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 1996, the Company recorded approximately $364 million in premium revenues, universal life, and investment annuity contract deposits. New life insurance issued during 1996 approximated $1.2 billion and the total amount in force at year-end 1996 was $8.1 billion. As of December 31, 1996, the Company had total consolidated assets of $3.12 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, 1995, the most recent date for which information is available, National Western ranked 143 in total admitted assets and 230 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 a minor portion of the Company's life insurance in force at December 31, 1996.
In addition to competition within the life insurance industry, National Western and other insurance companies face competition from other industries. Banks, brokerage firms, and other financial institutions also market insurance products or other competing products such as mutual funds. The continued growth and popularity of mutual funds has attracted large amounts of investment funds, particularly during periods of declining or low market interest rates. Many mutual funds also allow tax deferred features through individual retirement accounts, 401(k) plans, and other qualified methods which compete directly with the Company's tax deferred annuity products.
Financial strength ratings of insurance companies also directly affect competitive positions within the industry. Most insurance companies obtain one or more ratings from independent rating agencies. National Western is rated "A- (Excellent)" by A.M. Best Company. A.M. Best ratings for the life insurance industry range from "A++ (Superior)" to "F (In Liquidation)." The "A-" rating identifies companies which have demonstrated excellent overall performance when compared to the standards established by A.M. Best. These companies have a strong ability to meet their obligations to policyholders over a long period of time. National Western has also been assigned a claims-paying ability rating of "A+ (Good)" by Standard and Poor's Corporation. Standard and Poor's ratings range from "AAA (Superior)" to " R (Regulatory Action)" .
In general, the above described ratings are developed and based on factors that are of more importance to policyholders, agents, and marketing organizations than to investors. In recent years, there has been increased emphasis and use of these financial strength ratings in the marketing efforts for insurance companies. While upgrades in ratings could be very positive for marketing efforts, declines in ratings could adversely affect product sales and persistency of policies currently in force.
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 7,386 at December 31, 1996. 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.
Many of the domestic marketing agents are contracted through independent marketing organizations. These organizations have well developed agent networks and extensive experience, financial resources, and success in marketing life insurance and annuity products. The international marketing broker-agents are a significantly smaller group than the domestic force. However, these broker-agents have been carefully selected and are proven producers, many of whom have been with the Company for 20 or more years.
Types of Insurance Written: National Western offers a broad portfolio of individual whole life, universal life and term insurance plans, endowments, and annuities, including standard supplementary riders. The Company does not market group life insurance but does offer group annuities. Annuities sold include flexible premium deferred annuities, single premium deferred annuities, and single premium immediate annuities. These products can be tax-qualified or non-qualified annuities. In recent years the majority of the business written has been non-qualified single premium deferred 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. Distributions of the Company's direct premium revenues and deposits by types of products are 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 $200,000 on the life of any one individual. Also, following general industry practice, policies are issued on substandard risks.
Geographical Distribution of Business: For the year 1996, insurance and annuity policies held by residents of the State of Texas accounted for 18% 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 10%, 8%, and 5%, respectively. All other states of the United States accounted for 43% of premium revenues and deposits from direct business. The remaining 16% of premium revenues and deposits were derived from the Company's policies issued to foreign nationals, primarily in Central and South America, almost 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 62% of the direct life insurance premiums collected during 1996 was sold 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, and 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 the distribution of the Company's investments:
The following table shows investment results for insurance operations for the periods indicated:
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. 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. 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.
Also of particular importance, the NAIC has established 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.
While the insurance industry is primarily regulated by state governments, federal regulation also affects the industry in various areas such as pension regulations, securities laws, and federal taxation. For example, annuity and insurance products have certain income tax advantages for the policyholders compared to other savings investments such as certificates of deposits and taxable bonds. Unlike many other investments, increases in the contract values of annuity and life insurance products are not subject to income taxation until these values are actually paid to and received by the policyholder. At various times, the federal government has considered revising or eliminating this income tax deferral. Such a change, if ever enacted, could have an adverse effect on the Company's ability to sell certain annuity and insurance products.
There have been numerous proposals recently to modify the existing federal income tax laws. Some proposals outline measures to implement a "flat tax" structure that would lower the marginal tax rates for many taxpayers. Other proposals call for eliminating the existing income tax and implementing a consumption based tax. Adoption of any of these new tax proposals, particularly the "consumption based tax", could have adverse effects on the insurance industry, as the value of annuity and life insurance products with income tax deferral advantages would be lessened or minimized. However, it is impossible to predict what changes, if any, will be made to the existing federal income tax structure and the timing of any such changes.
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 included Westcap Securities Investment, Inc. (Westcap Investment), Westcap Securities Management, Inc. (Westcap Management), and Westcap Mortgage Company (Westcap Mortgage). Westcap Investment and Westcap Management owned 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 and Chapter 11 Bankruptcy Filing: 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) prejudgment 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.
On April 12, 1996, The Westcap Corporation and its wholly owned subsidiary, Westcap Enterprises, Inc., separately filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court, Southern District of Texas, Houston Division. Westcap Enterprises, Inc. is the successor by merger to Westcap Securities Investment, Inc., Westcap Securities Management, Inc., and Westcap Securities, L.P., which prior to such merger were subsidiaries or affiliates of The Westcap Corporation. The bankruptcy filing is more fully described in Item 3, Legal Proceedings.
(b) Financial Information About Industry Segments
A summary of financial information for the Company's two industry segments follows:
Additional information concerning these industry segments is included in Item 1.(a).
(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. Upon termination of the existing lease in early 1997, The Westcap Corporation will reduce its office space to approximately 2,800 square feet in the same facility and will execute a month to month lease contract. The monthly lease rate will be $3,020.
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 or National Western) and subsidiaries of The Westcap Corporation (Westcap), a wholly owned subsidiary of the Company. 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. Westcap has filed Chapter 11 bankruptcy (see below), and City Colleges has filed a $55 million claim in the bankruptcy court. The claim has been tried before the court, but no judgment has been entered. Although the alleged damages would be material to the Company's financial statements, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The lawsuit against the Company has been stayed pending determination of the proceeding against Westcap.
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, 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 the Company's financial statements, 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 lawsuit has been transferred to the Westcap bankruptcy court, and the proceedings against the Company have been stayed pending determination of the claim in bankruptcy against Westcap.
