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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 2-17039
NATIONAL WESTERN LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
COLORADO 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, 1998, was approximately
$208,478,000.
As of March 10, 1998, the number of shares of Registrant's common stock
outstanding was: Class A - 3,291,738 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 various countries in Central and South
America, the Caribbean, and the Pacific Rim. Such policies are accepted and
issued in the United States. During 1997, the Company recorded approximately
$328 million in premium revenues, universal life, and investment annuity
contract deposits. New life insurance issued during 1997 approximated $1.4
billion and the total amount in force at year-end 1997 was $8.6 billion. As of
December 31, 1997, the Company had total consolidated assets of $3.2 billion.
Competition: The life insurance business is highly competitive and National
Western competes with approximately 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, 1996, the most recent date for which information is
available, National Western ranked 149 in total admitted assets, 200 in net
premiums written, and 236 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, 1997.
There has been an ongoing consolidation of companies within the life insurance
industry in recent years. It appears this consolidation process will continue
as entities acquire other insurance companies, blocks of insurance business,
or even related businesses. The reasons for the consolidations are numerous
and include, among others, strengthening market share, diversifying into other
lines of insurance, improving marketing and distribution channels, and
economies of scale. For whatever reasons, this consolidation trend in the
insurance industry will likely continue to affect competition.
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 237 full-time employees at its
principal executive office. Its insurance operations are conducted primarily
through broker-agents, which numbered 7,904 at December 31, 1997. 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.
A significant portion of the Company's universal life and investment annuity
contracts were sold through three marketing agencies in recent years. Combined
business from these agencies accounted for approximately 21%, 31%, and 34% of
total direct premium revenues and universal life and investment annuity
contract deposits for 1997, 1996, and 1995, respectively.
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 nonqualified annuities. In recent years the majority of the
business written has been nonqualified single premium deferred annuities and
universal life products. Although the Company introduced an equity-indexed
annuity in 1997, no variable life or annuity products are currently offered.
Except for a small employee health plan and a small number of existing
individual accident and health policies, 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,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Investment annuities:
Single premium deferred $ 195,752 234,335 260,478
Flexible premium deferred 32,702 35,813 47,144
Single premium immediate 12,533 3,054 2,349
Total annuities 240,987 273,202 309,971
Universal life insurance 65,862 67,438 68,464
Traditional life and other 21,506 23,135 24,801
Total direct premiums collected $ 328,355 363,775 403,236
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
First year and single premiums:
Investment annuities $ 218,203 243,686 272,219
Life insurance 19,045 20,509 22,419
Total first year and single 237,248 264,195 294,638
Renewal premiums:
Investment annuities 22,784 29,516 37,752
Life insurance 68,323 70,064 70,846
Total renewal 91,107 99,580 108,598
Total direct premiums collected $ 328,355 363,775 403,236
</TABLE>
The underwriting policy of the Company requires 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 1997, 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 Pennsylvania,
California, and Florida accounted for approximately 8%, 7%, and 5%,
respectively. All other states of the United States accounted for 44% of
premium revenues and deposits from direct business. The remaining 18% 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,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
United States domestic market:
Investment annuities $ 239,338 273,057 309,415
Life insurance 31,248 34,029 36,414
Total domestic market 270,586 307,086 345,829
International market:
Investment annuities 1,649 145 556
Life insurance 56,120 56,544 56,851
Total international market 57,769 56,689 57,407
Total direct premiums collected $ 328,355 363,775 403,236
</TABLE>
Approximately 64% of the direct life insurance premiums collected during 1997
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,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Securities held
to maturity 65.2% 67.6% 62.6% 68.5% 79.9%
Securities available
for sale 22.6 19.0 22.9 15.1 1.8
Mortgage loans 6.3 7.0 7.3 8.1 8.4
Policy loans 4.7 5.1 5.6 6.5 6.9
Other investments 1.2 1.3 1.6 1.8 3.0
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>
Invested Net Unrealized
Assets of Net Realized Appreciation
Calendar Insurance Investment Gains (Losses) Increase
Year Operations Income (A) On Investments (Decrease) (B)
(In thousands)
<S> <C> <C> <C> <C>
1997 $ 2,877,340 217,446 (1,588) 3,929
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)
<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 had a significant, negative
impact on the operations of the Company. National Western is anticipating
that its next examination will be conducted in 1998 for the five year period
ended December 31, 1997.
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. 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.
In addition to RBC requirements, insurance companies are also monitored by the
NAIC through its Insurance Regulatory Information System (IRIS). IRIS
consists of two systems, the original IRIS system and the Financial Analysis
and Solvency Tracking System. The original IRIS consists of two phases. The
first is a statistical phase during which key financial ratio results are
generated from the NAIC data base, which contains financial information
obtained from insurers' statutory annual statements. The second, an
analytical phase, is a review of the annual statements and financial ratios by
experienced financial examiners. The ratios of companies are compared against
usual ranges to identify trends or areas requiring additional review or
analysis. All of the Company's ratios for 1997 were within usual ranges.
The RBC regulation and IRIS system developed by the NAIC are examples of its
involvement in the regulatory process. Additionally, 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 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.
Additionally, recent tax legislation has reduced the individual capital gains
tax rate from 28% to 20%. Because many consumers purchase annuities and life
insurance for their tax deferral advantages over other investments or
retirement products, a reduction in the Federal income tax rate for capital
gains could increase the attractiveness of competing products. Accordingly,
sales by the Company, and industry wide, could be negatively affected by these
changes.
There have also been numerous proposals in recent years 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, previously operated as 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. 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 and events subsequent to the
filing are more fully described in Item 3, Legal Proceedings and in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
(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:
1997 $ 312,274 32(A) (32) 312,274
1996 311,209 373(A) (373) 311,209
1995 287,816 5,112(A) (5,693) 287,235
Net earnings
(losses):
1997 $ 42,572 (1,000) - 41,572
1996 46,215 - - 46,215
1995 35,634 (16,350) - 19,284
Identifiable
assets:
1997 $ 3,224,671 892 - 3,225,563
1996 3,119,572 1,257 - 3,120,829
1995 2,952,282 6,177 - 2,958,459
<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. Lease costs and related
operating expenses for office facilities of the Company's subsidiaries are not
significant in relation to the Company's consolidated financial statements.
ITEM 3. LEGAL PROCEEDINGS
Pending Litigation
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 sought 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 was named as a
"controlling person" of the Westcap defendants. Westcap filed Chapter 11
bankruptcy (see below), and City Colleges filed a claim in the bankruptcy
court against Westcap. The claim was tried before the bankruptcy court and in
September, 1997, a $56,173,000 judgment was entered against Westcap favorable
to The City Colleges. Westcap has appealed this decision to the United States
District Court for the Southern District of Texas (Houston Division). While
Westcap is a wholly owned subsidiary of the Company, the Company is not a
party to the bankruptcy or the judgment against Westcap by the bankruptcy
court. The lawsuit against the Company was stayed in September, 1994, pending
resolution of The City Colleges' claim against Westcap. Following the
judgment against Westcap in the bankruptcy court, on December 2, 1997, the
stay was lifted by the United States District Court in Illinois, and The City
Colleges filed an amended complaint seeking to hold the Company liable for the
claim allowed in the bankruptcy court against Westcap under the "control
person" provision of the Texas Securities Act. The suit seeks approximately
$56 million plus fees and costs. The Company filed jurisdictional and
venue motions to have the case transferred to the United States District
Court for the Western District of Texas, which motions were agreed to by the
Plaintiff, and the case is now pending in the United States District Court for
the Western District of Texas. The Company believes it has reasonable and
adequate defenses to the suit. Although the alleged damages, if sustained,
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.
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. As a creditor in the Westcap bankruptcy, the Plaintiff is
represented in the Creditors' Committee settlement negotiations pending
between Westcap, the creditors, and the Company, discussed below. If the
settlement is ultimately approved by Westcap, its creditors, the bankruptcy
court, and the Company, this lawsuit would be dismissed.
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.
As a creditor in the Westcap bankruptcy, the Plaintiff is represented in the
Creditors' Committee settlement negotiations pending between Westcap, the
creditors, and the Company, discussed below. If the settlement is ultimately
approved by Westcap, its creditors, the bankrupcy court, and the Company, this
lawsuit would be dismissed.
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
arose 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 alleged that the Westcap affiliates were
controlled by the Company and Mr. Moody and that they were responsible for the
alleged wrongful acts of the Westcap affiliates in selling the securities to
the Plaintiff. Plaintiff alleged that the Westcap affiliates violated duties
and responsibilities owed to the Plaintiff related to the investment
recommendations and decisions made by Plaintiff, and alleged that the
Plaintiff was financially damaged by such actions of Westcap. The suit is
currently in process of settlement with a payment of $200,000 to be made by
National Western to San Patricio County and with no admission of liability.
In exchange for the payment, National Western and Robert L. Moody will
receive a general release of all claims asserted, including all claims that
have been asserted against Westcap Securities, L.P. or could have been
asserted in another court against Westcap Securities, L.P., and the lawsuit
will be dismissed.
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. As a creditor in the Westcap bankruptcy, the
Plaintiff is represented in the Creditors' Committee settlement negotiations
pending between Westcap, the creditors, and the Company, discussed below. If
the settlement is ultimately approved by Westcap, its creditors, the
bankruptcy court, and the Company, this lawsuit would be dismissed.
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. As a
creditor in the Westcap bankruptcy, the Plaintiff is represented in the
Creditors' Committee settlement negotiations pending between Westcap, the
creditors, and the Company, discussed below. If the settlement is ultimately
approved by Westcap, its creditors, the bankruptcy court, and the Company,
this lawsuit would be dismissed.
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.
National Western Life Insurance Company (the Company) and National Annuity
Programs, Inc. (NAP) have been sued in the District Court of Travis County,
Texas, by a former agent of the Company, eight plaintiffs, and fourteen
intervenors, being present and past annuity policyholders of the Company, and
on behalf of an asserted class of annuity policyholders of the Company, and
alleged that in the sale of certain Company annuities to the plaintiffs and
intervenors the Company and NAP (i) had violated the Texas Deceptive Trade
Practices-Consumer Protection Act, statutes in the Texas Insurance Code, and
certain rules and regulations of the Texas Department of Insurance; (ii)
committed common law fraud; (iii) were negligent; (iv) had breached a duty of
good faith and fair dealing; (v) made negligent misrepresentations; (vi)
committed a civil conspiracy to commit fraud; and (vii) breached policy
contracts. The plaintiffs seek (i) certification of one or more classes; and
(ii) recovery of unspecified actual damages, monies paid by plaintiffs,
attorneys' fees, prejudgment and postjudgment interests and costs, increased
or treble damages, punitive damages, and general relief as awarded by the
Court. NAP was an independent marketing general agency under contract with
the Company that hired and supervised the agents marketing the annuity
products on behalf of the Company. The Company and NAP have answered and
denied liability, and the parties have engaged in extensive discovery.
Plaintiffs'/intervenors' motions to certify classes and class representation
are pending before the Court. NAP and the plaintiffs/intervenors have entered
into a proposed settlement agreement between themselves whereby NAP would
pay a total of $750,000 for a complete release of all alleged liabilities,
which proposed settlement is subject to approval by the Court. While the
Company and the plaintiffs/intervenors have engaged in mediation conferences
and settlement discussions, no settlement has been reached. 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.
On December 31, 1997, National Western Life Insurance Company (National
Western) filed a declaratory judgment action against National Annuity
Programs, Inc. (NAP) and Robert L. Myer (Myer) for construction of a General
Agent Manager Contract and amendments thereto between National Western and
NAP, a declaration that the contract is enforceable, and for an award for
damages. The contract was entered into in 1983 and amended in 1994, by which
NAP was to market insurance and annuity products issued by National Western.
The suit alleges that during the course of the contract NAP violated its terms
and conditions, violated the insurance laws and regulations of the State of
Texas, misrepresented the terms and conditions of National Western's insurance
and annuity products, induced National Western's policyholders to relinquish
or terminate its policies of insurance or annuities, and failed to use
reasonable efforts to conserve its insurance and annuity products. National
Western seeks (i) to withhold, deduct, and/or terminate the payment of agency
commissions under the contract to NAP, which are based on future premiums
received and policies maintained in force, and in 1997 totaled approximately
$4,400,000; (ii) damages from breach of the contract; (iii) recovery of
damages from Robert L. Myer for tortious interference with National Western's
contractual relations with its policyholders; (iv) recovery of damages from
Robert L. Myer for conspiracy to cause NAP to breach its contract with
National Western and to induce its policyholders to terminate their policies
with National Western; and (v) reasonable attorneys' fees, costs, and
expenses. The parties have started discovery proceedings.
Although the alleged damages for the above-described suits would be material
to the Company's consolidated financial statements, 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.
The Westcap Corporation Bankruptcy Proceedings
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 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. The negotiations also include the possible
settlement of claims by certain creditors of Westcap directly filed against
the Company as the "controlling person" of Westcap. 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 would make a $1,000,000 cash infusion to Westcap for operational
expenses incurred during its bankruptcy and that such cash infusion would 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, and the
$1,000,000 contribution described above was reflected as a loss from
discontinued operations in 1997. Any additional losses from discontinued
operations will depend primarily on results of Westcap bankruptcy proceedings
and settlement discussions.
On September 29, 1997, the United States Bankruptcy Court, Southern District
of Texas, Houston, Texas, entered an order approving claims in the amount of
$56,173,000 against The Westcap Corporation and its wholly owned subsidiary,
Westcap Enterprises, Inc. The claims were filed by the Board of Trustees of
Community College District No. 508, County of Cook, State of Illinois (The
City Colleges). The Westcap Corporation and Westcap Enterprises, Inc. have
appealed this order. While The Westcap Corporation is a wholly owned
brokerage subsidiary of National Western Life Insurance Company, National
Western is not a party to the order or the bankruptcy proceeding.
On February 20, 1998, The Westcap Corporation, the Creditors' Committee, and
National Western reported to the bankruptcy court tentative agreements that
could lead to the settlement of all claims of the creditors of Westcap and the
claims of Westcap against National Western, with the exception of the claims
of The City Colleges against National Western. The preliminary agreements are
subject to documentation, notice and disclosure to and approval by the Westcap
creditors, approval by Westcap and National Western and approval and
confirmation by the bankruptcy court. If the plan is ultimately approved and
confirmed, National Western's obligations could total approximately $15
million for complete releases from all Westcap claims against National Western
and creditors' claims against Westcap and National Western, except for the
pending claims asserted by The City Colleges against National Western in
federal court litigation. However, it remains uncertain at this time whether
the tentative agreements will be approved by all the parties, including the
bankruptcy court. As a result, no amounts have been accrued in the Company's
financial statements for potential settlements.
