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, 1993
[ ] 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
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
11, 1994, was approximately $83,104,000.
At March 11, 1994, the number of shares of Registrant's common
stock outstanding was: Class A - 3,284,672; Class B - 200,000.
PART I
ITEM 1. BUSINESS
(a) General
Life Insurance Business
National Western Life Insurance Company (hereinafter referred to as
"National Western", "Company", or "Registrant") is a life, health,
and accident insurance corporation, chartered in the State of
Colorado in 1956, and doing business in 43 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 1993, the Company recorded approximately $172
million in premium revenues, universal life, and investment annuity
contract deposits. New life insurance issued during 1993
approximated $1.1 billion and the total amount in force at year-end
1993 was $7.4 billion. As of December 31, 1993, 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,
1993. 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, 1992, the
most recent date for which information is available, National
Western ranked 122 in total admitted assets and 226 in life
insurance in force among the estimated 2,000 life insurance
companies domiciled in the United States.
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 6,475 at
December 31, 1993. 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:
<TABLE>
<CAPTION>
Years Ended
December 31,
1993 1992 1991
<S> <C> <C> <C>
Commissions 17% 17% 19%
Other underwriting expenses 9% 7% 6%
Totals 26% 24% 25%
</TABLE>
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 estimates that more than 65% of its ordinary life insurance
in force at December 31, 1993, was issued without a medical
examination.
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. At December 31, 1993, approximately 3%
of the individual life insurance in force was represented by
substandard risks.
Geographical Distribution of Business: For the year 1993, insurance
and annuity policies held by residents of the State of California
accounted for 18% of premium revenues, universal life, and
investment annuity contract deposits from direct business, while
policies held by residents of Texas and Florida accounted for
approximately 13% and 4%, respectively. All other states of the
United States accounted for 34% of premium revenues from direct
business, with no such state accounting for as much as 4% of
premium revenues. The remaining 31% of premium revenues, universal
life, and investment annuity contract deposits were derived from
the Company's policies issued to foreign nationals.
Approximately 63% of the life insurance face amount issued by the
Company during 1993 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.
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:
<TABLE>
<CAPTION>
Net Unrealized
Invested Net Realized Appreciation
Calendar Assets of Insurance Investment Gains(Losses) Increase (Losses)
Year Operations Income(*) On Investments (Decrease)
(In thousands)
<C> <C> <C> <C> <C>
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)
1989 1,539,668 129,743 (3,028) 886
<FN>
(*) Net investment income is after deduction of investment
expenses, but before net capital gains (losses) and Federal income
taxes.
</TABLE>
The following table shows the percentage distribution of insurance
operation investments:
<TABLE>
<CAPTION>
December 31,
1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Fixed maturities 79.9% 77.5% 77.1% 81.7% 75.8%
Mortgage loans 8.4 8.1 7.8 6.4 6.8
Policy loans 6.9 7.2 7.7 8.2 8.8
Other investments 4.8 7.2 7.4 3.7 8.6
</TABLE>
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 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
has not been completed and published. However, the Company has
obtained a draft copy of the report and has reviewed it with the
examination team. The draft report contained no adjustments or
issues which would have a significant, negative impact on the
operations of the Company. A final published report is anticipated
by mid-1994.
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 the implementation of nonstatutory guidelines.
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 Business
The Westcap Corporation, a wholly-owned subsidiary of the Company,
is a brokerage firm headquartered in Houston, Texas, with 178
employees. Its wholly-owned subsidiaries include Westcap
Securities, Inc. (Westcap Securities), Westcap Government
Securities, Inc. (Westcap Government Securities), and Westcap
Mortgage Company (Westcap Mortgage).
Westcap Securities is primarily a dealer in municipal and corporate
bonds and collateralized mortgage obligations and serves as an
underwriter for municipal bond issuers. It is subject to the
Securities and Exchange Commission's Uniform Net Capital Rule (Rule
15c3-1), which requires the maintenance of minimum net capital and
requires that the ratio of its aggregate indebtedness to net
capital, both as defined, shall not exceed 15 to 1. Retained
earnings may be restricted as to payment of dividends if this ratio
exceeds 10 to 1. At September 30, 1993, its most recent fiscal year-
end, Westcap Securities' net capital was in excess of the minimum
requirements and its ratio of aggregate indebtedness to net capital
was 0.1 to 1.
Westcap Government Securities is principally a secondary market
dealer in obligations issued or guaranteed by the U.S. government
or its agencies. It is subject to the capital rules of the
Government Securities Act of 1986 that requires the maintenance of
minimum liquid capital and the ratio of liquid capital to measured
market and credit risk, all as defined, to be 120% or higher.
Distributions of equity in the form of dividends or purchases of
common stock may be restricted if this ratio is less than 150%. At
September 30, 1993, its most recent fiscal year-end, Westcap
Government Securities' ratio of liquid capital to market and credit
risk was 376%.
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 customer base includes commercial banks,
savings and loan associations, public funds, credit unions,
insurance companies, investment advisors, private pensions,
mortgage bankers, and sophisticated individual investors. Westcap
offers a complete mix of debt securities, including mortgage-backed
securities, U.S government and federal agency issues,
collateralized mortgage obligations (CMOs), real estate mortgage
investment conduits (REMICs), stripped mortgage-backed securities
(SMBs), SBA loan pools, certificates of deposit, and corporate,
taxable, and tax-exempt bonds.
Effective October 1, 1993, Westcap Securities and Westcap
Government Securities were merged with and into Westcap Securities
Operating Partnership, a newly formed Delaware limited partnership
whose sole partners are Westcap Securities Management, Inc.
(Management) and Westcap Securities Investment, Inc. (Investment).
Both Management and Investment were incorporated on October 1, 1993,
under the laws of the State of Nevada and are wholly-owned
subsidiaries of The Westcap Corporation. The change in
organizational structure had no impact on the financial statements
of The Westcap Corporation as of September 30, 1993, its fiscal
year-end. As National Western consolidates The Westcap Corporation
as of September 30, the organizational changes also had no impact
on the consolidated financial statements as of December 31, 1993.
(b) Financial Information About Industry Segments
Information concerning the Company's two industry segments follows:
<TABLE>
<CAPTION>
Life
Insurance Brokerage Consolidated
Business Business Eliminations Amounts
(In thousands)
<S> <C> <C> <C> <C> <C>
Gross revenues:
1993 $ 273,363 105,923 (1,656) 377,630
1992 279,882 123,094 (1,499) 401,477
1991 253,396 43,837 (593) 296,640
Net earnings:
1993 $ 34,892 21,832 - 56,724
1992 36,683 26,728 - 63,411
1991 20,514 5,244 - 25,758
Identifiable assets:
1993 $2,590,537 372,301 (21,787) 2,941,051
1992 2,554,850 164,002 (20,355) 2,698,497
1991 2,363,248 231,184 (13,400) 2,581,032
</TABLE>
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 $565,000 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, which was to expire in 1994, has been
extended through October 2000, with rent of $477,600 per year.
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 38,500 square feet.
Westcap also leases several small branch office spaces in Austin,
Texas, Sarasota, Florida and Morris Plains, New Jersey. The annual
lease cost for all locations through the year 1997 will range from
approximately $251,000 to $618,000.
ITEM 3. LEGAL PROCEEDINGS
Suit was filed in the United States District Court for the District
of Minnesota, Fourth Division, on September 14, 1989, against the
Company by Midwest Savings Association, F.A. (Midwest Savings).
Midwest Savings is the successor to Midwest Federal Savings and
Loan Association of Minneapolis (Midwest Federal), which was taken
under receivership by the Federal Savings and Loan Insurance
Corporation (FSLIC). Midwest Savings sued the Company for the
return of prepaid life insurance premiums and the present cash
value for the policies issued to Midwest Federal Executive Officers
Plan. Midwest Savings acquired these life insurance policies as
part of its assumption of Midwest Federal's assets and deposit
liabilities. The Company claimed that Midwest Savings was not
entitled to receive the policy values because Midwest Federal
executed assignments of these policies to the Company as security
for five debentures purchased by the Company from Midwest Federal
in the total face amount of $8,000,000. Midwest Savings claimed
that the assignments were not intended and did not secure the
debentures.
Plaintiff filed a motion for summary judgment which was heard by
the Court on January 3, 1991. On February 21, 1991, the Court
granted plaintiff's motion for summary judgment, and on March 7,
1991, the Resolution Trust Corporation was substituted as plaintiff
in the case. The District Court judgment represented an unfavorable
outcome to the Company. The Company appealed the court ruling and
also recorded a corresponding $8,000,000 liability for the
potential payment of this claim. The Company has since 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. This difference has been reflected as other income in
the accompanying statements of earnings for the year ended December
31, 1993.
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, Cause No. 940-1920, against Westcap
Government Securities, Inc., Westcap Securities, L.P., Westcap
Securities Management, Inc. (collectively Westcap) and National
Western Life Insurance Company. The suit seeks recession 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. As of the date hereof, neither Westcap nor the
Company has been formally served with the complaint, no discovery
has occurred, no judicial proceedings or hearings have occurred, no
answers or responses have been prepared or filed, and 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 financial position, a reasonable estimate of any
actual losses which may result from this suit cannot be made at
this time.
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 1993
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 in which the common stock of the Company is
traded is the NASDAQ/NMS Over-the-Counter Market. The high and low
sales prices for the common stock for each quarter in the last two
years are shown in the following table:
<TABLE>
<CAPTION>
High Low
<C> <S> <C> <C>
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
1992: First Quarter $ 40-1/4 27
Second Quarter 37-1/2 26-1/2
Third Quarter 37-1/2 26-1/2
Fourth Quarter 49-1/4 28-1/4
</TABLE>
These quotations represent prices in the Over-the-Counter 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, 1993, was as
follows:
Class A Common Stock 7,637
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:
<TABLE>
<CAPTION>
Years Ended December 31,
1993 1992 1991 1990 1989
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues:
Life and annuity premiums $ 18,624 21,365 21,525 22,895 25,920
Universal life and investment
annuity contract revenues 67,778 56,543 44,627 33,777 22,974
Net investment income 180,252 184,149 176,443 159,938 129,743
Brokerage revenues 105,923 123,094 43,837 25,681 16,453
Other income 1,847 616 848 578 498
Realized gains (losses)
on investments 3,206 15,710 9,360 (17,071) (3,028)
Total revenues 377,630 401,477 296,640 225,798 192,560
Expenses:
Policyholder benefits 34,646 34,234 31,908 31,070 32,224
Amortization of deferred
policy acquisition costs 33,159 25,085 16,852 9,263 13,620
Universal life and investment
annuity contract interest 130,875 135,792 143,018 128,150 101,487
Other insurance operating expenses 28,959 27,870 32,897 36,455 26,069
Brokerage expenses 72,310 82,561 34,549 22,816 18,077
Total expenses 299,949 305,542 259,224 227,754 191,477
Provision (benefit) for
Federal income taxes 26,477 32,524 11,170 1,099 (54)
Earnings (loss) before cumulative
effect of change in accounting
principle and discontinued operations 51,204 63,411 26,246 (3,055) 1,137
Cumulative effect of change in
accounting for income taxes 5,520 - - - -
Loss from discontinued operations - - (488) (1,695) (528)
Net earnings (loss) $ 56,724 63,411 25,758 (4,750) 609
Per Share:
Earnings (loss) before cumulative
effect of change in accounting
principle and discontinue operations $ 14.71 18.23 7.55 (0.88) 0.33
Cumulative effect of change in
accounting for income taxes 1.58 - - - -
Loss from discontinued operations - - (0.14) (0.49) (0.15)
Net earnings (loss) $ 16.29 18.23 7.41 (1.37) 0.18
Total assets $ 2,941,051 2,698,497 2,581,032 2,288,281 1,908,181
Total liabilities $ 2,698,333 2,512,406 2,458,589 2,192,123 1,807,009
Stockholders' equity $ 242,718 186,091 122,443 96,158 101,172
</TABLE>
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 31%
of the Company's total premium revenues, universal life, and
investment annuity contract deposits in 1993. The Company ranks
among the top ten percent of all life insurance companies measured
by assets. The primary products marketed by the Company are its
universal life 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. As
this method of operation has proven successful, there are no
immediate plans to make any significant changes in marketing
operations.
