-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EKck1omBVAlqSPUCTEeBQ07lRkRQzGnEaIobdQoHYatLKPK69wGX2NXsS58/zDDG kNpqYNTWuBzsIn813JZpEw== 0000070684-96-000004.txt : 19960402 0000070684-96-000004.hdr.sgml : 19960402 ACCESSION NUMBER: 0000070684-96-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL WESTERN LIFE INSURANCE CO CENTRAL INDEX KEY: 0000070684 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 840467208 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 002-17039 FILM NUMBER: 96542612 BUSINESS ADDRESS: STREET 1: 850 E ANDERSON LN CITY: AUSTIN STATE: TX ZIP: 78752-1602 BUSINESS PHONE: 5128361010 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Fiscal Year Ended December 31, 1995 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ___________ to ___________ Commission File Number: 2-17039 NATIONAL WESTERN LIFE INSURANCE COMPANY (Exact name of Registrant as specified in its charter) COLORADO 84-0467208 (State of Incorporation) (I.R.S. Employer Identification Number) 850 EAST ANDERSON LANE AUSTIN, TEXAS 78752-1602 (512) 836-1010 (Address of Principal Executive Offices) (Telephone Number) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: EXEMPT Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the common stock (based upon the closing price) held by non-affiliates of the Registrant at March 15, 1996, was approximately $130,074,000. As of March 15, 1996, the number of shares of Registrant's common stock outstanding was: Class A - 3,291,338 and Class B - 200,000. PART I ITEM 1. BUSINESS (a) General Life Insurance Operations National Western Life Insurance Company (hereinafter referred to as "National Western", "Company", or "Registrant") is a life insurance company, chartered in the State of Colorado in 1956, and doing business in forty-three states and the District of Columbia. National Western also accepts applications from and issues policies to residents of several Central and South American countries. Such policies are accepted and issued in the United States. During 1995, the Company recorded approximately $403 million in premium revenues, universal life, and investment annuity contract deposits. New life insurance issued during 1995 approximated $1.2 billion and the total amount in force at year-end 1995 was $7.9 billion. As of December 31, 1995, the Company had total consolidated assets of approximately $2.96 billion. Competition: The life insurance business is highly competitive and National Western competes with over 1,700 stock and mutual companies. Best's Agents Guide To Life Insurance Companies, an authoritative life insurance publication, lists companies by total admitted assets and life insurance in force. As of December 31, 1994, the most recent date for which information is available, National Western ranked 145 in total admitted assets and 227 in life insurance in force among approximately 1,700 life insurance companies domiciled in the United States. Life insurance companies compete not only on product design and price, but increasingly on policyowner service and marketing and sales efforts. National Western believes that its products, premium rates, policyowner service, and marketing efforts are generally competitive with those of other life insurance companies selling similar types of insurance. Mutual insurance companies may have certain competitive advantages over stock companies in that the policies written by them are participating policies and their profits inure to the benefit of their policyholders. The Company no longer writes participating policies, and such policies represent only 1% of the Company's life insurance in force at December 31, 1995. In addition to competition within the life insurance industry, National Western and other insurance companies face competition from other industries. In recent years, there has been increased interest in the banking industry to directly market annuities. In fact, in January, 1995, the U.S. Supreme Court ruled that national banks may compete with insurance companies in the sale of annuities. Such regulation changes could result in increased competition for National Western and the life insurance industry. Competition also arises from different investment and product choices. Annuities are often used as long-term, tax deferred investment vehicles and in retirement planning. As a result, other investment types can be competitive products to annuities. For example, the recent growth and popularity of mutual funds has attracted large amounts of investment funds over the past several years, particularly during periods of declining market interest rates. Many mutual funds also allow tax deferred features through individual retirement accounts, 401(k) plans, and other qualified methods. Agents and Employees: National Western has 230 full-time employees at its principal executive office. Its insurance operations are conducted primarily through broker-agents, which numbered 8,330 at December 31, 1995. The agency operations are supervised by Senior Vice Presidents of domestic and international marketing. The Company's agents are independent contractors who are compensated on a commission basis. General agents receive overriding first year and renewal commissions on business written by agents under their supervision. Types of Insurance Written: National Western offers a broad portfolio of individual whole life and term life insurance plans, endowments, and annuities, including standard supplementary riders. The Company does not market group life insurance but does offer group annuities. In recent years the majority of the business written has been individual flexible premium and single premium annuities and universal life products. Except for a small employee health plan and a small number of existing individual accident and health policies, primarily in Florida, the Company does not write any new policies in the accident and health markets. A distribution of the Company's direct premium revenues and deposits by type of product is provided below:
1995 1994 Amounts in Amounts in Thousands % Thousands % Investment annuities 309,971 77 % 157,622 64 % Universal life insurance 68,464 17 64,760 26 Traditional life and other 24,801 6 24,919 10 403,236 100 % 247,301 100 %
The underwriting policy of the Company is to require medical examination of applicants for ordinary insurance in excess of certain prescribed limits. These limits are graduated according to the age of the applicant and the amount of insurance desired. The Company has no maximum for issuance of life insurance on any one life. However, the Company's general policy is to reinsure that portion of any risk in excess of $150,000 on the life of any one individual. Effective January 1, 1996, the Company has raised this reinsurance level to $200,000 per individual. Also, following general industry practice, policies are issued on substandard risks. Geographical Distribution of Business: For the year 1995, insurance and annuity policies held by residents of the State of Texas accounted for 17% of premium revenues, universal life, and investment annuity contract deposits from direct business, while policies held by residents of California, Pennsylvania, and Michigan accounted for approximately 8%, 7%, and 6%, respectively. All other states of the United States accounted for 48% of premium revenues and deposits from direct business. The remaining 14% of premium revenues and deposits were derived from the Company's policies issued to foreign nationals, primarily all of which was for individual life insurance. A distribution of the Company's direct premium revenues and deposits by domestic and international markets is provided below:
1995 1994 Amounts in Amounts in Thousands % Thousands % United States domestic market 345,829 86 % 193,455 78 % International market 57,407 14 53,846 22 403,236 100 % 247,301 100 %
Approximately 74% of the life insurance face amount issued by the Company during 1995 was written through international insurance brokers acting as independent contractors. Foreign business is solicited by various independent brokers, primarily in Central and South America, and forwarded to the United States for acceptance and issuance. The Company maintains strict controls on the business it accepts from such foreign independent brokers, as well as its underwriting procedures for such business. Except for a small block of business, a currency clause is included in each foreign policy stating that premium and claim "dollars" refer to lawful currency of the United States. Traditional and universal life products are sold in the international market to individuals in upper socioeconomic classes. By marketing exclusively to this group, sales typically produce a higher average policy size, strong persistency, and claims experience similar to that in the United States. Investments: State insurance statutes prescribe the nature, quality, an percentage of the various types of investments which may be made by insurance companies and generally permit investments in qualified state, municipal, federal, and foreign government obligations, corporate bonds, preferred and common stock, real estate, and real estate first lien mortgages where the value of the underlying real estate exceeds the amount of the mortgage lien by certain required percentages. The following table shows investment results for insurance operations for the periods indicated:
Net Unrealized Invested Realized Appreciation Assets of Net Gains Increase Calendar Insurance Investment (Losses) on (Decrease) Year Operations Income (A) Investments (B) (In thousands) 1995 $ 2,624,596 201,816 (2,415) 17,394 1994 2,343,827 190,021 1,626 (1,942) 1993 2,237,687 180,252 3,206 (395) 1992 2,200,518 184,149 15,710 237 1991 2,025,997 176,443 9,360 527 Notes to Table: (A) Net investment income is after deduction of investment expenses, but before realized gains (losses) on investments and Federal income taxes. (B) Unrealized appreciation, net of effects of deferred policy acquisition costs and taxes, relates only to those investment securities classified as available for sale.
The following table shows the percentage distribution of insurance operation investments:
December 31, 1995 1994 1993 1991 1992 Securities held to maturity 62.6% 68.5% 79.9% 77.5% 77.1% Securities available for sale 22.9 15.1 1.8 4.7 - Mortgage loans 7.3 8.1 8.4 8.1 7.8 Policy loans 5.6 6.5 6.9 7.2 7.7 Other investments 1.6 1.8 3.0 2.5 7.4 Totals 100.0% 100.0% 100.0% 100.0% 100.0%
Regulation: The Company is subject to regulation by the supervisory agency of each state or other jurisdiction in which it is licensed to do business. These agencies have broad administrative powers, including the granting and revocation of licenses to transact business, the licensing of agents, the approval of policy forms, the form and content of mandatory financial statements, capital, surplus, and reserve requirements, as well as the previously mentioned regulation of the types of investments which may be made. The Company is required to file detailed financial reports with each state or jurisdiction in which it is licensed, and its books and records are subject to examination by each. In accordance with the insurance laws of the various states in which the Company is licensed and the rules and practices of the National Association of Insurance Commissioners, examination of the Company's records routinely takes place every three to five years. These examinations are supervised by the Company's domiciliary state, with representatives from other states participating. The most recent examination of National Western was completed in 1994 and covered the six-year period ended December 31, 1992. The states of Colorado and Delaware participated. A final report disclosing the examination results was received by the Company in March, 1995. The report contained no adjustments or issues which would have a significant, negative impact on the operations of the Company. Regulations that affect the Company and the insurance industry are often the result of efforts by the National Association of Insurance Commissioners (NAIC). The NAIC is an association of state insurance commissioners, regulators and support staff that acts as a coordinating body for the state insurance regulatory process. Recently, increased scrutiny has been placed upon the insurance regulatory framework, and certain state legislatures have considered or enacted laws that alter, and in many cases increase, state authority to regulate insurance companies. The NAIC and state insurance regulators periodically re-examine existing laws and regulations, and recently have been specifically focusing on insurance company investments and solvency issues, statutory policy reserves, reinsurance, risk-based capital guidelines, and codification of prescribed statutory accounting principles. Of particular importance, in 1993 the NAIC established new risk-based capital (RBC) requirements to help state regulators monitor the financial strength and stability of life insurers by identifying those companies that may be inadequately capitalized. Under the NAIC's requirements, each insurer must maintain its total capital above a calculated threshold or take corrective measures to achieve the threshold. The threshold of adequate capital is based on a formula that takes into account the amount of risk each company faces on its products and investments. The RBC formula takes into consideration four major areas of risk which are: (i) asset risk which primarily focuses on the quality of investments; (ii) insurance risk which encompasses mortality and morbidity risk; (iii) interest rate risk which involves asset/liability matching issues; and (iv) other business risks. The Company has calculated its RBC level and has determined that its capital and surplus is significantly in excess of the threshold requirements. The RBC regulation developed by the NAIC is an example of its involvement in the regulatory process. New regulations are routinely published by the NAIC as model acts or model laws. The NAIC encourages adoption of these model acts by all states to provide uniformity and consistency among state insurance regulations. Discontinued Brokerage Operations General: The Westcap Corporation (Westcap), a wholly owned subsidiary of the Company, was a brokerage firm headquartered in Houston, Texas. Prior to July 17, 1995, Westcap provided investment products and financial services to a nationwide customer base. Its wholly owned subsidiaries include Westcap Securities Investment, Inc. (Westcap Investment), Westcap Securities Management, Inc. (Westcap Management), and Westcap Mortgage Company (Westcap Mortgage). Westcap Investment and Westcap Management own 100% of the partnership interests in Westcap Securities, L.P. (Westcap L.P.). Westcap L.P. was primarily a dealer in municipal and corporate bonds and collateralized mortgage obligations and a secondary market dealer in obligations issued or guaranteed by the U.S. government or its agencies. The limited partnership was subject to regulation by the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers. Plan to Cease Brokerage Operations: Effective July 17, 1995, The Westcap Corporation and subsidiaries discontinued all sales and trading activities in its Houston, Texas, office. At that time, Westcap continued its corporate operations and small sales operations in its New Jersey office. However, in September, 1995, Westcap approved a plan to close the remaining sales office in New Jersey and to cease all brokerage operations. As more fully described in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, declines in both sales revenues and earnings were the principal reasons for ceasing brokerage operations. The declines resulted primarily from adverse bond market conditions and adverse publicity about litigation. As a result of Westcap's decision to cease brokerage operations, the brokerage segment is now reported as discontinued operations throughout this report and in the accompanying financial statements. In anticipation of an Order Instituting Public Administrative Proceedings, Making Findings and Imposing Remedial Sanctions (Order) being entered pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 by the Securities and Exchange Commission (Commission), on February 8, 1996, Westcap L.P. submitted an offer of settlement to the Commission whereby it consented, without admitting or denying the findings in the Order, to the entry of an Order of the Commission making findings, revoking Westcap L.P.'s registration with the Commission, and requiring payment to the Commission of (i) $445,341 disgorgement, (ii) prejudgement interest of $83,879, and (iii) civil penalty of $300,000. Such an Order was entered by the Commission on February 14, 1996. In compliance with the Order, Westcap L.P. made payment to the Commission of $829,220 on March 5, 1996. (b) Financial Information About Industry Segments A summary of financial information for the Company's two industry segments follows:
Life Discontinued Insurance Brokerage Adjustments Consolidated Operations Operations (B) Amounts (In thousands) Gross revenues: 1995 $ 287,816 5,112 (A) (5,693) 287,235 1994 278,431 40,208 (A) (41,881) 276,758 1993 273,363 105,923 (A) (107,579) 271,707 Net earnings (losses): 1995 $ 35,634 (16,350) - 19,284 1994 37,172 (2,936) - 34,236 1993 34,892 21,832 - 56,724 Identifiable assets: 1995 $2,952,282 6,177 - 2,958,459 1994 2,702,184 232,057 (19,187) 2,915,054 1993 2,590,537 372,301 (21,787) 2,941,051 Notes to Table: (A) These amounts are not reported as revenues in the accompanying consolidated financial statements, as the segment has been discontinued. Instead, gross revenues are reported net of expenses and taxes as a separate line item identified as discontinued operations. This reporting classification is used to clearly separate discontinued operations from continuing operations of the consolidated entity. (B) These amounts include both consolidating eliminations and adjustments for reporting discontinued brokerage operations as described in note (A) above. 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. PROPERTIES The Company leases approximately 72,000 square feet of office space in Austin, Texas, for $477,600 per year plus taxes, insurance, maintenance, and other operating costs. This lease expires in 2000. The Company's brokerage subsidiary, The Westcap Corporation, leases its office facilities in Houston, Texas, under a lease which terminates in 1997. The total leased space is approximately 4,200 square feet. The annual lease costs will be approximately $74,000 and $35,000 in 1996 and 1997, respectively. ITEM 3. LEGAL PROCEEDINGS On March 28, 1994, the Community College District No. 508, County of Cook and State of Illinois (The City Colleges) filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division, against National Western Life Insurance Company (the Company) and subsidiaries of The Westcap Corporation. The suit seeks rescission of securities purchase transactions by The City Colleges from Westcap between September 9, 1993 and November 3, 1993, alleged compensatory damages, punitive damages, injunctive relief, declaratory relief, fees, and costs. National Western is named as a "controlling person" of the Westcap defendants. On February 1, 1995, the complaint was amended to add a RICO count for treble damages and claims under the Texas securities and consumer fraud laws, and to add additional defendants. Westcap and the Company are of the opinions that Westcap has adequate documentation to validate all such securities purchase transactions by The City Colleges, and that Westcap and the Company each have adequate defenses to the litigation. Although the alleged damages would be material to the Company's and Westcap's financial positions, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. A judicial ruling favorable to Westcap has been made requiring resolution of the suit against Westcap through binding arbitration. The lawsuit against the Company was suspended pending determination of the arbitration proceeding against Westcap. Arbitration proceedings are currently set to begin in August, 1996. On February 1, 1995, the San Antonio River Authority (SARA) filed a complaint in the 285th Judicial District Court, Bexar County, Texas, against Kenneth William Katzen (Katzen), Westcap Securities, L.P., The Westcap Corporation (Westcap), and National Western Life Insurance Company (the Company). The suit alleges that Katzen and Westcap sold mortgage-backed security derivatives to SARA and misrepresented these securities to SARA. The suit alleges violations of the Federal Securities Act, Texas Securities Act, Deceptive Trade Practices Act, breach of fiduciary duty, fraud, negligence, breach of contract, and seeks attorney's fees. The Company is named as a "controlling person" of the Westcap defendants. Westcap and the Company are of the opinions that Westcap has adequate documentation to validate all securities purchases by SARA and that the Company and Westcap have adequate defenses to such suit. Although the alleged damages would be material to Westcap's financial condition, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The Company and Westcap have denied all allegations and the parties have initiated discovery. The case is set for trial on April 8, 1996. On June 9, 1995, Charles McCutcheon, as Sheriff of Palm Beach County, Florida, served The Westcap Corporation, Westcap Securities, Inc., Westcap Government Securities, Inc., individual officers and directors of the Westcap entities, and National Western Life Insurance Company as defendants with a complaint filed in the U.S. District Court for the Southern District of Florida. The Complaint alleges that the Westcap entities improperly sold certain derivative securities to the Plaintiff and did not disclose the high risk of these securities to the Plaintiff, who suffered financial losses from the investments. The Company is sued as a "controlling person" of Westcap, and it is alleged that the Company is responsible and liable for the alleged wrongful conduct of Westcap. The suit seeks rescission of the investment transactions, alleged damages, punitive and exemplary damages, attorneys' fees, and injunction. On October 13, 1995, the U.S. District Judge ordered arbitration of Plaintiff's claims against the Westcap entities and stayed all proceedings pending outcome of the arbitration. Although the alleged damages would be material to Westcap's financial condition, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The Company and Westcap deny the allegations and believe they each have adequate defenses to such suit. On July 5, 1995, San Patricio County, Texas, filed suit in the District Court of San Patricio County, Texas, against National Western Life Insurance Company (the Company) and its chief executive officer, Robert L. Moody. The suit arises from derivative investments purchased by San Patricio County from Westcap Securities, L.P. or Westcap Government Securities, Inc., affiliates of The Westcap Corporation, a wholly owned subsidiary of the Company. The suit alleges that the Westcap affiliates were controlled by the Company and Mr. Moody and that they are responsible for the alleged wrongful acts of the Westcap affiliates in selling the securities to the Plaintiff. Plaintiff alleges that the Westcap affiliates violated duties and responsibilities owed to the Plaintiff related to its investment recommendations and the decisions made by Plaintiff, and alleges that the Plaintiff was financially damaged by such actions of Westcap. The suit seeks rescission of the investment transactions and actual and punitive damages of unspecified amounts. Although the alleged damages would be material to Westcap's financial condition, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The Company believes that it has adequate defenses to such suit and denies the allegations. The parties have initiated discovery. On September 13, 1995, Michigan South Central Power Agency filed a complaint in The United States District Court for the Western District of Michigan against Westcap Securities Investment, Inc., Westcap Securities, L.P., Westcap Securities Management, Inc., The Westcap Corporation, National Western Life Insurance Company (the Company), and others. The suit alleges that salesmen of Westcap sold mortgage-backed securities to the Plaintiff and misrepresented these securities in violation of Federal and state securities laws and common law. The Company is named as a "controlling person" of the Westcap defendants. Westcap and the Company are of the opinions that they have adequate defenses to the suit. Although the alleged damages would be material to Westcap's financial condition, a reasonable estimate of any actual losses which may result from the suit cannot be made at this time. The Company and Westcap deny all allegations. The Westcap Corporation and Westcap Securities, L.P. are also defendants in several other pending lawsuits which have arisen in the ordinary course of its business. Westcap Securities, L.P. has also been notified of several arbitration claims filed with the National Association of Securities Dealers. After reviewing the lawsuits and arbitration filings with outside counsel, management believes it has adequate defenses to each of the claims. Although the alleged damages for all of the above-described suits and arbitration claims would be material to the financial positions of the Company and The Westcap Corporation, a reasonable estimate of actual losses which may result from any of these claims cannot be made at this time. Accordingly, no provision for any liability that may result from these actions has been recognized in the consolidated financial statements. No other legal proceedings presently pending by or against the Company or its subsidiaries are described, because management believes the outcome of such litigation should not have a material adverse effect on the financial position of the Company or its subsidiaries taken as a whole. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's security holders during the fourth quarter of 1995. PART II ITEM 5. 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:
High Low 1995: First Quarter $ 39 32 Second Quarter 44 34-3/4 Third Quarter 59 43 Fourth Quarter 61 46-1/2 1994: First Quarter $ 48 37 Second Quarter 40-1/2 33-3/4 Third Quarter 38 34-1/4 Fourth Quarter 38-1/4 30
(b) Equity Security Holders The number of stockholders of record on December 31, 1995, was as follows: Class A Common Stock 6,839 Class B Common Stock 2
(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. 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.
Years Ended December 31, 1995 1994 1993 1992 1991 (In thousands except per share amounts) Revenues: Life and annuity $ 17,390 18,938 18,624 21,365 21,525 premiums Universal life and investment annuity contract revenues 69,783 64,711 67,778 56,543 44,627 Net investment income 201,816 190,021 180,252 184,149 176,443 Other income 661 1,462 1,847 616 848 Realized gains (losses) on investments (2,415) 1,626 3,206 15,710 9,360 Total revenues 287,235 276,758 271,707 278,383 252,803 Expenses: Policyholder benfits 37,336 32,790 34,646 34,234 31,908 Amortization of deferred policy acquisition costs 33,675 32,131 33,159 25,085 16,852 Universal life and investment annuity contract interest 142,940 129,064 130,875 135,792 143,018 Other insurance operating expenses 27,084 29,394 28,959 27,870 32,897 Total expenses 241,035 223,379 227,639 222,981 224,675 Federal income taxes 10,566 16,207 14,696 18,719 7,615 Earnings before cumulative effect of change in accounting principle and discontinued operations 35,634 37,172 29,372 36,683 20,513 Cumulative effect of change in accounting for income taxes - - 5,520 - - Earnings (losses) from discontinued operations (16,350) (2,936) 21,832 26,728 5,245 Net earnings $ 19,284 34,236 56,724 63,411 25,758 Per Share: Earnings before cumulative effect of change in accounting principle and discontinued operations $ 10.22 10.66 8.44 10.55 5.89 Cumulative effect of change in accounting for income taxes - - 1.58 - - Earnings (losses) from discontinued operations (4.69) (0.84) 6.27 7.68 1.52 Net earnings $ 5.53 9.82 16.29 18.23 7.41 Total assets $2,958,459 2,915,054 2,941,051 2,698,497 2,581,032 Total liabilities $2,646,472 2,639,920 2,698,333 2,512,406 2,458,589 Stockholders' equity $ 311,987 275,134 242,718 186,091 122,443
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL National Western Life Insurance Company is a life insurance company, chartered in the State of Colorado in 1956, and doing business in forty-three states and the District of Columbia. It also accepts applications from and issues policies to residents of Central and South American countries. These policies are accepted and issued in the United States and accounted for approximately 14% of the Company's total premium revenues, universal life, and investment annuity contract deposits in 1995. The primary products marketed by the Company are its universal life and single and flexible premium annuity products. In addition to the life insurance business, the Company has a brokerage operations segment through its wholly owned subsidiary, The Westcap Corporation. However, during 1995 The Westcap Corporation closed its sales offices and approved a plan to cease all brokerage operations. Accordingly, the brokerage segment is now reported as discontinued operations throughout this report and in the accompanying financial statements. INVESTMENTS IN DEBT AND EQUITY SECURITIES Investment Philosophy The Company's investment philosophy is to maintain a diversified portfolio of investment grade debt and equity securities that provide adequate liquidity to meet policyholder obligations and other cash needs. The prevailing strategy within this philosophy is the intent to hold investments in debt securities to maturity. However, the Company manages its portfolio, which entails monitoring and reacting to all components which affect changes in the price, value, or credit rating of investments in debt and equity securities. Investments in debt and equity securities are classified and reported into the following categories: held to maturity, available for sale, and trading. The reporting category chosen for the Company's securities investments depends on various factors including the type and quality of the particular security and how it will be incorporated into the Company's overall asset/liability management strategy. At December 31, 1995, approximately 26% of the Company's total debt and equity securities, based on fair values, were classified as securities available for sale. These holdings provide flexibility to the Company to react to market opportunities and conditions and to practice active management within the portfolio to provide adequate liquidity to meet policyholder obligations and other cash needs. Securities the Company purchases with the intent to hold to maturity are classified as securities held to maturity. Because the Company has strong cash flows and matches expected maturities of assets and liabilities, the Company has the ability to hold the securities, as it would be unlikely that forced sales of securities would be required prior to maturity to cover payments of liabilities. As a result, securities held to maturity are carried at amortized cost less declines in value that are other than temporary. However, certain situations may change the Company's intent to hold a particular security to maturity, the most notable of which is a deterioration in the issuer's creditworthiness. Accordingly, a security may be sold to avoid a further decline in realizable value when there has been a significant change in the credit risk of the issuer. Securities that are held for current resale are classified as trading securities, as the intent is to sell them, producing a trading profit. The Company does not maintain a portfolio of trading securities. Securities that are not classified as either held to maturity or trading securities are reported as securities available for sale. These securities may be sold if market or other measurement factors change unexpectedly after the securities were acquired. For example, opportunities arise when factors change that allow the Company to improve the performance and credit quality of the investment portfolio by replacing an existing security with an alternative security while still maintaining an appropriate matching of expected maturities of assets and liabilities. Examples of such improvements are as follows: improving the yield earned on invested assets, improving the credit quality, changing the duration of the portfolio, and selling securities in advance of anticipated calls or other prepayments. Securities available for sale are reported in the Company's financial statements at fair value. Any unrealized gains or losses resulting from changes in the fair value of the securities are reflected as a component of stockholders' equity. As an integral part of its investment philosophy, the Company performs an ongoing process of monitoring the creditworthiness of issuers within the investment portfolio. In addition, review procedures are performed on securities that have had significant declines in fair value. The Company's objective in these circumstances is to determine if the decline in fair value is due to changing market expectations regarding inflation and general interest rates or other factors. Additional review procedures are performed on those fair value declines which are caused by factors other than market expectations regarding inflation and general interest rates. Specific conditions of the issuer and its ability to comply with all terms of the instrument are considered in the evaluation of the realizable value of the investment. Information reviewed in making this evaluation would include the recent operational results and financial position of the issuer, information about its industry, recent press releases, and other available data. If evidence does not exist to support a realizable value equal to or greater than the carrying value of the investment, such decline in fair value is determined to be other than temporary, and the carrying amount is reduced to its net realizable value. The amount of the reduction is reported as a realized loss. The Company's overall conservative investment philosophy is reflected in the allocation of investments of its insurance operations which is detailed below as of December 31, 1995 and 1994. The Company emphasizes debt securities, with smaller holdings in mortgage loans and real estate than industry averages.
Percent of Insurance Operations Investments 1995 1994 Debt securities 84.5 % 82.5 % Mortgage loans 7.3 8.1 Policy loans 5.6 6.5 Equity securities 1.0 1.1 Real Estate 0.7 0.8 Other 0.9 1.0 Totals 100.0 % 100.0 %
Portfolio Analysis At December 31, 1995, securities held to maturity totaled $1.643 billion, or 62.6% of total invested assets. The fair value of these securities was $1.726 billion, which reflects gross unrealized gains of $83 million. The unrealized gains within this portfolio result from decreases in market interest rates during 1995. The unrealized gains have no effect on the Company's financial statements, as securities held to maturity are recorded at amortized cost. Securities available for sale totaled $601 million at December 31, 1995, or 22.9% of total invested assets. Equity securities, which are included in securities available for sale, continue to be a small component of the Company's total investment portfolio totaling only $26 million. Securities available for sale are reported in the accompanying financial statements at fair value, with changes in values reported as a separate component of stockholders' equity. Net unrealized gains, net of adjustments for deferred policy acquisition costs and Federal income taxes, on securities in the available for sale category at December 31, 1995, totaled $12 million and are reflected as a component of stockholders' equity. As described in the notes in the accompanying financial statements, on July 31, 1994, the Company transferred securities with fair values totaling $805 million from securities available for sale to securities held to maturity. On December 29, 1995, the Company made additional transfers totaling $156 million to the held to maturity category from securities available for sale. The lower holdings of securities available for sale significantly reduces the Company's exposure to equity volatility while still providing securities for liquidity and asset/liability management purposes. The transfers to held to maturity in 1994 and 1995 resulted in locking in net unrealized gains which require subsequent amortization and had the following effects on stockholders' equity:
Net Unrealized Gains (Losses) as of December 31, 1995 1994 (In thousands) Beginning unamortized gains from transfers $ 941 - Net unrealized gains related to transfer of securities from available for sale to held to maturity 3,159 1,380 Amortization of net unrealized gains related to transferred securities (931) (439) 2,228 941 Ending unamortized gains from transfers $ 3,169 941
On December 29, 1995, the Company also transferred securities totaling $284 million to the available for sale category from securities held to maturity. This transfer resulted in an increase to stockholder's equity of $4,266,000 as of December 31, 1995, net of effects of deferred policy acquisition costs and taxes. This transfer was made to restructure the Company's portfolio to provide increased flexibility for both portfolio and asset/liability management. Accounting principles typically do not allow transfers from the held to maturity category to the available for sale category except under certain prescribed circumstances. However, in 1995 the Financial Accounting Standards Board permitted a one-time reassessment by companies of their securities classifications and allowed transfers out of the held to maturity category without regard to the prescribed circumstances. The reassessment and any resulting transfers had to be completed by December 31, 1995. The Company maintains a diversified debt securities portfolio which consists of various types of fixed income securities including primarily U.S. government, public utilities, corporate, and mortgage-backed securities. Investments in mortgage-backed securities include U.S. government and private issue mortgage-backed pass-through securities as well as collateralized mortgage obligations (CMOs). As of December 31, 1995 and 1994, the Company's debt securities portfolio consisted of the following mix of securities based on amortized cost:
Percent of Debt Securities 1995 1994 Mortgage and asset-backed securities 40.6 % 47.6 % Corporate 40.3 32.5 Public utilities 12.9 14.5 Foreign government 2.2 1.3 States and political subdivisions 2.2 2.5 U.S. government 1.8 1.6 Totals 100.0 % 100.0 %
The amortized cost and estimated fair values of investments in debt securities at December 31, 1995, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Fair Cost Value (In thousands) Due in one year or less $ 8,205 8,264 Due after one year through five years 109,919 112,928 Due after five years through ten years 853,549 898,249 Due after ten years 323,043 352,239 1,294,716 1,371,680 Mortgage-backed securities 885,223 929,723 Totals $ 2,179,939 2,301,403
Because expected maturities of securities may differ from contractual maturities due to prepayments and calls, the Company takes steps to manage and minimize such risks. In previous years, the Company has experienced increased calls, particularly in the public utilities portfolio. As a result, the Company has been increasing its holdings in noncallable corporate securities. Corporate holdings as a percentage of the entire portfolio increased from 32.5% in 1994 to 40.3% in 1995. The Company's holdings of mortgage-backed securities are also subject to prepayment risk, as well as extension risk. Both of these risks are addressed by specific portfolio management strategies. The Company substantially reduced both prepayment and extension risks by investing primarily in collateralized mortgage obligations which have more predictable cash flow patterns than pass-through securities. These securities, known as planned amortization class I (PAC I) CMOs, are designed to amortize in a more predictable manner than other CMO classes or pass-throughs. Using this strategy, the Company can more effectively manage and reduce prepayment and extension risks, thereby helping to maintain the appropriate matching of the Company's assets and liabilities. PAC I CMOs now account for approximately 90% of the total CMO portfolio as of December 31, 1995. The CMOs that the Company purchases are modeled and subjected to detailed, comprehensive analysis by the Company's investment staff before any investment decision is made. The overall structure of the entire CMO is evaluated, and an average life sensitivity analysis is performed on the individual tranche being considered for purchase under increasing and decreasing interest rate scenarios. This analysis provides information used in selecting securities that fit appropriately within the Company's investment philosophy and asset/liability management parameters. The Company's investment mix between mortgage-backed securities and other fixed income securities helps effectively balance prepayment, extension, and credit risks. In addition to managing prepayment, extension, and call risks, the Company continues to concentrate on improving the credit quality of its investments in debt securities. Much attention is often placed on a company's holdings of below investment grade debt securities, as these securities generally have greater default risk than higher rated corporate debt. These issuers usually have high levels of indebtedness and are more sensitive to adverse industry or economic conditions than are investment grade issuers. The Company's small holdings of below investment grade debt securities are summarized as follows:
Below Investment Grade Debt Securities % of Carrying Market Invested Value Value Assets (In thousands) December 31, 1995 $ 14,244 14,567 0.5% December 31, 1994 $ 31,861 28,670 1.4% December 31, 1993 $ 24,261 24,223 1.1%
The level of investments in debt securities which are in default as to principal or interest payments is indicative of the Company's minimal holdings of below investment grade debt securities. At December 31, 1995 and 1994, securities with principal balances totaling $3,575,000 and $2,415,000 were in default and on non-accrual status. The Company's commitment to high-quality investments in debt securities is also reflected by the portfolio average rating of "Aa," which is high quality. Allocation of investments in debt securities classified in accordance with the highest rating by a nationally recognized statistical rating organization as of December 31, 1995, is provided below. If securities were not rated by one of these organizations, the equivalent classification as assigned by the National Association of Insurance Commissioners was used.