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 (the 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 actual damages of $8 million, 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. The Company and Westcap deny the allegations and believe they each have adequate defenses to such suit. Although the alleged damages would be material to the Company s financial statements, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The lawsuit is currently stayed pending the determination of the claim in bankruptcy against Westcap.
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. 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 the investment recommendations and 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. The Company believes that it has adequate defenses to such suit and denies the allegations. The parties have initiated discovery. Although the alleged damages would be material to the Company's financial statements, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The lawsuit is currently stayed pending the determination of a similar claim against Westcap in the Westcap bankruptcy proceedings.
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 and is alleged to be responsible for their acts. Westcap and the Company are of the opinions that they have adequate defenses to the suit. Although the alleged damages would be material to the Company's financial statements, 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 lawsuit is currently stayed pending the determination of the claim in bankruptcy against Westcap.
On February 27, 1996, the City of Tracy, a California municipal corporation, filed a complaint in the Superior Court of San Joaquin County, California, against Westcap Securities, L.P., National Western Life Insurance Company (the Company) and others. The suit arises from derivative investments purchased by the City of Tracy from Westcap Securities, L.P., an affiliate of The Westcap Corporation. The suit alleges that The Westcap Corporation and its subsidiaries are controlled by the Company and that it is responsible for alleged wrongful acts of the Westcap subsidiaries. Plaintiff alleges that the Westcap affiliates violated fiduciary duties and responsibilities owed to the Plaintiff related to investment purchases and decisions made by the Plaintiff, breach of contract, deceit, fraud, violation of California Securities Laws, and negligence, and that the Plaintiff was financially damaged thereby. The suit seeks rescission of the investment transactions, actual and punitive damages. Westcap and the Company are of the opinions that each of them have good and adequate defenses to the suit, and they deny the allegations. Although the alleged damages would be material to the Company's financial statements, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The lawsuit has been removed to the U.S. Bankruptcy Court in Houston, Texas, where it is currently pending.
On January 8, 1997, Tom Green County, a county government entity of the State of Texas, filed a petition in the District Court of Tom Green 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 Tom Green County from Westcap Securities, L.P., an affiliate of The Westcap Corporation. The suit alleges that The Westcap Corporation and its affiliates are controlled by the Company and Robert L. Moody, and that they are responsible for the alleged wrongful acts of the Westcap affiliates in selling securities to the Plaintiff. Plaintiff alleges that the Westcap affiliates violated fiduciary duties and responsibilities allegedly owed to the Plaintiff related to investment recommendations and decisions made by the Plaintiff in purchasing securities, engaged in fraud and deceptive practices, conspiracy, violations of Texas Securities Laws, negligence and gross negligence, 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. The Company believes it has good and adequate defenses to the suit and denies the allegations. Although the alleged damages would be material to the Company's financial statements, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The Company has filed an answer in the suit, has denied all claims and allegations, and has removed the case to the U.S. District Court for the Northern District of Texas, San Angelo Division.
Although the alleged damages for the above-described suits would be material to the financial statements of National Western Life Insurance 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 accompanying 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 arise from these lawsuits would not have a material adverse effect on the Company's financial position.
On April 12, 1996, The Westcap Corporation and its wholly owned subsidiary, Westcap Enterprises, Inc., separately filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court, Southern District of Texas, Houston Division. Westcap Enterprises, Inc. is the successor by merger to Westcap Securities Investment, Inc., Westcap Securities Management, Inc., and Westcap Securities, L.P., which prior to such merger were subsidiaries or affiliates of The Westcap Corporation.
The plan of reorganization filed in the Bankruptcy Court provides for the merger of Westcap Enterprises, Inc. into The Westcap Corporation (Westcap), with the survivor to conduct business as a real estate investment trust under sections 856-58 of the Federal Tax Code. National Western has agreed to participate in the Westcap plan of reorganization by the contribution of $5,000,000 of cash and $5,000,000 of income producing real estate properties in exchange for a complete settlement and release of any claims by Westcap against National Western and a continuing equity interest in the reorganized entity. The reorganization plan is subject to approval by Westcap's creditors and the Bankruptcy Court. The Creditors' Committee, the debtor Westcap, and National Western are currently engaged in discussions relating to the possible settlement of all claims by the creditors against Westcap and the claims of Westcap against National Western. No prediction can be made at this time as to the outcome of such settlement discussions.
National Western, Westcap, and the Creditors Committee agreed that National Western may make a $1,000,000 cash infusion to Westcap for operational expenses incurred during its bankruptcy and that such cash infusion will be credited against any future settlement or litigation recovery related to Westcap's alleged claims against National Western. Such funding was approved by the Bankruptcy Court on February 21, 1997, and the funds were transferred by National Western to Westcap on March 18, 1997.
National Western's investment in Westcap was completely written off during 1995. The $1,000,000 contribution described above will be reflected as losses from discontinued operations in the first quarter of 1997. Any additional losses from discontinued operations will depend primarily on results of Westcap bankruptcy proceedings.
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 1996.
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, 1996, 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 16% of the Company's total premium revenues, universal life, and investment annuity contract deposits in 1996. 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 had a brokerage operations segment through its wholly owned subsidiary, The Westcap Corporation (Westcap). However, during 1995 Westcap closed its sales offices and approved a plan to cease all brokerage operations. Subsequently on April 12, 1996, Westcap and its wholly owned subsidiary, Westcap Enterprises, Inc., separately filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. 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 as either securities held to maturity or securities available for sale. The Company does not maintain a portfolio of trading securities. 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, 1996, approximately 22% 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 not classified as held to maturity 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 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. Review procedures are also 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. Additionally, the Company closely monitors financial, economic, and interest rate conditions to manage prepayment and extension risks in its mortgage-backed securities portfolio.
The Company's overall conservative investment philosophy is reflected in the allocation of its investments which is detailed below as of December 31, 1996 and 1995. The Company emphasizes investment grade debt securities, with smaller holdings in mortgage loans and real estate.
Portfolio Analysis
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, 1996, 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, 1996, 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.
