base salary and 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%
To obtain shares in accordance with the above vesting schedule, an officer
must be actively employed by the Company on such dates and in the same or
higher office as that held on December 31, 1992. However, upon the
occurrence of certain events such as death or retirement, the officer shall
become fully vested. Of the 13,496 total shares granted, 6,830 shares were
issued and reflected as bonuses in 1993. The remaining 6,666 unvested
shares were reflected as long term compensation - restricted stock awards
for 1993, based on the closing market price of such shares on December 31,
1993. Of these remaining 6,666 unvested shares at December 31, 1993, 3,520
of such shares vested on December 31, 1994, and are reflected as bonuses in
1994.
(2) Westcap Bonuses - Ross R. Moody and Charles D. Milos, Jr. are directors
of the Company's brokerage subsidiary, Westcap. The directors received
bonuses for such services in 1992 and 1993.
(3) Other Bonuses - Employment and performance related bonuses are
occasionally granted. Robert L. Busby, III received such bonus in 1994 and
Paul D. Facey in 1994 and 1992.
(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
Charles D. Milos, Jr. 214 9,523
Robert L. Busby, III 286 12,727
Patricia L. Scheuer 50 2,225
Of the remaining 6,666 unvested shares at December 31, 1993, 3,520 of such
shares vested on December 31, 1994, and are reflected as bonuses in 1994.
The remaining 3,146 unvested shares at December 31, 1994, are scheduled to
vest on December 31, 1995, and will be reflected as bonuses at such time.
(D) All other compensation includes 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
None.
(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
Name and Defined Defined
Principal Position Benefit Plan Benefit Plan Totals
(1) Robert L. Moody
Chairman of the Board and
Chief Executive Officer $ 125,335 309,513 434,848
(2) Ross R. Moody
President and Chief
Operating Officer 79,663 - 79,663
(3) Robert L. Busby, III
Senior Vice President -
Chief Administrative
Officer, Chief Financial
Officer and Treasurer 47,132 19,637 66,769
(4) Paul D. Facey
Senior Vice President -
Chief Actuary 47,935 - 47,935
(5) Charles D. Milos, Jr.
Senior Vice President -
Investment Analyst 42,658 - 42,658
(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.
Directors of the Company's brokerage subsidiary, Westcap, currently receive
$250 for each board meeting attended. In addition, the directors may
receive an annual bonus.
(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. 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 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 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 committee, comprised of outside, independent
directors, determines compensation for the three highest paid Company
executives. Those directors serving on the committee include the following:
Arthur O. Dummer
Harry L. Edwards
E. J. Pederson
The policies used by the compensation 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, 1989, and that all dividends were reinvested.
For the purposes of this electronic filing, the graph has been filed
separately under the Securites and Exchange Commission filing Form SE
dated March 30, 1995. The coordinates of the graph are as follows:
12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94
National Western Life 100.00 53.5 258.1 437.2 414.0 323.3
NASDAQ U.S. Companies Index 100.00 84.9 136.3 158.6 180.9 176.9
NASDAQ Insurance Stock Index 100.00 84.7 119.4 161.6 172.8 162.7
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, 1994:
Amount and Nature
Title Name and Address of Percent
of of Beneficial Ownership of
Class Beneficial Owners Record and Beneficially Class
Class A Common Robert L. Moody 1,164,171 35.40
2302 Postoffice Street
Suite 702
Galveston, Texas
Class A Common Westport Asset 326,700 9.94
Management, Inc.
253 Riverside Avenue
Westport, Connecticut
Class A Common Tweedy Browne Company 285,659 8.69
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, 1994, 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 Beneficially Class
Directors and Named Officers:
Robert L. Moody Class A Common 1,164,171 35.40
Class B Common 198,074 99.04
Ross R. Moody Class A Common 3,634 0.11
Class B Common 482 0.24
Charles D. Milos, Jr. Class A Common 421 0.01
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 535 0.02
Class B Common - -
Paul D. Facey Class A Common 282 0.01
Class B Common - -
All Directors and
Executive Officers Class A Common 1,176,710 35.79
as a Group Class B Common 199,520 99.76
(c) Changes in Control
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 1996, with interest of 8% annually.
The Company also holds a corporate note for $2,535,103 issued in 1990 by
Seal (GP), Inc. which is a subsidiary of Seal Fleet, Inc. The note is due in
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, 1994, reflected total
assets of $11,805,000, net income of $478,000, and negative stockholders'
equity of $3,505,000.
Gal-Tex Hotel Corporation
The Company also holds two 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 $3,303,000
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 $8,972,000 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 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.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) 1 and 2. Financial Statements and Financial Statement Schedules
See Attachment "A" at pages __ through __.
All other schedules are omitted, as the required information is inapplicable
or the information is presented in the financial statements or related
notes.
(a) 3. Exhibits
None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1994.
The parent-only financial statements of the Company are omitted, because the
Company is primarily an operating company and all subsidiaries included in
the consolidated financial statements being filed, in the aggregate, do not
have minority equity interest and/or indebtedness to any person other than
the Company or its consolidated subsidiaries in amounts which together
exceed 5% of the total assets as shown by the most recent year-end
consolidated balance sheet.