Percent of Debt Securities Aaa and U.S. government 43.0 % Aa 4.3 A 29.1 Baa 22.4 Ba and other below investment grade 0.7 Not rated 0.5 100.0 %
MORTGAGE LOANS AND REAL ESTATE Investment Philosophy In general, the Company seeks loans on high quality, income producing properties such as shopping centers, freestanding retail stores, office buildings, industrial and sales or service facilities, selected apartment buildings, motels, and health care facilities. The location of these loans is typically in growth areas that offer a potential for property value appreciation. These growth areas are found primarily in major metropolitan areas, but occasionally in selected smaller communities. The Company currently seeks loans ranging from $500,000 to $11,000,000, with terms ranging from three to twenty-five years, at interest rates dictated by the marketplace. The Company seeks to minimize the credit and default risk in its mortgage loan portfolio through strict underwriting guidelines and diversification of underlying property types and geographic locations. In addition to being secured by the property, mortgage loans with leases on the underlying property are often guaranteed by the lessee, in which case the Company approves the loan based on the credit strength of the lessee. This approach, implemented in 1991, has significantly improved the quality of the Company's mortgage loan portfolio and reduced defaults. The Company's level of mortgage loan originations declined in 1995 to approximately $18 million. This is in comparison to originations totaling $30 million and $33 million in 1994 and 1993, respectively. Market conditions in 1995 included a decreasing interest rate environment and increasing competition. As a result, mortgage loan originations declined in 1995, as the Company has maintained its strict underwriting policies and its commitment to quality loans. The Company's direct investments in real estate are not a significant portion of its total investment portfolio, and the majority of real estate owned was acquired through mortgage loan foreclosures. However, the Company is also currently participating in several real estate joint ventures and limited partnerships. The joint ventures and partnerships invest primarily in income-producing retail properties. While not a significant portion of the Company's investment portfolio, these investments have produced favorable returns to date. The Company has no current plans to significantly increase its investments in real estate in the foreseeable future. Portfolio Analysis The Company held net investments in mortgage loans totaling $191,674,000 and $189,632,000, or 7.3% and 8.1% of total invested assets, at December 31, 1995 and 1994. The loans are real estate mortgages, substantially all of which are related to commercial properties and developments and have fixed interest rates. The diversification of the mortgage loan portfolio by geographic region of the United States and by property type as of December 31, 1995 and 1994, was as follows:
December 31, 1995 1994 West South Central 54.0 % 55.8 % Mountain 12.9 12.2 Pacific 9.4 9.7 South Atlantic 9.2 8.4 East South Central 4.3 4.5 East North Central 3.9 2.9 All Other 6.3 6.5 Totals 100.0 % 100.0 % December 31, 1995 1994 Retail 67.0 % 64.6 % Office 15.9 16.8 Hotel/Motel 8.3 7.6 Apartment 3.1 4.5 Industrial 0.6 0.7 Residential 0.4 0.4 Other Commercial 4.7 5.4 Totals 100.0 % 100.0 %
As of December 31, 1995, the allowance for possible losses on mortgage loans was $5,668,000. Additions to the allowance totaling $307,000 were recognized as realized losses on investments in the Company's 1994 financial statements. No additions were made in 1995. Management believes that the allowance for possible losses is adequate. However, while management uses available information to recognize losses, future additions to the allowance may be necessary based on changes in economic conditions, particularly in the West South Central region which includes Texas, Louisiana, Oklahoma, and Arkansas, as this area contains the highest concentrations of the Company's mortgage loans. The Company currently places all loans past due three months or more on non-accrual status, thus recognizing no interest income on the loans. At December 31, 1995 and 1994, the Company had approximately $202,000 and $2,292,000, respectively, of mortgage loan principal balances on non-accrual status. In addition to the non-accrual loans, the Company had mortgage loan principal balances with restructured terms totaling approximately $13,355,000 and $13,123,000 at December 31, 1995 and 1994, respectively. For the years ended December 31, 1995 and 1994, the reductions in interest income due to non-accrual and restructured mortgage loans were not significant. The contractual maturities of mortgage loans at December 31, 1995, are as follows:
Principal Due (In thousands) Due in one year or less $ 10,128 Due after one year through five years 32,494 Due after five years through ten years 121,509 Due after ten years through fifteen years 26,379 Due after fifteen years 7,484 Total $ 197,994
The Company owns real estate that was acquired through foreclosure and through direct investment totaling approximately $19,066,000 and $17,766,000 at December 31, 1995 and 1994, respectively. This small concentration of properties represents less than one percent of the Company's entire investment portfolio. The real estate holdings consist primarily of income-producing properties which are being operated by the Company. The Company recognized operating income on these properties of approximately $404,000 for the year ended December 31, 1995, and operating losses of approximately $62,000 for the year ended December 31, 1994. The Company does not anticipate significant changes in these operating results in the near future. The Company monitors the conditions and market values of these properties on a regular basis. Realized losses recognized due to declines in values of properties totaled $882,000 and $318,000 for the years ended December 31, 1995 and 1994, respectively. The Company makes repairs and capital improvements to keep the properties in good condition and will continue this maintenance as needed. RESULTS OF OPERATIONS Summary of Consolidated Operations A summary of operating results, net of taxes, for the years ended December 31, 1995, 1994, and 1993 is provided below:
Years Ended December 31, 1995 1994 1993 (In thousands except per share data) Revenues: Insurance revenues excluding realized gains (losses) on investments $ 289,650 275,132 268,501 Realized gains (losses) on investments (2,415) 1,626 3,206 Total revenues $ 287,235 276,758 271,707 Earnings: Earnings from insurance operations $ 37,203 36,115 27,288 Earnings (losses) from discontinued brokerage operations (16,350) (2,936) 21,832 Net realized gains (losses) on investments (1,569) 1,057 2,084 Cumulative effect of change in accounting for income taxes - - 5,520 Net earnings $ 19,284 34,236 56,724 Earnings Per Share: Earnings from insurance operations $ 10.67 10.36 7.84 Earnings (losses) from discontinued brokerage operations (4.69) (0.84) 6.27 Net realized gains (losses) on investments (0.45) 0.30 0.60 Cumulative effect of change in accounting for income taxes - - 1.58 Net earnings $ 5.53 9.82 16.29
Significant changes and fluctuations in income and expense items between years are described in detail for insurance and brokerage operations as follows: Insurance Operations Insurance Operations Net Earnings: Earnings from insurance operations for the year ended December 31, 1995, were $37,203,000 compared to $36,115,000 for 1994. However, 1995 earnings include a $5.7 million tax benefit resulting from the Company's subsidiary brokerage losses. Earnings for 1994 include a comparable $2.9 million tax benefit. The tax benefits were recognized in accordance with the Company's tax allocation agreement with its subsidiaries. Excluding the tax benefits, earnings from insurance operations for 1995 were down $1.7 million from 1994 due primarily to higher life insurance benefit claims and other policy and contract related expenses. The higher claims and policy related expenses were partially offset by lower insurance operating expenses relating to state guaranty association assessments. Life and Annuity Premiums: This revenue category represents the premiums on traditional type products. However, sales in most of the Company's markets currently consist of non-traditional types such as universal life and investment annuities. The Company's current plans are to continue to focus the majority of its product development and marketing efforts on universal life and investment annuities. As a result, no significant growth is anticipated for these premiums in the near future. Universal Life and Investment Annuity Contract Revenues: These revenues are from the Company's non-traditional products, which are universal life and investment annuities. Revenues from these types of products consist of policy charges for the cost of insurance, policy administration fees, and surrender charges assessed during the period. These revenues decreased from $67.8 million in 1993 to $64.7 million in 1994 and then increased to $69.8 million in 1995. More specifically, cost of insurance, policy administration fees, and other related revenues have steadily increased each year due to continued sales of non-traditional products which continue to increase the Company's policies in force. However, surrender charge revenues were significantly higher in 1993 due to increased policy surrenders. This accounts for the majority of the decrease in universal life and investment annuity contract revenues in 1994. Overall revenues were up in 1995 due to increases in cost of insurance and other related revenues as previously described, even though surrender charge revenues were not up significantly from 1994 and remained substantially below 1993 levels. Actual universal life and investment annuity deposits collected for the years ended December 31, 1995, 1994, and 1993 are detailed below. Deposits collected on these non-traditional products are not reflected as revenues in the Company's statements of earnings, as they are recorded directly to policyholder liabilities upon receipt, in accordance with generally accepted accounting principles.
Years Ended December 31, 1995 1994 1993 (In thousands) Investment annuities $ 309,971 157,622 86,700 Universal life insurance 68,464 64,760 67,060 Totals $ 378,435 222,382 153,760
Prior to 1993, most of the Company's investment annuity production was from the sale of two-tier annuity products. However, in the third quarter of 1992, the Company discontinued sales of all two-tier annuities due to declines in sales and certain regulatory issues concerning two-tier products. The Company has continued to collect additional premiums on existing two-tier annuities, which accounts for the majority of the deposits for investment annuities in 1993. The vast majority of the two-tier annuities were sold by a single independent marketing organization. Subsequent to discontinuing the two-tier annuity sales, the Company set goals to not only develop new annuity products to replace the lost two-tier production, but to diversify and strengthen distribution channels to avoid dependence on its primary independent marketing organization. The Company achieved this by developing new annuity products in 1994 and by contracting new marketing organizations with extensive experience, financial resources, and success in marketing annuities. The combination of new products, primarily a single premium deferred annuity, and new marketing organizations started to produce results in the latter half of 1994 as annuity production began to increase significantly. This increased production has continued into 1995 with annuity deposits increasing from $158 million in 1994 to $310 million in 1995, reflecting a 97% increase. The majority of the Company's universal life insurance production is from the international market, primarily Central and South American countries. The Company has seen increased competition in the Central and South American market in recent years causing production growth to slow. However, the Company has been accepting policies from foreign nationals for almost thirty years and has developed strong relationships with carefully selected brokers in the foreign countries. This experience and strong broker relations have enabled the Company to meet the increased competition with new product enhancements and marketing efforts. Such efforts have resulted in increased universal life production once again in 1995. Deposits for universal life for both international and domestic markets are up 5.7% in 1995 from $64.8 million in 1994 to $68.5 million in 1995. Net Investment Income: During 1995, net investment income increased 6.2% from 1994 while total invested assets increased 12.0% for the same period. The increase in invested assets was primarily due to the increased annuity production as previously described. The growth in net investment income lagged the growth in invested assets for several reasons. Interest rates declined significantly throughout 1995, resulting in investments in lower yielding securities. Also, net investment income was up significantly in 1994 due to yield and amortization adjustments on mortgage-backed securities as more fully described below. There were no significant corresponding adjustments in 1995. Net investment income increased 5.4% from $180.3 million in 1993 to $190.0 million in 1994. Net investment income was up primarily due to yield and amortization adjustments on mortgage-backed securities and increases in invested assets. The yield and amortization adjustments were made in accordance with Statement of Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." The adjustments are made to reflect changes in mortgage-backed securities prepayment levels, caused by changes in market interest rates, which affect average lives, yields, and amortization periods of the securities. Other Income: The Company received proceeds from lawsuit settlements totaling $1,050,000 in 1993 which has been reflected in other income. In 1984, certain employee participants in the Company's "Builders, Contractors, and Employees Retirement Trust and Pension Plan" (the Plan) and other plaintiffs filed a civil lawsuit against the Company and other defendants with respect to various Plan matters, all as previously disclosed in the Company's annual reports on Form 10-K. The Company settled the lawsuit in 1991 with payments to the Internal Revenue Service and participants in the Plan. Subsequent to this settlement, the Company filed suit against the law firm which assisted in the development of the Plan. The Company also filed suit, for recovery of damages incurred, against an insurance company providing liability coverage for trustees of the Plan. Both suits were settled, with the Company receiving the proceeds as described above. Also, as previously disclosed in the Company's annual reports on Form 10-K, the Company was a defendant in a lawsuit seeking recovery of certain values of life insurance policies pledged as collateral for debentures totaling $8,000,000. In early 1991, a court ruled that the collateral assignment was not enforceable. As a result, the Company recorded a loss of $8,000,000 in 1990, as the debentures were no longer deemed collateralized by the insurance policies and their market value was zero due to the insolvency of the issuer. The Company appealed the court ruling and also recorded a corresponding $8,000,000 liability for the potential payment of this claim. The Company had been accruing an additional liability for interest on this $8,000,000 balance. This lawsuit was settled in September, 1993, resulting in an $11,500,000 payment by the Company. The Company's total accrued liability for this claim exceeded the payment by approximately $670,000 which has been reflected as other income in 1993. The Company also received proceeds from a settlement totaling $955,000 for recovery of damages incurred related to this lawsuit. These settlement proceeds have been reflected as other income in 1994. Realized Gains and Losses on Investments: The Company recorded realized losses totaling $2.4 million in 1995 compared to realized gains of $1.6 million and $3.2 million in 1994 and 1993, respectively. The losses in 1995 were primarily from sales of investments in debt securities, the majority of which were from the Company's remaining investments in principal exchange rate linked securities. The Company made the decision to realize these losses to obtain tax benefits related to the losses which were scheduled to expire on December 31, 1995. The gains and losses in 1995, 1994, and 1993 are net of write-downs on real estate and mortgage loans totaling $882,000, $625,000, and $3,360,000, respectively. The 1993 gains are also net of write-downs for permanent impairments on investments in debt securities totaling $6,329,000. Life and Other Policy Benefits: Expenses in 1995 and 1993 were significantly higher at $39.8 million and $36.3 million than 1994 expenses which totaled only $32.1 million. The significant fluctuation in expenses is due to higher life insurance benefit claims and high policy surrenders on traditional insurance products in both 1995 and 1993. Life insurance benefit claims, which accounted for the majority of the fluctuation, totaled $24.6 million, $19.1 million, and $21.3 million in 1995, 1994, and 1993, respectively. The 1995 and 1993 expenses were abnormally high due to adverse claims experience. Throughout the Company's history, it has experienced both periods of higher and lower benefit claims in comparison to Company averages. Years 1995 and 1993 reflect such periods, as benefits were significantly higher. Such deviations are not uncommon in the life insurance industry and, over extended periods of time, tend to be offset by periods of more favorable claims experience. Amortization of Deferred Policy Acquisition Costs: This expense item represents the amortization of the costs of acquiring or producing new business, which consists primarily of agents' commissions. The majority of such costs are amortized in direct relation to the anticipated future gross profits of the applicable blocks of business. Amortization is also impacted by the level of policy surrenders. Amortization for 1995, 1994, and 1993 has been relatively consistent at $33.7 million, $32.1 million, and $33.2 million, respectively. The higher amortization in 1995 and 1993 correlates to increased policy surrenders in those years. Universal Life and Investment Annuity Contract Interest: Prior to 1995, interest expense declined steadily as amounts totaled $129.1 million, $130.9 million, and $135.8 million for 1994, 1993, and 1992, respectively. This decline was due to the lowering of credited interest rates on most universal life and investment annuity products throughout these years. Additional interest costs related to increasing business was not significant, as the policy liabilities remained relatively constant over those years. However, in the latter part of 1994, annuity production began to increase significantly, which continued through 1995. This increase in annuity deposits resulted in corresponding increases in policy liabilities and significantly higher interest costs in 1995. Also, the Company's new annuity products typically credit significantly higher interest rates in the first policy year, again resulting in higher 1995 interest costs. The Company closely monitors its credited interest rates, taking into consideration such factors as profitability goals, policyholder benefits, product marketability, and economic market conditions. Rates are established or adjusted after careful consideration and evaluation of these factors against established objectives. Other Insurance Operating Expenses: These expenses totaled $27.1 million, $29.4 million, and $29.0 million for 1995, 1994, and 1993, respectively. Although these expenses are relatively comparable between years, these amounts include significant expenses for guaranty association assessments. National Western Life Insurance Company is subject to state guaranty association assessments in all states in which it is licensed to do business. These associations generally guarantee certain levels of benefits payable to resident policyholders of insolvent insurance companies. Most states allow premium tax credits for all or a portion of such assessments, thereby allowing potential recovery of these payments over a period of years. However, several states do not allow such credits. In December, 1995 and 1994, the National Organization of Life and Health Insurance Guaranty Associations published revised assessment data on nationwide life and health insurance company insolvencies. Based on this information, the Company revised its estimates for assessment liabilities relating to such insolvencies. The Company will continue to monitor and revise its estimates for assessments as additional information becomes available, which could result in additional expense charges. Other insurance operating expenses related to state guaranty association assessments totaled $2,371,000, $4,869,000, and $4,583,000 for the years ended December 31, 1995, 1994, and 1993, respectively. The lower assessment expenses in 1995 are the primary reason for the lower overall insurance operating expenses for the same period. Discontinued Brokerage Operations Effective July 17, 1995, The Westcap Corporation, a wholly owned brokerage subsidiary of National Western Life Insurance Company, discontinued all sales and trading activities in its Houston, Texas, office. At that time, The Westcap Corporation (Westcap) continued its corporate operations and small sales operations in its New Jersey office. However, in September, 1995, Westcap approved a plan to close the remaining sales office in New Jersey and to cease all brokerage operations. Declines in both sales revenues and earnings were the principal reasons for ceasing operations. Increasing market interest rates and resulting adverse bond market conditions during 1994 and 1995 compared to previous years had a negative impact on the entire bond brokerage industry. These conditions, coupled with adverse publicity about litigation related to sales of collateralized mortgage obligation (CMO) products, led to the declines in sales and earnings. The publicity surrounding these claims made it extremely difficult to keep Westcap's customer base and sales force in place. Additionally, because much publicity characterizes CMOs as derivatives, adverse publicity about derivatives impacted the market for CMOs and decreased Westcap's prospects for future sales. In connection with the plan to cease brokerage operations, Westcap's assets are being carried at their estimated fair value, and its liabilities include estimated costs to dispose of assets and estimated future costs to cease operations. As a result of the plan and in accordance with generally accepted accounting principles, the assets and liabilities of Westcap have been reclassified in the accompanying consolidated balance sheets to separately identify them as assets and liabilities of the discontinued operations. In previous years, Westcap has contributed significantly to the consolidated earnings of National Western Life Insurance Company. However, more recently, brokerage operations have produced losses due to the reasons cited above. A summary of net earnings and losses from brokerage operations since 1992 is provided below.
Amounts in Per Thousands Share Years ended December 31: 1995 $ (16,350) $ (4.69) 1994 (2,936) (0.84) 1993 21,832 6.27 1992 26,728 7.68
Losses from the discontinued brokerage operations have been reflected separately from continuing operations of the Company in the accompanying consolidated financial statements. The 1995 losses disclosed above include estimated future operating losses as well as estimated costs to cease brokerage operations totaling $6,381,000 and have resulted in the complete write-off of the Company's investment in Westcap on a consolidated basis. Consolidated Federal Income Taxes Federal Income Taxes: Federal income taxes for 1995 on earnings from continuing operations reflect an effective tax rate of 23%. The 1995 taxes are lower than the expected statutory rate of 35% due to a $5.7 million tax benefit resulting from the Company's subsidiary brokerage losses. Correspondingly, losses on discontinued operations for 1995 totaling $16,350,000 do not include any tax benefits relating to the brokerage subsidiary. This tax reporting treatment is in accordance with the Company's tax allocation agreement with its subsidiaries. However, on a consolidated basis, the Federal income taxes reflect the expected effective tax rate of 35% for 1995. Federal income taxes for 1994 on earnings from continuing operations also reflect a low effective tax rate, as such taxes also include a tax benefit totaling $2.9 million resulting from the Company's subsidiary brokerage losses. Losses on discontinued operations for 1994 totaling $2,936,000 include Federal income taxes of $2,983,000. Again, the tax reporting treatment is in accordance with the tax allocation agreement previously described, and on a consolidated basis, Federal income taxes reflect an effective tax rate of 35% for 1994. The Federal corporate tax rate was increased from 34% to 35% beginning in 1993. The total increase in 1993 Federal income taxes resulting from the change in rates was approximately $1,018,000. Cumulative Effect of Change in Accounting for Income Taxes: In February, 1992, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 requires a change from the deferred method of accounting for income taxes of Accounting Principles Board Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company adopted SFAS No. 109 effective January 1, 1993. The cumulative effect of this change in accounting for income taxes of $5,520,000 was determined as of January 1, 1993, and is reported separately in the statement of earnings for the year ended December 31, 1993. LIQUIDITY AND CAPITAL RESOURCES Liquidity The liquidity requirements of the Company are met primarily by funds provided from operations. Premium deposits and revenues, investment income, and investment maturities are the primary sources of funds, while investment purchases and policy benefits are the primary uses of funds. Primary sources of liquidity to meet cash needs are the Company's securities available for sale portfolio, net cash provided by operations, and bank line of credit. The Company's investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs. The Company may also borrow up to $60 million on its bank line of credit for short-term cash needs. A primary liquidity concern for the Company's life insurance operations is the risk of early policyholder withdrawals. Consequently, the Company closely evaluates and manages the risk of early surrenders or withdrawals. The Company includes provisions within annuity and universal life insurance policies, such as surrender charges, that help limit early withdrawals. The Company also prepares cash flow projections and performs cash flow tests under various market interest rate scenarios to assist in evaluating liquidity needs and adequacy. The Company currently expects available liquidity sources and future cash flows to be adequate to meet the demand for funds. In the past, cash flows from the Company's insurance operations have been more than adequate to meet current needs. Cash flows from operating activities were $99 million, $117 million, and $136 million in 1995, 1994, and 1993, respectively. Lower earnings from brokerage operations is the primary reason for the decrease in cash flows in 1995 and 1994. Additionally, net cash flows from the Company's deposit product operations, which includes universal life and investment annuity products, totaled $99 million in 1995. These operations incurred net cash outflows in 1994 and 1993 totaling $17 million and $99 million, respectively. The increase in cash flows in 1995 is due to increased annuity production as previously described in "Results of Operations." The Company expects this increased annuity production will continue through 1996, thereby enhancing cash flows. The Company also has significant cash flows from both scheduled and unscheduled investment security maturities, redemptions, and prepayments. These cash flows totaled $69 million, $133 million, and $486 million in 1995, 1994, and 1993, respectively. The Company again expects significant cash flows from these sources in 1996 at levels similar to 1995 and 1994. Capital Resources The Company relies on stockholders' equity for its capital resources, as there has been no long-term debt outstanding in 1995 or recent years. The Company does not anticipate the need for any long-term debt in the near future. There are also no current or anticipated material commitments for capital expenditures in 1996. Stockholders' equity totaled $312 million at December 31, 1995, reflecting an increase of $37 million from 1994. The increase in capital is primarily from net earnings of $19 million and the change in net unrealized gains on investment securities totaling $17 million in 1995. The decrease in market interest rates during 1995 resulted in the significant increase in unrealized gains. Book value per share at December 31, 1995, was $89.36, reflecting a 13% increase for the year. CHANGES IN ACCOUNTING PRINCIPLES In January, 1995, the FASB issued SFAS No. 120, "Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts." Also, the AICPA has established accounting for certain participating life insurance contracts of mutual life insurance enterprises in its Statement of Position (SOP) 95-1, "Accounting for Certain Insurance Activities of Mutual Life Insurance Enterprises," that should be applied to those contracts that meet the conditions in this statement. This statement also permits stock life insurance enterprises to apply the provisions of the SOP to participating life insurance contracts that meet certain conditions. SFAS No. 120 is effective for financial statements issued for fiscal years beginning after December 15, 1995. Due to the Company's small level of participating life insurance contracts, this statement will have no significant effects on the Company's financial statements. The FASB issued SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," in March, 1995. The statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Measurement of an impairment loss for long-lived assets and identifiable intangibles that an entity expects to hold and use should be based on the fair value of the asset. The statement also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less costs to sell. The Company's real estate investments are the only significant assets that will be subject to this statement. As the Company already records foreclosed real estate at the lower of cost or fair value less estimated costs to sell, the implementation of this statement will not have a significant effect on the Company's financial statements. The statement will be implemented in the first quarter of 1996. In October, 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." This statement establishes financial accounting and reporting standards for stock-based employee compensation plans. It defines a fair value based method of accounting for employee stock options or similar equity instruments. However, it also allows an entity to continue to measure compensation cost for plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to continue applying the accounting methods in Opinion 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in SFAS No. 123 had been applied. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. For stock options, fair value is determined using an option pricing model that takes into account various information and assumptions regarding the Company's stock and options. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. The Company anticipates that it will continue to apply the accounting methods prescribed by Opinion 25 for its existing stock and incentive plan. Therefore, the implementation of this statement will not affect the Company's results of operations. However, as required by this statement, disclosure information will be provided in the Company' financial statements reflecting costs that would have been recorded under the fair value based method. The statement will be implemented in 1996. CURRENT REGULATORY ISSUES Actuarial Guideline 33 In December, 1995, the National Association of Insurance Commissioners adopted for statutory accounting practices Actuarial Guideline 33, previously referred to as Actuarial Guideline GGG. This reserve guideline, which has not been adopted by any states at this time, helps define the minimum reserves for policies with multiple benefit streams, such as two-tier annuities. As of December 31, 1995, the Company's statutory reserving practices for two-tier annuities follow an agreement reached in 1993 with its state of domicile, Colorado. This agreement requires the Company to phase-in a different reserve basis by the end of 1996. The agreement states the acceptable difference between the target reserve and the statutory reserve held by the Company will meet the following schedule: December 31, 1995 $5,000,000 December 31, 1996 -
The Company has met the above scheduled difference for December 31, 1995. However, in 1995, the Company entered into discussions with the Colorado Division of Insurance (the Division) to implement Actuarial Guideline 33 and to phase it in over a three-year period as allowed by the guideline. In January, 1996, the Division approved the proposal for this three-year phase-in. The effect on the Company's statutory financial statements will not be significant, since the previous agreement with the Division was similar to the final guideline. Also, the guideline does not affect the Company's policy reserves which are prepared under generally accepted accounting principles as reported in the accompanying consolidated financial statements. Risk Based Capital Requirements In 1993, the National Association of Insurance Commissioners (NAIC) established new risk-based capital (RBC) requirements to help state regulators monitor the financial strength and stability of life insurers by identifying those companies that may be inadequately capitalized. Under the NAIC's requirements, each insurer must maintain its total capital above a calculated threshold or take corrective measures to achieve the threshold. The threshold of adequate capital is based on a formula that takes into account the amount of risk each company faces on its products and investments. The RBC formula takes into consideration four major areas of risk which are: (i) asset risk which primarily focuses on the quality of investments; (ii) insurance risk which encompasses mortality and morbidity risk; (iii) interest rate risk which involves asset/liability matching issues; and (iv) other business risks. There continues to be some public pressure for insurance companies to publish their RBC ratios or levels. However, the legality of publishing such information is uncertain. The American Institute of Certified Public Accountants (AICPA) released an exposure draft of a Statement of Position (SOP) which included requirements that insurance companies disclose certain information about their RBC levels. This requirement was deleted from the final SOP version due to questions raised about the legality of such disclosures. Instead, the AICPA decided to consider a separate SOP at a later date on RBC disclosures, after the legal issues are resolved. Due to these unanswered legal issues, the Company has chosen not to publish its RBC ratios or levels. However, the Company's current statutory capital and surplus is significantly in excess of the threshold RBC requirements. ITEM 8. 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. 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. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY (a) Identification of Directors The following information as of January 31, 1996, is furnished with respect to each director. All terms expire in June of 1996.
Principal Occupation During Last First Name of Director Five Years and Directorships Elected Age Robert L. Moody Chairman of the Board and Chief 1964 60 (1) (3) (4) (5) Executive Officer of the Company; Investments, Galveston, Texas Ross R. Moody President and Chief Operating 1981 33 (1) (3) Officer of the Company, 4/92-present; Vice President - Office of the President of the Company, 4/91 - 4/92 Austin, Texas Arthur O. Dummer President, The Donner Company 1980 62 (1) (2) (3) Salt Lake City, Utah Harry L. Edwards Retired; Former President and Chief 1969 74 Operating Officer of the Company until 7/90, Austin, Texas E. Douglas McLeod Director of Development, Moody 1979 54 (4) Foundation, Galveston, Texas Charles D. Milos, Jr. Senior Vice President of the 1981 50 (1) (3) Company, Galveston, Texas Frances A. Moody Investments, Dallas, Texas, 1990 26 (4) 1992 - present; Student, Southern Methodist University, Dallas, Texas, 1987-1992 Russell S. Moody Investments, Austin, Texas 1988 34 (4) Louis E. Pauls, Jr. President, Louis Pauls & Company; 1971 60 (2) Investments, Galveston, Texas E. J. Pederson Executive Vice President, 1992 48 (2) The University of Texas Medical Branch, Galveston, Texas (1) Member of Executive Committee; (2) Member of Audit Committee; (3) Member of Investment Committee; (4) Director of American National Insurance Company of Galveston, Texas; (5) Director of The Moody National Bank of G alveston, Texas.
Family relationships among the directors are: Mr. Robert Moody and Mr. McLeod are brothers-in-law and Mr. Robert Moody is the father of Ms. Frances Moody, Mr. Ross Moody, and Mr. Russell Moody. (b) Identification of Executive Officers The following is a list of the Company's executive officers, their ages, and their positions and offices as of January 31, 1996.
