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 EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to ___________
Commission File Number: 2-17039
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
COLORADO 84-0467208
(State of Incorporation) (I.R.S. Employer Identification Number)
850 EAST ANDERSON LANE
AUSTIN, TEXAS 78752-1602 (512) 836-1010
(Address of Principal Executive Offices) (Telephone Number)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: EXEMPT
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days:
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the common stock (based upon the closing
price) held by non-affiliates of the Registrant at March 10, 1997, was
approximately $187,648,000.
As of March 10, 1997, the number of shares of Registrant's common stock
outstanding was: Class A - 3,291,338 and Class B - 200,000.
PART I
ITEM 1. BUSINESS
(a) General
Life Insurance Operations
National Western Life Insurance Company (hereinafter referred to as
"National Western," "Company," or "Registrant") is a life insurance
company, chartered in the State of Colorado in 1956, and doing business in
forty-three states and the District of Columbia. National Western also
accepts applications from and issues policies to residents of several
Central and South American countries. Such policies are accepted and
issued in the United States. During 1996, the Company recorded
approximately $364 million in premium revenues, universal life, and
investment annuity contract deposits. New life insurance issued during
1996 approximated $1.2 billion and the total amount in force at year-end
1996 was $8.1 billion. As of December 31, 1996, the Company had total
consolidated assets of $3.12 billion.
Competition: The life insurance business is highly competitive and
National Western competes with over 1,700 stock and mutual companies.
Best's Agents Guide To Life Insurance Companies, an authoritative life
insurance publication, lists companies by total admitted assets and life
insurance in force. As of December 31, 1995, the most recent date for
which information is available, National Western ranked 143 in total
admitted assets and 230 in life insurance in force among approximately
1,700 life insurance companies domiciled in the United States.
Life insurance companies compete not only on product design and price, but
increasingly on policyowner service and marketing and sales efforts.
National Western believes that its products, premium rates, policyowner
service, and marketing efforts are generally competitive with those of
other life insurance companies selling similar types of insurance. Mutual
insurance companies may have certain competitive advantages over stock
companies in that the policies written by them are participating policies
and their profits inure to the benefit of their policyholders. The Company
no longer writes participating policies, and such policies represent a
minor portion of the Company's life insurance in force at December 31,
1996.
In addition to competition within the life insurance industry, National
Western and other insurance companies face competition from other
industries. Banks, brokerage firms, and other financial institutions also
market insurance products or other competing products such as mutual
funds. The continued growth and popularity of mutual funds has attracted
large amounts of investment funds, particularly during periods of
declining or low market interest rates. Many mutual funds also allow tax
deferred features through individual retirement accounts, 401(k) plans,
and other qualified methods which compete directly with the Company's tax
deferred annuity products.
Financial strength ratings of insurance companies also directly affect
competitive positions within the industry. Most insurance companies
obtain one or more ratings from independent rating agencies. National
Western is rated "A- (Excellent)" by A.M. Best Company. A.M. Best ratings
for the life insurance industry range from "A++ (Superior)" to "F (In
Liquidation)." The "A-" rating identifies companies which have
demonstrated excellent overall performance when compared to the standards
established by A.M. Best. These companies have a strong ability to meet
their obligations to policyholders over a long period of time. National
Western has also been assigned a claims-paying ability rating of "A+
(Good)" by Standard and Poor's Corporation. Standard and Poor's ratings
range from "AAA (Superior)" to " R (Regulatory Action)" .
In general, the above described ratings are developed and based on factors
that are of more importance to policyholders, agents, and marketing
organizations than to investors. In recent years, there has been
increased emphasis and use of these financial strength ratings in the
marketing efforts for insurance companies. While upgrades in ratings
could be very positive for marketing efforts, declines in ratings could
adversely affect product sales and persistency of policies currently in
force.
Agents and Employees: National Western has 230 full-time employees at its
principal executive office. Its insurance operations are conducted
primarily through broker-agents, which numbered 7,386 at December 31,
1996. The agency operations are supervised by Senior Vice Presidents of
domestic and international marketing. The Company's agents are independent
contractors who are compensated on a commission basis. General agents
receive overriding first year and renewal commissions on business written
by agents under their supervision.
Many of the domestic marketing agents are contracted through independent
marketing organizations. These organizations have well developed agent
networks and extensive experience, financial resources, and success in
marketing life insurance and annuity products. The international
marketing broker-agents are a significantly smaller group than the
domestic force. However, these broker-agents have been carefully selected
and are proven producers, many of whom have been with the Company for 20
or more years.
Types of Insurance Written: National Western offers a broad portfolio of
individual whole life, universal life and term insurance plans,
endowments, and annuities, including standard supplementary riders. The
Company does not market group life insurance but does offer group
annuities. Annuities sold include flexible premium deferred annuities,
single premium deferred annuities, and single premium immediate annuities.
These products can be tax-qualified or non-qualified annuities. In recent
years the majority of the business written has been non-qualified single
premium deferred annuities and universal life products. Except for a small
employee health plan and a small number of existing individual accident
and health policies, primarily in Florida, the Company does not write any
new policies in the accident and health markets. Distributions of the
Company's direct premium revenues and deposits by types of products are
provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Investment annuities:
Single premium deferred $ 234,335 260,478 97,444
Flexible premium deferred 35,813 47,144 58,861
Single premium immediate 3,054 2,349 1,317
Total annuities 273,202 309,971 157,622
Universal life insurance 67,438 68,464 64,760
Traditional life and other 23,135 24,801 24,919
Total direct premiums collected $ 363,775 403,236 247,301
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
First year and single premiums:
Investment annuities $ 243,686 272,219 108,981
Life insurance 20,509 22,419 20,112
Total first year and single 264,195 294,638 129,093
Renewal premiums:
Investment annuities 29,516 37,752 48,641
Life insurance 70,064 70,846 69,567
Total renewal 99,580 108,598 118,208
Total direct premiums collected $ 363,775 403,236 247,301
</TABLE>
The underwriting policy of the Company is to require medical examination
of applicants for ordinary insurance in excess of certain prescribed
limits. These limits are graduated according to the age of the applicant
and the amount of insurance desired. The Company has no maximum for
issuance of life insurance on any one life. However, the Company's general
policy is to reinsure that portion of any risk in excess of $200,000 on
the life of any one individual. Also, following general industry practice,
policies are issued on substandard risks.
Geographical Distribution of Business: For the year 1996, insurance and
annuity policies held by residents of the State of Texas accounted for 18%
of premium revenues, universal life, and investment annuity contract
deposits from direct business, while policies held by residents of
California, Pennsylvania, and Michigan accounted for approximately 10%,
8%, and 5%, respectively. All other states of the United States accounted
for 43% of premium revenues and deposits from direct business. The
remaining 16% of premium revenues and deposits were derived from the
Company's policies issued to foreign nationals, primarily in Central and
South America, almost all of which was for individual life insurance. A
distribution of the Company's direct premium revenues and deposits by
domestic and international markets is provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
United States domestic market:
Investment annuities $ 273,057 309,415 157,400
Life insurance 34,029 36,414 36,055
Total domestic market 307,086 345,829 193,455
International market:
Investment annuities 145 556 222
Life insurance 56,544 56,851 53,624
Total international market 56,689 57,407 53,846
Total direct premiums collected $ 363,775 403,236 247,301
</TABLE>
Approximately 62% of the direct life insurance premiums collected during
1996 was sold through international insurance brokers acting as
independent contractors. Foreign business is solicited by various
independent brokers, primarily in Central and South America, and forwarded
to the United States for acceptance and issuance. The Company maintains
strict controls on the business it accepts from such foreign independent
brokers, as well as its underwriting procedures for such business. Except
for a small block of business, a currency clause is included in each
foreign policy stating that premium and claim "dollars" refer to lawful
currency of the United States. Traditional and universal life products
are sold in the international market to individuals in upper socioeconomic
classes. By marketing exclusively to this group, sales typically produce
a higher average policy size, strong persistency, and claims experience
similar to that in the United States.
Investments: State insurance statutes prescribe the nature, quality, 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 the distribution of the Company's investments:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Securities held to maturity 67.6% 62.6% 68.5% 79.9% 77.5%
Securities available
for sale 19.0 22.9 15.1 1.8 4.7
Mortgage loans 7.0 7.3 8.1 8.4 8.1
Policy loans 5.1 5.6 6.5 6.9 7.2
Other investments 1.3 1.6 1.8 3.0 2.5
Totals 100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
The following table shows investment results for insurance operations for
the periods indicated:
<TABLE>
<CAPTION>
Realized Net Unrealized
Invested Gains Appreciation
Assets of Net (Losses) Increase
Calendar Insurance Investment On (Decrease)
Year Operations Income (A) Investments (B)
(In thousands)
<C> <C> <C> <C> <C>
1996 $ 2,770,931 214,302 1,612 (5,342)
1995 2,624,596 201,816 (2,415) 17,394
1994 2,343,827 190,021 1,626 (1,942)
1993 2,237,687 180,252 3,206 (395)
1992 2,200,518 184,149 15,710 237
<FN>
Notes to Table:
(A) Net investment income is after deduction of investment expenses, but
before realized gains (losses) on investments and Federal income taxes.
(B) Unrealized appreciation, net of effects of deferred policy acquisition
costs and taxes, relates only to those investment securities classified as
available for sale.
</FN>
</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 of National Western was
completed in 1994 and covered the six-year period ended December 31, 1992.
The states of Colorado and Delaware participated. A final report
disclosing the examination results was received by the Company in March,
1995. The report contained no adjustments or issues which would have a
significant, negative impact on the operations of the Company.
Regulations that affect the Company and the insurance industry are often
the result of efforts by the National Association of Insurance
Commissioners (NAIC). The NAIC is an association of state insurance
commissioners, regulators, and support staff that acts as a coordinating
body for the state insurance regulatory process. The NAIC and state
insurance regulators periodically re-examine existing laws and
regulations, and recently have been specifically focusing on insurance
company investments and solvency issues, statutory policy reserves,
reinsurance, risk-based capital guidelines, and codification of prescribed
statutory accounting principles. The NAIC currently is in the process of
codifying statutory accounting practices, the result of which is expected
to constitute the only source of prescribed statutory accounting
practices. Accordingly, that project will likely change, to some extent,
prescribed statutory accounting practices and may result in changes to the
accounting practices that insurance companies use to prepare their
statutory financial statements.
Also of particular importance, the NAIC has established risk-based capital
(RBC) requirements to help state regulators monitor the financial strength
and stability of life insurers by identifying those companies that may be
inadequately capitalized. Under the NAIC's requirements, each insurer
must maintain its total capital above a calculated threshold or take
corrective measures to achieve the threshold. The threshold of adequate
capital is based on a formula that takes into account the amount of risk
each company faces on its products and investments. The RBC formula takes
into consideration four major areas of risk which are: (i) asset risk
which primarily focuses on the quality of investments; (ii) insurance risk
which encompasses mortality and morbidity risk; (iii) interest rate risk
which involves asset/liability matching issues; and (iv) other business
risks. The Company has calculated its RBC level and has determined that
its capital and surplus is significantly in excess of the threshold
requirements.
The RBC regulation developed by the NAIC is an example of its involvement
in the regulatory process. New regulations are routinely published by the
NAIC as model acts or model laws. The NAIC encourages adoption of these
model acts by all states to provide uniformity and consistency among state
insurance regulations.
While the insurance industry is primarily regulated by state governments,
federal regulation also affects the industry in various areas such as
pension regulations, securities laws, and federal taxation. For example,
annuity and insurance products have certain income tax advantages for the
policyholders compared to other savings investments such as certificates
of deposits and taxable bonds. Unlike many other investments, increases
in the contract values of annuity and life insurance products are not
subject to income taxation until these values are actually paid to and
received by the policyholder. At various times, the federal government
has considered revising or eliminating this income tax deferral. Such a
change, if ever enacted, could have an adverse effect on the Company's
ability to sell certain annuity and insurance products.
There have been numerous proposals recently to modify the existing federal
income tax laws. Some proposals outline measures to implement a "flat
tax" structure that would lower the marginal tax rates for many taxpayers.
Other proposals call for eliminating the existing income tax and
implementing a consumption based tax. Adoption of any of these new tax
proposals, particularly the "consumption based tax", could have adverse
effects on the insurance industry, as the value of annuity and life
insurance products with income tax deferral advantages would be lessened
or minimized. However, it is impossible to predict what changes, if any,
will be made to the existing federal income tax structure and the timing
of any such changes.
Discontinued Brokerage Operations
General: The Westcap Corporation (Westcap), a wholly owned subsidiary of
the Company, was a brokerage firm headquartered in Houston, Texas. Prior
to July 17, 1995, Westcap provided investment products and financial
services to a nationwide customer base. Its wholly owned subsidiaries
included Westcap Securities Investment, Inc. (Westcap Investment), Westcap
Securities Management, Inc. (Westcap Management), and Westcap Mortgage
Company (Westcap Mortgage). Westcap Investment and Westcap Management
owned 100% of the partnership interests in Westcap Securities, L.P.
(Westcap L.P.). Westcap L.P. was primarily a dealer in municipal and
corporate bonds and collateralized mortgage obligations and a secondary
market dealer in obligations issued or guaranteed by the U.S. government
or its agencies. The limited partnership was subject to regulation by the
Securities and Exchange Commission (SEC) and the National Association of
Securities Dealers.
Plan to Cease Brokerage Operations and Chapter 11 Bankruptcy Filing:
Effective July 17, 1995, The Westcap Corporation and subsidiaries
discontinued all sales and trading activities in its Houston, Texas,
office. At that time, Westcap continued its corporate operations and
small sales operations in its New Jersey office. However, in September,
1995, Westcap approved a plan to close the remaining sales office in New
Jersey and to cease all brokerage operations.
As more fully described in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, declines in both sales
revenues and earnings were the principal reasons for ceasing brokerage
operations. The declines resulted primarily from adverse bond market
conditions and adverse publicity about litigation. As a result of
Westcap's decision to cease brokerage operations, the brokerage segment is
now reported as discontinued operations throughout this report and in the
accompanying financial statements.
In anticipation of an Order Instituting Public Administrative Proceedings,
Making Findings and Imposing Remedial Sanctions (Order) being entered
pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of
1934 by the Securities and Exchange Commission (Commission), on February
8, 1996, Westcap L.P. submitted an offer of settlement to the Commission
whereby it consented, without admitting or denying the findings in the
Order, to the entry of an Order of the Commission making findings,
revoking Westcap L.P.'s registration with the Commission, and requiring
payment to the Commission of (i) $445,341 disgorgement, (ii) prejudgment
interest of $83,879, and (iii) civil penalty of $300,000. Such an Order
was entered by the Commission on February 14, 1996. In compliance with
the Order, Westcap L.P. made payment to the Commission of $829,220 on
March 5, 1996.
On April 12, 1996, The Westcap Corporation and its wholly owned
subsidiary, Westcap Enterprises, Inc., separately filed voluntary
petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code
in the United States Bankruptcy Court, Southern District of Texas, Houston
Division. Westcap Enterprises, Inc. is the successor by merger to Westcap
Securities Investment, Inc., Westcap Securities Management, Inc., and
Westcap Securities, L.P., which prior to such merger were subsidiaries or
affiliates of The Westcap Corporation. The bankruptcy filing is more fully
described in Item 3, Legal Proceedings.
(b) Financial Information About Industry Segments
A summary of financial information for the Company's two industry segments
follows:
<TABLE>
<CAPTION>
Life Discontinued
Insurance Brokerage Adjustments Consolidated
Operations Operations (B) Amounts
(In thousands)
<S> <C> <C> <C> <C>
Gross revenues:
1996 $ 311,209 373(A) (373) 311,209
1995 287,816 5,112(A) (5,693) 287,235
1994 278,431 40,208(A) (41,881) 276,758
Net earnings
(losses):
1996 $ 46,215 - - 46,215
1995 35,634 (16,350) - 19,284
1994 37,172 (2,936) - 34,236
Identifiable
assets:
1996 $ 3,119,572 1,257 - 3,120,829
1995 2,952,282 6,177 - 2,958,459
1994 2,702,184 232,057 (19,187) 2,915,054
<FN>
Notes to Table:
(A) These amounts are not reported as revenues in the accompanying
consolidated financial statements, as the segment has been discontinued.
Instead, gross revenues are reported net of expenses and taxes as a
separate line item identified as discontinued operations. This reporting
classification is used to clearly separate discontinued operations from
continuing operations of the consolidated entity.
(B) These amounts include both consolidating eliminations and adjustments
for reporting discontinued brokerage operations as described in note (A)
above.
</FN>
</TABLE>
Additional information concerning these industry segments is included in
Item 1.(a).
(c) Narrative Description of Business
Included in Item 1.(a).
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
Included in Item 1.(a).
ITEM 2. PROPERTIES
The Company leases approximately 72,000 square feet of office space in
Austin, Texas, for $477,600 per year plus taxes, insurance, maintenance,
and other operating costs. This lease expires in 2000.
The Company's brokerage subsidiary, The Westcap Corporation, leases its
office facilities in Houston, Texas, under a lease which terminates in
1997. The total leased space is approximately 4,200 square feet. Upon
termination of the existing lease in early 1997, The Westcap Corporation
will reduce its office space to approximately 2,800 square feet in the
same facility and will execute a month to month lease contract. The
monthly lease rate will be $3,020.
ITEM 3. LEGAL PROCEEDINGS
On March 28, 1994, the Community College District No. 508, County of Cook
and State of Illinois (The City Colleges) filed a complaint in the United
States District Court for the Northern District of Illinois, Eastern
Division, against National Western Life Insurance Company (the Company or
National Western) and subsidiaries of The Westcap Corporation (Westcap), a
wholly owned subsidiary of the Company. The suit seeks rescission of
securities purchase transactions by The City Colleges from Westcap between
September 9, 1993, and November 3, 1993, alleged compensatory damages,
punitive damages, injunctive relief, declaratory relief, fees, and costs.
National Western is named as a "controlling person" of the Westcap
defendants. On February 1, 1995, the complaint was amended to add a RICO
count for treble damages and claims under the Texas securities and
consumer fraud laws, and to add additional defendants. Westcap and the
Company are of the opinions that Westcap has adequate documentation to
validate all such securities purchase transactions by The City Colleges,
and that Westcap and the Company each have adequate defenses to the
litigation. Westcap has filed Chapter 11 bankruptcy (see below), and City
Colleges has filed a $55 million claim in the bankruptcy court. The claim
has been tried before the court, but no judgment has been entered.
Although the alleged damages would be material to the Company's financial
statements, a reasonable estimate of any actual losses which may result
from this suit cannot be made at this time. The lawsuit against the
Company has been stayed pending determination of the proceeding against
Westcap.
On February 1, 1995, the San Antonio River Authority (SARA) filed a
complaint in the 285th Judicial District Court, Bexar County, Texas,
against Kenneth William Katzen (Katzen), Westcap Securities, L.P., The
Westcap Corporation, and National Western Life Insurance Company (the
Company). The suit alleges that Katzen and Westcap sold mortgage-backed
security derivatives to SARA and misrepresented these securities to SARA.
The suit alleges violations of the Federal Securities Act, Texas
Securities Act, Deceptive Trade Practices Act, breach of fiduciary duty,
fraud, negligence, breach of contract, and seeks attorney's fees. The
Company is named as a "controlling person" of the Westcap defendants.
Westcap and the Company are of the opinions that Westcap has adequate
documentation to validate all securities purchases by SARA and that the
Company and Westcap have adequate defenses to such suit. Although the
alleged damages would be material to the Company's financial statements, a
reasonable estimate of any actual losses which may result from this suit
cannot be made at this time. The Company and Westcap have denied all
allegations and the parties have initiated discovery. The lawsuit has
been transferred to the Westcap bankruptcy court, and the proceedings
against the Company have been stayed pending determination of the claim in
bankruptcy against Westcap.
On June 9, 1995, Charles McCutcheon, as Sheriff of Palm Beach County,
Florida, served The Westcap Corporation, Westcap Securities, Inc., Westcap
Government Securities, Inc., individual officers and directors of the
Westcap entities, and National Western Life Insurance Company (the
Company) as defendants with a complaint filed in the U.S. District Court
for the Southern District of Florida. The Complaint alleges that the
Westcap entities improperly sold certain derivative securities to the
Plaintiff and did not disclose the high risk of these securities to the
Plaintiff, who suffered financial losses from the investments. The
Company is sued as a "controlling person" of Westcap, and it is alleged
that the Company is responsible and liable for the alleged wrongful
conduct of Westcap. The suit seeks rescission of the investments, alleged
actual damages of $8 million, punitive and exemplary damages, attorneys'
fees, and injunction. On October 13, 1995, the U.S. District Judge
ordered arbitration of Plaintiff's claims against the Westcap entities,
and stayed all proceedings pending outcome of the arbitration. The
Company and Westcap deny the allegations and believe they each have
adequate defenses to such suit. Although the alleged damages would be
material to the Company s financial statements, a reasonable estimate of
any actual losses which may result from this suit cannot be made at this
time. The lawsuit is currently stayed pending the determination of the
claim in bankruptcy against Westcap.
On July 5, 1995, San Patricio County, Texas, filed suit in the District
Court of San Patricio County, Texas, against National Western Life
Insurance Company (the Company) and its chief executive officer, Robert L.
Moody. The suit arises from derivative investments purchased by San
Patricio County from Westcap Securities, L.P. or Westcap Government
Securities, Inc., affiliates of The Westcap Corporation. The suit alleges
that the Westcap affiliates were controlled by the Company and Mr. Moody
and that they are responsible for the alleged wrongful acts of the Westcap
affiliates in selling the securities to the Plaintiff. Plaintiff alleges
that the Westcap affiliates violated duties and responsibilities owed to
the Plaintiff related to the investment recommendations and decisions made
by Plaintiff, and alleges that the Plaintiff was financially damaged by
such actions of Westcap. The suit seeks rescission of the investments and
actual and punitive damages of unspecified amounts. The Company believes
that it has adequate defenses to such suit and denies the allegations.
The parties have initiated discovery. Although the alleged damages would
be material to the Company's financial statements, a reasonable estimate
of any actual losses which may result from this suit cannot be made at
this time. The lawsuit is currently stayed pending the determination of a
similar claim against Westcap in the Westcap bankruptcy proceedings.
On September 13, 1995, Michigan South Central Power Agency filed a
complaint in The United States District Court for the Western District of
Michigan against Westcap Securities Investment, Inc., Westcap Securities,
L.P., Westcap Securities Management, Inc., The Westcap Corporation,
National Western Life Insurance Company (the Company), and others. The
suit alleges that salesmen of Westcap sold mortgage-backed securities to
the Plaintiff and misrepresented these securities in violation of Federal
and state securities laws and common law. The Company is named as a
"controlling person" of the Westcap defendants and is alleged to be
responsible for their acts. Westcap and the Company are of the opinions
that they have adequate defenses to the suit. Although the alleged
damages would be material to the Company's financial statements, a
reasonable estimate of any actual losses which may result from the suit
cannot be made at this time. The Company and Westcap deny all
allegations. The lawsuit is currently stayed pending the determination of
the claim in bankruptcy against Westcap.