An important aspect of the Company's investment philosophy is managing the cash flow stability of the portfolio. Because expected maturities of securities may differ from contractual maturities due to prepayments, extensions, and calls, the Company takes steps to manage and minimize these risks. The Company has reduced its exposure to prepayment and extension risks by lowering its holdings of mortgage-backed securities over the past few years. Mortgage and asset-backed securities totaled 47.6% of the entire portfolio in 1994 and now total only 34.5% at December 31, 1996. The majority of this reduction has been offset by increases in corporate securities, as corporate holdings have increased from 32.5% in 1994 to 45.5% in 1996. However, most of these additions were non-callable corporates which help reduce prepayment and call risks.
As indicated above, 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 reduces 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.
As of December 31, 1996, CMOs represent approximately 90% of the Company's mortgage-backed securities, and PAC I CMOs account for approximately 91% of this CMO portfolio. 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 closely manages the credit quality of its investments in debt securities. The Company continues to follow its conservative investment philosophy by minimizing its holdings of below investment grade debt securities, as these securities generally have greater default risk than higher rated corporate debt. These issuers usually 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 below. The increase in below investment grade debt securities from 1995 is primarily due to investment grade issuers that were downgraded to below investment grade status.
The Company's strong credit risk management and commitment to quality has resulted in minimal defaults in the debt securities portfolio in recent years. In fact, at December 31, 1996 and 1995, securities with principal balances totaling only $2,945,000 and $3,575,000 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 "A," 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, 1996 and 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.
At December 31, 1996, gross unrealized gains in the Company's debt and equity securities portfolios were as follows:
As detailed above, debt securities classified as held to maturity comprise the majority of the Company's securities portfolio, while equity securities continue to be a small component of the portfolio. Gross unrealized gains totaling $44,021,000 on the securities portfolio at December 31, 1996, is a reflection of market interest rates at year-end. The fair values, or market values, of fixed income debt securities correlate to external market interest rate conditions. Because the interest rates are fixed on almost all of the Company's debt securities, market values typically increase when market interest rates decline, and decrease when market interest rates rise. This correlation between market values and interest rates is reflected in the table below.
As reflected above, changes in interest rates of 100 basis points or more have a significant impact on the market values of the Company's debt securities. The Company would expect similar results in the future from any significant upward or downward movement in market rates. However, because the majority of the Company's debt securities are classified as held to maturity, the changes in market values have had relatively small effects on the Company's financial statements. Also, the Company has the intent and ability to hold these securities to maturity, and it is unlikely that sales of such securities would be required which would realize the market gains or losses.
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 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 has proven to result in higher quality mortgage loans with fewer defaults.
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 also participates 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 and increased investment income significantly in 1996. Several of these interests in real estate joint ventures were sold during 1996. The sales resulted in additional investment income totaling approximately $2,300,000.
Portfolio Analysis
The Company held net investments in mortgage loans totaling $193,311,000 and $191,674,000, or 7.0% and 7.3% of total invested assets, at December 31, 1996 and 1995. 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, 1996 and 1995, was as follows:
As of December 31, 1996, the allowance for possible losses on mortgage loans was $5,988,000. Additions to the allowance totaling $500,000 were recognized as realized losses on investments in the Company's 1996 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, 1996 and 1995, the Company had approximately $36,000 and $203,000, 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 $12,719,000 and $13,355,000 at December 31, 1996 and 1995, respectively. For the years ended December 31, 1996 and 1995, 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, 1996, are as follows:
The Company owns real estate that was acquired through foreclosure and through direct investment totaling approximately $15,209,000 and $19,066,000 at December 31, 1996 and 1995, 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 $638,000 and $404,000 for the years ended December 31, 1996 and 1995, respectively. The Company does not anticipate significant changes in these operating results in the near future.
The Company monitors the conditions and market values of these properties on a regular basis. Realized losses recognized due to declines in values of properties totaled $526,000 and $882,000 for the years ended December 31, 1996 and 1995, 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, 1996, 1995, and 1994 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: The Company recognized record earnings from insurance operations for the year totaling $45,167,000 in 1996, an increase of 21.4% over 1995 earnings. Increases in universal life and annuity revenues of 8.9% and net investment income of 6.2%, coupled with lower expenses, resulted in the record earnings. Lower expenses were primarily from decreases in life insurance benefit claims, policy acquisition costs, and state guaranty fund assessments. Also, 1995 earnings include a $5.7 million tax benefit resulting from the Company's subsidiary brokerage losses, and 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 1996 were actually up $13.7 million from 1995 due to the increases in revenues and lower expenses as previously described.
Life and Annuity Premiums: This revenue category represents the premiums on traditional type products. However, sales in most of the Company's markets continue to 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, as in past years 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 primarily of policy charges for the cost of insurance, policy administration fees, and surrender charges assessed during the period. These revenues increased from $64.7 million in 1994 to $76.0 million in 1996. 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. Additionally, surrender charge revenues continue upward due to increased policy surrenders. Policy surrenders were up 14.2% in 1996 over 1995, which corresponds to the increase in surrender charge revenues of 13.9%. A comparative detail of the components of universal life and investment annuity revenues is provided below:
Actual universal life and investment annuity deposits collected for the years ended December 31, 1996, 1995, and 1994 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, the vast majority of which were sold by a single independent marketing organization. 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, as much of the sales in prior years were flexible premium annuities on which renewal premiums are received subsequent to first year premiums.
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 continued throughout 1995. However, sales were lower in 1996, and the renewal premiums from the two-tier annuities also continued to decline. As the emphasis on new annuity sales is primarily single premium products, the Company does not anticipate a significant reversal of the decline in renewal premiums in the near future.
The majority of the Company's life insurance production is from the international market, primarily Central and South American countries. The Company continues to see increased competition in the Central and South American market, causing production growth to slow. However, the Company has been accepting policies from foreign nationals for over 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 resulted in increased life insurance production once again in 1995, although 1996 premiums declined somewhat from these levels.
Net Investment Income: Net investment income during 1996 increased 6.2% from 1995. The increase was from increases in invested assets and from gains from real estate joint ventures. NWL Investments I, L.P. sold several real estate joint venture interests during 1996, and the sales resulted in additional investment income totaling approximately $2,300,000. Excluding the income from the joint venture sales, net investment income was up 5.0% from 1995, which is consistent with the increase in total invested assets of 5.6% for the same period. Also, the yield on purchases in 1996 was similar to the yield of the 1995 portfolio.
