ITEM 1. BUSINESS
(a) General
Life Insurance Operations
National Western Life Insurance Company (hereinafter referred to as "National Western", "Company", or "Registrant") 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. National Western also accepts applications from and issues policies to residents of several Central and South American countries. Such policies are accepted and issued in the United States. During 1995, the Company recorded approximately $403 million in premium revenues, universal life, and investment annuity contract deposits. New life insurance issued during 1995 approximated $1.2 billion and the total amount in force at year-end 1995 was $7.9 billion. As of December 31, 1995, the Company had total consolidated assets of approximately $2.96 billion.
Competition: The life insurance business is highly competitive and National Western competes with over 1,700 stock and mutual companies. Best's Agents Guide To Life Insurance Companies, an authoritative life insurance publication, lists companies by total admitted assets and life insurance in force. As of December 31, 1994, the most recent date for which information is available, National Western ranked 145 in total admitted assets and 227 in life insurance in force among approximately 1,700 life insurance companies domiciled in the United States.
Life insurance companies compete not only on product design and price, but increasingly on policyowner service and marketing and sales efforts. National Western believes that its products, premium rates, policyowner service, and marketing efforts are generally competitive with those of other life insurance companies selling similar types of insurance. Mutual insurance companies may have certain competitive advantages over stock companies in that the policies written by them are participating policies and their profits inure to the benefit of their policyholders. The Company no longer writes participating policies, and such policies represent only 1% of the Company's life insurance in force at December 31, 1995.
In addition to competition within the life insurance industry, National Western and other insurance companies face competition from other industries. In recent years, there has been increased interest in the banking industry to directly market annuities. In fact, in January, 1995, the U.S. Supreme Court ruled that national banks may compete with insurance companies in the sale of annuities. Such regulation changes could result in increased competition for National Western and the life insurance industry.
Competition also arises from different investment and product choices. Annuities are often used as long-term, tax deferred investment vehicles and in retirement planning. As a result, other investment types can be competitive products to annuities. For example, the recent growth and popularity of mutual funds has attracted large amounts of investment funds over the past several years, particularly during periods of declining market interest rates. Many mutual funds also allow tax deferred features through individual retirement accounts, 401(k) plans, and other qualified methods.
Agents and Employees: National Western has 230 full-time employees at its principal executive office. Its insurance operations are conducted primarily through broker-agents, which numbered 8,330 at December 31, 1995. The agency operations are supervised by Senior Vice Presidents of domestic and international marketing. The Company's agents are independent contractors who are compensated on a commission basis. General agents receive overriding first year and renewal commissions on business written by agents under their supervision.
Types of Insurance Written: National Western offers a broad portfolio of individual whole life and term life insurance plans, endowments, and annuities, including standard supplementary riders. The Company does not market group life insurance but does offer group annuities. In recent years the majority of the business written has been individual flexible premium and single premium annuities and universal life products. Except for a small employee health plan and a small number of existing individual accident and health policies, primarily in Florida, the Company does not write any new policies in the accident and health markets. A distribution of the Company's direct premium revenues and deposits by type of product is provided below:
The underwriting policy of the Company is to require medical examination of applicants for ordinary insurance in excess of certain prescribed limits. These limits are graduated according to the age of the applicant and the amount of insurance desired. The Company has no maximum for issuance of life insurance on any one life. However, the Company's general policy is to reinsure that portion of any risk in excess of $150,000 on the life of any one individual. Effective January 1, 1996, the Company has raised this reinsurance level to $200,000 per individual. Also, following general industry practice, policies are issued on substandard risks.
Geographical Distribution of Business: For the year 1995, insurance and annuity policies held by residents of the State of Texas accounted for 17% of premium revenues, universal life, and investment annuity contract deposits from direct business, while policies held by residents of California, Pennsylvania, and Michigan accounted for approximately 8%, 7%, and 6%, respectively. All other states of the United States accounted for 48% of premium revenues and deposits from direct business. The remaining 14% of premium revenues and deposits were derived from the Company's policies issued to foreign nationals, primarily all of which was for individual life insurance. A distribution of the Company's direct premium revenues and deposits by domestic and international markets is provided below:
Approximately 74% of the life insurance face amount issued by the Company during 1995 was written through international insurance brokers acting as independent contractors. Foreign business is solicited by various independent brokers, primarily in Central and South America, and forwarded to the United States for acceptance and issuance. The Company maintains strict controls on the business it accepts from such foreign independent brokers, as well as its underwriting procedures for such business. Except for a small block of business, a currency clause is included in each foreign policy stating that premium and claim "dollars" refer to lawful currency of the United States. Traditional and universal life products are sold in the international market to individuals in upper socioeconomic classes. By marketing exclusively to this group, sales typically produce a higher average policy size, strong persistency, and claims experience similar to that in the United States.
Investments: State insurance statutes prescribe the nature, quality, an percentage of the various types of investments which may be made by insurance companies and generally permit investments in qualified state, municipal, federal, and foreign government obligations, corporate bonds, preferred and common stock, real estate, and real estate first lien mortgages where the value of the underlying real estate exceeds the amount of the mortgage lien by certain required percentages.
The following table shows investment results for insurance operations for the periods indicated:
The following table shows the percentage distribution of insurance operation investments:
Regulation: The Company is subject to regulation by the supervisory agency of each state or other jurisdiction in which it is licensed to do business. These agencies have broad administrative powers, including the granting and revocation of licenses to transact business, the licensing of agents, the approval of policy forms, the form and content of mandatory financial statements, capital, surplus, and reserve requirements, as well as the previously mentioned regulation of the types of investments which may be made. The Company is required to file detailed financial reports with each state or jurisdiction in which it is licensed, and its books and records are subject to examination by each. In accordance with the insurance laws of the various states in which the Company is licensed and the rules and practices of the National Association of Insurance Commissioners, examination of the Company's records routinely takes place every three to five years. These examinations are supervised by the Company's domiciliary state, with representatives from other states participating. The most recent examination of National Western was completed in 1994 and covered the six-year period ended December 31, 1992. The states of Colorado and Delaware participated. A final report disclosing the examination results was received by the Company in March, 1995. The report contained no adjustments or issues which would have a significant, negative impact on the operations of the Company.
Regulations that affect the Company and the insurance industry are often the result of efforts by the National Association of Insurance Commissioners (NAIC). The NAIC is an association of state insurance commissioners, regulators and support staff that acts as a coordinating body for the state insurance regulatory process. Recently, increased scrutiny has been placed upon the insurance regulatory framework, and certain state legislatures have considered or enacted laws that alter, and in many cases increase, state authority to regulate insurance companies. The NAIC and state insurance regulators periodically re-examine existing laws and regulations, and recently have been specifically focusing on insurance company investments and solvency issues, statutory policy reserves, reinsurance, risk-based capital guidelines, and codification of prescribed statutory accounting principles.
Of particular importance, in 1993 the NAIC established new risk-based capital (RBC) requirements to help state regulators monitor the financial strength and stability of life insurers by identifying those companies that may be inadequately capitalized. Under the NAIC's requirements, each insurer must maintain its total capital above a calculated threshold or take corrective measures to achieve the threshold. The threshold of adequate capital is based on a formula that takes into account the amount of risk each company faces on its products and investments. The RBC formula takes into consideration four major areas of risk which are: (i) asset risk which primarily focuses on the quality of investments; (ii) insurance risk which encompasses mortality and morbidity risk; (iii) interest rate risk which involves asset/liability matching issues; and (iv) other business risks. The Company has calculated its RBC level and has determined that its capital and surplus is significantly in excess of the threshold requirements.
The RBC regulation developed by the NAIC is an example of its involvement in the regulatory process. New regulations are routinely published by the NAIC as model acts or model laws. The NAIC encourages adoption of these model acts by all states to provide uniformity and consistency among state insurance regulations.
Discontinued Brokerage Operations
General: The Westcap Corporation (Westcap), a wholly owned subsidiary of the Company, was a brokerage firm headquartered in Houston, Texas. Prior to July 17, 1995, Westcap provided investment products and financial services to a nationwide customer base. Its wholly owned subsidiaries include Westcap Securities Investment, Inc. (Westcap Investment), Westcap Securities Management, Inc. (Westcap Management), and Westcap Mortgage Company (Westcap Mortgage). Westcap Investment and Westcap Management own 100% of the partnership interests in Westcap Securities, L.P. (Westcap L.P.). Westcap L.P. was primarily a dealer in municipal and corporate bonds and collateralized mortgage obligations and a secondary market dealer in obligations issued or guaranteed by the U.S. government or its agencies. The limited partnership was subject to regulation by the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers.
Plan to Cease Brokerage Operations: Effective July 17, 1995, The Westcap Corporation and subsidiaries discontinued all sales and trading activities in its Houston, Texas, office. At that time, 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.
As more fully described in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, declines in both sales revenues and earnings were the principal reasons for ceasing brokerage operations. The declines resulted primarily from adverse bond market conditions and adverse publicity about litigation. As a result of Westcap's decision to cease brokerage operations, the brokerage segment is now reported as discontinued operations throughout this report and in the accompanying financial statements.
In anticipation of an Order Instituting Public Administrative Proceedings, Making Findings and Imposing Remedial Sanctions (Order) being entered pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 by the Securities and Exchange Commission (Commission), on February 8, 1996, Westcap L.P. submitted an offer of settlement to the Commission whereby it consented, without admitting or denying the findings in the Order, to the entry of an Order of the Commission making findings, revoking Westcap L.P.'s registration with the Commission, and requiring payment to the Commission of (i) $445,341 disgorgement, (ii) prejudgement interest of $83,879, and (iii) civil penalty of $300,000. Such an Order was entered by the Commission on February 14, 1996. In compliance with the Order, Westcap L.P. made payment to the Commission of $829,220 on March 5, 1996.
(b) Financial Information About Industry Segments
A summary of financial information for the Company's two industry segments follows:
(c) Narrative Description of Business
Included in Item 1.(a).
(d) Financial Information About Foreign and Domestic Operations and Export Sales
Included in Item 1.(a).
ITEM 2.

ITEM 2. PROPERTIES
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. The annual lease costs will be approximately $74,000 and $35,000 in 1996 and 1997, respectively.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
On March 28, 1994, the Community College District No. 508, County of Cook and State of Illinois (The City Colleges) filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division, against National Western Life Insurance Company (the Company) and subsidiaries of The Westcap Corporation. The suit seeks rescission of securities purchase transactions by The City Colleges from Westcap between September 9, 1993 and November 3, 1993, alleged compensatory damages, punitive damages, injunctive relief, declaratory relief, fees, and costs. National Western is named as a "controlling person" of the Westcap defendants. On February 1, 1995, the complaint was amended to add a RICO count for treble damages and claims under the Texas securities and consumer fraud laws, and to add additional defendants. Westcap and the Company are of the opinions that Westcap has adequate documentation to validate all such securities purchase transactions by The City Colleges, and that Westcap and the Company each have adequate defenses to the litigation. Although the alleged damages would be material to the Company's and Westcap's financial positions, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. A judicial ruling favorable to Westcap has been made requiring resolution of the suit against Westcap through binding arbitration. The lawsuit against the Company was suspended pending determination of the arbitration proceeding against Westcap. Arbitration proceedings are currently set to begin in August, 1996.
On February 1, 1995, the San Antonio River Authority (SARA) filed a complaint in the 285th Judicial District Court, Bexar County, Texas, against Kenneth William Katzen (Katzen), Westcap Securities, L.P., The Westcap Corporation (Westcap), and National Western Life Insurance Company (the Company). The suit alleges that Katzen and Westcap sold mortgage-backed security derivatives to SARA and misrepresented these securities to SARA. The suit alleges violations of the Federal Securities Act, Texas Securities Act, Deceptive Trade Practices Act, breach of fiduciary duty, fraud, negligence, breach of contract, and seeks attorney's fees. The Company is named as a "controlling person" of the Westcap defendants. Westcap and the Company are of the opinions that Westcap has adequate documentation to validate all securities purchases by SARA and that the Company and Westcap have adequate defenses to such suit. Although the alleged damages would be material to Westcap's financial condition, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The Company and Westcap have denied all allegations and the parties have initiated discovery. The case is set for trial on April 8, 1996.
On June 9, 1995, Charles McCutcheon, as Sheriff of Palm Beach County, Florida, served The Westcap Corporation, Westcap Securities, Inc., Westcap Government Securities, Inc., individual officers and directors of the Westcap entities, and National Western Life Insurance Company as defendants with a complaint filed in the U.S. District Court for the Southern District of Florida. The Complaint alleges that the Westcap entities improperly sold certain derivative securities to the Plaintiff and did not disclose the high risk of these securities to the Plaintiff, who suffered financial losses from the investments. The Company is sued as a "controlling person" of Westcap, and it is alleged that the Company is responsible and liable for the alleged wrongful conduct of Westcap. The suit seeks rescission of the investment transactions, alleged damages, punitive and exemplary damages, attorneys' fees, and injunction. On October 13, 1995, the U.S. District Judge ordered arbitration of Plaintiff's claims against the Westcap entities and stayed all proceedings pending outcome of the arbitration. Although the alleged damages would be material to Westcap's financial condition, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The Company and Westcap deny the allegations and believe they each have adequate defenses to such suit.
On July 5, 1995, San Patricio County, Texas, filed suit in the District Court of San Patricio County, Texas, against National Western Life Insurance Company (the Company) and its chief executive officer, Robert L. Moody. The suit arises from derivative investments purchased by San Patricio County from Westcap Securities, L.P. or Westcap Government Securities, Inc., affiliates of The Westcap Corporation, a wholly owned subsidiary of the Company. The suit alleges that the Westcap affiliates were controlled by the Company and Mr. Moody and that they are responsible for the alleged wrongful acts of the Westcap affiliates in selling the securities to the Plaintiff. Plaintiff alleges that the Westcap affiliates violated duties and responsibilities owed to the Plaintiff related to its investment recommendations and the decisions made by Plaintiff, and alleges that the Plaintiff was financially damaged by such actions of Westcap. The suit seeks rescission of the investment transactions and actual and punitive damages of unspecified amounts. Although the alleged damages would be material to Westcap's financial condition, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The Company believes that it has adequate defenses to such suit and denies the allegations. The parties have initiated discovery.
