SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994.
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
.
Commission file number 1-7369
WASHINGTON NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2663225
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Tower Parkway,
Lincolnshire, Illinois 60069
(Address of principal (Zip Code)
executive offices)
Registrant's Telephone Number, Including Area Code: (708) 793-3000
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 files
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares of Common Stock, $5 par value outstanding as of
May 5, 1994 was 12,140,016.
CONTENTS
Part 1. Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheet - March 31, 1994
and December 31, 1993 2
Consolidated Statement of Operations - Three Months
Ended March 31, 1994 and 1993 3
Consolidated Condensed Statement of Cash Flows -
Three Months Ended March 31, 1994 and 1993 4
Notes to Consolidated Financial Statements - March 31, 1994 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II. Other Information
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Page 1 of 24
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(000s Omitted)
<CAPTION>
March 31,
1994 December 31,
(Unaudited) 1993
<S> <C> <C>
ASSETS
Investments
Fixed maturities -
Available for sale at fair value (amortized cost: $1,677,095) $1,665,663 $ -
Held to maturity at cost (fair value: $121,454; $134,448) 118,740 128,184
Held for sale at cost (fair value: $1,708,677) - 1,632,609
Equity securities (cost: $14,157; $15,903) 14,209 15,860
Mortgage loans on real estate 389,316 391,667
Real estate 36,266 39,086
Policy loans 51,913 52,285
Other long-term 18,968 21,032
Short-term 56,221 75,302
Total Investments 2,351,296 2,356,025
Cash 7,402 10,441
Deferred insurance costs 258,961 256,956
Reinsurance recoverables and prepaid premiums 54,975 56,314
Accrued investment income 32,410 32,386
Property and equipment 25,029 26,198
Insurance premiums in course of collection 15,413 25,159
Goodwill 21,568 21,772
Income taxes recoverable - 1,403
Separate account assets 43,476 44,589
Other 27,448 23,176
Total Assets 2,837,978 2,854,419
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy Liabilities
Future policy benefits - annuities 1,245,402 1,250,225
Future policy benefits - life 811,185 800,447
Policy and contract claims 208,426 206,963
Unearned premiums 36,584 34,649
Other 37,839 39,187
Total Policy Liabilities 2,339,436 2,331,471
General expenses and other liabilities 104,421 121,916
Mortgage payable 2,305 2,434
Income taxes (1994 current: $1,862) 6,785 5,064
Separate account liabilities 43,476 44,589
Total Liabilities 2,496,423 2,505,474
Shareholders' Equity
Convertible Preferred Stock 723 723
Common Stock - $5.00 par value 77,601 77,505
Additional paid-in capital 46,824 46,640
Retained earnings 288,605 284,938
Unrealized losses on investments (11,380) (43)
Unfunded pension loss (2,821) (2,821)
Cost of Common Treasury Stock (57,997) (57,997)
Total Shareholders' Equity 341,555 348,945
Total Liabilities and Shareholders' Equity $2,837,978 $2,854,419
See Notes to Consolidated Financial Statements
</TABLE>
<TABLE>
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
(000s Omitted, Except Per Share Data)
<CAPTION>
Three Months Ended
March 31,
1994 1993
<S> <C> <C>
Revenues
Insurance premiums and policy charges $113,870 $105,959
Net investment income 44,937 44,307
Realized investment gains (losses) 466 (987)
Other 1,143 1,901
Total Revenues 160,416 151,180
Benefits and Expenses
Insurance benefits paid or provided 108,438 105,495
Insurance and general expenses 33,143 30,386
Amortization of deferred insurance costs 8,637 8,068
Total Benefits and Expenses 150,218 143,949
Income Before Income Taxes and
Change in Accounting Principle 10,198 7,231
Income Taxes 3,164 2,485
Income Before Cumulative Effect of
Change in Accounting Principle 7,034 4,746
Cumulative Effect of Change in Accounting for
Postemployment Benefits - Net of Related Tax Effects - (1,550)
Net Income $7,034 $3,196
Primary Earnings Per Share
Income before cumulative effect $0.57 $0.46
Cumulative effect of change in accounting principle - (0.15)
Net Income Per Share $0.57 $0.31
Average Shares and Equivalents Outstanding 12,228 10,060
Fully Diluted Earnings Per Share
Income before cumulative effect $0.56 $0.46
Cumulative effect of change in accounting principle - (0.15)
Net Income Per Share $0.56 $0.31
Average Shares and Equivalents Outstanding 12,499 10,341
Dividends Paid Per Common Share $0.27 $0.27
See Notes to Consolidated Financial Statements
</TABLE>
<TABLE>
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Unaudited)
(000s Omitted)
<CAPTION>
Three Months Ended
March 31,
1994 1993
<S> <C> <C>
Net Cash Provided by Operating Activities $11,404 $19,883
Investing Activities
Proceeds from sales
Fixed maturities - available for sale 17,182 -
Fixed maturities - 82,527
Equities, mortgage loans, real estate, and other investments 4,686 8,958
Proceeds from maturities and redemptions
Fixed maturities - available for sale 65,305 -
Fixed maturities - held to maturity 3,723 -
Fixed maturities - 70,524
Equities, mortgage loans, real estate, and other investments 9,126 7,208
Cost of purchases
Fixed maturities - available for sale (116,991) -
Fixed maturities - held to maturity (26) -
Fixed maturities - (182,950)
Equities, mortgage loans, real estate, and other investments (8,217) (9,146)
Increase in policy loans 372 282
Purchases of property and equipment (398) (1,186)
Net (increase) decrease in short-term investments 19,081 (11,810)
Net Cash Used by Investing Activities (6,157) (35,593)
Financing Activities
Policyholder account deposits 33,731 40,022
Policyholder account withdrawals (38,802) (29,720)
Proceeds from sale of common stock 280 654
Repayment of mortgage and other notes payable (128) (120)
Cash dividends to shareholders (3,367) (2,773)
Repayment of short-term notes payable - (360)
Net Cash Provided (Used) by Financing Activities (8,286) 7,703
Decrease in Cash (3,039) (8,007)
Cash at Beginning of Period 10,441 9,471
Cash at End of Period $7,402 $1,464
See Notes to Consolidated Financial Statements
</TABLE>
Item 1. Financial Statements (continued)
WASHINGTON NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1994
A. Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles (GAAP) for interim periods. In the opinion of
management, all adjustments (consisting of normal, recurring
accruals) considered necessary for a fair presentation have been
included. The 1993 financial statements have been restated for the
adoption of Financial Accounting Standards Board (FASB) Statement
112, "Employers' Accounting for Postemployment Benefits," effective
for the first quarter, 1993.