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 increased annuity production. 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. The adjustments were made to reflect changes in mortgage-backed securities prepayment levels, caused by changes in market interest rates, which affected average lives, yields, and amortization periods of the securities. There were no significant corresponding adjustments in 1995.
As previously described, market interest rates declined significantly during 1995 from 1994 levels. Interest rates were somewhat volatile during 1996, but overall were at levels comparable to 1995. Detailed below is the Company's investment performance for 1996, 1995, and 1994. The changes in the Company's yield reflect the changes in market interest rates. However, changes in market rates affect the Company's portfolio yield slowly because of the relative small volume of new investment purchases during a year in comparison to the size of the overall investment portfolio.
Other Income: Other income for 1996 includes proceeds received from a lawsuit settlement totaling $850,000. The lawsuit related to the Company's previous investment in a mortgage loan.
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. This lawsuit was settled in September, 1993. However, the Company also received proceeds from a settlement totaling $955,000 for recovery of damages incurred related to this lawsuit. These settlement proceeds were reflected as other income in 1994.
Realized Gains and Losses on Investments: The Company recorded realized gains totaling $1.6 million in both 1996 and 1994 compared to realized losses of $2.4 million in 1995. The gains in 1996 were primarily from sales of investments in debt securities and real estate. The losses in 1995 were also 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 1996, 1995, and 1994 are net of write-downs on real estate and mortgage loans totaling $1,026,000, $882,000, and $625,000, respectively.
Life and Other Policy Benefits: Expenses in 1995 were significantly higher at $39.8 million than expenses in 1996 and 1994 which totaled only $35.4 million and $32.1 million, respectively. The significant fluctuation in expenses is due to higher life insurance benefit claims and high policy surrenders on traditional insurance products in 1995. Life insurance benefit claims, which accounted for the majority of the fluctuation, totaled $21.5 million, $24.6 million, and $19.1 million in 1996, 1995, and 1994, respectively. The 1995 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. The year 1995 reflects such a period, 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 lower 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 1996, 1995, and 1994 has been relatively consistent at $30.4 million, $33.7 million, and $32.1 million, respectively. The lower amortization in 1996 is primarily due to changes in timing and increases in levels of anticipated future gross profits for certain blocks of business.
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 primarily due to the lowering of credited interest rates on most universal life and investment annuity products throughout these years. The lowering of credited interest rates was largely in response to declining market interest rates. 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 and it continued to increase into 1996. The increase in annuity deposits resulted in corresponding increases in policy liabilities and significantly higher interest costs in 1995 and 1996. Also, the Company's new annuity products typically credit significantly higher interest rates in the first policy year, again resulting in higher 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. Average credited rates, calculated based on policy reserves for the Company s universal life and investment annuity business, have remained relatively consistent since 1994. Average credited rates for 1996, 1995, and 1994 were 6.15%, 6.19%, and 6.04%, respectively.
Other Insurance Operating Expenses: These expenses totaled $25.7 million, $27.1 million, and $29.4 million for 1996, 1995, and 1994, respectively. The significant decline in these expenses is primarily due to reduced expenses for state guaranty association assessments.
The 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. The National Organization of Life and Health Insurance Guaranty Associations annually publishes assessment data on nationwide life and health insurance company insolvencies. Based on this information, the Company revises 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. Other insurance operating expenses related to state guaranty association assessments totaled $1,146,000, $2,371,000, and $4,869,000 for the years ended December 31, 1996, 1995, and 1994, respectively.
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.
On April 12, 1996, The Westcap Corporation and its wholly owned subsidiary, Westcap Enterprises, Inc., separately filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court, Southern District of Texas, Houston Division. Westcap Enterprises, Inc. is the successor by merger to Westcap Securities Investment, Inc., Westcap Securities Management, Inc., and Westcap Securities, L.P., which prior to such merger were subsidiaries or affiliates of The Westcap Corporation. The bankruptcy filing is more fully described in Item 3, Legal Proceedings.
In connection with the discontinued operations and subsequent bankruptcy filing, 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. 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 resulted in the complete write-off of the Company's investment in Westcap on a consolidated basis. As a result, no losses were recognized in 1996. However, National Western, Westcap, and the Creditors' Committee agreed that National Western may make a $1,000,000 cash infusion to Westcap for operational expenses incurred during its bankruptcy and that such cash infusion will be credited against any future settlement or litigation recovery related to Westcap's alleged claims against National Western. Such funding was approved by the Bankruptcy Court on February 21, 1997, and the funds were transferred by National Western to Westcap on March 18, 1997. This contribution will be reflected as losses from discontinued operations in the first quarter of 1997. Any additional losses from discontinued operations will depend primarily on results of Westcap bankruptcy proceedings.
Consolidated Federal Income Taxes
Federal Income Taxes: Federal income taxes for 1996 reflect an effective tax rate of 34.3%, which is consistent with the expected statutory rate of 35%. However, Federal income taxes for 1995 on earnings from continuing operations reflect an effective tax rate of only 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 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.
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 $145 million, $99 million, and $117 million in 1996, 1995, and 1994, respectively. Lower earnings from brokerage operations was the primary reason for the lower cash flows in 1995 and 1994. Net cash flows from the Company's deposit product operations, which includes universal life and investment annuity products, totaled $16 million and $99 million in 1996 and 1995, respectively. These operations incurred net cash outflows in 1994 totaling $17 million. The increase in cash flows in 1995 was due to increased annuity production. However, the reduction in cash flows in 1996 was due to lower annuity production and higher policy surrenders than in 1995.
The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $117 million, $69 million, and $133 million in 1996, 1995, and 1994, respectively. The Company again expects significant cash flows from these sources in 1997 at levels similar to the past three years.
Capital Resources
The Company relies on stockholders' equity for its capital resources, as there has been no long-term debt outstanding in 1996 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 1997.
Stockholders' equity totaled $353 million at December 31, 1996, reflecting an increase of $41 million from 1995. The increase in capital is primarily from net earnings of $46 million, offset by the decrease in net unrealized gains on investment securities totaling $5 million in 1996. Slightly higher market interest rates at year-end 1996 compared to 1995 resulted in the decrease in unrealized gains. Book value per share at December 31, 1996, was $101.07, reflecting a 13.1% increase for the year.
