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, 1994Commission 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 60069-3665
(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 20, 1995.
Common Stock, $5 par value-$188,198,280
Convertible Preferred Stock, $5 par value-$4,941,411
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-12,178,821
(excluding 3,383,473 shares held in the Treasury) as of March 20, 1995
DOCUMENTS INCORPORATED BY REFERENCE
The 1995 Proxy Statement is incorporated by reference into Part III.
<PAGE>
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 shareholder 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, 1994,
WNC and its affiliates had 976 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 three lines of
business: health (primarily medical) insurance (both individual and
group) and disability insurance for educators (underwritten by
WNIC), and individual life insurance and annuities (underwritten by
UPI). In 1994, the Company started a broad review of corporate
strategy. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," in Part II, Item 7, for futher
information.
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.
Effective December 31, 1994, WNC redefined its reporting segments,
merging the previous individual health insurance and group products
segments to better align them with its operating organization. WNC
has three segments: life insurance and annuities; health insurance;
and corporate and other. The redefined segments are in line with
WNC's current operating structure. The corporate and other segment
is comprised of the operations of WNC that do not specifically
support the other segments.
See Item 8, under the caption "Note M - Segment Information," for
further information about WNC's three business segments. WNIC's group
products premiums which are included in the health insurance segment
were 32%, 35%, and 38% of WNC's total revenues in 1994, 1993, and 1992,
respectively. Premiums for WNIC's disability insurance for educators
accounted for 10% of WNC's revenues for each of the years 1994, 1993,
and 1992.
DESCRIPTION OF INSURANCE SUBSIDIARIES
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 health insurance for individuals and groups and
disability insurance for educators. As part of the 1989 corporate
strategic 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 retained its existing life insurance and
annuity business which is reported as part of the life insurance and
annuities segment.
WNIC's health insurance business consists of individual, group and
disability products. The individual health business includes major
medical and hospital-surgical policies. Group health consists
primarily of employer-sponsored health and associated life
insurance, stop-loss insurance, and administrative services only for
employers with from 2 to 1,000 employees. Disability products
include employee-paid disability insurance and other specialty
insurance products for educators. The individual and group health
business, along with the disability insurance products for educators
business, is reported as the health insurance segment.
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 health and
educator disability products consists of 78 field representatives,
including 17 managers, all of whom are salaried employees of WNIC.
Their activities are supported by 47 other field employees. WNIC
markets individual health products through brokers who are employed
by field marketing organizations under standard brokerage contracts.
At December 31, 1994, WNIC had approximately 80,000 brokers employed
by 68 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 for the
purpose of becoming the parent company and sole shareholder of UPI
and is 71% owned by WNIC and 29% owned by WNC. Prior to the fourth
quarter of 1993, UPC was 100% owned 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 and annuities. UPI's operating results are reported
in the life insurance and annuities segment.
Sales are made through approximately 5,000 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
In the life insurance and annuities segment, UPI introduced in 1994
a new annuity series and a low premium universal life insurance
product designed for permanent coverage. In 1995, UPI will introduce
at least two new universal life insurance products built to fit
within its existing portfolio.
In the health insurance segment, WNIC introduced in 1994 new
disability and short-term, major medical products for individuals
and a long-term care product, disability income enhancements, and a
small group product for groups. New products anticipated in 1995 for
the health insurance segment are new disability income and accident-
only products for individuals and new dental, term life, disability,
and managed care products for groups.
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 state insurance departments in each jurisdiction
in which they are licensed to do business, greatly affecting the
competitive environment in which they operate. The state insurance
departments 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, the form and content of required
financial statements, conducting of periodic examinations, and the
investment laws and regulations of their states of incorporation.
This regulation and supervision is primarily for the protection of
policyowners and not shareholders.
WNIC's individual health insurance 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. UPI competes for
the sale of life insurance and annuity products with approximately
300 U.S. life insurance companies, including stock and mutual
companies.
Recently, the environment for WNC'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 this sales environment, WNC expects an
increase in the level of policy lapses in the health insurance
segment and an increase in the benefit ratio over the next 1-2
years.
