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 September 30, 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 (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
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 file
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
November 4, 1994 was 12,156,077.
Page 1 of 26
CONTENTS
Part I. Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheet - September 30, 1994
and December 31, 1993 3
Consolidated Statement of Operations - Nine and Three Months
Ended September 30, 1994 and 1993 4
Consolidated Condensed Statement of Cash Flows -
Nine Months Ended September 30, 1994 and 1993 5
Notes to Consolidated Financial Statements - September 30, 1994 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. Other Information
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Page 2 of 26
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(000s Omitted)
<CAPTION>
September 30,
1994 December 31,
(Unaudited) 1993
<S> <C> <C>
ASSETS
Investments
Fixed maturities -
Available for sale at fair value (amortized cost: $1,748,507) $1,652,700 $ -
Held to maturity at cost (fair value: $114,897; $134,448) 114,255 128,184
Held for sale at cost (fair value: $1,708,677) - 1,632,609
Equity securities (cost: $13,742; $15,903) 13,584 15,860
Mortgage loans on real estate 366,108 391,667
Real estate 32,102 39,086
Policy loans 53,491 52,285
Other long-term 17,182 21,032
Short-term 46,171 75,302
Total Investments 2,295,593 2,356,025
Cash 2,787 10,441
Deferred insurance costs 261,859 256,956
Reinsurance recoverables and prepaid premiums 56,270 56,314
Accrued investment income 32,448 32,386
Property and equipment 23,797 26,198
Premiums in course of collection 18,230 25,159
Goodwill 19,973 21,772
Income taxes recoverable - 1,403
Separate account assets 42,248 44,589
Other 40,119 23,176
Total Assets $2,793,324 $2,854,419
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy Liabilities
Future policy benefits - annuities $1,289,429 $1,250,225
Future policy benefits - life 778,935 800,447
Policy and contract claims 212,091 206,963
Unearned premiums 33,683 34,649
Other 38,479 39,187
Total Policy Liabilities 2,352,617 2,331,471
General expenses and other liabilities 120,977 121,916
Short-term note payable 400 -
Mortgage payable 2,175 2,434
Income taxes (1994 current benefit $1,002) 6,838 5,064
Separate account liabilities 42,248 44,589
Total Liabilities 2,525,255 2,505,474
Shareholders' Equity
Convertible Preferred Stock 723 723
Common Stock - $5.00 par value 77,675 77,505
Additional paid-in capital 47,039 46,640
Retained earnings 299,415 284,938
Unrealized losses on investments (95,965) (43)
Unfunded pension loss (2,821) (2,821)
Cost of Common Treasury Stock (57,997) (57,997)
Total Shareholders' Equity 268,069 348,945
Total Liabilities and Shareholders' Equity $2,793,324 $2,854,419
See Notes to Consolidated Financial Statements
Page 3 of 26
</TABLE>
<TABLE>
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
(000s Omitted, Except Per Share Data)
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Revenues
Premiums and policy charges $349,047 $328,017 $118,610 $109,623
Net investment income 135,941 137,642 46,458 47,642
Realized investment gains (losses) 293 (1,420) (41) (715)
Other 4,945 5,022 2,733 1,575
Total Revenues 490,226 469,261 167,760 158,125
Benefits and Expenses
Benefits paid or provided 325,445 317,275 111,528 101,981
Insurance and general expenses 103,614 97,321 34,716 34,918
Amortization of deferred insurance costs 27,072 28,320 9,766 12,180
Total Benefits and Expenses 456,131 442,916 156,010 149,079
Income Before Income Taxes and
Change in Accounting Principle 34,095 26,345 11,750 9,046
Income Taxes 9,513 9,362 2,623 3,603
Income Before Cumulative Effect of
Change in Accounting Principle 24,582 16,983 9,127 5,443
Cumulative Effect of Change in Accounting
for Postemployment Benefits - Net
of Related Tax Effects - (1,550) - -
Net Income $24,582 $15,433 $9,127 $5,443
Primary Earnings Per Share
Income before cumulative effect $1.99 $1.62 $0.74 $0.50
Cumulative effect of change in
accounting principle - (0.15) - -
Net Income Per Share $1.99 $1.47 $0.74 $0.50
Average Shares and Equivalents Outstanding 12,225 10,317 12,227 10,701
Fully Diluted Earnings Per Share
Income before cumulative effect $1.97 $1.60 $0.73 $0.50
Cumulative effect of change in
accounting principle - (0.15) - -
Net Income Per Share $1.97 $1.45 $0.73 $0.50
Average Shares and Equivalents Outstanding 12,496 10,588 12,505 10,976
Dividends Paid Per Common Share $0.81 $0.81 $0.27 $0.27
See Notes to Consolidated Financial Statements
Page 4 of 26
</TABLE>
<TABLE>
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Unaudited)