ATTACHMENT A
Index to Financial Statements
Page
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1994 and 1993
Consolidated Statements of Earnings for the years ended
December 31, 1994, 1993 and 1992
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
Schedule I - Summary of Investments Other Than Investments
in Related Parties, December 31, 1994
Schedule V - Valuation and Qualifying Accounts for the years
ended December 31, 1994, 1993 and 1992
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, 1994 and
1993, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1994, 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 4, 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 7, 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 3, 1995
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1993
(In thousands)
ASSETS 1994 1993
Cash and investments:
Securities held to maturity, at
amortized cost (fair value: $1,488,063
and $1,908,714) $ 1,605,813 1,787,360
Securities available for sale, at fair
value in 1994 and aggregate
market in 1993 (cost $366,024 and
aggregate cost $39,823) 354,300 39,355
Mortgage loans, net of allowance for
possible losses ($5,929 and $6,849) 189,632 188,920
Policy loans 151,487 153,822
Other long-term investments 24,872 43,921
Securities purchased under agreements
to resell 153,971 186,896
Trading securities, at fair value 69,666 116,918
Cash and short-term investments 21,247 32,823
Total cash and investments 2,570,988 2,550,015
Brokerage trade receivables, net of
allowance for possible
losses ($1,000 and $123) 675 55,163
Accrued investment income 32,711 28,901
Deferred policy acquisition costs 291,274 287,711
Other assets 19,406 19,261
$ 2,915,054 2,941,051
See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1993
(In thousands except per share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
LIABILITIES:
Future policy benefits:
Traditional life and annuity products $ 177,429 177,157
Universal life and investment
annuity contracts 2,194,264 2,115,352
Other policyholder liabilities 23,183 24,211
Short-term borrowings 29,698 82,852
Securities sold not yet purchased, at market 87,336 78,835
Securities sold under agreements to repurchase 91,781 127,971
Brokerage trade payables 3,692 39,422
Federal income taxes payable:
Current - 4,823
Deferred 1,996 3,078
Other liabilities 30,541 44,632
Total liabilities 2,639,920 2,698,333
COMMITMENTS AND CONTINGENCIES (Notes 6, 9, and 12)
STOCKHOLDERS' EQUITY:
Common stock:
Class A - $1 par value; 7,500,000 shares
authorized; 3,288,192 and 3,284,672 shares
issued and outstanding in 1994 and 1993 3,288 3,285
Class B - $1 par value; 200,000 shares
authorized, issued and outstanding
in 1994 and 1993 200 200
Additional paid-in capital 24,475 24,356
Net unrealized losses on investment securities (2,199) (257)
Retained earnings 249,370 215,134
Total stockholders' equity 275,134 242,718
$ 2,915,054 2,941,051
See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
For the Years Ended December 31, 1994, 1993 and 1992
(In thousands except per share amounts)
1994 1993 1992
Premiums and other revenue:
Life and annuity premiums $ 18,938 18,624 21,365
Universal life and investment
annuity contract revenues 64,711 67,778 56,543
Net investment income 190,021 180,252 184,149
Brokerage revenues 40,208 105,923 123,094
Other income 1,462 1,847 616
Realized gains on investments 1,626 3,206 15,710
Total premiums and other revenue 316,966 377,630 401,477
Benefits and expenses:
Life and other policy benefits 32,132 36,257 37,957
Increase (decrease) in liabilities
for future policy benefits 658 (1,611) (3,723)
Amortization of deferred policy
acquisition costs 32,131 33,159 25,085
Universal life and investment
annuity contract interest 129,064 130,875 135,792
Other insurance operating expenses 29,394 28,959 27,870
Brokerage operating expenses 40,161 72,310 82,561
Total benefits and expenses 263,540 299,949 305,542
Earnings before Federal income
taxes and cumulative effect of
change in accounting principle 53,426 77,681 95,935
Provision (benefit) for Federal
income taxes:
Current 19,298 32,152 36,253
Deferred (108) (5,675) (3,729)
Total Federal income taxes 19,190 26,477 32,524
Earnings before cumulative effect
of change in accounting principle 34,236 51,204 63,411
(Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS, CONTINUED
For the Years Ended December 31, 1994, 1993 and 1992
(In thousands except per share amounts)
1994 1993 1992
Cumulative effect of change in
accounting for income taxes $ - 5,520 -
Net earnings $ 34,236 56,724 63,411
Earnings per share of common stock:
Earnings before cumulative effect
of change in accounting principle $ 9.82 14.71 18.23
Cumulative effect of change in
accounting for income taxes - 1.58 -
Net earnings $ 9.82 16.29 18.23
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, 1994, 1993 and 1992
(In thousands)
1994 1993 1992
Common stock shares outstanding:
Shares outstanding at
beginning of year 3,485 3,478 3,478
Shares issued for stock bonus plan 3 7 -
Shares outstanding at end of year 3,488 3,485 3,478
Common stock:
Balance at beginning of year $ 3,485 3,478 3,478
Shares issued for stock bonus plan 3 7 -
Balance at end of year 3,488 3,485 3,478
Additional paid-in capital:
Balance at beginning of year 24,356 24,065 24,065
Shares issued for stock bonus plan 119 291 -
Balance at end of year 24,475 24,356 24,065
Net unrealized gains (losses) on
investment securities:
Balance at beginning of year (257) 138 (99)
Effect of change in accounting
for investments in debt and equity
securities 26,610 - -
Change in unrealized gains
(losses) on investment
securities during the period (29,493) (395) 237
Net unrealized gain related to
transfer of securities available
for sale to securities held
to maturity 1,380 - -
Amortization of net unrealized gain
related to transferred securities (439) - -
Balance at end of year (2,199) (257) 138
Retained earnings:
Balance at beginning of year 215,134 158,410 94,999
Net earnings 34,236 56,724 63,411
Balance at end of year 249,370 215,134 158,410
Total stockholders' equity $ 275,134 242,718 186,091
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, 1994, 1993 and 1992
(In thousands)
1994 1993 1992
Cash flows from operating activities:
Net earnings $ 34,236 56,724 63,411
Adjustments to reconcile net
earnings to net cash provided by
operating activities:
Universal life and investment
annuity contract interest 129,064 130,875 135,792
Surrender charges (33,016) (36,563) (28,092)
Realized gains on investments (1,626) (3,206) (15,710)
Accrual and amortization of
investment income (10,722) 30 (678)
Depreciation and amortization 1,073 891 765
Decrease (increase) in other assets 4,425 (424) (4,518)
Decrease (increase) in
brokerage trade receivables 54,488 (25,817) (7,637)
Decrease (increase) in
accrued investment income (3,810) 1,768 381
Decrease (increase) in
deferred policy acquisition costs 2,354 11,475 (10,010)
Increase (decrease) in liability
for future policy benefits 658 (1,611) (3,723)
Increase (decrease) in other
policyholder liabilities (1,028) 3,149 1,761
Increase (decrease) in Federal
income taxes payable (10,177) (10,732) 48
Increase (decrease) in other
liabilities (14,516) (16,008) 18,257
Increase (decrease) in
brokerage trade payables (35,730) 13,875 7,508
Net decrease (increase) in
repurchase agreements
less related liabilities 5,236 (37) 3,013
Decrease (increase) in
trading securities 47,252 (22,881) 18,387
Other 663 (77) (1,366)
Net cash provided by operating
activities 168,824 101,431 177,589
Cash flows from investing activities:
Proceeds from sales of:
Securities available for sale 9,114 - -
Investments in debt securities - 77,869 1,600,779
Other investments 22,531 8,835 11,859
Proceeds from maturities and
redemptions of:
Securities held to maturity 76,174 - -
Securities available for sale 57,270 - -
Investments in debt securities - 485,818 102,396
Purchases of:
Securities held to maturity (155,892) - -
Securities available for sale (116,923) - -
Investments in debt securities - (576,403) (1,835,794)
Other investments (3,548) (18,588) (6,853)
Principal payments on
mortgage loans 29,431 16,971 13,046
Cost of mortgage loans acquired (30,093) (33,393) (37,477)
Decrease (increase) in policy loans 2,335 4,394 (1,463)
Other (509) (471) (460)
Net cash used in investing activities (110,110) (34,968) (153,967)
(Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Years Ended December 31, 1994, 1993 and 1992
(In thousands)
1994 1993 1992
Cash flows from financing activities:
Increase (decrease) in
short-term borrowings $ (53,154) 34,270 (64,147)
Deposits to account balances for
universal life and investment
annuity contracts 190,687 122,545 214,777
Return of account balances on
universal life and investment
annuity contracts (207,823) (221,658) (173,385)
Net cash used in financing activities (70,290) (64,843) (22,755)
Net increase (decrease) in cash and
short-term investments (11,576) 1,620 867
Cash and short-term investments at
beginning of year 32,823 31,203 30,336
Cash and short-term investments
at end of year $ 21,247 32,823 31,203
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 9,134 4,468 4,227
Income taxes 26,332 32,992 33,141
Non-cash investing activities:
Foreclosed mortgage loans $ 2,557 6,678 2,976
Mortgage loans originated to
facilitate the sale of
real estate 2,655 2,684 3,106
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., Commercial
Adjusters, Inc., and National Western Asset Management, Inc. Commercial
Adjusters, Inc. was dissolved in October, 1994, and all remaining assets and
liabilities were assumed by National Western Life Insurance Company.