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 a five-story, 175,000 square-foot
office building located at 300 Tower Parkway, Lincolnshire,
Illinois, that was first occupied by WNC in May, 1993. The building
is being leased for a period of twenty years from a joint venture
partnership in which Washington National Development Company (WNDC),
a subsidiary of WNIC, has a one-third interest.
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 8 percent of this building and
leases the remainder to nonaffiliated commercial enterprises. At
December 31, 1994, the outstanding balance on the mortgage loan
secured by this property was $1,907,000. WNIC also occupies 25 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 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
believe 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, 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, with respect to
these actions, an award of attorneys' fees and other relief, and a
certification of the class.
WNC, WNIC, and the individual trustees believe that valid defenses
exist and intend to contest vigorously the allegations made in the
complaint.
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.
<PAGE>
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 57, 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 48, 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. Mr. Fuhrmann is a Director of UPI and WNIC and serves on
WNIC's Executive and Finance Committees.
Kenneth A. Grubb
Mr. Grubb, age 55, 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 52, was elected Chairman of the Board and Chief
Executive Officer of WNC and Chairman of the Executive Committee 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 46, 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 45, 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 48, 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 of 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.
<PAGE>
PART II
Item 5. Market For the Registrant's Common Equity and Related
Shareholder Matters
Quarterly Information (unaudited)
The following table summarizes selected unaudited quarterly
information for 1994 and 1993. Stock quotes were obtained from the National
Quotation Bureau, Inc. As of March 2, 1995, WNC had approximately 9,900 Common
and Preferred shareholders, including individual participants in security
depository position listings.
<TABLE>
<CAPTION>
(000s omitted, except per share amounts)
1994
------------------------------------------------------------
Quarter Ended March 31, June 30, September 30, December 31,
<S> <C> <C> <C> <C>
Total revenues $160,416 $162,050 $167,760 $166,703
Net income 7,034 8,421 9,127 6,719
Net income per share .57 .68 .74 .54
Market price
Common
High 25 1/8 23 1/4 22 7/8 22 3/4
Low 22 3/4 21 20 5/8 18 5/8
Close 23 1/2 21 1/4 22 7/8 19
Preferred
High 50 48 3/4 46 45 7/8
Low 48 5/8 46 44 3/8 40
Close 49 1/4 46 1/4 44 3/4 40
Common Stock dividends .27 .27 .27 .27
Preferred Stock dividends .625 .625 .625 .625
</TABLE>
<TABLE>
<CAPTION>
1993
------------------------------------------------------------
Quarter Ended March 31, 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 change in
accounting principle 4,746 6,794 5,443 11,233
Cumulative effect (1,550) _ _ _
Net income 3,196 6,794 5,443 11,233
Net income per share before
cumulative effect .46 .66 .50 .91
Net income per share .31 .66 .50 .91
Market price
Common
High 27 7/8 27 1/4 24 5/8 25 7/8
Low 22 5/8 22 1/4 22 23 1/2
Close 26 1/4 22 7/8 23 3/4 24
Preferred
High 54 54 1/2 51 1/2 53 1/4
Low 44 3/4 46 46 3/8 49 3/4
Close 50 1/8 46 1/2 49 1/2 52
Common Stock dividends .27 .27 .27 .27
Preferred Stock dividends .625 .625 .625 .625
</TABLE>
Item 6. Selected Financial Data
<TABLE>
Five Year Summary
<CAPTION>
(000s omitted, except per share amounts)
1994 1993 1992 1991(c) 1990(d)
<S> <C> <C> <C> <C> <C>
Total revenues $ 656,929 $ 628,527 $ 570,442 $ 578,044 $ 709,083
Operating income (a)
Pretax operating income 46,252 38,577 26,975 20,370 4,568
Net operating income 30,155 25,057 18,808 17,381 4,872
Income (loss) before cumulative
effect of changes in
accounting principles 31,301 28,216 16,852 (2,964) (8,523)
Net income (loss) 31,301 26,666 (5,967) (2,964) (8,523)
Average common shares
and equivalents outstanding (b) 12,225 10,755 9,989 9,980 10,534
Per share:
Net operating income $ 2.44 $ 2.30 $ 1.84 $ 1.71 $ .43
Income (loss) before cumulative
effect of changes in
accounting principles 2.53 2.59 1.65 (.33) (.84)
Net income (loss) 2.53 2.45 (.63) (.33) (.84)
Common dividends declared 1.08 1.08 1.08 1.08 1.08
Total assets 2,810,568 2,854,419 2,712,783 2,554,999 2,759,861
Mortgage and long-term notes
payable 1,907 2,434 13,870 14,042 18,506
Shareholders' equity 306,323 348,945 288,040 300,062 307,412
Shareholders' equity excluding
unrealized investment gains
and losses 367,679 348,988 287,929 303,310 317,974
Life insurance in force (in
millions) 21,035 22,215 25,454 24,227 26,043
<FN>
(a) Income before realized investment gains and losses,
divestitures, gains from curtailments of benefit plans, and the cumulative
effect of accounting changes.
