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
the design and marketing of a specific product for that market. As
The Company's investment philosophy is to maintain a diversified portfolio of investment grade debt securities that provides adequate liquidity to meet policyholder obligations and other cash needs. The prevailing strategy within this philosophy is the intent to hold investments in debt securities to maturity. However, the Company does actively manage its portfolio which entails monitoring and reacting to all components which affect changes in the price or value of investments in debt securities. As a result, the Company classifies these securities for financial statement reporting purposes as either fixed maturities, securities available
Securities purchased by the Company's brokerage subsidiary that are held for current resale are classified as trading securities. These securities are typically held for short periods of time, as the intent is to sell them, producing a trading profit. Trading securities are recorded in the Company's financial statements at market value. Any trading profits or losses and unrealized gains or losses resulting from changes in the market value of the securities are reflected as a component of income in the Company's financial statements.
The Company's current accounting policy as described above is similar to the requirements of this new statement. Significant differences are that securities available for sale are currently being reported at the lower of aggregate cost or market value, whereas SFAS No. 115 requires reporting of these securities on an
later section of this report. The Company plans to implement the
circumstances is to determine if the decline in market value is due
of the issuer and its ability to comply with all terms of the
investment, such decline in market value is determined to be other
percentage of the entire portfolio was reduced from 26.6% in 1992
during 1993 due to the continued decline in interest rates. However, the Company substantially reduced its prepayment risk by investing primarily in collateralized mortgage obligations which have more predictable cash flow patterns than pass-through securities. The Company increased its holdings of planned amortization class I (PAC I) CMOs which are designed to amortize in a more predictable manner than other CMO classes or pass-throughs. This is achieved by redirecting prepayments to other CMO classes.
PAC I tranches now account for over 80% of the total CMO portfolio as of December 31, 1993. The CMOs that the Company purchases are modeled and subjected to detailed, comprehensive analysis by the Company's investment staff before any investment decision is made. The overall structure of the entire CMO is evaluated, and an average life sensitivity analysis is performed on the individual tranche being considered for purchase under increasing and decreasing interest rate scenarios. This analysis insures that the security fits appropriately within the Company's investment philosophy and asset/liability management parameters.
The level of investments in debt securities which are in default as to principal or interest payments is indicative of the Company's minimal holdings of below investment grade debt securities. At December 31, 1993 and 1992, securities with principal balances totaling $3,151,000 and $3,750,000 were in default and on non-accrual status.
The Company has changed its mortgage loan philosophy over the past several years. Historically, the Company had concentrated its mortgage loans within the State of Texas. The majority of loans were brought to the Company by brokers and others interested in securing a mortgage loan. While the mortgage loan portfolio has performed well despite downturns in the Texas economy, the Company has been forced to foreclose on certain loans.
which is guaranteed by the lessee, and approved based on the credit
stores, office buildings, industrial and sales or service facilities, selected apartment buildings, motels, and health care facilities. The location of these loans is typically in growth areas that offer a potential for property value appreciation. These growth areas are found primarily in major metropolitan areas, but occasionally in selected smaller communities. The Company currently seeks loans ranging from $500,000 to $11,000,000, with terms ranging from three to twenty-five years, at interest rates dictated by the marketplace.
The Company's direct investments in real estate are not a significant portion of its total investment portfolio. The majority of real estate owned was acquired through mortgage loan foreclosures. The Company has no current plans to significantly increase its investments in real estate in the foreseeable future.
The Company owns real estate that was acquired through foreclosure and through direct investment totaling approximately $22,672,000 and $20,401,000 at December 31, 1993 and 1992, respectively. This small concentration of properties represents less than one percent of the Company's entire investment portfolio. The real estate holdings consist primarily of income-producing properties which are being operated by the Company. The Company recognized operating income on these properties of approximately $607,000 and $298,000 for the years ended December 31, 1993 and 1992, respectively. The Company does not anticipate significant changes in these operating results in the near future.
The Company monitors the conditions and market values of these properties on a regular basis. Realized losses recognized due to declines in values of properties totaled $1,208,000 and $450,000 for the years ended December 31, 1993 and 1992, respectively. The Company makes repairs and capital improvements to keep the properties in good condition and will continue this maintenance as needed. However, the amounts expended for this maintenance has not had a significant impact on the Company's liquidity and capital resources, and such maintenance is not foreseen to have a significant impact in the near future.
