SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT FILED PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993 Commission file number 1-7369
WASHINGTON NATIONAL CORPORATION
(Exact name of registrant as specified in charter)
DELAWARE 36-2663225
(State of incorporation) (I.R.S. Employer
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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Noncumulative Common Stock New York Stock Exchange, Inc.
($5 par value)
Cumulative Convertible New York Stock Exchange, Inc.
Preferred Stock
($5 par value)
Securities registered pursuant to Section 12(g) of the Act:
None
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, and
(2) has been subject to such filing requirements for the past 90
days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statement incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. ( )
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant as of March 24, 1994.
Common Stock, $5 par value - $244,039,815
Convertible Preferred Stock, $5 par value - $6,161,126
Note: This calculation is made solely for the purpose of complying
with the requirements of this filing. Neither the registrant nor any
affiliates are bound by this calculation for any other purpose.
Indicate the number of shares outstanding of each of the
registrant's classes of Common Stock, as of the latest practicable
date.
Common Stock $5 par value - 12,135,821
(excluding 3,383,473 shares held in the Treasury) as of March 24, 1994
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1994 Proxy Statement are incorporated by reference into
Part III.
PART I
ITEM 1. BUSINESS
General Development of Business
Washington National Corporation (WNC) was incorporated as a general
business corporation under the Delaware General Corporation Law on
February 26, 1968, for the initial purpose of becoming the parent
company and sole stockholder of Washington National Insurance
Company (WNIC), an Illinois insurance corporation dating back to
1911. WNC was organized in order to permit diversification into the
broader field of financial services and is admitted to do business
in Delaware, Indiana, and Illinois. Its executive offices are
located at 300 Tower Parkway, Lincolnshire, Illinois 60069-3665.
The primary operating companies of WNC are WNIC and United
Presidential Life Insurance Company (UPI). As of December 31, 1993,
WNC and its affiliates had 971 employees.
In 1989, WNC and its affiliates completed a strategic plan and began
restructuring their operations. The strategic plan called for the
divestiture of the home service and direct response lines of
business at WNIC and a subsidiary, Washington National Life
Insurance Company of New York (WNNY). WNIC sold the direct response
and home service product lines and WNNY in 1989, 1990, and 1991,
respectively. The organization is now focused on four lines of
business: individual health insurance, group employee benefits,
disability insurance for educators (all underwritten by WNIC), and
individual life insurance and annuities (underwritten by UPI).
In the third quarter of 1993, WNC issued 2.1 million new shares of
common stock in a public offering that raised $47.3 million.
GENERAL DESCRIPTION OF THE BUSINESS OF THE INDUSTRY SEGMENTS
WNC is an insurance holding company which, through WNIC and UPI,
provides life, annuity, health, disability, and specialty insurance
products to individuals and groups in carefully targeted markets.
The business segments related to WNC's business are a life insurance
and annuities segment, an individual health insurance segment, a
group products segment, and a corporate and other segment. The
corporate and other segment includes realized investment gains and
losses, as well as the operations of divested lines of business and
the gain or loss on the sales thereof. In addition, this segment
includes the operations of WNC that do not specifically support one
of the other segments.
Further information about WNC's four business segments can be found in
Item 8, under the caption "Note K - Segment Information."
Washington National Insurance Company
WNIC is a legal reserve stock life insurance company organized under
the laws of Illinois in 1926 and is the successor to other companies
dating back to 1911. WNIC's home office is located at 300 Tower
Parkway, Lincolnshire, Illinois 60069-3665. WNIC is licensed to do
business in all states of the United States (except New York) and
the District of Columbia.
WNIC underwrites individual health insurance, group employee
benefits, and disability insurance for educators. As part of the
corporate strategy plan, the decision was made to write life
insurance and annuity business solely at UPI. Therefore, as of
November 1989, WNIC ceased writing individual life insurance
policies and annuities, except for home service life products, which
WNIC ceased writing in March 1990; however, WNIC continues to
administer existing life insurance and annuity business.
WNIC's individual health line of business includes major medical
and hospital-surgical policies. Group employee benefits consists of
term life, major medical, disability income, and dental insurance
policies. Disability insurance for educators generally is sponsored
by school districts or educational associations for voluntary
purchase by employees of public school systems.
In 1993, 2% of WNIC's insurance premiums and other policy charges
were derived from products in the life insurance and annuities
segment. A total of 40% of WNIC's 1993 insurance premiums and other
policy charges were derived from products in the individual health
insurance segment. A total of 58% of WNIC's 1993 insurance premiums
and other policy charges were derived from products in the group
products segment, of which 16% and 84% were from life insurance and
health insurance, respectively. Group health insurance premiums were
29%, 30%, and 35% of WNC's total revenues in 1993, 1992, and 1991,
respectively.
Texas, New Jersey, and Illinois account for approximately 33% of
WNIC's annual premium revenue. Arizona, Louisiana, Florida, and
Missouri also account for a significant portion of WNIC's premium
revenue, with a combined 20% of the total premium revenue.
WNIC's insurance products are primarily sold by salaried group
insurance representatives and field marketing organizations. The
sector of WNIC's field force that distributes group employee
benefits and disability insurance for educators consists of 65 field
representatives, including 12 managers, all of whom are salaried
employees of WNIC. Their activities are supported by 110 other field
employees. WNIC markets individual health products through brokers,
who are employed by field marketing organizations under standard
brokerage contracts. At December 31, 1993, WNIC had approximately
40,500 brokers employed by 66 field marketing organizations, who
sell insurance for other companies as well as for WNIC.
United Presidential Life Insurance Company
UPI, an Indiana life insurance company, began business in 1965 and
currently is licensed to do business in 45 states and the District
of Columbia. UPI's parent company, United Presidential Corporation
(UPC), was incorporated in 1961 as an Indiana corporation and,
effective during the fourth quarter of 1993, is 71% owned by WNIC
and 29% owned by WNC. Prior to fourth quarter 1993 UPC was owned
100% by WNIC. Both UPC and UPI have executive offices located at One
Presidential Parkway, Kokomo, Indiana 46904-9006. UPI's primary
business is the marketing and underwriting of individual life
insurance and annuities. Its primary marketing focus is interest-
sensitive products such as universal life insurance, excess-interest
whole life insurance, and annuities. UPI's operating results are in
the life insurance and annuities segment.
California, Indiana, and Michigan account for approximately 29% of
UPI's 1993 premiums and other charges. However, several other states
make significant contributions to premiums and other charges,
including Pennsylvania, Florida, Ohio, and Minnesota.
Sales are made through approximately 8,000 insurance agents and
brokers having an independent contractor relationship with UPI. Such
persons may also be independent insurance brokers. UPI has no
internal or captive sales force and accordingly, has negligible
training, maintenance, or financing expenses. This marketing system
facilitates sales force expansion without significant cost, provided
that product lines remain competitive with those being offered by
other companies.
New Products of the Segments
For the life insurance and annuities segment, UPI introduced in 1993
two new universal life insurance products to meet the demands and
needs of the marketplace. In 1994, UPI will introduce a low premium
permanent life insurance product and an update to its annuity
portfolio of products.
The individual health insurance segment introduced in 1993 new
versions of its major-medical and in-hospital products. New products
anticipated in 1994 are an individual disability product and a
cancer insurance product.
The group products segment introduced in 1993 a cancer insurance
product and several enhancements for disability insurance for
employees of employer-sponsored groups. New products anticipated in
1994 are long-term care insurance and further enhancements to
disability insurance.
Competitive Conditions of the Segments
The insurance subsidiaries, along with other insurance companies
with whom they are in competition, are subject to regulation and
supervision by the supervisory agency in each jurisdiction in which
they are licensed to do business, greatly affecting the competitive
environment in which they operate. These supervisory agencies have
broad administrative powers, including those relating to the
granting and revocation of licenses to transact business, licensing
of agents, approval of policy forms, establishing reserve
requirements as well as the form and content of required financial
statements, and conducting of periodic examinations. The companies
must meet the standards and tests established by the National
Association of Insurance Commissioners and, in particular, the
investment laws and regulations of their states of incorporation.
This regulation and supervision is primarily for the protection of
policyowners and not stockholders.
WNIC's individual health insurance line of business faces
competition from approximately 45 companies. There are approximately
90 group employee benefits insurers and less than 30 insurers of
disability insurance for educators in competition with WNIC's group
products segment. UPI competes for the sale of life insurance and
annuity products with approximately 300 U.S. life insurance
companies, including stock and mutual companies.
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Neither WNC nor any affiliated company is licensed to do business
outside of the United States.
ITEM 2. PROPERTIES
WNC's home office building is in a five-story, 175,000 square-foot
office building located at 300 Tower Parkway, Lincolnshire,
Illinois. The building is leased from a joint venture partnership in
which Washington National Development Company (WNDC), a subsidiary
of WNIC, has a one-third interest. WNC first occupied the property
in May, 1993 and WNIC signed a twenty-year lease to occupy the
building.
WNDC has a fifty percent interest in a joint venture partnership
that owns a 22,000 square-foot data center in Vernon Hills,
Illinois, that is leased and occupied solely by WNIC. WNIC first
occupied the property in April, 1993 and signed a twenty-year lease.
WNIC also owns a 335,000 square-foot office building in Evanston,
Illinois. WNIC occupies approximately 7 percent of this building and
leases the remainder to nonaffiliated commercial enterprises. At
December 31, 1993, the outstanding balance on the mortgage loan
secured by this property was $2,434,000. WNIC also occupies 28 field
offices throughout the country, all of which are leased.
UPI's home office is a 102,000 square-foot office building that UPI
owns, and is located on a thirty-acre site in Kokomo, Indiana.
ITEM 3. 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 against WNC's subsidiaries which
demand compensatory and punitive damages aggregating material dollar
amounts. WNC believes that such suits are substantially without
merit and that valid defenses exist. WNC's management is of the
opinion that such litigation will not have a material effect on
WNC's consolidated financial position. No proceedings, or group of
proceedings presenting in large degree the same issues, exceed the
materiality standard for disclosure contained in Instruction 2 to
Item 103 of Regulation S-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
Executive officers of WNC and a description of their business
experience are set forth below. The business experience of the
officers who have been affiliated with WNC less than five years is
described in detail; the business experience of officers who have
been affiliated with WNC five years or more focuses on only such
experience during the last five years.
Wade G. Brown
Mr. Brown, age 56, joined WNIC as Executive Vice President and Chief
Information Officer in June, 1993. From 1990 to 1993, Mr. Brown
was a senior management consultant with CompuPros, Inc. Prior to
that, Mr. Brown spent over seven years with Computer Language
Research, Inc. where his last position was as Director of
Information Services. Mr. Brown is a Director of UPI and WNIC and
serves on WNIC's Executive and Finance Committees.
Curt L. Fuhrmann
Mr. Fuhrmann, age 47, President of WNIC's Health Division as of
October, 1993, joined WNIC as President of the Individual Health
Division in October, 1989. Between 1985 and 1989, Mr. Fuhrmann was
President and Chief Executive Officer of Pyramid Life Insurance
Company, a company with approximately $40 million in annual
premiums. In these positions, Mr. Fuhrmann had total profit and loss
responsibility for an individual health book of business. Mr.
Fuhrmann is a Director of UPI and WNIC and serves on WNIC's
Executive and Finance Committees.
Kenneth A. Grubb
Mr. Grubb, age 54, joined WNIC as President of the Education
Division in June, 1992. From 1989 to 1992, Mr. Grubb was Director
of the Louisville Service Center of Humana, Inc., a large publicly-
held healthcare company, responsible for billing, claims, customer
service, underwriting and staff support. Prior to joining Humana,
Mr. Grubb spent nine years at Capital Holding Corporation where he
served as head of the group insurance division among other
responsibilities. Mr. Grubb is a Director of UPI and WNIC and
serves on WNIC's Executive and Finance Committees.
Robert W. Patin
Mr. Patin, age 51, was elected Chairman of the Board and Chief
Executive Officer of WNC and Chairman of the Executive and
Nominating Committees in July, 1988. At that time, he also assumed
the position of Chairman of the Board of WNIC and Chairman of its
Executive Committee. Mr. Patin also serves on WNIC's Finance
Committee. Mr. Patin was elected President of WNC and WNIC in May,
1990 and February, 1991, respectively. He also is a Director of
certain affiliated companies of WNC, including UPC and UPI.
James N. Plato
Mr. Plato, age 45, was elected Chairman of the Board, President and
Chief Executive Officer of UPC and its principal subsidiary, UPI,
effective February 1, 1994. From January 1, 1993 through January,
1994, Mr. Plato served as President and Chief Operating Officer of
UPC and UPI. From March, 1992 through December, 1992, Mr. Plato
held the position of Executive Vice President and Chief Marketing
Officer. Mr. Plato joined UPI in 1990 as its Senior Vice President
and Chief Marketing Officer. From 1986 to 1990, Mr. Plato was
Senior Vice President of Marketing for Reserve Life Insurance,
Dallas, Texas. Mr. Plato is a Director of WNIC.
Thomas Pontarelli
Mr. Pontarelli, age 44, has been Executive Vice President of WNC and
WNIC and head of the Staff Division of WNIC since 1989. Mr.
Pontarelli started at WNIC in 1974 and was elected Vice President,
General Counsel and Corporate Secretary of WNC in 1984. In 1985,
Mr. Pontarelli was elected Senior Vice President, General Counsel
and Corporate Secretary of WNC and Senior Vice President of WNIC.
He currently serves on the Board of Directors of WNIC, UPC, and UPI
and is a member of the Finance and Executive Committees of WNIC's
Board of Directors.
Thomas C. Scott
Mr. Scott, age 47, has been Executive Vice President and Chief
Financial Officer of WNC and Executive Vice President, Chief
Financial Officer and Chief Actuary of WNIC and head of its
Financial Division since 1989. Mr. Scott joined WNIC in 1974,
served as Vice President at WNIC from 1983 to 1987, and as Senior
Vice President of WNIC from 1987 to 1989. He currently serves on
the Board of Directors of WNIC, UPC, and UPI and is a member of the
Executive Committee and Chairman of the Finance Committee of WNIC's
Board of Directors.
Don L. Wilhelm
Mr. Wilhelm, age 62, retired on December 31, 1993 as a Director of
WNC, a position he has held since 1987, and as Chief Executive
Officer of UPC and UPI, positions he has held since 1961 and 1965,
respectively. On January 31, 1994, Mr. Wilhelm retired from the
Board of UPC and UPI and from his position as Chairman of the Board.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
QUARTERLY INFORMATION (unaudited)
Washington National Corporation and Subsidiaries
The following table summarizes selected unaudited quarterly information for
1993 and 1992. Stock quotes were obtained from the National Quotation
Bureau, Inc. As of March 10, 1994, WNC had approximately 9,200 Common and
Preferred stockholders, including individual participants in security
depository position listings.
<TABLE>
<CAPTION>
(000s omitted, except per share amounts) 1993
Quarter Ended
--------------------------------------------------------
March 31, (a) June 30, September 30, December 31,
<S> <C> <C> <C> <C>
Total revenues $151,180 $159,956 $158,125 $159,266
Income before cumulative effect of
changes in accounting principles 4,746 6,794 5,443 11,233
Cumulative effect (1,550) - - -
Net income 3,196 6,794 5,443 11,233
Income per share before cumulative effect 0.46 0.66 0.50 0.91
Net income per share 0.31 0.66 0.50 0.91
Market price:
Common:
High 27.875 27.250 24.625 25.875
Low 22.625 22.250 22.000 23.500
Close 26.250 22.875 23.750 24.000
Preferred:
High 54.000 54.500 51.500 53.250
Low 44.750 46.000 46.375 49.750
Close 50.125 46.500 49.500 52.000
Common Stock dividends 0.270 0.270 0.270 0.270
Preferred Stock dividends 0.625 0.625 0.625 0.625
</TABLE>
<TABLE>
<CAPTION>
(000s omitted, except per share amounts) 1992
Quarter Ended
--------------------------------------------------------
March 31, June 30, September 30, December 31,
<S> <C> <C> <C> <C>
Total revenues $142,587 $137,640 $142,647 $147,568
Income before cumulative effect of
changes in accounting principles 3,112 4,007 2,656 7,077
Cumulative effect (22,819) - - -
Net income (19,707) 4,007 2,656 7,077
Income per share before cumulative effect 0.30 0.39 0.26 0.70
Net income per share (1.99) 0.39 0.26 0.70
Market price:
Common:
High 19.125 20.250 23.500 23.500
Low 16.000 17.125 19.375 21.375
Close 17.250 19.625 23.500 23.000
Preferred:
High 36.250 41.125 46.500 46.250
Low 31.000 35.000 41.000 44.750
Close 35.000 40.750 45.500 45.250
Common Stock dividends 0.270 0.270 0.270 0.270
Preferred Stock dividends 0.625 0.625 0.625 0.625
<FN>
(a) Restated for the adoption of SFAS 112. See Note A.