National Western Asset Management, Inc. was sold in July, 1992. 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. 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 purchased by the Company that are
held for current resale are classified as trading securities. These
securities are typically held for short periods of time, as the intent is to
sell them producing a trading profit. As a result, trading securities are
recorded at fair value. Any trading profits or losses and unrealized gains
or losses resulting from changes in the fair value of the securities are
included in earnings.
Investments in debt and equity securities that are not classified as either
securities held to maturity or trading securities are reported as securities
available for sale. Securities available for sale are reported in the
accompanying financial statements at individual fair value for 1994 and at
the lower of aggregate cost or market value for 1993. Any valuation changes
resulting from changes in the market or fair value of the securities are
reflected as a component of stockholders' equity. For 1994, these
unrealized gains or losses in stockholders' equity are reported net of
taxes and adjustments to deferred acquisition costs.
Transfers of securities between categories are recorded at fair value at the
date of transfer. Unrealized holding gains and losses are recognized in
earnings for transfers into trading securities. 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 slae and securities
held to maturity are included in earnings and are derived using the specific
idenification method for determining the cost of securities sold. For
securities available for sale or securities held to maturity, a decline
in the market 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.
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.
(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) Brokerage Trade Receivables and Payables - Brokerage trade receivables
and payables consist of receivables from and payables to customers and
brokers and dealers which 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.
(F) 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.
(G) Brokerage Revenues and Expenses - Securities transactions and related
revenues and expenses, except trading profits, are recorded in the accounts
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 the Company.
Securities transactions executed but not yet settled as of September 30,
1994 and 1993 (the brokerage subsidiary's year-end), would result in an
increase in receivables from customers and brokers and dealers of
approximately $124,365,000 and $634,042,000, if settled. There would also
be a corresponding increase of approximately $151,297,000 and $677,905,000
in payables to customers and brokers and dealers and an increase of
$27,050,000 and $50,106,000 in trading securities at September 30, 1994 and
1993, respectively.
(H) Depreciation of Property, Equipment and Leasehold Improvements -
Depreciation is based on the estimated useful lives of the assets and is
calculated on the straight-line and accelerated methods. Leasehold
improvements are amortized over the lesser of the economic useful life of
the improvement or the term of the lease.
(I) 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 3,484,682, 3,481,233, and 3,477,842
for the years ended December 31, 1994, 1993, and 1992, respectively.
(J) Classification - Certain reclassifications have been made to the prior
years to conform to the reporting categories used in 1994.
(K) 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. 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, net of reinsurance, follows:
Years Ended December 31,
1994 1993 1992
(In thousands)
Costs deferred:
Agents' commissions $ 27,177 19,038 31,838
Other 2,600 2,646 3,257
$ 29,777 21,684 35,095
Amounts amortized $ 32,131 33,159 25,085
First-year and single premium
revenues $ 2,746 3,065 3,304
Renewal premium revenues $ 16,192 15,559 18,061
Universal life and investment
annuity deposits $ 222,382 153,760 243,228
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.
5. 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.
6. 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.
7. 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 recently valued at
$26,400,000 which was computed as the present value of the estimated future
income to be received from the Trust, limited to the amount of existing
insurance in force on the life of Mr. Robert L. Moody. 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, 1994 is $22,507,000 in comparison to a
carrying value of $5,486,000 in the accompanying consolidated financial
statements.
Reconciliations of statutory basis stockholders' equity and net income, 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 are as follows:
Stockholders' Equity as of December 31,
1994 1993 1992
(In thousands)
Amounts per annual statements $ 212,063 182,876 129,391
Adjustments:
Difference in valuation of
investment in the Libbie
Shearn Moody Trust (17,021) (17,911) (20,360)
Deferral of policy
acquisition costs 291,274 287,711 299,186
Adjustment of future policy
benefits (206,027) (205,357) (217,145)
Deferred Federal income
taxes payable (1,996) (3,078) (14,484)
Adjust securities available
for sale to fair value (10,469) (1,080) (146)
Reversal of asset valuation
reserve 10,197 13,225 18,244
Reversal of interest
maintenance reserve 4,922 2,222 10,586
Reinstatement of
non-admitted assets 2,468 3,134 3,014
Valuation allowances on
investments (10,573) (15,566) (17,594)
Adjustment for consolidation 102 (3,664) (3,978)
Other, net 194 206 (623)
Amounts per consolidated
financial statements $ 275,134 242,718 186,091
Net Earnings for the
Years Ended December 31,
1994 1993 1992
(In thousands)
Amounts per annual statements $ 32,513 46,013 48,063
Subsidiary earnings (loss)before
deferred Federal income taxes (3,806) 20,879 26,039
Consolidated statutory net income 28,707 66,892 74,102
Adjustments:
Deferral of policy acquisition costs (2,354) (11,475) 10,010
Adjustment of future policy benefits (671) 11,816 2,678
Amortization of investment in Trust (279) (275) (272)
Deferred Federal income taxes benefit 108 5,675 3,729
Valuation allowances and permanent
impairment write-downs on investments 5,238 5,238 (6,724)
Lawsuit settlements recorded as surplus
adjustments for statutory accounting 955 1,620 -
Reversal of statutory accounting gain
on subsidiary stock conversion - - (6,399)
Subsidiary stock dividends (1,366) (20,442) (24,206)
Increase (decrease) in
interest maintenance reserve 2,700 (8,364) 10,586
Cumulative effect of change in
accounting for income taxes - 5,520 -
Other, net 1,198 519 (93)
Amounts per consolidated
financial statements $ 34,236 56,724 63,411
(2) SIGNIFICANT SUBSIDIARY
The Westcap Corporation and subsidiaries (Westcap), a wholly owned brokerage
firm, have been consolidated in the accompanying financial statements.
Subsidiaries of The Westcap Corporation also own 100% of the partnership
interest in Westcap Securities, L.P. which is also included in the
consolidation. Westcap's fiscal year-end is September 30.
Westcap Securities, L.P. is subject to the Securities and Exchange
Commission's Uniform Net Capital Rule (Rule 15c3-1), which requires the
maintenance of minimum net capital. Westcap Securities, L.P. has elected to
be subject to the Alternative Net Capital requirement which requires 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, 1994, Westcap Securities, L.P. had net capital of
$8,423,000 which was $8,173,000 in excess of its required net capital of
$250,000.