On February 27, 1996, the City of Tracy, a California municipal
corporation, filed a complaint in the Superior Court of San Joaquin
County, California, against Westcap Securities, L.P., National Western
Life Insurance Company (the Company) and others. The suit arises from
derivative investments purchased by the City of Tracy from Westcap
Securities, L.P., an affiliate of The Westcap Corporation. The suit
alleges that The Westcap Corporation and its subsidiaries are controlled
by the Company and that it is responsible for alleged wrongful acts of the
Westcap subsidiaries. Plaintiff alleges that the Westcap affiliates
violated fiduciary duties and responsibilities owed to the Plaintiff
related to investment purchases and decisions made by the Plaintiff,
breach of contract, deceit, fraud, violation of California Securities
Laws, and negligence, and that the Plaintiff was financially damaged
thereby. The suit seeks rescission of the investment transactions, actual
and punitive damages. Westcap and the Company are of the opinions that
each of them have good and adequate defenses to the suit, and they deny
the allegations. Although the alleged damages would be material to the
Company's financial statements, a reasonable estimate of any actual losses
which may result from this suit cannot be made at this time. The lawsuit
has been removed to the U.S. Bankruptcy Court in Houston, Texas, where it
is currently pending.
On January 8, 1997, Tom Green County, a county government entity of the
State of Texas, filed a petition in the District Court of Tom Green
County, Texas, against National Western Life Insurance Company (the
Company) and its chief executive officer, Robert L. Moody. The suit
arises from derivative investments purchased by Tom Green County from
Westcap Securities, L.P., an affiliate of The Westcap Corporation. The
suit alleges that The Westcap Corporation and its affiliates are
controlled by the Company and Robert L. Moody, and that they are
responsible for the alleged wrongful acts of the Westcap affiliates in
selling securities to the Plaintiff. Plaintiff alleges that the Westcap
affiliates violated fiduciary duties and responsibilities allegedly owed
to the Plaintiff related to investment recommendations and decisions made
by the Plaintiff in purchasing securities, engaged in fraud and deceptive
practices, conspiracy, violations of Texas Securities Laws, negligence and
gross negligence, and alleges that the Plaintiff was financially damaged
by such actions of Westcap. The suit seeks rescission of the investments
and actual and punitive damages of unspecified amounts. The Company
believes it has good and adequate defenses to the suit and denies the
allegations. Although the alleged damages would be material to the
Company's financial statements, a reasonable estimate of any actual losses
which may result from this suit cannot be made at this time. The Company
has filed an answer in the suit, has denied all claims and allegations,
and has removed the case to the U.S. District Court for the Northern
District of Texas, San Angelo Division.
Although the alleged damages for the above-described suits would be
material to the financial statements of National Western Life Insurance
Company and The Westcap Corporation, a reasonable estimate of actual
losses which may result from any of these claims cannot be made at this
time. Accordingly, no provision for any liability that may result from
these actions has been recognized in the accompanying financial
statements. National Western Life Insurance Company is also currently a
defendant in several other lawsuits, substantially all of which are in the
normal course of business. In the opinion of management, the liability, if
any, which may arise from these lawsuits would not have a material adverse
effect on the Company's financial position.
On April 12, 1996, The Westcap Corporation and its wholly owned
subsidiary, Westcap Enterprises, Inc., separately filed voluntary
petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code
in the United States Bankruptcy Court, Southern District of Texas, Houston
Division. Westcap Enterprises, Inc. is the successor by merger to Westcap
Securities Investment, Inc., Westcap Securities Management, Inc., and
Westcap Securities, L.P., which prior to such merger were subsidiaries or
affiliates of The Westcap Corporation.
The plan of reorganization filed in the Bankruptcy Court provides for the
merger of Westcap Enterprises, Inc. into The Westcap Corporation
(Westcap), with the survivor to conduct business as a real estate
investment trust under sections 856-58 of the Federal Tax Code. National
Western has agreed to participate in the Westcap plan of reorganization by
the contribution of $5,000,000 of cash and $5,000,000 of income producing
real estate properties in exchange for a complete settlement and release
of any claims by Westcap against National Western and a continuing equity
interest in the reorganized entity. The reorganization plan is subject
to approval by Westcap's creditors and the Bankruptcy Court. The
Creditors' Committee, the debtor Westcap, and National Western are
currently engaged in discussions relating to the possible settlement of
all claims by the creditors against Westcap and the claims of Westcap
against National Western. No prediction can be made at this time as to
the outcome of such settlement discussions.
National Western, Westcap, and the Creditors Committee agreed that
National Western may make a $1,000,000 cash infusion to Westcap for
operational expenses incurred during its bankruptcy and that such cash
infusion will be credited against any future settlement or litigation
recovery related to Westcap's alleged claims against National Western.
Such funding was approved by the Bankruptcy Court on February 21, 1997,
and the funds were transferred by National Western to Westcap on March 18,
1997.
National Western's investment in Westcap was completely written off during
1995. The $1,000,000 contribution described above will be reflected as
losses from discontinued operations in the first quarter of 1997. Any
additional losses from discontinued operations will depend primarily on
results of Westcap bankruptcy proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The principal market on which the common stock of the Company is traded is
The Nasdaq Stock Market under the symbol NWLIA. The high and low sales
prices for the common stock for each quarter during the last two years are
shown in the following table:
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
1996: First Quarter $ 64-1/2 55-1/2
Second Quarter 69-1/2 61-1/2
Third Quarter 84 66-1/4
Fourth Quarter 89-1/4 72-1/4
1995: First Quarter $ 39 32
Second Quarter 44 34-3/4
Third Quarter 59 43
Fourth Quarter 61 46-1/2
</TABLE>
(b) Equity Security Holders
The number of stockholders of record on December 31, 1996, was as follows:
<TABLE>
<S> <C>
Class A Common Stock 6,561
Class B Common Stock 2
</TABLE>
(c) Dividends
The Company has never paid cash dividends on its common stock. Payment of
dividends is within the discretion of the Company's Board of Directors and
will depend on factors such as earnings, capital requirements, and the
operating and financial condition of the Company. Presently, the Company's
capital requirements are such that it intends to follow a policy of
retaining any earnings in order to finance the development of business and
to meet increased regulatory requirements for capital.
ITEM 6. SELECTED FINANCIAL DATA
The following five-year financial summary includes comparative amounts
taken from the audited financial statements. The results have been
reclassified to reflect The Westcap Corporation as discontinued brokerage
operations.
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994 1993 1992
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues:
Life and
annuity premiums $ 16,611 17,390 18,938 18,624 21,365
Universal life
and investment
annuity contract
revenues 75,966 69,783 64,711 67,778 56,543
Net investment
income 214,302 201,816 190,021 180,252 184,149
Other income 2,718 661 1,462 1,847 616
Realized gains
(losses)
on investments 1,612 (2,415) 1,626 3,206 15,710
Total revenues 311,209 287,235 276,758 271,707 278,383
Expenses:
Policyholder
benefits 33,313 37,336 32,790 34,646 34,234
Amortization of
deferred policy
acquisition costs 30,361 33,675 32,131 33,159 25,085
Universal life
and investment
annuity contract
interest 151,475 142,940 129,064 130,875 135,792
Other insurance
operating expenses 25,722 27,084 29,394 28,959 27,870
Total expenses 240,871 241,035 223,379 227,639 222,981
Federal income taxes 24,123 10,566 16,207 14,696 18,719
Earnings before
cumulative
effect of change
in accounting
principle and
discontinued
operations 46,215 35,634 37,172 29,372 36,683
Cumulative effect
of change in
accounting for
income taxes - - - 5,520 -
Earnings (losses)
from discontinued
operations - (16,350) (2,936) 21,832 26,728
Net earnings $ 46,215 19,284 34,236 56,724 63,411
Per Share:
Earnings before
cumulative
effect of change
in accounting
principle and
discontinued
operations $ 13.24 10.22 10.66 8.44 10.55
Cumulative effect
of change in
accounting for
income taxes - - - 1.58 -
Earnings (losses)
from discontinued
operations - (4.69) (0.84) 6.27 7.68
Net earnings $ 13.24 5.53 9.82 16.29 18.23
Total assets $3,120,829 2,958,459 2,915,054 2,941,051 2,698,497
Total liabilities $2,767,969 2,646,472 2,639,920 2,698,333 2,512,406
Stockholders'
equity $ 352,860 311,987 275,134 242,718 186,091
</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 16% of the Company's total premium
revenues, universal life, and investment annuity contract deposits in
1996. The primary products marketed by the Company are its universal life
and single and flexible premium annuity products.
In addition to the life insurance business, the Company had a brokerage
operations segment through its wholly owned subsidiary, The Westcap
Corporation (Westcap). However, during 1995 Westcap closed its sales
offices and approved a plan to cease all brokerage operations.
Subsequently on April 12, 1996, Westcap and its wholly owned subsidiary,
Westcap Enterprises, Inc., separately filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. The
brokerage segment is now reported as discontinued operations throughout
this report and in the accompanying financial statements.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Investment Philosophy
The Company's investment philosophy is to maintain a diversified portfolio
of investment grade debt and equity securities that provide adequate
liquidity to meet policyholder obligations and other cash needs. The
prevailing strategy within this philosophy is the intent to hold
investments in debt securities to maturity. However, the Company manages
its portfolio, which entails monitoring and reacting to all components
which affect changes in the price, value, or credit rating of investments
in debt and equity securities.
Investments in debt and equity securities are classified and reported as
either securities held to maturity or securities available for sale. The
Company does not maintain a portfolio of trading securities. The
reporting category chosen for the Company's securities investments depends
on various factors including the type and quality of the particular
security and how it will be incorporated into the Company's overall
asset/liability management strategy. At December 31, 1996, approximately
22% of the Company's total debt and equity securities, based on fair
values, were classified as securities available for sale. These holdings
provide flexibility to the Company to react to market opportunities and
conditions and to practice active management within the portfolio to
provide adequate liquidity to meet policyholder obligations and other cash
needs.
Securities the Company purchases with the intent to hold to maturity are
classified as securities held to maturity. Because the Company has strong
cash flows and matches expected maturities of assets and liabilities, the
Company has the ability to hold the securities, as it would be unlikely
that forced sales of securities would be required prior to maturity to
cover payments of liabilities. As a result, securities held to maturity
are carried at amortized cost less declines in value that are other than
temporary. However, certain situations may change the Company's intent to
hold a particular security to maturity, the most notable of which is a
deterioration in the issuer's creditworthiness. Accordingly, a security
may be sold to avoid a further decline in realizable value when there has
been a significant change in the credit risk of the issuer.
Securities that are not classified as held to maturity 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 that allow the Company to
improve the performance and credit quality of the investment portfolio by
replacing an existing security with an alternative security while still
maintaining an appropriate matching of expected maturities of assets and
liabilities. Examples of such improvements are as follows: improving the
yield earned on invested assets, improving the credit quality, changing
the duration of the portfolio, and selling securities in advance of
anticipated calls or other prepayments. Securities available for sale are
reported in the Company's financial statements at fair value. Any
unrealized gains or losses resulting from changes in the fair value of the
securities are reflected as a component of stockholders' equity.
As an integral part of its investment philosophy, the Company performs an
ongoing process of monitoring the creditworthiness of issuers within the
investment portfolio. Review procedures are also performed on securities
that have had significant declines in fair value. The Company's objective
in these circumstances is to determine if the decline in fair value is due
to changing market expectations regarding inflation and general interest
rates or other factors. Additionally, the Company closely monitors
financial, economic, and interest rate conditions to manage prepayment and
extension risks in its mortgage-backed securities portfolio.
The Company's overall conservative investment philosophy is reflected in
the allocation of its investments which is detailed below as of December
31, 1996 and 1995. The Company emphasizes investment grade debt
securities, with smaller holdings in mortgage loans and real estate.
<TABLE>
<CAPTION>
Percent of Investments
1996 1995
<S> <C> <C>
Debt securities 86.0% 84.5%
Mortgage loans 7.0 7.3
Policy loans 5.1 5.6
Equity securities 0.6 1.0
Real estate 0.6 0.7
Other 0.7 0.9
Totals 100.0% 100.0%
</TABLE>
Portfolio Analysis
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,
1996, 1995, and 1994, the Company's debt securities portfolio consisted of
the following mix of securities based on amortized cost:
<TABLE>
<CAPTION>
Percent of Debt Securities
1996 1995 1994
<S> <C> <C> <C>
Corporate 45.5% 40.3% 32.5%
Mortgage and
asset-backed
securities 34.5 40.6 47.6
Public utilities 15.1 12.9 14.5
Foreign government 2.2 2.2 1.3
U.S. government 1.6 1.8 1.6
States and political
subdivisions 1.1 2.2 2.5
Totals 100.0% 100.0% 100.0%
</TABLE>
The amortized cost and estimated fair values of investments in debt
securities at December 31, 1996, 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>
Amortized Fair
Cost Value
(In thousands)
<S> <C> <C>
Due in one year or less $ 15,535 15,638
Due after one year
through five years 90,352 90,863
Due after five years
through ten years 1,120,022 1,127,620
Due after ten years 323,045 339,065
1,548,954 1,573,186
Mortgage and asset-backed
securities 816,157 833,669
Totals $ 2,365,111 2,406,855
</TABLE>
An important aspect of the Company's investment philosophy is managing the
cash flow stability of the portfolio. Because expected maturities of
securities may differ from contractual maturities due to prepayments,
extensions, and calls, the Company takes steps to manage and minimize
these risks. The Company has reduced its exposure to prepayment and
extension risks by lowering its holdings of mortgage-backed securities
over the past few years. Mortgage and asset-backed securities totaled
47.6% of the entire portfolio in 1994 and now total only 34.5% at December
31, 1996. The majority of this reduction has been offset by increases in
corporate securities, as corporate holdings have increased from 32.5% in
1994 to 45.5% in 1996. However, most of these additions were non-callable
corporates which help reduce prepayment and call risks.
As indicated above, the Company's holdings of mortgage-backed securities
are also subject to prepayment risk, as well as extension risk. Both of
these risks are addressed by specific portfolio management strategies.
The Company substantially reduces both prepayment and extension risks by
investing primarily in collateralized mortgage obligations which have more
predictable cash flow patterns than pass-through securities. These
securities, known as planned amortization class I (PAC I) CMOs, are
designed to amortize in a more predictable manner than other CMO classes
or pass-throughs. Using this strategy, the Company can more effectively
manage and reduce prepayment and extension risks, thereby helping to
maintain the appropriate matching of the Company's assets and liabilities.
As of December 31, 1996, CMOs represent approximately 90% of the Company's
mortgage-backed securities, and PAC I CMOs account for approximately 91%
of this CMO portfolio. The CMOs that the Company purchases are modeled
and subjected to detailed, comprehensive analysis by the Company's
investment staff before any investment decision is made. The overall
structure of the entire CMO is evaluated, and an average life sensitivity
analysis is performed on the individual tranche being considered for
purchase under increasing and decreasing interest rate scenarios. This
analysis provides information used in selecting securities that fit
appropriately within the Company's investment philosophy and
asset/liability management parameters. The Company's investment mix
between mortgage-backed securities and other fixed income securities helps
effectively balance prepayment, extension, and credit risks.
In addition to managing prepayment, extension, and call risks, the Company
closely manages the credit quality of its investments in debt securities.
The Company continues to follow its conservative investment philosophy by
minimizing its holdings of below investment grade debt securities, as
these securities generally have greater default risk than higher rated
corporate debt. These issuers usually are more sensitive to adverse
industry or economic conditions than are investment grade issuers. The
Company's small holdings of below investment grade debt securities are
summarized below. The increase in below investment grade debt securities
from 1995 is primarily due to investment grade issuers that were
downgraded to below investment grade status.
<TABLE>
<CAPTION>
Below Investment
Grade Debt Securities
% of
Carrying Market Invested
Value Value Assets
(In thousands)
<S> <C> <C> <C>
December 31, 1996 $ 38,696 38,784 1.4%
December 31, 1995 $ 14,244 14,567 0.5%
December 31, 1994 $ 31,861 28,670 1.4%
</TABLE>
The Company's strong credit risk management and commitment to quality has
resulted in minimal defaults in the debt securities portfolio in recent
years. In fact, at December 31, 1996 and 1995, securities with principal
balances totaling only $2,945,000 and $3,575,000 were in default and on
non-accrual status.
The Company's commitment to high-quality investments in debt securities is
also reflected by the portfolio average rating of "A," which is high
quality. Allocation of investments in debt securities classified in
accordance with the highest rating by a nationally recognized statistical
rating organization as of December 31, 1996 and 1995, is provided below.
If securities were not rated by one of these organizations, the equivalent
classification as assigned by the National Association of Insurance
Commissioners was used.
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Aaa and U.S. government 36.8% 43.0%
Aa 4.6 4.3
A 32.5 29.1
Baa 24.3 22.4
Ba and other below investment grade 1.7 0.7
Not rated 0.1 0.5
100.0% 100.0%
</TABLE>
At December 31, 1996, gross unrealized gains in the Company's debt and
equity securities portfolios were as follows:
<TABLE>
<CAPTION>
Gross
Fair Amortized Unrealized
Value Cost Gains
(In thousands)
<S> <C> <C> <C>
Securities held to maturity:
Debt securities $ 1,896,847 1,873,561 23,286
Securities available for sale:
Debt securities 510,008 491,550 18,458
Equity securities 17,619 15,342 2,277
Totals $ 2,424,474 2,380,453 44,021
</TABLE>
As detailed above, debt securities classified as held to maturity comprise
the majority of the Company's securities portfolio, while equity
securities continue to be a small component of the portfolio. Gross
unrealized gains totaling $44,021,000 on the securities portfolio at
December 31, 1996, is a reflection of market interest rates at year-end.
The fair values, or market values, of fixed income debt securities
correlate to external market interest rate conditions. Because the
interest rates are fixed on almost all of the Company's debt securities,
market values typically increase when market interest rates decline, and
decrease when market interest rates rise. This correlation between market
values and interest rates is reflected in the table below.
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Fair value $ 2,406,855 2,301,403 1,816,054
Amortized cost $ 2,365,111 2,179,939 1,944,098
Fair value as a percentage
of amortized cost 101.8% 105.6% 93.4%
Ten-year Treasury Bond -
change in
yield for the year 0.9% (2.0)% 2.0%
</TABLE>
As reflected above, changes in interest rates of 100 basis points or more
have a significant impact on the market values of the Company's debt
securities. The Company would expect similar results in the future from
any significant upward or downward movement in market rates. However,
because the majority of the Company's debt securities are classified as
held to maturity, the changes in market values have had relatively small
effects on the Company's financial statements. Also, the Company has the
intent and ability to hold these securities to maturity, and it is
unlikely that sales of such securities would be required which would
realize the market gains or losses.
MORTGAGE LOANS AND REAL ESTATE
Investment Philosophy
In general, the Company seeks loans on high quality, income producing
properties such as shopping centers, freestanding retail stores, office
buildings, industrial and sales or service facilities, selected apartment
buildings, motels, and health care facilities. The location of these
loans is typically in growth areas that offer a potential for property
value appreciation. These growth areas are found primarily in major
metropolitan areas, but occasionally in selected smaller communities.
The Company seeks to minimize the credit and default risk in its mortgage
loan portfolio through strict underwriting guidelines and diversification
of underlying property types and geographic locations. In addition to
being secured by the property, mortgage loans with leases on the
underlying property are often guaranteed by the lessee, in which case the
Company approves the loan based on the credit strength of the lessee.
This approach has proven to result in higher quality mortgage loans with
fewer defaults.
The Company's direct investments in real estate are not a significant
portion of its total investment portfolio, and the majority of real estate
owned was acquired through mortgage loan foreclosures. However, the
Company also participates in several real estate joint ventures and
limited partnerships. The joint ventures and partnerships invest
primarily in income-producing retail properties. While not a significant
portion of the Company's investment portfolio, these investments have
produced favorable returns to date and increased investment income
significantly in 1996. Several of these interests in real estate joint
ventures were sold during 1996. The sales resulted in additional
investment income totaling approximately $2,300,000.
Portfolio Analysis
The Company held net investments in mortgage loans totaling $193,311,000
and $191,674,000, or 7.0% and 7.3% of total invested assets, at December
31, 1996 and 1995. The loans are real estate mortgages, substantially all
of which are related to commercial properties and developments and have
fixed interest rates.
The diversification of the mortgage loan portfolio by geographic region of
the United States and by property type as of December 31, 1996 and 1995,
was as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
West South Central 51.4% 54.0%
Mountain 15.0 12.9
Pacific 11.2 9.4
South Atlantic 8.7 9.2
East South Central 4.0 4.3
East North Central 3.8 3.9
All other 5.9 6.3
Totals 100.0% 100.0%
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Retail 64.4% 67.0%
Office 18.9 15.9
Hotel/Motel 7.8 8.3
Apartment 3.9 3.1
Industrial 0.6 0.6
Residential 0.3 0.4
Other Commercial 4.1 4.7
Totals 100.0% 100.0%
</TABLE>
As of December 31, 1996, the allowance for possible losses on mortgage
loans was $5,988,000. Additions to the allowance totaling $500,000 were
recognized as realized losses on investments in the Company's 1996
financial statements. No additions were made in 1995. Management
believes that the allowance for possible losses is adequate. However,
while management uses available information to recognize losses, future
additions to the allowance may be necessary based on changes in economic
conditions, particularly in the West South Central region which includes
Texas, Louisiana, Oklahoma, and Arkansas, as this area contains the
highest concentrations of the Company's mortgage loans.
The Company currently places all loans past due three months or more on
non-accrual status, thus recognizing no interest income on the loans. At
December 31, 1996 and 1995, the Company had approximately $36,000 and
$203,000, respectively, of mortgage loan principal balances on non-accrual
status. In addition to the non-accrual loans, the Company had mortgage
loan principal balances with restructured terms totaling approximately
$12,719,000 and $13,355,000 at December 31, 1996 and 1995, respectively.
For the years ended December 31, 1996 and 1995, the reductions in interest
income due to non-accrual and restructured mortgage loans were not
significant.
The contractual maturities of mortgage loans at December 31, 1996, are as
follows:
<TABLE>
<CAPTION>
Principal
Due
(In thousands)
<S> <C>
Due in one year or less $ 18,347
Due after one year
through five years 69,239
Due after five years
through ten years 100,526
Due after ten years
through fifteen years 11,357
Due after fifteen years 1,380
Total $ 200,849
</TABLE>
The Company owns real estate that was acquired through foreclosure and
through direct investment totaling approximately $15,209,000 and
$19,066,000 at December 31, 1996 and 1995, 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 $638,000 and $404,000 for the years ended December 31, 1996
and 1995, 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 $526,000 and $882,000 for the years ended December
31, 1996 and 1995, respectively. The Company makes repairs and capital
improvements to keep the properties in good condition and will continue
this maintenance as needed.