Name of Officer Age Position (Year elected to position) Robert L. Moody 60 Chairman of the Board and Chief Executive Officer (1964-1968, 1971-1980, 1981), Director Ross R. Moody 33 President and Chief Operating Officer (1992), Director Robert L. Busby, II 58 Senior Vice President - Chief Administrative Officer, Chief Financial Officer and Treasurer (1992) Charles P. Baley 57 Senior Vice President - Data Processing (1990) Richard M. Edwards 43 Senior Vice President - International Marketing (1990) Paul D. Facey 44 Senior Vice President - Chief Actuary (1992) Charles D. Milos, Jr. 50 Senior Vice President - Investment Analyst (1990), Director Arthur W. Pickering 54 Senior Vice President - Domestic Marketing (1994) Patricia L. Scheuer 44 Senior Vice President - Chief Investment Officer (1992) Larry D. White 50 Senior Vice President - Policyowner Services (1990) Robert J. Antonowich 49 Vice President - Marketing (1995) Carol Jackson 60 Vice President - Human Resources (1990) Vincent L. Kasch 34 Vice President - Controller and Assistant Treasurer (1992) James A. Kincl 66 Vice President - Salary Savings (1986) Doris Kruse 50 Vice President - Policy Benefits (1990) James R. Naiser 53 Vice President - Systems Development (1984) James P. Payne 51 Vice President - Secretary (1994) Al R. Steger 53 Vice President - Risk Selection (1992) B. Ben Taylor 53 Vice President - Actuarial Services (1990)
(c) Identification of Certain Significant Employees None. (d) Family Relationships There are no family relationships among the officers listed except that Mr. Robert Moody is the father of Mr. Ross Moody. There are no arrangements or understandings pursuant to which any officer was elected. All officers hold office for one year and until their successors are elected and qualified, unless otherwise specified by the Board of Directors. (e) Business Experience All of the executive officers listed above have served in various executive capacities with the Company for more than five years, with the exception of the following: Mr. Ross Moody was a corporate financial analyst with Drexel Burnham Lambert from 1986 to 1987 and was a graduate student at the Harvard Business School from 1987 to 1989. He also served as Director of Administrative Services for American National Insurance Company from 1989 to 1991. Mr. Facey was Superintendent, Marketing, for Northern Life Assurance Company of Canada from 1973-1985. From 1985-1987, he was Assistant Vice President, Marketing and Actuarial Services for Gerling Global Life Insurance Company in Toronto, Canada, and from 1987 until March, 1992 was Director of Actuarial Services for Variable Annuity Life Insurance Company of Houston, Texas. Mr. Pickering was Agency Vice President of the Western Division with Integon Life Insurance Company from 1981 to 1987. From 1987 to 1990, he served as Regional Vice President of United Pacific Life Insurance Company. In 1990, he began work for Conseco/Western National Life Insurance Company as Vice President Marketing until May, 1994. Ms. Scheuer was a Management Consultant for Deloitte, Haskins & Sells from 1983-1984. From 1984-1988, she was Senior Financial Analyst with the Texas Public Utility Commission. From 1988 until August, 1992, she was the Fixed Income Portfolio Manager for the Texas Permanent School Fund. Mr. Antonowich was Regional Vice President of Security Life of Denver Insurance Company from 1982 to 1991. From 1991 to December, 1993, he was Vice President, Marketing, of Guarantee Mutual Life Company, and from 1994 to June, 1995, he was Senior Vice President, Sales, of Lamar Life Insurance Company. Mr. Kasch was Staff Accountant with Arthur Young & Company from 1984-1985. From 1985 until January, 1991, he was Senior Accountant and Audit Manager for KPMG Peat Marwick. Mr. Payne was staff attorney with the Kansas Insurance Department from 1972 to 1975. From 1975-1983, he was Vice President, Secretary & General Counsel for Lone Star Life Insurance Company; from 1983-1990, he was Vice President, Secretary and General Counsel for Reserve Life Insurance Company; from 1990-1991 he was President and CEO of Great Republic Insurance Company; and from 1991-1993 he was Vice President - Government Relations for United American Insurance Company. From 1993 until October, 1994, he was in private practice in Dallas, Texas. Mr. Steger was Assistant Vice President-Chief Underwriter of Tower Life, San Antonio, Texas from 1971 until December, 1991. (f) Involvement in Certain Legal Proceedings There are no events pending, or during the last five years, under any bankruptcy act, criminal proceedings, judgments, or injunctions material to the evaluation of the ability and integrity of any director or executive officer except as described below: In January, 1994, a United States District Court Judge vacated and withdrew the judgment which had been entered in Case No. H-86-4269, W. Steve Smith, Trustee vs. Shearn Moody, Jr., et al, United States District Court for the Southern District of Texas. The Judge also dismissed the case with prejudice. The judgment had been entered against Robert L. Moody and The Moody National Bank of Galveston, of which he was Chairman of the Board. Robert L. Moody is also Chairman of the Board of National Western Life Insurance Company. The case arose out of complex bankruptcy and related proceedings involving Robert L. Moody's brother, Shearn Moody, Jr. Subsequently, a global settlement of Shearn Moody, Jr.'s bankruptcy and related legal proceedings was reached and executed. As part of the global settlement, the Bankruptcy Trustee recommended, and other interested parties agreed not to oppose or object to, the Judge's vacating and withdrawing the judgment and dismissing the case with prejudice. This case and settlement did not involve the Company and had no effect on its financial statements. ITEM 11. EXECUTIVE COMPENSATION (b) Summary Compensation Table
Long Term Compensation No. of Annual Restricted Securities All Other Compensation Stock Underlying Compen- Name and Salary Bonus Awards Options sation Principal Position Year (A) (B) (C) (D) (E) 1 Robert L. Moody 1995 967,696 91,616 - 25,000 111,533 Chairman of the 1994 890,216 56,886 - - 19,016 Board and Chief 1993 836,476 145,693 139,103 - 18,185 Executive Officer Ross R. Moody 1995 361,427 19,768 - 9,000 20,866 President and 1994 311,977 12,267 - - 14,543 Chief Operating 1993 275,697 75,417 30,005 - 15,651 Officer 3 Arthur W. Pickering 1995 109,181 77,654 - 2,500 14,845 Senior Vice 1994 64,654 61,250 - - 70,340 President - 1993 - - - - - Domestic Marketing 4 Robert L. Busby, III 1995 160,690 8,008 - 4,000 9,068 Senior Vice 1994 151,877 9,969 - - 9,773 President-Chief 1993 136,882 12,727 12,155 - 9,346 Administrative Officer, Chief Financial Officer and Treasurer 5 Charles D. Milos, Jr. 1995 132,323 5,992 - 2,500 7,161 Senior Vice 1994 128,815 3,718 - - 7,561 President- 1993 119,643 53,523 9,095 - 7,245 Investment Analyst
Notes to Summary Compensation Table: (A) Salary includes directors' fees from National Western Life Insurance Company and its subsidiaries. (B) Bonuses include the following: (1) Stock Bonus Plan - During 1993 the Company implemented a one-time stock bonus plan for all officers of the Company. Class A common stock restricted shares totaling 13,496 were granted to officers based on their individual performance and contribution to the Company. The shares are subject to vesting requirements as reflected in the following schedule: January 1, 1993 25% December 31, 1993 25% December 31, 1994 25% December 31, 1995 25%
The resulting compensation from the vesting of shares has been included in the applicable year in the bonus column. All of the 13,496 shares that were granted have been issued and are outstanding as of December 31, 1995. (2) Westcap Bonuses - Ross R. Moody and Charles D. Milos, Jr., are directors of the Company's brokerage subsidiary, The Westcap Corporation. The directors received bonuses for such services in 1993. (3) Other Bonuses - Employment and performance related bonuses are occasionally granted. Arthur W. Pickering received such bonuses in 1995 and 1994 and Robert L. Busby, III received such bonuses in 1994. (C) Restricted stock awards include common stock shares that were granted as part of the stock bonus plan described in (1) above but had not vested as of December 31, 1993. Restricted stock holdings at December 31, 1993, for all officers totaled 6,666 shares with a market value of $296,637. Restricted stock holdings for the named executive officers were as follows at December 31, 1993:
Shares Value Robert L. Moody 3,273 $ 145,649 Ross R. Moody 706 31,417 Robert L. Busby, III 286 12,727 Charles D. Milos, Jr. 214 9,523
Of the remaining 6,666 unvested shares at December 31, 1993, 3,146 and 3,520 of such shares vested on December 31, 1995 and 1994, respectively, and are reflected as bonuses in those years. (D) Represents stock options granted under the National Western Life Insurance Company 1995 Stock and Incentive Plan. (E) All other compensation includes primarily employer contributions made to the Company's 401(k) Plan and Non-Qualified Deferred Compensation Plan on behalf of the employee. (c) Option/SAR Grants Table During 1995 the Company adopted the National Western Life Insurance Company 1995 Stock and Incentive Plan (the Plan). The Plan is effective as of April 21, 1995, and will terminate on April 20, 2005, unless terminated earlier by the Board of Directors. The number of shares of Class A, $1.00 par value, common stock which may be issued under the Plan, or as to which stock appreciation rights or other awards may be granted, may not exceed 300,000. These shares may be authorized and unissued shares or treasury shares. All of the employees of the Company and its subsidiaries are eligible to participate in the Plan. In addition, directors of the Company, other than Compensation and Stock Option Committee members, are eligible for restricted stock awards, incentive awards, and performance awards. Non-employee directors, including members of the Compensation and Stock Option Committee, are eligible for non-discretionary stock options. On May 19, 1995, the Committee approved the issuance of 52,500 non-qualified stock options to selected officers of the Company. The Committee also granted 7,000 non-qualified, non-discretionary stock options to non-employee Company directors. The stock options begin to vest following three full years of service to the Company after date of grant, with 20% of the options to vest at the beginning of the fourth year of service, and with 20% thereof to vest at the beginning of each of the next four years of service. The exercise price of the stock options was set at the fair market value of the common stock on the date of grant, May 19, 1995, which was $38.125 per share. Stock options granted to the named executive officers during 1995 are as follows:
Potential Realizable % of Value at Assumed Total Annual Number of Options Rates of Stock Securities Granted to Price Appreciation Underlying Employee for Option Term Options in Fiscal Exercise Exporation Name Granted Year Price Date 5% 10% 1 Robert L. Moody 25,000 47.6% $38.125 4-20-05 $599,411 $1,519,033 2 Ross R. Moody 9,000 17.1 38.125 4-20-05 215,788 546,852 3 Arthur W. Pickering 2,500 4.8 38.125 4-20-05 59,941 151,903 4 Robert L. Busby III 4,000 7.6 38.125 4-20-05 95,906 243,045 5 Charles D. Milos 2,500 4.8 38.125 4-20-05 59,941 151,903
(d) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table None. (e) Long-Term Incentive Plan Awards Table None. (f) Defined Benefit or Actuarial Plan Disclosure The Company currently has two employee defined benefit plans for the benefit of its employees and officers. A brief description and formulas by which benefits are determined for each of the plans are detailed as follows: Qualified Defined Benefit Plan - This plan covers all full-time employees and officers of the Company and provides benefits based on the participants' years of service and compensation. The Company makes annual contributions to the plan that comply with the minimum funding provisions of the Employee Retirement Income Security Act. Annual pension benefits for those employees who became eligible participants prior to January 1, 1991, are calculated as the sum of the following: (1) 50% of the participant's final 5-year average annual compensation at December 31, 1990, less 50% of their primary social security benefit determined at December 31, 1990; this net amount is then prorated for less than 15 years of benefit service at normal retirement date. This result is multiplied by a fraction which is the participant's years of benefit service at December 31, 1990, divided by the participant's years of benefit service at normal retirement date. (2) 1.5% of the participant's compensation earned during each year of benefit service after December 31, 1990. Annual pension benefits for those employees who become eligible participants on or subsequent to January 1, 1991, are calculated as 1.5% of their compensation earned during each year of benefit service. Non-Qualified Defined Benefit Plan - This plan covers those officers in the position of senior vice president or above and other employees who have been designated by the President of the Company as being in the class of persons who are eligible to participate in the plan. This plan also provides benefits based on the participants' years of service and compensation. However, no minimum funding standards are required. The benefit to be paid pursuant to this Plan to a Participant who retires at his normal retirement date shall be equal to (a) less (b) less (c) where: (a) is the benefit which would have been payable at the participant's normal retirement date under the terms of the Qualified Defined Benefit Plan as of December 31, 1990, as if that Plan had continued without change, and, (b) is the benefit which actually becomes payable under the terms of the Qualified Defined Benefit Plan at the participant's normal retirement date, and, (c) is the actuarially equivalent life annuity which may be provided by an accumulation of 2% of the participant's compensation for each year of service on or after January 1, 1991, accumulated at an assumed interest rate of 8.5% to his normal retirement date. In no event will the benefit be greater than the benefit which would have been payable at normal retirement date under the terms of the Qualified Defined Benefit Plan as of December 31, 1990, as if that plan had continued without change. The estimated annual benefits payable to the named executive officers upon retirement, at normal retirement age, for the Company's defined benefit plans are as follows:
Estimated Annual Benefits Qualified Non-Qualified Defined Defined Name Benefit Plan Benefit Plan Totals 1 Robert L. Moody $ 125,335 317,317 442,652 2 Ross R. Moody 83,243 - 83,243 3 Arthur W. Pickering 26,906 - 26,906 4 Robert L. Busby, III 47,132 18,599 65,731 5 Charles D. Milos, Jr. 44,032 - 44,032
(g) Compensation of Directors All directors of the Company currently receive $12,000 a year and $500 for each board meeting attended. They are also reimbursed for actual travel expenses incurred in performing services as directors. An additional $500 is paid for each committee meeting attended. However, a director attending multiple meetings on the same day receives only one meeting fee. The amounts paid pursuant to these arrangements are included in the summary compensation table under Item 11(b). The directors and their dependents are also insured under the Company's group insurance program. During 1995 the Company adopted the National Western Life Insurance Company 1995 Stock and Incentive Plan ( the Plan), as more fully described in Item 11(c). Directors of the Company, other than Compensation and Stock Option Committee members, are eligible for restricted stock awards, incentive awards, and performance awards. Non-employee directors, including members of the Compensation and Stock Option Committee, are eligible for non-discretionary stock options. On May 19, 1995, the Committee approved the issuance of 7,000 non-qualified, non-discretionary stock options to non-employee Company directors, with each such director receiving 1,000 stock options. Directors who are also employees of the Company were granted stock options as disclosed in the table in Item 11(c). Directors of the Company's subsidiary, NWL Investments, Inc., receive $250 annually. Directors' fees for the Company's subsidiary, The Westcap Corporation, have been suspended indefinitely. No fees were paid in 1995. (h) Employment Contracts and Termination of Employment and Change-in-Control Arrangements None. (i) Report on Repricing of Options/SARs None. (j) Compensation Committee Interlocks and Insider Participation The Company's Board of Directors determines and approves executive compensation. Mr. Robert Moody, Mr. Ross Moody, and Mr. Milos serve as directors and also serve as officers and employees of the Company. The Donner Company, 100% owned by Mr. Dummer, who is a director of National Western Life Insurance Company, was paid $60,474 in 1995 pursuant to an agreement between The Donner Company and a reinsurance intermediary relating to a reinsurance contract between the Company and certain life insurance reinsurers. No compensation committee interlocks exist with other unaffiliated companies. (k) Board Compensation Committee Report on Executive Compensation The Company's Board of Directors performs the functions of an executive compensation committee. The Board is responsible for developing and administering the policies that determine executive compensation. Executive compensation, including that of the chief executive officer, is comprised primarily of a base salary. The salary is adjusted annually based on a performance review of the individual as well as the performance of the Company as a whole. The president and chief executive officer make recommendations annually to the Board of Directors regarding such salary adjustments. The review encompasses the following factors: - - contributions to the Company's short and long-term strategic goals, including financial goals such as Company revenues and earnings - - achievement of specific goals within the individual's realm of responsibility - - development of management and employees within the Company - - performance of leadership within the industry The policies discussed above are reviewed periodically by the Board of Directors to ensure the support of the Company's overall business strategy and to attract and retain key executives. A separate Compensation and Stock Option Committee, comprised of outside, independent directors, determines compensation for the three highest paid Company executives. The committee also performs various projects relating to executive compensaion at the request of the Board of Directors. Those directors serving on the committee include the following: Arthur O. Dummer Harry L. Edwards E. J. Pederson The policies used by the Compensation and Stock Option Committee in determining compensation are similar to those described above for all other Company executives. (1) Performance Graph The following graph compares the change in the Company's cumulative total stockholder return on its common stock with the NASDAQ - U.S. Companies Index and the NASDAQ Insurance Stock Index. The graph assumes that the value of the investment in the Company's common stock and each index was $100 at December 31, 1990, and that all dividends were reinvested. For the purpose of this electronic filing, the graph has been filed separately under the Securities and Exchange Commission filing Form SE dated March 29, 1996. The coordinates of the graph are as follows:
12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 National Western Life 100.00 482.6 817.4 773.9 604.3 973.9 NASDAQ U.S. Companies Index 100.00 160.5 186.9 214.5 209.7 296.5 NASDAQ Insurance Stock Index 100.00 141.0 190.8 204.1 192.1 272.9
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security Ownership of Certain Beneficial Owners Set forth below is certain financial information concerning persons who are known by the Company to own beneficially more than 5% of any class of the Company's common stock on December 31, 1995:
Title Name and Address Amount and Nature of Percent of of Beneficial Ownership of Class Beneficial Owners Record and Class Beneficially Class A Common Robert L. Moody 1,160,896 35.27 2302 Postoffice Street Suite 702 Galveston, Texas Class A Common Westport Asset 326,700 9.93 Management, Inc. 253 Riverside Avenue Westport, Connecticut Class A Common Tweedy Browne Company 288,128 8.75 52 Vanderbilt Avenue New York, New York Class B Common Robert L. Moody 198,074 99.04 (same as above)
(b) Security Ownership of Management The following table sets forth as of December 31, 1995, information concerning the beneficial ownership of the Company's common stock by all directors, named officers, and all directors and officers of the Company as a group:
Title Amount and Nature of Percent Directors of Beneficial Ownership of and Officers Class Record and Class Beneficially Directors and Named Officers: Robert L. Moody Class A Common 1,160,896 35.27 Class B Common 198,074 99.04 Ross R. Moody Class A Common 2,828 0.09 Class B Common 482 0.24 Charles D. Milos, Jr. Class A Common 528 0.02 Class B Common - - Directors: Arthur O. Dummer Class A Common 10 - Class B Common - - Harry L. Edwards Class A Common 20 - Class B Common - - E. Douglas McLeod Class A Common 10 - Class B Common - - Frances A. Moody Class A Common 2,475 0.08 Class B Common 482 0.24 Russell S. Moody Class A Common 2,475 0.08 Class B Common 482 0.24 Louis E. Pauls, Jr. Class A Common 10 - Class B Common - - E. J. Pederson Class A Common 100 - Class B Common - - Named Officers: Robert L. Busby, III Class A Common 688 0.02 Class B Common - - Arthur W. Pickering Class A Common - - Class B Common - - All Directors and Executive Officers Class A Common 1,173,121 35.64 as a Group Class B Common 199,520 99.76
(c) Changes in Control None. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (a) Transactions with Management and Others The Donner Company, 100% owned by Mr. Arthur Dummer, who is a director of National Western Life Insurance Company, was paid $60,474 in 1995 pursuant to an agreement between The Donner Company and a reinsurance intermediary relating to a reinsurance contract between the Company and certain life insurance reinsurers. (b) Certain Business Relationships None. (c) Indebtedness of Management Seal Fleet, Inc. The Company holds a corporate note for $500,000 which was originally issued by Oceanographic and Seismic Services, Inc. (Oceanographic). Oceanographic was later merged into Seal Fleet, Inc. The original note was renewed in 1976 and is a 20-year debenture due in August, 1996, with interest of 8% annually. The Company also holds a corporate note for $2,168,232 issued in 1990 by Seal (GP), Inc., which is a subsidiary of Seal Fleet, Inc. The note is due in June, 2000, with interest of 12% payable monthly and is secured by first preferred ship mortgages. The note was modified during 1992 reducing the interest rate from 12% to 10%. However, the additional 2% interest will be payable upon maturity of the note. Seal Fleet, Inc., has two classes of stock outstanding, Class A and B. The Class B shares elect a majority of the Board of Directors of Seal Fleet, Inc. All of the Class B shares and 212,655 (9%) of the Class A shares of Seal Fleet, Inc., are owned by the Three R Trust, Galveston, Texas. This Trust was created by Robert L. Moody as Settlor for the benefit of his children. Three of his children, Mr. Ross R. Moody, Mr. Russell S. Moody, and Ms. Frances A. Moody are beneficiaries of the Three R Trust and are also directors of National Western Life Insurance Company. The Trustee of the Trust is Irwin M. Herz, Jr., of Galveston, Texas. Mr. Herz personally owns 10,932 (.5%) shares of the Class A stock of Seal Fleet, Inc. Mr. Herz is a lawyer representing the Company, Mr. Moody, and several of Mr. Moody's affiliated interests. Through its Trustee, Mr. Herz, the Three R Trust is considered to be the controlling stockholder of Seal Fleet, Inc. Louis Pauls, Jr., and Russell S. Moody, directors of the Company, are also directors of Seal Fleet, Inc. Seal Fleet, Inc., and its subsidiaries own, operate, or lease supply and equipment boats for off-shore oil and gas well drilling rigs. The consolidated audited financial statements of Seal Fleet, Inc., and its subsidiaries for the fiscal year ending December 31, 1995, reflected total assets of $10,394,000, net losses of $116,000, and negative stockholders' equity of $3,621,000. Gal-Tex Hotel Corporation The Company also holds three mortgage loans issued to Gal-Tex Hotel Corporation, which is owned 50% by the Libbie Shearn Moody Trust and 50% by The Moody Foundation. The first mortgage loan in the amount of $3,040,000 was issued in 1988, will mature in May of 1998, and pays interest of 10.5%. The loan is secured by property consisting of a hotel located in Kingsport, Tennessee. The second mortgage loan in the amount of $8,796,000 was issued in 1994, will mature in October of 2004, and pays interest of 8.75%. The loan is secured by property consisting of a hotel located in Houston, Texas. The third mortgage loan in the amount of $2,000,000 was issued in 1995, will mature in January of 2006, and pays interest of 9%. The loan is secured by property consisting of a hotel located in Woodstock, Virginia. The Company is the beneficial owner of a life interest (1/8 share), previously owned by Mr. Robert L. Moody, in the trust estate of Libbie Shearn Moody. The trustee of this estate is The Moody National Bank of Galveston. The Moody Foundation is a private charitable foundation governed by a Board of Trustees of three members. Mr. Robert L. Moody and Mr. Ross R. Moody are members of the Board of Trustees. (d) Transactions with Promoters None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Listing of Financial Statements See Attachment A, Index to Financial Statements and Schedules, on page ______ for a list of financial statements included in this report. (a) 2. Listing of Financial Statement Schedules See Attachment A, Index to Financial Statements and Schedules, on page ____ for a list of financial statement schedules included in this report. All other schedules are omitted because they are not applicable, not required or because the information required by the schedule is included elsewhere in the financial statements or notes. (a) 3. Listing of Exhibits Exhibit 3(a) - Restated Articles of Incorporation of National Western Life Insurance Company dated April 10, 1968 (filed on page _____ of this report). Exhibit 3(b) - Amendment to the Articles of Incorporation of National Western Life Insurance Company dated July 29, 1971 (filed on page ____ of this report). Exhibit 3(c) - Amendment to the Articles of Incorporation of National Western Life Insurance Company dated May 10, 1976 (filed on page ____ of this report). Exhibit 3(d) - Amendment to the Articles of Incorporation of National Western Life Insurance Company dated April 28, 1978 (filed on page ____ of this report). Exhibit 3(e) - Amendment to the Articles of Incorporation of National Western Life Insurance Company dated May 1, 1979 (filed on page ____ of this report). Exhibit 3(f) - Bylaws of National Western Life Insurance Company as amended through April 24, 1987 (filed on page ____ of this report). Exhibit 10(a) - National Western Life Insurance Company Non-Qualified Defined Benefit Plan dated July 26, 1991 (filed on page ____ of this report). Exhibit 10(b) - National Western Life Insurance Company Officers' Stock Bonus Plan effective December 31, 1992 (incorporated by reference to the Company's Form S-8 registration dated January 27, 1994). Exhibit 10(c) - National Western Life Insurance Company Non-Qualified Deferred Compensation Plan, as amended and restated, dated March 27, 1995 (filed on Page _____ of this report). Exhibit 10(d) - First Amendment to the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan effective July 1, 1995 (filed on page _____ of this report). Exhibit 10(e) - National Western Life Insurance Company 1995 Stock and Incentive Plan (filed on page _____ of this report). Exhibit 21 - Subsidiaries of the Registrant (filed on page _____ of this report). Exhibit 27 - Financial Data Schedule (filed electronically pursuant to Regulation S-K). (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1995. (c) Exhibits Exhibits required by Regulation S-K are listed as to location in the Listing of Exhibits in Item 14(a)3 above. Exhibits not referred to have been omitted as inapplicable or not required. (d) Financial Statement Schedules The financial statement schedules required by Regulation S-K are listed as to location in Attachment A, Index to Financial Statements and Schedules, on page ____ of this report. ATTACHMENT A Index to Financial Statements and Schedules Page Independent Auditors' Report Consolidated Balance Sheets, December 31, 1995 and 1994 Consolidated Statements of Earnings for the years ended December 31, 1995, 1994, and 1993 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1994, and 1993 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994, and 1993 Notes to Consolidated Financial Statements Schedule I - Summary of Investments Other Than Investments in Related Parties, December 31, 1995 Schedule V - Valuation and Qualifying Accounts for the years ended December 31, 1995, 1994, and 1993 All other schedules are omitted because they are not applicable, not required or because the information required by the schedule is included elsewhere in the financial statements or notes. INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders National Western Life Insurance Company Austin, Texas We have audited the consolidated financial statements of National Western Life Insurance Company and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Western Life Insurance Company and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Note 3, the Company changed its method of accounting for investments in debt and equity securities in 1994 to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." As discussed in Note 5, the Company changed its method of accounting for income taxes in 1993 to adopt the provisions of SFAS No. 109, "Accounting for Income Taxes." KPMG Peat Marwick LLP Austin, Texas March 1, 1996 NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1995 and 1994 (In thousands)
ASSETS 1995 1994 Cash and investments: Securities held to maturity, at amortized cost (fair value: $1,726,469 and $1,488,063) $ 1,643,211 1,605,813 Securities available for sale, at fair value (cost: $561,127 and $366,024) 600,794 354,300 Mortgage loans, net of allowance for possible losses ($5,668 and $5,929) 191,674 189,632 Policy loans 147,923 151,487 Other long-term investments 30,970 24,872 Cash and short-term investments 10,024 17,723 Total cash and investments 2,624,596 2,343,827 Accrued investment income 36,127 31,630 Deferred policy acquisition costs 270,167 291,274 Other assets 21,392 16,266 Assets of discontinued operations 6,177 232,057 $ 2,958,459 2,915,054 See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1995 and 1994 (In thousands except per share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994 LIABILITIES: Future policy benefits: Traditional life and annuity products $ 174,946 177,429 Universal life and investment annuity contracts 2,401,098 2,194,264 Other policyholder liabilities 22,833 23,183 Federal income taxes payable: Current 413 - Deferred 12,287 1,996 Other liabilities 28,718 27,718 Liabilities of discontinued operations 6,177 215,330 Total liabilities 2,646,472 2,639,920 COMMITMENTS AND CONTINGENCIES (Notes 4, 7, 9, and 15) STOCKHOLDERS' EQUITY: Common stock: Class A - $1 par value; 7,500,000 shares authorized; 3,291,338 and 3,288,192 shares issued and outstanding in 1995 and 1994 3,291 3,288 Class B - $1 par value; 200,000 shares authorized, issued and outstanding in 1995 and 1994 200 200 Additional paid-in capital 24,647 24,475 Net unrealized gains (losses) on investment securities 15,195 (2,199) Retained earnings 268,654 249,370 Total stockholders' equity 311,987 275,134 $ 2,958,459 2,915,054 See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS For the Years Ended December 31, 1995, 1994, and 1993 (In thousands except per share amounts)
1995 1994 1993 Premiums and other revenue: Life and annuity premiums $ 17,390 18,938 18,624 Universal life and investment annuity contract revenues 69,783 64,711 67,778 Net investment income 201,816 190,021 180,252 Other income 661 1,462 1,847 Realized gains (losses) on investments (2,415) 1,626 3,206 Total premiums and other revenue 287,235 276,758 271,707 Benefits and expenses: Life and other policy benefits 39,823 32,132 36,257 Increase (decrease) in liabilities for future policy benefits (2,487) 658 (1,611) Amortization of deferred policy acquisition costs 33,675 32,131 33,159 Universal life and investment annuity contract interest 142,940 129,064 130,875 Other insurance operating expenses 27,084 29,394 28,959 Total benefits and expenses 241,035 223,379 227,639 Earnings before Federal income taxes, cumulative effect of change in accounting principle, and discontinued operations 46,200 53,379 44,068 Provision (benefit) for Federal income taxes: Current 9,640 16,300 20,006 Deferred 926 (93) (5,310) Total Federal income taxes 10,566 16,207 14,696 Earnings before cumulative effect of change in accounting principle and discontinued operations 35,634 37,172 29,372 Cumulative effect of change in accounting for income taxes - - 5,520 Earnings from continuing operations 35,634 37,172 34,892 (Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS, CONTINUED For the Years Ended December 31, 1995, 1994, and 1993 (In thousands except per share amounts)
1995 1994 1993 Discontinued operations: Earnings (losses) from operations of discontinued brokerage operations (net of Federal income taxes of $2,983 and $11,781 in 1994 and 1993) $ (9,969) (2,936) 21,832 Estimated loss on disposal of discontinued brokerage operations (6,381) - - Earnings (losses) from discontinued operations (16,350) (2,936) 21,832 Net earnings $ 19,284 34,236 56,724 Earnings per share of common stock: Earnings before cumulative effect of change in accounting principle and discontinued operations $ 10.22 10.66 8.44 Cumulative effect of change in accounting for income taxes - - 1.58 Earnings (losses) from discontinued operations (4.69) (0.84) 6.27 Net earnings $ 5.53 9.82 16.29 See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 1995, 1994, and 1993 (In thousands)
1995 1994 1993 Common stock shares outstanding: Shares outstanding at beginning of year 3,488 3,485 3,478 Shares issued for stock bonus plan 3 3 7 Shares outstanding at end of year 3,491 3,488 3,485 Common stock: Balance at beginning of year $ 3,488 3,485 3,478 Shares issued for stock bonus plan 3 3 7 Balance at end of year 3,491 3,488 3,485 Additional paid-in capital: Balance at beginning of year 24,475 24,356 24,065 Shares issued for stock bonus plan 172 119 291 Balance at end of year 24,647 24,475 24,356 Net unrealized gains (losses) on securities available for sale, net of effects of deferred policy acquisition costs and taxes: Balance at beginning of year (2,199) (257) 138 Effect of change in accounting for investments in debt and equity securities - 26,610 - Change in unrealized gains (losses) during year 15,166 (29,493) (395) Net unrealized gains related to transfer of securities from available for sale to held to maturity 3,159 1,380 - Amortization of net unrealized gains related to transferred securities (931) (439) - Balance at end of year 15,195 (2,199) (257) Retained earnings: Balance at beginning of year 249,370 215,134 158,410 Net earnings 19,284 34,236 56,724 Balance at end of year 268,654 249,370 215,134 Total stockholders' equity $ 311,987 275,134 242,718 See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1995, 1994, and 1993 (In thousands)
1995 1994 1993 Cash flows from operating activities: Net earnings $ 19,284 34,236 56,724 Adjustments to reconcile net earnings to net cash provided by operating activities: Universal life and investment annuity contract interest 142,940 129,064 130,875 Surrender charges (34,936) (33,016) (36,563) Realized (gains) losses on investments 2,415 (1,626) (3,206) Accrual and amortization of investment income (7,129) (10,722) 30 Depreciation and amortization 620 649 482 Decrease (increase) in other assets 940 3,771 (3,184) Decrease (increase) in accrued investment income (4,497) (3,468) 959 Decrease (increase) in deferred policy acquisition costs (12,018) 2,354 11,475 Increase (decrease) in liability for future policy benefits (2,487) 658 (1,611) Increase (decrease) in other policyholder liabilities (350) (1,028) 3,149 Decrease in Federal income taxes payable (4,180) (9,222) (11,096) Increase (decrease) in other liabilities (1,781) 4,972 (12,314) Other 176 121 (74) Net cash provided by operating 98,997 116,743 135,646 activities Cash flows from investing activities: Proceeds from sales of: Securities held to maturity 10,659 - - Securities available for sale 44,440 9,114 - Investments in debt securities - - 77,869 Other investments 1,645 22,531 8,835 Proceeds from maturities and redemptions of: Securities held to maturity 54,720 76,174 - Securities available for sale 13,942 57,270 - Investments in debt securities - - 485,818 Purchases of: Securities held to maturity (212,192) (155,892) - Securities available for sale (130,066) (116,923) - Investments in debt securities - - (576,403) Other investments (5,941) (3,548) (18,588) Principal payments on mortgage loans 15,952 29,431 16,971 Cost of mortgage loans acquired (18,125) (30,093) (33,393) Decrease in policy loans 3,564 2,335 4,394 Decrease (increase) in assets of discontinued operations 225,880 140,244 (208,299) Increase (decrease) in liabilities of discontinued operations (209,153) (136,590) 206,799 Other (851) (245) (244) Net cash used in investing activities (205,526) (106,192) (36,241) (Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED For the Years Ended December 31, 1995, 1994, and 1993 (In thousands)
1995 1994 1993 Cash flows from financing activities: Deposits to account balances for universal life and investment annuity contracts $ 343,588 190,687 122,545 Return of account balances on universal life and investment annuity contracts (244,758) (207,823) (221,658) Net cash provided by (used in) financing activities 98,830 (17,136) (99,113) Net increase (decrease) in cash and short-term investments (7,699) (6,585) 292 Cash and short-term investments at beginning of year 17,723 24,308 24,016 Cash and short-term investments at end of year $ 10,024 17,723 24,308 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 3,740 9,134 4,468 Income taxes 15,129 26,332 32,992 Non-cash investing activities: Foreclosed mortgage loans $ 961 2,557 6,678 Mortgage loans originated to facilitate the sale of real estate 1,105 2,655 2,684 See accompanying notes to consolidated financial statements.
