Annual Report (Form 10-K), fiscal year 1993

ITEM 1. BUSINESS
(a) General
Life Insurance Business
National Western Life Insurance Company (hereinafter referred to as
"National Western", "Company", or "Registrant") is a life, health,
and accident insurance corporation, chartered in the State of
Colorado in 1956, and doing business in 43 states and the District
of Columbia. National Western also accepts applications from and
issues policies to residents of several Central and South American
countries. Such policies are accepted and issued in the United
States. During 1993, the Company recorded approximately $172
million in premium revenues, universal life, and investment annuity
contract deposits. New life insurance issued during 1993
approximated $1.1 billion and the total amount in force at year-end
1993 was $7.4 billion. As of December 31, 1993, the Company had
total consolidated assets of approximately $2.9 billion.
Competition: The life insurance business is highly competitive and
National Western competes with over 2,000 stock and mutual
companies. Mutual companies may have certain competitive
advantages over stock companies in that the policies written by
them are participating policies and their profits inure to the
benefit of their policyholders. The Company also writes
participating policies; however, participating policies represent
only 1% of the Company's life insurance in force at December 31,
1993. The Company believes that its premium rates and its policies
are generally competitive with those of other life insurance
companies selling similar types of insurance.
Best's Agents Guide To Life Insurance Companies, an authoritative
life insurance publication, lists companies by total admitted
assets and life insurance in force. As of December 31, 1992, the
most recent date for which information is available, National
Western ranked 122 in total admitted assets and 226 in life
insurance in force among the estimated 2,000 life insurance companies domiciled in the United States.
Agents and Employees: National Western has 231 full-time employees at its principal executive office. Its insurance operations are conducted primarily through broker-agents, which numbered 6,475 at December 31, 1993. The agency operations are supervised by Senior Vice Presidents of domestic and international marketing. The Company's agents are independent contractors who are compensated on a commission basis. General agents receive overwriting first-year and renewal commissions on business written by agents under their supervision. The ratio of agents' expenses to premium revenues, universal life, and investment annuity contract deposits before deferral of related acquisition costs were as follows:
Types of Insurance Written: National Western offers a broad portfolio of individual whole life and term life insurance plans, endowments, and annuities, including standard supplementary riders. The Company does not market group insurance. In recent years the majority of the business written has been flexible premium and single premium annuities and universal life products. Except for its employee health plan and a small number of existing individual accident and health policies, primarily in Florida, the Company does not write any new policies in the accident and health markets.
The underwriting policy of the Company is to require medical
examination of applicants for ordinary insurance in excess of
certain prescribed limits. These limits are graduated according to
the age of the applicant and the amount of insurance desired. The
Company estimates that more than 65% of its ordinary life insurance
in force at December 31, 1993, was issued without a medical
examination.
The Company has no maximum for issuance of life insurance on any
one life. However, the Company's general policy is to reinsure that
portion of any risk in excess of $150,000 on the life of any one
individual. Also, following general industry practice, policies are
issued on substandard risks. At December 31, 1993, approximately 3%
of the individual life insurance in force was represented by
substandard risks.
Geographical Distribution of Business: For the year 1993, insurance
and annuity policies held by residents of the State of California
accounted for 18% of premium revenues, universal life, and
investment annuity contract deposits from direct business, while
policies held by residents of Texas and Florida accounted for
approximately 13% and 4%, respectively. All other states of the United States accounted for 34% of premium revenues from direct business, with no such state accounting for as much as 4% of premium revenues. The remaining 31% of premium revenues, universal life, and investment annuity contract deposits were derived from the Company's policies issued to foreign nationals.
Approximately 63% of the life insurance face amount issued by the Company during 1993 was written through international insurance brokers acting as independent contractors. Foreign business is solicited by various independent brokers, primarily in Central and South America, and forwarded to the United States for acceptance and issuance. The Company maintains strict controls on the business it accepts from such foreign independent brokers, as well as its underwriting procedures for such business. A currency clause is included in each foreign policy stating that premium and claim "dollars" refer to lawful currency of the United States of America.
Investments: State insurance statutes prescribe the nature,
quality, and percentage of the various types of investments which
may be made by insurance companies and generally permit investments
in qualified state, municipal, federal, and foreign government
obligations, corporate bonds, preferred and common stock, real estate, and real estate first lien mortgages where the value of the underlying real estate exceeds the amount of the mortgage lien by certain required percentages.
The following table shows investment results for insurance operations for the periods indicated:
The following table shows the percentage distribution of insurance operation investments:
Regulation: The Company is subject to regulation by the supervisory agency of each state or other jurisdiction in which it is licensed to do business. These agencies have broad administrative powers, including the granting and revocation of licenses to transact business, the licensing of agents, the approval of policy forms, the form and content of mandatory financial statements, capital, surplus, and reserve requirements, as well as the previously
mentioned regulation of the types of investments which may be made.
The Company is required to file detailed financial reports with
each state or jurisdiction in which it is licensed, and its books
and records are subject to examination by each. In accordance with
the insurance laws of the various states in which the Company is
licensed and the rules and practices of the National Association of
Insurance Commissioners, examination of the Company's records
routinely takes place every three to five years. These examinations
are supervised by the Company's domiciliary state, with
representatives from other states participating. The most recent
examination was completed in 1994 and covered the six-year period
ended December 31, 1992. The states of Colorado and Delaware
participated. A final report disclosing the examination results
has not been completed and published. However, the Company has
obtained a draft copy of the report and has reviewed it with the
examination team. The draft report contained no adjustments or
issues which would have a significant, negative impact on the
operations of the Company. A final published report is anticipated
by mid-1994.
Regulations that affect the Company and the insurance industry are
often the result of efforts by the National Association of
Insurance Commissioners (the NAIC). The NAIC is an association of
state insurance commissioners, regulators and support staff that
acts as a coordinating body for the state insurance regulatory
process. Recently, increased scrutiny has been placed upon the
insurance regulatory framework, and certain state legislatures have
considered or enacted laws that alter, and in many cases increase,
state authority to regulate insurance companies. In light of
recent legislative developments, the NAIC and state insurance
regulators have begun re-examining existing laws and regulations,
specifically focusing on insurance company investments and solvency
issues, statutory policy reserves, reinsurance, risk-based capital
guidelines, interpretations of existing laws, the development of
new laws, and the implementation of nonstatutory guidelines.
Of particular importance, in 1993 the NAIC established new risk-based capital (RBC) requirements to help state regulators monitor the financial strength and stability of life insurers by identifying those companies that may be inadequately capitalized. Under the NAIC's requirements, each insurer must maintain its total capital above a calculated threshold or take corrective measures to achieve the threshold. The threshold of adequate capital is based on a formula that takes into account the amount of risk each company faces on its products and investments. The RBC formula takes into consideration four major areas of risk which are: (i) asset risk which primarily focuses on the quality of investments; (ii) insurance risk which encompasses mortality and morbidity risk; (iii) interest rate risk which involves asset/liability matching issues; and (iv) other business risks. The Company has calculated its RBC level based on the new requirement and has determined that its capital and surplus is significantly in excess of the threshold requirements.
The RBC regulation developed by the NAIC is an example of its involvement in the regulatory process. New regulations are routinely published by the NAIC as model acts or model laws. The NAIC encourages adoption of these model acts by all states to provide uniformity and consistency among state insurance regulations.
Brokerage Business
The Westcap Corporation, a wholly-owned subsidiary of the Company, is a brokerage firm headquartered in Houston, Texas, with 178 employees. Its wholly-owned subsidiaries include Westcap Securities, Inc. (Westcap Securities), Westcap Government Securities, Inc. (Westcap Government Securities), and Westcap Mortgage Company (Westcap Mortgage).
Westcap Securities is primarily a dealer in municipal and corporate bonds and collateralized mortgage obligations and serves as an underwriter for municipal bond issuers. It is subject to the Securities and Exchange Commission's Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital and
requires that the ratio of its aggregate indebtedness to net
capital, both as defined, shall not exceed 15 to 1. Retained
earnings may be restricted as to payment of dividends if this ratio exceeds 10 to 1. At September 30, 1993, its most recent fiscal year- end, Westcap Securities' net capital was in excess of the minimum requirements and its ratio of aggregate indebtedness to net capital was 0.1 to 1.
Westcap Government Securities is principally a secondary market dealer in obligations issued or guaranteed by the U.S. government or its agencies. It is subject to the capital rules of the Government Securities Act of 1986 that requires the maintenance of minimum liquid capital and the ratio of liquid capital to measured market and credit risk, all as defined, to be 120% or higher. Distributions of equity in the form of dividends or purchases of common stock may be restricted if this ratio is less than 150%. At September 30, 1993, its most recent fiscal year-end, Westcap Government Securities' ratio of liquid capital to market and credit risk was 376%.
Westcap Mortgage was previously engaged in the business of originating and servicing commercial and residential real estate loans. It also sold mortgages to investors which were securitized by the Government National Mortgage Association (GNMA). However, on December 10, 1990, the Board of Directors of Westcap Mortgage approved a plan for the complete dissolution and liquidation of Westcap Mortgage. Accordingly, an orderly liquidation of the assets of Westcap Mortgage commenced in 1990 and was essentially completed in 1992.
The Westcap Corporation's customer base includes commercial banks,
savings and loan associations, public funds, credit unions,
insurance companies, investment advisors, private pensions,
mortgage bankers, and sophisticated individual investors. Westcap
offers a complete mix of debt securities, including mortgage-backed securities, U.S government and federal agency issues, collateralized mortgage obligations (CMOs), real estate mortgage investment conduits (REMICs), stripped mortgage-backed securities (SMBs), SBA loan pools, certificates of deposit, and corporate, taxable, and tax-exempt bonds.
Effective October 1, 1993, Westcap Securities and Westcap Government Securities were merged with and into Westcap Securities Operating Partnership, a newly formed Delaware limited partnership whose sole partners are Westcap Securities Management, Inc. (Management) and Westcap Securities Investment, Inc. (Investment). Both Management and Investment were incorporated on October 1, 1993, under the laws of the State of Nevada and are wholly-owned subsidiaries of The Westcap Corporation. The change in organizational structure had no impact on the financial statements of The Westcap Corporation as of September 30, 1993, its fiscal year-end. As National Western consolidates The Westcap Corporation as of September 30, the organizational changes also had no impact on the consolidated financial statements as of December 31, 1993.
(b) Financial Information About Industry Segments
Information concerning the Company's two industry segments follows:
Other information concerning these industry segments is included in Item 1. (a).
(c) Narrative Description of Business
Included in Item 1.(a).
(d) Financial Information About Foreign and Domestic Operations and Export Sales
Included in Item 1.(a).
ITEM 2.



ITEM 2. PROPERTIES
The Company leases 72,000 square feet of office space in Austin, Texas, for $565,000 per year plus taxes, insurance, maintenance, and other operating costs less the amortization of the deferred gain of $325,000 which arose from the sale and lease-back of the property in 1984. This lease, which was to expire in 1994, has been extended through October 2000, with rent of $477,600 per year.
The Company's brokerage subsidiary, Westcap, leases its office facilities in Houston, Texas, under a lease which terminates in 1997. The total leased space is approximately 38,500 square feet. Westcap also leases several small branch office spaces in Austin, Texas, Sarasota, Florida and Morris Plains, New Jersey. The annual lease cost for all locations through the year 1997 will range from approximately $251,000 to $618,000.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
Suit was filed in the United States District Court for the District of Minnesota, Fourth Division, on September 14, 1989, against the Company by Midwest Savings Association, F.A. (Midwest Savings). Midwest Savings is the successor to Midwest Federal Savings and Loan Association of Minneapolis (Midwest Federal), which was taken under receivership by the Federal Savings and Loan Insurance Corporation (FSLIC). Midwest Savings sued the Company for the return of prepaid life insurance premiums and the present cash value for the policies issued to Midwest Federal Executive Officers Plan. Midwest Savings acquired these life insurance policies as part of its assumption of Midwest Federal's assets and deposit liabilities. The Company claimed that Midwest Savings was not entitled to receive the policy values because Midwest Federal executed assignments of these policies to the Company as security for five debentures purchased by the Company from Midwest Federal in the total face amount of $8,000,000. Midwest Savings claimed that the assignments were not intended and did not secure the debentures.
Plaintiff filed a motion for summary judgment which was heard by the Court on January 3, 1991. On February 21, 1991, the Court granted plaintiff's motion for summary judgment, and on March 7, 1991, the Resolution Trust Corporation was substituted as plaintiff in the case. The District Court judgment represented an unfavorable outcome to the Company. The Company appealed the court ruling and also recorded a corresponding $8,000,000 liability for the potential payment of this claim. The Company has since been accruing an additional liability for interest on this $8,000,000 balance.
This lawsuit was settled in September, 1993, resulting in an $11,500,000 payment by the Company. The Company's total accrued liability for this claim exceeded the payment by approximately $670,000. This difference has been reflected as other income in the accompanying statements of earnings for the year ended December 31, 1993.
On March 28, 1994, the Community College District No. 508, County of Cook and State of Illinois (The City Colleges) filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division, Cause No. 940-1920, against Westcap Government Securities, Inc., Westcap Securities, L.P., Westcap Securities Management, Inc. (collectively Westcap) and National Western Life Insurance Company. The suit seeks recession of securities purchase transactions by The City Colleges from Westcap between September 9, 1993 and November 3, 1993, alleged compensatory damages, punitive damages, injunctive relief, declaratory relief, fees and costs. As of the date hereof, neither Westcap nor the Company has been formally served with the complaint, no discovery has occurred, no judicial proceedings or hearings have occurred, no answers or responses have been prepared or filed, and Westcap and the Company are of the opinions that Westcap has adequate documentation to validate all such securities purchase transactions by The City Colleges, and that Westcap and the Company each have adequate defenses to the litigation. Although the alleged damages would be material to the Company's financial position, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time.