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 1997.
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>
1997: First Quarter $ 91-1/4 79
Second Quarter 91-1/2 81-1/2
Third Quarter 103 85-3/4
Fourth Quarter 107-1/2 93-3/4
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
</TABLE>
(b) Equity Security Holders
The number of stockholders of record on December 31, 1997, was as follows:
<TABLE>
<S> <C>
Class A Common Stock 6,273
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
regulatory requirements for capital. A strong capital position is important
not only for the protection of existing policyholders, but also in the
successful marketing of Company products to new customers.
ITEM 6. SELECTED FINANCIAL DATA
The following five-year financial summary includes comparative amounts taken
from the audited financial statements.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues:
Life and
annuity premiums $ 15,812 16,611 17,390 18,938 18,624
Universal life
and investment
annuity contract
revenues 80,250 75,966 69,783 64,711 67,778
Net investment
income 217,446 214,302 201,816 190,021 180,252
Other income 354 2,718 661 1,462 1,847
Realized gains
(losses)
on investments (1,588) 1,612 (2,415) 1,626 3,206
Total revenues 312,274 311,209 287,235 276,758 271,707
Expenses:
Policyholder
benefits 35,285 33,313 37,336 32,790 34,646
Amortization of
deferred
policy
acquisition
costs 39,934 30,361 33,675 32,131 33,159
Universal life
and investment
annuity contract
interest 145,200 151,475 142,940 129,064 130,875
Other insurance
operating
expenses 27,560 25,722 27,084 29,394 28,959
Total expenses 247,979 240,871 241,035 223,379 227,639
Federal
income taxes 21,723 24,123 10,566 16,207 14,696
Earnings before
cumulative
effect of change
in accounting
principle and
discontinued
operations 42,572 46,215 35,634 37,172 29,372
Cumulative effect
of change in
accounting for
income taxes - - - - 5,520
Earnings (losses)
from discontinued
operations (1,000) - (16,350) (2,936) 21,832
Net earnings $ 41,572 46,215 19,284 34,236 56,724
Diluted Earnings
Per Share: (A)
Earnings before
cumulative
effect of change
in accounting
principle and
discontinued
operations $ 12.09 13.17 10.20 10.66 8.44
Cumulative effect
of change in
accounting for
income taxes - - - - 1.58
Earnings (losses)
from discontinued
operations (0.28) - (4.68) (0.84) 6.27
Net earnings $ 11.81 13.17 5.52 9.82 16.29
Total assets $3,225,563 3,120,829 2,958,459 2,915,054 2,941,051
Total liabilities $2,824,700 2,767,969 2,646,472 2,639,920 2,698,333
Stockholders'
equity $ 400,863 352,860 311,987 275,134 242,718
<FN>
Note to Table:
(A) - Amounts have been restated in accordance with the implementation of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
</FN>
</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 various Central and South American, Caribbean, and
Pacific Rim countries. 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,
1997 1996 1995
<S> <C> <C> <C>
United States domestic market:
Investment annuities 72.9 % 75.1 % 76.7 %
Life insurance 9.5 9.3 9.1
Total domestic market 82.4 84.4 85.8
International market:
Investment annuities 0.5 0.1 0.1
Life insurance 17.1 15.5 14.1
Total international market 17.6 15.6 14.2
Total direct premiums collected 100.0 % 100.0 % 100.0 %
</TABLE>
Insurance Operations - Domestic Division
The Company's Domestic Division concentrates marketing efforts on federal
employees, seniors, and specific employee groups in private industry, as well
as individual sales. The products marketed are annuities, universal life
insurance, and traditional life insurance, which includes both term and whole
life products. The majority of products sold are the Company's annuities,
which include single and flexible premium deferred annuities, single premium
immediate annuities, and the newly introduced equity-indexed annuity. Most of
these annuities can be sold as tax qualified or nonqualified products.
National Western markets and distributes its domestic products primarily
through independent marketing organizations (IMOs). These IMOs assist the
Company in recruiting, contracting, and managing agents. The Company
currently has over 30 IMOs contracted for sales of life and annuity products.
Current marketing plans are to increase the number of IMOs under contract by
adding qualified, select organizations each year that are able to meet minimum
production standards.
Insurance Operations - International Division
The Company's International Division focuses marketing efforts on foreign
nationals in upper socioeconomic classes with substantial financial resources.
Insurance sales are primarily in countries in Central and South America, the
Caribbean, and increasingly the Pacific Rim. Marketing to numerous countries
in these different regions provides diversification that helps to minimize
large fluctuations in sales that can occur due to various economic, political,
and competitive pressures that may occur from one country to another.
Products sold in the international market are almost entirely universal life
and traditional life insurance products. However, certain annuity and
investment contracts are also available in this market. The Company minimizes
exposure to foreign currency risks, as almost all foreign policies require
payment of premiums and claims in United States dollars.
The International Division's sales production is from broker-agents, many of
whom have been selling National Western products for 20 or more years.
Currently marketing plans include expanding sales networks in specifically
targeted South American and Pacific Rim countries which have higher growth
potential than other countries. These plans also include the introduction of
two new equity-indexed investment products similar to the Domestic Division's
new equity-indexed annuity. While National Western increases its sales
efforts in the international arena, the Company remains committed to its
conservative, yet competitive, underwriting practices which historically have
resulted in claims experience similar to that in the United States.
Other
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.
During 1997 the Company formed two new subsidiaries, NWL Services, Inc. and
NWL Financial, Inc. The new wholly owned subsidiaries were incorporated
primarily for investment related activities.
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, 1997, approximately 25% 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, 1997
and 1996. The Company emphasizes investment grade debt securities, with
smaller holdings in mortgage loans and real estate.
<TABLE>
<CAPTION>
Percent of Investments
1997 1996
<S> <C> <C>
Debt securities 87.3% 86.0%
Mortgage loans 6.3 7.0
Policy loans 4.7 5.1
Equity securities 0.5 0.6
Real estate 0.5 0.6
Other 0.7 0.7
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 corporate,
mortgage-backed securities, and public utilities. Investments in
mortgage-backed securities include U.S. government agency and private issue
pass-through securities and collateralized mortgage obligations (CMOs). As of
December 31, 1997, 1996, and 1995, the Company's debt securities portfolio
consisted of the following mix of securities based on amortized cost:
<TABLE>
<CAPTION>
Percent of Debt Securities
1997 1996 1995
<S> <C> <C> <C>
Corporate 51.1% 45.5% 40.3%
Mortgage-backed securities 27.9 33.5 39.5
Public utilities 13.3 15.1 12.9
Asset-backed securities 3.5 1.0 1.1
Foreign governments 2.0 2.2 2.2
U.S. government 1.1 1.6 1.8
States & political subdivisions 1.1 1.1 2.2
Totals 100.0% 100.0% 100.0%
</TABLE>
The amortized cost and estimated fair values of investments in debt securities
at December 31, 1997, 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 $ 9,426 9,286
Due after one year through five years 193,651 200,697
Due after five years through ten years 1,207,135 1,247,506
Due after ten years 292,903 318,297
1,703,115 1,775,786
Mortgage and asset-backed securities 779,691 812,540
Totals $ 2,482,806 2,588,326
</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 continues to reduce its exposure to prepayment and
extension risks by lowering its holdings of mortgage-backed securities. This
strategy began in 1994 when mortgage-backed securities totaled 47.6% of the
entire portfolio, but now total only 27.9% at December 31, 1997. The majority
of this reduction has been achieved by shifting investments into corporate
securities, as corporate holdings have increased from 32.5% in 1994 to 51.1%
in 1997. Also, most of these additions have been noncallable 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
has substantially reduced both prepayment and extension risks by investing
primarily in collateralized mortgage obligations which have more predictable
cash flow patterns than pass-through securities. 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, 1997, CMOs represent approximately 90% of the Company's
mortgage-backed securities, and PAC I CMOs account for approximately 90% of
this CMO portfolio. The CMOs in the Company's portfolio have been modeled
and subjected to detailed, comprehensive analysis by the Company's investment
staff. The overall structure of the CMO as well as the individual tranche
being considered for purchase have been evaluated to ensure that the security
fits 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.
Thorough credit analysis is performed on potential corporate investments
including examination of a Company's credit and industry outlook, financial
ratios and trends, and event risks. 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, 1997 $ 41,149 41,969 1.4%
December 31, 1996 $ 38,696 38,784 1.4%
December 31, 1995 $ 14,244 14,567 0.5%
</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, 1997, no securities were in default and on nonaccrual
status, and at December 31, 1996, securities totaling only $2,945,000 were in
such status.
The Company's commitment to high quality investments in debt securities is
also reflected in the portfolio's high average credit rating. In the table
below, investments in debt securities are classified according to credit
ratings by Standard and Poor's Corporation (S&P), a nationally recognized
statistical rating organization (NRSRO). If securities were not rated by S&P,
the equivalent rating of another NRSRO or the National Association of
Insurance Commissioners was used.
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
AAA and U.S. government 33.3% 36.8%
AA 6.5 4.6
A 33.1 32.5
BBB 25.4 24.3
BB and other below investment grade 1.7 1.7
Not rated - 0.1
100.0% 100.0%
</TABLE>
At December 31, 1997, 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 $ 1,949,876 1,874,643 75,233
Securities available
for sale:
Debt securities 638,450 608,163 30,287
Equity securities 13,286 10,111 3,175
Totals $ 2,601,612 2,492,917 108,695
</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 $108,695,000 on the securities portfolio at December 31, 1997, 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
tables below.
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Fair value $ 2,588,326 2,406,855 2,301,403
Amortized cost $ 2,482,806 2,365,111 2,179,939
Fair value as a percentage
of amortized cost 104.3% 101.8% 105.6%
Ten-year Treasury Bond -
change in
yield for the year (0.7)% 0.9% (2.0)%
</TABLE>
<TABLE>
<CAPTION>
Gross Unrealized Gains Increase in
At At Unrealized
December 31, December 31, Gains
1997 1996 During 1997
(In thousands)
<S> <C> <C> <C>
Securities held to maturity:
Debt securities $ 75,233 23,286 51,947
Securities available
for sale:
Debt securities 30,287 18,458 11,829
Equity securities 3,175 2,277 898
Totals $ 108,695 44,021 64,674
</TABLE>
As reflected above, changes in interest rates of 100 basis points or even less
can 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 as several of these
interests in real estate joint ventures were sold. The sales resulted in
additional investment income totaling approximately $2,300,000 in 1996. No
real estate joint ventures were sold in 1997.
Portfolio Analysis
The Company held net investments in mortgage loans totaling $181,878,000 and
$193,311,000, or 6.3% and 7.0% of total invested assets, at December 31, 1997
and 1996. 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, 1997 and 1996, was as
follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
West South Central 54.9% 51.4%
South Atlantic 11.4 8.7
Mountain 11.3 15.0
Pacific 8.0 11.2
East South Central 5.2 4.0
East North Central 3.9 3.8
All other 5.3 5.9
Totals 100.0% 100.0%
</TABLE>
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Retail 62.2% 64.4%
Office 16.6 18.9
Hotel/Motel 7.9 7.8
Apartment 4.1 3.9
Land/Lots 3.3 0.4
Nursing Homes 3.2 3.2
All other 2.7 1.4
Totals 100.0% 100.0%
</TABLE>
As of December 31, 1997, the allowance for possible losses on mortgage loans
was $4,640,000. Additions to the allowance totaling $1,133,000 and $500,000
were recognized as realized losses on investments in the Company's 1997 and
1996 financial statements, respectively. 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
nonaccrual status, thus recognizing no interest income on the loans. At
December 31, 1997, the Company had no mortage loan principal balances on
nonaccrual status, while at December 31, 1996, the Company had only $36,000 of
mortgage loan principal balances on nonaccrual status. In addition to the
nonaccrual loans, the Company had mortgage loan principal balances with
restructured terms totaling approximately $12,463,000 and $12,719,000 at
December 31, 1997 and 1996, respectively. For the years ended December 31,
1997 and 1996, the reductions in interest income due to nonaccrual and
restructured mortgage loans were not significant.
The contractual maturities of mortgage loans at December 31, 1997, are as
follows:
<TABLE>
<CAPTION>
Principal
Due
(In thousands)
<S> <C>
Due in one year or less $ 17,198
Due after one year through five years 82,592
Due after five years through ten years 82,573
Due after ten years through fifteen years 5,664
Due after fifteen years 244
Total $ 188,271
</TABLE>
The Company owns real estate that was acquired through foreclosure and through
direct investment totaling approximately $15,027,000 and $15,209,000 at
December 31, 1997 and 1996, 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 $716,000 and $638,000
for the years ended December 31, 1997 and 1996, 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. The Company makes repairs and capital improvements to keep the
properties in good condition and will continue this maintenance as needed.
Realized losses recognized due to declines in values of properties totaled
$46,000 and $526,000 for the years ended December 31, 1997 and 1996,
respectively.
RESULTS OF OPERATIONS
Summary of Consolidated Operations
A summary of operating results, net of taxes, for the years ended December 31,
1997, 1996, and 1995 is provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
(In thousands except per share data)
<S> <C> <C> <C>
Revenues:
Insurance revenues
excluding realized
gains (losses)
on investments $ 313,862 309,597 289,650
Realized gains
(losses) on investments (1,588) 1,612 (2,415)
Total revenues $ 312,274 311,209 287,235
Earnings:
Earnings from
insurance operations $ 43,604 45,167 37,203
Losses from discontinued
brokerage operations (1,000) - (16,350)
Net realized gains
(losses) on investments (1,032) 1,048 (1,569)
Net earnings $ 41,572 46,215 19,284
Basic Earnings Per Share:
Earnings from
insurance operations $ 12.49 12.94 10.67
Losses from discontinued
brokerage operations (0.29) - (4.69)
Net realized gains
(losses) on investments (0.29) 0.30 (0.45)
Net earnings $ 11.91 13.24 5.53
Diluted Earnings Per Share:
Earnings from
insurance operations $ 12.38 12.87 10.65
Losses from discontinued
brokerage operations (0.28) - (4.68)
Net realized gains
(losses) on investments (0.29) 0.30 (0.45)
Net earnings $ 11.81 13.17 5.52
</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: For the year ended December 31, 1997, the
Company recognized earnings from insurance operations totaling $43,604,000, a
decrease of 3.5% from 1996 earnings. The lower earnings in 1997 were
primarily due to higher life insurance benefit claims and amortization of
deferred policy acquisition costs. Deferred policy acquisitions costs, which
are primarily capitalized agents' commissions, are amortized in direct
relation to anticipated future gross profits on applicable life and annuity
business. Increases in anticipated future gross profits resulted in
retrospective adjustments to deferred policy acquisition costs, which lowered
the amortization in 1996 relative to 1997 amounts. Also, other income in 1997
declined $1.5 million, net of taxes, as 1996 included nonrecurring income
primarily due to litigation related recoveries.
