Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS
(a) General
Life Insurance Operations
National Western Life Insurance Company (hereinafter referred to as "National Western", "Company", or "Registrant") is a life insurance company, chartered in the State of Colorado in 1956, and doing business in forty-three states and the District of Columbia. National Western also accepts applications from and issues policies to residents of several Central and South American countries. Such policies are accepted and issued in the United States. During 1994, the Company recorded approximately $241 million in premium revenues, universal life, and investment annuity contract deposits. New life insurance issued during 1994 approximated $1.2 billion and the total amount in force at year-end 1994 was $7.7 billion. As of December 31, 1994, the Company had total consolidated assets of approximately $2.9 billion.
Competition: The life insurance business is highly competitive and National Western competes with over 2,000 stock and mutual companies. Mutual companies may have certain competitive advantages over stock companies in that the policies written by them are participating policies and their profits inure to the benefit of their policyholders. The Company also writes participating policies; however, participating policies represent only 1% of the Company's life insurance in force at December 31, 1994. The Company believes that its premium rates and its policies are generally competitive with those of other life insurance companies selling similar types of insurance.
Best's Agents Guide To Life Insurance Companies, an authoritative life insurance publication, lists companies by total admitted assets and life insurance in force. As of December 31, 1993, the most recent date for which information is available, National Western ranked 136 in total admitted assets and 249 in life insurance in force among approximately 2,000 life insurance companies domiciled in the United States.
In addition to competition within the life insurance industry, National Western and other insurance companies face competition from other industries. In recent years, there has been increased interest in the banking industry to directly market annuities. The banking industry continues to press for changes in current regulations to allow for increased rights to market and issue annuities. Such regulation changes could result in increased competition for National Western and the life insurance industry.
Annuities are often used as long-term, tax deferred investment vehicles and in retirement planning. As a result, other investment types can be competitive products to annuities. For example, the recent growth and popularity of mutual funds has attracted large amounts of investment funds over the past several years, particularly during periods of declining market interest rates. Many mutual funds also allow tax deferred features through individual retirement accounts, 401(k) plans and other qualified methods.
Agents and Employees: National Western has 231 full-time employees at its principal executive office. Its insurance operations are conducted primarily through broker-agents, which numbered 6,716 at December 31, 1994. The agency operations are supervised by Senior Vice Presidents of domestic and international marketing. The Company's agents are independent contractors who are compensated on a commission basis. General agents receive overwriting first year and renewal commissions on business written by agents under their supervision. The ratio of agents' expenses to premium revenues, universal life, and investment annuity contract deposits before deferral of related acquisition costs were as follows:
Types of Insurance Written: National Western offers a broad portfolio of individual whole life and term life insurance plans, endowments, and annuities, including standard supplementary riders. The Company does not market group insurance. In recent years the majority of the business written has been flexible premium and single premium annuities and universal life products. Except for its employee health plan and a small number of existing individual accident and health policies, primarily in Florida, the Company does not write any new policies in the accident and health markets.
The underwriting policy of the Company is to require medical examination of applicants for ordinary insurance in excess of certain prescribed limits. These limits are graduated according to the age of the applicant and the amount of insurance desired. The Company has no maximum for issuance of life insurance on any one life. However, the Company's general policy is to reinsure that portion of any risk in excess of $150,000 on the life of any one individual. Also, following general industry practice, policies are issued on substandard risks.
Geographical Distribution of Business: For the year 1994, insurance and annuity policies held by residents of the State of Texas accounted for 16% of premium revenues, universal life, and investment annuity contract deposits from direct business, while policies held by residents of California and Illinois accounted for approximately 12% and 4%, respectively. All other states of the United States accounted for 46% of premium revenues and deposits from direct business. The remaining 22% of premium revenues, universal life, and investment annuity contract deposits were derived from the Company's policies issued to foreign nationals.
Approximately 72% of the life insurance face amount issued by the Company during 1994 was written through international insurance brokers acting as independent contractors. Foreign business is solicited by various independent brokers, primarily in Central and South America, and forwarded to the United States for acceptance and issuance. The Company maintains strict controls on the business it accepts from such foreign independent brokers, as well as its underwriting procedures for such business. A currency clause is included in each foreign policy stating that premium and claim "dollars" refer to lawful currency of the United States of America. Traditional and universal life products are sold in the international market to individuals in upper socioeconomic classes. By marketing exclusively to this group, sales typically produce a higher average policy size, strong persistency, and claims experience similar to that in the United States.
Investments: State insurance statutes prescribe the nature, quality, and percentage of the various types of investments which may be made by insurance companies and generally permit investments in qualified state, municipal, federal, and foreign government obligations, corporate bonds, preferred and common stock, real estate, and real estate first lien mortgages where the value of the underlying real estate exceeds the amount of the mortgage lien by certain required percentages.
The following table shows investment results for insurance operations for the periods indicated:
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 of National Western was completed in 1994 and covered the six-year period ended December 31, 1992. The states of Colorado and Delaware participated. A final report disclosing the examination results was received by the Company in March, 1995. The report contained no adjustments or issues which would have a significant, negative impact on the operations of the Company.
Regulations that affect the Company and the insurance industry are often the result of efforts by the National Association of Insurance Commissioners (the NAIC). The NAIC is an association of state insurance commissioners, regulators and support staff that acts as a coordinating body for the state insurance regulatory process. Recently, increased scrutiny has been placed upon the insurance regulatory framework, and certain state legislatures have considered or enacted laws that alter, and in many cases increase, state authority to regulate insurance companies. In light of recent legislative developments, the NAIC and state insurance regulators have begun re-examining existing laws and regulations, specifically focusing on insurance company investments and solvency issues, statutory policy reserves, reinsurance, risk-based capital guidelines, interpretations of existing laws, the development of new laws, and codification of prescribed statutory accounting principles.
Of particular importance, in 1993 the NAIC established new risk-based capital (RBC) requirements to help state regulators monitor the financial strength and stability of life insurers by identifying those companies that may be inadequately capitalized. Under the NAIC's requirements, each insurer must maintain its total capital above a calculated threshold or take corrective measures to achieve the threshold. The threshold of adequate capital is based on a formula that takes into account the amount of risk each company faces on its products and investments. The RBC formula takes into consideration four major areas of risk which are: (i) asset risk which primarily focuses on the quality of investments; (ii) insurance risk which encompasses mortality and morbidity risk; (iii) interest rate risk which involves asset/liability matching issues; and (iv) other business risks. The Company has calculated its RBC level based on the new requirement and has determined that its capital and surplus is significantly in excess of the threshold requirements.
The RBC regulation developed by the NAIC is an example of its involvement in the regulatory process. New regulations are routinely published by the NAIC as model acts or model laws. The NAIC encourages adoption of these model acts by all states to provide uniformity and consistency among state insurance regulations.
Brokerage Operations
The Westcap Corporation, a wholly owned subsidiary of the Company, is a brokerage firm headquartered in Houston, Texas, with 119 employees. With branch offices in Seattle, Washington and Morris Plains, New Jersey, The Westcap Corporation provides investment products and financial services to a nationwide customer base. Its wholly owned subsidiaries include Westcap Securities Investment, Inc. (Westcap Investment), Westcap Securities Management, Inc. (Westcap Management), and Westcap Mortgage Company (Westcap Mortgage). Westcap Investment and Westcap Management own 100% of the partnership interest in Westcap Securities, L.P.
Westcap Securities, L.P. is primarily a dealer in municipal and corporate bonds and collateralized mortgage obligations and a secondary market dealer in obligations issued or guaranteed by the U.S. government or its agencies. The limited partnership is subject to regulation by the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers, and it is subject to the SEC's Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital. Westcap Securities, L.P. has elected to be subject to the Alternative Net Capital requirement which requires the partnership to, at all times, maintain net capital equal to the greater of $250,000 or 2% of aggregate debit items computed in accordance with the formula for the determination of Reserve Requirements for Brokers and Dealers. At September 30, 1994, its most recent fiscal year-end, Westcap Securities, L.P. had net capital of $8,423,000 which was $8,173,000 in excess of its required net capital of $250,000.
Westcap Mortgage was previously engaged in the business of originating and servicing commercial and residential real estate loans. It also sold mortgages to investors which were securitized by the Government National Mortgage Association (GNMA). However, on December 10, 1990, the Board of Directors of Westcap Mortgage approved a plan for the complete dissolution and liquidation of Westcap Mortgage. Accordingly, an orderly liquidation of the assets of Westcap Mortgage commenced in 1990 and was essentially completed in 1992.
The Westcap Corporation's client base includes financial institutions, public funds, private and public pensions, insurance companies and various other types of institutional investors. Westcap offers a complete mix of debt securities, including mortgage-backed securities, U.S government and federal agency issues, collateralized mortgage obligations (CMOs), municipal securities, corporate bonds and certificates of deposit. Westcap's competition includes regional and national brokerage firms.
(b) Financial Information About Industry Segments
Information concerning the Company's two industry segments follows:
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 $477,600 per year plus taxes, insurance, maintenance, and other operating costs less the amortization of the deferred gain of $325,000 which arose from the sale and lease-back of the property in 1984. This lease expires in 2000.
The Company's brokerage subsidiary, Westcap, leases its office facilities in Houston, Texas, under a lease which terminates in 1997. The total leased space is approximately 38,600 square feet. Westcap also leases several small branch office spaces in various cities. The annual lease cost for all locations through the year 1997 will range from approximately $251,000 to $618,000.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
On March 28, 1994, the Community College District No. 508, County of Cook and State of Illinois (The City Colleges) filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division, against National Western Life Insurance Company (the Company) and subsidiaries of The Westcap Corporation. The suit seeks rescission of securities purchase transactions by The City Colleges from Westcap between September 9, 1993 and November 3, 1993, alleged compensatory damages, punitive damages, injunctive relief, declaratory relief, fees and costs. National Western is named as a "controlling person" of the Westcap defendants. On February 1, 1995, the complaint was amended to add a RICO count for treble damages and claims under the Texas securities and consumer fraud laws, and to add additional defendants. Westcap and the Company are of the opinions that Westcap has adequate documentation to validate all such securities purchase transactions by The City Colleges, and that Westcap and the Company each have adequate defenses to the litigation. Although the alleged damages would be material to the Company's and Westcap's financial positions, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. A judicial ruling favorable to Westcap has been made requiring resolution of the suit against Westcap through binding arbitration. The lawsuit against the Company was suspended pending determination of the arbitration proceeding against Westcap.
On August 5, 1994, the Sarasota-Manatee Airport Authority filed a complaint in the United States District Court, Middle District of Florida, Tampa Division, against National Western Life Insurance Company (the Company), The Westcap Corporation and subsidiaries of Westcap. The suit seeks rescission of securities purchase transactions by the Sarasota-Manatee Airport Authority from Westcap, judgment for damages, or such other relief as the court may deem appropriate. The Company is named as a "controlling person" of the Westcap defendants. The Company and Westcap have answered the complaint and denied all material allegations. Westcap and the Company are of the opinions that Westcap has adequate documentation to validate all such securities purchase transactions by Sarasota-Manatee Airport Authority, and that Westcap and the Company each have adequate defenses to the litigation. Although the alleged damages would be material to Westcap's financial position, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The litigation is in early stages of discovery.
On February 1, 1995, the San Antonio River Authority (SARA) filed a complaint in the 285th Judicial District Court, Bexar County, Texas, against Kenneth William Katzen (Katzen), Westcap Securities , L.P., The Westcap Corporation (Westcap), and National Western Life Insurance Company (the Company). The suit alleges that Katzen and Westcap sold mortgage-backed security derivatives to SARA and misrepresented these securities to SARA. The suit alleges violations of the Federal Securities Act, Texas Securities Act, Deceptive Trade Practices Act, breach of fiduciary duty, fraud, negligence, breach of contract, and seeks attorney's fees. The Company is named as a "controlling person" of the Westcap defendants. Westcap and the Company are of the opinions that Westcap has adequate documentation to validate all securities purchases by SARA and that the Company and Westcap have adequate defenses to such suit. Although the alleged damages would be material to Westcap's financial condition, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The Company and Westcap have denied all allegations and there has been no discovery at this time.
The Westcap Corporation and Westcap Securities, L.P. are also defendants in several other pending lawsuits which have arisen in the ordinary course of its business. Westcap Securities, L.P. has also been notified of several arbitration claims filed with the National Association of Securities Dealers. After reviewing the lawsuits and arbitration filings with outside counsel, management believes it has adequate defenses to each of the claims. Although the alleged damages would be material to the financial position of The Westcap Corporation, a reasonable estimate of actual loss which may result from any of these claims cannot be made at this time. Accordingly, no provision for any liability that may result from these actions has been recognized in the consolidated financial statements.