No other legal proceedings presently pending by or against the Company or its subsidiaries are described, because management believes the outcome of such litigation should not have a material adverse effect on the financial position of the Company or its subsidiaries taken as a whole.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of fiscal 1993 to a vote of the Company's security holders.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The principal market in which the common stock of the Company is traded is the NASDAQ/NMS Over-the-Counter Market. The high and low sales prices for the common stock for each quarter in the last two years are shown in the following table:
These quotations represent prices in the Over-the-Counter Market between dealers in securities, do not include retail markup, markdown, or commission, and do not necessarily represent actual transactions.
(b) Equity Security Holders
The number of stockholders of record on December 31, 1993, was as follows:
Class A Common Stock 7,637 Class B Common Stock 2
(c) Dividends
The Company has never paid cash dividends on its common stock. Payment of dividends is within the discretion of the Company's Board of Directors and will depend on factors such as earnings, capital requirements, and the operating and financial condition of the Company. Presently, the Company's capital requirements are such that it intends to follow a policy of retaining any earnings in order to finance the development of business and to meet increased regulatory requirements for capital.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The following five-year financial summary includes comparative amounts taken from the audited financial statements:
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
National Western Life Insurance Company is a life insurance company, chartered in the State of Colorado in 1956, and doing business in forty-three states and the District of Columbia. It
also accepts applications from and issues policies to residents of
Central and South American countries. These policies are accepted
and issued in the United States and accounted for approximately 31%
of the Company's total premium revenues, universal life, and
investment annuity contract deposits in 1993. The Company ranks
among the top ten percent of all life insurance companies measured
by assets. The primary products marketed by the Company are its
universal life and flexible premium annuity products. Most of the
Company's new business comes from the development of a market and
the design and marketing of a specific product for that market. As
this method of operation has proven successful, there are no
immediate plans to make any significant changes in marketing
operations.
In addition to the life insurance business, the Company has two
wholly-owned subsidiaries, The Westcap Corporation and Commercial Adjusters, Inc. The Westcap Corporation's principal activity is that of a U.S. government and municipal securities dealer, and Commercial Adjusters, Inc. is a small corporation investing primarily in six real estate joint ventures.
INVESTMENTS IN DEBT SECURITIES
Investment Philosophy
The Company's investment philosophy is to maintain a diversified portfolio of investment grade debt securities that provides adequate liquidity to meet policyholder obligations and other cash needs. The prevailing strategy within this philosophy is the intent to hold investments in debt securities to maturity. However, the Company does actively manage its portfolio which entails monitoring and reacting to all components which affect changes in the price or value of investments in debt securities. As a result, the Company classifies these securities for financial statement reporting purposes as either fixed maturities, securities available
for sale or trading securities. The reporting category chosen
depends on various factors including the type and quality of the
particular security and how it will be incorporated into the
Company's overall asset/liability management strategy.
Securities the Company purchases with the intent to hold to
maturity are classified as fixed maturities. Because the Company
has strong cash flows and matches expected maturities of assets and liabilities, the Company has the ability to hold the securities, as it would be unlikely that forced sales of securities would be required prior to maturity to cover payments of liabilities. As a result, fixed maturities are carried at amortized cost less declines in value that are other than temporary. However, certain situations may change the Company's intent to hold a particular security to maturity, the most notable of which is a deterioration in the issuer's creditworthiness. Accordingly, a security may be sold to avoid a further decline in realizable value when there has been a significant change in the credit risk of the issuer.
Securities purchased by the Company's brokerage subsidiary that are held for current resale are classified as trading securities. These securities are typically held for short periods of time, as the intent is to sell them, producing a trading profit. Trading securities are recorded in the Company's financial statements at market value. Any trading profits or losses and unrealized gains or losses resulting from changes in the market value of the securities are reflected as a component of income in the Company's financial statements.
Securities that are not classified as either fixed maturities or trading securities are reported as securities available for sale. These securities may be sold if market or other measurement factors change unexpectedly after the securities were acquired. For example, opportunities arise when factors change that allow the Company to improve the performance and credit quality of the investment portfolio by replacing an existing security with an alternative security while still maintaining an appropriate matching of expected maturities of assets and liabilities. Examples of such improvements are as follows: improving the yield earned on invested assets, improving the credit quality and performance or duration of the portfolio, and selling securities in advance of anticipated calls or other prepayments. Securities available for sale are reported in the Company's financial statements at the lower of aggregate cost or market value. Any unrealized gains or losses resulting from changes in the market value of the securities are reflected as a component of stockholders' equity.
In May, 1993, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities.
The Company's current accounting policy as described above is similar to the requirements of this new statement. Significant differences are that securities available for sale are currently being reported at the lower of aggregate cost or market value, whereas SFAS No. 115 requires reporting of these securities on an
individual fair value basis. Also, SFAS No. 115 provides stricter
requirements and guidance on the classification of securities among
the reporting categories. The potential financial effects of this
change in accounting principle are described in more detail in a
later section of this report. The Company plans to implement the
statement in the first quarter of 1994. Although the
implementation of this statement will have significant accounting
effects, the new statement will not significantly change or impact
the Company's investment philosophy and strategies.
As an integral part of its investment philosophy, the Company
performs an ongoing process of monitoring the creditworthiness of
issuers within the investment portfolio. In addition, review
procedures are performed on securities that have had significant
declines in market value. The Company's objective in these
circumstances is to determine if the decline in market value is due
to changing market expectations regarding inflation and general
interest rates or other factors.
Additional review procedures are performed on those market value
declines which are caused by factors other than market expectations
regarding inflation and general interest rates. Specific conditions
of the issuer and its ability to comply with all terms of the
instrument are considered in the evaluation of the realizable value
of the investment. Information reviewed in making this evaluation
would include the recent operational results and financial position
of the issuer, industry trends, recent credit reports and other
available data. If evidence does not exist to support a realizable
value equal to or greater than the carrying value of the
investment, such decline in market value is determined to be other
than temporary, and the carrying amount is reduced to its net realizable value. The amount of the reduction is reported as a realized loss.
Portfolio Analysis
At December 31, 1993, the fixed maturities portfolio totaled $1.79 billion or 70.1% of the Company's total invested assets. Securities available for sale were $39 million or 1.5% of total invested assets, while trading securities were $117 million or 4.6% of total invested assets at the same time period.
The carrying values of the trading securities and securities available for sale were the same as their market values as of December 31, 1993. However, the market value of the Company's fixed maturities was $1.91 billion compared to a carrying value of $1.79 billion. This represents a net unrealized gain of $121 million. The unrealized gain is reflective of the decline in market interest rates during 1993 and 1992.
The Company maintains a diversified debt securities portfolio which consists of various types of fixed income securities including primarily U.S. government, public utilities, corporate and mortgage-backed securities. Investments in mortgage-backed securities include U.S. government and private issue mortgage-backed pass-through securities as well as collateralized mortgage obligations (CMOs). As of December 31, 1993 and 1992, the Company's debt securities portfolio consisted of the following mix of securities:
The amortized cost and estimated market values of investments in debt securities at December 31, 1993, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
As market interest rates continued to decline in 1992 and into 1993, the Company's portfolio experienced increased calls and principal prepayments. The increase in calls was primarily in the Company's utilities holdings. The Company responded with an active approach in managing future call risk by investing the call
proceeds in a more diverse group of companies with increased call
protection. As a result, the Company's utilities holdings as a
percentage of the entire portfolio was reduced from 26.6% in 1992
to 16.3% in 1993.
Principal prepayments on mortgage-backed securities also increased
during 1993 due to the continued decline in interest rates. However, the Company substantially reduced its prepayment risk by investing primarily in collateralized mortgage obligations which have more predictable cash flow patterns than pass-through securities. The Company increased its holdings of planned amortization class I (PAC I) CMOs which are designed to amortize in a more predictable manner than other CMO classes or pass-throughs. This is achieved by redirecting prepayments to other CMO classes.
PAC I tranches now account for over 80% of the total CMO portfolio as of December 31, 1993. The CMOs that the Company purchases are modeled and subjected to detailed, comprehensive analysis by the Company's investment staff before any investment decision is made. The overall structure of the entire CMO is evaluated, and an average life sensitivity analysis is performed on the individual tranche being considered for purchase under increasing and decreasing interest rate scenarios. This analysis insures that the security fits appropriately within the Company's investment philosophy and asset/liability management parameters.
In addition to managing prepayment and call risk, the Company continues to concentrate on improving the credit quality of its investments in debt securities. Much attention is often placed on a company's holdings of below investment grade debt securities, as these securities generally have greater default risk than higher rated corporate debt. These issuers usually have high levels of indebtedness and are more sensitive to adverse industry or economic conditions than are investment grade issuers. The Company's small holdings of below investment grade debt securities, which are summarized as follows, increased slightly from 1992 primarily due to two corporate issuers that were downgraded.
The level of investments in debt securities which are in default as to principal or interest payments is indicative of the Company's minimal holdings of below investment grade debt securities. At December 31, 1993 and 1992, securities with principal balances totaling $3,151,000 and $3,750,000 were in default and on non-accrual status.
MORTGAGE LOANS AND REAL ESTATE
Investment Philosophy
The Company has changed its mortgage loan philosophy over the past several years. Historically, the Company had concentrated its mortgage loans within the State of Texas. The majority of loans were brought to the Company by brokers and others interested in securing a mortgage loan. While the mortgage loan portfolio has performed well despite downturns in the Texas economy, the Company has been forced to foreclose on certain loans.
The Company now takes a more proactive approach in originating
mortgage loans. This change in philosophy has resulted in an
overall improvement in the quality of mortgage loans, while
diversifying exposures geographically. In most cases, mortgage
loans now are: guaranteed by the borrower and secured by the
property, amortized over the term of the lease on the property
which is guaranteed by the lessee, and approved based on the credit
strength of the lessee. This approach also enables the Company to
choose the locale in which the property securing the loan is
located. In addition, the Company's underwriting guidelines still
require a loan-to-value ratio of 75% or less.
In general, the Company seeks loans on high quality, income
producing properties such as shopping centers, freestanding retail
stores, office buildings, industrial and sales or service facilities, selected apartment buildings, motels, and health care facilities. The location of these loans is typically in growth areas that offer a potential for property value appreciation. These growth areas are found primarily in major metropolitan areas, but occasionally in selected smaller communities. The Company currently seeks loans ranging from $500,000 to $11,000,000, with terms ranging from three to twenty-five years, at interest rates dictated by the marketplace.
The Company's direct investments in real estate are not a significant portion of its total investment portfolio. The majority of real estate owned was acquired through mortgage loan foreclosures. The Company has no current plans to significantly increase its investments in real estate in the foreseeable future.
Portfolio Analysis
The Company held net investments in mortgage loans totaling $188,920,000 and $177,236,000, or 7.4% and 7.6% of total invested assets, at December 31, 1993 and 1992, respectively. The loans are real estate mortgages, substantially all of which are related to commercial properties and developments and have fixed interest rates.
The diversification of the mortgage loan portfolio by geographic region of the country and by property type as of December 31, 1993 and 1992, was as follows:
As of December 31, 1993, the allowance for possible losses on mortgage loans was $6,849,000. Additions to the allowance totaling $2,152,000 were recognized as realized losses on investments in the Company's 1993 financial statements. Management believes that the allowance for possible losses is adequate. However, while management uses available information to recognize losses, future additions to the allowance may be necessary based on changes in economic conditions, particularly in the West South Central region which includes Texas, Louisiana, Oklahoma, and Arkansas.
The Company currently places all loans past due three months or more on a non-accrual status, thus recognizing no interest income on the loans. At December 31, 1993 and 1992, the Company had approximately $4,191,000 and $5,154,000, respectively, of mortgage loan principal balances on a non-accrual status. For the years ended December 31, 1993 and 1992, the approximate reduction in interest income associated with non-accrual loans was as follows:
In addition to the non-accrual loans, the Company had mortgage loans with restructured terms totaling approximately $14,257,000 and $7,263,000 at December 31, 1993 and 1992, respectively. For the years ended December 31, 1993 and 1992, the approximate reduction in interest income associated with restructured loans was as follows:
The contractual maturities of principal payments on mortgage loans at December 31, 1993, are as follows:
The Company owns real estate that was acquired through foreclosure and through direct investment totaling approximately $22,672,000 and $20,401,000 at December 31, 1993 and 1992, respectively. This small concentration of properties represents less than one percent of the Company's entire investment portfolio. The real estate holdings consist primarily of income-producing properties which are being operated by the Company. The Company recognized operating income on these properties of approximately $607,000 and $298,000 for the years ended December 31, 1993 and 1992, respectively. The Company does not anticipate significant changes in these operating results in the near future.
The Company monitors the conditions and market values of these properties on a regular basis. Realized losses recognized due to declines in values of properties totaled $1,208,000 and $450,000 for the years ended December 31, 1993 and 1992, respectively. The Company makes repairs and capital improvements to keep the properties in good condition and will continue this maintenance as needed. However, the amounts expended for this maintenance has not had a significant impact on the Company's liquidity and capital resources, and such maintenance is not foreseen to have a significant impact in the near future.
RESULTS OF OPERATIONS
The following table reflects financial statement income and expense items as a percentage of total Company revenues. Significant changes and fluctuations between years are described in detail following the table.
Life and Annuity Premiums: This revenue category represents the premiums on traditional type products. However, sales in most of the Company's markets have moved toward the non-traditional types such as universal life and investment annuities. This move in market direction accounts for the decrease in revenues in this category over the three-year period.