(000s Omitted)
<CAPTION>
Nine Months Ended
September 30,
1994 1993
<S> <C> <C>
Net Cash Provided by Operating Activities $51,287 $81,923
Investing Activities
Proceeds from sales
Fixed maturities - available for sale 101,584 -
Fixed maturities - 193,321
Equities, mortgage loans, real estate, and other investments 12,131 34,446
Proceeds from maturities and redemptions
Fixed maturities - available for sale 123,391 -
Fixed maturities - held to maturity 14,573 -
Fixed maturities - 226,875
Equities, mortgage loans, real estate, and other investments 45,958 43,332
Cost of purchases
Fixed maturities - available for sale (335,664) -
Fixed maturities - held to maturity (3,000) -
Fixed maturities - (570,588)
Equities, mortgage loans, real estate, and other investments (19,717) (24,274)
Increase in policy loans (1,206) (635)
Purchases of property and equipment (1,540) (7,451)
Net (increase) decrease in short-term investments 29,131 (4,870)
Net Cash Used by Investing Activities (34,359) (109,844)
Financing Activities
Policyholder account deposits 106,565 109,898
Policyholder account withdrawals (121,752) (90,709)
Proceeds from sale of common stock 569 48,239
Repayment of mortgage and other notes payable (259) (9,410)
Cash dividends to shareholders (10,105) (8,875)
Change in short-term notes payable 400 (17,350)
Net Cash Provided (Used) by Financing Activities (24,582) 31,793
Increase (Decrease) in Cash (7,654) 3,872
Cash at Beginning of Period 10,441 9,471
Cash at End of Period $2,787 $13,343
See Notes to Consolidated Financial Statements
Page 5 of 26
</TABLE>
Item 1. Financial Statements (continued)
WASHINGTON NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 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 primarily 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
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 market or amortized cost
less other-than-temporary impairments. 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 $95,807,000 at September 30, 1994 detailed in the table
below.
(000s omitted) 1/1/94 9/30/94
Fair value adjustment to available
for sale fixed maturity securities $75,081 $(95,807)
Less: Decrease in deferred insurance costs 18,630 -
Increase in deferred federal
income taxes 14,807 -
Net unrealized gain (loss) on fixed
maturities $41,644 $(95,807)
Page 6 of 26
Item 1. Financial Statements (continued)
WASHINGTON NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
September 30, 1994
At September 30, 1994, the unrealized loss was primarily due to the
increase in interest rates since adoption. Due to the change, the
effect on deferred policy acquisition costs was reversed and
deferred taxes have not been established on the unrealized loss as
the Company has a capital loss carryforward and does not currently
record a tax benefit for such carryforwards.
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 September 30, 1994, approximately 51 percent of WNC's total
reinsurance was ceded to Combined Life Insurance Company of
America, with approximately 19 percent ceded to UNUM Life Insurance
Company, and approximately 16 percent ceded to American Founders
Life Insurance Company. The reinsurance with Combined Life and
American Founders is a result of divestitures of supplemental
health insurance, 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):
September 30, September 30,
1994 1993
Direct premiums and policy charges $353,977 $352,962
Reinsurance assumed 42,284 22,620
Reinsurance ceded (47,214) (47,565)
Premiums and Policy Charges $349,047 $328,017
Reinsurance benefits ceded were $19,021,000 and $15,657,000 at
September 30, 1994 and 1993, respectively.
Page 7 of 26
Item 1. Financial Statements (continued)
WASHINGTON NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
September 30, 1994
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 and guarantees are primarily issued to
support public and private borrowing arrangements, including bond
financing and letters of credit. 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 September 30, 1994 and December 31, 1993,
standby purchase commitments and guarantees were $22,394,000 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.
During August, 1994, the Company obtained a letter of credit in the
amount of $2,500,000. WNC has four letters of credit available
totaling $3,344,000 with varying terms and conditions. As of
November 14, 1994, the entire amount was unused.
Page 8 of 26
<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, copies of which
may be obtained by contacting: Craig Simundza, Vice President, Financial Reporting, Washington National
Corporation, 300 Tower Parkway, Lincolnshire, Illinois 60069 (telephone (708) 793-3053).