CHANGES IN ACCOUNTING PRINCIPLES
In June, 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." In December, 1996, SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125," was issued which defers portions of SFAS No. 125 to be effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1997. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 125 is effective for applicable transactions occurring after December 31, 1996, and is to be applied prospectively. The Company anticipates that the implementation of this statement will have no significant effects on its financial statements.
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 helps define the minimum reserves for policies with multiple benefit streams, such as two-tier annuities. The Company had been reserving for its two-tier annuities according to an agreement reached in 1993 with its state of domicile, Colorado. 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
The National Association of Insurance Commissioners (NAIC) has established 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.
Due to the uncertainty of the legality of publishing RBC information, 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, 1997, is furnished with respect to each director. All terms expire in June of 1997.
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, 1997.
(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. 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. 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.
(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 were 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 were outstanding as of December 31, 1995.
(2) Other Bonuses - Employment and performance related bonuses are occasionally granted. Arthur W. Pickering received such bonuses in 1996, 1995, and 1994, and Robert L. Busby, III received such bonus in 1994.
(C) Represents stock options granted under the National Western Life Insurance Company 1995 Stock and Incentive Plan.
(D) 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. However, this item also includes taxable income for Robert L. Moody, related to his assignment of excess insurance on the Libbie Shearn Moody Trust of approximately $138,000, $92,000, and $2,000 in 1996, 1995, and 1994, respectively. This item also includes moving expenses for Arthur W. Pickering in 1994 of approximately $67,000.
(c) Option/SAR Grants Table
During 1995 the Company adopted the National Western Life Insurance Company 1995 Stock and Incentive Plan (the Plan). The purpose of the Plan is to align the personal financial incentives of key personnel with the long-term growth of the Company and the interests of the Company's stockholders through the ownership and performance of the Company's Class A, $1.00 par value, common stock, to enhance the Company's ability to retain key personnel, and to attract outstanding prospective employees and directors. 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. On April 19, 1996, an additional 33,000 options were issued to selected officers. The directors stock options vest 20% annually following one full year of service to the Company from the date of grant. The officers stock options vest 20% annually following three full years of service to the Company from the date of grant. The exercise prices of the stock options were set at the fair market values of the common stock on the dates of grant.
Stock options granted to the named executive officers during 1996 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) minus (b) minus (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.
(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. No compensation committee interlocks exist with other unaffiliated companies.
Mr. Robert Moody, Mr. Ross Moody, and Mr. Milos serve as directors and also serve as officers and employees of the Company. Mr. Ross Moody and Mr. Milos also serve as officers of National Western Life Insurance Company's wholly owned subsidiaries, NWL 806 Main, Inc., NWL Investments, Inc., and NWL Properties, Inc. The Donner Company, 100% owned by Mr. Dummer, who is a director of National Western Life Insurance Company, was paid $70,273 in 1996 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.
(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 compensation 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, 1991, 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 27, 1997. 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, 1996:
(b) Security Ownership of Management
The following table sets forth as of December 31, 1996, 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 $70,273 in 1996 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 held 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 was a 20-year debenture due in August, 1996, with interest of 8% annually. The Company received payment in full including accrued interest on the debenture in 1996.
The Company also held a corporate note for $2,168,232 issued in 1990 by Seal (GP), Inc., which is a subsidiary of Seal Fleet, Inc. The note was due in June, 2000, with interest of 12% payable monthly and was 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 was payable upon maturity of the note. In 1996, the Company received payment in full on the note including accrued interest at 10% and the additional 2% interest accrued since the modification of the note.
Seal Fleet, Inc. was acquired in 1996 by an entity unaffiliated with National Western Life Insurance Company or the Moody family. Prior to the sale, Seal Fleet, Inc., had two classes of stock outstanding, Class A and B. The Class B shares elected 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., were 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 owned 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 was considered to be the controlling stockholder of Seal Fleet, Inc. Louis Pauls, Jr., and Russell S. Moody, directors of the Company, were also directors of Seal Fleet, Inc.
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 $2,748,000 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 $8,603,000 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 $1,940,000 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 - Restated Articles of Incorporation of National Western Life 3(a) Insurance Company dated April 10, 1968 (incorporated by reference to Exhibit 3(a) to the Company's Form 10-K for the year ended December 31, 1995).
Exhibit - Amendment to the Articles of Incorporation of National Western 3(b) Life Insurance Company dated July 29, 1971 (incorporated by reference to Exhibit 3(b) to the Company's Form 10-K for the year ended December 31, 1995).
Exhibit - Amendment to the Articles of Incorporation of National Western 3(c) Life Insurance Company dated May 10, 1976 (incorporated by reference to Exhibit 3(c) to the Company's Form 10-K for the year ended December 31, 1995).
Exhibit - Amendment to the Articles of Incorporation of National Western 3(d) Life Insurance Company dated April 28, 1978 (incorporated by reference to Exhibit 3(d) to the Company's Form 10-K for the year ended December 31, 1995).
Exhibit - Amendment to the Articles of Incorporation of National Western 3(e) Life Insurance Company dated May 1, 1979 (incorporated by reference to Exhibit 3(e) to the Company's Form 10-K for the year ended December 31, 1995).
Exhibit - Bylaws of National Western Life Insurance Company as amended 3(f) through April 24, 1987 (incorporated by reference to Exhibit 3(f) to the Company's Form 10-K for the year ended December 31, 1995).
Exhibit - National Western Life Insurance Company Non-Qualified Defined 10(a) Benefit Plan dated July 26, 1991 (incorporated by reference to Exhibit 10(a) to the Company's Form 10-K for the year ended December 31, 1995).
Exhibit - National Western Life Insurance Company Officers' Stock Bonus Plan 10(b) effective December 31, 1992 (incorporated by reference to the Company's Form S-8 registration dated January 27, 1994).
Exhibit - National Western Life Insurance Company Non-Qualified Deferred 10(c) Compensation Plan, as amended and restated, dated March 27, 1995 (incorporated by reference to Exhibit 10(c) to the Company's Form 10-K for the year ended December 31, 1995).
Exhibit - First Amendment to the National Western Life Insurance Company 10(d) Non-Qualified Deferred Compensation Plan effective July 1, 1995 (incorporated by reference to Exhibit 10(d) to the Company's Form 10-K for the year ended December 31, 1995).