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
Five Year Summary
<CAPTION>
Washington National Corporation
(000s omitted, except per share amounts) 1993 1992 1991 (b) 1990 (c) 1989 (d)
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $628,527 $570,442 $578,044 $709,083 $813,947
Operating income (loss) (a)
Pretax operating income (loss) 38,577 26,975 20,370 4,568 (6,833)
Net operating income (loss) 25,057 18,808 17,381 4,872 (2,211)
Income (loss) before cumulative
effect of changes in accounting
principles 28,216 16,852 (2,964) (8,523) 9,778
Net income (loss) 26,666 (5,967) (2,964) (8,523) 9,778
Average common shares and
equivalents outstanding 10,755 9,989 9,980 10,534 10,816
Per share:
Net operating income (loss) $2.30 $1.84 $1.71 $0.43 ($0.24)
Income (loss) before cumulative
effect of changes in
accounting principles 2.59 1.65 (0.33) (0.84) 0.87
Net income (loss) 2.45 (0.63) (0.33) (0.84) 0.87
Common dividends declared 1.08 1.08 1.08 1.08 1.08
Total assets 2,854,419 2,712,783 2,554,999 2,759,861 2,974,456
Mortgage and long-term notes
payable 2,434 13,870 14,042 18,506 44,692
Stockholders' equity 348,945 288,040 300,062 307,412 346,112
Life insurance in force (in millions) 22,215 25,454 24,227 26,043 29,992
<FN>
(a) Consists of income before realized investment losses, divestitures, gains from curtailments of
benefit plans, and the cumulative effect of accounting changes.
(b) Included in 1991 is the sale of the Company's New York subsidiary and two blocks of
business. See Note J to the Consolidated Financial Statements for further discussion.
(c) Included in 1990 is the sale of the Company's home service business that had revenues and
policy charges of $16.8 million and a $23.9 million pretax gain. Also included in 1990 was a
$16.0 million accrual for the loss on the sale of the Company's New York subsidiary.
(d) Included in 1989 is the sale of the Company's direct response business which had revenues
and policy charges of $40.1 million and an $18.3 million pretax gain.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Washington National Corporation (WNC or the Company) is an insurance
holding company that, through its two principal operating subsidiaries,
Washington National Insurance Company (WNIC) and United Presidential Life
Insurance Company (UPI), provides life, annuity, health, disability, and
specialty insurance products to individuals and groups in carefully
targeted markets that the Company believes are underserved by other
insurance carriers. In 1991, the Company completed a three-year corporate
restructuring that narrowed its focus to three core businesses, improved
its operating performance, and in management's view, positioned the Company
for profitable expansion.
The Company's three core businesses are: (i) life insurance and annuities:
universal life insurance and other interest-sensitive life insurance and
annuity products marketed to individuals and small businesses; (ii) group
products: employee-paid disability and other specialty insurance products
for teachers and other employers with 100 to 1,000 employees; and (iii)
individual health: individual health insurance products, primarily major
medical and hospital coverage for persons under the age of 65 without
employer-sponsored insurance.
The Company employs a decentralized operating structure and utilizes
distinct distribution systems to access each of its targeted markets and to
provide timely, individualized service to its customers. The Company
emphasizes the sale of market-driven products, a profit-oriented rather
than a volume-oriented approach to underwriting, tight expense controls,
and a proactive approach to market and regulatory changes. The Company
continually evaluates new products and markets in order to capitalize on
potential opportunities and to anticipate and respond effectively to
business and regulatory changes.
Corporate Restructuring
In 1988, the Company commenced a major restructuring effort to narrow its
focus to three core businesses, reduced its work force by over two-thirds,
and recruited new operating managers with many years of insurance industry
experience. The Company decentralized decision-making and implemented
performance-based management compensation in order to promote greater
accountability at the operating business level. The Company also invested
approximately $40 million in its operating businesses to improve computer
systems, technical expertise, administrative facilities, and distribution
systems. In addition, the Company implemented underwriting and pricing
changes in its three core businesses to improve profitability, and upgraded
the quality of its investment portfolio.
Strategy
The Company's current focus is on continuing the improvement in its
operating performance, principally through a strategy of disciplined
revenue growth in each of the three core businesses along with further
reductions in expense ratios. The Company seeks to achieve revenue growth
primarily by expanding its sale of existing and new products and services
within targeted markets that are underserved by other insurance carriers.
The Company anticipates that additional revenue growth may result from
certain cross-marketing opportunities within its businesses and selected
acquisitions of profitable blocks of business. Additionally, the Company
believes that its life insurance and annuities business complements the
Company's more cyclical health businesses, thereby providing greater
stability to the Company's earnings base. The Company seeks to achieve
reductions in its expense ratios through infrastructure improvements,
ongoing work flow re-engineering, and revenue growth.
The Company is closely monitoring developments concerning health care
reform and is preparing strategic responses to different possible outcomes.
In anticipation of health care reform, the Company's health businesses have
begun to diversify into product areas that the Company believes are
consistent with its targeted market focus and may be less affected, or
unaffected, by health care reform. The Company's strategy regarding health
care reform is discussed in more detail under the caption "Health Care
Reform."
<TABLE>
Consolidated Results of Operations
Components of Income (Loss) by Segment
(000s omitted)
<CAPTION>
1993
------------------------------------------------------------
Life
Insurance & Group Individual Corporate &
Annuities Products Health Other Total
<S> <C> <C> <C> <C> <C>
Revenues
Insurance and other revenues $69,969 $219,016 $154,398 $1,763 $445,146
Net investment income 158,981 15,605 5,543 3,606 183,735
Realized investment losses - - - (354) (354)
Total revenues 228,950 234,621 159,941 5,015 628,527
Benefits and Expenses
Insurance benefits 160,341 166,884 92,042 1,091 420,358
Expenses 20,650 59,484 46,540 4,838 131,512
Amortization of deferred insurance costs 19,831 2,121 15,991 - 37,943
Total benefits and expenses 200,822 228,489 154,573 5,929 589,813
Pretax income (loss) $28,128 $6,132 $5,368 ($914) 38,714
Income taxes 10,498
Income before change in accounting principles 28,216
Cumulative effect of change in accounting principles (1,550)
Net income $26,666
</TABLE>
<TABLE>
<CAPTION>
1992
------------------------------------------------------------
Life
Insurance & Group Individual Corporate &
Annuities Products Health Other Total
<S> <C> <C> <C> <C> <C>
Revenues
Insurance and other revenues $68,734 $215,021 $102,373 $1,795 $387,923
Net investment income 164,754 16,211 5,205 967 187,137
Realized investment losses - - - (4,618) (4,618)
Total revenues 233,488 231,232 107,578 (1,856) 570,442
Benefits and Expenses
Insurance benefits 176,949 168,919 62,798 1,174 409,840
Expenses 21,152 50,957 35,540 (557) 107,092
Amortization of deferred insurance costs 13,531 1,107 12,482 - 27,120
Total benefits and expenses 211,632 220,983 110,820 617 544,052
Pretax income (loss) $21,856 $10,249 ($3,242) ($2,473) 26,390
Income taxes 9,538
Income before changes in accounting principles 16,852
Cumulative effect of changes in accounting principles (22,819)
Net loss ($5,967)
</TABLE>
<TABLE>
<CAPTION>
1991
------------------------------------------------------------
Life
Insurance & Group Individual Corporate &
Annuities Products Health Other Total
<S> <C> <C> <C> <C> <C>
Revenues
Insurance and other revenues $63,467 $251,298 $77,604 $5,935 $398,304
Net investment income 163,592 16,693 4,833 14,242 199,360
Realized investment losses - - - (19,620) (19,620)
Total revenues 227,059 267,991 82,437 557 578,044
Benefits and Expenses
Insurance benefits 176,072 194,961 51,016 8,239 430,288
Expenses 17,095 58,607 36,332 15,005 127,039
Amortization of deferred insurance costs 9,905 899 8,906 1,415 21,125
Total benefits and expenses 203,072 254,467 96,254 24,659 578,452
Pretax income (loss) $23,987 $13,524 ($13,817) ($24,102) (408)
Income taxes 2,556
Net loss ($2,964)
</TABLE>
<TABLE>
Analysis of Net Income (Loss)
<CAPTION>
(000s omitted) 1993 1992 1991
------------------------------------
<S> <C> <C> <C>
Pretax operating income (loss) (1)
Life insurance and annuities $27,637 $21,856 $23,987
Group products 6,132 10,249 13,524
Individual health 5,368 (3,242) (13,817)
Corporate and other (560) (1,888) (3,324)
Total pretax operating income 38,577 26,975 20,370
Income taxes on operations 13,520 8,167 2,989
Net operating income 25,057 18,808 17,381
Other components of net income (net of taxes)
Realized investment gains (losses) (2) 2,840 (4,618) (19,620)
Gains from benefit plan changes (3) 319 2,662 -
Cumulative effect of changes in accounting principles (4) (1,550) (22,819) -
Loss on divestitures - - (725)
Net income (loss) $26,666 ($5,967) ($2,964)
<FN>
(1) Pretax income (loss) before realized investment gains (losses), loss on divestitures, cumulative effect of
accounting changes, and gains from benefit plan changes.
(2) 1993: Realized losses of $354 less tax benefit of $3,194.
(3) 1993: Curtailment gain of $491 less tax of $172 for UPI; 1992: Curtailment gain of $4,033 less tax of $1,371
for WNIC.
(4) 1993: Employers' Accounting for Postemployment Benefits; 1992: Employers' Accounting for Postretirement
Benefits Other than Pensions and Accounting for Income Taxes.
</TABLE>
Year Ended December 31, 1993 Compared to Year Ended December 31, 1992
Insurance Premiums and Policy Charges. Insurance premiums and policy
charges increased $57.8 million, or 15.2%, from $381.0 million in 1992 to
$438.8 million in 1993. The increase was primarily due to an increase in
individual health insurance premiums of $52.3 million and group products
premiums of $4.1 million resulting from an increased amount of business in
force and rate increases for both segments and $23.2 million of premium
revenues from an individual health reinsurance transaction entered into in
the second quarter of 1993. See "Segment Information - Group Products" and
"Segment Information - Individual Health," below.
Net Investment Income. Net investment income decreased $3.4 million, or
1.8%, to $183.7 million in 1993 from $187.1 million in 1992. The decrease
was due to a general decline in market interest rates which caused a
decline in the Company's portfolio yield from 8.6% to 8.0%, offset in part
by an increase in invested assets. Invested assets at December 31, 1993
increased $122.4 million from December 31, 1992, principally due to
deposits on life insurance policies and annuity contracts exceeding
withdrawals combined with proceeds from a secondary stock offering in the
third quarter of 1993.
Realized Investment Losses. Realized investment losses for 1993 were $0.4
million compared to $4.6 million in 1992. In 1993, realized gains of $7.8
million, $2.0 million, and $0.4 million on fixed maturity investments,
mortgage loans on real estate, and equity securities, respectively, were
offset by losses of $10.6 million on real estate investments. In 1992,
realized gains of $5.6 million on fixed maturity investments were offset by
losses of $4.9 million on mortgage loans on real estate, $3.6 million on
real estate investments, and $1.7 million on equity securities.
Insurance Benefits Paid or Provided. Insurance benefits paid or provided
increased $10.6 million, or 2.6%, from $409.8 million in 1992 to $420.4
million in 1993. The increase was primarily due to increased individual
health insurance benefits of $29.2 million resulting from an increase in
the block of in force business and the reinsurance transaction referred to
above. Partially offsetting this was a decline in life insurance and
annuities benefits of $16.6 million resulting from a decrease in interest
credited on interest-sensitive products, favorable mortality experience,
and the annual review of benefits assumptions, discussed below in
"Amortization of Deferred Insurance Costs."
Insurance and General Expenses. Insurance and general expenses increased
$24.4 million from $107.1 million in 1992 to $131.5 million in 1993.
Included in 1993 are expenses of $6.9 million related to an individual
health reinsurance transaction. See "Segment Information - Individual
Health," below. Additionally, 1993 includes charges of $1.6 million related
to re-engineering in the life insurance and annuities segment and $1.7
million for the combination of the individual health and employee benefits
divisions. 1993 also includes move related costs, primarily due to the
closing of the Company's previous headquarters.
Amortization of Deferred Insurance Costs. Amortization of deferred
insurance costs increased $10.8 million, or 39.9%, in 1993 to $37.9 million
from $27.1 million in 1992. The change was primarily due to increased
amortization of $3.5 million in the individual health insurance segment
resulting from an increase in the block of in force business and $3.6
million due to the annual review of amortization assumptions in the life
insurance and annuities segment, partially offset by the decrease in
benefits, discussed above.
Income Before Income Taxes and Changes in Accounting Principles. Income
before income taxes and changes in accounting principles increased $12.3
million, or 46.7%, to $38.7 million in 1993 compared to $26.4 million in
1992. The increase was due primarily to improved operations in the
Company's individual health and life insurance and annuities segments,
offset in part by lower pretax income from the group products segment.
Income Taxes. Income taxes increased $1.0 million to $10.5 million in 1993
compared to $9.5 million in 1992, primarily due to improved income from
operations. Included in income taxes for 1993 is a tax credit of $3.2
million related to realized investment losses. Also in 1993, the Company's
federal income tax rate increased from 34% to 35%, retroactive to January
1, 1993, due to legislation enacted in August, 1993.
Changes in Accounting Principles (Net of Taxes). The Company recorded a
one-time charge of $1.6 million after taxes effective the first quarter
1993 for the adoption of a new accounting standard on accounting for
postemployment benefits. The adoption did not have a material impact on
income before accounting changes. 1992 included a $22.8 million after-tax
charge relating to the first quarter 1992 adoption of new accounting
standards, related to postretirement benefits other than pensions and
income taxes.
Net Income (Loss). Net income for 1993 was $26.7 million compared to a net
loss of $6.0 million in 1992. The improvement in net income resulted
primarily from the charges in the first quarter of 1992 relating to the
adoption of two new accounting standards described above and improved
operations in the individual health and life insurance and annuities
segments, partially offset by a decline in group products operating income
and the charge relating to the new accounting standard in the first quarter
of 1993.
Segment Information
Life Insurance and Annuities. Revenues for the life insurance and annuities
segment, which is comprised of new business sold by UPI to individuals and
small businesses and closed blocks of life insurance and annuities written
by WNIC prior to 1990, were $229.0 million for 1993, down from $233.5
million in 1992. A decline in investment income of $5.8 million resulted
from lower portfolio yield rates, offset in part by an increase in invested
assets. A $1.5 million improvement in insurance revenues was primarily due
to an increase in life insurance in force combined with higher policy
charges at UPI, offset in part by a decline in insurance revenues on the
closed blocks of business at WNIC.
Pretax income for the life insurance and annuities segment increased 28.7%
to $28.1 million in 1993 from $21.9 million in 1992. The increase was
primarily due to improved interest rate spreads, as the interest credited
on account balances was reduced more than the reduction in the yield on
invested assets, and favorable mortality experience. Also contributing to
the improvement was a charge of $2.8 million for anticipated guaranty fund
assessments recorded in 1992 compared to $0.5 million in 1993. Partially
offsetting these increases were charges in 1993 of $1.6 million to combine
the Company's data centers, implement work flow re-engineering at UPI, and
transfer the administration of WNIC's closed block of life insurance to
UPI.
Group Products. Revenues for the group products segment were $234.6 million
in 1993 compared to $231.2 million in 1992, an increase of 1.5%. The
increase was primarily due to an increase in the amount of business in
force in the education product line resulting from sales in 1992 and 1993
and premium rate increases averaging 7% in the employee benefits product
line. These increases were partially offset by a decline of approximately
$6 million from the termination of a large group life insurance contract,
with approximately $3 billion of life insurance in force, in the third
quarter of 1993. The annual premiums and related benefits related to this
contract were each approximately $11 million. The termination of this
contract will not materially affect net income.
Pretax income for the group products segment was $6.1 million in 1993
compared to $10.2 million in 1992. The decline was primarily due to higher
medical claims, less favorable mortality experience, and increased
operating expenses, including the receipt in the first quarter of 1992 of
an expense refund of $1.8 million in connection with a withdrawal from a
partnership. Also included in operating expenses in 1993 were charges of
$1.7 million related to the combination of the individual health and
employee benefits divisions. These increases were partially offset by
favorable disability claims experience in 1993.
