The Company leases 72,000 square feet of office space in Austin, Texas, for $565,000 per year plus taxes, insurance, maintenance, and other operating costs less the amortization of the deferred gain of $325,000 which arose from the sale and lease-back of the property in 1984. This lease, which was to expire in 1994, has been extended through October 2000, with rent of $477,600 per year.
The Company's brokerage subsidiary, Westcap, leases its office facilities in Houston, Texas, under a lease which terminates in 1997. The total leased space is approximately 38,500 square feet. Westcap also leases several small branch office spaces in Austin, Texas, Sarasota, Florida and Morris Plains, New Jersey. The annual lease cost for all locations through the year 1997 will range from approximately $251,000 to $618,000.
The following five-year financial summary includes comparative amounts taken from the audited financial statements:
and issued in the United States and accounted for approximately 31%
among the top ten percent of all life insurance companies measured
by assets. The primary products marketed by the Company are its
Company's new business comes from the development of a market and
In addition to the life insurance business, the Company has two
wholly-owned subsidiaries, The Westcap Corporation and Commercial Adjusters, Inc. The Westcap Corporation's principal activity is that of a U.S. government and municipal securities dealer, and Commercial Adjusters, Inc. is a small corporation investing primarily in six real estate joint ventures.
depends on various factors including the type and quality of the
has strong cash flows and matches expected maturities of assets and liabilities, the Company has the ability to hold the securities, as it would be unlikely that forced sales of securities would be required prior to maturity to cover payments of liabilities. As a result, fixed maturities are carried at amortized cost less declines in value that are other than temporary. However, certain situations may change the Company's intent to hold a particular security to maturity, the most notable of which is a deterioration in the issuer's creditworthiness. Accordingly, a security may be sold to avoid a further decline in realizable value when there has been a significant change in the credit risk of the issuer.
In May, 1993, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities.
change in accounting principle are described in more detail in a
than temporary, and the carrying amount is reduced to its net realizable value. The amount of the reduction is reported as a realized loss.
The carrying values of the trading securities and securities available for sale were the same as their market values as of December 31, 1993. However, the market value of the Company's fixed maturities was $1.91 billion compared to a carrying value of $1.79 billion. This represents a net unrealized gain of $121 million. The unrealized gain is reflective of the decline in market interest rates during 1993 and 1992.
The amortized cost and estimated market values of investments in debt securities at December 31, 1993, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
As market interest rates continued to decline in 1992 and into 1993, the Company's portfolio experienced increased calls and principal prepayments. The increase in calls was primarily in the Company's utilities holdings. The Company responded with an active approach in managing future call risk by investing the call
proceeds in a more diverse group of companies with increased call
In addition to managing prepayment and call risk, the Company continues to concentrate on improving the credit quality of its investments in debt securities. Much attention is often placed on a company's holdings of below investment grade debt securities, as these securities generally have greater default risk than higher rated corporate debt. These issuers usually have high levels of indebtedness and are more sensitive to adverse industry or economic conditions than are investment grade issuers. The Company's small holdings of below investment grade debt securities, which are summarized as follows, increased slightly from 1992 primarily due to two corporate issuers that were downgraded.
loans now are: guaranteed by the borrower and secured by the
property, amortized over the term of the lease on the property
strength of the lessee. This approach also enables the Company to
choose the locale in which the property securing the loan is
The Company held net investments in mortgage loans totaling $188,920,000 and $177,236,000, or 7.4% and 7.6% of total invested assets, at December 31, 1993 and 1992, respectively. The loans are real estate mortgages, substantially all of which are related to commercial properties and developments and have fixed interest rates.
The diversification of the mortgage loan portfolio by geographic region of the country and by property type as of December 31, 1993 and 1992, was as follows:
As of December 31, 1993, the allowance for possible losses on mortgage loans was $6,849,000. Additions to the allowance totaling $2,152,000 were recognized as realized losses on investments in the Company's 1993 financial statements. Management believes that the allowance for possible losses is adequate. However, while management uses available information to recognize losses, future additions to the allowance may be necessary based on changes in economic conditions, particularly in the West South Central region which includes Texas, Louisiana, Oklahoma, and Arkansas.