No other legal proceedings presently pending by or against the Company or its subsidiaries are described, because management believes the outcome of such litigation should not have a material adverse effect on the financial position of the Company or its subsidiaries taken as a whole.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of fiscal 1994 to a vote of the Company's security holders.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The principal market on which the common stock of the Company is traded is The Nasdaq Stock Market under the symbol: NWLIA. The high and low sales prices for the common stock for each quarter during the last two years are shown in the following table:
These quotations represent prices in the market between dealers in securities, do not include retail markup, markdown, or commission, and do not necessarily represent actual transactions.
(b) Equity Security Holders
The number of stockholders of record on December 31, 1994, was as follows:
Class A Common Stock 7,160 Class B Common Stock 2
(c) Dividends
The Company has never paid cash dividends on its common stock. Payment of dividends is within the discretion of the Company's Board of Directors and will depend on factors such as earnings, capital requirements, and the operating and financial condition of the Company. Presently, the Company's capital requirements are such that it intends to follow a policy of retaining any earnings in order to finance the development of business and to meet increased regulatory requirements for capital.
ITEM 6.

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 22% of the Company's total premium revenues, universal life, and investment annuity contract deposits in 1994. The Company ranks among the top eight percent of all life insurance companies measured by statutory admitted assets. The primary products marketed by the Company are its universal life and single and flexible premium annuity products. Most of the Company's new business comes from the development of a market and the design and marketing of a specific product for that market.
In addition to the life insurance business, the Company has a brokerage operations segment. The Westcap Corporation, a wholly owned subsidiary of National Western Life Insurance Company, is primarily a dealer in municipal and corporate bonds and collateralized mortgage obligations and a secondary market dealer in obligations issued or guaranteed by the U.S. Government or its agencies.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Investment Philosophy
The Company's investment philosophy is to maintain a diversified portfolio of investment grade debt and equity securities that provide adequate liquidity to meet policyholder obligations and other cash needs. The prevailing strategy within this philosophy is the intent to hold investments in debt securities to maturity. However, the Company does manage its portfolio, which entails monitoring and reacting to all components which affect changes in the price or value of investments in debt and equity securities.
Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," as more fully described in the notes to the financial statements. This statement addresses the accounting and reporting for investments in debt and equity securities and requires classification of such securities into the following categories: held to maturity, available for sale, and trading. At December 31, 1994, approximately 18% of the Company's total debt and equity securities were classified as securities available for sale. These holdings provide flexibility to the Company to react to market opportunities and conditions and to practice active management within the portfolio to provide adequate liquidity to meet policyholder obligations and other cash needs. The reporting category chosen for the Company's securities investments depends on various factors including the type and quality of the particular security and how it will be incorporated into the Company's overall asset/liability management strategy.
Securities the Company purchases with the intent to hold to maturity are classified as securities held to maturity. Because the Company has strong cash flows and matches expected maturities of assets and liabilities, the Company has the ability to hold the securities, as it would be unlikely that forced sales of securities would be required prior to maturity to cover payments of liabilities. As a result, securities held to maturity are carried at amortized cost less declines in value that are other than temporary. However, certain situations may change the Company's intent to hold a particular security to maturity, the most notable of which is a deterioration in the issuer's creditworthiness. Accordingly, a security may be sold to avoid a further decline in realizable value when there has been a significant change in the credit risk of the issuer.
Securities purchased by the Company's brokerage subsidiary that are held for current resale are classified as trading securities. These securities are typically held for short periods of time, as the intent is to sell them, producing a trading profit. Trading securities are recorded in the Company's financial statements at fair value. Any trading profits or losses and unrealized gains or losses resulting from changes in the fair value of the securities are reflected as a component of income in the Company's financial statements.
Securities that are not classified as either held to maturity or trading securities are reported as securities available for sale. These securities may be sold if market or other measurement factors change unexpectedly after the securities were acquired. For example, opportunities arise when factors change that allow the Company to improve the performance and credit quality of the investment portfolio by replacing an existing security with an alternative security while still maintaining an appropriate matching of expected maturities of assets and liabilities. Examples of such improvements are as follows: improving the yield earned on invested assets, improving the credit quality, changing the duration of the portfolio, and selling securities in advance of anticipated calls or other prepayments. Securities available for sale are reported in the Company's financial statements at individual fair value. Any unrealized gains or losses resulting from changes in the fair value of the securities are reflected as a component of stockholders' equity.
As an integral part of its investment philosophy, the Company performs an ongoing process of monitoring the creditworthiness of issuers within the investment portfolio. In addition, review procedures are performed on securities that have had significant declines in fair value. The Company's objective in these circumstances is to determine if the decline in fair value is due to changing market expectations regarding inflation and general interest rates or other factors.
Additional review procedures are performed on those fair value declines which are caused by factors other than market expectations regarding inflation and general interest rates. Specific conditions of the issuer and its ability to comply with all terms of the instrument are considered in the evaluation of the realizable value of the investment. Information reviewed in making this evaluation would include the recent operational results and financial position of the issuer, information about its industry, recent press releases and other available data. If evidence does not exist to support a realizable value equal to or greater than the carrying value of the investment, such decline in fair value is determined to be other than temporary, and the carrying amount is reduced to its net realizable value. The amount of the reduction is reported as a realized loss.
Portfolio Analysis
At December 31, 1994, securities held to maturity totaled $1.606 billion or 62.5% of total invested assets. The fair value of these securities was $1.488 billion which reflects gross unrealized losses of $118 million. The unrealized losses within this portfolio result from increases in market interest rates during 1994. These gross unrealized losses are partially offset by $941,000 of net unrealized gains at December 31, 1994, recorded as a separate component of stockholders' equity resulting from the transfer of securities from available for sale to held to maturity as described in the notes to the financial statements.
Securities available for sale totaled $354 million at December 31, 1994, or 13.8% of total invested assets. Equity securities, which are included in securities available for sale, continue to be a small component of the Company's total investment portfolio totaling only $26 million. Securities available for sale are reported in the accompanying financial statements at fair value with changes in values reported as a separate component of stockholders' equity. As described in the notes to the financial statements, on July 31, 1994, the Company transferred securities with fair values totaling $805 million from securities available for sale to securities held to maturity. The lower holdings of securities available for sale will significantly reduce the Company's exposure to equity volatility while still providing securities for liquidity and asset/liability management purposes. The transfer resulted in locking in a net unrealized gain totaling $1,380,000 as a separate component of stockholders' equity which is subsequently being amortized. The net unrealized loss of the remaining securities available for sale was $3,140,000 at December 31, 1994.
The Company's insurance operations do not maintain a trading securities portfolio. All trading securities reported in the accompanying financial statements are held by the Company's brokerage subsidiary, The Westcap Corporation. These securities totaled $69.7 million at December 31, 1994, or 2.7% of total invested assets. Net increases in the fair values of these securities totaled approximately $58,000 for the year ended December 31, 1994, and have been included in earnings.
The Company's insurance operations maintain a diversified debt securities portfolio which consists of various types of fixed income securities including primarily U.S. government, public utilities, corporate and mortgage-backed securities. Investments in mortgage-backed securities include U.S. government and private issue mortgage-backed pass-through securities as well as collateralized mortgage obligations (CMOs). As of December 31, 1994 and 1993, the Company's debt securities portfolio consisted of the following mix of securities:
The amortized cost and estimated fair values of investments in debt securities at December 31, 1994, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
As market interest rates declined in 1992 and into 1993, the Company's portfolio experienced increased calls and principal prepayments. The increase in calls was primarily in the Company's utilities holdings. The Company responded with an active approach in managing future call risk by investing the call proceeds in a more diverse group of companies with increased call protection. As a result, the Company's utilities holdings as a percentage of the entire portfolio was reduced from 26.6% in 1992 to 14.6% in 1994.
The Company's holdings of mortgage-backed securities are also subject to prepayment risk, and principal prepayments did increase during 1993 due to the decline in market interest rates. However, as market interest rates increased in 1994, extension risk become more of a factor than prepayment risk. The Company has substantially reduced both prepayment and extension risks by investing primarily in collateralized mortgage obligations which have more predictable cash flow patterns than pass-through securities. During 1993, the Company increased its holdings of planned amortization class I (PAC I) CMOs which are designed to amortize in a more predictable manner than other CMO classes or pass-throughs. Due to this strategy, the Company continues to manage and reduce prepayment and extension risks, thereby helping to maintain the appropriate matching of the Company's assets and liabilities.
PAC I CMOs account for over 85% of the total CMO portfolio as of December 31, 1994. The CMOs that the Company purchases are modeled and subjected to detailed, comprehensive analysis by the Company's investment staff before any investment decision is made. The overall structure of the entire CMO is evaluated, and an average life sensitivity analysis is performed on the individual tranche being considered for purchase under increasing and decreasing interest rate scenarios. This analysis provides information used in selecting securities that fit appropriately within the Company's investment philosophy and asset/liability management parameters. The Company's investment mix between mortgage-backed securities and other fixed income securities helps effectively balance prepayment, extension and credit risks.
In addition to managing prepayment, extension and call risks, the Company continues to concentrate on improving the credit quality of its investments in debt securities. Much attention is often placed on a company's holdings of below investment grade debt securities, as these securities generally have greater default risk than higher rated corporate debt. These issuers usually have high levels of indebtedness and are more sensitive to adverse industry or economic conditions than are investment grade issuers. The Company's small holdings of below investment grade debt securities, which are summarized as follows, have increased slightly from 1992 primarily due to several corporate issuers that had ratings downgraded.
The level of investments in debt securities which are in default as to principal or interest payments is indicative of the Company's minimal holdings of below investment grade debt securities. At December 31, 1994 and 1993, securities with principal balances totaling $2,415,000 and $3,151,000 were in default and on non-accrual status.
The Company's overall conservative investment philosophy is reflected in the allocation of investments of its insurance operations which is detailed below as of December 31, 1994 and 1993. The Company emphasizes debt securities with smaller holdings in mortgage loans and real estate than industry averages.
MORTGAGE LOANS AND REAL ESTATE
Investment Philosophy
In general, the Company seeks loans on high quality, income producing properties such as shopping centers, freestanding retail stores, office buildings, industrial and sales or service facilities, selected apartment buildings, motels, and health care facilities. The location of these loans is typically in growth areas that offer a potential for property value appreciation. These growth areas are found primarily in major metropolitan areas, but occasionally in selected smaller communities. The Company currently seeks loans ranging from $500,000 to $11,000,000, with terms ranging from three to twenty-five years, at interest rates dictated by the marketplace.
The Company continues to improve the quality of its mortgage loan portfolio through strict underwriting guidelines and diversification of underlying property types and geographic locations. In addition to all mortgage loans being secured by the property, the majority of loans originated since 1991 are amortized over the term of the lease on the property, which is guaranteed by the lessee, and are approved based on the credit strength of the lessee. This approach also enables the Company to choose the locale in which the property securing the loan is located. In addition, the Company's underwriting guidelines require a loan-to-value ratio of 75% or less.
The Company's direct investments in real estate are not a significant portion of its total investment portfolio, and the majority of real estate owned was acquired through mortgage loan foreclosures. However, the Company is also currently participating in several real estate joint ventures. The joint ventures invest primarily in income-producing retail properties. While not a significant portion of the Company's investment portfolio, the joint ventures have produced favorable returns to date. The Company has no current plans to significantly increase its investments in real estate in the foreseeable future.
Portfolio Analysis
The Company held net investments in mortgage loans totaling $189,632,000 and $188,920,000, or 7.4% of total invested assets, at December 31, 1994 and 1993. The loans are real estate mortgages, substantially all of which are related to commercial properties and developments and have fixed interest rates.
The diversification of the mortgage loan portfolio by geographic region of the United States and by property type as of December 31, 1994 and 1993, was as follows:
As of December 31, 1994, the allowance for possible losses on mortgage loans was approximately $5,929,000. Additions to the allowance totaling $307,000 and $2,152,000 were recognized as realized losses on investments in the Company's 1994 and 1993 financial statements. Management believes that the allowance for possible losses is adequate. However, while management uses available information to recognize losses, future additions to the allowance may be necessary based on changes in economic conditions, particularly in the West South Central region which includes Texas, Louisiana, Oklahoma, and Arkansas.
The Company currently places all loans past due three months or more on a non-accrual status, thus recognizing no interest income on the loans. At December 31, 1994 and 1993, the Company had approximately $2,292,000 and $4,191,000, respectively, of mortgage loan principal balances on a non-accrual status. For the years ended December 31, 1994 and 1993, the approximate reduction in interest income associated with non-accrual loans was as follows:
In addition to the non-accrual loans, the Company had mortgage loan principal balances with restructured terms totaling approximately $13,123,000 and $14,257,000 at December 31, 1994 and 1993, respectively. For the years ended December 31, 1994 and 1993, the approximate reduction in interest income associated with restructured loans was as follows:
The contractual maturities of mortgage loans at December 31, 1994, are as follows:
The Company owns real estate that was acquired through foreclosure and through direct investment totaling approximately $17,766,000 and $22,672,000 at December 31, 1994 and 1993, respectively. This small concentration of properties represents less than one percent of the Company's entire investment portfolio. The real estate holdings consist primarily of income-producing properties which are being operated by the Company. The Company recognized operating losses on these properties of approximately $62,000 for the year ended December 31, 1994 and operating income of approximately $607,000 for the year ended December 31, 1993. The Company does not anticipate significant changes in these operating results in the near future.