Universal Life and Investment Annuity Contract Revenues: These revenues are from the Company's non-traditional products which are universal life and investment annuities. Revenues from these types of products consist of policy charges for the cost of insurance, policy administration fees and surrender charges assessed during the period. These revenues have increased from $44.6 million in 1991 to $67.8 million in 1993 due to the Company's concentration of sales efforts on these products. However, increased surrender charge revenues resulting from increased policy surrenders account for the majority of the increase. Also, although these revenues continue to increase, the actual universal life and investment annuity deposits collected have decreased over the past three years. Deposits collected for the years ended December 31, 1993, 1992 and 1991 were $153.8 million, $243.2 million and $258.8 million, respectively.
The decline in universal life and investment annuity deposits
collected is primarily related to the Company's two-tier investment
annuity products. Over the past several years, one of the Company's
leading products was a two-tier rollover annuity. This annuity was designed to restore a policyholder's loss of funds, if any, upon transfer from another qualified plan vehicle to the Company's annuity contract. In developing the product, the Company anticipated that there would be a limited market for this type of annuity and that production would peak and then decrease. Production did peak in 1989 as assumed and has steadily decreased since that time. Due to this decline in sales and certain regulatory issues concerning two-tier products, the Company discontinued all sales of its two-tier annuities in the third quarter of 1992. (The regulatory issues are described in detail in a later section of this filing entitled "Current Regulatory Issues.") The Company also lowered credited interest rates on its universal life and annuity products primarily during 1992 and 1991. This was done in response to the overall decline in market rates over the same time period. As a result of the declining market rates, there has been increased competition which has also had an effect on the level of universal life and investment annuity
deposits collected and on the level of policy surrenders.
The discontinued products have been replaced with single-tier annuities, and the Company anticipates somewhat lower deposit collections than in previous years during this transition period. However, the Company anticipates that this decline will be reversed as efforts have continued to develop new annuity and life products for sale and distribution through independent marketing organizations. In addition to new product developments, the Company has contracted with additional independent marketing organizations to further strengthen and diversify distribution channels. Also, many products are developed specifically for these organizations to meet the needs for a particular customer base.
Net Investment Income: While investments attributable to the Company's insurance operations have been growing steadily over the past several years, the growth has slowed substantially in 1992 and 1993 primarily due to decreased universal life and annuity deposits and increased policy surrenders. During 1992, net investment income increased 4.4% which was consistent with the growth in investments.
However, net investment income declined from $184.1 million in 1992
to $180.3 million in 1993. This is reflective of both the slower
investment growth and the decline in the Company's investment
portfolio yield due primarily to the overall drop in market interest rates. In 1993, both cash from operations and investment proceeds from increased principal prepayments and calls on debt securities have been reinvested at lower yields due to market conditions, thereby producing lower investment income. Additionally, in 1993 and 1992 investment income was impacted due to reductions in the yields of the Company's remaining holdings of residual interests in collateralized mortgage obligations (CMO residuals). Holdings of principal exchange rate linked securities (PERLS) were also reduced substantially throughout 1992 which decreased yields. Although the reductions in holdings of the CMO residuals and PERLS did decrease portfolio yields, the exposure to exchange rate and prepayment risks were significantly reduced.
Brokerage Revenues: These revenues are from the Company's wholly-owned subsidiary, The Westcap Corporation. Revenues for 1993, 1992 and 1991 were $105.9 million, $123.1 million and $43.8 million, respectively. The significant increase in the level of brokerage revenues from 1991 is attributable to several factors. The steady decline in market interest rates has been very positive for brokerage firms. Also, The Westcap Corporation specializes in mortgage-backed securities, and many of their customers have experienced significant prepayments within their portfolios. This contributes to increased sales for the brokerage firm as the investors reinvest the proceeds. Other contributing factors have been the firm's ability to attract an experienced sales force and to increase the overall size of the force over the past several years. While The Westcap Corporation has increased its revenues, the brokerage industry is usually impacted significantly by prevailing economic and interest rate conditions. Therefore, operating results could be more cyclical in comparison to the insurance industry.
Other Income: The Company received proceeds from lawsuit settlements totaling $1,050,000 in 1993 which has been reflected in other income. In 1984, certain employee participants in the Company's "Builders, Contractors, and Employees Retirement Trust and Pension Plan" (the Plan) and other plaintiffs filed a civil lawsuit against the Company and other defendants with respect to various Plan matters, all as previously disclosed in the Company's annual reports on Form 10-K. The Company settled the lawsuit in 1991 with payments to the Internal Revenue Service and participants in the Plan. Subsequent to this settlement, the Company filed suit against the law firm which assisted in the development of the Plan. The Company also filed suit, for recovery of damages incurred, against an insurance company providing liability coverage for trustees of the Plan. Both suits were settled, with the Company receiving the proceeds as described above.
Also, as previously disclosed in the Company's annual reports on Form 10-K, the Company was a defendant in a lawsuit seeking recovery of certain values of life insurance policies pledged as collateral for debentures totaling $8,000,000. In early 1991, a court ruled that the collateral assignment was not enforceable. As a result, the Company recorded a loss of $8,000,000, in 1990 as the debentures were no longer deemed collateralized by the insurance policies and their market value was zero due to the insolvency of the issuer. The Company appealed the court ruling and also recorded a corresponding $8,000,000 liability for the potential payment of this claim. The Company has since been accruing an additional liability for interest on this $8,000,000 balance. This lawsuit was settled in September, 1993, resulting in an $11,500,000 payment by the Company. The Company's total accrued liability for this claim exceeded the payment by approximately $670,000 which has been reflected as other income.
Realized Gains on Investments: The Company had realized gains of $3.2 million, $15.7 million and $9.4 million in 1993, 1992 and 1991, respectively. The decrease in 1993 from the previous years is attributable to the prevailing strategy within the Company's investment philosophy which is the intent to hold debt securities
to maturity. The gains in the three years are net of write-downs on real estate and mortgage loans totaling $3,360,000, $3,325,000 and $3,200,000. The gains also are net of write-downs for permanent impairments on fixed maturities of $6,329,000, $5,000,000 and $5,969,000.
The loss in 1991 for permanent impairments on fixed maturities consisted primarily of realized losses related to below investment grade debt securities in which the issuers were in poor financial condition or in bankruptcy. The Company has substantially reduced its holdings in these securities over the past several years to approximately $25 million which is only 1% of total invested assets at December 31, 1993. The write-downs for 1992 and 1993 relate primarily to holdings of PERLS and CMO residuals. The Company made substantial reductions in the holdings of these securities in 1992 and 1993, thereby reducing the exposure to potential future losses.
Amortization of Deferred Policy Acquisition Costs: Amortization
has increased from $16.9 million in 1991 to $33.2 million in 1993.
The increase in amortization correlates to the increase in insurance operating profits, as these deferred costs are amortized based on product profitability.
Universal Life and Investment Annuity Contract Interest: Interest expense has declined steadily as amounts totaled $130.9 million, $135.8 million and $143.0 million for 1993, 1992 and 1991, respectively. This decline is due to the lowering of credited interest rates on most universal life and investment annuity products throughout these years. Also, as universal life and annuity deposits collected have decreased along with increased surrenders, the policy liabilities subject to interest crediting have remained relatively stable. As a result, additional interest costs related to increasing business have not been significant.
Although lowering credited rates on products has been profitable for the Company, it has also resulted in increased surrenders of policies as previously described. However, the Company closely monitors its credited rates taking into consideration such factors as profitability goals, policyholder benefits, product marketability, and economic market conditions. Rates are established or adjusted after careful consideration and evaluation of these factors against established objectives.
Other Insurance Operating Expenses: These expenses totaled $29.0 million, $27.9 million and $32.9 million for 1993, 1992 and 1991, respectively. The 1991 expenses were significantly higher due to a lawsuit settlement. In 1991 the Company settled a civil lawsuit which was originally filed against the Company in 1984. Under terms of the settlement, the Company paid approximately $6,218,000 to various parties plus approximately $57,000 in related expenses. (This lawsuit was described more fully under "Other Income" in this section.) Although 1992 and 1993 expenses are relatively comparable, there were several items of significance which are described as follows: (a) Commission expenses on insurance product sales were $2,500,000 lower in 1993 due to decreases in sales. (b) National Western Life Insurance Company is subject to state guaranty association assessments in all states in which it is licensed to do business. These associations generally guarantee certain levels of benefits payable to resident policyholders of
insolvent insurance companies. Most states allow premium tax credits for all or a portion of such assessments, thereby allowing eventual recovery of these payments over a period of years. However, several states do not allow such credits. In 1993 the Company recorded a charge of $3,700,000 to other insurance operating expenses for anticipated assessments. Although additional charges to expenses may be required, the Company currently is unaware of any significant pending assessments requiring accrual.
Brokerage Expenses: Expenses for 1993, 1992 and 1991 were $72.3 million, $82.6 million and $34.5 million, respectively. The majority of these expenses relate to commission compensation and vary directly with brokerage revenues. Accordingly, the expenses directly correspond to the level of brokerage revenues for the same periods. Also, as brokerage revenues increase, the ratio of brokerage expenses to such revenues decreases. This is because fixed costs are covered at a certain level of revenues, leaving only the variable cost of commissions.
Federal Income Tax Expense: The Federal corporate tax rate was increased from 34% to 35% in 1993. The total increase in 1993 Federal income taxes resulting from the change in rates was $1,018,000. Also, the 1991 expenses are not reflective of the statutory rate due to non-recurring items. The 1991 Federal income tax expense includes approximately $544,000 in additional taxes relating to the $6.2 million lawsuit previously described. Approximately $1.6 million of the total settlement was not deductible for tax purposes, resulting in the additional taxes. Also, capital losses were incurred in 1990 which could not be fully deducted for deferred tax purposes. This resulted in a capital loss carryforward of approximately $5,544,000 at December 31, 1990, that was fully utilized in 1991, resulting in a reduction of taxes of approximately $1,885,000.
Cumulative Effect of Change in Accounting for Income Taxes: In February, 1992, the FASB issued SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires a change from the deferred method of accounting for income taxes of Accounting Principles Board (APB) Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company adopted SFAS No. 109 effective January 1, 1993. The cumulative effect of this change in accounting for income taxes of $5,520,000 was determined as of January 1, 1993, and is reported separately in the statement of earnings for the year ended December 31, 1993. Prior periods' financial statements have not been restated to apply the provisions of SFAS No. 109.
SUBSEQUENT EVENTS
The Westcap Corporation, the Company's brokerage subsidiary, incurred trading losses during March, 1994, through unsettled customer securities purchase transactions. The net effect of these trading losses, which are expected to be between approximately $4,400,000 and $5,200,000, will be reflected in the Company's consolidated financial statements ended March 31, 1994. As a result of these losses, the Company has purchased an additional $4,400,000 of preferred stock of The Westcap Corporation and has agreed to provide a $3,000,000 line of credit to Westcap. This infusion of capital was important in order for Westcap to maintain its normal capital position, which is well in excess of required financial operating ratios.
On March 28, 1994, the Community College District No. 508, County of Cook and State of Illinois (The City Colleges) filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division, against National Western Life Insurance Company and subsidiaries of the The Westcap Corporation. The suit seeks recession of securities purchase transactions by The City Colleges from Westcap between September 9, 1993 and November 3, 1993, alleged compensatory damages, punitive damages, injunctive relief, declaratory relief, fees and costs. Neither Westcap nor the Company has been formally served with the complaint, no discovery has occurred, no judicial proceedings or hearings have occurred, and no answers or responses have been prepared or filed. Westcap and the Company are of the opinions that Westcap has adequate documentation to validate all of such securities purchase transactions by The City Colleges, and that Westcap and the Company each have adequate defenses to the litigation. Although the alleged damages would be material to the Company's financial position, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the Company are met primarily by funds provided from the life insurance operations. Policy deposits and revenues, investment income, and investment maturities are the primary sources of funds, while investment purchases and policy benefits are the primary uses of funds. The Company's brokerage subsidiary uses revolving lines of credit to complement any funds generated from operations. These lines of credit are used primarily for clearing functions for all securities transactions with its customers. National Western also has a $60 million bank line of credit. The line of credit is primarily used for cash management purposes relating to investment transactions.
Most of the Company's assets, other than policy loans and deferred
policy acquisition costs, are invested in bonds and other
securities, substantially all of which are readily marketable.
Although there is no present need or intent to dispose of such
investments, the Company could liquidate portions of the
investments should the need arise. Additionally, the Company has use of the line of credit for short-term liquidity needs for periods not exceeding 30 days. The Company expects future cash flows to be adequate to meet the demands for funds.
The Company had no long-term debt during 1993 or 1992. There are no present material commitments for capital expenditures in 1994, and the Company does not anticipate incurring any such commitments through the remainder of 1994.
CHANGES IN ACCOUNTING PRINCIPLES
In December 1990, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Post Retirement Benefits Other than Pensions." SFAS No. 106 establishes accounting standards for employers' accounting for, primarily, post retirement health care
benefits. The statement is effective for fiscal years beginning
after December 15, 1992. Since the Company currently pays no such
benefits, implementation had no impact on the results of operations
of the Company.
SFAS No. 112, "Employers' Accounting for Postemployment Benefits" was issued by the FASB in November 1992. This statement establishes accounting standards for employers who provide benefits to former or inactive employees after employment but before retirement. Postemployment benefits include all types of benefits provided to former or inactive employees, their beneficiaries and covered dependents. The statement is effective for fiscal years beginning after December 15, 1993. Implementation of this statement is not expected to have a significant impact on the results of operations of the Company.