B. Reclassifications
Certain amounts in the 1993 consolidated financial statements have
been reclassified to conform to the 1994 presentation.
C. Adoption of New Accounting Standard
Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standards Number 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement requires
the Company to segregate its fixed maturity portfolio into three
separate classifications on the balance sheet: investments held to
maturity, trading securities, and investments available for sale.
Investments held to maturity include only those fixed maturities
that the Company has a positive intent and ability to hold to
maturity. These securities are carried at amortized cost less write-
downs for other-than-temporary impairments. Trading securities
consist of those fixed maturity and equity securities held for
short periods of time and are carried on the balance sheet at fair
value, with any change in value reported as a component of income.
The Company does not have a trading portfolio. Investments
available for sale consist of those securities that do not meet the
criteria of investments held to maturity or trading securities and
are carried on the balance sheet at fair value, with any change in
value recognized as an unrealized gain or loss in shareholders'
equity. If a decrease in value of fixed maturity investments is
other-than-temporary, the loss is recognized immediately as a
realized loss. Prior to adoption, these securities were primarily
classified as held for sale and carried at the lower of amortized
cost less other-than-temporary impairments or market. In addition,
shareholders' equity is reduced by the estimated amortization of
deferred insurance costs that the realization of any unrealized
gains would produce. The unrealized gain or loss and the deferred
insurance costs are tax effected to the extent realizable.
Restatement of prior period financial statements is not permitted.
The adoption of this standard resulted in an increase in
shareholders' equity of $41,644,000 at January 1, 1994 and a
decrease of $11,432,000 at March 31, 1994 detailed in the table
below.
(000s) 1/1/94 3/31/94
Fair value adjustment to available for sale fixed
maturity securities $75,081 $(11,432)
Less: Decrease in deferred policy acquisition costs 18,630 -
Increase in deferred federal income taxes 14,807 -
Net unrealized gain (loss) on securities $41,644 $(11,432)
At March 31, 1994, unrealized gains decreased primarily due to the
change in interest rates. Due to the change, the effect on deferred
policy acquisition costs was reversed and deferred taxes are not
established on the unrealized loss as the Company has a capital
loss carryforward and does not currently record a tax benefit for
such carryforwards.
Page 5 of 24
Item 1. Financial Statements (continued)
WASHINGTON NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
March 31, 1994
The Company foresees that this standard will continue to result in
added volatility to shareholders' equity as the standard does not
permit a corresponding adjustment to the liabilities that these
assets support.
D. Reinsurance
At March 31, 1994, approximately 50 percent of WNC's total
reinsurance was ceded to Combined Life Insurance Company of America
and approximately 19 percent was ceded to each of American Founders
Life Insurance Company and UNUM Life Insurance Company. The
reinsurance with Combined Life and American Founders is a result of
divestitures of supplemental health, life insurance and annuity
business.
Substantially all of the reinsurance ceded by the Company is to
entities rated "A" or better by A. M. Best, or to entities
required to maintain assets in an independent trust fund whose fair
value is sufficient to discharge the obligations of the reinsurer.
To the extent that any reinsurance company is unable to meet their
obligations under the agreements, WNC's insurance subsidiaries
would remain liable.
Amounts paid or deemed to have been paid for reinsurance contracts
are recorded as reinsurance receivables. The cost of reinsurance
related to long-duration contracts is accounted for over the life
of the underlying reinsured policies using assumptions consistent
with those used to account for the underlying policies.
The effect of reinsurance on premiums and policy charges was as
follows (000s omitted):
March 31, March 31,
1994 1993
Direct premiums and policy charges $109,469 $120,251
Reinsurance assumed 19,937 533
Reinsurance ceded (15,536) (14,825)
Premiums and Policy Charges $113,870 $105,959
Reinsurance benefits ceded were $5,961,000 and $22,685,000 at March
31, 1994 and December 31, 1993, respectively.
E. Standby Purchase Commitments and Financial Guarantees
Standby purchase commitments and financial guarantees written are
conditional commitments issued by WNIC and a subsidiary to guarantee
the performance of an unrelated entity to a third party. These purchase
commitments andguarantees are primarily issued to support public and
private borrowing arrangements, including bond financing and letters of
credit, and expire principally by July, 1994. WNIC and its
subsidiary do not hold collateral for these conditional
commitments; however, in the event of nonperformance by the entity,
WNIC and its subsidiary would be entitled to the underlying
collateral, principally commercial real estate properties. In
addition, WNIC and its subsidiary are entitled to a share in the
appreciation of the collateral underlying the conditional
commitments at the time of sale or refinancing. At March 31,
1994 and December 31, 1993, standby purchase commitments and
guarantees were $24,303,000 and $24,323,000, respectively. Management
is not aware of any material losses on these conditional commitments.