The Company currently places all loans past due three months or more on a non-accrual status, thus recognizing no interest income on the loans. At December 31, 1993 and 1992, the Company had approximately $4,191,000 and $5,154,000, respectively, of mortgage loan principal balances on a non-accrual status. For the years ended December 31, 1993 and 1992, the approximate reduction in interest income associated with non-accrual loans was as follows:
In addition to the non-accrual loans, the Company had mortgage loans with restructured terms totaling approximately $14,257,000 and $7,263,000 at December 31, 1993 and 1992, respectively. For the years ended December 31, 1993 and 1992, the approximate reduction in interest income associated with restructured loans was as follows:
The contractual maturities of principal payments on mortgage loans at December 31, 1993, are as follows:
The following table reflects financial statement income and expense items as a percentage of total Company revenues. Significant changes and fluctuations between years are described in detail following the table.
Life and Annuity Premiums: This revenue category represents the premiums on traditional type products. However, sales in most of the Company's markets have moved toward the non-traditional types such as universal life and investment annuities. This move in market direction accounts for the decrease in revenues in this category over the three-year period.
The discontinued products have been replaced with single-tier annuities, and the Company anticipates somewhat lower deposit collections than in previous years during this transition period. However, the Company anticipates that this decline will be reversed as efforts have continued to develop new annuity and life products for sale and distribution through independent marketing organizations. In addition to new product developments, the Company has contracted with additional independent marketing organizations to further strengthen and diversify distribution channels. Also, many products are developed specifically for these organizations to meet the needs for a particular customer base.
to $180.3 million in 1993. This is reflective of both the slower
portfolio yield due primarily to the overall drop in market interest rates. In 1993, both cash from operations and investment proceeds from increased principal prepayments and calls on debt securities have been reinvested at lower yields due to market conditions, thereby producing lower investment income. Additionally, in 1993 and 1992 investment income was impacted due to reductions in the yields of the Company's remaining holdings of residual interests in collateralized mortgage obligations (CMO residuals). Holdings of principal exchange rate linked securities (PERLS) were also reduced substantially throughout 1992 which decreased yields. Although the reductions in holdings of the CMO residuals and PERLS did decrease portfolio yields, the exposure to exchange rate and prepayment risks were significantly reduced.
Brokerage Revenues: These revenues are from the Company's wholly-owned subsidiary, The Westcap Corporation. Revenues for 1993, 1992 and 1991 were $105.9 million, $123.1 million and $43.8 million, respectively. The significant increase in the level of brokerage revenues from 1991 is attributable to several factors. The steady decline in market interest rates has been very positive for brokerage firms. Also, The Westcap Corporation specializes in mortgage-backed securities, and many of their customers have experienced significant prepayments within their portfolios. This contributes to increased sales for the brokerage firm as the investors reinvest the proceeds. Other contributing factors have been the firm's ability to attract an experienced sales force and to increase the overall size of the force over the past several years. While The Westcap Corporation has increased its revenues, the brokerage industry is usually impacted significantly by prevailing economic and interest rate conditions. Therefore, operating results could be more cyclical in comparison to the insurance industry.
to maturity. The gains in the three years are net of write-downs on real estate and mortgage loans totaling $3,360,000, $3,325,000 and $3,200,000. The gains also are net of write-downs for permanent impairments on fixed maturities of $6,329,000, $5,000,000 and $5,969,000.
The loss in 1991 for permanent impairments on fixed maturities consisted primarily of realized losses related to below investment grade debt securities in which the issuers were in poor financial condition or in bankruptcy. The Company has substantially reduced its holdings in these securities over the past several years to approximately $25 million which is only 1% of total invested assets at December 31, 1993. The write-downs for 1992 and 1993 relate primarily to holdings of PERLS and CMO residuals. The Company made substantial reductions in the holdings of these securities in 1992 and 1993, thereby reducing the exposure to potential future losses.
has increased from $16.9 million in 1991 to $33.2 million in 1993.
