The following five-year financial summary includes comparative amounts derived from the audited Consolidated Financial Statements. (1)
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) of National Western Life Group, Inc. (formerly National Western Life Insurance Company and subsidiaries) for the three years ended December 31, 2017 follows. This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and related notes beginning on page 84 of this report.
Due to the business of accepting funds to pay future obligations in later years and the underlying economics, the relevant factors affecting the Company’s overall business and profitability include the following:
The Company monitors these factors continually as key business indicators. The discussion that follows in this Item 7 includes these indicators and presents information useful to an overall understanding of the Company’s business performance in 2017, incorporating required disclosures in accordance with the rules and regulations of the SEC.
The Company's business is generally aided by an economic environment experiencing growth, whether moderate or vibrant, characterized by metrics which indicate improving employment data and increases in personal income growth. When the Federal Reserve increased the benchmark interest rate in December, it extolled solid growth and an acceleration in housing spending. The unemployment rate ended the year at 4.1% improving from 4.7% at the end of the previous year. Retail sales showed solid growth at year's end suggesting the economy exited 2017 with good momentum.
Traditional life premiums - Traditional life premiums have been relatively level over the past three years. Traditional life insurance premiums for products such as whole life and term life are recognized as revenues over the premium-paying period. The Company’s life insurance sales focus has been primarily centered around universal life products. Universal life products, especially the Company’s equity-index universal life products, which offer the opportunity for consumers to acquire life insurance protection and receive credited interest linked in part to an outside market index such as the S&P 500 Index®, have been more popular product offerings in the Company’s markets representing 93% of new life insurance sales in 2017. The majority of traditional life premiums reside in the Company's international life segment.
In order to evaluate underlying profitability and results from ongoing operations, net investment income performance is analyzed excluding derivative gain (loss), which is a common practice in the insurance industry. Net investment income and average invested assets shown below includes cash and cash equivalents. Net investment income performance is summarized as follows:
The decline in average invested asset yield, excluding derivatives, from 2015 to 2016 and to 2017 is due to the Company continuing to obtain lower yields on newly invested cash inflows. As described above, the Company invests substantially all of its net cash flows in debt securities whose new money yields have remained below the weighted average portfolio yield. The pattern in average invested asset yield, including derivatives, incorporates increases and decreases in the fair value of index options purchased by the Company to support its fixed-index products. Fair values of the purchased call options recorded net gains in 2017 and 2016 and a net loss in 2015 corresponding to the movement in the S&P 500 Index® during these periods (the primary index the Company's fixed-index products employ). Refer to the derivatives discussion following this section for a more detailed explanation.
Other revenues - Other revenues primarily pertain to the Company’s two nursing home operations in Reno, Nevada and San Marcos, Texas. Revenues associated with these operations were $18.2 million, $18.2 million and $20.6 million in 2017, 2016 and 2015, respectively. Beginning in 2017, other revenues includes the operations of Braker P III ("BP III"), a new subsidiary created at the end of 2016 to own and manage a commercial office building it acquired (Refer to Item 2. Properties in Part I of this filing for further discussion). Revenues associated with BP III were $1.5 million in 2017. Other revenues also includes the annual revaluation of fair value of the life interest in the Libbie Shearn Moody Trust.
The financial statement investment spread, the difference between investment income and interest credited to contractholders, is subject to variations from option performance during any given period. For example, many of the company's equity-index annuity products provide for the collection of asset management fees. These asset management fees are assessed when returns on expiring options are positive, and they are collected prior to passing any additional returns above the assessed management fees to the policy contractholders. During periods of positive returns, the collected asset management fees serve to increase the financial statement spread by increasing option realized gains reported as investment income in an amount greater than interest credited to policy contractholders which is reported as contract interest expense. Asset management fees collected in 2017, 2016, and 2015 were $31.8 million, $6.4 million, and $10.6 million, respectively.
Net realized investment gains (losses) - Realized gains (losses) on investments include proceeds on bond calls and sales as well as impairment write-downs on investments in debt and equity securities and real estate. The net investment gains reported in 2017 consisted of gross gains of $15.0 million, primarily from calls of debt securities, offset by gross losses of $0.2 million, which included $0.1 million of other-than-temporary impairment losses. Included in the gross gains is approximately $2.3 million realized from a partial sale of the Company's previous home office land property to the Texas Department of Transportation to be used in the construction of roadway expansion.