The Company recognized record earnings from insurance operations in 1996
totaling $45,167,000, 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, amortization
of deferred policy acquisition costs, and state guaranty fund assessments.
Earnings for 1995 include a $5.7 million tax benefit resulting from the
Company's subsidiary brokerage losses. 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 nontraditional 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 nontraditional 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
$69.8 million in 1995 to $80.3 million in 1997. More specifically, cost of
insurance, policy administration fees, and other related revenues have
steadily increased each year due to continued sales of nontraditional
products which continue to increase the Company's policies in force.
Although policy surrenders increased again in 1997 from 1996 and 1995 levels,
surrender charge revenues actually declined in 1997 primarily due to changes
in the types of surrenders. Life insurance surrenders increased only slightly
in 1997 over 1996 amounts, while single-tier annuities increased significantly
compared to declines in surrenders of two-tier annuities. As a result,
because single-tier annuities typically have lower surrender charges than two-
tier annuities, surrender charge revenues declined in 1997. The increase in
these revenues in 1996 from 1995 was due to higher surrenders coupled with a
higher ratio of two-tier annuity surrenders in 1996.
Policy fees and other revenues consist primarily of policy administration fee
charges on universal life products and recognition of deferred revenues
relating to immediate annuities. The significant increase in these revenues
in 1997 is primarily due to increases in deferred revenues on immediate
annuities. As the Company's deferred annuities in force continue to increase,
so do the immediate annuities as policyholders annuitize their policies.
Annuitizations result in transfers of policies from deferred to immediate or
pay-out status. The deferred revenues related to the immediate annuities are
amortized into income during the payout period. A comparative detail of the
components of universal life and investment annuity contract revenues is
provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Surrender charges:
Two-tier annuities $ 19,941 22,679 20,302
Universal life insurance 8,829 8,820 8,253
Single-tier annuities 5,178 3,442 2,110
Total surrender charges 33,948 34,941 30,665
Cost of insurance revenues 34,777 32,266 30,378
Policy fees and other revenues 11,525 8,759 8,740
Totals $ 80,250 75,966 69,783
</TABLE>
Actual universal life and investment annuity deposits collected for the years
ended December 31, 1997, 1996, and 1995 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,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Investment annuities:
First year and
single premiums $ 218,203 243,686 272,219
Renewal premiums 22,784 29,516 37,752
Universal life insurance:
First year and
single premiums 17,341 18,611 19,850
Renewal premiums 48,521 48,827 48,614
Totals $ 306,849 340,640 378,435
</TABLE>
Annuities sold include flexible premium deferred annuities, single premium
deferred annuities, and single premium immediate annuities. These products
can be tax qualified or nonqualified annuities. In recent years the majority
of annuities sold have been nonqualified single premium deferred annuities.
The Company also continues to collect additional premiums on existing two-tier
annuities, as a large portion of the two-tier block of business were flexible
premium annuities on which renewal premiums continue to be collected.
Subsequent to discontinuing two-tier annuity sales in 1992, the Company
developed new annuity products and diversified its distribution system by
contracting new marketing organizations with extensive experience, financial
resources, and success in marketing life and annuity products. The new
products and new marketing organizations resulted in significant increases in
annuity production in 1994 and 1995. However, annuity production slowed in
1996 and has continued to decrease in 1997, but sales still continue to be
higher under this more diversified distribution system.
In efforts to increase annuity production again, the Company has further
diversified its annuity products offered to customers by introducing an
equity-indexed annuity in late 1997. This product is a flexible premium
deferred annuity which combines the features associated with traditional fixed
annuities, with the option to have interest rates that are linked in part to
an equity index, the S&P 500 Composite Stock Price Index. This new annuity
is a long-term contract designed as a planning vehicle for retirement
security. The Company anticipates that this product will be attractive to
customers, as it has guaranteed minimum interest rates, coupled with the
potential for significantly higher returns based on an equity index component.
Also, because the Company does not offer variable products or mutual funds,
this new product provides a key equity-based alternative to the Company's
existing fixed annuity products.
The Company has implemented an investment hedging program to offset the
potential higher returns required to be paid on these products. Specifically,
the Company purchases index options from highly rated banks and brokerage
firms. These index options act as hedges to match closely the returns based on
the S&P 500 Composite Stock Price Index which may be paid to policyholders. As
the equity-indexed annuity was just recently introduced, sales of this product
totaled only $6 million in 1997.
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 economic and competitive pressures in the Central and
South American market, which has resulted in relatively flat insurance
production over the past few years. 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 these
pressures with continued strong production and successful marketing efforts.
While international life insurance production remains consistent, the
Company's goal is to increase sales in this market. To accomplish this goal,
the Company has continued to modify its market, distribution, and product
strategies. The Company's plans for international products include the
development of two new equity-indexed investment products similar to the
equity-indexed annuity developed for the domestic market. The new products
will be targeted primarily to specific South American countries for pension
and retirement planning needs. The Company also plans to modify the current
portfolio of international universal life products to better meet the needs in
expanded market niches. For example, new life insurance products will be
developed for large policy cases and with low minimum premiums specifically
for business cases.
The international marketing and distribution strategy will include efforts to
expand broker relationships and sales networks in countries that have higher
growth potential than others. This will also include increased marketing
efforts in the Pacific Rim. Marketing plans also include increased broker
training on the Company's new and existing products.
Net Investment Income: A detail of net investment income is provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Investment income:
Debt securities $ 184,870 176,825 165,879
Mortgage loans 18,659 19,851 19,644
Policy loans 9,764 10,645 11,018
Other investment income 6,760 10,082 7,764
Total investment income 220,053 217,403 204,305
Investment expenses 2,607 3,101 2,489
Net investment income $ 217,446 214,302 201,816
</TABLE>
Net investment income during 1997 increased only 1.5% from 1996, while
invested assets increased 3.8%. The lower investment income growth is
attributable to several factors. Market interest rates have continued to
decline, which has affected yields on purchases of new debt securities.
Mortgage loans continue to decline as a percentage of the investment portfolio
and in actual amounts from previous years. Mortgage loans have typically had
significantly higher yields than investments in debt securities.
Additionally, investment income in 1996 included significantly higher returns
from real estate joint ventures than in 1997.
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.
An analysis of net investment income also requires a review of market interest
rates. 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. However, interest rates declined again in 1997
from 1996 rates. Detailed below is the Company's investment performance for
1997, 1996, and 1995, and 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. Yields in 1997 were also affected by the change in the
mix of the investment portfolio and by lower returns from real estate joint
ventures as previously described above.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Net investment income $ 217,446 214,302 201,816
Average invested assets,
at amortized cost $ 2,799,149 2,652,232 2,460,571
Yield on average
invested assets 7.77% 8.08% 8.20%
</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 included in 1996 is other income totaling
$1.3 million relating to litigation involving an independent marketing
organization. The litigation is more fully described in Item 3, Legal
Proceedings.
Realized Gains and Losses on Investments: The Company realized losses of $1.6
million in 1997 compared to realized gains of $1.6 million in 1996 and losses
of $2.4 million in 1995. The losses in 1997 were primarily from net losses on
debt securities totaling $1.2 million and writedowns on real estate and
mortgage loans totaling $1.2 million, primarily related to a single
foreclosure. 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 1997, 1996, and 1995 are net of writedowns on real
estate and mortgage loans totaling $1,179,000, $1,026,000, and $882,000,
respectively.
Life and Other Policy Benefits: Expenses in 1997 and 1995 were significantly
higher at $37.4 million and $39.8 million, respectively, than expenses in 1996
which totaled only $35.4 million. The significant fluctuation in expenses is
due to higher life insurance benefit claims in 1997 and 1995, along with
higher policy surrenders on traditional insurance products in 1995. Mortality
claims experience fluctuates from period to period, and such deviations are
not uncommon in the life insurance industry. Over extended periods of time,
higher claims experience tends to be offset by periods of lower claims
experience. Also, as the Company's insurance in force continues to grow,
increases in life insurance claims are to be expected. However, the Company
utilizes reinsurance to help minimize its exposure to adverse mortality
experience. The Company's general policy is to reinsure amounts in excess of
$200,000 on the life of any one individual. A comparative detail of life and
other policy benefits is provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Life insurance benefit claims $ 24,199 21,491 24,565
Surrenders of traditional products 11,316 11,925 12,630
Other policy benefits 1,846 1,938 2,628
Totals $ 37,361 35,354 39,823
</TABLE>
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 1997, 1996, and 1995 was
$39.9 million, $30.4 million, and $33.7 million, respectively. Increases in
anticipated future gross profits resulted in retrospective adjustments to
deferred policy acquisition costs which lowered the amortization in 1996
relative to 1997 and 1995 amounts. Additionally, an increase in policy
surrenders of 24% since 1995 contributed to the higher amortization in 1997.
Universal Life and Investment Annuity Contract Interest: 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 declined since 1995,
which is consistent with declines in market interest rates. As market
interest rates fluctuate, the Company's credited interest rates are often
adjusted accordingly, while also taking into consideration other factors as
described above. Average credited rates for 1997, 1996, and 1995 were 5.68%,
6.15%, and 6.19%, respectively. The declines in average credited rates over
the past three years is also consistent with the Company's lower yields on
average invested assets. The difference between yields earned over credited
rates, often referred to as the interest spread, has remained relatively
consistent at approximately 2% in 1997, 1996, and 1995.
Other Insurance Operating Expenses: These expenses totaled $27.6 million,
$25.7 million, and $27.1 million for 1997, 1996, and 1995, respectively.
The increase in expenses in 1997 is attributable to several items. Salaries
expense increased during 1997 primarily due to cost of living type increases
and additions of domestic marketing personnel. Legal fees were higher due to
litigation related expenses, and the Company increased allowances for
uncollectible agents' balances.
The significant decline in expenses in 1996 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 $952,000,
$1,146,000, and $2,371,000 for the years ended December 31, 1997, 1996, and
1995, respectively.
Discontinued Brokerage Operations
As previously reported, National Western Life Insurance Company's brokerage
subsidiary, The Westcap Corporation, is currently in reorganization under
Chapter 11 bankruptcy. Declines in both sales revenues and earnings were
principal reasons for ceasing brokerage operations in 1995. 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
characterized 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. As a
result of the discontinued operations and subsequent bankruptcy filing,
Westcap's assets are being carried at their estimated fair value, and its
liabilities include estimated costs related to ceasing 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.
As a result of brokerage losses and the resulting bankruptcy, National
Western's investment in Westcap was completely written off during 1995.
However, a $1,000,000 cash infusion was made to Westcap on March 18, 1997, for
operational expenses incurred during its bankruptcy. This contribution was
reflected as a loss from discontinued operations in the first quarter of 1997.
Losses from the discontinued brokerage operations have been reflected
separately from continuing operations of the Company in the accompanying
consolidated financial statements. Any additional losses from discontinued
operations will depend primarily on results of Westcap bankruptcy proceedings
and settlement discussions. A summary of net earnings and losses from
brokerage operations since 1993 is provided below.
<TABLE>
<CAPTION>
Amounts in Per Diluted
Thousands Share
<S> <C> <C>
Years ended December 31:
1997 $ (1,000) $ (0.28)
1996 - -
1995 (16,350) (4.68)
1994 (2,936) (0.84)
1993 21,832 6.27
</TABLE>
On September 29, 1997, the United States Bankruptcy Court, Southern District
of Texas, Houston, Texas, entered an order approving claims in the amount of
$56,173,000 against The Westcap Corporation and its wholly owned subsidiary,
Westcap Enterprises, Inc. The claims were filed by the Board of Trustees of
Community College District No. 508, County of Cook, State of Illinois (The
City Colleges). The Westcap Corporation and Westcap Enterprises, Inc. have
appealed this order. While The Westcap Corporation is a wholly owned
brokerage subsidiary of National Western Life Insurance Company, National
Western is not a party to the order or the bankruptcy proceeding.
On February 20, 1998, The Westcap Corporation, the Creditors' Committee, and
National Western reported to the bankruptcy court tentative agreements that
could lead to the settlement of all claims of the creditors of Westcap and the
claims of Westcap against National Western, with the exception of the claims
of The City Colleges against National Western. The preliminary agreements are
subject to documentation, notice and disclosure to and approval by the Westcap
creditors, approval by Westcap and National Western, and approval and
confirmation by the bankruptcy court. If the plan is ultimately approved and
confirmed, National Western's obligations could total approximately $15
million for complete releases from all Westcap claims against National Western
and creditors' claims against Westcap and National Western, except for the
pending claims asserted by The City Colleges against National Western in
federal court litigation. However, it remains uncertain at this time whether
the tentative agreements will be approved by all the parties, including the
bankruptcy court. As a result, no amounts have been accrued in the Company's
financial statements for potential settlements.
Consolidated Federal Income Taxes
Federal Income Taxes: Federal income taxes for 1997 and 1996 reflect effective
tax rates of 33.8% and 34.3%, respectively, which are consistent with the
expected federal 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.
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 $144 million, $145 million, and $99 million in 1997, 1996, and 1995,
respectively. Lower earnings from brokerage operations was the primary reason
for the lower cash flows in 1995. 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.
However, these operations incurred net cash outflows in 1997 totaling $51
million. The higher cash flows in 1995 were due to increased annuity
production. The reduction in cash flows in 1997 and 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 $144 million, $117 million, and $69 million in 1997,
1996, and 1995, respectively. The Company again expects significant cash
flows from these sources in 1998 at levels similar to the past two years.
Capital Resources
The Company relies on stockholders' equity for its capital resources, as there
has been no long-term debt outstanding in 1997 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 1998.
Stockholders' equity totaled $401 million at December 31, 1997, reflecting an
increase of $48 million from 1996. The increase in capital is primarily from
net earnings of $42 million. Net unrealized gains on investment securities
totaling $3.9 million and a foreign currency translation adjustment of $2.5
million also contributed to the rise in stockholder's equity. Book value per
share at December 31, 1997, was $114.80, reflecting a 13.6% increase for the
year.
CHANGES IN ACCOUNTING PRINCIPLES
Comprehensive Income
In June, 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial statement
and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position.
Prior to issuance of SFAS No. 130, some changes in equity were displayed in
the income statement, which reports the results of operations, while other
changes were included directly in balances within a separate component of
equity in the statement of financial position. SFAS No. 130 will affect the
Company's reporting presentation of certain items such as foreign currency
translation adjustments and unrealized gains and losses on investment
securities. These items will now be a component of other comprehensive
income. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997, and reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company will implement
this statement in the first quarter of 1998.