On September 13, 1995, Michigan South Central Power Agency filed a complaint in The United States District Court for the Western District of Michigan against Westcap Securities Investment, Inc., Westcap Securities, L.P., Westcap Securities Management, Inc., The Westcap Corporation, National Western Life Insurance Company (the Company), and others. The suit alleges that salesmen of Westcap sold mortgage-backed securities to the Plaintiff and misrepresented these securities in violation of Federal and state securities laws and common law. The Company is named as a "controlling person" of the Westcap defendants. Westcap and the Company are of the opinions that they have adequate defenses to the suit. Although the alleged damages would be material to Westcap's financial condition, a reasonable estimate of any actual losses which may result from the suit cannot be made at this time. The Company and Westcap deny all allegations.
The Westcap Corporation and Westcap Securities, L.P. are also defendants in several other pending lawsuits which have arisen in the ordinary course of its business. Westcap Securities, L.P. has also been notified of several arbitration claims filed with the National Association of Securities Dealers. After reviewing the lawsuits and arbitration filings with outside counsel, management believes it has adequate defenses to each of the claims.
Although the alleged damages for all of the above-described suits and arbitration claims would be material to the financial positions of the Company and The Westcap Corporation, a reasonable estimate of actual losses which may result from any of these claims cannot be made at this time. Accordingly, no provision for any liability that may result from these actions has been recognized in the consolidated financial statements.
No other legal proceedings presently pending by or against the Company or its subsidiaries are described, because management believes the outcome of such litigation should not have a material adverse effect on the financial position of the Company or its subsidiaries taken as a whole.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the fourth quarter of 1995.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The principal market on which the common stock of the Company is traded is The Nasdaq Stock Market under the symbol NWLIA. The high and low sales prices for the common stock for each quarter during the last two years are shown in the following table:
(b) Equity Security Holders
The number of stockholders of record on December 31, 1995, was as follows:
(c) Dividends
The Company has never paid cash dividends on its common stock. Payment of dividends is within the discretion of the Company's Board of Directors and will depend on factors such as earnings, capital requirements, and the operating and financial condition of the Company. Presently, the Company's capital requirements are such that it intends to follow a policy of retaining any earnings in order to finance the development of business and to meet increased regulatory requirements for capital.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The following five-year financial summary includes comparative amounts taken from the audited financial statements. The results have been reclassified to reflect The Westcap Corporation as discontinued brokerage operations.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
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 Central and South American countries. These policies are accepted and issued in the United States and accounted for approximately 14% of the Company's total premium revenues, universal life, and investment annuity contract deposits in 1995. The primary products marketed by the Company are its universal life and single and flexible premium annuity products.
In addition to the life insurance business, the Company has a brokerage operations segment through its wholly owned subsidiary, The Westcap Corporation. However, during 1995 The Westcap Corporation closed its sales offices and approved a plan to cease all brokerage operations. Accordingly, the brokerage segment is now reported as discontinued operations throughout this report and in the accompanying financial statements.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Investment Philosophy
The Company's investment philosophy is to maintain a diversified portfolio of investment grade debt and equity securities that provide 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 manages its portfolio, which entails monitoring and reacting to all components which affect changes in the price, value, or credit rating of investments in debt and equity securities.
Investments in debt and equity securities are classified and reported into the following categories: held to maturity, available for sale, and trading. The reporting category chosen for the Company's securities investments depends 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. At December 31, 1995, approximately 26% of the Company's total debt and equity securities, based on fair values, were classified as securities available for sale. These holdings 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.
Securities the Company purchases with the intent to hold to maturity are classified as securities held to maturity. Because the Company 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, securities held to maturity 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. Securities that are held for current resale are classified as trading securities, as the intent is to sell them, producing a trading profit. The Company does not maintain a portfolio of trading securities.
Securities that are not classified as either held to maturity or trading securities are reported as securities available for sale. These securities may be sold if market or other measurement factors change unexpectedly after the securities were acquired. For example, opportunities arise when factors change that allow the Company to improve the performance and credit quality of the investment portfolio by replacing an existing security with an alternative security while still maintaining an appropriate matching of expected maturities of assets and liabilities. Examples of such improvements are as follows: improving the yield earned on invested assets, improving the credit quality, changing the duration of the portfolio, and selling securities in advance of anticipated calls or other prepayments. Securities available for sale are reported in the Company's financial statements at fair value. Any unrealized gains or losses resulting from changes in the fair value of the securities are reflected as a component of stockholders' equity.
As an integral part of its investment philosophy, the Company performs an ongoing process of monitoring the creditworthiness of issuers within the investment portfolio. In addition, review procedures are performed on securities that have had significant declines in fair value. The Company's objective in these circumstances is to determine if the decline in fair value is due to changing market expectations regarding inflation and general interest rates or other factors.
Additional review procedures are performed on those fair value declines which are caused by factors other than market expectations regarding inflation and general interest rates. Specific conditions of the issuer and its ability to comply with all terms of the instrument are considered in the evaluation of the realizable value of the investment. Information reviewed in making this evaluation would include the recent operational results and financial position of the issuer, information about its industry, recent press releases, and other available data. If evidence does not exist to support a realizable value equal to or greater than the carrying value of the investment, such decline in fair value is determined to be other 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 Company's overall conservative investment philosophy is reflected in the allocation of investments of its insurance operations which is detailed below as of December 31, 1995 and 1994. The Company emphasizes debt securities, with smaller holdings in mortgage loans and real estate than industry averages.
Portfolio Analysis
At December 31, 1995, securities held to maturity totaled $1.643 billion, or 62.6% of total invested assets. The fair value of these securities was $1.726 billion, which reflects gross unrealized gains of $83 million. The unrealized gains within this portfolio result from decreases in market interest rates during 1995. The unrealized gains have no effect on the Company's financial statements, as securities held to maturity are recorded at amortized cost.
Securities available for sale totaled $601 million at December 31, 1995, or 22.9% of total invested assets. Equity securities, which are included in securities available for sale, continue to be a small component of the Company's total investment portfolio totaling only $26 million. Securities available for sale are reported in the accompanying financial statements at fair value, with changes in values reported as a separate component of stockholders' equity. Net unrealized gains, net of adjustments for deferred policy acquisition costs and Federal income taxes, on securities in the available for sale category at December 31, 1995, totaled $12 million and are reflected as a component of stockholders' equity.
As described in the notes in the accompanying financial statements, on July 31, 1994, the Company transferred securities with fair values totaling $805 million from securities available for sale to securities held to maturity. On December 29, 1995, the Company made additional transfers totaling $156 million to the held to maturity category from securities available for sale. The lower holdings of securities available for sale significantly reduces the Company's exposure to equity volatility while still providing securities for liquidity and asset/liability management purposes. The transfers to held to maturity in 1994 and 1995 resulted in locking in net unrealized gains which require subsequent amortization and had the following effects on stockholders' equity:
On December 29, 1995, the Company also transferred securities totaling $284 million to the available for sale category from securities held to maturity. This transfer resulted in an increase to stockholder's equity of $4,266,000 as of December 31, 1995, net of effects of deferred policy acquisition costs and taxes. This transfer was made to restructure the Company's portfolio to provide increased flexibility for both portfolio and asset/liability management. Accounting principles typically do not allow transfers from the held to maturity category to the available for sale category except under certain prescribed circumstances. However, in 1995 the Financial Accounting Standards Board permitted a one-time reassessment by companies of their securities classifications and allowed transfers out of the held to maturity category without regard to the prescribed circumstances. The reassessment and any resulting transfers had to be completed by December 31, 1995.
The Company maintains a diversified debt securities portfolio which consists of various types of fixed income securities including primarily U.S. government, public utilities, corporate, and mortgage-backed securities. Investments in mortgage-backed securities include U.S. government and private issue mortgage-backed pass-through securities as well as collateralized mortgage obligations (CMOs). As of December 31, 1995 and 1994, the Company's debt securities portfolio consisted of the following mix of securities based on amortized cost:
The amortized cost and estimated fair values of investments in debt securities at December 31, 1995, 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.
Because expected maturities of securities may differ from contractual maturities due to prepayments and calls, the Company takes steps to manage and minimize such risks. In previous years, the Company has experienced increased calls, particularly in the public utilities portfolio. As a result, the Company has been increasing its holdings in noncallable corporate securities. Corporate holdings as a percentage of the entire portfolio increased from 32.5% in 1994 to 40.3% in 1995.
The Company's holdings of mortgage-backed securities are also subject to prepayment risk, as well as extension risk. Both of these risks are addressed by specific portfolio management strategies. The Company substantially reduced both prepayment and extension risks by investing primarily in collateralized mortgage obligations which have more predictable cash flow patterns than pass-through securities. These securities, known as planned amortization class I (PAC I) CMOs, are designed to amortize in a more predictable manner than other CMO classes or pass-throughs. Using this strategy, the Company can more effectively manage and reduce prepayment and extension risks, thereby helping to maintain the appropriate matching of the Company's assets and liabilities.
PAC I CMOs now account for approximately 90% of the total CMO portfolio as of December 31, 1995. 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 provides information used in selecting securities that fit appropriately within the Company's investment philosophy and asset/liability management parameters. The Company's investment mix between mortgage-backed securities and other fixed income securities helps effectively balance prepayment, extension, and credit risks.
In addition to managing prepayment, extension, and call risks, 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 are summarized as follows:
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, 1995 and 1994, securities with principal balances totaling $3,575,000 and $2,415,000 were in default and on non-accrual status.
The Company's commitment to high-quality investments in debt securities is also reflected by the portfolio average rating of "Aa," which is high quality. Allocation of investments in debt securities classified in accordance with the highest rating by a nationally recognized statistical rating organization as of December 31, 1995, is provided below. If securities were not rated by one of these organizations, the equivalent classification as assigned by the National Association of Insurance Commissioners was used.
MORTGAGE LOANS AND REAL ESTATE
Investment Philosophy
In general, the Company seeks loans on high quality, income producing properties such as shopping centers, freestanding retail 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 seeks to minimize the credit and default risk in its mortgage loan portfolio 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 lessee, in which case the Company approves the loan based on the credit strength of the lessee. This approach, implemented in 1991, has significantly improved the quality of the Company's mortgage loan portfolio and reduced defaults.
The Company's level of mortgage loan originations declined in 1995 to approximately $18 million. This is in comparison to originations totaling $30 million and $33 million in 1994 and 1993, respectively. Market conditions in 1995 included a decreasing interest rate environment and increasing competition. As a result, mortgage loan originations declined in 1995, as the Company has maintained its strict underwriting policies and its commitment to quality loans.
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 is also currently participating 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. The Company has no current plans to significantly increase its investments in real estate in the foreseeable future.
Portfolio Analysis
The Company held net investments in mortgage loans totaling $191,674,000 and $189,632,000, or 7.3% and 8.1% of total invested assets, at December 31, 1995 and 1994. 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 United States and by property type as of December 31, 1995 and 1994, was as follows:
As of December 31, 1995, the allowance for possible losses on mortgage loans was $5,668,000. Additions to the allowance totaling $307,000 were recognized as realized losses on investments in the Company's 1994 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, 1995 and 1994, the Company had approximately $202,000 and $2,292,000, 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 $13,355,000 and $13,123,000 at December 31, 1995 and 1994, respectively. For the years ended December 31, 1995 and 1994, the reductions in interest income due to non-accrual and restructured mortgage loans were not significant.
The contractual maturities of mortgage loans at December 31, 1995, are as follows:
The Company owns real estate that was acquired through foreclosure and through direct investment totaling approximately $19,066,000 and $17,766,000 at December 31, 1995 and 1994, 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 $404,000 for the year ended December 31, 1995, and operating losses of approximately $62,000 for the year ended December 31, 1994. 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 $882,000 and $318,000 for the years ended December 31, 1995 and 1994, respectively. The Company makes repairs and capital improvements to keep the properties in good condition and will continue this maintenance as needed.
RESULTS OF OPERATIONS
Summary of Consolidated Operations
A summary of operating results, net of taxes, for the years ended December 31, 1995, 1994, and 1993 is provided below:
Significant changes and fluctuations in income and expense items between years are described in detail for insurance and brokerage operations as follows:
Insurance Operations
Insurance Operations Net Earnings: Earnings from insurance operations for the year ended December 31, 1995, were $37,203,000 compared to $36,115,000 for 1994. However, 1995 earnings include a $5.7 million tax benefit resulting from the Company's subsidiary brokerage losses. Earnings for 1994 include a comparable $2.9 million tax benefit. The tax benefits were recognized in accordance with the Company's tax allocation agreement with its subsidiaries. Excluding the tax benefits, earnings from insurance operations for 1995 were down $1.7 million from 1994 due primarily to higher life insurance benefit claims and other policy and contract related expenses. The higher claims and policy related expenses were partially offset by lower insurance operating expenses relating to state guaranty association assessments.
Life and Annuity Premiums: This revenue category represents the premiums on traditional type products. However, sales in most of the Company's markets currently 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, 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 of policy charges for the cost of insurance, policy administration fees, and surrender charges assessed during the period. These revenues decreased from $67.8 million in 1993 to $64.7 million in 1994 and then increased to $69.8 million in 1995. 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. However, surrender charge revenues were significantly higher in 1993 due to increased policy surrenders. This accounts for the majority of the decrease in universal life and investment annuity contract revenues in 1994. Overall revenues were up in 1995 due to increases in cost of insurance and other related revenues as previously described, even though surrender charge revenues were not up significantly from 1994 and remained substantially below 1993 levels.
Actual universal life and investment annuity deposits collected for the years ended December 31, 1995, 1994, and 1993 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. 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, which accounts for the majority of the deposits for investment annuities in 1993. The vast majority of the two-tier annuities were sold by a single independent marketing organization.