RESULTS OF OPERATIONS
Summary of Consolidated Operations
A summary of operating results, net of taxes, for the years ended December
31, 1996, 1995, and 1994 is provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
(In thousands except per share data)
<S> <C> <C> <C>
Revenues:
Insurance revenues excluding
realized
gains (losses) on investments $ 309,597 289,650 275,132
Realized gains (losses)
on investments 1,612 (2,415) 1,626
Total revenues $ 311,209 287,235 276,758
Earnings:
Earnings from insurance
operations $ 45,167 37,203 36,115
Losses from discontinued
brokerage operations - (16,350) (2,936)
Net realized gains (losses)
on investments 1,048 (1,569) 1,057
Net earnings $ 46,215 19,284 34,236
Earnings Per Share:
Earnings from insurance
operations $ 12.94 10.67 10.36
Losses from discontinued
brokerage operations - (4.69) (0.84)
Net realized gains (losses)
on investments 0.30 (0.45) 0.30
Net earnings $ 13.24 5.53 9.82
</TABLE>
Significant changes and fluctuations in income and expense items between
years are described in detail for insurance and brokerage operations as
follows:
Insurance Operations
Insurance Operations Net Earnings: The Company recognized record earnings
from insurance operations for the year totaling $45,167,000 in 1996, an
increase of 21.4% over 1995 earnings. Increases in universal life and
annuity revenues of 8.9% and net investment income of 6.2%, coupled with
lower expenses, resulted in the record earnings. Lower expenses were
primarily from decreases in life insurance benefit claims, policy
acquisition costs, and state guaranty fund assessments. Also, 1995
earnings include a $5.7 million tax benefit resulting from the Company's
subsidiary brokerage losses, and earnings for 1994 include a comparable
$2.9 million tax benefit. The tax benefits were recognized in accordance
with the Company's tax allocation agreement with its subsidiaries.
Excluding the tax benefits, earnings from insurance operations for 1996
were actually up $13.7 million from 1995 due to the increases in revenues
and lower expenses as previously described.
Life and Annuity Premiums: This revenue category represents the premiums
on traditional type products. However, sales in most of the Company's
markets continue to consist of non-traditional types such as universal
life and investment annuities. The Company's current plans are to
continue to focus the majority of its product development and marketing
efforts on universal life and investment annuities. As a result, as in
past years no significant growth is anticipated for these premiums in the
near future.
Universal Life and Investment Annuity Contract Revenues: These revenues
are from the Company's non-traditional products, which are universal life
and investment annuities. Revenues from these types of products consist
primarily of policy charges for the cost of insurance, policy
administration fees, and surrender charges assessed during the period.
These revenues increased from $64.7 million in 1994 to $76.0 million in
1996. More specifically, cost of insurance, policy administration fees,
and other related revenues have steadily increased each year due to
continued sales of non-traditional products which continue to increase the
Company's policies in force. Additionally, surrender charge revenues
continue upward due to increased policy surrenders. Policy surrenders
were up 14.2% in 1996 over 1995, which corresponds to the increase in
surrender charge revenues of 13.9%. A comparative detail of the
components of universal life and investment annuity revenues is provided
below:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Surrender charges $ 34,941 30,665 29,882
Cost of insurance revenues 32,266 30,378 26,829
Policy fees and other revenues 8,759 8,740 8,000
Totals $ 75,966 69,783 64,711
</TABLE>
Actual universal life and investment annuity deposits collected for the
years ended December 31, 1996, 1995, and 1994 are detailed below.
Deposits collected on these non-traditional products are not reflected as
revenues in the Company's statements of earnings, as they are recorded
directly to policyholder liabilities upon receipt, in accordance with
generally accepted accounting principles.
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Investment annuities:
First year and single
premiums $ 243,686 272,219 108,981
Renewal premiums 29,516 37,752 48,641
Universal life insurance:
First year and single
premiums 18,611 19,850 17,003
Renewal premiums 48,827 48,614 47,757
Totals $ 340,640 378,435 222,382
</TABLE>
Prior to 1993, most of the Company's investment annuity production was
from the sale of two-tier annuity products, the vast majority of which
were sold by a single independent marketing organization. However, in
the third quarter of 1992, the Company discontinued sales of all two-tier
annuities due to declines in sales and certain regulatory issues
concerning two-tier products. The Company has continued to collect
additional premiums on existing two-tier annuities, as much of the sales
in prior years were flexible premium annuities on which renewal premiums
are received subsequent to first year premiums.
Subsequent to discontinuing the two-tier annuity sales, the Company set
goals to not only develop new annuity products to replace the lost
two-tier production, but to diversify and strengthen distribution channels
to avoid dependence on its primary independent marketing organization.
The Company achieved this by developing new annuity products in 1994 and
by contracting new marketing organizations with extensive experience,
financial resources, and success in marketing annuities. The combination
of new products, primarily a single premium deferred annuity, and new
marketing organizations started to produce results in the latter half of
1994 as annuity production began to increase significantly. This
increased production continued throughout 1995. However, sales were lower
in 1996, and the renewal premiums from the two-tier annuities also
continued to decline. As the emphasis on new annuity sales is primarily
single premium products, the Company does not anticipate a significant
reversal of the decline in renewal premiums in the near future.
The majority of the Company's life insurance production is from
the international market, primarily Central and South American countries.
The Company continues to see increased competition in the Central and
South American market, causing production growth to slow. However, the
Company has been accepting policies from foreign nationals for over
thirty years and has developed strong relationships with carefully
selected brokers in the foreign countries. This experience and strong
broker relations have enabled the Company to meet the increased
competition with new product enhancements and marketing efforts. Such
efforts resulted in increased life insurance production once again in
1995, although 1996 premiums declined somewhat from these levels.
Net Investment Income: Net investment income during 1996 increased 6.2%
from 1995. The increase was from increases in invested assets and from
gains from real estate joint ventures. NWL Investments I, L.P. sold
several real estate joint venture interests during 1996, and the sales
resulted in additional investment income totaling approximately
$2,300,000. Excluding the income from the joint venture sales, net
investment income was up 5.0% from 1995, which is consistent with the
increase in total invested assets of 5.6% for the same period. Also, the
yield on purchases in 1996 was similar to the yield of the 1995 portfolio.
During 1995, net investment income increased 6.2% from 1994 while total
invested assets increased 12.0% for the same period. The increase in
invested assets was primarily due to increased annuity production. The
growth in net investment income lagged the growth in invested assets for
several reasons. Interest rates declined significantly throughout 1995,
resulting in investments in lower yielding securities. Also, net
investment income was up significantly in 1994 due to yield and
amortization adjustments on mortgage-backed securities. The adjustments
were made to reflect changes in mortgage-backed securities prepayment
levels, caused by changes in market interest rates, which affected average
lives, yields, and amortization periods of the securities. There were no
significant corresponding adjustments in 1995.
As previously described, market interest rates declined significantly
during 1995 from 1994 levels. Interest rates were somewhat volatile
during 1996, but overall were at levels comparable to 1995. Detailed
below is the Company's investment performance for 1996, 1995, and 1994.
The changes in the Company's yield reflect the changes in market interest
rates. However, changes in market rates affect the Company's portfolio
yield slowly because of the relative small volume of new investment
purchases during a year in comparison to the size of the overall
investment portfolio.
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Net investment income $ 214,302 201,816 190,021
Average invested assets,
at amortized cost $ 2,652,232 2,460,571 2,294,830
Yield on average
invested assets 8.08% 8.20% 8.28%
</TABLE>
Other Income: Other income for 1996 includes proceeds received from a
lawsuit settlement totaling $850,000. The lawsuit related to the
Company's previous investment in a mortgage loan.
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. This lawsuit was settled in September, 1993.
However, the Company also received proceeds from a settlement totaling
$955,000 for recovery of damages incurred related to this lawsuit. These
settlement proceeds were reflected as other income in 1994.
Realized Gains and Losses on Investments: The Company recorded realized
gains totaling $1.6 million in both 1996 and 1994 compared to realized losses
of $2.4 million in 1995. The gains in 1996 were primarily from sales of
investments in debt securities and real estate. The losses in 1995 were
also primarily from sales of investments in debt securities, the majority
of which were from the Company's remaining investments in principal
exchange rate linked securities. The Company made the decision to realize
these losses to obtain tax benefits related to the losses which were
scheduled to expire on December 31, 1995. The gains and losses in 1996,
1995, and 1994 are net of write-downs on real estate and mortgage loans
totaling $1,026,000, $882,000, and $625,000, respectively.
Life and Other Policy Benefits: Expenses in 1995 were significantly
higher at $39.8 million than expenses in 1996 and 1994 which totaled only
$35.4 million and $32.1 million, respectively. The significant
fluctuation in expenses is due to higher life insurance benefit claims and
high policy surrenders on traditional insurance products in 1995. Life
insurance benefit claims, which accounted for the majority of the
fluctuation, totaled $21.5 million, $24.6 million, and $19.1 million in
1996, 1995, and 1994, respectively. The 1995 expenses were abnormally
high due to adverse claims experience. Throughout the Company's history,
it has experienced both periods of higher and lower benefit claims in
comparison to Company averages. The year 1995 reflects such a period, as
benefits were significantly higher. Such deviations are not uncommon in
the life insurance industry and, over extended periods of time, tend to be
offset by periods of lower claims experience.
Amortization of Deferred Policy Acquisition Costs: This expense item
represents the amortization of the costs of acquiring or producing new
business, which consists primarily of agents' commissions. The majority
of such costs are amortized in direct relation to the anticipated future
gross profits of the applicable blocks of business. Amortization is also
impacted by the level of policy surrenders. Amortization for 1996, 1995,
and 1994 has been relatively consistent at $30.4 million, $33.7 million,
and $32.1 million, respectively. The lower amortization in 1996 is
primarily due to changes in timing and increases in levels of anticipated
future gross profits for certain blocks of business.
Universal Life and Investment Annuity Contract Interest: Prior to 1995,
interest expense declined steadily as amounts totaled $129.1 million,
$130.9 million, and $135.8 million for 1994, 1993, and 1992, respectively.
This decline was primarily due to the lowering of credited interest rates
on most universal life and investment annuity products throughout these
years. The lowering of credited interest rates was largely in response to
declining market interest rates. Additional interest costs related to
increasing business was not significant, as the policy liabilities
remained relatively constant over those years. However, in the latter
part of 1994, annuity production began to increase significantly and it
continued to increase into 1996. The increase in annuity deposits resulted
in corresponding increases in policy liabilities and significantly higher
interest costs in 1995 and 1996. Also, the Company's new annuity products
typically credit significantly higher interest rates in the first policy
year, again resulting in higher interest costs.
The Company closely monitors its credited interest rates, taking into
consideration such factors as profitability goals, policyholder benefits,
product marketability, and economic market conditions. Rates are
established or adjusted after careful consideration and evaluation of
these factors against established objectives. Average credited rates,
calculated based on policy reserves for the Company s universal life and
investment annuity business, have remained relatively consistent since
1994. Average credited rates for 1996, 1995, and 1994 were 6.15%, 6.19%,
and 6.04%, respectively.
Other Insurance Operating Expenses: These expenses totaled $25.7 million,
$27.1 million, and $29.4 million for 1996, 1995, and 1994, respectively.
The significant decline in these expenses is primarily due to reduced
expenses for state guaranty association assessments.
The Company is subject to state guaranty association assessments in all
states in which it is licensed to do business. These associations
generally guarantee certain levels of benefits payable to resident
policyholders of insolvent insurance companies. Most states allow premium
tax credits for all or a portion of such assessments, thereby allowing
potential recovery of these payments over a period of years. However,
several states do not allow such credits. The National Organization of
Life and Health Insurance Guaranty Associations annually publishes
assessment data on nationwide life and health insurance company
insolvencies. Based on this information, the Company revises its
estimates for assessment liabilities relating to such insolvencies. The
Company will continue to monitor and revise its estimates for assessments
as additional information becomes available. Other insurance operating
expenses related to state guaranty association assessments totaled
$1,146,000, $2,371,000, and $4,869,000 for the years ended December 31,
1996, 1995, and 1994, respectively.
Discontinued Brokerage Operations
Effective July 17, 1995, The Westcap Corporation, a wholly owned brokerage
subsidiary of National Western Life Insurance Company, discontinued all
sales and trading activities in its Houston, Texas, office. At that time,
The Westcap Corporation (Westcap) continued its corporate operations and
small sales operations in its New Jersey office. However, in September,
1995, Westcap approved a plan to close the remaining sales office in New
Jersey and to cease all brokerage operations.
Declines in both sales revenues and earnings were the principal reasons
for ceasing operations. Increasing market interest rates and resulting
adverse bond market conditions during 1994 and 1995 compared to previous
years had a negative impact on the entire bond brokerage industry. These
conditions, coupled with adverse publicity about litigation related to
sales of collateralized mortgage obligation (CMO) products, led to the
declines in sales and earnings. The publicity surrounding these claims
made it extremely difficult to keep Westcap's customer base and sales
force in place. Additionally, because much publicity characterizes CMOs
as derivatives, adverse publicity about derivatives impacted the market
for CMOs and decreased Westcap's prospects for future sales.
On April 12, 1996, The Westcap Corporation and its wholly owned
subsidiary, Westcap Enterprises, Inc., separately filed voluntary
petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code
in the United States Bankruptcy Court, Southern District of Texas, Houston
Division. Westcap Enterprises, Inc. is the successor by merger to Westcap
Securities Investment, Inc., Westcap Securities Management, Inc., and
Westcap Securities, L.P., which prior to such merger were subsidiaries or
affiliates of The Westcap Corporation. The bankruptcy filing is more
fully described in Item 3, Legal Proceedings.
In connection with the discontinued operations and subsequent bankruptcy
filing, Westcap's assets are being carried at their estimated fair value,
and its liabilities include estimated costs to dispose of assets and
estimated future costs to cease operations. In accordance with generally
accepted accounting principles, the assets and liabilities of Westcap have
been reclassified in the accompanying consolidated balance sheets to
separately identify them as assets and liabilities of the discontinued
operations.
In previous years, Westcap has contributed significantly to the
consolidated earnings of National Western Life Insurance Company.
However, more recently, brokerage operations have produced losses due to
the reasons cited above. A summary of net earnings and losses from
brokerage operations since 1992 is provided below.
<TABLE>
<CAPTION>
Amounts in Per
Thousands Share
<S> <C> <C>
Years ended December 31:
1996 $ - $ -
1995 (16,350) (4.69)
1994 (2,936) (0.84)
1993 21,832 6.27
1992 26,728 7.68
</TABLE>
Losses from the discontinued brokerage operations have been reflected
separately from continuing operations of the Company in the accompanying
consolidated financial statements. The 1995 losses disclosed above
include estimated future operating losses as well as estimated costs to
cease brokerage operations totaling $6,381,000 and resulted in the
complete write-off of the Company's investment in Westcap on a
consolidated basis. As a result, no losses were recognized in 1996.
However, National Western, Westcap, and the Creditors' Committee agreed
that National Western may make a $1,000,000 cash infusion to Westcap for
operational expenses incurred during its bankruptcy and that such cash
infusion will be credited against any future settlement or litigation
recovery related to Westcap's alleged claims against National Western.
Such funding was approved by the Bankruptcy Court on February 21, 1997,
and the funds were transferred by National Western to Westcap on March 18,
1997. This contribution will be reflected as losses from discontinued
operations in the first quarter of 1997. Any additional losses from
discontinued operations will depend primarily on results of Westcap
bankruptcy proceedings.
Consolidated Federal Income Taxes
Federal Income Taxes: Federal income taxes for 1996 reflect an effective
tax rate of 34.3%, which is consistent with the expected statutory rate of
35%. However, Federal income taxes for 1995 on earnings from continuing
operations reflect an effective tax rate of only 23%. The 1995 taxes are
lower than the expected statutory rate of 35% due to a $5.7 million tax
benefit resulting from the Company's subsidiary brokerage losses.
Correspondingly, losses on discontinued operations for 1995 totaling
$16,350,000 do not include any tax benefits relating to the brokerage
subsidiary. This tax reporting treatment is in accordance with the
Company's tax allocation agreement with its subsidiaries. However, on a
consolidated basis, the Federal income taxes reflect the expected
effective tax rate of 35% for 1995.
Federal income taxes for 1994 on earnings from continuing operations
reflect a low effective tax rate, as such taxes also include a tax benefit
totaling $2.9 million resulting from the Company's subsidiary brokerage
losses. Losses on discontinued operations for 1994 totaling $2,936,000
include Federal income taxes of $2,983,000. Again, the tax reporting
treatment is in accordance with the tax allocation agreement previously
described, and on a consolidated basis, Federal income taxes reflect an
effective tax rate of 35% for 1994.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The liquidity requirements of the Company are met primarily by funds
provided from operations. Premium deposits and revenues, investment
income, and investment maturities are the primary sources of funds, while
investment purchases and policy benefits are the primary uses of funds.
Primary sources of liquidity to meet cash needs are the Company's
securities available for sale portfolio, net cash provided by operations,
and bank line of credit. The Company's investments consist primarily of
marketable debt securities that could be readily converted to cash for
liquidity needs. The Company may also borrow up to $60 million on its
bank line of credit for short-term cash needs.
A primary liquidity concern for the Company's life insurance operations is
the risk of early policyholder withdrawals. Consequently, the Company
closely evaluates and manages the risk of early surrenders or withdrawals.
The Company includes provisions within annuity and universal life
insurance policies, such as surrender charges, that help limit early
withdrawals. The Company also prepares cash flow projections and performs
cash flow tests under various market interest rate scenarios to assist in
evaluating liquidity needs and adequacy. The Company currently expects
available liquidity sources and future cash flows to be adequate to meet
the demand for funds.
In the past, cash flows from the Company's insurance operations have been
more than adequate to meet current needs. Cash flows from operating
activities were $145 million, $99 million, and $117 million in 1996, 1995,
and 1994, respectively. Lower earnings from brokerage operations was the
primary reason for the lower cash flows in 1995 and 1994. Net cash flows
from the Company's deposit product operations, which includes universal
life and investment annuity products, totaled $16 million and $99 million
in 1996 and 1995, respectively. These operations incurred net cash
outflows in 1994 totaling $17 million. The increase in cash flows in 1995
was due to increased annuity production. However, the reduction in cash
flows in 1996 was due to lower annuity production and higher policy
surrenders than in 1995.
The Company also has significant cash flows from both scheduled and
unscheduled investment security maturities, redemptions, and prepayments.
These cash flows totaled $117 million, $69 million, and $133 million in
1996, 1995, and 1994, respectively. The Company again expects significant
cash flows from these sources in 1997 at levels similar to the past three
years.
Capital Resources
The Company relies on stockholders' equity for its capital resources, as
there has been no long-term debt outstanding in 1996 or recent years. The
Company does not anticipate the need for any long-term debt in the near
future. There are also no current or anticipated material commitments for
capital expenditures in 1997.
Stockholders' equity totaled $353 million at December 31, 1996, reflecting
an increase of $41 million from 1995. The increase in capital is
primarily from net earnings of $46 million, offset by the decrease in net
unrealized gains on investment securities totaling $5 million in 1996.
Slightly higher market interest rates at year-end 1996 compared to 1995
resulted in the decrease in unrealized gains. Book value per share at
December 31, 1996, was $101.07, reflecting a 13.1% increase for the year.
CHANGES IN ACCOUNTING PRINCIPLES
In June, 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities." In December, 1996, SFAS No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125," was issued which
defers portions of SFAS No. 125 to be effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1997. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishment of liabilities. Those standards are based on consistent
application of a financial-components approach that focuses on control.
Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control
has been surrendered, and derecognizes liabilities when extinguished.
This statement provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 125 is effective for applicable transactions
occurring after December 31, 1996, and is to be applied prospectively.
The Company anticipates that the implementation of this statement will
have no significant effects on its financial statements.
CURRENT REGULATORY ISSUES
Actuarial Guideline 33
In December, 1995, the National Association of Insurance Commissioners
adopted for statutory accounting practices Actuarial Guideline 33,
previously referred to as Actuarial Guideline GGG. This reserve guideline
helps define the minimum reserves for policies with multiple benefit
streams, such as two-tier annuities. The Company had been reserving for
its two-tier annuities according to an agreement reached in 1993 with its
state of domicile, Colorado. However, in 1995, the Company entered into
discussions with the Colorado Division of Insurance (the Division) to
implement Actuarial Guideline 33 and to phase it in over a three-year
period as allowed by the guideline. In January, 1996, the Division
approved the proposal for this three-year phase-in. The effect on the
Company's statutory financial statements will not be significant, since
the previous agreement with the Division was similar to the final
guideline. Also, the guideline does not affect the Company's policy
reserves which are prepared under generally accepted accounting principles
as reported in the accompanying consolidated financial statements.
Risk Based Capital Requirements
The National Association of Insurance Commissioners (NAIC) has established
risk-based capital (RBC) requirements to help state regulators monitor the
financial strength and stability of life insurers by identifying those
companies that may be inadequately capitalized. Under the NAIC's
requirements, each insurer must maintain its total capital above a
calculated threshold or take corrective measures to achieve the threshold.
The threshold of adequate capital is based on a formula that takes into
account the amount of risk each company faces on its products and
investments. The RBC formula takes into consideration four major areas of
risk which are: (i) asset risk which primarily focuses on the quality of
investments; (ii) insurance risk which encompasses mortality and morbidity
risk; (iii) interest rate risk which involves asset/liability matching
issues; and (iv) other business risks.
Due to the uncertainty of the legality of publishing RBC information, the
Company has chosen not to publish its RBC ratios or levels. However, the
Company's current statutory capital and surplus is significantly in excess
of the threshold RBC requirements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is reported in Attachment A
beginning on page __. See Index to Financial Statements and Schedules on
page __ for a list of financial information included in Attachment A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in auditors or disagreements with auditors
which are reportable pursuant to Item 304 of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) Identification of Directors
The following information as of January 31, 1997, is furnished with
respect to each director. All terms expire in June of 1997.
<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 61
(1) (3) (4) (5) Exectuive Officer of
the Company;
Investments, Galveston, Texas
Ross R. Moody President and Chief Operating 1981 34
(1) (3) Officer of the Company,
4/92-present;
Vice President - Office of
the President of the Company,
4/91 - 4/92, Austin, Texas
Arthur O. Dummer President, The Donner Company 1980 63
(1) (2) (3) Salt Lake City, Utah
Harry L. Edwards Retired; Former President and 1969 75
Chief Operating Officer
of the Company until
7/90, Austin, Texas
E. Douglas McLeod Director of Development, Moody 1979 55
(4) Foundation, Galveston, Texas
Charles D. Milos, Jr. Senior Vice President of the 1981 51
(1) (3) Company, Galveston, Texas
Frances A. Moody Investments, Dallas, Texas, 1990 27
(4) 1992 - present; Student,
Southern Methodist
University, Dallas, Texas,
1987-1992
Russell S. Moody Investments, Austin, Texas 1988 35
(4)
Louis E. Pauls, Jr. President, Louis Pauls & Company; 1971 61
(2) & Company; Investments,
Galveston, Texas
E. J. Pederson Executive Vice President, 1992 49
(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.