Segment Reporting
In June, 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers.
SFAS No. 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments, such as
segment profit or loss, certain specific revenue and expense items, and
segment assets. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated regularly
by the chief operating decision maker in deciding how to allocate resources
and in assessing performance.
Although the Company currently reports certain information about its operating
segments, products, geographical distribution of business, and major
customers, this new standard will require expanded disclosures related to
these items. The Company anticipates that the expanded disclosures will
include additional information about its life insurance and annuity products
as well as its domestic and international operations. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company will implement this statement in its December 31, 1998,
financial statements.
Insurance Related Assessments
In December, 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-3, which provides guidance on accounting
by insurance and other enterprises for assessments related to insurance
activities. The SOP provides: (1) guidance for determining when an entity
should recognize a liability for guaranty fund and other insurance related
assessments, (2) guidance on how to measure the liability, including
discounting of the liability if the amount and timing of the cash payments are
fixed or reliably determinable, (3) guidance on when an asset may be
recognized for a portion or all of the assessment liability or paid assessment
that can be recovered through premium tax offsets or policy surcharges, and
(4) requirements for disclosure of certain information. The Company
anticipates that this SOP will not have a significant effect on its reporting
of liabilities for guaranty fund assessments, as the Company is currently
applying accounting procedures similar to those in the new statement. SOP 97-
3 is effective for financial statements for fiscal years beginning after
December 15, 1998. The Company currently expects to implement the SOP in the
first quarter of 1999.
Pensions and Other Postretirement Benefits
In February, 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pension and Other Postretirement Benefits." This statement revises employers'
disclosures about pension and other postretirement benefit plans, but does not
change the measurement or recognition of those plans. SFAS No. 132
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain less useful disclosures. The new
statement also suggests combined formats for presentation of pension and other
postretirement benefit disclosures.
The new statement will require changes and enhancements to certain pension
related disclosures of the Company, primarily related to changes in plan
assets. Other aspects of the statement will have no effect as the Company
provides no significant other postretirement benefits to retirees. SFAS No.
132 is effective for fiscal years beginning after December 15, 1997. The
Company will implement this statement in its December 31, 1998, financial
statements.
REGULATORY AND OTHER ISSUES
Actuarial Guideline 33
In December, 1995, the National Association of Insurance Commissioners (NAIC)
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.
Subsequently, Actuarial Guideline 33 has undergone a review by the NAIC to
clarify certain aspects of the guideline. This review resulted in a new
interpretation of the guideline which becomes effective after year-end 1997.
The Company has also received approval from the Division for a phase-in of
this new interpretation. The effect of these two phase-in adjustments will
not have a material effect on the Company's statutory capital and surplus
position. Also, Actuarial Guideline 33 and the related phase-in adjustments
do 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) 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 statutory laws prohibiting public dissemination of certain 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.
Year 2000 Issues
The Year 2000 issue refers to some computer systems' inability to recognize
"00" in the date field as the year 2000. As a result, some computer systems
may be unable to process date sensitive data accurately beyond the year 1999.
Because of the potential financial and operational problems this could
present, the Company has conducted a review of its computer systems to
identify systems that could be affected by the "Year 2000" issue. The Company
is primarily utilizing its own resources to correct, reprogram, and test
internally developed and maintained systems. Computer systems purchased from
software developers are also being reviewed for "Year 2000" compliance. These
systems are either already "Year 2000" compliant or the software developers
are in the process of completing the required programing changes.
Additionally, the Company is reviewing possible implications from its major
service providers, which include investment trust, banking, and telephone
services. The Company does not anticipate significant problems from these
services related to "Year 2000" issues.
The Company has reviewed potential costs to modify its existing systems, and
such costs are not expected to exceed $200,000. A significant amount of
any such costs will not be incremental costs to the Company, as internal
information technology resources are primarily being used and will continue
to be utilized and reallocated as needed. Also, for externally developed
systems under licensing contracts, costs are primarily borne by the software
developer.
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, 1998, is furnished with respect to
each director. All terms expire in June of 1998.
<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 1963 62
(1) (3) (4) (5) and Chief Executive
Officer of the Company;
Investments, Galveston, Texas
Ross R. Moody President and Chief Operating 1981 35
(1) (3) Officer of the
Company, Austin, Texas
Arthur O. Dummer President, The Donner Company 1980 64
(1) (2) (3) Salt Lake City, Utah
Harry L. Edwards Retired; Former President 1969 76
and Chief Operating Officer
of the Company, Austin, Texas
E. Douglas McLeod Director of Development, Moody 1979 56
(4) Foundation, Galveston, Texas
Charles D. Milos, Jr. Senior Vice President of 1981 52
(1) (3) the Company, Galveston, Texas
Frances A. Moody Executive Director, Center 1990 28
(4) for Non-profit
Management, The Moody Foundation,
Dallas, Texas, 1997 - present;
Investments, Dallas, Texas, 1992 -
1997
Russell S. Moody Investments, Austin, Texas 1988 36
(4)
Louis E. Pauls, Jr. President, Louis Pauls & Company; 1971 62
(2) Investments, Galveston, Texas
E. J. Pederson Executive Vice President, 1992 50
(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, 1998.
<TABLE>
<CAPTION>
Name of Officer Age Position (Year elected to position)
<S> <C> <S>
Robert L. Moody 62 Chairman of the Board and Chief Executive
Officer (1963-1968, 1971-1980, 1981), Director
Ross R. Moody 35 President and Chief Operating
Officer (1992), Director
Robert L. Busby, III 60 Senior Vice President -
Chief Administrative Officer,
Chief Financial Officer and Treasurer (1992)
Charles P. Baley 59 Senior Vice President -
Information Services (1990)
Richard M. Edwards 45 Senior Vice President -
International Marketing (1990)
Paul D. Facey 46 Senior Vice President - Chief Actuary (1992)
Charles D. Milos, Jr. 52 Senior Vice President -
Investment Analyst (1990), Director
Arthur W. Pickering 56 Senior Vice President - Domestic Marketing (1994)
Patricia L. Scheuer 46 Senior Vice President -
Chief Investment Officer (1992)
Robert J. Antonowich 51 Vice President - Marketing (1995)
Robert B. Carlton 40 Vice President - Marketing (1997)
Carol Jackson 62 Vice President - Human Resources (1990)
Vincent L. Kasch 36 Vice President - Controller
and Assistant Treasurer (1992)
James A. Kincl 68 Vice President - Salary Savings (1986)
Doris Kruse 52 Vice President - Policy Benefits (1990)
Paul G. McGillivray 44 Vice President - Marketing (1998)
James R. Naiser 55 Vice President - Systems Development (1984)
James P. Payne 53 Vice President - Secretary (1994)
Al R. Steger 55 Vice President - Risk Selection (1992)
B. Ben Taylor 55 Vice President - Actuarial Services (1990)
Larry D. White 52 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. Pickering was Agency Vice President of the Western Division with Integon
Life Insurance Company from 1981 to 1987. From 1987 to 1990, he served as
Regional Vice President of United Pacific Life Insurance Company. In 1990, he
began work for Conseco/Western National Life Insurance Company as Vice
President Marketing until May, 1994.
Mr. 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. Carlton was an agent for Equitable Life from 1981-1982 and was an
independent general agent from 1982-1985. From 1985-1987, he was Life
District Sales Manager for Meridian Insurance; from 1987-1991, he was Manager
of Financial Services for the Al Phillips Insurance Agency of Nashville,
Tennessee; he was Regional Vice President of Shenandoah Life from 1991-1994;
and he was Sales Vice President for United Presidential Life from 1994-1997.
Mr. McGillivray was employed as an attorney in 1979. He was a special agent
for Northwestern Mutual Life from 1980-1982, and he was Vice President -
Marketing of Allied Life Insurance Co. from 1982-1997.
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>
1Robert L. Moody 1997 $ 1,077,350 $ - 10,000 $ 194,684
Chairman of the 1996 1,026,964 - 14,400 160,064
Board and Chief 1995 967,696 91,616 25,000 111,533
Executive Officer
2Ross R. Moody 1997 411,198 - 500 50,683
President and 1996 400,334 - 5,500 32,366
Chief Operating 1995 361,427 19,768 9,000 20,866
Officer
3Arthur W. Pickering 1997 124,445 105,687 1,500 13,781
Senior Vice 1996 119,137 117,888 2,000 15,516
President - 1995 109,181 77,654 2,500 14,845
Domestic Marketing
4Robert L. Busby, III 1997 178,518 - 1,000 10,654
Senior Vice 1996 168,579 - 1,000 11,050
President - Chief 1995 160,690 8,008 4,000 9,068
Administrative
Officer,Chief
Financial Officer
and Treasurer
5Richard M. Edwards 1997 150,019 9,625 1,500 9,568
Senior Vice 1996 128,753 - 2,000 7,580
President - 1995 110,455 5,600 2,500 6,266
International
Marketing
</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 1997,
1996, and 1995, and Richard M. Edwards received such bonus in 1997.
(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 $173,000, $138,000, and $92,000 in 1997,
1996, and 1995, respectively. This item also includes various expense
allowances for Ross R. Moody in 1997 and 1996 of approximately $34,000 and
$6,000, respectively.
(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. Nonemployee
directors, including members of the Compensation and Stock Option Committee,
are eligible for nondiscretionary stock options. On May 19, 1995, the
Committee approved the issuance of 52,500 nonqualified stock options to
selected officers of the Company. The Committee also granted 7,000
nonqualified, nondiscretionary stock options to nonemployee Company directors.
Additional options totaling 33,000 and 21,900 were issued to selected officers
on April 19, 1996 and May 1, 1997, respectively. 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 1997 are as
follows:
<TABLE>
<CAPTION>
% of Potential Realizable
Number Total Value at Assumed
of Options Annual Rates
Securities Granted to of Stock Price
Underlying Employees Appreciation for
Options in Fiscal Exercise Expiration Option Term
Name Granted Year Price Date 5% 10%
<S> <C> <C> <C> <C> <C> <C>
1 Robert L.
Moody 10,000 45.7% $ 85.125 5-1-07 $535,347 $ 1,356,673
2 Ross R.
Moody 500 2.3 85.125 5-1-07 26,767 67,834
3 Arthur W.
Pickering 1,500 6.8 85.125 5-1-07 80,302 203,501
4 Robert L.
Busby, III 1,000 4.6 85.125 5-1-07 53,535 135,667
5 Richard M.
Edwards 1,500 6.8 85.125 5-1-07 80,302 203,501
</TABLE>
(d) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Shares Options Options
Acquired
On Value Exercis- Unexercis- Exercis- Unexercis-
Name Exercise Realized able able able able
<S> <C> <C> <C> <C> <C> <C>
1 Robert L.
Moody - $ - - 49,400 $ - $ 2,273,725
2 Ross R.
Moody - - - 15,000 - 779,313
3 Arthur W.
Pickering - - - 6,000 - 256,000
4 Robert L.
Busby, III - - - 6,000 - 306,375
5 Richard M.
Edwards - - - 6,000 - 256,000
</TABLE>
(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 who were
in the position of senior vice president or above prior to 1991 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 $ 125,335 355,797 481,132
2 Ross R. Moody 87,868 - 87,868
3 Arthur W. Pickering 28,305 - 28,305
4 Robert L. Busby, III 47,907 25,862 73,769
5 Richard M. Edwards 66,444 - 66,444
</TABLE>
(g) Compensation of Directors
All directors of the Company currently receive $15,000 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. Nonemployee directors, including members of the
Compensation and Stock Option Committee, are eligible for nondiscretionary
stock options. On May 19, 1995, the Committee approved the issuance of 7,000
nonqualified, nondiscretionary stock options to nonemployee 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. Nonemployee directors of the Company's subsidiary, NWL Services,
Inc., receive $1,000 per board meeting attended. 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. Charles Milos serve as directors and
also serve as officers and employees of National Western Life Insurance
Company. Mr. Ross Moody and Mr. Charles Milos are directors of Company's
wholly owned subsidiary, The Westcap Corporation. Mr. Ross Moody also serves
as an officer and director and Mr. Charles Milos serves as an officer of the
Company's other wholly owned subsidiaries, NWL 806 Main, Inc., NWL
Investments, Inc., NWL Properties, Inc., NWL Financial, Inc., and NWL
Services, Inc. Additionally, Mr. Robert Moody is an officer and Mr. Arthur
Dummer is an officer and director of NWL Services, Inc.
The Donner Company, 100% owned by Mr. Dummer, who is a director of National
Western Life Insurance Company and an officer and director of NWL Services,
Inc., was paid $24,654 in 1997 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: (1) contributions
to the Company's short and long-term strategic goals, including financial
goals such as Company revenues and earnings, (2) achievement of specific goals
within the individual's realm of responsibility, (3) development of management
and employees within the Company, and (4) performance of leadership within the
industry. These policies 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, 1992, 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,
1998. The coordinates of the graph are as follows:
<TABLE>
<CAPTION>
December 31
1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
National Western
Life $ 100 94.681 73.936 119.149 185.107 215.958
NASDAQ - US
Companies 100 114.796 112.214 158.699 195.196 239.527
NASDAQ - Insurance
Stock Index 100 106.956 100.679 143.014 163.034 239.181
</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, 1997:
<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 352,400 10.71
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, 1997, 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 625 .02
Class B Common 482 .24
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 - -
Charles D. Milos, Jr. Class A Common 528 .02
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 100 -
Class B Common - -
Richard M. Edwards Class A Common 303 .01
Class B Common - -
Arthur W. Pickering Class A Common - -
Class B Common - -
Directors and Class A Common 1,168,926 35.51
Officers 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 $24,654 in 1997 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
Gal-Tex Hotel Corporation
The Company 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 $2,424,000 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 $8,394,000 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 $1,868,000 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's wholly owned subsidiary, NWL Services, Inc., is the beneficial
owner of a life interest (1/8 share), previously owned by Mr. Robert L. Moody,
in the trust estate of Libbie Shearn Moody. The trustee of this estate is The
Moody National Bank of Galveston. The Moody Foundation is a private
charitable foundation governed by a Board of Trustees of three members. Mr.
Robert L. Moody and Mr. Ross R. Moody are members of the Board of Trustees.
(d) Transactions with Promoters
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) 1. Listing of Financial Statements
See Attachment A, Index to Financial Statements and Schedules, on page __ for
a list of financial statements included in this report.
(a) 2. Listing of Financial Statement Schedules
See Attachment A, Index to Financial Statements and Schedules, on page __ for
a list of financial statement schedules included in this report.
All other schedules are omitted because they are not applicable, not required,
or because the information required by the schedule is included elsewhere in
the financial statements or notes.