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) Principles of Consolidation - The accompanying consolidated financial statements include the accounts of National Western Life Insurance Company and its wholly owned subsidiaries (the Company), The Westcap Corporation, NWL Investments, Inc., NWL Properties, Inc., NWL 806 Main, Inc., and Commercial Adjusters, Inc. Commercial Adjusters, Inc., was dissolved in October, 1994, and all remaining assets and liabilities were assumed by National Western Life Insurance Company. The Westcap Corporation ceased brokerage operations during 1995 and, as a result, is reflected as discontinued operations in the accompanying financial statements. All significant intercorporate transactions and accounts have been eliminated in consolidation. (B) Basis of Presentation - The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates included in the accompanying financial statements include (1) contingent liabilities related to litigation, (2) recoverability of deferred policy acquisition costs, (3) estimated losses related to discontinued operations, and (4) valuation allowances for mortgage loans. National Western Life Insurance Company also files financial statements with insurance regulatory authorities which are prepared on the basis of statutory accounting practices which are significantly different from financial statements prepared in accordance with generally accepted accounting principles. These differences are described in detail in the statutory information section of this note. (C) Investments - Investments in debt securities the Company purchases with the intent to hold to maturity are classified as securities held to maturity. The Company has the ability to hold the securities, as it would be unlikely that forced sales of securities would be required prior to maturity to cover payments of liabilities. As a result, securities held to maturity are carried at amortized cost less declines in value that are other than temporary. Investments in debt and equity securities that are not classified as securities held to maturity are reported as securities available for sale. Securities available for sale are reported in the accompanying financial statements at individual fair value. Any valuation changes resulting from changes in the fair value of the securities are reflected as a component of stockholders' equity. These unrealized gains or losses in stockholders' equity are reported net of taxes and adjustments to deferred policy acquisition costs. Transfers of securities between categories are recorded at fair value at the date of transfer. Unrealized holding gains or losses associated with transfers of securities held to maturity to securities available for sale are recorded as a separate component of stockholders' equity. The unrealized holding gains or losses included as a separate component of equity for securities transferred from available for sale to held to maturity are maintained and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with the amortization or accretion of premium or discount on the associated security. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Realized gains and losses for securities available for sale and securities held to maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. For securities available for sale or securities held to maturity, a decline in the fair value below cost that is deemed other than temporary is charged to earnings, resulting in the establishment of a new cost basis for the security. Mortgage loans and other long-term investments are stated at cost, less unamortized discounts and allowances for possible losses. Policy loans are stated at their aggregate unpaid balances. Real estate acquired by foreclosure is stated at the lower of cost or fair value less estimated costs to sell. (D) Cash Equivalents - For purposes of the statements of cash flows, the Company considers all short-term investments with a maturity at date of purchase of three months or less to be cash equivalents. (E) Insurance Revenues and Expenses - Premiums on traditional life insurance products are recognized as revenues as they become due or, for short duration contracts, over the contract periods. Benefits and expenses are matched with premiums in arriving at profits by providing for policy benefits over the lives of the policies and by amortizing acquisition costs over the premium-paying periods of the policies. For universal life and investment annuity contracts, revenues consist of policy charges for the cost of insurance, policy administration, and surrender charges assessed during the period. Expenses for these policies include interest credited to policy account balances and benefit claims incurred in excess of policy account balances. The related deferred policy acquisition costs are amortized in relation to the present value of expected gross profits on the policies. (F) Federal Income Taxes - Federal income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance for deferred tax assets is provided if all or some portion of the deferred tax asset may not be realized. An increase or decrease in a valuation allowance that results from a change in circumstances that affects the realizability of the related deferred tax asset is included in income. (G) Depreciation of Property, Equipment, and Leasehold Improvements - Depreciation is based on the estimated useful lives of the assets and is calculated on the straight-line and accelerated methods. Leasehold improvements are amortized over the lesser of the economic useful life of the improvement or the term of the lease. (H) Earnings Per Share - Earnings per share of common stock are based on the weighted average number of such shares outstanding during each year. The weighted average shares outstanding were 3,488,205 and 3,484,682, and 3,481,233 for the years ended December 31, 1995, 1994, and 1993, respectively. (I) Classification - Certain reclassifications have been made to the prior years to conform to the reporting categories used in 1995. The most significant of these reclassifications relate to The Westcap Corporation and its discontinued brokerage operations. All assets, liabilities, results of operations, and cash flows of The Westcap Corporation for 1994 and 1993 have been reclassified and reported separately as discontinued operations in the accompanying financial statements. (J) Statutory Information - National Western Life Insurance Company, domiciled in Colorado, prepares its statutory financial statements in accordance with accounting practices prescribed or permitted by the Colorado Division of Insurance. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (NAIC), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. Such practices may differ from state to state, may differ from company to company within a state, and may change in the future. The NAIC currently is in the process of codifying statutory accounting practices, the result of which is expected to constitute the only source of prescribed statutory accounting practices. Accordingly, that project will likely change, to some extent, prescribed statutory accounting practices and may result in changes to the accounting practices that insurance companies use to prepare their statutory financial statements. The following are major differences between generally accepted accounting principles and prescribed or permitted statutory accounting practices. 1. The Company accounts for universal life and investment annuity contracts based on the provisions of Statement of Financial Accounting Standards (SFAS) No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments." The basic effect of the statement with respect to certain long-duration contracts is that deposits for universal life and investment annuity contracts are not reflected as revenues, and surrenders and certain other benefit payments are not reflected as expenses. However, statutory accounting practices do reflect such items as revenues and expenses. 2. Commissions and certain expenses related to policy issuance and underwriting, all of which generally vary with and are related to the production of new business, have been deferred. For traditional products, these costs are being amortized over the premium-paying period of the related policies in proportion to the ratio of the premium earned to the total premium revenue anticipated, using the same assumptions as to interest, mortality, and withdrawals as were used in calculating the liability for future policy benefits. For universal life and investment annuity contracts, these costs are amortized in relation to the present value of expected gross profits on these policies. The Company evaluates the recoverability of deferred policy acquisition costs on an annual basis. In this evaluation, the Company considers estimated future gross profits or future premiums, as applicable for the type of contract. The Company also considers expected mortality, interest earned and credited rates, persistency, and expenses. Statutory accounting practices require commissions and related costs to be expensed as incurred. A summary of information relative to deferred policy acquisition costs and premiums and deposits follows:
Years Ended December 31, 1995 1994 1993 (In thousands) Costs deferred: Agents' commissions $ 42,904 27,177 19,038 Other 2,790 2,600 2,646 $ 45,694 29,777 21,684 Amounts amortized $ 33,675 32,131 33,159 Direct traditional life and other premiums $ 24,801 24,919 26,070 Universal life insurance deposits $ 68,464 64,760 67,060 Investment annuity deposits $ 309,971 157,622 86,700
3. Under generally accepted accounting principles, the liability for future policy benefits on traditional products has been calculated by the net level method using assumptions as to future mortality (based on the 1965-1970 and 1975-1980 Select and Ultimate mortality tables), interest ranging from 4% to 8%, and withdrawals based on Company experience. For universal life and investment annuity contracts, the liability for future policy benefits represents the account balance. 4. Deferred Federal income taxes are provided for temporary differences which are recognized in the financial statements in a different period than for Federal income tax purposes. Deferred taxes are not recognized in statutory accounting practices. Also, for statutory accounting purposes, the Company has recorded Federal income tax receivables as permitted by the Colorado Division of Insurance. The Federal income tax receivables related to subsidiary losses have been recorded directly to surplus and were not recorded in results of operations. Prescribed statutory accounting practices do not address the accounting for tax receivables. 5. For statutory accounting purposes, debt securities are recorded at amortized cost, except for securities in or near default which are reported at market value. 6. Investments in subsidiaries are recorded at admitted asset value for statutory purposes, whereas the financial statements of the subsidiaries have been consolidated with those of the Company under generally accepted accounting principles. 7. The asset valuation reserve and interest maintenance reserve, which are investment valuation reserves prescribed by statutory accounting practices, have been eliminated, as they are not required under generally accepted accounting principles. 8. The recorded value of the life interest in the Libbie Shearn Moody Trust (the Trust) is reported at its initial valuation, net of accumulated amortization. The initial valuation was based on the assumption that the Trust would provide certain income to the Company at an assumed interest rate and is being amortized over 53 years, the life expectancy of Mr. Robert L. Moody at the date he contributed the life interest to the Company. For statutory accounting purposes, the life interest has been valued at $26,400,000, which was computed as the present value of the estimated future income to be received from the Trust. However, this amount is being amortized to a valuation of $12,774,000 over a seven-year period in accordance with Colorado Division of Insurance permitted accounting requirements. Prescribed statutory accounting practices provide no accounting guidance for such asset. The statutory admitted value of this life interest at December 31, 1995, is $20,561,000 in comparison to a carrying value of $5,206,000 in the accompanying consolidated financial statements. Reconciliations of statutory stockholders' equity, as included in the annual statements filed with the Colorado Division of Insurance, to the respective amounts as reported in the accompanying consolidated financial statements prepared under generally accepted accounting principles are as follows:
Stockholders' Equity as of December 31, 1995 1994 1993 (In thousands) Statutory equity $ 236,884 212,063 182,876 Adjustments: Difference in valuation of investment in the Libbie Shearn Moody Trust (15,355) (17,021) (17,911) Deferral of policy acquisition costs 270,167 291,274 287,711 Adjustment of future policy benefits (218,352) (206,027) (205,357) Deferred Federal income taxes payable (12,287) (1,996) (3,078) Adjust securities available for sale to fair value 48,880 (10,469) (1,080) Reversal of asset valuation reserve 4,002 10,197 13,225 Reversal of interest maintenance reserve 5,991 4,922 2,222 Reinstatement of non-admitted assets 2,429 2,468 3,134 Valuation allowances on investments (10,862) (10,573) (15,566) Adjustment for consolidation 102 102 (3,664) Other, net 388 194 206 Generally accepted accounting principles equity $ 311,987 275,134 242,718
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:
Net Earnings for the Years Ended December 31, 1995 1994 1993 (In thousands) Statutory net earnings $ 28,343 32,513 46,013 Subsidiary earnings (losses) before deferred Federal income taxes (17,594) (3,806) 20,879 Consolidated statutory net earnings 10,749 28,707 66,892 Adjustments: Deferral of policy acquisition costs 12,018 (2,354) (11,475) Adjustment of future policy benefits (12,325) (671) 11,816 Amortization of investment in Trust (280) (279) (275) Benefit (provision) for deferred Federal income taxes (715) 108 5,675 Valuation allowances and permanent impairment write-downs on investments 3,901 5,238 5,238 Lawsuit settlements recorded as surplus adjustments for statutory accounting (200) 955 1,620 Subsidiary stock dividends - (1,366) (20,442) Increase (decrease) in interest maintenance reserve 1,069 2,700 (8,364) Cumulative effect of change in accounting for income taxes - - 5,520 Other, net 5,067 1,198 519 Generally accepted accounting principles net earnings $ 19,284 34,236 56,724
(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:
December 31, 1995 1994 (In thousands) Debt securities $ 28,184 62,413 Certificates of deposit 210 210 Totals $ 28,394 62,623
(3) INVESTMENTS (A) Investment Income The major components of net investment income are as follows:
Years Ended December 31, 1995 1994 1993 (In thousands) Investment income: Debt securities $ 165,879 154,417 144,218 Mortgage loans 19,644 19,839 18,450 Policy loans 11,018 10,546 11,962 Other investment income 7,764 7,982 8,412 Total investment income 204,305 192,784 183,042 Investment expenses 2,489 2,763 2,790 Net investment income $ 201,816 190,021 180,252
Investments of the following amounts were non-income producing for the preceding twelve months:
December 31, 1995 1994 (In thousands) Debt securities $ 2,209 4,924 Equity securities 1,896 1,549 Real estate 2,175 2,160 Totals $ 6,280 8,633
As of December 31, 1995 and 1994, investments in debt securities and mortgage loans with principal balances totaling $3,778,000 and $8,314,000 were on non-accrual status. During 1995, 1994, and 1993, reductions in interest income associated with non-performing investments in debt securities and mortgage loans were as follows:
Years Ended December 31, 1995 1994 1993 (In thousands) Interest at contract rate $ 340 647 1,029 Interest income recognized 4 184 123 Interest income not accrued $ 336 463 906
(B) Investment Concentrations Concentrations of credit risk arising from mortgage loans exist in relation to certain groups of customers. A group concentration arises when a number of counterparties have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Company does not have a significant exposure to any individual customer or counterparty. The major concentrations of mortgage loan credit risk for the Company arise by geographic location in the United States and by property type as detailed below.
December 31, 1995 1994 West South Central 54.0% 55.8% Mountain 12.9 12.2 Pacific 9.4 9.7 All other 23.7 22.3 Totals 100.0 % 100.0 %
December 31, 1995 1994 Retail 67.0 % 64.6 % Office 15.9 16.8 Hotel/Motel 8.3 7.6 All other 8.8 11.0 Totals 100.0 % 100.0 %
The Company held in its investment portfolio below investment grade debt securities totaling $14,244,000 and $31,861,000 at December 31, 1995 and 1994, respectively. This represents approximately 0.5% and 1.4% of total invested assets. These below investment grade debt securities often have common characteristics in that they are usually unsecured and are often subordinated to other creditors of the borrower or issuer. Additionally, the issuers of the below investment grade debt securities usually have high levels of indebtedness and are more sensitive to adverse economic conditions. At December 31, 1995 and 1994, the Company held $4,966,000 and $8,948,000 of residual interests in collateralized mortgage obligations (CMOs) in its investment portfolio. Investments in residual interests of CMOs are securities that entitle the Company to the excess cash flows arising from the difference between the cash flows required to make principal and interest payments on the related CMOs and the actual cash flows received on the underlying U.S. agency collateral included in the CMO portfolios. Total cash flows to be received by the Company from the residual interests could differ from the projected cash flows resulting in changes in yield or losses if prepayments vary from projections on the collateral underlying the CMOs. At December 31, 1995 and 1994, the Company had real estate totaling $19,066,000 and $17,766,000, net of estimated selling costs, which is reflected in other long-term investments in the accompanying financial statements. The Company had no investments in any entity, except for U.S. government agency securities, in excess of 10% of stockholders' equity at December 31, 1995. (C) Investment Gains and Losses The table below presents realized gains and losses and increases or decreases in unrealized gains on investments:
Net Realized Increase Investment (Decrease) Gains in Unrealized (Losses) Investment Gains (In thousands) Year Ended December 31, 1995: Securities held to maturity $ 600 201,008 Securities available for sale (2,599) 15,166 Other (416) - Totals $ (2,415) 216,174 Year Ended December 31, 1994: Securities held to maturity $ 1,632 (239,104) Securities available for sale (881) (29,493) Other 875 - Totals $ 1,626 (268,597) Year Ended December 31, 1993: Securities held to maturity $ 3,937 78,960 Securities available for sale 1,541 (395) Other (2,272) - Totals $ 3,206 78,565
The tables below present amortized cost and fair values of securities held to maturity and securities available for sale at December 31, 1995:
Securities Held to Maturity Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In thousands) Debt securities: U.S. Treasury and other U.S. government corporations and agencies $ 35,764 262 - 36,026 States and political subdivisions 47,574 3,737 - 51,311 Foreign governments 48,286 3,030 - 51,316 Public utilities 227,449 12,358 278 239,529 Corporate 774,134 43,724 438 817,420 Mortgage-backed 510,004 21,391 528 530,867 Totals $ 1,643,211 84,502 1,244 1,726,469
Securities Available for Sale Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In thousands) Debt securities: U.S. Treasury and other U.S. government corporations and agencies $ 2,948 363 - 3,311 Public utilities 54,677 3,543 790 57,430 Corporate 103,884 11,618 165 115,337 Mortgage-backed 375,219 25,259 1,622 398,856 Equity securities 24,399 2,434 973 25,860 Totals $ 561,127 43,217 3,550 600,794
The tables below present amortized cost and fair values of securities held to maturity and securities available for sale at December 31, 1994:
Securities Held to Maturity Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In thousands) Debt securities: U.S. Treasury and other U.S. government corporations and agencies $ 24,595 44 886 23,753 States and political subdivisions 47,532 480 3,527 44,485 Foreign governments 25,407 - 1,517 23,890 Public utilities 272,478 722 22,807 250,393 Corporate 538,914 1,728 43,200 497,442 Mortgage-backed 696,887 5,759 54,546 648,100 Totals $ 1,605,813 8,733 126,483 1,488,063
Securities Available for Sale Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In thousands) Debt securities: U.S. Treasury and other U.S. government corporations and agencies $ 7,353 59 2,467 4,945 Public utilities 10,263 155 918 9,500 Corporate 92,280 881 1,847 91,314 Mortgage-backed 228,389 2,413 8,570 222,232 Equity securities 27,739 1,382 2,812 26,309 Totals $ 366,024 4,890 16,614 354,300
The amortized cost and fair values of investments in debt securities at December 31, 1995, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities Securities Held to Maturity Available for Sale Amortized Fair Amortized Fair Cost Value Cost Value (In thousands) Due in 1 year or less $ 7,923 7,978 282 286 Due after 1 year through 5 years 93,335 95,280 16,584 17,648 Due after 5 years through 10 years 773,979 812,622 79,570 85,627 Due after 10 years 257,970 279,722 65,073 72,517 1,133,207 1,195,602 161,509 176,078 Mortgage-backed securities 510,004 530,867 375,219 398,856 Totals $ 1,643,211 1,726,469 536,728 574,934
Proceeds from sales of securities available for sale during 1995 and 1994 totaled $44,440,000 and $9,114,000, respectively. Gross gains of $1,153,000 and $654,000 and gross losses of $3,752,000 and $1,535,000 were realized on those sales during 1995 and 1994, respectively. Proceeds from sales of investments in debt securities during 1993 were $77,869,000. Gross gains of $12,966,000 and gross losses of $1,283,000 were realized on those sales, respectively. The Company uses the specific identification method in computing realized gains and losses. The Company sold three held to maturity securities during 1995 due to significant credit deterioration of the issuing companies. Amortized cost of the securities sold totaled $10,727,000, and realized losses of $68,000 were recognized on the sales. (D) Changes in Accounting Principles In May, 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities as previously described in note 1. The Company adopted SFAS No. 115 effective January 1, 1994. Upon adoption, approximately 60% of the Company's insurance operations debt securities were reported as securities available for sale, with the remainder classified as securities held to maturity. The Company's relatively small holdings of equity securities were also reported as securities available for sale. Upon adoption of the new statement, certain related balance sheet accounts, deferred Federal income taxes payable and deferred policy acquisition costs, were adjusted as if the unrealized gains on the securities classified as available for sale had actually been realized. For the Company's universal life and investment annuity contracts, deferred policy acquisition costs are amortized in relation to the present value of expected gross profits on these policies. Accordingly, under SFAS No. 115, deferred policy acquisition costs are adjusted for the impact on estimated gross profits of net unrealized gains and losses on securities. The implementation of the new statement had no effect on net earnings of the Company. However, stockholders' equity was adjusted as follows as of January 1, 1994:
January 1, 1994 (In thousands) Fair value adjustment to investments in debt and equity securities $ 93,788 Less: Decrease in deferred policy acquisition costs (52,849) Increase in deferred Federal income taxes (14,329) Effect of change in accounting for investments in debt and equity securities $ 26,610
At July 31, 1994, the Company transferred debt securities with fair values totaling $805 million from securities available for sale to securities held to maturity. On December 29, 1995, the Company made additional transfers totaling $156 million to the held to maturity category from securities available for sale. The lower holdings of securities available for sale significantly reduces the Company's exposure to equity volatility while still providing securities for liquidity and asset/liability management purposes. The transfers of securities were recorded at fair values in accordance with SFAS No. 115. This statement requires that the unrealized holding gain or loss at the date of the transfer continue to be reported in a separate component of stockholders' equity but shall be amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount. The amortization of an unrealized holding gain or loss reported in equity will offset or mitigate the effect on interest income of the amortization of the premium or discount for the held-to-maturity securities. The transfer of securities from available for sale to held to maturity had no effect on net earnings of the Company. However, stockholders' equity was adjusted as follows:
Net Unrealized Gains (Losses) as of December 31, 1995 1994 (In thousands) Beginning unamortized gains from transfers $ 941 - Net unrealized gains related to transfer of securities from available for sale to held to maturity 3,159 1,380 Amortization of net unrealized gains related to transferred securities (931) (439) 2,228 941 Ending unamortized gains from transfers $ 3,169 941
Also on December 29, 1995, the Company transferred securities totaling $284 million to the available for sale category from securities held to maturity. This transfer resulted in an increase to stockholder's equity of $4,266,000 as of December 31, 1995, net of effects of deferred policy acquisition costs and taxes. This transfer was made to restructure the Company's portfolio to provide increased flexibility for both portfolio and asset/liability management. Accounting principles typically do not allow transfers from the held to maturity category to the available for sale category except under certain prescribed circumstances. However, in 1995 the Financial Accounting Standards Board permitted a one-time reassessment by companies of their securities classifications and allowed transfers out of the held to maturity category without regard to the prescribed circumstances. The reassessment and any resulting transfers had to be completed by December 31, 1995. Net unrealized gains (losses) on investment securities included in stockholders' equity at December 31, 1995 and 1994 are as follows:
December 31, 1995 1994 (in thousands) Gross unrealized gains $ 43,217 4,890 Gross unrealized losses (3,550) (16,614) Adjustments for: Deferred policy acquisition costs (21,166) 6,893 Deferred Federal income taxes (6,475) 1,691 12,026 (3,140) Net unrealized gain related to securities transferred to held to maturity 3,169 941 Net unrealized gains (losses) on investment securities $ 15,195 (2,199)
The Financial Accounting Standards Board (FASB) issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," in May, 1993. In October, 1994, the FASB also issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," which amends SFAS No. 114. These statements address the accounting by creditors for impairment of certain loans and related financial statement disclosures. The Company adopted both SFAS No. 114 and No. 118 effective January 1, 1995. As the Company was already providing for impairment of loans through an allowance for possible losses, the implementation of this statement had no significant effect on the Company's results of operations or stockholders' equity. However, additional disclosures are required by these statements which are provided below. As of December 31, 1995 and 1994, impaired mortgage loans were as follows:
1995 1994 (In thousands) Impaired loans with allowance for losses $ - 861 Allowance for losses - (261) Impaired loans with no allowance for losses - 379 Net impaired loans $ - 979
For the years ended December 31, 1995 and 1994, average investments in impaired mortgage loans were $234,000 and $997,000, respectively. Interest income recognized on impaired loans during the years ended December 31, 1995 and 1994, was not significant. Impaired loans are typically placed on non-accrual status and no interest income is recognized. However, if cash is received on the impaired loan, it is applied to principal and interest on past due payments, beginning with the most delinquent payment. Detailed below are the changes in the allowance for mortgage loan losses for the years ended December 31, 1995 and 1994.
1995 1994 (In thousands) Balance at beginning of year $ 5,929 6,849 Net additions charged to realized investment gains and losses - 307 Releases due primarily to foreclosures (261) (1,227) Balance at end of year $ 5,668 5,929
In March, 1995, the FASB issued SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Measurement of an impairment loss for long-lived assets and identifiable intangibles that an entity expects to hold and use should be based on the fair value of the asset. The statement also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less costs to sell. The Company's real estate investments are the only significant assets that will be subject to this statement. As the Company already records foreclosed real estate at the lower of cost or fair value less estimated costs to sell, the implementation of this statement will not have a significant effect on the Company's financial statements. The statement will be implemented in the first quarter of 1996. (4) REINSURANCE The Company is party to several reinsurance agreements. The Company's general policy is to reinsure that portion of any risk in excess of $150,000 on the life of any one individual. Total life insurance in force was $7.94 billion and $7.71 billion at December 31, 1995 and 1994, respectively. Of these amounts, life insurance in force totaling $1.27 billion and $1.05 billion was ceded to reinsurance companies, primarily on a yearly renewable term basis, at December 31, 1995 and 1994, respectively. In accordance with the reinsurance contracts, reinsurance receivables including amounts related to claims incurred but not reported and liabilities for future policy benefits totaled $5,646,000 and $6,480,000 at December 31, 1995 and 1994, respectively. Premium revenues were reduced by $7,420,000, $6,040,000, and $7,450,000 for reinsurance premiums incurred during 1995, 1994, and 1993, respectively. Benefit expenses were reduced by $5,812,000, $3,295,000, and $6,943,000 for reinsurance recoveries during 1995, 1994, and 1993, respectively. A contingent liability exists with respect to reinsurance, as the Company remains liable if the reinsurance companies are unable to meet their obligations under the existing agreements. (5) FEDERAL INCOME TAXES Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes," which requires an asset and liability method of accounting. The cumulative effect of this change in accounting for income taxes of $5,520,000 was determined as of January 1, 1993, and is reported separately in the consolidated statement of earnings for the year ended December 31, 1993. Total Federal income taxes were allocated as follows:
Years Ended December 31, 1995 1994 1993 (In thousands) Earnings from continuing operations $ 10,566 16,207 14,696 Discontinued operations - 2,983 11,781 Stockholders' equity for net unrealized gains and losses on securities available for sale 9,365 (974) (211) Total Federal income taxes $ 19,931 18,216 26,266
The provisions for Federal income taxes attributable to income from continuing operations vary from amounts computed by applying the statutory income tax rate to earnings before Federal income taxes. The reasons for the differences, and the tax effects thereof, are as follows:
Years Ended December 31, 1995 1994 1993 (In thousands) Income tax expense at statutory rate $ 16,170 18,683 15,424 Dividends-received deduction (298) (333) (420) Amortization of life interest in the Libbie Shearn Moody Trust 98 97 96 Payment (recovery) of non-deductible excise tax - 53 (368) Adjustment to deferred tax assets and liabilities for enacted changes in tax rates - - 98 Tax benefit of discontinued operations (5,669) (2,864) - Other 265 571 (134) Provision for Federal income taxes $ 10,566 16,207 14,696
The significant components of deferred income tax expense (benefit) attributable to earnings from continuing operations for the years ended December 31, 1995, 1994, and 1993, are as follows:
Years Ended December 31, 1995 1994 1993 (In thousands) Deferred tax expense (benefit), exclusive of adjustments for changes in tax rates $ 926 (93) (5,408) Adjustments to deferred tax assets and liabilities for enacted changes in tax rates - - 98 Total deferred tax expense (benefit) $ 926 (93) (5,310)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995, 1994, and 1993, are presented below:
December 31, 1995 1994 (In thousands) Deferred tax assets: Future policy benefits, excess of financial accounting liability over tax liability $ 86,358 81,849 Mortgage loans, principally due to valuation allowances for financial accounting purposes 2,212 2,242 Real estate, principally due to write-downs for financial accounting purposes 2,089 2,382 Accrued and unearned investment income recognized for tax purposes and deferred for financial accounting purposes 2,311 2,299 Accrued operating expenses recorded for financial accounting purposes not currently tax deductible 2,766 2,451 Accrued liabilities of discontinued operations not currently tax deductible 1,368 - Net unrealized losses on securities availabe for sale - 1,184 Other 595 733 Total gross deferred tax assets 97,699 93,140 Less valuation allowance - - Net deferred tax assets 97,699 93,140 Deferred tax liabilities: Deferred policy acquisition costs, principally expensed for tax purposes (95,650) (92,884) Debt securities, principally due to deferred market discount for tax (4,482) - Real estate, principally due to differences in tax and financial accounting for depreciation (1,622) (1,964) Net unrealized gains on securities available for sale (8,181) - Other (51) (288) Total gross deferred tax liabilities (109,986) (95,136) Net deferred tax liabilities $ (12,287) (1,996)
There was no valuation allowance for deferred tax assets at December 31, 1995 and 1994. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. Prior to the Tax Reform Act of 1984 (1984 Act), a portion of a life insurance company's income was not subject to tax until it was distributed to stockholders, at which time it was taxed at the regular corporate tax rate. In accordance with the 1984 Act, this income, referred to as policyholders' surplus, would not increase, yet any amounts distributed would be taxable at the regular corporate rate. The balance of this account as of December 31, 1995, is approximately $2,446,000. No provision for income taxes has been made on this untaxed income, as management is of the opinion that no distribution to stockholders will be made from policyholders' surplus in the foreseeable future. Should the balance in the policyholders' surplus account at December 31, 1995, become taxable, the Federal income taxes computed at present rates would be approximately $856,000. The Company files a consolidated Federal income tax return with its subsidiaries. Allocation of the consolidated tax liability is based on separate return calculations pursuant to the "wait-and-see" method as described in sections 1.1552-1(a)(2) and 1.1502-33(d)(2)(i) of the current Treasury Regulations. Under this method, consolidated group members are not given current credit for net losses until future net taxable income is generated to realize such credits. In accordance with this consolidated tax sharing agreement, tax benefits resulting from discontinued brokerage operation losses totaling $5,669,000 and $2,864,000 for 1995 and 1994 were included in earnings from continuing operations. (6) TRANSACTIONS WITH CONTROLLING STOCKHOLDER AND AFFILIATES (A) Life Interest in Libbie Shearn Moody Trust The Company is the beneficial owner of a life interest (1/8 share), in the trust estate of Libbie Shearn Moody which was previously owned by Mr. Robert L. Moody, Chairman of the Board of Directors of the Company. The Company has issued term insurance policies on the life of Mr. Robert L. Moody which are reinsured through agreements with unaffiliated insurance companies. The Company is the beneficiary of these policies for an amount equal to the statutory admitted value of the Trust, which was $20,561,000 at December 31, 1995. The excess of $27,000,000 face amount of the reinsured policies over the statutory admitted value of the Trust has been assigned to Mr. Robert L. Moody. The recorded net asset values in the accompanying consolidated financial statements for the Company's life interest in the Trust are as follows:
December 31, 1995 1994 (In thousands) Original valuation of life interest at February 26, 1960 $ 13,793 13,793 Less accumulated amortization (8,587) (8,307) Net asset value of life interest in the Trust $ 5,206 5,486
Income from the Trust and related expenses reflected in the accompanying consolidated statements of earnings are summarized as follows:
Years Ended December 31, 1995 1994 1993 (In thousands) Income distributions $ 3,085 2,937 2,596 Deduct: Amortization (280) (279) (275) Reinsurance premiums (212) (188) (162) Net income from life interest in the Trust $ 2,593 2,470 2,159
(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:
Years Ended December 31, 1995 1994 1993 (In thousands) Service cost-benefits earned during the period $ 143 218 156 Interest cost on projected benefit 510 498 481 obligations Actual return on plan assets (962) 112 (321) Net amortization and deferral 427 (622) (258) Net pension cost $ 118 206 58
The following sets forth the plan's funded status and related amounts recognized in the Company's balance sheet as of:
December 31, 1995 1994 (In thousands) Actuarial present value of benefit obligations: Accumulated benefit obligations, including vested benefits of $7,562,000 and $5,565,000, respectively $ (7,961) (5,906) Projected benefit obligations for service rendered to date $ (8,199) (6,317) Plan assets at fair market value primarily consisting of equity and fixed income securities 6,557 5,513 Projected benefit obligations in excess of plan assets (1,642) (804) Unrecognized net transitional asset at January 1, 1987 being recognized over employees' average remaining service of 15 years (319) (374) Prior service cost not yet recognized in net periodic pension cost (236) (266) Unrecognized net losses from past experience different from that assumed 2,174 1,058 Adjustment to recognize minimum liability (1,381) (7) Accrued pension cost $ (1,404) (393)
The discount rate used in determining the actuarial present value of the projected benefit obligations was 7.0% for 1995 and 8.75% for 1994. The projected increase in future compensation levels was based on a rate of 5.0% and 6.0% for 1995 and 1994, respectively. The projected long-term rate of return on plan assets was 8.5% for 1995 and 1994. The Company also has a non-qualified defined benefit plan primarily for senior officers. The plan provides benefits based on the participants' years of service and compensation. No minimum funding standards are required. However, at the option of the Company, contributions may be funded into the National Western Life Insurance Company Non-Qualified Plans Trust. There are currently no plan assets in the trust. A summary of plan information is as follows: Pension costs include the following components:
Years Ended December 31, 1995 1994 1993 (In thousands) Service cost-benefits earned during the period $ 71 91 63 Interest cost on projected benefit obligations 153 158 98 Net amortization and deferral 78 129 68 Net pension cost $ 302 378 229
The following sets forth the plan's funded status and related amounts recognized in the Company's balance sheet as of:
December 31, 1995 1994 (In thousands) Actuarial present value of benefit obligations: Accumulated benefit obligations, including vested benefits of $1,545,000 and $640,000, respectively $ (1,550) (670) Projected benefit obligations for service rendered to date (2,532) (1,749) Plan assets at fair market value - - Projected benefit obligations in excess of plan assets (2,532) (1,749) Unrecognized net transitional obligation at January 1, 1991, being recognized over employees' average remaining service of 12 years 598 677 Unrecognized net losses from past experience different from that assumed 582 22 Adjustment to recognize minimum liability (198) - Accrued pension cost $ (1,550) (1,050)
The discount rate used in determining the actuarial present value of the projected benefit obligations was 7.0% for 1995 and 8.75% for 1994. The projected increase in future compensation levels was based on a rate of 5.0% and 6.0% for 1995 and 1994, respectively. In addition to the defined benefit plans, the Company has a qualified 401(k) plan for substantially all full-time employees and a non-qualified deferred compensation plan primarily for senior officers. The Company makes annual contributions to the 401(k) plan of two percent of each employee's compensation. Additional Company matching contributions of up to two percent of each employee's compensation are also made each year based on the employee's personal level of salary deferrals to the plan. All Company contributions are subject to a vesting schedule based on the employee's years of service. For the years ended December 31, 1995 and 1994, Company contributions totaled $201,000 and $198,000. The non-qualified deferred compensation plan was established to allow eligible employees to defer the payment of a percentage of their compensation and to provide for additional Company contributions. Company contributions are subject to a vesting schedule based on the employee's years of service. For the years ended December 31, 1995 and 1994, Company contributions totaled $55,000 and $45,000, respectively. (8) SHORT-TERM BORROWINGS The Company has available a $60 million bank line of credit primarily for cash management purposes relating to investment transactions. The Company is required to maintain a collateral security deposit in trust with the bank equal to 120% of any outstanding liability. The Company had no outstanding liabilities or collateral security deposits with the bank at December 31, 1995 and 1994. The average interest rate on borrowings for the year ended December 31, 1994 was 4.45%. The Company had no borrowings on the line of credit during 1995. (9) COMMITMENTS AND CONTINGENCIES (A) Current Regulatory Issues In December, 1995, the National Association of Insurance Commissioners adopted for statutory accounting practices Actuarial Guideline 33, previously referred to as Actuarial Guideline GGG. This reserve guideline, which has not been adopted by any states at this time, helps define the minimum reserves for policies with multiple benefit streams, such as two-tier annuities. As of December 31, 1995, the Company's statutory reserving practices for two-tier annuities follow an agreement reached in 1993 with its state of domicile, Colorado. This agreement requires the Company to phase-in a different reserve basis by the end of 1996. The agreement states the acceptable difference between the target reserve and the statutory reserve held by the Company will meet the following schedule: December 31, 1995 $5,000,000 December 31, 1996 -
The Company has met the above scheduled difference for December 31, 1995. However, in 1995, the Company entered into discussions with the Colorado Division of Insurance (the Division) to implement Actuarial Guideline 33 and to phase it in over a three-year period as allowed by the guideline. In January, 1996, the Division approved the proposal for this three-year phase-in. The effect on the Company's statutory financial statements will not be significant, since the previous agreement with the Division was similar to the final guideline. Also, the guideline does not affect the Company's policy reserves which are prepared under generally accepted accounting principles as reported in the accompanying consolidated financial statements. (B) Legal Proceedings On March 28, 1994, the Community College District No. 508, County of Cook and State of Illinois (The City Colleges) filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division, against National Western Life Insurance Company (the Company) and subsidiaries of The Westcap Corporation. The suit seeks rescission of securities purchase transactions by The City Colleges from Westcap between September 9, 1993 and November 3, 1993, alleged compensatory damages, punitive damages, injunctive relief, declaratory relief, fees, and costs. National Western is named as a "controlling person" of the Westcap defendants. On February 1, 1995, the complaint was amended to add a RICO count for treble damages and claims under the Texas securities and consumer fraud laws, and to add additional defendants. Westcap and the Company are of the opinions that Westcap has adequate documentation to validate all such securities purchase transactions by The City Colleges, and that Westcap and the Company each have adequate defenses to the litigation. Although the alleged damages would be material to the Company's and Westcap's financial positions, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. A judicial ruling favorable to Westcap has been made requiring resolution of the suit against Westcap through binding arbitration. The lawsuit against the Company was suspended pending determination of the arbitration proceeding against Westcap. Arbitration proceedings are currently set to begin in August, 1996. On February 1, 1995, the San Antonio River Authority (SARA) filed a complaint in the 285th Judicial District Court, Bexar County, Texas, against Kenneth William Katzen (Katzen), Westcap Securities, L.P., The Westcap Corporation (Westcap), and National Western Life Insurance Company (the Company). The suit alleges that Katzen and Westcap sold mortgage-backed security derivatives to SARA and misrepresented these securities to SARA. The suit alleges violations of the Federal Securities Act, Texas Securities Act, Deceptive Trade Practices Act, breach of fiduciary duty, fraud, negligence, breach of contract, and seeks attorney's fees. The Company is named as a "controlling person" of the Westcap defendants. Westcap and the Company are of the opinions that Westcap has adequate documentation to validate all securities purchases by SARA and that the Company and Westcap have adequate defenses to such suit. Although the alleged damages would be material to Westcap's financial condition, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The Company and Westcap have denied all allegations and the parties have initiated discovery. The case is set for trial on April 8, 1996. On June 9, 1995, Charles McCutcheon, as Sheriff of Palm Beach County, Florida, served The Westcap Corporation, Westcap Securities, Inc., Westcap Government Securities, Inc., individual officers and directors of the Westcap entities, and National Western Life Insurance Company as defendants with a complaint filed in the U.S. District Court for the Southern District of Florida. The Complaint alleges that the Westcap entities improperly sold certain derivative securities to the Plaintiff and did not disclose the high risk of these securities to the Plaintiff, who suffered financial losses from the investments. The Company is sued as a "controlling person" of Westcap, and it is alleged that the Company is responsible and liable for the alleged wrongful conduct of Westcap. The suit seeks rescission of the investments, alleged damages, punitive and exemplary damages, attorneys' fees, and injunction. On October 13, 1995, the U.S. District Judge ordered arbitration of Plaintiff's claims against the Westcap entities and stayed all proceedings pending outcome of the arbitration. Although the alleged damages would be material to Westcap's financial condition, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The Company and Westcap deny the allegations and believe they each have adequate defenses to such suit. On July 5, 1995, San Patricio County, Texas, filed suit in the District Court of San Patricio County, Texas, against National Western Life Insurance Company (the Company) and its chief executive officer, Robert L. Moody. The suit arises from derivative investments purchased by San Patricio County from Westcap Securities, L.P. or Westcap Government Securities, Inc., affiliates of The Westcap Corporation, a wholly owned subsidiary of the Company. The suit alleges that the Westcap affiliates were controlled by the Company and Mr. Moody and that they are responsible for the alleged wrongful acts of the Westcap affiliates in selling the securities to the Plaintiff. Plaintiff alleges that the Westcap affiliates violated duties and responsibilities owed to the Plaintiff related to its investment recommendations and the decisions made by Plaintiff, and alleges that the Plaintiff was financially damaged by such actions of Westcap. The suit seeks rescission of the investments and actual and punitive damages of unspecified amounts. Although the alleged damages would be material to Westcap's financial condition, a reasonable estimate of any actual losses which may result from this suit cannot be made at this time. The Company believes that it has adequate defenses to such suit and denies the allegations. The parties have initiated discovery. On September 13, 1995, Michigan South Central Power Agency filed a complaint in The United States District Court for the Western District of Michigan against Westcap Securities Investment, Inc., Westcap Securities, L.P., Westcap Securities Management, Inc., The Westcap Corporation, National Western Life Insurance Company (the Company), and others. The suit alleges that salesmen of Westcap sold mortgage-backed securities to the Plaintiff and misrepresented these securities in violation of Federal and state securities laws and common law. The Company is named as a "controlling person" of the Westcap defendants. Westcap and the Company are of the opinions that they have adequate defenses to the suit. Although the alleged damages would be material to Westcap's financial condition, a reasonable estimate of any actual losses which may result from the suit cannot be made at this time. The Company and Westcap deny all allegations. The Westcap Corporation and Westcap Securities, L.P. are also defendants in several other pending lawsuits which have arisen in the ordinary course of its business. Westcap Securities, L.P. has also been notified of several arbitration claims filed with the National Association of Securities Dealers. After reviewing the lawsuits and arbitration filings with outside counsel, management believes it has adequate defenses to each of the claims. Although the alleged damages for all of the above-described suits and arbitration claims would be material to the financial positions of the Company and The Westcap Corporation, a reasonable estimate of actual losses which may result from any of these claims cannot be made at this time. Accordingly, no provision for any liability that may result from these actions has been recognized in the consolidated financial statements. National Western Life Insurance Company is also currently a defendant in several other lawsuits, substantially all of which are in the normal course of business. In the opinion of management, the liability, if any, which may rise from these lawsuits would not have a material adverse effect on the Company's financial condition. The Company settled several lawsuits during 1994 and 1993. Other income totaling $955,000 and $1,720,000 from these settlements has been reflected in the accompanying statements of earnings for the years ended December 31, 1994 and 1993, respectively. (C) Financial Instruments In order to meet the financing needs of its customers in the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments are commitments to extend credit which involve elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amounts, assuming that the amounts are fully advanced and that collateral or other security is of no value. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company controls the credit risk of these transactions through credit approvals, limits, and monitoring procedures. The Company had commitments to extend credit relating to mortgage loans totaling $211,000 at December 31, 1995. Commitments to extend credit are legally binding agreements to lend to a customer that generally have fixed expiration dates or other termination clauses and may require payment of a fee. These commitments do not necessarily represent future liquidity requirements, as some of the commitments could expire without being drawn upon. The Company evaluates each customer's creditworthiness on a case-by-case basis. The Company also had commitments to purchase investment securities totaling $4,710,000 at December 31, 1995. (D) Guaranty Association Assessments National Western Life Insurance Company is subject to state guaranty association assessments in all states in which it is licensed to do business. These associations generally guarantee certain levels of benefits payable to resident policyholders of insolvent insurance companies. Many states allow premium tax credits for all or a portion of such assessments, thereby allowing potential recovery of these payments over a period of years. However, several states do not allow such credits. The Company estimates its liabilities for guaranty association assessments by using the latest information available from the National Organization of Life and Health Insurance Guaranty Associations. The Company will continue to monitor and revise its estimates for assessments as additional information becomes available which could result in changes to the estimated liabilities. Other insurance operating expenses related to state guaranty association assessments totaled $2,371,000, $4,869,000, and $4,583,000 for the years ended December 31, 1995, 1994, and 1993, respectively. (10) STOCKHOLDERS' EQUITY (A) Dividend Restrictions The Company is restricted by state insurance laws as to dividend amounts which may be paid to stockholders without prior approval from the Colorado Division of Insurance. The restrictions are based on statutory earnings and surplus levels of the Company. The maximum dividend payment which may be made without prior approval in 1996 is $28,992,000. The Company has never paid cash dividends on its common stock, as it follows a policy of retaining any earnings in order to finance the development of business and to meet increased regulatory requirements for capital. (B) Regulatory Capital Requirements The Colorado Division of Insurance imposes minimum risk-based capital requirements on insurance companies that were developed by the National Association of Insurance Commissioners (NAIC). The formulas for determining the amount of risk-based capital (RBC) specify various weighting factors that are applied to statutory financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of the Company's regulatory total adjusted capital to its authorized control level RBC, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The Company's current statutory capital and surplus is significantly in excess of the threshold RBC requirements. (C) Stock Bonus Plan During 1993 the Company implemented a one-time stock bonus plan for all officers of the Company. Class A common stock restricted shares totaling 13,496 were granted to officers based on their individual performance and contribution to the Company. The shares are subject to vesting requirements as reflected in the following schedule: January 1, 1993 25% December 31, 1993 25% December 31, 1994 25% December 31, 1995 25%
All of the 13,496 shares that were granted have been issued and are outstanding as of December 31, 1995. (D) Stock and Incentive Plan During 1995 the Company adopted the National Western Life Insurance Company 1995 Stock and Incentive Plan (the Plan). The Plan provides for the grant of any or all of the following types of awards to eligible employees: (1) stock options, including incentive stock options and non-qualified stock options; (2) stock appreciation rights, in tandem with stock options or freestanding; (3) restricted stock; (4) incentive awards; and (5) performance awards. The Plan is effective as of April 21, 1995, and will terminate on April 20, 2005, unless terminated earlier by the Board of Directors. The number of shares of Class A, $1.00 par value, common stock which may be issued under the Plan, or as to which stock appreciation rights or other awards may be granted, may not exceed 300,000. These shares may be authorized and unissued shares or treasury shares. All of the employees of the Company and its subsidiaries are eligible to participate in the Plan. In addition, directors of the Company, other than Compensation and Stock Option Committee members, are eligible for restricted stock awards, incentive awards, and performance awards. Non-employee directors, including members of the Compensation and Stock Option Committee, are eligible for non-discretionary stock options. On May 19, 1995, the Committee approved the issuance of 52,500 non-qualified stock options to selected officers of the Company. The Committee also granted 7,000 non-qualified, non-discretionary stock options to non-employee Company directors. The stock options begin to vest following three full years of service to the Company after date of grant, with 20% of the options to vest at the beginning of the fourth year of service, and with 20% thereof to vest at the beginning of each of the next four years of service. The exercise price of the stock options was set at the fair market value of the common stock on the date of grant, May 19, 1995, which was $38.125 per share. In October, 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." This statement establishes financial accounting and reporting standards for stock-based employee compensation plans. It defines a fair value based method of accounting for employee stock options or similar equity instruments. However, it also allows an entity to continue to measure compensation cost for plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to continue applying the accounting methods in Opinion 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in SFAS No. 123 had been applied. Under the fair value based method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. For stock options, fair value is determined using an option pricing model that takes into account various information and assumptions regarding the Company's stock and options. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. The Company anticipates that it will continue to apply the accounting methods prescribed by Opinion 25 for its existing stock and incentive plan. Therefore, the implementation of this statement will not affect the Company's results of operations. However, as required by this statement, disclosure information will be provided in the Company's financial statements reflecting costs that would have been recorded under the fair value based method. The statement will be implemented in 1996. (11) FOREIGN SALES AND SIGNIFICANT AGENCY RELATIONSHIPS Total direct premium revenues and universal life and annuity contract deposits related to insurance written in foreign countries, primarily Central and South America, were approximately $57,407,000, $53,846,000, and $57,450,000, for the years ended December 31, 1995, 1994, and 1993, respectively. A significant portion of the Company's universal life and investment annuity contracts are written through one agency. Such business accounted for approximately 11%, 20%, and 44% of total direct premium revenues and universal life and investment annuity contract deposits for 1995, 1994, and 1993, respectively. (12) SEGMENT INFORMATION A summary of financial information for the Company's two industry segments follows:
Life Discontinued Insurance Brokerage (B) Consolidated Operations Operations Adjustments Amounts (In thousands) Gross revenues: 1995 $ 287,816 5,112 (A) (5,693) 287,235 1994 278,431 40,208 (A) (41,881) 276,758 1993 273,363 105,923 (A) (107,579) 271,707 Net earnings (losses): 1995 $ 35,634 (16,350) - 19,284 1994 37,172 (2,936) - 34,236 1993 34,892 21,832 - 56,724 Identifiable assets: 1995 $ 2,952,282 6,177 - 2,958,459 1994 2,702,184 232,057 (19,187) 2,915,054 1993 2,590,537 372,301 (21,787) 2,941,051 Notes to Table: (A) These amounts are not reported as revenues in the accompanying consolidated financial statements, as the segment has been discontinued. Instead, gross revenues are reported net of expenses and taxes as a separate line item identified as discontinued operations. This reporting classification is used to clearly separate discontinued operations from continuing operations of the consolidated entity. (B) These amounts include both consolidating eliminations and adjustments for reporting discontinued brokerage operations as described in note (A) above.