Subsequent to discontinuing the two-tier annuity sales, the Company set goals to not only develop new annuity products to replace the lost two-tier production, but to diversify and strengthen distribution channels to avoid dependence on its primary independent marketing organization. The Company achieved this by developing new annuity products in 1994 and by contracting new marketing organizations with extensive experience, financial resources, and success in marketing annuities. The combination of new products, primarily a single premium deferred annuity, and new marketing organizations started to produce results in the latter half of 1994 as annuity production began to increase significantly. This increased production has continued into 1995 with annuity deposits increasing from $158 million in 1994 to $310 million in 1995, reflecting a 97% increase.
The majority of the Company's universal life insurance production is from the international market, primarily Central and South American countries. The Company has seen increased competition in the Central and South American market in recent years causing production growth to slow. However, the Company has been accepting policies from foreign nationals for almost thirty years and has developed strong relationships with carefully selected brokers in the foreign countries. This experience and strong broker relations have enabled the Company to meet the increased competition with new product enhancements and marketing efforts. Such efforts have resulted in increased universal life production once again in 1995. Deposits for universal life for both international and domestic markets are up 5.7% in 1995 from $64.8 million in 1994 to $68.5 million in 1995.
Net Investment Income: During 1995, net investment income increased 6.2% from 1994 while total invested assets increased 12.0% for the same period. The increase in invested assets was primarily due to the increased annuity production as previously described. The growth in net investment income lagged the growth in invested assets for several reasons. Interest rates declined significantly throughout 1995, resulting in investments in lower yielding securities. Also, net investment income was up significantly in 1994 due to yield and amortization adjustments on mortgage-backed securities as more fully described below. There were no significant corresponding adjustments in 1995.
Net investment income increased 5.4% from $180.3 million in 1993 to $190.0 million in 1994. Net investment income was up primarily due to yield and amortization adjustments on mortgage-backed securities and increases in invested assets. The yield and amortization adjustments were made in accordance with Statement of Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." The adjustments are made to reflect changes in mortgage-backed securities prepayment levels, caused by changes in market interest rates, which affect average lives, yields, and amortization periods of the securities.
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 had 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 in 1993. The Company also received proceeds from a settlement totaling $955,000 for recovery of damages incurred related to this lawsuit. These settlement proceeds have been reflected as other income in 1994.
Realized Gains and Losses on Investments: The Company recorded realized losses totaling $2.4 million in 1995 compared to realized gains of $1.6 million and $3.2 million in 1994 and 1993, respectively. The losses in 1995 were primarily from sales of investments in debt securities, the majority of which were from the Company's remaining investments in principal exchange rate linked securities. The Company made the decision to realize these losses to obtain tax benefits related to the losses which were scheduled to expire on December 31, 1995. The gains and losses in 1995, 1994, and 1993 are net of write-downs on real estate and mortgage loans totaling $882,000, $625,000, and $3,360,000, respectively. The 1993 gains are also net of write-downs for permanent impairments on investments in debt securities totaling $6,329,000.
Life and Other Policy Benefits: Expenses in 1995 and 1993 were significantly higher at $39.8 million and $36.3 million than 1994 expenses which totaled only $32.1 million. The significant fluctuation in expenses is due to higher life insurance benefit claims and high policy surrenders on traditional insurance products in both 1995 and 1993. Life insurance benefit claims, which accounted for the majority of the fluctuation, totaled $24.6 million, $19.1 million, and $21.3 million in 1995, 1994, and 1993, respectively. The 1995 and 1993 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. Years 1995 and 1993 reflect such periods, 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 more favorable claims experience.
Amortization of Deferred Policy Acquisition Costs: This expense item represents the amortization of the costs of acquiring or producing new business, which consists primarily of agents' commissions. The majority of such costs are amortized in direct relation to the anticipated future gross profits of the applicable blocks of business. Amortization is also impacted by the level of policy surrenders. Amortization for 1995, 1994, and 1993 has been relatively consistent at $33.7 million, $32.1 million, and $33.2 million, respectively. The higher amortization in 1995 and 1993 correlates to increased policy surrenders in those years.
Universal Life and Investment Annuity Contract Interest: Prior to 1995, interest expense declined steadily as amounts totaled $129.1 million, $130.9 million, and $135.8 million for 1994, 1993, and 1992, respectively. This decline was due to the lowering of credited interest rates on most universal life and investment annuity products throughout these years. Additional interest costs related to increasing business was not significant, as the policy liabilities remained relatively constant over those years. However, in the latter part of 1994, annuity production began to increase significantly, which continued through 1995. This increase in annuity deposits resulted in corresponding increases in policy liabilities and significantly higher interest costs in 1995. Also, the Company's new annuity products typically credit significantly higher interest rates in the first policy year, again resulting in higher 1995 interest costs.
The Company closely monitors its credited interest 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 $27.1 million, $29.4 million, and $29.0 million for 1995, 1994, and 1993, respectively. Although these expenses are relatively comparable between years, these amounts include significant expenses for guaranty association assessments.
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 insolvent insurance companies. Most states allow premium tax credits for all or a portion of such assessments, thereby allowing potential recovery of these payments over a period of years. However, several states do not allow such credits. In December, 1995 and 1994, the National Organization of Life and Health Insurance Guaranty Associations published revised assessment data on nationwide life and health insurance company insolvencies. Based on this information, the Company revised its estimates for assessment liabilities relating to such insolvencies. The Company will continue to monitor and revise its estimates for assessments as additional information becomes available, which could result in additional expense charges. Other insurance operating expenses related to state guaranty association assessments totaled $2,371,000, $4,869,000, and $4,583,000 for the years ended December 31, 1995, 1994, and 1993, respectively. The lower assessment expenses in 1995 are the primary reason for the lower overall insurance operating expenses for the same period.
Discontinued Brokerage Operations
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 plan to cease brokerage operations, 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. As a result of the plan and 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.
In previous years, Westcap has contributed significantly to the consolidated earnings of National Western Life Insurance Company. However, more recently, brokerage operations have produced losses due to the reasons cited above. A summary of net earnings and losses from brokerage operations since 1992 is provided below.
Losses from the discontinued brokerage operations have been reflected separately from continuing operations of the Company in the accompanying consolidated financial statements. The 1995 losses disclosed above include estimated future operating losses as well as estimated costs to cease brokerage operations totaling $6,381,000 and have resulted in the complete write-off of the Company's investment in Westcap on a consolidated basis.
Consolidated Federal Income Taxes
Federal Income Taxes: Federal income taxes for 1995 on earnings from continuing operations reflect an effective tax rate of 23%. The 1995 taxes are lower than the expected statutory rate of 35% due to a $5.7 million tax benefit resulting from the Company's subsidiary brokerage losses. Correspondingly, losses on discontinued operations for 1995 totaling $16,350,000 do not include any tax benefits relating to the brokerage subsidiary. This tax reporting treatment is in accordance with the Company's tax allocation agreement with its subsidiaries. However, on a consolidated basis, the Federal income taxes reflect the expected effective tax rate of 35% for 1995.
Federal income taxes for 1994 on earnings from continuing operations also 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 Federal corporate tax rate was increased from 34% to 35% beginning in 1993. The total increase in 1993 Federal income taxes resulting from the change in rates was approximately $1,018,000.
Cumulative Effect of Change in Accounting for Income Taxes: In February, 1992, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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 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.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The liquidity requirements of the Company are met primarily by funds provided from operations. Premium 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. Primary sources of liquidity to meet cash needs are the Company's securities available for sale portfolio, net cash provided by operations, and bank line of credit. The Company's investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs. The Company may also borrow up to $60 million on its bank line of credit for short-term cash needs.
A primary liquidity concern for the Company's life insurance operations is the risk of early policyholder withdrawals. Consequently, the Company closely evaluates and manages the risk of early surrenders or withdrawals. The Company includes provisions within annuity and universal life insurance policies, such as surrender charges, that help limit early withdrawals. The Company also prepares cash flow projections and performs cash flow tests under various market interest rate scenarios to assist in evaluating liquidity needs and adequacy. The Company currently expects available liquidity sources and future cash flows to be adequate to meet the demand for funds.
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 $99 million, $117 million, and $136 million in 1995, 1994, and 1993, respectively. Lower earnings from brokerage operations is the primary reason for the decrease in cash flows in 1995 and 1994. Additionally, net cash flows from the Company's deposit product operations, which includes universal life and investment annuity products, totaled $99 million in 1995. These operations incurred net cash outflows in 1994 and 1993 totaling $17 million and $99 million, respectively. The increase in cash flows in 1995 is due to increased annuity production as previously described in "Results of Operations." The Company expects this increased annuity production will continue through 1996, thereby enhancing cash flows.
The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $69 million, $133 million, and $486 million in 1995, 1994, and 1993, respectively. The Company again expects significant cash flows from these sources in 1996 at levels similar to 1995 and 1994.
Capital Resources
The Company relies on stockholders' equity for its capital resources, as there has been no long-term debt outstanding in 1995 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 1996.
Stockholders' equity totaled $312 million at December 31, 1995, reflecting an increase of $37 million from 1994. The increase in capital is primarily from net earnings of $19 million and the change in net unrealized gains on investment securities totaling $17 million in 1995. The decrease in market interest rates during 1995 resulted in the significant increase in unrealized gains. Book value per share at December 31, 1995, was $89.36, reflecting a 13% increase for the year.
CHANGES IN ACCOUNTING PRINCIPLES
In January, 1995, the FASB issued SFAS No. 120, "Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts." Also, the AICPA has established accounting for certain participating life insurance contracts of mutual life insurance enterprises in its Statement of Position (SOP) 95-1, "Accounting for Certain Insurance Activities of Mutual Life Insurance Enterprises," that should be applied to those contracts that meet the conditions in this statement. This statement also permits stock life insurance enterprises to apply the provisions of the SOP to participating life insurance contracts that meet certain conditions. SFAS No. 120 is effective for financial statements issued for fiscal years beginning after December 15, 1995. Due to the Company's small level of participating life insurance contracts, this statement will have no significant effects on the Company's financial statements.
The FASB issued SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," in March, 1995. The statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Measurement of an impairment loss for long-lived assets and identifiable intangibles that an entity expects to hold and use should be based on the fair value of the asset. The statement also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less costs to sell.
The Company's real estate investments are the only significant assets that will be subject to this statement. As the Company already records foreclosed real estate at the lower of cost or fair value less estimated costs to sell, the implementation of this statement will not have a significant effect on the Company's financial statements. The statement will be implemented in the first quarter of 1996.
In October, 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." This statement establishes financial accounting and reporting standards for stock-based employee compensation plans. It defines a fair value based method of accounting for employee stock options or similar equity instruments. However, it also allows an entity to continue to measure compensation cost for plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to continue applying the accounting methods in Opinion 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in SFAS No. 123 had been applied.
Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. For stock options, fair value is determined using an option pricing model that takes into account various information and assumptions regarding the Company's stock and options. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock.
The Company anticipates that it will continue to apply the accounting methods prescribed by Opinion 25 for its existing stock and incentive plan. Therefore, the implementation of this statement will not affect the Company's results of operations. However, as required by this statement, disclosure information will be provided in the Company' financial statements reflecting costs that would have been recorded under the fair value based method. The statement will be implemented in 1996.
CURRENT REGULATORY ISSUES
Actuarial Guideline 33
In December, 1995, the National Association of Insurance Commissioners adopted for statutory accounting practices Actuarial Guideline 33, previously referred to as Actuarial Guideline GGG. This reserve guideline, which has not been adopted by any states at this time, helps define the minimum reserves for policies with multiple benefit streams, such as two-tier annuities.
As of December 31, 1995, the Company's statutory reserving practices for two-tier annuities follow an agreement reached in 1993 with its state of domicile, Colorado. This agreement requires the Company to phase-in a different reserve basis by the end of 1996. The agreement states the acceptable difference between the target reserve and the statutory reserve held by the Company will meet the following schedule:
The Company has met the above scheduled difference for December 31, 1995. However, in 1995, the Company entered into discussions with the Colorado Division of Insurance (the Division) to implement Actuarial Guideline 33 and to phase it in over a three-year period as allowed by the guideline. In January, 1996, the Division approved the proposal for this three-year phase-in. The effect on the Company's statutory financial statements will not be significant, since the previous agreement with the Division was similar to the final guideline. Also, the guideline does not affect the Company's policy reserves which are prepared under generally accepted accounting principles as reported in the accompanying consolidated financial statements.
Risk Based Capital Requirements
In 1993, the National Association of Insurance Commissioners (NAIC) established new risk-based capital (RBC) requirements to help state regulators monitor the financial strength and stability of life insurers by identifying those companies that may be inadequately capitalized. Under the NAIC's requirements, each insurer must maintain its total capital above a calculated threshold or take corrective measures to achieve the threshold. The threshold of adequate capital is based on a formula that takes into account the amount of risk each company faces on its products and investments. The RBC formula takes into consideration four major areas of risk which are: (i) asset risk which primarily focuses on the quality of investments; (ii) insurance risk which encompasses mortality and morbidity risk; (iii) interest rate risk which involves asset/liability matching issues; and (iv) other business risks.
There continues to be some public pressure for insurance companies to publish their RBC ratios or levels. However, the legality of publishing such information is uncertain. The American Institute of Certified Public Accountants (AICPA) released an exposure draft of a Statement of Position (SOP) which included requirements that insurance companies disclose certain information about their RBC levels. This requirement was deleted from the final SOP version due to questions raised about the legality of such disclosures. Instead, the AICPA decided to consider a separate SOP at a later date on RBC disclosures, after the legal issues are resolved. Due to these unanswered legal issues, 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.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is reported in Attachment A beginning on page ____. See Index to Financial Statements and Schedules on page ___ for a list of financial information included in Attachment A.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in auditors or disagreements with auditors which are reportable pursuant to Item 304 of Regulation S-K.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) Identification of Directors
The following information as of January 31, 1996, is furnished with respect to each director. All terms expire in June of 1996.
Family relationships among the directors are: Mr. Robert Moody and Mr. McLeod are brothers-in-law and Mr. Robert Moody is the father of Ms. Frances Moody, Mr. Ross Moody, and Mr. Russell Moody.
(b) Identification of Executive Officers
The following is a list of the Company's executive officers, their ages, and their positions and offices as of January 31, 1996.
(c) Identification of Certain Significant Employees
None.