The FASB issued SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" in December 1992. The statement specifies the accounting by insurance enterprises for the reinsuring of insurance contracts. It establishes the conditions required for a contract with a reinsurer to be accounted for as reinsurance and prescribes accounting and reporting standards for those contracts. It also eliminates the practice by insurance enterprises of reporting assets and liabilities relating to reinsured contracts net of the effects of reinsurance. This statement was implemented in 1993 but it had no effect on the Company's results of operations. It also had only a minor effect on the balance sheet presentation of certain assets and liabilities.
The FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," in May 1993. This statement addresses the accounting by creditors for impairment of certain loans. It is applicable to all creditors and to all loans, uncollateralized as well as collateralized, with certain exceptions. It also applies to all loans that are restructured in a troubled debt restructuring involving a modification of terms. It requires that impaired loans
that are within the scope of this statement be measured based on
the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the
loan's observable market price or the fair value of the collateral
if the loan is collateral dependent.
SFAS No. 114 applies to financial statements for fiscal years
beginning after December 15, 1994. The Company plans to implement
the statement in 1994. The Company is currently providing for
impairment of loans through an allowance for possible losses and
the implementation of this statement is not expected to have a
significant effect on the level of this allowance. As a result,
there should be no significant net impact on the Company's results
of operations or stockholders' equity. However, impairments under
the new statement will be reflected as insurance operating expenses
as opposed to realized losses in the Company's statements of
earnings.
In May 1993, the FASB also issued SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." This statement
addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all
investments in debt securities. Those investments are to be
classified in three categories and accounted for as follows:
(a) Debt securities that the enterprise has the positive intent
and ability to hold to maturity are classified as held-to-maturity
securities and reported at amortized cost.
(b) Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.
(c) Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity.
The Company's current accounting policy is similar to the requirements of the new statement. Significant differences are that securities available for sale are currently being reported at the lower of aggregate cost or market value, whereas, SFAS No. 115 requires reporting of these securities on an individual fair value basis. Also, SFAS No. 115 provides stricter requirements and guidance on the classification of securities among the three reporting categories.
SFAS No. 115 is effective for fiscal years beginning after December
15, 1993 and the Company plans to implement the statement in the
first quarter of 1994. As the Company's prevailing investment
philosophy for its insurance operations is the intent to hold
investments in debt securities to maturity, implementation of the
statement is not expected to have a significant impact on earnings
of the Company. However, the Company is anticipating that its
securities available for sale portfolio will increase significantly
upon implementation of the new statement which will impact reported
stockholders' equity. Preliminary results of the implementation process indicate that approximately 60% of the debt securities portfolio will be reported as securities available for sale with the remainder to be classified as held to maturity. Trading securities will be composed entirely of securities from the Company's brokerage operations which are already being recorded at market value with market value changes reflected in earnings. The effect on stockholders' equity of the implementation is estimated to be an increase in the range of $20 million to $25 million as of January 1, 1994. The increase is net of the estimated effects of Federal income taxes and amortization of deferred policy acquisition costs.
CURRENT REGULATORY ISSUES
Actuarial Guideline GGG
At its June 1992 meeting the NAIC Life and Health Actuarial Task
Force released for industry comment an exposure draft of Actuarial
Guideline GGG. The guideline would require, for statutory
accounting purposes, a single interest rate and mortality
assumption for any policy or contract which provides multiple
benefit options or option streams within a single policy or
contract. The Company and other insurers have made comments and
objections to the proposed guideline. As a result of these
comments, the NAIC Life and Health Actuarial Task Force has
appointed a joint regulatory advisory committee to study the issue
and to report its findings and recommendations at a subsequent
date. The Company has a representative on this advisory committee
and will participate in the committee discussions and development
of the committee report. Several versions of Actuarial Guideline
GGG have been drafted with the most recent one dated September
1993.
The Company's state of domicile, Colorado, has also taken a
position on the statutory reserving methodology for two-tier annuities. The Colorado Division of Insurance (the Division) issued a Notice in 1987 which defined the basis of reserving for two-tier annuities and utilized a single interest rate for all benefit streams. Based on the Colorado Notice and the uncertainty of the implementation of Actuarial Guideline GGG, the Company added $7,000,000 in 1992 and $6,000,000 in 1993 to its existing statutory annuity reserves. These additional reserves were agreed upon and approved by the Colorado Division of Insurance.
During 1993, the Division conducted an Association Financial Examination of the Company for the six-year period ended December 31, 1992. Although the final examination report has not been issued, an agreement between the Division and the Company has been reached concerning the statutory reserving basis for two-tier annuities. The agreement includes a plan to meet a target reserve by December 31, 1996. The agreement states the acceptable difference between the target reserve and the statutory reserve held by the Company. This difference will meet the following schedule:
December 31, 1993 $ 21,700,000 December 31, 1994 13,600,000 December 31, 1995 5,000,000 December 31, 1996 -
The Company met the above scheduled difference for December 31, 1993 as a result of the additional $13,000,000 in statutory reserves recorded in 1992 and 1993 as previously described. In fact, at December 31, 1993, the difference was less then that required and it is anticipated that the Company will not require any additional statutory reserves in order to meet the above schedule of differences. This agreement does not affect the Company's policy reserves which are prepared under generally accepted accounting principles as reported in the accompanying financial statements. Also, the compliance with this agreement is not anticipated to have any significant effects on the general operations of the Company.
The above mentioned agreement is separate from the proposed Actuarial Guideline GGG. The agreement does, however, state that if Actuarial Guideline GGG is adopted and it is more liberal than the agreement with the Division, then the Division will allow the Company to move to the more liberal basis.
Risk Based Capital Requirements
Regulations that affect the Company and the insurance industry are often the result of efforts by the National Association of
Insurance Commissioners (the NAIC). The NAIC is an association of
state insurance commissioners, regulators and support staff that
acts as a coordinating body for the state insurance regulatory
process. Recently, increased scrutiny has been placed upon the
insurance regulatory framework, and certain state legislatures have
considered or enacted laws that alter, and in many cases increase,
state authority to regulate insurance companies. In light of
recent legislative developments, the NAIC and state insurance
regulators have begun re-examining existing laws and regulations,
specifically focusing on insurance company investments and solvency
issues, statutory policy reserves, reinsurance, risk-based capital
guidelines, interpretations of existing laws, the development of
new laws, and the implementation of nonstatutory guidelines.
Of particular importance, in 1993 the NAIC established new
risk-based capital (RBC) requirements to help state regulators
monitor the financial strength and stability of life insurers by
identifying those companies that may be inadequately capitalized.
Under the NAIC's requirements, each insurer must maintain its total
capital above a calculated threshold or take corrective measures to
achieve the threshold. The threshold of adequate capital is based
on a formula that takes into account the amount of risk each company faces on its products and investments. The RBC formula takes into consideration four major areas of risk which are: (i) asset risk which primarily focuses on the quality of investments; (ii) insurance risk which encompasses mortality and morbidity risk; (iii) interest rate risk which involves asset/liability matching issues, and (iv) other business risks. The Company has calculated its RBC level based on the new requirement and has determined that its capital and surplus is significantly in excess of the threshold requirements.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is shown on Attachment "A".
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH AUDITOR ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements with auditors on accounting and financial disclosures.
PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) Identification of Directors
The following information as of January 31, 1994, is furnished with respect to each director. All terms expire in June of 1994.
Family relationships among the directors are: Mr. Robert Moody and Mr. McLeod are brothers-in-law and Mr. Robert Moody is the father of Ms. Frances Moody, Mr. Ross Moody, and Mr. Russell Moody.
(b) Identification of Executive Officers
The following is a list of the Company's executive officers, their ages, and their positions and offices as of January 31, 1994.
Name of Officer Age Position (Year elected to position)
Robert L. Moody 58 Chairman of the Board and Chief Executive Officer (1964-1968, 1971-1980, 1981), Director
Ross R. Moody 31 President and Chief Operating Officer (1992), Director
Robert L. Busby,III 56 Senior Vice President - Chief Administrative Officer, Chief Financial Officer and Treasurer (1992)
Charles P. Baley 55 Senior Vice President - Data Processing (1990)
Richard M. Edwards 41 Senior Vice President - International Marketing ( 1990)
Paul D. Facey 42 Senior Vice President - Chief Actuary (1992)
William K. Hawkins 53 Senior Vice President - Domestic Marketing (1990)
Charles D. Milos, Jr. 48 Senior Vice President - Investment Analyst (1990), Director
Patricia L. Scheuer 42 Senior Vice President - Chief Investment Officer (1992)
Larry D. White 48 Senior Vice President - Policyowner Services (1990)
Carol Jackson 58 Vice President - Human Resources (1990)
Vincent L. Kasch 32 Vice President - Controller and Assistant Treasurer (1992)
James A. Kincl 64 Vice President - Salary Savings (1986)
Doris Kruse 48 Vice President - Policy Benefits (1990)
John G. Lepore 52 Vice President - Marketing (1993)
James R. Naiser 51 Vice President - Systems Development (1984)
James V. Robinson 66 Vice President - Secretary (1977)
Al R. Steger 51 Vice President - Risk Selection (1992)
B. Ben Taylor 51 Vice President - Actuarial Services (1990)
(c) Identification of Certain Significant Employees
None.
(d) Family Relationships
There are no family relationships among the officers listed except that Mr. Robert Moody is the father of Mr. Ross Moody. There are no arrangements or understandings pursuant to which any officer was elected. All officers hold office for one year and until their successors are elected and qualified, unless otherwise specified by the Board of Directors.
(e) Business Experience
All of the executive officers listed above have served in various executive capacities with the Company for more than five years, with the exception of the following:
Mr. Ross Moody was a corporate financial analyst with Drexel Burnham Lambert from 1986 to 1987 and was a graduate student at the Harvard Business School from 1987 to 1989. He also served as Director of Administrative Services for American National Insurance Company from 1989 to 1991.
Mr. Facey was Superintendent, Marketing, for Northern Life Assurance Company of Canada from 1973-1985. From 1985-1987, he was Assistant Vice President, Marketing and Actuarial Services for Gerling Global Life Insurance Company in Toronto, Canada, and from 1987 until March, 1992 was Director of Actuarial Services for
Variable Annuity Life Insurance Company of Houston, Texas.
Ms. Scheuer was a Management Consultant for Deloitte, Haskins &
Sells from 1983-1984. From 1984-1988, she was Senior Financial
Analyst with the Texas Public Utility Commission. From 1988 until
August, 1992, she was the Fixed Income Portfolio Manager for the
Texas Permanent School Fund.
Mr. Kasch was Staff Accountant with Arthur Young & Company from
1984-1985. From 1985 until January, 1991 he was Senior Accountant
and Audit Manager for KPMG Peat Marwick.
Mr. Lepore was a school teacher from 1965-1969. From 1969-1970, he
was a sales representative with CIBA Pharmaceuticals. From
1970-1984, he held various management positions with Fidelity Union
Life, American Bankers Life, American Teachers Life, Consolidated
American Life, and Wisconsin National Life.
Mr. Steger was Assistant Vice President-Chief Underwriter of Tower
Life, San Antonio, Texas from 1971 until December, 1991.
(f) Involvement in Certain Legal Proceedings
There are no events pending, or during the last five years, under
any bankruptcy act, criminal proceedings, judgments, or injunctions
material to the evaluation of the ability and integrity of any
director or executive officer except as described below:
In January 1994, a United States District Court Judge vacated and
withdrew the judgment which had been entered in Case No. H-86-4269,
W. Steve Smith, Trustee vs. Shearn Moody Jr., et al, United States
District Court for the Southern District of Texas. The Judge also dismissed the case with prejudice. The judgment had been entered against Robert L. Moody, Sr. and The Moody National Bank of Galveston, of which he was Chairman of the Board. Robert L. Moody, Sr. is also Chairman of the Board of National Western Life Insurance Company. The case arose out of complex bankruptcy and related proceedings involving Robert L. Moody, Sr.'s brother, Shearn Moody, Jr. Subsequently, a global settlement of Shearn Moody, Jr.'s bankruptcy and related legal proceedings was reached and executed. As part of the global settlement, the Bankruptcy Trustee recommended, and other interested parties agreed not to oppose or object to, the Judge's vacating and withdrawing the judgment and dismissing the case with prejudice.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
(b) Summary Compensation Table
(A) Served as Vice President - Office of the President in 1991. (B) Salary includes base salary and directors' fees from National Western Life Insurance Company and its subsidiaries. (C) Bonus includes the following:
(1) Stock Bonus Plan - During 1993 the Company implemented a one-time stock bonus plan for all officers of the Company. Class A common stock restricted shares totaling 13,496 were granted to officers based on their individual performance and contribution to the Company. The shares are subject to vesting requirements as reflected in the following schedule:
January 1, 1993 25% December 31, 1993 25% December 31, 1994 25% December 31, 1995 25%
To obtain shares in accordance with the above vesting schedule, an officer must be actively employed by the Company on such dates and in the same or higher office as that held on December 31, 1992. However, upon the occurrence of certain events such as death or retirement, the officer shall become fully vested. Of the 13,496 total shares granted, 6,830 shares have been issued and are reflected as bonuses in 1993.
(2) Westcap Bonus - Ross R. Moody, Charles D. Milos, Jr. and Patricia L. Scheuer are directors of the Company's brokerage subsidiary, Westcap. The directors received bonuses for such services in 1992 and 1993.
(D) Restricted stock awards include common stock shares that were
granted as part of the stock bonus plan described above but had not vested as of December 31, 1993. Restricted stock holdings at December 31, 1993, for all officers totaled 6,666 shares with a market value of $296,637. Restricted stock holdings for the named executive officers were as follows at December 31, 1993:
Fifty percent of the reserved restricted shares will vest on December 31, 1994. The remaining fifty percent will vest on December 31, 1995. Restricted shares will not be eligible for dividends until issued.
