SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995.
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 1-7369
WASHINGTON NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2663225
(State or other (I.R.S. Employer
jurisdiction of
incorporation or Identification
organization) No.)
300 Tower Parkway,
Lincolnshire, Illinois 60069
(Address of principal (Zip Code)
executive offices)
Registrant's Telephone Number, Including Area Code: (708) 793-3000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares of Common Stock, $5 par value outstanding as of
May 5, 1995 was 12,188,773.
Page 1 of 21
<PAGE>
CONTENTS
Part I. Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheet - March 31, 1995
and December 31, 1994 3
Consolidated Statement of Operations - Three Months
Ended March 31, 1995 and 1994 4
Consolidated Condensed Statement of Cash Flows -
Three Months Ended March 31, 1995 and 1994 5
Notes to Consolidated Financial Statements - March 31, 1995 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Page 2 of 21
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(000s Omitted)
<CAPTION>
March 31,
1995 December 31,
(Unaudited) 1994
<S> <C> <C>
ASSETS
Investments
Fixed maturities -
Available for sale at fair value (cost: $1,790,461; $1,768,181) $1,735,803 $1,649,453
Held to maturity at cost (fair value: $104,410; $112,368) 103,306 113,116
Mortgage loans on real estate 353,861 357,641
Real estate 30,182 26,997
Policy loans 54,479 54,368
Equity securities at fair value (cost: $1,891; $1,891) 1,667 1,720
Other long-term 26,575 28,952
Short-term 52,844 52,387
Total Investments 2,358,717 2,284,634
Cash 3,115 7,272
Deferred acquisition costs 276,738 293,850
Reinsurance recoverables and prepaid premiums 53,814 54,842
Accrued investment income 32,626 33,084
Insurance premiums in course of collection 11,884 14,857
Property and equipment 21,965 22,988
Goodwill 18,915 19,092
Separate Account 44,965 42,178
Other 36,413 37,771
Total Assets $2,859,152 $2,810,568
LIABILITIES
Policy liabilities $2,355,357 $2,354,818
General expenses and other liabilities 115,432 121,685
Mortgage payable 1,770 1,907
Income taxes (current: $1,983; $316) (1,313) (16,343)
Separate Account 44,965 42,178
Total Liabilities 2,516,211 2,504,245
SHAREHOLDERS' EQUITY
Convertible Preferred Stock 723 723
Common Stock 125,116 124,842
Retained earnings 306,671 302,759
Net unrealized losses on investments (28,923) (61,356)
Unfunded pension loss (2,649) (2,648)
Cost of Common Treasury Stock (57,997) (57,997)
Total Shareholders' Equity 342,941 306,323
Total Liabilities and Shareholders' Equity $2,859,152 $2,810,568
See Notes to Consolidated Financial Statements
Page 3 of 21
</TABLE>
<TABLE>
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
(000s Omitted, Except Per Share Data)
<CAPTION>
Three Months Ended
March 31,
1995 1994
<S> <C> <C>
Revenues
Premiums and policy charges $120,711 $113,870
Net investment income 45,536 44,937
Realized investment gains (losses) (615) 466
Other 2,742 1,143
Total Revenues 168,374 160,416
Benefits and Expenses
Benefits paid or provided 112,904 108,438
Insurance and general expenses 35,252 33,143
Amortization of deferred insurance costs 9,429 8,637
Total Benefits and Expenses 157,585 150,218
Income Before Income Taxes 10,789 10,198
Income Taxes 3,499 3,164
Net Income $7,290 $7,034
Primary Earnings Per Share
Earnings Per Share $0.59 $0.57
Average Shares and Equivalents Outstanding 12,237 12,228
Fully Diluted Earnings Per Share
Earnings Per Share $0.58 $0.56
Average Shares and Equivalents Outstanding 12,508 12,499
Dividends Paid Per Common Share $0.27 $0.27
See Notes to Consolidated Financial Statements
Page 4 of 21
</TABLE>
<TABLE>
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Unaudited)
(000s Omitted)
<CAPTION>
Three Months Ended
March 31,
1995 1994
<S> <C> <C>
Net Cash Provided by Operating Activities $22,034 $11,404
Investing Activities
Proceeds from sales
Fixed maturities - available for sale 51,302 17,182
Equities, mortgage loans, real estate, and other investments 2,110 4,686
Proceeds from maturities and redemptions
Fixed maturities - available for sale 14,546 65,305
Fixed maturities - held to maturity 6,973 3,723
Equities, mortgage loans, real estate, and other investments 6,163 9,126
Cost of purchases
Fixed maturities - available for sale (87,730) (116,991)
Fixed maturities - held to maturity - (26)
Equities, mortgage loans, real estate, and other investments (3,042) (8,217)
(Increase) decrease in policy loans (111) 372
Purchases of property and equipment (34) (398)
Net (increase) decrease in short-term investments (457) 19,081
Net Cash Used by Investing Activities (10,280) (6,157)
Financing Activities
Policyholder account deposits 40,664 33,731
Policyholder account withdrawals (53,296) (38,802)
Proceeds from sale of common stock 236 280
Repayment of mortgage (137) (128)
Cash dividends to shareholders (3,378) (3,367)
Net Cash Used by Financing Activities (15,911) (8,286)
Decrease in Cash (4,157) (3,039)
Cash at Beginning of Period 7,272 10,441
Cash at End of Period $ 3,115 $ 7,402
See Notes to Consolidated Financial Statements
Page 5 of 21
</TABLE>
<PAGE>
Item 1. Financial Statements (continued)
WASHINGTON NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1995
A. Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles (GAAP) for interim periods. In the opinion of
management, all adjustments (consisting primarily of normal,
recurring accruals) considered necessary for a fair presentation
have been included.