Individual Health. Revenues for the individual health insurance segment
increased 48.7% to $159.9 million in 1993 compared to $107.6 million in
1992. Revenues for this segment increased in part as a result of a
reinsurance transaction that added a total of $23.2 million of premium
revenue in 1993. In addition to the reinsurance transaction, the amount of
business in force (based on the average number of policies in force)
increased approximately 13% in 1993 compared to 1992 and premium rates
increased an average of 7% in 1993.
Sales of individual health policies declined in 1993 compared to 1992 in
part due to a decision to maintain pricing margins in spite of increased
pricing competition. The Company expects such increased pricing competition
to continue in 1994. However, as a result of an expanded sales force from
the reinsurance agreements described below, the Company expects new sales
will increase in 1994.
Pretax income for the individual health insurance segment was $5.4 million
for 1993 compared to a loss of $3.2 million in 1992. 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. Harvest Life will continue to
administer this business for a period of at least three years. As part of
the reinsurance agreement, Harvest Life has agreed to market the Company's
major medical products in place of its own major medical products through
Harvest Life's career agent sales force. Harvest Life agents sell to
insureds in rural areas, primarily farming communities. In addition to
$23.2 million of premium revenue and $0.2 million of other income recorded
in 1993, insurance benefits of $15.5 million and insurance and general
expenses of $6.9 million were attributable to the reinsurance agreement.
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, effective January 1, 1994. The block had approximately $60
million of premium revenue in 1993. Beginning in 1994, the Company will
administer the entire block of business for a fee paid by National
Casualty. In addition, WNIC will market its products through the existing
National Casualty Company sales force.
The Company will carefully consider entering into additional, similar
reinsurance transactions as they arise.
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 1993, the pretax loss was $0.9
million compared to a loss of $2.5 million in 1992. The improvement was
primarily due to the previously mentioned decrease in realized investment
losses.
Revenues for this segment are expected to increase slightly in 1994 due to
investment income on a portion of the proceeds from the third quarter 1993
stock offering.
Year Ended December 31, 1992 Compared to Year Ended December 31, 1991
Insurance Premiums and Policy Charges. Insurance premiums and policy
charges decreased $5.8 million, or 1.5%, from $386.8 million in 1991 to
$381.0 million in 1992. The decrease was primarily attributable to a $36.5
million decline in the group products segment's premiums which was
primarily due to the termination and restructuring of certain group health
contracts resulting from rate increases in 1991 and a decrease of $3.4
million of premiums and policy charges resulting from the 1991 sale of
discontinued lines. These declines were offset in part by increases in
individual health premiums and policy charges of $24.2 million due to an
increase in the block of in force business from higher sales of and premium
rate increases on individual health policies and by increased policy
charges on life and annuity contracts of $9.8 million.
Net Investment Income. Net investment income decreased $12.3 million, or
6.1%, from $199.4 million in 1991 to $187.1 million in 1992. The decrease
was due to a lower average yield on invested assets in 1992, which
decreased from 9.1% in 1991 to 8.6% in 1992, resulting from a general
decline in interest rates combined with the Company's reinvestment of
assets in higher quality, lower yielding securities.
Realized Investment Losses. Realized investment losses decreased $15.0
million, or 76.5%, from $19.6 million in 1991 to $4.6 million in 1992.
Results in 1992 included gains of $5.6 million on the sale of fixed
maturity investments and losses on mortgage loans on real estate and real
estate investments of $4.9 million and $3.6 million, respectively, combined
with losses on equity securities of $1.7 million. Results in 1991 included
a $10.0 million loss related to bonds backed by guaranteed investment
contracts issued by Executive Life Insurance Company as well as losses on
mortgages loans on real estate of $6.6 million and real estate investments
of $3.2 million.
Loss on Divestitures. The 1991 pretax net loss consisted of a $1.8 million
loss on the sale of a subsidiary, partially offset by a gain on blocks of
business sold by WNIC. See Note J to the Consolidated Financial Statements
for further information.
Insurance Benefits Paid or Provided. Insurance benefits paid or provided
decreased $20.5 million, or 4.8%, from $430.3 million in 1991 to $409.8
million in 1992. The decrease was due to a $26.0 million decline in the
group products segment's benefits resulting from the termination and
restructuring of certain group health policies and a $7.5 million decline
in benefits related to the 1991 sale of discontinued lines, offset in part
by an $11.8 million rise in individual health benefits directly associated
with the increased business in force discussed above.
Insurance and General Expenses. Insurance and general expenses, including a
$4.0 million gain from the reduction of postretirement benefits, decreased
$19.9 million, or 15.7%, from $127.0 million in 1991 to $107.1 million in
1992. The decline resulted primarily from the elimination of $3.7 million
of expense from the sale of discontinued lines and a $7.7 million planned
decrease in operating expenses in the group products segment.
Amortization of Deferred Insurance Costs. Amortization of deferred
insurance costs increased $6.0 million, or 28.4%, from $21.1 million in
1991 to $27.1 million in 1992, due primarily to additional amortization
resulting from the early recognition of investment income caused by the
prepayment of certain mortgage-backed securities combined with the increase
in the individual health block of business.
Income (Loss) Before Income Taxes and Changes in Accounting Principles.
Income (loss) before income taxes and changes in accounting principles
increased $26.8 million from a pretax loss of $0.4 million in 1991 to
pretax income of $26.4 million in 1992. The largest items contributing to
the increase were the $10.6 million improvement in the individual health
segment's pretax income and the $15.0 million decrease in realized
investment losses.
Income Taxes. Income taxes increased $6.9 million from $2.6 million in 1991
to $9.5 million in 1992 due primarily to the higher level of pretax income
of $26.4 million in 1992, versus a pretax loss of $0.4 million in 1991.
Changes in Accounting Principles (Net of Taxes). Effective January 1,
1992, the Company adopted SFAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" and SFAS 109, "Accounting for
Income Taxes." The cumulative effect of adopting these new accounting
standards was a charge of $20.1 million and $2.7 million, respectively.
Net Loss. Net loss increased $3.0 million from $3.0 million in 1991 to $6.0
million in 1992. The change was primarily as a result of the $22.8 million
cumulative effect of changes in accounting principles described above,
partially offset by the increase in income before such changes of $19.8
million.
Segment Information
Life Insurance and Annuities. Revenues for the life insurance and annuities
segment were $233.5 million in 1992 compared to $227.1 million in 1991. The
increase was primarily due to increased policy revenues and investment
income at UPI, offset in part by declines in revenues in the closed blocks
of business at WNIC.
Pretax income for the life insurance and annuities segment decreased 8.9%
to $21.9 million in 1992 compared to $24.0 million in 1991. The decline was
primarily due to 1992 accruals for anticipated guaranty fund assessments of
$2.8 million.
Group Products. Revenues for the group products segment were $231.2
million in 1992 compared to $268.0 million in 1991. The decline was
attributable to terminated cases and the conversion of several cost plus
cases to a minimum premium basis.
Pretax income for the group products segment declined 24.2% to $10.2
million in 1992 compared to $13.5 million in 1991. The decline was
primarily due to a decline in premium revenues and an increase in the
claims ratio for 1992.
Individual Health. Revenues for the individual health insurance segment
increased 30.5% to $107.6 million in 1992 compared to $82.4 million in
1991. Revenues for this segment primarily increased due to an increase in
the amount of business in force and an increase in premium rates.
Pretax loss for the individual health insurance segment declined $10.6
million to $3.2 million for 1992 compared to a loss of $13.8 million in
1991. The decline in the loss from 1991 was primarily due to a larger
premium base over which to spread fixed operating expenses for this segment
and an improved ratio of claims to premium revenues in 1992.
Corporate and Other. The pretax loss for the corporate and other segment in
1992 was $2.5 million compared to a loss of $24.1 million in 1991. In 1992
realized investment losses were $4.6 million compared to losses of $19.6
million in 1991, which included losses of $10.0 million related to fixed
maturity investments backed by guaranteed investment contracts. 1991 also
included a loss of $1.2 million related to divestitures.
Investment Portfolio
The Company's investment portfolio is managed by an experienced staff of in-
house investment professionals, primarily at WNIC, and outside investment
advisors, primarily the investment management group at Scudder, Stevens &
Clark, Inc. Investments are made pursuant to strategies and guidelines
approved by the Finance Committee of the Company's Board of Directors. The
Company selects investments that match the needs of the businesses that the
assets support in the areas of yield, liquidity, asset quality, and
duration. The Company pursues a conservative investment philosophy by
balancing a variety of objectives, including high credit quality,
liquidity, high current income, preservation of capital, and protection
against market and interest rate risk. The Company's investment portfolio
consists primarily of investment grade, publicly-traded fixed maturity
investments and mortgage loans on real estate. All investments made by WNIC
and UPI are governed by Illinois and Indiana insurance laws and
regulations, respectively.
At December 31, 1993, the Company had invested assets of $2.4 billion. The
following table sets forth certain information about the Company's
investment portfolio as of that date:
<TABLE>
<CAPTION>
Percent of
Total
Carrying Carrying
(000s omitted) Value Value
------------------------
<S> <C> <C>
Fixed maturity investments:
United States government
obligations $55,646 2.4 %
Obligations of states and political
subdivisions 83,129 3.5
Public utilities 137,132 5.8
Corporate and other 745,632 31.6
Mortgage-backed securities 701,786 29.8
Foreign government obligations 37,468 1.6
Total fixed maturity investments 1,760,793 74.7
Equity securities 15,860 0.7
Other investments:
Mortgage loans on real estate 391,667 16.6
Real estate investments 39,086 1.7
Policy loans 52,285 2.2
Other long-term invested assets 21,032 0.9
Short-term invested assets 75,302 3.2
Total invested assets 2,356,025 100.0 %
</TABLE>
Fixed Maturity Investments
The carrying value of fixed maturity investments at December 31, 1993 was
$1.8 billion, or 74.7% of the Company's invested assets. This amount
increased from $1.6 billion, or 69.5% of the Company's invested assets at
December 31, 1992 primarily due to the Company making new investments
principally in investment grade fixed maturity securities. At December 31,
1993 and December 31, 1992, the fair value of the Company's fixed maturity
investments exceeded the carrying value by $82.3 million and $56.9 million,
respectively.
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's) 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's 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's or Moody's (unrated
private placements), but instead rated with comparable NAIC ratings,
comprise 0.4% of AAA-rated investments, 1.7% of AA-rated, 4.1% of A-rated,
23.2% of BBB-rated, and 50.2% of investments rated BB and lower at December
31, 1993.
The composition of the Company's fixed maturity portfolio, based on S&P's
and Moody's ratings at December 31, 1993, was as follows:
<TABLE>
<CAPTION>
Fair Carrying
(000s omitted) Value Value
----------------------------
<S> <C> <C>
AAA/Aaa $826,835 $798,589
AA/Aa 153,666 148,618
A 439,452 414,827
BBB/Baa 322,970 304,743
BB/Ba and lower 100,202 94,016
Total fixed maturities $1,843,125 $1,760,793
</TABLE>
<TABLE>
<CAPTION>
Carrying
Value as a Carrying
Percent of Value as a
Total Fixed Percent of
Maturities Invested Asset
----------------------------
<S> <C> <C>
AAA/Aaa 45.4 % 33.9 %
AA/Aa 8.4 6.3
A 23.6 17.6
BBB/Baa 17.3 12.9
BB/Ba and lower 5.3 4.0
Total fixed maturities 100.0 % 74.7 %
</TABLE>
The carrying value of the Company's high-yield investments (investments
rated BB and lower) at December 31, 1993 was $94.0 million or 4.0% of the
Company's invested assets compared to $108.3 million or 4.8% of invested
assets at December 31, 1992. The fair value of this portfolio exceeded the
carrying value by $6.2 million at December 31, 1993 and $6.1 million at
December 31, 1992. The decline in the size of the high-yield portfolio in
1993 was primarily due to redemptions and sales, partially offset by
downgrades.
At December 31, 1993, 29.5% 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), or the Federal Home Loan Mortgage
Corporation (FHLMC), all of which are agencies of the U.S. Government. Only
GNMA mortgage-backed securities 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. At December 31, 1993, 89.1% 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 and fair value of the Company's
mortgage-backed securities portfolio at December 31, 1993:
<TABLE>
<CAPTION>
Carrying Value
as a Percent Carrying Value
of Mortgage- as a Percent
Carrying Fair Backed of Total
(000s omitted) Value Value Securities Invested Asset
-----------------------------------------------------
<S> <C> <C> <C> <C>
Agency collateralized mortgage obligations
Planned and target amortization classes $290,190 $297,673 41.3 % 12.3 %
Sequential classes 18,925 19,971 2.7 0.8
Support classes 12,190 12,935 1.7 0.5
Residual 1,893 2,283 0.3 0.1
Total agency collateralized mortgage obligations 323,198 332,862 46.0 13.7
Non-agency collateralized mortgage obligations
Sequential classes 16,317 17,981 2.4 0.7
Support classes 11,430 11,872 1.6 0.5
Planned amortization classes 3,705 3,837 0.5 0.1
Total non-agency collateralized mortgage obligations 31,452 33,690 4.5 1.3
Total collateralized mortgage obligations 354,650 366,552 50.5 15.0
Agency mortgage-backed pass-through securities 341,141 352,095 48.6 14.5
Non-agency mortgage-backed pass-through securities 5,995 6,485 0.9 0.3
Total mortgage-backed securities $701,786 $725,132 100.0 % 29.8 %
</TABLE>
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.
Planned amortization class (PAC) and target amortization class (TAC)
tranches, which together comprised 12.4% of the Company's invested assets
at December 31, 1993, 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 1.5% of the Company's invested assets
at December 31, 1993, may have prepayment characteristics similar to
mortgage-backed pass-through securities. Support classes, which comprised
1.0% of the Company's invested assets at December 31, 1993, are the most
sensitive to prepayment risk.
Mortgage Loans and Real Estate
The Company had investments in mortgage loans of $391.7 million at December
31, 1993 compared to $452.0 million at December 31, 1992. Investments in
mortgage loans declined primarily due to prepayments and amortization of
the mortgage loan portfolio. Of the outstanding loans at December 31, 1993,
$3.7 million (net of allowances of $3.9 million), or 0.9%, were delinquent
60 days or more as to interest or principal.
At December 31, 1993, 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 1.1% compared to 2.2% at December 31, 1992. 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 following summarizes the additions and deductions to the Company's
mortgage loan allowance:
<TABLE>
<CAPTION>
(000s omitted) 1993 1992 1991
------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $11,618 $8,794 $2,582
Additions 3,475 4,090 8,673
Deductions (3,062) (1,266) (2,461)
Balance at end of year $12,031 $11,618 $8,794
</TABLE>
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 $16.9 million at December 31, 1993 compared to $18.2
million at December 31, 1992. At December 31, 1993, the Company's mortgage
loan portfolio included $6.9 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.
The Company's mortgage loan portfolio at December 31, 1993 was diverse with
respect to geographic distribution, principal repayment schedule dates, and
property type as outlined below:
<TABLE>
Geographic Distribution of Mortgage Loans - Top Eight States
At December 31, 1993
<CAPTION>
$(Millions) Percent Amount
------------------------
<S> <C> <C>
California 17.5% $68.6
Indiana 14.2 55.7
Illinois 12.1 47.3
Texas 9.0 35.2
Florida 8.8 34.4
North Carolina 4.8 18.9
Michigan 4.1 16.0
Wisconsin 3.7 14.4
</TABLE>
<TABLE>
Principal Repayment Schedule
At December 31, 1993
<CAPTION>
Scheduled Total
Principal Balloon Principal
(000s omitted) Repayments Payments Payments
------------------------------------
<S> <C> <C> <C>
Mortgage Loans by
Year of Maturity
1994 $2,276 $24,671 $26,947
1995 2,528 16,179 18,707
1996 3,173 35,941 39,114
1997 3,329 19,717 23,046
1998 3,368 4,248 7,616
1999 and thereafter 137,755 138,482 276,237
Total $152,429 $239,238 $391,667
</TABLE>
<TABLE>
Property Type Distribution of Mortgage Loans
At December 31, 1993
<S> <C>
Retail 58.1%
Office 12.8
Industrial 9.1
Residential 6.6
Medical 6.6
Other 6.8
Total 100.0%
</TABLE>
The Company's real estate investments totaled $39.1 million (net of
allowances of $8.6 million) at December 31, 1993 compared to $60.0 million
(net of allowances of $14.2 million) at December 31, 1992. The change was
primarily due to sales of real estate investments. At December 31, 1993,
$14.6 million of real estate investments were acquired through mortgage
loan foreclosure, compared to $20.2 million at year-end 1992.
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.
Equity Securities
At December 31, 1993, $7.0 million or 0.3% of the Company's invested assets
consisted of common stocks and common stock mutual funds, $3.5 million or
0.2% of invested assets consisted of nonredeemable preferred stocks, and
$5.4 million or 0.2% of invested assets consisted of fixed maturity and
money-market mutual funds. 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 1993, the Company's operating activities generated cash of $104.7
million compared to $93.3 million in 1992. The increase in cash provided by
operations in 1993 primarily resulted from improved insurance operations in
1993 compared to 1992.