(E) Includes employer contributions made to the Company's 401(k) Plan and Non-Qualified Deferred Compensation Plan on behalf of the employee.
(c) Option/SAR Grants Table
None.
(d) Aggregate Option/SAR Exercises and Fiscal Year-End Option/SAR
Value Table
None.
(e) Long-Term Incentive Plan Awards Table
None.
(f) Defined Benefit or Actuarial Plan Disclosure
The Company currently has two employee defined benefit plans for
the benefit of its employees and officers. A brief description and
formulas by which benefits are determined for each of the plans are
detailed as follows:
Qualified Defined Benefit Plan - This plan covers all full-time
employees and officers of the Company and provides benefits based
on the participants' years of service and compensation. The Company
makes annual contributions to the plan that comply with the minimum
funding provisions of the Employee Retirement Income Security Act.
Annual pension benefits for those employees who became eligible participants prior to January 1, 1991, are calculated as the sum of the following:
(1) 50% of the participant's final 5-year average annual compensation at December 31, 1990, less 50% of their primary social security benefit determined at December 31, 1990; this net amount is then prorated for less than 15 years of benefit service at normal retirement date. This result is multiplied by a fraction which is the participant's years of benefit service at December 31, 1990, divided by the participant's years of benefit service at normal retirement date.
(2) 1.5% of the participant's compensation earned during each year of benefit service after December 31, 1990.
Annual pension benefits for those employees who become eligible participants on or subsequent to January 1, 1991, are calculated as 1.5% of their compensation earned during each year of benefit service.
Non-Qualified Defined Benefit Plan - This plan covers those officers in the position of senior vice president or above and other employees who have been designated by the President of the Company as being in the class of persons who are eligible to participate in the plan. This plan also provides benefits based on the participants' years of service and compensation. However, no minimum funding standards are required.
The benefit to be paid pursuant to this Plan to a Participant who retires at his normal retirement date shall be equal to (a) less (b) less (c) where:
(a) is the benefit which would have been payable at the
participant's normal retirement date under the terms of the
Qualified Defined Benefit Plan as of December 31, 1990, as if that
Plan had continued without change, and,
(b) is the benefit which actually becomes payable under the terms
of the Qualified Defined Benefit Plan at the participant's normal
retirement date, and,
(c) is the actuarially equivalent life annuity which may be
provided by an accumulation of 2% of the participant's compensation
for each year of service on or after January 1, 1991, accumulated
at an assumed interest rate of 8.5% to his normal retirement date.
In no event will the benefit be greater than the benefit which
would have been payable at normal retirement date under the terms of the Qualified Defined Benefit Plan as of December 31, 1990, as if that plan had continued without change.
The estimated annual benefits payable to the named executive officers upon retirement, at normal retirement age, for the Company's defined benefit plans are as follows:
(g) Compensation of Directors
All directors of the Company receive $12,000 a year and $350 for each board meeting attended. They are also reimbursed for actual travel expenses incurred in performing services as directors. An additional $350 is paid for each committee meeting attended. However, a director attending multiple meetings on the same day receives only one meeting fee. The amounts paid pursuant to these arrangements are included in the summary compensation table under Item 11(b). The directors and their dependents are also insured under the Company's group insurance program.
Directors of the Company's brokerage subsidiary, Westcap, receive $500 for each board meeting attended. In addition, the directors
may receive an annual bonus.
(h) Employment Contract and Termination of Employment and
Change-in-Control Arrangements
None.
(i) Report on Repricing of Options/SARS
None.
(j) Compensation Committee Interlocks and Insider Participation
The Executive Committee of the Company's Board of Directors
determines executive compensation. Members of the Company's
Executive Committee are as follows:
Robert L. Moody, Chairman
Ross R. Moody
Arthur O. Dummer
Charles D. Milos, Jr.
Mr. Robert Moody, Mr. Ross Moody and Mr. Milos also serve as officers and employees of the Company. No compensation committee interlocks exist with other unaffiliated companies.
(k) Board Compensation Committee Report on Executive Compensation
The Company's Executive Committee performs the functions of an executive compensation committee. The Committee is responsible for developing and administering the policies that determine executive compensation.
Executive compensation is comprised primarily of a base salary. The salary is adjusted annually based on a performance review of the individual as well as the performance of the Company as a whole. The review encompasses the following factors:
- contributions to the Company's short and long-term strategic goals, including financial goals such as Company revenues and earnings
- achievement of specific goals within the individual's realm of responsibility
- development of management and employees within the Company
- performance of leadership within the industry
The policies discussed above are reviewed periodically by the Executive Committee to ensure the support of the Company's overall business strategy and to attract and retain key executives.
(l) Performance Graph
The performance graph required by this section has been filed separately under the Securites and Exchange Commission filing Form SE dated March 25, 1994.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Set forth below is certain financial information concerning persons who are known by the Company to own beneficially more than 5% of any class of the Company's common stock on December 31, 1993:
(b) Security Ownership of Management
The following table sets forth as of December 31, 1993, information concerning the beneficial ownership for each class of the Company's common stock by all directors and all directors and officers of the Company as a group:
(c) Changes in Control
None.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Seal Fleet, Inc.
The Company holds a corporate note for $500,000 which was originally issued by Oceanographic and Seismic Services, Inc. (Oceanographic). Oceanographic was later merged into Seal Fleet, Inc. The original note was renewed in 1976 and is a 20-year debenture due in 1996, with interest of 8% annually.
The Company also holds a corporate note for $2,867,200 issued in
1990 by Seal (GP), Inc. which is a subsidiary of Seal Fleet, Inc.
The note is due in 2000 with interest of 12% payable monthly and is
secured by first preferred ship mortgages. The note was modified
during 1992 reducing the interest rate from 12% to 10%. However,
the additional 2% interest will be payable upon maturity of the
note.
Seal Fleet, Inc., has two classes of stock outstanding, Class A and
B. The Class B shares elect a majority of the Board of Directors of
Seal Fleet, Inc. All of the Class B shares and 212,655 (9%) of the
Class A shares of Seal Fleet, Inc., are owned by the Three R Trust,
Galveston, Texas. This Trust was created by Robert L. Moody as
Settlor for the benefit of his children. Three of his children, Mr.
Ross R. Moody, Mr. Russell S. Moody, and Ms. Frances A. Moody are
beneficiaries of the Three R Trust and are also directors of the
Company. The Trustee of the Trust is Irwin M. Herz, Jr., of
Galveston, Texas. Mr. Herz personally owns 10,932 (.5%) shares of
the Class A stock of Seal Fleet, Inc. Mr. Herz is a lawyer
representing the Company, Mr. Moody, and several of Mr. Moody's
affiliated interests. Through its Trustee, Mr. Herz, the Three R
Trust is considered to be the controlling stockholder of Seal
Fleet, Inc. Louis Pauls, Jr., and Russell S. Moody, directors of
the Company, are also directors of Seal Fleet, Inc.
Seal Fleet, Inc., and its subsidiaries own, operate, or lease
supply and equipment boats for off-shore oil and gas well drilling
rigs. The consolidated audited financial statements of Seal Fleet,
Inc., and its subsidiaries for the fiscal year ending December 31,
1993, reflected total assets of $11,895,000, net income of $895,000, and negative stockholders' equity of $3,983,000.
Gal-Tex Hotel Corporation
The Company also holds a mortgage loan for $3,539,686 issued in 1988 to Gal-Tex Hotel Corporation which is owned 50% by the Libbie Shearn Moody Trust and 50% by The Moody Foundation. The mortgage loan will mature in May of 1998 and pays interest of 10.5%. The loan is secured by property consisting of a hotel located in Kingsport, Tennessee. The Company is the beneficial owner of a life interest (1/8 share), previously owned by Mr. Robert L. Moody, in the trust estate of Libbie Shearn Moody. The trustee of this estate is The Moody National Bank of Galveston. The Moody Foundation is a private charitable foundation governed by a Board of Trustees of three members. Mr. Robert L. Moody and Mr. Ross R. Moody are members of the Board of Trustees.
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1 and 2. Financial Statements and Financial Statement Schedules
See Attachment "A".
All other schedules are omitted, as the required information is inapplicable or the information is presented in the financial statements or related notes.
(a) 3. Exhibits
None.
(b) Reports on Form 8-K
None.
The parent-only financial statements of the Company are omitted, because the Company is primarily an operating company and all subsidiaries included in the consolidated financial statements being filed, in the aggregate, do not have minority equity interest and/or indebtedness to any person other than the Company or its consolidated subsidiaries in amounts which together exceed 5% of the total assets as shown by the most recent year-end consolidated balance sheet.
ATTACHMENT A
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1993 and 1992
Consolidated Statements of Earnings for the years ended December 31, 1993, 1992 and 1991
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993, 1992 and 1991
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992 and 1991
Notes to Consolidated Financial Statements
Schedule I, Summary of Investments Other Than Investments in Related Parties, December 31, 1993
Schedule VIII, Valuation and Qualifying Accounts for the years ended December 31, 1993, 1992 and 1991
Schedule IX, Short-term Borrowings for the years ended December 31, 1993, 1992 and 1991
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
National Western Life Insurance Company
Austin, Texas
We have audited the consolidated financial statements of National
Western Life Insurance Company and subsidiaries as listed in the
accompanying index. In connection with our audits of the
consolidated financial statements, we also have audited the
financial statement schedules as listed in the accompanying index.
These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of National Western Life Insurance Company and
subsidiaries at December 31, 1993 and 1992, and the results of
their operations and their cash flows for each of the years in the
three-year period ended December 31, 1993, in conformity with
generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 7, the Company changed its method of accounting for income taxes in 1993 to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." As discussed in Note 6, the Company changed its method of accounting for reinsurance contracts in 1993 to adopt the provisions of the Financial Accounting Standards Board's SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts."
KPMG Peat Marwick
Austin, Texas March 4, 1994
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1993 and 1992 (In thousands)
See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1993 and 1992 (In thousands except per share amounts)
See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS December 31, 1993, 1992 and 1991 (In thousands except per share amounts)
See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 1993, 1992 and 1991 (In thousands)
See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1993, 1992 and 1991 (In thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Principles of Consolidation - The accompanying consolidated financial statements include the accounts of National Western Life Insurance Company and its wholly-owned subsidiaries (the Company), The Westcap Corporation, Commercial Adjusters, Inc., and National Western Asset Management, Inc. National Western Asset Management, Inc. was sold in July, 1992. The Westcap Mortgage Company, a wholly-owned subsidiary of The Westcap Corporation, has been reflected as discontinued operations in the accompanying financial
statements. All significant intercorporate transactions and
accounts have been eliminated in consolidation.
(B) Basis of Presentation - The accompanying consolidated financial
statements have been prepared in conformity with generally accepted
accounting principles. National Western Life Insurance Company
also files financial statements with insurance regulatory
authorities which are prepared on the basis of statutory accounting
practices which are significantly different from financial
statements prepared in accordance with generally accepted
accounting principles. These differences are described in detail
in the statutory information section of this note.
(C) Investments - Investments in debt securities the Company purchases with the intent to hold to maturity are classified as fixed maturities. The Company has the ability to hold the securities, as it would be unlikely that forced sales of securities would be required prior to maturity to cover payments of liabilities. As a result, fixed maturities are carried at amortized cost less declines in value that are other than temporary. However, certain situations may change the Company's intent to hold a particular security to maturity, the most notable of which is a deterioration in the issuer's creditworthiness. Accordingly, a security may be sold to avoid a further decline in realizable value when there has been a significant change in the credit risk of the issuer.
Investments in debt and equity securities purchased by the Company that are held for current resale are classified as trading securities. These securities are typically held for short periods of time, as the intent is to sell them producing a trading profit. As a result, trading securities are recorded at market value. Any trading profits or losses and unrealized gains or losses resulting from changes in the market value of the securities are reflected as a component of income in the accompanying financial statements.
Investments in debt and equity securities that are not classified as either fixed maturities or trading securities are reported as securities available for sale. These securities may be sold if
market or other measurement factors change unexpectedly after the
securities were acquired. For example, opportunities arise when
factors change that allow the Company to improve the performance
and credit quality of the investment portfolio by replacing an
existing security with an alternative security while still
maintaining an appropriate matching of expected maturities of
assets and liabilities. Examples of such improvements are as
follows: improving the yield earned on invested assets, improving
the credit quality and performance or duration of the portfolio,
and selling securities in advance of anticipated calls or other
prepayments. Securities available for sale are reported in the
accompanying financial statements at the lower of aggregate cost or
market value. Any valuation changes resulting from changes in the
market value of the securities are reflected as a component of
stockholders' equity.
Investments in specific debt or equity securities having a
permanent loss in value have been written down to their estimated
realizable value, and losses thereon have been included in realized
investment gains and losses. Such losses are determined using the
specific identification method.
Mortgage loans and other long-term investments are stated at cost,
less unamortized discounts and allowances for possible losses.
Policy loans are stated at their aggregate unpaid balances. Real
estate acquired by foreclosure is stated at the lower of cost or
fair value less estimated costs to sell.
Securities purchased under agreements to resell and securities sold
under agreements to repurchase are treated as financing
transactions, collateralized by negotiable securities, and carried
at the amounts at which the securities will be subsequently resold
or repurchased as specified in the respective agreements.
(D) Cash Equivalents - For purposes of the statements of cash
flows, the Company considers all short-term investments with a
maturity at date of purchase of three months or less to be cash
equivalents.