Consolidated Results of Operations
Components of Income (Loss) by Segment
(000s omitted)
<CAPTION>
Life
Insurance
& Group Individual Corporate
Annuities Products Health & Other Total
Nine Months Ended September 30, 1994
<S> <C> <C> <C> <C> <C>
Revenues
Insurance and other revenues $ 55,532 $154,597 $143,655 $ 208 $353,992
Net investment income 114,935 10,902 4,177 5,927 135,941
Realized investment gains - - - 293 293
Total revenues 170,467 165,499 147,832 6,428 490,226
Benefits and Expenses
Insurance benefits 118,876 120,360 85,940 269 325,445
Expenses 14,291 43,852 45,450 21 103,614
Amortization of deferred insurance costs 12,767 2,151 12,154 - 27,072
Total benefits and expenses 145,934 166,363 143,544 290 456,131
Income (loss) before income taxes $ 24,533 $ (864) $ 4,288 $6,138 34,095
Income taxes 9,513
Net income $ 24,582
Nine Months Ended September 30, 1993
<S> <C> <C> <C> <C> <C>
Revenues
Insurance and other revenues $ 51,806 $165,979 $113,879 $ 1,375 $333,039
Net investment income 119,688 11,832 3,977 2,145 137,642
Realized investment losses - - - (1,420) (1,420)
Total revenues 171,494 177,811 117,856 2,100 469,261
Benefits and Expenses
Insurance benefits 119,708 128,032 68,644 891 317,275
Expenses 16,207 43,509 34,036 3,569 97,321
Amortization of deferred insurance costs 14,643 1,691 11,986 - 28,320
Total benefits and expenses 150,558 173,232 114,666 4,460 442,916
Income (loss) before income taxes and
change in accounting principle $ 20,936 $ 4,579 $ 3,190 $(2,360) 26,345
Income taxes 9,362
Income before change in accounting
principle 16,983
Change in accounting for postemployment
benefits (net of taxes) (1,550)
Net income $15,433
Page 9 of 26
</TABLE>
<TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
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 September 30, 1994
<S> <C> <C> <C> <C> <C>
Revenues
Insurance and other revenues $18,792 $53,667 $48,737 $ 147 $121,343
Net investment income 38,815 3,617 1,418 2,608 46,458
Realized investment losses - - - (41) (41)
Total revenues 57,607 57,284 50,155 2,714 167,760
Benefits and Expenses
Insurance benefits paid or provided 39,998 42,254 29,179 97 111,528
Insurance and general expenses 4,606 14,200 14,976 934 34,716
Amortization of deferred insurance costs 4,907 783 4,076 - 9,766
Total benefits and expenses 49,511 57,237 48,231 1,031 156,010
Income before income taxes $ 8,096 $ 47 $ 1,924 $1,683 11,750
Income taxes 2,623
Net income $ 9,127
Three Months Ended September 30, 1993
<S> <C> <C> <C> <C> <C>
Revenues
Insurance and other revenues $17,111 $51,834 $41,927 $ 326 $111,198
Net investment income 40,340 3,796 1,308 2,198 47,642
Realized investment losses - - - (715) (715)
Total revenues 57,451 55,630 43,235 1,809 158,125
Benefits and Expenses
Insurance benefits paid or provided 37,168 39,607 25,028 178 101,981
Insurance and general expenses 6,095 14,811 12,275 1,737 34,918
Amortization of deferred insurance costs 7,606 525 4,049 - 12,180
Total benefits and expenses 50,869 54,943 41,352 1,915 149,079
Income (loss) before income taxes $ 6,582 $ 687 $ 1,883 $ (106) 9,046
Income taxes 3,603
Net income $ 5,443
Page 10 of 26
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
<TABLE>
<CAPTION>
Analysis of Net Income
Three Months Ended Nine Months Ended
September 30, September 30,
(000s Omitted) 1994 1993 1994 1993
<S> <C> <C> <C> <C>
Pretax operating income (1)
Life insurance and annuities $8,096 $6,582 $24,533 $20,445
Group products 47 687 (864) 4,579
Individual health 1,924 1,883 4,288 3,190
Corporate and other 1,724 609 5,845 (940)
Total pretax operating income 11,791 9,761 33,802 27,274
Income taxes on operations 3,925 3,598 11,708 9,190
Net operating income 7,866 6,163 22,094 18,084
Other components of net
income (net of taxes)
Realized investment gains
(losses) (2) 1,261 (715) 2,488 (1,420)
Gain from benefit plan
changes (3) - (5) - 319
Cumulative effect of change in
accounting principle (4) - - - (1,550)
Net income $9,127 $5,443 $24,582 $15,433
<FN>
(1) Pretax income before realized investment gains (losses), cumulative effect of accounting
change, and gain from benefit plan changes in 1993.
(2) 1994 includes a tax benefit of $1,302 and $2,195 for the three and nine months periods,
respectively.
(3) Curtailment gain of $491 less tax of $172.
(4) Employers' Accounting for Postemployment Benefits.
</TABLE>
Comparison of Nine Months Ended September 30, 1994 to September 30, 1993
Insurance Premiums and Policy Charges. Insurance premiums and
policy charges increased $21.0 million, or 6.4%, from $328.0 million
in 1993 to $349.0 million in 1994. The improvement was primarily due
to an increase in individual health reinsurance premiums of $25.3
million, offset in part by a decline in group products premiums.
The group products premium decline was due primarily to policy
lapses, including the termination of a large group life insurance
contract with approximately $6 million of premium revenue and
expenses in the first nine months of 1993 . See "Segment
Information -- Individual Health" and "Segment Information -- Group
Products," below.
Net Investment Income. Net investment income decreased $1.7
million, or 1.2%, to $135.9 million in 1994 from $137.6 million in
1993. The decrease was due primarily to a decline in the Company's
portfolio yield (based on amortized cost) from 8.0% in the first
nine months of 1993 to 7.6% in the first nine months of 1994. For
the third quarter, net investment income decreased $1.2 million, or
2.5%, to $46.5 million in 1994 from $47.6 million in 1993 primarily
due to a drop in the Company's portfolio yield from 8.2% to 7.8%.