The Company records impairment write-downs when a decline in value is considered to be other-than-temporary and full recovery of the investment is not expected. Impairments due to credit factors are recorded in the Company’s Consolidated Statements of Earnings while non-credit (liquidity) impairment losses are included in the Consolidated Statements of Comprehensive Income (Loss). Impairment and valuation write-downs reflected in the Consolidated Statements of Earnings are summarized in the following table.
Life and other policy benefits also includes policy liabilities held associated with the company's traditional life products, including riders. The increases in these liabilities were $17.9 million, $17.5 million, and $19.8 million in 2017, 2016, and 2015, respectively. In 2016, the company recorded a prospective unlocking adjustment (see below) which included the company's withdrawal benefit rider ("WBR"), a component of these policy liabilities. The effect of this prospective unlocking was to decrease WBR reserves by $3.1 million which decreased life and other policy benefits by a like amount.
The following table identifies the effects of unlocking adjustments on DPAC balances recorded through amortization expense separate from recurring amortization expense components for 2017, 2016 and 2015.
In 2015, the Company unlocked its DPAC balance for: (1) International Life for favorable mortality experience on one of its universal life products, the effect of which was to decrease DPAC amortization expense by $7.1 million; and (2) Annuity future expense assumptions pertaining to product development override costs (trailer commissions) which it is obligated to pay certain contracted National Marketing Organizations, the effect of which was to increase DPAC amortization expense by $5.3 million.
Contract interest reported in financial statements also encompasses the performance of the index options associated with the Company's fixed-index products. As previously noted, the market value changes of these derivative features resulted in net realized and unrealized gains (losses) in 2017, 2016 and 2015 of $222.9 million, $28.4 million and $(61.8) million, respectively. In 2017, this figure was comprised of unrealized gains totaling $74.6 million plus realized gains of $148.3 million. These positive returns similarly increase the average credited rates for the periods shown.
Contract interest expense also includes reserve changes for immediate annuities, two tier annuities, excess death benefits, excess
Similar to deferred policy acquisition costs, the Company defers sales inducements in the form of first year credited interest bonuses on annuity products that are directly related to the production of new business. These bonus interest charges are deferred and amortized using the same methodology and assumptions used to amortize other capitalized acquisition costs and the amortization is included in contract interest. In addition, deferred sales inducement balances are also reviewed periodically to ascertain whether actual experience has deviated significantly from that assumed (unlock) and are adjusted to reflect current policy lapse or termination rates, expense levels and credited rates on policies compared to anticipated experience (true-up). These adjustments, plus or minus, are included in contract interest expense.
In addition to the unlockings of the DPAC and deferred sales inducement balances in 2016 and 2017, the Company unlocked its excess benefit reserves (International life) and two tier annuity reserves. As noted previously, changes in these items are also components of contract interest expense. The unlockings of these reserves increased contract interest expense by $13.7 million and $3.0 million in 2017 and 2016, respectively.
Other operating expenses - Other operating expenses consist of general administrative expenses, licenses and fees, commissions not subject to deferral, nursing home expenses, real estate expenses and compensation costs. These are summarized in the table that follows.
expenditures. The Company has progressively released into production components of system development over the past couple of years initiating amortization of these capitalized costs. Software costs, including amortization expense, for 2017, 2016, and 2015 were $9.0 million, $8.6 million, and $3.3 million, respectively. General insurance expenses also include payments and provisions made relating to potential or contingent legal liabilities. Expenses related to these items were $8.5 million, $4.2 million, and $0.1 million in 2017, 2016, and 2015, respectively. The 2017 amount pertains to an $8.2 million loss contingency recorded by the Company at December 31, 2017 related to excess premiums on certain of its policies. The 2016 amount includes a $1.3 million payment (including interest and expenses) to insurance authorities in Brazil pertaining to administrative proceedings in that country and a $2.9 million provision for an annuity contract matter in Puerto Rico in litigation. Refer to the Legal Proceedings narrative in Part I, Item 3 of this Form 10-K.