B. Reclassifications
Certain amounts in the 1994 consolidated financial statements have
been reclassified to conform to the 1995 presentation.
C. New Accounting Standards
1. Effective January 1, 1995, the Company adopted Statement of
Financial Accounting Standards (SFAS) 114, (as amended by SFAS
118) relating to the impairment of mortgage loans. This
statement provides measurement criteria for determining the
carrying value when it is probable that a loan is impaired and
for disclosing information about investments in impaired loans.
A loan is considered impaired when it is probable that the
Company will not collect all amounts due under the contractual
terms. The impairment is recognized by a valuation allowance
which may be subsequently increased or decreased based on
changes in the measurement criteria. The statement applies to
essentially all loans in the Company's mortgage loan portfolio.
Restatement of prior period financial statements is not
required.
The Company's investments in impaired mortgage loans is
summarized below (000s omitted):
<TABLE>
<CAPTION>
March 31, 1995
<S> <C>
Impaired loans (net of a $135 allowance) $ 2,806
Impaired loans without allowances 1,803
Total impaired loans 4,609
Non-impaired loans (net of $7,612 allowance) 349,252
Total invested in mortgage loans $353,861
Average investment in impaired loans $ 2,372
Income recognized on impaired loans 104
Income received on impaired loans 70
</TABLE>
At January 1, 1995, the Company had no loans that met the
criteria for impairment. The Company recognizes interest income
on impaired loans on a cash basis for loans for which interest
and principal are delinquent by more than three periodic
payments and on an accrual basis for all others.
Page 6 of 21
Item 1. Financial Statements (continued)
WASHINGTON NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
March 31, 1995
A rollforward of the allowance for mortgage loans losses
follows (000s omitted):
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1994 $8,032
Deductions (285)
Additions -
Balance March 31, 1995 $7,747
</TABLE>
2. In March of 1995 SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
was issued, which WNC must adopt effective January 1, 1996.
This statement requires a review for impairment of an asset
whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. WNC is
currently in the process of determining the effect of the
adoption of this new standard; however the new standard is not
expected to have a material effect on WNC's financial
statements.
D. Reinsurance
At March 31, 1995, approximately 49 percent of WNC's total
reinsurance was ceded to Combined Life Insurance Company of
America, with approximately 15 percent ceded to UNUM Life Insurance
Company, and approximately 17 percent ceded to American Founders
Life Insurance Company. The reinsurance with Combined Life and
American Founders is a result of divestitures of supplemental
health insurance, life insurance and annuity business.
Substantially all of the reinsurance ceded by the Company is to
entities rated "A" or better by A. M. Best, or to entities
required to maintain assets in an independent trust fund whose fair
value is sufficient to discharge the obligations of the reinsurer.
To the extent that any reinsurance company is unable to meet their
obligations under the agreements, WNC's insurance subsidiaries
would remain liable.
Amounts paid or deemed to have been paid for reinsurance contracts
are recorded as reinsurance receivables. The cost of reinsurance
related to long-duration contracts is accounted for over the life
of the underlying reinsured policies using assumptions consistent
with those used to account for the underlying policies.