(a) 3. Listing of Exhibits
Exhibit 3(a) - Restated Articles of Incorporation of National Western Life
Insurance Company dated April 10, 1968 (incorporated by
reference to Exhibit 3(a) to the Company's Form 10-K for the
year ended December 31, 1995).
Exhibit 3(b) - Amendment to the Articles of Incorporation of National Western
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 3(c) - Amendment to the Articles of Incorporation of National Western
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 3(d) - Amendment to the Articles of Incorporation of National Western
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 3(e) - Amendment to the Articles of Incorporation of National Western
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 3(f) - Bylaws of National Western Life Insurance Company as amended
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
10(b) Plan 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
10(e) Incentive 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
(incorporated by reference to Exhibit 10(f) to the Company's
Form 10-K for the year ended December 31, 1996).
Exhibit - Second Amendment to the National Western Life Insurance
10(g) Company Non-Qualified Defined Benefit Plan effective December
17, 1996 (incorporated by reference to Exhibit 10(g) to the
Company's Form 10-K for the year ended December 31, 1996).
Exhibit - Second Amendment to the National Western Life Insurance
10(h) Company Non-Qualified Deferred Compensation Plan effective
December 17, 1996 (incorporated by reference to Exhibit 10(h)
to the Company's Form 10-K for the year ended December 31,
1996).
Exhibit - Third Amendment to the National Western Life Insurance Company
10(i) Non-Qualified Deferred Compensation Plan effective December
17, 1996 (incorporated by reference to Exhibit 10(i) to the
Company's Form 10-K for the year ended December 31, 1996).
Exhibit - Fourth Amendment to the National Western Life Insurance
10(j) Company Non-Qualified Deferred Compensation Plan effective
June 20, 1997 (filed on page __ of this report).
Exhibit 21 - Subsidiaries of the Registrant (filed on page __ of this
report).
Exhibit 27 - Financial Data Schedule (filed electronically pursuant to
Regulation S-K).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1997.
(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, 1997 and 1996
Consolidated Statements of Earnings for the years ended December 31, 1997,
1996, and 1995
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995
Notes to Consolidated Financial Statements
Schedule I - Summary of Investments Other Than Investments in Related
Parties, December 31, 1997
Schedule V - Valuation and Qualifying Accounts for the years ended
December 31, 1997, 1996, and 1995
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, 1997 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1997, 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.
KPMG Peat Marwick LLP
Austin, Texas
February 27, 1998
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash and investments:
Securities held to maturity,
at amortized cost
(fair value: $1,949,876 and $1,896,847) $ 1,874,643 1,873,561
Securities available for sale,
at fair value (cost: $618,274
and $506,892) 651,736 527,627
Mortgage loans, net of allowance for
possible losses ($4,640 and $5,988) 181,878 193,311
Policy loans 133,826 142,077
Other long-term investments 27,387 22,997
Cash and short-term investments 7,870 11,358
Total cash and investments 2,877,340 2,770,931
Accrued investment income 41,050 39,503
Deferred policy acquisition costs 291,079 295,666
Other assets 15,202 13,472
Assets of discontinued operations 892 1,257
$ 3,225,563 3,120,829
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(In thousands except per share amounts)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
<S> <C> <C>
LIABILITIES:
Future policy benefits:
Traditional life and annuity products $ 170,423 172,565
Universal life and investment
annuity contracts 2,580,867 2,529,307
Other policyholder liabilities 25,001 24,403
Federal income taxes payable:
Current 2,470 -
Deferred 13,153 11,910
Other liabilities 31,894 28,527
Liabilities of discontinued operations 892 1,257
Total liabilities 2,824,700 2,767,969
COMMITMENTS AND CONTINGENCIES (Notes 4, 7, 9,
and 16)
STOCKHOLDERS' EQUITY:
Common stock:
Class A - $1 par value; 7,500,000
shares authorized; 3,291,738
and 3,291,338 shares issued and
outstanding in 1997 and 1996 3,292 3,291
Class B - $1 par value; 200,000
shares authorized, issued
and outstanding in 1997 and 1996 200 200
Additional paid-in capital 24,662 24,647
Net unrealized gains on investment securities 13,782 9,853
Foreign currency translation adjustment 2,486 -
Retained earnings 356,441 314,869
Total stockholders' equity 400,863 352,860
$ 3,225,563 3,120,829
<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, 1997, 1996, and 1995
(In thousands except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Premiums and other revenue:
Life and annuity premiums $ 15,812 16,611 17,390
Universal life and
investment annuity
contract revenues 80,250 75,966 69,783
Net investment income 217,446 214,302 201,816
Other income 354 2,718 661
Realized gains (losses)
on investments (1,588) 1,612 (2,415)
Total premiums and other revenue 312,274 311,209 287,235
Benefits and expenses:
Life and other policy benefits 37,361 35,354 39,823
Decrease in liabilities for
future policy benefits (2,076) (2,041) (2,487)
Amortization of deferred policy
acquisition costs 39,934 30,361 33,675
Universal life and
investment annuity
contract interest 145,200 151,475 142,940
Other insurance
operating expenses 27,560 25,722 27,084
Total benefits and expenses 247,979 240,871 241,035
Earnings before Federal
income taxes and discontinued
operations 64,295 70,338 46,200
Provision (benefit) for Federal
income taxes:
Current 23,934 21,624 9,640
Deferred (2,211) 2,499 926
Total Federal income taxes 21,723 24,123 10,566
Earnings from continuing operations 42,572 46,215 35,634
<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, 1997, 1996, and 1995
(In thousands except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Discontinued operations:
Losses from operations
of discontinued
brokerage operations $ (1,000) - (9,969)
Estimated loss on
disposal of discontinued
brokerage operations - - (6,381)
Losses from
discontinued operations (1,000) - (16,350)
Net earnings $ 41,572 46,215 19,284
Basic Earnings Per Share:
Earnings from
continuing operations $ 12.20 13.24 10.22
Losses from
discontinued operations (0.29) - (4.69)
Net earnings $ 11.91 13.24 5.53
Diluted Earnings Per Share:
Earnings from
continuing operations $ 12.09 13.17 10.20
Losses from
discontinued operations (0.28) - (4.68)
Net earnings $ 11.81 13.17 5.52
<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, 1997, 1996, and 1995
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Common stock:
Balance at beginning of year $ 3,491 3,491 3,488
Shares exercised under
stock option plan 1 - -
Shares issued under
stock bonus plan - - 3
Balance at end of year 3,492 3,491 3,491
Additional paid-in capital:
Balance at beginning of year 24,647 24,647 24,475
Shares exercised
under stock option plan 15 - -
Shares issued under
stock bonus plan - - 172
Balance at end of year 24,662 24,647 24,647
Net unrealized gains
(losses) on investment
securities, net of
effects of deferred
policy acquisition
costs and taxes:
Balance at beginning of year 9,853 15,195 (2,199)
Change in unrealized
gains (losses) during year 4,985 (4,774) 15,166
Net unrealized gains related
to transfer of securities
from available for sale
to held to maturity - - 3,159
Amortization of net
unrealized gains related
to transferred securities (1,056) (568) (931)
Balance at end of year 13,782 9,853 15,195
Foreign currency translation
adjustment, net of taxes:
Balance at beginning of year - - -
Change in translation
adjustment during year 2,486 - -
Balance at end of year 2,486 - -
Retained earnings:
Balance at beginning of year 314,869 268,654 249,370
Net earnings 41,572 46,215 19,284
Balance at end of year 356,441 314,869 268,654
Total stockholders' equity $ 400,863 352,860 311,987
<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, 1997, 1996, and 1995
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from
operating activities:
Net earnings $ 41,572 46,215 19,284
Adjustments to reconcile
net earnings to net cash
provided by operating
activities:
Universal life and investment
annuity contract interest 145,200 151,475 142,940
Surrender charges and
other policy revenues (42,149) (39,562) (34,936)
Realized (gains) losses
on investments 1,588 (1,612) 2,415
Accrual and amortization
of investment income (6,256) (6,880) (7,129)
Depreciation and amortization 900 708 620
Decrease (increase) in
other assets (11) (988) 940
Increase in accrued
investment income (1,547) (3,376) (4,497)
Decrease (increase) in
deferred policy
acquisition costs 989 (11,320) (12,018)
Decrease in liabilities for
future policy benefits (2,076) (2,041) (2,487)
Increase (decrease) in other
policyholder liabilities 598 1,570 (350)
Increase (decrease) in
Federal income taxes payable 2,195 10,645 (4,180)
Increase (decrease) in
other liabilities 3,367 (191) (1,781)
Other (18) - 176
Net cash provided by
operating activities 144,352 144,643 98,997
Cash flows from
investing activities:
Proceeds from sales of:
Securities held to maturity 1,993 - 10,659
Securities available for sale 50,706 41,276 44,440
Other investments 2,109 3,126 1,645
Proceeds from maturities
and redemptions of:
Securities held to maturity 105,162 72,138 54,720
Securities available for sale 38,529 44,662 13,942
Purchases of:
Securities held to maturity (115,095) (301,239) (212,192)
Securities available for sale (191,168) (27,838) (130,066)
Other investments (5,950) (4,014) (5,941)
Principal payments on
mortgage loans 40,987 32,995 15,952
Cost of mortgage loans acquired (31,654) (26,220) (18,125)
Decrease in policy loans 8,251 5,846 3,564
Decrease in assets of
discontinued operations 365 4,920 225,880
Decrease in liabilities
of discontinued operations (365) (4,920) (209,153)
Other (234) (337) (851)
Net cash used in investing activities (96,364) (159,605) (205,526)
<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, 1997, 1996, and 1995
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from financing
activities:
Deposits to account balances
for universal life and
investment annuity contracts $ 267,515 304,236 343,588
Return of account balances
on universal life and
investment annuity contracts (319,007) (287,940) (244,758)
Issuance of common stock
under stock option plan 16 - -
Net cash provided by (used in)
financing activities (51,476) 16,296 98,830
Net increase (decrease) in cash and
short-term investments (3,488) 1,334 (7,699)
Cash and short-term investments
at beginning of year 11,358 10,024 17,723
Cash and short-term investments
at end of year $ 7,870 11,358 10,024
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 326 251 3,740
Income taxes 19,203 13,466 15,129
Noncash investing activities:
Foreclosed mortgage loans $ 2,320 - 961
Mortgage loans originated
to facilitate
the sale of real estate 1,556 4,145 1,105
<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., NWL Services,
Inc., and NWL Financial, Inc. The two subsidiaries, NWL Services, Inc. and
NWL Financial, Inc., are new subsidiaries formed in 1997 primarily for
investment related activities. 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) Derivative Financial Instruments - The Company purchases over-the-counter
index options, which are derivative financial instruments, to hedge the equity
return component of its equity-indexed annuity products. The index options
act as hedges to match closely the returns on the S&P 500 Composite Stock
Price Index which may be paid to policyholders. As a result, changes to
policyholders' liabilities are substantially offset by changes in the value of
the options. Cash is exchanged upon purchase of the index options, and no
principal or interest payments are made by either party during the option
periods. Upon maturity or expiration of the options, cash is paid to the
Company based on the S&P 500 performance and terms of the contract.
The index options are reported at fair value in the accompanying financial
statements. The changes in the values of the index options and the changes in
the policyholder liabilities are both reflected in the statement of earnings.
Any gains or losses from the sale or maturity of the options, as well as
period-to-period changes in values, are reflected as net investment income in
the statement of earnings.
Although there is credit risk in the event of nonperformance by counterparties
to the index options, the Company does not expect any counterparties to fail
to meet their obligations, given their high credit ratings. In addition,
credit support agreements are in place with certain counterparties, which
further reduces the Company's credit exposure. At December 31, 1997, the fair
value of index options owned by the Company totaled $420,000, and the
options are reflected as other long-term investments, as they are not held
for trading purposes.
(F) Insurance Revenues and Expenses - Premiums on traditional life insurance
products are recognized as revenues as they become due or, for short duration
contracts, over the contract periods. Benefits and expenses are matched with
premiums in arriving at profits by providing for policy benefits over the
lives of the policies and by amortizing acquisition costs over the
premium-paying periods of the policies. For universal life and investment
annuity contracts, revenues consist of policy charges for the cost of
insurance, policy administration, and surrender charges assessed during the
period. Expenses for these policies include interest credited to policy
account balances and benefit claims incurred in excess of policy account
balances. The related deferred policy acquisition costs are amortized in
relation to the present value of expected gross profits on the policies.
(G) 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.
(H) Depreciation of Property, Equipment, and Leasehold Improvements -
Depreciation is based on the estimated useful lives of the assets and is
calculated on the straight-line and accelerated methods. Leasehold
improvements are amortized over the lesser of the economic useful life of the
improvement or the term of the lease.
(I) Classification - Certain reclassifications have been made to the prior
years to conform to the reporting categories used in 1997.
(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,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Direct premiums and deposits
collected:
Investment annuity deposits $ 240,987 273,202 309,971
Universal life
insurance deposits 65,862 67,438 68,464
Traditional life
and other premiums 21,506 23,135 24,801
Totals $ 328,355 363,775 403,236
</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,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Policy acquisition costs deferred:
Agents' commissions $ 37,069 39,218 42,903
Other 1,876 2,463 2,790
$ 38,945 41,681 45,693
Policy acquisition costs amortized $ 39,934 30,361 33,675
</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, 1997, is $16,668,000 in comparison to a
carrying value of $4,636,000 in the accompanying consolidated financial
statements.