Investing activities (principally purchases and sales of investments) used
cash of $130.8 million in 1993 compared to $140.0 million in 1992,
primarily for the purchase of fixed maturity investments in both periods.
Financing activities provided cash of $27.1 million and $49.7 million, in
1993 and 1992, respectively. In 1993, $47.3 million of cash was provided by
the sale of 2.1 million new shares of common stock and $18.1 million was
provided by net receipts from universal life insurance and annuity
policies. Partially offsetting these amounts in 1993 was the payment of
$17.4 million of short-term notes payable, $9.5 million of mortgage and
other notes payable, and $12.2 million of dividends to stockholders. In
1992, $46.0 million of cash was provided by net receipts from universal
life insurance and annuity policies and net proceeds from debt, offset in
part by $11.1 million of dividends to stockholders.
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 5 percent, 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 5 percent. 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 $85.7 million at
December 31, 1993, compared to $60.2 million at December 31, 1992. 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.
Stock Offering
During the third quarter of 1993, the Company issued 2,133,000 shares of
Common Stock in a secondary stock offering. The sale of the additional
shares resulted in an increase in stockholders' equity of $47.3 million and
a decrease in 1993 primary earnings of 4.3% or $.11 per share. See Note E
for additional information.
Dividends
The Company's primary sources of funds to pay dividends to stockholders are
investments held at the parent and dividends from WNIC. These dividends are
subject to restrictions set forth by the Illinois Insurance Department.
Illinois state regulations limit the amount of cash that can be withdrawn
from WNIC to the greater of the previous year's statutory earnings or 10%
of statutory capital and surplus. See Note E for further information.
UPI is wholly owned by United Presidential Corporation, an insurance
holding company which in turn is 71% owned by WNIC and 29% owned by WNC.
UPI is not considered a source of funds for dividends to stockholders of
the Company. Management expects UPI to pay no dividends in the foreseeable
future in order to conserve capital at that subsidiary.
Health Care Reform
On September 22, 1993, President Clinton provided the outline of the
Administration's proposal for health care reform and delivered to Congress
a more detailed package of the proposal in mid-October. The proposal relies
heavily on a federally guaranteed package of health care benefits and
medical services, primarily through an employer-based program for working
Americans. In addition, the Administration's outline provides for health
care coverage for non-working Americans. The Administration's proposal
could have the following effects on insurers: (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; or (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.
In addition to the Administration's plan, a number of members of Congress
have proposed alternative health care reform plans. These plans rely, in
some instances, more on market-driven reform rather than on government
mandated reform and several aspects of the Administration's proposal, such
as universal coverage and employer mandates, are being challenged by these
alternative plans.
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.
During the 1993 fourth quarter, the Company announced that it had combined
its individual health division and employee benefits division at WNIC. The
combination is designed to accelerate the Company's positioning for
strategic business opportunities under health care reform.
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 June 1993, the Company was advised by A.M. Best that, after review of
the 1992 statutory financial results and operating performance, both WNIC
and UPI were assigned ratings of "A- (Excellent)," an adjustment from their
previous ratings of "A (Excellent)." 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.
In communicating its most recent rating, A.M. Best advised WNIC that, if
current trends persist, further rating adjustments may be required. The
Company believes that the trends referred to by A.M. Best are (i) a decline
in WNIC's statutory capital and surplus and (ii) increased net statutory
operating losses on certain health insurance products of WNIC as calculated
using statutory accounting practices. WNIC's statutory operating income in
recent years has been adversely affected by the payment of first year
commissions on new sales of certain health insurance products and
investments in infrastructure improvements. The Company believes that as
renewal business increases as a percentage of total revenues, statutory
operating income for these products will improve. For 1993, statutory net
operating income improved to $19.9 million from $5.8 million in 1992, and
net income improved to $11.0 million from $36 thousand in 1992. Statutory
capital and surplus increased $9.2 million, or 5.1%, to $188.3 million in
1993 versus a decrease of $9.1 million, or 4.8%, in 1992.
Notwithstanding the foregoing, there can be no assurance that A.M. Best
will maintain the ratings of the Company's insurance subsidiaries at their
present levels. A rating downgrade at either WNIC or UPI could have a
materially adverse effect on the ability of that subsidiary to write and
retain business.
Inflation and Changing Prices
Inflation and changing prices are anticipated by the Company in the pricing
of its insurance products. Significant components of health insurance
benefits are the medical care inflation rate, policyholder utilization of
medical services, and cost-shifting, which is the transfer of medical care
provider expenses that are not covered by governmental plans and HMOs to
private insurers. As a result of relatively stable general and medical care
inflation rates in 1993, WNIC's health insurance pricing assumptions
regarding these factors were essentially unchanged from the prior year. For
the first quarter of 1994, these assumptions have also not changed
materially.
The effect of inflation on operating expenses has not been significant.
However, if inflation increases significantly, operating expenses would be
expected to increase.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
Consolidated Balance Sheets
Washington National Corporation
(000s omitted)
<CAPTION>
December 31, 1993 1992
------------------------
<S> <C> <C>
Assets
Investments
Fixed maturities-
Held to maturity (fair value: $134,448; $1,608,401) $128,184 $1,551,507
Held for sale (fair value: $1,708,677) 1,632,609 -
Equity securities (cost: $15,903; $38,407) 15,860 38,518
Mortgage loans on real estate 391,667 451,960
Real estate 39,086 60,001
Policy loans 52,285 51,501
Other long-term 21,032 29,386
Short-term 75,302 50,722
Total Investments 2,356,025 2,233,595
Cash 10,441 9,471
Deferred insurance costs 256,956 241,674
Reinsurance recoverables and prepaid premiums 56,314 60,901
Accrued investment income 32,386 33,704
Insurance premiums in course of collection 25,159 13,082
Property and equipment 26,198 20,808
Goodwill 21,772 24,914
Income taxes recoverable 1,403 649
Separate account assets 44,589 43,055
Other 23,176 30,930
Total Assets $2,854,419 $2,712,783
</TABLE>
<TABLE>
<CAPTION>
1993 1992
------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Liabilities
Policy Liabilities
Future policy benefits:
Life $800,447 $749,268
Annuities 1,250,225 1,225,839
Policy and contract claims 206,963 199,690
Unearned premiums 34,649 33,734
Other 39,187 24,424
Total Policy Liabilities 2,331,471 2,232,955
General expenses and other liabilities 121,916 116,233
Mortgage and long-term notes payable 2,434 13,870
Short-term notes payable - 17,350
Deferred income taxes 5,064 1,280
Separate account liabilities 44,589 43,055
Total Liabilities 2,505,474 2,424,743
Stockholders' Equity
Convertible Preferred Stock 723 727
Common Stock, $5.00 par value 77,505 66,473
Additional paid-in capital 46,640 9,487
Retained earnings 284,938 270,508
Net unrealized gains (losses) on equity securities (43) 111
Unfunded pension loss (2,821) (1,269)
Cost of Common Treasury Stock (57,997) (57,997)
Total Stockholders' Equity 348,945 288,040
Total Liabilities and Stockholders' Equity $2,854,419 $2,712,783
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
Consolidated Statements of Operations
Washington National Corporation
(000s omitted, except per share amounts)
<CAPTION>
Year Ended December 31, 1993 1992 1991
------------------------------------
<S> <C> <C> <C>
Revenues
Insurance premiums and policy charges $438,822 $380,970 $386,815
Net investment income 183,735 187,137 199,360
Realized investment losses (354) (4,618) (19,620)
Loss on divestitures - - (1,158)
Other 6,324 6,953 12,647
Total Revenues 628,527 570,442 578,044
Benefits and Expenses
Insurance benefits paid or provided 420,358 409,840 430,288
Insurance and general expenses 131,512 107,092 127,039
Amortization of deferred insurance costs 37,943 27,120 21,125
Total Benefits and Expenses 589,813 544,052 578,452
Income (loss) before income taxes and cumulative effect of
changes in accounting principles 38,714 26,390 (408)
Income Taxes 10,498 9,538 2,556
Income (loss) before cumulative effect of changes
in accounting principles 28,216 16,852 (2,964)
Cumulative Effect of Changes in Accounting Principles
- -Net of Related Tax Effects
Postemployment benefits (1,550) - -
Postretirement benefits other than pensions - (20,126) -
Accounting for income taxes - (2,693) -
(1,550) (22,819) -
Net Income (Loss) $26,666 ($5,967) ($2,964)
Primary Earnings Per Share
Income (loss) before cumulative effect $2.59 $1.65 ($.33)
Cumulative effect of changes in accounting principles (.14) (2.28) -
Net Income (Loss) Per Share $2.45 ($.63) ($.33)
Average shares and equivalents outstanding 10,755 9,989 9,980
Fully Diluted Earnings Per Share
Income (loss) before cumulative effect $2.56 $1.65 ($.33)
Cumulative effect of changes in accounting principles (.14) (2.28) -
Net Income (Loss) Per Share $2.42 ($.63) ($.33)
Average shares and equivalents outstanding 11,026 9,989 9,980
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
Consolidated Statements Of Cash Flows
Washington National Corporation
(000s omitted)
<CAPTION>
Year Ended December 31, 1993 1992 1991
------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $26,666 ($5,967) ($2,964)
Adjustments to reconcile net cash provided (used) by operating
activities
Increase in policy liabilities 80,440 82,513 69,294
Deferred insurance costs (15,282) (30,788) (25,234)
Change in premiums in course of collection (12,077) 6,963 1,217
Changes in accounting principles-net of tax 1,550 22,819 -
Realized investment losses 354 4,618 19,620
Net liability of businesses sold - - (96,656)
Other, net 23,030 13,111 19,473
Net Cash Provided (Used) by Operating Activities 104,681 93,269 (15,250)
Investing Activities
Proceeds from sales
Fixed maturities 261,313 123,549 200,389
Equity securities, mortgage loans, real estate, and other 177,839 192,487 464,301
Proceeds from maturities and redemptions
Fixed maturities 266,217 435,506 152,069
Equity securities, mortgage loans, real estate, and other 73,763 85,864 48,198
Cost of purchases
Fixed maturities (726,358) (775,858) (402,835)
Equity securities, mortgage loans, real estate, and other (150,432) (226,101) (442,413)
Increase in policy loans (784) (1,815) (3,203)
Purchase of property and equipment (7,824) (5,369) (13,371)
Net (increase) decrease in short-term investments (24,580) 31,764 (22,554)
Carrying value of subsidiary sold, less cash of $1,496 - - 6,268
Net Cash Used by Investing Activities (130,846) (139,973) (13,151)
Financing Activities
Policyholder account deposits 142,871 174,841 194,439
Policyholder account withdrawals (124,795) (128,815) (148,281)
Change in short-term notes payable (17,350) 10,714 2,069
Repayment of mortgage and long-term notes payable (9,536) (822) (7,307)
Proceeds from mortgage and long-term notes payable - 4,400 2,843
Proceeds from sale of Common Stock 48,181 428 167
Dividends to stockholders (12,236) (11,050) (11,114)
Purchase of Common Stock - (21) (3,207)
Net Cash Provided by Financing Activities 27,135 49,675 29,609
Increase in Cash 970 2,971 1,208
Cash at beginning of year 9,471 6,500 5,292
Cash at End of Year $10,441 $9,471 $6,500
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
Consolidated Statements Of Stockholders' Equity
<CAPTION>
Washington National Corporation
(000s omitted)
Year Ended December 31, 1993 1992 1991
------------------------------------
<S> <C> <C> <C>
Convertible Preferred Stock
Balance at beginning of year $727 $732 $732
Conversion to common stock (4) (5) -
Balance at end of year 723 727 732
Common Stock and Additional Paid-In Capital
Balance at beginning of year 75,960 75,527 75,360
Sale on open market 47,263 - -
Other issuances 922 433 167
Balance at end of year 124,145 75,960 75,527
Retained Earnings
Balance at beginning of year 270,508 287,525 301,603
Net income (loss) 26,666 (5,967) (2,964)
Common stock dividends (11,874) (10,686) (10,748)
Preferred stock dividends (362) (364) (366)
Balance at end of year 284,938 270,508 287,525
Net Unrealized Gains (Losses) on Equity Securities
Balance at beginning of year 111 (3,248) (10,562)
Change during year (154) 3,359 7,314
Balance at end of year (43) 111 (3,248)
Unfunded Pension Loss
Balance at beginning of year (1,269) (2,498) (4,952)
Change during year (1,552) 1,229 2,454
Balance at end of year (2,821) (1,269) (2,498)
Cost of Common Treasury Stock
Balance at beginning of year (57,997) (57,976) (54,769)
Purchases on open market - (21) (3,207)
Balance at end of year (57,997) (57,997) (57,976)
Total Stockholders' Equity at End of Year $348,945 $288,040 $300,062
</TABLE>
<TABLE>
Capital Stock Activity
(Shares)
<CAPTION>
(000s omitted)
Year Ended December 31, 1993 1992 1991
------------------------------------
<S> <C> <C> <C>
Convertible Preferred Stock
Balance at beginning of year 145 146 146
Conversion to common stock - (1) -
Balance at end of year 145 145 146
Common Stock
Balance at beginning of year 13,295 13,262 13,250
Sale on open market 2,133 - -
Other issuances 73 33 12
Balance at end of year 15,501 13,295 13,262
Common Treasury Stock
Balance at beginning of year (3,383) (3,383) (3,145)
Purchases on open market - - (238)
Balance at end of year (3,383) (3,383) (3,383)
Outstanding Common Shares at End of Year 12,118 9,912 9,879
<FN>
See notes to consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A
Significant Accounting Policies and Practices
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) and include
the accounts and operations of Washington National Corporation and its
subsidiaries (WNC or the Company). Significant intercompany transactions
have been eliminated.
Reclassifications
Certain amounts in the 1992 and 1991 financial statements have been
reclassified to conform to the 1993 presentation.
Investments
Fixed Maturities.
Fixed maturity investments are securities that mature more than one year
after issuance. They include bonds, notes, and redeemable preferred stocks.
All fixed maturities are intended to be used by WNC as part of its
asset/liability matching strategy. Effective March 31, 1993, the Company
reclassified its fixed maturity investments into investments that are "held
for sale" and investments that are "held to maturity." Fixed maturity
investments held to maturity generally are carried at amortized cost, less
write-downs for other-than-temporary impairments. Fixed maturity
investments that are held for sale are those securities that may be sold in
response to unanticipated policy surrenders, policy loan demand, or
infrequent transactions. These fixed maturity investments are carried, on
an aggregate basis, at the lower of amortized cost, less write-downs for
other-than- temporary impairments and an allowance for below-investment
grade securities, or fair value. Unrealized losses in aggregate on fixed
maturity investments held for sale would be recorded in stockholders'
equity, net of applicable deferred income taxes. At December 31, 1993 and
1992, the fair value of all fixed maturity investments exceeded carrying
value by $82,332,000 and $56,894,000, respectively.
Equity Securities.
Equity securities represent investments in mutual funds, nonredeemable
preferred stocks, and common stocks. These securities are carried at fair
value which is determined primarily through published quotes of trading
values. Changes in the valuation allowance necessary to adjust the carrying
amount of the equity securities for temporary changes in fair value are
reported directly in stockholders' equity. Other-than-temporary declines
below cost are recorded as realized losses.
Mortgage Loans on Real Estate.
Mortgage loans on real estate are carried at unpaid principal, less
unearned discount and allowance for possible losses. An allowance for
mortgage loan losses is established based on an evaluation of the mortgage
loan portfolio, past credit loss experience, and current economic
conditions.
Real Estate Investments.
Real estate investments are principally carried at cost, less allowances
for depreciation and possible losses. Foreclosed real estate is considered
held for sale and is recorded at the lower of current carrying value or
fair value, less estimated costs of disposal.
Other Long-term Investments.
Other long-term investments consist principally of venture capital
investments which are carried at cost, less other- than-temporary
impairments.
Short-term Investments.
Short-term investments include commercial paper, variable demand notes, and
money market funds, and are carried at cost.
Investment Income.
Interest on bonds, loans, and notes is recorded in income as earned. Income
is adjusted for any amortization of premium or discount on these
investments. Any excess cash flows arising from prepayments are booked as
adjustments to the carrying value of the investment. Income on real estate
and other long-term investments is recorded principally on a cash basis.
Dividends are recorded as income on ex-dividend dates.
Realized Gains or Losses.