(d) Family Relationships
There are no family relationships among the officers listed except that Mr. Robert Moody is the father of Mr. Ross Moody. There are no arrangements or understandings pursuant to which any officer was elected. All officers hold office for one year and until their successors are elected and qualified, unless otherwise specified by the Board of Directors.
(e) Business Experience
All of the executive officers listed above have served in various executive capacities with the Company for more than five years, with the exception of the following:
Mr. Ross Moody was a corporate financial analyst with Drexel Burnham Lambert from 1986 to 1987 and was a graduate student at the Harvard Business School from 1987 to 1989. He also served as Director of Administrative Services for American National Insurance Company from 1989 to 1991.
Mr. Facey was Superintendent, Marketing, for Northern Life Assurance Company of Canada from 1973-1985. From 1985-1987, he was Assistant Vice President, Marketing and Actuarial Services for Gerling Global Life Insurance Company in Toronto, Canada, and from 1987 until March, 1992 was Director of Actuarial Services for Variable Annuity Life Insurance Company of Houston, Texas.
Mr. Pickering was Agency Vice President of the Western Division with Integon Life Insurance Company from 1981 to 1987. From 1987 to 1990, he served as Regional Vice President of United Pacific Life Insurance Company. In 1990, he began work for Conseco/Western National Life Insurance Company as Vice President Marketing until May, 1994.
Ms. Scheuer was a Management Consultant for Deloitte, Haskins & Sells from 1983-1984. From 1984-1988, she was Senior Financial Analyst with the Texas Public Utility Commission. From 1988 until August, 1992, she was the Fixed Income Portfolio Manager for the Texas Permanent School Fund.
Mr. Antonowich was Regional Vice President of Security Life of Denver Insurance Company from 1982 to 1991. From 1991 to December, 1993, he was Vice President, Marketing, of Guarantee Mutual Life Company, and from 1994 to June, 1995, he was Senior Vice President, Sales, of Lamar Life Insurance Company.
Mr. Kasch was Staff Accountant with Arthur Young & Company from 1984-1985. From 1985 until January, 1991, he was Senior Accountant and Audit Manager for KPMG Peat Marwick.
Mr. Payne was staff attorney with the Kansas Insurance Department from 1972 to 1975. From 1975-1983, he was Vice President, Secretary & General Counsel for Lone Star Life Insurance Company; from 1983-1990, he was Vice President, Secretary and General Counsel for Reserve Life Insurance Company; from 1990-1991 he was President and CEO of Great Republic Insurance Company; and from 1991-1993 he was Vice President - Government Relations for United American Insurance Company. From 1993 until October, 1994, he was in private practice in Dallas, Texas.
Mr. Steger was Assistant Vice President-Chief Underwriter of Tower Life, San Antonio, Texas from 1971 until December, 1991.
(f) Involvement in Certain Legal Proceedings
There are no events pending, or during the last five years, under any bankruptcy act, criminal proceedings, judgments, or injunctions material to the evaluation of the ability and integrity of any director or executive officer except as described below:
In January, 1994, a United States District Court Judge vacated and withdrew the judgment which had been entered in Case No. H-86-4269, W. Steve Smith, Trustee vs. Shearn Moody, Jr., et al, United States District Court for the Southern District of Texas. The Judge also dismissed the case with prejudice. The judgment had been entered against Robert L. Moody and The Moody National Bank of Galveston, of which he was Chairman of the Board. Robert L. Moody is also Chairman of the Board of National Western Life Insurance Company. The case arose out of complex bankruptcy and related proceedings involving Robert L. Moody's brother, Shearn Moody, Jr. Subsequently, a global settlement of Shearn Moody, Jr.'s bankruptcy and related legal proceedings was reached and executed. As part of the global settlement, the Bankruptcy Trustee recommended, and other interested parties agreed not to oppose or object to, the Judge's vacating and withdrawing the judgment and dismissing the case with prejudice. This case and settlement did not involve the Company and had no effect on its financial statements.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
(b) Summary Compensation Table
Notes to Summary Compensation Table:
(A) Salary includes directors' fees from National Western Life Insurance Company and its subsidiaries.
(B) Bonuses include the following:
(1) Stock Bonus Plan - During 1993 the Company implemented a one-time stock bonus plan for all officers of the Company. Class A common stock restricted shares totaling 13,496 were granted to officers based on their individual performance and contribution to the Company. The shares are subject to vesting requirements as reflected in the following schedule:
The resulting compensation from the vesting of shares has been included in the applicable year in the bonus column. All of the 13,496 shares that were granted have been issued and are outstanding as of December 31, 1995.
(2) Westcap Bonuses - Ross R. Moody and Charles D. Milos, Jr., are directors of the Company's brokerage subsidiary, The Westcap Corporation. The directors received bonuses for such services in 1993.
(3) Other Bonuses - Employment and performance related bonuses are occasionally granted. Arthur W. Pickering received such bonuses in 1995 and 1994 and Robert L. Busby, III received such bonuses in 1994.
(C) Restricted stock awards include common stock shares that were granted as part of the stock bonus plan described in (1) above but had not vested as of December 31, 1993. Restricted stock holdings at December 31, 1993, for all officers totaled 6,666 shares with a market value of $296,637. Restricted stock holdings for the named executive officers were as follows at December 31, 1993:
Of the remaining 6,666 unvested shares at December 31, 1993, 3,146 and 3,520 of such shares vested on December 31, 1995 and 1994, respectively, and are reflected as bonuses in those years.
(D) Represents stock options granted under the National Western Life Insurance Company 1995 Stock and Incentive Plan.
(E) All other compensation includes primarily employer contributions made to the Company's 401(k) Plan and Non-Qualified Deferred Compensation Plan on behalf of the employee.
(c) Option/SAR Grants Table
During 1995 the Company adopted the National Western Life Insurance Company 1995 Stock and Incentive Plan (the Plan). The Plan is effective as of April 21, 1995, and will terminate on April 20, 2005, unless terminated earlier by the Board of Directors. The number of shares of Class A, $1.00 par value, common stock which may be issued under the Plan, or as to which stock appreciation rights or other awards may be granted, may not exceed 300,000. These shares may be authorized and unissued shares or treasury shares.
All of the employees of the Company and its subsidiaries are eligible to participate in the Plan. In addition, directors of the Company, other than Compensation and Stock Option Committee members, are eligible for restricted stock awards, incentive awards, and performance awards. Non-employee directors, including members of the Compensation and Stock Option Committee, are eligible for non-discretionary stock options. On May 19, 1995, the Committee approved the issuance of 52,500 non-qualified stock options to selected officers of the Company. The Committee also granted 7,000 non-qualified, non-discretionary stock options to non-employee Company directors. The stock options begin to vest following three full years of service to the Company after date of grant, with 20% of the options to vest at the beginning of the fourth year of service, and with 20% thereof to vest at the beginning of each of the next four years of service. The exercise price of the stock options was set at the fair market value of the common stock on the date of grant, May 19, 1995, which was $38.125 per share.
Stock options granted to the named executive officers during 1995 are as follows:
(d) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table
None.
(e) Long-Term Incentive Plan Awards Table
None.
(f) Defined Benefit or Actuarial Plan Disclosure
The Company currently has two employee defined benefit plans for the benefit of its employees and officers. A brief description and formulas by which benefits are determined for each of the plans are detailed as follows:
Qualified Defined Benefit Plan - This plan covers all full-time employees and officers of the Company and provides benefits based on the participants' years of service and compensation. The Company makes annual contributions to the plan that comply with the minimum funding provisions of the Employee Retirement Income Security Act.
Annual pension benefits for those employees who became eligible participants prior to January 1, 1991, are calculated as the sum of the following:
(1) 50% of the participant's final 5-year average annual compensation at December 31, 1990, less 50% of their primary social security benefit determined at December 31, 1990; this net amount is then prorated for less than 15 years of benefit service at normal retirement date. This result is multiplied by a fraction which is the participant's years of benefit service at December 31, 1990, divided by the participant's years of benefit service at normal retirement date.
(2) 1.5% of the participant's compensation earned during each year of benefit service after December 31, 1990.
Annual pension benefits for those employees who become eligible participants on or subsequent to January 1, 1991, are calculated as 1.5% of their compensation earned during each year of benefit service.
Non-Qualified Defined Benefit Plan - This plan covers those officers in the position of senior vice president or above and other employees who have been designated by the President of the Company as being in the class of persons who are eligible to participate in the plan. This plan also provides benefits based on the participants' years of service and compensation. However, no minimum funding standards are required.
The benefit to be paid pursuant to this Plan to a Participant who retires at his normal retirement date shall be equal to (a) less (b) less (c) where:
(a) is the benefit which would have been payable at the participant's normal retirement date under the terms of the Qualified Defined Benefit Plan as of December 31, 1990, as if that Plan had continued without change, and,
(b) is the benefit which actually becomes payable under the terms of the Qualified Defined Benefit Plan at the participant's normal retirement date, and,
(c) is the actuarially equivalent life annuity which may be provided by an accumulation of 2% of the participant's compensation for each year of service on or after January 1, 1991, accumulated at an assumed interest rate of 8.5% to his normal retirement date.
In no event will the benefit be greater than the benefit which would have been payable at normal retirement date under the terms of the Qualified Defined Benefit Plan as of December 31, 1990, as if that plan had continued without change.
The estimated annual benefits payable to the named executive officers upon retirement, at normal retirement age, for the Company's defined benefit plans are as follows:
(g) Compensation of Directors
All directors of the Company currently receive $12,000 a year and $500 for each board meeting attended. They are also reimbursed for actual travel expenses incurred in performing services as directors. An additional $500 is paid for each committee meeting attended. However, a director attending multiple meetings on the same day receives only one meeting fee. The amounts paid pursuant to these arrangements are included in the summary compensation table under Item 11(b). The directors and their dependents are also insured under the Company's group insurance program.
During 1995 the Company adopted the National Western Life Insurance Company 1995 Stock and Incentive Plan ( the Plan), as more fully described in Item 11(c). Directors of the Company, other than Compensation and Stock Option Committee members, are eligible for restricted stock awards, incentive awards, and performance awards. Non-employee directors, including members of the Compensation and Stock Option Committee, are eligible for non-discretionary stock options. On May 19, 1995, the Committee approved the issuance of 7,000 non-qualified, non-discretionary stock options to non-employee Company directors, with each such director receiving 1,000 stock options. Directors who are also employees of the Company were granted stock options as disclosed in the table in Item 11(c).
Directors of the Company's subsidiary, NWL Investments, Inc., receive $250 annually. Directors' fees for the Company's subsidiary, The Westcap Corporation, have been suspended indefinitely. No fees were paid in 1995.
(h) Employment Contracts and Termination of Employment and Change-in-Control Arrangements
None.
(i) Report on Repricing of Options/SARs
None.
(j) Compensation Committee Interlocks and Insider Participation
The Company's Board of Directors determines and approves executive compensation. Mr. Robert Moody, Mr. Ross Moody, and Mr. Milos serve as directors and also serve as officers and employees of the Company. The Donner Company, 100% owned by Mr. Dummer, who is a director of National Western Life Insurance Company, was paid $60,474 in 1995 pursuant to an agreement between The Donner Company and a reinsurance intermediary relating to a reinsurance contract between the Company and certain life insurance reinsurers. No compensation committee interlocks exist with other unaffiliated companies.
(k) Board Compensation Committee Report on Executive Compensation
The Company's Board of Directors performs the functions of an executive compensation committee. The Board is responsible for developing and administering the policies that determine executive compensation.
Executive compensation, including that of the chief executive officer, is comprised primarily of a base salary. The salary is adjusted annually based on a performance review of the individual as well as the performance of the Company as a whole. The president and chief executive officer make recommendations annually to the Board of Directors regarding such salary adjustments. The review encompasses the following factors:
- - contributions to the Company's short and long-term strategic goals, including financial goals such as Company revenues and earnings
- - achievement of specific goals within the individual's realm of responsibility
- - development of management and employees within the Company
- - performance of leadership within the industry
The policies discussed above are reviewed periodically by the Board of Directors to ensure the support of the Company's overall business strategy and to attract and retain key executives.
A separate Compensation and Stock Option Committee, comprised of outside, independent directors, determines compensation for the three highest paid Company executives. The committee also performs various projects relating to executive compensaion at the request of the Board of Directors. Those directors serving on the committee include the following:
Arthur O. Dummer Harry L. Edwards E. J. Pederson
The policies used by the Compensation and Stock Option Committee in determining compensation are similar to those described above for all other Company executives.
(1) Performance Graph
The following graph compares the change in the Company's cumulative total stockholder return on its common stock with the NASDAQ - U.S. Companies Index and the NASDAQ Insurance Stock Index. The graph assumes that the value of the investment in the Company's common stock and each index was $100 at December 31, 1990, and that all dividends were reinvested.
For the purpose of this electronic filing, the graph has been filed separately under the Securities and Exchange Commission filing Form SE dated March 29, 1996. The coordinates of the graph are as follows:
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Set forth below is certain financial information concerning persons who are known by the Company to own beneficially more than 5% of any class of the Company's common stock on December 31, 1995:
(b) Security Ownership of Management
The following table sets forth as of December 31, 1995, information concerning the beneficial ownership of the Company's common stock by all directors, named officers, and all directors and officers of the Company as a group:
(c) Changes in Control
None.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with Management and Others
The Donner Company, 100% owned by Mr. Arthur Dummer, who is a director of National Western Life Insurance Company, was paid $60,474 in 1995 pursuant to an agreement between The Donner Company and a reinsurance intermediary relating to a reinsurance contract between the Company and certain life insurance reinsurers.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management
Seal Fleet, Inc.
The Company holds a corporate note for $500,000 which was originally issued by Oceanographic and Seismic Services, Inc. (Oceanographic). Oceanographic was later merged into Seal Fleet, Inc. The original note was renewed in 1976 and is a 20-year debenture due in August, 1996, with interest of 8% annually.