9. 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,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Statutory equity $ 300,589 265,289 236,884
Adjustments:
Difference in valuation
of investment in
the Libbie Shearn Moody Trust (12,032) (13,692) (15,355)
Deferral of policy
acquisition costs 291,079 295,666 270,167
Adjustment of future
policy benefits (217,040) (220,510) (218,352)
Deferred Federal
income taxes payable (13,153) (11,910) (12,287)
Adjustment of securities
available for sale to fair value 34,957 26,116 48,880
Reversal of asset
valuation reserve 11,654 10,403 4,002
Reversal of interest
maintenance reserve 9,630 7,837 5,991
Reinstatement of
nonadmitted assets 2,535 3,088 2,429
Valuation allowances
on investments (6,571) (10,052) (10,862)
Adjustment for consolidation 375 102 102
Other, net (1,160) 523 388
Generally accepted accounting
principles equity $ 400,863 352,860 311,987
</TABLE>
10. 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,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Statutory net earnings $ 33,771 35,644 28,343
Subsidiary earnings (losses)
before deferred
Federal income taxes 2,372 (656) (17,594)
Consolidated statutory net earnings 36,143 34,988 10,749
Adjustments:
Deferral of policy
acquisition costs (989) 11,320 12,018
Adjustment of future
policy benefits 3,469 (2,158) (12,325)
Amortization of investment
in the Libbie
Shearn Moody Trust (286) (284) (280)
Benefit (provision) for
deferred Federal income taxes 2,211 (2,499) (715)
Valuation allowances and
permanent impairment
writedowns on investments 1,816 954 3,901
Lawsuit settlements recorded
as surplus adjustments for
statutory accounting (90) 850 (200)
Subsidiary stock dividends (243) - -
Increase in interest
maintenance reserve 1,793 1,846 1,069
Other, net (2,252) 1,198 5,067
Generally accepted accounting
principles net earnings $ 41,572 46,215 19,284
</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,
1997 1996
(In thousands)
<S> <C> <C>
Debt securities $ 18,127 24,305
Certificates of deposit 260 210
Totals $ 18,387 24,515
</TABLE>
(3) INVESTMENTS
(A) Investment Income
The major components of net investment income are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Investment income:
Debt securities $ 184,870 176,825 165,879
Mortgage loans 18,659 19,851 19,644
Policy loans 9,764 10,645 11,018
Other investment income 6,760 10,082 7,764
Total investment income 220,053 217,403 204,305
Investment expenses 2,607 3,101 2,489
Net investment income $ 217,446 214,302 201,816
</TABLE>
Investments of the following amounts were not income producing for the
preceding twelve months:
<TABLE>
<CAPTION>
December 31,
1997 1996
(In thousands)
<S> <C> <C>
Debt securities $ - 2,209
Equity securities 2,706 2,235
Real estate 488 1,336
Totals $ 3,194 5,780
</TABLE>
As of December 31, 1997, the Company had no investments in debt securities or
mortgage loans that were on nonaccrual status. As of December 31, 1996,
$2,981,000 of securities and mortgage loans were on nonaccrual status.
Reductions in interest income associated with nonperforming investments in
debt securities and mortgage loans were not significant during 1997, 1996, and
1995.
(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,
1997 1996
<S> <C> <C>
West South Central 54.9% 51.4%
South Atlantic 11.4 8.7
Mountain 11.3 15.0
Pacific 8.0 11.2
All other 14.4 13.7
Totals 100.0% 100.0%
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Retail 62.2% 64.4%
Office 16.6 18.9
Hotel/Motel 7.9 7.8
Apartment 4.1 3.9
All other 9.2 5.0
Totals 100.0% 100.0%
</TABLE>
As of December 31, 1997 and 1996, impaired mortgage loans were as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
(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, 1997, 1996, and 1995, average investments in
impaired mortgage loans were $676,000, $232,000, and $234,000, respectively.
Interest income recognized on impaired loans during the years ended December
31, 1997, 1996, and 1995, was not significant. Impaired loans are typically
placed on nonaccrual 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
1997, 1996, and 1995:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 5,988 5,668 5,929
Net additions charged to realized
investment gains and losses 1,133 500 -
Releases due primarily to
foreclosures and loan payoffs (2,481) (180) (261)
Balance at end of year $ 4,640 5,988 5,668
</TABLE>
At December 31, 1997 and 1996, the Company owned investment real estate
totaling $15,027,000 and $15,209,000 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, 1997, 1996, and 1995, impairment losses on real estate due to
decreases in market values totaled $46,000, $526,000, and $882,000,
respectively.
(C) Investment Gains and Losses
The table below presents realized gains and losses and changes in unrealized
gains and losses on investments for 1997, 1996, and 1995:
<TABLE>
<CAPTION>
Changes in
Realized Unrealized
Investment Investment
Gains Gains (Losses)
(Losses) From Prior Year
(In thousands)
<S> <C> <C>
Year Ended December 31, 1997:
Securities held to maturity $ 1,791 51,947
Securities available for sale 1,061 12,727
Other (4,440) -
Totals $ (1,588) 64,674
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
</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, 1997:
<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 $ 23,867 331 - 24,198
States and
political
subdivisions 26,996 2,549 - 29,545
Foreign governments 51,331 2,357 - 53,688
Public utilities 271,478 10,902 1,322 281,058
Corporate 1,034,677 43,799 1,074 1,077,402
Mortgage-backed 451,515 17,995 108 469,402
Asset-backed 14,779 - 196 14,583
Totals $ 1,874,643 77,933 2,700 1,949,876
</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 $ 3,219 223 - 3,442
Public utilities 58,567 3,224 283 61,508
Corporate 232,980 13,463 1,498 244,945
Mortgage-backed 240,479 14,138 960 253,657
Asset-backed 72,918 1,980 - 74,898
Equity securities 10,111 3,269 94 13,286
Totals $ 618,274 36,297 2,835 651,736
</TABLE>
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-backed 481,367 8,269 2,349 487,287
Asset-backed 18,268 534 - 18,802
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-backed 311,564 11,874 1,211 322,227
Asset-backed 4,958 395 - 5,353
Equity securities 15,342 2,624 347 17,619
Totals $ 506,892 24,199 3,464 527,627
</TABLE>
The amortized cost and fair values of investments in debt securities at
December 31, 1997, 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 $ - - 9,426 9,286
Due after 1 year
through 5 years 23,554 25,245 170,097 175,452
Due after 5 years
through 10 years 181,377 186,973 1,025,758 1,060,533
Due after 10 years 89,835 97,677 203,068 220,620
294,766 309,895 1,408,349 1,465,891
Mortgage and asset-
backed securities 313,397 328,555 466,294 483,985
Totals $ 608,163 638,450 1,874,643 1,949,876
</TABLE>
The Company uses the specific identification method in computing realized
gains and losses. Proceeds from sales of securities available for sale during
1997, 1996, and 1995 totaled $50,706,000, $41,276,000, and $44,440,000,
respectively. Gross gains and gross losses realized on those sales are
detailed below:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Gross realized gains $ 1,029 575 1,153
Gross realized losses - (402) (3,752)
Net realized gains (losses) $ 1,029 173 (2,599)
</TABLE>
In 1997, the Company sold one held to maturity bond due to significant credit
deterioration of the issuing company. Amortized cost of the security totaled
$1,987,000, and a realized gain of $6,000 was recognized on the sale. The
Company did not sell any held to maturity securities during 1996. However,
during 1995, three held to maturity bonds were sold also due to significant
credit deterioration. 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 $41,149,000 and $38,696,000 at December 31, 1997 and 1996,
respectively. These amounts represent approximately 1.4% of total invested
assets in both 1997 and 1996. 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,
1997.
(E) Transfers of Securities
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
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." 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,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Beginning unamortized
gains from transfers $ 2,601 3,169 941
Net unrealized gains related to
transfer of securities from
available for sale to
held to maturity - - 3,159
Amortization of net unrealized
gains related
to transferred securities (1,056) (568) (931)
(1,056) (568) 2,228
Ending unamortized
gains from transfers $ 1,545 2,601 3,169
</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 and losses on investment securities included in
stockholders' equity at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
(In thousands)
<S> <C> <C>
Gross unrealized gains $ 36,297 24,199
Gross unrealized losses (2,835) (3,464)
Adjustments for:
Deferred policy acquisition costs (14,637) (9,578)
Deferred Federal income taxes (6,588) (3,905)
12,237 7,252
Net unrealized gains related to securities
transferred to held to maturity 1,545 2,601
Net unrealized gains on investment securities $ 13,782 9,853
</TABLE>
(F) Change in Accounting Principles
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards 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.
(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
$8.56 billion and $8.15 billion at December 31, 1997 and 1996, respectively.
Of these amounts, life insurance in force totaling $1.24 billion and $1.07
billion was ceded to reinsurance companies, primarily on a yearly renewable
term basis, at December 31, 1997 and 1996, 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 $5,396,000 and $5,490,000 at December 31,
1997 and 1996, respectively. Premium revenues were reduced by $5,719,000,
$6,442,000, and $7,420,000 for reinsurance premiums incurred during 1997,
1996, and 1995, respectively. Benefit expenses were reduced by $5,396,000,
$19,070,000, and $5,812,000 for reinsurance recoveries during 1997, 1996, and
1995, 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 1997, 1996, and 1995 were allocated as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Earnings from continuing operations $ 21,723 24,123 10,566
Stockholders' equity for net
unrealized gains and losses on
securities available for sale 2,115 (2,876) 9,365
Stockholders' equity for foreign
currency translation adjustment 1,338 - -
Total Federal income taxes $ 25,176 21,247 19,931
</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,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Income tax expense at statutory rate $ 22,503 24,618 16,170
Dividends-received deduction (822) (298) (298)
Amortization of life interest in the
Libbie Shearn Moody Trust 100 99 98
Non-deductible travel and entertainment 101 116 86
Tax benefit of discontinued operations (350) (182) (5,669)
Other 191 (230) 179
Provision for Federal income taxes $ 21,723 24,123 10,566
</TABLE>
There were no deferred taxes attributable to enacted tax rate changes for the
years ended December 31, 1997, 1996, and 1995.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 and 1996, are presented below:
<TABLE>
<CAPTION>
December 31,
1997 1996
(In thousands)
<S> <C> <C>
Deferred tax assets:
Future policy benefits, excess of financial
accounting liability over tax liability $ 90,314 88,855
Mortgage loans, principally due to valuation
allowances for financial accounting purposes 1,657 2,218
Real estate, principally due to writedowns
for financial accounting purposes 1,678 2,119
Accrued and unearned investment income
recognized for tax purposes and deferred for
financial accounting purposes 2,333 2,352
Accrued operating expenses recorded for
financial accounting purposes not
currently tax deductible 2,357 3,049
Other 959 576
Total gross deferred tax assets 99,298 99,169
Less valuation allowance - -
Net deferred tax assets 99,298 99,169
Deferred tax liabilities:
Deferred policy acquisition costs,
principally expensed for tax purposes (97,173) (98,235)
Debt securities, principally due to
deferred market discount for tax (5,687) (6,016)
Real estate, principally due to
differences in tax and
financial accounting for depreciation (823) (1,487)
Net unrealized gains on securities
available for sale (7,420) (5,305)
Foreign currency translation adjustment (1,338) -
Other (10) (36)
Total gross deferred tax liabilities (112,451) (111,079)
Net deferred tax liabilities $ (13,153) (11,910)
</TABLE>
There was no valuation allowance for deferred tax assets at December 31, 1997
and 1996. 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,
1997, 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, 1997, 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 $350,000, $182,000, and $5,669,000 for 1997, 1996,
and 1995 were included in earnings from continuing operations.
(6) TRANSACTIONS WITH CONTROLLING STOCKHOLDER AND AFFILIATES
(A) Life Interest in Libbie Shearn Moody Trust
The Company's wholly owned subidiary, NWL Services, Inc., 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. NWL Services, Inc. is the beneficiary of
these policies for an amount equal to the statutory admitted value of the
Trust, which was $16,668,000 at December 31, 1997. 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 life interest in
the Trust are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
(In thousands)
<S> <C> <C>
Original valuation of life
interest at February 26, 1960 $ 13,793 13,793
Less accumulated amortization (9,157) (8,871)
Net asset value of life interest in the Trust $ 4,636 4,922
</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,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Income distributions $ 3,335 3,252 3,085
Deduct:
Amortization (286) (284) (280)
Reinsurance premiums (266) (238) (212)
Net income from life
interest in the Trust $ 2,783 2,730 2,593
</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
(A) Defined Benefit Plans
The Company has a qualified defined benefit 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,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Service cost-benefits earned
during the period $ 286 287 143
Interest cost on projected
benefit obligations 620 571 510
Actual return on plan assets (1,437) (643) (962)
Net amortization and deferral 839 57 427
Net pension cost $ 308 272 118
</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,
1997 1996
(In thousands)
<S> <C> <C>
Actuarial present value of
benefit obligations:
Accumulated benefit obligations,
including vested
benefits of $8,504,000 and
$7,638,000, respectively $ (9,044) (8,076)
Projected benefit obligations for service
rendered to date $ (9,408) (8,332)
Plan assets at fair market value
primarily consisting of equity
and fixed income securities 9,265 7,899
Projected benefit obligations in
excess of plan assets (143) (433)
Unrecognized net transitional asset
at January 1, 1987, being recognized
over employees' average remaining
service of 15 years (209) (264)
Prior service cost not yet recognized
in net periodic pension cost (176) (206)
Unrecognized net losses from past
experience different from that assumed 1,503 1,766
Adjustment to recognize minimum liability - (1,039)
Prepaid (accrued) pension cost $ 975 (176)
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligations was 7.0% for 1997 and 7.5% for 1996. The
projected increase in future compensation levels was based on a rate of 4.5%
for 1997 and 1996. The projected long-term rate of return on plan assets was
7.5% for 1997 and 8.5% for 1996.
The Company also has a nonqualified 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,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Service cost-benefits earned
during the period $ 75 73 71
Interest cost on projected
benefit obligations 181 162 153
Net amortization and deferral 78 91 78
Net pension cost $ 334 326 302
</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,
1997 1996
(In thousands)
<S> <C> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligations,
including vested
benefits of $2,379,000 and
$1,809,000, respectively $ (2,379) (1,809)
Projected benefit obligations for
service rendered to date $ (2,881) (2,415)
Plan assets at fair market value - -
Projected benefit obligations in
excess of plan assets (2,881) (2,415)
Unrecognized net transitional
obligation at January 1, 1991, being
recognized over employees' average
remaining service of 12 years 442 520
Unrecognized net losses from past experience
different from that assumed 427 217
Adjustment to recognize minimum liability (367) (131)
Accrued pension cost $ (2,379) (1,809)
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligations was 7.0% for 1997 and 7.5% for 1996. The
projected increase in future compensation levels was based on a rate of 4.5%
for 1997 and 1996.
(B) Defined Contribution Plans
In addition to the defined benefit plans, the Company has a qualified 401(k)
plan for substantially all full-time employees and a nonqualified 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, 1997, 1996, and 1995, Company
contributions totaled $250,000, $217,000, and $201,000, respectively.
The nonqualified 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, 1997, 1996, and 1995, Company contributions
totaled $36,000, $62,000, and $55,000, respectively.
(C) Change in Accounting Principles
In February, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 132, "Employers' Disclosures
about Pension and Other Postretirement Benefits." This statement revises
employers' disclosures about pension and other postretirement benefit plans,
but does not change the measurement or recognition of those plans. SFAS No.
132 standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain less
useful disclosures. The new statement also suggests combined formats for
presentation of pension and other postretirement benefit disclosures.
The new statement will require changes and enhancements to certain pension
related disclosures of the Company, primarily related to changes in plan
assets. Other aspects of the statement will have no effect as the Company
provides no significant other postretirement benefits to retirees. SFAS No.