The Company does not anticipate entering into any such agreements in
the future.
Page 6 of 24
<TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following updates and should be read in conjunction with the Management's Discussion and Analysis of
Financial Condition and Results of Operations section of the Company's 1993 Annual Report.
Consolidated Results of Operations
Components of Income (Loss) by Segment
(000s omitted)
<CAPTION>
Life
Insurance
& Group Individual Corporate
Annuities Products Health & Other Total
Three Months Ended March 31, 1994
<S> <C> <C> <C> <C> <C>
Revenues
Insurance and other revenues $18,919 $47,870 $48,200 $ 24 $115,013
Net investment income 38,184 3,614 1,395 1,744 44,937
Realized investment gains - - - 466 466
Total revenues 57,103 51,484 49,595 2,234 160,416
Benefits and Expenses
Insurance benefits 40,840 37,548 29,986 64 108,438
Expenses 4,705 14,871 14,963 (1,396) 33,143
Amortization of deferred insurance costs 3,833 762 4,042 - 8,637
Total benefits and expenses 49,378 53,181 48,991 (1,332) 150,218
Income (loss) before income taxes $ 7,725 $ (1,697) $ 604 $ 3,566 10,198
Income taxes 3,164
Net income $ 7,034
Three Months Ended March 31, 1993
<S> <C> <C> <C> <C> <C>
Revenues
Insurance and other revenues $17,811 $58,252 $31,010 $ 787 $107,860
Net investment income 39,681 4,006 1,343 (723) 44,307
Realized investment losses - - - (987) (987)
Total revenues 57,492 62,258 32,353 (923) 151,180
Benefits and Expenses
Insurance benefits 41,856 44,575 18,426 638 105,495
Expenses 5,210 14,188 9,977 1,011 30,386
Amortization of deferred insurance costs 3,499 656 3,913 - 8,068
Total benefits and expenses 50,565 59,419 32,316 1,649 143,949
Income (loss) before income taxes and
change in accounting principle $ 6,927 $ 2,839 $ 37 $(2,572) 7,231
Income taxes 2,485
Income before change in accounting
principle 4,746
Change in accounting for postemployment
benefits (net of taxes) (1,550)
Net income $ 3,196
</TABLE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Analysis of Net Income
Quarter Ended March 31,
(000s Omitted) 1994 1993
Pretax operating income (loss) (1)
Life insurance and annuities $ 7,725 $ 6,436
Group products (1,697) 2,839
Individual health 604 37
Corporate and other 3,100 (1,585)
Total pretax operating income 9,732 7,727
Income taxes on operations 3,329 2,318
Net operating income 6,403 5,409
Other components of net income (net of taxes)
Realized investment gains (losses) (2) 631 (987)
Gains from benefit plan changes (3) - 324
Cumulative effect of change in
accounting principle (4) - (1,550)
Net income $ 7,034 $ 3,196
(1) Pretax income (loss) before realized investment gains
(losses), cumulative effect of accounting changes, and
and gains from benefit plan changes in 1993.
(2) 1994 includes tax benefit of $165.
(3) Curtailment gain of $491 less tax of $167.
(4) Employers' Accounting for Postemployment Benefits, net of
taxes.
Comparison of Quarter Ended March 31, 1994 to March 31, 1993
Insurance Premiums and Policy Charges. Insurance premiums and
policy charges increased $7.9 million, or 7.5%, from $106.0
million in 1993 to $113.9 million in 1994. The improvement was
primarily due to an increase in individual health insurance
premiums of $17.1 million, $14.4 million of which was due to two
individual health reinsurance transactions entered into after the
first quarter of 1993 offset in part by a decline in group
products premiums. The group products premium decline was due to
the termination of a large group life insurance contract with
approximately $3 million of premium revenue in the 1993 first
quarter and to an adjustment to unpaid premiums in 1994 for this
segment. See "Segment Information -- Individual Health" and
"Segment Information -- Group Products," below.
Net Investment Income. Net investment income increased $0.6
million, or 1.4%, to $44.9 million in 1994 from $44.3 million in
1993. The improvement was due to an increase in invested assets
partially offset by a general decline in market interest rates.
The Company's portfolio yield declined from 7.9% in the 1993
first quarter to 7.6% in the 1994 first quarter. Invested
assets at March 31, 1994 increased $85.5 million from March 31,
1993, principally due to deposits on life insurance policies and
annuity contracts exceeding withdrawals combined with the
proceeds from a secondary stock offering in the third quarter of
1993.
Page 8 of 24
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Realized Investment Gains (Losses). Realized investment gains
for 1994 were $0.5 million compared to realized investment losses
of $1.0 million in 1993. In 1994, realized gains on fixed
maturity investments of $1.7 million were partially offset by
losses of $0.6 million on mortgage loans on real estate and $0.7
million of losses on real estate investments and other invested
assets. In 1993, realized gains of $2.1 million on fixed
maturity investments and $0.7 million on equity securities and
other invested assets were more than offset by losses of $2.1
million on mortgage loans on real estate and $1.7 million on real
estate investments.
Insurance Benefits Paid or Provided. Insurance benefits paid or
provided increased $2.9 million, or 2.8%, from $105.5 million in
1993 to $108.4 million in 1994. The increase was primarily due to
higher individual health insurance benefits of $11.6 million
resulting from the reinsurance transactions referred to above and
an increase in the block of in force business. Partially
offsetting this was a decline in group products benefits of $7.0
million due to a smaller block of employee benefits conventional
health business in force, the termination of a large group life
insurance contract (see "Segment Information--Group Products,"
below), and a decline in life insurance and annuities benefits of
$1.0 million resulting from a decrease in interest credited on
interest-sensitive products.