The Company monitors the conditions and market values of these properties on a regular basis. Realized losses recognized due to declines in values of properties totaled $318,000 and $1,208,000 for the years ended December 31, 1994 and 1993, respectively. The Company makes repairs and capital improvements to keep the properties in good condition and will continue this maintenance as needed. However, the amounts expended for this maintenance have not had a significant impact on the Company's liquidity and capital resources, and such maintenance is not foreseen to have a significant impact in the near future.
RESULTS OF OPERATIONS
Summary of Consolidated Operations
A summary of operating results, net of taxes, for the years ended December 31, 1994, 1993 and 1992 is provided below:
Significant changes and fluctuations in income and expense items between years are described in detail for insurance and brokerage operations as follows:
Insurance Operations
Insurance Operations Net Earnings: Performance continues to improve as the Company recorded earnings from insurance operations for 1994 totaling $36,115,000 which represents an increase of $8,827,000, or 32%, over 1993 earnings. Increased net investment income, prudent interest and operating expense management, and favorable policy benefit expense experience all contributed to the positive results for 1994 as more fully described below.
Life and Annuity Premiums: This revenue category represents the premiums on traditional type products. However, sales in most of the Company's markets currently consist of non-traditional types such as universal life and investment annuities. Although 1994 reflects a small increase in these revenues, the Company will continue to focus the majority of its product development and marketing efforts on universal life and investment annuities.
Universal Life and Investment Annuity Contract Revenues: These revenues are from the Company's non-traditional products which are universal life and investment annuities. Revenues from these types of products consist of policy charges for the cost of insurance, policy administration fees and surrender charges assessed during the period. These revenues increased from $56.5 million in 1992 to $67.8 million in 1993 and declined somewhat to $64.7 million in 1994. More specifically, cost of insurance, policy administration fees and other related revenues have steadily increased each year due to continued sales of non-traditional products which continue to increase the Company's policies in force. Although surrender charge revenues were relatively comparable for 1992 and 1994, these revenues were significantly higher in 1993 due to increased policy surrenders. This accounts for the majority of the significant increase in universal life and investment annuity contract revenues in 1993.
Actual universal life and investment annuity deposits collected for the years ended December 31, 1994, 1993 and 1992 are detailed below. Deposits collected on these non-traditional products are not reflected as revenues in the Company's statements of earnings, as they are recorded directly to policyholder liabilities upon receipt, in accordance with generally accepted accounting principles.
As detailed above, the decline in deposits collected in 1993 is primarily related to investment annuities. Much of this decline is due to the discontinuance of the Company's two-tier annuity products in 1992 and increased competition due to market interest rate conditions. However, the Company has continued to develop new annuity and life products and has continued to contract new independent marketing organizations to further strengthen and diversify distribution channels for the sale of such products. The Company also significantly increased annuity marketing efforts in the second quarter of 1994 through personnel and agent additions and product developments. As a result of these efforts, annuity deposits have increased over $70 million, or 81%, from 1993.
Net Investment Income: Net investment income increased 5.4% from $180.3 million in 1993 to $190.0 million in 1994. Net investment income was up primarily due to yield and amortization adjustments on mortgage-backed securities and increases in invested assets. The yield and amortization adjustments were made in accordance with Statement of Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." The adjustments are made to reflect changes in mortgage-backed securities prepayment levels, caused by changes in market interest rates, which affect average lives, yields and amortization periods of the securities. The increase in invested assets for insurance operations is primarily due to increases in investment annuity deposits as previously described.
During 1992, net investment income increased 4.4% which was consistent with the growth in investments. However, net investment income declined from $184.1 million in 1992 to $180.3 million in 1993. This is reflective of both slower investment growth and the decline in the Company's investment portfolio yield due primarily to the overall drop in market interest rates. In 1993, both cash from operations and investment proceeds from increased principal prepayments and calls on debt securities were reinvested at lower yields due to market conditions, thereby producing lower investment income. Additionally, in 1993 and 1992 investment income was impacted due to reductions in the yields of the Company's remaining holdings of residual interests in collateralized mortgage obligations (CMO residuals). Holdings of principal exchange rate linked securities (PERLS) were also reduced substantially throughout 1992 which decreased yields. Although the reductions in holdings of the CMO residuals and PERLS did decrease portfolio yields, the exposure to exchange rate and prepayment risks was significantly reduced. Remaining holdings of these securities totaled approximately $16.9 million at December 31, 1994.
Other Income: The Company received proceeds from lawsuit settlements totaling $1,050,000 in 1993 which has been reflected in other income. In 1984, certain employee participants in the Company's "Builders, Contractors, and Employees Retirement Trust and Pension Plan" (the Plan) and other plaintiffs filed a civil lawsuit against the Company and other defendants with respect to various Plan matters, all as previously disclosed in the Company's annual reports on Form 10-K. The Company settled the lawsuit in 1991 with payments to the Internal Revenue Service and participants in the Plan. Subsequent to this settlement, the Company filed suit against the law firm which assisted in the development of the Plan. The Company also filed suit, for recovery of damages incurred, against an insurance company providing liability coverage for trustees of the Plan. Both suits were settled, with the Company receiving the proceeds as described above.
Also, as previously disclosed in the Company's annual reports on Form 10-K, the Company was a defendant in a lawsuit seeking recovery of certain values of life insurance policies pledged as collateral for debentures totaling $8,000,000. In early 1991, a court ruled that the collateral assignment was not enforceable. As a result, the Company recorded a loss of $8,000,000 in 1990, as the debentures were no longer deemed collateralized by the insurance policies and their market value was zero due to the insolvency of the issuer. The Company appealed the court ruling and also recorded a corresponding $8,000,000 liability for the potential payment of this claim. The Company had been accruing an additional liability for interest on this $8,000,000 balance. This lawsuit was settled in September, 1993, resulting in an $11,500,000 payment by the Company. The Company's total accrued liability for this claim exceeded the payment by approximately $670,000 which has been reflected as other income in 1993. The Company also received proceeds from a settlement totaling $955,000 for recovery of damages incurred related to this lawsuit. These settlement proceeds have been reflected as other income in 1994.
Realized Gains on Investments: The Company had realized gains of $1.6 million, $3.2 million and $15.7 million in 1994, 1993 and 1992, respectively. The decrease in 1994 and 1993 from the previous year is attributable to the prevailing strategy within the Company's investment philosophy which is the intent to hold debt securities to maturity. The gains in the three years are net of write-downs on real estate and mortgage loans totaling $625,000, $3,360,000, and $3,325,000. The gains also are net of write-downs for permanent impairments on securities held to maturity of $6,329,000 and $5,000,000 in 1993 and 1992, respectively. The write-downs in 1993 and 1992 for securities held to maturity relate primarily to holdings of PERLS and CMO residuals. The Company made substantial reductions in the holdings of these securities in 1993 and 1992, thereby reducing the exposure to potential future losses.
Life and Other Policy Benefits: The decrease in these expenses is largely related to reductions in policy surrenders on traditional insurance products in 1994 and 1993 in comparison to 1992. Also, 1993 life insurance benefit claims were significantly higher than the Company's prior experience. However, the 1994 claims declined to a level more consistent with previous claims history.
Amortization of Deferred Policy Acquisition Costs: This expense item represents the amortization of the costs of acquiring or producing new business, which consists primarily of agents commissions. The majority of such costs are amortized in direct relation to the anticipated future gross profits of the applicable blocks of business. Amortization for 1994 was $32,131,000 compared to $33,159,000 and $25,085,000 for 1993 and 1992, respectively. The increase in amortization from 1992 correlates to increased earnings from insurance operations.
Universal Life and Investment Annuity Contract Interest: Interest expense has declined steadily as amounts totaled $129.1 million, $130.9 million and $135.8 million for 1994, 1993 and 1992, respectively. This decline is due to the lowering of credited interest rates on most universal life and investment annuity products throughout these years. Additional interest costs related to increasing business has not been significant as the policy liabilities have remained relatively constant over the past three years except for the recent increase in investment annuity deposits in the latter part of 1994. The Company closely monitors its credited interest rates taking into consideration such factors as profitability goals, policyholder benefits, product marketability, and economic market conditions. Rates are established or adjusted after careful consideration and evaluation of these factors against established objectives.
Other Insurance Operating Expenses: These expenses totaled $29.4 million, $29.0 million and $27.9 million for 1994, 1993 and 1992, respectively. Although these expenses are relatively comparable between years, there were several items of significance which are described as follows:
(a) Commission expenses on insurance product sales were approximately $2,500,000 higher in 1992 due to higher premium volumes.
(b) National Western Life Insurance Company is subject to state guaranty association assessments in all states in which it is licensed to do business. These associations generally guarantee certain levels of benefits payable to resident policyholders of insolvent insurance companies. Most states allow premium tax credits for all or a portion of such assessments, thereby allowing potential recovery of these payments over a period of years. However, several states do not allow such credits. In December, 1994, the National Organization of Life and Health Insurance Guaranty Associations published revised assessment data on nationwide life and health insurance company insolvencies. Based on this information, the Company significantly increased its estimates in 1994 for assessment liabilities relating to such insolvencies. The Company will continue to monitor and revise its estimates for assessments as additional information becomes available which could result in additional expense charges. Other insurance operating expenses related to state guaranty association assessments totaled $4,869,000, $4,583,000 and $1,877,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
Brokerage Operations
Brokerage Net Earnings (Loss): 1994 net losses from the Company's wholly owned subsidiary, The Westcap Corporation, totaled $2,936,000 compared to net earnings of $21,832,000 and $26,728,000 in 1993 and 1992, respectively. As described in detail below, adverse bond market conditions were the major factor for lower production and the resulting loss in 1994 for the subsidiary.
Brokerage Revenues: Revenues for 1994, 1993 and 1992 were $40.2 million, $105.9 million and $123.1 million, respectively. The significant level of brokerage revenues in 1993 and 1992 is attributable to several factors. The steady decline in market interest rates in these years was very positive for brokerage firms. Also, The Westcap Corporation specializes in mortgage-backed securities, and many of their customers experienced significant prepayments within their portfolios. This contributed to increased sales for the brokerage firm as the investors reinvested the proceeds. Other contributing factors were the firm's ability to attract an experienced sales force and increases in the overall size of the force. While The Westcap Corporation experienced significantly increased revenues in 1993 and 1992, the entire brokerage industry, including Westcap, was impacted significantly by increasing interest rate conditions during 1994. The increase in market interest rates had a negative impact on sales for Westcap, and the bond brokerage industry in general, resulting in the significant decline in revenues in 1994.
Brokerage Expenses: Expenses for 1994, 1993 and 1992 were $40.2 million, $72.3 million and $82.6 million, respectively. The majority of these expenses relate to commission compensation and vary directly with brokerage revenues. Accordingly, the expenses directly correspond to the level of brokerage revenues for the same periods. However, as brokerage revenues decrease, the ratio of brokerage expenses to such revenues increases. This is because fixed and administrative costs are covered at certain levels of revenues, leaving only the variable cost of commissions. To adjust to the reduced volume of business due to the current adverse bond market conditions, Westcap has taken appropriate steps in 1995 to reduce administrative and operating costs.
Consolidated Federal Income Taxes
Federal Income Tax Expense: The Federal corporate tax rate was increased from 34% to 35% beginning in 1993. The total increase in 1993 Federal income taxes resulting from the change in rates was approximately $1,018,000.
Cumulative Effect of Change in Accounting for Income Taxes: In February, 1992, the FASB issued SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires a change from the deferred method of accounting for income taxes of Accounting Principles Board Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company adopted SFAS No. 109 effective January 1, 1993. The cumulative effect of this change in accounting for income taxes of $5,520,000 was determined as of January 1, 1993, and is reported separately in the statement of earnings for the year ended December 31, 1993. Prior periods' financial statements have not been restated to apply the provisions of SFAS No. 109.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the Company are met primarily by funds provided from operations. Premium deposits and revenues, investment income, and investment maturities are the primary sources of funds, while investment purchases and policy benefits are the primary uses of funds. Primary sources of liquidity to meet unexpected cash needs are the Company's securities available for sale portfolio, net cash provided by operations and $60 million bank line of credit. The Company's brokerage subsidiary also uses revolving lines of credit to complement any funds generated from operations. These lines of credit are used primarily for clearing functions for all securities transactions with its customers.
A primary liquidity concern for the Company's life insurance operations is the risk of early policyholder withdrawals. Consequently, the Company closely evaluates and manages the risk of early surrenders or withdrawals. The Company includes provisions within annuity and universal life insurance policies, such as surrender charges, that help limit early withdrawals. The Company also prepares cash flow projections and performs cash flow tests under various market interest rate scenarios to assist in evaluating liquidity needs and adequacy. The Company currently expects available liquidity sources and future cash flows to be adequate to meet the demand for funds.