Compensation expenses include share-based compensation costs related to outstanding vested and nonvested stock options and stock appreciation rights ("SARs"), restricted stock units ("RSUs"), and performance share units ("PSUs"). The related share-based compensation costs move in tandem not only with the number of awards outstanding but also with the movement in the market price of the Company's Class A common stock as a result of marking the stock options, SARs, and RSUs to fair value under the liability method of accounting. Consequently, the related expense amount varies positive or negative in any given period. For the three years shown, share-based compensation expense totaled $5.0 million in 2017, $7.9 million in 2016 and $(0.9) million in 2015. These expense levels reflect a change in the Company's Class A common share price from $269.25 at December 31, 2014 to $251.94 at December 31, 2015 to $310.80 at December 31, 2016 and to $331.02 at December 31, 2017. In addition to the changes in price of the Company's Class A common shares, there were 22,184 and 14,643 SARs granted to officers of National Western in 2017 and 2016. No awards of stock options or SARs were granted in 2015.
The Company’s domestic life insurance in force in terms of policy counts has been declining for some time. The pace of new policies issued has lagged the number of policies terminating from death or surrender by roughly a two-to-one rate over the past several years causing a declining level of insurance in force from which contract revenue is received. Consequently, the number of domestic life insurance policies in force has declined from 54,300 at December 31, 2015 to 51,600 at December 31, 2016 and to 50,200 at December 31, 2017. Policy lapse rates in 2017 decreased to 6.0% from 7.5% in 2016 and were approximately the same in 2015 at 5.9%.
During the past several years the Company has achieved some success in growing its domestic life insurance business. Sales have been substantially weighted toward single premium policies which do not have much in the way of recurring premium payments. These products are targeting wealth transfer strategies involving the movement of accumulated wealth in alternative investment vehicles, including annuities, into life insurance products. As a result, renewal premium levels have not been exhibiting a corresponding level of increase.
For liability purposes, the embedded option in the Company's policyholder obligations for this feature is bifurcated and reserved for separately. Accordingly, the impact for the embedded derivative component in the equity-index universal life product is reflected in the contract interest expense for each respective period.
Life and policy benefits for a smaller block of business are subject to variation from period to period. Claim activity during 2017 was marginally higher than in 2016 and but in line with historical trends. The number of incurred claims in 2017 declined a fraction of 1% from the prior year, while the average net claim amount increased from $24,800 to $27,700. The low face amount per claim reflects the older block of domestic life insurance policies sold which were final expense type products (i.e. purchased to cover funeral costs). The increase in the average net claim amount reflects claims from more recent policy sales (single premium wealth transfer products) which have much higher face amounts of insurance coverage per policy. The Company's overall mortality experience for this segment has been better than pricing assumptions.
In general, universal life revenues and operating earnings are anticipated to emerge with the amount of life insurance in force and a steady growth in new sales. Over the past three years, the volume of insurance in force has contracted from $19.0 billion at December 31, 2015 to $17.9 billion at December 31, 2016 and to $16.6 billion at December 31, 2017. The decline in volume of in force reflect the Company's decision at the end of 2015 to disengage from certain countries. Universal life insurance revenues are also generated with the issuance of new business based upon amounts per application and percentages of the face amount (volume) of insurance issued. During 2017, the number of international life policies decreased 12% from the prior year while the volume of insurance issued decreased approximately 20% from the level in 2016.
A third component of international universal life revenues include surrender charges assessed upon surrender of contracts by policyholders. At the height of the financial crisis in 2008 through 2010, the Company’s international policyholders exhibited concern regarding the developments in U.S. financial markets. This evidenced itself in the Company's termination activity in its international life policies in force. The Company incurred higher termination experience than is typical which resulted in recognition of increased surrender charge fee income. This level of termination activity subsequently subsided in 2011 with the termination activity over the following years remaining relatively level. In 2015, termination activity revisited the levels last seen during the 2008 through 2010 period resulting in additional surrender charge fee income, and this activity continued into 2016 and 2017. The following table illustrates the Company’s international life termination experience over the past five years.