Insurance and General Expenses. Insurance and general expenses
increased $2.7 million from $30.4 million in 1993 to $33.1
million in 1994. Included in 1994 are expenses of $4.8 million
related to two individual health reinsurance transactions. See
"Segment Information--Individual Health," below.
Amortization of Deferred Insurance Costs. Amortization of
deferred insurance costs increased $0.6 million, or 7.1%, in 1994
to $8.6 million from $8.1 million in 1993 primarily due to
increased amortization of $0.3 million in the life insurance and
annuities segment resulting from higher policy charges and
favorable interest rate spreads.
Income Before Income Taxes and Change in Accounting Principle.
Income before income taxes and change in accounting principle
increased $3.0 million, or 41.0%, to $10.2 million in 1994
compared to $7.2 million in 1993. The increase was due primarily
to improved operations in the Company's life insurance and
annuities, individual health, and corporate and other segments,
offset in part by a loss in 1994 in the group products segment.
Income Taxes. Income taxes increased $0.7 million to $3.2
million in 1994 compared to $2.5 million in 1993, primarily due
to improved income from operations. In 1994, the Company's
Federal tax rate was 35% compared to 34% in 1993.
Change in Accounting Principle. In 1993, the Company recorded a
one-time charge of $1.6 million after taxes for the adoption of a
new accounting standard, Employers' Accounting for Postemployment
Benefits. The adoption did not have a material impact on income
before accounting changes.
Net Income. Net income for 1994 was $7.0 million compared to
$3.2 million in 1993. The improvement in net income resulted
from increased earnings in the life insurance and annuities,
individual health, and corporate and other segments, realized
investment gains in 1994 versus realized investment losses in
1993, and the charge in the first quarter of 1993 relating to the
adoption of a new accounting standard described above.
Page 9 of 24
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Segment Information
Life Insurance and Annuities. Revenues for the life insurance
and annuities segment were $57.1 million for 1994, down from
$57.5 million in 1993. A decline in investment income of $1.5
million resulted primarily from lower portfolio yield rates,
offset in part by an increase in invested assets. An increase of
$1.1 million in insurance revenues was primarily due to an
increase in life insurance in force combined with an increase in
policy charges at UPI, offset in part by a decline in insurance
revenues at WNIC where no new policies are being sold.
Pretax income for the life insurance and annuities segment
increased 11.5% to $7.7 million in 1994 from $6.9 million in
1993, primarily due to increased policy charges and improved
interest rate spreads, as the interest credited on account
balances was reduced more than the reduction in the yield on
invested assets.
In an environment of rising interest rates, the Company may have
difficulty maintaining the current spread between the rates
credited to policyholders and its investment income, resulting in
lower profits in this segment.
Group Products. Revenues for the group products segment were
$51.5 million in 1994 compared to $62.3 million in 1993, a
decrease of 17.3%. The decrease was primarily due to the
termination of a large group life insurance contract in the third
quarter of 1993, with approximately $3 million of premium revenue
in the first quarter of 1993, and an adjustment to unpaid
premiums of approximately $2.5 million. The termination of the
large group life insurance contract, which had approximately $3
billion of life insurance in force, will not materially affect
net income as there was a corresponding decrease in benefits and
expenses.
The pretax loss for the group products segment was $1.7 million
in 1994 compared to pretax income of $2.8 million in 1993. The
loss was primarily due to the aforementioned decrease in revenues
and a higher claims ratio in the education disability portion
of the segment.
Individual Health. Revenues for the individual health insurance
segment increased 53.3% to $49.6 million in 1994 compared to
$32.4 million in 1993. Revenues for this segment increased
primarily as a result of two reinsurance transactions that added
a total of $14.4 million of premium revenue in 1994. The
improvement was also due to average rate increases of 7% in 1994
on the direct portion of the business in force.
Pretax income for the individual health insurance segment was
$0.6 million for 1994 compared to $37 thousand in 1993. The
improvement was primarily due to a larger premium base over which
to spread fixed operating expenses.
Effective in the 1993 second quarter, the Company entered into a
reinsurance agreement with The Harvest Life Insurance Company
(Harvest Life) that provides that the Company will reinsure 100%
of a block of major medical business issued by Harvest Life. In
the 1994 first quarter, premiums of $6.9 million, investment
income of $0.2 million and insurance benefits of $4.3 million and
insurance and general expenses of $1.9 million were attributable
to this reinsurance transaction.
Page 10 of 24
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
In 1994, the Company entered into a reinsurance agreement with
National Casualty Company, a subsidiary of Nationwide
Corporation, whereby the Company will reinsure 50% of a block of
individual major medical health insurance. The block had
approximately $60 million of premium revenue in 1993. In the
1994 first quarter, premiums of $7.4 million, other income of
$0.3 million and insurance benefits of $4.8 million and insurance
and general expenses of $2.9 million were attributable to this
transaction. Due to the start-up expenses associated with
administering this block of business, the Company expects to
break-even on this transaction in 1994.
Washington National will market its products through the existing
Harvest Life and National Casualty Company sales forces.
Corporate and Other. The corporate and other segment includes
realized investment gains and losses, the operations of non-
insurance lines of business, and corporate expenses. For 1994,
income was $3.6 million compared to a loss of $2.6 million in
1993. The improvement was due to the previously mentioned
realized investment gains in 1994 versus realized investment
losses in 1993, investment income on a portion of the proceeds
from the 1993 secondary stock offering, and expenses in 1993
related to the closing of the Company's former headquarters.