In addition to the life insurance business, the Company has two
wholly-owned subsidiaries, The Westcap Corporation and Commercial
Adjusters, Inc. The Westcap Corporation's principal activity is
that of a U.S. government and municipal securities dealer, and
Commercial Adjusters, Inc. is a small corporation investing
primarily in six real estate joint ventures.
INVESTMENTS IN DEBT SECURITIES
Investment Philosophy
The Company's investment philosophy is to maintain a diversified
portfolio of investment grade debt securities that provides
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 actively manage its portfolio which entails
monitoring and reacting to all components which affect changes in
the price or value of investments in debt securities. As a result,
the Company classifies these securities for financial statement
reporting purposes as either fixed maturities, securities available
for sale or trading securities. The reporting category chosen
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 fixed maturities. 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, fixed maturities 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
market value. Any trading profits or losses and unrealized gains or
losses resulting from changes in the market value of the securities
are reflected as a component of income in the Company's financial
statements.
Securities that are not classified as either fixed maturities 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 and performance or
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 the
lower of aggregate cost or market value. Any unrealized gains or
losses resulting from changes in the market value of the securities
are reflected as a component of stockholders' equity.
In May, 1993, the Financial Accounting Standards Board (FASB) 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.
The Company's current accounting policy as described above is
similar to the requirements of this new statement. Significant
differences are that securities available for sale are currently
being 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 reporting categories. The potential financial effects of this
change in accounting principle are described in more detail in a
later section of this report. The Company plans to implement the
statement in the first quarter of 1994. Although the
implementation of this statement will have significant accounting
effects, the new statement will not significantly change or impact
the Company's investment philosophy and strategies.
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 market value. The Company's objective in these
circumstances is to determine if the decline in market value is due
to changing market expectations regarding inflation and general
interest rates or other factors.
Additional review procedures are performed on those market 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, industry trends, recent credit reports 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 market 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, 1993, the fixed maturities portfolio totaled $1.79
billion or 70.1% of the Company's total invested assets. Securities
available for sale were $39 million or 1.5% of total invested
assets, while trading securities were $117 million or 4.6% of total
invested assets at the same time period.
The carrying values of the trading securities and securities
available for sale were the same as their market values as of
December 31, 1993. However, the market value of the Company's fixed
maturities was $1.91 billion compared to a carrying value of $1.79
billion. This represents a net unrealized gain of $121 million. The
unrealized gain is reflective of the decline in market interest
rates during 1993 and 1992.
The Company maintains a diversified debt securities portfolio which
consists of various types of fixed income securities including
primarily U.S. government, public utilities, corporate and
mortgage-backed securities. Investments in mortgage-backed
securities include U.S. government and private issue
mortgage-backed pass-through securities as well as collateralized
mortgage obligations (CMOs). As of December 31, 1993 and 1992, the
Company's debt securities portfolio consisted of the following mix
of securities:
<TABLE>
<CAPTION>
Percent of
Debt Securities
1993 1992
<S> <C> <C>
Public utilities 16.3 % 26.6 %
Other corporates 25.9 13.4
Mortgage-backed securities 53.3 52.8
U.S. government 2.7 1.8
Foreign government 1.3 1.1
States and political subdivisions 0.5 4.3
Totals 100.0 % 100.0 %
</TABLE>
The amortized cost and estimated market values of investments in
debt securities at December 31, 1993, 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.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
(In thousands)
<S> <C> <C>
Due in one year or less $ - -
Due after one year through five years 61,313 62,662
Due after five years through ten years 226,182 237,815
Due after ten years 553,062 585,173
840,557 885,650
Mortgage-backed securities 957,953 1,032,039
Totals $1,798,510 1,917,689
</TABLE>
As market interest rates continued to decline 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 16.3% in 1993.
Principal prepayments on mortgage-backed securities also increased
during 1993 due to the continued decline in interest rates.
However, the Company substantially reduced its prepayment risk by
investing primarily in collateralized mortgage obligations which
have more predictable cash flow patterns than pass-through
securities. 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.
This is achieved by redirecting prepayments to other CMO classes.
PAC I tranches now account for over 80% of the total CMO portfolio
as of December 31, 1993. 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 insures that the security
fits appropriately within the Company's investment philosophy and
asset/liability management parameters.
In addition to managing prepayment and call risk, 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, increased slightly from 1992 primarily due
to two corporate issuers that were downgraded.
<TABLE>
<CAPTION>
Below Investment
Grade Debt Securities
% of
Carrying Market Invested
Value Value Assets
(In thousands)
<S> <C> <C> <C>
December 31, 1993 $ 24,261 24,223 1.0%
December 31, 1992 16,259 14,700 0.7%
December 31, 1991 30,119 30,119 1.4%
</TABLE>
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, 1993 and 1992, securities with principal balances
totaling $3,151,000 and $3,750,000 were in default and on
non-accrual status.
MORTGAGE LOANS AND REAL ESTATE
Investment Philosophy
The Company has changed its mortgage loan philosophy over the past
several years. Historically, the Company had concentrated its
mortgage loans within the State of Texas. The majority of loans
were brought to the Company by brokers and others interested in
securing a mortgage loan. While the mortgage loan portfolio has
performed well despite downturns in the Texas economy, the Company
has been forced to foreclose on certain loans.
The Company now takes a more proactive approach in originating
mortgage loans. This change in philosophy has resulted in an
overall improvement in the quality of mortgage loans, while
diversifying exposures geographically. In most cases, mortgage
loans now are: guaranteed by the borrower and secured by the
property, amortized over the term of the lease on the property
which is guaranteed by the lessee, and 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 still
require a loan-to-value ratio of 75% or less.
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's direct investments in real estate are not a
significant portion of its total investment portfolio. The majority
of real estate owned was acquired through mortgage loan
foreclosures. 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
$188,920,000 and $177,236,000, or 7.4% and 7.6% of total invested
assets, at December 31, 1993 and 1992, respectively. 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 country and by property type as of December 31, 1993
and 1992, was as follows:
<TABLE>
<CAPTION>
December 31,
1993 1992
<S> <C> <C>
West South Central 51.3 % 53.0 %
Mountain 15.2 16.0
Pacific 10.0 5.0
East South Central 6.8 8.2
South Atlantic 6.8 7.0
West North Central 4.8 3.2
All Other 5.1 7.6
Totals 100.0 % 100.0 %
</TABLE>
<TABLE>
<CAPTION>
December 31,
1993 1992
<S> <C> <C>
Retail 66.7 % 65.1 %
Office 17.9 16.2
Apartment 5.8 6.3
Hotel/Motel 3.1 3.5
Industrial 0.8 0.9
Residential 0.5 0.8
Other Commercial 5.2 7.2
Totals 100.0 % 100.0 %
</TABLE>
As of December 31, 1993, the allowance for possible losses on
mortgage loans was $6,849,000. Additions to the allowance totaling
$2,152,000 were recognized as realized losses on investments in the
Company's 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, 1993 and 1992, the Company had
approximately $4,191,000 and $5,154,000, respectively, of mortgage
loan principal balances on a non-accrual status. For the years
ended December 31, 1993 and 1992, the approximate reduction in
interest income associated with non-accrual loans was as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
1993 1992
(In thousands)
<S> <C> <C>
Interest income at contract rate $ 758 601
Interest income recognized 113 218
Interest income not accrued $ 645 383
</TABLE>
In addition to the non-accrual loans, the Company had mortgage
loans with restructured terms totaling approximately $14,257,000
and $7,263,000 at December 31, 1993 and 1992, respectively. For the
years ended December 31, 1993 and 1992, the approximate reduction
in interest income associated with restructured loans was as
follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
1993 1992
(In thousands)
<S> <C> <C>
Interest income under original terms $ 1,564 816
Interest income recognized 1,378 606
Reduction in interest income $ 186 210
</TABLE>
The contractual maturities of principal payments on mortgage loans
at December 31, 1993, are as follows:
<TABLE>
<CAPTION>
Principal
Payments
Due
(In thousands)
<S> <C>
Due in one year or less $ 10,290
Due after one year through five years 58,950
Due after five years 126,900
Total $ 196,140
</TABLE>
The Company owns real estate that was acquired through foreclosure
and through direct investment totaling approximately $22,672,000
and $20,401,000 at December 31, 1993 and 1992, respectively. This
small concentration of properties represents less than one percent
of the Company's entire investment portfolio. The real estate
holdings consist primarily of income-producing properties which are
being operated by the Company. The Company recognized operating
income on these properties of approximately $607,000 and $298,000
for the years ended December 31, 1993 and 1992, respectively. 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 $1,208,000 and $450,000
for the years ended December 31, 1993 and 1992, 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 has 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
The following table reflects financial statement income and expense
items as a percentage of total Company revenues. Significant
changes and fluctuations between years are described in detail
following the table.
<TABLE>
<CAPTION>
Relationship to Total
Revenues
Years Ended December 31,
1993 1992 1991
<S> <C> <C> <C>
Life and annuity premiums 4.9 % 5.3 % 7.2 %
Universal life and investment
annuity contract revenues 17.9 14.1 15.0
Net investment income 47.7 45.9 59.5
Brokerage revenues 28.1 30.7 14.8
Other income 0.5 0.1 0.3
Realized gains on investments 0.9 3.9 3.2
Total revenues 100.0 100.0 100.0
Policyholder benefits (9.2) (8.5) (10.8)
Amortization of deferred
policy acquisition costs (8.8) (6.3) (5.7)
Universal life and investment
annuity contract interest (34.7) (33.8) (48.2)
Other insurance operating expenses (7.7) (6.9) (11.1)
Brokerage expenses (19.1) (20.6) (11.6)
Provision for Federal income taxes (7.0) (8.1) (3.8)
Cumulative effect of change in
accounting for income taxes 1.5 - -
Loss from discontinued operations - - (0.1)
Net earnings 15.0 % 15.8 % 8.7 %
</TABLE>
Life and Annuity Premiums: This revenue category represents the
premiums on traditional type products. However, sales in most of
the Company's markets have moved toward the non-traditional types
such as universal life and investment annuities. This move in
market direction accounts for the decrease in revenues in this
category over the three-year period.
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 have increased from $44.6 million in
1991 to $67.8 million in 1993 due to the Company's concentration of
sales efforts on these products. However, increased surrender
charge revenues resulting from increased policy surrenders account
for the majority of the increase. Also, although these revenues
continue to increase, the actual universal life and investment
annuity deposits collected have decreased over the past three
years. Deposits collected for the years ended December 31, 1993,
1992 and 1991 were $153.8 million, $243.2 million and $258.8
million, respectively.
The decline in universal life and investment annuity deposits
collected is primarily related to the Company's two-tier investment
annuity products. Over the past several years, one of the Company's
leading products was a two-tier rollover annuity. This annuity was
designed to restore a policyholder's loss of funds, if any, upon
transfer from another qualified plan vehicle to the Company's
annuity contract. In developing the product, the Company
anticipated that there would be a limited market for this type of
annuity and that production would peak and then decrease.
Production did peak in 1989 as assumed and has steadily decreased
since that time. Due to this decline in sales and certain
regulatory issues concerning two-tier products, the Company
discontinued all sales of its two-tier annuities in the third
quarter of 1992. (The regulatory issues are described in detail in
a later section of this filing entitled "Current Regulatory
Issues.") The Company also lowered credited interest rates on its
universal life and annuity products primarily during 1992 and 1991.
This was done in response to the overall decline in market rates
over the same time period. As a result of the declining market
rates, there has been increased competition which has also had an
effect on the level of universal life and investment annuity
deposits collected and on the level of policy surrenders.
The discontinued products have been replaced with single-tier
annuities, and the Company anticipates somewhat lower deposit
collections than in previous years during this transition period.
However, the Company anticipates that this decline will be reversed
as efforts have continued to develop new annuity and life products
for sale and distribution through independent marketing
organizations. In addition to new product developments, the
Company has contracted with additional independent marketing
organizations to further strengthen and diversify distribution
channels. Also, many products are developed specifically for these
organizations to meet the needs for a particular customer base.
Net Investment Income: While investments attributable to the
Company's insurance operations have been growing steadily over the
past several years, the growth has slowed substantially in 1992 and
1993 primarily due to decreased universal life and annuity deposits
and increased policy surrenders. 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 the 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 have been 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 were significantly reduced.