</FN>
</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, 1997.
<TABLE>
<CAPTION>
Name of Officer Age Position (Year elected to position)
<S> <C> <S>
Robert L. Moody 61 Chairman of the Board and Chief Executive
Officer (1964-1968, 1971-1980, 1981),
Director
Ross R. Moody 34 President and Chief Operating Officer
(1992), Director
Robert L. Busby, III 59 Senior Vice President - Chief Administrative
Officer, Chief Financial Officer and
Treasurer (1992)
Charles P. Bale 58 Senior Vice President - Information Services
(1990)
Richard M. Edwards 44 Senior Vice President - International
Marketing ( 1990)
Paul D. Facey 45 Senior Vice President - Chief Actuary (1992)
Charles D. Milos, Jr. 51 Senior Vice President - Investment
Analyst (1990), Director
Arthur W. Pickering 55 Senior Vice President - Domestic Marketing
(1994)
Patricia L. Scheuer 45 Senior Vice President - Chief Investment
Officer (1992)
Robert J. Antonowich 50 Vice President - Marketing (1995)
Carol Jackson 61 Vice President - Human Resources (1990)
Vincent L. Kasch 35 Vice President - Controller and Assistant
Treasurer (1992)
James A. Kincl 67 Vice President - Salary Savings (1986)
Doris Kruse 51 Vice President - Policy Benefits (1990)
James R. Naiser 54 Vice President - Systems Development (1984)
James P. Payne 52 Vice President - Secretary (1994)
Al R. Steger 54 Vice President - Risk Selection (1992)
B. Ben Taylor 54 Vice President - Actuarial Services (1990)
Larry D. White 51 Vice President - Policyowner Services (1990)
</TABLE>
(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. Facey was Superintendent, Marketing, for Northern Life Assurance
Company of Canada from 1973-1985. From 1985-1987, he was Assistant Vice
President, Marketing and Actuarial Services for Gerling Global Life
Insurance Company in Toronto, Canada, and from 1987 until March, 1992, was
Director of Actuarial Services for Variable Annuity Life Insurance Company
of Houston, Texas.
Mr. Pickering was Agency Vice President of the Western Division with
Integon Life Insurance Company from 1981 to 1987. From 1987 to 1990, he
served as Regional Vice President of United Pacific Life Insurance
Company. In 1990, he began work for Conseco/Western National Life
Insurance Company as Vice President Marketing until May, 1994.
Ms. Scheuer was a Management Consultant for Deloitte, Haskins & Sells from
1983-1984. From 1984-1988, she was Senior Financial Analyst with the Texas
Public Utility Commission. From 1988 until August, 1992, she was the Fixed
Income Portfolio Manager for the Texas Permanent School Fund.
Mr. Antonowich was Regional Vice President of Security Life of Denver
Insurance Company from 1982 to 1991. From 1991 to December, 1993, he was
Vice President, Marketing, of Guarantee Mutual Life Company, and from 1994
to June, 1995, he was Senior Vice President, Sales, of Lamar Life
Insurance Company.
Mr. Payne was staff attorney with the Kansas Insurance Department from
1972 to 1975. From 1975-1983, he was Vice President, Secretary & General
Counsel for Lone Star Life Insurance Company; from 1983-1990, he was Vice
President, Secretary and General Counsel for Reserve Life Insurance
Company; from 1990-1991 he was President and CEO of Great Republic
Insurance Company; and from 1991-1993 he was Vice President - Government
Relations for United American Insurance Company. From 1993 until October,
1994, he was in private practice in Dallas, Texas.
(f) Involvement in Certain Legal Proceedings
There are no events pending, or during the last five years, under any
bankruptcy act, criminal proceedings, judgments, or injunctions material
to the evaluation of the ability and integrity of any director or
executive officer except as described below:
In January, 1994, a United States District Court Judge vacated and
withdrew the judgment which had been entered in Case No. H-86-4269, W.
Steve Smith, Trustee vs. Shearn Moody, Jr., et al, United States District
Court for the Southern District of Texas. The Judge also dismissed the
case with prejudice. The judgment had been entered against Robert L.
Moody and The Moody National Bank of Galveston, of which he was Chairman
of the Board. Robert L. Moody is also Chairman of the Board of National
Western Life Insurance Company. The case arose out of complex bankruptcy
and related proceedings involving Robert L. Moody's brother, Shearn Moody,
Jr. Subsequently, a global settlement of Shearn Moody, Jr.'s bankruptcy
and related legal proceedings was reached and executed. As part of the
global settlement, the Bankruptcy Trustee recommended, and other
interested parties agreed not to oppose or object to, the Judge's vacating
and withdrawing the judgment and dismissing the case with prejudice. This
case and settlement did not involve the Company and had no effect on its
financial statements.
ITEM 11. EXECUTIVE COMPENSATION
(b) Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
No. of
Securities
Annual Compensation Underlying All Other
Name and Salary Bonus Options Compensation
Principal Position Year (A) (B) (C) (D)
<S> <C> <C> <C> <C> <C>
1 Robert L. Moody 1996 $ 1,026,964 $ - 14,400 $ 160,064
Chairman of 1995 967,696 91,616 25,000 111,533
the Board 1994 890,216 56,886 - 19,016
and Chief Executive
Officer
2 Ross R. Moody 1996 400,334 - 5,500 32,366
President and Chief 1995 361,427 19,768 9,000 20,866
Operating Officer 1994 311,977 12,267 - 14,543
3 Arthur W. Pickering 1996 119,137 117,888 2,000 15,516
Senior Vice 1995 109,181 77,654 2,500 14,845
President - 1994 64,654 6,125 - 70,340
Domestic Marketing
4 Robert L. Busby, III 1996 168,579 - 1,000 11,050
Senior Vice 1995 160,690 8,008 4,000 9,068
President - 1994 151,877 9,969 - 9,773
Chief
Administrative
Officer,
Chief Financial
Officer
and Treasurer
5 Charles D. Milos, 1996 143,930 - 1,400 8,940
Jr.
Senior Vice 1995 132,323 5,992 2,500 7,161
President - 1994 128,815 3,718 - 7,561
Investment Analyst
</TABLE>
Notes to Summary Compensation Table:
(A) Salary includes directors' fees from National Western Life Insurance
Company and its subsidiaries.
(B) Bonuses include the following:
(1) Stock Bonus Plan - During 1993 the Company implemented a one-time
stock bonus plan for all officers of the Company. Class A common stock
restricted shares totaling 13,496 were granted to officers based on their
individual performance and contribution to the Company. The shares were
subject to vesting requirements as reflected in the following schedule:
<TABLE>
<S> <C>
January 1, 1993 25%
December 31, 1993 25%
December 31, 1994 25%
December 31, 1995 25%
</TABLE>
The resulting compensation from the vesting of shares has been included in
the applicable year in the bonus column. All of the 13,496 shares that
were granted have been issued and were outstanding as of December 31,
1995.
(2) Other Bonuses - Employment and performance related bonuses are
occasionally granted. Arthur W. Pickering received such bonuses in 1996,
1995, and 1994, and Robert L. Busby, III received such bonus in 1994.
(C) Represents stock options granted under the National Western Life
Insurance Company 1995 Stock and Incentive Plan.
(D) All other compensation includes primarily employer contributions made
to the Company's 401(k) Plan and Non-Qualified Deferred Compensation Plan
on behalf of the employee. However, this item also includes taxable
income for Robert L. Moody, related to his assignment of excess insurance
on the Libbie Shearn Moody Trust of approximately $138,000, $92,000, and
$2,000 in 1996, 1995, and 1994, respectively. This item also includes
moving expenses for Arthur W. Pickering in 1994 of approximately $67,000.
(c) Option/SAR Grants Table
During 1995 the Company adopted the National Western Life Insurance
Company 1995 Stock and Incentive Plan (the Plan). The purpose of the Plan
is to align the personal financial incentives of key personnel with the
long-term growth of the Company and the interests of the Company's
stockholders through the ownership and performance of the Company's Class
A, $1.00 par value, common stock, to enhance the Company's ability to
retain key personnel, and to attract outstanding prospective employees and
directors. The Plan is effective as of April 21, 1995, and will terminate
on April 20, 2005, unless terminated earlier by the Board of Directors.
The number of shares of Class A, $1.00 par value, common stock which may
be issued under the Plan, or as to which stock appreciation rights or
other awards may be granted, may not exceed 300,000. These shares may be
authorized and unissued shares or treasury shares.
All of the employees of the Company and its subsidiaries are eligible to
participate in the Plan. In addition, directors of the Company, other
than Compensation and Stock Option Committee members, are eligible for
restricted stock awards, incentive awards, and performance awards.
Non-employee directors, including members of the Compensation and Stock
Option Committee, are eligible for non-discretionary stock options. On
May 19, 1995, the Committee approved the issuance of 52,500 non-qualified
stock options to selected officers of the Company. The Committee also
granted 7,000 non-qualified, non-discretionary stock options to
non-employee Company directors. On April 19, 1996, an additional 33,000
options were issued to selected officers. The directors stock options
vest 20% annually following one full year of service to the Company from
the date of grant. The officers stock options vest 20% annually
following three full years of service to the Company from the date of
grant. The exercise prices of the stock options were set at the fair
market values of the common stock on the dates of grant.
Stock options granted to the named executive officers during 1996 are as
follows:
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
% of Annual Rates
Total of Stock Price
Number of Options Appreciation
Securities Granted to for
Underlying Employees Option Term
Options in Fiscal Exercise Expiration
Name Granted Year Price Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
1 Robert L. 14,400 43.6% $65.00 4-20-05 $516,044 $1,270,994
Moody
2 Ross R. 5,500 16.7 65.00 4-20-05 197,100 485,449
Moody
3 Arthur W. 2,000 6.1 65.00 4-20-05 71,673 176,527
Pickering
4 Robert L. 1,000 3.0 65.00 4-20-05 35,836 88,264
Busby, III
5 Charles D. 1,400 4.2 65.00 4-20-05 50,171 123,569
Milos, Jr.
</TABLE>
(d) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value
Table
None.
(e) Long-Term Incentive Plan Awards Table
None.
(f) Defined Benefit or Actuarial Plan Disclosure
The Company currently has two employee defined benefit plans for the
benefit of its employees and officers. A brief description and formulas by
which benefits are determined for each of the plans are detailed as
follows:
Qualified Defined Benefit Plan - This plan covers all full-time employees
and officers of the Company and provides benefits based on the
participants' years of service and compensation. The Company makes annual
contributions to the plan that comply with the minimum funding provisions
of the Employee Retirement Income Security Act.
Annual pension benefits for those employees who became eligible
participants prior to January 1, 1991, are calculated as the sum of the
following:
(1) 50% of the participant's final 5-year average annual compensation at
December 31, 1990, less 50% of their primary social security benefit
determined at December 31, 1990; this net amount is then prorated for less
than 15 years of benefit service at normal retirement date. This result is
multiplied by a fraction which is the participant's years of benefit
service at December 31, 1990, divided by the participant's years of
benefit service at normal retirement date.
(2) 1.5% of the participant's compensation earned during each year of
benefit service after December 31, 1990.
Annual pension benefits for those employees who become eligible
participants on or subsequent to January 1, 1991, are calculated as 1.5%
of their compensation earned during each year of benefit service.
Non-Qualified Defined Benefit Plan - This plan covers those officers in
the position of senior vice president or above and other employees who
have been designated by the President of the Company as being in the class
of persons who are eligible to participate in the plan. This plan also
provides benefits based on the participants' years of service and
compensation. However, no minimum funding standards are required.
The benefit to be paid pursuant to this Plan to a Participant who retires
at his normal retirement date shall be equal to (a) minus (b) minus (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-Qualified
Defined Defined
Name Benefit Plan Benefit Plan Totals
<S> <C> <C> <C>
1 Robert L. Moody $ 125,335 341,427 466,762
2 Ross R. Moody 83,243 - 83,243
3 Arthur W. Pickering 26,906 - 26,906
4 Robert L. Busby, III 47,132 22,240 69,372
5 Charles D. Milos, Jr. 46,537 1,745 48,282
</TABLE>
(g) Compensation of Directors
All directors of the Company currently receive $12,000 a year and $500 for
each board meeting attended. They are also reimbursed for actual travel
expenses incurred in performing services as directors. An additional $500
is paid for each committee meeting attended. However, a director attending
multiple meetings on the same day receives only one meeting fee. The
amounts paid pursuant to these arrangements are included in the summary
compensation table under Item 11(b). The directors and their dependents
are also insured under the Company's group insurance program.
During 1995 the Company adopted the National Western Life Insurance
Company 1995 Stock and Incentive Plan (the Plan), as more fully described
in Item 11(c). Directors of the Company, other than Compensation and
Stock Option Committee members, are eligible for restricted stock awards,
incentive awards, and performance awards. Non-employee directors,
including members of the Compensation and Stock Option Committee, are
eligible for non-discretionary stock options. On May 19, 1995, the
Committee approved the issuance of 7,000 non-qualified, non-discretionary
stock options to non-employee Company directors, with each such director
receiving 1,000 stock options. Directors who are also employees of the
Company were granted stock options as disclosed in the table in Item
11(c).
Directors of the Company's subsidiary, NWL Investments, Inc., receive $250
annually. Directors' fees for the Company's subsidiary, The Westcap
Corporation, have been suspended indefinitely.
(h) Employment Contracts and Termination of Employment and
Change-in-Control Arrangements
None.
(i) Report on Repricing of Options/SARs
None.
(j) Compensation Committee Interlocks and Insider Participation
The Company's Board of Directors determines and approves executive
compensation. No compensation committee interlocks exist with other
unaffiliated companies.
Mr. Robert Moody, Mr. Ross Moody, and Mr. Milos serve as directors and
also serve as officers and employees of the Company. Mr. Ross Moody and
Mr. Milos also serve as officers of National Western Life Insurance
Company's wholly owned subsidiaries, NWL 806 Main, Inc., NWL Investments,
Inc., and NWL Properties, Inc. The Donner Company, 100% owned by Mr.
Dummer, who is a director of National Western Life Insurance Company, was
paid $70,273 in 1996 pursuant to an agreement between The Donner Company
and a reinsurance intermediary relating to a reinsurance contract between
the Company and certain life insurance reinsurers.
(k) Board Compensation Committee Report on Executive Compensation
The Company's Board of Directors performs the functions of an executive
compensation committee. The Board is responsible for developing and
administering the policies that determine executive compensation.
Executive compensation, including that of the chief executive officer, is
comprised primarily of a base salary. The salary is adjusted annually
based on a performance review of the individual as well as the performance
of the Company as a whole. The president and chief executive officer make
recommendations annually to the Board of Directors regarding such salary
adjustments. The review encompasses the following factors:
- - contributions to the Company's short and long-term strategic goals,
including financial goals such as Company revenues and earnings
- - achievement of specific goals within the individual's realm of
responsibility
- - development of management and employees within the Company
- - performance of leadership within the industry
The policies discussed above are reviewed periodically by the Board of
Directors to ensure the support of the Company's overall business strategy
and to attract and retain key executives.
A separate Compensation and Stock Option Committee, comprised of outside,
independent directors, determines compensation for the three highest paid
Company executives. The committee also performs various projects relating
to executive compensation at the request of the Board of Directors. Those
directors serving on the committee include the following:
Arthur O. Dummer
Harry L. Edwards
E. J. Pederson
The policies used by the Compensation and Stock Option Committee in
determining compensation are similar to those described above for all
other Company executives.
(1) Performance Graph
The following graph compares the change in the Company's cumulative total
stockholder return on its common stock with the NASDAQ - U.S. Companies
Index and the NASDAQ Insurance Stock Index. The graph assumes that the
value of the investment in the Company's common stock and each index was
$100 at December 31, 1991, and that all dividends were reinvested.
For the purpose of this electronic filing, the graph has been filed
separately under the Securities and Exchange Commission filing Form SE dated
March 27, 1997. The coordinates of the graph are as follows:
<TABLE>
<CAPTION>
December 31,
1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
National Western Life 100.0 169.4 160.4 125.2 201.8 313.5
NASDAQ - US Companies 100.0 116.4 133.6 130.6 184.7 227.2
NASDAQ - Insurance
Stock Index 100.0 135.3 144.8 136.3 193.6 220.6
</TABLE>
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, 1996:
<TABLE>
<CAPTION>
Title Name and Address Amount and Nature of Percent
of of Beneficial Ownership of
Class Beneficial Owners Record and Beneficially Class
<S> <S> <C> <C>
Class A Common Robert L. Moody 1,160,896 35.27
2302 Postoffice Street
Suite 702
Galveston, Texas
Class A Common Westport Asset 356,500 10.83
Management, Inc.
253 Riverside Avenue
Westport, Connecticut
Class A Common Tweedy Browne Company 288,128 8.75
52 Vanderbilt Avenue
New York, New York
Class B Common Robert L. Moody 198,074 99.04
(same as above)
</TABLE>
(b) Security Ownership of Management
The following table sets forth as of December 31, 1996, information
concerning the beneficial ownership of the Company's common stock by all
directors, named officers, and all directors and officers of the Company
as a group:
<TABLE>
<CAPTION>
Title Amount and Nature of Percent
Directors of Beneficial Ownership of
and Officers Class Record and Beneficially Class
<S> <S> <C> <C>
Directors and
Named Officers:
Robert L. Moody Class A Common 1,160,896 35.27
Class B Common 198,074 99.04
Ross R. Moody Class A Common 2,475 .08
Class B Common 482 .24
Charles D. Milos, Jr. Class A Common 528 .02
Class B Common - -
Directors:
Arthur O. Dummer Class A Common 15 -
Class B Common - -
Harry L. Edwards Class A Common 20 -
Class B Common - -
E. Douglas McLeod Class A Common 10 -
Class B Common - -
Frances A. Moody Class A Common 2,475 .08
Class B Common 482 .24
Russell S. Moody Class A Common 2,475 .08
Class B Common 482 .24
Louis E. Pauls, Jr. Class A Common 10 -
Class B Common - -
E. J. Pederson Class A Common 100 -
Class B Common - -
Named Officers:
Robert L. Busby, III Class A Common 688 .02
Class B Common - -
Arthur W. Pickering Class A Common - -
Class B Common - -
All Directors and
Executive Officers Class A Common 1,171,965 35.61
as a Group Class B Common 199,520 99.76
</TABLE>
(c) Changes in Control
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with Management and Others
The Donner Company, 100% owned by Mr. Arthur Dummer, who is a director of
National Western Life Insurance Company, was paid $70,273 in 1996 pursuant
to an agreement between The Donner Company and a reinsurance intermediary
relating to a reinsurance contract between the Company and certain life
insurance reinsurers.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management
Seal Fleet, Inc.
The Company held 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 was a 20-year debenture due in August, 1996, with interest of 8%
annually. The Company received payment in full including accrued interest
on the debenture in 1996.
The Company also held a corporate note for $2,168,232 issued in 1990 by
Seal (GP), Inc., which is a subsidiary of Seal Fleet, Inc. The note was
due in June, 2000, with interest of 12% payable monthly and was 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 was
payable upon maturity of the note. In 1996, the Company received payment
in full on the note including accrued interest at 10% and the additional
2% interest accrued since the modification of the note.
Seal Fleet, Inc. was acquired in 1996 by an entity unaffiliated with
National Western Life Insurance Company or the Moody family. Prior to the
sale, Seal Fleet, Inc., had two classes of stock outstanding, Class A and
B. The Class B shares elected 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., were owned by the Three R Trust, Galveston,
Texas. This Trust was created by Robert L. Moody as Settlor for the
benefit of his children. Three of his children, Mr. Ross R. Moody, Mr.
Russell S. Moody, and Ms. Frances A. Moody are beneficiaries of the Three
R Trust and are also directors of National Western Life Insurance Company.
The Trustee of the Trust is Irwin M. Herz, Jr., of Galveston, Texas. Mr.
Herz personally owned 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 was considered to be the controlling stockholder
of Seal Fleet, Inc. Louis Pauls, Jr., and Russell S. Moody, directors of
the Company, were also directors of Seal Fleet, Inc.
Gal-Tex Hotel Corporation
The Company also holds three mortgage loans issued to Gal-Tex Hotel
Corporation, which is owned 50% by the Libbie Shearn Moody Trust and 50%
by The Moody Foundation. The first mortgage loan in the amount of
$2,748,000 was issued in 1988, will mature in May of 1998, and pays
interest of 10.5%. The loan is secured by property consisting of a hotel
located in Kingsport, Tennessee. The second mortgage loan in the amount
of $8,603,000 was issued in 1994, will mature in October of 2004, and pays
interest of 8.75%. The loan is secured by property consisting of a hotel
located in Houston, Texas. The third mortgage loan in the amount of
$1,940,000 was issued in 1995, will mature in January of 2006, and pays
interest of 9%. The loan is secured by property consisting of a hotel
located in Woodstock, Virginia.
The Company is the beneficial owner of a life interest (1/8 share),
previously owned by Mr. Robert L. Moody, in the trust estate of Libbie
Shearn Moody. The trustee of this estate is The Moody National Bank of
Galveston. The Moody Foundation is a private charitable foundation
governed by a Board of Trustees of three members. Mr. Robert L. Moody and
Mr. Ross R. Moody are members of the Board of Trustees.
(d) Transactions with Promoters
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) 1. Listing of Financial Statements
See Attachment A, Index to Financial Statements and Schedules, on page __
for a list of financial statements included in this report.
(a) 2. Listing of Financial Statement Schedules
See Attachment A, Index to Financial Statements and Schedules, on page __
for a list of financial statement schedules included in this report.
All other schedules are omitted because they are not applicable, not
required, or because the information required by the schedule is included
elsewhere in the financial statements or notes.
(a) 3. Listing of Exhibits
Exhibit - Restated Articles of Incorporation of National Western Life
3(a) Insurance Company dated April 10, 1968 (incorporated by reference
to Exhibit 3(a) to the Company's Form 10-K for the year ended
December 31, 1995).
Exhibit - Amendment to the Articles of Incorporation of National Western
3(b) Life Insurance Company dated July 29, 1971 (incorporated by
reference to Exhibit 3(b) to the Company's Form 10-K for the
year ended December 31, 1995).
Exhibit - Amendment to the Articles of Incorporation of National Western
3(c) Life Insurance Company dated May 10, 1976 (incorporated by
reference to Exhibit 3(c) to the Company's Form 10-K for the
year ended December 31, 1995).