Investment Portfolio
On January 1, 1994, the Company adopted SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities." As a result,
most of the Company's fixed maturity investments were classified
as "Available for Sale" and are carried at fair value. The
remaining fixed maturity investments were classified as "Held to
Maturity" and will continue to be carried at amortized cost, less
write-downs for other-than-temporary impairments. See Note C for
further information.
At March 31, 1994, the Company had invested assets with a
carrying value of $2.4 billion. The following table sets forth
certain information about the Company's investment portfolio as
of that date (dollars in millions):
Percent
of Total
Carrying Carrying
Value Value
Fixed maturity investments:
United States government obligations $ 57.9 2.5%
Obligations of states and
political subdivisions 95.2 4.0
Public utilities 140.5 6.0
Industrial and miscellaneous 783.0 33.3
Mortgage-backed securities 671.3 28.6
Other 36.5 1.5
Total fixed maturity investments 1,784.4 75.9
Equity securities 14.2 0.6
Other investments:
Mortgage loans on real estate 389.3 16.6
Real estate investments 36.3 1.5
Policy loans 51.9 2.2
Other long-term invested assets 19.0 0.8
Short-term invested assets 56.2 2.4
Total invested assets $2,351.3 100.0%
Page 11 of 24
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Fixed Maturity Investments
The carrying value of fixed maturity investments at March 31,
1994 was $1.784 billion, or 75.9% of the Company's invested
assets. This amount increased from $1.761 billion, or 74.7% of
the Company's invested assets at December 31, 1993 primarily due
to the Company making new investments principally in investment
grade securities.
The composition of the Company's fixed maturity portfolio at
March 31, 1994, was as follows (dollars in millions):
Carrying Value
as a Percent of
Carrying Total Fixed Invested
Value Maturities Assets
AAA/Aaa $ 771.7 43.2% 32.8%
AA/Aa 157.1 8.8 6.7
A 452.5 25.4 19.2
BBB/Baa 307.3 17.2 13.1
BB/Ba and lower 95.8 5.4 4.1
Total Fixed Maturities $1,784.4 100.0% 75.9%
The Company's policy for rating fixed maturity investments is to
use the rating on such investments as determined by Standard &
Poor's Company ("S&P") or Moody's Investor Service, Inc.
("Moody's"). If an investment has a split rating (i.e.,
different ratings from the two rating services) the Company
categorizes the investment under the lower rating. For those
investments that do not have a rating from either S&P or
Moody's, the Company categorizes those investments on
ratings assigned by the National Association of Insurance
Commissioners (NAIC), whose ratings are as follows: NAIC Class 1
is considered equivalent to a AAA/Aaa, AA/Aa, or A rating; NAIC
Class 2, BBB/Baa; and NAIC Classes 3-6, BB/Ba and below. Fixed
maturity investments that are not rated by S&P or Moody's
(unrated private placements), but instead rated with
comparable NAIC ratings, comprise 0.5% of AAA-rated investments,
1.7% of AA-rated, 3.7% of A-rated, 20.4% of BBB-rated, and 40.7%
of investments rated BB and lower at March 31, 1994.
The carrying value of the Company's high-yield investments
(investments rated BB and lower) at March 31, 1994 was $95.8 million
or 4.1% of the Company's invested assets compared to $94.0 million or
4.0% of invested assets at December 31, 1993. The increase in the
carrying value of the high-yield investments in 1994 was primarily due
to downgrades, partially offset by redemptions and sales.
At March 31, 1993, 28.6% of the Company's invested assets were in
mortgage-backed fixed maturity investments, including collateralized
mortgage obligations (CMOs) and mortgage-backed pass-through
securities. Mortgage-backed securities generally are collateralized by
mortgages backed by the Government National Mortgage Association
(GNMA), the Federal National Mortgage Association (FNMA), and the
Federal Home Loan Mortgage Corporation (FHLMC), all of which are
agencies of the U.S. Government. Only GNMA mortgages are backed by the
full faith and credit of the U.S. Government. Agency mortgage-backed
securities are considered to have a AAA credit rating.
Page 12 of 24
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
In some instances, the Company invests in non-agency mortgage-backed
securities. The Company primarily invests in highly-rated non-agency
CMOs. At March 31, 1994, 79.2% of the Company's non-agency CMOs were
rated AAA. The credit risk associated with non-agency mortgage-backed
securities is generally greater than that of agency mortgage-backed
securities.
The following details the carrying value of theCompany's mortgage-backed
securities portfolio at March 31, 1994 (dollars in millions):
Carrying Value
as a Percent of
Mortgage- Total
Carrying Backed Invested
Value Securities Assets
Agency collateralized mortgage obligations:
Planned and target amortization classes $278.7 41.5% 11.9%
Sequential classes 14.4 2.2 0.6
Support classes 12.3 1.8 0.5
Accrual 2.3 0.3 0.1
Total agency collateralized mortgage
obligations 307.7 45.8 13.1
Non-agency collateralized mortgage
obligations:
Planned amortization classes 7.0 1.1 0.3
Sequential classes 15.4 2.3 0.7
Support classes 4.9 0.7 0.2
Total non-agency collateralized mortgage
obligations 27.3 4.1 1.2
Total collateralized mortgage obligations 335.0 49.9 14.3
Non-agency mortgage-backed pass-through
securities 5.5 0.8 0.2
Agency mortgage-backed pass-through
securities 330.8 49.3 14.1
Total mortgage-backed securities $671.3 100.0% 28.6%
Certain mortgage-backed securities are subject to significant
prepayment risk. This is due to the fact that in periods of
declining interest rates, mortgages may be repaid more rapidly
than scheduled as individuals refinance higher-rate mortgages to
take advantage of lower rates. As a result, holders of mortgage-
backed securities may receive large prepayments on their
investments that cannot be reinvested at interest rates
comparable to the rates on the prepaid mortgages. Conversely, in
periods of rising interest rates, mortgage prepayments may slow
down which would result in holders of mortgage-backed securities
having less funds to reinvest at higher rates.