Brokerage Revenues: These revenues are from the Company's
wholly-owned subsidiary, The Westcap Corporation. Revenues for
1993, 1992 and 1991 were $105.9 million, $123.1 million and $43.8
million, respectively. The significant increase in the level of
brokerage revenues from 1991 is attributable to several factors.
The steady decline in market interest rates has been very positive
for brokerage firms. Also, The Westcap Corporation specializes in
mortgage-backed securities, and many of their customers have
experienced significant prepayments within their portfolios. This
contributes to increased sales for the brokerage firm as the
investors reinvest the proceeds. Other contributing factors have
been the firm's ability to attract an experienced sales force and
to increase the overall size of the force over the past several
years. While The Westcap Corporation has increased its revenues,
the brokerage industry is usually impacted significantly by
prevailing economic and interest rate conditions. Therefore,
operating results could be more cyclical in comparison to the
insurance industry.
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 has since 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.
Realized Gains on Investments: The Company had realized gains of
$3.2 million, $15.7 million and $9.4 million in 1993, 1992 and
1991, respectively. The decrease in 1993 from the previous years
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 $3,360,000, $3,325,000
and $3,200,000. The gains also are net of write-downs for
permanent impairments on fixed maturities of $6,329,000, $5,000,000
and $5,969,000.
The loss in 1991 for permanent impairments on fixed maturities
consisted primarily of realized losses related to below investment
grade debt securities in which the issuers were in poor financial
condition or in bankruptcy. The Company has substantially reduced
its holdings in these securities over the past several years to
approximately $25 million which is only 1% of total invested assets
at December 31, 1993. The write-downs for 1992 and 1993 relate
primarily to holdings of PERLS and CMO residuals. The Company made
substantial reductions in the holdings of these securities in 1992
and 1993, thereby reducing the exposure to potential future losses.
Amortization of Deferred Policy Acquisition Costs: Amortization
has increased from $16.9 million in 1991 to $33.2 million in 1993.
The increase in amortization correlates to the increase in
insurance operating profits, as these deferred costs are amortized
based on product profitability.
Universal Life and Investment Annuity Contract Interest: Interest
expense has declined steadily as amounts totaled $130.9 million,
$135.8 million and $143.0 million for 1993, 1992 and 1991,
respectively. This decline is due to the lowering of credited
interest rates on most universal life and investment annuity
products throughout these years. Also, as universal life and
annuity deposits collected have decreased along with increased
surrenders, the policy liabilities subject to interest crediting
have remained relatively stable. As a result, additional interest
costs related to increasing business have not been significant.
Although lowering credited rates on products has been profitable
for the Company, it has also resulted in increased surrenders of
policies as previously described. However, the Company closely
monitors its credited 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 $29.0
million, $27.9 million and $32.9 million for 1993, 1992 and 1991,
respectively. The 1991 expenses were significantly higher due to a
lawsuit settlement. In 1991 the Company settled a civil lawsuit
which was originally filed against the Company in 1984. Under
terms of the settlement, the Company paid approximately $6,218,000
to various parties plus approximately $57,000 in related expenses.
(This lawsuit was described more fully under "Other Income" in this
section.) Although 1992 and 1993 expenses are relatively
comparable, there were several items of significance which are
described as follows: (a) Commission expenses on insurance product
sales were $2,500,000 lower in 1993 due to decreases in sales. (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
eventual recovery of these payments over a period of years.
However, several states do not allow such credits. In 1993 the
Company recorded a charge of $3,700,000 to other insurance
operating expenses for anticipated assessments. Although
additional charges to expenses may be required, the Company
currently is unaware of any significant pending assessments
requiring accrual.
Brokerage Expenses: Expenses for 1993, 1992 and 1991 were $72.3
million, $82.6 million and $34.5 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. Also, as brokerage revenues increase, the ratio of
brokerage expenses to such revenues decreases. This is because
fixed costs are covered at a certain level of revenues, leaving only
the variable cost of commissions.
Federal Income Tax Expense: The Federal corporate tax rate was
increased from 34% to 35% in 1993. The total increase in 1993
Federal income taxes resulting from the change in rates was
$1,018,000. Also, the 1991 expenses are not reflective of the
statutory rate due to non-recurring items. The 1991 Federal income
tax expense includes approximately $544,000 in additional taxes
relating to the $6.2 million lawsuit previously described.
Approximately $1.6 million of the total settlement was not
deductible for tax purposes, resulting in the additional taxes.
Also, capital losses were incurred in 1990 which could not be fully
deducted for deferred tax purposes. This resulted in a capital loss
carryforward of approximately $5,544,000 at December 31, 1990, that
was fully utilized in 1991, resulting in a reduction of taxes of
approximately $1,885,000.
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 (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.
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.
SUBSEQUENT EVENTS
The Westcap Corporation, the Company's brokerage subsidiary, incurred
trading losses during March, 1994, through unsettled customer
securities purchase transactions. The net effect of these trading
losses, which are expected to be between approximately $4,400,000 and
$5,200,000, will be reflected in the Company's consolidated financial
statements ended March 31, 1994. As a result of these losses, the
Company has purchased an additional $4,400,000 of preferred stock
of The Westcap Corporation and has agreed to provide a $3,000,000
line of credit to Westcap. This infusion of capital was important
in order for Westcap to maintain its normal capital position, which
is well in excess of required financial operating ratios.
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 and
subsidiaries of the The Westcap Corporation. The suit seeks recession
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. Neither Westcap nor the Company has been formally
served with the complaint, no discovery has occurred, no judicial
proceedings or hearings have occurred, and no answers or responses
have been prepared or filed. Westcap and the Company are of the
opinions that Westcap has adequate documentation to validate all of
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
financial position, a reasonable estimate of any actual losses which
may result from this suit cannot be made at this time.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the Company are met primarily by
funds provided from the life insurance operations. Policy 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. The Company's brokerage
subsidiary 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. National Western also has a $60 million bank line of
credit. The line of credit is primarily used for cash management
purposes relating to investment transactions.
Most of the Company's assets, other than policy loans and deferred
policy acquisition costs, are invested in bonds and other
securities, substantially all of which are readily marketable.
Although there is no present need or intent to dispose of such
investments, the Company could liquidate portions of the
investments should the need arise. Additionally, the Company has
use of the line of credit for short-term liquidity needs for
periods not exceeding 30 days. The Company expects future cash
flows to be adequate to meet the demands for funds.
The Company had no long-term debt during 1993 or 1992. There are no
present material commitments for capital expenditures in 1994, and
the Company does not anticipate incurring any such commitments
through the remainder of 1994.
CHANGES IN ACCOUNTING PRINCIPLES
In December 1990, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 106,
"Employers' Accounting for Post Retirement Benefits Other than
Pensions." SFAS No. 106 establishes accounting standards for
employers' accounting for, primarily, post retirement health care
benefits. The statement is effective for fiscal years beginning
after December 15, 1992. Since the Company currently pays no such
benefits, implementation had no impact on the results of operations
of the Company.
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. Implementation of this statement is not
expected to have a significant impact on the results of operations
of the Company.
The FASB issued SFAS No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts" in
December 1992. The statement specifies the accounting by insurance
enterprises for the reinsuring of insurance contracts. It
establishes the conditions required for a contract with a reinsurer
to be accounted for as reinsurance and prescribes accounting and
reporting standards for those contracts. It also eliminates the
practice by insurance enterprises of reporting assets and
liabilities relating to reinsured contracts net of the effects of
reinsurance. This statement was implemented in 1993 but it had no
effect on the Company's results of operations. It also had only a
minor effect on the balance sheet presentation of certain assets
and liabilities.
The FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," in May 1993. This statement addresses the
accounting by creditors for impairment of certain loans. It is
applicable to all creditors and to all loans, uncollateralized as
well as collateralized, with certain exceptions. It also applies
to all loans that are restructured in a troubled debt restructuring
involving a modification of terms. It requires that impaired loans
that are within the scope of this statement 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.
SFAS No. 114 applies to financial statements for fiscal years
beginning after December 15, 1994. The Company plans to implement
the statement in 1994. 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 or stockholders' equity. However, impairments under
the new statement will be reflected as insurance operating expenses
as opposed to realized losses in the Company's statements of
earnings.
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.
The Company's current accounting policy is similar to the
requirements of the new statement. Significant differences are
that securities available for sale are currently being 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.
SFAS No. 115 is effective for fiscal years beginning after December
15, 1993 and the Company plans to implement the statement in the
first quarter of 1994. As the Company's prevailing investment
philosophy for its insurance operations is the intent to hold
investments in debt securities to maturity, implementation of the
statement is not expected to have a significant impact on earnings
of the Company. However, the Company is anticipating that its
securities available for sale portfolio will increase significantly
upon implementation of the new statement which will impact reported
stockholders' equity. Preliminary results of the implementation
process indicate that approximately 60% of the debt securities
portfolio will be reported as securities available for sale with
the remainder to be classified as held to maturity. Trading
securities will be composed entirely of securities from the
Company's brokerage operations which are already being recorded at
market value with market value changes reflected in earnings. The
effect on stockholders' equity of the implementation is estimated
to be an increase in the range of $20 million to $25 million as of
January 1, 1994. The increase is net of the estimated effects of
Federal income taxes and amortization of deferred policy
acquisition costs.
CURRENT REGULATORY ISSUES
Actuarial Guideline GGG
At its June 1992 meeting the NAIC Life and Health Actuarial Task
Force released for industry comment an exposure draft of Actuarial
Guideline GGG. The guideline would require, for statutory
accounting purposes, a single interest rate and mortality
assumption for any policy or contract which provides multiple
benefit options or option streams within a single policy or
contract. The Company and other insurers have made comments and
objections to the proposed guideline. As a result of these
comments, the NAIC Life and Health Actuarial Task Force has
appointed a joint regulatory advisory committee to study the issue
and to report its findings and recommendations at a subsequent
date. The Company has a representative on this advisory committee
and will participate in the committee discussions and development
of the committee report. Several versions of Actuarial Guideline
GGG have been drafted with the most recent one dated September
1993.
The Company's state of domicile, Colorado, has also taken a
position on the statutory reserving methodology for two-tier
annuities. 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. Although the final examination report has not been
issued, an agreement between the Division and the Company has been
reached concerning the 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. This difference will meet the following
schedule:
December 31, 1993 $ 21,700,000
December 31, 1994 13,600,000
December 31, 1995 5,000,000
December 31, 1996 -
The Company met the above scheduled difference for December 31,
1993 as a result of the additional $13,000,000 in statutory
reserves recorded in 1992 and 1993 as previously described. In
fact, at December 31, 1993, the difference was less then 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
financial statements. Also, the compliance with this agreement is
not anticipated to have any significant effects on the general
operations of the Company.
The above mentioned agreement is separate from the proposed
Actuarial Guideline GGG. The agreement does, however, state that
if Actuarial Guideline GGG is adopted and it is more liberal than
the agreement with the Division, then the Division will allow the
Company to move to the more liberal basis.
Risk Based Capital Requirements
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 the implementation of nonstatutory guidelines.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is shown on Attachment "A".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITOR
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no 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, 1994, is furnished with
respect to each director. All terms expire in June of 1994.
<TABLE>
<CAPTION>
Principal Occupation During
Last Five First
Name of Director Years and Directorships Elected Age
<S> <S> <C> <C>
Robert L. Moody Chairman of the Board and Chief 1964 58
(1) (3) (4) (5) Executive Officer of the Company;
Investments, Galveston, Texas
Ross R. Moody President and Chief Operating Officer
(1) (3) (5) of the Company, 4/92-present;
Vice President - Office of the 1981 31
President of the Company, 4/91-4/92
Director of Administrative
Services, American National Insurance
Company, Galveston, Texas 1989-1991
Arthur O. Dummer Chief Executive Officer, The 1980 60
(1) (2) (3) Donner Company, Salt Lake City, Utah
Harry L. Edwards Retired; Former President and 1969 72
Chief Operating Officer of the
Company until 7/90, Austin, Texas
E. Douglas McLeod Director of Development, Moody 1979 52
(4) Foundation, Galveston, Texas
Charles D. Milos, Senior Vice President of the 1981 48
Jr. (1) (3) Company, Galveston, Texas
Frances A. Moody Investments, New York, New 1990 24
(4) York, 1992 - present; Student,
Southern Methodist University,
Dallas, Texas, 1987-92
Russell S. Moody Investments, Austin, Texas 1988 32
(4) (5)
Louis E. Pauls, President, Louis Pauls & 1971 58
Jr. (2) Company; Investments, Galveston, Texas
E. J. Pederson Executive Vice President, 1992 46
(2) The University of Texas
Medical Branch, Galveston,
Texas
<FN>
(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.