Westcap Securities, L.P. is required by Rule 15c 3-3 to maintain special
reserve bank accounts. The amount in this account is restricted for the
exclusive benefit of customers. The restricted amount, if any, is
determined periodically in accordance with a specified formula. At
September 30, 1994, cash of $1,443,000 had been segregated in a special
reserve bank account. The required restricted amount was approximately
$2,172,000. An additional deposit was made to the special reserve account,
as required.
A summary of the most recent audited consolidated financial information for
Westcap is as follows:
September 30,
1994 1993 1992
(In thousands)
Assets:
Cash $ 3,524 8,514 7,188
Receivables from customers
and broker 675 55,163 29,346
Trading securities 69,666 116,918 93,627
Securities purchased under
agreements to resell 153,971 186,896 25,165
Other assets 4,221 4,810 8,676
$ 232,057 372,301 164,002
Liabilities and Stockholder's Equity:
Short-term borrowings $ 29,698 82,852 48,582
Payables to customers and brokers 3,692 39,422 25,547
Securities sold not yet purchased 87,336 78,835 6,034
Securities sold under
agreements to repurchase 91,781 127,971 39,078
Other liabilities 2,823 22,840 27,380
Stockholder's equity 16,727 20,381 17,381
$ 232,057 372,301 164,002
Revenues $ 40,208 105,923 123,094
Net income (loss) $ (2,936) 21,832 26,728
(3) 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,
1994 1993
(In thousands)
Securities held to maturity $ 62,413 63,719
Certificates of deposit 210 210
(4) INVESTMENTS
(A) Investment Income
The major components of net investment income are as follows:
Years Ended December 31,
1994 1993 1992
(In thousands)
Investment income:
Debt securities $ 154,417 144,218 147,445
Mortgage loans 19,839 18,450 17,992
Policy loans 10,546 11,962 12,387
Other investment income 7,982 8,412 9,405
Total investment income 192,784 183,042 187,229
Investment expenses 2,763 2,790 3,080
Net investment income $ 190,021 180,252 184,149
Investments of the following amounts were non-income producing for the
preceding twelve months:
December 31,
1994 1993
(In thousands)
Securities held to maturity $ 4,924 2,185
Mortgage loans - 985
Other long-term investments 3,709 6,248
As of December 31, 1994 and 1993, investments in debt securities and
mortgage loans with principal balances totaling $8,314,000 and $7,342,000
were on non-accrual status. During 1994, 1993 and 1992, reductions in
interest income associated with non-performing investments in debt
securities and mortgage loans were as follows:
Years Ended December 31,
1994 1993 1992
(In thousands)
Interest at contract rate $ 647 1,029 975
Interest income recognized 184 123 240
Interest income not accrued $ 463 906 735
(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,
1994 1993
(In thousands)
West South Central 55.8 % 51.3%
Mountain 12.2 15.2
Pacific 9.7 10.0
All Other 22.3 23.5
Totals 100.0 % 100.0%
December 31,
1994 1993
(In thousands)
Retail 64.6 % 66.7 %
Office 16.8 17.9
Hotel/Motel 7.6 3.1
All Other 11.0 12.3
Totals 100.0 % 100.0 %
The Company held in its investment portfolio below investment grade debt
securities, net of loss provisions, of approximately $31,861,000 and
$24,261,000 at December 31, 1994 and 1993, respectively. This represents
approximately 1.2% and 1.0% 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, 1994 and 1993, the Company held approximately $8,948,000 and
$13,822,000 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. The Company also has investments in principal exchange
rate linked securities at December 31, 1994 and 1993, totaling approximately
$7,982,000 and $11,150,000. These securities bear interest at fixed rates
payable on a semiannual basis. The amount of principal to be received by the
Company at maturity is dependent on the exchange rates of various foreign
currencies relative to the U.S. dollar at the maturity date. The securities
are not subject to prepayments or redemptions prior to maturity.
At December 31, 1994 and 1993, the Company had approximately $17,766,000 and
$22,672,000 of real estate, 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,
1994.
(C) Investment Gains and Losses
The table below presents realized gains and losses and the increase or
decrease in unrealized gains on investments:
Net Realized Increase
Investment (Decrease)
Gains in Unrealized
(Losses) Investment Gains
(In thousands)
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
Year Ended December 31, 1992:
Securities held to maturity $ 18,862 (24,581)
Other (3,152) 237
Totals $ 15,710 (24,344)
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 subdividison 6,434 480 98 6,816
Foreign governments 107,299 - 7,205 100,094
Public utilities 272,478 722 22,807 250,393
Corporate 498,120 1,728 40,941 458,907
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
Foreign governments 16,014 117 862 15,269
Public utilities 10,263 155 918 9,500
Corporate 76,266 764 985 76,045
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 tables below present amortized cost and fair values of securities held
to maturity and securities available for sale at December 31, 1993:
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 $ 40,542 4,710 - 45,252
States and political subdivisions 8,421 1,134 - 9,555
Foreign governments 20,343 870 24 21,189
Public utilities 293,855 16,175 1,061 308,969
Corporate 466,246 27,813 2,349 491,710
Mortgage-backed 957,953 75,074 988 1,032,039
Totals $1,787,360 125,776 4,422 1,908,714
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 $ 7,581 - 1,506 6,075
Foreign governments 3,569 - 669 2,900
Equity securities 28,673 2,186 479 30,380
Totals $ 39,823 2,186 2,654 39,355
The amortized cost and fair values of investments in debt securities at
December 31, 1994, 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 $ 4,375 4,424 - -
Due after 1 year
through 5 years 59,544 58,949 17,403 14,081
Due after 5 years
through 10 years 491,248 444,585 58,435 58,519
Due after 10 years 353,759 332,005 34,058 33,159
908,926 839,963 109,896 105,759
Mortgage-backed securities 696,887 648,100 228,389 222,232
Totals $ 1,605,813 1,488,063 338,285 327,991
Proceeds from sales of securities available for sale during 1994 totaled
$9,114,000. Gross gains of $654,000 and gross losses of $1,535,000 were
realized on those sales. Proceeds from sales of investments in debt
securities during 1993 and 1992 were $77,869,000 and $1,600,779,000,
respectively. Gross gains of $12,966,000 and $38,272,000, and gross losses
of $1,283,000 and $14,410,000, were realized on those sales, respectively.
The Company uses the specific identification method in computing realized
gains and losses. Net increases in the fair values of trading securities
totaled $58,000 for the year ended December 31, 1994, and have been included
in earnings.
(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.
Those investments are to be classified in three categories and accounted for
as follows:
(a) Debt securities that the enterprise has the positive intent and ability
to hold to maturity are classified as held-to-maturity securities and
reported at amortized cost.
(b) Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
(c) Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses, net
of taxes and adjustments to deferred policy acquisition costs, excluded from
earnings and reported as a separate component of stockholders' equity.