132 is effective for fiscal years beginning after December 15, 1997. The
Company will implement this statement in its December 31, 1998, financial
statements.
(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, 1997
and 1996. The weighted average interest rates on borrowings for the years
ended December 31, 1997 and 1996 were 6.42% and 6.91%, respectively. Actual
borrowings and interest expense for 1997 and 1996 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 (NAIC)
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.
Subsequently, Actuarial Guideline 33 has undergone a review by the NAIC to
clarify certain aspects of the guideline. This review resulted in a new
interpretation of the guideline which becomes effective after year-end 1997.
The Company has also received approval from the Division for a phase-in of
this new interpretation. The effect of these two phase-in adjustments will
not have a material effect on the Company's statutory capital and surplus
position. Also, Actuarial Guideline 33 and the related phase-in adjustments
do 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
Pending Litigation
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 sought 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 was named as a
"controlling person" of the Westcap defendants. Westcap filed Chapter 11
bankruptcy (see below), and City Colleges filed a claim in the bankruptcy
court against Westcap. The claim was tried before the bankruptcy court and in
September, 1997, a $56,173,000 judgment was entered against Westcap favorable
to The City Colleges. Westcap has appealed this decision to the United States
District Court for the Southern District of Texas (Houston Division). While
Westcap is a wholly owned subsidiary of the Company, the Company is not a
party to the bankruptcy or the judgment against Westcap by the bankruptcy
court. The lawsuit against the Company was stayed in September, 1994, pending
resolution of The City Colleges' claim against Westcap. Following the
judgment against Westcap in the bankruptcy court, on December 2, 1997, the
stay was lifted by the United States District Court in Illinois, and The City
Colleges filed an amended complaint seeking to hold the Company liable for the
claim allowed in the bankruptcy court against Westcap under the "control
person" provision of the Texas Securities Act. The suit seeks approximately
$56 million plus fees and costs. The Company filed jurisdictional and venue
motions to have the case transferred to the United States District Court for
the Western District of Texas, which motions were agreed to by the Plaintiff,
and the case is now pending in the United States District Court for the
Western District of Texas. The Company believes it has reasonable and
adequate defenses to the suit. Although the alleged damages, if sustained,
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.
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. As a creditor in the Westcap bankruptcy, the Plaintiff is
represented in the Creditors' Committee settlement negotiations pending
between Westcap, the creditors, and the Company, discussed below. If the
settlement is ultimately approved by Westcap, its creditors, the bankruptcy
court, and the Company, this lawsuit would be dismissed.
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.
As a creditor in the Westcap bankruptcy, the Plaintiff is represented in the
Creditors' Committee settlement negotiations pending between Westcap, the
creditors, and the Company, discussed below. If the settlement is ultimately
approved by Westcap, its creditors, the bankruptcy court, and the Company,
this lawsuit would be dismissed.
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
arose 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 alleged that the Westcap affiliates were
controlled by the Company and Mr. Moody and that they were responsible for the
alleged wrongful acts of the Westcap affiliates in selling the securities to
the Plaintiff. Plaintiff alleged that the Westcap affiliates violated duties
and responsibilities owed to the Plaintiff related to the investment
recommendations and decisions made by Plaintiff, and alleged that the
Plaintiff was financially damaged by such actions of Westcap. The suit is
currently in process of settlement with a payment of $200,000 to be made by
National Western to San Patricio County and with no admission of liability.
In exchange for the payment, National Western and Robert L. Moody will
receive a general release of all claims asserted, including all claims that
have been asserted against Westcap Securities, L.P. or could have been
asserted in another court against Westcap Securities, L.P., and the lawsuit
will be dismissed.
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. As a creditor in the Westcap bankruptcy, the
Plaintiff is represented in the Creditors' Committee settlement negotiations
pending between Westcap, the creditors, and the Company, discussed below. If
the settlement is ultimately approved by Westcap, its creditors, the
bankruptcy court, and the Company, this lawsuit would be dismissed.
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. As a
creditor in the Westcap bankruptcy, the Plaintiff is represented in the
Creditors' Committee settlement negotiations pending between Westcap, the
creditors, and the Company, discussed below. If the settlement is ultimately
approved by Westcap, its creditors, the bankruptcy court, and the Company,
this lawsuit would be dismissed.
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.
National Western Life Insurance Company (the Company) and National Annuity
Programs, Inc. (NAP) have been sued in the District Court of Travis County,
Texas, by a former agent of the Company, eight plaintiffs, and fourteen
intervenors, being present and past annuity policyholders of the Company, and
on behalf of an asserted class of annuity policyholders of the Company, and
alleged that in the sale of certain Company annuities to the plaintiffs and
intervenors the Company and NAP (i) had violated the Texas Deceptive Trade
Practices-Consumer Protection Act, statutes in the Texas Insurance Code, and
certain rules and regulations of the Texas Department of Insurance; (ii)
committed common law fraud; (iii) were negligent; (iv) had breached a duty of
good faith and fair dealing; (v) made negligent misrepresentations; (vi)
committed a civil conspiracy to commit fraud; and (vii) breached policy
contracts. The plaintiffs seek (i) certification of one or more classes; and
(ii) recovery of unspecified actual damages, monies paid by plaintiffs,
attorneys' fees, prejudgment and postjudgment interests and costs, increased
or treble damages, punitive damages, and general relief as awarded by the
Court. NAP was an independent marketing general agency under contract with
the Company that hired and supervised the agents marketing the annuity
products on behalf of the Company. The Company and NAP have answered and
denied liability, and the parties have engaged in extensive discovery.
Plaintiffs'/intervenors' motions to certify classes and class representation
are pending before the Court. NAP and the plaintiffs/intervenors have
entered into a proposed settlement agreement between themselves whereby NAP
would pay a total of $750,000 for a complete release of all alleged
liabilities, which proposed settlement is subject to approval by the Court.
While the Company and the plaintiffs/intervenors have engaged in mediation
conferences and settlement discussions, no settlement has been reached.
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.
On December 31, 1997, National Western Life Insurance Company (National
Western) filed a declaratory judgment action against National Annuity
Programs, Inc. (NAP) and Robert L. Myer (Myer) for construction of a General
Agent Manager Contract and amendments thereto between National Western and
NAP, a declaration that the contract is enforceable, and for an award for
damages. The contract was entered into in 1983 and amended in 1994, by which
NAP was to market insurance and annuity products issued by National Western.
The suit alleges that during the course of the contract NAP violated its terms
and conditions, violated the insurance laws and regulations of the State of
Texas, misrepresented the terms and conditions of National Western's insurance
and annuity products, induced National Western's policyholders to relinquish
or terminate its policies of insurance or annuities, and failed to use
reasonable efforts to conserve its insurance and annuity products. National
Western seeks (i) to withhold, deduct, and/or terminate the payment of agency
commissions under the contract to NAP, which are based on future premiums
received and policies maintained in force, and in 1997 totaled approximately
$4,400,000; (ii) damages from breach of the contract; (iii) recovery of
damages from Robert L. Myer for tortious interference with National Western's
contractual relations with its policyholders; (iv) recovery of damages from
Robert L. Myer for conspiracy to cause NAP to breach its contract with
National Western and to induce its policyholders to terminate their policies
with National Western; and (v) reasonable attorneys' fees, costs, and
expenses. The parties have started discovery proceedings.
Although the alleged damages for the above-described suits would be material
to the Company's consolidated financial statements, 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.
The Westcap Corporation Bankruptcy Proceedings
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 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. The negotiations also include the possible
settlement of claims by certain creditors of Westcap directly filed against
the Company as the "controlling person" of Westcap. 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 would make a $1,000,000 cash infusion to Westcap for operational
expenses incurred during its bankruptcy and that such cash infusion would 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, and the
$1,000,000 contribution described above was reflected as a loss from
discontinued operations in 1997. Any additional losses from discontinued
operations will depend primarily on results of Westcap bankruptcy proceedings
and settlement discussions.
On September 29, 1997, the United States Bankruptcy Court, Southern District
of Texas, Houston, Texas, entered an order approving claims in the amount of
$56,173,000 against The Westcap Corporation and its wholly owned subsidiary,
Westcap Enterprises, Inc. The claims were filed by the Board of Trustees of
Community College District No. 508, County of Cook, State of Illinois (The
City Colleges). The Westcap Corporation and Westcap Enterprises, Inc. have
appealed this order. While The Westcap Corporation is a wholly owned
brokerage subsidiary of National Western Life Insurance Company, National
Western is not a party to the order or the bankruptcy proceeding.
On February 20, 1998, The Westcap Corporation, the Creditors' Committee, and
National Western reported to the bankruptcy court tentative agreements that
could lead to the settlement of all claims of the creditors of Westcap and the
claims of Westcap against National Western, with the exception of the claims
of The City Colleges against National Western. The preliminary agreements are
subject to documentation, notice and disclosure to and approval by the Westcap
creditors, approval by Westcap and National Western, and approval and
confirmation by the bankruptcy court. If the plan is ultimately approved and
confirmed, National Western's obligations could total approximately $15
million for complete releases from all Westcap claims against National Western
and creditors' claims against Westcap and National Western, except for the
pending claims asserted by The City Colleges against National Western in
federal court litigation. However, it remains uncertain at this time whether
the tentative agreements will be approved by all the parties, including the
bankruptcy court. As a result, no amounts have been accrued in the Company's
financial statements for potential settlements.
(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 $2,725,000 at December 31, 1997. 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 monitors and revises
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
$952,000, $1,146,000, and $2,371,000 for the years ended December 31, 1997,
1996, and 1995, respectively.
(E) Changes in Accounting Principles
In December, 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-3, which provides guidance on accounting
by insurance and other enterprises for assessments related to insurance
activities. The SOP provides: (1) guidance for determining when an entity
should recognize a liability for guaranty fund and other insurance related
assessments, (2) guidance on how to measure the liability including
discounting of the liability if the amount and timing of the cash payments are
fixed or reliably determinable, (3) guidance on when an asset may be
recognized for a portion or all of the assessment liability or paid assessment
that can be recovered through premium tax offsets or policy surcharges, and
(4) requirements for disclosure of certain information. The Company
anticipates that this SOP will not have a significant effect on its reporting
of liabilities for guaranty fund assessments, as the Company is currently
applying accounting procedures similar to those in the new statement. SOP 97-
3 is effective for financial statements for fiscal years beginning after
December 15, 1998. The Company currently expects to implement the SOP in the
first quarter of 1999.
(10) STOCKHOLDERS' EQUITY
(A) Changes in Common Stock Shares Outstanding
Details of changes in shares of common stock outstanding is provided below:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Common stock shares outstanding:
Shares outstanding at beginning of year 3,491 3,491 3,488
Shares exercised under stock option plan 1 - -
Shares issued under stock bonus plan - - 3
Shares outstanding at end of year 3,492 3,491 3,491
</TABLE>
(B) 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 1998 is $37,351,000. 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
regulatory requirements for capital.
(C) 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.
(D) Stock Bonus Plan
During 1993 the Company implemented a onetime 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, 1997 and 1996.
(E) Stock and Incentive Plan
The Company has a stock and incentive plan which 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 nonqualified 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 began on 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. Nonemployee
directors, including members of the Compensation and Stock Option Committee,
are eligible for nondiscretionary stock options.
On May 19, 1995, the Committee approved the issuance of 52,500 nonqualified
stock options to selected officers of the Company. The Committee also granted
7,000 nonqualified, nondiscretionary stock options to nonemployee Company
directors. Additional options totaling 33,000 and 21,900 were issued to
selected officers on April 19, 1996 and May 1, 1997, respectively. 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
Balance at December 31, 1995 240,500 59,500 38.13
Stock Options:
Granted (33,000) 33,000 65.00
Balance at December 31, 1996 207,500 92,500 47.71
Stock Options:
Granted (21,900) 21,900 85.13
Exercised - (400) 99.75
Forfeited 100 (100) 75.06
Balance at December 31, 1997 185,700 113,900 $ 54.92
</TABLE>
Vested and exercisable options at December 31, 1997 and 1996 totaled 2,400 and
1,400, respectively. No options were vested and exercisable at December 31,
1995.
The following table summarizes information about stock options outstanding at
December 31, 1997.
<TABLE>
<CAPTION>
Options Outstanding
Weighted-
Number Average Options
Outstanding Remaining Life Exercisable
<S> <C> <C> <C>
Exercise prices:
$38.13 59,100 7.4 years 2,400
65.00 32,950 8.3 years -
85.13 21,850 9.3 years -
Totals 113,900 2,400
</TABLE>
In October, 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (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. No
compensation costs have been recorded for the Company's existing plan using
the intrinsic value based method. However, if compensation expense for the
stock options had been determined using the fair value based method under SFAS
No. 123, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
(In thousands except per share amounts)
<S> <C> <C> <C>
Net earnings:
As reported $ 41,572 46,215 19,284
Pro forma $ 41,211 45,975 19,186
Basic earnings per share:
As reported $ 11.91 13.24 5.53
Pro forma $ 11.80 13.17 5.50
Diluted earnings per share:
As reported $ 11.81 13.17 5.52
Pro forma $ 11.70 13.10 5.49
</TABLE>
The fair value of the options used in estimating the pro forma amounts above
were estimated on the date of grant using an option pricing model with the
weighted-average assumptions as detailed below:
<TABLE>
<CAPTION>
Options Granted in
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Risk-free interest rates 5.4% 6.5% 6.4%
Dividend yields - - -
Volatility factors 32.1% 32.6% 32.5%
Weighted-average
expected life 7 years 7 years 7 years
Weighted-average
fair value per share $ 39.08 $ 31.63 $ 18.56
</TABLE>
(F) Changes in Accounting Principles
In June, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. This statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This statement requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position.
Prior to issuance of SFAS No. 130, some changes in equity were displayed in
the income statement, which reports the results of operations, while other
changes were included directly in balances within a separate component of
equity in the statement of financial position. SFAS No. 130 will affect the
Company's reporting presentation of certain items such as foreign currency
translation adjustments and unrealized gains and losses on investment
securities. These items will now be a component of other comprehensive
income. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997, and reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company will implement
this statement in the first quarter of 1998.
(11) EARNINGS PER SHARE
In February, 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." This
statement changes the computation, presentation, and disclosure requirements
for earnings per share (EPS). SFAS No. 128 replaces the presentation of
primary and fully diluted EPS with basic and diluted EPS, respectively. Basic
EPS excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.