(b) The increase in 1994 of average common shares and
equivalents outstanding is a result of the Company's public offering of
2,133,000 newly issued shares in the third quarter of 1993.
(c) A subsidiary and two blocks of business were sold in 1991. A
pretax loss of $1.8 million on the sale of the subsidiary was recognized in
1991(see (d) below). Operating revenues of $12.2 million were attributable to
this subsidiary. The two blocks of business were sold for a pretax gain of $.7
million.
(d) In 1990 the Company sold its home service business that had revenues of $16.8
million for a $23.9 million pretax gain. Also included in 1990 was a $16.0
million accrual for the loss on the 1991 sale of a subsidiary.
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
<TABLE>
Analysis of Net Income (Loss)
<CAPTION>
(000s omitted) 1994 1993 1992
<S> <C> <C> <C>
Pretax operating income
(loss) (a)
Life insurance and
annuities $33,177 $27,637 $ 21,856
Health insurance 5,895 11,500 7,007
Corporate and other 7,180 (560) (1,888)
Total pretax operating
income 46,252 38,577 26,975
Income taxes on operations 16,097 13,520 8,167
Net operating income 30,155 25,057 18,808
Other components of net
income (loss)(net of taxes)
Realized investment gains
(losses) (b) 1,146 2,840 (4,618)
Gains from benefit plan
changes - 319 2,662
Cumulative effect of
changes in accounting
principles (c) - (1,550) (22,819)
Net income (loss) $31,301 $26,666 $ (5,967)
<FN>
(a) Pretax income (loss) before realized investment gains and
losses, gains from benefit plan changes, and cumulative effect of
accounting changes.
(b) 1994 and 1993 include tax benefits of $2,752 and $3,194,
respectively.
(c) 1993: Employers' Accounting for Postemployment Benefits;
1992: Employers' Accounting for Postretirement Benefits Other
than Pensions and Accounting for Income Taxes.
</TABLE>
Overview
Washington National Corporation (WNC or the Company) is an
insurance holding company that is engaged primarily in marketing and
underwriting life insurance, annuities, medical, disability, and specialty
insurance for individuals and groups. The major operating subsidiaries of the
Company are Washington National Insurance Company (WNIC) and United
Presidential Life Insurance Company (UPI).
The Company targets markets that it believes are underserved by other insurance
companies. It has 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. It continually evaluates new products and markets
in order to capitalize on potential opportunities and to anticipate and respond
effectively to business and regulatory changes.
The Company believes these factors contributed to a substantial improvement in
operations thus far in the 1990s. From 1990 to 1994, pretax operating income
increased from $4.6 million to $46.3 million.
Corporate Restructuring and Strategy
In 1988, the Company began restructuring to narrow its focus on
fewer businesses, reduce its work force, and recruit new operating managers with
significant insurance industry experience. Since that time, the operating
businesses have continually adjusted their specific strategies to remain
competitive and profitable. Late in 1994, the Company began a broad review of
its corporate strategy which it expects to complete in 1995.