Page 13 of 24
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Planned amortization class (PAC) and target amortization class
(TAC) tranches, which together comprised 12.2% of the Company's
invested assets at March 31, 1994 are designed to amortize in a
manner that shifts the primary risk of prepayment of the
underlying collateral to investors in other tranches of the CMO.
The PAC and TAC instruments tend to be less sensitive to
prepayment risk.
Sequential classes, which comprised 1.3% of the Company's
invested assets at March 31, 1994 may have prepayment
characteristics similar to mortgage-backed pass-through
securities. Support classes, which comprised 0.7% of the
Company's invested assets at March 31, 1994, are the most
sensitive to prepayment risk.
Mortgage Loans and Real Estate
In the first quarter of 1994, the Company decided that in order to
provide better matching between the characteristics of its assets
and liabilities it will no longer make new investments in mortgage
loans, except for purchase money loans and expansion of the Company's
properties. The Company will continue to service its remaining
mortgage loans.
The Company had investments in mortgage loans of $389.3 million
at March 31, 1994 compared to $391.7 million at December 31,
1993. Investments in mortgage loans declined primarily due to
prepayments and amortization of the mortgage loan portfolio. Of
the outstanding loans at March 31, 1994, $6.6 million (net of
allowances of $0.7 million) or 1.9% were delinquent 60 days or
more as to interest or principal.
At March 31, 1994, the Company's insurance subsidiaries had a
delinquent mortgage loan ratio (mortgage loans overdue 60 days or
in foreclosure, before allowances, as compared to the total
mortgage portfolio before allowances) of 1.7% compared to 1.1%
at December 31, 1993. The industry average delinquent mortgage
loan ratio for residential and commercial mortgages, as measured
by the American Council of Life Insurance, was 4.5% at December
31, 1993, the latest available date.
The Company actively manages its non-current investments through
restructuring of mortgages and sales and leasing of foreclosed
real estate in order to achieve the highest current return as
well as to preserve capital. Restructured loans, where
modifications of the terms of the mortgage loan have generally
occurred and which are considered current investments, were $11.8
million at March 31, 1994 compared to $16.9 million at December
31, 1993. At March 31, 1994, the Company's mortgage loan
portfolio included $6.3 million of mortgage loans, before
allowances, overdue at least three months and on which no
interest income was being accrued. The Company does not expect
the non-current investments to have a material adverse effect on
its liquidity or ability to hold its other investments to
maturity. This is primarily due to the relatively small amount of
these non-current investments as compared to total invested
assets and to the total amount of high quality, liquid
investments.
Page 14 of 24
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
The Company's mortgage loan portfolio at March 31, 1994 was
diverse with respect to geographic distribution, property type,
and principal repayment schedule dates, as outlined below
(dollars in millions):
Geographic Distribution Property Type
California $ 67.8 17.4% Retail $226.3 58.1%
Indiana 55.8 14.3 Office 46.4 11.9
Illinois 45.1 11.6 Industrial 37.9 9.7
Florida 34.9 9.0 Medical 25.2 6.5
Texas 33.1 8.5 Residential 25.3 6.5
North Carolina 20.0 5.1 Other 28.2 7.3
Michigan 15.9 4.1 Total $389.3 100.0%
Wisconsin 14.3 3.7
All other 102.4 26.3
Total $389.3 100.0%
Scheduled Total
Principal Balloon Principal
Repayments Payments Payments
Mortgage Loans by Year of Maturity:
1994 $ 1.6 $ 20.6 $ 22.2
1995 2.4 17.6 20.0
1996 2.9 34.9 37.8
1997 3.2 19.7 22.9
1998 3.4 4.2 7.6
1999 and thereafter 141.9 136.9 278.8
Total $155.4 $233.9 $389.3
The Company's real estate investments totaled $36.3 million (net
of allowances of $8.5 million) at March 31, 1994 compared to
$39.1 million (net of allowances of $8.6 million) at December 31,
1993. The decline was primarily due to sales of real estate
investments. At March 31, 1994, $11.9 million of the real estate
investments were acquired through mortgage loan foreclosure,
compared to $14.6 million at year-end 1993.
Current and expected conditions in many real estate markets are
depressed, with high vacancy rates and flat or declining rental
rates. Moreover, the availability of financing is currently
restricted as banks, insurance companies, and other lenders have
reduced their exposure to real estate loans. In such an
environment, the number of defaults on mortgage loans would be
expected to remain at higher than historical average levels as
borrowers' cash flows are insufficient to cover expenses.
Additionally, the ability to rent investment real estate at
favorable rates diminishes and properties may become vacant.
Page 15 of 24
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Equity Securities
At March 31, 1994, $7.1 million, or 0.3% of the Company's
invested assets, consisted of common stocks and common stock
mutual funds, $5.6 million, or 0.2% of invested assets, consisted
of fixed maturity and money-market mutual funds, and $1.5
million, or 0.1% of invested assets, consisted of nonredeemable
preferred stocks. Nonredeemable preferred stocks, common stocks,
and common stock mutual funds are carried on the Company's
balance sheet at fair value. The Company does not anticipate any
significant change in the size of its equity securities
portfolio.