Exhibit - Amendment to the Articles of Incorporation of National Western
3(d) Life Insurance Company dated April 28, 1978 (incorporated by
reference to Exhibit 3(d) to the Company's Form 10-K for the
year ended December 31, 1995).
Exhibit - Amendment to the Articles of Incorporation of National Western
3(e) Life Insurance Company dated May 1, 1979 (incorporated by
reference to Exhibit 3(e) to the Company's Form 10-K for the
year ended December 31, 1995).
Exhibit - Bylaws of National Western Life Insurance Company as amended
3(f) through April 24, 1987 (incorporated by reference to Exhibit 3(f)
to the Company's Form 10-K for the year ended December 31, 1995).
Exhibit - National Western Life Insurance Company Non-Qualified Defined
10(a) Benefit Plan dated July 26, 1991 (incorporated by reference to
Exhibit 10(a) to the Company's Form 10-K for the year ended
December 31, 1995).
Exhibit - National Western Life Insurance Company Officers' Stock Bonus Plan
10(b) effective December 31, 1992 (incorporated by reference to the
Company's Form S-8 registration dated January 27, 1994).
Exhibit - National Western Life Insurance Company Non-Qualified Deferred
10(c) Compensation Plan, as amended and restated, dated March 27, 1995
(incorporated by reference to Exhibit 10(c) to the Company's Form
10-K for the year ended December 31, 1995).
Exhibit - First Amendment to the National Western Life Insurance Company
10(d) Non-Qualified Deferred Compensation Plan effective July 1, 1995
(incorporated by reference to Exhibit 10(d) to the Company's Form
10-K for the year ended December 31, 1995).
Exhibit - National Western Life Insurance Company 1995 Stock and Incentive
10(e) Plan (incorporated by reference to Exhibit 10(e) to the Company's
Form 10-K for the year ended December 31, 1995).
Exhibit - First Amendment to the National Western Life Insurance Company
10(f) Non-Qualified Defined Benefit Plan effective December 17, 1996
(filed on page __ of this report).
Exhibit - Second Amendment to the National Western Life Insurance Company
10(g) Non-Qualified Defined Benefit Plan effective December 17, 1996
(filed on page __ of this report).
Exhibit - Second Amendment to the National Western Life Insurance Company
10(h) Non-Qualified Deferred Compensation Plan effective December 17,
1996 (filed on page __ of this report).
Exhibit - Third Amendment to the National Western Life Insurance Company
10(i) Non-Qualified Deferred Compensation Plan effective December 17,
1996 (filed on page __ of this report).
Exhibit - Subsidiaries of the Registrant (incorporated by reference to
21 Exhibit 21 to the Company's Form 10-K for the year ended
December 31, 1995).
Exhibit - Financial Data Schedule (filed electronically pursuant to
27 Regulation S-K).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
(c) Exhibits
Exhibits required by Regulation S-K are listed as to location in the
Listing of Exhibits in Item 14(a)3 above. Exhibits not referred to have
been omitted as inapplicable or not required.
(d) Financial Statement Schedules
The financial statement schedules required by Regulation S-K are listed as
to location in Attachment A, Index to Financial Statements and Schedules,
on page __ of this report.
ATTACHMENT A
Index to Financial Statements and Schedules
Page
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1996 and 1995
Consolidated Statements of Earnings for the years ended December 31,
1996, 1995, and 1994
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995, and 1994
Notes to Consolidated Financial Statements
Schedule I - Summary of Investments Other Than Investments in Related
Parties, December 31, 1996
Schedule V - Valuation and Qualifying Accounts for the years ended
December 31, 1996, 1995, and 1994
All other schedules are omitted because they are not applicable, not
required, or because the information required by the schedule is included
elsewhere in the financial statements or notes.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
National Western Life Insurance Company
Austin, Texas
We have audited the consolidated financial statements of National Western
Life Insurance Company and subsidiaries as listed in the accompanying
index. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedules as
listed in the accompanying index. These consolidated financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
National Western Life Insurance Company and subsidiaries at December 31,
1996 and 1995, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth
therein.
As discussed in Note 3, the Company changed its method of accounting for
investments in debt and equity securities in 1994 to adopt the provisions
of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." As discussed in Note 3, the Company
changed its method of accounting for impairment of long-lived assets in
1996 to adopt the provisions of SFAS No. 121, "Accounting for Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed Of."
KPMG Peat Marwick LLP
Austin, Texas
February 28, 1997
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash and investments:
Securities held to maturity, at
amortized cost (fair value: $1,896,847
and $1,726,469) $ 1,873,561 1,643,211
Securities available for sale,
at fair value (cost: $506,892
and $561,127) 527,627 600,794
Mortgage loans, net of allowance
for possible losses ($5,988 and $5,668) 193,311 191,674
Policy loans 142,077 147,923
Other long-term investments 22,997 30,970
Cash and short-term investments 11,358 10,024
Total cash and investments 2,770,931 2,624,596
Accrued investment income 39,503 36,127
Deferred policy acquisition costs 295,666 270,167
Other assets 13,472 21,392
Assets of discontinued operations 1,257 6,177
$ 3,120,829 2,958,459
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(In thousands except per share amounts)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
<S> <C> <C>
LIABILITIES:
Future policy benefits:
Traditional life and annuity products $ 172,565 174,946
Universal life and investment
annuity contracts 2,529,307 2,401,098
Other policyholder liabilities 24,403 22,833
Federal income taxes payable:
Current - 413
Deferred 11,910 12,287
Other liabilities 28,527 28,718
Liabilities of discontinued operations 1,257 6,177
Total liabilities 2,767,969 2,646,472
COMMITMENTS AND CONTINGENCIES (Notes 4,
7, 9, and 15)
STOCKHOLDERS' EQUITY:
Common stock:
Class A - $1 par value; 7,500,000 shares
authorized; 3,291,338 shares issued and
outstanding in 1996 and 1995 3,291 3,291
Class B - $1 par value; 200,000 shares
authorized, issued and outstanding in
1996 and 1995 200 200
Additional paid-in capital 24,647 24,647
Net unrealized gains on investment securities 9,853 15,195
Retained earnings 314,869 268,654
Total stockholders' equity 352,860 311,987
$ 3,120,829 2,958,459
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
For the Years Ended December 31, 1996, 1995, and 1994
(In thousands except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Premiums and other revenue:
Life and annuity premiums $ 16,611 17,390 18,938
Universal life and investment
annuity contract revenues 75,966 69,783 64,711
Net investment income 214,302 201,816 190,021
Other income 2,718 661 1,462
Realized gains (losses
on investments 1,612 (2,415) 1,626
Total premiums and other revenue 311,209 287,235 276,758
Benefits and expenses:
Life and other policy benefits 35,354 39,823 32,132
Increase (decrease) in
liabilities for future
policy benefits (2,041) (2,487) 658
Amortization of deferred policy
acquisition costs 30,361 33,675 32,131
Universal life and investment
annuity contract interest 151,475 142,940 129,064
Other insurance
operating expenses 25,722 27,084 29,394
Total benefits and expenses 240,871 241,035 223,379
Earnings before Federal income
taxes and discontinued operations 70,338 46,200 53,379
Provision (benefit) for Federal
income taxes:
Current 21,624 9,640 16,300
Deferred 2,499 926 (93)
Total Federal income taxes 24,123 10,566 16,207
Earnings from continuing operations 46,215 35,634 37,172
<FN>
(Continued on next page)
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS, CONTINUED
For the Years Ended December 31, 1996, 1995, and 1994
(In thousands except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Discontinued operations:
Losses from operations of
discontinued brokerage
operations (net of Federal
income taxes of $2,983 in 1994) $ - (9,969) (2,936)
Estimated loss on disposal
of discontinued
brokerage operations - (6,381) -
Losses from discontinued operations - (16,350) (2,936)
Net earnings $ 46,215 19,284 34,236
Earnings (losses) per share of common
stock:
Earnings from
continuing operations $ 13.24 10.22 10.66
Losses from
discontinued operations - (4.69) (0.84)
Net earnings $ 13.24 5.53 9.82
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1995, and 1994
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Common stock shares outstanding:
Shares outstanding at
beginning of year 3,491 3,488 3,485
Shares issued for stock
bonus plan - 3 3
Shares outstanding at end of year 3,491 3,491 3,488
Common stock:
Balance at beginning of year $ 3,491 3,488 3,485
Shares issued for stock
bonus plan - 3 3
Balance at end of year 3,491 3,491 3,488
Additional paid-in capital:
Balance at beginning of year 24,647 24,475 24,356
Shares issued for stock
bonus plan - 172 119
Balance at end of year 24,647 24,647 24,475
Net unrealized gains (losses) on
securities available for
sale, net of effects of deferred
policy acquisition
costs and taxes:
Balance at beginning of year 15,195 (2,199) (257)
Effect of change in accounting
for investments
in debt and equity securities - - 26,610
Change in unrealized gains
(losses) during year (4,774) 15,166 (29,493)
Net unrealized gains related
to transfer of securities
from available for sale to
held to maturity - 3,159 1,380
Amortization of net unrealized
gains related to
transferred securities (568) (931) (439)
Balance at end of year 9,853 15,195 (2,199)
Retained earnings:
Balance at beginning of year 268,654 249,370 215,134
Net earnings 46,215 19,284 34,236
Balance at end of year 314,869 268,654 249,370
Total stockholders' equity $ 352,860 311,987 275,134
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995, and 1994
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating
activities:
Net earnings $ 46,215 19,284 34,236
Adjustments to reconcile
net earnings to net cash
provided by operating
activities:
Universal life and investment
annuity contract interest 151,475 142,940 129,064
Surrender charges and other
policy revenues (39,562) (34,936) (33,016)
Realized (gains) losses
on investments (1,612) 2,415 (1,626)
Accrual and amortization
of investment income (6,880) (7,129) (10,722)
Depreciation and amortization 708 620 649
Decrease (increase) in other assets (988) 940 3,771
Increase in accrued
investment income (3,376) (4,497) (3,468)
Decrease (increase) in deferred
policy acquisition costs (11,320) (12,018) 2,354
Increase (decrease) in liability
for future policy benefits (2,041) (2,487) 658
Increase (decrease) in other
policyholder liabilities 1,570 (350) (1,028)
Increase (decrease) in Federal
income taxes payable 10,645 (4,180) (9,222)
Increase (decrease) in other
liabilities (191) (1,781) 4,972
Other - 176 121
Net cash provided by
operating activities 144,643 98,997 116,743
Cash flows from investing activities:
Proceeds from sales of:
Securities held to maturity - 10,659 -
Securities available for sale 41,276 44,440 9,114
Other investments 3,126 1,645 22,531
Proceeds from maturities and
redemptions of:
Securities held to maturity 72,138 54,720 76,174
Securities available for sale 44,662 13,942 57,270
Purchases of:
Securities held to maturity (301,239) (212,192) (155,892)
Securities available for sale (27,838) (130,066) (116,923)
Other investments (4,014) (5,941) (3,548)
Principal payments on
mortgage loans 32,995 15,952 29,431
Cost of mortgage loans acquired (26,220) (18,125) (30,093)
Decrease in policy loans 5,846 3,564 2,335
Decrease in assets of
discontinued operations 4,920 225,880 140,244
Decrease in liabilities of
discontinued operations (4,920) (209,153) (136,590)
Other (337) (851) (245)
Net cash used in
investing activities (159,605) (205,526) (106,192)
<FN>
(Continued on next page)
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the Years Ended December 31, 1996, 1995, and 1994
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from financing
activities:
Deposits to account balances
for universal life and
investment annuity contracts $ 304,236 343,588 190,687
Return of account balances
on universal life and
investment annuity contracts (287,940) (244,758) (207,823)
Net cash provided by (used in)
financing activities 16,296 98,830 (17,136)
Net increase (decrease) in cash and
short-term investments 1,334 (7,699) (6,585)
Cash and short-term investments at
beginning of year 10,024 17,723 24,308
Cash and short-term investments
at end of year $ 11,358 10,024 17,723
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 281 3,740 9,134
Income taxes 13,466 15,129 26,332
Non-cash investing activities:
Foreclosed mortgage loans $ - 961 2,557
Mortgage loans originated
to facilitate
the sale of real estate 4,145 1,105 2,655
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of National Western Life Insurance Company
and its wholly owned subsidiaries (the Company), The Westcap Corporation,
NWL Investments, Inc., NWL Properties, Inc., NWL 806 Main, Inc., and
Commercial Adjusters, Inc. Commercial Adjusters, Inc., was dissolved in
October, 1994, and all remaining assets and liabilities were assumed by
National Western Life Insurance Company. The Westcap Corporation ceased
brokerage operations during 1995 and filed for reorganization under
Chapter 11 of the U.S. Bankruptcy Code in 1996. As a result, The Westcap
Corporation is reflected as discontinued operations in the accompanying
financial statements. All significant intercorporate transactions and
accounts have been eliminated in consolidation.
(B) Basis of Presentation - The accompanying consolidated financial
statements have been prepared in conformity with generally accepted
accounting principles which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities, and the reported amounts
of revenues and expenses during the reporting periods. Actual results
could differ from those estimates. Significant estimates included in the
accompanying financial statements include (1) contingent liabilities
related to litigation, (2) recoverability of deferred policy acquisition
costs, (3) estimated losses related to discontinued operations, and (4)
valuation allowances for mortgage loans.
National Western Life Insurance Company also files financial statements
with insurance regulatory authorities which are prepared on the basis of
statutory accounting practices which are significantly different from
financial statements prepared in accordance with generally accepted
accounting principles. These differences are described in detail in the
statutory information section of this note.
(C) Investments - Investments in debt securities the Company purchases
with the intent to hold to maturity are classified as securities held to
maturity. The Company has the ability to hold the securities, as it would
be unlikely that forced sales of securities would be required prior to
maturity to cover payments of liabilities. As a result, securities held to
maturity are carried at amortized cost less declines in value that are
other than temporary.
Investments in debt and equity securities that are not classified as
securities held to maturity are reported as securities available for sale.
Securities available for sale are reported in the accompanying financial
statements at individual fair value. Any valuation changes resulting from
changes in the fair value of the securities are reflected as a component
of stockholders' equity. These unrealized gains or losses in
stockholders' equity are reported net of taxes and adjustments to deferred
policy acquisition costs.
Transfers of securities between categories are recorded at fair value at
the date of transfer. The unrealized holding gains or losses for
securities transferred from available for sale to held to maturity are
included as a separate component of equity and amortized into earnings
over the remaining life of the security as an adjustment to yield in a
manner consistent with the amortization or accretion of premium or
discount on the associated security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest
method. Realized gains and losses for securities available for sale and
securities held to maturity are included in earnings and are derived using
the specific identification method for determining the cost of securities
sold. A decline in the fair value below cost that is deemed other than
temporary is charged to earnings, resulting in the establishment of a new
cost basis for the security.
Mortgage loans and other long-term investments are stated at cost, less
unamortized discounts and allowances for possible losses. Policy loans are
stated at their aggregate unpaid balances. Real estate is stated at the
lower of cost or fair value less estimated costs to sell.
(D) Cash Equivalents - For purposes of the statements of cash flows, the
Company considers all short-term investments with a maturity at date of
purchase of three months or less to be cash equivalents.
(E) Insurance Revenues and Expenses - Premiums on traditional life
insurance products are recognized as revenues as they become due or, for
short duration contracts, over the contract periods. Benefits and expenses
are matched with premiums in arriving at profits by providing for policy
benefits over the lives of the policies and by amortizing acquisition
costs over the premium-paying periods of the policies. For universal life
and investment annuity contracts, revenues consist of policy charges for
the cost of insurance, policy administration, and surrender charges
assessed during the period. Expenses for these policies include interest
credited to policy account balances and benefit claims incurred in excess
of policy account balances. The related deferred policy acquisition costs
are amortized in relation to the present value of expected gross profits
on the policies.
(F) Federal Income Taxes - Federal income taxes are accounted for under
the asset and liability method. Under this method, deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. A valuation
allowance for deferred tax assets is provided if all or some portion of
the deferred tax asset may not be realized. An increase or decrease in a
valuation allowance that results from a change in circumstances that
affects the realizability of the related deferred tax asset is included in
income.
(G) Depreciation of Property, Equipment, and Leasehold Improvements -
Depreciation is based on the estimated useful lives of the assets and is
calculated on the straight-line and accelerated methods. Leasehold
improvements are amortized over the lesser of the economic useful life of
the improvement or the term of the lease.
(H) Earnings Per Share - Earnings per share of common stock are based on
the weighted average number of such shares outstanding during each year.
The weighted average shares outstanding were 3,491,338, 3,488,205, and
3,484,682 for the years ended December 31, 1996, 1995, and 1994,
respectively.
(I) Classification - Certain reclassifications have been made to the prior
years to conform to the reporting categories used in 1996. The most
significant of these reclassifications relate to The Westcap Corporation
and its discontinued brokerage operations. All assets, liabilities,
results of operations, and cash flows of The Westcap Corporation have been
reclassified and reported separately as discontinued operations in the
accompanying financial statements.
(J) Statutory Information - National Western Life Insurance Company,
domiciled in Colorado, prepares its statutory financial statements in
accordance with accounting practices prescribed or permitted by the
Colorado Division of Insurance. Prescribed statutory accounting practices
include a variety of publications of the National Association of Insurance
Commissioners (NAIC), as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass
all accounting practices not so prescribed. Such practices may differ
from state to state, may differ from company to company within a state,
and may change in the future. The NAIC currently is in the process of
codifying statutory accounting practices, the result of which is expected
to constitute the only source of prescribed statutory accounting
practices. Accordingly, that project will likely change, to some extent,
prescribed statutory accounting practices and may result in changes to the
accounting practices that insurance companies use to prepare their
statutory financial statements. The following are major differences
between generally accepted accounting principles and prescribed or
permitted statutory accounting practices.
1. The Company accounts for universal life and investment annuity
contracts based on the provisions of Statement of Financial Accounting
Standards (SFAS) No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments." The basic effect of the statement
with respect to certain long-duration contracts is that deposits for
universal life and investment annuity contracts are not reflected as
revenues, and surrenders and certain other benefit payments are not
reflected as expenses. However, statutory accounting practices do reflect
such items as revenues and expenses.
A summary of direct premiums and deposits collected is provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Direct premiums and deposits
collected:
Investment annuity deposits $ 273,202 309,971 157,622
Universal life
insurance deposits 67,438 68,464 64,760
Traditional life
and other premiums 23,135 24,801 24,919
Totals $ 363,775 403,236 247,301
</TABLE>
2. Under generally accepted accounting principles, 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, are
deferred. For traditional products, these costs are amortized over the
premium-paying period of the related policies in proportion to the ratio
of the premium earned to the total premium revenue anticipated, using the
same assumptions as to interest, mortality, and withdrawals as were used
in calculating the liability for future policy benefits. For universal
life and investment annuity contracts, these costs are amortized in
relation to the present value of expected gross profits on these policies.
The Company evaluates the recoverability of deferred policy acquisition
costs on an annual basis. In this evaluation, the Company considers
estimated future gross profits or future premiums, as applicable for the
type of contract. The Company also considers expected mortality, interest
earned and credited rates, persistency, and expenses. Statutory
accounting practices require commissions and related costs to be expensed
as incurred.
A summary of information relative to deferred policy acquisition costs is
provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Policy acquisition costs
deferred:
Agents' commissions $ 39,218 42,903 27,177
Other 2,463 2,790 2,600
$ 41,681 45,693 29,777
Policy acquisition costs
amortized $ 30,361 33,675 32,131
</TABLE>
3. Under generally accepted accounting principles, the liability for
future policy benefits on traditional products has been calculated by the
net level method using assumptions as to future mortality (based on the
1965-1970 and 1975-1980 Select and Ultimate mortality tables), interest
ranging from 4% to 8%, and withdrawals based on Company experience. For
universal life and investment annuity contracts, the liability for future
policy benefits represents the account balance. For statutory accounting
purposes, liabilities for future policy benefits for life insurance
policies are calculated by the net level premium method or the
commissioners reserve valuation method. Future policy benefit liabilities
for annuities are calculated based on the continuous commissioners annuity
reserve valuation method and provisions of Actuarial Guideline 33.
4. Deferred Federal income taxes are provided for temporary differences
which are recognized in the financial statements in a different period
than for Federal income tax purposes. Deferred taxes are not recognized
in statutory accounting practices. Also, for statutory accounting
purposes, the Company has recorded Federal income tax receivables as
permitted by the Colorado Division of Insurance. The Federal income tax
receivables related to subsidiary losses have been recorded directly to
surplus and were not recorded in results of operations.
5. For statutory accounting purposes, debt securities are recorded at
amortized cost, except for securities in or near default which are
reported at market value.
6. Investments in subsidiaries are recorded at admitted asset value for
statutory purposes, whereas the financial statements of the subsidiaries
have been consolidated with those of the Company under generally accepted
accounting principles.
7. The asset valuation reserve and interest maintenance reserve, which are
investment valuation reserves prescribed by statutory accounting
practices, have been eliminated, as they are not required under generally
accepted accounting principles.
8. The recorded value of the life interest in the Libbie Shearn Moody
Trust (the Trust) is reported at its initial valuation, net of accumulated
amortization, under generally accepted accounting principles. The initial
valuation was based on the assumption that the Trust would provide certain
income to the Company at an assumed interest rate and is being amortized
over 53 years, the life expectancy of Mr. Robert L. Moody at the date he
contributed the life interest to the Company. For statutory accounting
purposes, the life interest has been valued at $26,400,000, which was
computed as the present value of the estimated future income to be
received from the Trust. However, this amount is being amortized to a
valuation of $12,774,000 over a seven-year period in accordance with
Colorado Division of Insurance permitted accounting requirements.
Prescribed statutory accounting practices provide no accounting guidance
for such asset. The statutory admitted value of this life interest at
December 31, 1996, is $18,614,000 in comparison to a carrying value of
$4,922,000 in the accompanying consolidated financial statements.