(E) Brokerage Trade Receivables and Payables - Brokerage trade
receivables and payables consist of receivables from and payables
to customers and brokers and dealers which represent the contract
value of securities which have not been delivered or received as
of settlement date. The receivables from customers and brokers and
dealers are collateralized by securities held by or due to
subsidiaries of The Westcap Corporation.
(F) Insurance Revenues and Expenses - Premiums on traditional life insurance products are recognized as revenues as they become due or, for short duration contracts, over the contract periods. Benefits and expenses are matched with premiums in arriving at profits by providing for policy benefits over the lives of the policies and by amortizing acquisition costs over the premium-paying periods of the policies. For universal life and investment annuity contracts, revenues consist of policy charges for the cost of insurance, policy administration, and surrender charges assessed during the period. Expenses for these policies include interest credited to policy account balances and benefit claims incurred in excess of policy account balances. The related deferred policy acquisition costs are amortized in relation to the present value of expected gross profits on the policies.
(G) Brokerage Revenues and Expenses - Securities transactions and related revenues and expenses except trading profits are recorded
in the accounts on a settlement date basis. Trading profits are
recorded on a trade date basis. Other revenues and expenses related to securities transactions executed but not yet settled as of year- end were not material to the financial position and results of operations of the Company.
Securities transactions executed but not yet settled as of September 30, 1993 and 1992 (the brokerage subsidiary's year-end), would result in an increase in receivables from customers and brokers and dealers of approximately $634,042,000 and $371,521,000, if settled. There would also be a corresponding increase of approximately $677,905,000 and $363,737,000 in payables to customers and brokers and dealers and an increase of $50,106,000 and a decrease of $3,561,000 in trading securities at September 30, 1993 and 1992, respectively.
(H) Depreciation of Property and Equipment - Depreciation is based on the estimated useful lives of the assets and is calculated on the straight-line and accelerated methods.
(I) Earnings Per Share - Earnings per share of common stock are
based on the weighted average number of such shares outstanding during each year. The weighted average shares outstanding were 3,481,233 for the year ended December 31, 1993, and 3,477,842 for the years ended December 31, 1992 and 1991.
(J) Classification - Certain reclassifications have been made to the prior years to conform to the reporting categories used in 1993.
(K) Statutory Information - The following are major differences between generally accepted accounting principles and statutory accounting principles prescribed by insurance regulatory authorities.
1. The Company accounts for universal life and investment annuity contracts based on the provisions of Statement of Financial Accounting Standards (SFAS) No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments." The basic effect of the statement with respect to certain long-duration contracts is that deposits for universal life and investment annuity contracts are not reflected as revenues, and surrenders and certain other benefit payments are not reflected as expenses.
2. Commissions and certain expenses related to policy issuance and underwriting, all of which generally vary with and are related to the production of new business, have been deferred. For traditional products, these costs are being amortized over the premium-paying period of the related policies in proportion to the ratio of the premium earned to the total premium revenue anticipated, using the same assumptions as to interest, mortality, and withdrawals as were used in calculating the liability for future policy benefits. For universal life and investment annuity contracts, these costs are amortized in relation to the present value of expected gross profits on these policies.
A summary of information relative to deferred policy acquisition costs and premiums follows:
3. The liability for future policy benefits on traditional products has been calculated by the net level method using assumptions as to future mortality (based on the 1965-1970 and 1975-1980 Select and Ultimate mortality tables), interest ranging from 4% to 8%, and withdrawals based on Company experience. For universal life and investment annuity contracts, the liability for future policy benefits represents the account balance.
4. Deferred Federal income taxes are provided for income and deductions which are recognized in the financial statements in a different period than for Federal income tax purposes.
5. Investments in subsidiaries are recorded at admitted asset value for statutory purposes, whereas the financial statements of the
subsidiaries have been consolidated with those of the Company under
generally accepted accounting principles.
6. The asset valuation reserve and interest maintenance reserve,
which are investment valuation reserves required by insurance
regulatory authorities, have been eliminated, as they are not
required under generally accepted accounting principles.
7. The recorded value of the life interest in the Libbie Shearn
Moody Trust (the Trust) is reported at its initial valuation, net
of accumulated amortization. The initial valuation was based on the
assumption that the Trust would provide certain income to the
Company at an assumed interest rate and is being amortized over 53
years, the life expectancy of Mr. Robert L. Moody at the date he
contributed the life interest to the Company. For statutory purposes, the life interest is reflected at an amount computed as the present value of the estimated future income to be received, limited to the amount of existing insurance in force on the life of Mr. Robert L. Moody. The statutory amount is not being amortized.
8. Reconciliations of statutory basis stockholders' equity and net income, as included in the annual statements filed with the Colorado Division of Insurance, to the respective amounts as reported in the accompanying consolidated financial statements are as follows:
(2) SIGNIFICANT SUBSIDIARY
The Westcap Corporation and subsidiaries (Westcap), a wholly-owned brokerage firm, have been consolidated in the accompanying financial statements. Westcap's fiscal year-end is September 30. The Westcap Mortgage Company, a wholly-owned subsidiary of The Westcap Corporation, has been reflected as discontinued operations in the accompanying financial statements for 1991.
Westcap Securities, Inc. (Westcap Securities), a wholly-owned subsidiary of The Westcap Corporation, is subject to the Securities and Exchange Commission's Uniform Net Capital Rule (Rule 15c3-1) which requires the maintenance of minimum net capital and requires that the ratio of its aggregate indebtedness to net capital, both
as defined, shall not exceed 15 to 1. Retained earnings may be
restricted as to payment of dividends if this ratio exceeds 10 to
1. At September 30, 1993 and 1992, Westcap Securities had net
capital of $3,011,000 and $2,652,000, which was in excess of its
required net capital of $100,000 and $344,000, respectively.
Westcap Securities' ratio of aggregate indebtedness to net capital
was 0.1 to 1 and 1.9 to 1 at September 30, 1993 and 1992.
Westcap Government Securities, Inc. (Westcap Government
Securities), also a wholly-owned subsidiary of The Westcap
Corporation, is subject to the capital rules of the Government
Securities Act of 1986. This act requires the maintenance of
minimum liquid capital and the ratio of liquid capital to measured
market and credit risk, all as defined, to be 120% or higher.
Distributions of equity in the form of dividends or purchases of
common stock may be restricted if this ratio is less than 150%. At
September 30, 1993 and 1992, Westcap Government Securities had
liquid capital of $17,684,000 and $15,940,000, which was in excess
of required liquid capital of $5,638,000 and $3,629,000, respectively. Westcap Government Securities' ratio of liquid capital to market and credit risk was 376% and 527% at September 30, 1993 and 1992.
A summary of the most recent audited consolidated financial information for Westcap is as follows:
(3) DEPOSITS WITH REGULATORY AUTHORITIES
The following assets were on deposit with state and other regulatory authorities as required by law at the end of each year:
(4) INVESTMENTS
The major components of net investment income are as follows:
Investments of the following amounts were non-income producing for the preceding twelve months:
As of December 31, 1993 and 1992, investments in debt securities and mortgage loans with principal balances totaling $7,342,000 and $8,904,000 were on non-accrual status. During 1993, 1992 and 1991, reductions in interest income associated with non-performing investments in debt securities and mortgage loans were as follows:
At December 31, 1993 and 1992, approximately 51% and 53% of the Company's mortgage loans were on properties located in the West South Central region which includes Texas, Louisiana, Oklahoma and Arkansas. Also, approximately 67% and 65% of the Company's mortgage loans were on retail type properties at December 31, 1993 and 1992. With regard to the origination of mortgage loans, it is the Company's policy for mortgage loans not to exceed 75% of the appraised values of the underlying collateral.
The Company held in its investment portfolio below investment grade debt securities, net of loss provisions, of approximately $24,261,000 and $16,259,000 at December 31, 1993 and 1992, respectively. This represents approximately 1.0% and 0.7% of total invested assets. These below investment grade debt securities often have common characteristics in that they are usually unsecured and are often subordinated to other creditors of the borrower or
issuer. Additionally, the issuers of the below investment grade
debt securities usually have high levels of indebtedness and are more sensitive to adverse economic conditions.
At December 31, 1993 and 1992, the Company held approximately $14 million and $26 million of residual interests in collateralized mortgage obligations (CMOs) in its investment portfolio. Investments in residual interests of CMOs are securities that entitle the Company to the excess cash flows arising from the difference between the cash flows required to make principal and interest payments on the related CMOs and the actual cash flows received on the underlying U.S. agency collateral included in the CMO portfolios. Total cash flows to be received by the Company from the residual interests could differ from the projected cash flows resulting in changes in yield or losses if prepayments vary from projections on the collateral underlying the CMOs. The Company also has investments in principal exchange rate linked securities at December 31, 1993 and 1992, totaling approximately $11 million and $12 million. These securities bear interest at fixed rates
payable on a semiannual basis. The amount of principal to be
received by the Company at maturity is dependent on the exchange
rates of various foreign currencies relative to the U.S. dollar at
the maturity date. The securities are not subject to prepayments or
redemptions prior to maturity.
At December 31, 1993 and 1992, the Company had approximately
$22,672,000 and $20,401,000 of real estate, net of estimated
selling costs, which is reflected in other long-term investments in the accompanying financial statements.
There were no investments in any entity in excess of 10% of stockholders' equity at December 31, 1993.
The table below presents realized gains and losses and the increase or decrease in unrealized gains on investments:
The table below presents amortized cost and estimated market values of investments in debt securities classified as fixed maturities and securities available for sale at December 31, 1993 and 1992:
The amortized cost and estimated market values of investments in debt securities at December 31, 1993, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Proceeds from sales of investments in debt securities during 1993, 1992 and 1991 were $77,869,000, $1,600,779,000 and $1,399,929,000, respectively. Gross gains of $12,966,000, $38,272,000 and $32,807,000, and gross losses of $1,283,000, $14,410,000 and $14,730,000, were realized on those sales, respectively.
The Financial Accounting Standards Board (FASB) issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," in May, 1993. This statement addresses the accounting by creditors for impairment of certain loans. It is applicable to all creditors and to all loans, uncollateralized as well as collateralized, with certain exceptions. It also applies to all loans that are restructured in a troubled debt restructuring involving a modification of terms. It requires that impaired loans that are within the scope of this statement be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent.
SFAS No. 114 applies to financial statements for fiscal years beginning after December 15, 1994. The Company plans to implement the statement in 1994. The Company is currently providing for impairment of loans through an allowance for possible losses, and the implementation of this statement is not expected to have a significant effect on the level of this allowance. As a result, there should be no significant net impact on the Company's results of operations or stockholders' equity. However, impairments under the new statement will be reflected as insurance operating expenses as opposed to realized losses in the Company's statements of earnings.
In May, 1993, the FASB also issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments are to be classified in three categories and accounted for as follows:
(a) Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost.
(b) Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.
(c) Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity.
The Company's current accounting policy is similar to the requirements of the new statement. Significant differences are that securities available for sale are currently being reported at the lower of aggregate cost or market value, whereas SFAS No. 115 requires reporting of these securities on an individual fair value basis. Also, SFAS No. 115 provides stricter requirements and guidance on the classification of securities among the three reporting categories.
SFAS No. 115 is effective for fiscal years beginning after December 15, 1993, and the Company plans to implement the statement in the first quarter of 1994. As the Company's prevailing investment
philosophy for its insurance operations is the intent to hold
investments in debt securities to maturity, implementation of the
statement is not expected to have a significant impact on earnings
of the Company. However, the Company is anticipating that its
securities available for sale portfolio will increase significantly
upon implementation of the new statement which will impact reported
stockholders' equity. Preliminary results of the implementation
process indicate that approximately 60% of the debt securities
portfolio will be reported as securities available for sale with
the remainder to be classified as held to maturity. Trading
securities will be composed entirely of securities from the
Company's brokerage operations which are already being recorded at
market value with market value changes reflected in earnings. The
effect on stockholders' equity of the implementation is estimated to be an increase in the range of $20 million to $25 million as of January 1, 1994. The increase is net of the estimated effects of Federal income taxes and amortization of deferred policy acquisition costs.
(5) PARTICIPATING POLICIES
The Company has issued participating policies which entitle the policyholders to participate in cash and, in certain instances, in stock dividends paid to stockholders. The participating preferences of these special policy plans are as follows:
(A) Certain participating policies require payment of dividends to policyholders of not less than a specified percentage of dividends paid to stockholders. Holders of such policies at December 31, 1993
and 1992, are entitled to dividends equal to an aggregate maximum
of less than 1% of dividends paid to holders of the Company's
common stock.
(B) Certain participating policies are entitled to receive
policyholder dividends at least equivalent to stockholders'
dividends paid on a designated number of shares of common stock of
the Company. Holders of such policies at December 31, 1993 and
1992, are entitled to receive dividends equivalent to less than 1%
of dividends paid to holders of the Company's common stock.
All other policyholders' dividends are apportioned for payment by
the Company's Board of Directors at the beginning of certain
periods of time on participating policies having anniversary dates
during such designated periods. These policyholders' dividends are
at various rates based upon factors such as the policy plan, loading factor of the plan, and issue date of policies. The provision for the policyholders' dividend liability is included in the future policy benefit liabilities. Retained earnings are allocable to participating policies only when dividends thereon are specifically declared by the Company's Board of Directors except as noted above. At December 31, 1993 and 1992, no retained earnings were so allocated.
Participating business constitutes approximately 1% of the Company's life insurance in force, 9% and 10% of the life insurance policies in force, and 1% of the premium revenues and universal life deposits for the years ended December 31, 1993 and 1992, respectively.