The effect of reinsurance on premiums and policy charges was as
follows (000s omitted):
<TABLE>
<CAPTION>
March 31, March 31,
1995 1994
<S> <C> <C>
Direct premiums and policy charges $120,814 $109,469
Reinsurance assumed 14,358 19,937
Reinsurance ceded (14,461) (15,536)
Premiums and Policy Charges $120,711 $113,870
</TABLE>
Reinsurance benefits ceded were $4,598,000 and $5,961,000 at March
31, 1995 and 1994, respectively.
Page 7 of 21
Item 1. Financial Statements (continued)
WASHINGTON NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
March 31, 1995
E. Financial Commitments and Guarantees
The Company has entered into financial guarantees which are
financial instruments with off-balance sheet credit risk. The
exposure to credit risk is represented by the amount the Company,
under certain circumstances, would contractually have to pay out.
These financial instruments were entered into for the fee income
and the potential to share in future capital appreciation of the
underlying assets.
A financial guarantee is a conditional commitment to guarantee the
payment of an obligation by an unrelated entity to a third party.
At March 31, 1995, the Company had two financial guarantees
totaling $8,501,000 which are collateralized by the underlying real
estate and related assets compared to financial guarantees totaling
$15,206,000 at December 31, 1994. In the event of a sale or
refinancing, the Company is entitled to share in the appreciation
of the collateral.
The financial guarantees are scheduled to expire in 1995 and 1996,
however, the guarantees may be extended. The Company feels it has
adequate reserves for potential losses in the future.
Page 8 of 21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following updates and should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and
Results of Operations section of the Company's 1994 Annual Report,
copies of which may be obtained by contacting: Craig Simundza, Vice
President, Financial Reporting Department, Washington National
Corporation, 300 Tower Parkway, Lincolnshire, Illinois 60069
(telephone (708) 793-3053).
<TABLE>
Analysis of Net Income
<CAPTION>
Three Months Ended
March 31,
(000s omitted) 1995 1994
<S> <C> <C>
Pretax operating income (loss) (a)
Life insurance and annuities $8,386 $7,725
Specialty health insurance 1,403 (1,093)
Corporate and other 1,615 3,100
Total pretax operating income 11,404 9,732
Income taxes on operations 4,006 3,329
Net operating income 7,398 6,403
Net realized investment gains (losses) (b) (108) 631
Net income $7,290 $7,034
<FN>
(a) Pretax income (loss) before realized investment gains and
losses.
(b) 1995 and 1994 include tax benefits of $507 and $165,
respectively.
</TABLE>
<TABLE>
Consolidated Results of Operations
Components of Pretax Operating Income (Loss) by Segment
<CAPTION>
Life Specialty
Insurance Health Corporate
(000s omitted) and Annuities Insurance and Other Total
Three Months Ended March 31,1995
<S> <C> <C> <C> <C>
Revenues
Insurance and other revenues $19,775 $103,695 $ (17) $123,453
Net investment income 38,406 4,789 2,341 45,536
Total revenues excluding realized
investment losses 58,181 108,484 2,324 168,989
Benefits and expenses
Insurance benefits 40,248 72,582 74 112,904
Expenses 4,777 29,840 635 35,252
Amortization of deferred
acquisition costs 4,770 4,659 - 9,429
Total benefits and expenses 49,795 107,081 709 157,585
Pretax operating income $ 8,386 $ 1,403 $1,615 $ 11,404
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1994
<S> <C> <C> <C> <C>
Revenues
Insurance and other revenues $18,919 $ 96,070 $ 24 $115,013
Net investment income 38,184 5,009 1,744 44,937
Total revenues excluding realized
investment gains 57,103 101,079 1,768 159,950
Benefits and expenses
Insurance benefits 40,840 67,534 64 108,438
Expenses 4,705 29,834 (1,396) 33,143
Amortization of deferred
acquisition costs 3,833 4,804 - 8,637
Total benefits and expenses 49,378 102,172 (1,332) 150,218
Pretax operating income (loss) $ 7,725 $ (1,093) $3,100 $ 9,732
</TABLE>
Page 9 of 21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Three Months Ended March 31, 1995 Compared to Three Months Ended
March 31, 1994
Total Revenues Excluding Realized Investment Gains (Losses). Total
revenues excluding realized investment gains and losses increased
$9.0 million, or 5.7%, from $160.0 million to $169.0 million
primarily due to increased premium revenue in the specialty health
insurance segment. That segment's first quarter 1995 revenues
increased primarily due to fee income for administering a block of
reinsured individual health insurance that the Company first began
to administer in the third quarter of 1994, sales and rate increases
in the employee benefits product line, and increased premiums in the
education disability product line due to sales in 1994. The 1994
first quarter included an adjustment of approximately $2.5 million
to unpaid premiums that reduced revenues in that quarter.