The Company’s most popular international products have been its fixed-index universal life products in which the policyholder can elect to have the interest rate credited to their policy account values linked in part to the performance of an outside equity index. Included in the totals in the above table are collected premiums for fixed-index universal life products of approximately $65.6 million, $74.9 million and $84.5 million for the years ended 2017, 2016 and 2015, respectively. The decline in renewal premiums during these periods corresponds with the increased termination activity discussed above.
Life and policy benefits primarily consist of death claims on policies. The Company’s clientele for international products are generally wealthy individuals with access to U.S. dollars and quality medical care. Consequently, the amounts of coverage purchased have historically tended to be larger amounts. In the year ended December 31, 2017, the average face amount of insurance purchased was approximately $306,300, reflecting a level somewhat lower than that of immediately prior years. While life and policy benefit expense for the international life segment reflects the larger policies purchased, mortality due to natural causes is comparable to that in the United States. The Company's maximum risk exposure per insured life is capped at $500,000 through reinsurance. The number of claims reported during 2017 was approximately 14% more than the prior year, and the average net claim (after reinsurance) increased from $137,900 to $152,200. Measured over a period of years, the Company's international life mortality experience has generally been better than product pricing assumptions.
Fixed-index products are more attractive for consumers when interest rate levels remain low and equity markets produce positive returns. Since National Western does not offer variable products or mutual funds, fixed-index products provide an important alternative to the company's existing fixed interest rate annuity products. Fixed-index annuity deposits as a percentage of total annuity deposits were 95%, 94% and 93% for the years ended December 31, 2017, 2016 and 2015, respectively. The increasing percentage of fixed-index products to total annuity deposits reflects the low interest rate environment and the ongoing bull market in equities.
As a selling inducement, some of the deferred products, including fixed-index annuity products, contain a first year interest bonus ranging from 1% to 7% depending upon the product, in addition to the base first year interest rate. Other products include a premium bonus ranging from 2% to 10% which is credited to the account balance when premiums are applied. These bonus rates are deferred in conjunction with other capitalized policy acquisition costs. The amount deferred to be amortized over future periods amounted to approximately $17.9 million, $19.3 million and $17.7 million for the years ended December 31, 2017, 2016 and 2015, respectively. Amortization of deferred sales inducements is included as a component of annuity contract interest as described later in this discussion of annuity operations.
Consistent with the domestic and international life segments, the Company records true-up adjustments to DPAC balances each period to reflect current policy lapse or termination rates, expense levels and credited rates on policies as compared to anticipated experience as well as unlocking adjustments as necessary. The following table identifies the effects of unlocking adjustments on annuity DPAC balances recorded through amortization expense separate from recurring amortization expense components for 2017, 2016 and 2015.
The unlocking in 2016, in addition to impacting the DPAC and deferred sales inducement balances, also increased the Company's benefit reserves by $12.2 million for the two-tiered deferred annuity block of business which in turn increased contract interest expense.
The Company's overall conservative investment philosophy is reflected in the allocation of its investments, which is detailed below as of December 31, 2017 and 2016. The Company emphasizes investment grade debt securities.
A portion of the Company’s securities are designated in the available for sale portfolio, which is reported at fair market value. Unrealized gains associated with this part of the portfolio increased from $69.3 million at December 31, 2016 to $82.2 million at December 31, 2017 incrementally adding to the total portfolio balance.
Derivatives, index options, are call options purchased to hedge the interest crediting mechanism associated with the Company's fixed-index universal life and annuity policies. These options are reported on the Consolidated Balance Sheets at fair value in accordance with GAAP. The unrealized position of options held at December 31, 2017 was $119.4 million which was $74.6 million higher than the unrealized gain position at December 31, 2016 of $44.8 million. The increase is due to the higher equity index level at the end of 2017 relative to the market indice levels at the time outstanding options were purchased.
The Company maintains a diversified portfolio which consists mostly of corporate, mortgage-backed, and public utility fixed income securities. Investments in mortgage-backed securities primarily include U.S. government agency pass-through securities and collateralized mortgage obligations ("CMO"). The Company's investment guidelines prescribe limitations by type of security as a percent of the total investment portfolio and all holdings were within these threshold limits. As of December 31, the Company's debt securities portfolio consisted of the following for 2017 and 2016:
The Company's percentage of below investment grade securities compared to total invested assets at December 31, 2017 decreased from year-end 2016 due to upgrades of several securities, primarily energy-related entities, maturities, and calls by several issuers in this category. The Company's holdings of below investment grade securities are relatively small and as a percentage of total invested assets low compared to industry averages.