Universal Life and Investment Annuity Contract Revenues: These revenues are from the Company's non-traditional products which are universal life and investment annuities. Revenues from these types of products consist of policy charges for the cost of insurance, policy administration fees and surrender charges assessed during the period. These revenues have increased from $44.6 million in 1991 to $67.8 million in 1993 due to the Company's concentration of sales efforts on these products. However, increased surrender charge revenues resulting from increased policy surrenders account for the majority of the increase. Also, although these revenues continue to increase, the actual universal life and investment annuity deposits collected have decreased over the past three years. Deposits collected for the years ended December 31, 1993, 1992 and 1991 were $153.8 million, $243.2 million and $258.8 million, respectively.
annuity products. Over the past several years, one of the Company's
leading products was a two-tier rollover annuity. This annuity was designed to restore a policyholder's loss of funds, if any, upon transfer from another qualified plan vehicle to the Company's annuity contract. In developing the product, the Company anticipated that there would be a limited market for this type of annuity and that production would peak and then decrease. Production did peak in 1989 as assumed and has steadily decreased since that time. Due to this decline in sales and certain regulatory issues concerning two-tier products, the Company discontinued all sales of its two-tier annuities in the third quarter of 1992. (The regulatory issues are described in detail in a later section of this filing entitled "Current Regulatory Issues.") The Company also lowered credited interest rates on its universal life and annuity products primarily during 1992 and 1991. This was done in response to the overall decline in market rates over the same time period. As a result of the declining market rates, there has been increased competition which has also had an effect on the level of universal life and investment annuity
Net Investment Income: While investments attributable to the Company's insurance operations have been growing steadily over the past several years, the growth has slowed substantially in 1992 and 1993 primarily due to decreased universal life and annuity deposits and increased policy surrenders. During 1992, net investment income increased 4.4% which was consistent with the growth in investments.
Other Income: The Company received proceeds from lawsuit settlements totaling $1,050,000 in 1993 which has been reflected in other income. In 1984, certain employee participants in the Company's "Builders, Contractors, and Employees Retirement Trust and Pension Plan" (the Plan) and other plaintiffs filed a civil lawsuit against the Company and other defendants with respect to various Plan matters, all as previously disclosed in the Company's annual reports on Form 10-K. The Company settled the lawsuit in 1991 with payments to the Internal Revenue Service and participants in the Plan. Subsequent to this settlement, the Company filed suit against the law firm which assisted in the development of the Plan. The Company also filed suit, for recovery of damages incurred, against an insurance company providing liability coverage for trustees of the Plan. Both suits were settled, with the Company receiving the proceeds as described above.
Also, as previously disclosed in the Company's annual reports on Form 10-K, the Company was a defendant in a lawsuit seeking recovery of certain values of life insurance policies pledged as collateral for debentures totaling $8,000,000. In early 1991, a court ruled that the collateral assignment was not enforceable. As a result, the Company recorded a loss of $8,000,000, in 1990 as the debentures were no longer deemed collateralized by the insurance policies and their market value was zero due to the insolvency of the issuer. The Company appealed the court ruling and also recorded a corresponding $8,000,000 liability for the potential payment of this claim. The Company has since been accruing an additional liability for interest on this $8,000,000 balance. This lawsuit was settled in September, 1993, resulting in an $11,500,000 payment by the Company. The Company's total accrued liability for this claim exceeded the payment by approximately $670,000 which has been reflected as other income.
Realized Gains on Investments: The Company had realized gains of $3.2 million, $15.7 million and $9.4 million in 1993, 1992 and 1991, respectively. The decrease in 1993 from the previous years is attributable to the prevailing strategy within the Company's investment philosophy which is the intent to hold debt securities
The increase in amortization correlates to the increase in insurance operating profits, as these deferred costs are amortized based on product profitability.
Although lowering credited rates on products has been profitable for the Company, it has also resulted in increased surrenders of policies as previously described. However, the Company closely monitors its credited rates taking into consideration such factors as profitability goals, policyholder benefits, product marketability, and economic market conditions. Rates are established or adjusted after careful consideration and evaluation of these factors against established objectives.