Insurance Benefits. Insurance benefits increased $4.5 million, or
4.1%, from $108.4 million in 1994 to $112.9 million in the first
quarter of 1995. The increase was primarily due to higher benefits
discussed in "Specialty Health Insurance Segment," below.
Insurance and General Expenses. Insurance and general expenses
increased $2.1 million, or 6.4%, from $33.1 million in the first
quarter of 1994 to $35.3 million in the first quarter of 1995. The
increase was due primarily to expenses related to administering a
block of reinsured individual health insurance that the Company
first began to administer in the third quarter of 1994.
During the first quarter of 1995, the Company changed its allocation
of income and expense items to more accurately reflect where these
items are incurred. As a result, the corporate and other segment
had an increase in insurance and general expenses of $2.0 million,
with expenses in the operating segments correspondingly reduced.
Segment Information
The Company has two operating business segments. The life insurance
and annuities segment consists of universal life insurance and other
interest-sensitive life insurance and annuity products marketed to
individuals and small businesses by UPI and a block of similar
business at WNIC, which no longer sells new business of this type.
The specialty health insurance segment consists primarily of
employee-paid disability insurance and other specialty insurance
products for educators, individual health insurance products,
primarily major medical and hospital indemnity coverage for persons
under the age of 65 without employer-sponsored insurance, and
employer-sponsored health and associated life insurance, stop-loss
insurance, and administrative services only for employers with from
2 to 1,000 employees. A third segment, corporate and other, includes
the non-insurance operations of the Company.
Life Insurance and Annuities. Revenues for the life insurance and
annuities segment for the first quarter of 1995 were $58.2 million,
compared to $57.1 million for the first quarter of 1994. The
improvement was primarily attributable to higher insurance premiums
and policy charges of $1.0 million, resulting from an increase in
life insurance in force and policy charges at UPI.
Pretax operating income for the life insurance and annuities segment
increased $0.7 million, or 8.6%, to $8.4 million in the first
quarter of 1995 from $7.7 million in the first quarter of 1994 as a
result of the increase in revenues and a decline in benefits.
In the second half of 1994, as market interest rates rose, the
Company increased credited interest rates, primarily at WNIC. As a
result, interest-rate spreads (the difference between what the
Company earns on its investments and what is credited to
policyholders) have declined below the levels of late 1994 and may
remain so until at least the latter part of 1995.
Page 10 of 21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Specialty Health Insurance. Revenues for the specialty health
insurance segment were $108.5 million in the first quarter of 1995
compared to $101.1 million in the first quarter of 1994, an increase
of $7.4 million, or 7.3%. The improvement was primarily due to fee
income for administering a block of reinsured individual health
insurance, sales and rate increases in the employee benefits product
line, and 1994 sales in the education disability product line. In
addition, the 1994 first quarter included an adjustment of
approximately $2.5 million to unpaid premiums that reduced revenues
in that quarter.
The specialty health insurance segment reported pretax operating
income of $1.4 million in the first quarter of 1995 compared to a
loss of $1.1 million in the first quarter of 1994. The improvement
was due to increased earnings from the individual health reinsurance
transactions offset in part by an increase in the benefit ratio
(insurance benefits divided by insurance premiums) of the group
products portion of this segment.
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 reinsures 100% of a
block of individual major medical business issued by Harvest Life.
In the first quarter of 1994, the Company entered into a reinsurance
agreement with National Casualty Company (National Casualty),
whereby the Company reinsures 50% and administers 100% of a block of
individual major medical health insurance. The Company receives a
fee for administering this block of business.
The combined effect of these reinsurance transactions was to
increase revenues and benefits and expenses by $16.5 million and
$15.1 million, respectively, in the first quarter of 1995, from
$14.8 million and $13.9 million, respectively, in the first quarter
of 1994. Because these two reinsurance transactions are comprised of
closed blocks of business, revenues and income from these
transactions are expected to decline over the next several years.