(13) UNAUDITED QUARTERLY FINANCIAL DATA Quarterly results of operations are summarized as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter (In thousands except per share data) 1995: Revenues $ 70,506 72,058 69,930 74,741 Earnings from continuing operations $ 7,057 8,894 11,784 7,899 Losses from discontinued operations (1,733) (1,484) (13,133) - Net earnings (losses) $ 5,324 7,410 (1,349) 7,899 Per Share: Earnings from continuing operations $ 2.03 2.54 3.38 2.27 Losses from discontinued operations (0.50) (0.42) (3.77) - Net earnings (losses) $ 1.53 2.12 (0.39) 2.27 1994: Revenues $ 68,815 69,135 70,723 68,085 Earnings from continuing operations $ 8,961 9,000 11,459 7,752 Earnings (losses) from discontinued operations (450) 1,194 288 (3,968) Net earnings $ 8,511 10,194 11,747 3,784 Per Share: Earnings from continuing operations $ 2.57 2.59 3.29 2.21 Earnings (losses) from discontinued operations (0.13) 0.34 0.08 (1.13) Net earnings $ 2.44 2.93 3.37 1.08
The fourth quarter net earnings in 1995 reflect the following significant items: Continuing Operations: Earnings from insurance operations, excluding net realized gains and losses on investments, for the quarter ended December 31, 1995, were $8,345,000 compared to $8,311,000 for the fourth quarter of 1994. However, fourth quarter 1994 earnings included a $2.9 million tax benefit resulting from the Company's subsidiary brokerage losses, whereas 1995 fourth quarter earnings do not include such a benefit because the total 1995 tax benefit had been recognized as of September 30, 1995. The tax benefit was recognized in accordance with the Company's tax allocation agreement with its subsidiaries. Excluding the tax benefit, 1995 fourth quarter earnings were up $2.9 million over the comparable 1994 quarter. Contributing to the increased earnings were insurance revenues, excluding realized gains and losses on investments, which were up $6,482,000, or 9.4%, from the 1994 fourth quarter. The increase in revenues was offset somewhat by higher life insurance benefit claims and other policy and contract related expenses. Discontinued Operations: Third quarter 1995 losses from discontinued brokerage operations included estimated future operating losses, as well as estimated costs to cease brokerage operations, and resulted in the complete write-off of the Company's investment in Westcap on a consolidated basis. Accordingly, no earnings or losses were reported for the discontinued operations for the fourth quarter of 1995, as the investment in Westcap was previously written-off and there have been no significant changes in estimated costs to close the brokerage operations. The fourth quarter net earnings in 1994 reflect the following significant items: Continuing Operations: Other insurance operating expenses were up significantly, as fourth quarter 1994 expenses included a charge of $2,636,000, net of taxes, or $0.76 per share, for state guaranty fund assessments relating to insolvent insurance companies. Discontinued Operations: Fourth quarter 1994 net losses from the Company's discontinued brokerage operations, The Westcap Corporation, totaled $3,968,000, or $1.13 per share, compared to net earnings of $7,309,000, or $2.10 per share, for the fourth quarter of 1993. Volatile bond market conditions due to increasing market interest rates was the major factor for lower production, coupled with adverse publicity about litigation which led to the decline in sales and earnings. (14) FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Investment securities: Fair values for investments in debt and equity securities are based on quoted market prices, where available. For securities not actively traded, fair values are estimated using values obtained from various independent pricing services and the Securities Valuation Office of the National Association of Insurance Commissioners. In the cases where prices are unavailable from these sources, prices are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the investments. Cash and short-term investments: The carrying amounts reported in the balance sheet for these instruments approximate their fair values. Mortgage loans: The fair value of performing mortgage loans is estimated by discounting scheduled cash flows through the scheduled maturities of the loans, using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Fair value for significant nonperforming loans is based on recent internal or external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Policy loans: The fair value for policy loans is calculated by discounting estimated cash flows using U.S. Treasury bill rates as of December 31, 1995 and 1994. The estimated cash flows include assumptions as to whether such loans will be repaid by the policyholders or settled upon payment of death or surrender benefits on the underlying insurance contracts. As a result, these assumptions incorporate both Company experience and mortality assumptions associated with such contracts. Life interest in Libbie Shearn Moody Trust: The fair value of the life interest is estimated based on assumptions as to future dividends from the Trust over the life expectancy of Mr. Robert L. Moody. These estimated cash flows were discounted at a rate consistent with uncertainties relating to the amount and timing of future cash distributions. However, the Company has limited the fair value to the statutory admitted value of the Trust, as this is the maximum amount to be received by the Company in the event of Mr. Moody's premature death. Assets of discontinued operations: These assets consist of cash, trading securities, and securities purchased under agreements to resell. Trading securities are based on quoted market prices. The carrying amount and fair value of securities purchased under agreements to resell are the amounts at which the securities will be subsequently resold as specified in the respective agreements. Investment and supplemental contracts: Fair value of the Company's liabilities for deferred investment annuity contracts is estimated to be the cash surrender value of each contract. The cash surrender value represents the policyholder's account balance less applicable surrender charges. The fair value of liabilities for immediate investment annuity contracts and supplemental contracts with and without life contingencies is estimated by discounting estimated cash flows using U.S. Treasury bill rates as of December 31, 1995 and 1994. Fair value for the Company's insurance contracts other than investment contracts is not required to be disclosed. This includes the Company's traditional and universal life products. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, which minimizes exposure to changing interest rates through the matching of investment maturities with amounts due under insurance and investment contracts. Liabilities of discontinued operations: These liabilities consist of short-term borrowings, securities sold not yet purchased, and securities sold under agreements to repurchase. The carrying amount of the Company's borrowings approximates its fair value due to the short duration of the borrowing periods. Securities sold not yet purchased are carried at fair values determined in the same manner as investment securities described above. The carrying amounts and fair values of securities sold under agreements to repurchase are the amounts at which the securities will be subsequently repurchased as specified in the respective agreements. The carrying amounts and fair values of the Company's financial instruments are as follows:
December 31, 1995 December 31, 1994 Carrying Fair Carrying Fair Value Value Value Value (In thousands) ASSETS Investments in debt and equity securities: Securities held to maturity $ 1,643,211 1,726,469 1,605,813 1,488,063 Securities available for sale 600,794 600,794 354,300 354,300 Cash and short-term investments 10,024 10,024 17,723 17,723 Mortgage loans 191,674 202,512 189,632 200,696 Policy loans 147,923 171,816 151,487 147,858 Life interest in Libbie Shearn Moody Trust 5,206 20,561 5,486 22,507 Assets of discontinued operations: Cash 5,646 5,646 3,524 3,524 Trading securities - - 69,666 69,666 Securities purchased under agreements to resell - - 153,971 153,971 LIABILITIES Deferred investment annuity contracts $ 1,843,793 1,607,360 1,681,797 1,458,303 Immediate investment annuity and supplemental contracts 137,254 145,644 117,234 116,943 Liabilities of discontinued operations: Short-term borrowings - - 29,698 29,698 Securities sold not yet purchased - - 87,336 87,336 Securities sold under agreements to repurchase - - 91,781 91,781
Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (15) DISCONTINUED BROKERAGE OPERATIONS (A) Plan to Cease Brokerage Operations Effective July 17, 1995, The Westcap Corporation (Westcap), a wholly owned brokerage subsidiary of National Western Life Insurance Company, discontinued all sales and trading activities in its Houston, Texas, office. In September, 1995, Westcap approved a plan to close its remaining sales office in New Jersey and to cease all brokerage operations. In connection with the plan, as of December 31, 1995, Westcap's assets are being carried at their estimated fair value, and its liabilities include estimated costs to dispose of assets and estimated future costs to cease operations. These estimated costs consist primarily of operating and legal expenses based on a reasonable time period to cease operations. The preparation of Westcap's 1995 financial statements required assumptions by management that included assumptions regarding the fair value of assets and expenses to be incurred. Variations between these assumptions and actual results could result in a change in the estimated fair value of assets recorded in Westcap's 1995 financial statements. However, management believes that, based on information currently available, any differences in recoveries on its assets in the future from the existing carrying values thereof will not have a material effect on the financial statements. As a result of the plan and in accordance with generally accepted accounting principles, the assets and liabilities of Westcap have been reclassified in the accompanying consolidated balance sheets to separately identify them as assets and liabilities of the discontinued operations. Earnings and losses from the discontinued brokerage operations have also been reflected separately from continuing operations of the Company in the accompanying consolidated financial statements. The 1995 losses from discontinued operations include estimated future operating losses as well as estimated costs to cease brokerage operations totaling $6,381,000 and have resulted in the complete write-off of National Western Life Insurance Company's investment in Westcap on a consolidated basis. (B) Summary Financial Statements and Significant Disclosures A summary of Westcap's financial statements for the years ended September 30, 1995, 1994, and 1993 is provided below. Westcap's fiscal year-end is September 30. Although reported in detail below, these assets and liabilities have been aggregated and reported as assets and liabilities of discontinued operations in the accompanying financial statements. Likewise, all revenues and expenses have been netted and reported separately in the accompanying financial statements as earnings or losses from discontinued operations.
September 30, 1995 1994 1993 (In thousands) Assets: Cash $ 5,646 3,524 8,514 Receivables from customers and brokers - 675 55,163 Trading securities - 69,666 116,918 Securities purchased under agreements to resell - 153,971 186,896 Other assets 531 4,221 4,810 $ 6,177 232,057 372,301 Liabilities and Stockholder's Equity: Short-term borrowings $ - 29,698 82,852 Payables to customers and brokers - 3,692 39,422 Securities sold not yet purchased - 87,336 78,835 Securities sold under agreements to repurchase - 91,781 127,971 Other liabilities 7,430 2,823 22,840 Stockholder's equity (1,253) 16,727 20,381 $ 6,177 232,057 372,301 Revenues $ 5,112 40,208 105,923 Expenses 22,715 43,144 84,091 Net earnings (losses) $ (17,603) (2,936) 21,832
The following disclosures refer to the assets, liabilities, and operations items of Westcap as detailed above. Significant Accounting Policies: Trading securities are carried at fair value. Unrealized gains and losses on trading securities are included in revenues. Securities purchased under agreements to resell and securities sold under agreements to repurchase are treated as financing transactions, collateralized by negotiable securities, and carried at the amounts at which the securities will be subsequently resold or repurchased as specified in the respective agreements. Receivables from and payables to customers and brokers and dealers represent the contract value of securities which have not been delivered or received as of settlement date. The receivables from customers and brokers and dealers are collateralized by securities held by or due to subsidiaries of The Westcap Corporation. Securities transactions and related revenues and expenses, except trading profits, are recorded on a settlement date basis. Trading profits are recorded on a trade date basis. Other revenues and expenses related to securities transactions executed but not yet settled as of year-end were not material to the financial position and results of operations of Westcap. Capital Requirements: The Westcap Corporation conducted its brokerage operations through a limited partnership, Westcap Securities, L.P. (Westcap L.P.). Westcap L.P. was subject to the Securities and Exchange Commission's Uniform Net Capital Rule (Rule 15c3-1), which required the maintenance of minimum net capital. The limited partnership elected to be subject to the Alternative Net Capital requirement which required the partnership to, at all times, maintain net capital equal to the greater of $250,000 or 2% of aggregate debit items computed in accordance with the formula for the determination of Reserve Requirements for Brokers and Dealers. At September 30, 1995, Westcap L.P. had a net capital deficit of $1,499,000 which was $1,749,000 below its required net capital of $250,000. In anticipation of an Order Instituting Public Administrative Proceedings, Making Findings and Imposing Remedial Sanctions (Order) being entered pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 by the Securities and Exchange Commission (Commission), on February 8, 1996, Westcap L.P. submitted an offer of settlement to the Commission whereby it consented, without admitting or denying the findings in the Order, to the entry of an Order of the Commission making findings, revoking Westcap L.P.'s registration with the Commission, and requiring payment to the Commission of (i) $445,341 disgorgement, (ii) prejudgement interest of $83,879, and (iii) civil penalty of $300,000. Such an Order was entered by the Commission on February 14, 1996. In compliance with the Order, Westcap L.P. made payment to the Commission of $829,220 on March 5, 1996. Short-Term Borrowings: Certain subsidiaries of The Westcap Corporation have arrangements with a financial institution whereby the institution performs clearing functions for all securities transactions with customers and brokers and dealers. These arrangements include revolving line of credit agreements which bear interest at variable rates based on Federal funds rates and are due on demand. Borrowings under these arrangements are guaranteed by Westcap and collateralized by trading securities and certain customers' and brokers' and dealers' unpaid securities, which at September 30, 1994, had aggregate market values of approximately $35,354,000. There were no short-term borrowings outstanding at September 30, 1995. The average interest rates on borrowings for the years ended September 30, 1995 and 1994, were 6.26% and 4.60%, respectively. Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase: At September 30, 1994, securities purchased under agreements to resell by Westcap were collateralized by U.S. Government and agencies' securities with market values of approximately $152,753,000. These agreements had maturity dates ranging from one to ninety days and weighted average interest rates of 4.2%. There were no securities purchased under agreement to resell at September 30, 1995. During the years ended September 30, 1995 and 1994, the maximum month-end balance of outstanding agreements was $136,906,000 and $270,854,000, and the average amount of outstanding agreements was $68,876,000 and $197,327,000, respectively. Risks arise from the possible inability of counterparties to meet the terms of their agreements and from movements in securities' values. At September 30, 1994, securities sold under agreements to repurchase by Westcap were collateralized by U.S. Government and agencies' securities with market values of approximately $93,025,000. These agreements had maturity dates ranging from one to ninety days and weighted average interest rates of 4.8%. There were no securities sold under agreements to repurchase at September 30, 1995. During the years ended September 30, 1995 and 1994, the maximum month-end balance of outstanding agreements was $125,864,000 and $245,564,000, and the average amount of outstanding agreements was $54,322,000 and $169,187,000, respectively. When-Issued and Forward Contracts: In the normal course of business, Westcap entered into when-issued and forward contracts principally related to mortgage-backed and U.S. Government securities issues. These contracts are for delayed delivery of securities in which the seller agrees to make delivery at a specified future date of a specified instrument, at a specified price. These securities issues may have settlement dates ranging from several weeks to several months after trade date. Revenues and expenses related to such contracts are recognized on settlement date. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities values and interest rates. At September 30, 1994, the approximate amount of unsettled when-issued and forward purchase and sale contracts were $73,009,000 and $73,431,000, respectively. These contracts principally related to obligations of the U.S. Government and its agencies. There were no unsettled when-issued and forward purchase and sale contracts at September 30, 1995. During the year ended September 30, 1994, Westcap adopted the provisions of SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," which requires disclosure of certain fair value information regarding derivative financial instruments. During 1994, the average fair value of when-issued purchase and sale contracts were approximately $4,789,000 and $2,602,000, respectively. At September 30, 1994, the fair value of when-issued and forward purchase and sale contracts were approximately $68,146,000 and $68,632,000, respectively. For the year ended September 30, 1994, Westcap recognized a net gain of approximately $12,079,000 from such transactions. There were no significant transactions during 1995 in when-issued purchase and sale contracts. NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES SCHEDULE I SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1995 (In thousands)
Balance (1) Market Sheet Type of Investment Cost Value Amount Fixed maturity bonds: Securities held to maturity: United States government and government agencies and authorities $ 35,764 36,026 35,764 States, municipalities, and political subdivisions 47,574 51,311 47,574 Foreign governments 48,286 51,316 48,286 Public utilities 227,449 239,529 227,449 Corporates 771,716 815,002 771,716 Mortgage-backed 510,004 530,867 510,004 Total securities held to maturity 1,640,793 1,724,051 1,640,793 Securities available for sale: United States government and government agencies and authorities 2,948 3,311 3,311 Public utilities 54,677 57,430 57,430 Corporates 103,884 115,337 115,337 Mortgage-backed 375,219 398,856 398,856 Total securities available for sale 536,728 574,934 574,934 Total fixed maturity bonds 2,177,521 2,298,985 2,215,727 Equity securities: Securities available for sale: Common stocks: Public utilities 192 263 263 Banks, trust and insurance companies 195 1,716 1,716 Industrial and other 87 198 198 Preferred stocks 23,925 23,683 23,683 Total equity securities 24,399 25,860 25,860 Mortgage loans 183,506 177,838 Policy loans 147,923 147,923 Other long-term investments 33,122 (2) 30,970 Cash and short-term investments 10,024 10,024 Total investments other than investments in related parties $ 2,576,495 2,608,342 (Continued on next page)
NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES SCHEDULE I, CONTINUED SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1995 (In thousands) Notes to Schedule I (1) Fixed maturity bonds are shown at amortized cost, mortgage loans are shown at unpaid principal balances before allowances for possible losses of $5,668,000, and real estate is stated at cost before allowances for possible losses of $2,152,000. The following investments in related parties have been excluded: fixed maturity bonds - $2,418,000 and mortgage loans - $13,836,000. (2) Real estate acquired by foreclosure included in other long-term investments totaled approximately $6,260,000. NATIONAL WESTERN LIFE INSURANCE COMPANY AND SUBSIDIARIES SCHEDULE V VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 1995, 1994, and 1993 (In thousands)
(1) Balance Charged Balance at to at Beginning Costs and (2) (3) End of Description of Period Expenses Reductions Transfer Period Valuation accounts deducted from applicable assets: Allowance for possible losse on brokerage trade receivables: December 31, 1995 $ 1,000 - (1,000) - - December 31, 1994 $ 123 877 - - 1,000 December 31, 1993 $ 125 - (2) - 123 Allowance for possible losses on mortgage loans: December 31, 1995 $ 5,929 - (261) - 5,668 December 31, 1994 $ 6,849 307 (927) (300) 5,929 December 31, 1993 $ 6,000 2,152 (702) (601) 6,849 Allowance for possible losses on real estate: December 31, 1995 $ 1,803 882 (533) - 2,152 December 31, 1994 $ 1,556 318 (371) 300 1,803 December 31, 1993 $ 9,950 1,208 (10,203) 601 1,556 (1) Except for expenses related to brokerage trade receivables, which were charged to discontinued operations, these amounts were charged to realized gains and losses on investments. (2) These amounts were related to charge off of assets against the allowances. (3) These amounts were transferred to real estate.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NATIONAL WESTERN LIFE INSURANCE COMPANY (Registrant) /S/ Robert L. Moody /S/ Ross R. Moody By: Robert L. Moody By: Ross R. Moody Chairman of the Board, Chief President, Chief Operating Executive Officer, Director Officer, Director /S/ Robert L. Busby, III By: Robert L. Busby, III Senior Vice President - Chief Administrative Officer, Chief Financial Officer and Treasurer March 28, 1996 Date Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /S/ Arthur O. Dummer Arthur O. Dummer, Frances A. Moody, Director Director /S/ Harry L. Edwards Harry L. Edwards, Russell S. Moody, Director Director /S/ E. Douglas McLeod /S/ Louis E. Pauls, Jr. E. Douglas McLeod, Louis E. Pauls, Jr., Director Director /S/ Charles D. Milos, Jr. Charles D. Milos, Jr., E. J. Pederson, Director Director March 28, 1996 Date EX-3.A 2 EXHIBIT 3(a) - ARTICLES OF INCORPORATION RESTATED ARTICLES OF INCORPORATION OF NATIONAL WESTERN LIFE INSURANCE COMPANY Pursuant to the provisions of Section 60 of the Colorado Corporation Act, the undersigned corporation adopts the following Restated Articles of Incorporation: FIRST: The corporate name and style of our said corporation shall be NATIONAL WESTERN LIFE INSURANCE COMPANY. SECOND: The objects for which said corporation is formed and incorporated are as follows: A. To make insurance or reinsurance upon the lives of persons, and every insurance appertaining thereto or connected therewith, including health and accident insurance, and to grant, purchase or dispose of annuities. B. To reinsure with any company or association as provided by laws any risks undertaken by this corporation; to enter into contracts or reinsurance upon any lawful terms; to make such contracts and agreements with other insurance companies or associations for the purchase of the assets and the assumption and guarantee of their liabilities or the reinsurance of their risks as provided by law and deemed by the Directors advantageous and for the best interest of this corporation. C. To acquire, hold, pledge, encumber, assign, lease and dispose of such real estate and personal property as may be permitted by law. D. To invest such moneys as may come into its possession in the course of its business in real or personal property in any manner not inconsistent with, nor prohibited by the laws of the State of Colorado, and to loan such money upon mortgages or other security or securities. E. To do any or all of the aforementioned things in any part of the world; and to do all acts and things and possess all such powers as are in any manner incident or necessary to conduct the business for which our said company is formed; and to have, enjoy and exercise all rights, powers, franchises and privileges now conferred by law or which may hereafter be lawfully conferred or acquired. THIRD: The term of existence of our said corporation is perpetual. FOURTH: The amount of the total authorized capital stock of the company is SEVEN MILLION, SEVEN HUNDRED THOUSAND DOLLARS ($7,700,000.00) divided into Seven Million, Five Hundred Thousand (7,500,000) shares of Class A common stock with a par value of One Dollar ($1.00) each, and Two Hundred Thousand (200,000) shares of Class B common stock with a par value of One Dollar ($1.00) each. Class A common stock and Class B common stock shall be alike in all respects except that: (a) Class A common stock shall have the exclusive right to elect One Third (1/3) of the total number of directors constituting the whole Board of Directors (treating any fraction as an additional director) and Class B common stock shall have the exclusive right to elect the remaining directors. (b) The cash or in kind dividends to be paid on each share of the Class B common stock per annum shall be only one-half (1/2) of the cash or in kind dividends to be paid on each share of the Class A common stock per annum. (c) In the event of the dissolution or winding up of the corporation, whether voluntary or involuntary, the assets shall be distributed among the Class A and Class B stockholders in the following manner: (i) the Class A stockholders shall first receive the par value of their shares; (ii) the Class B stockholders shall then receive the par value of their shares; (iii) the remaining assets of the corporation shall then be divided and distributed to and among the holders of all the stock of the corporation in proportion to the number of shares of stock held by each, without preference of any one class of stock over any other class. In the event of a vacancy on the Board of Directors, such vacancy shall be filled by a vote of the majority of the remaining directors elected by the class who elected the directors whose position is being filled. In the event that there is no majority of such directors, then such vacancy shall be filled at a special meeting of the shareholders who elected the director whose position is being filled. Said Classes of stock shall be fully paid and non-assessable. No holder of any stock of the company shall, as such, have any preemptive right to purchase or subscribe for any shares of the capital stock or any other securities of the company which it may issue or sell, whether out of the number of shares authorized by the Articles of Incorporation of the company as originally filed or by any amendment thereof, or out of the shares of the capital stock of the company acquired by it after the issuance thereof, nor shall any holder of any such stock, as such, have any right to purchase or subscribe for any obligation which the company may issue or sell that shall be convertible into or exchangeable for any shares of the capital stock of the company, or to which shall be attached or appertained any warrant or warrants or any instrument or instruments that shall confer upon the owner of such obligation, warrant or instrument the right to subscribe for, or purchase from the company, any shares of its capital stock. Article IV (b) and (c) shall not be subject to amendment except upon the affirmative vote of the holders of 75% of the issued and outstanding Class A common stock. FIFTH: The affairs and management of our said company shall be under the control of a Board of Directors consisting of not less than seven (7) nor more than twenty-seven (27) persons who shall be stockholders of this company, and who, upon being duly elected and qualified, shall manage the affairs and concerns of our said company until their successors are chosen and qualified, and A. Vaughn Ayers 4680 West Mexico Ave. Denver, Colorado Stanford L. Hyman 421 Magnolia Street Denver, Colorado James A. Matson 4960 S. Lafayette St. Englewood, Colorado Harold M. Quiat 788 Milwaukee Street Denver, Colorado Lars O. Prestrud 118 Krameria Street Denver, Colorado are hereby designated as the Directors of this company to serve until such time as a complete Board of Directors shall be elected by the stockholders and enter upon the duties of their office. The Directors are to be elected by the holders of Class A common stock and Class B common stock as provided for in Article IV hereof. SIXTH: The location of the principal office of our company in the State of Colorado is 5670 E. Evans, Suite 103, Denver, Colorado. The registered office of the company is 1900 First National Bank Building, Denver, Colorado, and Arthur K. Underwood, Jr., is hereby designated as the registered agent of the company at said address. SEVENTH: The operations of our said company are to be carried on in the State of Colorado and in such other states and territories of the United States and in such foreign countries as the Board of Directors may from time to time determine. EIGHTH: The Board of Directors shall have the power to make, alter, and repeal such prudential bylaws as they may determine proper for the management of the affairs of this company in accordance with the statutes in such case made and provided. NINTH: Cumulative voting shall not be allowed. TENTH: Meetings of the Board of Directors and meetings of the stockholders of said company may be held beyond the limits of the State of Colorado whenever and at such place or places as may be directed by the bylaws of this company, or by the Board of Directors. ELEVENTH: One half (1/2) of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at any meeting of the shareholders. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders, unless the vote of a greater number of shares is required by law. In the election of Directors a quorum shall consist of one half (1/2) of the shares of Class A common stock entitled thereat and one half (1/2) of the shares of Class B common stock entitled to vote thereat. Whenever, with respect to any action to be taken by the shareholders, the vote or concurrence of the holders of more than one half (1/2) of the shares as required by law with respect to such action, the provision of the law shall control. TWELFTH: The Restated Articles of Incorporation correctly set forth without change the corresponding provisions of the Articles of Incorporation as heretofore amended, and supersede the original Articles of Incorporation and all amendments thereto. Dated April 10, 1968. NATIONAL WESTERN LIFE INSURANCE COMPANY By /s/ Harold E. Riley Its President and /s/ R. F. Varnado Its Secretary STATE OF TEXAS ) ) COUNTY OF TRAVIS ) I, Jan M. McDonald, a Notary Public, do hereby certify that on this 10th day of April, 1968, personally appeared before me Harold E. Riley , who being by me first duly sworn, declared that he is the President of National Western Life Insurance Company, that he signed the foregoing document as the President of said corporation, and that the statements therein contained are true. /s/ Jan M. McDonald Notary Public EX-3.B 3 EXHIBIT 3(b) - ARTICLES OF INCORPORATION AMENDMENT TO THE ARTICLES OF INCORPORATION OF NATIONAL WESTERN LIFE INSURANCE COMPANY PURSUANT to the provisions of the Colorado Insurance Code and the Colorado Corporation Act, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: 1. The name of the corporation is National Western Life Insurance Company. 2. The following amendment to the Articles of Incorporation was duly submitted to and adopted by the shareholders of the corporation on April 27, 1971. The amendment alters and changes Article VI of the original Articles of Incorporation by removing any specific street address for the Home Office of the Company in Denver, Colorado. Article VI is hereby amended to read and provide as follows: ARTICLE VI "The location of the Home Office of the Company shall be in Denver, Colorado. The registered office of the Company is 1900 First National Bank Building, Denver, Colorado, and Arthur K. Underwood, Jr., is hereby designated as the initial resident agent of the Company at said address." 3. The number of shares of the corporation outstanding and entitled to vote at the date of such adoption was 3,508,283, being 3,308,283 Class A shares and 200,000 Class B shares. 4. The number of shares voted "for" and "against" such amendment was as follows:
For Against Class A: 2,403,357 24,889 Class B: 200,000 -0-
5. The amendment does not affect the stated capital of the Company. National Western Life Insurance Company /s/ Harry L. Edwards By: President /s/ R. F. Varnado Secretary STATE OF TEXAS ) ) COUNTY OF TRAVIS ) I, a Notary Public, do hereby certify that on this 29th day of July, 1971, personally appeared before me Harry L. Edwards who declared that he is the President of the Corporation executing the foregoing instrument, and being first duly sworn acknowledged that he signed the foregoing instrument in the capacity therein set forth and declared that the statements therein contained are true and correct. IN WITNESS WHEREOF, I have hereunto set my hand and seal this day and year above written. /s/ Mary L. Stacks NOTARY PUBLIC in and for Travis County, Texas EX-3.C 4 EXHIBIT 3(c) - ARTICLES OF INCORPORATION AMENDMENT TO THE ARTICLES OF INCORPORATION OF NATIONAL WESTERN LIFE INSURANCE COMPANY PURSUANT to the provisions of the Colorado Insurance Code and the Colorado Corporation Act, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: 1. The name of the corporation is National Western Life Insurance Company. 2. The following amendment to the Articles of Incorporation was duly submitted to and adopted by the shareholders of the corporation on April 29, 1975. The amendment alters and changes Article VI of the original Articles of Incorporation by changing the street address of the registered office of the Company in Denver, Colorado. Article VI is hereby amended to read and provide as follows: ARTICLE VI "The location of the Home Office of the Company shall be in Denver, Colorado. The registered office of the Company is 2900 First of Denver Plaza, Denver, Colorado, and Arthur K. Underwood, Jr., is hereby designated as the initial resident agent of the Company at said address." 3. The number of shares of the corporation outstanding and entitled to vote at the date of such adoption was 3,337,568, being 3,137,568 Class A shares and 200,000 Class B shares. 4. The number of shares voted "for" and "against" such amendment was as follows:
For Against Class A: 2,255,341 19,332 Class B: 200,000 -0-