</TABLE>
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, 1994.
Name of Officer Age Position (Year elected to position)
Robert L. Moody 58 Chairman of the Board and Chief Executive
Officer (1964-1968, 1971-1980, 1981),
Director
Ross R. Moody 31 President and Chief Operating Officer
(1992), Director
Robert L. Busby,III 56 Senior Vice President - Chief
Administrative Officer,
Chief Financial Officer and Treasurer
(1992)
Charles P. Baley 55 Senior Vice President - Data Processing
(1990)
Richard M. Edwards 41 Senior Vice President - International
Marketing ( 1990)
Paul D. Facey 42 Senior Vice President - Chief Actuary
(1992)
William K. Hawkins 53 Senior Vice President - Domestic Marketing
(1990)
Charles D. Milos, Jr. 48 Senior Vice President - Investment Analyst
(1990), Director
Patricia L. Scheuer 42 Senior Vice President - Chief Investment
Officer (1992)
Larry D. White 48 Senior Vice President - Policyowner
Services (1990)
Carol Jackson 58 Vice President - Human Resources (1990)
Vincent L. Kasch 32 Vice President - Controller and Assistant
Treasurer (1992)
James A. Kincl 64 Vice President - Salary Savings (1986)
Doris Kruse 48 Vice President - Policy Benefits (1990)
John G. Lepore 52 Vice President - Marketing (1993)
James R. Naiser 51 Vice President - Systems Development
(1984)
James V. Robinson 66 Vice President - Secretary (1977)
Al R. Steger 51 Vice President - Risk Selection (1992)
B. Ben Taylor 51 Vice President - Actuarial Services (1990)
(c) Identification of Certain Significant Employees
None.
(d) Family Relationships
There are no family relationships among the officers listed except
that Mr. Robert Moody is the father of Mr. Ross Moody. There are no
arrangements or understandings pursuant to which any officer was
elected. All officers hold office for one year and until their
successors are elected and qualified, unless otherwise specified by
the Board of Directors.
(e) Business Experience
All of the executive officers listed above have served in various
executive capacities with the Company for more than five years,
with the exception of the following:
Mr. Ross Moody was a corporate financial analyst with Drexel
Burnham Lambert from 1986 to 1987 and was a graduate student at the
Harvard Business School from 1987 to 1989. He also served as
Director of Administrative Services for American National Insurance
Company from 1989 to 1991.
Mr. Facey was Superintendent, Marketing, for Northern Life
Assurance Company of Canada from 1973-1985. From 1985-1987, he was
Assistant Vice President, Marketing and Actuarial Services for
Gerling Global Life Insurance Company in Toronto, Canada, and from
1987 until March, 1992 was Director of Actuarial Services for
Variable Annuity Life Insurance Company of Houston, Texas.
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. Lepore was a school teacher from 1965-1969. From 1969-1970, he
was a sales representative with CIBA Pharmaceuticals. From
1970-1984, he held various management positions with Fidelity Union
Life, American Bankers Life, American Teachers Life, Consolidated
American Life, and Wisconsin National Life.
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, Sr. and The Moody National Bank of
Galveston, of which he was Chairman of the Board. Robert L. Moody,
Sr. 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, Sr.'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.
ITEM 11. EXECUTIVE COMPENSATION
(b) Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation All
Annual Compensation Restricted All Other
Name and Salary Bonus Stock Awards Compensation
Principal Position Year (B) (C) (D) (E)
<S> <C> <C> <C> <C> <C>
(1)Robert L. Moody 1993 $836,476 $145,693 $139,103 $ 18,185
Chairman of the 1992 825,017 - - 16,500
Board and Chief 1991 729,692 - - 14,594
Executive Officer
(2)Ross R. Moody 1993 275,697 75,417 30,005 15,651
President and 1992 198,129 25,000 - 11,558
Chief Operating 1991 86,691(A) - - 4,342
(3)Charles D. Milos, Jr. 1993 119,643 53,523 9,095 7,245
Senior Vice President- 1992 113,979 25,000 - 6,569
Investment Analyst 1991 102,557 - - 5,973
(4)Robert L. Busby, III 1993 136,882 12,727 12,155 9,346
Senior Vice President- 1992 123,458 - - 7,407
Chief Administrative 1991 105,090 - - 6,305
Officer, Chief Financial
Officer and Treasurer
(5)Patricia L. Scheuer 1993 74,937 46,314 2,125 3,845
Senior Vice President- 1992 25,800 15,000 - 604
Chief Investment Officer 1991 - - - -
</TABLE>
(A) Served as Vice President - Office of the President in 1991.
(B) Salary includes base salary and directors' fees from
National Western Life Insurance Company and its subsidiaries.
(C) Bonus includes 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 have been issued and are
reflected as bonuses in 1993.
(2) Westcap Bonus - Ross R. Moody, Charles D. Milos, Jr. and
Patricia L. Scheuer are directors of the Company's brokerage
subsidiary, Westcap. The directors received bonuses for such
services in 1992 and 1993.
(D) Restricted stock awards include common stock shares that were
granted as part of the stock bonus plan described 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:
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
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
</TABLE>
Fifty percent of the reserved restricted shares will vest on
December 31, 1994. The remaining fifty percent will vest on
December 31, 1995. Restricted shares will not be eligible for
dividends until issued.
(E) 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) Aggregate 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:
<TABLE>
<CAPTION>
Estimated Annual Benefits
Qualified Non-Qualifed
Name and Defined Defined
Principal Position Benefit Plan Benefit Plan Totals
<C> <S> <C> <C> <C>
(1) Robert L. Moody
Chairman of the Board and
Chief Executive Officer $ 125,335 282,746 408,081
(2) Ross R. Moody
President and Chief 100,222 - 100,222
Operating Officer
(3) Charles D. Milos, Jr.
Senior Vice President - 41,334 - 41,334
Investment Analyst
(4) Robert L. Busby, III
Senior Vice President -
Chief Administrative
Officer, Chief Financial
Officer and Treasurer 45,199 11,016 56,215
Treasurer
(5) Patricia L. Scheuer
Senior Vice President-
Chief Investment Officer 25,293 - 25,293
</TABLE>
(g) Compensation of Directors
All directors of the Company receive $12,000 a year and $350 for
each board meeting attended. They are also reimbursed for actual
travel expenses incurred in performing services as directors. An
additional $350 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, receive
$500 for each board meeting attended. In addition, the directors
may receive an annual bonus.
(h) Employment Contract 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 Executive Committee of the Company's Board of Directors
determines executive compensation. Members of the Company's
Executive Committee are as follows:
Robert L. Moody, Chairman
Ross R. Moody
Arthur O. Dummer
Charles D. Milos, Jr.
Mr. Robert Moody, Mr. Ross Moody and Mr. Milos 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 Executive Committee performs the functions of an
executive compensation committee. The Committee 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
Executive Committee to ensure the support of the Company's overall
business strategy and to attract and retain key executives.
(l) Performance Graph
The performance graph required by this section has been filed
separately under the Securites and Exchange Commission filing Form SE
dated March 25, 1994.
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, 1993:
<TABLE>
<CAPTION>
Amount and Nature
Title Name and Address of Percent
of of Beneficial of
Class Beneficial Owners Record and Class
Beneficially
<S> <S> <C> <C>
Class A Common Robert L. Moody 1,162,534 35.39
2302 Postoffice
Street
Suite 702
Galveston, Texas
Class A Common Westport Asset 291,600 8.88
Management, Inc.
253 Riverside Avenue
Westport,
Connecticut
Class A Common Tweedy Browne 193,410 5.89
Company
52 Vanderbilt Avenue
New York, New York
Class B Common Robert L. Moody 198,074 99.04
(same as above)
</TABLE>
(b) Security Ownership of Management
The following table sets forth as of December 31, 1993, information
concerning the beneficial ownership for each class of the Company's
common stock by all directors and all directors and officers of the
Company as a group:
<TABLE>
<CAPTION>
Amount and Nature
Title of Percent
of Beneficial Ownership of
Directors Class Record and Class
Beneficially
<S> <S> <C> <C>
Robert L. Moody Class A Common 1,162,534 35.39
Class B Common 198,074 99.04
Ross R. Moody Class A Common 2,656 0.08
Class B Common 482 0.24
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 - -
Charles D. Milos, Jr. Class A Common 314 0.01
Class B Common - -
Frances A. Moody Class A Common 1,850 0.06
Class B Common 482 0.24
Russell S. Moody Class A Common 1,850 0.06
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 - -
All Directors and
Executive Officers Class A Common 1,172,196 35.69
as a Group Class B Common 199,520 99.76
</TABLE>
(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 $2,867,200 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 the
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,
1993, reflected total assets of $11,895,000, net income of
$895,000, and negative stockholders' equity of $3,983,000.
Gal-Tex Hotel Corporation
The Company also holds a mortgage loan for $3,539,686 issued in
1988 to Gal-Tex Hotel Corporation which is owned 50% by the Libbie
Shearn Moody Trust and 50% by The Moody Foundation. The mortgage
loan 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 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".
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
None.
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
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1993 and 1992
Consolidated Statements of Earnings for the years ended
December 31, 1993, 1992 and 1991
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1993, 1992 and 1991
Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1992 and 1991
Notes to Consolidated Financial Statements
Schedule I, Summary of Investments Other Than Investments in
Related Parties, December 31, 1993
Schedule VIII, Valuation and Qualifying Accounts for the
years ended December 31, 1993, 1992 and 1991
Schedule IX, Short-term Borrowings for the years ended
December 31, 1993, 1992 and 1991
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, 1993 and 1992, and the results of
their operations and their cash flows for each of the years in the
three-year period ended December 31, 1993, 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 7, the Company changed its method of
accounting for income taxes in 1993 to adopt the provisions of the
Financial Accounting Standards Board's Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
As discussed in Note 6, the Company changed its method of accounting
for reinsurance contracts in 1993 to adopt the provisions of the
Financial Accounting Standards Board's SFAS No. 113, "Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts."