<TABLE>
Consolidated Results of Operations
Components of Pretax Operating Income (Loss) by Segment
<CAPTION>
Life Insurance Health Corporate
(000s omitted) and Annuities Insurance and Other Total
1994
<S> <C> <C> <C> <C>
Revenues
Insurance premiums and policy charges $ 71,784 $396,601 $ 1 $468,386
Net investment income 154,414 20,003 7,590 182,007
Other revenues 3,534 4,378 230 8,142
Total revenues excluding realized investment losses 229,732 420,982 7,821 658,535
Benefits and expenses
Insurance benefits 159,661 275,878 263 435,802
Expenses 18,692 119,358 378 138,428
Amortization of deferred acquisition costs 18,202 19,851 - 38,053
Total benefits and expenses 196,555 415,087 641 612,283
Pretax operating income $ 33,177 $ 5,895 $ 7,180 $ 46,252
</TABLE>
<TABLE>
<CAPTION>
1993
<S> <C> <C> <C> <C>
Revenues
Insurance premiums and policy charges $ 64,915 $373,150 $ 757 $438,822
Net investment income 158,981 21,148 3,606 183,735
Other revenues 5,054 264 1,006 6,324
Total revenues excluding realized investment losses 228,950 394,562 5,369 628,881
Benefits and expenses
Insurance benefits 160,341 258,926 1,091 420,358
Expenses 21,141 106,024 4,838 132,003
Amortization of deferred acquisition costs 19,831 18,112 - 37,943
Total benefits and expenses 201,313 383,062 5,929 590,304
Pretax operating income (loss) $ 27,637 $ 11,500 $ (560) $ 38,577
</TABLE>
<TABLE>
<CAPTION>
1992
<S> <C> <C> <C> <C>
Revenues
Insurance premiums and policy charges $ 63,400 $316,775 $ 795 $380,970
Net investment income 164,754 21,416 967 187,137
Other revenues 5,334 619 1,000 6,953
Total revenues excluding realized investment losses 233,488 338,810 2,762 575,060
Benefits and expenses
Insurance benefits 176,949 231,717 1,174 409,840
Expenses 21,152 86,497 3,476 111,125
Amortization of deferred acquisition costs 13,531 13,589 - 27,120
Total benefits and expenses 211,632 331,803 4,650 548,085
Pretax operating income (loss) $ 21,856 $ 7,007 $ (1,888) $ 26,975
</TABLE>
Year Ended December 31, 1994 Compared to
Year Ended December 31, 1993
Insurance Premiums and Policy Charges. Insurance premiums
and policy charges increased $29.6 million, or 6.7%, from $438.8 million in 1993
to $468.4 million in 1994. The change was primarily due to an increase of $23.5
million in premiums in the health insurance segment, the result of higher
premiums from individual health reinsurance transactions, partially offset by a
decline in group products premiums. In addition, insurance premiums and policy
charges in the life insurance and annuities segment increased by $6.9 million
due to an increase in life insurance in force and an increase in policy charges.
See "Segment Information - Health Insurance and Life Insurance and Annuities,"
below.
Net Investment Income. Net investment income decreased $1.7 million, or 0.9%,
to $182.0 million in 1994 from $183.7 million in 1993. The decrease was due
primarily to a decline in the Company's portfolio yield (based on amortized
cost) from 8.0% in 1993 to 7.7% in 1994.
Realized Investment Losses. Realized investment losses before taxes for 1994
were $1.6 million compared to $0.4 million in 1993. In 1994, realized losses of
$1.7 million on fixed maturity investments and $2.0 million on real estate and
mortgage loans were partially offset by gains on equity securities and other
invested assets of $2.1 million. In 1993, realized gains of $8.2 million on
fixed maturity investments and equity securities were offset by losses of $8.5
million on real estate investments, mortgage loans, and other invested assets.
The Company's income taxes included tax benefits of $2.8 million and $3.2
million in 1994 and 1993, respectively, from previous years' realized investment
losses.
Insurance Benefits Paid or Provided. Insurance benefits paid or provided
increased $15.4 million, or 3.7%, from $420.4 million in 1993 to $435.8 million
in 1994. The increase was primarily due to higher benefits of $17.0 million in
the health insurance segment primarily due to additional business from
individual health reinsurance transactions which also increased premium
revenues.
Insurance and General Expenses. Insurance and general expenses increased $6.9
million, or 5.3%, from $131.5 million in 1993 to $138.4 million in 1994,
primarily due to higher expenses in the health insurance segment of $13.3
million principally related to the individual health reinsurance transactions.