Reconciliations of statutory stockholders' equity, as included in the
annual statements filed with the Colorado Division of Insurance, to the
respective amounts as reported in the accompanying consolidated financial
statements prepared under generally accepted accounting principles are as
follows:
<TABLE>
<CAPTION>
Stockholders' Equity
as of December 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Statutory equity $ 265,289 236,884 212,063
Adjustments:
Difference in valuation of
investment in the Libbie
Shearn Moody Trust (13,692) (15,355) (17,021)
Deferral of policy
acquisition costs 295,666 270,167 291,274
Adjustment of future
policy benefits (220,510) (218,352) (206,027)
Deferred Federal income
taxes payable (11,910) (12,287) (1,996)
Adjustment of securities
available for sale
to fair value 26,116 48,880 (10,469)
Reversal of asset
valuation reserve 10,403 4,002 10,197
Reversal of interest
maintenance reserve 7,837 5,991 4,922
Reinstatement of non-
admitted assets 3,088 2,429 2,468
Valuation allowances
on investments (10,052) (10,862) (10,573)
Adjustment for consolidation 102 102 102
Other, net 523 388 194
Generally accepted accounting
principles equity $ 352,860 311,987 275,134
</TABLE>
Reconciliations of statutory net earnings, as included in the annual
statements filed with the Colorado Division of Insurance, to the
respective amounts as reported in the accompanying consolidated financial
statements prepared under generally accepted accounting principles are as
follows:
<TABLE>
<CAPTION>
Net Earnings for the
Years Ended December 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Statutory net earnings $ 35,644 28,343 32,513
Subsidiary losses before
deferred Federal
income taxes (656) (17,594) (3,806)
Consolidated statutory
net earnings 34,988 10,749 28,707
Adjustments:
Deferral of policy
acquisition costs 11,320 12,018 (2,354)
Adjustment of future
policy benefits (2,158) (12,325) (671)
Amortization of investment
in the Libbie
Shearn Moody Trust (284) (280) (279)
Benefit (provision) for
deferred Federal income taxes (2,499) (715) 108
Valuation allowances and
permanent
impairment write-downs
on investments 954 3,901 5,238
Lawsuit settlements
recorded as surplus
adjustments for
statutory accounting 850 (200) 955
Subsidiary stock dividends - - (1,366)
Increase in interest
maintenance reserve 1,846 1,069 2,700
Other, net 1,198 5,067 1,198
Generally accepted accounting
principles net earnings $ 46,215 19,284 34,236
</TABLE>
(2) DEPOSITS WITH REGULATORY AUTHORITIES
The following assets were on deposit with state and other regulatory
authorities as required by law at the end of each year:
<TABLE>
<CAPTION>
December 31,
1996 1995
(In thousands)
<S> <C> <C>
Debt securities $ 24,305 28,184
Certificates of deposit 210 210
Totals $ 24,515 28,394
</TABLE>
(3) INVESTMENTS
(A) Investment Income
The major components of net investment income are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Investment income:
Debt securities $ 176,825 165,879 154,417
Mortgage loans 19,851 19,644 19,839
Policy loans 10,645 11,018 10,546
Other investment income 10,082 7,764 7,982
Total investment income 217,403 204,305 192,784
Investment expenses 3,101 2,489 2,763
Net investment income $ 214,302 201,816 190,021
</TABLE>
Investments of the following amounts were non-income producing for the
preceding twelve months:
<TABLE>
<CAPTION>
December 31,
1996 1995
(In thousands)
<S> <C> <C>
Debt securities $ 2,209 2,209
Equity securities 2,235 1,896
Real estate 1,336 2,175
Totals $ 5,780 6,280
</TABLE>
As of December 31, 1996 and 1995, investments in debt securities and
mortgage loans with principal balances totaling $2,981,000 and $3,778,000
were on non-accrual status. During 1996, 1995, and 1994, reductions in
interest income associated with non-performing investments in debt
securities and mortgage loans were not significant.
(B) Mortgage Loans and Real Estate
Concentrations of credit risk arising from mortgage loans exist in
relation to certain groups of customers. A group concentration arises
when a number of counterparties have similar economic characteristics that
would cause their ability to meet contractual obligations to be similarly
affected by changes in economic or other conditions. The Company does not
have a significant exposure to any individual customer or counterparty.
The major concentrations of mortgage loan credit risk for the Company
arise by geographic location in the United States and by property type as
detailed below.
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
West South Central 51.4% 54.0%
Mountain 15.0 12.9
Pacific 11.2 9.4
South Atlantic 8.7 9.2
All other 13.7 14.5
Totals 100.0% 100.0%
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Retail 64.4% 67.0%
Office 18.9 15.9
Hotel/Motel 7.8 8.3
Apartment 3.9 3.1
All other 5.0 5.7
Totals 100.0% 100.0%
</TABLE>
As of December 31, 1996 and 1995, impaired mortgage loans were as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
(In thousands)
<S> <C> <C>
Impaired loans with allowance for losses $ 612 -
Allowance for losses (48) -
Impaired loans with no allowance for losses - -
Net impaired loans $ 564 -
</TABLE>
For the years ended December 31, 1996 and 1995, average investments in
impaired mortgage loans were $232,000 and $234,000, respectively.
Interest income recognized on impaired loans during the years ended
December 31, 1996 and 1995, was not significant. Impaired loans are
typically placed on non-accrual status and no interest income is
recognized. However, if cash is received on the impaired loan, it is
applied to principal and interest on past due payments, beginning with the
most delinquent payment.
Detailed below are changes in the allowance for mortgage loan losses for
1996, 1995, and 1994:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 5,668 5,929 6,849
Net additions charged to
realized investment gains
and losses 500 - 307
Releases due primarily to
foreclosures
and loan payoffs (180) (261) (1,227)
Balance at end of year $ 5,988 5,668 5,929
</TABLE>
At December 31, 1996 and 1995, the Company owned investment real estate
totaling $15,209,000 and $19,066,000 which is reflected in other long-term
investments in the accompanying financial statements. The Company records
real estate at the lower of cost or fair value less estimated costs to
sell. Real estate values are monitored and evaluated at least annually by
the use of independent appraisals or internal valuations. Decreases in
market values affecting carrying values are recorded in a valuation
allowance which is reflected in realized gains or losses on investments.
For the years ended December 31, 1996, 1995, and 1994, impairment losses
on real estate due to decreases in market values totaled $526,000,
$882,000, and $318,000, respectively.
(C) Investment Gains and Losses
The table below presents realized gains and losses and changes in
unrealized gains and losses on investments for 1996, 1995, and 1994:
<TABLE>
<CAPTION>
Changes in
Realized Unrealized
Investment Investment
Gains Gains (Losses)
(Losses) From Prior Year
(In thousands)
<S> <C> <C>
Year Ended December 31, 1996:
Securities held to maturity $ 936 (59,972)
Securities available for sale 237 (4,774)
Other 439 -
Totals $ 1,612 (64,746)
Year Ended December 31, 1995:
Securities held to maturity $ 600 201,008
Securities available for sale (2,599) 15,166
Other (416) -
Totals $ (2,415) 216,174
Year Ended December 31, 1994:
Securities held to maturity $ 1,632 (239,104)
Securities available for sale (881) (29,493)
Other 875 -
Totals $ 1,626 (268,597)
</TABLE>
(D) Debt and Equity Securities
The tables below present amortized cost and fair values of securities held
to maturity and securities available for sale at December 31, 1996:
<TABLE>
<CAPTION>
Securities Held to Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury and
other U.S.
government
corporations
and agencies $ 34,839 183 192 34,830
States and political
subdivisions 26,735 2,176 - 28,911
Foreign governments 51,278 993 322 51,949
Public utilities 298,317 6,665 3,408 301,574
Corporate 962,757 19,377 8,640 973,494
Mortgage and
asset-backed 499,635 8,803 2,349 506,089
Totals $1,873,561 38,197 14,911 1,896,847
</TABLE>
<TABLE>
<CAPTION>
Securities Available for Sale
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury and
other U.S.
government
corporations
and agencies $ 2,957 214 - 3,171
Public utilities 58,703 2,108 927 59,884
Corporate 113,368 6,984 979 119,373
Mortgage and
asset-backed 316,522 12,269 1,211 327,580
Equity securities 15,342 2,624 347 17,619
Totals $ 506,892 24,199 3,464 527,627
</TABLE>
The tables below present amortized cost and fair values of securities held
to maturity and securities available for sale at December 31, 1995:
<TABLE>
<CAPTION>
Securities Held to Maturity
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury and
other U.S.
government
corporations
and agencies $ 35,764 262 - 36,026
States and political
subdivisions 47,574 3,737 - 51,311
Foreign governments 48,286 3,030 - 51,316
Public utilities 227,449 12,358 278 239,529
Corporate 774,134 43,724 438 817,420
Mortgage and
asset-backed 510,004 21,391 528 530,867
Totals $1,643,211 84,502 1,244 1,726,469
</TABLE>
<TABLE>
<CAPTION>
Securities Available for Sale
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury and
other U.S.
government
corporations
and agencies $ 2,948 363 - 3,311
Public utilities 54,677 3,543 790 57,430
Corporate 103,884 11,618 165 115,337
Mortgage and
asset-backed 375,219 25,259 1,622 398,856
Equity securities 24,399 2,434 973 25,860
Totals $ 561,127 43,217 3,550 600,794
</TABLE>
The amortized cost and fair values of investments in debt securities at
December 31, 1996, 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>
Securities Securities
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
(In thousands)
<S> <C> <C> <C> <C>
Due in 1 year or less $ 2,147 2,158 13,388 13,480
Due after 1 year
through 5 years 13,561 14,088 76,791 76,775
Due after 5 years
through 10 years 100,051 101,932 1,019,971 1,025,688
Due after 10 years 59,269 64,250 263,776 274,815
175,028 182,428 1,373,926 1,390,758
Mortgage and asset-
backed securities 316,522 327,580 499,635 506,089
Totals $ 491,550 510,008 1,873,561 1,896,847
</TABLE>
Proceeds from sales of securities available for sale during 1996, 1995,
and 1994 totaled $41,276,000, $44,440,000, and $9,114,000, respectively.
Gross gains of $575,000, $1,153,000, and $654,000 and gross losses of
$402,000, $3,752,000, and $1,535,000 were realized on those sales during
1996, 1995, and 1994, respectively. The Company uses the specific
identification method in computing realized gains and losses.
The Company did not sell any held to maturity securities during 1996 and
1994. However, during 1995, three held to maturity bonds were sold due to
significant credit deterioration of the issuing companies. Amortized cost
of the securities sold totaled $10,727,000, and realized losses of $68,000
were recognized on the sales.
The Company held in its investment portfolio below investment grade debt
securities totaling $38,696,000 and $14,244,000 at December 31, 1996 and
1995, respectively. This represents approximately 1.4% and 0.5% of total
invested assets. Below investment grade securities generally have greater
default risk than higher rated corporate debt. The issuers of these
securities are usually more sensitive to adverse industry or economic
conditions than are investment grade issuers.
The Company had no investments in any entity, except for U.S. government
agency securities, in excess of 10% of stockholders' equity at December
31, 1996.
(E) Changes in Accounting Principles
In May, 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement addresses the
accounting and reporting for investments in equity securities that have
readily determinable fair values and for all investments in debt
securities as previously described in Note 1. The Company adopted SFAS
No. 115 effective January 1, 1994. Upon adoption, approximately 60% of
the Company's insurance operations debt securities were reported as
securities available for sale, with the remainder classified as securities
held to maturity. The Company's relatively small holdings of equity
securities were also reported as securities available for sale.
Upon adoption of the new statement, certain related balance sheet
accounts, deferred Federal income taxes payable and deferred policy
acquisition costs, were adjusted as if the unrealized gains on the
securities classified as available for sale had actually been realized.
For the Company's universal life and investment annuity contracts,
deferred policy acquisition costs are amortized in relation to the present
value of expected gross profits on these policies. Accordingly, under
SFAS No. 115, deferred policy acquisition costs are adjusted for the
impact on estimated gross profits of net unrealized gains and losses on
securities. The implementation of the new statement had no effect on net
earnings of the Company. However, stockholders' equity was adjusted as
follows as of January 1, 1994:
<TABLE>
<CAPTION>
January 1,
1994
(In thousands)
<S> <C>
Fair value adjustment to investments in
debt and equity securities $ 93,788
Less:
Decrease in deferred policy acquisition costs (52,849)
Increase in deferred Federal income taxes (14,329)
Effect of change in accounting for investments
in debt and equity securities $ 26,610
</TABLE>
At July 31, 1994, the Company transferred debt securities with fair values
totaling $805 million from securities available for sale to securities
held to maturity. On December 29, 1995, the Company made additional
transfers totaling $156 million to the held to maturity category from
securities available for sale. The lower holdings of securities available
for sale significantly reduce the Company's exposure to equity volatility
while still providing securities for liquidity and asset/liability
management purposes. The transfers of securities were recorded at fair
values in accordance with SFAS No. 115. This statement requires that the
unrealized holding gain or loss at the date of the transfer continue to be
reported in a separate component of stockholders' equity but shall be
amortized over the remaining life of the security as an adjustment of
yield in a manner consistent with the amortization of any premium or
discount. The amortization of an unrealized holding gain or loss reported
in equity will offset or mitigate the effect on interest income of the
amortization of the premium or discount for the held-to-maturity
securities. The transfer of securities from available for sale to held to
maturity had no effect on net earnings of the Company. However,
stockholders' equity was adjusted as follows:
<TABLE>
<CAPTION>
Net Unrealized Gains (Losses)
as of December 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Beginning unamortized
gains from transfers $ 3,169 941 -
Net unrealized gains
related to transfer of
securities from available
for sale to
held to maturity - 3,159 1,380
Amortization of net
unrealized gains related
to transferred securities (568) (931) (439)
(568) 2,228 941
Ending unamortized
gains from transfers $ 2,601 3,169 941
</TABLE>
Also on December 29, 1995, the Company transferred securities totaling
$284 million to the available for sale category from securities held to
maturity. This transfer resulted in an increase to stockholders' equity
of $4,266,000 as of December 31, 1995, net of effects of deferred policy
acquisition costs and taxes. This transfer was made to restructure the
Company's portfolio to provide increased flexibility for both portfolio
and asset/liability management. Accounting principles do not allow
transfers from the held to maturity category to the available for sale
category except under certain prescribed circumstances. However, in 1995
the Financial Accounting Standards Board permitted a one-time reassessment
by companies of their securities classifications and allowed transfers out
of the held to maturity category without regard to the prescribed
circumstances.
Net unrealized gains (losses) on investment securities included in
stockholders' equity at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
(In thousands)
<S> <C> <C>
Gross unrealized gains $ 24,199 43,217
Gross unrealized losses (3,464) (3,550)
Adjustments for:
Deferred policy acquisition costs (9,578) (21,166)
Deferred Federal income taxes (3,905) (6,475)
7,252 12,026
Net unrealized gain related to securities
transferred to held to maturity 2,601 3,169
Net unrealized gains (losses)
on investment securities $ 9,853 15,195
</TABLE>
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." The statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Measurement of an
impairment loss for long-lived assets and identifiable intangibles that an
entity expects to hold and use should be based on the fair value of the
asset. The statement also requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of
carrying amount or fair value less costs to sell. The Company's real
estate investments are the only significant assets that are subject to
this statement. As the Company was already recording real estate at the
lower of cost or fair value less estimated costs to sell, the
implementation of this statement had no significant effects on its
financial statements.
In June, 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities. In December, 1996, SFAS No. 127, Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125, was issued which
defers portions of SFAS No. 125 to be effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1997. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishment of liabilities. Those standards are based on consistent
application of a financial-components approach that focuses on control.
Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control
has been surrendered, and derecognizes liabilities when extinguished.
This statement provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 125 is effective for applicable transactions
occurring after December 31, 1996, and is to be applied prospectively.
The Company anticipates that the implementation of this statement will
have no significant effects on its financial statements.
(4) REINSURANCE
The Company is party to several reinsurance agreements. The Company's
general policy is to reinsure that portion of any risk in excess of
$200,000 on the life of any one individual. Prior to 1996, the Company's
policy was to reinsure amounts in excess of $150,000. Total life
insurance in force was $8.15 billion and $7.94 billion at December 31,
1996 and 1995, respectively. Of these amounts, life insurance in force
totaling $1.07 billion and $1.27 billion was ceded to reinsurance
companies, primarily on a yearly renewable term basis, at December 31,
1996 and 1995, respectively.
In accordance with the reinsurance contracts, reinsurance receivables
including amounts related to claims incurred but not reported and
liabilities for future policy benefits totaled $5,490,000 and $5,646,000
at December 31, 1996 and 1995, respectively. Premium revenues were
reduced by $6,442,000, $7,420,000, and $6,040,000 for reinsurance premiums
incurred during 1996, 1995, and 1994, respectively. Benefit expenses were
reduced by $19,070,000, $5,812,000, and $3,295,000 for reinsurance
recoveries during 1996, 1995, and 1994, respectively. A contingent
liability exists with respect to reinsurance, as the Company remains
liable if the reinsurance companies are unable to meet their obligations
under the existing agreements.
(5) FEDERAL INCOME TAXES
Total Federal income taxes for 1996, 1995, and 1994 were allocated as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Earnings from continuing
operations $ 24,123 10,566 16,207
Discontinued operations - - 2,983
Stockholders' equity for net
unrealized gains and losses on
securities available for sale (2,876) 9,365 (974)
Total Federal income taxes $ 21,247 19,931 18,216
</TABLE>
The provisions for Federal income taxes attributable to earnings from
continuing operations vary from amounts computed by applying the statutory
income tax rate to earnings before Federal income taxes. The reasons for
the differences and the corresponding tax effects are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Income tax expense at
statutory rate $ 24,618 16,170 18,683
Dividends-received deduction (298) (298) (333)
Amortization of life interest in
the Libbie Shearn Moody Trust 99 98 97
Non-deductible travel and
entertainment 116 86 148
Tax benefit of
discontinued operations (182) (5,669) (2,864)
Other (230) 179 476
Provision for Federal
income taxes $ 24,123 10,566 16,207
</TABLE>
There were no deferred taxes attributable to enacted tax rate changes for
the years ended December 31, 1996, 1995, and 1994.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995, are presented below:
<TABLE>
<CAPTION>
December 31,
1996 1995
(In thousands)
<S> <C> <C>
Deferred tax assets:
Future policy benefits, excess of
financial accounting liability
over tax liability $ 88,855 86,358
Mortgage loans, principally due
to valuation allowances for
financial accounting purposes 2,218 2,212
Real estate, principally due to
write-downs for financial
accounting purposes 2,119 2,089
Accrued and unearned investment
income recognized for tax
purposes and deferred for
financial accounting purposes 2,352 2,311
Accrued operating expenses recorded
for financial accounting purposes
not currently tax deductible 3,049 2,766
Accrued liabilities of discontinued
operations not currently tax
deductible - 1,368
Other 576 595
Total gross deferred tax assets 99,169 97,699
Less valuation allowance - -
Net deferred tax assets 99,169 97,699
Deferred tax liabilities:
Deferred policy acquisition costs,
principally expensed for
tax purposes (98,235) (95,650)
Debt securities, principally due
to deferred market discount for tax (6,016) (4,482)
Real estate, principally due to
differences in tax and
financial accounting for depreciation (1,487) (1,622)
Net unrealized gains on
securities available for sale (5,305) (8,181)
Other (36) (51)
Total gross deferred tax liabilities (111,079) (109,986)
Net deferred tax liabilities $ (11,910) (12,287)
</TABLE>
There was no valuation allowance for deferred tax assets at December 31,
1996 and 1995. 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 in which the deferred tax assets are deductible, management
believes it is more likely than not that the Company will realize the
benefits of these deductible differences.
Prior to the Tax Reform Act of 1984 (1984 Act), a portion of a life
insurance company's income was not subject to tax until it was distributed
to stockholders, at which time it was taxed at the regular corporate tax
rate. In accordance with the 1984 Act, this income, referred to as
policyholders' surplus, would not increase, yet any amounts distributed
would be taxable at the regular corporate rate. The balance of this
account as of December 31, 1996, 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, 1996, become
taxable, the Federal income taxes computed at present rates would be
approximately $856,000.
The Company files a consolidated Federal income tax return with its
subsidiaries. Allocation of the consolidated tax liability is based on
separate return calculations pursuant to the "wait-and-see method as
described in sections 1.1552-1(a)(2) and 1.1502-33(d)(2)(i) of the current
Treasury Regulations. Under this method, consolidated group members are
not given current credit for net losses until future net taxable income is
generated to realize such credits. In accordance with this consolidated
tax sharing agreement, tax benefits resulting from discontinued brokerage
operation losses totaling $182,000, $5,669,000 and $2,864,000 for 1996,
1995, and 1994 were included in earnings from continuing operations.
(6) TRANSACTIONS WITH CONTROLLING STOCKHOLDER AND AFFILIATES
(A) Life Interest in Libbie Shearn Moody Trust
The Company is the beneficial owner of a life interest (1/8 share), in
the trust estate of Libbie Shearn Moody which was previously owned by Mr.
Robert L. Moody, Chairman of the Board of Directors of the Company. The
Company has issued term insurance policies on the life of Mr. Robert L.
Moody which are reinsured through agreements with unaffiliated insurance
companies. The Company is the beneficiary of these policies for an amount
equal to the statutory admitted value of the Trust, which was $18,614,000
at December 31, 1996. The excess of $27,000,000 face amount of the
reinsured policies over the statutory admitted value of the Trust has been
assigned to Mr. Robert L. Moody. The recorded net asset values in the
accompanying consolidated financial statements for the Company's life
interest in the Trust are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
(In thousands)
<S> <C> <C>
Original valuation of life interest at
February 26, 1960 $ 13,793 13,793
Less accumulated amortization (8,871) (8,587)
Net asset value of life
interest in the Trust $ 4,922 5,206
</TABLE>
Income from the Trust and related expenses reflected in the accompanying
consolidated statements of earnings are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Income distributions $ 3,252 3,085 2,937
Deduct:
Amortization (284) (280) (279)
Reinsurance premiums (238) (212) (188)
Net income from life interest
in the Trust $ 2,730 2,593 2,470
</TABLE>
(B) Common Stock
Mr. Robert L. Moody, Chairman of the Board of Directors, owns 198,074 of
the total outstanding shares of the Company's Class B common stock and
1,160,896 of the Class A common stock.
Holders of the Company's Class A common stock elect one-third of the Board
of Directors of the Company, and holders of the Class B common stock elect
the remainder. Any cash or in-kind dividends paid on each share of Class B
common stock shall be only one-half of the cash or in-kind dividends paid
on each share of Class A common stock. Also, in the event of liquidation
of the Company, the Class A stockholders shall first receive the par value
of their shares; then the Class B stockholders shall receive the par value
of their shares; and the remaining net assets of the Company shall be
divided between the stockholders of both Class A and Class B common stock,
based on the number of shares held.
(7) PENSION PLANS
The Company has a qualified noncontributory pension plan covering
substantially all full-time employees. The plan provides benefits based on
the participants' years of service and compensation. The Company makes
annual contributions to the plan that comply with the minimum funding
provisions of the Employee Retirement Income Security Act. A summary of
plan information is as follows:
Pension costs (credits) include the following components:
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Service cost-benefits earned
during the period $ 287 143 218
Interest cost on projectd
benefit obligations 571 510 498
Actual return on plan assets (643) (962) 112
Net amortization and deferral 57 427 (622)
Net pension cost $ 272 118 206
</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,
1996 1995
(In thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including
vested benefits of $7,638,000 and
$7,562,000, respectively $ (8,076) (7,961)
Projected benefit obligations for service
rendered to date $ (8,332) (8,199)
Plan assets at fair market value
primarily consisting of equity and
fixed income securities 7,899 6,557
Projected benefit obligations in
excess of plan assets (433) (1,642)
Unrecognized net transitional asset
at January 1, 1987, being recognized
over employees' average remaining
service of 15 years (264) (319)
Prior service cost not yet recognized
in net periodic pension cost (206) (236)
Unrecognized net losses from past
experience different from that assumed 1,766 2,174
Adjustment to recognize minimum liability (1,039) (1,381)
Accrued pension cost $ (176) (1,404)
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligations was 7.5% for 1996 and 7.0% for 1995. The
projected increase in future compensation levels was based on a rate of
4.5% and 5.0% for 1996 and 1995, respectively. The projected long-term
rate of return on plan assets was 8.5% for 1996 and 1995.