Over the last several quarters, including the first quarter of 1995,
the sales environment for the Company's group and individual major
medical health insurance products has become more competitive as
other insurance companies have priced their products more
aggressively in order to obtain additional market share in these
product lines. As a result of the sales environment, the Company has
experienced an increase in the level of policy lapses in the segment
and an increase in the benefit ratio in the 1995 first quarter and
may experience a higher benefit ratio during the remainder of 1995
and in 1996 than in 1994. The higher benefit ratio may be offset in
part by a lower expense ratio due to the economies generated by
added business and organizational changes implemented in 1994.
The Company prices its products to emphasize maintaining desired
profit margins and, as a result, saw a decline in new business sold
in 1994. To help offset the decline, the Company has expanded its
distribution network. As part of the reinsurance transactions, the
sales forces of Harvest Life and National Casualty are now selling
WNIC health products. The National Casualty sales force began
selling WNIC products in the first quarter of 1995. For the first
quarter, new sales increased to 11,000 policies, up from a quarterly
average in 1994 of 7,000 policies sold.
Corporate and Other. For the first quarter of 1995, the corporate
and other segment had pretax operating income of $1.6 million
compared to $3.1 million in the first quarter of 1994. The decline
was primarily due to a change in the allocation of expenses to the
life insurance and annuities and specialty health insurance segments
to more accurately report where the expenses are incurred.
Partially offsetting the expense reallocation, during 1994, the
Company sold certain real estate investments that did not produce
current income and invested the proceeds in income-producing fixed
maturity investments, resulting in an increase in investment income
in the 1995 first quarter over the same period of 1994.
Page 11 of 21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Investment Portfolio
At March 31, 1995, the Company had invested assets with a carrying
value of $2.4 billion. Certain information about the Company's
investment portfolio as of that date follows (dollars in millions):
<TABLE>
<CAPTION>
Percent of
Total
Carrying Value Carrying Value
<S> <C> <C>
Fixed maturity investments:
United States government
obligations $ 72.3 3.1%
Obligations of states and
political subdivisions 87.0 3.7
Public utilities 124.7 5.3
Industrial and miscellaneous 880.6 37.3
Mortgage-backed securities 641.4 27.2
Other 33.1 1.4
Total fixed maturity investments 1,839.1 78.0
Mortgage loans on real estate 353.9 15.0
Real estate 30.2 1.3
Policy loans 54.5 2.3
Equity securities 1.6 0.1
Other long-term 26.6 1.1
Short-term 52.8 2.2
Total invested assets $2,358.7 100.0%
</TABLE>
Fixed Maturity Investments
The carrying value of fixed maturity investments at December 31,
1994 was $1.8 billion, or 78.0% of the Company's invested assets.
Due to the decline in market interest rates in the first quarter of
1995, the carrying value of the Company's fixed maturity investments
compared to amortized cost increased and resulted in an unrealized
loss on fixed maturity investments of $53.6 million compared to
$119.5 million at December 31, 1994. The amortized cost of the
Company's fixed maturity portfolio was $1.9 billion at March 31,
1995, unchanged from December 31, 1994.
The Company's policy for rating fixed maturity investments is to use
the rating determined by Standard & Poor's Company or Moody's
Investor Service, Inc. for publicly-traded investments. For
privately-traded securities, the ratings of Duff & Phelps Credit
Rating Company and Fitch Investors Service, Inc. are also recognized
in defining rated securities. If an investment has a split rating
(i.e., different ratings from the rating services) the Company
categorizes the investment under the lowest rating. For those
investments that do not have a rating from these services, 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. At March 31, 1995, 7.7% of fixed maturity
investments were rated with comparable NAIC ratings, the majority of
which is $58.2 million of BBB-rated and $55.5 million of investments
rated BB and lower.
Page 12 of 21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The composition of the Company's fixed maturity portfolio at March
31, 1995, based on ratings follows (dollars in millions):
<TABLE>
<CATION>
Carrying Value
as a Percent of
Carrying Fixed Invested
Value Maturities Assets
<S> <C> <C> <C>
AAA/Aaa $ 764.9 41.6% 32.4%
AA/Aa 133.8 7.3 5.7
A 529.3 28.8 22.4
BBB/Baa 308.0 16.7 13.1
BB/Ba and lower 103.1 5.6 4.4
Total Fixed Maturities $1,839.1 100.0% 78.0%
</TABLE>
The carrying value of the Company's high-yield investments (rated BB
and lower) at March 31, 1995, was $103.1 million or 4.4% of the
Company's invested assets, up from $90.9 million at December 31,
1994, due to rating downgrades. The Company does not anticipate any
significant new investments in high-yield fixed maturity
investments.