Income Taxes. Income taxes on operations increased $2.6 million to $16.1
million in 1994 compared to $13.5 million in 1993 primarily due to increased
operating income.
Change in Accounting Principle. In the first quarter of 1993, the Company
recorded a one-time charge of $1.6 million after taxes for the adoption of a new
accounting standard, Employers' Accounting for Postemployment Benefits. The
adoption did not have a material impact on income before accounting changes.
Net Income. Net income for 1994 was $31.3 million compared to $26.7 million
in 1993. The improvement in net income resulted from increased earnings from
operations and the charge in the first quarter of 1993 relating to the adoption
of the new accounting standard described above.
Segment Information
Effective December 31, 1994, the Company redefined its
reporting segments, merging the previous individual health insurance and group
products segments to better align them with its operating organization. All
prior years' segment information has been restated to be comparable.
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 closed blocks of similar business at WNIC. The health
insurance segment consists primarily of employer-sponsored health and associated
life insurance, stop-loss insurance, and administrative services only for
employers with from 2 to 1,000 employees, employee-paid disability insurance and
other specialty insurance products for educators, and individual health
insurance products, primarily major medical and hospital indemnity coverage for
persons under the age of 65 without employer-sponsored insurance. The 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 1994 were $229.7 million, compared to $229.0 million for 1993. The
improvement was attributable to higher insurance premiums and policy charges of
$6.9 million, primarily due to an increase in life insurance in force and policy
charges at UPI, mostly offset by a $4.6 million decrease in investment income
resulting primarily from a lower portfolio yield. UPI's increase in insurance
premiums and policy charges was offset in part by a decline at WNIC where no new
policies are being sold in this segment.
Pretax operating income for the life insurance and annuities segment increased
$5.6 million, or 20.0%, to $33.2 million in 1994 from $27.6 million in 1993, due
to improved interest rate spreads (as the interest credited on account balances
was reduced more than the decrease in the yield on invested assets), a reduction
in operating expenses at UPI, and the improvement in revenues.
Generally, in an environment of rising interest rates, the Company may have
difficulty maintaining the spread between the rates credited to policyholders
and the rate earned on its investment portfolio, resulting in lower profit
margins for this segment. While the Company was able to maintain its spread for
1994 as market interest rates rose, the Company expects spreads to decline in
1995. For 1994, maintenance of interest rate spreads higher than the Company's
long-term spread assumptions resulted in additional pretax income of
approximately $5 million. The future profitability of the Company's closed
blocks of life insurance and annuities is highly dependent upon maintaining a
minimum expected interest rate spread and level of persistency. A significant
deterioration in policy persistency would reduce future profits.
Health Insurance. Revenues for the health insurance segment were $421.0
million in 1994 compared to $394.6 million in 1993, an increase of $26.4
million, or 6.7%. The improvement was primarily due to two individual health
reinsurance transactions that added $61.0 million of revenues in 1994, compared
to $23.4 million of revenues in 1993. The increase was also due in part to
average rate increases of approximately 6% in 1994 on the direct portion of the
individual health insurance in force, offset in part by a decline of 2.1% in the
total number of policies in force for this part of the business. The increase in
revenues from the reinsurance transactions was partially offset by a reduction
in group products premiums of $14.8 million primarily due to policy lapses,
including the termination of a large group life insurance contract in 1993, with
approximately $6 million of premium revenues in 1993. The termination of the
large group life contract, which had approximately $3 billion of life insurance
in force, did not materially affect net income as there was a corresponding
decrease in benefits and expenses.
The health insurance segment reported pretax operating income of $5.9 million in
1994 compared to $11.5 million in 1993. The decrease was primarily due to 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 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 combined effect of these reinsurance transactions was to increase revenues
and benefits and expenses by $61.0 million and $55.5 million, respectively, in
1994, compared to $23.4 million and $22.3 million, respectively, in 1993.
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, 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 expects an increase in the
level of policy lapses in the segment and an increase in the benefit ratio over
the next 1-2 years.