5. The amendment does not affect the stated capital of the Company. National Western Life Insurance Company /s/ Harry L. Edwards By: President /s/ Mary L. Smith Assistant Secretary STATE OF TEXAS ) ) COUNTY OF TRAVIS ) I, a Notary Public, do hereby certify that on this 10th day of May, 1976, personally appeared before me Harry L. Edwards who declared that he is the President of the Corporation executing the foregoing instrument, and being first duly sworn acknowledged that he signed the foregoing instrument in the capacity therein set forth and declared that the statements therein contained are true and correct. IN WITNESS WHEREOF, I have hereunto set my hand and seal this day and year before written. /s/ Lynette Weber NOTARY PUBLIC in and for Travis County, Texas EX-3.D 5 EXHIBIT 3(d) - ARTICLES OF INCORPORATION AMENDMENT TO THE ARTICLES OF INCORPORATION OF NATIONAL WESTERN LIFE INSURANCE COMPANY PURSUANT to the provisions of the Colorado Insurance Code and the Colorado Corporation Act, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: Article One. The name of the corporation is NATIONAL WESTERN LIFE INSURANCE COMPANY. Article Two. The following amendment to the Articles of Incorporation was duly submitted to and adopted by the stockholders of the corporation on April 25, 1978. Article IV of the Articles of Incorporation of the Company is amended by the addition thereto of subparagraph "(d)", and said subparagraph "(d)" of Article IV shall read and provide as follows: "(d) In the event of any 'spin-off' or distribution 'in-kind' of the shares of a subsidiary corporation of the Corporation, and which subsidiary corporation has only one class of stock issued and outstanding, each share of Class B common stock shall receive only one-half (1/2) of the number of shares of the subsidiary corporation as are to be received by each share of the Class A common stock; and, in the event that such subsidiary corporation has two classes of stock which are similar in rights and privileges to the Class A common stock and Class B common stock of the Corporation provided for in this Article, then the Class A common stock shall receive 'in-kind' only that class of shares of the subsidiary corporation which is similar to the Class A common shares, and the Class B common stock shall receive 'in-kind' only that class of shares of the subsidiary corporation which is similar to the Class B common shares." Article Three. The total number of shares of the corporation outstanding and entitled to vote at the date of such adoption was 3,411,682, consisting of 3,211,682 Class A shares and 200,000 Class B shares. All of the shares of each class of stock were entitled to vote thereon within each class as a separate class. Article Four. The number of shares voted for such amendment was 2,520,409 (78.48%) of the Class A shares and 200,000 (100%) of the Class B shares; and the number of shares voted against such amendment was 48,454 (1.51%) of the Class A shares. None of the Class B shares voted against the amendment. DATED this 28 day of April, 1978. NATIONAL WESTERN LIFE INSURANCE COMPANY /s/ Harry L. Edwards Harry L. Edwards, President /s/ James V. Robinson James V. Robinson, Secretary THE STATE OF TEXAS ) ) COUNTY OF TRAVIS ) BEFORE ME, the undersigned authority, on this 28 day of April, 1978, personally appeared HARRY L. EDWARDS and JAMES V. ROBINSON, who being first duly sworn, declared they are the President and Secretary, respectively, of the Corporation executing the foregoing document, and that they had signed the foregoing document in the capacity therein set forth, and declared that the statements therein contained are true and correct. TO CERTIFY WHICH, I have hereunto set my hand and seal of office this day and year above written. /s/ Margaret M. Simpson Notary Public in and for Travis County, T E X A S ( S E A L ) EX-3.E 6 EXHIBIT 3(e) - ARTICLES OF INCORPORATION AMENDMENT TO THE ARTICLES OF INCORPORATION OF NATIONAL WESTERN LIFE INSURANCE COMPANY PURSUANT to the provisions of the Colorado Insurance Code and the Colorado Corporation Act, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: Article One. The name of the corporation is NATIONAL WESTERN LIFE INSURANCE COMPANY. Article Two. The following amendment to the Articles of Incorporation was duly submitted to and adopted by the stockholders of the corporation on April 24, 1979. Article Eight of the Articles of Incorporation of the Company is amended to hereafter read and provide as follows: "ARTICLE EIGHT: The Board of Directors shall have the power to (a) adopt, amend, and repeal such bylaws as they may determine to be proper for the management of the affairs of this Company and which are in accordance with the statutes of Colorado, and (b) to adopt plans relating to dividends and distributions in partial liquidation, to declare dividends, and to distribute to the shareholders in partial liquidation, out of the capital surplus of the company, a portion of its assets in cash or property, subject only to the statutes of Colorado relating to the payment of such dividends or distributions in partial liquidation." Article Three. The total number of shares of the corporation outstanding and entitled to vote at the date of such adoption was 3,411,390, consisting of 3,211,390 Class A shares and 200,000 Class B shares. All of the shares of each class of stock were entitled to vote thereon within each class as a separate class. Article Four. The total number of shares voted for such amendment was 2,366,406 (69.37%). 2,166,406 (67.46%) of the Class A shares and 200,000 (100%) of the Class B shares voted for such amendment. 16,022 (0.50%) of the Class A shares voted against such amendment. None of the Class B shares voted against the amendment. DATED this 1 day of May, 1979. NATIONAL WESTERN LIFE INSURANCE COMPANY /s/ Harry L. Edwards Harry L. Edwards, President /s/ James V. Robinson James V. Robinson, Secretary THE STATE OF TEXAS ) ) COUNTY OF TRAVIS ) BEFORE ME, the undersigned authority, on this 1 day of May, 1979, personally appeared HARRY L. EDWARDS and JAMES V. ROBINSON, who being first duly sworn, declared they are the President and Secretary, respectively, of the Corporation executing the foregoing document, and that they had signed the foregoing document in the capacity therein set forth, and declared that the statements therein contained are true and correct. TO CERTIFY WHICH, I have hereunto set my hand and seal of office this day and year above written. /s/ Margaret M. Simpson Notary Public in and for Travis County, T E X A S My commission expires: 3-31-81 ( S E A L ) EX-3.F 7 EXHIBIT 3(f) - BYLAWS BYLAWS OF NATIONAL WESTERN LIFE INSURANCE COMPANY ARTICLE I Offices Section 1.01. Home Office. The Home Office of the Company shall be in Denver, Colorado. Section 1.02. Other Offices. The Corporation may also have offices at such other places, both within and without the State of Colorado, as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II Meetings of Stockholders Section 2.01. Place. Meetings of shareholders for any purpose may be held at such time and place, within or without the State of Colorado, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof, except as may be provided by law. Section 2.02. Annual Meetings. An annual meeting of the stockholders shall be held after March 31 but not later than July 31 of each calendar year, at a date to be selected by the Board of Directors, at which time the stockholders shall elect a Board of Directors and transact such other business as may properly be brought before the meeting. Section 2.03. Special Meetings. Special meetings of the shareholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Articles of Incorporation or by these Bylaws, may be called by the Chairman of the Board of Directors or the President, the Board of Directors, or the holders of not less than one-fourth of all the shares entitled to vote at the meeting. Section 2.04. Notice. Written or printed notice stating the place, day, and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than forty days before the date of the meeting, either personally or by mail, by or at the direction of the President, the Secretary, or the officer or person calling the meeting, to each shareholder of record entitled to vote at the meeting. Section 2.05. Quorum. The shareholders present in person or represented by proxy at any meeting, whether or not there shall be a quorum, shall have power to adjourn or recess the meeting from time to time, without notice other than announcement at the meeting. At such adjourned or recessed meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. Section 2.06. Majority Vote. When a quorum is present at any meeting, the vote of the holders of a majority of the shares having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the statutes or of the Articles of Incorporation or of these Bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such question. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. Section 2.07. Stockholders Entitled to Vote. Each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders, except to the extent that the voting rights of the shares of any class or classes are limited or denied by the Articles of Incorporation. At any meeting of the shareholders, every shareholder having the right to vote shall be entitled to vote in person, or by proxy appointed by an instrument in writing subscribed by such shareholder, or by his duly authorized attorney-in-fact. Such proxy shall be filed with the Secretary of the Corporation prior to or at the time of the meeting. The Board of Directors may fix in advance a record date for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such record date to be not less than ten nor more than forty-five days prior to such meeting, or the Board of Directors may close the stock transfer books for such purpose for a period of not less than ten nor more than forty-five days prior to such meeting. In the absence of any action by the Board of Directors, the date upon which the notice of the meeting is mailed shall be the record date. ARTICLE III Directors Section 3.01. Authority. The business and affairs of the Corporation shall be managed by its Board of Directors, who may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Articles of Incorporation or by these Bylaws directed or required to be exercised or done by the shareholders. Section 3.02. Number and Election. The Board of Directors shall consist of not less than seven (7) and not more than twenty-seven (27) Directors, none of whom need be residents of the State of Colorado. The Directors shall be elected at the annual meeting of the shareholders, except as hereinafter provided, and each Director elected shall hold office until his successor shall be elected and shall qualify. Section 3.03. Removal. Any Director may be removed, either for or without cause, at any special meeting of shareholders by the affirmative vote of a majority in number of shares of the shareholders present in person or by proxy at such meeting and entitled to vote for the election of such Director, if notice of the intention to act upon such matter shall have been given in the notice calling such meeting. Any Director may be removed, either for or without cause, at any meeting of Directors by the affirmative vote of two-thirds of all members of the Board of Directors. If any vacancies occur in the Board of Directors because of death, resignation, retirement, disqualification, or removal from office of any Director or otherwise, a majority of the Directors then in office, though less than a quorum, may choose a successor or successors, or a successor or successors may be chosen at a special meeting of shareholders called for that purpose; and each successor Director so chosen shall be elected for the unexpired term of his predecessor in office. Any directorship to be filled by reason of an increase in the number of Directors may be filled by election at any meeting of shareholders, or may be filled by affirmative vote of a majority of all members of the Board of Directors then in office. Section 3.04. Method of Election. Directors shall be elected by plurality vote. Cumulative voting shall not be permitted. Section 3.05. Place of Meetings. Directors of the Corporation may hold their meetings, both regular and special, either within or without the State of Colorado, except as may be provided by law. Section 3.06. First Meeting. The first meeting of each newly-elected Board shall be held without further notice immediately following the annual meeting of shareholders, and at the same place, unless by unanimous consent of the Directors then elected and serving such time or place shall be changed. Section 3.07. Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by the Board. Section 3.08. Special Meetings. Special meetings of the Board of Directors may be called by either the Chairman of the Board or President or Secretary, on three days' notice to each Director, either personally or by mail or by telegram. Special meetings shall be called by either the Chairman of the Board, President, or Secretary, in like manner and on like notice, on the written request of four or more Directors. Except as may be otherwise expressly provided by statute or by the Articles of Incorporation or by these Bylaws, neither the business to be transacted at, nor the purpose of, any special meeting of Directors need be specified in a notice or waiver of notice. Section 3.09. Quorum. At all meetings of the Board of Directors, the presence of a majority of the Directors shall be necessary and sufficient to constitute a quorum for the transaction of any business except any matter which, under these Bylaws, is to be done or performed by a majority of all members of the Board of Directors. If a quorum shall not be present at any meeting of Directors, the Directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 3.10. Executive Committee. The Board of Directors may, by resolution passed by a majority of the whole Board, designate an Executive Committee to consist of Directors of the Corporation, one of whom shall be either the Chairman of the Board of Directors or the President. The Executive Committee shall have and may exercise all the authority of the Board of Directors in the management of the business and affairs of the corporation, except where action of a majority of all members of the Board of Directors is required by statute or by the Articles of Incorporation or by these Bylaws, and shall have power to authorize the seal of the corporation to be affixed to all papers which may require it. Section 3.11. Executive Committee Minutes. The Executive Committee shall keep regular minutes of its proceedings and report the same to the Board when required. Section 3.12. Compensation. Directors, by resolution of the Board, shall receive a fixed sum, and expenses of attendance if any, for attendance at each regular or special meeting of the Board and, in addition thereto, may receive a retainer for their services, the amount to be authorized by resolution of the Board of Directors; provided that nothing herein contained shall be construed to preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. Members of the Executive Committee may, by resolution of the Board of Directors, be allowed a fixed sum, and expenses of attendance if any, for attendance at the Committee's meetings. Section 3.13. Other Committees. The Board may name and appoint such other special committees composed of Directors, officers, or employees of the Company as it deems necessary and important to the affairs of the Company, and may vest in such committees such authority as it deems appropriate to the functions of the Company. ARTICLE IV Officers Section 4.01. Number. The officers of the Corporation shall be elected by the Directors and shall be a Chairman of the Board, a President, one or more Vice Presidents, a Secretary, and a Treasurer. The Board of Directors may also choose one or more Assistant Vice Presidents and one or more Assistant Secretaries and Assistant Treasurers. Any two or more offices may be held by the same person, except that the offices of President and Secretary shall not be held by the same person. Section 4.02. Election. The Board of Directors at its first meeting after each annual meeting of shareholders shall elect the said officers, and the Chairman of the Board and the President shall be elected by the Board from its members. Section 4.03. Additional Officers. The Board of Directors may appoint such other officers as its shall deem necessary, who shall be appointed for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. Section 4.04. Salaries. The salaries of all officers of the Corporation shall be fixed by the Board of Directors. Section 4.05. Removal. Each officer of the Corporation shall hold office until his successor is chosen and qualified in his stead or until his death or until his resignation or removal from office. Any officer elected or appointed by the Board of Directors may be removed at any time by the vote of the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. Section 4.06. Chairman of the Board. The Chairman of the Board shall be the Chief Executive Officer of the Company and shall preside at all meetings of the Board of Directors and shareholders. He shall have general and active management responsibilities of the business and affairs of the Company, and shall see that all orders and resolutions of the Board are carried into effect, and shall perform such other duties and have such other powers as the Bylaws, Board of Directors, or Executive Committee may prescribe. Section 4.07. The President. The President, in the absence or disability of the Chairman of the Board, shall perform the duties and exercise the powers of the Chairman of the Board. He shall be the principal administrative officer of the company, his activities as such subject to the direction and approval of the Chief Executive Officer, and shall be responsible for the implementation of the details of managing the administrative affairs of the Company, and shall perform such other duties and have such other powers as the Bylaws, Board of Directors, or Executive Committee may prescribe. Section 4.08. Vice Presidents. Each Vice President shall have such powers and perform such duties as the Board of Directors may from time to time prescribe or as the Chief Executive Officer or President may from time to time delegate to him. Section 4.09. Secretary. The Secretary shall attend all sessions of the Board of Directors and all meetings of the shareholders and record all votes and the minutes of all proceedings in a book to be kept for the purpose and shall perform like duties for the Executive Committee. He shall give, or cause to be given, notice of all meetings of the shareholders and shall perform such other duties as may be prescribed by the Board of Directors or Chief Executive Officer or President, under whose supervision he shall be. He shall keep in safe custody the minute book and seal of the corporation and affix the seal to any instrument requiring it, and, when so affixed, it shall be attested by his signature or by the signature of the Treasurer or an Assistant Secretary. Section 4.10. Assistant Secretaries. Each Assistant Secretary shall have such powers and perform such duties as the Board of Directors may from time to time prescribe or as the Chief Executive Officer or President may from time to time delegate to him. Section 4.11. Treasurer. The Treasurer shall have the custody of the corporate funds and securities, and shall keep full and accurate accounts of receipts and disbursements of the Corporation, and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Chief Executive Officer or President and Directors, at the regular meetings of the Board, or whenever they may require it, an account of all his transactions as Treasurer and of the financial condition of the Corporation, and shall perform such other duties as the Board of Directors may prescribe. Section 4.12. Assistant Treasurers. Each Assistant Treasurer shall have such powers and perform such duties as the Board of Directors may from time to time prescribe or as the Chief Executive Officer or President may from time to time delegate to him. ARTICLE V Stock and Stock Certificates Section 5.01. Form and Execution. Certificates in such form as may be determined by the Board of Directors shall be delivered representing all shares to which shareholders are entitled. Such certificates shall be consecutively numbered and shall be entered in the books of the Corporation as they are issued. Each certificate shall state on the face thereof the holder's name, the number and class of shares, and the par value of such shares or a statement that such shares are without par value. They shall be signed by the President or a Vice President and the Secretary or an Assistant Secretary and may be sealed with the seal of the Corporation or a facsimile thereof. If any certificate is countersigned by a transfer agent, or an assistant transfer agent or a transfer clerk, the signature of any such officer may be facsimile. Section 5.02. Lost Certificates. The Board of Directors may direct a new certificate representing shares to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificates to be lost or destroyed. When authorizing such issue of a new certificate, the Board of Directors, in its discretion and as a condition precedent to the issuance thereof, may require the owner of such lost or destroyed certificate, or his legal representative, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such form, in such sum, and with such surety or sureties as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed. Section 5.03. Transfer of Shares. Shares of stock shall be transferable only on the books of the Corporation by the holder thereof in person or by his duly authorized attorney. Upon surrender to the Corporation, or the Transfer Agent of the Corporation, of a certificate representing shares duly endorsed or accompanied by proper evidence of succession, assignment, or authority to transfer, it shall be the duty of the Corporation or the Transfer Agent of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction upon its books. Section 5.04. Registered Shareholders. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. ARTICLE VI General Provisions Section 6.01. Dividends. Dividends upon the outstanding shares of the Corporation, subject to the provisions of the Articles of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the Corporation, subject to the provisions of the statutes and the Articles of Incorporation. The Board of Directors may fix in advance a record date for the purpose of determining shareholders entitled to receive payment of any dividend, such record date to be not more than forty days prior to the payment date of such dividend, or the Board of Directors may close the stock transfer books for such purpose for a period of not more than forty days prior to the payment date of such dividend. In the absence of any action by the Board of Directors, the date upon which the Board of Directors adopts the resolution declaring such dividend shall be the record date. Section 6.02. Reserves. There may be created by resolution of the Board of Directors out of the earned surplus of the Corporation such reserve or reserves as the Directors from time to time, in their discretion, think proper to provide for contingencies, or to equalize dividends, or to repair or maintain any property of the corporation, or for such other purpose as the Directors shall think beneficial to the Corporation, and the Directors may modify or abolish any such reserve in the manner in which it was created. Section 6.03. Checks. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 6.04. Seal. The Corporation seal shall have inscribed thereon the name of the Corporation and the words "Corporate Seal." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced. Section 6.05. Indemnification. Subsection 6.05.1. Definitions. In this Section: (a) "Indemnitee" means (i) any present or former Director or officer of the Corporation, while serving in any of the capacities referred to in clause (I) hereof, served at the Corporation's request as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, and (iii) any person nominated or designated by (or pursuant to authority granted by) the Board of Directors or any committee thereof to serve in any of the capacities referred to in clauses (i) and (ii) hereof. (b) "Official Capacity" means (i) when used with respect to a Director, the office of Director of the Corporation, and (ii) when used with respect to a person other than a Director, the elective or appointive office of the Corporation held by such person or the employment or agency relationship undertaken by such person on behalf of the Corporation, but in each case does not include service for any other foreign or domestic corporation or any partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise. (c) "Proceeding" means any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, arbitrative, or investigative, any appeal in such an action, suit, or proceeding, and any inquiry or investigation that could lead to such an action, suit, or proceeding. Subsection 6.05.2. Indemnification. The Corporation shall indemnify every indemnitee against all judgments, penalties (including excise and similar taxes), fines, amounts paid in settlement, and reasonable expenses actually incurred by the Indemnitee in connection with any proceeding to which he was, is, or is threatened to be named defendant or respondent, or in which he was or is a witness without being named a defendant or respondent, by reason, in whole or in part, of his serving or having served, or having been nominated or designated to serve, in any of the capacities referred to in Subsection 6.05.1., if it is determined in accordance with Subsection 6.05.4. that the Indemnitee (i) conducted himself in good faith, (ii) reasonably believed, in the case of conduct in his official capacity, that his conduct was in the Corporation's best interests and, in all other cases, that his conduct was at least not opposed to the Corporation's best interests, and (iii) in the case of any criminal proceeding, had no reasonable cause to believe that his conduct was unlawful; provided, however, that in the event a determination is made that a person is entitled to indemnification pursuant to this Subsection 6.05.2. in connection with a proceeding brought by or on behalf of the Corporation, such indemnification shall be limited to the reasonable expenses (including court costs and attorney's fees) actually incurred by the Indemnitee in connection with the proceeding. No indemnification shall be made under this Subsection 6.05.2. in respect of any judgment, penalty, fine, or amount paid in settlement in connection with any proceeding in which such Indemnitee shall have been (a) found liable on the basis that personal benefit was improperly received by him, whether or not the benefit resulted from an action taken in the Indemnitee's official capacity, or (b) found liable to the Corporation. The termination of any proceeding by judgment, order, settlement, or conviction, or on a plea of nolo contendere or its equivalent, is not of itself determinative that the Indemnitee did not meet the requirements set forth in clauses (i), (ii), or (iii) in the first sentence of this Subsection 6.05.2. Subsection 6.05.3. Successful Defense. Without limitation of Subsection 6.05.2. and in addition to the indemnification provided for in Subsection 6.05.2., the Corporation shall indemnify every Indemnitee against reasonable expenses incurred by such person in connection with any proceeding in which he is a witness or a named defendant or respondent because he served in any of the capacities referred to in Section 6.05.1., if such person has been wholly successful, on the merits or otherwise, in defense of the proceeding. Subsection 6.05.4. Determinations. Any indemnification under Subsection 6.05.2. (unless ordered by a court of competent jurisdiction) shall be made by the Corporation only upon a determination that indemnification of the Indemnitee is proper in the circumstances because he has met the applicable standard of conduct. Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum consisting of Directors who, at the time of such vote, are not named defendants or respondents in the proceeding; (b) if such a quorum cannot be obtained, then by a majority vote of a committee of the Board of Directors, duly designated to act in the matter by a majority vote of all Directors (in which designation Directors who are named defendants or respondents in the proceeding may participate), such committee to consist solely of two or more Directors who, at the time of the committee vote, are not named defendants or respondents in the proceeding; (c) by special legal counsel selected by the Board of Directors or a committee thereof by vote as set forth in clauses (a) or (b) of this Subsection 6.05.4., or, if the requisite quorum of all of the Directors cannot be obtained therefor and such committee cannot be established, by a majority vote of all of the Directors (in which Directors who are named defendants or respondents in the proceeding may participate); or (d) by the shareholders in a vote that excludes the shares held by Directors that are named defendants or respondents in the proceeding. Determination as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is permissible, except that, if the determination that indemnification is permissible is made by special legal counsel, determination as to reasonableness of expenses must be by special legal counsel. In the event a determination is made under this Subsection 6.05.4. that the Director or officer has met the applicable standard of conduct as to some matters but not as to others, amounts to be indemnified may be reasonably prorated. Subsection 6.05.5. Advancement of Expenses. Reasonable expenses (including court costs and attorneys' fees) incurred by an Indemnitee who was or is a witness or was, is, or is threatened to be made a named defendant or respondent in a proceeding shall be paid by the Corporation at reasonable intervals in advance of the final disposition of such proceeding after a determination is made in the manner specified by Subsection 6.05.4. that the facts then known to those making the determination (without undertaking further investigation for purposes thereof) do not establish that indemnification would be impermissible under Subsection 6.05.2. and upon receipt by the Corporation of (i) a written affirmation by such Indemnitee of his good faith belief that he has met the standard of conduct necessary for indemnification by the Corporation under this Article and (ii) a written undertaking by or on behalf of such Indemnitee to repay the amount paid or reimbursed by the Corporation if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article. Such written undertaking shall be an unlimited obligation of the Indemnitee but need not be secured, and it may be accepted without reference to financial ability to make repayment. Notwithstanding any other provision of this Section, the Corporation may pay or reimburse expenses incurred by an Indemnitee in connection with his appearance as a witness or other participation in a proceeding at a time when he is not named a defendant or respondent in the proceeding. Subsection 6.06.6. Employee Benefit Plans. For purposes of this Section, the Corporation shall be deemed to have requested an Indemnitee to serve an employee benefit plan whenever the performance by him of his duties to the Corporation also imposes duties on or otherwise involves services by him to the plan or participants or beneficiaries of the plan. Excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall be deemed fines. Action taken or omitted by an Indemnitee with respect to an employee benefit plan in the performance of his duties for a purpose reasonably believed by him to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Corporation. Subsection 6.05.7. Other Indemnification and Insurance. The indemnification provided by this Section shall (i) not be deemed exclusive of, or to preclude, any other rights to which those seeking indemnification may at any time be entitled under the Corporation's Articles of Incorporation, any law, agreement, or vote of shareholders or disinterested Directors, or otherwise, or under any policy or policies of insurance purchased and maintained by the Corporation on behalf of any Indemnitee, both as to action in his official capacity and as to action in any other capacity, (ii) continue as to a person who has ceased to be in the capacity by reason of which he was an Indemnitee with respect to matters arising during the period he was in such capacity, and (iii) inure to the benefit of the heirs, executors, and administrators of such a person. Subsection 6.05.8. Notice. Any indemnification of or advance of expenses to a present or former Director of the Corporation in accordance with this Article shall be reported in writing to the shareholders of the Corporation with or before the notice or waiver of notice of the next shareholders' meeting or with or before the next submission to shareholders of a consent to action without a meeting and, in any case, within the twelve-month period immediately following the date of the indemnification or advance. Subsection 6.05.9. Construction. The indemnification provided by this Section shall be subject to all valid and applicable laws, including, without limitation, Article 73101.5 of the Colorado Corporation Code, and, in the event this Section or any of the provisions hereof or the indemnification contemplated hereby are found to be inconsistent with or contrary to any such valid laws, the latter shall be deemed to control, and this Section shall be regarded as modified accordingly, and, as so modified, to continue in full force and effect. Subsection 6.05.10. Continuing Offer, Reliance, etc. The provisions of this Section (i) are for the benefit of, and may be enforced by, each Director and officer of the Corporation, the same as if set forth in their entirety in a written instrument duly executed and delivered by the Corporation and such Director or officer and (ii) constitute a continuing offer to all present and future Directors and officers of the Corporation. The Corporation, by its adoption of these Bylaws, (i) acknowledges and agrees that each present and future Director and officer of the Corporation has relied upon and will continue to rely upon the provisions of this Article in accepting and serving in any of the capacities referred to in Subsection 6.05.1. of this Section, (ii) waives reliance upon, and all notices of acceptance of, such provisions by such Directors and officers, and (iii) acknowledges and agrees that no present or future Director or officer of the Corporation shall be prejudiced in his right to enforce the provisions of this Section in accordance with their terms by any act or failure to act on the part of the Corporation. Subsection 6.05.11. Effect of Amendment. No amendment, modification, or repeal of this Section or any provision hereof shall in any manner terminate, reduce, or impair the right of any past, present, or future Director or officer of the Corporation to be indemnified by the Corporation, nor the obligation of the Corporation to indemnify any such Director or officer, under and in accordance with the provisions of the Section as in effect immediately prior to such amendment, modification, or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification, or repeal, regardless of when such claims may arise or be asserted. Section 6.06. Notices. Whenever, under the provisions of the statutes or of the Articles of Incorporation or of these Bylaws, notice is required to be given to any Director or shareholder, and no provision is made as to how such notice shall be given, it shall not be construed to mean personal notice, but any such notice may be given in writing, by mail, postage prepaid, addressed to such Director or shareholder at such address as appears on the books of the Corporation. Any notice required or permitted to be given by mail shall be deemed to be given at the time when the same shall be thus deposited in the United States mail as aforesaid. Section 6.07. Waiver of Notice. Whenever any notice is required to be given to any shareholder or Director of the Corporation under the provisions of the statutes or of the Articles of Incorporation or of these Bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated in such notice, shall be deemed equivalent to the giving of such notice. Section 6.08. Bond. Each officer and each employee shall give the Corporation a bond in such form, in such sum, and with such surety or sureties as shall be satisfactory to the Board for the faithful performance of the duties of his office and for the restoration to the Corporation in case of his death, resignation, retirement, or removal from office of all books, papers, vouchers, money, and other property, of whatever kind, in his possession or under his control belonging to the Corporation. The Corporation shall pay all insurance premiums for such bonds. Section 6.09. Approval of Acts. The Corporation shall be deemed to have waived any claim against any officer of the Corporation for any act or deed approved or ratified by the Board of Directors, and the Corporation and all stockholders shall be deemed to have waived any claim against any Director or officer of the Corporation for any act or deed approved or ratified by a majority of the stockholders present in person or by proxy at any meeting of stockholders of the Corporation, whether or not such meeting was called for such purpose and whether or not the notice of such meeting specified that such matter is to be considered or voted upon. ARTICLE VII Amendments Section 7.01. By Stockholders. These Bylaws may be altered, amended, or repealed at any meeting of the shareholders at which a quorum is present or represented, by the affirmative vote of the holders of a majority of the shares present or represented at such meeting and entitled to vote thereat. Section 7.02. By Directors. These Bylaws may be altered, amended, or repealed at any meeting of the Board of Directors at which a quorum is present, by the affirmative vote of a majority of the Directors present at such meeting, provided notice of the proposed alteration, amendment, or repeal be contained in the notice of such meeting. As Amended April 27, 1971 And on June 21, 1972 And on November 13, 1974 And on November 15, 1979 And on May 21, 1980 And on December 30, 1986 And on April 24, 1987 EX-10.A 8 EXHIBIT 10(a) - MATERIAL CONTRACTS NATIONAL WESTERN LIFE INSURANCE COMPANY NON-QUALIFIED DEFINED BENEFIT PLAN Effective January 1, 1991 Table of Contents ARTICLE I - Purpose, Definitions and Construction 1.1 Purpose of the Plan 1.2 Definitions 1.3 Construction ARTICLE II - Eligibility 2.1 Eligibility Requirements ARTICLE III - Funding 3.1 Funding ARTICLE IV - Benefits Under the Plan 4.1 Normal Retirement Benefit 4.2 Late Retirement Benefit 4.3 Early Retirement Benefit 4.4 Disability Retirement Benefit 4.5 Benefit At Termination of Employment 4.6 Pre-Retirement Death Benefit ARTICLE V - Determination of Payment of Account 5.1 Form of Payment 5.2 Special Payment Provision ARTICLE VI - Miscellaneous 6.1 Administration of the Plan 6.2 Amendment of the Plan 6.3 Termination of the Plan 6.4 Notices to Participants 6.5 Non-Alienation ARTICLE I PURPOSE, DEFINITIONS AND CONSTRUCTION 1.1 Purpose of the Plan This Plan is established by the Employer to provide an additional benefit for certain select management employees, who are defined below, to augment the retirement benefit which is otherwise provided to such employees under the tax qualified defined benefit plan maintained by the Employer. This Plan is not intended to, and does not, qualify under Sections 401(a) and 501(a) of the Internal Revenue Code, and is designed to be exempt from the requirements of the Employee Retirement Income Security Act. 1.2 Definitions The following terms, when found in the Plan, shall have the meanings set forth below: (a) Accrued Benefit: The benefit determined under Article IV hereof, payable at the Participant's Normal Retirement Date, which has accrued at any time under the provisions of the Plan, determined as if the Participant had then terminated his employment with the Employer. (b) Actuarial Equivalent: The equivalent in value of amounts expected to be received under the Plan under different forms of payment, determined based upon an interest assumption of eight and one-half percent (8.5%) and a mortality assumption based on the 1984 Unisex Pension (UP84) Mortality Table. (c) Beneficiary: The person(s) and/or the trust(s) created for the benefit of a person or persons who are the natural object of the Participant's bounty, or the Participant's estate, whichever is designated by the Participant to receive the benefits payable hereunder upon his death. (d) Code: The Internal Revenue Code of 1986, as it may be amended from time to time, including any successor. (e) Compensation: Compensation shall be the total cash remuneration paid by the Employer during each Plan Year, as reported on Form W-2 or its subsequent equivalent, including bonuses, fees, commissions, amounts deferred under Code Sections 401(k) and 125, and amounts deferred under any other non-qualified program of salary reduction, but excluding any NWAMI Compensation. Compensation hereunder shall not be subject to any limitations applicable to tax-qualified plans, such as pursuant to Code Sections 401(a)(17) or 415. (f) Disability: A physical or mental condition of a Participant resulting from bodily injury, disease or mental disorder which renders him incapable of continuing any gainful occupation. The determination of Disability shall be made either as a result of the Participant qualifying for a pension under the federal Social Security Act, or based upon such evidence as is determined to be applicable by the Employer in its sole discretion. (g) Early Retirement Date: The first day of the month which is prior to a Participant's Normal Retirement Date, but follows his attainment of age fifty-five (55), completion of fifteen (15) Years of Service, and his termination of employment from the Employer. (h) Effective Date: January 1, 1991. (i) Eligible Employee: A person employed by the Employer in the position of Senior Vice President or above, or a person who has been designated by the President of the Employer, by name, position, or in any other manner, as being in the class of persons who are eligible to participate in the Plan. Such latter designation shall be made in writing by the President of the Employer. However, no person who is an employee of the Employer shall be selected as an Eligible Employee except a member of the select group of management or highly compensated employees of the Employer, as such term is defined under Section 201 of the Employee Retirement Income Security Act of 1974, and regulations and rulings promulgated thereunder by the Department of Labor. (j) Employer: National Western Life Insurance Company, a corporation organized and existing under the laws of the State of Texas, and any successor or successors. (k) Normal Retirement Age: The date on which a Participant attains age sixty-five (65). (l) Normal Retirement Date: The first day of the month coincident with or next following a Participant's Normal Retirement Age. (m) Participant: An Eligible Employee who has met the requirements Section 2.1 hereof, and whose participation has not been terminated. (n) Plan: The National Western Life Insurance Company Non-Qualified Defined Benefit Plan, as set forth herein, and as it may be amended from time to time. (o) Plan Year: The twelve month period beginning on January 1 and ending on December 31 each year. (p) Qualified Plan: The National Western Life Insurance Company Pension Plan, as it may be amended from time-to-time. (q) Service: The period of a Participant's employment considered in the determination of his eligibility hereunder and in the calculation of the vested amount of his benefits. A Participant's Service shall be determined in twelve (12) month periods, commencing with the twelve (12) month period that begins on his date of hire with the Employer, and thereafter based on Plan Years, including the Plan Year within which falls his date of hire. During such twelve (12) month periods, a Year of Service will be granted if the Participant completes at least one thousand (1,000) Hours of Service. An Hour of Service is each hour of which the Participant is paid by virtue of his employment with the Employer, including hours paid but not worked, and including hours completed prior to the date he actually becomes a Participant hereunder. 