Previous accounting policy was similar to the requirements of the new
statement. Significant differences are that securities available for sale
were reported at the lower of aggregate cost or market value, whereas SFAS
No. 115 requires reporting of these securities on an individual fair value
basis. Also, SFAS No. 115 provides stricter requirements and guidance on
the classification of securities among the three reporting categories.
Effective January 1, 1994, the Company adopted SFAS No. 115. 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.
Trading securities were composed entirely of securities from the Company's
brokerage operations. There was no change in accounting policy for the
trading securities as they were already being recorded at fair value with
fair value changes reflected in earnings.
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 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. There were no changes in classifications of the Company's
equity or trading securities. Securities available for sale now represent
approximately 19% of the Company's insurance operations debt and equity
securities as compared to 60% prior to the transfers. The lower holdings of
securities available for sale will significantly reduce the Company's
exposure to equity volatility while still providing securities for liquidity
and asset/liability management purposes. The transfers of securities were
recorded at fair values in accordance with SFAS No. 115. 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:
(In thousands)
Fair value adjustment to securities
transferred at July 31, 1994 $ 3,898
Less:
Decrease in deferred policy acquisition costs (1,775)
Increase in deferred Federal income taxes (743)
Net unrealized gain related to securities transferred
to held to maturity at July 31, 1994 1,380
Less:
Amortization of net unrealized gain for the
period August 1 to December 31, 1994 (439)
Net unrealized gain related to securities transferred
to held to maturity at December 31, 1994 $ 941
Net unrealized gains (losses) on investment securities included in
stockholders' equity at December 31, 1994 and 1993 are as follows:
December 31,
1994 1993
(in thousands)
Gross unrealized gains $ 4,890 2,186
Gross unrealized losses (16,614) (2,654)
Adjustments for:
Deferred policy acquisition costs 6,893 -
Deferred Federal income taxes 1,691 211
(3,140) (257)
Net unrealized gain related to securities
transferred to held to maturity 941 -
Net unrealized losses on investment securities $ (2,199) (257)
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 statements are applicable to all creditors and to all loans,
uncollateralized as well as collateralized, with certain exceptions and also
apply to all loans that are restructured in a troubled debt restructuring
involving a modification of terms. The statements require that impaired
loans be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent.
Both SFAS No. 114 and No. 118 apply to financial statements for fiscal years
beginning after December 15, 1994. The Company will implement the
statements in the first quarter of 1995. The Company is currently providing
for impairment of loans through an allowance for possible losses, and the
implementation of this statement is not expected to have a significant
effect on the level of this allowance. As a result, there should be no
significant net impact on the Company's results of operations
stockholders' equity.
(5) PARTICIPATING POLICIES
The Company has issued participating policies which entitle the
policyholders to participate in cash and, in certain instances, in stock
dividends paid to stockholders. The participating preferences of these
special policy plans are as follows:
(A) Certain participating policies require payment of dividends to
policyholders of not less than a specified percentage of dividends paid to
stockholders. Holders of such policies at December 31, 1994 and 1993, are
entitled to dividends equal to an aggregate maximum of less than 1% of
dividends paid to holders of the Company's common stock.
(B) Certain participating policies are entitled to receive policyholder
dividends at least equivalent to stockholders' dividends paid on a
designated number of shares of common stock of the Company. Holders of such
policies at December 31, 1994 and 1993, are entitled to receive dividends
equivalent to less than 1% of dividends paid to holders of the Company's
common stock.
All other policyholders' dividends are apportioned for payment by the
Company's Board of Directors at the beginning of certain periods of time on
participating policies having anniversary dates during such designated
periods. These policyholders' dividends are at various rates based upon
factors such as the policy plan, loading factor of the plan, and issue date
of policies. The provision for the policyholders' dividend liability is
included in the future policy benefit liabilities. Retained earnings are
allocable to participating policies only when dividends thereon are
specifically declared by the Company's Board of Directors except as noted
above. At December 31, 1994 and 1993, no retained earnings were so
allocated.
Participating business constitutes approximately 1% of the Company's life
insurance in force and 1% of the premium revenues and universal life
deposits for the years ended December 31, 1994 and 1993, respectively.
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." This statement extends the
requirements of SFAS No. 60, "Accounting and Reporting by Insurance
Enterprises," No. 97, "Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and Losses from the
Sale of Investments," and No. 113, "Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts," to mutual life insurance
enterprises. 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 should have no
significant effects on the Company's financial statements.
(6) 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. Life insurance in force in the amounts
of $1,034,000,000 and $861,000,000 is ceded on a yearly renewable term
basis, $117,000 and $134,000 is ceded on a modified coinsurance basis, and
$21,000,000 and $38,000,000 is ceded on a coinsurance basis at December 31,
1994 and 1993, 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 $6,480,000 and
$9,187,000 at December 31, 1994 and 1993, respectively. Premium revenues
were reduced by $6,040,000, $7,450,000, and $4,800,000 for reinsurance
premiums incurred during the years ended December 31, 1994, 1993 and 1992,
respectively. Benefits were reduced by $3,295,000, $6,943,000, and
$3,865,000 for reinsurance recoverables during the years ended December 31,
1994, 1993 and 1992, respectively. A contingent liability exists with
respect to such reinsurance which could become a liability of the Company in
the event such reinsurance companies are unable to meet their obligations
under existing reinsurance agreements.
(7) FEDERAL INCOME TAXES
In February, 1992, the FASB issued 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 (APB) 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.
Pursuant to the deferred method under APB Opinion 11, which was applied in
1992, deferred income taxes are recognized for income and expense items that
are reported in different years for financial reporting purposes and income
tax purposes using the tax rate applicable for the year of the calculation.
Under the deferred method, deferred taxes are not adjusted for subsequent
changes in tax rates.
Effective January 1, 1993, the Company adopted SFAS No. 109. 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.
Prior periods' financial statements have not been restated to apply the
provisions of SFAS No. 109.