Holdings in below investment grade securities by category as of December 31, 2017 are summarized below, including the comparable fair value as of December 31, 2016 for those debt securities rated below investment grade at December 31, 2017. The Company continually monitors developments in these industries for issues that may affect security valuation.
The Company is required to classify its investments in debt and equity securities into one of three categories: (a) trading securities; (b) securities available for sale; or (c) securities held to maturity. The Company purchases securities with the intent to hold to maturity and accordingly does not maintain a portfolio of trading securities. Of the remaining two categories, available for sale and held to maturity, the Company makes a determination on categorization based 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. As shown in the table below, at December 31, 2017, approximately 29.2% of the Company's total debt and equity securities, based on fair values, were classified as securities available for sale. These holdings in available for sale 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 Company’s exposure to the subprime sector is limited to investments in the senior tranches of subprime residential mortgage loans. The subprime sector is generally categorized under the asset-backed sector. This sector lends to borrowers who do not qualify for prime interest rates due to poor or insufficient credit history. The slowing housing market, rising interest rates, and relaxed underwriting standards for loans originated after 2005 resulted in higher delinquency rates and losses beginning in 2007. These events caused illiquidity in the market and volatility in the market prices of subprime securities. The housing market subsequently stabilized and an improvement in the prices of subprime securities occurred as the bond market regained more liquidity. All of the loans classified as subprime in the Company’s portfolio as of December 31, 2017 were underwritten prior to 2005 as noted in the table below.
As of December 31, 2017, the Company held seven subprime issues of which one was rated AA, one was rated A, one was rated BBB, one was rated BB, one was rated B, one was rated CCC and one was not rated.
The Company originates loans on high quality, income-producing properties such as shopping centers, freestanding retail stores, office buildings, industrial, sales or service facilities, selected apartment buildings, hotels, and health care facilities. The location of these properties is typically in major metropolitan areas that offer a potential for property value appreciation. Credit and default risk is minimized through strict underwriting guidelines and diversification of underlying property types and geographic locations. In addition to being secured by the property, mortgage loans with leases on the underlying property are often guaranteed by the lease payments and also by the borrower. This approach has proved over time to result in quality mortgage loans with few defaults. Mortgage loan interest income is recognized on an accrual basis with any premium or discount amortized over the life of the loan. Prepayment and late fees are recorded on the date of collection.
The Company targets a minimum specified yield on mortgage loan investments determined by reference to currently available debt security instrument yields, plus a desired amount of incremental basis points. During the past several years, the low interest rate environment has resulted in fewer loan opportunities being available that meet the Company's required rate of return. Mortgage loans originated by the Company totaled $59.4 million and $84.6 million for the years 2017 and 2016, respectively.
The Company held net investments in mortgage loans, after allowances for possible losses, totaling $208.2 million and $174.5 million at December 31, 2017 and 2016, respectively. The diversification of the portfolio by geographic region, property type, and loan-to-value ratio was as follows:
The Company recognized no valuation losses for the years ended December 31, 2017, 2016 and 2015, respectively. The current mortgage loan valuation allowance represents a general valuation allowance established for the Company's mortgage loan portfolio based upon the Company's loss experience for more than ten years and is not specifically identified to individual loans.
The fair value of derivative instruments presented in the Company’s Consolidated Financial Statements totaling $194.7 million at December 31, 2017 and $120.6 million at December 31, 2016 pertain to notional policyholder account values of $3.2 billion and $2.9 billion at December 31, 2017 and 2016, respectively, electing interest credits based upon applicable market index performance.
The Company seeks to minimize the impact of interest rate risk through surrender charges that are imposed to discourage policy surrenders and to offset unamortized acquisition costs. Certain products, such as supplementary contracts with life contingencies, are not subject to surrender or discretionary withdrawal. The Company may also include a market value adjustment (“MVA”) feature on its annuity products which could increase or decrease the amount paid to contract holders upon surrender of their contract as a means to further mitigate interest rate risk.