The Company had no long-term debt during 1994 or 1993. There are no present material commitments for capital expenditures in 1995, and the Company does not anticipate incurring any such commitments in the remainder of 1995.
CHANGES IN ACCOUNTING PRINCIPLES
SFAS No. 112, "Employers' Accounting for Postemployment Benefits," was issued by the Financial Accounting Standards Board (FASB) in November, 1992. This statement establishes accounting standards for employers who provide benefits to former or inactive employees after employment but before retirement. Postemployment benefits include all types of benefits provided to former or inactive employees, their beneficiaries and covered dependents. The statement is effective for fiscal years beginning after December 15, 1993. As the Company provides insignificant postemployment benefits, implementation of this statement had no significant impact on the results of operations of the Company.
The FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," in May, 1993. In October, 1994, the FASB also issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," which amends SFAS No. 114. These statements address the accounting by creditors for impairment of certain loans and related financial statement disclosures. The statements are applicable to all creditors and to all loans, uncollateralized as well as collateralized, with certain exceptions and also apply to all loans that are restructured in a troubled debt restructuring involving a modification of terms. The statements require that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent.
Both SFAS No. 114 and No. 118 apply to financial statements for fiscal years beginning after December 15, 1994. The Company will implement the statements in the first quarter of 1995. The Company is currently providing for impairment of loans through an allowance for possible losses, and the implementation of this statement is not expected to have a significant effect on the level of this allowance. As a result, there should be no significant net impact on the Company's results of operations stockholders' equity.
In May, 1993, the FASB also issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments are to be classified in three categories and accounted for as follows:
(a) Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost.
(b) Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.
(c) Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity.
Previous accounting policy was similar to the requirements of the new statement. Significant differences were that securities available for sale were reported at the lower of aggregate cost or market value, whereas SFAS No. 115 requires reporting of these securities on an individual fair value basis. Also, SFAS No. 115 provides stricter requirements and guidance on the classification of securities among the three reporting categories.
The Company adopted SFAS No. 115 effective January 1, 1994, resulting in an increase to stockholders' equity of $26,610,000 on that date. There was no effect on net earnings of the Company. The implementation of SFAS No. 115 and subsequent effects on stockholders' equity during 1994 is more fully described in the accompanying notes to consolidated financial statements.
In January, 1995, the FASB issued SFAS No. 120, "Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts." This statement extends the requirements of SFAS No. 60, "Accounting and Reporting by Insurance Enterprises," No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments," and No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," to mutual life insurance enterprises. Also, the AICPA has established accounting for certain participating life insurance contracts of mutual life insurance enterprises in its Statement of Position (SOP) 95-1, "Accounting for Certain Insurance Activities of Mutual Life Insurance Enterprises," that should be applied to those contracts that meet the conditions in this statement. This statement also permits stock life insurance enterprises to apply the provisions of the SOP to participating life insurance contracts that meet certain conditions. SFAS No. 120 is effective for financial statements issued for fiscal years beginning after December 15, 1995. Due to the Company's small level of participating life insurance contracts, this statement should have no significant effects on the Company's financial statements.
CURRENT REGULATORY ISSUES
Actuarial Guideline GGG
In December, 1994, the NAIC adopted for statutory accounting practices Actuarial Guideline GGG for determining minimum reserves for annuity contracts with multiple benefit streams often referred to as two-tier annuities. The guideline will be effective December 31, 1995, and will apply to all contracts issued on or after January 1, 1981, and allowance is made for a three-year phase-in period. However, the Company's statutory reserving practices for two-tier annuities follow an agreement reached with its state of domicile, Colorado.
The Colorado Division of Insurance (the Division) issued a Notice in 1987 which defined the basis of reserving for two-tier annuities and utilized a single interest rate for all benefit streams. Based on the Colorado Notice and the uncertainty of the implementation of Actuarial Guideline GGG, the Company added $7,000,000 in 1992 and $6,000,000 in 1993 to its existing statutory annuity reserves. These additional reserves were agreed upon and approved by the Colorado Division of Insurance.
During 1993, the Division conducted an Association Financial Examination of the Company for the six-year period ended December 31, 1992. One of the results of the examination was an agreement between the Division and the Company concerning the permitted statutory reserving basis for two-tier annuities. The agreement includes a plan to meet a target reserve by December 31, 1996. The agreement states the acceptable difference between the target reserve and the statutory reserve held by the Company. The difference will meet the following schedule:
The Company has met the above scheduled difference for December 31, 1994. In fact, at December 31, 1994, the difference was less than that required, and it is anticipated that the Company will not require any additional statutory reserves in order to meet the above schedule of differences. This agreement does not affect the Company's policy reserves which are prepared under generally accepted accounting principles as reported in the accompanying consolidated financial statements.
Risk Based Capital Requirements
In 1993, the National Association of Insurance Commissioners (NAIC) established new risk-based capital (RBC) requirements to help state regulators monitor the financial strength and stability of life insurers by identifying those companies that may be inadequately capitalized. Under the NAIC's requirements, each insurer must maintain its total capital above a calculated threshold or take corrective measures to achieve the threshold. The threshold of adequate capital is based on a formula that takes into account the amount of risk each company faces on its products and investments. The RBC formula takes into consideration four major areas of risk which are: (i) asset risk which primarily focuses on the quality of investments; (ii) insurance risk which encompasses mortality and morbidity risk; (iii) interest rate risk which involves asset/liability matching issues; and (iv) other business risks.
There is currently some public pressure for insurance companies to publish their RBC ratios or levels. However, the legality of publishing such information is uncertain. The American Institute of Certified Public Accountants (AICPA) recently released an exposure draft of a Statement of Position (SOP) which included requirements that insurance companies disclose certain information about their RBC levels. This requirement was deleted from the final SOP version due to questions raised about the legality of such disclosures. Instead, the AICPA has decided to consider a separate SOP at a later date on RBC disclosures, after the legal issues are resolved. Due to these unanswered legal issues, the Company has chosen not to publish its RBC ratios or levels. However, the Company's current statutory capital and surplus is significantly in excess of the threshold RBC requirements.
ITEM 8.


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

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



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) Identification of Directors
The following information as of January 31, 1995, is furnished with respect to each director. All terms expire in June of 1995.
Family relationships among the directors are: Mr. Robert Moody and Mr. McLeod are brothers-in-law and Mr. Robert Moody is the father of Ms. Frances Moody, Mr. Ross Moody, and Mr. Russell Moody.
(b) Identification of Executive Officers
The following is a list of the Company's executive officers, their ages, and their positions and offices as of January 31, 1995.
(c) Identification of Certain Significant Employees
None.
(d) Family Relationships
There are no family relationships among the officers listed except that Mr. Robert Moody is the father of Mr. Ross Moody. There are no arrangements or understandings pursuant to which any officer was elected. All officers hold office for one year and until their successors are elected and qualified, unless otherwise specified by the Board of Directors.
(e) Business Experience
All of the executive officers listed above have served in various executive capacities with the Company for more than five years, with the exception of the following:
Mr. Ross Moody was a corporate financial analyst with Drexel Burnham Lambert from 1986 to 1987 and was a graduate student at the Harvard Business School from 1987 to 1989. He also served as Director of Administrative Services for American National Insurance Company from 1989 to 1991.
Mr. Pickering was Agency Vice President of the Western Division with Integon Life Insurance Company from 1981 to 1987. From 1987 to 1990, he served as Regional Vice President of United Pacific Life Insurance Company. In 1990, he began work for Conseco/Western National Life Insurance Company as Vice President Marketing until May, 1994.
Mr. Facey was Superintendent, Marketing, for Northern Life Assurance Company of Canada from 1973-1985. From 1985-1987, he was Assistant Vice President, Marketing and Actuarial Services for Gerling Global Life Insurance Company in Toronto, Canada, and from 1987 until March, 1992 was Director of Actuarial Services for Variable Annuity Life Insurance Company of Houston, Texas.
Ms. Scheuer was a Management Consultant for Deloitte, Haskins & Sells from 1983-1984. From 1984-1988, she was Senior Financial Analyst with the Texas Public Utility Commission. From 1988 until August, 1992, she was the Fixed Income Portfolio Manager for the Texas Permanent School Fund.
Mr. Kasch was Staff Accountant with Arthur Young & Company from 1984-1985. From 1985 until January, 1991, he was Senior Accountant and Audit Manager for KPMG Peat Marwick.
Mr. Payne was staff attorney with the Kansas Insurance Department from 1972 to 1975. From 1975-1983, he was Vice President, Secretary & General Counsel for Lone Star Life Insurance Company; from 1983-1990, he was Vice President, Secretary and General Counsel for Reserve Life Insurance Company; from 1990-1991 he was President and CEO of Great Republic Insurance Company; and from 1991-1993 he was Vice President - Government Relations for United American Insurance Company. From 1993 until October, 1994, he was in private practice in Dallas, Texas.
Mr. Steger was Assistant Vice President-Chief Underwriter of Tower Life, San Antonio, Texas from 1971 until December, 1991.
(f) Involvement in Certain Legal Proceedings
There are no events pending, or during the last five years, under any bankruptcy act, criminal proceedings, judgments, or injunctions material to the evaluation of the ability and integrity of any director or executive officer except as described below:
In January, 1994, a United States District Court Judge vacated and withdrew the judgment which had been entered in Case No. H-86-4269, W. Steve Smith, Trustee vs. Shearn Moody Jr., et al, United States District Court for the Southern District of Texas. The Judge also dismissed the case with prejudice. The judgment had been entered against Robert L. Moody and The Moody National Bank of Galveston, of which he was Chairman of the Board. Robert L. Moody is also Chairman of the Board of National Western Life Insurance Company. The case arose out of complex bankruptcy and related proceedings involving Robert L. Moody's brother, Shearn Moody, Jr. Subsequently, a global settlement of Shearn Moody, Jr.'s bankruptcy and related legal proceedings was reached and executed. As part of the global settlement, the Bankruptcy Trustee recommended, and other interested parties agreed not to oppose or object to, the Judge's vacating and withdrawing the judgment and dismissing the case with prejudice. This case and settlement did not involve the Company and had no effect on its financial statements.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
(b) Summary Compensation Table
(c) Option/SAR Grants Table
None.
(d) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table
None.
(e) Long-Term Incentive Plan Awards Table
None.
(f) Defined Benefit or Actuarial Plan Disclosure
The Company currently has two employee defined benefit plans for the benefit of its employees and officers. A brief description and formulas by which benefits are determined for each of the plans are detailed as follows:
Qualified Defined Benefit Plan - This plan covers all full-time employees and officers of the Company and provides benefits based on the participants' years of service and compensation. The Company makes annual contributions to the plan that comply with the minimum funding provisions of the Employee Retirement Income Security Act.
Annual pension benefits for those employees who became eligible participants prior to January 1, 1991, are calculated as the sum of the following:
(1) 50% of the participant's final 5-year average annual compensation at December 31, 1990, less 50% of their primary social security benefit determined at December 31, 1990; this net amount is then prorated for less than 15 years of benefit service at normal retirement date. This result is multiplied by a fraction which is the participant's years of benefit service at December 31, 1990, divided by the participant's years of benefit service at normal retirement date.
(2) 1.5% of the participant's compensation earned during each year of benefit service after December 31, 1990.
Annual pension benefits for those employees who become eligible participants on or subsequent to January 1, 1991, are calculated as 1.5% of their compensation earned during each year of benefit service.
Non-Qualified Defined Benefit Plan - This plan covers those officers in the position of senior vice president or above and other employees who have been designated by the President of the Company as being in the class of persons who are eligible to participate in the plan. This plan also provides benefits based on the participants' years of service and compensation. However, no minimum funding standards are required.
The benefit to be paid pursuant to this Plan to a Participant who retires at his normal retirement date shall be equal to (a) less (b) less (c) where:
(a) is the benefit which would have been payable at the participant's normal retirement date under the terms of the Qualified Defined Benefit Plan as of December 31, 1990, as if that Plan had continued without change, and,
(b) is the benefit which actually becomes payable under the terms of the Qualified Defined Benefit Plan at the participant's normal retirement date, and,
(c) is the actuarially equivalent life annuity which may be provided by an accumulation of 2% of the participant's compensation for each year of service on or after January 1, 1991, accumulated at an assumed interest rate of 8.5% to his normal retirement date.
In no event will the benefit be greater than the benefit which would have been payable at normal retirement date under the terms of the Qualified Defined Benefit Plan as of December 31, 1990, as if that plan had continued without change.