When an investment is sold, its selling price may be higher or lower than
its carrying value. The difference between the selling price and the
carrying value is recorded as a realized gain or loss, using the specific
identification method. Investments that have declined in fair value below
cost, and for which the decline is judged to be other-than-temporary, are
written down to their estimated fair value. Write-downs and allowances for
losses on mortgage loans and below-investment grade bonds are included in
realized investment losses.
Fair Value of Financial Instruments
GAAP requires the disclosure of fair value information about certain
financial instruments for which it is practicable to estimate that value.
In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. The
fair values are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. The derived fair
value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in the immediate
settlement of the instrument. As the fair value of all of WNC's assets and
liabilities is not presented, the aggregate fair value of the amounts
presented does not represent the underlying value of WNC.
The carrying amounts reported in the balance sheets for cash, short-term
investments, short-term borrowings, and accrued investment income
approximate their fair values.
Fair values for fixed maturity securities are based on quoted market
prices, where available. For fixed maturity securities not actively traded,
fair values are estimated using values obtained from independent pricing
services or, in the case of private placements, are estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality, and maturity of the investments.
Fair values for mortgage loans and policy loans are estimated using
discounted cash flow analyses, based on interest rates currently being
offered for similar loans to borrowers with similar credit ratings.
A pricing cap is put on mortgage loans that carry significant above-market
interest rate yields to reflect the illiquid nature of the mortgage loans
and the risk that such loans could be prepaid.
Fair values for liabilities under investment-type insurance contracts are
estimated using discounted cash flow calculations, based on interest rates
currently being offered for similar contracts with similar maturities.
The fair value of long-term debt is estimated using discounted cash flow
analyses, based on current incremental borrowing rates for similar types of
borrowing arrangements.
Fair values for real estate development guarantees, to the extent
practicable, are based on estimates of fees to guarantee similar
developments. Fair values for lending commitments are based on the
commitment fee of the loans in question.
Depreciation
Provisions for depreciation of real estate investments and home office
properties are computed using primarily the straight-line method over the
estimated useful lives. Accumulated depreciation on real estate investments
at December 31, was $24,184,000 in 1993 and $10,834,000 in 1992.
Accumulated depreciation on home office properties at December 31, was
$1,122,000 and $13,495,000 in 1993 and 1992, respectively. In 1993, the
Company's previous home office real estate and related accumulated
depreciation were transferred to investment real estate.
Insurance Premiums and Policy Charges
Health insurance premiums are earned pro rata over the terms of the
policies. For traditional life insurance products, premiums are recognized
as revenues when due. Revenues for certain interest-sensitive products
consist of charges earned and assessed against policy account balances
during the period for the cost of insurance, policy initiation fees, policy
administration expenses, and surrenders.
Policy Liabilities
Liabilities for future policy benefits for traditional life insurance
products are determined using the present value of future net premiums,
benefits and expenses, and the net level valuation method, based on
estimates of future investment yield, mortality, and withdrawal rates,
adjusted to provide for possible adverse deviation. Interest rate
assumptions are graded and range from 4.5% to 7.5%. Withdrawal assumptions
are based principally on experience and vary by issue age, type of
coverage, and duration.
Liabilities for future policy benefits of certain interest-sensitive
products represent policy account balances before applicable surrender
charges plus certain deferred policy initiation fees that are recognized as
income over the term of the policies and a provision for the return of cost
of insurance charges. Policy benefits and claims that are charged to
expense include interest credited to policy account balances, benefit
claims incurred in the period in excess of related policy account balances,
and a provision for the return of cost of insurance charges. Credited
interest rates for these products ranged from 3.0% to 7.5% at December 31,
1993.
The liabilities for policy and contract claims are determined using case-
basis evaluations and statistical analyses. These liabilities represent
estimates of the ultimate expected cost of incurred claims and the related
claim adjustment expenses. Any required revisions in these estimates are
included in operations in the period when such adjustments become
determinable.
The carrying amounts, net of deferred insurance costs, for investment-type
insurance contracts, principally included with future policy benefits of
annuities were $1,226,238,000 and $1,197,340,000, at December 31, 1993 and
1992, respectively. The estimated fair values at December 31, 1993 and 1992
were $1,224,550,000 and $1,176,435,000, respectively.
The fair values of liabilities under all insurance contracts are taken into
consideration in WNC's overall management of interest rate risk, which
minimizes exposure to changing interest rates through the matching of
investment maturities with amounts due under insurance contracts.
Deferred Insurance Costs
Costs directly associated with the acquisition of new business are deferred
and amortized. For traditional life insurance and health insurance
products, costs are amortized over the premium-paying period of the
products based on assumptions that are used in calculating policy benefit
reserves. For certain interest-sensitive products, costs are generally
amortized over the estimated lives of the products in relation to the
present value of estimated gross profits from surrender charges and
investment, mortality, and expense margins.
The unamortized cost of purchased insurance in force is included in
deferred insurance costs. Amortization is in relation to the present value
of estimated gross profits over the estimated remaining life of the related
insurance in force of 23 years, with interest rates ranging from 7.5% to
8.5%.
The following summarizes the changes in the unamortized cost of purchased
insurance in force for the years ended December 31:
<TABLE>
<CAPTION>
(000s omitted) 1993 1992 1991
------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $47,039 $33,996 $36,207
Interest on unamortized
balance 3,436 4,016 2,615
Amortization (8,573) (8,486) (4,826)
Change in accounting
principle for income taxes - 17,513 -
Balance at end of year $41,902 $47,039 $33,996
</TABLE>
The estimated percentage of the December 31, 1993 balance to be amortized
over the next five years is as follows:
<TABLE>
<S> <C>
1994 13.9%
1995 13.5%
1996 12.5%
1997 11.4%
1998 10.1%
</TABLE>
Goodwill
The cost of purchased businesses in excess of net assets is reported as
goodwill and amortized on a straight-line basis, generally over thirty-six
years. Goodwill is evaluated based on the prospect for continued growth and
the long-term nature of the insurance policies sold. The asset value is
considered appropriate. Accumulated amortization of goodwill was $6,023,000
and $5,204,000 at December 31, 1993 and 1992, respectively.
Separate Account
Separate Account assets and liabilities are principally carried at fair
value and represent funds that are separately administered for annuity
contracts and for which the contract holders bear the investment risk.
Investment income and realized gains and losses allocable to Separate
Accounts generally accrue to the contract holders and are excluded from the
Consolidated Statements of Operations.
Income Taxes
In 1992, WNC adopted the Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) 109, "Accounting for
Income Taxes." The accounting policies of WNC result in deferred taxes being
provided for significant temporary differences between financial statement
and tax return bases, using the asset and liability method. These
differences result primarily from policy reserves, insurance acquisition
costs, and reserves for postretirement benefits. WNC and its subsidiaries
file a consolidated life/nonlife federal income tax return.
Reinsurance
The insurance subsidiaries of WNC reinsure a portion of their life,
annuity, and health risks with other insurance companies to minimize their
exposure to loss. In particular, for the life insurance and annuity
business, the Company's policy is to retain a maximum of $300,000 of life
insurance exposure on any one individual ($400,000 with accidental death).
For the group products business, the Company limits its paid-claim exposure
in any one calendar year to $750,000 per claim for major medical coverage
and $250,000 per claim for individual stop-loss. The Company retains a
maximum of 50% of each employee benefits long-term disability claim, and
limits its group term life exposure to $200,000 per life ($400,000 with
accidental death). The Company's reinsurance for individual health claims
is designed to protect the Company from an excessive amount of claims in
excess of $250,000 on an individual claim basis.
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 its obligations under the agreements, WNC's
insurance subsidiaries would remain liable.
Amounts paid or deemed to have been paid for ceded reinsurance contracts
are recorded as reinsurance recoverables. 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.
Substantially all of the reinsurance assumed by the Company as of December
31, 1993 is on a 100% coinsurance basis and is accounted for in a manner
similar to the direct business.
New Accounting Standards
In 1992, the FASB issued SFAS 112, "Employers' Accounting for Postemployment
Benefits," which WNC adopted effective January 1, 1993. This standard
requires employers to recognize the costs and obligations of all types of
postemployment benefits provided to former or inactive employees, their
beneficiaries, and covered dependents. Under the standard, vested benefits
are to be accrued over the relevant service period rather than expensed as
they are paid, as was the practice. For postemployment benefits that do not
vest or accumulate, employers are to accrue a liability and recognize the
expected cost when it is probable that a benefit obligation has been
incurred and the amount is reasonably estimable. The adoption resulted in a
one-time cumulative adjustment of $1,550,000, net of taxes of $834,000,
relating to benefits previously recorded on a pay-as-you-go basis. The
adoption of SFAS 112 did not have a material effect on 1993 pretax income
and is not expected to have a material impact on future years' earnings.
Effective January 1, 1993, WNC adopted SFAS 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts." The
statement requires that reinsurance recoverables, including amounts related
to claims incurred but not reported and prepaid reinsurance premiums, be
reported as assets instead of net of the related liabilities. The adoption
resulted in an increase in total assets and liabilities of $58,173,000 and
$60,266,000 at December 31, 1993 and 1992, respectively. The adoption had
no impact on net income or stockholders' equity.
In June 1993, the FASB issued two new accounting standards. SFAS 114,
"Accounting by Creditors for Impairment of a Loan," must be adopted by the
Company by January 1, 1995. The standard will require the Company to
measure an impaired loan at (i) the present value of expected future cash
flows, discounting those cash flows at the loan's effective interest rate,
(ii) the fair value of the collateral of an impaired collateral dependent
loan, or (iii) an observable market price. The impairment is recognized by
a valuation allowance which may be subsequently increased or decreased
based on changes in the measurement criteria. The Company is in the process
of determining the effect the new standard will have on net income and
stockholders' equity but does not expect the effect to be material.
The second standard, SFAS 115, "Accounting for Certain Investments in Debt
and Equity Securities," which the Company must adopt prospectively effective
January 1, 1994, 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 will include only those fixed
maturities that the Company has a positive intent and ability to hold to
maturity. These securities will be carried at amortized cost less write-
downs for other-than-temporary impairments. Trading securities will consist
of those fixed maturity and equity securities held for short periods of
time and will be carried on the balance sheet at fair value, with any
change in value reported as a component of income. Investments available
for sale will consist of those securities that do not meet the criteria of
investments held to maturity or trading securities and will be carried on
the balance sheet at fair value, with any change in value recognized as an
unrealized gain or loss in stockholders' equity. If a decrease in value of
fixed maturity investments is other than temporary, the loss is recognized
immediately as a realized loss. In addition, stockholders' equity will be
reduced by the estimated amortization of deferred insurance costs that the
realization of the unrealized gains would produce. The adoption of this
standard at January 1, 1994 will result in an increase in stockholders'
equity of approximately $43,000,000. This is the result of changing the
carrying value of the current held for sale fixed maturities to fair value,
a reduction in deferred insurance costs of $19,000,000, and a related
increase in deferred taxes of $14,000,000. There will not be an income
statement effect for adoption as the Company does not have a trading
portfolio.
The Company foresees that this standard will result in added volatility to
stockholders' equity as the standard does not permit a corresponding
adjustment to the liabilities that these assets support.
Note B
Investments
Gains and Losses and Income
Realized investment gains (losses) for years ended December 31 are
comprised of the following:
<TABLE>
<CAPTION>
(000s omitted) 1993 1992 1991
------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Gross gains $20,263 $9,798 $13,473
Gross losses (12,481) (4,177) (24,700)
-------- -------- --------
7,782 5,621 (11,227)
Equity securities 383 (1,746) 1,464
Mortgage loans 2,047 (4,934) (6,643)
Real estate and other
investments (10,566) (3,559) (3,214)
Realized investment losses ($354) ($4,618) ($19,620)
</TABLE>
Major categories of net investment income for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
(000s omitted) 1993 1992 1991
------------------------------------
<S> <C> <C> <C>
Fixed maturities $141,809 $136,409 $134,231
Equity securities 1,505 3,530 4,162
Mortgage loans 42,030 49,147 55,633
Real estate and other
investments 11,431 11,241 13,784
Policy loans 3,460 3,369 3,539
Short-term investments 2,398 3,938 6,267
------- ------- -------
Subtotal 202,633 207,634 217,616
Investment expenses 18,898 20,497 18,256
Net investment income $183,735 $187,137 $199,360
</TABLE>
As of December 31, 1993, investments included real estate, mortgage loans,
and fixed maturities with a carrying value of $22,158,000 which were non-
income producing for the previous twelve months.
Fixed Maturities
A comparison of amortized cost to fair value of fixed maturity investments
by category at December 31, 1993 and 1992 is as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Cost(1) Unrealized Gains Unrealized Losses Fair Value
(000s omitted) 1993 1992 1993 1992 1993 1992 1993 1992
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government obligations $55,646 $47,085 $3,786 $3,252 $93 $193 $59,339 $50,144
Obligations of states and
political subdivisions 83,129 88,617 5,705 4,962 538 999 88,296 92,580
Corporate and other securities 882,764 742,547 51,043 25,908 2,531 2,264 931,276 766,191
Mortgage-backed securities 701,786 654,985 24,917 29,239 1,571 3,233 725,132 680,991
Foreign government obligations 37,468 18,273 2,402 222 788 - 39,082 18,495
Total $1,760,793 $1,551,507 $87,853 $63,583 $5,521 $6,689 $1,843,125 $1,608,401
<FN>
(1) The amortized cost is net of permanent impairments and an allowance for losses for below-investment grade securities totalling
$9,631,000 and $5,500,000 at December 31, 1993 and 1992, respectively.
</TABLE>
The amortized cost and fair value of fixed maturities at December 31, 1993,
by contractual maturity, are shown in the following table. Expected
maturities differ from contractual maturities as borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Amortized Fair
(000s omitted) Cost Value
<S> <C> <C>
Fixed maturities, excluding
mortgage-backed securities
Due in 1994 $39 $1,966
Due in 1995 - 1998 94,745 98,571
Due in 1999 - 2003 385,642 409,638
Due after 2003 578,581 607,818
Mortgage-backed securities 701,786 725,132
Total $1,760,793 $1,843,125
</TABLE>
Fixed maturities had an increase (decrease) in unrealized gains (the excess
of fair value over amortized cost) of $25,438,000, $(4,245,000), and
$88,953,000 in 1993, 1992, and 1991, respectively. At December 31, 1993,
gross unrealized gains (losses) on investments in equity securities
amounted to $386,000 and $(429,000), respectively.
Other
During 1993, 1992, and 1991, non-cash investing activities consisted of
real estate acquired through foreclosure of mortgage loans which totaled
$4,869,000, $14,302,000, and $3,829,000, respectively.
The fair value of investments in mortgage loans was estimated to be
$411,250,000 and $471,082,000 at December 31, 1993 and 1992, respectively.
The fair value of policy loans was estimated to be $50,340,000 and
$48,246,000 at December 31, 1993 and 1992, respectively.
Note C
Borrowings and Other Credit Arrangements
Borrowings
Borrowings of $2,434,000 at December 31, 1993 consist of a mortgage on
investment real estate with an interest rate of 6.5% that matures in March
1998. Payments of $526,000, $562,000, $599,000, $613,000 and $134,000 will
be required in 1994, 1995, 1996, 1997, and 1998, respectively. The property
is pledged as collateral.
Interest paid on borrowings by WNC was $1,673,000, $1,313,000, and
$2,130,000 in 1993, 1992, and 1991, respectively.
The fair value of WNC's mortgage and long-term notes payable at December
31, 1993 and 1992 was estimated to be $2,438,000 and $14,107,000,
respectively.
Credit Arrangements
WNC has a line of credit arrangement for short-term borrowings with one
bank amounting to $10,000,000, all of which was unused at December 31,
1993. The line of credit arrangement can be renewed annually, but credit
can be withdrawn at the bank's option.
In addition, WNC has three letters of credit available from one bank
totaling $1,892,000 with varying terms and conditions. As of December 31,
1993, the entire amount was unused.
Note D
Income Taxes
Effective January 1, 1992, WNC adopted SFAS 109, "Accounting for Income
Taxes." Amounts prior to 1992 are presented under the previous accounting
rules.
The Omnibus Budget Reconciliation Act of 1993 changed WNC's prevailing
federal income tax rate from 34% to 35% effective January 1, 1993. The
application of the 35% tax rate to the December 31, 1992 deferred income
tax liability balance resulted in a $38,000 increase in federal income tax
expense for 1993.