Universal Life and Investment Annuity Contract Interest: Interest expense has declined steadily as amounts totaled $130.9 million, $135.8 million and $143.0 million for 1993, 1992 and 1991, respectively. This decline is due to the lowering of credited interest rates on most universal life and investment annuity products throughout these years. Also, as universal life and annuity deposits collected have decreased along with increased surrenders, the policy liabilities subject to interest crediting have remained relatively stable. As a result, additional interest costs related to increasing business have not been significant.
insolvent insurance companies. Most states allow premium tax credits for all or a portion of such assessments, thereby allowing eventual recovery of these payments over a period of years. However, several states do not allow such credits. In 1993 the Company recorded a charge of $3,700,000 to other insurance operating expenses for anticipated assessments. Although additional charges to expenses may be required, the Company currently is unaware of any significant pending assessments requiring accrual.
Brokerage Expenses: Expenses for 1993, 1992 and 1991 were $72.3 million, $82.6 million and $34.5 million, respectively. The majority of these expenses relate to commission compensation and vary directly with brokerage revenues. Accordingly, the expenses directly correspond to the level of brokerage revenues for the same periods. Also, as brokerage revenues increase, the ratio of brokerage expenses to such revenues decreases. This is because fixed costs are covered at a certain level of revenues, leaving only the variable cost of commissions.
The FASB issued SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" in December 1992. The statement specifies the accounting by insurance enterprises for the reinsuring of insurance contracts. It establishes the conditions required for a contract with a reinsurer to be accounted for as reinsurance and prescribes accounting and reporting standards for those contracts. It also eliminates the practice by insurance enterprises of reporting assets and liabilities relating to reinsured contracts net of the effects of reinsurance. This statement was implemented in 1993 but it had no effect on the Company's results of operations. It also had only a minor effect on the balance sheet presentation of certain assets and liabilities.
loan's effective interest rate or, as a practical expedient, at the
loan's observable market price or the fair value of the collateral
In May 1993, the FASB also issued SFAS No. 115, "Accounting for
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.
statement is not expected to have a significant impact on earnings
stockholders' equity. Preliminary results of the implementation process indicate that approximately 60% of the debt securities portfolio will be reported as securities available for sale with the remainder to be classified as held to maturity. Trading securities will be composed entirely of securities from the Company's brokerage operations which are already being recorded at market value with market value changes reflected in earnings. The effect on stockholders' equity of the implementation is estimated to be an increase in the range of $20 million to $25 million as of January 1, 1994. The increase is net of the estimated effects of Federal income taxes and amortization of deferred policy acquisition costs.
At its June 1992 meeting the NAIC Life and Health Actuarial Task
GGG have been drafted with the most recent one dated September
December 31, 1993 $ 21,700,000 December 31, 1994 13,600,000 December 31, 1995 5,000,000 December 31, 1996 -
The Company met the above scheduled difference for December 31, 1993 as a result of the additional $13,000,000 in statutory reserves recorded in 1992 and 1993 as previously described. In fact, at December 31, 1993, the difference was less then that required and it is anticipated that the Company will not require any additional statutory reserves in order to meet the above schedule of differences. This agreement does not affect the Company's policy reserves which are prepared under generally accepted accounting principles as reported in the accompanying financial statements. Also, the compliance with this agreement is not anticipated to have any significant effects on the general operations of the Company.
The above mentioned agreement is separate from the proposed Actuarial Guideline GGG. The agreement does, however, state that if Actuarial Guideline GGG is adopted and it is more liberal than the agreement with the Division, then the Division will allow the Company to move to the more liberal basis.
considered or enacted laws that alter, and in many cases increase,
The information required by this item is shown on Attachment "A".