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 various Central and South American, Caribbean, and Pacific Rim countries. A distribution of the Company's direct premium revenues and deposits by domestic and international markets is provided below:
The International Division's sales production is from broker-agents, many of whom have been selling National Western products for 20 or more years. Currently marketing plans include expanding sales networks in specifically targeted South American and Pacific Rim countries which have higher growth potential than other countries. These plans also include the introduction of two new equity-indexed investment products similar to the Domestic Division's new equity-indexed annuity. While National Western increases its sales efforts in the international arena, the Company remains committed to its conservative, yet competitive, underwriting practices which historically have resulted in claims experience similar to that in the United States.
An important aspect of the Company's investment philosophy is managing the cash flow stability of the portfolio. Because expected maturities of securities may differ from contractual maturities due to prepayments, extensions, and calls, the Company takes steps to manage and minimize these risks. The Company continues to reduce its exposure to prepayment and extension risks by lowering its holdings of mortgage-backed securities. This strategy began in 1994 when mortgage-backed securities totaled 47.6% of the entire portfolio, but now total only 27.9% at December 31, 1997. The majority of this reduction has been achieved by shifting investments into corporate securities, as corporate holdings have increased from 32.5% in 1994 to 51.1% in 1997. Also, most of these additions have been noncallable corporates which help reduce prepayment and call risks.
As of December 31, 1997, the allowance for possible losses on mortgage loans was $4,640,000. Additions to the allowance totaling $1,133,000 and $500,000 were recognized as realized losses on investments in the Company's 1997 and 1996 financial statements, respectively. 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.
On February 20, 1998, The Westcap Corporation, the Creditors' Committee, and National Western reported to the bankruptcy court tentative agreements that could lead to the settlement of all claims of the creditors of Westcap and the claims of Westcap against National Western, with the exception of the claims of The City Colleges against National Western. The preliminary agreements are subject to documentation, notice and disclosure to and approval by the Westcap creditors, approval by Westcap and National Western, and approval and confirmation by the bankruptcy court. If the plan is ultimately approved and confirmed, National Western's obligations could total approximately $15 million for complete releases from all Westcap claims against National Western and creditors' claims against Westcap and National Western, except for the pending claims asserted by The City Colleges against National Western in federal court litigation. However, it remains uncertain at this time whether the tentative agreements will be approved by all the parties, including the bankruptcy court. As a result, no amounts have been accrued in the Company's financial statements for potential settlements.
In the past, cash flows from the Company's insurance operations have been more than adequate to meet current needs. Cash flows from operating activities were $144 million, $145 million, and $99 million in 1997, 1996, and 1995, respectively. Lower earnings from brokerage operations was the primary reason for the lower cash flows in 1995. Net cash flows from the Company's deposit product operations, which includes universal life and investment annuity products, totaled $16 million and $99 million in 1996 and 1995, respectively. However, these operations incurred net cash outflows in 1997 totaling $51 million. The higher cash flows in 1995 were due to increased annuity production. The reduction in cash flows in 1997 and 1996 was due to lower annuity production and higher policy surrenders than in 1995.
In June, 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This statement requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position.
Because of the potential financial and operational problems this could present, the Company has conducted a review of its computer systems to identify systems that could be affected by the "Year 2000" issue. The Company is primarily utilizing its own resources to correct, reprogram, and test internally developed and maintained systems. Computer systems purchased from software developers are also being reviewed for "Year 2000" compliance. These systems are either already "Year 2000" compliant or the software developers are in the process of completing the required programing changes. Additionally, the Company is reviewing possible implications from its major service providers, which include investment trust, banking, and telephone services. The Company does not anticipate significant problems from these services related to "Year 2000" issues.