The estimated annual benefits payable to the named executive officers upon retirement, at normal retirement age, for the Company's defined benefit plans are as follows:
(g) Compensation of Directors
All directors of the Company currently receive $12,000 a year and $500 for each board meeting attended. They are also reimbursed for actual travel expenses incurred in performing services as directors. An additional $500 is paid for each committee meeting attended. However, a director attending multiple meetings on the same day receives only one meeting fee. The amounts paid pursuant to these arrangements are included in the summary compensation table under Item 11(b). The directors and their dependents are also insured under the Company's group insurance program.
Directors of the Company's brokerage subsidiary, Westcap, currently receive $250 for each board meeting attended. In addition, the directors may receive an annual bonus.
(h) Employment Contracts and Termination of Employment and Change-in-Control Arrangements
None.
(i) Report on Repricing of Options/SARs
None.
(j) Compensation Committee Interlocks and Insider Participation
The Company's Board of Directors determines and approves executive compensation. Mr. Robert Moody, Mr. Ross Moody and Mr. Milos serve as directors and also serve as officers and employees of the Company. No compensation committee interlocks exist with other unaffiliated companies.
(k) Board Compensation Committee Report on Executive Compensation
The Company's Board of Directors performs the functions of an executive compensation committee. The Board is responsible for developing and administering the policies that determine executive compensation.
Executive compensation is comprised primarily of a base salary. The salary is adjusted annually based on a performance review of the individual as well as the performance of the Company as a whole. The review encompasses the following factors:
- contributions to the Company's short and long-term strategic goals, including financial goals such as Company revenues and earnings
- achievement of specific goals within the individual's realm of responsibility
- development of management and employees within the Company
- performance of leadership within the industry
The policies discussed above are reviewed periodically by the Board of Directors to ensure the support of the Company's overall business strategy and to attract and retain key executives.
A separate compensation committee, comprised of outside, independent directors, determines compensation for the three highest paid Company executives. Those directors serving on the committee include the following:
Arthur O. Dummer Harry L. Edwards E. J. Pederson
The policies used by the compensation committee in determining compensation are similar to those described above for all other Company executives.
(1) Performance Graph
The following graph compares the change in the Company's cumulative total stockholder return on its common stock with the NASDAQ - U.S. Companies Index and the NASDAQ Insurance Stock Index. The graph assumes that the value of the investment in the Company's common stock and each index was $100 at December 31, 1989, and that all dividends were reinvested.
For the purposes of this electronic filing, the graph has been filed separately under the Securites and Exchange Commission filing Form SE dated March 30, 1995. The coordinates of the graph are as follows:
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, 1994:
(b) Security Ownership of Management
The following table sets forth as of December 31, 1994, information concerning the beneficial ownership of the Company's common stock by all directors, named officers, and all directors and officers of the Company as a group:
(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 $2,535,103 issued in 1990 by Seal (GP), Inc. which is a subsidiary of Seal Fleet, Inc. The note is due in 2000 with interest of 12% payable monthly and is secured by first preferred ship mortgages. The note was modified during 1992 reducing the interest rate from 12% to 10%. However, the additional 2% interest will be payable upon maturity of the note.
Seal Fleet, Inc., has two classes of stock outstanding, Class A and B. The Class B shares elect a majority of the Board of Directors of Seal Fleet, Inc. All of the Class B shares and 212,655 (9%) of the Class A shares of Seal Fleet, Inc., are owned by the Three R Trust, Galveston, Texas. This Trust was created by Robert L. Moody as Settlor for the benefit of his children. Three of his children, Mr. Ross R. Moody, Mr. Russell S. Moody, and Ms. Frances A. Moody are beneficiaries of the Three R Trust and are also directors of National Western Life Insurance Company. The Trustee of the Trust is Irwin M. Herz, Jr., of Galveston, Texas. Mr. Herz personally owns 10,932 (.5%) shares of the Class A stock of Seal Fleet, Inc. Mr. Herz is a lawyer representing the Company, Mr. Moody, and several of Mr. Moody's affiliated interests. Through its Trustee, Mr. Herz, the Three R Trust is considered to be the controlling stockholder of Seal Fleet, Inc. Louis Pauls, Jr., and Russell S. Moody, directors of the Company, are also directors of Seal Fleet, Inc.
Seal Fleet, Inc., and its subsidiaries own, operate, or lease supply and equipment boats for off-shore oil and gas well drilling rigs. The consolidated audited financial statements of Seal Fleet, Inc., and its subsidiaries for the fiscal year ending December 31, 1994, reflected total assets of $11,805,000, net income of $478,000, and negative stockholders' equity of $3,505,000.
Gal-Tex Hotel Corporation
The Company also holds two mortgage loans issued to Gal-Tex Hotel Corporation which is owned 50% by the Libbie Shearn Moody Trust and 50% by The Moody Foundation. The first mortgage loan in the amount of $3,303,000 was issued in 1988, will mature in May of 1998 and pays interest of 10.5%. The loan is secured by property consisting of a hotel located in Kingsport, Tennessee. The second mortgage loan in the amount of $8,972,000 was issued in 1994, will mature in October of 2004 and pays interest of 8.75%. The loan is secured by property consisting of a hotel located in Houston, Texas. The Company is the beneficial owner of a life interest (1/8 share), previously owned by Mr. Robert L. Moody, in the trust estate of Libbie Shearn Moody. The trustee of this estate is The Moody National Bank of Galveston. The Moody Foundation is a private charitable foundation governed by a Board of Trustees of three members. Mr. Robert L. Moody and Mr. Ross R. Moody are members of the Board of Trustees.
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1 and 2. Financial Statements and Financial Statement Schedules
See Attachment "A" at pages __ through __.
All other schedules are omitted, as the required information is inapplicable or the information is presented in the financial statements or related notes.
(a) 3. Exhibits
None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1994.
The parent-only financial statements of the Company are omitted, because the Company is primarily an operating company and all subsidiaries included in the consolidated financial statements being filed, in the aggregate, do not have minority equity interest and/or indebtedness to any person other than the Company or its consolidated subsidiaries in amounts which together exceed 5% of the total assets as shown by the most recent year-end consolidated balance sheet.
ATTACHMENT A
Page
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1994 and 1993
Consolidated Statements of Earnings for the years ended December 31, 1994, 1993 and 1992
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
Schedule I - Summary of Investments Other Than Investments in Related Parties, December 31, 1994
Schedule V - Valuation and Qualifying Accounts for the years ended December 31, 1994, 1993 and 1992
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders National Western Life Insurance Company Austin, Texas
We have audited the consolidated financial statements of National Western Life Insurance Company and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Western Life Insurance Company and subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 4, the Company changed its method of accounting for investments in debt and equity securities in 1994 to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." As discussed in Note 7, the Company changed its method of accounting for income taxes in 1993 to adopt the provisions of SFAS No. 109, "Accounting for Income Taxes."
KPMG Peat Marwick LLP
Austin, Texas March 3, 1995
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1994 and 1993 (In thousands)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1994 and 1993 (In thousands except per share amounts)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS For the Years Ended December 31, 1994, 1993 and 1992 (In thousands except per share amounts)
(Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS, CONTINUED For the Years Ended December 31, 1994, 1993 and 1992 (In thousands except per share amounts)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 1994, 1993 and 1992 (In thousands)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1994, 1993 and 1992 (In thousands)
(Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED For the Years Ended December 31, 1994, 1993 and 1992 (In thousands)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Principles of Consolidation - The accompanying consolidated financial statements include the accounts of National Western Life Insurance Company and its wholly owned subsidiaries (the Company), The Westcap Corporation, NWL Investments, Inc., NWL Properties, Inc., NWL 806 Main, Inc., Commercial Adjusters, Inc., and National Western Asset Management, Inc. Commercial Adjusters, Inc. was dissolved in October, 1994, and all remaining assets and liabilities were assumed by National Western Life Insurance Company. National Western Asset Management, Inc. was sold in July, 1992. All significant intercorporate transactions and accounts have been eliminated in consolidation.
(B) Basis of Presentation - The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles. National Western Life Insurance Company also files financial statements with insurance regulatory authorities which are prepared on the basis of statutory accounting practices which are significantly different from financial statements prepared in accordance with generally accepted accounting principles. These differences are described in detail in the statutory information section of this note.
(C) Investments - Investments in debt securities the Company purchases with the intent to hold to maturity are classified as securities held to maturity. The Company has the ability to hold the securities, as it would be unlikely that forced sales of securities would be required prior to maturity to cover payments of liabilities. As a result, securities held to maturity are carried at amortized cost less declines in value that are other than temporary.
Investments in debt and equity securities purchased by the Company that are held for current resale are classified as trading securities. These securities are typically held for short periods of time, as the intent is to sell them producing a trading profit. As a result, trading securities are recorded at fair value. Any trading profits or losses and unrealized gains or losses resulting from changes in the fair value of the securities are included in earnings.
Investments in debt and equity securities that are not classified as either securities held to maturity or trading securities are reported as securities available for sale. Securities available for sale are reported in the accompanying financial statements at individual fair value for 1994 and at the lower of aggregate cost or market value for 1993. Any valuation changes resulting from changes in the market or fair value of the securities are reflected as a component of stockholders' equity. For 1994, these unrealized gains or losses in stockholders' equity are reported net of taxes and adjustments to deferred acquisition costs.
Transfers of securities between categories are recorded at fair value at the date of transfer. Unrealized holding gains and losses are recognized in earnings for transfers into trading securities. Unrealized holding gains or losses associated with transfers of securities held to maturity to securities available for sale are recorded as a separate component of stockholders' equity. The unrealized holding gains or losses included as a separate component of equity for securities transferred from available for sale to held to maturity are maintained and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with the amortization or accretion of premium or discount on the associated security.
Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Realized gains and losses for securities available for slae and securities held to maturity are included in earnings and are derived using the specific idenification method for determining the cost of securities sold. For securities available for sale or securities held to maturity, a decline in the market value below cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security.
Mortgage loans and other long-term investments are stated at cost, less unamortized discounts and allowances for possible losses. Policy loans are stated at their aggregate unpaid balances. Real estate acquired by foreclosure is stated at the lower of cost or fair value less estimated costs to sell.
Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as financing transactions, collateralized by negotiable securities, and carried at the amounts at which the securities will be subsequently resold or repurchased as specified in the respective agreements.
(D) Cash Equivalents - For purposes of the statements of cash flows, the Company considers all short-term investments with a maturity at date of purchase of three months or less to be cash equivalents.
(E) Brokerage Trade Receivables and Payables - Brokerage trade receivables and payables consist of receivables from and payables to customers and brokers and dealers which represent the contract value of securities which have not been delivered or received as of settlement date. The receivables from customers and brokers and dealers are collateralized by securities held by or due to subsidiaries of The Westcap Corporation.
(F) Insurance Revenues and Expenses - Premiums on traditional life insurance products are recognized as revenues as they become due or, for short duration contracts, over the contract periods. Benefits and expenses are matched with premiums in arriving at profits by providing for policy benefits over the lives of the policies and by amortizing acquisition costs over the premium-paying periods of the policies. For universal life and investment annuity contracts, revenues consist of policy charges for the cost of insurance, policy administration, and surrender charges assessed during the period. Expenses for these policies include interest credited to policy account balances and benefit claims incurred in excess of policy account balances. The related deferred policy acquisition costs are amortized in relation to the present value of expected gross profits on the policies.
(G) Brokerage Revenues and Expenses - Securities transactions and related revenues and expenses, except trading profits, are recorded in the accounts on a settlement date basis. Trading profits are recorded on a trade date basis. Other revenues and expenses related to securities transactions executed but not yet settled as of year-end were not material to the financial position and results of operations of the Company.
Securities transactions executed but not yet settled as of September 30, 1994 and 1993 (the brokerage subsidiary's year-end), would result in an increase in receivables from customers and brokers and dealers of approximately $124,365,000 and $634,042,000, if settled. There would also be a corresponding increase of approximately $151,297,000 and $677,905,000 in payables to customers and brokers and dealers and an increase of $27,050,000 and $50,106,000 in trading securities at September 30, 1994 and 1993, respectively.
(H) Depreciation of Property, Equipment and Leasehold Improvements - Depreciation is based on the estimated useful lives of the assets and is calculated on the straight-line and accelerated methods. Leasehold improvements are amortized over the lesser of the economic useful life of the improvement or the term of the lease.
(I) Earnings Per Share - Earnings per share of common stock are based on the weighted average number of such shares outstanding during each year. The weighted average shares outstanding were 3,484,682, 3,481,233, and 3,477,842 for the years ended December 31, 1994, 1993, and 1992, respectively.
(J) Classification - Certain reclassifications have been made to the prior years to conform to the reporting categories used in 1994.
(K) Statutory Information - National Western Life Insurance Company, domiciled in Colorado, prepares its statutory financial statements in accordance with accounting practices prescribed or permitted by the Colorado Division of Insurance. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (NAIC), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. Such practices may differ from state to state, may differ from company to company within a state, and may change in the future. The NAIC currently is in the process of codifying statutory accounting practices, the result of which is expected to constitute the only source of prescribed statutory accounting practices. Accordingly, that project will likely change, to some extent, prescribed statutory accounting practices and may result in changes to the accounting practices that insurance companies use to prepare their statutory financial statements. The following are major differences between generally accepted accounting principles and prescribed or permitted statutory accounting practices.