Other Insurance Operating Expenses: These expenses totaled $29.0 million, $27.9 million and $32.9 million for 1993, 1992 and 1991, respectively. The 1991 expenses were significantly higher due to a lawsuit settlement. In 1991 the Company settled a civil lawsuit which was originally filed against the Company in 1984. Under terms of the settlement, the Company paid approximately $6,218,000 to various parties plus approximately $57,000 in related expenses. (This lawsuit was described more fully under "Other Income" in this section.) Although 1992 and 1993 expenses are relatively comparable, there were several items of significance which are described as follows: (a) Commission expenses on insurance product sales were $2,500,000 lower in 1993 due to decreases in sales. (b) National Western Life Insurance Company is subject to state guaranty association assessments in all states in which it is licensed to do business. These associations generally guarantee certain levels of benefits payable to resident policyholders of
Federal Income Tax Expense: The Federal corporate tax rate was increased from 34% to 35% in 1993. The total increase in 1993 Federal income taxes resulting from the change in rates was $1,018,000. Also, the 1991 expenses are not reflective of the statutory rate due to non-recurring items. The 1991 Federal income tax expense includes approximately $544,000 in additional taxes relating to the $6.2 million lawsuit previously described. Approximately $1.6 million of the total settlement was not deductible for tax purposes, resulting in the additional taxes. Also, capital losses were incurred in 1990 which could not be fully deducted for deferred tax purposes. This resulted in a capital loss carryforward of approximately $5,544,000 at December 31, 1990, that was fully utilized in 1991, resulting in a reduction of taxes of approximately $1,885,000.
Cumulative Effect of Change in Accounting for Income Taxes: In February, 1992, the FASB issued SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires a change from the deferred method of accounting for income taxes of Accounting Principles Board (APB) Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company adopted SFAS No. 109 effective January 1, 1993. The cumulative effect of this change in accounting for income taxes of $5,520,000 was determined as of January 1, 1993, and is reported separately in the statement of earnings for the year ended December 31, 1993. Prior periods' financial statements have not been restated to apply the provisions of SFAS No. 109.
The Westcap Corporation, the Company's brokerage subsidiary, incurred trading losses during March, 1994, through unsettled customer securities purchase transactions. The net effect of these trading losses, which are expected to be between approximately $4,400,000 and $5,200,000, will be reflected in the Company's consolidated financial statements ended March 31, 1994. As a result of these losses, the Company has purchased an additional $4,400,000 of preferred stock of The Westcap Corporation and has agreed to provide a $3,000,000 line of credit to Westcap. This infusion of capital was important in order for Westcap to maintain its normal capital position, which is well in excess of required financial operating ratios.
The liquidity requirements of the Company are met primarily by funds provided from the life insurance operations. Policy deposits and revenues, investment income, and investment maturities are the primary sources of funds, while investment purchases and policy benefits are the primary uses of funds. The Company's brokerage subsidiary uses revolving lines of credit to complement any funds generated from operations. These lines of credit are used primarily for clearing functions for all securities transactions with its customers. National Western also has a $60 million bank line of credit. The line of credit is primarily used for cash management purposes relating to investment transactions.
Most of the Company's assets, other than policy loans and deferred
Although there is no present need or intent to dispose of such
investments should the need arise. Additionally, the Company has use of the line of credit for short-term liquidity needs for periods not exceeding 30 days. The Company expects future cash flows to be adequate to meet the demands for funds.
In December 1990, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Post Retirement Benefits Other than Pensions." SFAS No. 106 establishes accounting standards for employers' accounting for, primarily, post retirement health care
after December 15, 1992. Since the Company currently pays no such
SFAS No. 112, "Employers' Accounting for Postemployment Benefits" was issued by the FASB in November 1992. This statement establishes accounting standards for employers who provide benefits to former or inactive employees after employment but before retirement. Postemployment benefits include all types of benefits provided to former or inactive employees, their beneficiaries and covered dependents. The statement is effective for fiscal years beginning after December 15, 1993. Implementation of this statement is not expected to have a significant impact on the results of operations of the Company.
The FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," in May 1993. This statement addresses the accounting by creditors for impairment of certain loans. It is applicable to all creditors and to all loans, uncollateralized as well as collateralized, with certain exceptions. It also applies to all loans that are restructured in a troubled debt restructuring involving a modification of terms. It requires that impaired loans
that are within the scope of this statement be measured based on
the present value of expected future cash flows discounted at the
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
(c) Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity.
The Company's current accounting policy is similar to the requirements of the new statement. Significant differences are that securities available for sale are currently being reported at the lower of aggregate cost or market value, whereas, SFAS No. 115 requires reporting of these securities on an individual fair value basis. Also, SFAS No. 115 provides stricter requirements and guidance on the classification of securities among the three reporting categories.
SFAS No. 115 is effective for fiscal years beginning after December
15, 1993 and the Company plans to implement the statement in the
During 1993, the Division conducted an Association Financial Examination of the Company for the six-year period ended December 31, 1992. Although the final examination report has not been issued, an agreement between the Division and the Company has been reached concerning the statutory reserving basis for two-tier annuities. The agreement includes a plan to meet a target reserve by December 31, 1996. The agreement states the acceptable difference between the target reserve and the statutory reserve held by the Company. This difference will meet the following schedule:
Regulations that affect the Company and the insurance industry are often the result of efforts by the National Association of