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,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Service cost-benefits earned
during the period $ 73 71 91
Interest cost on projected
benefit obligations 162 153 158
Net amortization and deferral 91 78 129
Net pension cost $ 326 302 378
</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,
1996 1995
(In thousands)
<S> <C> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligations,
including vested
benefits of $1,809,000 and
$1,545,000, respectively $ (1,809) (1,550)
Projected benefit obligations for service
rendered to date $ (2,415) (2,532)
Plan assets at fair market value - -
Projected benefit obligations in
excess of plan assets (2,415) (2,532)
Unrecognized net transitional obligation at
January 1, 1991, being recognized over
employees' average remaining
service of 12 years 520 598
Unrecognized net losses from past experience
different from that assumed 217 582
Adjustment to recognize minimum liability (131) (198)
Accrued pension cost $ (1,809) (1,550)
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligations was 7.5% for 1996 and 7.0% for 1995. The
projected increase in future compensation levels was based on a rate of
4.5% and 5.0% for 1996 and 1995, respectively.
In addition to the defined benefit plans, the Company has a qualified
401(k) plan for substantially all full-time employees and a non-qualified
deferred compensation plan primarily for senior officers. The Company
makes annual contributions to the 401(k) plan of two percent of each
employee's compensation. Additional Company matching contributions of up
to two percent of each employee's compensation are also made each year
based on the employee's personal level of salary deferrals to the plan.
All Company contributions are subject to a vesting schedule based on the
employee's years of service. For the years ended December 31, 1996 and
1995, Company contributions totaled $217,000 and $201,000, respectively.
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, 1996 and 1995, Company
contributions totaled $62,000 and $55,000, respectively.
(8) SHORT-TERM BORROWINGS
The Company has available a $60 million bank line of credit primarily for
cash management purposes relating to investment transactions. The Company
is required to maintain a collateral security deposit in trust with the
bank equal to 120% of any outstanding liability. The Company had no
outstanding liabilities or collateral security deposits with the bank at
December 31, 1996 and 1995. The weighted average interest rates on
borrowings for the years ended December 31, 1996 and 1994 were 6.91% and
4.45%, respectively. Actual borrowings and interest expense for 1996 and
1994 were minimal. The Company had no borrowings on the line of credit
during 1995.
(9) COMMITMENTS AND CONTINGENCIES
(A) Current Regulatory Issues
In December, 1995, the National Association of Insurance Commissioners
adopted for statutory accounting practices Actuarial Guideline 33,
previously referred to as Actuarial Guideline GGG. This reserve guideline
helps define the minimum reserves for policies with multiple benefit
streams, such as two-tier annuities. The Company had been reserving for
its two-tier annuities according to an agreement reached in 1993 with its
state of domicile, Colorado. However, in 1995, the Company entered into
discussions with the Colorado Division of Insurance (the Division) to
implement Actuarial Guideline 33 and to phase it in over a three-year
period as allowed by the guideline. In January, 1996, the Division
approved the proposal for this three-year phase-in. The effect on the
Company's statutory financial statements will not be significant, since
the previous agreement with the Division was similar to the final
guideline. Also, the guideline does not affect the Company's policy
reserves which are prepared under generally accepted accounting principles
as reported in the accompanying consolidated financial statements.
(B) Legal Proceedings
On March 28, 1994, the Community College District No. 508, County of Cook
and State of Illinois (The City Colleges) filed a complaint in the United
States District Court for the Northern District of Illinois, Eastern
Division, against National Western Life Insurance Company (the Company or
National Western) and subsidiaries of The Westcap Corporation (Westcap), a
wholly owned subsidiary of the Company. The suit seeks rescission of
securities purchase transactions by The City Colleges from Westcap between
September 9, 1993, and November 3, 1993, alleged compensatory damages,
punitive damages, injunctive relief, declaratory relief, fees, and costs.
National Western is named as a "controlling person" of the Westcap
defendants. On February 1, 1995, the complaint was amended to add a RICO
count for treble damages and claims under the Texas securities and
consumer fraud laws, and to add additional defendants. Westcap and the
Company are of the opinions that Westcap has adequate documentation to
validate all such securities purchase transactions by The City Colleges,
and that Westcap and the Company each have adequate defenses to the
litigation. Westcap has filed Chapter 11 bankruptcy (see below), and City
Colleges has filed a $55 million claim in the bankruptcy court. The claim
has been tried before the court, but no judgment has been entered.
Although the alleged damages would be material to the Company's financial
statements, a reasonable estimate of any actual losses which may result
from this suit cannot be made at this time. The lawsuit against the
Company has been stayed pending determination of the proceeding against
Westcap.
On February 1, 1995, the San Antonio River Authority (SARA) filed a
complaint in the 285th Judicial District Court, Bexar County, Texas,
against Kenneth William Katzen (Katzen), Westcap Securities, L.P., The
Westcap Corporation, and National Western Life Insurance Company (the
Company). The suit alleges that Katzen and Westcap sold mortgage-backed
security derivatives to SARA and misrepresented these securities to SARA.
The suit alleges violations of the Federal Securities Act, Texas
Securities Act, Deceptive Trade Practices Act, breach of fiduciary duty,
fraud, negligence, breach of contract, and seeks attorney's fees. The
Company is named as a "controlling person" of the Westcap defendants.
Westcap and the Company are of the opinions that Westcap has adequate
documentation to validate all securities purchases by SARA and that the
Company and Westcap have adequate defenses to such suit. Although the
alleged damages would be material to the Company s financial statements, a
reasonable estimate of any actual losses which may result from this suit
cannot be made at this time. The Company and Westcap have denied all
allegations and the parties have initiated discovery. The lawsuit has
been transferred to the Westcap bankruptcy court, and the proceedings
against the Company have been stayed pending determination of the claim in
bankruptcy against Westcap.
On June 9, 1995, Charles McCutcheon, as Sheriff of Palm Beach County,
Florida, served The Westcap Corporation, Westcap Securities, Inc., Westcap
Government Securities, Inc., individual officers and directors of the
Westcap entities, and National Western Life Insurance Company (the
Company) as defendants with a complaint filed in the U.S. District Court
for the Southern District of Florida. The Complaint alleges that the
Westcap entities improperly sold certain derivative securities to the
Plaintiff and did not disclose the high risk of these securities to the
Plaintiff, who suffered financial losses from the investments. The
Company is sued as a "controlling person" of Westcap, and it is alleged
that the Company is responsible and liable for the alleged wrongful
conduct of Westcap. The suit seeks rescission of the investments, alleged
actual damages of $8 million, punitive and exemplary damages, attorneys'
fees, and injunction. On October 13, 1995, the U.S. District Judge
ordered arbitration of Plaintiff's claims against the Westcap entities,
and stayed all proceedings pending outcome of the arbitration. The
Company and Westcap deny the allegations and believe they each have
adequate defenses to such suit. Although the alleged damages would be
material to the Company s financial statements, a reasonable estimate of
any actual losses which may result from this suit cannot be made at this
time. The lawsuit is currently stayed pending the determination of the
claim in bankruptcy against Westcap.
On July 5, 1995, San Patricio County, Texas, filed suit in the District
Court of San Patricio County, Texas, against National Western Life
Insurance Company (the Company) and its chief executive officer, Robert L.
Moody. The suit arises from derivative investments purchased by San
Patricio County from Westcap Securities, L.P. or Westcap Government
Securities, Inc., affiliates of The Westcap Corporation. The suit alleges
that the Westcap affiliates were controlled by the Company and Mr. Moody
and that they are responsible for the alleged wrongful acts of the Westcap
affiliates in selling the securities to the Plaintiff. Plaintiff alleges
that the Westcap affiliates violated duties and responsibilities owed to
the Plaintiff related to the investment recommendations and decisions made
by Plaintiff, and alleges that the Plaintiff was financially damaged by
such actions of Westcap. The suit seeks rescission of the investments and
actual and punitive damages of unspecified amounts. The Company believes
that it has adequate defenses to such suit and denies the allegations.
The parties have initiated discovery. Although the alleged damages would
be material to the Company's financial statements, a reasonable estimate
of any actual losses which may result from this suit cannot be made at
this time. The lawsuit is currently stayed pending the determination of a
similar claim against Westcap in the Westcap bankruptcy proceedings.
On September 13, 1995, Michigan South Central Power Agency filed a
complaint in The United States District Court for the Western District of
Michigan against Westcap Securities Investment, Inc., Westcap Securities,
L.P., Westcap Securities Management, Inc., The Westcap Corporation,
National Western Life Insurance Company (the Company), and others. The
suit alleges that salesmen of Westcap sold mortgage-backed securities to
the Plaintiff and misrepresented these securities in violation of Federal
and state securities laws and common law. The Company is named as a
"controlling person" of the Westcap defendants and is alleged to be
responsible for their acts. Westcap and the Company are of the opinions
that they have adequate defenses to the suit. Although the alleged
damages would be material to the Company's financial statements, a
reasonable estimate of any actual losses which may result from the suit
cannot be made at this time. The Company and Westcap deny all
allegations. The lawsuit is currently stayed pending the determination of
the claim in bankruptcy against Westcap.
On February 27, 1996, the City of Tracy, a California municipal
corporation, filed a complaint in the Superior Court of San Joaquin
County, California, against Westcap Securities, L.P., National Western
Life Insurance Company (the Company) and others. The suit arises from
derivative investments purchased by the City of Tracy from Westcap
Securities, L.P., an affiliate of The Westcap Corporation. The suit
alleges that The Westcap Corporation and its subsidiaries are controlled
by the Company and that it is responsible for alleged wrongful acts of the
Westcap subsidiaries. Plaintiff alleges that the Westcap affiliates
violated fiduciary duties and responsibilities owed to the Plaintiff
related to investment purchases and decisions made by the Plaintiff,
breach of contract, deceit, fraud, violation of California Securities
Laws, and negligence, and that the Plaintiff was financially damaged
thereby. The suit seeks rescission of the investment transactions, actual
and punitive damages. Westcap and the Company are of the opinions that
each of them have good and adequate defenses to the suit, and they deny
the allegations. Although the alleged damages would be material to the
Company's financial statements, a reasonable estimate of any actual losses
which may result from this suit cannot be made at this time. The lawsuit
has been removed to the U.S. Bankruptcy Court in Houston, Texas, where it
is currently pending.
On January 8, 1997, Tom Green County, a county government entity of the
State of Texas, filed a petition in the District Court of Tom Green
County, Texas, against National Western Life Insurance Company (the
Company) and its chief executive officer, Robert L. Moody. The suit
arises from derivative investments purchased by Tom Green County from
Westcap Securities, L.P., an affiliate of The Westcap Corporation. The
suit alleges that The Westcap Corporation and its affiliates are
controlled by the Company and Robert L. Moody, and that they are
responsible for the alleged wrongful acts of the Westcap affiliates in
selling securities to the Plaintiff. Plaintiff alleges that the Westcap
affiliates violated fiduciary duties and responsibilities allegedly owed
to the Plaintiff related to investment recommendations and decisions made
by the Plaintiff in purchasing securities, engaged in fraud and deceptive
practices, conspiracy, violations of Texas Securities Laws, negligence and
gross negligence, and alleges that the Plaintiff was financially damaged
by such actions of Westcap. The suit seeks rescission of the investments
and actual and punitive damages of unspecified amounts. The Company
believes it has good and adequate defenses to the suit and denies the
allegations. Although the alleged damages would be material to the
Company's financial statements, a reasonable estimate of any actual losses
which may result from this suit cannot be made at this time. The Company
has filed an answer in the suit, has denied all claims and allegations,
and has removed the case to the U.S. District Court for the Northern
District of Texas, San Angelo Division.
Although the alleged damages for the above-described suits would be
material to the financial statements of National Western Life Insurance
Company and The Westcap Corporation, a reasonable estimate of actual
losses which may result from any of these claims cannot be made at this
time. Accordingly, no provision for any liability that may result from
these actions has been recognized in the accompanying financial
statements. National Western Life Insurance Company is also currently a
defendant in several other lawsuits, substantially all of which are in the
normal course of business. In the opinion of management, the liability, if
any, which may arise from these lawsuits would not have a material adverse
effect on the Company's financial position.
On April 12, 1996, The Westcap Corporation and its wholly owned
subsidiary, Westcap Enterprises, Inc., separately filed voluntary
petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code
in the United States Bankruptcy Court, Southern District of Texas, Houston
Division. Westcap Enterprises, Inc. is the successor by merger to Westcap
Securities Investment, Inc., Westcap Securities Management, Inc., and
Westcap Securities, L.P., which prior to such merger were subsidiaries or
affiliates of The Westcap Corporation.
The plan of reorganization filed in the Bankruptcy Court provides for the
merger of Westcap Enterprises, Inc. into The Westcap Corporation
(Westcap), with the survivor to conduct business as a real estate
investment trust under sections 856-58 of the Federal Tax Code. National
Western has agreed to participate in the Westcap plan of reorganization by
the contribution of $5,000,000 of cash and $5,000,000 of income producing
real estate properties in exchange for a complete settlement and release
of any claims by Westcap against National Western and a continuing equity
interest in the reorganized entity. The reorganization plan is subject
to approval by Westcap's creditors and the Bankruptcy Court. The
Creditors' Committee, the debtor Westcap, and National Western are
currently engaged in discussions relating to the possible settlement of
all claims by the creditors against Westcap and the claims of Westcap
against National Western. No prediction can be made at this time as to
the outcome of such settlement discussions.
National Western, Westcap, and the Creditors Committee agreed that
National Western may make a $1,000,000 cash infusion to Westcap for
operational expenses incurred during its bankruptcy and that such cash
infusion will be credited against any future settlement or litigation
recovery related to Westcap's alleged claims against National Western.
Such funding was approved by the Bankruptcy Court on February 21, 1997,
and the funds were transferred by National Western to Westcap on March 18,
1997.
National Western's investment in Westcap was completely written off during
1995. The $1,000,000 contribution described above will be reflected as
losses from discontinued operations in the first quarter of 1997. Any
additional losses from discontinued operations will depend primarily on
results of Westcap bankruptcy proceedings.
(C) Financial Instruments
In order to meet the financing needs of its customers in the normal course
of business, the Company is a party to financial instruments with
off-balance sheet risk. These financial instruments are commitments to
extend credit which involve elements of credit and interest rate risk in
excess of the amounts recognized in the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit is represented by the contractual amounts, assuming that the
amounts are fully advanced and that collateral or other security is of no
value. The Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
The Company controls the credit risk of these transactions through credit
approvals, limits, and monitoring procedures.
The Company had commitments to extend credit relating to mortgage loans
totaling $1,000,000 at December 31, 1996. 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 . Commitments do not necessarily represent future liquidity
requirements, as some could expire without being drawn upon. The Company
evaluates each customer's creditworthiness on a case-by-case basis.
(D) Guaranty Association Assessments
National Western Life Insurance Company is subject to state guaranty
association assessments in all states in which it is licensed to do
business. These associations generally guarantee certain levels of
benefits payable to resident policyholders of insolvent insurance
companies. Many states allow premium tax credits for all or a portion of
such assessments, thereby allowing potential recovery of these payments
over a period of years. However, several states do not allow such
credits.
The Company estimates its liabilities for guaranty association assessments
by using the latest information available from the National Organization
of Life and Health Insurance Guaranty Associations. The Company will
continue to monitor and revise its estimates for assessments as additional
information becomes available which could result in changes to the
estimated liabilities. Other insurance operating expenses related to
state guaranty association assessments totaled $1,146,000, $2,371,000, and
$4,869,000 for the years ended December 31, 1996, 1995, and 1994,
respectively.
(10) STOCKHOLDERS' EQUITY
(A) Dividend Restrictions
The Company is restricted by state insurance laws as to dividend amounts
which may be paid to stockholders without prior approval from the Colorado
Division of Insurance. The restrictions are based on statutory earnings
and surplus levels of the Company. The maximum dividend payment which may
be made without prior approval in 1997 is $35,209,000. The Company has
never paid cash dividends on its common stock, as it follows a policy of
retaining any earnings in order to finance the development of business and
to meet increased regulatory requirements for capital.
(B) Regulatory Capital Requirements
The Colorado Division of Insurance imposes minimum risk-based capital
requirements on insurance companies that were developed by the National
Association of Insurance Commissioners (NAIC). The formulas for
determining the amount of risk-based capital (RBC) specify various
weighting factors that are applied to statutory financial balances or
various levels of activity based on the perceived degree of risk.
Regulatory compliance is determined by a ratio of the Company's regulatory
total adjusted capital to its authorized control level RBC, as defined by
the NAIC. Companies below specific trigger points or ratios are
classified within certain levels, each of which requires specified
corrective action. The Company's current statutory capital and surplus is
significantly in excess of the threshold RBC requirements.
(C) Stock Bonus Plan
During 1993 the Company implemented a one-time stock bonus plan for all
officers of the Company. Class A common stock restricted shares totaling
13,496 were granted to officers based on their individual performance and
contribution to the Company. The shares were subject to vesting
requirements as reflected in the following schedule:
<TABLE>
<S> <C>
January 1, 1993 25%
December 31, 1993 25%
December 31, 1994 25%
December 31, 1995 25%
</TABLE>
All of the 13,496 shares that were granted have been issued and were
outstanding as of December 31, 1996 and 1995.
(D) Stock and Incentive Plan
During 1995 the Company adopted the National Western Life Insurance
Company 1995 Stock and Incentive Plan (the Plan). The Plan provides for
the grant of any or all of the following types of awards to eligible
employees: (1) stock options, including incentive stock options and
non-qualified stock options; (2) stock appreciation rights, in tandem
with stock options or freestanding; (3) restricted stock; (4) incentive
awards; and (5) performance awards.
The Plan is effective as of April 21, 1995, and will terminate on April
20, 2005, unless terminated earlier by the Board of Directors. The number
of shares of Class A, $1.00 par value, common stock which may be issued
under the Plan, or as to which stock appreciation rights or other awards
may be granted, may not exceed 300,000. These shares may be authorized
and unissued shares or treasury shares.
All of the employees of the Company and its subsidiaries are eligible to
participate in the Plan. In addition, directors of the Company, other
than Compensation and Stock Option Committee members, are eligible for
restricted stock awards, incentive awards, and performance awards.
Non-employee directors, including members of the Compensation and Stock
Option Committee, are eligible for non-discretionary stock options.
On May 19, 1995, the Committee approved the issuance of 52,500
non-qualified stock options to selected officers of the Company. The
Committee also granted 7,000 non-qualified, non-discretionary stock
options to non-employee Company directors. On April 19, 1996, an
additional 33,000 options were issued to selected officers. The
directors' stock options vest 20% annually following one full year of
service to the Company from the date of grant. The officers' stock
options vest 20% annually following three full years of service to the
Company from the date of grant. The exercise prices of the stock options
were set at the fair market values of the common stock on the dates of
grant. A summary of shares available for grant and stock option activity
is detailed below:
<TABLE>
<CAPTION>
Options Outstanding
Shares Weighted-
Available Average
For Grant Shares Exercise Price
<S> <C> <C> <C>
Balance at April 21, 1995 300,000 - $ -
Stock Options:
Granted (59,500) 59,500 38.13
Exercised or forfeited - - -
Balance at December 31, 1995 240,500 59,500 38.13
Stock Options:
Granted (33,000) 33,000 65.00
Exercised or forfeited - - -
Balance at December 31, 1996 207,500 92,500 $ 47.71
</TABLE>
Of the 92,500 shares outstanding at December 31, 1996, only 1,400 are
vested and exercisable at an exercise price of $38.13.
In October, 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." This statement establishes financial
accounting and reporting standards for stock-based employee compensation
plans. It defines a fair value based method of accounting for employee
stock options or similar equity instruments. However, it also allows an
entity to continue to measure compensation cost for plans using the
intrinsic value based method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees."
Under the fair value based method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. For stock options,
fair value is determined using an option pricing model that takes into
account various information and assumptions regarding the Company's stock
and options. Under the intrinsic value based method, compensation cost is
the excess, if any, of the quoted market price of the stock at grant date
or other measurement date over the amount an employee must pay to acquire
the stock.
The Company has elected to continue to apply the accounting methods
prescribed by APB Opinion No. 25 for its existing stock and incentive
plan. As a result, no compensation costs have been recorded for the
Company's existing plan using the intrinsic value based method. If
compensation expense for the stock options had been determined using the
fair value based method, there would have been no significant changes in
the Company's net income and earnings per share for 1996 and 1995.
(11) FOREIGN SALES AND SIGNIFICANT AGENCY RELATIONSHIPS
Total direct premium revenues and universal life and annuity contract
deposits related to insurance written in foreign countries, primarily in
Central and South America, were approximately $56,689,000, $57,407,000,
and $53,846,000, for the years ended December 31, 1996, 1995, and 1994,
respectively.
A significant portion of the Company's universal life and investment
annuity contracts were sold through three agencies. Combined business from
these agencies accounted for approximately 31%, 34%, and 40% of total direct
premium revenues and universal life and investment annuity contract deposits
for 1996, 1995, and 1994, respectively.
(12) SEGMENT INFORMATION
A summary of financial information for the Company's two industry segments
follows:
<TABLE>
<CAPTION>
Life Discontinued
Insurance Brokerage Adjustments Consolidated
Operations Operations (B) Amounts
(In thousands)
<S> <C> <C> <C> <C>
Gross revenues:
1996 $ 311,209 373(A) (373) 311,209
1995 287,816 5,112(A) (5,693) 287,235
1994 278,431 40,208(A) (41,881) 276,758
Net earnings
(losses):
1996 $ 46,215 - - 46,215
1995 35,634 (16,350) - 19,284
1994 37,172 (2,936) - 34,236
Identifiable
assets:
1996 $ 3,119,572 1,257 - 3,120,829
1995 2,952,282 6,177 - 2,958,459
1994 2,702,184 232,057 (19,187) 2,915,054
<FN>
Notes to Table:
(A) These amounts are not reported as revenues in the accompanying
consolidated financial statements, as the segment has been discontinued.
Instead, gross revenues are reported net of expenses and taxes as a
separate line item identified as discontinued operations. This reporting
classification is used to clearly separate discontinued operations from
continuing operations of the consolidated entity.