1. The Company accounts for universal life and investment annuity contracts based on the provisions of Statement of Financial Accounting Standards (SFAS) No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments." The basic effect of the statement with respect to certain long-duration contracts is that deposits for universal life and investment annuity contracts are not reflected as revenues, and surrenders and certain other benefit payments are not reflected as expenses. However, statutory accounting practices do reflect such items as revenues and expenses.
2. Commissions and certain expenses related to policy issuance and underwriting, all of which generally vary with and are related to the production of new business, have been deferred. For traditional products, these costs are being amortized over the premium-paying period of the related policies in proportion to the ratio of the premium earned to the total premium revenue anticipated, using the same assumptions as to interest, mortality, and withdrawals as were used in calculating the liability for future policy benefits. For universal life and investment annuity contracts, these costs are amortized in relation to the present value of expected gross profits on these policies. Statutory accounting practices require commissions and related costs to be expensed as incurred. A summary of information relative to deferred policy acquisition costs and premiums and deposits, net of reinsurance, follows:
3. Under generally accepted accounting principles, the liability for future policy benefits on traditional products has been calculated by the net level method using assumptions as to future mortality (based on the 1965-1970 and 1975-1980 Select and Ultimate mortality tables), interest ranging from 4% to 8%, and withdrawals based on Company experience. For universal life and investment annuity contracts, the liability for future policy benefits represents the account balance.
4. Deferred Federal income taxes are provided for temporary differences which are recognized in the financial statements in a different period than for Federal income tax purposes. Deferred taxes are not recognized in statutory accounting practices.
5. Investments in subsidiaries are recorded at admitted asset value for statutory purposes, whereas the financial statements of the subsidiaries have been consolidated with those of the Company under generally accepted accounting principles.
6. The asset valuation reserve and interest maintenance reserve, which are investment valuation reserves prescribed by statutory accounting practices, have been eliminated, as they are not required under generally accepted accounting principles.
7. The recorded value of the life interest in the Libbie Shearn Moody Trust (the Trust) is reported at its initial valuation, net of accumulated amortization. The initial valuation was based on the assumption that the Trust would provide certain income to the Company at an assumed interest rate and is being amortized over 53 years, the life expectancy of Mr. Robert L. Moody at the date he contributed the life interest to the Company. For statutory accounting purposes, the life interest has been recently valued at $26,400,000 which was computed as the present value of the estimated future income to be received from the Trust, limited to the amount of existing insurance in force on the life of Mr. Robert L. Moody. However, this amount is being amortized to a valuation of $12,774,000 over a seven-year period in accordance with Colorado Division of Insurance permitted accounting requirements. Prescribed statutory accounting practices provide no accounting guidance for such asset. The statutory admitted value of this life interest at December 31, 1994 is $22,507,000 in comparison to a carrying value of $5,486,000 in the accompanying consolidated financial statements.
Reconciliations of statutory basis stockholders' equity and net income, as included in the annual statements filed with the Colorado Division of Insurance, to the respective amounts as reported in the accompanying consolidated financial statements are as follows:
(2) SIGNIFICANT SUBSIDIARY
The Westcap Corporation and subsidiaries (Westcap), a wholly owned brokerage firm, have been consolidated in the accompanying financial statements. Subsidiaries of The Westcap Corporation also own 100% of the partnership interest in Westcap Securities, L.P. which is also included in the consolidation. Westcap's fiscal year-end is September 30.
Westcap Securities, L.P. is subject to the Securities and Exchange Commission's Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital. Westcap Securities, L.P. has elected to be subject to the Alternative Net Capital requirement which requires the partnership to, at all times, maintain net capital equal to the greater of $250,000 or 2% of aggregate debit items computed in accordance with the formula for the determination of Reserve Requirements for Brokers and Dealers. At September 30, 1994, Westcap Securities, L.P. had net capital of $8,423,000 which was $8,173,000 in excess of its required net capital of $250,000.
Westcap Securities, L.P. is required by Rule 15c 3-3 to maintain special reserve bank accounts. The amount in this account is restricted for the exclusive benefit of customers. The restricted amount, if any, is determined periodically in accordance with a specified formula. At September 30, 1994, cash of $1,443,000 had been segregated in a special reserve bank account. The required restricted amount was approximately $2,172,000. An additional deposit was made to the special reserve account, as required.
A summary of the most recent audited consolidated financial information for Westcap is as follows:
(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
(A) Investment Income
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, 1994 and 1993, investments in debt securities and mortgage loans with principal balances totaling $8,314,000 and $7,342,000 were on non-accrual status. During 1994, 1993 and 1992, reductions in interest income associated with non-performing investments in debt securities and mortgage loans were as follows:
(B) Investment Concentrations
Concentrations of credit risk arising from mortgage loans exist in relation to certain groups of customers. A group concentration arises when a number of counterparties have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Company does not have a significant exposure to any individual customer or counterparty. The major concentrations of mortgage loan credit risk for the Company arise by geographic location in the United States and by property type as detailed below.
The Company held in its investment portfolio below investment grade debt securities, net of loss provisions, of approximately $31,861,000 and $24,261,000 at December 31, 1994 and 1993, respectively. This represents approximately 1.2% and 1.0% of total invested assets. These below investment grade debt securities often have common characteristics in that they are usually unsecured and are often subordinated to other creditors of the borrower or issuer. Additionally, the issuers of the below investment grade debt securities usually have high levels of indebtedness and are more sensitive to adverse economic conditions.
At December 31, 1994 and 1993, the Company held approximately $8,948,000 and $13,822,000 of residual interests in collateralized mortgage obligations (CMOs) in its investment portfolio. Investments in residual interests of CMOs are securities that entitle the Company to the excess cash flows arising from the difference between the cash flows required to make principal and interest payments on the related CMOs and the actual cash flows received on the underlying U.S. agency collateral included in the CMO portfolios. Total cash flows to be received by the Company from the residual interests could differ from the projected cash flows resulting in changes in yield or losses if prepayments vary from projections on the collateral underlying the CMOs. The Company also has investments in principal exchange rate linked securities at December 31, 1994 and 1993, totaling approximately $7,982,000 and $11,150,000. These securities bear interest at fixed rates payable on a semiannual basis. The amount of principal to be received by the Company at maturity is dependent on the exchange rates of various foreign currencies relative to the U.S. dollar at the maturity date. The securities are not subject to prepayments or redemptions prior to maturity.
At December 31, 1994 and 1993, the Company had approximately $17,766,000 and $22,672,000 of real estate, net of estimated selling costs, which is reflected in other long-term investments in the accompanying financial statements.
The Company had no investments in any entity, except for U.S. government agency securities, in excess of 10% of stockholders' equity at December 31, 1994.
(C) Investment Gains and Losses
The table below presents realized gains and losses and the increase or decrease in unrealized gains on investments:
The tables below present amortized cost and fair values of securities held to maturity and securities available for sale at December 31, 1994:
The amortized cost and fair values of investments in debt securities at December 31, 1994, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Proceeds from sales of securities available for sale during 1994 totaled $9,114,000. Gross gains of $654,000 and gross losses of $1,535,000 were realized on those sales. Proceeds from sales of investments in debt securities during 1993 and 1992 were $77,869,000 and $1,600,779,000, respectively. Gross gains of $12,966,000 and $38,272,000, and gross losses of $1,283,000 and $14,410,000, were realized on those sales, respectively. The Company uses the specific identification method in computing realized gains and losses. Net increases in the fair values of trading securities totaled $58,000 for the year ended December 31, 1994, and have been included in earnings.
(D) Changes in Accounting Principles
In May, 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments are to be classified in three categories and accounted for as follows:
(a) Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost.
(b) Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.
(c) Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses, net of taxes and adjustments to deferred policy acquisition costs, excluded from earnings and reported as a separate component of stockholders' equity.
Previous accounting policy was similar to the requirements of the new statement. Significant differences are that securities available for sale were reported at the lower of aggregate cost or market value, whereas SFAS No. 115 requires reporting of these securities on an individual fair value basis. Also, SFAS No. 115 provides stricter requirements and guidance on the classification of securities among the three reporting categories.
Effective January 1, 1994, the Company adopted SFAS No. 115. Upon adoption, approximately 60% of the Company's insurance operations debt securities were reported as securities available for sale with the remainder classified as securities held to maturity. The Company's relatively small holdings of equity securities were also reported as securities available for sale. Trading securities were composed entirely of securities from the Company's brokerage operations. There was no change in accounting policy for the trading securities as they were already being recorded at fair value with fair value changes reflected in earnings.
Upon adoption of the new statement, certain related balance sheet accounts, deferred Federal income taxes payable and deferred policy acquisition costs, were adjusted as if the unrealized gains had actually been realized. For the Company's universal life and investment annuity contracts, deferred policy acquisition costs are amortized in relation to the present value of expected gross profits on these policies. Accordingly, under SFAS No. 115, deferred policy acquisition costs are adjusted for the impact on estimated gross profits of net unrealized gains and losses on securities. The implementation of the new statement had no effect on net earnings of the Company. However, stockholders' equity was adjusted as follows as of January 1, 1994:
At July 31, 1994, the Company transferred debt securities with fair values totaling $805 million from securities available for sale to securities held to maturity. There were no changes in classifications of the Company's equity or trading securities. Securities available for sale now represent approximately 19% of the Company's insurance operations debt and equity securities as compared to 60% prior to the transfers. The lower holdings of securities available for sale will significantly reduce the Company's exposure to equity volatility while still providing securities for liquidity and asset/liability management purposes. The transfers of securities were recorded at fair values in accordance with SFAS No. 115. This statement requires that the unrealized holding gain or loss at the date of the transfer continue to be reported in a separate component of stockholders' equity but shall be amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount. The amortization of an unrealized holding gain or loss reported in equity will offset or mitigate the effect on interest income of the amortization of the premium or discount for the held-to-maturity securities. The transfer of securities from available for sale to held to maturity had no effect on net earnings of the Company. However, stockholders' equity was adjusted as follows:
Net unrealized gains (losses) on investment securities included in stockholders' equity at December 31, 1994 and 1993 are as follows:
The Financial Accounting Standards Board (FASB) issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," in May, 1993. In October, 1994, the FASB also issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," which amends SFAS No. 114. These statements address the accounting by creditors for impairment of certain loans and related financial statement disclosures. The statements are applicable to all creditors and to all loans, uncollateralized as well as collateralized, with certain exceptions and also apply to all loans that are restructured in a troubled debt restructuring involving a modification of terms. The statements require that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent.
Both SFAS No. 114 and No. 118 apply to financial statements for fiscal years beginning after December 15, 1994. The Company will implement the statements in the first quarter of 1995. The Company is currently providing for impairment of loans through an allowance for possible losses, and the implementation of this statement is not expected to have a significant effect on the level of this allowance. As a result, there should be no significant net impact on the Company's results of operations stockholders' equity.
(5) PARTICIPATING POLICIES
The Company has issued participating policies which entitle the policyholders to participate in cash and, in certain instances, in stock dividends paid to stockholders. The participating preferences of these special policy plans are as follows:
(A) Certain participating policies require payment of dividends to policyholders of not less than a specified percentage of dividends paid to stockholders. Holders of such policies at December 31, 1994 and 1993, are entitled to dividends equal to an aggregate maximum of less than 1% of dividends paid to holders of the Company's common stock.
(B) Certain participating policies are entitled to receive policyholder dividends at least equivalent to stockholders' dividends paid on a designated number of shares of common stock of the Company. Holders of such policies at December 31, 1994 and 1993, are entitled to receive dividends equivalent to less than 1% of dividends paid to holders of the Company's common stock.
All other policyholders' dividends are apportioned for payment by the Company's Board of Directors at the beginning of certain periods of time on participating policies having anniversary dates during such designated periods. These policyholders' dividends are at various rates based upon factors such as the policy plan, loading factor of the plan, and issue date of policies. The provision for the policyholders' dividend liability is included in the future policy benefit liabilities. Retained earnings are allocable to participating policies only when dividends thereon are specifically declared by the Company's Board of Directors except as noted above. At December 31, 1994 and 1993, no retained earnings were so allocated.
Participating business constitutes approximately 1% of the Company's life insurance in force and 1% of the premium revenues and universal life deposits for the years ended December 31, 1994 and 1993, respectively.