(6) REINSURANCE
The Company is party to several reinsurance agreements. The
Company's general policy is to reinsure that portion of any risk in
excess of $150,000 on the life of any one individual. Life
insurance in force in the amounts of $861,000,000 and $878,000,000
is ceded on a yearly renewable term basis, $134,000 is ceded on a
modified coinsurance basis, and $38,000,000 and $47,000,000 is ceded on a coinsurance basis at December 31, 1993 and 1992, respectively. In accordance with the reinsurance contracts, reinsurance receivables including amounts related to claims incurred but not reported and liabilities for future policy benefits totaled $9,187,000 at December 31, 1993. A credit in the amount of $16,300,000 was taken against the liability for future policy benefits at December 31, 1992. Premium revenues were reduced by $7,450,000, $4,800,000 and $4,600,000 for reinsurance premiums incurred during the years ended December 31, 1993, 1992 and 1991, respectively. Benefits were reduced by $6,943,000, $3,865,000 and $2,141,000 for reinsurance recoverables during the years ended December 31, 1993, 1992 and 1991, respectively. A contingent liability exists with respect to such reinsurance which could become a liability of the Company in the event such reinsurance companies are unable to meet their obligations under existing reinsurance agreements.
The FASB issued SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," in December, 1992. The statement specifies the accounting by insurance enterprises for the reinsuring of insurance contracts. It establishes the conditions required for a contract with a reinsurer to be accounted for as reinsurance and prescribes accounting and reporting standards for those contracts. It also eliminates the practice by insurance enterprises of reporting assets and liabilities relating to reinsured contracts net of the effects of reinsurance. This statement was implemented in 1993, but it had no effect on the Company's results of operations. It also had only a minor effect on the balance sheet presentation of reinsurance receivables and credits against future policy benefits as described above. The balance sheet at December 31, 1992, has not been restated.
(7) FEDERAL INCOME TAXES
In February, 1992, the FASB issued SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires a change from the deferred
method of accounting for income taxes of Accounting Principles
Board (APB) Opinion 11 to the asset and liability method of
accounting for income taxes. Under the asset and liability method
of SFAS No. 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Pursuant to the deferred method under APB Opinion 11, which was applied in 1992 and 1991, deferred income taxes are recognized for income and expense items that are reported in different years for financial reporting purposes and income tax purposes using the tax rate applicable for the year of the calculation. Under the deferred method, deferred taxes are not adjusted for subsequent changes in tax rates.
Effective January 1, 1993, the Company adopted SFAS No. 109. The cumulative effect of this change in accounting for income taxes of $5,520,000 was determined as of January 1, 1993 and is reported separately in the consolidated statement of earnings for the year ended December 31, 1993. Prior periods' financial statements have not been restated to apply the provisions of SFAS No. 109.
Total Federal income tax expense (benefit) was allocated as follows: [CAPTION]
The provisions for Federal income taxes vary from amounts computed by applying the statutory income tax rate to earnings from continuing operations before Federal income taxes. The reasons for the differences, and the tax effects thereof, are as follows:
The significant components of the deferred income tax benefit attributable to earnings from continuing operations for the year ended December 31, 1993, are as follows:
Deferred tax benefit, exclusive of adjustments for changes in tax rates $ (5,773) Adjustments to deferred tax assets and liabilities for enacted changes in tax rates 98
Total deferred tax benefit $ (5,675)
For the years ended December 31, 1992 and 1991, deferred Federal income tax benefits of $3,729 and $730, respectively, resulted from timing differences in the recognition of income and expense for income tax and financial reporting purposes. The source and tax effects of those timing differences are presented below:
There was no valuation allowance for deferred tax assets at January 1, 1993, or December 31, 1993. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1993, are presented below:
Prior to the Tax Reform Act of 1984 (1984 Act), a portion of a life insurance company's income was not subject to tax until it was distributed to stockholders, at which time it was taxed at the regular corporate tax rate. In accordance with the 1984 Act, this income, referred to as policyholders' surplus, would not increase, yet any amounts distributed would be taxable at the regular corporate rate. The balance of this account as of December 31, 1993 is approximately $2,446,000. No provision for income taxes has been made on this untaxed income, as management is of the opinion that no distribution to stockholders will be made from policyholders' surplus in the foreseeable future. Should the balance in the policyholders' surplus account at December 31, 1993, become taxable, the Federal income tax computed at present rates would be approximately $856,000.
At December 31, 1990, the Company had a capital loss carryforward for financial statement purposes of approximately $5,544,000. The
carryforward was fully utilized in 1991.
The Company files a consolidated Federal income tax return with its
subsidiaries. Allocation is based on separate return calculations
with current credit for net losses. Intercompany tax balances are
settled quarterly.
(8) TRANSACTIONS WITH CONTROLLING STOCKHOLDER AND AFFILIATES
(A) Life Interest in Libbie Shearn Moody Trust - The Company is the
beneficial owner of a life interest (1/8 share), previously owned
by Mr. Robert L. Moody, Chairman of the Board of Directors of the Company, in the trust estate of Libbie Shearn Moody.
The recorded amount of the Company's life interest in the Trust is summarized below:
In 1989, the Company was the beneficiary of life insurance on Mr. Moody's life in the amount of $12,775,000, all of which was issued by the Company and was reinsured through agreements with unaffiliated insurance companies. These policies were surrendered during 1990 and the Company issued new term insurance policies, which accumulate no cash value, in the amount of $27,000,000. The Company is the beneficiary of these new policies which are also reinsured through agreements with unaffiliated insurance companies. The previous policies were surrendered and new policies were issued in conjunction with a revaluation of the Trust for statutory accounting purposes.
Income from the Trust and related expenses reflected in the accompanying consolidated statements of operations are summarized as follows:
The accompanying statements also reflect liabilities for future policy benefits related to these policies in the amounts of $126,000 and $96,000 at December 31, 1993 and 1992, respectively.
(B) Common Stock - Mr. Robert L. Moody, Chairman of the Board of Directors, owns 198,074 of the total outstanding shares of the
Company's Class B common stock and 1,162,534 of the Class A common
stock.
Holders of the Company's Class A common stock elect one-third of
the Board of Directors of the Company, and holders of the Class B
common stock elect the remainder. Any cash or in-kind dividends paid on each share of Class B common stock shall be only one-half of the cash or in-kind dividends paid on each share of Class A common stock. In addition, upon liquidation of the Company, the Class A stockholders shall first receive the par value of their shares; then the Class B stockholders shall receive the par value of their shares; and the remaining net assets of the Company shall be divided between the stockholders of both Class A and Class B common stock, based on the number of shares held.
(9) PENSION PLANS
The Company has a qualified noncontributory pension plan covering substantially all full-time employees. The plan provides benefits based on the participants' years of service and compensation. The Company makes annual contributions to the plan that comply with the minimum funding provisions of the Employee Retirement Income Security Act. A summary of plan information is as follows:
Pension costs (credits) include the following components:
The following sets forth the plan's funded status and related amounts recognized in the Company's balance sheet as of:
The discount rate used in determining the actuarial present value of the projected benefit obligations was 7.25% for 1993 and 8.5% for 1992. The projected increase in future compensation levels was based on a rate of 6.0% for 1993 and 1992. The projected long-term rate of return on plan assets was 8.5% for 1993 and 1992.
The Company also has a non-qualified defined benefit plan primarily for senior officers. The plan provides benefits based on the participants' years of service and compensation. No minimum funding standards are required. However, at the option of the Company, contributions may be funded into the National Western Life Insurance Company Non-Qualified Plans Trust. There are currently no plan assets in the trust. A summary of plan information is as follows:
Pension costs include the following components:
The following sets forth the plan's funded status and related amounts recognized in the Company's balance sheet as of:
The discount rate used in determining the actuarial present value of the projected benefit obligations was 7.25% for 1993 and 8.5% for 1992. The projected increase in future compensation levels was based on a rate of 6.0% for 1993 and 1992.
In addition to the defined benefit plans, the Company has a qualified 401(k) plan for substantially all full-time employees and a non-qualified deferred compensation plan primarily for senior officers. The Company makes annual contributions to the 401(k) plan of two percent of each employee's compensation. Additional Company matching contributions of up to two percent of each employee's compensation are also made each year based on the employee's personal level of salary deferrals to the plan. All Company contributions are subject to a vesting schedule based on the employee's years of service. For the years ended December 31, 1993 and 1992, Company contributions totaled $187,000 and $193,000.
The non-qualified deferred compensation plan was established to allow eligible employees to defer the payment of a percentage of their compensation and to provide for additional Company contributions. Company contributions are subject to a vesting schedule based on the employee's years of service. For the years ended December 31, 1993 and 1992, Company contributions totaled $45,000 and $40,000.
In December, 1990, the FASB issued SFAS No. 106, "Employers' Accounting for Post Retirement Benefits Other than Pensions." SFAS No. 106 establishes accounting standards for employers' accounting for, primarily, post retirement health care benefits. The statement is effective for fiscal years beginning after December 15, 1992. Since the Company currently pays no such benefits, implementation had no impact on the results of operations of the Company.
SFAS No. 112, "Employers' Accounting for Postemployment Benefits," was issued by the FASB in November, 1992. This statement establishes accounting standards for employers who provide benefits to former or inactive employees after employment but before retirement. Postemployment benefits include all types of benefits provided to former or inactive employees, their beneficiaries and covered dependents. The statement is effective for fiscal years beginning after December 15, 1993. Implementation of this statement is not expected to have a significant impact on the results of operations of the Company.
(10) SHORT-TERM BORROWINGS
The Company has available a $60 million bank line of credit primarily for cash management purposes relating to investment transactions. The Company is required to maintain a collateral security deposit in trust with the bank equal to 120% of any outstanding liability. The Company had no outstanding liabilities or collateral security deposits with the bank at December 31, 1993 and 1992. The average interest rates on borrowings for the years ended December 31, 1993 and 1992, were 4.36% and 5.53%, respectively.
Certain subsidiaries of the Company's brokerage subsidiary (Westcap) have arrangements with a financial institution whereby the institution performs clearing functions for all securities transactions with customers and brokers and dealers. These arrangements include revolving line of credit agreements which bear interest at variable rates based on Federal funds rates and are due on demand. Borrowings under these arrangements are guaranteed by Westcap and collateralized by trading securities and certain customers' and brokers' and dealers' unpaid securities, which at September 30, 1993 and 1992 (the subsidiary's fiscal year-end), had aggregate market values of approximately $119,082,000 and $84,408,000, respectively. The average interest rates on the borrowings for the years ended September 30, 1993 and 1992, were 4.24% and 5.20%, respectively.
(11) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At September 30, 1993 and 1992, securities purchased under agreements to resell by Westcap were collateralized by U.S. Government and agencies' securities with market values of approximately $189,659,000 and $26,781,000. These agreements had maturity dates ranging from one to thirty days and weighted average interest rates of 3.3% and 3.5%. During the years ended September 30, 1993 and 1992, the maximum month-end balance of outstanding agreements were $186,896,000 and $111,938,000, and the average amount of outstanding agreements were $75,634,000 and $47,252,000, respectively. Risks arise from the possible inability of counter-parties to meet the terms of their agreements and from movements in securities' values.
At September 30, 1993 and 1992, securities sold under agreements to repurchase by Westcap were collateralized by U.S. Government and agencies' securities with market values of approximately $129,523,000 and $41,770,000. These agreements had maturity dates ranging from one to thirty days and weighted average interest rates of 3.5%. During the years ended September 30, 1993 and 1992, the maximum month-end balance of outstanding agreements were $127,971,000 and $97,883,000, and the average amount of outstanding agreements were $66,941,000 and $43,977,000, respectively.
(12) COMMITMENTS AND CONTINGENCIES
(A) Current Regulatory Issues - At its June, 1992, meeting the NAIC Life and Health Actuarial Task Force released for industry comment an exposure draft of Actuarial Guideline GGG. The guideline would require, for statutory accounting purposes, a single interest rate
and mortality assumption for any policy or contract which provides
multiple benefit options or option streams within a single policy
or contract. The Company and other insurers have made comments and
objections to the proposed guideline. As a result of these
comments, the NAIC Life and Health Actuarial Task Force has
appointed a joint regulatory advisory committee to study the issue
and to report its findings and recommendations at a subsequent
date. The Company has a representative on this advisory committee
and will participate in the committee discussions and development
of the committee report. Several versions of Actuarial Guideline
GGG have been drafted with the most recent one dated September,
1993.
The Company's state of domicile, Colorado, has also taken a
position on the statutory reserving methodology for two-tier
annuities. The Colorado Division of Insurance (the Division)
issued a Notice in 1987 which defined the basis of reserving for
two-tier annuities and utilized a single interest rate for all
benefit streams. Based on the Colorado Notice and the uncertainty
of the implementation of Actuarial Guideline GGG, the Company added
$7,000,000 in 1992 and $6,000,000 in 1993 to its existing statutory
annuity reserves. These additional reserves were agreed upon and
approved by the Colorado Division of Insurance.
During 1993, the Division conducted an Association Financial
Examination of the Company for the six-year period ended December 31, 1992. Although the final examination report has not been issued, an agreement between the Division and the Company has been reached concerning the statutory reserving basis for two-tier annuities. The agreement includes a plan to meet a target reserve by December 31, 1996. The agreement states the acceptable difference between the target reserve and the statutory reserve held by the Company. This difference will meet the following schedule:
December 31, 1993 $ 21,700,000 December 31, 1994 13,600,000 December 31, 1995 5,000,000 December 31, 1996 -
The Company met the above scheduled difference for December 31, 1993, as a result of the additional $13,000,000 in statutory reserves recorded in 1992 and 1993 as previously described. In fact, at December 31, 1993, the difference was less than that required, and it is anticipated that the Company will not require any additional statutory reserves in order to meet the above schedule of differences. This agreement does not affect the Company's policy reserves which are prepared under generally accepted accounting principles as reported in the accompanying financial statements. Also, the compliance with this agreement is not anticipated to have any significant effects on the general operations of the Company.