Liquidity and Capital Resources
Cash Flows
During the first quarter of 1994, the Company's operating
activities generated cash of $11.4 million compared to $19.9
million in the first quarter of 1993. The decrease in cash
provided by operations in 1994 resulted from a number of items,
including a $4 million return of funds held for a terminated
group life insurance contract.
Investing activities (purchases and sales of investments) used
cash of $6.2 million in the first quarter of 1994 compared to
$35.6 million in the first quarter of 1993, primarily for the
purchase of fixed maturity investments in both periods. Sales of
short-term securities partially funded these purchases.
Financing activities used cash of $8.3 million in the first
quarter of 1994 and provided cash of $8.1 million in the first
quarter of 1993. The increase in cash used for financing was due
primarily to increased policyholder withdrawals, decreased
policyholder account deposits, and increased dividends in 1994.
The fair value of the Company's investment portfolio, primarily
fixed maturity investments, is affected by changing interest
rates. When interest rates rise, the fair value of the Company's
fixed maturity investments declines. In addition, the value of
the Company's policy liabilities decreases. In periods of
declining interest rates, the fair value of the Company's fixed
maturity investments increases, accompanied by an increase in the
value of its policy liabilities. The Company estimates that a
one percentage point increase in market interest rates would
result in a decrease in the fair value of its fixed maturity
investments of approximately 6%, and a one percentage
point decrease in market interest rates would result in an
increase in the fair value of its fixed maturity investments of
approximately 6%. In addition, rising interest rates
could result in increased surrenders of life insurance policies
and annuities causing the Company to sell fixed maturity
investments below cost. In order to minimize the need to sell
fixed maturity investments below cost, the Company seeks to
maintain sufficient levels of cash and short-term investments.
The Company held cash and short-term investments of $63.6 million
at March 31, 1994, compared to $85.7 million at December 31,
1993. The balance of cash and short-term investments plus cash
inflow from premium revenues, investment income, and investment
maturities is considered to be more than sufficient to meet the
requirements of the Company and its subsidiaries.
Page 16 of 24
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Health Care Reform
There have been no material changes to the Company's assessment
of health care reform in the 1993 annual report.
A.M. Best Ratings
The ability of an insurance company to compete successfully
depends, in part, on its financial strength, operating
performance and claims-paying ability as rated by A.M. Best and
other rating agencies. The Company's insurance subsidiaries are
each currently rated "A- (Excellent)" by A.M. Best, based on
their 1992 statutory financial results and operating performance.
A.M. Best's 15 categories of ratings for insurance companies
currently range from "A++ (Superior)" to "F (In Liquidation)."
According to A.M. Best, an "A" or "A-" rating is assigned to
companies which, in A.M. Best's opinion, have achieved excellent
overall performance when compared to the standards of the life
insurance industry and generally have demonstrated a strong
ability to meet their obligations to policyholders over a long
period of time. In evaluating a company's statutory financial
and operating performance, A.M. Best reviews the company's
statutory profitability, leverage, and liquidity, as well as the
company's spread of risk, quality, and appropriateness of its
reinsurance program, quality and diversification of assets, the
adequacy of its policy reserves and surplus, capital structure,
and the experience and competency of its management. A.M. Best
ratings are based upon factors of concern to policyholders,
agents, and intermediaries and are not directed toward the
protection of investors.
In May 1994, the Company was advised by A.M. Best that, after
review of the 1993 statutory financial results and operating
performance, both WNIC and UPI were reassigned ratings of "A-
(Excellent)," no change from their previous ratings. Many of
the Company's competitors have A.M. Best ratings of "A-" or
lower, and the Company believes that its A.M. Best ratings are
adequate to enable its insurance subsidiaries to compete
successfully.
Page 17 of 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
WNC and certain affiliated companies have been named in various
pending legal proceedings considered to be ordinary routine
litigation incidental to the business of such companies. A number
of other legal actions have been filed which demand compensatory
and punitive damages aggregating material dollar amounts.
WNC believes that such suits are substantially
without merit and that valid defenses to them exist. WNC's
management and its chief legal officer are of the opinion that such
litigation will not have a material effect on WNC's results of
operations or consolidated financial position. The amount involved
in any proceeding, or group of proceedings presenting in large
degree the same issues, does not exceed the materiality standard for
disclosure contained in Instruction 2 to Item 103 of Regulation S-K.
Page 18 of 24
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 11 - Computation of Per Share Earnings.
b. Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended
March 31, 1994 or through May 12, 1994.
Page 19 of 24
SIGNATURES
Pursuant to the requirements 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.
WASHINGTON NATIONAL CORPORATION
May 13, 1994 /s/ Craig R. Edwards
Craig R. Edwards
Vice President, Corporate Counsel and
Corporate Secretary
May 13, 1994 /s/ Joan K. Cohen
Joan K. Cohen
Vice President, Controller and Treasurer
(Duly Authorized Chief Accounting Officer)
Page 20 of 24
EXHIBIT INDEX
PAGE
Exhibit 10.5 - Washington National Corporation
Directors' RetirementIncome Plan,
as amended March 1994. 22
Exhibit 11 - Computation of Per Share Earnings. 24
Page 21 of 24
EXHIBIT 10.5
MARCH 11, 1994
WASHINGTON NATIONAL CORPORATION
DIRECTORS' RETIREMENT INCOME PLAN
I. PURPOSE
The Washington National Corporation ("WNC") Directors'
Retirement Income Plan ( the " Plan " ), is created to give
appropriate recognition to the past service of the directors of
WNC, to assure the continued availability of their knowledge and
experience as a resource to WNC, and to assist in attracting and
retaining individuals of superior talent and achievement as WNC
directors.