Components of WNC's deferred tax liabilities and assets at December 31 are
as follows:
<TABLE>
<CAPTION>
(000s omitted) 1993 1992
------------------------
<S> <C> <C>
Deferred tax liabilities:
Deferred insurance costs $85,114 $78,426
Joint ventures and venture capital
investments 1,525 3,144
Accrued bond discount 1,038 1,129
Other 2,749 2,987
Total deferred tax liabilities 90,426 85,686
Deferred tax assets:
Policy liability adjustments 66,091 66,267
Realized investment losses 15,586 19,501
Liabilities for employee benefits 13,930 12,880
Other 4,658 3,933
Total deferred tax assets 100,265 102,581
Valuation allowance (14,903) (18,175)
Net deferred tax assets 85,362 84,406
Net deferred tax liabilities $5,064 $1,280
</TABLE>
The net deferred tax liabilities relate primarily to the future taxable
temporary differences for deferred insurance costs. The net deferred tax
assets relate primarily to the future deductible temporary differences for
policy liabilities and liabilities for employee benefits items. The nature
of WNC's deferred tax assets and liabilities is such that the general
reversal pattern for these temporary differences should result in a full
realization of WNC's deferred tax assets other than capital gain or loss
items.
The components of the provision for deferred income taxes for the year
ended December 31, 1991 are as follows:
<TABLE>
<CAPTION>
(000s omitted)
<S> <C>
Deferred insurance costs $3,888
Policy liability adjustments (5,324)
Liability for serverance pay and other
employee benefit related items 2,890
Net effect of realized investment losses (667)
Accrual of bond discount 392
Other (2,489)
Deferred income tax benefit ($1,310)
</TABLE>
At December 31, 1993, WNC had capital loss carryforwards for tax return
purposes of $7,404,000 that expire in 1996. For financial reporting
purposes, a valuation allowance of $14,903,000 has been recognized to
offset the deferred tax assets related to those carryforwards, investment
loss reserves, and other capital loss related deferred tax assets not
expected to be realized. The valuation allowance was reduced by $3,272,000
and $500,000 in 1993 and 1992, respectively.
The components of income tax expense for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
(000s omitted) 1993 1992 1991
------------------------------
<S> <C> <C> <C>
Current expense $4,328 $9,884 $3,866
Deferred expense (benefit) 6,170 (346) (1,310)
Income tax expense $10,498 $9,538 $2,556
</TABLE>
The following reconciles the difference between the actual tax provision
and the amounts obtained by applying the statutory federal income tax rate
of 35% for 1993 and 34% for 1992 and 1991 to the income or loss before
income taxes and cumulative effect of changes in accounting principles:
<TABLE>
<CAPTION>
(000s omitted) 1993 1992 1991
------------------------------
<S> <C> <C> <C>
Income tax (credit) at statutory
rate applied to income (loss)
before taxes and cumulative
effect of changes in
accounting principles $13,550 $8,973 ($139)
Add (deduct) tax effect of:
Investment income not taxed (1,035) (1,514) (1,689)
Tax benefit (expense) not
recognized on other GAAP-
basis capital losses (gains) (2,870) 1,437 6,639
Amortization of purchase
accounting adjustments 247 333 311
Amortization of prior
periods' deferred taxes - - (2,720)
Other 606 309 154
Provision for income taxes $10,498 $9,538 $2,556
</TABLE>
At December 31, 1993, up to $19,851,000 (at a 35% tax rate) would be
required for possible federal income taxes that might become due in future
years, in whole or in part, if any portion of $56,717,000 of the insurance
companies' gains from operations which accumulated under pre-1984 income
tax laws, presently included in earned untaxed surplus and identified as
tax "Policyholders' Surplus," becomes includable in taxable income. Also,
distribution of amounts in excess of taxable "Shareholders' Surplus"
($221,591,000 at December 31, 1993) by the insurance companies under
certain conditions may require payment of additional federal income taxes.
However, WNC does not expect or intend that these taxable events will
occur and, as such, the related deferred income taxes are not required to
be provided.
Federal income taxes paid by WNC were $4,100,000, $8,700,000, and
$5,300,000 in 1993, 1992, and 1991, respectively. WNC has a nonlife net
operating loss carryforward for tax purposes of $2,222,000 that will begin
to expire in 2005.
Note E
Stockholders' Equity
Convertible Preferred Stock
WNC has 10,000,000 shares of $5 par value Preferred Stock authorized that
is designated as $2.50 Convertible Preferred Stock. Each share is entitled
to a cumulative annual dividend of $2.50, and a preference of $50 in the
event of involuntary liquidation and $55 in the event of voluntary
liquidation of WNC. Further, each share is convertible at any time into
1.875 shares of Common Stock at the option of the holder and is redeemable
at $55 at the option of WNC. Each holder is entitled to one vote for each
share held and, except as otherwise provided by law, the $2.50 Convertible
Preferred Stock and the Common Stock vote together as one class.
Stock Purchase Rights
WNC has one outstanding Common Stock Purchase Right for each outstanding
share of Common Stock. The Rights will become exercisable only if a person
or group acquires 20% or more of WNC's Common Stock or announces a tender
offer following which it would hold 30% or more of such Common Stock. If
the Rights become exercisable, a holder will be entitled to buy from WNC
one share of WNC Common Stock at a price of $100 per share. If, after the
Rights become exercisable, WNC is acquired in a merger or other business
combination or more than 50% of WNC's assets or earning power are sold,
each Right will entitle its holder to buy that number of shares of Common
Stock of the acquiring company having a market value of twice the exercise
price of the Right. Alternatively, if a 20% WNC stockholder acquires WNC by
means of a merger in which WNC and its Common Stock survive or that
stockholder engages in self-dealing transactions with WNC, each Right not
owned by the 20% holder would become exercisable for that number of shares
of WNC Common Stock which have a market value of twice the exercise price
of the Right. Until the Rights become exercisable, one additional Right
will be distributed with each share of WNC Common Stock issued in the
future. The Rights will expire in January 1997. The Rights may be redeemed
by WNC at $.01 per Right prior to the time that 20% or more of WNC's Common
Stock has been accumulated by a person or group or within ten days
thereafter under certain circumstances.
Common Stock
WNC has 60,000,000 authorized shares of $5 par value Common Stock including
treasury shares. In the third quarter of 1993, the Company completed a
public offering of 2,133,000 newly issued shares for $23.75 per share.
Capital contributions of $14,000,000 were made to a subsidiary out of the
net proceeds. In addition, short-term indebtedness was reduced $11,000,000.
The remainder is being used for other general corporate purposes.
At December 31, 1993, 13,768,000 shares of WNC's Common Stock were reserved
for future issuance. Of this amount 12,118,000 shares were reserved for
future exercises of Purchase Rights, 271,000 shares were reserved for
conversion of outstanding Convertible Preferred Stock, 1,344,000 shares
were reserved for exercise of options to purchase Common Stock and for use
in connection with the restricted stock grants, and 35,000 shares were
reserved for issuance of Common Stock in connection with the dividend
reinvestment plan. The annual dividend paid on WNC Common Stock in 1993,
1992, and 1991 was $1.08 per share.
The number of shares used in computing primary earnings per share for 1993,
1992, and 1991 was 10,755,000, 9,989,000, and 9,980,000, respectively.
These consisted of average shares outstanding plus the effect of dilutive
stock options totalling 112,000 shares in 1993 and 97,000 shares in 1992. No
effect was given to stock options in 1991 because the effect would have
decreased the loss per share.
The number of shares used in computing fully diluted earnings per share for
1993 was 11,026,000. This included average shares outstanding plus 383,000
shares of common stock equivalents consisting of dilutive stock options and
the assumed conversion of preferred stock.
Primary and fully diluted earnings per share were the same for 1992 and
1991 because the computation of fully diluted earnings per share resulted
in a smaller loss per share.
Statutory
The statutory accounting practices prescribed for WNC's insurance
subsidiaries by regulatory authorities differ from GAAP. The following
reconciles statutory capital and surplus to GAAP stockholders' equity at
December 31:
<TABLE>
<CAPTION>
(000s omitted) 1993 1992
-----------------------
<S> <C> <C>
Statutory capital and surplus $206,841 $179,080
Deferred insurance costs 256,956 241,674
Adjustments to policy liabilities (126,325) (124,441)
Goodwill 16,725 18,184
Assets valuation and interest
maintenance reserves 30,589 15,780
Deferred income taxes (5,042) (1,249)
Postretirement and pension liabilities (30,581) (29,245)
Other, net (218) (11,743)
GAAP stockholders' equity $348,945 $288,040
</TABLE>
The following reconciles statutory net income (loss) to GAAP net income
(loss) for the years ended December 31:
<TABLE>
<CAPTION>
(000s omitted) 1993 1992 1991
-----------------------------
<S> <C> <C> <C>
Statutory net income (loss) $10,954 $36 ($27,396)
Deferred insurance costs 15,282 30,788 25,234
Cumulative effect of changes
in accounting principles (1,550) (22,819) -
Adjustments to policy liabilities 401 (14,812) (17,911)
Financial reinsurance (3,500) (7,500) -
Deferred income taxes (6,180) 346 1,560
Other (includes amounts
related to divestitures) 11,259 7,994 15,549
GAAP net income (loss) $26,666 ($5,967) ($2,964)
</TABLE>
The net assets of WNC's insurance subsidiaries that are available for
transfer to WNC generally are limited to the amounts by which such net
assets, as determined in accordance with statutory accounting practices,
exceed minimum statutory capital requirements. In addition, transfers in
excess of certain amounts require approval of regulatory authorities.
Retained earnings at December 31, 1993 includes $125,000,000 in excess of
the statutory unassigned surplus of the insurance subsidiaries.
Note F
Stock Benefit Plan
WNC has a stock benefit plan under which WNC's Compensation Committee may
grant stock options, stock appreciation rights (SARs), and shares of
restricted stock. The following summarizes the changes in the shares of
Common Stock of WNC under the plan:
<TABLE>
<CAPTION>
Available Issuable Under
For Grant Outstanding Options
During 1993 1993 1992 1991
------------------------------------------------
<S> <C> <C> <C> <C>
January 1 balance 66,922 594,659 572,850 415,350
Increase in authorized 750,000
Stock options
Granted (216,500) 216,500 58,500 248,250
Exercised - (53,321) (19,700) -
Forfeited 72,594 (72,594) (16,991) (90,750)
Restricted stock issued (9,350)
December 31 balance 663,666 685,244 594,659 572,850
Options exercisable - 346,032 276,100 160,963
</TABLE>
Stock options granted from 1991 to 1993 ranged from $10.21 per share to
$26.57 per share. Stock options exercised from 1991 to 1993 ranged from
$10.21 per share to $21.70 per share. Exercise prices on stock options
outstanding range from $10.21 to $27.29 per share.
Shares of restricted stock may be granted either separately or in tandem
with the grant of a stock option to key employees and others. These
restricted shares are subject to certain terms and conditions defined in
the plan. Options for 7,500 and 6,750 such shares were granted in 1992 and
1991, respectively.
Note G
Defined Benefit and Contribution Plans
Retirement Plans
Washington National Insurance Company (WNIC) and an indirect wholly-owned
subsidiary, United Presidential Life Insurance Company (UPI), each have a
defined benefit retirement plan covering substantially all employees who
have met the prescribed requirements for participation. Both plans have
been amended to terminate the accrual of future benefits. Benefits are
based principally on years of service and compensation. Generally, the
funding policies are to contribute annually amounts required by the
Internal Revenue Code (IRC). Contributions are intended to provide benefits
attributed to service to date.
Effective January 1, 1991 for WNIC, and March 31, 1993 for UPI, the Company
established two defined contribution retirement plans, a money-purchase
retirement plan and a discretionary profit sharing plan. Neither plan
allows employee contributions. These two plans, in addition to the
contributory 401(k) plan, collectively represent the current retirement
benefit program. The plans now cover substantially all WNIC and UPI
employees who have met the prescribed requirements for participation. The
contribution to the 401(k) plan matches employee contributions dollar for
dollar up to a maximum of 3% of compensation. The contribution to the money-
purchase retirement plan is 3% of each employee's compensation and an
additional 3% of compensation in excess of the Social Security wage base.
The contribution to the profit sharing plan is at the discretion of the
insurance subsidiaries' Boards of Directors in consultation with the Board
of Directors of WNC and is based on financial performance. WNC also has
supplemental retirement plans under which benefits are paid equal to any
amount by which benefits are reduced for any participant in the defined
contribution or defined benefit retirement plans due to provisions of the
IRC. The liabilities for the supplemental retirement plans at December 31,
1993 and 1992 were immaterial. The net pension expense for the defined
contribution plans in 1993, 1992, and 1991 was $2,777,000, $2,110,000, and
$1,866,000, respectively.
A summary of the components of the net periodic pension expense for the
defined benefit retirement plans follows:
<TABLE>
<CAPTION>
(000s omitted) 1993 1992 1991
------------------------------
<S> <C> <C> <C>
Service cost for benefits
earned $99 $300 $274
Interest cost on projected
benefit obligation 1,923 2,275 2,829
Actual return on plan assets (2,035) (5,167) (5,095)
Net amortization and deferral (642) 2,996 2,498
Curtailment gain (491) - -
Net periodic pension expense ($1,146) $404 $506
</TABLE>
Net periodic pension expense for 1993 includes a $491,000 curtailment gain
from the termination of the accumulation of benefits of UPI's defined
benefit plan.
The defined benefit retirement plans' funded status and amounts reported in
WNC's consolidated balance sheets as of December 31 are as follows:
<TABLE>
<CAPTION>
(000s omitted) 1993 1992
------------------------
<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested ($28,696) ($29,029)
Non-vested (254) (143)
Accumulated benefit obligation ($28,950) ($29,172)
Projected benefit obligation for
service provided to date ($28,950) ($31,778)
Plan assets at fair value 26,429 26,871
Funded status-projected benefit
obligation in excess of plan assets ($2,521) ($4,907)
Comprised of:
Accrued pension cost $512 ($1,688)
Unrecognized investment and
actuarial net loss (9,566) (11,023)
Unrecognized transition gain 6,533 7,840
Unrecognized prior service cost - (36)
Total ($2,521) ($4,907)
</TABLE>
The unrecognized transition gain in the preceeding schedule is the amount
by which the plans' net assets exceeded the actuarial present value of
projected benefit obligations as of January 1, 1985, net of amortization,
the date on which current pension accounting standards were adopted. The
transition gain is being amortized by credits to income over a fourteen-
year period. In addition, the excess of actual investment and actuarial
gains and losses realized over those expected are deferred and, when the
cumulative deferred amounts exceed certain limits, will be amortized at a
rate consistent with a fourteen-year amortization period. Costs created by
plan amendments that are associated with prior employee service are also
deferred and amortized over fourteen years.
Accrued pension cost and the various net gains and losses not recognized in
the consolidated financial statements are compared annually to the plans'
funded status. The comparison is made using the plans' accumulated benefit
obligations. When a deficiency exists, an adjustment is made for the amount
of the deficiency to recognize a minimum liability. At December 31, 1993
and 1992, the pretax adjustment was $3,033,000 and $1,269,000,
respectively. The liability and subsequent changes had no effect on net
periodic pension expense and were reported directly in stockholders'
equity.
In determining the actuarial present value of the projected benefit
obligation as of December 31, 1993 and 1992, the discount rate used was
6.7% and 6.9%, respectively. The rate of increase in compensation levels
used in 1992 was 5% for the UPI plan. The expected rate of return on plan
assets was 7.5% for 1993, 1992, and 1991.
Assets of the defined benefit plans are invested principally in mutual
funds, bonds, and stocks. Assets of the WNIC retirement plan include Common
and Preferred Stock of WNC of $10,863,000 and $10,332,000, at fair value,
at December 31, 1993 and 1992, respectively. Dividends of $492,000 were
received on the WNC Common and Preferred Stock in 1993 and 1992. No shares
were purchased or sold during 1993.
Postretirement Benefits
In addition to WNC's various retirement programs, WNIC provides certain
health care and life insurance benefits to eligible retired employees.
Employees generally have become eligible for these benefits after reaching
age 55 with 20 years of service or after reaching age 65 with 10 years of
service. Generally, the health plans pay a stated percentage of most
medical expenses reduced for deductibles and any payments made by
government programs or other group coverage. Retirees contribute to the
plan according to a schedule which averages 16% of the benefits paid.
Effective January 1, 1992, WNC adopted SFAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." Prior to December 1993, these
benefits were unfunded. In December 1993, the Company contributed
$1,100,000 to a Voluntary Employees' Beneficiary Association (VEBA) trust.
The amount funded to the VEBA trust was based on the difference between the
net periodic postretirement benefit expense and the retiree medical claims
incurred during the period, subject to certain IRC limitations. Assets of
the VEBA trust were invested in short-term variable demand notes at
December 31, 1993.
Effective December 31, 1992, the WNIC plan was changed to limit future
eligibility. Active employees who were not at least age 50 as of December
31, 1992 and whose combination of age and years of service did not total at
least 65 as of that date are not eligible for postretirement health
insurance benefits and are only eligible for $10,000 of postretirement life
insurance benefits. This curtailment resulted in a gain of $4,033,000
recorded as part of operations in the fourth quarter of 1992.
