The Company leases approximately 72,000 square feet of office space in Austin, Texas, for $477,600 per year plus taxes, insurance, maintenance, and other operating costs. This lease expires in 2000.
The Company's brokerage subsidiary, The Westcap Corporation, leases its office facilities in Houston, Texas, under a lease which terminates in 1997. The total leased space is approximately 4,200 square feet. Upon termination of the existing lease in early 1997, The Westcap Corporation will reduce its office space to approximately 2,800 square feet in the same facility and will execute a month to month lease contract. The monthly lease rate will be $3,020.
In addition to the life insurance business, the Company had a brokerage operations segment through its wholly owned subsidiary, The Westcap Corporation (Westcap). However, during 1995 Westcap closed its sales offices and approved a plan to cease all brokerage operations. Subsequently on April 12, 1996, Westcap and its wholly owned subsidiary, Westcap Enterprises, Inc., separately filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The brokerage segment is now reported as discontinued operations throughout this report and in the accompanying financial statements.
The Company's strong credit risk management and commitment to quality has resulted in minimal defaults in the debt securities portfolio in recent years. In fact, at December 31, 1996 and 1995, securities with principal balances totaling only $2,945,000 and $3,575,000 were in default and on non-accrual status.
At December 31, 1996, gross unrealized gains in the Company's debt and equity securities portfolios were as follows:
As detailed above, debt securities classified as held to maturity comprise the majority of the Company's securities portfolio, while equity securities continue to be a small component of the portfolio. Gross unrealized gains totaling $44,021,000 on the securities portfolio at December 31, 1996, is a reflection of market interest rates at year-end. The fair values, or market values, of fixed income debt securities correlate to external market interest rate conditions. Because the interest rates are fixed on almost all of the Company's debt securities, market values typically increase when market interest rates decline, and decrease when market interest rates rise. This correlation between market values and interest rates is reflected in the table below.
The Company's direct investments in real estate are not a significant portion of its total investment portfolio, and the majority of real estate owned was acquired through mortgage loan foreclosures. However, the Company also participates in several real estate joint ventures and limited partnerships. The joint ventures and partnerships invest primarily in income-producing retail properties. While not a significant portion of the Company's investment portfolio, these investments have produced favorable returns to date and increased investment income significantly in 1996. Several of these interests in real estate joint ventures were sold during 1996. The sales resulted in additional investment income totaling approximately $2,300,000.
As of December 31, 1996, the allowance for possible losses on mortgage loans was $5,988,000. Additions to the allowance totaling $500,000 were recognized as realized losses on investments in the Company's 1996 financial statements. No additions were made in 1995. Management believes that the allowance for possible losses is adequate. However, while management uses available information to recognize losses, future additions to the allowance may be necessary based on changes in economic conditions, particularly in the West South Central region which includes Texas, Louisiana, Oklahoma, and Arkansas, as this area contains the highest concentrations of the Company's mortgage loans.
The Company currently places all loans past due three months or more on non-accrual status, thus recognizing no interest income on the loans. At December 31, 1996 and 1995, the Company had approximately $36,000 and $203,000, respectively, of mortgage loan principal balances on non-accrual status. In addition to the non-accrual loans, the Company had mortgage loan principal balances with restructured terms totaling approximately $12,719,000 and $13,355,000 at December 31, 1996 and 1995, respectively. For the years ended December 31, 1996 and 1995, the reductions in interest income due to non-accrual and restructured mortgage loans were not significant.
A summary of operating results, net of taxes, for the years ended December 31, 1996, 1995, and 1994 is provided below:
Life and Annuity Premiums: This revenue category represents the premiums on traditional type products. However, sales in most of the Company's markets continue to consist of non-traditional types such as universal life and investment annuities. The Company's current plans are to continue to focus the majority of its product development and marketing efforts on universal life and investment annuities. As a result, as in past years no significant growth is anticipated for these premiums in the near future.
Universal Life and Investment Annuity Contract Revenues: These revenues are from the Company's non-traditional products, which are universal life and investment annuities. Revenues from these types of products consist primarily of policy charges for the cost of insurance, policy administration fees, and surrender charges assessed during the period. These revenues increased from $64.7 million in 1994 to $76.0 million in 1996. More specifically, cost of insurance, policy administration fees, and other related revenues have steadily increased each year due to continued sales of non-traditional products which continue to increase the Company's policies in force. Additionally, surrender charge revenues continue upward due to increased policy surrenders. Policy surrenders were up 14.2% in 1996 over 1995, which corresponds to the increase in surrender charge revenues of 13.9%. A comparative detail of the components of universal life and investment annuity revenues is provided below:
Actual universal life and investment annuity deposits collected for the years ended December 31, 1996, 1995, and 1994 are detailed below. Deposits collected on these non-traditional products are not reflected as revenues in the Company's statements of earnings, as they are recorded directly to policyholder liabilities upon receipt, in accordance with generally accepted accounting principles.