(B) These amounts include both consolidating eliminations and adjustments
for reporting discontinued brokerage operations as described in note (A)
above.
</FN>
</TABLE>
(13) 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)
<S> <C> <C> <C> <C>
1996:
Revenues $ 75,469 79,510 76,725 79,505
Net earnings $ 8,744 11,840 12,560 13,071
Per Share:
Net earnings $ 2.50 3.40 3.59 3.75
1995:
Revenues $ 70,506 72,058 69,930 74,741
Earnings from
continuing
operations $ 7,057 8,894 11,784 7,899
Losses from
discontinued
operations (1,733) (1,484) (13,133) -
Net earnings (losses) $ 5,324 7,410 (1,349) 7,899
Per Share:
Earnings from
continuing
operations $ 2.03 2.54 3.38 2.27
Losses from
discontinued
operations (0.50) (0.42) (3.77) -
Net earnings (losses) $ 1.53 2.12 (0.39) 2.27
</TABLE>
The fourth quarter net earnings in 1996 reflect the following significant
items:
Net earnings for the fourth quarter of 1996 totaled $13,071,000 compared
to $7,899,000 for the fourth quarter of 1995. Insurance revenues,
excluding realized gains and losses on investments, increased $3,741,000
from the 1995 fourth quarter, primarily due to increases in net investment
income. Additionally, expenses decreased significantly in 1996 primarily
due to lower life insurance benefit claims and amortization of deferred
policy acquisition costs.
The fourth quarter net earnings in 1995 reflect the following significant
items:
Continuing Operations: Earnings from insurance operations, excluding net
realized gains and losses on investments, for the quarter ended December
31, 1995, were $8,345,000 compared to $8,311,000 for the fourth quarter of
1994. However, fourth quarter 1994 earnings included a $2.9 million tax
benefit resulting from the Company's subsidiary brokerage losses, whereas
1995 fourth quarter earnings do not include such a benefit because the
total 1995 tax benefit had been recognized as of September 30, 1995. The
tax benefit was recognized in accordance with the Company's tax allocation
agreement with its subsidiaries. Excluding the tax benefit, 1995 fourth
quarter earnings were up $2.9 million over the comparable 1994 quarter.
Contributing to the increased earnings were insurance revenues, excluding
realized gains and losses on investments, which were up $6,482,000, or
9.4%, from the 1994 fourth quarter. The increase in revenues was offset
somewhat by higher life insurance benefit claims and other policy and
contract related expenses.
Discontinued Operations: Third quarter 1995 losses from discontinued
brokerage operations included estimated future operating losses, as well
as estimated costs to cease brokerage operations, and resulted in the
complete write-off of the Company's investment in Westcap on a
consolidated basis. Accordingly, no earnings or losses were reported for
the discontinued operations for the fourth quarter of 1995, as the
investment in Westcap was previously written-off.
(14) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Investment securities: Fair values for investments in debt and equity
securities are based on quoted market prices, where available. For
securities not actively traded, fair values are estimated using values
obtained from various independent pricing services and the Securities
Valuation Office of the National Association of Insurance Commissioners.
In the cases where prices are unavailable from these sources, prices are
estimated by discounting expected future cash flows using a current market
rate applicable to the yield, credit quality, and maturity of the
investments.
Cash and short-term investments: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Mortgage loans: The fair value of performing mortgage loans is estimated
by discounting scheduled cash flows through the scheduled maturities of
the loans, using interest rates currently being offered for similar loans
to borrowers with similar credit ratings. Fair value for significant
nonperforming loans is based on recent internal or external appraisals. If
appraisals are not available, estimated cash flows are discounted using a
rate commensurate with the risk associated with the estimated cash flows.
Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific
borrower information.
Policy loans: The fair value for policy loans is calculated by discounting
estimated cash flows using U.S. Treasury bill rates as of December 31,
1996 and 1995. The estimated cash flows include assumptions as to whether
such loans will be repaid by the policyholders or settled upon payment of
death or surrender benefits on the underlying insurance contracts. As a
result, these assumptions incorporate both Company experience and
mortality assumptions associated with such contracts.
Life interest in Libbie Shearn Moody Trust: The fair value of the life
interest is estimated based on assumptions as to future dividends from the
Trust over the life expectancy of Mr. Robert L. Moody. These estimated
cash flows were discounted at a rate consistent with uncertainties
relating to the amount and timing of future cash distributions. However,
the Company has limited the fair value to the statutory admitted value of
the Trust, as this is the maximum amount to be received by the Company in
the event of Mr. Moody's premature death.
Investment annuity and supplemental contracts: Fair value of the Company's
liabilities for deferred investment annuity contracts is estimated to be
the cash surrender value of each contract. The cash surrender value
represents the policyholder's account balance less applicable surrender
charges. The fair value of liabilities for immediate investment annuity
contracts and supplemental contracts with and without life contingencies
is estimated by discounting estimated cash flows using U.S. Treasury bill
rates as of December 31, 1996 and 1995.
Fair value for the Company's insurance contracts other than investment
contracts is not required to be disclosed. This includes the Company's
traditional and universal life products. However, the fair values of
liabilities under all insurance contracts are taken into consideration in
the Company's overall management of interest rate risk, which minimizes
exposure to changing interest rates through the matching of investment
maturities with amounts due under insurance and investment contracts.
The carrying amounts and fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Carrying Fair Carrying Fair
Value Value Value Value
(In thousands)
<S> <C> <C> <C> <C>
ASSETS
Investments in debt and
equity securities:
Securities held
to maturity $ 1,873,561 1,896,847 1,643,211 1,726,469
Securities
available
for sale 527,627 527,627 600,794 600,794
Cash and short-term
investments 11,358 11,358 10,024 10,024
Mortgage loans 193,311 202,961 191,674 202,512
Policy loans 142,077 154,681 147,923 171,816
Life interest in
Libbie Shearn
Moody Trust 4,922 18,614 5,206 20,561
Assets of discontinued
operations - cash 270 270 5,646 5,646
LIABILITIES
Deferred investment
annuity contracts $ 1,927,220 1,688,417 1,843,793 1,607,360
Immediate investment
annuity and
supplemental contracts 163,444 163,860 137,254 145,644
</TABLE>
Fair value estimates are made at a specific point in time based on
relevant market information and information about the financial
instruments. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists
for a portion of the Company's financial instruments, fair value estimates
are based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
(15) DISCONTINUED BROKERAGE OPERATIONS
(A) Plan to Cease Brokerage Operations and Chapter 11 Bankruptcy Filing
Effective July 17, 1995, The Westcap Corporation (Westcap), a wholly owned
brokerage subsidiary of National Western Life Insurance Company,
discontinued all sales and trading activities in its Houston, Texas,
office. In September, 1995, Westcap approved a plan to close its
remaining sales office in New Jersey and to cease all brokerage
operations. Subsequently, on April 12, 1996, The Westcap Corporation and
its wholly owned subsidiary, Westcap Enterprises, Inc., separately filed
voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code in the United States Bankruptcy Court, Southern District
of Texas, Houston Division. Westcap Enterprises, Inc. is the successor by
merger to Westcap Securities Investment, Inc., Westcap Securities
Management, Inc., and Westcap Securities, L.P., which prior to such merger
were subsidiaries or affiliates of The Westcap Corporation. The
bankruptcy filing is more fully described in Note 9, Commitments and
Contingencies.
As of December 31, 1996 and 1995, Westcap's assets are being carried at
their estimated fair value, and its liabilities include estimated costs to
dispose of assets and estimated future costs to cease operations. These
estimated costs consist primarily of operating and legal expenses. The
preparation of Westcap's 1996 and 1995 financial statements required
assumptions by management that included assumptions regarding the fair
value of assets and expenses to be incurred. In accordance with generally
accepted accounting principles, the assets and liabilities of Westcap have
been reclassified in the accompanying consolidated balance sheets to
separately identify them as assets and liabilities of discontinued
operations. Losses from discontinued brokerage operations have also
been reflected separately from continuing operations of the Company in the
accompanying consolidated financial statements. The 1995 losses from
discontinued operations include estimated future operating losses as well
as estimated costs to cease brokerage operations totaling $6,381,000 and
resulted in the complete write-off of National Western Life Insurance
Company's investment in Westcap on a consolidated basis. Additional
losses from discontinued operations will depend primarily on results of
Westcap bankruptcy proceedings as previously described in Note 9,
Commitments and Contingencies.
(B) Summary Financial Statements and Significant Disclosures
A summary of Westcap's financial statements for the years ended September
30, 1996, 1995, and 1994 is provided below. Westcap's fiscal year-end is
September 30. Although reported in detail below, these assets and
liabilities have been aggregated and reported as assets and liabilities of
discontinued operations in the accompanying financial statements.
Likewise, all revenues and expenses have been netted and reported
separately in the accompanying financial statements as losses from
discontinued operations.
<TABLE>
<CAPTION>
September 30,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Assets:
Cash $ 270 5,646 3,524
Trading securities - - 69,666
Securities purchased
under agreements to resell - - 153,971
Other assets 987 531 4,896
$ 1,257 6,177 232,057
Liabilities and Stockholder's
Equity:
Short-term borrowings $ - - 29,698
Payables to customers
and brokers - - 3,692
Securities sold not
yet purchased - - 87,336
Securities sold under
agreements to repurchase - - 91,781
Other liabilities 2,744 7,430 2,823
Stockholder's equity (deficit) (1,487) (1,253) 16,727
$ 1,257 6,177 232,057
</TABLE>
<TABLE>
<CAPTION>
Years Ended September 30,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Revenues $ 373 5,112 40,208
Expenses 607 22,715 43,144
Net losses $ (234) (17,603) (2,936)
</TABLE>
The Westcap Corporation conducted its brokerage operations through a
limited partnership, Westcap Securities, L.P. (Westcap L.P.). Westcap
L.P. was subject to regulation by the Securities and Exchange Commission.
In anticipation of an Order Instituting Public Administrative Proceedings,
Making Findings and Imposing Remedial Sanctions (Order) being entered
pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of
1934 by the Securities and Exchange Commission (Commission), on February
8, 1996, Westcap L.P. submitted an offer of settlement to the Commission
whereby it consented, without admitting or denying the findings in the
Order, to the entry of an Order of the Commission making findings,
revoking Westcap L.P.'s registration with the Commission, and requiring
payment to the Commission of (i) $445,341 disgorgement, (ii) prejudgment
interest of $83,879, and (iii) civil penalty of $300,000. Such an Order
was entered by the Commission on February 14, 1996. In compliance with
the Order, Westcap L.P. made payment to the Commission of $829,220 on
March 5, 1996.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1996
(In thousands)
<TABLE>
<CAPTION>
Balance
(1) Market Sheet
Type of Investment Cost Value Amount
<S> <C> <C> <C>
Fixed maturity bonds:
Securities held to maturity:
United States government
and government
agencies and authorities $ 34,839 34,830 34,839
States, municipalities,
and political subdivisions 26,735 28,911 26,735
Foreign governments 51,278 51,949 51,278
Public utilities 298,317 301,574 298,317
Corporates 962,757 973,494 962,757
Mortgage-backed 499,635 506,089 499,635
Total securities held
to maturity 1,873,561 1,896,847 1,873,561
Securities available for
sale:
United States government
and government
agencies and authorities 2,957 3,171 3,171
Public utilities 58,703 59,884 59,884
Corporates 113,368 119,373 119,373
Mortgage-backed 316,522 327,580 327,580
Total securities
available for sale 491,550 510,008 510,008
Total fixed maturity bonds 2,365,111 2,406,855 2,383,569
Equity securities:
Securities available for
sale:
Common stocks:
Public utilities 192 272 272
Banks, trust and
insurance companies 195 2,190 2,190
Industrial and
other 86 83 83
Preferred stocks 14,869 15,074 15,074
Total equity securities 15,342 17,619 17,619
Mortgage loans (2) 186,008 180,020
Policy loans 142,077 142,077
Other long-term investments (3) 25,285 22,997
Cash and short-term investments 11,358 11,358
Total investments other than
investments in related parties $ 2,745,181 2,757,640
<FN>
(Continued on next page)
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I, CONTINUED
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1996
Notes to Schedule I
(1) Fixed maturity bonds are shown at amortized cost, mortgage loans are
shown at unpaid principal balances before allowances for possible losses
of $5,988,000, and real estate is stated at cost before allowances for
possible losses of $2,288,000.
(2) Mortgage loans with related parties totaling $13,291,000 have been
excluded.
(3) Real estate acquired by foreclosure included in other long-term
investments is as follows: cost $3,214,000; balance sheet amount
$2,156,000.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1996, 1995, and 1994
(In thousands)
<TABLE>
<CAPTION>
(1) Balance
Balance at Charged to at End
Beginning Costs and (2) (3) of
Description of Period Expenses Reductions Transfers Period
<S> <C> <C> <C> <C> <C>
Valuation accounts
deducted
from applicable
assets:
Allowance for
possible losses
on brokerage
trade receivables:
December 31, 1996 $ - - - - -
December 31, 1995 $ 1,000 - (1,000) - -
December 31, 1994 $ 123 877 - - 1,000
Allowance for
possible losses
on mortgage
loans:
December 31, 1996 $ 5,668 500 (180) - 5,988
December 31, 1995 $ 5,929 - (261) - 5,668
December 31, 1994 $ 6,849 307 (927) (300) 5,929
Allowance for
possible losses
on real estate:
December 31, 1996 $ 2,152 526 (390) - 2,288
December 31, 1995 $ 1,803 882 (533) - 2,152
December 31, 1994 $ 1,556 318 (371) 300 1,803
<FN>
(1) Except for expenses related to brokerage trade receivables, which were
charged to discontinued operations, these amounts were charged to realized
gains and losses on investments.
(2) These amounts were related to charge off of assets against the
allowances.
(3) These amounts were transferred to real estate.
</FN>
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Registrant)
/S/ Robert L. Moody /S/ Ross R. Moody
By: Robert L. Moody By: Ross R. Moody
Chairman of the Board, President,
Chief Executive Officer, Chief Operating Officer,
and Director and Director
/S/ Robert L. Busby, III /S/ Vincent L. Kasch
By: Robert L. Busby, III By: Vincent L. Kasch
Senior Vice President - Vice President -
Chief Administrative Officer, Controller and
Chief Financial Officer Assistant Treasurer
and Treasurer
March 27, 1997
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/S/ Arthur O. Dummer
Arthur O. Dummer, Frances A. Moody,
Director Director
Harry L. Edwards, Russell S. Moody,
Director Director
/S/ E. Douglas McLeod /S/ Louis E. Pauls, Jr.
E. Douglas McLeod, Louis E. Pauls, Jr.,
Director Director
/S/ Charles D. Milos, Jr. /S/ E.J. Pederson
Charles D. Milos, Jr., E. J. Pederson,
Director Director
March 27, 1997
Date
EXHIBIT 10(f)
FIRST AMENDMENT TO THE
NATIONAL WESTERN LIFE INSURANCE COMPANY
NON-QUALIFIED DEFINED BENEFIT PLAN
This First Amendment to the National Western Life Insurance Company
Pension Plan (the Plan) is hereby made and entered into this 17th day of
December, 1996, by National Western Life Insurance Company (the Company).
WITNESSETH:
WHEREAS, the Plan was originally established, effective January 1,
1991; and
WHEREAS, Section 6.2 of the Plan permits the Company to amend the
Plan at any time; and
WHEREAS, the Company desires to change certain provisions of the
Plan;
NOW THEREFORE, the Plan is hereby amended as follows:
1. Section 1.2(r), Committee, is hereby added, effective December 17,
1996:
The individuals appointed by the Board of Directors of the Employer, and
known as the Pension Committee, to manage and direct the operation and
administration of the Plan.
2. Section 6.1, Administration of the Plan, is hereby replaced with the
following, effective December 17, 1996:
The Plan shall be administered by the Committee. The books and records
of the Plan shall be maintained by the Employer at its expense, and no
member of the Board of Directors of the Employer, or any employee of the
Employer acting on its behalf, shall be liable to any person for any
action taken or omitted in connection with the administration of the Plan,
unless attributable to his own fraud or willful misconduct.
IN WITNESS WHEREOF, National Western Life Insurance Company has
executed this First Amendment.
ATTEST: NATIONAL WESTERN LIFE INSURANCE COMPANY
By:_________________________________
Its:_________________________________
Approved by Pension Committee on December 16, 1996
Approved by National Western Life Board of Directors on December 17, 1996
EXHIBIT 10(g)
SECOND AMENDMENT TO THE
NATIONAL WESTERN LIFE INSURANCE COMPANY
NON-QUALIFIED DEFINED BENEFIT PLAN
This Second Amendment to the National Western Life Insurance Company
Non-Qualified Defined Benefit Plan (the Plan) is hereby made and entered
into this 17th day of December, 1996, by National Western Life Insurance
Company (the Company).
WITNESSETH:
WHEREAS, the Plan was originally established effective January 1,
1991; and
WHEREAS, Section 6.2 of the Plan permits the Company to amend the
Plan at anytime; and
WHEREAS, the Company desires to change certain provisions of the
Plan;
NOW THEREFORE, the Plan is hereby amended as follows:
1. Section 1.2(i), Eligible Employee, is hereby replaced with the
following, effective January 1, 1991:
A person employed by the Employer as of December 31, 1990, in the
position of Senior Vice President or above, or a person who has been
designated by the President of the Employer, by name, position, or in any
other manner, as being in the class of persons who are eligible to
participate in the Plan. Such latter designation shall be made in writing
by the President of the Employer. However, no person who is an employee
of the Employer shall be selected as an Eligible Employee except a member
of the select group of management or highly compensated employees of the
Employer, as such term is defined under Section 201 of the Employee
Retirement Income Security Act of 1974, and regulations and rulings
promulgated thereunder by the Department of Labor.
IN WITNESS WHEREOF, National Western Life Insurance Company has
executed this Second Amendment.
ATTEST: National Western Life Insurance Company
By:_______________________________
Its:_______________________________
Approved by Pension Committee on December 16, 1996
Approved by National Western Life Board of Directors on December 17, 1996
EXHIBIT 10(h)
SECOND AMENDMENT TO THE
NATIONAL WESTERN LIFE INSURANCE COMPANY
NON-QUALIFIED DEFERRED COMPENSATION PLAN
This Second Amendment to the National Western Life Insurance Company
Pension Plan (the Plan) is hereby made and entered into this 17th day of
December, 1996, by National Western Life Insurance Company (the Company).
WITNESSETH:
WHEREAS, the Plan was originally established, effective April 1,
1995; and
WHEREAS, Section 6.2 of the Plan permits the Company to amend the
Plan at any time; and
WHEREAS, the Company desires to change certain provisions of the
Plan;
NOW THEREFORE, the Plan is hereby amended as follows:
1. Section 1.2(r), Committee, is hereby replaced with the following,
effective December 17, 1996:
The individuals appointed by the Board of Directors of the Employer, and
known as the Pension Committee, to manage and direct the operation and
administration of the Plan.
2. Section 6.1, Administration of the Plan, is hereby replaced with the
following, effective December 17, 1996:
The Plan shall be administered by the Committee. The books and records
of the Plan shall be maintained by the Employer at its expense, and no
member of the Board of Directors of the Employer, or any employee of the
Employer acting on its behalf, shall be liable to any person for any
action taken or omitted in connection with the administration of the Plan,
unless attributable to his own fraud or willful misconduct.
IN WITNESS WHEREOF, National Western Life Insurance Company has
executed this Second Amendment.
ATTEST: NATIONAL WESTERN LIFE INSURANCE COMPANY
By:_________________________________
Its:_________________________________
Approved by Pension Committee on December 16, 1996
Approved by National Western Life Board of Directors on December 17, 1996
EXHIBIT 10(i)
THIRD AMENDMENT TO THE
NATIONAL WESTERN LIFE INSURANCE COMPANY
NON-QUALIFIED DEFERRED COMPENSATION PLAN
This Third Amendment to the National Western Life Insurance Company
Non-Qualified Deferred Compensation Plan (the Plan) is hereby made and
entered into this 17th day of December, 1996, by National Western Life
Insurance Company (the Company).
WITNESSETH:
WHEREAS, the Plan was originally established effective April 1,
1995; and
WHEREAS, Section 6.2 of the Plan permits the Company to amend the
Plan at anytime; and
WHEREAS, the Company desires to change certain provisions of the
Plan;
NOW THEREFORE, the Plan is hereby amended as follows:
1. Section 3.5, Establishment of Account, is hereby renamed Section 3.6,
Establishment of Account, effective October 1, 1996.
2. Section 3.5, Employer Additional Discretionary Contributions, is
hereby added as follows, effective October 1, 1996:
The Employer may make an additional discretionary contribution each Plan
Quarter. The determination as to which Participant(s) receives the
contribution, the amount of the contribution and the timing of the
contribution is in the sole discretion of the President of the Employer,
determined on a quarterly basis.
IN WITNESS WHEREOF, National Western Life Insurance Company has
executed this Third Amendment.
ATTEST: National Western Life Insurance Company
By:_______________________________
Its:_______________________________
Approved by Pension Committee on December 16, 1996
Approved by National Western Life Board of Directors on December 17, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND> This schedule contains summary financial information extracted from
the National Western Life Insurance Company and subsidiaries consolidated
financial statements and is qualified in its entirety by reference to such
financial statements.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 510,008
<DEBT-CARRYING-VALUE> 1,873,561
<DEBT-MARKET-VALUE> 1,896,547
<EQUITIES> 17,619
<MORTGAGE> 193,311
<REAL-ESTATE> 15,209
<TOTAL-INVEST> 2,770,931
<CASH> 11,358
<RECOVER-REINSURE> 216
<DEFERRED-ACQUISITION> 295,666
<TOTAL-ASSETS> 3,120,829
<POLICY-LOSSES> 2,701,872
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 14,562
<POLICY-HOLDER-FUNDS> 9,841
<NOTES-PAYABLE> 2,716
0
0
<COMMON> 3,491
<OTHER-SE> 349,369
<TOTAL-LIABILITY-AND-EQUITY> 3,120,829
92,577<F1>
<INVESTMENT-INCOME> 214,302
<INVESTMENT-GAINS> 1,612
<OTHER-INCOME> 2,718
<BENEFITS> 184,788<F2>
<UNDERWRITING-AMORTIZATION> 30,361
<UNDERWRITING-OTHER> 25,722
<INCOME-PRETAX> 70,338
<INCOME-TAX> 24,123
<INCOME-CONTINUING> 46,215
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,215
<EPS-PRIMARY> 13.24
<EPS-DILUTED> 13.24
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Consists of $16,611 revenues from traditional contracts subject to FAS 60
accounting treatment and $75,966 revenues from universal life and investment
annuity contracts subject to FAS 97 accounting treatment.
<F2>Consists of $35,354 benefits paid to policyholders, $(2,041) decrease in
reserves on traditional contracts and $151,475 interest on univeral life and
investment annuity contracts.
</FN>
</TABLE>