The Company also holds a corporate note for $2,168,232 issued in 1990 by Seal (GP), Inc., which is a subsidiary of Seal Fleet, Inc. The note is due in June, 2000, with interest of 12% payable monthly and is secured by first preferred ship mortgages. The note was modified during 1992 reducing the interest rate from 12% to 10%. However, the additional 2% interest will be payable upon maturity of the note.
Seal Fleet, Inc., has two classes of stock outstanding, Class A and B. The Class B shares elect a majority of the Board of Directors of Seal Fleet, Inc. All of the Class B shares and 212,655 (9%) of the Class A shares of Seal Fleet, Inc., are owned by the Three R Trust, Galveston, Texas. This Trust was created by Robert L. Moody as Settlor for the benefit of his children. Three of his children, Mr. Ross R. Moody, Mr. Russell S. Moody, and Ms. Frances A. Moody are beneficiaries of the Three R Trust and are also directors of National Western Life Insurance Company. The Trustee of the Trust is Irwin M. Herz, Jr., of Galveston, Texas. Mr. Herz personally owns 10,932 (.5%) shares of the Class A stock of Seal Fleet, Inc. Mr. Herz is a lawyer representing the Company, Mr. Moody, and several of Mr. Moody's affiliated interests. Through its Trustee, Mr. Herz, the Three R Trust is considered to be the controlling stockholder of Seal Fleet, Inc. Louis Pauls, Jr., and Russell S. Moody, directors of the Company, are also directors of Seal Fleet, Inc.
Seal Fleet, Inc., and its subsidiaries own, operate, or lease supply and equipment boats for off-shore oil and gas well drilling rigs. The consolidated audited financial statements of Seal Fleet, Inc., and its subsidiaries for the fiscal year ending December 31, 1995, reflected total assets of $10,394,000, net losses of $116,000, and negative stockholders' equity of $3,621,000.
Gal-Tex Hotel Corporation
The Company also holds three mortgage loans issued to Gal-Tex Hotel Corporation, which is owned 50% by the Libbie Shearn Moody Trust and 50% by The Moody Foundation. The first mortgage loan in the amount of $3,040,000 was issued in 1988, will mature in May of 1998, and pays interest of 10.5%. The loan is secured by property consisting of a hotel located in Kingsport, Tennessee. The second mortgage loan in the amount of $8,796,000 was issued in 1994, will mature in October of 2004, and pays interest of 8.75%. The loan is secured by property consisting of a hotel located in Houston, Texas. The third mortgage loan in the amount of $2,000,000 was issued in 1995, will mature in January of 2006, and pays interest of 9%. The loan is secured by property consisting of a hotel located in Woodstock, Virginia.
The Company is the beneficial owner of a life interest (1/8 share), previously owned by Mr. Robert L. Moody, in the trust estate of Libbie Shearn Moody. The trustee of this estate is The Moody National Bank of Galveston. The Moody Foundation is a private charitable foundation governed by a Board of Trustees of three members. Mr. Robert L. Moody and Mr. Ross R. Moody are members of the Board of Trustees.
(d) Transactions with Promoters
None.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Listing of Financial Statements
See Attachment A, Index to Financial Statements and Schedules, on page ______ for a list of financial statements included in this report.
(a) 2. Listing of Financial Statement Schedules
See Attachment A, Index to Financial Statements and Schedules, on page ____ for a list of financial statement schedules included in this report.
All other schedules are omitted because they are not applicable, not required or because the information required by the schedule is included elsewhere in the financial statements or notes.
(a) 3. Listing of Exhibits
Exhibit 3(a) - Restated Articles of Incorporation of National Western Life Insurance Company dated April 10, 1968 (filed on page _____ of this report).
Exhibit 3(b) - Amendment to the Articles of Incorporation of National Western Life Insurance Company dated July 29, 1971 (filed on page ____ of this report).
Exhibit 3(c) - Amendment to the Articles of Incorporation of National Western Life Insurance Company dated May 10, 1976 (filed on page ____ of this report).
Exhibit 3(d) - Amendment to the Articles of Incorporation of National Western Life Insurance Company dated April 28, 1978 (filed on page ____ of this report).
Exhibit 3(e) - Amendment to the Articles of Incorporation of National Western Life Insurance Company dated May 1, 1979 (filed on page ____ of this report).
Exhibit 3(f) - Bylaws of National Western Life Insurance Company as amended through April 24, 1987 (filed on page ____ of this report).
Exhibit 10(a) - National Western Life Insurance Company Non-Qualified Defined Benefit Plan dated July 26, 1991 (filed on page ____ of this report).
Exhibit 10(b) - National Western Life Insurance Company Officers' Stock Bonus Plan effective December 31, 1992 (incorporated by reference to the Company's Form S-8 registration dated January 27, 1994).
Exhibit 10(c) - National Western Life Insurance Company Non-Qualified Deferred Compensation Plan, as amended and restated, dated March 27, 1995 (filed on Page _____ of this report).
Exhibit 10(d) - First Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective July 1, 1995 (filed on page _____ of this report).
Exhibit 10(e) - National Western Life Insurance Company 1995 Stock and Incentive Plan (filed on page _____ of this report).
Exhibit 21 - Subsidiaries of the Registrant (filed on page _____ of this report).
Exhibit 27 - Financial Data Schedule (filed electronically pursuant to Regulation S-K).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1995.
(c) Exhibits
Exhibits required by Regulation S-K are listed as to location in the Listing of Exhibits in Item 14(a)3 above. Exhibits not referred to have been omitted as inapplicable or not required.
(d) Financial Statement Schedules
The financial statement schedules required by Regulation S-K are listed as to location in Attachment A, Index to Financial Statements and Schedules, on page ____ of this report.
ATTACHMENT A
Index to Financial Statements and Schedules
Page
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1995 and 1994
Consolidated Statements of Earnings for the years ended December 31, 1995, 1994, and 1993
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1994, and 1993
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994, and 1993
Notes to Consolidated Financial Statements
Schedule I - Summary of Investments Other Than Investments in Related Parties, December 31, 1995
Schedule V - Valuation and Qualifying Accounts for the years ended December 31, 1995, 1994, and 1993
All other schedules are omitted because they are not applicable, not required or because the information required by the schedule is included elsewhere in the financial statements or notes.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders National Western Life Insurance Company Austin, Texas
We have audited the consolidated financial statements of National Western Life Insurance Company and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Western Life Insurance Company and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 3, the Company changed its method of accounting for investments in debt and equity securities in 1994 to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." As discussed in Note 5, the Company changed its method of accounting for income taxes in 1993 to adopt the provisions of SFAS No. 109, "Accounting for Income Taxes."
KPMG Peat Marwick LLP
Austin, Texas March 1, 1996
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1995 and 1994 (In thousands)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1995 and 1994 (In thousands except per share amounts)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS For the Years Ended December 31, 1995, 1994, and 1993 (In thousands except per share amounts)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS, CONTINUED For the Years Ended December 31, 1995, 1994, and 1993 (In thousands except per share amounts)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 1995, 1994, and 1993 (In thousands)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1995, 1994, and 1993 (In thousands)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED For the Years Ended December 31, 1995, 1994, and 1993 (In thousands)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Principles of Consolidation - The accompanying consolidated financial statements include the accounts of National Western Life Insurance Company and its wholly owned subsidiaries (the Company), The Westcap Corporation, NWL Investments, Inc., NWL Properties, Inc., NWL 806 Main, Inc., and Commercial Adjusters, Inc. Commercial Adjusters, Inc., was dissolved in October, 1994, and all remaining assets and liabilities were assumed by National Western Life Insurance Company. The Westcap Corporation ceased brokerage operations during 1995 and, as a result, is reflected as discontinued operations in the accompanying financial statements. All significant intercorporate transactions and accounts have been eliminated in consolidation.
(B) Basis of Presentation - The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates included in the accompanying financial statements include (1) contingent liabilities related to litigation, (2) recoverability of deferred policy acquisition costs, (3) estimated losses related to discontinued operations, and (4) valuation allowances for mortgage loans.
National Western Life Insurance Company also files financial statements with insurance regulatory authorities which are prepared on the basis of statutory accounting practices which are significantly different from financial statements prepared in accordance with generally accepted accounting principles. These differences are described in detail in the statutory information section of this note.
(C) Investments - Investments in debt securities the Company purchases with the intent to hold to maturity are classified as securities held to maturity. 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, securities held to maturity are carried at amortized cost less declines in value that are other than temporary.
Investments in debt and equity securities that are not classified as securities held to maturity are reported as securities available for sale. Securities available for sale are reported in the accompanying financial statements at individual fair value. Any valuation changes resulting from changes in the fair value of the securities are reflected as a component of stockholders' equity. These unrealized gains or losses in stockholders' equity are reported net of taxes and adjustments to deferred policy acquisition costs.
Transfers of securities between categories are recorded at fair value at the date of transfer. Unrealized holding gains or losses associated with transfers of securities held to maturity to securities available for sale are recorded as a separate component of stockholders' equity. The unrealized holding gains or losses included as a separate component of equity for securities transferred from available for sale to held to maturity are maintained and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with the amortization or accretion of premium or discount on the associated security.
Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Realized gains and losses for securities available for sale and securities held to maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. For securities available for sale or securities held to maturity, a decline in the fair value below cost that is deemed other than temporary is charged to earnings, resulting in the establishment of a new cost basis for the security.
Mortgage loans and other long-term investments are stated at cost, less unamortized discounts and allowances for possible losses. Policy loans are stated at their aggregate unpaid balances. Real estate acquired by foreclosure is stated at the lower of cost or fair value less estimated costs to sell.
(D) Cash Equivalents - For purposes of the statements of cash flows, the Company considers all short-term investments with a maturity at date of purchase of three months or less to be cash equivalents.
(E) Insurance Revenues and Expenses - Premiums on traditional life insurance products are recognized as revenues as they become due or, for short duration contracts, over the contract periods. Benefits and expenses are matched with premiums in arriving at profits by providing for policy benefits over the lives of the policies and by amortizing acquisition costs over the premium-paying periods of the policies. For universal life and investment annuity contracts, revenues consist of policy charges for the cost of insurance, policy administration, and surrender charges assessed during the period. Expenses for these policies include interest credited to policy account balances and benefit claims incurred in excess of policy account balances. The related deferred policy acquisition costs are amortized in relation to the present value of expected gross profits on the policies.
(F) Federal Income Taxes - Federal income taxes are accounted for under the asset and liability method. Under this method, 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. 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. A valuation allowance for deferred tax assets is provided if all or some portion of the deferred tax asset may not be realized. An increase or decrease in a valuation allowance that results from a change in circumstances that affects the realizability of the related deferred tax asset is included in income.
(G) Depreciation of Property, Equipment, and Leasehold Improvements - Depreciation is based on the estimated useful lives of the assets and is calculated on the straight-line and accelerated methods. Leasehold improvements are amortized over the lesser of the economic useful life of the improvement or the term of the lease.
(H) Earnings Per Share - Earnings per share of common stock are based on the weighted average number of such shares outstanding during each year. The weighted average shares outstanding were 3,488,205 and 3,484,682, and 3,481,233 for the years ended December 31, 1995, 1994, and 1993, respectively.
(I) Classification - Certain reclassifications have been made to the prior years to conform to the reporting categories used in 1995. The most significant of these reclassifications relate to The Westcap Corporation and its discontinued brokerage operations. All assets, liabilities, results of operations, and cash flows of The Westcap Corporation for 1994 and 1993 have been reclassified and reported separately as discontinued operations in the accompanying financial statements.
(J) Statutory Information - National Western Life Insurance Company, domiciled in Colorado, prepares its statutory financial statements in accordance with accounting practices prescribed or permitted by the Colorado Division of Insurance. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (NAIC), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. Such practices may differ from state to state, may differ from company to company within a state, and may change in the future. The NAIC currently is in the process of codifying statutory accounting practices, the result of which is expected to constitute the only source of prescribed statutory accounting practices. Accordingly, that project will likely change, to some extent, prescribed statutory accounting practices and may result in changes to the accounting practices that insurance companies use to prepare their statutory financial statements. The following are major differences between generally accepted accounting principles and prescribed or permitted statutory accounting practices.
1. The Company accounts for universal life and investment annuity contracts based on the provisions of Statement of Financial Accounting Standards (SFAS) No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments." The basic effect of the statement with respect to certain long-duration contracts is that deposits for universal life and investment annuity contracts are not reflected as revenues, and surrenders and certain other benefit payments are not reflected as expenses. However, statutory accounting practices do reflect such items as revenues and expenses.
2. Commissions and certain expenses related to policy issuance and underwriting, all of which generally vary with and are related to the production of new business, have been deferred. For traditional products, these costs are being amortized over the premium-paying period of the related policies in proportion to the ratio of the premium earned to the total premium revenue anticipated, using the same assumptions as to interest, mortality, and withdrawals as were used in calculating the liability for future policy benefits. For universal life and investment annuity contracts, these costs are amortized in relation to the present value of expected gross profits on these policies. The Company evaluates the recoverability of deferred policy acquisition costs on an annual basis. In this evaluation, the Company considers estimated future gross profits or future premiums, as applicable for the type of contract. The Company also considers expected mortality, interest earned and credited rates, persistency, and expenses. Statutory accounting practices require commissions and related costs to be expensed as incurred.
A summary of information relative to deferred policy acquisition costs and premiums and deposits follows:
3. Under generally accepted accounting principles, the liability for future policy benefits on traditional products has been calculated by the net level method using assumptions as to future mortality (based on the 1965-1970 and 1975-1980 Select and Ultimate mortality tables), interest ranging from 4% to 8%, and withdrawals based on Company experience. For universal life and investment annuity contracts, the liability for future policy benefits represents the account balance.
4. Deferred Federal income taxes are provided for temporary differences which are recognized in the financial statements in a different period than for Federal income tax purposes. Deferred taxes are not recognized in statutory accounting practices. Also, for statutory accounting purposes, the Company has recorded Federal income tax receivables as permitted by the Colorado Division of Insurance. The Federal income tax receivables related to subsidiary losses have been recorded directly to surplus and were not recorded in results of operations. Prescribed statutory accounting practices do not address the accounting for tax receivables.
5. For statutory accounting purposes, debt securities are recorded at amortized cost, except for securities in or near default which are reported at market value.