The net periodic postretirement benefit expense includes the following
components at December 31:
<TABLE>
<CAPTION>
(000s omitted) 1993 1992
--------------------
<S> <C> <C>
Service cost $61 $557
Interest cost 2,061 2,198
Net amortization and deferral (14) -
Curtailment gain - (4,033)
Net periodic expense $2,108 ($1,278)
</TABLE>
Postretirement benefit expenses were recorded on a pay-as-you-go basis in
1991 and totaled $3,100,000.
The following reconciles the plans' accumulated postretirement benefit
obligation with amounts recognized in WNC's consolidated balance sheets at
December 31:
<TABLE>
<CAPTION>
(000s omitted) 1993 1992
------------------------
<S> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees ($26,080) ($24,365)
Fully eligible active plan participants (1,300) (1,011)
Other active participants (1,269) (1,888)
Total ($28,649) ($27,264)
Comprised of:
Accrued postretirement benefit
expense ($27,298) ($27,097)
Unrecognized net loss (1,561) (392)
Unrecognized prior service cost 210 225
Total ($28,649) ($27,264)
Discount rate 7.5% 7.5%
</TABLE>
The health care cost trend rate used in 1993 and 1992 was 15% grading to 6%
evenly over thirty years. The health care cost trend rate assumption has a
significant effect on the amounts reported. Increasing the trend rate by 1%
per year would increase the accumulated postretirement benefit obligation
by $2,825,000 at December 31, 1993 and the aggregate of the service and
interest cost components of the net periodic postretirement benefit expense
for 1993 by $200,000.
Note H
Reinsurance
The effect of reinsurance on premiums and policy charges for the years
ended December 31 was as follows:
<TABLE>
(000s omitted) 1993 1992 1991
------------------------------------
<S> <C> <C> <C>
Direct premiums and policy
charges $470,617 $440,574 $445,941
Reinsurance assumed 31,022 2,570 2,734
Reinsurance ceded (62,817) (62,174) (61,860)
Premiums and policy charges $438,822 $380,970 $386,815
</TABLE>
Reinsurance benefits ceded were $22,685,000, $22,516,000, and $17,372,000
in 1993, 1992, and 1991, respectively.
As a result of past divestitures, the Company reinsures 100% of certain
blocks of supplemental health insurance, life insurance, and annuity
business with unaffiliated companies. At December 31, 1993, approximately
50% of WNC's total reinsurance recoverables were ceded to Combined Life
Insurance Company of America and approximately 19% was ceded each to
American Founders Life Insurance Company and UNUM Life Insurance Company.
Of these three, two are related to divestitures. Also at December 31, 1993,
89% of reinsurance premiums assumed were from Harvest Life Insurance
Company. The reinsurance agreement provides that the Company will reinsure
a block of individual major medical business issued by Harvest Life on a
100% coinsurance basis.
The Company also uses yearly renewable term reinsurance at UPI to maintain
statutory profitability and other financial requirements at UPI while
sustaining growth. At December 31, 1993, such reinsurance, net of related
taxes had contributed $9,300,000 of statutory capital to UPI. These
transactions do not materially impact the Company's GAAP financial
statements.
Note I
Commitments and Contingencies
Leases
WNC has noncancelable operating leases primarily for office space and
office equipment, the most significant of which relates to a twenty-year
lease of WNIC's home office building with a related party as lessor. Future
minimum lease payments required under operating leases that have initial or
remaining noncancelable lease terms in excess of one year at December 31,
1993 are as follows:
<TABLE>
(000s omitted)
<S> <C>
1994 $7,668
1995 7,096
1996 6,733
1997 6,453
1998 4,575
Thereafter 49,462
Total minimum lease commitments $81,987
</TABLE>
Rental expenses were $6,900,000, $2,871,000, and $3,039,000 in 1993, 1992,
and 1991, respectively.
Financial Commitments and Guarantees
The Company is party to financial instruments with off-balance-sheet risk
in the normal course of business. These financial instruments include
commitments to extend credit, commitments to fund investments, standby
purchase commitments, and financial guarantees related to various
investments in real estate and joint ventures. These instruments involve,
to varying degrees, elements of credit risk in excess of the amount
recognized in the consolidated balance sheets.
The exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for the aforementioned commitments and
guarantees is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. If
funded, the commitments and guarantees would be collateralized by the
related real estate investments.
Commitments to extend credit are agreements to lend to an entity as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. An entity's credit worthiness is
evaluated on a case-by-case basis and the amount of collateral obtained
upon extension of credit is based on management's credit evaluation of the
counterparty. Collateral held would include the related real estate
investment properties. At December 31, 1993 and 1992, commitments to extend
credit were $6,425,000 and $11,049,000, respectively. These commitments
principally expire by July 1994.
Commitments to fund investments primarily for venture capital and fixed
maturity investments amounted to $358,000 and $14,398,000 at December 31,
1993 and 1992, respectively. These commitments are on call and do not have
a formal expiration date.
Standby purchase commitments and financial guarantees are conditional
commitments issued by the Company 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, and expire in
1994, 1995, and 1996. The Company does not hold collateral for these
conditional commitments; however, in the event of nonperformance by the
entity, the Company would be entitled to the underlying collateral,
principally commercial real estate properties. In addition, the Company is
entitled to share in the appreciation of the collateral on the conditional
commitments at the time of sale or refinancing. Management is not aware of
any material losses on these conditional commitments. At December 31, 1993
and 1992, standby purchase commitments and guarantees were $24,323,000 and
$34,126,000, respectively.
The Company issued financial guarantees on two real estate investments and
received $676,000 of consideration, principally in 1986. The estimated fair
value at December 31, 1993 of these guarantees is less than $500,000.
The Company also entered into financial guarantees that are integral and
inseparable components of real estate and mortgage loan transactions. No
consideration was received for these guarantees which relate primarily to
the guarantee of debt repayment on three joint venture real estate
investments. Accordingly, the fair value of these financial guarantees is
zero.
Litigation
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 against the Company that demand compensatory and punitive
damages aggregating material dollar amounts. Management believes that such
suits are substantially without merit and that valid defenses exist and are
of the opinion that such litigation will not have a material effect on
WNC's consolidated financial position.
Health Care Reform
See Item 7, "Management's Discussion And Analysis Of Financial Condition
And Results Of Operations - Health Care Reform" for a discussion of health
care reform and its possible effect on the Company's business.
State Guaranty Funds
Under insolvency or guaranty laws in most states in which the Company's
insurance subsidiaries operate, insurers can be assessed for policyholder
losses incurred by insolvent insurance companies. At present, most
insolvency or guaranty laws provide for assessments based on the amount of
insurance underwritten in a given jurisdiction. The Company's insurance
subsidiaries paid $2,500,000, $1,800,000, and $2,000,000 in state guaranty
fund assessments in 1993, 1992, and 1991, respectively and had accrued
liabilities of $2,800,000 for future assessments at December 31, 1993 and
1992. Mandatory assessments can be partially recovered through a reduction
in future premium taxes in some states.
The Company's accounting policy with regard to payments to state guaranty
funds is to treat as a deferred asset any such payments in those states
where current law allows an offset against future premium taxes. At
December 31, 1993 and 1992, other assets included $5,100,000 and $4,000,000
of deferred payments to state guaranty funds. Generally, this amount will
be used to offset future premium tax payments over periods from five to ten
years. In the event of a change in the law pertaining to prior tax offsets,
such amounts might become unrecoverable.
Note J
Divestitures
In the third quarter of 1991, WNC completed the sale of its New York-based
life insurance subsidiary. A pretax loss of $16,000,000 was recorded on
this sale in 1990. An additional pretax loss of $1,826,000 was recognized
in the second quarter of 1991. At June 30, 1991, this subsidiary had
assets, principally investments, of $200,000,000 and liabilities,
principally policy liabilities, of $176,000,000. In the consolidated
statement of operations for 1991, total revenues of $12,200,000 are
attributable to this subsidiary.
In the second and third quarters of 1991, WNIC sold blocks of universal
life insurance and annuities for a pretax gain of $668,000. The gain is
included in net loss on divestitures. The operations of these blocks of
business are included in the life insurance and annuities segment. These
blocks of business had policy-related assets, principally deferred
insurance costs, of $13,000,000 and policy liabilities of $110,000,000.
Note K
Segment Information
WNC has four business segments: life insurance and annuities; group
products; individual health insurance; and corporate and other. The
segments are based on WNC's insurance products. The corporate and other
segment includes realized investment gains and losses, a curtailment gain
in 1992 of $4,033,000 resulting from a change to WNIC's postretirement
health benefits program, operations that do not specifically support one of
the other segments, and the operations and the net loss on divestitures in
1991. See Note J for further information on divestitures. Assets not
individually identifiable by segment are allocated based on the amount of
segment liabilities. Depreciation expense and capital expenditures are not
considered material. Revenues, income or loss before income taxes and
cumulative effect of changes in accounting principles, and assets by
segment for the years ended and as of December 31 are as follows:
<TABLE>
<CAPTION>
(000s omitted)
1993 1992 1991
------------------------------------
<S> <C> <C> <C>
Revenues:
Life insurance and annuities $228,950 $233,488 $227,059
Group products 234,621 231,232 267,991
Individual health insurance 159,941 107,578 82,437
Corporate and other 5,015 (1,856) 557
Consolidated total $628,527 $570,442 $578,044
Income (loss) before income taxes and
cumulative effect:
Life insurance and annuities $28,128 $21,856 $23,987
Group products 6,132 10,249 13,524
Individual health insurance 5,368 (3,242) (13,817)
Corporate and other (914) (2,473) (24,102)
Consolidated total $38,714 $26,390 ($408)
Assets:
Life insurance and annuities $2,291,529 $2,184,660 $1,999,172
Group products 233,616 213,929 211,472
Individual health insurance 110,629 92,769 74,420
Corporate and other 218,645 221,425 269,935
Consolidated total $2,854,419 $2,712,783 $2,554,999
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Descriptions of WNC's directors are contained in WNC's 1994 proxy under
the caption "Election of Directors." Information regarding compliance
with Section 16(a) of the Exchange Act is contained in WNC's 1994 proxy
statement under that caption. Additionally, biographical descriptions
of Wade G. Brown, Executive Vice President and Chief Information Officer;
Curt L. Fuhrmann, President - WNIC Health Division; Kenneth A. Grubb,
President - WNIC Education Division; R. W. Patin, Chairman of the
Board and Chief Executive Officer, WNC and WNIC; James N. Plato,
President and Chief Executive Officer, United Presidential Life
Insurance Company; Thomas Pontarelli, Executive Vice President,
Thomas C. Scott, Executive Vice President and Chief Financial
Officer; and Don L. Wilhelm, former Chairman of the Board and Chief
Executive Officer, United Presidential Life Insurance Company, are
contained in Part I of this Report, pursuant to General Instruction G.
ITEM 11. EXECUTIVE COMPENSATION
Executive compensation and transactions are contained in WNC's 1994
proxy statement under the caption, "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
A description of security ownership of certain beneficial owners and
management is contained in WNC's 1994 proxy statement under the caption,
"Stock Ownership."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A description of transactions with management is contained in WNC's
1994 proxy statement under the caption, "Transactions with Management."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1)The following consolidated financial statements of WNC and
subsidiaries included in the 1993 Annual Report to Stockholders
are presented in Item 8:
Consolidated Balance Sheets, December 31, 1993 and 1992
Consolidated Statements of Operations,
Year Ended December 31, 1993, 1992, and 1991
Consolidated Statements of Cash Flows,
Year Ended December 31, 1993, 1992, and 1991
Consolidated Statements of Stockholders' Equity,
Year Ended December 31, 1993, 1992 and 1991
Capital Stock Activity,
Year Ended December 31, 1993, 1992, and 1991
Notes to Consolidated Financial Statements
Quarterly Information
(a)(2)The financial schedules required by Item 14(d) are presented in
a separate section of this report and are preceded by the Index
to Financial Schedules.
All other schedules pursuant to Regulation S-X are not submitted
because they are not applicable, not required, or the required
information is included in the consolidated financial statements,
including the notes thereto.
(a)(3)The exhibits filed with this Form 10-K are listed in the Exhibit
Index located elsewhere herein. All management contracts and
compensatory plans or arrangements set forth in such list are
marked with a double asterisk (**).
(b) WNC filed no reports on Form 8-K during the last quarter of the
period covered by this report.
(c) Included in 14(a)(3) above.
(d) Included in 14(a)(2) above.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
WASHINGTON NATIONAL CORPORATION
REGISTRANT
Date: March 11, 1994 /c/ Robert W. Patin
Robert W. Patin
Chairman of the Board, President and
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Date: March 11, 1994 /c/ Frederick R. Blume
Frederick R. Blume
Director
Date: March 11, 1994 /c/ Elaine R. Bond
Elaine R. Bond
Director
Date: March 11, 1994 /c/ Ronald L. Bornhuetter
Ronald L. Bornhuetter
Director
Date: March 11, 1994 /c/ Joan K. Cohen
Joan K. Cohen
Vice President, Controller and Treasurer
Date: March 11, 1994 /c/ Lee A. Ellis
Lee A. Ellis
Director
Date: March 11, 1994 /c/ John R. Haire
John R. Haire
Director
Date: March 11, 1994 /c/ Stanley P. Hutchison
Stanley P. Hutchison
Director
Date: March 11, 1994 /c/ George P. Kendall, Jr.
George P. Kendall, Jr.
Director
Date: March 11, 1994 /c/ Frank L. Klapperich, Jr.
Frank L. Klapperich, Jr.
Director
Date: March 11, 1994 /c/ Lee M. Mitchell
Lee M. Mitchell
Director
Date: March 11, 1994 /c/ Robert W. Patin
Robert W. Patin
Chairman of the Board, President and
Chief Executive Officer and Director
Date: March 11, 1994 /c/ Rex Reade
Rex Reade
Director
Date: March 11, 1994 /c/ Thomas C. Scott
Thomas C. Scott
Executive Vice President and Chief
Financial Officer
Date: March 11, 1994 /c/ Patricia Y. Tsien
Patricia Y. Tsien
Director
INDEX TO FINANCIAL SCHEDULES
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
Schedules filed pursuant to Rule 7-05 of Regulation S-X:
I. Summary of Investments - Other than Investments in Related Parties
II. Amounts Receivable from Related Parties and Underwriters, Promoters,
and Employees Other Than Related Parties
III. Condensed Financial Information of Registrant
V. Supplementary Insurance Information
VI. Reinsurance
VII. Guarantees of Securities of Other Issuers
IX. Short-Term Borrowings
<TABLE>
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
December 31, 1993
<CAPTION>
(000s Omitted)
- ---------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D
Fair Amount Shown in
Type of Investment Cost Value the Balance Sheet
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
U.S. government and government
agencies and authorities $55,646 $59,339 $55,646
States, municipalities and political
subdivisions * 83,829 88,296 83,129
Mortgage-backed securities 701,786 725,132 701,786
Foreign governments 37,468 39,082 37,468
Public utilities 137,132 140,932 137,132
Convertibles and bonds with
warrants attached 1,730 2,023 1,730
All other corporate bonds * 752,684 788,114 743,753
Redeemable preferred stocks 149 207 149
TOTAL FIXED MATURITIES 1,770,424 $1,843,125 1,760,793
Equity securities:
Common stocks:
Banks, trusts, and insurance companies 96 $113 113
Industrial and miscellaneous 1,512 1,420 1,420
Mutual funds 10,860 10,860 10,860
Nonredeemable preferred stocks 3,435 3,467 3,467
TOTAL EQUITY SECURITIES 15,903 $15,860 15,860
Mortgage loans on real estate * 403,698 391,667
Real estate:
Investment properties * 53,886 24,518
Acquired in satisfaction of debt * 19,296 14,568
Policy loans 52,285 52,285
Other long-term invested assets * 22,961 21,032
Short-term investments 75,302 75,302
TOTAL INVESTMENTS $2,413,755 $2,356,025
<FN>
* Difference between cost and carrying value results from certain valuation allowances, declines in
value that are other than temporary, accumulated depreciation on real estate and share of undistributed
net income or loss on joint ventures.
</TABLE>
<TABLE>
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
<CAPTION>
- ----------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Deductions Balance at End of Period
- ----------------------------------------------------------------------------------------------------
Balance at
Beginning Amounts Amounts Not
Name of Debtor of Period Additions Collected Written Off Current * Current
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1993
Ken A. Grubb $ - $100,000 $ - - $100,000 -
Robert W. Patin 248,345 - 3,432 - 244,913 -
$248,345 $100,000 $3,432 - $344,913 -
- ----------------------------
Year ended December 31, 1992
Douglas T. Maines $125,000 - $125,000 - $ - -
Robert W. Patin 250,000 - 1,655 - 248,345 -
$375,000 - $126,655 - $248,345 -
- ----------------------------
Year ended December 31, 1991
Douglas T. Maines $125,000 $ - $ - - $125,000 -
Robert W. Patin - 425,000 175,000 - 250,000 -
$125,000 $425,000 $175,000 - $375,000 -
<FN>
- ----------------------------------------------------------------------------------------------------
* These receivables include a combination of demand notes and mortgage loans with varying interest
rates.