Exhibit - National Western Life Insurance Company 1995 Stock and Incentive 10(e) Plan (incorporated by reference to Exhibit 10(e) to the Company's Form 10-K for the year ended December 31, 1995).
Exhibit - First Amendment to the National Western Life Insurance Company 10(f) Non-Qualified Defined Benefit Plan effective December 17, 1996 (filed on page __ of this report).
Exhibit - Second Amendment to the National Western Life Insurance Company 10(g) Non-Qualified Defined Benefit Plan effective December 17, 1996 (filed on page __ of this report).
Exhibit - Second Amendment to the National Western Life Insurance Company 10(h) Non-Qualified Deferred Compensation Plan effective December 17, 1996 (filed on page __ of this report).
Exhibit - Third Amendment to the National Western Life Insurance Company 10(i) Non-Qualified Deferred Compensation Plan effective December 17, 1996 (filed on page __ of this report).
Exhibit - Subsidiaries of the Registrant (incorporated by reference to 21 Exhibit 21 to the Company's Form 10-K for the year ended December 31, 1995).
Exhibit - Financial Data Schedule (filed electronically pursuant to 27 Regulation S-K).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1996.
(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, 1996 and 1995
Consolidated Statements of Earnings for the years ended December 31, 1996, 1995, and 1994
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
Schedule I - Summary of Investments Other Than Investments in Related Parties, December 31, 1996
Schedule V - Valuation and Qualifying Accounts for the years ended December 31, 1996, 1995, and 1994
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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, 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 3, the Company changed its method of accounting for impairment of long-lived assets in 1996 to adopt the provisions of SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of."
KPMG Peat Marwick LLP
Austin, Texas February 28, 1997
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995 (In thousands)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995 (In thousands except per share amounts)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS For the Years Ended December 31, 1996, 1995, and 1994 (In thousands except per share amounts)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS, CONTINUED For the Years Ended December 31, 1996, 1995, and 1994 (In thousands except per share amounts)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 1996, 1995, and 1994 (In thousands)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1996, 1995, and 1994 (In thousands)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED For the Years Ended December 31, 1996, 1995, and 1994 (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 filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in 1996. As a result, The Westcap Corporation 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 require 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. The unrealized holding gains or losses for securities transferred from available for sale to held to maturity are included as a separate component of equity 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. 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 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 3,491,338, 3,488,205, and 3,484,682 for the years ended December 31, 1996, 1995, and 1994, respectively.
(I) Classification - Certain reclassifications have been made to the prior years to conform to the reporting categories used in 1996. 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 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.
A summary of direct premiums and deposits collected is provided below:
2. Under generally accepted accounting principles, 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, are deferred. For traditional products, these costs are 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 is provided below:
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. For statutory accounting purposes, liabilities for future policy benefits for life insurance policies are calculated by the net level premium method or the commissioners reserve valuation method. Future policy benefit liabilities for annuities are calculated based on the continuous commissioners annuity reserve valuation method and provisions of Actuarial Guideline 33.
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.
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, under generally accepted accounting principles. 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, 1996, is $18,614,000 in comparison to a carrying value of $4,922,000 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, 1996 and 1995, investments in debt securities and mortgage loans with principal balances totaling $2,981,000 and $3,778,000 were on non-accrual status. During 1996, 1995, and 1994, reductions in interest income associated with non-performing investments in debt securities and mortgage loans were not significant.
(B) Mortgage Loans and Real Estate
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.
As of December 31, 1996 and 1995, impaired mortgage loans were as follows:
For the years ended December 31, 1996 and 1995, average investments in impaired mortgage loans were $232,000 and $234,000, respectively. Interest income recognized on impaired loans during the years ended December 31, 1996 and 1995, 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 changes in the allowance for mortgage loan losses for 1996, 1995, and 1994:
At December 31, 1996 and 1995, the Company owned investment real estate totaling $15,209,000 and $19,066,000 which is reflected in other long-term investments in the accompanying financial statements. The Company records real estate at the lower of cost or fair value less estimated costs to sell. Real estate values are monitored and evaluated at least annually by the use of independent appraisals or internal valuations. Decreases in market values affecting carrying values are recorded in a valuation allowance which is reflected in realized gains or losses on investments. For the years ended December 31, 1996, 1995, and 1994, impairment losses on real estate due to decreases in market values totaled $526,000, $882,000, and $318,000, respectively.
(C) Investment Gains and Losses
The table below presents realized gains and losses and changes in unrealized gains and losses on investments for 1996, 1995, and 1994:
(D) Debt and Equity Securities
The tables below present amortized cost and fair values of securities held to maturity and securities available for sale at December 31, 1996:
The tables below present amortized cost and fair values of securities held to maturity and securities available for sale at December 31, 1995:
The amortized cost and fair values of investments in debt securities at December 31, 1996, 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 1996, 1995, and 1994 totaled $41,276,000, $44,440,000, and $9,114,000, respectively. Gross gains of $575,000, $1,153,000, and $654,000 and gross losses of $402,000, $3,752,000, and $1,535,000 were realized on those sales during 1996, 1995, and 1994, respectively. The Company uses the specific identification method in computing realized gains and losses.
The Company did not sell any held to maturity securities during 1996 and 1994. However, during 1995, three held to maturity bonds were sold 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.
The Company held in its investment portfolio below investment grade debt securities totaling $38,696,000 and $14,244,000 at December 31, 1996 and 1995, respectively. This represents approximately 1.4% and 0.5% of total invested assets. Below investment grade securities generally have greater default risk than higher rated corporate debt. The issuers of these securities are usually more sensitive to adverse industry or economic conditions than are investment grade issuers.
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, 1996.
(E) 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 reduce 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 stockholders' 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 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.
Net unrealized gains (losses) on investment securities included in stockholders' equity at December 31, 1996 and 1995 are as follows:
Effective January 1, 1996, the Company adopted 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 are subject to this statement. As the Company was already recording real estate at the lower of cost or fair value less estimated costs to sell, the implementation of this statement had no significant effects on its financial statements.
In June, 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. In December, 1996, SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125, was issued which defers portions of SFAS No. 125 to be effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1997. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 125 is effective for applicable transactions occurring after December 31, 1996, and is to be applied prospectively. The Company anticipates that the implementation of this statement will have no significant effects on its financial statements.