6. Investments in subsidiaries are recorded at admitted asset value for statutory purposes, whereas the financial statements of the subsidiaries have been consolidated with those of the Company under generally accepted accounting principles.
7. The asset valuation reserve and interest maintenance reserve, which are investment valuation reserves prescribed by statutory accounting practices, have been eliminated, as they are not required under generally accepted accounting principles.
8. The recorded value of the life interest in the Libbie Shearn Moody Trust (the Trust) is reported at its initial valuation, net of accumulated amortization. The initial valuation was based on the assumption that the Trust would provide certain income to the Company at an assumed interest rate and is being amortized over 53 years, the life expectancy of Mr. Robert L. Moody at the date he contributed the life interest to the Company. For statutory accounting purposes, the life interest has been valued at $26,400,000, which was computed as the present value of the estimated future income to be received from the Trust. However, this amount is being amortized to a valuation of $12,774,000 over a seven-year period in accordance with Colorado Division of Insurance permitted accounting requirements. Prescribed statutory accounting practices provide no accounting guidance for such asset. The statutory admitted value of this life interest at December 31, 1995, is $20,561,000 in comparison to a carrying value of $5,206,000 in the accompanying consolidated financial statements.
Reconciliations of statutory stockholders' equity, as included in the annual statements filed with the Colorado Division of Insurance, to the respective amounts as reported in the accompanying consolidated financial statements prepared under generally accepted accounting principles are as follows:
Reconciliations of statutory net earnings, as included in the annual statements filed with the Colorado Division of Insurance, to the respective amounts as reported in the accompanying consolidated financial statements prepared under generally accepted accounting principles are as follows:
(2) DEPOSITS WITH REGULATORY AUTHORITIES
The following assets were on deposit with state and other regulatory authorities as required by law at the end of each year:
(3) INVESTMENTS
(A) Investment Income
The major components of net investment income are as follows:
Investments of the following amounts were non-income producing for the preceding twelve months:
As of December 31, 1995 and 1994, investments in debt securities and mortgage loans with principal balances totaling $3,778,000 and $8,314,000 were on non-accrual status. During 1995, 1994, and 1993, reductions in interest income associated with non-performing investments in debt securities and mortgage loans were as follows:
(B) Investment Concentrations
Concentrations of credit risk arising from mortgage loans exist in relation to certain groups of customers. A group concentration arises when a number of counterparties have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Company does not have a significant exposure to any individual customer or counterparty. The major concentrations of mortgage loan credit risk for the Company arise by geographic location in the United States and by property type as detailed below.
The Company held in its investment portfolio below investment grade debt securities totaling $14,244,000 and $31,861,000 at December 31, 1995 and 1994, respectively. This represents approximately 0.5% and 1.4% of total invested assets. These below investment grade debt securities often have common characteristics in that they are usually unsecured and are often subordinated to other creditors of the borrower or issuer. Additionally, the issuers of the below investment grade debt securities usually have high levels of indebtedness and are more sensitive to adverse economic conditions.
At December 31, 1995 and 1994, the Company held $4,966,000 and $8,948,000 of residual interests in collateralized mortgage obligations (CMOs) in its investment portfolio. Investments in residual interests of CMOs are securities that entitle the Company to the excess cash flows arising from the difference between the cash flows required to make principal and interest payments on the related CMOs and the actual cash flows received on the underlying U.S. agency collateral included in the CMO portfolios. Total cash flows to be received by the Company from the residual interests could differ from the projected cash flows resulting in changes in yield or losses if prepayments vary from projections on the collateral underlying the CMOs.
At December 31, 1995 and 1994, the Company had real estate totaling $19,066,000 and $17,766,000, net of estimated selling costs, which is reflected in other long-term investments in the accompanying financial statements.
The Company had no investments in any entity, except for U.S. government agency securities, in excess of 10% of stockholders' equity at December 31, 1995.
(C) Investment Gains and Losses
The table below presents realized gains and losses and increases or decreases in unrealized gains on investments:
The tables below present amortized cost and fair values of securities held to maturity and securities available for sale at December 31, 1995:
The tables below present amortized cost and fair values of securities held to maturity and securities available for sale at December 31, 1994:
The amortized cost and fair values of investments in debt securities at December 31, 1995, 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.
Proceeds from sales of securities available for sale during 1995 and 1994 totaled $44,440,000 and $9,114,000, respectively. Gross gains of $1,153,000 and $654,000 and gross losses of $3,752,000 and $1,535,000 were realized on those sales during 1995 and 1994, respectively. Proceeds from sales of investments in debt securities during 1993 were $77,869,000. Gross gains of $12,966,000 and gross losses of $1,283,000 were realized on those sales, respectively. The Company uses the specific identification method in computing realized gains and losses.
The Company sold three held to maturity securities during 1995 due to significant credit deterioration of the issuing companies. Amortized cost of the securities sold totaled $10,727,000, and realized losses of $68,000 were recognized on the sales.
(D) Changes in Accounting Principles
In May, 1993, the Financial Accounting Standards Board 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 as previously described in note 1. The Company adopted SFAS No. 115 effective January 1, 1994. Upon adoption, approximately 60% of the Company's insurance operations debt securities were reported as securities available for sale, with the remainder classified as securities held to maturity. The Company's relatively small holdings of equity securities were also reported as securities available for sale.
Upon adoption of the new statement, certain related balance sheet accounts, deferred Federal income taxes payable and deferred policy acquisition costs, were adjusted as if the unrealized gains on the securities classified as available for sale had actually been realized. For the Company's universal life and investment annuity contracts, deferred policy acquisition costs are amortized in relation to the present value of expected gross profits on these policies. Accordingly, under SFAS No. 115, deferred policy acquisition costs are adjusted for the impact on estimated gross profits of net unrealized gains and losses on securities. The implementation of the new statement had no effect on net earnings of the Company. However, stockholders' equity was adjusted as follows as of January 1, 1994:
At July 31, 1994, the Company transferred debt securities with fair values totaling $805 million from securities available for sale to securities held to maturity. On December 29, 1995, the Company made additional transfers totaling $156 million to the held to maturity category from securities available for sale. The lower holdings of securities available for sale significantly reduces the Company's exposure to equity volatility while still providing securities for liquidity and asset/liability management purposes. The transfers of securities were recorded at fair values in accordance with SFAS No. 115. This statement requires that the unrealized holding gain or loss at the date of the transfer continue to be reported in a separate component of stockholders' equity but shall be amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount. The amortization of an unrealized holding gain or loss reported in equity will offset or mitigate the effect on interest income of the amortization of the premium or discount for the held-to-maturity securities. The transfer of securities from available for sale to held to maturity had no effect on net earnings of the Company. However, stockholders' equity was adjusted as follows:
Also on December 29, 1995, the Company transferred securities totaling $284 million to the available for sale category from securities held to maturity. This transfer resulted in an increase to stockholder's equity of $4,266,000 as of December 31, 1995, net of effects of deferred policy acquisition costs and taxes. This transfer was made to restructure the Company's portfolio to provide increased flexibility for both portfolio and asset/liability management. Accounting principles typically do not allow transfers from the held to maturity category to the available for sale category except under certain prescribed circumstances. However, in 1995 the Financial Accounting Standards Board permitted a one-time reassessment by companies of their securities classifications and allowed transfers out of the held to maturity category without regard to the prescribed circumstances. The reassessment and any resulting transfers had to be completed by December 31, 1995.
Net unrealized gains (losses) on investment securities included in stockholders' equity at December 31, 1995 and 1994 are as follows:
The Financial Accounting Standards Board (FASB) issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," in May, 1993. In October, 1994, the FASB also issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," which amends SFAS No. 114. These statements address the accounting by creditors for impairment of certain loans and related financial statement disclosures.
The Company adopted both SFAS No. 114 and No. 118 effective January 1, 1995. As the Company was already providing for impairment of loans through an allowance for possible losses, the implementation of this statement had no significant effect on the Company's results of operations or stockholders' equity. However, additional disclosures are required by these statements which are provided below.
As of December 31, 1995 and 1994, impaired mortgage loans were as follows:
For the years ended December 31, 1995 and 1994, average investments in impaired mortgage loans were $234,000 and $997,000, respectively. Interest income recognized on impaired loans during the years ended December 31, 1995 and 1994, was not significant. Impaired loans are typically placed on non-accrual status and no interest income is recognized. However, if cash is received on the impaired loan, it is applied to principal and interest on past due payments, beginning with the most delinquent payment. Detailed below are the changes in the allowance for mortgage loan losses for the years ended December 31, 1995 and 1994.
In March, 1995, the FASB issued SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Measurement of an impairment loss for long-lived assets and identifiable intangibles that an entity expects to hold and use should be based on the fair value of the asset. The statement also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less costs to sell.
The Company's real estate investments are the only significant assets that will be subject to this statement. As the Company already records foreclosed real estate at the lower of cost or fair value less estimated costs to sell, the implementation of this statement will not have a significant effect on the Company's financial statements. The statement will be implemented in the first quarter of 1996.
(4) REINSURANCE
The Company is party to several reinsurance agreements. The Company's general policy is to reinsure that portion of any risk in excess of $150,000 on the life of any one individual. Total life insurance in force was $7.94 billion and $7.71 billion at December 31, 1995 and 1994, respectively. Of these amounts, life insurance in force totaling $1.27 billion and $1.05 billion was ceded to reinsurance companies, primarily on a yearly renewable term basis, at December 31, 1995 and 1994, respectively.
In accordance with the reinsurance contracts, reinsurance receivables including amounts related to claims incurred but not reported and liabilities for future policy benefits totaled $5,646,000 and $6,480,000 at December 31, 1995 and 1994, respectively. Premium revenues were reduced by $7,420,000, $6,040,000, and $7,450,000 for reinsurance premiums incurred during 1995, 1994, and 1993, respectively. Benefit expenses were reduced by $5,812,000, $3,295,000, and $6,943,000 for reinsurance recoveries during 1995, 1994, and 1993, respectively. A contingent liability exists with respect to reinsurance, as the Company remains liable if the reinsurance companies are unable to meet their obligations under the existing agreements.
(5) FEDERAL INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes," which requires an asset and liability method of accounting. 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 consolidated statement of earnings for the year ended December 31, 1993.
Total Federal income taxes were allocated as follows:
The provisions for Federal income taxes attributable to income from continuing operations vary from amounts computed by applying the statutory income tax rate to earnings before Federal income taxes. The reasons for the differences, and the tax effects thereof, are as follows:
The significant components of deferred income tax expense (benefit) attributable to earnings from continuing operations for the years ended December 31, 1995, 1994, and 1993, are as follows:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995, 1994, and 1993, are presented below:
There was no valuation allowance for deferred tax assets at December 31, 1995 and 1994. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.
Prior to the Tax Reform Act of 1984 (1984 Act), a portion of a life insurance company's income was not subject to tax until it was distributed to stockholders, at which time it was taxed at the regular corporate tax rate. In accordance with the 1984 Act, this income, referred to as policyholders' surplus, would not increase, yet any amounts distributed would be taxable at the regular corporate rate. The balance of this account as of December 31, 1995, is approximately $2,446,000. No provision for income taxes has been made on this untaxed income, as management is of the opinion that no distribution to stockholders will be made from policyholders' surplus in the foreseeable future. Should the balance in the policyholders' surplus account at December 31, 1995, become taxable, the Federal income taxes computed at present rates would be approximately $856,000.
The Company files a consolidated Federal income tax return with its subsidiaries. Allocation of the consolidated tax liability is based on separate return calculations pursuant to the "wait-and-see" method as described in sections 1.1552-1(a)(2) and 1.1502-33(d)(2)(i) of the current Treasury Regulations. Under this method, consolidated group members are not given current credit for net losses until future net taxable income is generated to realize such credits. In accordance with this consolidated tax sharing agreement, tax benefits resulting from discontinued brokerage operation losses totaling $5,669,000 and $2,864,000 for 1995 and 1994 were included in earnings from continuing operations.
(6) TRANSACTIONS WITH CONTROLLING STOCKHOLDER AND AFFILIATES
(A) Life Interest in Libbie Shearn Moody Trust
The Company is the beneficial owner of a life interest (1/8 share), in the trust estate of Libbie Shearn Moody which was previously owned by Mr. Robert L. Moody, Chairman of the Board of Directors of the Company. The Company has issued term insurance policies on the life of Mr. Robert L. Moody which are reinsured through agreements with unaffiliated insurance companies. The Company is the beneficiary of these policies for an amount equal to the statutory admitted value of the Trust, which was $20,561,000 at December 31, 1995. The excess of $27,000,000 face amount of the reinsured policies over the statutory admitted value of the Trust has been assigned to Mr. Robert L. Moody. The recorded net asset values in the accompanying consolidated financial statements for the Company's life interest in the Trust are as follows:
Income from the Trust and related expenses reflected in the accompanying consolidated statements of earnings are summarized as follows:
(B) Common Stock
Mr. Robert L. Moody, Chairman of the Board of Directors, owns 198,074 of the total outstanding shares of the Company's Class B common stock and 1,160,896 of the Class A common stock.
Holders of the Company's Class A common stock elect one-third of the Board of Directors of the Company, and holders of the Class B common stock elect the remainder. Any cash or in-kind dividends paid on each share of Class B common stock shall be only one-half of the cash or in-kind dividends paid on each share of Class A common stock. Also, in the event of liquidation of the Company, the Class A stockholders shall first receive the par value of their shares; then the Class B stockholders shall receive the par value of their shares; and the remaining net assets of the Company shall be divided between the stockholders of both Class A and Class B common stock, based on the number of shares held.
(7) PENSION PLANS
The Company has a qualified noncontributory pension plan covering substantially all full-time employees. The plan provides benefits based on the participants' years of service and compensation. The Company makes annual contributions to the plan that comply with the minimum funding provisions of the Employee Retirement Income Security Act. A summary of plan information is as follows:
Pension costs (credits) include the following components:
The following sets forth the plan's funded status and related amounts recognized in the Company's balance sheet as of:
The discount rate used in determining the actuarial present value of the projected benefit obligations was 7.0% for 1995 and 8.75% for 1994. The projected increase in future compensation levels was based on a rate of 5.0% and 6.0% for 1995 and 1994, respectively. The projected long-term rate of return on plan assets was 8.5% for 1995 and 1994.