</TABLE>
<TABLE>
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
WASHINGTON NATIONAL CORPORATION
(Parent Corporation Only)
<CAPTION>
BALANCE SHEETS
December 31,
(000s omitted) 1993 1992
---------------------------
<S> <C> <C>
ASSETS
Cash $3,383 $2,833
Short-term investments 7,899 384
Equity in net assets of subsidiaries * 338,139 294,595
Amounts due from subsidiaries * 2,857 -
Real estate 207 207
Other 3,979 3,867
Total Assets $356,464 $301,886
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Dividends payable $3,361 $2,765
Other liabilities 1,422 1,352
Amounts due to subsidiaries * 2,736 7,129
Short-term note payable - 2,600
Total Liabilities 7,519 13,846
STOCKHOLDERS' EQUITY
Convertible preferred stock 723 727
Common stock 77,505 66,473
Additional paid-in capital 46,640 9,487
Retained earnings (including equity in retained earnings
of subsidiaries: 1993 - $261,071; 1992 - $240,857) 284,938 270,508
Net unrealized gains (losses) on equity securities
of subsidiaries (43) 111
Unfunded pension loss of subsidiaries (2,821) (1,269)
Cost of common treasury stock (57,997) (57,997)
Total Stockholders' Equity 348,945 288,040
Total Liabilities and Stockholders' Equity $356,464 $301,886
<FN>
* Eliminated in consolidation.
</TABLE>
<TABLE>
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Continued
WASHINGTON NATIONAL CORPORATION
(Parent Corporation Only)
<CAPTION>
STATEMENTS OF OPERATIONS
Year Ended December 31,
(000s omitted) 1993 1992 1991
----------------------------------------
<S> <C> <C> <C>
REVENUES
Interest $274 $85 $170
Dividends from subsidiary * 7,709 9,915 11,836
Realized investment gains - 336 -
Total Revenues 7,983 10,336 12,006
GENERAL AND ADMINISTRATIVE EXPENSES 1,768 1,313 1,389
INCOME BEFORE INCOME-TAX CREDIT, EQUITY IN
UNDISTRIBUTED NET INCOME (LOSS) OF SUBSIDIARIES,
AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 6,215 9,023 10,617
Income-tax credit (237) (146) (309)
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME
(LOSS) OF SUBSIDIARIES AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 6,452 9,169 10,926
Equity in undistributed net income (loss) of subsidiaries * 20,214 (7,547) (13,890)
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 26,666 1,622 (2,964)
Cumulative effect of change in accounting
for income taxes - (7,589) -
NET INCOME (LOSS) $26,666 ($5,967) ($2,964)
<FN>
* Eliminated in consolidation.
</TABLE>
<TABLE>
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Continued
WASHINGTON NATIONAL CORPORATION
(Parent Corporation Only)
<CAPTION>
STATEMENTS OF CASH FLOWS
Year Ended December 31,
(000s omitted) 1993 1992 1991
-------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $26,666 ($5,967) ($2,964)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Equity in undistributed net (income) loss of subsidiaries (20,214) 7,547 13,890
Change in accounting principle - 7,589 -
Other, net 900 1,542 (60)
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,352 10,711 10,866
INVESTING ACTIVITIES
Net (increase) decrease in short-term investments (7,515) 867 (386)
Investment in subsidiary (25,382) - -
Sales of fixed maturities - - 137
Change in indebtedness from subsidiaries (7,250) 1,767 536
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (40,147) 2,634 287
FINANCING ACTIVITIES
Proceeds from sale of common stock 48,181 428 167
Cash dividends to stockholders (12,236) (11,050) (11,114)
Change in short-term notes payable (2,600) (400) 3,000
Purchase of common stock for treasury - (21) (3,207)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 33,345 (11,043) (11,154)
INCREASE (DECREASE) IN CASH 550 2,302 (1)
Cash at beginning of year 2,833 531 532
CASH AT END OF YEAR $3,383 $2,833 $531
</TABLE>
<TABLE>
SCHEDULE V - SUPPLEMENTARY INSURANCE INFORMATION
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
Future Policy Insurance
Deferred Benefits, Other Policy Premiums
Segment Policy Losses, Claims Unearned Claims and and
Acquisition and Loss Premiums Benefits Policy
Costs Expenses Payable Charges
- ---------------------------------------------------------------------------------------------------------
(000s Omitted)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993
Life and annuities $219,780 $2,006,713 $ - $17,407 $64,917
Group products 5,864 43,959 2,164 147,279 219,002
Individual health insurance 31,312 - 12,828 72,264 154,148
Corporate and other - - 19,657 9,200 755
TOTAL $256,956 $2,050,672 $34,649 $246,150 $438,822
Year ended December 31, 1992
Life and annuities $212,327 $1,931,842 $ - $16,411 $63,400
Group products 3,268 42,948 2,352 136,430 214,952
Individual health insurance 26,079 - 11,601 61,552 101,823
Corporate and other - 317 19,781 9,721 795
TOTAL $241,674 $1,975,107 $33,734 $224,114 $380,970
Year ended December 31, 1991
Life and annuities $174,566 $1,799,389 $ - $14,497 $53,583
Group products 1,859 41,068 2,636 145,532 251,402
Individual health insurance 16,948 - 7,548 58,080 77,591
Corporate and other - - 18,405 2,850 4,239
TOTAL $193,373 $1,840,457 $28,589 $220,959 $386,815
</TABLE>
<TABLE>
SCHEDULE V - SUPPLEMENTARY INSURANCE INFORMATION
Continued
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
COLUMN A COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
Benefits, Amortization
Claims, Losses of Deferred Other
Segment Net and Policy Operating Premiums
Investment Settlement Acquisition Expenses Written
Income Expenses Costs (1)
- ---------------------------------------------------------------------------------------------------------
(000s omitted)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993
Life and annuities $158,981 $160,341 $19,831 $20,650 $ -
Group products 15,605 166,884 2,121 59,484 176,386
Individual health insurance 5,543 92,042 15,991 46,540 156,601
Corporate and other 3,606 1,091 - 4,838 -
TOTAL $183,735 $420,358 $37,943 $131,512 $332,987
Year ended December 31, 1992
Life and annuities $164,754 $176,949 $13,531 $21,152 $ -
Group products 16,211 168,919 1,107 50,957 167,580
Individual health insurance 5,205 62,798 12,482 35,540 105,697
Corporate and other 967 1,174 - (557) -
TOTAL $187,137 $409,840 $27,120 $107,092 $273,277
Year ended December 31, 1991
Life and annuities $163,592 $176,072 $9,905 $17,095 $ -
Group products 16,693 194,961 899 58,607 200,455
Individual health insurance 4,833 51,016 8,906 36,332 77,240
Corporate and other 14,242 8,239 1,415 15,005 -
TOTAL $199,360 $430,288 $21,125 $127,039 $277,695
<FN>
- ---------------------------------------------------------------------------------------------------------
(1) Allocations are based on certain assumptions and estimates. These allocations would change if
different methods were applied.
</TABLE>
<TABLE>
SCHEDULE VI - REINSURANCE
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
Ceded to Assumed Percentage of
Segment Gross Other from Other Net Amount
Amount Companies Companies Amount Assumed to Net
- ----------------------------------------------------------------------------------------------------------
(000s omitted)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993
Life insurance in force $22,215,104 $3,170,467 $ - $19,044,637 - %
Insurance premiums and policy
charges:
Life and annuities $75,899 $10,983 $1 $64,917 - %
Group products 223,726 4,724 - 219,002 -
Individual health insurance 123,765 638 31,021 154,148 20
Corporate and other 47,227 46,472 - 755 -
TOTAL $470,617 $62,817 $31,022 $438,822 7 %
Year ended December 31, 1992
Life insurance in force $25,454,261 $3,402,069 $ - $22,052,192 - %
Insurance premiums and policy
charges:
Life and annuities $73,611 $10,212 $1 $63,400 - %
Group products 219,284 4,332 - 214,952 -
Individual health insurance 100,108 854 2,569 101,823 3
Corporate and other 47,571 46,776 - 795 -
TOTAL $440,574 $62,174 $2,570 $380,970 1 %
Year ended December 31, 1991
Life insurance in force $24,227,210 $3,187,803 $17,337 $21,056,744 - %
Insurance premiums and policy
charges:
Life and annuities $62,542 $8,959 $ - $53,583 - %
Group products 257,376 5,974 - 251,402 -
Individual health insurance 75,311 451 2,731 77,591 4
Corporate and other 50,712 46,476 3 4,239 -
TOTAL $445,941 $61,860 $2,734 $386,815 1 %
<FN>
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
SCHEDULE VII - GUARANTEES OF SECURITIES OF OTHER ISSUERS
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
Nature of any
Amount Default by Issuer
Name of Issuer of Total Owned by Amount in of Securities
Securities Guaran- Title of Issue Amount Person or Treasury of Nature of Guaranteed in
teed by Person for Each Class of Guaranteed Persons for Issuer of Guarantee Principal, Interest,
which Statement Securities and which Securities Sinking Fund or
is Filed Guaranteed Outstanding Statement Guaranteed Redemption
is Filed Provisions, or
Payment of
Dividends
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
City of Milwaukee, Industrial Project $9,910,000 None $6,053,000 Guarantee of None
Wisconsin Revenue Bond Principal and
Interest
(Annual interest of $110,000) (A)
City of West Allis, Industrial Project $6,603,000 None None Guarantee of None
Wisconsin Revenue Bond Principal and
Interest
(Annual interest of $250,000) (A)
City of Milwaukee, Industrial Project $5,869,000 None None Guarantee of None
Wisconsin Revenue Bond Principal and
Interest
(Annual interest of $216,000) (A)
<FN>
(A) Interest is at a floating rate; amount shown is 1993 interest expense.
Note - Excluded from the amounts shown above is $1,941,000 of guarantees related to the sale of real estate.
</TABLE>
<TABLE>
SCHEDULE IX - SHORT-TERM BORROWINGS
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
<CAPTION>
- --------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
Maximum Average Weighted
Balance at Weighted Amount Amount Average
Category of Aggregate End of Average Outstanding Outstanding Interest Rate
Short-Term Borrowings Period Interest Rate During the During the During the
Period Period* Period**
- --------------------------------------------------------------------------------------------------
(000s omitted)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993
Notes payable to banks $ - - % $17,270 $9,918 5.30 %
Year ended December 31, 1992
Notes payable to banks 17,350 5.72 17,350 2,696 5.11
Year ended December 31, 1991
Notes payable to banks 6,636 6.00 9,637 6,515 8.21
<FN>
* The average amount outstanding during the period was computed by dividing the total of
month-end outstanding principal balances by 12.
**The weighted average interest rate during the period was computed by dividing the actual
interest expense by average short-term borrowings outstanding.
Notes payable to banks are comprised of borrowings under line of credit borrowing arrangements,
(1992 and 1991 only), collateral loans due within one year, and the current portion of a
mortgage payable. The line of credit arrangements generally have no termination date but credit
can be withdrawn at the banks' option.
</TABLE>
EXHIBIT INDEX
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
EXHIBITS FILED PURSUANT TO ITEM 14(a)(3)
Page Number
3.1 Certificate of Incorporation, as amended, on Form 10-K, for the
year ended December 31, 1987 *
3.2 By-laws, as amended, on Form 10-K, for the year ended December
31, 1986 *
4 Rights agreement between WNC and The First National Bank of
Chicago, on Form 8-K dated December 23, 1986 *
10.1 Employment agreements with R. W. Patin, T. Pontarelli, T. C.
Scott, and C. L. Fuhrmann, on Form 10-K, for the year ended
December 31, 1991 ** *
10.2 Employment agreements with K. A. Grubb and J. N. Plato, on Form
10-K, for the year ended December 31, 1992 ** *
10.3 Employment agreement with W. G. Brown on Form 10-Q, for the
period ended September 30, 1993 ** *
10.4 Form of Indemnification Agreement between Registrant and each
Director and Executive Officer of Registrant on Form 10-Q, for
the period ended June 30, 1993 ** *
11 Computation of Earnings per Share see below
13 WNC's Annual Report to Stockholders for the year ended
December 31, 1993, which is furnished for the information of
the Commission and, except for those portions which are
expressly incorporated by reference in this filing is
not to be deemed "filed" as part of this filing *
21 Subsidiaries of WNC see below
23 Consent of Ernst & Young, Independent Auditors see below
* Incorporated by reference.
** Management contract and compensatory plans or arrangements.
<TABLE>
EXHIBIT 11
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
(000s omitted, except per share amounts) Year Ended December 31,
1993 1992 1991
----------------------------------------
<S> <C> <C> <C>
PRIMARY
Average common shares outstanding 10,643 9,892 9,980
Net effect of dilutive stock options -
based on the treasury stock method
using average market price 112 97 -
TOTAL 10,755 9,989 9,980
Income (loss) before cumulative effect of changes
in accounting principles and dividend
requirement on Preferred Stock $28,216 $16,852 ($2,964)
Dividend requirement on Preferred Stock (362) (364) (366)
Income (loss) before cumulative effect of changes
in accounting principles 27,854 16,488 (3,330)
Cumulative effect of changes in accounting
principles (1,550) (22,819) -
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCK AND EQUIVALENTS $26,304 ($6,331) ($3,330)
Income (loss) per share before cumulative effect $2.59 $1.65 $ (.33)
Cumulative effect of changes in accounting
principles per share (.14) (2.28) -
NET INCOME (LOSS) PER SHARE $2.45 $(.63) $ (.33)
FULLY DILUTED
Average common shares outstanding 10,643 9,892 9,980
Assumed conversion of preferred stock 271 - -
Net effect of dilutive stock options -
based on the treasury stock method
using average market price 112 97 -
TOTAL 11,026 9,989 9,980
Income (loss) before cumulative effect of changes
in accounting principles and dividend
requirement on Preferred Stock $28,216 $16,852 ($2,964)
Dividend requirement on Preferred Stock - (364) (366)
Income (loss) before cumulative effect of changes
in accounting principles 28,216 16,488 (3,330)
Cumulative effect of changes in accounting
principles (1,550) (22,819) -
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCK AND EQUIVALENTS $26,666 ($6,331) ($3,330)
Income (loss) per share before cumulative effect $2.56 $1.65 $ (.33)
Cumulative effect of changes in accounting
principles per share (.14) (2.28) -
NET INCOME (LOSS) PER SHARE $2.42 $(.63) $ (.33)
<FN>
For 1992 and 1991 fully diluted earnings per share equals primary earnings per share due to the fully
diluted computation being anti-dilutive for these periods.
</TABLE>
<TABLE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
AS OF MARCH 25, 1994
<CAPTION>
- --------------------------------------------------------------------------
Percent
State of of Capital
Name of Company Incorporation Stock Owned
- --------------------------------------------------------------------------
<S> <C> <C>
United Presidential Corporation Indiana 100 (1)
United Presidential Life Insurance Company Indiana 100 (2)
Washington National Insurance Company Illinois 100 (3)
<FN>
Note 1 - Owned by Washington National Insurance Company (71.3%) and Washington National
Corporation (28.7%).
Note 2 - Owned by United Presidential Corporation.
Note 3 - Owned by Washington National Corporation.
</TABLE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG, Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Washington National Corporation of our report dated February 9,
1994, included in the 1993 Annual Report to Stockholders of Washington
National Corporation.
Our audit also included the financial statement schedules of Washington
National Corporation listed in Item 14(a). These schedules are the
responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, the financial
statement schedules referred to above, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein. As discussed in Note A, in
1993, the Company changed its method of accounting for postemployment
benefits, and as discussed in Notes D and G, in 1992, the Company changed
its method of accounting for income taxes and postretirement benefits other
than pensions.
We also consent to the incorporation by reference in the Registration
Statements pertaining to the stock benefit plan (Form S-8 Numbers 33-28858,
33-10179, and 2-83640) and automatic dividend reinvestment and stock
purchase plan (Form S-3 Number 2-72599) of Washington National Corporation
and the related Prospectuses of our report dated February 9, 1994, with
respect to the financial statements incorporated herein by reference, and
our report included in the preceding paragraph with respect to the
financial statement schedules included in this Annual Report (Form 10-K) of
Washington National Corporation.
ERNST & YOUNG
Chicago, Illinois
March 29, 1994