At March 31, 1995, 27.2% 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, and the Federal Home Loan Mortgage Corporation, all of
which are agencies of the U.S. Government. Only GNMA mortgages are
backed by the full faith and credit of the U.S. Government. Agency
mortgage-backed securities are considered to have a AAA credit
rating.
The carrying value of the Company's mortgage-backed securities
portfolio at March 31, 1995 follows (dollars in millions):
<TABLE>
<CAPTION>
Carrying Value as a Percent of
Mortgage-
Carrying Backed Invested
Value Securities Assets
<S> <C> <C> <C>
Agency CMOs
Planned and target amortization
classes $266.1 41.5% 11.3%
Sequential classes 7.5 1.2 0.3
Support classes 5.4 0.8 0.2
Accrual classes 7.8 1.2 0.4
Total agency CMOs 286.8 44.7 12.2
Non-agency CMOs
Planned amortization classes 12.3 1.9 0.5
Sequential classes 8.8 1.4 0.3
Accrual classes 2.1 0.3 0.1
Total non-agency CMOs 23.2 3.6 0.9
Total CMOs 310.0 48.3 13.1
Non-agency mortgage-backed
pass-through securities 3.9 0.6 0.2
Agency mortgage-backed
pass-through securities 327.5 51.1 13.9
Total mortgage-backed securities $641.4 100.0% 27.2%
</TABLE>
Page 13 of 21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
In some instances, the Company invests in non-agency mortgage-backed
securities, primarily highly-rated CMOs. At March 31, 1995, $20.4
million, or 88%, 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.
Certain mortgage-backed securities are subject to significant
prepayment risk. This is due to the fact that in periods of
declining interest rates, mortgages may be repaid more rapidly than
scheduled as individuals refinance higher-rate mortgages to take
advantage of lower rates. As a result, holders of mortgage-backed
securities may receive large prepayments on their investments that
cannot be reinvested at interest rates comparable to the rates on
the prepaid mortgages. Conversely, in periods of rising interest
rates, mortgage prepayments may slow down which would result in
holders of mortgage-backed securities having less funds to reinvest
at higher rates.
Planned amortization class and target amortization class tranches,
which together comprised 11.8% of the Company's invested assets at
March 31, 1995, 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.
Mortgage Loans
The Company's mortgage loan portfolio at March 31, 1995, shown by
geographic distribution, year of maturity, and property type follows
(dollars in millions):
<TABLE>
<CAPTION>
Geographic Distribution
<S> <C> <C>
California $ 60.7 17.2%
Indiana 44.7 12.6
Illinois 44.4 12.5
Florida 32.0 9.0
Texas 30.0 8.5
North Carolina 19.6 5.5
Georgia 13.5 3.8
Wisconsin 11.0 3.1
All other 98.0 27.8
Total $353.9 100.0%
</TABLE>
<TABLE>
<CAPTION>
Property Type
<S> <C> <C>
Retail $210.7 59.5%
Office 41.0 11.6
Industrial 31.1 8.8
Medical 23.6 6.7
All other 47.5 13.4
Total $353.9 100.0%
</TABLE>
<TABLE>
<CAPTION>
Scheduled
Principal Balloon
Payments Payments Total
<S> <C> <C> <C>
Mortgage Loans by Year
of Maturity:
1995 $ 6.6 $ 17.4 $ 24.0
1996 9.6 32.3 41.9
1997 10.2 25.0 35.2
1998 10.5 12.3 22.8
1999 10.8 10.4 21.2
2000 and thereafter 90.5 118.3 208.8
Total $138.2 $215.7 $353.9
</TABLE>
Page 14 of 21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The Company had investments in mortgage loans of $353.9 million at
March 31, 1995 compared to $357.6 million at December 31, 1994.
Investments in mortgage loans declined primarily due to prepayments
and amortization of the mortgage loan portfolio during the first
quarter of 1995. Of the outstanding loans at March 31, 1995, loans
with a carrying value of $3.1 million (net of allowances of $0.5
million) or 1.0% were delinquent 60 days or more as to interest or
principal, far better than recent industry averages.
The Company actively manages its non-current investments through
restructuring of mortgages and sales and leasing of foreclosed real
estate in order to achieve the highest current return as well as to
preserve capital. Restructured loans, where modifications of the
terms of the mortgage loan have generally occurred and which are
considered current investments, had a carrying value of $16.7
million at March 31, 1995, essentially unchanged from December 31,
1994.