Total Federal income taxes were allocated as follows:
Years Ended December 31,
1994 1993 1992
(In thousands)
Earnings from continuing operations $ 19,190 26,477 32,524
Stockholders' equity for net unrealized
losses on investment securities (974) (211) -
Total Federal income taxes $ 18,216 26,266 32,524
The provisions for Federal income taxes 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,
1994 1993 1992
(In thousands)
Income tax expense at statutory rate $ 18,699 27,188 32,618
Dividends-received deduction (333) (420) (306)
Amortization of life interest in the
Libbie Shearn Moody Trust 97 96 93
Payment (recovery) of
non-deductible excise tax 53 (368) -
Adjustment to deferred tax assets and
liabilities for enacted changes in
tax rates - 98 -
Other 674 (117) 119
Provision for Federal income taxes $ 19,190 26,477 32,524
The significant components of the deferred income tax benefit attributable
to earnings from operations for the years ended December 31, 1994 and 1993,
are as follows:
Years Ended December 31,
1994 1993
(In thousands)
Deferred tax benefit, exclusive of
adjustments for changes in tax rates $ (108) (5,773)
Adjustments to deferred tax assets and
liabilities for enacted changes
in tax rates - 98
Total deferred tax benefit $ (108) (5,675)
For the year ended December 31, 1992, deferred Federal income tax benefits
of $3,729 resulted from timing differences in the recognition of income and
expense for income tax and financial reporting purposes. The source and tax
effects of those timing differences are presented below:
(In thousands)
Policy acquisition costs expensed for tax purposes
and deferred for financial accounting purposes $ 1,622
Excess of the increase in the liability for future
policy benefits for tax purposes over the increase
for financial statement purposes (3,543)
Investment income recognized for tax purposes
and deferred for financial accounting pruposes 255
Accretion of bond discount recognized for financial
accounting purposes and deferred for tax purposes (454)
Difference in tax accounting and financial
accounting for asset valuation allowances (2,499)
Amounts expensed for financial accounting
purposes not currently tax deductible 161
Other 729
Deferred tax benefit $ (3,729)
There was no valuation allowance for deferred tax assets at January 1, 1993,
or December 31, 1994 and 1993. 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.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1994 and 1993, are presented below:
December 31,
1994 1993
(In thousands)
Deferred tax assets:
Future policy benefits, excess of financial
accounting liability over tax liability $ 81,849 80,241
Fixed maturities, principally due to permanent
impairment write-downs for financial
accounting purposes 27 3,929
Mortgage loans, principally due to valuation
allowances for financial accounting purposes 2,242 2,545
Real estate, principally due to write-downs
for financial accounting purposes 2,382 2,389
Accrued and unearned investment income
recognized for tax purposes and deferred for
financial accounting purposes 2,299 2,791
Accrued operating expenses recorded for financial
accounting purposes not currently tax deductible 2,451 1,649
Net unrealized losses on investment securities 1,184 164
Other 706 314
Total gross deferred tax assets 93,140 94,022
Less valuation allowance - -
Net deferred tax assets 93,140 94,022
Deferred tax liabilities:
Deferred policy acquisition costs,
principally expensed for tax purposes (92,884) (94,837)
Real estate, principally due to
differences in tax and financial accounting
for depreciation (1,964) (2,183)
Other (288) (80)
Total gross deferred tax liabilities (95,136) (97,100)
Net deferred tax liability $ (1,996) (3,078)
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, 1994, 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, 1994, 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. Intercompany tax balances are settled
quarterly.
(8) 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),
previously owned by Mr. Robert L. Moody, Chairman of the Board of Directors
of the Company, in the trust estate of Libbie Shearn Moody. 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 $22,507,000 at December 31,
1994. The excess of $27,000,000 face amount of the reinsured policies over
the statutory admitted value for 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,
1994 1993
(In thousands)
Original valuation of life
interest at February 26, 1960 $ 13,793 13,793
Less accumulated amortization (8,307) (8,028)
Net asset value of life interest in the Trust $ 5,486 5,765
Income from the Trust and related expenses reflected in the accompanying
consolidated statements of earnings are summarized as follows:
Years Ended December 31,
1994 1993 1992
(In thousands)
Income distributions $ 2,937 2,596 2,485
Deduct:
Amortization (279) (275) (272)
Reinsurance premiums (188) (162) (134)
Net income from life interest in the Trust $ 2,470 2,159 2,079
(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 1,164,171
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. In addition, upon 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.
(9) 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,
1994 1993 1992
(In thousands)
Service cost-benefits earned
during the period $ 218 156 194
Interest cost on projected
benefit obligations 498 481 453
Actual return on plan assets 112 (321) (272)
Net amortization and deferral (622) (258) (316)
Net pension cost $ 206 58 59
The following sets forth the plan's funded status and related amounts
recognized in the Company's balance sheet as of:
December 31,
1994 1993
(In thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested
benefits of $5,565,000 and $5,753,000, respectively $ (5,906) (6,128)
Projected benefit obligations for service
rendered to date $ (6,317) (6,594)
Plan assets at fair market value primarily consisting
of equity and fixed income securities 5,513 5,938
Projected benefit obligations in
excess of plan assets (804) (656)
Unrecognized net transitional asset atJanuary 1, 1987
being recognized over employees' average remaining
service of 15 years (374) (429)
Prior service cost not yet recognized in net
periodic pension cost (266) (296)
Unrecognized net losses from past experience
different from that assumed 1,058 1,201
Adjustment to recognize minimum liability (7) (10)
Accrued pension cost $ (393) (190)
The discount rate used in determining the actuarial present value of the
projected benefit obligations was 8.75% for 1994 and 7.25% for 1993. The
projected increase in future compensation levels was based on a rate of 6.0%
for 1994 and 1993. The projected long-term rate of return on plan assets was
8.5% for 1994 and 1993.
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,
1994 1993 1992
(In thousands)
Service cost-benefits earned during the period $ 91 63 81
Interest cost on projected benefit obligations 158 98 87
Net amortization and deferral 129 68 70
Net pension cost $ 378 229 238
The following sets forth the plan's funded status and related amounts
recognized in the Company's balance sheet as of:
December 31,
1994 1993
(In thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested
benefits of $640,000 and $799,000, respectively $ (670) (836)
Projected benefit obligations for service
rendered to date (1,749) (2,182)
Plan assets at fair market value - -
Projected benefit obligations in
excess of plan assets (1,749) (2,182)
Unrecognized net transitional obligation
at January 1, 1991, being recognized over
employees' average remaining service of 12 years 677 756
Unrecognized net losses from past experience
different from that assumed 22 754
Adjustment to recognize minimum liability - (164)
Accrued pension cost $ (1,050) (836)
The discount rate used in determining the actuarial present value of the
projected benefit obligations was 8.75% for 1994 and 7.25% for 1993. The
projected increase in future compensation levels was based on a rate of 6.0%
for 1994 and 1993.
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, 1994 and 1993, Company
contributions totaled $198,000 and $187,000.
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, 1994 and 1993, Company
contributions totaled $45,000 in each year.
SFAS No. 112, "Employers' Accounting for Postemployment Benefits," was
issued by the FASB in November, 1992. This statement establishes accounting
standards for employers who provide benefits to former or inactive employees
after employment but before retirement. Postemployment benefits include all
types of benefits provided to former or inactive employees, their
beneficiaries and covered dependents. The statement is effective for fiscal
years beginning after December 15, 1993. As the Company provides
insignificant postemployment benefits, implementation had no significant
impact on the results of operations of the company.
(10) 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,
1994 and 1993. The average interest rates on borrowings for the years ended
December 31, 1994 and 1993, were 4.45% and 4.36%, respectively.
Certain subsidiaries of the Company's brokerage subsidiary (Westcap) 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 and 1993 (the subsidiary's fiscal year-end), had aggregate market
values of approximately $35,354,000 and $119,082,000, respectively. The
average interest rates on the borrowings for the years ended September 30,
1994 and 1993, were 4.60% and 4.24%, respectively.