In January, 1995, the FASB issued SFAS No. 120, "Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts." This statement extends the requirements of SFAS No. 60, "Accounting and Reporting by Insurance Enterprises," No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments," and No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," to mutual life insurance enterprises. Also, the AICPA has established accounting for certain participating life insurance contracts of mutual life insurance enterprises in its Statement of Position (SOP) 95-1, "Accounting for Certain Insurance Activities of Mutual Life Insurance Enterprises," that should be applied to those contracts that meet the conditions in this statement. This statement also permits stock life insurance enterprises to apply the provisions of the SOP to participating life insurance contracts that meet certain conditions. SFAS No. 120 is effective for financial statements issued for fiscal years beginning after December 15, 1995. Due to the Company's small level of participating life insurance contracts, this statement should have no significant effects on the Company's financial statements.
(6) REINSURANCE
The Company is party to several reinsurance agreements. The Company's general policy is to reinsure that portion of any risk in excess of $150,000 on the life of any one individual. Life insurance in force in the amounts of $1,034,000,000 and $861,000,000 is ceded on a yearly renewable term basis, $117,000 and $134,000 is ceded on a modified coinsurance basis, and $21,000,000 and $38,000,000 is ceded on a coinsurance basis at December 31, 1994 and 1993, respectively. In accordance with the reinsurance contracts, reinsurance receivables including amounts related to claims incurred but not reported and liabilities for future policy benefits totaled $6,480,000 and $9,187,000 at December 31, 1994 and 1993, respectively. Premium revenues were reduced by $6,040,000, $7,450,000, and $4,800,000 for reinsurance premiums incurred during the years ended December 31, 1994, 1993 and 1992, respectively. Benefits were reduced by $3,295,000, $6,943,000, and $3,865,000 for reinsurance recoverables during the years ended December 31, 1994, 1993 and 1992, respectively. A contingent liability exists with respect to such reinsurance which could become a liability of the Company in the event such reinsurance companies are unable to meet their obligations under existing reinsurance agreements.
(7) FEDERAL INCOME TAXES
In February, 1992, the FASB issued SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires a change from the deferred method of accounting for income taxes of Accounting Principles Board (APB) Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Pursuant to the deferred method under APB Opinion 11, which was applied in 1992, deferred income taxes are recognized for income and expense items that are reported in different years for financial reporting purposes and income tax purposes using the tax rate applicable for the year of the calculation. Under the deferred method, deferred taxes are not adjusted for subsequent changes in tax rates.
Effective January 1, 1993, the Company adopted SFAS No. 109. The cumulative effect of this change in accounting for income taxes of $5,520,000 was determined as of January 1, 1993 and is reported separately in the consolidated statement of earnings for the year ended December 31, 1993. Prior periods' financial statements have not been restated to apply the provisions of SFAS No. 109.
Total Federal income taxes were allocated as follows:
The provisions for Federal income taxes vary from amounts computed by applying the statutory income tax rate to earnings before Federal income taxes. The reasons for the differences, and the tax effects thereof, are as follows:
The significant components of the deferred income tax benefit attributable to earnings from operations for the years ended December 31, 1994 and 1993, are as follows:
For the year ended December 31, 1992, deferred Federal income tax benefits of $3,729 resulted from timing differences in the recognition of income and expense for income tax and financial reporting purposes. The source and tax effects of those timing differences are presented below:
There was no valuation allowance for deferred tax assets at January 1, 1993, or December 31, 1994 and 1993. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1994 and 1993, are presented below:
Prior to the Tax Reform Act of 1984 (1984 Act), a portion of a life insurance company's income was not subject to tax until it was distributed to stockholders, at which time it was taxed at the regular corporate tax rate. In accordance with the 1984 Act, this income, referred to as policyholders' surplus, would not increase, yet any amounts distributed would be taxable at the regular corporate rate. The balance of this account as of December 31, 1994, is approximately $2,446,000. No provision for income taxes has been made on this untaxed income, as management is of the opinion that no distribution to stockholders will be made from policyholders' surplus in the foreseeable future. Should the balance in the policyholders' surplus account at December 31, 1994, become taxable, the Federal income taxes computed at present rates would be approximately $856,000.
The Company files a consolidated Federal income tax return with its subsidiaries. Allocation of the consolidated tax liability is based on separate return calculations pursuant to the "wait-and-see" method as described in sections 1.1552-1(a)(2) and 1.1502-33(d)(2)(i) of the current Treasury Regulations. Under this method, consolidated group members are not given current credit for net losses until future net taxable income is generated to realize such credits. Intercompany tax balances are settled quarterly.
(8) TRANSACTIONS WITH CONTROLLING STOCKHOLDER AND AFFILIATES
(A) Life Interest in Libbie Shearn Moody Trust
The Company is the beneficial owner of a life interest (1/8 share), previously owned by Mr. Robert L. Moody, Chairman of the Board of Directors of the Company, in the trust estate of Libbie Shearn Moody. The Company has issued term insurance policies on the life of Mr. Robert L. Moody which are reinsured through agreements with unaffiliated insurance companies. The Company is the beneficiary of these policies for an amount equal to the statutory admitted value of the Trust which was $22,507,000 at December 31, 1994. The excess of $27,000,000 face amount of the reinsured policies over the statutory admitted value for the Trust has been assigned to Mr. Robert L. Moody. The recorded net asset values in the accompanying consolidated financial statements for the Company's life interest in the Trust are as follows:
Income from the Trust and related expenses reflected in the accompanying consolidated statements of earnings are summarized as follows:
(B) Common Stock
Mr. Robert L. Moody, Chairman of the Board of Directors, owns 198,074 of the total outstanding shares of the Company's Class B common stock and 1,164,171 of the Class A common stock.
Holders of the Company's Class A common stock elect one-third of the Board of Directors of the Company, and holders of the Class B common stock elect the remainder. Any cash or in-kind dividends paid on each share of Class B common stock shall be only one-half of the cash or in-kind dividends paid on each share of Class A common stock. In addition, upon liquidation of the Company, the Class A stockholders shall first receive the par value of their shares; then the Class B stockholders shall receive the par value of their shares; and the remaining net assets of the Company shall be divided between the stockholders of both Class A and Class B common stock, based on the number of shares held.
(9) PENSION PLANS
The Company has a qualified noncontributory pension plan covering substantially all full-time employees. The plan provides benefits based on the participants' years of service and compensation. The Company makes annual contributions to the plan that comply with the minimum funding provisions of the Employee Retirement Income Security Act. A summary of plan information is as follows:
Pension costs (credits) include the following components:
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 8.75% for 1994 and 7.25% for 1993. The projected increase in future compensation levels was based on a rate of 6.0% for 1994 and 1993. The projected long-term rate of return on plan assets was 8.5% for 1994 and 1993.
The Company also has a non-qualified defined benefit plan primarily for senior officers. The plan provides benefits based on the participants' years of service and compensation. No minimum funding standards are required. However, at the option of the Company, contributions may be funded into the National Western Life Insurance Company Non-Qualified Plans Trust. There are currently no plan assets in the trust. A summary of plan information is as follows:
Pension costs include the following components:
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 8.75% for 1994 and 7.25% for 1993. The projected increase in future compensation levels was based on a rate of 6.0% for 1994 and 1993.
In addition to the defined benefit plans, the Company has a qualified 401(k) plan for substantially all full-time employees and a non-qualified deferred compensation plan primarily for senior officers. The Company makes annual contributions to the 401(k) plan of two percent of each employee's compensation. Additional Company matching contributions of up to two percent of each employee's compensation are also made each year based on the employee's personal level of salary deferrals to the plan. All Company contributions are subject to a vesting schedule based on the employee's years of service. For the years ended December 31, 1994 and 1993, Company contributions totaled $198,000 and $187,000.
The non-qualified deferred compensation plan was established to allow eligible employees to defer the payment of a percentage of their compensation and to provide for additional Company contributions. Company contributions are subject to a vesting schedule based on the employee's years of service. For the years ended December 31, 1994 and 1993, Company contributions totaled $45,000 in each year.
SFAS No. 112, "Employers' Accounting for Postemployment Benefits," was issued by the FASB in November, 1992. This statement establishes accounting standards for employers who provide benefits to former or inactive employees after employment but before retirement. Postemployment benefits include all types of benefits provided to former or inactive employees, their beneficiaries and covered dependents. The statement is effective for fiscal years beginning after December 15, 1993. As the Company provides insignificant postemployment benefits, implementation had no significant impact on the results of operations of the company.
(10) SHORT-TERM BORROWINGS
The Company has available a $60 million bank line of credit primarily for cash management purposes relating to investment transactions. The Company is required to maintain a collateral security deposit in trust with the bank equal to 120% of any outstanding liability. The Company had no outstanding liabilities or collateral security deposits with the bank at December 31, 1994 and 1993. The average interest rates on borrowings for the years ended December 31, 1994 and 1993, were 4.45% and 4.36%, respectively.
Certain subsidiaries of the Company's brokerage subsidiary (Westcap) have arrangements with a financial institution whereby the institution performs clearing functions for all securities transactions with customers and brokers and dealers. These arrangements include revolving line of credit agreements which bear interest at variable rates based on Federal funds rates and are due on demand. Borrowings under these arrangements are guaranteed by Westcap and collateralized by trading securities and certain customers' and brokers' and dealers' unpaid securities, which at September 30, 1994 and 1993 (the subsidiary's fiscal year-end), had aggregate market values of approximately $35,354,000 and $119,082,000, respectively. The average interest rates on the borrowings for the years ended September 30, 1994 and 1993, were 4.60% and 4.24%, respectively.
(11) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At September 30, 1994 and 1993, securities purchased under agreements to resell by Westcap were collateralized by U.S. Government and agencies' securities with market values of approximately $152,753,000 and $189,659,000. These agreements had maturity dates ranging from one to ninety days and weighted average interest rates of 4.2% and 3.3%. During the years ended September 30, 1994 and 1993, the maximum month-end balance of outstanding agreements was $270,854,000 and $186,896,000, and the average amount of outstanding agreements was $197,327,000 and $75,634,000, respectively. Risks arise from the possible inability of counterparties to meet the terms of their agreements and from movements in securities' values.
At September 30, 1994 and 1993, securities sold under agreements to repurchase by Westcap were collateralized by U.S. Government and agencies' securities with market values of approximately $93,025,000 and $129,523,000. These agreements had maturity dates ranging from one to ninety days and weighted average interest rates of 4.8% and 3.5%. During the years ended September 30, 1994 and 1993, the maximum month-end balance of outstanding agreements was $245,564,000 and $127,971,000, and the average amount of outstanding agreements was $169,187,000 and $66,941,000, respectively.
(12) COMMITMENTS AND CONTINGENCIES
(A) Current Regulatory Issues
In December, 1994, the NAIC adopted for statutory accounting practices Actuarial Guideline GGG for determining minimum reserves for annuity contracts with multiple benefit streams often referred to as two-tier annuities. The guideline will be effective December 31, 1995, and will apply to all contracts issued on or after January 1, 1981, and allowance is made for a three-year phase-in period. However, the Company's statutory reserving practices for two-tier annuities follow an agreement reached with its state of domicile, Colorado.
The Colorado Division of Insurance (the Division) issued a Notice in 1987 which defined the basis of reserving for two-tier annuities and utilized a single interest rate for all benefit streams. Based on the Colorado Notice and the uncertainty of the implementation of Actuarial Guideline GGG, the Company added $7,000,000 in 1992 and $6,000,000 in 1993 to its existing statutory annuity reserves. These additional reserves were agreed upon and approved by the Colorado Division of Insurance.
During 1993, the Division conducted an Association Financial Examination of the Company for the six-year period ended December 31, 1992. One of the results of the examination was an agreement between the Division and the Company concerning the permitted statutory reserving basis for two-tier annuities. The agreement includes a plan to meet a target reserve by December 31, 1996. The agreement states the acceptable difference between the target reserve and the statutory reserve held by the Company. The difference will meet the following schedule:
The Company has met the above scheduled difference for December 31, 1994. In fact, at December 31, 1994, the difference was less than that required, and it is anticipated that the Company will not require any additional statutory reserves in order to meet the above schedule of differences. This agreement does not affect the Company's policy reserves which are prepared under generally accepted accounting principles as reported in the accompanying consolidated financial statements.
(B) Legal Proceedings
On March 28, 1994, the Community College District No. 508, County of Cook and State of Illinois (The City Colleges) filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division, against National Western Life Insurance Company (the Company) and subsidiaries of The Westcap Corporation. The suit seeks rescission of securities purchase transactions by The City Colleges from Westcap between September 9, 1993 and November 3, 1993, alleged compensatory damages, punitive damages, injunctive relief, declaratory relief, fees and costs. National Western is named as a "controlling person" of the Westcap defendants. On February 1, 1995, the complaint was amended to add a RICO count for treble damages and claims under the Texas securities and consumer fraud laws, and to add additional defendants. Westcap and the Company are of the opinions that Westcap has adequate documentation to validate all such securities purchase transactions by The City Colleges, and that Westcap and the Company each have adequate defenses to the litigation. Although the alleged damages would be material to the Company's and Westcap's financial positions, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. A judicial ruling favorable to Westcap has been made requiring resolution of the suit against Westcap through binding arbitration. The lawsuit against the Company was suspended pending determination of the arbitration proceeding against Westcap.