KPMG Peat Marwick
Austin, Texas
March 4, 1994
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1993 and 1992
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1993 1992
<S> <C> <C>
Cash and investments:
Fixed maturities, at amortized cost
(market: $1,908,714 and $1,748,788) $1,787,360 1,706,394
Securities available for sale, at aggregate
market (aggregate cost: $39,823 and $103,070) 39,355 102,951
Mortgage loans, net of allowance for
possible losses ($6,849 and $6,000) 188,920 177,236
Policy loans 153,822 158,216
Other long-term investments 43,921 31,706
Securities purchased under agreements to resell 186,896 25,165
Trading securities, at market 116,918 93,627
Cash and short-term investments 32,823 31,203
Total cash and investments 2,550,015 2,326,498
Brokerage trade receivables, net of allowance
for possible losses ($123 and $125) 55,163 29,346
Accrued investment income 28,901 30,669
Deferred policy acquisition costs 287,711 299,186
Other assets 19,261 12,798
$2,941,051 2,698,497
</TABLE>
See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1993 and 1992
(In thousands except per share amounts)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1993 1992
LIABILITIES:
<S> <C> <C>
Future policy benefits:
Traditional life and annuity products $ 177,157 177,402
Universal life and investment annuity contracts 2,115,352 2,105,978
Other policyholder liabilities 24,211 17,742
Short-term borrowings 82,852 48,582
Securities sold not yet purchased, at market 78,835 6,034
Securities sold under agreements to repurchase 127,971 39,078
Brokerage trade payables 39,422 25,547
Federal income tax payable:
Current 4,823 4,360
Deferred 3,078 14,484
Other liabilities 44,632 73,199
Total liabilities 2,698,333 2,512,406
COMMITMENTS AND CONTINGENCIES (Notes 6, 9, 12 and 19)
STOCKHOLDERS' EQUITY:
Common stock:
Class A - $1 par value; 7,500,000 shares
authorized; 3,284,672 and 3,277,842 shares
issued and outstanding in 1993 and 1992 3,285 3,278
Class B - $1 par value; 200,000 shares
authorized, issued
and outstanding in 1993 and 1992 200 200
Additional paid-in capital 24,356 24,065
Net unrealized gains (losses) on investment securities (257) 138
Retained earnings 215,134 158,410
Total stockholders' equity 242,718 186,091
$2,941,051 2,698,497
</TABLE>
See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
December 31, 1993, 1992 and 1991
(In thousands except per share amounts)
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Premiums and other revenue:
Life and annuity premiums $ 18,624 21,365 21,525
Universal life and investment
annuity contract revenues 67,778 56,543 44,627
Net investment income 180,252 184,149 176,443
Brokerage revenues 105,923 123,094 43,837
Other income 1,847 616 848
Realized gains on investments 3,206 15,710 9,360
Total premiums and other revenue 377,630 401,477 296,640
Benefits and expenses:
Life and other policy benefits 36,257 37,957 35,157
Decrease in liabilities
for future policy benefits (1,611) (3,723) (3,249)
Amortization of deferred
policy acquisition costs 33,159 25,085 16,852
Universal life and investment
annuity contract interest 130,875 135,792 143,018
Other insurance operating expenses 28,959 27,870 32,897
Brokerage operating expenses 72,310 82,561 34,549
Total benefits and expenses 299,949 305,542 259,224
Earnings before Federal income tax,
cumulative effect of change in
accounting principle
and discontinued operations 77,681 95,935 37,416
Provision (benefit) for Federal
income tax:
Current 32,152 36,253 11,900
Deferred (5,675) (3,729) (730)
Total Federal income tax expense 26,477 32,524 11,170
Earnings before cumulative effect
of change in accounting principle
and discontinued operations 51,204 63,411 26,246
(Continued on next page)
See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS, CONTINUED
For the Years Ended December 31, 1993, 1992 and 1991
(In thousands except per share amounts)
1993 1992 1991
Cumulative effect of change in
accounting for income taxes $ 5,520 - -
Estimated loss on disposal of
discontinued operations (net of
applicable Federal
income tax benefit of $225) - - (488)
Net earnings $ 56,724 63,411 25,758
Earnings per share of common stock:
Earnings before cumulative effect
of change in accounting principle
and discontinued operations $ 14.71 18.23 7.55
Cumulative effect of change in
accounting for income taxes 1.58 - -
Loss from discontinued operations - - (0.14)
Net earnings $ 16.29 18.23 7.41
</TABLE>
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, 1993, 1992 and 1991
(In thousands)
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Common stock shares outstanding:
Shares outstanding at
beginning of year 3,478 3,478 3,478
Shares issued for stock bonus plan 7 - -
Shares outstanding at end of year 3,485 3,478 3,478
Common stock:
Balance at beginning of year $ 3,478 3,478 3,478
Shares issued for stock bonus plan 7 - -
Balance at end of year 3,485 3,478 3,478
Additional paid-in capital:
Balance at beginning of year 24,065 24,065 24,065
Shares issued for stock bonus plan 291 - -
Balance at end of year 24,356 24,065 24,065
Net unrealized gains (losses) on
investment securities:
Balance at beginning of year 138 (99) (626)
Change in unrealized gains (losses) on
investment securities during the year (395) 237 527
Balance at end of year (257) 138 (99)
Retained earnings:
Balance at beginning of year 158,410 94,999 69,241
Net earnings 56,724 63,411 25,758
Balance at end of year 215,134 158,410 94,999
Total stockholders' equity $ 242,718 186,091 122,443
</TABLE>
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, 1993, 1992 and 1991
(In thousands)
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 56,724 63,411 25,758
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Universal life and investment
annuity contract interest 130,875 135,792 143,018
Surrender charges (36,563) (28,092) (20,455)
Realized gains on investments (3,206) (15,710) (9,360)
Accrual and amortization of
investments income 30 (678) (1,579)
Depreciation and amortization 891 765 1,272
Decrease (increase) in insurance
receivables and other assets (424) (4,518) 3,718
Increase in brokerage trade receivables (25,817) (7,637) (332)
Decrease (increase) in accrued
investment income 1,768 381 (298)
Decrease (increase) in deferred policy
acquisition costs 11,475 (10,010) (23,813)
Decrease in liability for future
policy benefits (1,611) (3,723) (3,249)
Increase in other policyholder
liabilities 3,149 1,761 1,042
Increase (decrease) in Federal income
tax payable (10,732) 48 (1,270)
Increase (decrease) in other liabilities (16,008) 18,257 8,168
Increase (decrease) in brokerage
trade payables 13,875 7,508 (1,644)
Net decrease (increase) in repurchase
agreements less related liabilities (37) 3,013 (3,543)
Decrease (increase) in trading securities (22,881) 18,387 (29,313)
Other (77) (1,366) (912)
Net cash provided by operating activities 101,431 177,589 87,208
Cash flows from investing activities:
Proceeds from sales of investments
in debt securities 77,869 1,600,779 1,399,929
Proceeds from maturities and redemptions
of investments in debt securities 485,818 102,396 54,088
Proceeds from sale of other investments 8,835 11,859 55,888
Purchase of investments (594,991) (1,842,647) (1,656,477)
Principal payments on mortgage loans 16,971 13,046 5,363
Cost of mortgage loans acquired (33,393) (37,477) (53,844)
Net decrease (increase) in policy loans 4,394 (1,463) (8,972)
Decrease in assets of discontinued
operations - 7,500 12,455
Decrease in liabilities of discontinued
operations - (6,923) (10,593)
Other (471) (1,037) (605)
Net cash used in investing activities (34,968) (153,967) (202,768)
(Continued on next page)
See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Years Ended December 31, 1993, 1992 and 1991
(In thousands)
1993 1992 1991
Cash flows from financing activities:
Net increase (decrease) in short-term
borrowings $ 34,270 (64,147) 46,783
Deposits to account balances for
universal life and investment
annuity contracts 122,545 214,777 234,667
Return of account balances on universal
life and investment annuity contracts (221,658) (173,385) (166,235)
Net cash provided (used) by financing
activities (64,843) (22,755) 115,215
Net increase (decrease) in cash and
short-term investments 1,620 867 (345)
Cash and short-term investments
at beginning of year 31,203 30,336 30,681
Cash and short-term investments at
at end of year $ 32,823 31,203 30,336
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
<TABLE>
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 4,468 4,227 4,712
Income taxes 32,992 33,141 11,996
Non-cash investing activities:
Foreclosed mortgage loans $ 6,678 2,976 5,771
Mortgage loans originated to
facilitate the sale of real estate 2,684 3,106 4,859
</TABLE>
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, Commercial Adjusters, Inc., and National
Western Asset Management, Inc. National Western Asset Management,
Inc. was sold in July, 1992. The Westcap Mortgage Company, a
wholly-owned subsidiary of The Westcap Corporation, has been
reflected as discontinued operations in the accompanying financial
statements. All significant intercorporate transactions and
accounts have been eliminated in consolidation.
(B) Basis of Presentation - The accompanying consolidated financial
statements have been prepared in conformity with generally accepted
accounting principles. 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
fixed maturities. 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, fixed maturities 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.
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 market value. Any
trading profits or losses and unrealized gains or losses resulting
from changes in the market value of the securities are reflected as
a component of income in the accompanying financial statements.
Investments in debt and equity securities that are not classified
as either fixed maturities 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 and performance or duration of the portfolio,
and selling securities in advance of anticipated calls or other
prepayments. Securities available for sale are reported in the
accompanying financial statements at the lower of aggregate cost or
market value. Any valuation changes resulting from changes in the
market value of the securities are reflected as a component of
stockholders' equity.
Investments in specific debt or equity securities having a
permanent loss in value have been written down to their estimated
realizable value, and losses thereon have been included in realized
investment gains and losses. Such losses are determined using the
specific identification method.
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, 1993 and 1992 (the brokerage subsidiary's year-end),
would result in an increase in receivables from customers and
brokers and dealers of approximately $634,042,000 and $371,521,000,
if settled. There would also be a corresponding increase of
approximately $677,905,000 and $363,737,000 in payables to
customers and brokers and dealers and an increase of $50,106,000
and a decrease of $3,561,000 in trading securities at September 30,
1993 and 1992, respectively.
(H) Depreciation of Property and Equipment - Depreciation is based
on the estimated useful lives of the assets and is calculated on
the straight-line and accelerated methods.
(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
3,481,233 for the year ended December 31, 1993, and 3,477,842 for
the years ended December 31, 1992 and 1991.
(J) Classification - Certain reclassifications have been made to
the prior years to conform to the reporting categories used in
1993.
(K) Statutory Information - The following are major differences
between generally accepted accounting principles and statutory
accounting principles prescribed by insurance regulatory
authorities.
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.
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.
A summary of information relative to deferred policy acquisition
costs and premiums follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1993 1992 1991
(In thousands)
<S> <C> <C> <C>
Costs deferred:
Agents' commissions $ 19,038 31,838 36,843
Other 2,646 3,257 3,822
$ 21,684 35,095 40,665
Amounts amortized $ 33,159 25,085 16,852
First-year and single premium revenues $ 3,065 3,304 3,066
Renewal premium revenues $ 15,559 18,061 18,459
Universal life and investment annuity deposits $ 153,760 243,228 258,839
</TABLE>
3. 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 income and
deductions which are recognized in the financial statements in a
different period than for Federal income tax purposes.
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 required by insurance
regulatory authorities, 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
purposes, the life interest is reflected at an amount computed as
the present value of the estimated future income to be received,
limited to the amount of existing insurance in force on the life of
Mr. Robert L. Moody. The statutory amount is not being amortized.
8. 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:
<TABLE>
<CAPTION>
Stockholders' Equity as of
December 31,
1993 1992 1991
(In thousands)
<S> <C> <C> <C>
Amounts per annual statements $ 182,876 129,391 83,194
Adjustments:
Difference in valuation of investment
in the Libbie Shearn Moody Trust (17,911) (20,360) (20,088)
Deferral of policy acquisition costs 287,711 299,186 289,176
Adjustment of future policy benefits (205,357) (217,145) (219,822)
Deferred Federal income tax benefit (3,078) (14,484) (17,989)
Adjust securities available for sale
to market value (1,080) (146) 328
Reversal of statutory investment
valuation reserves 13,225 18,244 9,815
Reversal of interest maintenance
reserve 2,222 10,586 -
Reinstatement of non-admitted assets 3,134 3,014 3,004
Valuation allowances on investments (15,566) (17,594) (4,981)
Adjustment for consolidation (3,664) (3,978) -
Other, net 206 (623) (194)
Amounts per consolidated financial statements $ 242,718 186,091 122,443
</TABLE>
<TABLE>
<CAPTION>
Net Earnings for the
Years Ended December 31,
1993 1992 1991
(In thousands)
<S> <C> <C> <C>
Amounts per annual statements $ 46,013 48,063 20,952
Subsidiary earnings before deferred
Federal income tax 20,879 26,039 5,353
Consolidated statutory net income 66,892 74,102 26,305
Adjustments:
Deferral of policy acquisition costs (11,475) 10,010 23,813
Adjustment of future policy benefits 11,816 2,678 (25,172)
Amortization of investment in Trust (275) (272) (271)
Deferred Federal income tax benefit 5,675 3,729 730
Valuation allowances and permanent
impairment write-downs on investments 5,238 (6,724) 14,045
Lawsuit settlements recorded as surplus
adjustments for statutory accounting 1,620 - (4,207)
Reversal of statutory accounting gain
on subsidiary stock conversion - (6,399) (9,886)
Subsidiary stock dividends (20,442) (24,206) -
Increase (decrease) in interest
maintenance reserve (8,364) 10,586 -
Cumulative effect of change in
accounting for income taxes 5,520 - -
Other, net 519 (93) 401
Amounts per consolidated finacial statements $ 56,724 63,411 25,758
</TABLE>
(2) SIGNIFICANT SUBSIDIARY
The Westcap Corporation and subsidiaries (Westcap), a wholly-owned
brokerage firm, have been consolidated in the accompanying
financial statements. Westcap's fiscal year-end is September 30.
The Westcap Mortgage Company, a wholly-owned subsidiary of The
Westcap Corporation, has been reflected as discontinued operations
in the accompanying financial statements for 1991.