The carrying value of the Company's invested assets remained
essentially unchanged from December 31, 1993. See "Investment
Portfolio," below. On January 1, 1994, the Company adopted SFAS
115. See Note C to the financial statements for further discussion
of the adoption and its effect.
Page 11 of 26
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Realized Investment Gains (Losses). Realized investment gains for
the first nine months of 1994 were $0.3 million compared to realized
investment losses of $1.4 million in the first nine months of 1993.
In 1994, realized gains on equity securities and other invested
assets of $2.1 million were partially offset by losses of $1.8
million on fixed maturity investments, mortgage loans on real
estate, and real estate investments. In 1993, realized gains of
$5.4 million on fixed maturity investments were more than offset by
losses of $6.8 million on mortgage loans on real estate, real estate
investments, and equity securities.
Insurance Benefits Paid or Provided. Insurance benefits paid or
provided increased $8.2 million, or 2.6%, from $317.3 million in the
first nine months of 1993 to $325.4 million in the first nine months
of 1994. The increase was primarily due to higher individual health
insurance benefits of $17.3 million resulting primarily from the
reinsurance transactions referred to above, offset by a decline in
group products benefits of $7.7 million (due primarily to a smaller
block of employee benefits conventional health business in force and
the termination of the large group life insurance contract discussed
above). For the third quarter, benefits paid or provided increased
$9.5 million, or 9.4%, from $102.0 million in 1993 to $111.5 million
in 1994. The increase was primarily due to the reinsurance
transactions referred to above, an increase in education disability
benefits in the group products segment, and an increase in life
insurance and annuity benefits.
Insurance and General Expenses. Insurance and general expenses
increased $6.3 million, or 6.5%, from $97.3 million in the first
nine months of 1993 to $103.6 million in the first nine months of
1994, primarily due to an increase in expenses related to two
individual health reinsurance transactions.
Amortization of Deferred Insurance Costs. Amortization of deferred
insurance costs decreased $1.2 million, or 4.4%, from $28.3 million
in the first nine months of 1993 to $27.1 million in 1994. For the
third quarter, amortization of deferred insurance costs decreased
$2.4 million, or 19.8%, to $9.8 million from $12.2 million in 1993.
The decline in 1994 for both the three and nine month periods was
due to the annual review of amortization assumptions for the life
insurance and annuities segment in 1993 which caused an increase of
$2.8 million in the third quarter of 1993.
Income Before Income Taxes and Change in Accounting Principle.
Income before income taxes and change in accounting principle
increased $7.8 million, or 29.4%, to $34.1 million in the first nine
months of 1994 compared to $26.3 million in the first nine months of
1993. The increase was due 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 the group products
segment. For the third quarter, income before income taxes and
change in accounting principle increased $2.8 million, or 29.9%, to
$11.8 million from $9.0 million in the 1993 third quarter. The
increase was due to improved operations in the life insurance and
annuities and corporate and other segments, offset in part by a
decline in the group segment's operating income.
Income Taxes. Income taxes increased $0.1 million to $9.5 million
in the first nine months of 1994 compared to $9.4 million in the
first nine months of 1993, primarily due to improved income from
operations, partially offset by a tax benefit of $2.2 million
related to investment losses realized in 1994 and earlier years.
For the third quarter, income taxes were $2.6 million in 1994
compared to $3.6 million in 1993, a decrease of $1.0 million, or
27.2%. The decrease was primarily due to a tax benefit of $1.3
million on investment losses realized in 1994 and earlier years.
Change in Accounting Principle. In the first quarter of 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.
Page 12 of 26
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Net Income. Net income for the first nine months of 1994 was $24.6
million compared to $15.4 million in the first nine months of 1993.
The improvement in net income resulted from increased earnings from
operations, 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 the new accounting standard
described above.
Segment Information
Life Insurance and Annuities. Revenues for the life insurance and
annuities segment for the first nine months of 1994 were $170.5
million, compared to $171.5 million in 1993. The decline was
attributable to reduced investment income of $4.8 million (resulting
primarily from a lower portfolio yield), mostly offset by an
improvement of $3.7 million in insurance premiums and policy
charges, primarily due to an increase in life insurance in force
combined with higher policy charges at UPI. UPI's increase in
insurance premiums and policy charges was offset in part by a
decline at WNIC where no new policies are being sold.
Pretax income for the life insurance and annuities segment increased
17.2% to $24.5 million in the first nine months of 1994 from $20.4
million in the first nine months of 1993, primarily due to higher
policy charges and improved interest rate spreads, as the interest
credited on account balances was reduced more than the decrease in
the yield on invested assets. In addition, the third quarter of
1993 included a charge of $1.6 million for restructuring of
operations in this segment.
Generally, 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 profit margins for this segment. While the Company has been
able to maintain its current spread for the first nine months of
1994 as market interest rates have risen, the Company cannot be
certain it will be able to do so in the future. For the first nine
months of 1994, maintenance of higher interest rate spreads than the
Company's long-term spread expectations contributed to pretax income
by approximately $3 million.