1.3 Construction The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender, and the singular may indicate the plural, unless the context clearly indicates the contrary. The words "hereof", "herein", "hereunder" and other similar compounds of the word "here" shall, unless otherwise specifically stated, mean and refer to the entire Plan, not to any particular provision or Section. Article and Section headings are included for convenience of reference and are not intended to add to, or subtract from, the terms of the Plan. ARTICLE II ELIGIBILITY 2.1 Eligibility Requirements An Eligible Employee shall become a Participant hereunder as of the first January 1 or July 1 which is coincident with or next follows his completion of one (1) Year of Service. ARTICLE III FUNDING 3.1 Funding The Employer is under no obligation to earmark or set aside any funds toward the funding of this Plan. However, it is intended that the benefits to be provided to each Participant hereunder shall be paid from the assets of the National Western Life Insurance Company Non-Qualified Plans Trust, designed to be an irrevocable grantor trust under Code Section 671. However, if the assets of such trust are not available or are insufficient to pay such benefits, then benefits hereunder shall be paid from the general assets of the Employer. ARTICLE IV BENEFITS UNDER THE PLAN 4.1 Normal Retirement Benefit The benefit to be paid pursuant to this Plan to a Participant who retires at his Normal Retirement Date shall be equal to a. less b. less c., but in no event greater than d., where: (a) equals the benefit which would have been payable at the Participant's Normal Retirement Date under the terms of the Qualified Plan as of December 31, 1990, as if that plan had continued without change, and without regard to limitations applicable under Code Sections 401(a)(17) and 415, and (b) equals the benefit which actually becomes payable under the terms of the Qualified Plan at the Participant's Normal Retirement Date, and (c) equals the Actuarially Equivalent life annuity which may be provided by an accumulation of two percent (2%) of the Participant's Compensation for each year of Service on and after the Effective Date hereunder, accumulated at an assumed interest rate of eight and one-half percent (8.5%) to his Normal Retirement Date, and (d) equals the benefit which would have been payable at the Participant's Normal Retirement Date under the terms of the Qualified Plan as of December 31, 1990, as if that plan had continued without change, and without regard to limitations applicable under Code Sections 401(a)(17) and 415, except that the proration over fifteen (15) years shall instead be calculated over thirty (30) years (i. e. the benefit shall equal fifty percent (50%) of Final Average Compensation less fifty percent (50%) of Primary Insurance Amount as defined under the Qualified Plan, for thirty (30) or more years of service at Normal Retirement Date or, alternatively, each portion of the formula shall be determined as One and two-thirds percent (1.667%) for each year of service to the maximum thirty (30) years of service), and except that NWAMI Compensation normally excluded by reason of Section 1.2(e) hereof shall be included, less the benefit provided under the Qualified Plan. The foregoing benefit shall be payable as of the Participant's Normal Retirement Date, in accordance with Article V hereof as to form and duration of payment. 4.2 Late Retirement Benefit The benefit to be paid pursuant to this Plan to a Participant who retires after his Normal Retirement Date shall be equal to a. less b. less c., but not greater than d., where: (a) equals the Actuarial Equivalent of the benefit which would have been payable at the Participant's Normal Retirement Date under the terms of the Qualified Plan as of December 31, 1990, as if that plan had continued without change, and without regard to limitations applicable under Code Sections 401(a)(17) and 415, and (b) equals the benefit which actually becomes payable under the terms of the Qualified Plan at the Participant's Late Retirement Date, and (c) equals the Actuarially Equivalent life annuity which may be provided by an accumulation of two percent (2%) of the Participant's Compensation for each year of Service on and after the Effective Date hereunder, accumulated at an assumed interest rate of eight and one-half percent (8.5%) to his Late Retirement Date, and (d) equals the benefit which would have been payable at the Participant's Late Retirement Date under the terms of the Qualified Plan as of December 31, 1990, as if that plan had continued without change, and without regard to limitations applicable under Code Sections 401(a)(17) and 415, except that the proration over fifteen (15) years shall instead be calculated over thirty (30) years (i. e. the benefit shall equal fifty percent (50%) of Final Average Compensation less fifty percent (50%) of Primary Insurance Amount as defined under the Qualified Plan, for thirty (30) or more years of service at Late Retirement Date or, alternatively, each portion of the formula shall be determined as One and two-thirds percent (1.667%) for each year of service to the maximum thirty (30) years of service), and except that NWAMI Compensation normally excluded by reason of Section 1.2(e) hereof shall be included, less the benefit provided under the Qualified Plan. The foregoing benefit shall be payable as of the first day of the month following the Participant's termination of employment from the Employer, in accordance with Article V hereof as to form and duration of payment. 4.3 Early Retirement Benefit The benefit to be paid pursuant to this Plan to a Participant who retires after his Normal Retirement Date shall be equal to a. less b. less c., but not greater than d., where: (a) equals the benefit which would have been payable at the Participant's Normal Retirement Date under the terms of the Qualified Plan as of December 31, 1990, as if that plan had continued without change, and without regard to limitations applicable under Code Sections 401(a)(17) and 415, multiplied by a fraction, the numerator of which is his years of Service as of his Early Retirement Date, and the denominator of which is his years of Service he would have earned had his employment continued uninterrupted to his Normal Retirement Date, and (b) equals the benefit which would be payable under the terms of the Qualified Plan if his retirement under such plan were effective as of the same date, and (c) equals the Actuarially Equivalent life annuity which may be provided by an accumulation of two percent (2%) of the Participant's Compensation for each year of Service on and after the Effective Date hereunder, accumulated at an assumed interest rate of eight and one-half percent (8.5%) to his Early Retirement Date; and (d) equals the benefit which would have been payable at the Participant's Normal Retirement Date under the terms of the Qualified Plan as of December 31, 1990, as if that plan had continued without change, and without regard to limitations applicable under Code Sections 401(a)(17) and 415, except that the proration over fifteen (15) years shall instead be calculated over thirty (30) years (i. e. the benefit shall equal fifty percent (50%) of Final Average Compensation less fifty percent (50%) of Primary Insurance Amount as defined under the Qualified Plan, for thirty (30) or more years of service at Early Retirement Date or, alternatively, each portion of the formula shall be determined as One and two-thirds percent (1.667%) for each year of service to the maximum thirty (30) years of service), and except that NWAMI Compensation normally excluded by reason of Section 1.2(e) hereof shall be included, less the benefit provided under the Qualified Plan. Such benefit shall then be multiplied by a fraction, the numerator of which is his years of Service as of his Early retirement Date, and the denominator of which is his years of Service he would have earned had his employment continued uninterrupted to his Normal Retirement Date. The foregoing benefit shall be payable as of the Participant's Early Retirement Date, in accordance with Article V hereof as to form and duration of payment. Such benefit shall be reduced to reflect earlier commencement, by one fifteenth (1/15th) for each of the first five (5) years and one thirtieth (1/30th) for each of the next five (5) years by which the Early Retirement Date precedes the Participant's Normal Retirement Date, with such reduction interpolated between whole years of completed months. 4.4 Disability Retirement Benefit If a Participant who has completed five (5) years of Service becomes Disabled, the benefit to be paid pursuant to this Plan shall be equal to a. less b. less c., but not greater than d., where: (a) equals the benefit which would have been payable at the Participant's Normal Retirement Date under the terms of the Qualified Plan as of December 31, 1990, as if that plan had continued without change, and without regard to limitations applicable under Code Sections 401(a)(17) and 415, and (b) equals the benefit which actually becomes payable under the terms of the Qualified Plan at the Participant's Disability Retirement Date, and (c) equals the Actuarially Equivalent life annuity which may be provided by an accumulation of two percent (2%) of the Participant's Compensation (assuming his Compensation continues unchanged from his last complete year of employment) for each year of Service on and after the Effective Date hereunder, accumulated at an assumed interest rate of eight and one-half percent (8.5%) to his Normal Retirement Date, and (d) equals the benefit which would have been payable at the Participant's Normal Retirement Date under the terms of the Qualified Plan as of December 31, 1990, as if that plan had continued without change, and without regard to limitations applicable under Code Sections 401(a)(17) and 415, except that the proration over fifteen (15) years shall instead be calculated over thirty (30) years (i. e. the benefit shall equal fifty percent (50%) of Final Average Compensation less fifty percent (50%) of Primary Insurance Amount as defined under the Qualified Plan, for thirty (30) or more years of service at Normal Retirement Date or, alternatively, each portion of the formula shall be determined as One and two-thirds percent (1.667%) for each year of service to the maximum thirty (30) years of service), and except that NWAMI Compensation normally excluded by reason of Section 1.2(e) hereof shall be included, less the benefit provided under the Qualified Plan. The foregoing benefit shall be payable as of the Participant's Normal Retirement Date, in accordance with Article V hereof as to form and duration of payment. 4.5 Benefit at Termination of Employment The benefit to be paid pursuant to this Plan to a Participant who terminates his employment at a time when he is not entitled to a Normal Retirement, Late Retirement, Early Retirement, Disability Retirement, or Death Benefit shall be equal to a. less b. less c., but not greater than d., multiplied by e., where: (a) equals the benefit which would have been payable at the Participant's Normal Retirement Date under the terms of the Qualified Plan as of December 31, 1990, as if that plan had continued without change, and without regard to limitations applicable under Code Sections 401(a)(17) and 415, multiplied by a fraction, the numerator of which is his years of Service as of his date of termination of employment with the Employer, and the denominator of which is his years of Service he would have earned had his employment continued uninterrupted to his Normal Retirement Date, and (b) equals the benefit which would be payable under the terms of the Qualified Plan if his retirement under such plan were effective as of the same date, and (c) equals the Actuarially Equivalent life annuity which may be provided by an accumulation of two percent (2%) of the Participant's Compensation for each year of Service on and after the Effective Date hereunder, accumulated at an assumed interest rate of eight and one-half percent (8.5%) to his date of termination of employment with the Employer. (d) equals the benefit which would have been payable at the Participant's Normal Retirement Date under the terms of the Qualified Plan as of December 31, 1990, as if that plan had continued without change, and without regard to limitations applicable under Code Sections 401(a)(17) and 415, except that the proration over fifteen (15) years shall instead be calculated over thirty (30) years (i. e. the benefit shall equal fifty percent (50%) of Final Average Compensation less fifty percent (50%) of Primary Insurance Amount as defined under the Qualified Plan, for thirty (30) or more years of service at Normal Retirement Date or, alternatively, each portion of the formula shall be determined as One and two-thirds percent (1.667%) for each year of service to the maximum thirty (30) years of service), less the benefit provided under the Qualified Plan, and except that NWAMI Compensation normally excluded by reason of Section 1.2(e) hereof shall be included, such benefit multiplied by a fraction, the numerator of which is his years of Service as of his date of termination of employment with the Employer, and the denominator of which is his years of Service he would have earned had his employment continued uninterrupted to his Normal Retirement Date, and (e) is one hundred percent (100%) if the Participant is at a level equal to or higher than Executive Vice President, and in all other cases is determined based on the following:
Year of Service Percent Less than 3 years 0% 3 years 20% 4 years 40% 5 years 60% 6 years 80% 7 years or more 100%
The foregoing benefit shall be payable as of the Participant's Normal Retirement Date, unless at his date of termination of employment with the Employer he had completed at least fifteen (15) years of Service, in which event it shall be payable as of the first day of the month coincident with or following his fifty-fifth (55th) birthday, reduced in accordance with the provisions of Section 4.3 hereof. The benefit shall be paid in accordance with Article V hereof as to form and duration of payment. 4.6 Pre-Retirement Death Benefit If a Participant dies while in the active service of the Employer, his Beneficiary shall be entitled to receive the Actuarial Equivalent of his Accrued Benefit that would have been payable at his Normal Retirement Date. Such benefit shall be payable as of the first day of the month coinciding with or next following the date of the Participant's death, in accordance with Article V hereof as to form and duration of payment. If a Participant dies following his termination of employment at a time when he is entitled to a deferred benefit under Section 4.5 hereof, his Beneficiary shall be entitled to receive the Actuarial Equivalent of his vested Accrued Benefit that would have been payable at his Normal Retirement Date. Such benefit shall be payable as of the first day of the month coinciding with or next following the date of the Participant's death, in accordance with Article V hereof as to form and duration of payment. ARTICLE V DETERMINATION OF PAYMENT OF ACCOUNT 5.1 Form of Payment A Participant or Beneficiary entitled to payment shall receive his vested Accrued Benefit payable in the form of an annuity purchased from a commercial insurer, in a form as available from such insurer, and based on the applicable market rates at that time. The election of a specific form of payment under the annuity contract shall be made in writing, prior to receipt of first payment, and shall be irrevocable. 5.2 Special Payment Provision As to the Participants whose position with the Employer is that of either Chairman of the Board or President, an election shall be made available to such person, as of the date of execution of this Plan, relative to the payment of his benefit in the form of an Actuarially Equivalent single sum value. Such election shall provide that payment of the Participant's benefit, at whatever date it becomes payable, shall either be made as permitted under Section 5.1 hereof, or in the alternative lump sum. Further, such election shall allow such Participants to elect to receive payment, notwithstanding any other provisions of this Plan, either at the earlier of date of termination of employment from the Employer or Normal Retirement Date, or the later of date of termination of employment from the Employer or Normal Retirement Date. The election shall be provided only one time, shall be made in writing, and shall be irrevocable. ARTICLE VI MISCELLANEOUS 6.1 Administration of the Plan The Plan shall be administered by the Employer. The books and records of the Plan shall be maintained by the Employer at its expense, and no member of the Board of Directors of the Employer, or any employee of the Employer acting on its behalf, shall be liable to any person for any action taken or omitted in connection with the administration of the Plan, unless attributable to his own fraud or willful misconduct. 6.2 Amendment of the Plan The Plan may be amended, in whole or in part, from time-to-time, by the Board of Directors of the Employer, without the consent of any other party. 6.3 Termination of the Plan The Plan may be terminated, at any time, by action of the Board of Directors, without the consent of any other party. The termination of this Plan shall not result in the granting of any additional rights to any Participant, such as full vesting of his Account, except as already provided under the terms of Article IV hereof. 6.4 Notices to Participants From time-to-time, the Employer shall provide a Participant with a statement regarding his Accrued Benefit. Further, a Participant will be provided written notice of any amendment of the Plan that affects his rights herein, and of the termination of the Plan. 6.5 Non-Alienation To the extent permitted by law, the right of any Participant or Beneficiary in any Account balance hereunder shall not be subject in any manner to attachment or other legal process for the debts of such Participant or Beneficiary, and any such Account balance shall not be subject to anticipation, alienation, sale, transfer, assignment or encumbrance. IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the foregoing instrument comprising the National Western Life Insurance Company Non-Qualified Defined Benefit Plan, NATIONAL WESTERN LIFE INSURANCE COMPANY, as the Employer, has caused its seal to be affixed hereto and these presents to be duly executed in its name and behalf by its proper officers thereunto authorized this 26th day of July, 1991. ATTEST: NATIONAL WESTERN LIFE INSURANCE COMPANY /S/ Margaret M. Simpson /S/ William P. Tedrow Asst. Secretary Name: Title: EX-10.C 9 EXHIBIT 10(c) - MATERIAL CONTRACTS NATIONAL WESTERN LIFE INSURANCE COMPANY NON-QUALIFIED DEFERRED COMPENSATION PLAN Effective April 1, 1995 Table of Contents ARTICLE I - Purpose, Definitions and Construction 1.1 Purpose of the Plan 1.2 Definitions 1.3 Construction ARTICLE II - Eligibility 2.1 Initial Eligibility Requirements 2.2 Eligibility Requirements for Subsequent Plan Years ARTICLE III - Contributions to the Plan 3.1 Participant Contributions 3.2 Employer Mandatory Matching Contributions 3.3 Employer Discretionary Matching Contributions 3.4 Employer Mandatory Non-Matching Contributions 3.5 Establishment of Account ARTICLE IV - Allocation and Investment 4.1 Allocation 4.2 Establishment of Trust 4.3 Allocation of Investment Earnings ARTICLE V - Determination of Payment of Account 5.1 Vesting of Account 5.2 Determination of Account 5.3 Timing of Payment 5.4 Form of Payment ARTICLE VI - Miscellaneous 6.1 Administration of the Plan 6.2 Amendment of the Plan 6.3 Termination of the Plan 6.4 Notices to Participants 6.5 Non-Alienation ARTICLE I PURPOSE, DEFINITIONS AND CONSTRUCTION 1.1 Purpose of the Plan This Plan is established by the Employer to permit certain select management employees, who are defined below, to defer the payment of a percentage of their Compensation, and in addition thereto, to provide for certain Employer contributions to augment such employees' retirement income. This Plan is not intended to, and does not, qualify under Sections 401(a) and 501(a) of the Internal Revenue Code, and is designed to be exempt from the requirements of the Employee Retirement Income Security Act. 1.2 Definitions The following terms, when found in the Plan, shall have the meanings set forth below: (a) Account Balance: At any time, the total of all amounts credited under the terms of the Plan to a Participant, the rights to which are determined under the Plan. (b) Beneficiary: The person(s) and/or the trust(s) created for the benefit of a person or persons who are the natural object of the Participant's bounty, or the Participant's estate, whichever is designated by the Participant to receive the benefits payable hereunder upon his death. (c) Code: The Internal Revenue Code of 1986, as it may be amended from time to time, including any successor. (d) Committee: The individuals appointed by the Board of Directors of the Employer, and know as the Administrative Committee, to manage and direct the operation and administration of the Plan. (e) Compensation: Compensation shall be the total cash remuneration paid by the Employer during each Plan Year, as reported on Form W-2 or its subsequent equivalent, including bonuses, fees, commissions, amounts deferred under Code Sections 401(k) and 125, and amounts deferred under any other non-qualified program of salary reduction. Compensation hereunder shall not be subject to any limitations applicable to tax-qualified plans, such as pursuant to Code Sections 401(a)(17) or 415. (f) Disability: A physical or mental condition of a Participant resulting from bodily injury, disease or mental disorder which renders him incapable of continuing any gainful occupation. The determination of Disability shall be made either as a result of the Participant qualifying for a pension under the federal Social Security Act, or based upon such evidence as is determined to be applicable by the Employer in its sole discretion. (g) Effective Date: April 1, 1995. (h) Eligible Employee: A person employed by the Employer in the position of Senior Vice President or above, or a person who has been designated by the President of the Employer, by name, position, or in any other manner, as being in the class of persons who are eligible to participate in the Plan. Such latter designation shall be made in writing by the President of the Employer. However, no person who is an employee of the Employer shall be selected as an Eligible Employee except a member of the select group of management or highly compensated employees of the Employer, as such term is defined under Section 201 of the Employee Retirement Income Security Act of 1974, and regulations and rulings promulgated thereunder by the Department of Labor. (i) Employer: National Western Life Insurance Company, a corporation organized and existing under the laws of the State of Texas, and any successor or successors. (j) Hours of Service: An Hour of Service is each hour for which the Participant is paid by virtue of his employment with the Employer, including hours paid but not worked, and including hours completed prior to the date he actually becomes a Participant hereunder. (k) Initial Participation Period: The time period beginning when the Eligible Employee first completes an Hour of Service until the first January 1 or July 1 which is coincident with or next follows his completion of one (1) year of service. (l) Normal Retirement Age: The date on which a Participant attains age sixty-five (65). (m) Normal Retirement Date: The first day of the month coincident with or next following a Participant's Normal Retirement Age. (n) Participant: An Eligible Employee who has met the requirements Section 2.1 hereof, and whose participation has not been terminated. (o) Plan: The National Western Life Insurance Company Non-Qulified Deferred Compensation Plan, as set forth herein, and as it may be amended from time to time. (p) Plan Quarter: The three month period beginning on January 1, April 1, July 1 or October 1 and ending on March 31, June 30, September 30 or December 31. (q) Plan Year: The twelve month period beginning on January 1 and ending on December 31 each year. (r) Valuation Date: The date as of which the Plan is valued and gains or losses allocated, which shall be March 31, June 30, September 30 and December 31 of each Plan Year. However, the Committee may use more frequent Valuation Dates if it so desires. (s) Years of Service: The period of an Eligible Employee's employment considered in the calculation of the vested amount of his benefits. An Eligible Employee's service shall be determined in twelve (12) month periods, based on Plan Years, including the Plan Year within which falls his date of hire. During such twelve (12) month periods, a Year of Service will be granted if the Eligible Employee completes at least one thousand (1,000) Hours of Service. 1.3 Construction The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender, and the singular may indicate the plural, unless the context clearly indicates the contrary. The words "hereof", "herein", "hereunder" and other similar compounds of the word "here" shall, unless otherwise specifically stated, mean and refer to the entire Plan, not to any particular provision or Section. Article and Section headings are included for convenience of reference and are not intended to add to, or subtract from, the terms of the Plan. ARTICLE II ELIGIBILITY 2.1 Initial Eligibility Requirements An Eligible Employee may elect to become a Participant hereunder on the date the Eligible Employee first completes an Hour of Service for the Employer. An election to become a Participant shall be made no later than 30 days after the date the Eligible Employee first completes an Hour of Service for the Employer. 2.2 Eligibility Requirements for Subsequent Plan Years An Eligible Employee who does not become a Participant when first eligible under the provisions of Section 2.1 may elect to become a Participant hereunder as of the first day of any subsequent Plan Year by executing an enrollment form at least 30 days prior to the beginning of such Plan Year. ARTICLE III CONTRIBUTIONS TO THE PLAN 3.1 Participant Contributions Each Employee who becomes a Participant in accordance with Article II hereof may elect to make contributions to the Plan on a pre-tax basis equal to full percentage increments of his Compensation for the quarter, from one percent (1%) to fifty percent (50%). Each Participant's pre-tax salary deferral agreement shall be made in writing on such forms as the Committee shall prescribe, and shall be effective on a Plan Year basis, or until changed in accordance with subsequent provisions of this Section 3.1. A Participant's election hereunder may be completely discontinued at any time, and may be changed as of any Valuation Date, provided that notice of such change is received at least thirty (30) days prior to such Valuation Date for Compensation to be earned for services rendered following such date, or within such time frame as is approved by the Committee. If, as of any Valuation Date, a Participant does not submit a new election, his previous election shall be deemed to continue. 3.2 Employer Mandatory Matching Contributions The Employer shall make an Employer mandatory matching contribution each Plan Quarter equal to fifty percent (50%) of the Participant's contributions made under Section 3.1 of this Plan, limited to no more than two percent (2%) of the Participant's Compensation for the quarter, that exceeds, on a year to date basis, the OBRA'93 annual compensation limit ($150,000 in 1995), as adjusted by the Commissioner for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Code. However, during any Participant's Initial Participation Period, the Employer shall make an Employer mandatory matching contribution each Plan Quarter equal to fifty percent (50%) of the Participant's contributions made under Section 3.1 of this Plan, limited to no more than two percent (2%) of the Participant's Compensation for the quarter. 3.3 Employer Discretionary Matching Contributions The Employer may make an additional matching contribution each Plan Quarter, to be known as an Employer discretionary matching contribution, equal to fifty percent (50%) of the Participant's contributions made under Section 3.1 of this Plan, limited to no more than two percent (2%) of the Participant's Compensation for the quarter. The determination as to whether an Employer discretionary matching contribution shall be made is in the sole discretion of the President of the Employer, determined on an quarterly basis. 3.4 Employer Mandatory Non-Matching Contributions The Employer shall make an Employer mandatory non-matching contribution each Plan Quarter equal to two percent (2%) of the participant's Compensation for the quarter that exceeds, on a year to date basis, the OBRA'93 annual compensation limit ($150,000 in 1995), as adjusted by the Commissioner for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Code. However, during any Participant's Initial Participation Period, the Employer shall make an Employer mandatory non-matching contribution each Plan Quarter equal to two percent (2%) of the Participant's Compensation for the quarter. 3.5 Establishment of Account Each Participant herein shall have maintained in his name an Account, to which shall be credited his salary reduction contributions, as well as his allocable share of Employer contributions made under the terms of this Article. A Participant's Account shall reflect his share of such contributions, including his allocable share of any gains and losses pursuant to Section 4.3 hereof. ARTICLE IV ALLOCATION AND INVESTMENT 4.1 Allocation Contributions made pursuant to Section 3.1 hereof shall be allocated to the Account of the Participant from whose Compensation such amounts were reduced, as soon as practicable following the date of actual salary reduction. Any contribution made pursuant to Section 3.2, 3.3 and 3.4 hereof shall be allocated to each participant who is in the active employ of the Employer as of the last day of the Plan Quarter for which such contribution was made, unless that Participant's termination of employment is as a result of his death, Disability, attainment of Normal Retirement Age, or such other cause as shall be deemed as acceptable by the Board of Directors of the Employer. 4.2 Establishment of Trust The Employer shall establish a trust fund with regard to the Accounts hereunder, designed to be an irrevocable grantor trust under Code Section 671. 4.3 Allocation of Investment Earnings Investment earnings shall be credited as of the last day of each calendar quarter, based on the actual investment results for such quarter. The earnings to be allocated will be allocated to each Participant's Account in the proportion that the Participant's Account balance at the beginning of the quarter, less any withdrawals during the quarter, plus one-half (1/2) of any additions made to the Account during the quarter, bears to the total of all such Accounts. If more than one investment fund is maintained, each Participant shall provide an election as to the investment of his Accounts. Each Participant's investment election shall be made in writing, on such forms as the Committee shall prescribe, and shall remain effective hereunder until changed. A Participant's election hereunder may be changed as of any Valuation Date, provided that notice of such change is received at least thirty (30) days prior to such Valuation Date, or within such time frame as is approved by the Committee. ARTICLE V DETERMINATION OF PAYMENT OF ACCOUNT 5.1 Vesting of Account The Participant's Account derived from contributions made under Section 3.1 hereof shall be one hundred percent (100%) vested and non-forfeitable at all times. As to a Participant who is at the level of Executive Vice President or above, his total Account shall be one hundred percent (100%) vested and non-forfeitable at all times. As to all other Participants, and as to the amount of such a Participant's Account other than that derived from contributions made pursuant to Section 3.1 hereof, such Account shall become one hundred percent (100%) vested and non-forfeitable in accordance with the following: (a) Upon the retirement of a Participant at or after his Normal Retirement Date. (b) Upon a determination of Disability in accordance with Section 1.2(e) hereof. (c) Upon the death of a Participant. Prior to the occurrence of any of the foregoing, such a Participant shall become vested in his Account in accordance with the following schedule:
Years of Service With the Employer Vested Percentage Less than 3 0% 3 20% 4 40% 5 60% 6 80% 7 or more 100%
5.2 Determination of Account As of the date of a Participant's termination of employment with the Employer (including termination due to any of the events specified under Section 5.1 hereof), his vested Account balance shall be determined in accordance with the provisions of Section 5.1 above. Thereafter, as of the last day of the Plan Quarter coincident with or next following his termination of employment, the non-vested portion of his Account shall be forfeited. Such forfeited amount shall be used to first reduce the Employer contributions specified under Sections 3.2, 3.3 and 3.4 hereof and any remaining amounts shall be reallocated among all Participants eligible to receive Employer contributions as of such date under Section 4.1 hereof, in the proportion that such Participant's Compensation for the Plan Quarter bears to the Compensation for the Plan Quarter of all Participants eligible for such contribution. 5.3 Timing of Payment A Participant, or in the case of a benefit due to the death of a Participant, his Beneficiary, shall be entitled to payment of his vested Account balance immediately following the termination of his employment status with the Employer. Payment shall be made as soon as administratively feasible following such event, based on the Participant's Account balance as of the last day of the calendar quarter next preceding the date of distribution. However, if the Employer determines that such payment would not be in the best interest of remaining participants due to fluctuations in the value of the trust, no distribution shall be made until a subsequent value of the trust is determined, as of the last day of the calendar quarter in which the event requiring distribution occurs. 5.4 Form of Payment A Participant or Beneficiary entitled to payment shall receive a single lump sum payment. ARTICLE VI MISCELLANEOUS 6.1 Administration of the Plan The Plan shall be administered by the Employer. The books and records of the Plan shall be maintained by the Employer at its expense, and no member of the Board of Directors of the Employer, or any employee of the Employer acting on its behalf, shall be liable to any person for any action taken or omitted in connection with the administration of the Plan, unless attributable to his own fraud or willful misconduct. 6.2 Amendment of the Plan The Plan may be amended, in whole or in part, from time-to-time, by the Board of Directors of the Employer, without the consent of any other party. 6.3 Termination of the Plan The Plan may be terminated, at any time, by action of the Board of Directors, without the consent of any other party. The termination of this Plan shall not result in the granting of any additional rights to any Participant, such as, to the extent not funded, full vesting of his Account, except as already provided under the terms of Section 5.1 hereof. 