The Company also has a non-qualified defined benefit plan primarily for senior officers. The plan provides benefits based on the participants' years of service and compensation. No minimum funding standards are required. However, at the option of the Company, contributions may be funded into the National Western Life Insurance Company Non-Qualified Plans Trust. There are currently no plan assets in the trust. A summary of plan information is as follows:
Pension costs include the following components:
The following sets forth the plan's funded status and related amounts recognized in the Company's balance sheet as of:
The discount rate used in determining the actuarial present value of the projected benefit obligations was 7.0% for 1995 and 8.75% for 1994. The projected increase in future compensation levels was based on a rate of 5.0% and 6.0% for 1995 and 1994, respectively.
In addition to the defined benefit plans, the Company has a qualified 401(k) plan for substantially all full-time employees and a non-qualified deferred compensation plan primarily for senior officers. The Company makes annual contributions to the 401(k) plan of two percent of each employee's compensation. Additional Company matching contributions of up to two percent of each employee's compensation are also made each year based on the employee's personal level of salary deferrals to the plan. All Company contributions are subject to a vesting schedule based on the employee's years of service. For the years ended December 31, 1995 and 1994, Company contributions totaled $201,000 and $198,000.
The non-qualified deferred compensation plan was established to allow eligible employees to defer the payment of a percentage of their compensation and to provide for additional Company contributions. Company contributions are subject to a vesting schedule based on the employee's years of service. For the years ended December 31, 1995 and 1994, Company contributions totaled $55,000 and $45,000, respectively.
(8) SHORT-TERM BORROWINGS
The Company has available a $60 million bank line of credit primarily for cash management purposes relating to investment transactions. The Company is required to maintain a collateral security deposit in trust with the bank equal to 120% of any outstanding liability. The Company had no outstanding liabilities or collateral security deposits with the bank at December 31, 1995 and 1994. The average interest rate on borrowings for the year ended December 31, 1994 was 4.45%. The Company had no borrowings on the line of credit during 1995.
(9) COMMITMENTS AND CONTINGENCIES
(A) Current Regulatory Issues
In December, 1995, the National Association of Insurance Commissioners adopted for statutory accounting practices Actuarial Guideline 33, previously referred to as Actuarial Guideline GGG. This reserve guideline, which has not been adopted by any states at this time, helps define the minimum reserves for policies with multiple benefit streams, such as two-tier annuities.
As of December 31, 1995, the Company's statutory reserving practices for two-tier annuities follow an agreement reached in 1993 with its state of domicile, Colorado. This agreement requires the Company to phase-in a different reserve basis by the end of 1996. The agreement states the acceptable difference between the target reserve and the statutory reserve held by the Company will meet the following schedule:
The Company has met the above scheduled difference for December 31, 1995. However, in 1995, the Company entered into discussions with the Colorado Division of Insurance (the Division) to implement Actuarial Guideline 33 and to phase it in over a three-year period as allowed by the guideline. In January, 1996, the Division approved the proposal for this three-year phase-in. The effect on the Company's statutory financial statements will not be significant, since the previous agreement with the Division was similar to the final guideline. Also, the guideline does not affect the Company's policy reserves which are prepared under generally accepted accounting principles as reported in the accompanying consolidated financial statements.
(B) Legal Proceedings
On March 28, 1994, the Community College District No. 508, County of Cook and State of Illinois (The City Colleges) filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division, against National Western Life Insurance Company (the Company) and subsidiaries of The Westcap Corporation. The suit seeks rescission of securities purchase transactions by The City Colleges from Westcap between September 9, 1993 and November 3, 1993, alleged compensatory damages, punitive damages, injunctive relief, declaratory relief, fees, and costs. National Western is named as a "controlling person" of the Westcap defendants. On February 1, 1995, the complaint was amended to add a RICO count for treble damages and claims under the Texas securities and consumer fraud laws, and to add additional defendants. Westcap and the Company are of the opinions that Westcap has adequate documentation to validate all such securities purchase transactions by The City Colleges, and that Westcap and the Company each have adequate defenses to the litigation. Although the alleged damages would be material to the Company's and Westcap's financial positions, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. A judicial ruling favorable to Westcap has been made requiring resolution of the suit against Westcap through binding arbitration. The lawsuit against the Company was suspended pending determination of the arbitration proceeding against Westcap. Arbitration proceedings are currently set to begin in August, 1996.
On February 1, 1995, the San Antonio River Authority (SARA) filed a complaint in the 285th Judicial District Court, Bexar County, Texas, against Kenneth William Katzen (Katzen), Westcap Securities, L.P., The Westcap Corporation (Westcap), and National Western Life Insurance Company (the Company). The suit alleges that Katzen and Westcap sold mortgage-backed security derivatives to SARA and misrepresented these securities to SARA. The suit alleges violations of the Federal Securities Act, Texas Securities Act, Deceptive Trade Practices Act, breach of fiduciary duty, fraud, negligence, breach of contract, and seeks attorney's fees. The Company is named as a "controlling person" of the Westcap defendants. Westcap and the Company are of the opinions that Westcap has adequate documentation to validate all securities purchases by SARA and that the Company and Westcap have adequate defenses to such suit. Although the alleged damages would be material to Westcap's financial condition, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The Company and Westcap have denied all allegations and the parties have initiated discovery. The case is set for trial on April 8, 1996.
On June 9, 1995, Charles McCutcheon, as Sheriff of Palm Beach County, Florida, served The Westcap Corporation, Westcap Securities, Inc., Westcap Government Securities, Inc., individual officers and directors of the Westcap entities, and National Western Life Insurance Company as defendants with a complaint filed in the U.S. District Court for the Southern District of Florida. The Complaint alleges that the Westcap entities improperly sold certain derivative securities to the Plaintiff and did not disclose the high risk of these securities to the Plaintiff, who suffered financial losses from the investments. The Company is sued as a "controlling person" of Westcap, and it is alleged that the Company is responsible and liable for the alleged wrongful conduct of Westcap. The suit seeks rescission of the investments, alleged damages, punitive and exemplary damages, attorneys' fees, and injunction. On October 13, 1995, the U.S. District Judge ordered arbitration of Plaintiff's claims against the Westcap entities and stayed all proceedings pending outcome of the arbitration. Although the alleged damages would be material to Westcap's financial condition, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The Company and Westcap deny the allegations and believe they each have adequate defenses to such suit.
On July 5, 1995, San Patricio County, Texas, filed suit in the District Court of San Patricio County, Texas, against National Western Life Insurance Company (the Company) and its chief executive officer, Robert L. Moody. The suit arises from derivative investments purchased by San Patricio County from Westcap Securities, L.P. or Westcap Government Securities, Inc., affiliates of The Westcap Corporation, a wholly owned subsidiary of the Company. The suit alleges that the Westcap affiliates were controlled by the Company and Mr. Moody and that they are responsible for the alleged wrongful acts of the Westcap affiliates in selling the securities to the Plaintiff. Plaintiff alleges that the Westcap affiliates violated duties and responsibilities owed to the Plaintiff related to its investment recommendations and the decisions made by Plaintiff, and alleges that the Plaintiff was financially damaged by such actions of Westcap. The suit seeks rescission of the investments and actual and punitive damages of unspecified amounts. Although the alleged damages would be material to Westcap's financial condition, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The Company believes that it has adequate defenses to such suit and denies the allegations. The parties have initiated discovery.
On September 13, 1995, Michigan South Central Power Agency filed a complaint in The United States District Court for the Western District of Michigan against Westcap Securities Investment, Inc., Westcap Securities, L.P., Westcap Securities Management, Inc., The Westcap Corporation, National Western Life Insurance Company (the Company), and others. The suit alleges that salesmen of Westcap sold mortgage-backed securities to the Plaintiff and misrepresented these securities in violation of Federal and state securities laws and common law. The Company is named as a "controlling person" of the Westcap defendants. Westcap and the Company are of the opinions that they have adequate defenses to the suit. Although the alleged damages would be material to Westcap's financial condition, a reasonable estimate of any actual losses which may result from the suit cannot be made at this time. The Company and Westcap deny all allegations.
The Westcap Corporation and Westcap Securities, L.P. are also defendants in several other pending lawsuits which have arisen in the ordinary course of its business. Westcap Securities, L.P. has also been notified of several arbitration claims filed with the National Association of Securities Dealers. After reviewing the lawsuits and arbitration filings with outside counsel, management believes it has adequate defenses to each of the claims.
Although the alleged damages for all of the above-described suits and arbitration claims would be material to the financial positions of the Company and The Westcap Corporation, a reasonable estimate of actual losses which may result from any of these claims cannot be made at this time. Accordingly, no provision for any liability that may result from these actions has been recognized in the consolidated financial statements.
National Western Life Insurance Company is also currently a defendant in several other lawsuits, substantially all of which are in the normal course of business. In the opinion of management, the liability, if any, which may rise from these lawsuits would not have a material adverse effect on the Company's financial condition. The Company settled several lawsuits during 1994 and 1993. Other income totaling $955,000 and $1,720,000 from these settlements has been reflected in the accompanying statements of earnings for the years ended December 31, 1994 and 1993, respectively.
(C) Financial Instruments
In order to meet the financing needs of its customers in the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments are commitments to extend credit which involve elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amounts, assuming that the amounts are fully advanced and that collateral or other security is of no value. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company controls the credit risk of these transactions through credit approvals, limits, and monitoring procedures.
The Company had commitments to extend credit relating to mortgage loans totaling $211,000 at December 31, 1995. Commitments to extend credit are legally binding agreements to lend to a customer that generally have fixed expiration dates or other termination clauses and may require payment of a fee. These commitments do not necessarily represent future liquidity requirements, as some of the commitments could expire without being drawn upon. The Company evaluates each customer's creditworthiness on a case-by-case basis. The Company also had commitments to purchase investment securities totaling $4,710,000 at December 31, 1995.
(D) Guaranty Association Assessments
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 insolvent insurance companies. Many states allow premium tax credits for all or a portion of such assessments, thereby allowing potential recovery of these payments over a period of years. However, several states do not allow such credits.
The Company estimates its liabilities for guaranty association assessments by using the latest information available from the National Organization of Life and Health Insurance Guaranty Associations. The Company will continue to monitor and revise its estimates for assessments as additional information becomes available which could result in changes to the estimated liabilities. Other insurance operating expenses related to state guaranty association assessments totaled $2,371,000, $4,869,000, and $4,583,000 for the years ended December 31, 1995, 1994, and 1993, respectively.
(10) STOCKHOLDERS' EQUITY
(A) Dividend Restrictions
The Company is restricted by state insurance laws as to dividend amounts which may be paid to stockholders without prior approval from the Colorado Division of Insurance. The restrictions are based on statutory earnings and surplus levels of the Company. The maximum dividend payment which may be made without prior approval in 1996 is $28,992,000. The Company has never paid cash dividends on its common stock, as it follows a policy of retaining any earnings in order to finance the development of business and to meet increased regulatory requirements for capital.
(B) Regulatory Capital Requirements
The Colorado Division of Insurance imposes minimum risk-based capital requirements on insurance companies that were developed by the National Association of Insurance Commissioners (NAIC). The formulas for determining the amount of risk-based capital (RBC) specify various weighting factors that are applied to statutory financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of the Company's regulatory total adjusted capital to its authorized control level RBC, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The Company's current statutory capital and surplus is significantly in excess of the threshold RBC requirements.
(C) Stock Bonus Plan
During 1993 the Company implemented a one-time stock bonus plan for all officers of the Company. Class A common stock restricted shares totaling 13,496 were granted to officers based on their individual performance and contribution to the Company. The shares are subject to vesting requirements as reflected in the following schedule:
All of the 13,496 shares that were granted have been issued and are outstanding as of December 31, 1995.
(D) Stock and Incentive Plan
During 1995 the Company adopted the National Western Life Insurance Company 1995 Stock and Incentive Plan (the Plan). The Plan provides for the grant of any or all of the following types of awards to eligible employees: (1) stock options, including incentive stock options and non-qualified stock options; (2) stock appreciation rights, in tandem with stock options or freestanding; (3) restricted stock; (4) incentive awards; and (5) performance awards.
The Plan is effective as of April 21, 1995, and will terminate on April 20, 2005, unless terminated earlier by the Board of Directors. The number of shares of Class A, $1.00 par value, common stock which may be issued under the Plan, or as to which stock appreciation rights or other awards may be granted, may not exceed 300,000. These shares may be authorized and unissued shares or treasury shares.
All of the employees of the Company and its subsidiaries are eligible to participate in the Plan. In addition, directors of the Company, other than Compensation and Stock Option Committee members, are eligible for restricted stock awards, incentive awards, and performance awards. Non-employee directors, including members of the Compensation and Stock Option Committee, are eligible for non-discretionary stock options. On May 19, 1995, the Committee approved the issuance of 52,500 non-qualified stock options to selected officers of the Company. The Committee also granted 7,000 non-qualified, non-discretionary stock options to non-employee Company directors. The stock options begin to vest following three full years of service to the Company after date of grant, with 20% of the options to vest at the beginning of the fourth year of service, and with 20% thereof to vest at the beginning of each of the next four years of service. The exercise price of the stock options was set at the fair market value of the common stock on the date of grant, May 19, 1995, which was $38.125 per share.
In October, 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." This statement establishes financial accounting and reporting standards for stock-based employee compensation plans. It defines a fair value based method of accounting for employee stock options or similar equity instruments. However, it also allows an entity to continue to measure compensation cost for plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to continue applying the accounting methods in Opinion 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in SFAS No. 123 had been applied.
Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. For stock options, fair value is determined using an option pricing model that takes into account various information and assumptions regarding the Company's stock and options. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock.
The Company anticipates that it will continue to apply the accounting methods prescribed by Opinion 25 for its existing stock and incentive plan. Therefore, the implementation of this statement will not affect the Company's results of operations. However, as required by this statement, disclosure information will be provided in the Company's financial statements reflecting costs that would have been recorded under the fair value based method. The statement will be implemented in 1996.