(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 $200,000 on the life of any one individual. Prior to 1996, the Company's policy was to reinsure amounts in excess of $150,000. Total life insurance in force was $8.15 billion and $7.94 billion at December 31, 1996 and 1995, respectively. Of these amounts, life insurance in force totaling $1.07 billion and $1.27 billion was ceded to reinsurance companies, primarily on a yearly renewable term basis, at December 31, 1996 and 1995, 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 $5,490,000 and $5,646,000 at December 31, 1996 and 1995, respectively. Premium revenues were reduced by $6,442,000, $7,420,000, and $6,040,000 for reinsurance premiums incurred during 1996, 1995, and 1994, respectively. Benefit expenses were reduced by $19,070,000, $5,812,000, and $3,295,000 for reinsurance recoveries during 1996, 1995, and 1994, 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
Total Federal income taxes for 1996, 1995, and 1994 were allocated as follows:
The provisions for Federal income taxes attributable to earnings 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 corresponding tax effects are as follows:
There were no deferred taxes attributable to enacted tax rate changes for the years ended December 31, 1996, 1995, and 1994.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995, are presented below:
There was no valuation allowance for deferred tax assets at December 31, 1996 and 1995. 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 in 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, 1996, 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, 1996, 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 $182,000, $5,669,000 and $2,864,000 for 1996, 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 $18,614,000 at December 31, 1996. 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 7.5% for 1996 and 7.0% for 1995. The projected increase in future compensation levels was based on a rate of 4.5% and 5.0% for 1996 and 1995, respectively. The projected long-term rate of return on plan assets was 8.5% for 1996 and 1995.
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 7.5% for 1996 and 7.0% for 1995. The projected increase in future compensation levels was based on a rate of 4.5% and 5.0% for 1996 and 1995, 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, 1996 and 1995, Company contributions totaled $217,000 and $201,000, respectively.
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, 1996 and 1995, Company contributions totaled $62,000 and $55,000, 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, 1996 and 1995. The weighted average interest rates on borrowings for the years ended December 31, 1996 and 1994 were 6.91% and 4.45%, respectively. Actual borrowings and interest expense for 1996 and 1994 were minimal. 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 helps define the minimum reserves for policies with multiple benefit streams, such as two-tier annuities. The Company had been reserving for its two-tier annuities according to an agreement reached in 1993 with its state of domicile, Colorado. 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 or National Western) and subsidiaries of The Westcap Corporation (Westcap), a wholly owned subsidiary of the Company. 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. Westcap has filed Chapter 11 bankruptcy (see below), and City Colleges has filed a $55 million claim in the bankruptcy court. The claim has been tried before the court, but no judgment has been entered. Although the alleged damages would be material to the Company's financial statements, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The lawsuit against the Company has been stayed pending determination of the proceeding against Westcap.
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, 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 the Company s financial statements, 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 lawsuit has been transferred to the Westcap bankruptcy court, and the proceedings against the Company have been stayed pending determination of the claim in bankruptcy against Westcap.
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 (the 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 actual damages of $8 million, 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. The Company and Westcap deny the allegations and believe they each have adequate defenses to such suit. Although the alleged damages would be material to the Company s financial statements, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The lawsuit is currently stayed pending the determination of the claim in bankruptcy against Westcap.
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. 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 the investment recommendations and 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. The Company believes that it has adequate defenses to such suit and denies the allegations. The parties have initiated discovery. Although the alleged damages would be material to the Company's financial statements, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The lawsuit is currently stayed pending the determination of a similar claim against Westcap in the Westcap bankruptcy proceedings.
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 and is alleged to be responsible for their acts. Westcap and the Company are of the opinions that they have adequate defenses to the suit. Although the alleged damages would be material to the Company's financial statements, 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 lawsuit is currently stayed pending the determination of the claim in bankruptcy against Westcap.
On February 27, 1996, the City of Tracy, a California municipal corporation, filed a complaint in the Superior Court of San Joaquin County, California, against Westcap Securities, L.P., National Western Life Insurance Company (the Company) and others. The suit arises from derivative investments purchased by the City of Tracy from Westcap Securities, L.P., an affiliate of The Westcap Corporation. The suit alleges that The Westcap Corporation and its subsidiaries are controlled by the Company and that it is responsible for alleged wrongful acts of the Westcap subsidiaries. Plaintiff alleges that the Westcap affiliates violated fiduciary duties and responsibilities owed to the Plaintiff related to investment purchases and decisions made by the Plaintiff, breach of contract, deceit, fraud, violation of California Securities Laws, and negligence, and that the Plaintiff was financially damaged thereby. The suit seeks rescission of the investment transactions, actual and punitive damages. Westcap and the Company are of the opinions that each of them have good and adequate defenses to the suit, and they deny the allegations. Although the alleged damages would be material to the Company's financial statements, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The lawsuit has been removed to the U.S. Bankruptcy Court in Houston, Texas, where it is currently pending.
On January 8, 1997, Tom Green County, a county government entity of the State of Texas, filed a petition in the District Court of Tom Green 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 Tom Green County from Westcap Securities, L.P., an affiliate of The Westcap Corporation. The suit alleges that The Westcap Corporation and its affiliates are controlled by the Company and Robert L. Moody, and that they are responsible for the alleged wrongful acts of the Westcap affiliates in selling securities to the Plaintiff. Plaintiff alleges that the Westcap affiliates violated fiduciary duties and responsibilities allegedly owed to the Plaintiff related to investment recommendations and decisions made by the Plaintiff in purchasing securities, engaged in fraud and deceptive practices, conspiracy, violations of Texas Securities Laws, negligence and gross negligence, 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. The Company believes it has good and adequate defenses to the suit and denies the allegations. Although the alleged damages would be material to the Company's financial statements, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The Company has filed an answer in the suit, has denied all claims and allegations, and has removed the case to the U.S. District Court for the Northern District of Texas, San Angelo Division.
Although the alleged damages for the above-described suits would be material to the financial statements of National Western Life Insurance 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 accompanying 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 arise from these lawsuits would not have a material adverse effect on the Company's financial position.
On April 12, 1996, The Westcap Corporation and its wholly owned subsidiary, Westcap Enterprises, Inc., separately filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court, Southern District of Texas, Houston Division. Westcap Enterprises, Inc. is the successor by merger to Westcap Securities Investment, Inc., Westcap Securities Management, Inc., and Westcap Securities, L.P., which prior to such merger were subsidiaries or affiliates of The Westcap Corporation.