Westcap Securities, Inc. (Westcap Securities), a wholly-owned
subsidiary of The Westcap Corporation, is subject to the Securities
and Exchange Commission's Uniform Net Capital Rule (Rule 15c3-1)
which requires the maintenance of minimum net capital and requires
that the ratio of its aggregate indebtedness to net capital, both
as defined, shall not exceed 15 to 1. Retained earnings may be
restricted as to payment of dividends if this ratio exceeds 10 to
1. At September 30, 1993 and 1992, Westcap Securities had net
capital of $3,011,000 and $2,652,000, which was in excess of its
required net capital of $100,000 and $344,000, respectively.
Westcap Securities' ratio of aggregate indebtedness to net capital
was 0.1 to 1 and 1.9 to 1 at September 30, 1993 and 1992.
Westcap Government Securities, Inc. (Westcap Government
Securities), also a wholly-owned subsidiary of The Westcap
Corporation, is subject to the capital rules of the Government
Securities Act of 1986. This act requires the maintenance of
minimum liquid capital and the ratio of liquid capital to measured
market and credit risk, all as defined, to be 120% or higher.
Distributions of equity in the form of dividends or purchases of
common stock may be restricted if this ratio is less than 150%. At
September 30, 1993 and 1992, Westcap Government Securities had
liquid capital of $17,684,000 and $15,940,000, which was in excess
of required liquid capital of $5,638,000 and $3,629,000,
respectively. Westcap Government Securities' ratio of liquid
capital to market and credit risk was 376% and 527% at September
30, 1993 and 1992.
A summary of the most recent audited consolidated financial
information for Westcap is as follows:
<TABLE>
<CAPTION>
September 30,
1993 1992 1991
(In thousands)
<S> <C> <C> <C>
Assets:
Cash $ 8,514 7,188 1,311
Receivables from customers and brokers 55,163 29,346 21,709
Trading securities 116,918 93,627 121,624
Securities purchased under
agreements to resell 186,896 25,165 74,715
Other assets 4,810 8,676 11,825
$ 372,301 164,002 231,184
Liabilities and Stockholder's Equity:
Short-term borrowings $ 82,852 48,582 87,694
Payables to customers and brokers 39,422 25,547 18,039
Securities sold not yet purchased 78,835 6,034 73,423
Securities sold under agreements
to repurchase 127,971 39,078 18,226
Other liabilities 22,840 27,380 21,823
Stockholder's equity 20,381 17,381 11,979
$ 372,301 164,002 231,184
Revenues $ 105,923 123,094 43,837
Net income $ 21,832 26,728 5,244
</TABLE>
(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:
<TABLE>
<CAPTION>
December 31,
1993 1992
(In thousands)
<S> <C> <C>
Fixed maturities, at amortized cost $ 63,719 65,881
Certificates of deposit 210 210
</TABLE>
(4) INVESTMENTS
The major components of net investment income are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1993 1992 1991
(In thousands)
<S> <C> <C> <C>
Investment income:
Debt securities $ 144,218 147,445 145,842
Mortgage loans 18,450 17,992 13,114
Policy loans 11,962 12,387 12,108
Other investment income 8,412 9,405 7,746
Total investment income 183,042 187,229 178,810
Investment expenses 2,790 3,080 2,367
Net investment income $ 180,252 184,149 176,443
</TABLE>
Investments of the following amounts were non-income producing for
the preceding twelve months:
<TABLE>
<CAPTION>
December 31,
1993 1992
(In thousands)
<S> <C> <C>
Fixed maturities $ 2,185 -
Mortgage loans 985 110
Other long-term investments 6,248 3,051
</TABLE>
As of December 31, 1993 and 1992, investments in debt securities
and mortgage loans with principal balances totaling $7,342,000 and
$8,904,000 were on non-accrual status. During 1993, 1992 and 1991,
reductions in interest income associated with non-performing
investments in debt securities and mortgage loans were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1993 1992 1991
(In thousands)
<S> <C> <C> <C>
Interest at contract rate $ 1,029 975 3,171
Interest income recognized 123 240 416
Interest income not accrued $ 906 735 2,755
</TABLE>
At December 31, 1993 and 1992, approximately 51% and 53% of the
Company's mortgage loans were on properties located in the West
South Central region which includes Texas, Louisiana, Oklahoma and
Arkansas. Also, approximately 67% and 65% of the Company's mortgage
loans were on retail type properties at December 31, 1993 and 1992.
With regard to the origination of mortgage loans, it is the
Company's policy for mortgage loans not to exceed 75% of the
appraised values of the underlying collateral.
The Company held in its investment portfolio below investment grade
debt securities, net of loss provisions, of approximately
$24,261,000 and $16,259,000 at December 31, 1993 and 1992,
respectively. This represents approximately 1.0% and 0.7% 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, 1993 and 1992, the Company held approximately $14
million and $26 million 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, 1993 and 1992, totaling approximately $11 million
and $12 million. 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, 1993 and 1992, the Company had approximately
$22,672,000 and $20,401,000 of real estate, net of estimated
selling costs, which is reflected in other long-term investments in
the accompanying financial statements.
There were no investments in any entity in excess of 10% of
stockholders' equity at December 31, 1993.
The table below presents realized gains and losses and the increase
or decrease in unrealized gains on investments:
<TABLE>
<CAPTION>
Net Realized Increase Total
Investment (Decrease) Investment
Gains in Unrealized Gains
(Losses) Investment Gains (Losses)
(In thousands)
<S> <C> <C> <C>
Year Ended December 31, 1993:
Fixed maturities $ 5,354 78,960 84,314
Other (2,148) (395) (2,543)
Totals $ 3,206 78,565 81,771
Year Ended December 31, 1992:
Fixed maturities $ 18,862 (24,581) (5,719)
Other (3,152) 237 (2,915)
Totals $ 15,710 (24,344) (8,634)
Year Ended December 31, 1991:
Fixed maturities $ 12,108 90,258 102,366
Other (2,748) 527 (2,221)
Totals $ 9,360 90,785 100,145
</TABLE>
The table below presents amortized cost and estimated market values
of investments in debt securities classified as fixed maturities
and securities available for sale at December 31, 1993 and 1992:
<TABLE>
<CAPTION>
December 31, 1993
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 48,123 4,710 1,506 51,327
Mortgage-backed securities
issued by U.S. government
corporations 815,525 69,670 436 884,759
Obligations of states and
political subdivisions 8,421 1,134 - 9,555
Foreign government securities 23,912 870 693 24,089
Public utilities 293,855 16,175 1,061 308,969
Corporate securities 466,246 27,813 2,349 491,710
Private issue
mortgage-backed securities 142,428 5,404 552 147,280
Totals $ 1,798,510 125,776 6,597 1,917,689
</TABLE>
<TABLE>
<CAPTION>
December 31, 1992
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Loss Value
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 31,964 1,492 - 33,456
Mortgage-backed securities
issued by U.S. government
corporations 780,177 32,366 1,112 811,431
Obligations of states and
political subdivisions 77,317 3,167 92 80,392
Foreign government securities 19,386 592 847 19,131
Public utilities 473,295 6,261 1,984 477,572
Corporate securities 238,704 8,258 4,980 241,982
Private issue
mortgage-backed securities 159,267 5,841 6,388 158,720
Totals $ 1,780,110 57,977 15,403 1,822,684
</TABLE>
The amortized cost and estimated market values of investments in
debt securities at December 31, 1993, 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.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
(In thousands)
<S> <C> <C>
Due in one year or less $ - -
Due after one year through five years 61,313 62,662
Due after five years through ten years 226,182 237,815
Due after ten years 553,062 585,173
840,557 885,650
Mortgage-backed securities 957,953 1,032,039
Totals $1,798,510 1,917,689
</TABLE>
Proceeds from sales of investments in debt securities during 1993,
1992 and 1991 were $77,869,000, $1,600,779,000 and $1,399,929,000,
respectively. Gross gains of $12,966,000, $38,272,000 and
$32,807,000, and gross losses of $1,283,000, $14,410,000 and
$14,730,000, were realized on those sales, respectively.
The Financial Accounting Standards Board (FASB) issued SFAS No.
114, "Accounting by Creditors for Impairment of a Loan," in May,
1993. This statement addresses the accounting by creditors for
impairment of certain loans. It is applicable to all creditors and
to all loans, uncollateralized as well as collateralized, with
certain exceptions. It also applies to all loans that are
restructured in a troubled debt restructuring involving a
modification of terms. It requires that impaired loans that are
within the scope of this statement 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.
SFAS No. 114 applies to financial statements for fiscal years
beginning after December 15, 1994. The Company plans to implement
the statement in 1994. 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 or stockholders' equity. However, impairments under
the new statement will be reflected as insurance operating expenses
as opposed to realized losses in the Company's statements of
earnings.
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.
The Company's current accounting policy is similar to the
requirements of the new statement. Significant differences are
that securities available for sale are currently being 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.
SFAS No. 115 is effective for fiscal years beginning after December
15, 1993, and the Company plans to implement the statement in the
first quarter of 1994. As the Company's prevailing investment
philosophy for its insurance operations is the intent to hold
investments in debt securities to maturity, implementation of the
statement is not expected to have a significant impact on earnings
of the Company. However, the Company is anticipating that its
securities available for sale portfolio will increase significantly
upon implementation of the new statement which will impact reported
stockholders' equity. Preliminary results of the implementation
process indicate that approximately 60% of the debt securities
portfolio will be reported as securities available for sale with
the remainder to be classified as held to maturity. Trading
securities will be composed entirely of securities from the
Company's brokerage operations which are already being recorded at
market value with market value changes reflected in earnings. The
effect on stockholders' equity of the implementation is estimated
to be an increase in the range of $20 million to $25 million as of
January 1, 1994. The increase is net of the estimated effects of
Federal income taxes and amortization of deferred policy
acquisition costs.
(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, 1993
and 1992, 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, 1993 and
1992, 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, 1993 and 1992, no retained earnings
were so allocated.
Participating business constitutes approximately 1% of the
Company's life insurance in force, 9% and 10% of the life insurance
policies in force, and 1% of the premium revenues and universal
life deposits for the years ended December 31, 1993 and 1992,
respectively.
(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 $861,000,000 and $878,000,000
is ceded on a yearly renewable term basis, $134,000 is ceded on a
modified coinsurance basis, and $38,000,000 and $47,000,000 is
ceded on a coinsurance basis at December 31, 1993 and 1992,
respectively. In accordance with the reinsurance contracts,
reinsurance receivables including amounts related to claims
incurred but not reported and liabilities for future policy
benefits totaled $9,187,000 at December 31, 1993. A credit in the
amount of $16,300,000 was taken against the liability for future
policy benefits at December 31, 1992. Premium revenues were
reduced by $7,450,000, $4,800,000 and $4,600,000 for reinsurance
premiums incurred during the years ended December 31, 1993, 1992
and 1991, respectively. Benefits were reduced by $6,943,000,
$3,865,000 and $2,141,000 for reinsurance recoverables during the
years ended December 31, 1993, 1992 and 1991, 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.
The FASB issued SFAS No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts," in
December, 1992. The statement specifies the accounting by insurance
enterprises for the reinsuring of insurance contracts. It
establishes the conditions required for a contract with a reinsurer
to be accounted for as reinsurance and prescribes accounting and
reporting standards for those contracts. It also eliminates the
practice by insurance enterprises of reporting assets and
liabilities relating to reinsured contracts net of the effects of
reinsurance. This statement was implemented in 1993, but it had no
effect on the Company's results of operations. It also had only a
minor effect on the balance sheet presentation of reinsurance
receivables and credits against future policy benefits as described
above. The balance sheet at December 31, 1992, has not been
restated.