The Company adopted SFAS No. 128 effective December 31, 1997. In accordance
with the new statement, prior period earnings per share data has been restated
in the accompanying financial statements. The following table sets forth the
computation of basic and diluted earnings per share:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
(In thousands except per share amounts)
<S> <C> <C> <C>
Numerator for basic and diluted
earnings per share:
Income from continuing operations
available to common stockholders
before and after assumed conversions $ 42,572 46,215 35,634
Denominator:
Basic earnings per share -
weighted-average shares 3,491 3,491 3,488
Effect of dilutive stock options 30 19 5
Diluted earnings per share -
adjusted weighted-average shares
for assumed conversions 3,521 3,510 3,493
Basic earnings per share $ 12.20 13.24 10.22
Diluted earnings per share $ 12.09 13.17 10.20
</TABLE>
(12) 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 $57,769,000, $56,689,000, and $57,407,000,
for the years ended December 31, 1997, 1996, and 1995, respectively.
A significant portion of the Company's universal life and investment annuity
contracts were sold through three marketing agencies. Combined business from
these agencies accounted for approximately 21%, 31%, and 34% of total direct
premium revenues and universal life and investment annuity contract deposits
for 1997, 1996, and 1995, respectively.
(13) SEGMENT INFORMATION
(A) Insurance and Discontinued Brokerage Operations
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:
1997 $ 312,274 32(A) (32) 312,274
1996 311,209 373(A) (373) 311,209
1995 287,816 5,112(A) (5,693) 287,235
Net earnings
(losses):
1997 $ 42,572 (1,000) - 41,572
1996 46,215 - - 46,215
1995 35,634 (16,350) - 19,284
Identifiable
assets:
1997 $ 3,224,671 892 - 3,225,563
1996 3,119,572 1,257 - 3,120,829
1995 2,952,282 6,177 - 2,958,459
<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>
(B) Changes in Accounting Principles
In June, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This statement establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers.
SFAS No. 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments, such as
segment profit or loss, certain specific revenue and expense items, and
segment assets. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated regularly
by the chief operating decision maker in deciding how to allocate resources
and in assessing performance.
Although the Company currently reports certain information about its operating
segments, products, geographical distribution of business, and major
customers, this new standard will require expanded disclosures related to
these items. The Company anticipates that the expanded disclosures will
require additional information about its life insurance and annuity products
as well as its domestic and international operations. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company will implement this statement in its December 31, 1998,
financial statements.
(14) 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>
1997:
Revenues $ 72,916 80,924 76,094 82,340
Earnings from
continuing operations $ 6,752 11,798 9,529 14,493
Losses from
discontinued operations (1,000) - - -
Net earnings $ 5,752 11,798 9,529 14,493
Basic earnings per share:
Earnings from
continuing operations $ 1.94 3.38 2.73 4.15
Losses from
discontinued operations (0.29) - - -
Net earnings $ 1.65 3.38 2.73 4.15
Diluted earnings per share:
Earnings from
continuing operations $ 1.92 3.35 2.71 4.11
Losses from
discontinued operations (0.28) - - -
Net earnings $ 1.64 3.35 2.71 4.11
1996:
Revenues $ 75,469 79,510 76,725 79,505
Net earnings $ 8,744 11,840 12,560 13,071
Basic earnings per share:
Net earnings $ 2.50 3.40 3.59 3.75
Diluted earnings
per share:
Net earnings $ 2.49 3.38 3.58 3.72
</TABLE>
The fourth quarter net earnings in 1997 reflect the following significant
items:
Net earnings for the quarter ended December 31, 1997, were $14,493,000
compared to $13,071,000 for the fourth quarter of 1996. This reflects an
increase of $1,422,000, or 10.9%, over 1996 fourth quarter earnings.
Increases in universal life and annuity contract revenues of 12.8% and net
investment income of 4.0% contributed to the higher earnings. Life insurance
benefit claims were also down 7.7%, which had a positive effect on 1997 fourth
quarter earnings. Realized gains, net of taxes, included in net earnings
totaled $509,000 and $219,000 for the fourth quarters 1997 and 1996,
respectively.
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.
(15) 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, 1997
and 1996. 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, 1997 and 1996.
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, 1997 December 31, 1996
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 $ 1,874,643 1,949,876 1,873,561 1,896,847
Securities available
for sale 651,736 651,736 527,627 527,627
Cash and short-term
investments 7,870 7,870 11,358 11,358
Mortgage loans 181,878 192,640 193,311 202,961
Policy loans 133,826 152,809 142,077 154,681
Life interest in Libbie
Shearn Moody Trust 4,636 16,668 4,922 18,614
Assets of
discontinued
operations - cash 269 269 270 270
LIABILITIES
Deferred investment
annuity contracts $ 1,934,019 1,703,599 1,927,220 1,688,417
Immediate investment
annuity and
supplemental contracts 196,827 205,042 163,444 163,860
</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.
(16) 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.
As a result of the discontinued operations and subsequent bankruptcy filing,
Westcap's assets are being carried at their estimated fair value, and its
liabilities include estimated costs related to ceasing operations. These
estimated costs consist primarily of general and legal expenses. The
preparation of Westcap's 1997 and 1996 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. The 1995 losses from discontinued
operations resulted in the complete write-off of National Western Life
Insurance Company's investment in Westcap on a consolidated basis. However, a
$1,000,000 cash infusion was made to Westcap on March 18, 1997, for
operational expenses incurred during its bankruptcy. This contribution was
reflected as a loss from discontinued operations in the first quarter of 1997.
Any additional losses from discontinued operations will depend primarily on
results of Westcap bankruptcy proceedings and settlement discussions. The
bankruptcy filing and events and settlement discussions subsequent to the
filing are more fully 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,
1997, 1996, and 1995 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,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Assets:
Cash $ 269 270 5,646
Other assets 623 987 531
$ 892 1,257 6,177
Liabilities and Stockholder's Deficit:
Liabilities $ 1,625 2,744 7,430
Stockholder's deficit (733) (1,487) (1,253)
$ 892 1,257 6,177
</TABLE>
<TABLE>
<CAPTION>
Years Ended September 30,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Revenues $ 32 373 5,112
Expenses 278 607 22,715
Net losses $ (246) (234) (17,603)
</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, 1997
(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 $ 23,867 24,198 23,867
States, municipalities,
and political
subdivisions 26,996 29,545 26,996
Foreign governments 51,331 53,688 51,331
Public utilities 271,478 281,058 271,478
Corporate 1,034,677 1,077,402 1,034,677
Mortgage-backed 451,515 469,402 451,515
Asset-backed 14,779 14,583 14,779
Total securities held
to maturity 1,874,643 1,949,876 1,874,643
Securities available
for sale:
United States government
and government
agencies and authorities 3,219 3,442 3,442
Public utilities 58,567 61,508 61,508
Corporate 232,980 244,945 244,945
Mortgage-backed 240,479 253,657 253,657
Asset-backed 72,918 74,898 74,898
Total securities available
for sale 608,163 638,450 638,450
Total fixed maturity bonds 2,482,806 2,588,326 2,513,093
Equity securities:
Securities available
for sale:
Common stocks:
Public utilities 192 314 314
Banks, trust and
insurance
companies 195 2,651 2,651
Industrial
and other 86 105 105
Preferred stocks 9,638 10,216 10,216
Total equity securities 10,111 13,286 13,286
Mortgage loans (2) 173,832 169,192
Policy loans 133,826 133,826
Other long-term investments (3) 29,609 27,387
Cash and short-term investments 7,870 7,870
Total investments other than
investments in related parties $ 2,838,054 2,864,654
<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, 1997
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
$4,640,000, and real estate is stated at cost before allowances for possible
losses of $2,222,000.
(2) Mortgage loans with related parties totaling $12,686,000 have been
excluded.
(3) Real estate acquired by foreclosure included in other long-term
investments is as follows: cost $4,214,000; balance sheet amount $3,238,000.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1997, 1996, and 1995
(In thousands)
<TABLE>
<CAPTION>
Balance (1)
at Charged to Balance at
Beginning Costs and (2) (3) End 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, 1997 $ - - - - -
December 31, 1996 $ - - - - -
December 31, 1995 $ 1,000 - (1,000) - -
Allowance for
possible
losses on
mortgage loans:
December 31, 1997 $ 5,988 1,133 (2,408) (73) 4,640
December 31, 1996 $ 5,668 500 (180) - 5,988
December 31, 1995 $ 5,929 - (261) - 5,668
Allowance for
possible
losses on real
estate:
December 31, 1997 $ 2,288 46 (185) 73 2,222
December 31, 1996 $ 2,152 526 (390) - 2,288
December 31, 1995 $ 1,803 882 (533) - 2,152
<FN>
(1) Except for expenses related to brokerage trade receivables, which are
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
Date: March 27, 1998 /S/ Robert L. Moody
By: Robert L. Moody, Chairman of the
Board, Chief Executive Officer, and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title (Capacity) Date
/S/ Robert L. Moody Chairman of the Board, March 27, 1998
Robert L. Moody Chief Executive Officer,
and Director
(Principal Executive Officer)
/S/ Ross R. Moody President, Chief Operating March 27, 1998
Ross R. Moody Officer, and Director
/S/ Robert L. Busby, III Senior Vice President - Chief March 27, 1998
Robert L. Busby, III Administrative Officer, Chief
Financial Officer and
Treasurer
(Principal Financial Officer)
/S/ Vincent L. Kasch Vice President - Controller March 27, 1998
Vincent L. Kasch and Assistant Treasurer
(Principal Accounting
Officer)
Director March 27, 1998
Arthur O. Dummer
Director March 27, 1998
Harry L. Edwards
/S/ E. Douglas McLeod Director March 27, 1998
E. Douglas McLeod
/S/ Charles D. Milos, Director March 27, 1998
Jr.
Charles D. Milos, Jr.
Director March 27, 1998
Frances A. Moody
/S/ Russell S. Moody Director March 27, 1998
Russell S. Moody
/S/ Louis E. Pauls, Jr. Director March 27, 1998
Louis E. Pauls, Jr.
Director March 27, 1998
E.J. Pederson
EXHIBIT 10(j)
FOURTH AMENDMENT TO THE
NON-QUALIFIED DEFERRED COMPENSATION PLAN
WHEREAS, National Western Life Insurance Company established a Non-Qualified
Deferred Compensation Plan ("the Plan"), effective April 1, 1995, and
WHEREAS, the Plan may be amended by action of the Board of Directors of the
Company pursuant to the provisions of Section 6.2 at any time, and
WHEREAS, the Plan currently has no provision for a participant to access funds
in his account balance except for retirement, disability, or death, pursuant
to the Plan, and
WHEREAS, the Pension Committee has recommended to the Board of Directors that
the Plan be amended as set forth herein to allow for hardship withdrawals and
other early withdrawals, and
WHEREAS, this Board believes it is desirable to so amend the Plan,
NOW THEREFORE, the Plan is amended as follows:
Article V is amended by adding the following new section 5.5 in its entirety:
"5.5 `Hardship Withdrawals' In the event of a Participant's `unforeseeable
emergency,' the Participant may submit a written request to the Administrative
Committee for an early withdrawal from the Participant's Account Balance
(herein called a `Hardship Withdrawal').
"The Administrative Committee may, in its sole discretion, grant a Hardship
Withdrawal, if the Administrative Committee determines that the Participant
has an unforeseeable emergency as hereinafter defined. The amount of the
Hardship Withdrawal shall not exceed an amount reasonably needed for the
unforeseeable emergency and shall not exceed the vested balance of the
Participant's Accounts on the date of such Hardship Withdrawal. An
unforeseeable emergency is defined as a severe financial hardship resulting
from a sudden and unexpected illness or accident of the Participant or of a
dependent (as defined in Section 152(a) of the Code), loss of the
Participant's property due to casualty, or other similar extraordinary and
unforeseeable circumstances arising as a result of events beyond the control
of the Participant. The circumstances that will constitute an unforeseeable
emergency will depend upon the facts of each case."
Article V is amended by adding the following new Section 5.6 in its entirety:
"5.6 `Early Withdrawals' Notwithstanding the aforementioned, the Participant
may elect to receive a lump sum distribution of all or a portion of the
Participant's Account Balance by submitting a written request to the
Administrative Committee. Such distribution, however, will be subject to a
ten percent (10%) early withdrawal penalty. The withdrawal penalty is ten
percent (10%) of the amount of the lump sum distribution and will reduce such
distribution.
"The ten percent (10%) withdrawal penalty will be used by the Employer to
offset any required Employer contribution under this Plan."
CERTIFICATION
I, James P. Payne, Secretary of National Western Life Insurance Company, do
hereby certify that the above and foregoing is a true and correct copy of a
resolution adopted by a meeting of the Board of Directors of said Company on
the 20th day of June, 1997, and that it is currently in effect.
WITNESS MY HAND this 16th day of July, 1997.
/S/ James P. Payne
Secretary
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary State of Incorporation
The Westcap Corporation Delaware
NWL Investments, Inc. Texas
NWL Properties, Inc. Texas
NWL 806 Main, Inc. Texas
NWL Services, Inc. Nevada
NWL Financial, Inc. Nevada
All of the subsidiaries listed above are wholly owned by National Western Life
Insurance Company. The subsidiaries conduct business under the same corporate
names as detailed above.
<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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 638,450
<DEBT-CARRYING-VALUE> 1,874,643
<DEBT-MARKET-VALUE> 1,949,876
<EQUITIES> 13,286
<MORTGAGE> 181,878
<REAL-ESTATE> 15,027
<TOTAL-INVEST> 2,877,340
<CASH> 7,870
<RECOVER-REINSURE> 461
<DEFERRED-ACQUISITION> 291,079
<TOTAL-ASSETS> 3,225,563
<POLICY-LOSSES> 2,751,290
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 15,723
<POLICY-HOLDER-FUNDS> 9,278
<NOTES-PAYABLE> 2,646
0
0
<COMMON> 3,492
<OTHER-SE> 397,371
<TOTAL-LIABILITY-AND-EQUITY> 3,225,563
96,062<F1>
<INVESTMENT-INCOME> 217,446
<INVESTMENT-GAINS> (1,588)
<OTHER-INCOME> 354
<BENEFITS> 180,485<F2>
<UNDERWRITING-AMORTIZATION> 39,934
<UNDERWRITING-OTHER> 27,560
<INCOME-PRETAX> 64,295
<INCOME-TAX> 21,723
<INCOME-CONTINUING> 42,572
<DISCONTINUED> (1,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,572
<EPS-PRIMARY> 11.91
<EPS-DILUTED> 11.81
<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 $15,812 revenues from traditional contracts subject to FAS 60
accounting treatment and $80,250 revenues from universal life and investment
annuity contracts subject to FAS 97 accounting treatment.
<F2>Consists of $37,361 benefits paid to policyholders, $(2,076) decrease in
reserves on traditional contracts and $145,200 interest on universal life and
investment annuity contracts.
</FN>
</TABLE>