Group Products. Revenues for the group products segment were $165.5
million in the first nine months of 1994 compared to $177.8 million
in the first nine months of 1993, a decrease of 6.9%. The largest
items contributing to the decrease were policy lapses, including the
termination of a large group life insurance contract in the third
quarter of 1993, with approximately $6 million of premium revenue in
the first nine months of 1993, and an adjustment to unpaid premiums
of approximately $2.5 million in 1994. The termination of the large
group life insurance contract, which had approximately $3 billion of
life insurance in force, did not materially affect net income as
there was a corresponding decrease in benefits and expenses.
The group products segment reported a loss of $0.9 million in the
first nine months of 1994 compared to income of $4.6 million in the
first nine months of 1993. The loss was primarily due to an
adjustment to unpaid premiums and increased expenses.
Over the last several quarters, operating results for the group
products segment have been favorably affected by a better than
expected benefit ratio primarily due to the Company raising premium
rates at a level higher than medical care inflation. The sales
environment for these products has begun to be more competitive as
other insurance companies have reduced pricing assumptions about
medical care inflation in order to obtain additional market share.
As a result, the Company expects an increase in the level of policy
lapses in the segment and an increase in the benefit ratio over the
next 12-24 months. In the fourth quarter of 1993, the Company
announced the combination of its employee benefits and individual
health divisions. Among the expected outcomes of this combination
is some expense efficiencies for the combined division in 1995 and
later periods.
Page 13 of 26
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Individual Health. Revenues for the individual health insurance
segment increased 25.4% to $147.8 million in the first nine months
of 1994, compared to $117.9 million in the first nine months of
1993. Revenues for this segment increased primarily as a result of
two reinsurance transactions with $44.3 million of revenue in 1994
compared to $16.6 million in 1993. The improvement was also due in
part to average rate increases of approximately 5% in the first nine
months of 1994 on the direct portion of the business in force,
offset in part by a decline of 4.8% in the total number of policies
in force in the direct portion of the business.
Pretax income for the individual health insurance segment was $4.3
million for the first nine months of 1994 compared to $3.2 million
in the first nine months of 1993. The improvement was primarily due
to income from the reinsurance transactions.
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 1994,
the Company entered into a reinsurance agreement with National
Casualty Company (National Casualty), whereby the Company will
reinsure 50% and administer 100% of a block of individual major
medical health insurance. Due to the start-up expenses associated
with administering this block of business, the Company expects to
break-even on this transaction in 1994.
The combined effect of these reinsurance transactions was to
increase revenues and benefits and expenses by $44.3 million and
$41.8 million, respectively, in 1994, compared to $16.6 million and
$16.1 million, respectively, in 1993.
In the short term, this segment is expected to be negatively
impacted by adverse market conditions, with many competitors
lowering rates or maintaining rates to attain greater market share.
To date, the Company has priced its products to maintain desired
profit margins and, as a result, has seen a decline in new business
sold. To help offset the decline, the Company has expanded its
distribution network, including utilizing the sales force of Harvest
Life, which has generated approximately 10% of 1994 new sales.
National Casualty agents will begin marketing the Company's
individual health products in 1995.
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 the first
nine months of 1994, income was $6.1 million compared to a loss of
$2.4 million in the first nine months of 1993. The improvement was
due to investment income on the Company's surplus funds, the
previously mentioned realized investment gains of $0.3 million in
1994 versus realized investment losses of $1.4 million in 1993, and
expenses in 1993 related to the closing of the Company's former
headquarters.
Comparison of Quarter Ended September 30, 1994 to September 30, 1993
The nature and reasons for any significant variations between the
quarters ended September 30, 1994 and September 30, 1993 are the
same as those discussed above for the respective nine-month periods,
except where otherwise noted.
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 now 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.
Page 14 of 26
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
At September 30, 1994, the Company had invested assets with a
carrying value of $2.3 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 $ 65.8 2.9%
Obligations of states and political
subdivisions 92.0 4.0
Public utilities 123.7 5.4
Industrial and miscellaneous 825.2 35.9
Mortgage-backed securities 639.5 27.9
Other 20.8 0.9
Total fixed maturity investments 1,767.0 77.0
Equity securities 13.6 0.6
Other investments:
Mortgage loans on real estate 366.1 15.9
Real estate 32.1 1.4
Policy loans 53.5 2.3
Other long-term 17.1 0.8
Short-term 46.2 2.0
Total invested assets $2,295.6 100.0%
Fixed Maturity Investments
The carrying value of fixed maturity investments at September 30,
1994 was $1.767 billion, or 77.0% of the Company's invested assets.
The amortized cost of the Company's fixed maturity portfolio
increased $102.0 million to $1.863 billion at September 30, 1994
from $1.761 billion at December 31, 1993. Due to the increase in
market interest rates in the first nine months of 1994, the carrying
value of the Company's fixed maturity investments compared to
amortized cost declined, resulting in an unrealized loss on fixed
maturity investments of $95.8 million.