The above-mentioned agreement is separate from the proposed Actuarial Guideline GGG. The agreement does, however, state that if Actuarial Guideline GGG is adopted and it is more liberal than
the agreement with the Division, then the Division will allow the
Company to move to the more liberal basis.
(B) Legal Proceedings - The Company was a defendant in a lawsuit alleging various violations by the Company of the Employee Retirement Income Security Act of 1974. The alleged violations arose from the establishment of an employee benefit pension plan (the Plan) and the Company's sale of group annuity contracts to the Plan. The suit sought several claims including restoration of all Plan assets wrongfully paid and punitive damages in an unspecified amount. The Company settled the lawsuit in 1991. Under the terms of the settlement, the Company paid approximately $6,218,000 to various parties plus approximately $57,000 in related expenses. Subsequent to this settlement, the Company filed suit against the law firm which assisted in the development of the Plan. The Company also filed suit, for recovery of damages incurred, against an insurance company providing liability coverage for trustees of the Plan. Both suits were settled with the Company receiving proceeds totaling $1,050,000 which have been reflected in other income in the accompanying statement of earnings for the year ended December 31, 1993.
The Company was also a defendant in a lawsuit seeking recovery of certain values of life insurance policies pledged as collateral for debentures totaling $8,000,000. In early 1991, a court ruled that the collateral assignment was not enforceable. As a result, the Company recorded a liability and unrealized loss totaling $8,000,000 in 1990, as the debentures were no longer deemed collateralized by the insurance policies and their market value was zero due to the insolvency of the issuer. The debentures were charged off in 1991. The Company has since been accruing an additional liability for interest on this $8,000,000 balance. The Company appealed the court ruling and ultimately settled the suit in September, 1993, resulting in an $11,500,000 payment by the Company. The Company's total accrued liability for this claim exceeded the payment by approximately $670,000. This difference has been reflected as other income in the accompanying statement of
earnings for the year ended December 31, 1993.
The Company is a defendant in several other lawsuits, substantially
all of which are in the normal course of business. In the opinion
of management, the liability, if any, which may rise from these
lawsuits would not have a material adverse effect on the Company's
financial condition.
(C) Financial Instruments - In order to meet the financing needs of
its customers in the normal course of business, the Company is a
party to financial instruments with off-balance sheet risk. These
financial instruments are commitments to extend credit which
involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized in the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company controls the credit risk of these transactions through credit approvals, limits, and monitoring procedures.
The Company had commitments to extend credit relating to mortgage loans totaling $14,650,000 at December 31, 1993. Commitments to extend credit are legally binding agreements to lend to a customer that generally have fixed expiration dates or other termination clauses and may require payment of a fee. These commitments do not necessarily represent future liquidity requirements, as some of the commitments could expire without being drawn upon. The Company evaluates each customer's creditworthiness on a case-by-case basis.
The Company also had commitments to purchase investment securities
in the normal course of business totaling $21,490,000 at December
31, 1993.
In the normal course of business, Westcap enters into when-issued,
underwriting, forward and futures contracts principally related to
mortgage-backed, U.S. government, and municipal securities issues
which have settlement dates ranging from several weeks to several
months after trade date. Revenues and expenses, except trading
profits, related to such contracts are recorded on settlement date.
Trading profits are recorded on a trade date basis. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities' values and interest rates. As of September 30, 1993, unsettled forward purchase and sale contracts approximated $544,236,000 and $538,966,000, respectively, substantially all of which are matched. In the opinion of management, the settlement of these transactions is not expected to have a material effect on Westcap's financial condition.
In the normal course of business, Westcap also enters into contracts involving securities not yet purchased principally related to mortgage-backed and U.S. Government securities issues. These financial instruments are considered to have off-balance sheet risk, as they involve, to varying degrees, elements of interest rate risk in excess of the amount recognized in the statement of financial condition. Risks arise from movements in securities values' and interest rates.
(D) Guaranty Association Assessments - National Western Life Insurance Company is subject to state guaranty association assessments in all states in which it is licensed to do business. These associations generally guarantee certain levels of benefits payable to resident policyholders of insolvent insurance companies. Most states allow premium tax credits for all or a portion of such assessments, thereby allowing eventual recovery of these payments over a period of years. However, several states do not allow such credits. In 1993 the Company recorded a charge of $3,700,000 to
other insurance operating expenses for anticipated assessments. Although additional charges to expenses may be required, the Company currently is unaware of any significant pending assessments requiring accrual.
(13) STOCKHOLDERS' EQUITY
Dividends to stockholders can be paid only from the Company's statutory unassigned surplus as determined by accounting principles prescribed by insurance regulatory authorities. Statutory unassigned surplus amounted to approximately $152,725,000 at December 31, 1993, and stockholders' equity in that amount was available for dividends subject to the tax effects of distributions from the policyholders' surplus account as described in note 7.
During 1993 the Company implemented a one-time stock bonus plan for all officers of the Company. Class A common stock restricted shares totaling 13,496 were granted to officers based on their individual performance and contribution to the Company. The shares are subject to vesting requirements as reflected in the following schedule:
January 1, 1993 25% December 31, 1993 25% December 31, 1994 25% December 31, 1995 25%
To obtain shares in accordance with the above vesting schedule, an officer must be actively employed by the Company on such dates and in the same or higher office as that held on December 31, 1992.
However, upon the occurrence of certain events such as death or retirement, the officer shall become fully vested. Of the 13,496 total shares granted, 6,830 shares have been issued and are outstanding as of December 31, 1993. The remaining shares will be issued pursuant to the vesting requirements described above.
(14) FOREIGN SALES AND SIGNIFICANT AGENCY RELATIONSHIPS
Total premium revenues and universal life deposits related to life insurance written in foreign countries, primarily Central and South America, were approximately $57,450,000, $58,300,000 and $56,400,000, for the years ended December 31, 1993, 1992 and 1991, respectively.
A significant portion of the Company's universal life and
investment annuity contracts are written through one agency. Such
business accounted for approximately 44%, 45% and 65% of total
premium revenues and universal life and investment annuity contract
deposits for 1993, 1992 and 1991, respectively.
(15) SEGMENT INFORMATION
Information concerning the Company's two industry segments follows:
(16) UNAUDITED QUARTERLY FINANCIAL DATA
Quarterly results of operations are summarized as follows:
The fourth quarter net earnings in 1993 reflect the following significant items:
(A) Realized losses of approximately $2,174,000 resulting from write-downs of fixed maturities and increases in allowances for possible losses for real estate and mortgage loans, and
(B) Net earnings from the Company's brokerage subsidiary were approximately $7,309,000 which is higher than previous quarters in 1993 but is significantly lower than corresponding 1992 fourth quarter net earnings.
The fourth quarter net earnings in 1992 reflect the following significant items:
(A) Realized losses of approximately $2,425,000 resulting from write-downs of fixed maturities and increases in allowances for possible losses from real estate and mortgage loans, and
(B) Net earnings from the Company's brokerage subsidiary were approximately $12,115,000 for the fourth quarter which is significantly higher than in previous quarters.
(17) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Investment securities: Fair values for investments in debt and
equity securities are based on quoted market prices, where
available. For securities not actively traded, fair values are
estimated using values obtained from various independent pricing
services and the Securities Valuation Office of the National
Association of Insurance Commissioners. In the cases where prices
are unavailable from these sources, prices are estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality, and maturity of the
investments. The carrying amount and fair value of securities
purchased under agreements to resell are the amounts at which the
securities will be subsequently resold as specified in the
respective agreements.
Cash and short-term investments: The carrying amounts reported in
the balance sheet for these instruments approximate their fair
values.
Mortgage loans: The fair value of performing mortgage loans is estimated by discounting scheduled cash flows through the scheduled maturities of the loans, using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Fair value for significant nonperforming loans is based on recent internal or external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information.
Policy loans: The fair value for policy loans is calculated by discounting estimated cash flows using U.S. Treasury bill rates as of December 31, 1993 and 1992. The estimated cash flows include assumptions as to whether such loans will be repaid by the policyholders or settled upon payment of death or surrender benefits on the underlying insurance contracts. As a result, these assumptions incorporate both Company experience and mortality assumptions associated with such contracts.
Life interest in Libbie Shearn Moody Trust: The fair value of the life interest is estimated based on assumptions as to future dividends from the Trust over the life expectancy of Mr. Robert L. Moody. These estimated cash flows were discounted at a rate consistent with uncertainties relating to the amount and timing of future cash distributions. However, the Company has limited the fair value to the amount of life insurance on Mr. Moody, as this is the maximum amount to be received by the Company in the event of Mr. Moody's premature death.
Investment contracts: Fair value of the Company's liabilities for deferred investment annuity contracts are estimated to be the cash surrender value of each contract. The cash surrender value represents the policyholder's account balance less applicable surrender charges. The fair value of liabilities for immediate investment annuity contracts are estimated by discounting estimated cash flows using U.S. Treasury bill rates as of December 31, 1993 and 1992.
Fair value for the Company's insurance contracts other than
investment contracts are not required to be disclosed. This
includes the Company's traditional and universal life products.
However, the fair values of liabilities under all insurance
contracts are taken into consideration in the Company's overall
management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment
maturities with amounts due under insurance and investment
contracts.
Short-term borrowings: The carrying amount of the Company's
borrowings approximates its fair value due to the short duration of
the borrowing periods.
Securities sold not yet purchased: These securities are carried at
fair values determined in the same manner as investment securities described above.
Securities sold under agreements to repurchase: The carrying amounts and fair values of these securities are the amounts at which the securities will be subsequently repurchased as specified in the respective agreements.
The carrying amounts and fair values of the Company's financial instruments are as follows:
(18) DISCONTINUED OPERATIONS
On December 10, 1990, the Board of Directors of Westcap Mortgage Company (Westcap Mortgage), a subsidiary of The Westcap Corporation, approved a plan for the complete dissolution and liquidation of Westcap Mortgage. Accordingly, an orderly liquidation of the assets of Westcap Mortgage commenced, and the disposal was essentially completed during 1992. The accompanying consolidated financial statements reflect the estimated $488,000 loss, in 1991, on liquidation of the subsidiary separate from earnings from continuing operations, net of related income tax benefits.
(19) SUBSEQUENT EVENTS
The Westcap Corporation, the Company's brokerage subsidiary, incurred trading losses during March, 1994, through unsettled customer securities purchase transactions. The net effect of these trading losses, which are expected to be between approximately $4,400,000 and $5,200,000, will be reflected in the Company's consolidated financial statements ended March 31, 1994. As a result of these losses, the Company has purchased an additional $4,400,000 of preferred stock of The Westcap Corporation and has agreed to provide a $3,000,000 line of credit to Westcap. This infusion of capital was important in order for Westcap to maintain its normal capital position, which is well in excess of required financial operating ratios.
On March 28, 1994, the Community College District No. 508, County of Cook and State of Illinois (The City Colleges) filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division, against National Western Life Insurance Company and subsidiaries of The Westcap Corporation. The suit seeks recession of securities purchase transactions by The City Colleges from Westcap between September 9, 1993 and November 3, 1993, alleged compensatory damages, punitive damages, injunctive relief, declaratory relief, fees and costs. Neither Westcap nor the Company has been formally served with the complaint, no discovery has occurred, no judicial proceedings or hearings have occurred, and no answers or responses have been prepared or filed. Westcap and the Company are of the opinions that Westcap has adequate documentation to validate all of such securities purchase transactions by The City Colleges, and that Westcap and the Company each have adequate defenses to the litigation. Although the alleged damages would be material to the Company's financial position, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES SCHEDULE I SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1993 (In thousands)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 1993, 1992 AND 1991 (In thousands)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES SCHEDULE IX SHORT-TERM BORROWINGS For the Years Ended December 31, 1993, 1992 AND 1991 (In thousands except percentage data)
The above short-term borrowings are those of the Company's brokerage subsidiary, The Westcap Corporation, and its subsidiaries. All short-term borrowings are governed by revolving line of credit agreements which bear interest at variable rates based on Federal funds rates and are due on demand. Weighted average interest rates during the period were calculated by dividing the total interest expense for the period by the average daily balance of short-term borrowings.
The above short-term borrowings are those of National Western Life Insurance Company. All short-term borrowings are governed by a revolving note and loan agreement under which individual draws are made subject to a maximum outstanding balance of $60 million. Borrowings have 30-day maturities but may be accelerated by the bank. Interest rates are based on the lower of the bank's short-term certificate of deposit rate, base borrowing rate, or the Federal funds rate. Weighted average interest rates during the period were calculated by dividing the total interest expense for the period by the average daily balance of short-term borrowings.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL WESTERN LIFE INSURANCE COMPANY (Registrant)
/S/ Robert L. Moody /S/ Ross R. Moody By: Robert L. Moody By: Ross R. Moody Chairman of the Board, Chief President, Chief Operating Executive Officer, Director Officer, Director
/S/ Robert L. Busby, III By: Robert L. Busby, III Senior Vice President - Chief Administrative Officer, Chief Financial Officer and Treasurer
March 25, 1994 Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/S/ Arthur O. Dummer Arthur O. Dummer, Frances A. Moody, Director Director
Harry L. Edwards, Russell S. Moody, Director Director
/S/ E. Douglas McLeod /S/ Louis E. Pauls, Jr. E. Douglas McLeod, Louis E. Pauls, Jr., Director Director
/S/ Charles D. Milos, Jr. /S/ E. J. Pederson Charles D. Milos, Jr., E. J. Pederson, Director Director