(11) FOREIGN SALES AND SIGNIFICANT AGENCY RELATIONSHIPS
Total direct premium revenues and universal life and annuity contract deposits related to insurance written in foreign countries, primarily Central and South America, were approximately $57,407,000, $53,846,000, and $57,450,000, for the years ended December 31, 1995, 1994, and 1993, respectively.
A significant portion of the Company's universal life and investment annuity contracts are written through one agency. Such business accounted for approximately 11%, 20%, and 44% of total direct premium revenues and universal life and investment annuity contract deposits for 1995, 1994, and 1993, respectively.
(12) SEGMENT INFORMATION
A summary of financial information for the Company's two industry segments follows:
(13) UNAUDITED QUARTERLY FINANCIAL DATA
Quarterly results of operations are summarized as follows:
The fourth quarter net earnings in 1995 reflect the following significant items:
Continuing Operations: Earnings from insurance operations, excluding net realized gains and losses on investments, for the quarter ended December 31, 1995, were $8,345,000 compared to $8,311,000 for the fourth quarter of 1994. However, fourth quarter 1994 earnings included a $2.9 million tax benefit resulting from the Company's subsidiary brokerage losses, whereas 1995 fourth quarter earnings do not include such a benefit because the total 1995 tax benefit had been recognized as of September 30, 1995. The tax benefit was recognized in accordance with the Company's tax allocation agreement with its subsidiaries. Excluding the tax benefit, 1995 fourth quarter earnings were up $2.9 million over the comparable 1994 quarter. Contributing to the increased earnings were insurance revenues, excluding realized gains and losses on investments, which were up $6,482,000, or 9.4%, from the 1994 fourth quarter. The increase in revenues was offset somewhat by higher life insurance benefit claims and other policy and contract related expenses.
Discontinued Operations: Third quarter 1995 losses from discontinued brokerage operations included estimated future operating losses, as well as estimated costs to cease brokerage operations, and resulted in the complete write-off of the Company's investment in Westcap on a consolidated basis. Accordingly, no earnings or losses were reported for the discontinued operations for the fourth quarter of 1995, as the investment in Westcap was previously written-off and there have been no significant changes in estimated costs to close the brokerage operations.
The fourth quarter net earnings in 1994 reflect the following significant items:
Continuing Operations: Other insurance operating expenses were up significantly, as fourth quarter 1994 expenses included a charge of $2,636,000, net of taxes, or $0.76 per share, for state guaranty fund assessments relating to insolvent insurance companies.
Discontinued Operations: Fourth quarter 1994 net losses from the Company's discontinued brokerage operations, The Westcap Corporation, totaled $3,968,000, or $1.13 per share, compared to net earnings of $7,309,000, or $2.10 per share, for the fourth quarter of 1993. Volatile bond market conditions due to increasing market interest rates was the major factor for lower production, coupled with adverse publicity about litigation which led to the decline in sales and earnings.
(14) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Investment securities: Fair values for investments in debt and equity securities are based on quoted market prices, where available. For securities not actively traded, fair values are estimated using values obtained from various independent pricing services and the Securities Valuation Office of the National Association of Insurance Commissioners. In the cases where prices are unavailable from these sources, prices are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the investments.
Cash and short-term investments: The carrying amounts reported in the balance sheet for these instruments approximate their fair values.
Mortgage loans: The fair value of performing mortgage loans is estimated by discounting scheduled cash flows through the scheduled maturities of the loans, using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Fair value for significant nonperforming loans is based on recent internal or external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information.
Policy loans: The fair value for policy loans is calculated by discounting estimated cash flows using U.S. Treasury bill rates as of December 31, 1995 and 1994. 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. As a result, these assumptions incorporate both Company experience and mortality assumptions associated with such contracts.
Life interest in Libbie Shearn Moody Trust: The fair value of the life interest is estimated based on assumptions as to future dividends from the Trust over the life expectancy of Mr. Robert L. Moody. These estimated cash flows were discounted at a rate consistent with uncertainties relating to the amount and timing of future cash distributions. However, the Company has limited the fair value to the statutory admitted value of the Trust, as this is the maximum amount to be received by the Company in the event of Mr. Moody's premature death.
Assets of discontinued operations: These assets consist of cash, trading securities, and securities purchased under agreements to resell. Trading securities are based on quoted market prices. The carrying amount and fair value of securities purchased under agreements to resell are the amounts at which the securities will be subsequently resold as specified in the respective agreements.
Investment and supplemental contracts: Fair value of the Company's liabilities for deferred investment annuity contracts is estimated to be the cash surrender value of each contract. The cash surrender value represents the policyholder's account balance less applicable surrender charges. The fair value of liabilities for immediate investment annuity contracts and supplemental contracts with and without life contingencies is estimated by discounting estimated cash flows using U.S. Treasury bill rates as of December 31, 1995 and 1994.
Fair value for the Company's insurance contracts other than investment contracts is not required to be disclosed. This includes the Company's traditional and universal life products. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, which minimizes exposure to changing interest rates through the matching of investment maturities with amounts due under insurance and investment contracts.
Liabilities of discontinued operations: These liabilities consist of short-term borrowings, securities sold not yet purchased, and securities sold under agreements to repurchase. The carrying amount of the Company's borrowings approximates its fair value due to the short duration of the borrowing periods. Securities sold not yet purchased are carried at fair values determined in the same manner as investment securities described above. The carrying amounts and fair values of securities sold under agreements to repurchase are the amounts at which the securities will be subsequently repurchased as specified in the respective agreements.
The carrying amounts and fair values of the Company's financial instruments are as follows:
Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
(15) DISCONTINUED BROKERAGE OPERATIONS
(A) Plan to Cease Brokerage Operations
Effective July 17, 1995, The Westcap Corporation (Westcap), a wholly owned brokerage subsidiary of National Western Life Insurance Company, discontinued all sales and trading activities in its Houston, Texas, office. In September, 1995, Westcap approved a plan to close its remaining sales office in New Jersey and to cease all brokerage operations.
In connection with the plan, as of December 31, 1995, 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. These estimated costs consist primarily of operating and legal expenses based on a reasonable time period to cease operations. The preparation of Westcap's 1995 financial statements required assumptions by management that included assumptions regarding the fair value of assets and expenses to be incurred. Variations between these assumptions and actual results could result in a change in the estimated fair value of assets recorded in Westcap's 1995 financial statements. However, management believes that, based on information currently available, any differences in recoveries on its assets in the future from the existing carrying values thereof will not have a material effect on the financial statements.
As a result of the plan and 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. Earnings and losses from the discontinued brokerage operations have also been reflected separately from continuing operations of the Company in the accompanying consolidated financial statements. The 1995 losses from discontinued operations include estimated future operating losses as well as estimated costs to cease brokerage operations totaling $6,381,000 and have resulted in the complete write-off of National Western Life Insurance Company's investment in Westcap on a consolidated basis.
(B) Summary Financial Statements and Significant Disclosures
A summary of Westcap's financial statements for the years ended September 30, 1995, 1994, and 1993 is provided below. Westcap's fiscal year-end is September 30. Although reported in detail below, these assets and liabilities have been aggregated and reported as assets and liabilities of discontinued operations in the accompanying financial statements. Likewise, all revenues and expenses have been netted and reported separately in the accompanying financial statements as earnings or losses from discontinued operations.
The following disclosures refer to the assets, liabilities, and operations items of Westcap as detailed above.
Significant Accounting Policies: Trading securities are carried at fair value. Unrealized gains and losses on trading securities are included in revenues.
Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as financing transactions, collateralized by negotiable securities, and carried at the amounts at which the securities will be subsequently resold or repurchased as specified in the respective agreements.
Receivables from and payables to customers and brokers and dealers represent the contract value of securities which have not been delivered or received as of settlement date. The receivables from customers and brokers and dealers are collateralized by securities held by or due to subsidiaries of The Westcap Corporation.
Securities transactions and related revenues and expenses, except trading profits, are recorded on a settlement date basis. Trading profits are recorded on a trade date basis. Other revenues and expenses related to securities transactions executed but not yet settled as of year-end were not material to the financial position and results of operations of Westcap.
Capital Requirements: The Westcap Corporation conducted its brokerage operations through a limited partnership, Westcap Securities, L.P. (Westcap L.P.). Westcap L.P. was subject to the Securities and Exchange Commission's Uniform Net Capital Rule (Rule 15c3-1), which required the maintenance of minimum net capital. The limited partnership elected to be subject to the Alternative Net Capital requirement which required the partnership to, at all times, maintain net capital equal to the greater of $250,000 or 2% of aggregate debit items computed in accordance with the formula for the determination of Reserve Requirements for Brokers and Dealers. At September 30, 1995, Westcap L.P. had a net capital deficit of $1,499,000 which was $1,749,000 below its required net capital of $250,000.
In anticipation of an Order Instituting Public Administrative Proceedings, Making Findings and Imposing Remedial Sanctions (Order) being entered pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 by the Securities and Exchange Commission (Commission), on February 8, 1996, Westcap L.P. submitted an offer of settlement to the Commission whereby it consented, without admitting or denying the findings in the Order, to the entry of an Order of the Commission making findings, revoking Westcap L.P.'s registration with the Commission, and requiring payment to the Commission of (i) $445,341 disgorgement, (ii) prejudgement interest of $83,879, and (iii) civil penalty of $300,000. Such an Order was entered by the Commission on February 14, 1996. In compliance with the Order, Westcap L.P. made payment to the Commission of $829,220 on March 5, 1996.
Short-Term Borrowings: Certain subsidiaries of The Westcap Corporation have arrangements with a financial institution whereby the institution performs clearing functions for all securities transactions with customers and brokers and dealers. These arrangements include revolving line of credit agreements which bear interest at variable rates based on Federal funds rates and are due on demand. Borrowings under these arrangements are guaranteed by Westcap and collateralized by trading securities and certain customers' and brokers' and dealers' unpaid securities, which at September 30, 1994, had aggregate market values of approximately $35,354,000. There were no short-term borrowings outstanding at September 30, 1995. The average interest rates on borrowings for the years ended September 30, 1995 and 1994, were 6.26% and 4.60%, respectively.
Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase: At September 30, 1994, securities purchased under agreements to resell by Westcap were collateralized by U.S. Government and agencies' securities with market values of approximately $152,753,000. These agreements had maturity dates ranging from one to ninety days and weighted average interest rates of 4.2%. There were no securities purchased under agreement to resell at September 30, 1995. During the years ended September 30, 1995 and 1994, the maximum month-end balance of outstanding agreements was $136,906,000 and $270,854,000, and the average amount of outstanding agreements was $68,876,000 and $197,327,000, respectively. Risks arise from the possible inability of counterparties to meet the terms of their agreements and from movements in securities' values.
At September 30, 1994, securities sold under agreements to repurchase by Westcap were collateralized by U.S. Government and agencies' securities with market values of approximately $93,025,000. These agreements had maturity dates ranging from one to ninety days and weighted average interest rates of 4.8%. There were no securities sold under agreements to repurchase at September 30, 1995. During the years ended September 30, 1995 and 1994, the maximum month-end balance of outstanding agreements was $125,864,000 and $245,564,000, and the average amount of outstanding agreements was $54,322,000 and $169,187,000, respectively.
When-Issued and Forward Contracts: In the normal course of business, Westcap entered into when-issued and forward contracts principally related to mortgage-backed and U.S. Government securities issues. These contracts are for delayed delivery of securities in which the seller agrees to make delivery at a specified future date of a specified instrument, at a specified price. These securities issues may have settlement dates ranging from several weeks to several months after trade date. Revenues and expenses related to such contracts are recognized on settlement date. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities values and interest rates. At September 30, 1994, the approximate amount of unsettled when-issued and forward purchase and sale contracts were $73,009,000 and $73,431,000, respectively. These contracts principally related to obligations of the U.S. Government and its agencies. There were no unsettled when-issued and forward purchase and sale contracts at September 30, 1995.
During the year ended September 30, 1994, Westcap adopted the provisions of SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," which requires disclosure of certain fair value information regarding derivative financial instruments. During 1994, the average fair value of when-issued purchase and sale contracts were approximately $4,789,000 and $2,602,000, respectively. At September 30, 1994, the fair value of when-issued and forward purchase and sale contracts were approximately $68,146,000 and $68,632,000, respectively. For the year ended September 30, 1994, Westcap recognized a net gain of approximately $12,079,000 from such transactions. There were no significant transactions during 1995 in when-issued purchase and sale contracts.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES SCHEDULE I SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1995 (In thousands)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES SCHEDULE I, CONTINUED SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1995 (In thousands)
Notes to Schedule I
(1) Fixed maturity bonds are shown at amortized cost, mortgage loans are shown at unpaid principal balances before allowances for possible losses of $5,668,000, and real estate is stated at cost before allowances for possible losses of $2,152,000. The following investments in related parties have been excluded: fixed maturity bonds - $2,418,000 and mortgage loans - $13,836,000.
(2) Real estate acquired by foreclosure included in other long-term investments totaled approximately $6,260,000.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES SCHEDULE V VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 1995, 1994, and 1993 (In thousands)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL WESTERN LIFE INSURANCE COMPANY (Registrant)
/S/ Robert L. Moody /S/ Ross R. Moody By: Robert L. Moody By: Ross R. Moody Chairman of the Board, Chief President, Chief Operating Executive Officer, Director Officer, Director
/S/ Robert L. Busby, III By: Robert L. Busby, III Senior Vice President - Chief Administrative Officer, Chief Financial Officer and Treasurer
March 28, 1996 Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/S/ Arthur O. Dummer Arthur O. Dummer, Frances A. Moody, Director Director
/S/ Harry L. Edwards Harry L. Edwards, Russell S. Moody, Director Director
/S/ E. Douglas McLeod /S/ Louis E. Pauls, Jr. E. Douglas McLeod, Louis E. Pauls, Jr., Director Director
/S/ Charles D. Milos, Jr. Charles D. Milos, Jr., E. J. Pederson, Director Director
March 28, 1996 Date