The composition of the Company's fixed maturity portfolio at
September 30, 1994, based on quality ratings, was as follows
(dollars in millions):
Carrying Value
as a Percent of
Carrying Total Fixed Invested
Value Maturities Assets
AAA/Aaa $ 747.4 42.3% 32.6%
AA/Aa 125.8 7.1 5.5
A 487.7 27.6 21.2
BBB/Baa 310.3 17.6 13.5
BB/Ba and lower 95.8 5.4 4.2
Total Fixed Maturities $1,767.0 100.0% 77.0%
Page 15 of 26
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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") for
publicly-traded investments. For privately-traded securities, the
ratings of Duff & Phelps Credit Rating Company ("Duff & Phelps") and
Fitch Investors Service, Inc. ("Fitch") are also recognized in
defining rated securities. If an investment has a split rating
(i.e., different ratings from the rating services) the Company
categorizes the investment under the lower rating. For those
investments that do not have a rating from S&P, Moody's, Duff &
Phelps, or Fitch, 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, Moody's, Duff & Phelps, or
Fitch but instead rated with comparable NAIC ratings, comprise 1.1%
of AAA-rated investments, 2.0% of AA-rated, 2.4% of A-rated, 20.7%
of BBB-rated, and 40.2% of investments rated BB and lower at
September 30, 1994.
At September 30, 1994, 27.9% 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.
In some instances, the Company invests in non-agency mortgage-backed
securities. The Company primarily invests in highly-rated non-agency
CMOs. At September 30, 1994, 84.6% 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 the Company's mortgage-
backed securities portfolio at September 30, 1994 (dollars in
millions):
Carrying Value
as a Percent of
Mortgage- Total
Carrying Backed Invested
Mortgage Obligations Value Securities Assets
Agency collateralized:
Planned and target amortization classes $258.0 40.3% 11.2%
Sequential classes 9.5 1.5 0.4
Support classes 5.2 0.8 0.2
Accrual classes 8.3 1.3 0.4
Total agency collateralized 281.0 43.9 12.2
Non-agency collateralized :
Planned amortization classes 11.8 1.9 0.5
Sequential classes 11.3 1.8 0.5
Accrual classes 2.6 0.4 0.2
Total non-agency collateralized 25.7 4.1 1.2
Total collateralized 306.7 48.0 13.4
Non-agency pass-through
securities 4.6 0.7 0.2
Agency pass-through
securities 328.2 51.3 14.3
Total mortgage-backed securities $639.5 100.0% 27.9%
Page 16 of 26
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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.
Planned amortization class (PAC) and target amortization class (TAC)
tranches, which together comprised 11.7% of the Company's invested
assets at September 30, 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 0.9% of the Company's invested
assets at September 30, 1994 may have prepayment characteristics
similar to mortgage-backed pass-through securities. Accrual classes,
which comprised 0.6% of the Company's invested assets at September
30, 1994, have prepayment characteristics similar to sequential
classes when receiving principal payments. Support classes, which
comprised 0.2% of the Company's invested assets at September 30,
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 retain its existing mortgage
loans.
The Company had investments in mortgage loans of $366.1 million at
September 30, 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 September 30, 1994, loans with a carrying value of $5.2
million (net of allowances of $0.7 million) or 1.6% were delinquent
60 days or more as to interest or principal.
At September 30, 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 1.5% 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 5.0% at June 30, 1994, 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, had a carrying value of $17.4
million at September 30, 1994 compared to $16.9 million at December
31, 1993. At September 30, 1994, the Company's mortgage loan
portfolio included $4.5 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 17 of 26
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The Company's mortgage loan portfolio at September 30, 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 $ 62.9 17.2% Retail $216.3 59.1%
Indiana 49.9 13.6 Office 44.5 12.1
Illinois 42.2 11.5 Industrial 33.0 9.0
Florida 34.2 9.3 Medical 24.2 6.6
Texas 32.3 8.8 Residential 20.5 5.6
North Carolina 19.8 5.4 Other 27.6 7.6
Wisconsin 13.3 3.6 Total $366.1 100.0%
Georgia 12.5 3.4
All other 99.0 27.2
Total $366.1 100.0%
Scheduled Total
Principal Balloon Principal
Repayments Payments Payments
Mortgage Loans by Year of Maturity:
1994 $ 0.5 $ 12.7 $ 13.2
1995 2.1 14.7 16.8
1996 2.6 33.2 35.8
1997 2.9 18.6 21.5
1998 3.2 4.2 7.4
1999 and thereafter 133.6 137.8 271.4
Total $144.9 $221.2 $366.1
The Company's real estate investments totaled $32.1 million (net of
allowances of $2.5 million) at September 30, 1994 compared to $39.1
million (net of allowances of $8.6 million) at December 31, 1993.
At September 30, 1994, $8.3 million of the real estate investments
were acquired through mortgage loan foreclosure, compared to $14.6
million at December 31, 1993. The decline was primarily due to
sales of foreclosed real estate investments.