Real Estate
The Company's real estate investments totaled $30.2 million (net of
allowances of $2.5 million) at March 31, 1995 compared to $27.0
million (net of allowances of $2.5 million) at December 31, 1994.
The increase was due to foreclosures. At March 31, 1995, $7.9
million of the real estate investments were acquired through
foreclosures, compared to $4.7 million at December 31, 1994. The
Company does not anticipate any new acquisition of real estate other
than through foreclosure of mortgage loans.
Liquidity and Capital Resources
Cash Flows. During the first quarter of 1995, the Company's
operating activities generated cash of $22.0 million compared to
$11.4 million in the first quarter of 1994. The increase in cash
provided by operations in the first quarter of 1995 resulted
primarily from improved earnings from operations partially offset by
the return in the first quarter of 1994 of $4 million funds held
for a terminated group life insurance contract.
Investing activities (purchases and sales of investments) used cash
of $10.3 million in the first quarter of 1995 compared to $6.2
million in the first quarter of 1994, primarily for the purchase of
fixed maturity investments in both periods.
Financing activities used cash of $15.9 million in the first quarter
of 1995 and $8.3 million in the first quarter of 1994. The increase
in cash used for financing activities was due to increased
policyholder withdrawals from the closed block of interest-sensitive
annuity business at WNIC, offset in part by increased interest-
sensitive life insurance and annuity account deposits on this
business at UPI.
Liquidity. The fair value of the Company's investment portfolio,
primarily fixed maturity investments, is affected by changing
interest rates. When interest rates rise, the fair value of the
Company's fixed maturity investments declines. In addition, the
value of the Company's policy liabilities decreases. In periods of
declining interest rates, the fair value of the Company's fixed
maturity investments increases, accompanied by an increase in the
value of its policy liabilities. The Company estimates that a one
percentage point change in market interest rates would have an
inverse effect on the fair value of its fixed maturity investments
of approximately 5.8%.
In addition, rising interest rates could result in increased
surrenders of life insurance policies and annuities (as current
policy and contract holders seek higher returns elsewhere) causing
the Company to sell fixed maturity investments below cost. In order
to minimize the need to sell fixed maturity investments below cost,
the Company seeks to maintain sufficient levels of cash and short-
term investments.
Page 15 of 21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The Company held cash and short-term investments of $56.0 million at
March 31, 1995. Management believes the balance of cash and short-
term investments plus cash inflow from premium revenues, investment
income, and investment maturities is more than sufficient to meet
the requirements of the Company and its subsidiaries.
Corporate Restructuring and Strategy
As a result of changing business and regulatory climates, the
Company began a detailed review of its corporate strategy late in
1994. During the process of developing a new strategy, the Company
is considering a number of business proposals to maximize the value
of the Company for shareholders. The completion and announcement of
the Company's new business strategy are expected in the second half
of 1995.
A.M. Best Ratings
The ability of an insurance company to compete successfully depends,
in part, on its financial strength, operating performance, and
claims-paying ability as rated by A.M. Best and other rating
agencies. The Company's insurance subsidiaries are each currently
rated "A- (Excellent)" by A.M. Best, based on their 1993 statutory
financial results and operating performance.
A. M. Best's 15 categories of rating 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. Many of the Company's competitors have A.M. Best ratings of "A-
" or lower, and the Company believes the insurance subsidiaries'
A.M. Best ratings are adequate to enable them to compete
successfully. A.M. Best ratings are based upon factors of concern to
policyholders, agents, and intermediaries and are directed toward
the protection of policyholders, not investors.
A. M. Best uses a variety of qualitative and quantitative measures
in determining a company's rating and surplus adequacy. The Company
expects that both WNIC and UPI will continue to meet A.M. Best's
standards for an "A-" rating based on 1994 results.
Page 16 of 21
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
WNC and certain affiliated companies have been named in various
pending legal proceedings considered to be ordinary routine
litigation incidental to the business of such companies. A number
of other legal actions have been filed which demand compensatory and
punitive damages aggregating material dollar amounts. WNC believes
that such suits are substantially without merit and that valid
defenses to them exist. WNC's management and its chief legal
officer are of the opinion that such litigation will not have a
material effect on WNC's results of operations or consolidated
financial position. The amount involved in any proceeding, or group
of proceedings presenting in large degree the same issues, does not
exceed the materiality standard for disclosure contained in
Instruction 2 to Item 103 of Regulation S-K.