Prior to 1993, most of the Company's investment annuity production was from the sale of two-tier annuity products, the vast majority of which were sold by a single independent marketing organization. However, in the third quarter of 1992, the Company discontinued sales of all two-tier annuities due to declines in sales and certain regulatory issues concerning two-tier products. The Company has continued to collect additional premiums on existing two-tier annuities, as much of the sales in prior years were flexible premium annuities on which renewal premiums are received subsequent to first year premiums.
Also, as previously disclosed in the Company's annual reports on Form 10-K, the Company was a defendant in a lawsuit seeking recovery of certain values of life insurance policies pledged as collateral for debentures totaling $8,000,000. This lawsuit was settled in September, 1993. However, the Company also received proceeds from a settlement totaling $955,000 for recovery of damages incurred related to this lawsuit. These settlement proceeds were reflected as other income in 1994.
Life and Other Policy Benefits: Expenses in 1995 were significantly higher at $39.8 million than expenses in 1996 and 1994 which totaled only $35.4 million and $32.1 million, respectively. The significant fluctuation in expenses is due to higher life insurance benefit claims and high policy surrenders on traditional insurance products in 1995. Life insurance benefit claims, which accounted for the majority of the fluctuation, totaled $21.5 million, $24.6 million, and $19.1 million in 1996, 1995, and 1994, respectively. The 1995 expenses were abnormally high due to adverse claims experience. Throughout the Company's history, it has experienced both periods of higher and lower benefit claims in comparison to Company averages. The year 1995 reflects such a period, as benefits were significantly higher. Such deviations are not uncommon in the life insurance industry and, over extended periods of time, tend to be offset by periods of lower claims experience.
Other Insurance Operating Expenses: These expenses totaled $25.7 million, $27.1 million, and $29.4 million for 1996, 1995, and 1994, respectively. The significant decline in these expenses is primarily due to reduced expenses for state guaranty association assessments.
Effective July 17, 1995, The Westcap Corporation, a wholly owned brokerage subsidiary of National Western Life Insurance Company, discontinued all sales and trading activities in its Houston, Texas, office. At that time, The Westcap Corporation (Westcap) continued its corporate operations and small sales operations in its New Jersey office. However, in September, 1995, Westcap approved a plan to close the remaining sales office in New Jersey and to cease all brokerage operations.
Declines in both sales revenues and earnings were the principal reasons for ceasing operations. Increasing market interest rates and resulting adverse bond market conditions during 1994 and 1995 compared to previous years had a negative impact on the entire bond brokerage industry. These conditions, coupled with adverse publicity about litigation related to sales of collateralized mortgage obligation (CMO) products, led to the declines in sales and earnings. The publicity surrounding these claims made it extremely difficult to keep Westcap's customer base and sales force in place. Additionally, because much publicity characterizes CMOs as derivatives, adverse publicity about derivatives impacted the market for CMOs and decreased Westcap's prospects for future sales.
In connection with the discontinued operations and subsequent bankruptcy filing, Westcap's assets are being carried at their estimated fair value, and its liabilities include estimated costs to dispose of assets and estimated future costs to cease operations. In accordance with generally accepted accounting principles, the assets and liabilities of Westcap have been reclassified in the accompanying consolidated balance sheets to separately identify them as assets and liabilities of the discontinued operations.
Federal income taxes for 1994 on earnings from continuing operations reflect a low effective tax rate, as such taxes also include a tax benefit totaling $2.9 million resulting from the Company's subsidiary brokerage losses. Losses on discontinued operations for 1994 totaling $2,936,000 include Federal income taxes of $2,983,000. Again, the tax reporting treatment is in accordance with the tax allocation agreement previously described, and on a consolidated basis, Federal income taxes reflect an effective tax rate of 35% for 1994.
The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $117 million, $69 million, and $133 million in 1996, 1995, and 1994, respectively. The Company again expects significant cash flows from these sources in 1997 at levels similar to the past three years.
The Company relies on stockholders' equity for its capital resources, as there has been no long-term debt outstanding in 1996 or recent years. The Company does not anticipate the need for any long-term debt in the near future. There are also no current or anticipated material commitments for capital expenditures in 1997.
In June, 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." In December, 1996, SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125," was issued which defers portions of SFAS No. 125 to be effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1997. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 125 is effective for applicable transactions occurring after December 31, 1996, and is to be applied prospectively. The Company anticipates that the implementation of this statement will have no significant effects on its financial statements.
Due to the uncertainty of the legality of publishing RBC information, the Company has chosen not to publish its RBC ratios or levels. However, the Company's current statutory capital and surplus is significantly in excess of the threshold RBC requirements.