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 18 of 26
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Equity Securities
At September 30, 1994, $6.3 million, or 0.3% of the Company's
invested assets, consisted of common stocks and common stock mutual
funds, $5.8 million, or 0.3% 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 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 nine months of 1994, the Company's operating
activities generated cash of $51.3 million compared to $81.9 million
in the first nine months of 1993. The decrease in cash provided by
operations in 1994 resulted primarily from increased benefits, a
return of funds held for a terminated group life insurance contract
and an increase in income taxes.
Investing activities (purchases and sales of investments) used cash
of $34.4 million in the first nine months of 1994 compared to $109.8
million in the first nine months of 1993, primarily for the purchase
of fixed maturity investments in both periods. The decrease in
purchases was primarily due to the use of cash by financing
activities combined with the smaller increase in cash provided by
operating activities discussed above. Sales of short-term
securities partially funded these purchases.
Financing activities used cash of $24.6 million in the first nine
months of 1994 and provided cash of $31.8 million in the first nine
months of 1993. The decrease in cash provided by financing was due
primarily to increased policyholder withdrawals, decreased
policyholder account deposits, and increased dividends in 1994 due
to the additional shares outstanding from the stock offering in the
1993 third quarter. In 1993, $48.2 million of cash was provided by
the sale of common stock, partially offset by the payment of $17.4
million of short-term notes payable and $9.4 million of mortgage and
other notes payable.
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 change in market interest rates would have an inverse effect
on 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 (as current
policy and contract holders seek higher returns elsewhere) 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 $49.0 million at
September 30, 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 19 of 26
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Health Care Reform
In October, Congress adjourned without the passage of a health care
reform proposal. The Company expects that health care reform will
again be a dominant issue before Congress next year.
In addition to reform proposals on a national basis, legislative
efforts to reform health care at the state level are likely to
intensify. The potential reform plans at the federal and state
levels may: (i) partially or fully replace products sold by
insurers; (ii) limit the ability of insurers to charge higher rates
to, or decline to cover, insureds who present greater risks; (iii)
limit the ability of insurers to exclude coverage for pre-existing
conditions; (iv) mandate the types of insurance benefits to be
provided in certain instances; (v) impose insurance rate regulation
or additional taxes on insurance premiums or benefits; (vi) increase
competition by expanding employee choice of insurance plans and by
requiring the employee to bear the full cost increment for higher
priced plans; (vii) establish programs run by the government that
would compete with or replace business written by the Company.
The Company has monitored and will continue to monitor all aspects
of the developments surrounding this issue and is preparing
strategic responses to its possible outcomes. The Company's health
businesses have begun to diversify into product areas, such as
supplemental insurance products and disability products, that the
Company believes are consistent with its targeted market focus and
may be less affected or unaffected by health care reform. Such
products may not be a component of a mandated benefits package and
may be supplementally purchased by consumers. Health care reform at
the federal and state levels may have a material adverse effect on
the Company's operating results and financial position, but it is
not possible at this time to predict the nature and effects of
health care reform or how soon its measures will be adopted and
implemented.
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 1993 statutory financial
results and operating performance. 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. A.M. Best ratings
are based upon factors of concern to policyholders, agents, and
intermediaries and are not directed toward the protection of
investors.
A. M. Best uses a variety of qualitative and quantitative measures
in determining a company's rating. One of A.M. Best's quantitative
tests measures insurance companies' surplus adequacy. The test is
structured similarly to the risk based capital test of the National
Association of Insurance Commissioners (NAIC). These tests attempt
to measure statutory capital and surplus needs based on the risks in
a company's mix of products and investment portfolio. The risk
based capital tests evaluate the adequacy of total adjusted
statutory capital and surplus in relation to investment and
insurance risks associated with asset quality, mortality and
morbidity, asset and liability matching, and other business factors.
A.M. Best's new test is designed to serve as a tool to assist in
identifying weakly capitalized companies and is considerably more
conservative than the NAIC's risk based capital test. The Company
expects that both WNIC and UPI will continue to meet A.M. Best's new
surplus adequacy standards for an "A-" rating at year-end 1994.
Page 20 of 26
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.
In September 1994, two retired employees filed a lawsuit in the
United States District Court for the Northern District of Illinois
against WNC, WNC's wholly owned subsidiary, Washington National
Insurance Company ("WNIC"), and the three individual trustees of the
Washington National Insurance Company Home Office Group Insurance
Plan (the "Plan"). The plaintiffs purport to act as members of a
class consisting of all employees of WNC and WNIC who retired or
tendered their irrevocable notice of retirement on or before July
24, 1989 and who are eligible to receive benefits under the Plan.
The complaint is brought under the Employee Retirement Income
Security Act ("ERISA") and alleges that WNC, WNIC and the trustees
have taken and threatened to take actions to modify, amend or
terminate the Plan in violation of written and oral promises and
representations, and the terms of the Plan. The alleged violations
include changing the method for computing claims payable under the
Plan, requiring retired employees to contribute to the payment of
premiums for their Medicare supplemental health insurance coverage
and maintaining that WNC, WNIC and the trustees have reserved the
right to modify or terminate benefits under the Plan. Plaintiffs
seek a declaration of their rights under the Plan, the reinstatement
of Medicare supplemental health insurance coverage for all members
of the class, an accounting of all funds obtained and claims not
paid as a result of the Plan modifications, an award of attorneys'
fees and other relief.