The plan of reorganization filed in the Bankruptcy Court provides for the merger of Westcap Enterprises, Inc. into The Westcap Corporation (Westcap), with the survivor to conduct business as a real estate investment trust under sections 856-58 of the Federal Tax Code. National Western has agreed to participate in the Westcap plan of reorganization by the contribution of $5,000,000 of cash and $5,000,000 of income producing real estate properties in exchange for a complete settlement and release of any claims by Westcap against National Western and a continuing equity interest in the reorganized entity. The reorganization plan is subject to approval by Westcap's creditors and the Bankruptcy Court. The Creditors' Committee, the debtor Westcap, and National Western are currently engaged in discussions relating to the possible settlement of all claims by the creditors against Westcap and the claims of Westcap against National Western. No prediction can be made at this time as to the outcome of such settlement discussions.
National Western, Westcap, and the Creditors Committee agreed that National Western may make a $1,000,000 cash infusion to Westcap for operational expenses incurred during its bankruptcy and that such cash infusion will be credited against any future settlement or litigation recovery related to Westcap's alleged claims against National Western. Such funding was approved by the Bankruptcy Court on February 21, 1997, and the funds were transferred by National Western to Westcap on March 18, 1997.
National Western's investment in Westcap was completely written off during 1995. The $1,000,000 contribution described above will be reflected as losses from discontinued operations in the first quarter of 1997. Any additional losses from discontinued operations will depend primarily on results of Westcap bankruptcy proceedings.
(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 $1,000,000 at December 31, 1996. 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 . Commitments do not necessarily represent future liquidity requirements, as some could expire without being drawn upon. The Company evaluates each customer's creditworthiness on a case-by-case basis.
(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 $1,146,000, $2,371,000, and $4,869,000 for the years ended December 31, 1996, 1995, and 1994, 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 1997 is $35,209,000. 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 were subject to vesting requirements as reflected in the following schedule:
All of the 13,496 shares that were granted have been issued and were outstanding as of December 31, 1996 and 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. On April 19, 1996, an additional 33,000 options were issued to selected officers. The directors' stock options vest 20% annually following one full year of service to the Company from the date of grant. The officers' stock options vest 20% annually following three full years of service to the Company from the date of grant. The exercise prices of the stock options were set at the fair market values of the common stock on the dates of grant. A summary of shares available for grant and stock option activity is detailed below:
Of the 92,500 shares outstanding at December 31, 1996, only 1,400 are vested and exercisable at an exercise price of $38.13.
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 Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees."
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 has elected to continue to apply the accounting methods prescribed by APB Opinion No. 25 for its existing stock and incentive plan. As a result, no compensation costs have been recorded for the Company's existing plan using the intrinsic value based method. If compensation expense for the stock options had been determined using the fair value based method, there would have been no significant changes in the Company's net income and earnings per share for 1996 and 1995.
(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 in Central and South America, were approximately $56,689,000, $57,407,000, and $53,846,000, for the years ended December 31, 1996, 1995, and 1994, respectively.
A significant portion of the Company's universal life and investment annuity contracts were sold through three agencies. Combined business from these agencies accounted for approximately 31%, 34%, and 40% of total direct premium revenues and universal life and investment annuity contract deposits for 1996, 1995, and 1994, 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 1996 reflect the following significant items:
Net earnings for the fourth quarter of 1996 totaled $13,071,000 compared to $7,899,000 for the fourth quarter of 1995. Insurance revenues, excluding realized gains and losses on investments, increased $3,741,000 from the 1995 fourth quarter, primarily due to increases in net investment income. Additionally, expenses decreased significantly in 1996 primarily due to lower life insurance benefit claims and amortization of deferred policy acquisition costs.
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.
(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, 1996 and 1995. 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.
Investment annuity 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, 1996 and 1995.
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.
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 and Chapter 11 Bankruptcy Filing
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. Subsequently, on April 12, 1996, The Westcap Corporation and its wholly owned subsidiary, Westcap Enterprises, Inc., separately filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court, Southern District of Texas, Houston Division. Westcap Enterprises, Inc. is the successor by merger to Westcap Securities Investment, Inc., Westcap Securities Management, Inc., and Westcap Securities, L.P., which prior to such merger were subsidiaries or affiliates of The Westcap Corporation. The bankruptcy filing is more fully described in Note 9, Commitments and Contingencies.
As of December 31, 1996 and 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. The preparation of Westcap's 1996 and 1995 financial statements required assumptions by management that included assumptions regarding the fair value of assets and expenses to be incurred. 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 discontinued operations. Losses from 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 resulted in the complete write-off of National Western Life Insurance Company's investment in Westcap on a consolidated basis. Additional losses from discontinued operations will depend primarily on results of Westcap bankruptcy proceedings as previously described in Note 9, Commitments and Contingencies.
(B) Summary Financial Statements and Significant Disclosures
A summary of Westcap's financial statements for the years ended September 30, 1996, 1995, and 1994 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 losses from discontinued operations.
The Westcap Corporation conducted its brokerage operations through a limited partnership, Westcap Securities, L.P. (Westcap L.P.). Westcap L.P. was subject to regulation by the Securities and Exchange Commission. 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) prejudgment 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.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES SCHEDULE I SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1996 (In thousands)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES SCHEDULE I, CONTINUED SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1996
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 $5,988,000, and real estate is stated at cost before allowances for possible losses of $2,288,000.
(2) Mortgage loans with related parties totaling $13,291,000 have been excluded.
(3) Real estate acquired by foreclosure included in other long-term investments is as follows: cost $3,214,000; balance sheet amount $2,156,000.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES SCHEDULE V VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 1996, 1995, and 1994 (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, President, Chief Executive Officer, Chief Operating Officer, and Director and Director
/S/ Robert L. Busby, III /S/ Vincent L. Kasch By: Robert L. Busby, III By: Vincent L. Kasch Senior Vice President - Vice President - Chief Administrative Officer, Controller and Chief Financial Officer Assistant Treasurer and Treasurer
March 27, 1997 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
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. /S/ E.J. Pederson Charles D. Milos, Jr., E. J. Pederson, Director Director
March 27, 1997 Date