The following table profiles the Company’s insurance liabilities at December 31, 2017 for annuities, deposit-type contracts and supplementary contracts with life contingencies by surrender and discretionary withdrawal characteristics.
Mortgage and other loans were modeled by discounting scheduled cash flows through the scheduled maturities of the loans, starting with interest rates currently being offered for similar loans to borrowers with similar credit ratings. Policy loans were modeled by discounting estimated cash flows using U.S. Treasury Bill interest rates as base rates at December 31, 2017. 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 and incorporate both Company experience and mortality assumptions associated with such contracts.
The Company's market risk liabilities, which include policy liabilities for annuity and supplemental contracts, are managed for interest rate risk through cash flow testing as previously described. As part of this cash flow testing, the Company has analyzed the potential impact on net earnings of a 100 basis point decrease and increases in increments of 100 basis points in the U.S. Treasury yield curve as of December 31, 2017. The potential impact on net earnings from these interest rate changes are summarized below.
The above described scenarios produce estimated changes in cash flows as well as cash flow reinvestment projections. Estimated cash flows in the Company's model assume cash flow reinvestments, which are representative of the Company's current investment strategy. Calls and prepayments include scheduled maturities and those expected to occur which would benefit the security issuers. Assumed policy surrenders consider differences and relationships between credited interest rates and market interest rates as well as surrender charges on individual policies. The impact to earnings also includes the expected effects on amortization of deferred policy acquisition costs. The model considers only annuity and supplemental contracts in force at December 31, 2017, and does not consider new product sales or the possible impact of interest rate changes on sales.
Liquidity requirements are met primarily by funds provided from operations. Premium deposits and annuity considerations, investment income, and investment maturities and prepayments are the primary sources of funds while investment purchases, policy benefits in the form of claims, and payments to policyholders and contract holders in connection with surrenders and withdrawals as well as operating expenses are the primary uses of funds. To ensure the Company will be able to pay future commitments, the funds received as premium payments and deposits are invested in high quality investments, primarily fixed income securities. Funds are invested with the intent that the income from investments, plus proceeds from maturities, will meet the ongoing cash flow needs of the Company. The approach of matching asset and liability durations and yields requires an appropriate mix of investments. Although the Company historically has not been put in the position of having to liquidate invested assets to provide cash flow, its investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs. The Company (National Western) may also borrow up to $40 million on its bank line of credit for short-term cash needs. There were no borrowings outstanding under the line of credit at December 31, 2017.
Cash flows from the Company's insurance operations have historically been sufficient to meet current needs. Cash flows from operating activities were $276.1 million, $309.1 million, and $346.2 million in 2017, 2016, and 2015, respectively. The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $0.8 billion, $0.6 billion, and $0.7 billion in 2017, 2016, and 2015, respectively. Cash flows from security maturities, redemptions, and prepayments coincide primarily with scheduled maturity dates of securities given the Company buy and hold investment philosophy but may become amplified during periods of significant declines in interest rates due to prepayments and bond calls. Conversely, these cash flow items could experience reduced levels of activity if interest rates rise in the future. Net cash inflows/(outflows) from the Company's universal life and annuity product operations totaled $(163.3) million, $(52.8) million, and $8.2 million in 2017, 2016, and 2015, respectively.
The National Association of Insurance Commissioners ("NAIC") has established risk-based capital ("RBC") standards for U.S. life insurers as well as a risk-based capital model act ("RBC Model Act"). The RBC Model Act requires that life insurers annually submit a report to state regulators regarding their RBC amounts based upon four categories of risk (asset risk, insurance risk, interest rate risk, and business risk). The capital requirement for each is determined by applying factors that vary based upon the degree of risk to various asset, premium and policy benefit reserve items. The formula is an early warning tool to identify potential weakly capitalized companies for purposes of initiating further regulatory action. Independent rating agencies utilize proprietary versions similar to the NAIC RBC model incorporating additional risk factors identified in their respective rating methodology. At December 31, 2017, National Western maintained statutory capital substantially in excess of applicable statutory requirements.
(1) Refer to Note 9, Commitments and Contingencies, of the accompanying Consolidated Financial Statements relating to Company leases.