WNC, WNIC and the individual trustees believe that valid defenses
exist and intend to contest vigorously the allegations made in the
complaint.
Page 21 of 26
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 10.1 - Form of Amendment to Employment Agreements**
between Registrant and each of the following Executive
Officers of Registrant: R. W. Patin, T. Pontarelli, T.
C. Scott, and C. L. Fuhrmann (original Employment
Agreement filed as an exhibit to the Form 10-K for the
year ended December 31, 1991); K. A. Grubb and J. N.
Plato (original Employment Agreement filed as an exhibit
to the Form 10-K for the year ended December 31, 1992);
and, W. G. Brown (original Employment Agreement filed as
an exhibit to the Form 10-Q for the period ended June
30, 1993).
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
September 30, 1994.
** Management contract or compensatory plans or arrangements.
Page 22 of 26
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
November 14, 1994 /s/ Joan K. Cohen
Joan K. Cohen
Vice President, Controller and Treasurer
(Duly Authorized Officer and Chief
Accounting Officer)
Page 23 of 26
EXHIBIT INDEX
PAGE
Exhibit 10.1 - Form of Amendment to Employment Agreement 25
Exhibit 11 - Computation of Per Share Earnings. 26
Page 24 of 26
EXHIBIT 10.1
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Amendment") is
made as of the ___ day of ____, 1994, by and among Washington
National Insurance Company, an Illinois insurance corporation
(the "Company"), Washington National Corporation, a Delaware
corporation ("WNC"), and _______________ (the "Employee"). The
Company, WNC and the Employee agree that this Amendment amends
that certain Employment Agreement, dated as of _________, by and
among the Company, WNC and the Employee (the "Employment
Agreement").
WHEREAS, the Company, WNC and the Employee desire to provide
for the payment to the Employee of amounts vesting under certain
pay-at- risk plans on the terms and subject to the conditions set
forth below:
NOW, THEREFORE, in consideration of the foregoing and of the
respective covenants and agreements of the parties herein
contained, the parties hereto agree to amend the Employment
Agreement as follows:
1. Section 5. Termination of the Employment Agreement is
amended by the addition of the following subsection 5(b)(vi).
5(b)(vi) The Company shall pay to the Employee within ten
days after the Date of Termination, in a lump sum payment, an
amount equal to the total of all amounts which would otherwise be
payable on a future date to the Employee under the terms of any
long term pay-at-risk or incentive compensation plan but for the
termination of the Employee's employment with the Company. The
Employee's fixed annual salary on the Date of Termination shall
be used to determine amounts payable under this subsection.
2. All terms and conditions not modified by the terms of
this Amendment shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment
effective as of the day and year first above written.
WASHINGTON NATIONAL INSURANCE COMPANY
By:__________________________________
Its:__________________________________
WASHINGTON NATIONAL CORPORATION
By:__________________________________
Its:__________________________________
The Employee:
_____________________________________
Page 25 of 26
<TABLE>
WASHINGTON NATIONAL CORPORATION
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
Primary and Fully Diluted
(000s Omitted Except Per Share Amounts)
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Primary
Average Shares:
Average common shares outstanding 12,139 10,203 12,148 10,596
Assumed exercise of stock options 86 114 79 105
Total Average Shares 12,225 10,317 12,227 10,701
Net Income Available to Shareholders:
Income before cumulative effect of change
in accounting principle and Preferred Stock
dividend requirement $24,582 $16,983 $9,127 $5,443
Preferred Stock dividend requirement (271) (271) (90) (90)
Income before cumulative effect of change
in accounting principle 24,311 16,712 9,037 5,353
Cumulative effect of change in accounting
for postemployment benefits - (1,550) - -
Net Income Available to
Common Shareholders $24,311 $15,162 $9,037 $5,353
Primary Earnings Per Share:
Income before cumulative effect $1.99 $1.62 $0.74 $0.50
Cumulative effect of change in accounting
for postemployment benefits - (0.15) - -
Net Income Per Share $1.99 $1.47 $0.74 $0.50
Fully Diluted
Average Shares:
Average common shares outstanding 12,139 10,203 12,148 10,596
Assumed conversion of preferred stock 271 271 271 271
Assumed exercise of stock options 86 114 86 109
Total Average Shares 12,496 10,588 12,505 10,976
Net Income Available to Shareholders:
Income before cumulative effect of change
in accounting principle $24,582 $16,983 $9,127 $5,443
Cumulative effect of change in accounting
for postemployment benefits - (1,550) - -
Net Income Available to
Common Shareholders $24,582 $15,433 $9,127 $5,443
Fully Diluted Earnings Per Share:
Income before cumulative effect $1.97 $1.60 $0.73 $0.50
Cumulative effect of change in accounting
for postemployment benefits - (0.15) - -
Net Income Per Share $1.97 $1.45 $0.73 $0.50
Page 26 of 26
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