(11) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At September 30, 1994 and 1993, 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 and
$189,659,000. These agreements had maturity dates ranging from one to
ninety days and weighted average interest rates of 4.2% and 3.3%. During
the years ended September 30, 1994 and 1993, the maximum month-end balance
of outstanding agreements was $270,854,000 and $186,896,000, and the
average amount of outstanding agreements was $197,327,000 and $75,634,000,
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 and 1993, 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 and $129,523,000.
These agreements had maturity dates ranging from one to ninety days and
weighted average interest rates of 4.8% and 3.5%. During the years ended
September 30, 1994 and 1993, the maximum month-end balance of outstanding
agreements was $245,564,000 and $127,971,000, and the average amount of
outstanding agreements was $169,187,000 and $66,941,000, respectively.
(12) COMMITMENTS AND CONTINGENCIES
(A) Current Regulatory Issues
In December, 1994, the NAIC adopted for statutory accounting practices
Actuarial Guideline GGG for determining minimum reserves for annuity
contracts with multiple benefit streams often referred to as two-tier
annuities. The guideline will be effective December 31, 1995, and will
apply to all contracts issued on or after January 1, 1981, and allowance is
made for a three-year phase-in period. However, the Company's statutory
reserving practices for two-tier annuities follow an agreement reached with
its state of domicile, Colorado.
The Colorado Division of Insurance (the Division) issued a Notice in 1987
which defined the basis of reserving for two-tier annuities and utilized a
single interest rate for all benefit streams. Based on the Colorado Notice
and the uncertainty of the implementation of Actuarial Guideline GGG, the
Company added $7,000,000 in 1992 and $6,000,000 in 1993 to its existing
statutory annuity reserves. These additional reserves were agreed upon and
approved by the Colorado Division of Insurance.
During 1993, the Division conducted an Association Financial Examination of
the Company for the six-year period ended December 31, 1992. One of the
results of the examination was an agreement between the Division and the
Company concerning the permitted statutory reserving basis for two-tier
annuities. The agreement includes a plan to meet a target reserve by
December 31, 1996. The agreement states the acceptable difference between
the target reserve and the statutory reserve held by the Company. The
difference will meet the following schedule:
December 31, 1994 $13,600,000
December 31, 1995 5,000,000
December 31, 1996 -
The Company has met the above scheduled difference for December 31, 1994.
In fact, at December 31, 1994, the difference was less than that required,
and it is anticipated that the Company will not require any additional
statutory reserves in order to meet the above schedule of differences. This
agreement 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.
On August 5, 1994, the Sarasota-Manatee Airport Authority filed a complaint
in the United States District Court, Middle District of Florida, Tampa
Division, against National Western Life Insurance Company (the Company), The
Westcap Corporation and subsidiaries of Westcap. The suit seeks rescission
of securities purchase transactions by the Sarasota-Manatee Airport
Authority from Westcap, judgment for damages, or such other relief as the
court may deem appropriate. The Company is named as a "controlling person"
of the Westcap defendants. The Company and Westcap have answered the complaint
and denied all material allegations. Westcap and the Company are of the
opinions that Westcap has adequate documentation to validate all such
securities purchase transactions by Sarasota-Manatee Airport Authority, and
that Westcap and the Company each have adequate defenses to the litigation.
Although the alleged damages would be material to Westcap's financial
position, a reasonable estimate of any actual losses which may result from
this suit cannot be made at this time. The litigation is in early stages
of discovery.
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 there
has been no discovery at this time.
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 would be material to the financial position of
The Westcap Corporation, a reasonable estimate of actual loss 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 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.
National Western Life Insurance Company is 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.
(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 $14,700,000 at December 31, 1994. 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 had no commitments to purchase investment
securities at December 31, 1994.
In the normal course of business, Westcap enters 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.
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.
Substantially all of these contracts are matched. In the opinion of
management, the settlement of these transactions is not expected to
have a material effect on the Company's financial condition.
In the normal course of business, Westcap also enters into contracts
involving securities not yet purchased principally related to
mortgage-backed and U.S. Government securities issues. These financial
instruments are considered to have off-balance sheet risk, as they involve,
to varying degrees, elements of interest rate risk in excess of the amount
recognized in the statement of financial condition. Risks arise from
movements in securities values and interest rates.
(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.
In December, 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 significantly increased its estimates in 1994 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 $4,869,000, $4,583,000 and $1,877,000 for the years
ended December 31, 1994, 1993 and 1992, respectively.
(13) STOCKHOLDERS' EQUITY
(A) Dividend Restrictions
Dividends to stockholders can be paid only from the Company's statutory
unassigned surplus as determined by accounting principles prescribed by
insurance regulatory authorities. Statutory unassigned surplus amounted to
approximately $181,790,000 at December 31, 1994, and stockholders' equity in
that amount was available for dividends subject to the tax effects of
distributions from the policyholders' surplus account as described in note
7.
(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%
To obtain shares in accordance with the above vesting schedule, an officer
must be actively employed by the Company on such dates and in the same or
higher office as that held on December 31, 1992. However, upon the
occurrence of certain events such as death or retirement, the officer shall
become fully vested. Of the 13,496 total shares granted, 10,350 shares have
been issued and are outstanding as of December 31, 1994. The remaining
shares will be issued pursuant to the vesting requirements described above.
(14) FOREIGN SALES AND SIGNIFICANT AGENCY RELATIONSHIPS
Total premium revenues and universal life and annuity contract deposits
related to life insurance written in foreign countries, primarily Central
and South America, were approximately $53,846,000, $57,450,000 and
$58,300,000, for the years ended December 31, 1994, 1993 and 1992,
respectively.
A significant portion of the Company's universal life and investment annuity
contracts are written through one agency. Such business accounted for
approximately 20%, 44% and 45% of total premium revenues and universal life
and investment annuity contract deposits for 1994, 1993 and 1992,
respectively.
(15) SEGMENT INFORMATION
Information concerning the Company's two industry segments follows:
Life Insurance Brokerage Consolidated
Operations Operations Eliminations Amounts
(In thousands)
Gross revenues:
1994 $ 278,431 40,208 (1,673) 316,966
1993 273,363 105,923 (1,656) 377,630
1992 279,882 123,094 (1,499) 401,477
Net earnings (loss):
1994 $ 37,172 (2,936) - 34,236
1993 34,892 21,832 - 56,724
1992 36,683 26,728 - 63,411
Identifiable assets:
1994 $ 2,702,184 232,057 (19,187) 2,915,054
1993 2,590,537 372,301 (21,787) 2,941,051
1992 2,554,850 164,002 (20,355) 2,698,497
(16) 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)
1994:
Revenues $ 83,825 81,913 78,317 72,911
Net earnings 8,511 10,194 11,747 3,784
Per Share:
Net earnings 2.44 2.93 3.37 1.08
1993:
Revenues $ 87,812 96,404 90,446 102,968
Earnings before
cumulative effect
of change in
accounting principle 10,335 13,746 8,836 18,287
Cumulative effect
of change in accounting
for income taxes 5,520 - - -
Net earnings 15,855 13,746 8,836 18,287
Per Share:
Earnings before cumulative
effect of change in
accounting principle $ 2.97 3.95 2.54 5.25
Cumulative effect of
change in accounting
for income taxes 1.58 - - -
Net earnings 4.55 3.95 2.54 5.25
The fourth quarter net earnings in 1994 reflect the following significant
items:
(A) 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.