In September 1994, two retired employees filed a lawsuit in the
United States District Court for the Northern District of Illinois
against WNC, WNC's wholly owned subsidiary, Washington National
Insurance Company ("WNIC"), and the three individual trustees of the
Washington National Insurance Company Home Office Group Insurance
Plan (the "Plan"). The plaintiffs purport to act as members of a
class consisting of all employees of WNC and WNIC who retired or
tendered their irrevocable notice of retirement on or before July
24, 1989 and who are eligible to receive benefits under the Plan.
The complaint is brought under the Employee Retirement Income
Security Act ("ERISA") and alleges that WNC, WNIC and the trustees
have taken and threatened to take actions to modify, amend or
terminate the Plan in violation of written and oral promises and
representations, and the terms of the Plan. The alleged violations
include changing the method for computing claims payable under the
Plan, requiring retired employees to contribute to the payment of
premiums for their Medicare supplemental health insurance coverage
and maintaining that WNC, WNIC and the trustees have reserved the
right to modify or terminate benefits under the Plan. Plaintiffs
seek a declaration of their rights under the Plan, the reinstatement
of Medicare supplemental health insurance coverage for all members
of the class, an accounting of all funds obtained and claims not
paid as a result of the Plan modifications, an award of attorneys'
fees and other relief.
WNC, WNIC and the individual trustees believe that valid defenses
exist and intend to contest vigorously the allegations made in the
complaint.
Page 17 of 21
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 11 - Computation of Per Share Earnings.
b. Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended
March 31, 1995.
Page 18 of 21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
WASHINGTON NATIONAL CORPORATION
May 11, 1995 /s/ Joan K. Cohen
Joan K. Cohen
Vice President, Controller and Treasurer
(Duly Authorized Officer and Chief
Accounting Officer)
Page 19 of 21
<PAGE>
EXHIBIT INDEX
PAGE
Exhibit 11 - Computation of Per Share Earnings. 21
Page 20 of 21
<TABLE>
WASHINGTON NATIONAL CORPORATION
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
Primary and Fully Diluted
(000s Omitted Except Per Share Amounts)
<CAPTION>
Three Months Ended
March 31,
1995 1994
<S> <C> <C>
Primary
Average Shares:
Average common shares outstanding 12,172 12,128
Assumed exercise of stock options 65 100
Total Average Shares 12,237 12,228
Net Income Available to Common Shareholders:
Income before Preferred Stock dividend
requirement $7,290 $7,034
Preferred Stock dividend requirement (90) (90)
Net Income Available to Common Shareholders $7,200 $6,944
Primary Earnings Per Share $0.59 $0.57
Fully Diluted
Average Shares:
Average common shares outstanding 12,172 12,128
Assumed conversion of preferred stock 271 271
Assumed exercise of stock options 65 100
Total Average Shares 12,508 12,499
Net Income Available to Common Shareholders $7,290 $7,034
Fully Diluted Earnings Per Share $0.58 $0.56
Page 21 of 21
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 1,735,803
<DEBT-CARRYING-VALUE> 103,306
<DEBT-MARKET-VALUE> 104,410
<EQUITIES> 1,667
<MORTGAGE> 353,861
<REAL-ESTATE> 30,182
<TOTAL-INVEST> 2,358,717
<CASH> 3,115
<RECOVER-REINSURE> 53,814
<DEFERRED-ACQUISITION> 276,738
<TOTAL-ASSETS> 2,859,152
<POLICY-LOSSES> 2,066,951
<UNEARNED-PREMIUMS> 35,260
<POLICY-OTHER> 214,458
<POLICY-HOLDER-FUNDS> 38,688
<NOTES-PAYABLE> 1,770
<COMMON> 125,116<F1>
0
723
<OTHER-SE> 217,102
<TOTAL-LIABILITY-AND-EQUITY> 2,859,152
120,711
<INVESTMENT-INCOME> 45,536
<INVESTMENT-GAINS> (615)
<OTHER-INCOME> 2,742
<BENEFITS> 112,904
<UNDERWRITING-AMORTIZATION> 9,429
<UNDERWRITING-OTHER> 35,252
<INCOME-PRETAX> 10,789
<INCOME-TAX> 3,499
<INCOME-CONTINUING> 7,290
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,290
<EPS-PRIMARY> .59
<EPS-DILUTED> .58
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>INCLUDES ADDITIONAL PAID-IN CAPITAL OF $47,305.
</FN>
</TABLE>