(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 and 1991, 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 tax expense (benefit) was allocated as
follows:
[CAPTION]
<TABLE>
Years Ended December 31,
1993 1992 1991
(In thousands)
<S> <C> <C> <C>
Earnings from continuing operations $ 26,477 32,524 11,170
Loss from discontinued operations - - (225)
Stockholders' equity for net
unrealized losses
on investment securities (211) - -
Total Federal income tax expense $ 26,266 32,524 10,945
</TABLE>
The provisions for Federal income taxes vary from amounts computed
by applying the statutory income tax rate to earnings from
continuing operations before Federal income taxes. The reasons for
the differences, and the tax effects thereof, are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1993 1992 1991
(In thousands)
<S> <C> <C> <C>
Income tax expense at statutory rate $ 27,188 32,618 12,721
Dividends received deduction (420) (306) (292)
Amortization of life interest in
the Libbie Shearn Moody Trust 96 93 92
Payment (recovery) of
non-deductible excise tax (368) - 544
Capital loss carryforward for
financial statement purposes - - (1,885)
Adjustment to deferred tax
assets and liabilities
for enacted changes in tax rates 98 - -
Other (117) 119 (10)
Provision for Federal income taxes $ 26,477 32,524 11,170
</TABLE>
The significant components of the deferred income tax benefit
attributable to earnings from continuing operations for the year
ended December 31, 1993, are as follows:
Deferred tax benefit, exclusive of adjustments
for changes in tax rates $ (5,773)
Adjustments to deferred tax assets and
liabilities for enacted changes in tax rates 98
Total deferred tax benefit $ (5,675)
For the years ended December 31, 1992 and 1991, deferred Federal
income tax benefits of $3,729 and $730, respectively, 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:
<TABLE>
<CAPTION>
Years Ended December
31,
1992 1991
(In thousands)
<S> <C> <C>
Policy acquisition costs expensed for
tax purposes and deferred for financial
accounting purposes $ 1,622 6,390
Excess of the increase in the liability
for future policy benefits for tax
purposes over the increase
for financial statement purposes (3,543) (9,292)
Investment income recognized for tax
purposes and deferred for financial
accounting purposes 255 805
Accretion of bond discount recognized
for financial accounting purposes
and deferred for tax purposes (454) (2,258)
Difference in tax accounting and financial
accounting for asset valuation allowances (2,499) 4,842
Amounts expensed for financial accounting
purposes not currently tax deductible 161 645
Capital loss carryforward for
financial statement purposes - (1,885)
Other 729 23
Deferred tax benefit $ (3,729) (730)
</TABLE>
There was no valuation allowance for deferred tax assets at January
1, 1993, or December 31, 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, 1993, are presented below:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Deferred tax assets:
Future policy benefits,excess of financial
accounting liability over tax liability $ 80,241
Fixed maturities,principally due to permanent
impairment write-downs for financial
accounting purposes 3,929
Mortgage loans, principally due to valuation
allowances for financial accounting purposes 2,545
Real estate, principally due to write-downs
for financial accounting purposes 2,389
Accrued and unearned investment income
recognized for tax purposes and deferred for
financial accounting purposes 2,791
Accrued operating expenses recorded for
financial accounting purposes not currently
tax deductible 1,649
Net unrealized losses on investment securities 164
Other 314
Total gross deferred tax assets 94,022
Less valuation allowance -
Net deferred tax assets 94,022
Deferred tax liabilities:
Deferred policy acquisition costs, principally
expensed for tax purposes (94,837)
Real estate, principally due to differences
in tax and financial accounting for depreciation (2,183)
Other (80)
Total gross deferred tax liabilities (97,100)
Net deferred tax liability $ (3,078)
</TABLE>
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,
1993 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, 1993,
become taxable, the Federal income tax computed at present rates
would be approximately $856,000.
At December 31, 1990, the Company had a capital loss carryforward
for financial statement purposes of approximately $5,544,000. The
carryforward was fully utilized in 1991.
The Company files a consolidated Federal income tax return with its
subsidiaries. Allocation is based on separate return calculations
with current credit for net losses. 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 recorded amount of the Company's life interest in the Trust is
summarized below:
<TABLE>
<CAPTION>
December 31,
1993 1992
(In thousands)
<S> <C> <C>
Original valuation of life interest at
February 26, 1960 $ 13,793 13,793
Less accumulated amortization (8,028) (7,753)
Net asset value of life interest in the Trust $ 5,765 6,040
</TABLE>
In 1989, the Company was the beneficiary of life insurance on Mr.
Moody's life in the amount of $12,775,000, all of which was issued
by the Company and was reinsured through agreements with
unaffiliated insurance companies. These policies were surrendered
during 1990 and the Company issued new term insurance policies,
which accumulate no cash value, in the amount of $27,000,000. The
Company is the beneficiary of these new policies which are also
reinsured through agreements with unaffiliated insurance companies.
The previous policies were surrendered and new policies were issued
in conjunction with a revaluation of the Trust for statutory
accounting purposes.
Income from the Trust and related expenses reflected in the
accompanying consolidated statements of operations are summarized
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1993 1992 1991
(In thousands)
<S> <C> <C> <C>
Income distributions $ 2,596 2,485 2,325
Deduct:
Amortization (275) (272) (271)
Reinsurance premiums (162) (134) (102)
Net income from life interest in the Trust $ 2,159 2,079 1,952
</TABLE>
The accompanying statements also reflect liabilities for future
policy benefits related to these policies in the amounts of
$126,000 and $96,000 at December 31, 1993 and 1992, respectively.
(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 1,162,534 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:
<TABLE>
<CAPTION>
Years Ended December 31,
1993 1992 1991
(In thousands)
<S> <C> <C> <C> <C>
Service cost-benefits earned
during the period $ 156 194 193
Interest cost on projected
benefit obligations 481 453 429
Actual return on plan assets (321) (272) (967)
Net amortization and deferral (258) (316) 443
Net pension cost $ 58 59 98
</TABLE>
The following sets forth the plan's funded status and related
amounts recognized in the Company's balance sheet as of:
<TABLE>
<CAPTION>
December 31,
1993 1992
(In thousands)
<S> <C> <C>
Actuarial present value of
benefit obligations:
Accumulated benefit obligations,
including vested benefits of
$5,753,000 and $5,147,000, respectively $ (6,128) (5,240)
Projected benefit obligations for
service rendered to date $ (6,594) (5,831)
Plan assets at fair market value
primarily consisting of equity and
fixed income securities 5,938 5,980
Plan assets in excess of or (less than)
projected benefit obligations (656) 149
Unrecognized net transitional asset
at January 1, 1987 being recognized
over employees' average remaining
service of 15 years (429) (484)
Prior service cost not yet
recognized in net
periodic pension cost (296) (326)
Unrecognized net losses from
past experience
different from that assumed 1,201 539
Adjustment to recognize minimum liability (10) -
Accrued pension cost $ (190) (122)
</TABLE>
The discount rate used in determining the actuarial present value
of the projected benefit obligations was 7.25% for 1993 and 8.5%
for 1992. The projected increase in future compensation levels was
based on a rate of 6.0% for 1993 and 1992. The projected long-term
rate of return on plan assets was 8.5% for 1993 and 1992.
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:
<TABLE>
<CAPTION>
Years Ended December 31,
1993 1992 1991
(In thousands)
<S> <C> <C> <C>
Service cost-benefits earned
during the period $ 63 81 57
Interest cost on projected
benefit obligations 98 87 84
Net amortization and deferral 68 70 79
Net pension cost $ 229 238 220
</TABLE>
The following sets forth the plan's funded status and related
amounts recognized in the Company's balance sheet as of:
<TABLE>
<CAPTION>
December 31,
1993 1992
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including
vested benefits of $799,000
and $590,000, respectively $ (836) (644)
Projected benefit obligations for service
rendered to date (2,182) (1,155)
Plan assets at fair market value - -
Projected benefit obligations in excess
of plan assets (2,182) (1,155)
Unrecognized net transitional obligation
at January 1, 1991, being recognized over
employees' average remaining service of
12 years 756 834
Unrecognized net (gains) losses
from past experience
different from that assumed 754 (122)
Adjustment to recognize minimum liability (164) (201)
Accrued pension cost $ (836) (644)
</TABLE>
The discount rate used in determining the actuarial present value
of the projected benefit obligations was 7.25% for 1993 and 8.5%
for 1992. The projected increase in future compensation levels was
based on a rate of 6.0% for 1993 and 1992.
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,
1993 and 1992, Company contributions totaled $187,000 and $193,000.
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, 1993 and 1992, Company contributions totaled
$45,000 and $40,000.
In December, 1990, the FASB issued SFAS No. 106, "Employers'
Accounting for Post Retirement Benefits Other than Pensions." SFAS
No. 106 establishes accounting standards for employers' accounting
for, primarily, post retirement health care benefits. The statement
is effective for fiscal years beginning after December 15, 1992.
Since the Company currently pays no such benefits, implementation
had no impact on the results of operations of the Company.
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. Implementation of this statement is not
expected to have a 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, 1993
and 1992. The average interest rates on borrowings for the years
ended December 31, 1993 and 1992, were 4.36% and 5.53%,
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, 1993 and 1992 (the subsidiary's fiscal year-end), had
aggregate market values of approximately $119,082,000 and
$84,408,000, respectively. The average interest rates on the
borrowings for the years ended September 30, 1993 and 1992, were
4.24% and 5.20%, respectively.
(11) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At September 30, 1993 and 1992, securities purchased under
agreements to resell by Westcap were collateralized by U.S.
Government and agencies' securities with market values of
approximately $189,659,000 and $26,781,000. These agreements had
maturity dates ranging from one to thirty days and weighted average
interest rates of 3.3% and 3.5%. During the years ended September
30, 1993 and 1992, the maximum month-end balance of outstanding
agreements were $186,896,000 and $111,938,000, and the average
amount of outstanding agreements were $75,634,000 and $47,252,000,
respectively. Risks arise from the possible inability of
counter-parties to meet the terms of their agreements and from
movements in securities' values.
At September 30, 1993 and 1992, securities sold under agreements to
repurchase by Westcap were collateralized by U.S. Government and
agencies' securities with market values of approximately
$129,523,000 and $41,770,000. These agreements had maturity dates
ranging from one to thirty days and weighted average interest rates
of 3.5%. During the years ended September 30, 1993 and 1992, the
maximum month-end balance of outstanding agreements were
$127,971,000 and $97,883,000, and the average amount of outstanding
agreements were $66,941,000 and $43,977,000, respectively.
(12) COMMITMENTS AND CONTINGENCIES
(A) Current Regulatory Issues - At its June, 1992, meeting the NAIC
Life and Health Actuarial Task Force released for industry comment
an exposure draft of Actuarial Guideline GGG. The guideline would
require, for statutory accounting purposes, a single interest rate
and mortality assumption for any policy or contract which provides
multiple benefit options or option streams within a single policy
or contract. The Company and other insurers have made comments and
objections to the proposed guideline. As a result of these
comments, the NAIC Life and Health Actuarial Task Force has
appointed a joint regulatory advisory committee to study the issue
and to report its findings and recommendations at a subsequent
date. The Company has a representative on this advisory committee
and will participate in the committee discussions and development
of the committee report. Several versions of Actuarial Guideline
GGG have been drafted with the most recent one dated September,
1993.
The Company's state of domicile, Colorado, has also taken a
position on the statutory reserving methodology for two-tier
annuities. 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. Although the final examination report has not been
issued, an agreement between the Division and the Company has been
reached concerning the 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. This difference will meet the following
schedule:
December 31, 1993 $ 21,700,000
December 31, 1994 13,600,000
December 31, 1995 5,000,000
December 31, 1996 -
The Company met the above scheduled difference for December 31,
1993, as a result of the additional $13,000,000 in statutory
reserves recorded in 1992 and 1993 as previously described. In
fact, at December 31, 1993, 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
financial statements. Also, the compliance with this agreement is
not anticipated to have any significant effects on the general
operations of the Company.
The above-mentioned agreement is separate from the proposed
Actuarial Guideline GGG. The agreement does, however, state that
if Actuarial Guideline GGG is adopted and it is more liberal than
the agreement with the Division, then the Division will allow the
Company to move to the more liberal basis.
(B) Legal Proceedings - The Company was a defendant in a lawsuit
alleging various violations by the Company of the Employee
Retirement Income Security Act of 1974. The alleged violations
arose from the establishment of an employee benefit pension plan
(the Plan) and the Company's sale of group annuity contracts to the
Plan. The suit sought several claims including restoration of all
Plan assets wrongfully paid and punitive damages in an unspecified
amount. The Company settled the lawsuit in 1991. Under the terms of
the settlement, the Company paid approximately $6,218,000 to
various parties plus approximately $57,000 in related expenses.
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
proceeds totaling $1,050,000 which have been reflected in other
income in the accompanying statement of earnings for the year ended
December 31, 1993.