(B) Fourth quarter 1994 net losses from the Company's brokerage subsidiary,
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. Adverse bond market conditions due to increasing market interest
rates was the major factor for lower production and the resulting loss for
the subsidiary.
The fourth quarter net earnings in 1993 reflect the following significant
items:
(A) Realized losses of approximately $2,174,000 were recorded in the fourth
quarter of 1993 resulting from write-downs of securities held to maturity
and increases in allowances for possible losses for real estate and mortgage
loans.
(B) Net earnings from the Company's brokerage subsidiary were approximately
$7,309,000, which is higher than previous quarters in 1993 but is
significantly lower than corresponding 1992 fourth quarter net earnings.
(17) 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. 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.
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, 1994
and 1993. 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.
Investment and supplemental contracts: Fair value of the Company's
liabilities for deferred investment annuity contracts are 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 are
estimated by discounting estimated cash flows using U.S. Treasury bill rates
as of December 31, 1994 and 1993.
Fair value for the Company's insurance contracts other than investment
contracts are not required to be disclosed. This includes the Company's
traditional and universal life products. However, the fair values of
liabilities under all insurance contracts are taken into consideration in
the Company's overall management of interest rate risk, which minimizes
exposure to changing interest rates through the matching of investment
maturities with amounts due under insurance and investment contracts.
Short-term borrowings: 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: These securities are carried at fair
values determined in the same manner as investment securities described
above.
Securities sold under agreements to repurchase: The carrying amounts and
fair values of these securities 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, 1994 December 31, 1993
Carrying Fair Carrying Fair
Value Value Value Value
(In thousands)
ASSETS
Investments in debt and equity
securities:
Securities held to maturity $ 1,605,813 1,488,063 1,787,360 1,908,714
Securities available
for sale 354,300 354,300 39,355 39,355
Trading securities 69,666 69,666 116,918 116,918
Securities purchased under
agreements to resell 153,971 153,971 186,896 186,896
Cash and short-term investments 21,247 21,247 32,823 32,823
Mortgage loans 189,632 200,696 188,920 199,903
Policy loans 151,487 147,858 153,822 176,549
Life interest in Libbie
Shearn Moody Trust 5,486 22,507 5,765 27,000
LIABILITIES
Deferred investment
annuity contracts $ 1,681,797 1,458,303 1,660,109 1,437,383
Immediate investment
annuity and
supplemental contracts 117,234 116,943 87,784 94,490
Short-term borrowings 29,698 29,698 82,852 82,852
Securities sold not yet
purchased 87,336 87,336 78,835 78,835
Securities sold under
agreements to repurchase 91,781 91,781 127,971 127,971
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.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1994
(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 $ 24,595 23,753 24,595
States, municipalities,
and political subdivisions 6,434 6,816 6,434
Foreign governments 107,299 100,094 107,299
Public utilities 272,478 250,393 272,478
Corporates 495,335 456,122 495,335
Mortgage-backed 696,887 648,100 696,887
Total securities held to maturity 1,603,028 1,485,278 1,603,028
Securities available for sale:
United States government
and government agencies and
authorities 7,353 4,945 4,945
Foreign governments 16,014 15,269 15,269
Public utilities 10,263 9,500 9,500
Corporates 76,266 76,045 76,045
Mortgage-backed 228,389 222,232 222,232
Total securities available for sale 338,285 327,991 327,991
Total fixed maturity bonds 1,941,313 1,813,269 1,931,019
Equity securities:
Securities available for sale:
Common stocks:
Public utilities 192 182 182
Banks, trust and
insurance companies 195 1,329 1,329
Industrial and all other 101 145 145
Preferred stocks 27,251 24,653 24,653
Total equity securities 27,739 26,309 26,309
Mortgage loans 183,286 177,357
Policy loans 151,487 151,487
Other long term investments 26,675 (2) 24,872
Securities purchased under
agreement to resell 153,971 153,971
Trading securities 69,666 69,666
Cash and short-term investments 21,247 21,247
Total investments other than
investments in related parties $ 2,575,384 2,555,928
(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, 1994
(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
$5,929,000, and real estate is stated at cost before allowances for possible
losses of $1,803,000. Trading securities are shown at market value. The
following investments in related parties have been excluded: fixed maturity
bonds - $2,785,000 and mortgage loans - $12,275,000.
(2) Real estate acquired by foreclosure included in other long-term
investments totaled approximately $6,407,000.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1994, 1993 and 1992
(In thousands)
(1)
Balance at Charged to Balance
Beginning Costs and (2) (3) at End
Description of Period Expenses Reductions Transfer of Period
Valuation accounts
deducted from
applicable assets:
Allowance for possible
losses on brokerage
trade receivables:
December 31, 1994 $ 123 877 - - 1,000
December 31, 1993 $ 125 - (2) - 123
December 31, 1992 $ 140 100 (115) - 125
Allowance for
possible losses
on mortgage loans:
December 31, 1994 $ 6,849 307 (927) (300) 5,929
December 31, 1993 $ 6,000 2,152 (702) (601) 6,849
December 31, 1992 $ 3,125 2,875 - - 6,000
Allowance for
possible losses
on real estate:
December 31, 1994 $ 1,556 318 (371) 300 1,803
December 31, 1993 $ 9,950 1,208 (10,203) 601 1,556
December 31, 1992 $ 9,500 450 - - 9,950
(1) Except for expenses related to brokerage trade receivables, which were
charged to brokerage expenses, 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, President, Chief Operating
Chief Executive Officer, Officer, Director
Director
/S/ Robert L. Busby, III
By: Robert L. Busby, III
Senior Vice President -
Chief Administrative Officer,
Chief Financial Officer
and Treasurer
March 28, 1995
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
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. /S/ E. J. Pederson
Charles D. Milos, Jr., E. J. Pederson,
Director Director
March 28, 1995
Date
EX-27
2
7
1000
YEAR
DEC-31-1994
JAN-01-1994
DEC-31-1994
397,657
1,605,813
1,488,063
26,309
189,632
17,766
2,570,988
21,247
1,779
291,274
2,915,054
2,371,693
0
13,309
9,874
29,698
3,488
0
0
271,646
2,915,054
83,649
190,021
1,626
1,462
161,854
32,131
29,394
53,426
19,190
34,236
0
0
0
34,236
9.82
9.82
0
0
0
0
0
0
0
Consists of $18,938 revenues from traditional contracts subject to FAS
60 accounting treatment and $64,711 revenues from universal life and
investment annuity contracts subject to FAS 97 accounting treatment.
Consists of $32,132 benefits paid to policyholders, $658 increase in
reserves on traditional contracts and $129,064 interest on univeral life
and investment annuity contracts.