On August 5, 1994, the Sarasota-Manatee Airport Authority filed a complaint in the United States District Court, Middle District of Florida, Tampa Division, against National Western Life Insurance Company (the Company), The Westcap Corporation and subsidiaries of Westcap. The suit seeks rescission of securities purchase transactions by the Sarasota-Manatee Airport Authority from Westcap, judgment for damages, or such other relief as the court may deem appropriate. The Company is named as a "controlling person" of the Westcap defendants. The Company and Westcap have answered the complaint and denied all material allegations. Westcap and the Company are of the opinions that Westcap has adequate documentation to validate all such securities purchase transactions by Sarasota-Manatee Airport Authority, and that Westcap and the Company each have adequate defenses to the litigation. Although the alleged damages would be material to Westcap's financial position, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The litigation is in early stages of discovery.
On February 1, 1995, the San Antonio River Authority (SARA) filed a complaint in the 285th Judicial District Court, Bexar County, Texas, against Kenneth William Katzen (Katzen), Westcap Securities, L.P., The Westcap Corporation (Westcap), and National Western Life Insurance Company (the Company). The suit alleges that Katzen and Westcap sold mortgage-backed security derivatives to SARA and misrepresented these securities to SARA. The suit alleges violations of the Federal Securities Act, Texas Securities Act, Deceptive Trade Practices Act, breach of fiduciary duty, fraud, negligence, breach of contract, and seeks attorney's fees. The Company is named as a "controlling person" of the Westcap defendants. Westcap and the Company are of the opinions that Westcap has adequate documentation to validate all securities purchases by SARA, and that the Company and Westcap have adequate defenses to such suit. Although the alleged damages would be material to Westcap's financial condition, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The Company and Westcap have denied all allegations and there has been no discovery at this time.
The Westcap Corporation and Westcap Securities, L.P. are also defendants in several other pending lawsuits which have arisen in the ordinary course of its business. Westcap Securities, L.P. has also been notified of several arbitration claims filed with the National Association of Securities Dealers. After reviewing the lawsuits and arbitration filings with outside counsel, management believes it has adequate defenses to each of the claims. Although the alleged damages would be material to the financial position of The Westcap Corporation, a reasonable estimate of actual loss which may result from any of these claims cannot be made at this time. Accordingly, no provision for any liability that may result from these actions has been recognized in the consolidated financial statements.
National Western Life Insurance Company settled several lawsuits during 1994 and 1993. Other income totaling $955,000 and $1,720,000 from these settlements has been reflected in the accompanying statements of earnings for the years ended December 31, 1994 and 1993, respectively.
National Western Life Insurance Company is currently a defendant in several other lawsuits, substantially all of which are in the normal course of business. In the opinion of management, the liability, if any, which may rise from these lawsuits would not have a material adverse effect on the Company's financial condition.
(C) Financial Instruments
In order to meet the financing needs of its customers in the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments are commitments to extend credit which involve elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amounts, assuming that the amounts are fully advanced and that collateral or other security is of no value. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company controls the credit risk of these transactions through credit approvals, limits, and monitoring procedures.
The Company had commitments to extend credit relating to mortgage loans totaling $14,700,000 at December 31, 1994. Commitments to extend credit are legally binding agreements to lend to a customer that generally have fixed expiration dates or other termination clauses and may require payment of a fee. These commitments do not necessarily represent future liquidity requirements, as some of the commitments could expire without being drawn upon. The Company evaluates each customer's creditworthiness on a case-by-case basis. The Company had no commitments to purchase investment securities at December 31, 1994.
In the normal course of business, Westcap enters into when-issued and forward contracts principally related to mortgage-backed and U.S. Government securities issues. These contracts are for delayed delivery of securities in which the seller agrees to make delivery at a specified future date of a specified instrument, at a specified price. These securities issues may have settlement dates ranging from several weeks to several months after trade date. Revenues and expenses related to such contracts are recognized on settlement date. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities values and interest rates.
At September 30, 1994, the approximate amount of unsettled when-issued and forward purchase and sale contracts were $73,009,000 and $73,431,000, respectively. These contracts principally related to obligations of the U.S. Government and its agencies.
During the year ended September 30, 1994, Westcap adopted the provisions of SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," which requires disclosure of certain fair value information regarding derivative financial instruments. During 1994, the average fair value of when-issued purchase and sale contracts were approximately $4,789,000 and $2,602,000, respectively. At September 30, 1994, the fair value of when-issued and forward purchase and sale contracts were approximately $68,146,000 and $68,632,000, respectively. For the year ended September 30, 1994, Westcap recognized a net gain of approximately $12,079,000 from such transactions.
Substantially all of these contracts are matched. In the opinion of management, the settlement of these transactions is not expected to have a material effect on the Company's financial condition.
In the normal course of business, Westcap also enters into contracts involving securities not yet purchased principally related to mortgage-backed and U.S. Government securities issues. These financial instruments are considered to have off-balance sheet risk, as they involve, to varying degrees, elements of interest rate risk in excess of the amount recognized in the statement of financial condition. Risks arise from movements in securities values and interest rates.
(D) Guaranty Association Assessments
National Western Life Insurance Company is subject to state guaranty association assessments in all states in which it is licensed to do business. These associations generally guarantee certain levels of benefits payable to resident policyholders of insolvent insurance companies. Many states allow premium tax credits for all or a portion of such assessments, thereby allowing potential recovery of these payments over a period of years. However, several states do not allow such credits.
In December, 1994, the National Organization of Life and Health Insurance Guaranty Associations published revised assessment data on nationwide life and health insurance company insolvencies. Based on this information, the Company significantly increased its estimates in 1994 for assessment liabilities relating to such insolvencies. The Company will continue to monitor and revise its estimates for assessments as additional information becomes available which could result in additional expense charges. Other insurance operating expenses related to state guaranty association assessments totaled $4,869,000, $4,583,000 and $1,877,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
(13) STOCKHOLDERS' EQUITY
(A) Dividend Restrictions
Dividends to stockholders can be paid only from the Company's statutory unassigned surplus as determined by accounting principles prescribed by insurance regulatory authorities. Statutory unassigned surplus amounted to approximately $181,790,000 at December 31, 1994, and stockholders' equity in that amount was available for dividends subject to the tax effects of distributions from the policyholders' surplus account as described in note 7.
(B) Regulatory Capital Requirements
The Colorado Division of Insurance imposes minimum risk-based capital requirements on insurance companies that were developed by the National Association of Insurance Commissioners (NAIC). The formulas for determining the amount of risk-based capital (RBC) specify various weighting factors that are applied to statutory financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of the Company's regulatory total adjusted capital to its authorized control level RBC, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The Company's current statutory capital and surplus is significantly in excess of the threshold RBC requirements.
(C) Stock Bonus Plan
During 1993 the Company implemented a one-time stock bonus plan for all officers of the Company. Class A common stock restricted shares totaling 13,496 were granted to officers based on their individual performance and contribution to the Company. The shares are subject to vesting requirements as reflected in the following schedule:
January 1, 1993 25% December 31, 1993 25% December 31, 1994 25% December 31, 1995 25%
To obtain shares in accordance with the above vesting schedule, an officer must be actively employed by the Company on such dates and in the same or higher office as that held on December 31, 1992. However, upon the occurrence of certain events such as death or retirement, the officer shall become fully vested. Of the 13,496 total shares granted, 10,350 shares have been issued and are outstanding as of December 31, 1994. The remaining shares will be issued pursuant to the vesting requirements described above.
(14) FOREIGN SALES AND SIGNIFICANT AGENCY RELATIONSHIPS
Total premium revenues and universal life and annuity contract deposits related to life insurance written in foreign countries, primarily Central and South America, were approximately $53,846,000, $57,450,000 and $58,300,000, for the years ended December 31, 1994, 1993 and 1992, respectively.
A significant portion of the Company's universal life and investment annuity contracts are written through one agency. Such business accounted for approximately 20%, 44% and 45% of total premium revenues and universal life and investment annuity contract deposits for 1994, 1993 and 1992, respectively.
(15) SEGMENT INFORMATION
Information concerning the Company's two industry segments follows:
(16) UNAUDITED QUARTERLY FINANCIAL DATA
Quarterly results of operations are summarized as follows:
The fourth quarter net earnings in 1994 reflect the following significant items:
(A) Other insurance operating expenses were up significantly as fourth quarter 1994 expenses included a charge of $2,636,000, net of taxes, or $0.76 per share, for state guaranty fund assessments relating to insolvent insurance companies.
(B) Fourth quarter 1994 net losses from the Company's brokerage subsidiary, The Westcap Corporation, totaled $3,968,000, or $1.13 per share, compared to net earnings of $7,309,000, or $2.10 per share, for the fourth quarter of 1993. Adverse bond market conditions due to increasing market interest rates was the major factor for lower production and the resulting loss for the subsidiary.
The fourth quarter net earnings in 1993 reflect the following significant items:
(A) Realized losses of approximately $2,174,000 were recorded in the fourth quarter of 1993 resulting from write-downs of securities held to maturity and increases in allowances for possible losses for real estate and mortgage loans.
(B) Net earnings from the Company's brokerage subsidiary were approximately $7,309,000, which is higher than previous quarters in 1993 but is significantly lower than corresponding 1992 fourth quarter net earnings.
(17) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Investment securities: Fair values for investments in debt and equity securities are based on quoted market prices, where available. For securities not actively traded, fair values are estimated using values obtained from various independent pricing services and the Securities Valuation Office of the National Association of Insurance Commissioners. In the cases where prices are unavailable from these sources, prices are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the investments. The carrying amount and fair value of securities purchased under agreements to resell are the amounts at which the securities will be subsequently resold as specified in the respective agreements.
Cash and short-term investments: The carrying amounts reported in the balance sheet for these instruments approximate their fair values.
Mortgage loans: The fair value of performing mortgage loans is estimated by discounting scheduled cash flows through the scheduled maturities of the loans, using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Fair value for significant nonperforming loans is based on recent internal or external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information.
Policy loans: The fair value for policy loans is calculated by discounting estimated cash flows using U.S. Treasury bill rates as of December 31, 1994 and 1993. The estimated cash flows include assumptions as to whether such loans will be repaid by the policyholders or settled upon payment of death or surrender benefits on the underlying insurance contracts. As a result, these assumptions incorporate both Company experience and mortality assumptions associated with such contracts.
Life interest in Libbie Shearn Moody Trust: The fair value of the life interest is estimated based on assumptions as to future dividends from the Trust over the life expectancy of Mr. Robert L. Moody. These estimated cash flows were discounted at a rate consistent with uncertainties relating to the amount and timing of future cash distributions. However, the Company has limited the fair value to the statutory admitted value of the Trust, as this is the maximum amount to be received by the Company in the event of Mr. Moody's premature death.
Investment and supplemental contracts: Fair value of the Company's liabilities for deferred investment annuity contracts are estimated to be the cash surrender value of each contract. The cash surrender value represents the policyholder's account balance less applicable surrender charges. The fair value of liabilities for immediate investment annuity contracts and supplemental contracts with and without life contingencies are estimated by discounting estimated cash flows using U.S. Treasury bill rates as of December 31, 1994 and 1993.
Fair value for the Company's insurance contracts other than investment contracts are not required to be disclosed. This includes the Company's traditional and universal life products. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, which minimizes exposure to changing interest rates through the matching of investment maturities with amounts due under insurance and investment contracts.
Short-term borrowings: The carrying amount of the Company's borrowings approximates its fair value due to the short duration of the borrowing periods.
Securities sold not yet purchased: These securities are carried at fair values determined in the same manner as investment securities described above.
Securities sold under agreements to repurchase: The carrying amounts and fair values of these securities are the amounts at which the securities will be subsequently repurchased as specified in the respective agreements.
The carrying amounts and fair values of the Company's financial instruments are as follows:
Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES SCHEDULE I SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1994 (In thousands)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES SCHEDULE V VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 1994, 1993 and 1992 (In thousands)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL WESTERN LIFE INSURANCE COMPANY (Registrant)
/S/ Robert L. Moody /S/ Ross R. Moody By: Robert L. Moody By: Ross R. Moody Chairman of the Board, President, Chief Operating Chief Executive Officer, Officer, Director Director
/S/ Robert L. Busby, III By: Robert L. Busby, III Senior Vice President - Chief Administrative Officer, Chief Financial Officer and Treasurer
March 28, 1995 Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/S/ Arthur O. Dummer Arthur O. Dummer, Frances A. Moody, Director Director
Harry L. Edwards, Russell S. Moody, Director Director
/S/ E. Douglas McLeod /S/ Louis E. Pauls, Jr. E. Douglas McLeod, Louis E. Pauls, Jr., Director Director
/S/ Charles D. Milos, Jr. /S/ E. J. Pederson Charles D. Milos, Jr., E. J. Pederson, Director Director
March 28, 1995 Date