II. EFFECTIVE DATE
The effective date of this Plan is May 1, 1992. Past
service as a non-employee director on the effective date is
considered service for purposes of the Plan.
III. ELIGIBILITY
Any director who has completed six or more years of non-
employee service on the board and who retires from the board on
or after May 1, 1992 is eligible to receive a benefit under the
Plan. For purposes of the Plan, "retires" shall mean resigns
from serving as a director, fails to stand for re-election as a
director or fails to be elected as a director after being duly
nominated; "non-employee director" is a member of the WNC Board
of Directors who is not also an employee of WNC or any of its
past or current, direct or indirect, subsidiaries.
IV. BENEFITS
Benefits shall be payable in the amount of 10% of the annual
board retainer fee in effect immediately prior to retirement for
each year of non-employee service on the board to a maximum of
100% of such retainer fee. Benefits shall commence on the first
day of the calendar quarter immediately following the later to
occur of attainment of age 65 or the date of retirement from the
board. Benefits shall be paid in quarterly installments and
shall continue for a period equal to the lesser of five years or
the joint lives of the director and his or her spouse. In the
event of the death of the director who is eligible to receive
benefits under this Plan, the benefits that would have been
otherwise payable to the director shall be payable to the
director's surviving spouse. Such benefits to a surviving spouse
will commence on the same date as would have been the case had
the director survived and such benefits will terminate on the
earlier of the death of the surviving spouse or the date that
benefits to the director would have terminated had he or she
survived. If, in the determination of the Compensation
Committee, a director is unable to continue to serve on the Board
for reasons of health, upon such determination, such director
shall be fully vested under this Plan and entitled to benefits
commensurate with his or her year's of service prior to such
determination in accordance with this Section. Benefits shall
commence on the first day of the calendar quarter immediately
following such determination.
Page 22 of 24
V. CALCULATION OF YEARS OF SERVICE
For purposes of this Plan, a director will be credited with
a year of service for each calendar year in which he or she has
served as a non-employee director for a minimum of six full
months.
VI. PAYMENT OF BENEFITS
The Plan shall be unfunded, and WNC shall not segregate any
of its assets in connection with the Plan. Except as may be
required by law, no benefit payable under the Plan shall be
subject in any manner to anticipation, assignment, garnishment,
or pledge; and any attempt to anticipate, assign, or pledge
benefits shall be void.
VII. DUTIES OF DIRECTORS
As a condition of his or her right to receive payment of
any benefits under the Plan, each eligible director shall make
himself/herself available at all reasonable times after
retirement to consult with the chief executive officer or such
other persons as the chief executive officer may reasonably
request and to render advice to such persons. WNC shall
reimburse the director for any direct expenses incurred in
connection with such consultations and rendering such advice. No
director shall be eligible for benefits under the Plan if the
Compensation Committee shall determine that, at any time
subsequent to his or her election as a director, he or she has
engaged in any business or activity which is competitive with and
therefore detrimental to WNC's business.
VIII. ADMINISTRATION
The administrator of this Plan shall be WNC's chief legal
officer. The administrator shall have the authority to implement
its provisions and to adopt rules and regulations for carrying
out the Plan. The Compensation Committee shall be authorized to
interpret and construe the Plan.
IX. AMENDMENT AND TERMINATION
This plan may be amended, modified, or terminated by WNC's
board of directors at any time; provided however that no
amendment, modification or termination shall decrease or
eliminate benefits already accrued under the Plan.
X. NOTICES
All notices to WNC under this Plan shall be in writing and
shall be given to WNC's chief legal officer, Washington National
Corporation, 300 Tower Parkway, Lincolnshire, Illinois 60069.
XI. GOVERNING LAW
This Plan shall be governed by the laws of Illinois and
shall be construed for all purposes in accordance with Illinois
law.
Page 23 of 24
<TABLE>
WASHINGTON NATIONAL CORPORATION
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
Primary and Fully Diluted
(000s Omitted Except Per Share Amounts)
<CAPTION>
Three Months Ended
March 31,
1994 1993
<S> <C> <C>
Primary
Average Shares:
Average common shares outstanding 12,128 9,931
Assumed exercise of stock options 100 129
Total Average Shares 12,228 10,060
Net Income Available to Shareholders:
Income before cumulative effect of change
in accounting principle and Preferred Stock
dividend requirement $ 7,034 $ 4,746
Preferred Stock dividend requirement (90) (90)
Income before cumulative effect of change
in accounting principle 6,944 4,656
Cumulative effect of change in accounting
for postemployment benefits - (1,550)
Net Income Available to
Common Shareholders $ 6,944 $ 3,106
Primary Earnings Per Share:
Income before cumulative effect $0.57 $0.46
Cumulative effect of change in accounting
for postemployment benefits - ($0.15)
Net Income Per Share $0.57 $0.31
Fully Diluted
Average Shares:
Average common shares outstanding 12,128 9,931
Assumed conversion of preferred stock 271 272
Assumed exercise of stock options 100 138
Total Average Shares 12,499 10,341
Net Income Available to Shareholders:
Income before cumulative effect of change
in accounting principle $ 7,034 $ 4,746
Cumulative effect of change in accounting
for postemployment benefits - (1,550)
Net Income Available to
Common Shareholders $ 7,034 $ 3,196
Fully Diluted Earnings Per Share:
Income before cumulative effect $0.56 $0.46
Cumulative effect of change in accounting
for postemployment benefits - ($0.15)
Net Income Per Share $0.56 $0.31
</TABLE>