The Company was also 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 liability and unrealized loss totaling
$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 debentures were
charged off in 1991. The Company has since been accruing an
additional liability for interest on this $8,000,000 balance. The
Company appealed the court ruling and ultimately settled the suit
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. This difference
has been reflected as other income in the accompanying statement of
earnings for the year ended December 31, 1993.
The Company is 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, to varying degrees, 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
amount of those instruments. 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 $14,650,000 at December 31, 1993. Commitments to
extend credit are legally binding agreements to lend to a customer
that generally have fixed expiration dates or other termination
clauses and may require payment of a fee. These commitments do not
necessarily represent future liquidity requirements, as some of the
commitments could expire without being drawn upon. The Company
evaluates each customer's creditworthiness on a case-by-case basis.
The Company also had commitments to purchase investment securities
in the normal course of business totaling $21,490,000 at December
31, 1993.
In the normal course of business, Westcap enters into when-issued,
underwriting, forward and futures contracts principally related to
mortgage-backed, U.S. government, and municipal securities issues
which have settlement dates ranging from several weeks to several
months after trade date. Revenues and expenses, except trading
profits, related to such contracts are recorded on settlement date.
Trading profits are recorded on a trade date basis. Risks arise
from the possible inability of counterparties to meet the terms of
their contracts and from movements in securities' values and
interest rates. As of September 30, 1993, unsettled forward
purchase and sale contracts approximated $544,236,000 and
$538,966,000, respectively, substantially all of which are matched.
In the opinion of management, the settlement of these transactions
is not expected to have a material effect on Westcap'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.
Most states allow premium tax credits for all or a portion of such
assessments, thereby allowing eventual recovery of these payments
over a period of years. However, several states do not allow such
credits. In 1993 the Company recorded a charge of $3,700,000 to
other insurance operating expenses for anticipated assessments.
Although additional charges to expenses may be required, the
Company currently is unaware of any significant pending assessments
requiring accrual.
(13) STOCKHOLDERS' EQUITY
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 $152,725,000 at
December 31, 1993, 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.
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 have been issued and are
outstanding as of December 31, 1993. 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 deposits related to life
insurance written in foreign countries, primarily Central and South
America, were approximately $57,450,000, $58,300,000 and
$56,400,000, for the years ended December 31, 1993, 1992 and 1991,
respectively.
A significant portion of the Company's universal life and
investment annuity contracts are written through one agency. Such
business accounted for approximately 44%, 45% and 65% of total
premium revenues and universal life and investment annuity contract
deposits for 1993, 1992 and 1991, respectively.
(15) SEGMENT INFORMATION
Information concerning the Company's two industry segments follows:
<TABLE>
<CAPTION>
Life
Insurance Brokerage Consolidated
Business Business Eliminations Amounts
(In thousands)
<S> <C> <C> <C> <C>
Gross revenues:
1993 $ 273,363 105,923 (1,656) 377,630
1992 279,882 123,094 (1,499) 401,477
1991 253,396 43,837 (593) 296,640
Net earnings:
1993 $ 34,892 21,832 - 56,724
1992 36,683 26,728 - 63,411
1991 20,514 5,244 - 25,758
Identifiable assets:
1993 $2,590,537 372,301 (21,787) 2,941,051
1992 2,554,850 164,002 (20,355) 2,698,497
1991 2,363,248 231,184 (13,400) 2,581,032
</TABLE>
(16) UNAUDITED QUARTERLY FINANCIAL DATA
Quarterly results of operations are summarized as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands except per share data)
<C> <C> <C> <C> <C>
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
1992:
Revenues $ 99,771 94,898 90,086 116,722
Net earnings 16,082 14,465 12,640 20,224
Per share:
Net earnings $ 4.62 4.16 3.63 5.82
</TABLE>
The fourth quarter net earnings in 1993 reflect the following
significant items:
(A) Realized losses of approximately $2,174,000 resulting from
write-downs of fixed maturities and increases in allowances for
possible losses for real estate and mortgage loans, and
(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.
The fourth quarter net earnings in 1992 reflect the following
significant items:
(A) Realized losses of approximately $2,425,000 resulting from
write-downs of fixed maturities and increases in allowances for
possible losses from real estate and mortgage loans, and
(B) Net earnings from the Company's brokerage subsidiary were
approximately $12,115,000 for the fourth quarter which is
significantly higher than in previous quarters.
(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, 1993 and 1992. 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 amount of life insurance on Mr. Moody, as this is
the maximum amount to be received by the Company in the event of
Mr. Moody's premature death.
Investment 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 are estimated by discounting estimated
cash flows using U.S. Treasury bill rates as of December 31, 1993
and 1992.
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:
<TABLE>
<CAPTION>
December 31, 1993 December 31, 1992
Carrying Fair Carrying Fair
Value Value Value Value
(In thousands)
<S> <C> <C> <C> <C>
ASSETS
Investments in debt and equity
securities:
Fixed maturities $ 1,787,360 1,908,714 1,706,394 1,748,788
Securities available
for sale 39,355 39,355 102,951 102,951
Trading securities 116,918 116,918 93,627 93,627
Securities purchased under
agreements to resell 186,896 186,896 25,165 25,165
Common stock - - 700 700
Cash and short-term investments 32,823 32,823 31,203 31,203
Mortgage loans 188,920 199,903 177,236 182,673
Policy loans 153,822 176,549 158,216 176,243
Life interest in
Libbie Shearn Moody Trust 5,764 27,000 6,040 27,000
LIABILITIES
Deferred investment
annuity contracts $ 1,660,109 1,437,383 1,727,672 1,495,989
Immediate investment
annuity contracts 87,784 94,490 55,663 58,549
Short-term borrowings 82,852 82,852 48,582 48,582
Securities sold not yet purchased 78,835 78,835 6,034 6,034
Securities sold under
agreements to repurchase 127,971 127,971 39,078 39,078
</TABLE>
(18) DISCONTINUED OPERATIONS
On December 10, 1990, the Board of Directors of Westcap Mortgage
Company (Westcap Mortgage), a subsidiary of The Westcap
Corporation, approved a plan for the complete dissolution and
liquidation of Westcap Mortgage. Accordingly, an orderly
liquidation of the assets of Westcap Mortgage commenced, and the
disposal was essentially completed during 1992. The accompanying
consolidated financial statements reflect the estimated $488,000
loss, in 1991, on liquidation of the subsidiary separate from earnings
from continuing operations, net of related income tax benefits.
(19) SUBSEQUENT EVENTS
The Westcap Corporation, the Company's brokerage subsidiary, incurred
trading losses during March, 1994, through unsettled customer securities
purchase transactions. The net effect of these trading losses, which
are expected to be between approximately $4,400,000 and $5,200,000,
will be reflected in the Company's consolidated financial statements
ended March 31, 1994. As a result of these losses, the Company has
purchased an additional $4,400,000 of preferred stock of The Westcap
Corporation and has agreed to provide a $3,000,000 line of credit
to Westcap. This infusion of capital was important in order for
Westcap to maintain its normal capital position, which is well in
excess of required financial operating ratios.
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 and
subsidiaries of The Westcap Corporation. The suit seeks recession 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. Neither Westcap nor the Company has been formally
served with the complaint, no discovery has occurred, no judicial
proceedings or hearings have occurred, and no answers or responses
have been prepared or filed. Westcap and the Company are of the opinions
that Westcap has adequate documentation to validate all of 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
financial position, a reasonable estimate of any actual losses which
may result from this suit cannot be made at this time.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1993
(In thousands)
<TABLE>
<CAPTION>
Balance
(1) Market Sheet
Type of Investment Cost Value Amount
<S> <C> <C> <C>
Fixed Maturities:
United States government and
government agencies and authorities $ 856,067 930,011 856,067
States, municipalities,
and political subdivisions 8,421 9,555 8,421
Foreign governments 20,343 21,189 20,343
Public utilities 293,855 308,969 293,855
All other corporate 605,557 635,873 605,557
Total fixed maturities 1,784,243 1,905,597 1,784,243
Mortgage loans 192,229 185,380
Policy loans 153,822 153,822
Other long-term investments 45,477 (2) 43,921
Securities purchased under
agreements to resell 186,896 186,896
Trading securities 116,918 116,918
Securities available for sale 39,823 39,355
Cash and short-term investments 32,823 32,823
Total investments other than
investments in related parties $2,552,231 2,543,358
<FN>
(1) Fixed maturities and securities available for sale are shown at
amortized cost, mortgage loans are shown at unpaid principal
balance before allowances for possible losses of $6,849,000, and
real estate acquired by foreclosure is shown at the unpaid
principal balance of the original mortgage loan at date of
foreclosure before allowances for possible losses of $1,556,000.
Trading securities are shown at market value. The following
investments in related parties have been excluded: fixed
maturities - $3,117,000 and mortgage loans - $3,540,000.
(2) Real estate acquired by foreclosure included in other long-term
investments totaled approximately $16,191,000.
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1993, 1992 AND 1991
(In thousands)
<TABLE>
<CAPTION>
(1)
Balance at Charged to Balance at
Beginning Costs and (2) (3) End of
Description of Period Expenses Reductions Transfers Period
Valuation accounts deducted
from applicable assets:
Allowance for possible losses
on brokerage trade receivables:
<S> <C> <C> <C> <C> <C>
December 31, 1993 $ 125 - (2) - 123
December 31, 1992 $ 140 100 (115) - 125
December 31, 1991 $ 185 32 (77) - 140
Allowance for possible
losses on mortgage loans:
December 31, 1993 $ 6,000 2,152 (702) (601) 6,849
December 31, 1992 $ 3,125 2,875 - - 6,000
December 31, 1991 $ 3,075 620 - (570) 3,125
Allowance for possible
losses on real estate:
December 31, 1993 $ 9,950 1,208 (10,203) 601 1,556
December 31, 1992 $ 9,500 450 - - 9,950
December 31, 1991 $ 6,350 2,580 - 570 9,500
<FN>
(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.
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IX
SHORT-TERM BORROWINGS
For the Years Ended December 31, 1993, 1992 AND 1991
(In thousands except percentage data)
<TABLE>
<CAPTION>
Maximum Average Weighted
Weighted Amount Amount Average
Balance Average Outstanding Outstanding Interest Rate
Category of Aggregate at End Interest During During During
Short-term Borrowings of Period Rate Period Period Period
Revolving credit lines with bank:
<S> <C> <C> <C> <C> <C>
December 31, 1993 $ 82,852 5.00% 102,433 47,314 4.24%
December 31, 1992 $ 48,582 5.47% 132,240 67,246 5.20%
December 31, 1991 $ 87,694 6.60% 88,380 53,639 7.80%
</TABLE>
The above short-term borrowings are those of the Company's
brokerage subsidiary, The Westcap Corporation, and its
subsidiaries. All short-term borrowings are governed by revolving
line of credit agreements which bear interest at variable rates
based on Federal funds rates and are due on demand. Weighted
average interest rates during the period were calculated by
dividing the total interest expense for the period by the average
daily balance of short-term borrowings.
<TABLE>
<CAPTION>
Maximum Average Weighted
Weighted Amount Amount Average
Balance Average Outstanding Outstanding Interest Rate
Category of Aggregate at end Interest During During During
Short-term Borrowings of period Rate Period Period Period
Revolving credit lines with bank:
<S> <C> <C> <C> <C> <C>
December 31, 1993 $ - - 21,000 1,028 4.36%
December 31, 1992 $ - - 41,000 3,375 5.53%
December 31, 1991 $ 25,035 5.70% 25,035 581 6.03%
</TABLE>
The above short-term borrowings are those of National Western Life
Insurance Company. All short-term borrowings are governed by a
revolving note and loan agreement under which individual draws are
made subject to a maximum outstanding balance of $60 million.
Borrowings have 30-day maturities but may be accelerated by the
bank. Interest rates are based on the lower of the bank's
short-term certificate of deposit rate, base borrowing rate, or the
Federal funds rate. Weighted average interest rates during the
period were calculated by dividing the total interest expense for
the period by the average daily balance of short-term borrowings.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Registrant)
/S/ Robert L. Moody /S/ Ross R. Moody
By: Robert L. Moody By: Ross R. Moody
Chairman of the Board, Chief President, Chief Operating
Executive Officer, Director Officer, Director
/S/ Robert L. Busby, III
By: Robert L. Busby, III
Senior Vice President -
Chief Administrative
Officer, Chief Financial
Officer and Treasurer
March 25, 1994
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