6.4 Notices to Participants From time-to-time, the Employer shall provide a Participant with an accounting of the value of his Account. Further, a Participant will be provided written notice of any amendment of the Plan that affects his rights herein, and of the termination of the Plan. 6.5 Non-Alienation To the extent permitted by law, the right of any Participant or Beneficiary in any Account balance hereunder shall not be subject in any manner to attachment or other legal process for the debts of such Participant or Beneficiary, and any such Account balance shall not be subject to anticipation, alienation, sale, transfer, assignment or encumbrance. IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the foregoing instrument comprising the National Western Life Insurance Company Non-Qualified Deferred Compensation Plan as amended and restated effective April 1, 1995, NATIONAL WESTERN LIFE INSURANCE COMPANY, as the Employer, has caused its seal to be affixed hereto and these presents to be duly executed in its name and behalf by its proper officers thereunto authorized this 27th day of March, 1995. ATTEST: NATIONAL WESTERN LIFE INSURANCE COMPANY /S/ James P. Payne /S/ Ross R. Moody Secretary Name: Title: EX-10.D 10 EXHIBIT 10(d) - MATERIAL CONTRACTS FIRST AMENDMENT TO THE NATIONAL WESTERN LIFE INSURANCE COMPANY NON-QUALIFIED DEFERRED COMPENSATION PLAN WHEREAS, the Plan was originally established effective April 1, 1995; and WHEREAS, Section 6.2 of the Plan permits the Company to amend the Plan at anytime; and WHEREAS, the Company desires to change certain provisions of the Plan; NOW THEREFORE, the Plan is hereby amended as follows: 1. Section 1.2(k), Initial Participation Period, is hereby replaced with the following, effective July 1, 1995: "The time period beginning when the Eligible Employee first completes and Hour of Service until the first January 1, April 1, July 1 or October 1 which is coincident with or next follows the earlier of (i) six (6) months after the date the Employee first completes an Hour of Service for the Employer, provided the Employee completes five hundred (500) Hours of Service during such six (6) month period or (ii) the date he completes one (1) Year of Service." IN WITNESS WHEREOF, National Western Life Insurance Company has executed this First Amendment. ATTEST: National Western Life Insurance Company By: /S/ Ross R. Moody Its: President EX-10.E 11 EXHIBIT 10(e) - MATERIAL CONTRACTS NATIONAL WESTERN LIFE INSURANCE COMPANY 1995 STOCK AND INCENTIVE PLAN I. PURPOSE PLAN (the "Plan") is to provide a means through which National Western Life Insurance Company, a Colorado corporation (the "Company"), and its subsidiaries may attract able persons to enter the employ or become directors of the Company and to provide a means whereby those persons upon whom the responsibilities of the successful administration and management of the Company rest, and whose present and potential contributions to the welfare of the Company are of importance, can acquire and maintain stock ownership, thereby strengthening their concern for the welfare of the Company and their desire to remain in its employ or as directors. A further purpose of the Plan is to provide such persons with additional incentive and reward opportunities designed to enhance the profitable growth of the Company. Accordingly, the Plan provides for granting Incentive Stock Options, options which do not constitute Incentive Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Performance Awards, Incentive Awards, or any combination of the foregoing, as is best suited to the circumstances of the particular person as provided herein. II. DEFINITIONS The following definitions shall be applicable throughout the Plan unless specifically modified by any paragraph: (a) "Award" means, individually or collectively, any Option, Restricted Stock Award, Performance Award, Incentive Award, or Stock Appreciation Right. (b) "Board" means the Board of Directors of the Company. (c) A "Change of Control" of the Company occurs if: (1) any "person," as such term is used in Sections 13(d) and 14(d)(2) of the 1934 Act, becomes the beneficial owner, directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's outstanding securities then entitled to vote for the election of directors; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof; or (iii) the Board shall approve the sale of all or substantially all of the assets of the Company; or (iv) the Board shall approve any merger, consolidation, issuance of securities or purchase of assets, the result of which would be the occurrence of any event described in clause (i) or (ii) above. (d) "Code" means the Internal Revenue Code of 1986, as amended. Reference in the Plan to any section of the Code shall be deemed to include any amendments or successor provisions to any section and any regulations under such section. (e) "Committee" means not less than two members of the Board who are selected by the Board as provided in paragraph IV(a). (f) "Common Stock" means the Class A common stock, par value $1.00 per share, of the Company. (g) "Company" means National Western Life Insurance Company. (h) "Director" means an individual elected to the Board by the stockholders of the Company or by the Board under applicable corporate law who is serving on the Board on the date the Plan is adopted by the Board or is elected to the Board after such date. (i) An "employee" means any person (including a Director) in an employment relationship with the Company or any subsidiary corporation (as defined in section 424 of the Code). (j) "1934 Act" means the Securities Exchange Act of 1934, as amended. (k) "Fair Market Value" means, if the Common Stock is traded over the counter at the time a determination of its fair market value is required to be made hereunder, its fair market value shall be deemed to be equal to the average between the reported high and low or closing bid and asked prices of Common Stock on the most recent date on which Common Stock was publicly traded. In the event Common Stock is not publicly traded at the time a determination of its value is required to be made hereunder, the determination of its fair market value shall be made by the Committee in such manner as it deems appropriate. (l) "Holder" means an employee or a nonemployee Director who has been granted an Award. (m) "Incentive Award" means an Award granted under paragraph XI of the Plan. (n) "Incentive Award Agreement" means a written agreement between the Company and a Holder with respect to an Incentive Award. (o) "Incentive Stock Option" means an incentive stock option within the meaning of section 422 of the Code. (p) "Option" means an Award granted under paragraph VII of the Plan and includes both Incentive Stock Options to purchase Common Stock and Options which do not constitute Incentive Stock Options to purchase Common Stock. (q) "Option Agreement" means a written agreement between the Company and a Holder with respect to an Option. (r) "Performance Award" means an Award granted under paragraph X of the Plan. (s) "Performance Award Agreement" means a written agreement between the Company and a Holder with respect to a Performance Award. (t) "Plan" means National Western Life Insurance Company 1995 Stock and Incentive Plan, as amended from time to time. (u) "Restricted Stock Agreement" means a written agreement between the Company and a Holder with respect to a Restricted Stock Award. (v) "Restricted Stock Award" means an Award granted under paragraph IX of the Plan. (w) "Rule 16b3" means SEC Rule 16b3 promulgated under the 1934 Act, as such may be amended from time to time, and any successor rule, regulation, or statute fulfilling the same or a similar function. (x) "Spread" means, in the case of a Stock Appreciation Right, an amount equal to the excess, if any, of the Fair Market Value of a share of Common Stock on the date such right is exercised over the exercise price of such Stock Appreciation Right. (y) "Stock Appreciation Right" means an Award granted under paragraph VIII of the Plan. (z) "Stock Appreciation Rights Agreement" means a written agreement between the Company and a Holder with respect to an Award of Stock Appreciation Rights. III. EFFECTIVE DATE AND DURATION OF THE PLAN The Plan shall be effective as of April 21, 1995, the date of its adoption by the Board, provided the Plan is approved by the shareholders of the Company within twelve months thereafter and on or prior to the date of the first annual meeting of shareholders of the Company held subsequent to the acquisition of an equity security by a Holder hereunder for which exemption is claimed under Rule 16b3. No further Awards may be granted under the Plan after April 20, 2005. The Plan shall remain in effect until all Awards granted under the Plan have been satisfied or expired. IV. ADMINISTRATION (a) Composition of Committee. The Plan shall be administered by a committee which shall be (i) appointed by the Board; (ii) constituted so as to permit the Plan to comply with Rule 16b3; and (iii) constituted solely of "outside directors," within the meaning of section 162(m) of the Code and applicable interpretive authority thereunder. Except for Awards described in paragraph VII(h), no member of the Committee shall be eligible to receive an Award under the Plan and no person who has received an Award in the preceding year shall be eligible to serve on the Committee. (b) Powers. Subject to the provisions of the Plan, the Committee shall have sole authority, in its discretion, to determine which employees or Directors shall receive an Award, the time or times when such Award shall be made, whether an Incentive Stock Option, nonqualified Option or Stock Appreciation Right shall be granted, the number of shares of Common Stock which may be issued under each Option, Stock Appreciation Right, or Restricted Stock Award, and the value of each Performance Award and Incentive Award. In making such determinations the Committee may take into account the nature of the services rendered by the respective individuals, their present and potential contribution to the Company's success, and such other factors as the Committee in its discretion shall deem relevant. (c) Additional Powers. The Committee shall have such additional powers as are delegated to it by the other provisions of the Plan. Subject to the express provisions of the Plan, the Committee is authorized to construe the Plan and the respective agreements executed thereunder, to prescribe such rules and regulations relating to the Plan as it may deem advisable to carry out the Plan, and to determine the terms, restrictions, and provisions of each Award, including such terms, restrictions, and provisions as shall be requisite in the judgment of the Committee to cause designated Options to qualify as Incentive Stock Options, and to make all other determinations necessary or advisable for administering the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in any agreement relating to an Award in the manner and to the extent it shall deem expedient to carry it into effect. The determinations of the Committee on the matters referred to in this Article IV shall be conclusive. V. GRANT OF OPTIONS, STOCK APPRECIATION RIGHTS, RESTRICTED STOCK AWARDS, PERFORMANCE AWARDS AND INCENTIVE AWARDS; SHARES SUBJECT TO THE PLAN (a) Stock Grant and Award Limits. The Committee may from time to time grant Awards to one or more individuals determined by it to be eligible for participation in the Plan in accordance with the provisions of paragraph VI. Subject to paragraph XII, the aggregate number of shares of Common Stock that may be issued under the Plan shall not exceed 300,000 shares. Shares shall be deemed to have been issued under the Plan only (i) to the extent actually issued and delivered pursuant to an Award or (ii) to the extent an Award granted under paragraph VII, VIII, IX, or XI is settled in cash. To the extent that an Award lapses or the rights of its Holder terminate, any shares of Common Stock subject to such Award shall again be available for the grant of an Award. Separate stock certificates shall be issued by the Company for those shares acquired pursuant to the exercise of an Incentive Stock Option and for those shares acquired pursuant to the exercise of any Option which does not constitute an Incentive Stock Option. Notwithstanding any provision in the Plan to the contrary, the maximum number of shares of Common Stock that may be subject to Awards granted to any one individual during any calendar year is 30,000 shares of Common Stock (subject to adjustment in the same manner as provided in paragraph XII with respect to shares of Common Stock subject to Awards then outstanding). The limitation set forth in the preceding sentence shall be applied in a manner which will permit compensation generated in connection with the exercise of Options and Stock Appreciation Rights to constitute "performance-base" compensation for purposes of section 162(m) of the Code, including, without limitation, counting against such maximum number of shares, to the extent required under section 162(m) of the Code and applicable interpretive authority thereunder, any shares subject to Options or Stock Appreciation Rights that are cancelled or repriced. (b) Stock Offered. The stock to be offered pursuant to the grant of an Award may be authorized but unissued Common Stock or Common Stock previously issued and outstanding and reacquired by the Company. VI. ELIGIBILITY Awards made pursuant to paragraphs IX, X and XI may be granted only to persons who, at the time of grant, are employees or Directors. Awards made pursuant to paragraphs VII and VIII may be granted only to persons who, at the time of grant, are employees or (only as set forth in the following sentence) Directors. Except as set forth in paragraph VII(h), Awards pursuant to paragraphs VII and VIII may not be granted to any Director who is not an employee of the Company. An award made pursuant to paragraphs VII, VIII, IX, X, or XI may be granted on more than one occasion to the same person, and, subject to the limitations set forth in the Plan, such Award may include an Incentive Stock Option or an Option which is not an Incentive Stock Option, a Stock Appreciation Right, a Restricted Stock Award, a Performance Award, an Incentive Award or any combination thereof. VII. STOCK OPTIONS (a) Option Period. The term of each Option shall be as specified by the Committee at the date of grant. (b) Limitations on Exercise of Option. An Option shall be exercisable in whole or in such installments and at such times as determined by the Committee. (c) Special Limitations on Incentive Stock Options. To the extent that the aggregate Fair Market Value (determined at the time the respective Incentive Stock Option is granted) of Common Stock with respect to which Incentive Stock Options granted after the effective date hereof are exercisable for the first time by an individual during any calendar year under all incentive stock option plans of the Company and its parent and subsidiary corporations, if any, exceeds $100,000, such Incentive Stock Options shall be treated as options which do not constitute Incentive Stock Options. The Committee shall determine, in accordance with applicable provisions of the Code, Treasury Regulations and other administrative pronouncements, which of an optionee's Incentive Stock Options will not constitute Incentive Stock Options because of such limitation and shall notify the optionee of such determination as soon as practicable after such determination. No Incentive Stock Option shall be granted to an individual if, at the time the Option is granted, such individual owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its parent or subsidiary corporation, if any, within the meaning of section 422(b)(6) of the Code, unless (i) at the time such Option is granted the option price is at least 110% of the Fair Market Value of the Common Stock subject to the Option and (ii) such Option by its terms is not exercisable after the expiration of five years from the date of grant. (d) Option Agreement. Each Option shall be evidenced by an Option Agreement in such form and containing such provisions not inconsistent with the provisions of the Plan as the Committee from time to time shall approve, including, without limitation, provisions to qualify an Incentive Stock Option under section 422 of the Code. An Option Agreement may provide for the payment of the option price, in whole or in part, by the delivery of a number of shares of Common Stock (plus cash if necessary) having a Fair Market Value equal to such option price. Each Option Agreement shall provide that the Option may not be exercised earlier than six months from the date of grant and shall specify the effect of termination of employment on the exercisability of the Option. Moreover, an Option Agreement may provide for a "cashless exercise" of the Option by establishing procedures whereby the Holder, by a properly executed written notice, directs (i) an immediate market sale or margin loan respecting all or a part of the shares of Common Stock to which he is entitled upon exercise pursuant to an extension of credit by the Company to the Holder of the Option price, (ii) the delivery of the shares of Common Stock from the Company directly to a brokerage firm, and (iii) the delivery of the option price from sale or margin loan proceeds from the brokerage firm directly to the Company. Such Option Agreement may also include, without limitation, provisions relating to (i) subject to the provisions hereof accelerating such vesting on a Change of Control, vesting of Options, (ii) tax matters (including provisions covering any applicable employee wage withholding requirements and requiring additional "gross-up" payments to Holders to meet any excise taxes or other additional income tax liability imposed as a result of a Change of Control payment resulting from the operation of the Plan or of such Option Agreement), and (iii) any other matters not inconsistent with the terms and provisions of this Plan that the Committee shall in its sole discretion determine. The terms and conditions of the respective Option Agreements need not be identical. (e) Option Price and Payment. The price at which a share of Common Stock may be purchased upon exercise of an Option shall be determined by the Committee, but such purchase price (i) shall not be less than the Fair Market Value of a share of Common Stock on the date such Option is granted and (ii) shall be subject to adjustment as provided in paragraph XII. The Option or portion thereof may be exercised by delivery of an irrevocable notice of exercise to the Company. The purchase price of the Option or portion thereof shall be paid in full in the manner prescribed by the Committee. Separate stock certificates shall be issued by the Company for those shares acquired pursuant to the exercise of an Incentive Stock Option and for those shares acquired pursuant to the exercise of any Option which does not constitute an Incentive Stock Option. (f) Shareholder Rights and Privileges. The Holder shall be entitled to all the privileges and rights of a shareholder only with respect to such shares of Common Stock as have been purchased under the Option and for which certificates of stock have been registered in the Holder's name. (g) Options and Rights in Substitution for Stock Options Granted by Other Corporations. Options and Stock Appreciation Rights may be granted under the Plan from time to time in substitution for stock options held by individuals employed by corporations who become employees as a result of a merger or consolidation of the employing corporation with the Company or any subsidiary, or the acquisition by the Company or a subsidiary of the assets of the employing corporation, or the acquisition by the Company or a subsidiary of stock of the employing corporation with the result that such employing corporation becomes a subsidiary. (h) Fixed Grants to Non-Employee Directors. Each individual who is a non-employee Director of the Company on the date of the approval of the Plan by the Directors shall receive an Option to purchase 1,000 shares of Common Stock at the Fair Market Value thereof on the date of grant. Each individual who thereafter becomes a non-employee Director of the Company upon election to such office shall receive an Option to purchase 1,000 shares of Common Stock at the Fair Market Value thereof on the date of grant. Each Option granted under this paragraph VII(h) shall (i) not constitute an Incentive Stock Option, (ii) not have Stock Appreciation Rights granted in connection therewith, (iii) have a term of ten years, (iv) vest twenty percent (20%) per year on each of the first five anniversary dates of grant subject to acceleration and vesting pursuant to paragraph XII(c), and (v) cease to be exercisable after the date which is three months after the termination of such individual's service as a Director (provided that such exercise period shall be extended to one year in the event of the death of the non-employee Director). Any non-employee Director holding Options granted under this paragraph VII(h) who is a member of the Committee shall not participate in any action of the Committee with respect to any claim or dispute involving such non-employee Director. VIII. STOCK APPRECIATION RIGHTS (a) Stock Appreciation Rights. A Stock Appreciation Right is the right to receive an amount equal to the Spread with respect to a share of Common Stock upon the exercise of such Stock Appreciation Right. Stock Appreciation Rights may be granted in connection with the grant of an Option, in which case the Option Agreement will provide that exercise of Stock Appreciation Rights will result in the surrender of the right to purchase the shares under the Option as to which the Stock Appreciation Rights were exercised. Alternatively, Stock Appreciation Rights may be granted independently of Options, in which case each Award of Stock Appreciation Rights shall be evidenced by a Stock Appreciation Rights Agreement which shall contain such terms and conditions as may be approved by the Committee including without limitation all applicable matters set forth with specificity in paragraph VII(d) with respect to Option Agreements. The terms and conditions of the respective Stock Appreciation Rights Agreements need not be identical. The Spread with respect to a Stock Appreciation Right may be payable either in cash, shares of Common Stock with a Fair Market Value equal to the Spread or in a combination of cash and shares of Common Stock. With respect to Stock Appreciation Rights that are subject to Section 16 of the 1934 Act, however, the Committee shall, except as provided in paragraph XII(c), retain sole discretion (i) to determine the form in which payment of the Stock Appreciation Right will be made (i.e., cash, securities or any combination thereof) or (ii) to approve an election by a Holder to receive cash in full or partial settlement of Stock Appreciation Rights. Each Stock Appreciation Rights Agreement shall provide that the Stock Appreciation Rights may not be exercised earlier than six months from the date of grant and shall specify the effect of termination of employment on the exercisability of the Stock Appreciation Rights. (b) Exercise Price. The exercise price of each Stock Appreciation Right shall be determined by the Committee, but such exercise price (i) shall not be less than the Fair Market Value of a share of Common Stock on the date the Stock Appreciation Right is granted (or such greater exercise price as may be required if such Stock Appreciation Right is granted in connection with an Incentive Stock Option that must have an exercise price equal to 110% of the Fair Market Value of the Common Stock on the date of grant pursuant to paragraph VII(c)) and (ii) shall be subject to adjustment as provided in paragraph XII. (c) Exercise Period. The term of each Stock Appreciation Right shall be as specified by the Committee at the date of grant. (d) Limitations on Exercise of Stock Appreciation Right. A Stock Appreciation Right shall be exercisable in whole or in such installments and at such times as determined by the Committee. IX. RESTRICTED STOCK AWARDS (a) Restriction Period To Be Established by the Committee. At the time a Restricted Stock Award is made, the Committee shall establish a period of time (the "Restriction Period") applicable to such Award. Each Restricted Stock Award may have a different Restriction Period, in the discretion of the Committee. The Restriction Period applicable to a particular Restricted Stock Award shall not be changed except as permitted by paragraph IX(b) or paragraph XII. (b) Other Terms and Conditions. Common Stock awarded pursuant to a Restricted Stock Award shall be represented by a stock certificate registered in the name of the Holder of such Restricted Stock Award. The Holder shall have the right to receive dividends during the Restriction Period, to vote Common Stock subject thereto and to enjoy all other shareholder rights, except that (i) the Holder shall not be entitled to delivery of the stock certificate until the Restriction Period shall have expired, (ii) the Company shall retain custody of the stock during the Restriction Period, (iii) the Holder may not sell, transfer, pledge, exchange, hypothecate, or otherwise dispose of the stock during the Restriction Period, and (iv) a breach of the terms and conditions established by the Committee pursuant to the Restricted Stock Agreement shall cause a forfeiture of the Restricted Stock Award. At the time of such Award, the Committee may, in its sole discretion, prescribe additional terms, conditions, or restrictions relating to Restricted Stock Awards, including, but not limited to, rules pertaining to the termination of employment or service as a Director (by retirement, disability, death, or otherwise) of a Holder prior to expiration of the Restriction Period. Such additional terms, conditions, or restrictions shall be set forth in a Restricted Stock Agreement made in conjunction with the Award. Such Restricted Stock Agreement may also include, without limitation, provisions relating to (i) subject to the provisions hereof accelerating vesting on a Change of Control, vesting of Awards, (ii) tax matters (including provisions (x) covering any applicable employee wage withholding requirement, (y) prohibiting an election by the Holder under section 83(b) of the Code and (z) requiring additional "grossup" payments to Holders to meet any excise taxes or other additional income tax liability imposed as a result of a Change of Control payment resulting from the operation of the Plan or of such Restricted Stock Agreement), and (iii) any other matters not inconsistent with the terms and provisions of this Plan that the Committee shall in its sole discretion determine. The terms and conditions of the respective Restricted Stock Agreements need not be identical. (c) Payment for Restricted Stock. The Committee shall determine the amount and form of any payment for Common Stock received pursuant to a Restricted Stock Award, provided that in the absence of such a determination, a Holder shall not be required to make any payment for Common Stock received pursuant to a Restricted Stock Award, except to the extent otherwise required by law. (d) Agreements. At the time any Award is made under this paragraph IX, the Company and the Holder shall enter into a Restricted Stock Agreement setting forth each of the matters contemplated hereby and such other matters as the Committee may determine to be appropriate. The terms and provisions of the respective Restricted Stock Agreements need not be identical. X. PERFORMANCE AWARDS (a) Performance Period. The Committee shall establish, with respect to and at the time of each Performance Award, a performance period over which the performance of the Holder shall be measured. (b) Performance Awards. Each Performance Award shall have a maximum value established by the Committee at the time of such Award. (c) Performance Measures. A Performance Award shall be awarded to an employee or a Director contingent upon future performance of the Company or any subsidiary, division, or department thereof by or in which is he employed (if applicable) during the performance period. The Committee shall establish the performance measures applicable to such performance prior to the beginning of the performance period but subject to such later revisions as the Committee shall deem appropriate to reflect significant, unforeseen events or changes. (d) Awards Criteria. In determining the value of Performance Awards, the Committee shall take into account an individual's responsibility level, performance, potential, other Awards, and such other considerations as it deems appropriate. (e) Payment. Following the end of the performance period, the Holder of a Performance Award shall be entitled to receive payment of an amount, not exceeding the maximum value of the Performance Award, based on the achievement of the performance measures for such performance period, as determined by the Committee. Payment of a performance Award may be made in cash, Common Stock or a combination thereof, as determined by the Committee. Payment shall be made in a lump sum or in installments as prescribed by the Committee. Any payment to be made in Common Stock shall be based on the Fair Market Value of the Common Stock on the payment date. (f) Termination of Employment. A Performance Award shall terminate if the Holder does not remain continuously in the employ of the Company (or in service as a Director) at all times during the applicable performance period, except as may be determined by the Committee or as may otherwise be provided in the Award at the time granted. (g) Agreements. At the time any Award is made under this paragraph X, the Company and the Holder shall enter into a Performance Award Agreement setting forth each of the matter contemplated hereby and, in addition, such matters as are set forth in paragraph 1X(b) as the Committee may determine to be appropriate. The terms and provisions of the respective agreements need not be identical. XI. INCENTIVE AWARDS (a) Incentive Awards. Incentive Awards are rights to receive shares of Common Stock (or cash in an amount equal to the Fair Market Value thereof), or rights to receive an amount equal to any appreciation in the Fair Market Value of Common Stock (or portion thereof) over a specified period of time, which vest over a period of time or upon the occurrence of an event (including without limitation a Change of Control) as established by the Committee, without payment of any amounts by the Holder thereof (except to the extent otherwise required by law) or satisfaction of any performance criteria or objectives. Each Incentive Award shall have a maximum value established by the Committee at the time of such Award. (b) Award Period. The Committee shall establish, with respect to and at the time of each Incentive Award, a period over which or the event upon which the Award shall vest with respect to the Holder. (c) Awards Criteria. In determining the value of Incentive Awards, the Committee shall take into account an individual's responsibility level, performance, potential, other Awards, and such other considerations as it deems appropriate. (d) Payment. Following the end of the vesting period for an Incentive Award, the Holder of an Incentive Award shall be entitled to receive payment of an amount, not exceeding the maximum value of the Incentive Award, based on the then vested value of the award. Payment of an Incentive Award may be made in cash, Common Stock, or a combination thereof as determined by the Committee. Payment shall be made in a lump sum or in installments as prescribed by the Committee in its sole discretion. Any payment to be made in Common Stock shall be based on the Fair Market Value of the Common Stock on the payment date. Cash dividend equivalents may be paid during or after the vesting period with respect to an Incentive Award, as determined by the Committee. (e) Termination of Employment. An Incentive Award shall terminate if the Holder does not remain continuously in the employ of the Company (or in service as a Director) at all times during the applicable vesting period, except as may be otherwise determined by the Committee or as set forth in the Award at the time of grant. (f) Agreements. At the time any Award is made under this paragraph XI, the Company and the Holder shall enter into an Incentive Award Agreement setting forth each of the matters contemplated hereby and, in addition, such matters as are set forth in paragraph IX(b) as the Committee may determine to be appropriate. The terms and provisions of the respective agreements need not be identical. XII. RECAPITALIZATION OR REORGANIZATION (a) The shares with respect to which Awards may be granted are shares of Common Stock as presently constituted, but if, and whenever, prior to the expiration of an Award theretofore granted, the Company shall effect a subdivision or consolidation of shares of Common Stock or the payment of a stock dividend on Common Stock without receipt of consideration by the Company, the number of shares of Common Stock with respect to which such Award may thereafter be exercised or satisfied, as applicable, (i) in the event of an increase in the number of outstanding shares shall be proportionately increased, and the purchase price per share shall be proportionately reduced, and (ii) in the event of a reduction in the number of outstanding shares shall be proportionately reduced, and the purchase price per share shall be proportionately increased. (b) If the Company recapitalizes or otherwise changes its capital structure, thereafter upon any exercise or satisfaction, as applicable, of an Award theretofore granted, the Holder shall be entitled to (or entitled to purchase, if applicable) under such Award in lieu of the number of shares of Common Stock then covered by such Award, the number and class of shares of stock and securities to which the Holder would have been entitled pursuant to the terms of the recapitalization if, immediately prior to such recapitalization, the Holder had been the holder of record of the number of shares of Common Stock then covered by such Award. (c) In the event of a Change of Control, all outstanding Awards shall immediately vest and become exercisable or satisfiable, as applicable. The Committee, in its discretion, may determine that upon the occurrence of a Change of Control, each Award outstanding hereunder shall terminate within a specified number of days after notice to the Holder, and such Holder shall receive, with respect to each share of Common Stock subject to such Award, cash in an amount equal to the excess of (i) the higher of (x) the Fair Market Value of such share of Common Stock immediately prior to the occurrence of such Change of Control or (y) the value of the consideration to be received in connection with such Change of Control for one share of Common Stock over (ii) the exercise price per share, if applicable, of Common Stock set forth in such Award. The provisions contained in the preceding sentence shall be inapplicable to an Award granted within six (6) months before the occurrence of a Change of Control if the Holder of such Award is subject to the reporting requirements of Section 16(a) of the 1934 Act. If the consideration offered to shareholders of the Company in any transaction described in this paragraph consists of anything other than cash, the Committee shall determine the fair cash equivalent of the portion of the consideration offered which is other than cash. The provisions contained in this paragraph shall not terminate any rights of the Holder to further payments pursuant to any other agreement with the Company following a Change of Control. (d) In the event of changes in the outstanding Common Stock by reason of recapitalization, reorganizations, mergers, consolidations, combinations, exchanges or other relevant changes in capitalization occurring after the date of the grant of any Award and not otherwise provided for by this paragraph XII, any outstanding Awards and any agreements evidencing such Awards shall be subject to adjustment by the Committee at its discretion as to the number and price of shares of Common Stock or other consideration subject to such Awards. In the event of any such change in the outstanding Common Stock, the aggregate number of shares available under the Plan may be appropriately adjusted by the Committee, whose determination shall be conclusive. (e) The existence of the Plan and the Awards granted hereunder shall not affect in any way the right or power of the Board or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization, or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of debt or equity securities ahead of or affecting Common Stock or the rights thereof, the dissolution or liquidation of the Company or any sale, lease, exchange, or other disposition of all or any part of its assets or business or any other corporate act or proceeding. (f) Any adjustment provided for in Subparagraphs (a), (b), (c) or (d) above shall be subject to any required shareholder action. (g) Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Common Stock subject to Awards theretofore granted or the purchase price per share, if applicable. XIII. AMENDMENT AND TERMINATION OF THE PLAN The Board in its discretion may terminate the Plan at any time with respect to any shares for which Awards have not theretofore been granted. The Board shall have the right to alter or amend the Plan or any part thereof from time to time; provided that no change in any Award theretofore granted may be made which would impair the rights of the Holder without the consent of the Holder (unless such change is required in order to cause the benefits under the Plan to qualify as performancebased compensation within the meaning of section 162(m) of the Code and applicable interpretive authority thereunder) and provided, further, that the Board may not, without approval of the shareholders, amend the Plan: (a) to increase the maximum number of shares which may be issued on exercise or surrender of an Award, except as provided in paragraph XII; (b) to change the Option price; (c) to change the class of individuals eligible to receive Awards or materially increase the benefits accruing to employees and Directors under the Plan; (d) to extend the maximum period during which Awards may be granted under the Plan; (e) to modify materially the requirements as to eligibility for participation in the Plan; or (f) to decrease any authority granted to the Committee hereunder in contravention of Rule 16b3. XIV. MISCELLANEOUS (a) No Right To An Award. Neither the adoption of the Plan by the Company nor any action of the Board or the Committee shall be deemed to give an employee any right to be granted an Award to purchase Common Stock, a right to a Stock Appreciation Right, a Restricted Stock Award, a Performance Award, or an Incentive Award, or any of the rights hereunder except as may be evidenced by an Award or by an Option Agreement, Stock Appreciation Rights Agreement, Restricted Stock Agreement, a Performance Award Agreement or an Incentive Award Agreement duly executed on behalf of the Company, and then only to the extent and on the terms and conditions expressly set forth therein. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of funds or assets to assure the payment of any Award. (b) No Employment Rights Conferred. Nothing contained in the Plan shall (i) confer upon any employee any right with respect to continuation of employment with the Company or any subsidiary or (ii) interfere in any way with the right of the Company or any subsidiary to terminate his or her employment (or service as a Director, in accordance with applicable corporate law) at any time. (c) Other Laws; Withholding. The Company shall not be obligated to issue any Common Stock pursuant to any Award granted under the Plan at any time when the shares covered by such Award have not been registered under the Securities Act of 1933 and such other state and federal laws, rules or regulations as the Company or the Committee deems applicable and, in the opinion of legal counsel for the Company, there is no exemption from the registration requirements of such laws, rules or regulations available for the issuance and sale of such shares. No fractional shares of Common Stock shall be delivered, nor shall any cash in lieu of fractional shares be paid. The Company shall have the right to deduct in connection with all Awards any taxes required by law to be withheld and to require any payments required to enable it to satisfy its withholding obligations. (d) No Restriction on Corporate Action. Nothing contained in the Plan shall be construed to prevent the Company or any subsidiary from taking any corporate action which is deemed by the Company or such subsidiary to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any Award made under the Plan. No employee, beneficiary or other person shall have any claim against the Company or any subsidiary as a result of any such action. (e) Restrictions on Transfer. An Award shall not be transferable otherwise than by will or the laws of descent and distribution and may be exercisable during the lifetime of the Holder only by such Holder or the Holder's guardian or legal representative. (f) Rule 16b3. It is intended that the Plan and any grant of an Award made to a person subject to Section 16 of the 1934 Act meet all of the requirements of Rule 16b3. If any provision of the Plan or any such Award would disqualify the Plan or such Award under, or would otherwise not comply with, Rule 16b3, such provision or Award shall be construed or deemed amended to conform to Rule 16b3. (g) Section 162(m). It is intended that the Plan comply fully with and meet all the requirements of Section 162(m) of the code so that options and Stock Appreciation Rights granted hereunder with an exercise price not less than Fair Market Value of a share of Common Stock on the date of grant shall constitute "performancebased" compensation within the meaning of such section. If any provision of the Plan would disqualify the Plan or would not otherwise permit the Plan to comply with section 162(m) as so intended, such provision shall be construed or deemed amended to conform to the requirements or provisions of Section 162(m); provided that no such construction or amendment shall have an adverse effect on the economic value to a Holder of any Award previously granted hereunder. (h) Governing Law. The Plan shall be construed in accordance with the laws of the State of Texas, except to the extent that it implicates matters which are the subject of the General Corporation Law of the State of Colorado which matters shall be governed by the latter law. EX-21 12 EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT National Western Life Insurance Company has one subsidiary which meets the definition of significant subsidiary according to Regulation S-X. The subsidiary is The Westcap Corporation incorporated in the State of Delaware, and it conducts business under the same name. EX-27 13
7 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 574,934 1,643,211 1,726,469 25,860 191,674 19,066 2,624,596 10,024 1,339 270,167 2,958,459 2,576,044 0 12,908 9,925 2,781 0 0 3,491 308,496 2,958,459 87,173 201,816 (2,415) 661 180,276 33,675 27,084 46,200 10,566 35,634 (16,350) 0 0 19,284 5.53 5.53 0 0 0 0 0 0 0 Consists of $17,390 revenues from traditional contracts subject to FAS 60 accounting treatment and $69,783 revenues from universal life and investment annuity contracts subject to FAS 97 accounting treatment. Consists of $39,823 benefits paid to policyholders, $(2,487) decrease in reserves on traditional contracts and $142,940 interest on universal life and investment annuity contracts.
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