The Company prices its products to emphasize maintaining desired profit margins
and, as a result, has seen a decline in new business sold. To help offset the
decline, the Company has expanded its distribution network. As part of the
reinsurance transactions, the Company is utilizing the sales force of Harvest
Life, whose agents generated approximately 10% of 1994 new sales. In addition,
National Casualty agents began marketing the Company's individual health
products in the first quarter of 1995 and are expected to add significantly to
new sales volume.
Corporate and Other. For 1994, the corporate and other segment had pretax
operating income of $7.2 million compared to a loss of $0.6 million in 1993.
The improvement was due to increased investment income on the Company's surplus
funds in 1994 and expenses in 1993 related to the relocation of the Company's
headquarters.
In 1995, the Company plans to change its allocation to the operating segments of
income and expense items in this segment to more accurately reflect these
savings. This will result in lower earnings for this segment and higher earnings
for the other segments but will have no affect on net income.
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
health insurance segment premiums arising from individual health insurance
premiums of $52.3 million, offset in part by a decline in group products
premiums. The premium decline was due primarily to policy lapses, including the
termination of a large contract with approximately $6 million of both premium
revenue and benefits and expenses in 1993 and $11 million of premium revenue and
expenses in 1992. See "Segment Information - Health Insurance," 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 that caused a decline in the Company's
portfolio yield from 8.6% in 1992 to 8.0% in 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 $8.2
million on fixed maturity investments and equity securities were offset by
losses of $8.5 million on real estate investments, mortgage loans, and other
invested assets. 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. The Company's 1993 income taxes included a tax benefit of $3.2
million from previous years' realized investment losses.
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 higher health insurance benefits of
$27.2 million resulting primarily from the individual health reinsurance
transaction entered into in 1993. 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, improved mortality
experience, and the annual review of benefits assumptions, discussed in
"Amortization of Deferred Acquisition Costs," below.
Insurance and General Expenses. Insurance and general expenses increased
$24.4 million, or 22.8%, from $107.1 million in 1992 to $131.5 million in 1993.
Included in 1993 were expenses of $6.9 million related to the individual health
reinsurance transaction, charges of $1.7 million for the combination of the
individual health and employee benefits divisions, and $1.6 million related to
reengineering in the life insurance and annuities segment. Also included in 1993
were move-related costs, primarily due to the relocation of the Company's
headquarters.
Amortization of Deferred Acquisition Costs. Amortization of deferred
acquisition costs increased $10.8 million, or 39.9%, from $27.1 million in 1992
to $37.9 million in 1993. The change was primarily due to increased amortization
of $3.5 million in the health insurance segment resulting from an increase in
the block of in force individual health insurance 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, described
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 to improvement in the operations of all of the Company's
segments.
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. Also in 1993, the Company's federal income tax rate increased from
34% to 35%.
Changes in Accounting Principles. In 1993, the Company recorded a one-time
charge of $1.6 million after taxes 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 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 from all three
of the Company's segments, partially offset by a 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 for 1993 were $229.0 million, compared to $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 increased policy charges at UPI, offset
in part by a decline in insurance revenues on the closed blocks of business at
WNIC.
Pretax operating income for the life insurance and annuities segment increased
26.5% to $27.6 million in 1993 from $21.9 million in 1992. The increase was
primarily due to improved interest rate spreads 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
reengineering at UPI, and transfer the administration of WNIC's closed block of
life insurance to UPI.
Health Insurance. Revenues for the health insurance segment were $394.6
million in 1993 compared to $338.8 million in 1992, an increase of 16.5%. The
increase was due to an individual health reinsurance transaction that added
$23.4 million of revenue, 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 group products. The increase in revenues was partially
offset by a decline of approximately $6 million of premium revenue from the
termination of a large group life insurance contract in 1993. The annual
premiums and related benefits related to this contract were each approximately
$11 million in 1992. The termination of the large group life insurance contract,
which had approximately $3 billion of life insurance in force, did not
materially affect net income.
The health insurance segment reported pretax operating income of $11.5 million
in 1993 compared to $7.0 million in 1992. The increase in pretax income was due
to an improved ratio of claims to premiums in 1993 over 1992, offset in part by
increased expenses.
Corporate and Other. For 1993, the pretax operating loss was $0.6 million
compared to a loss of $1.9 million in 1992. The improvement was primarily due to
an increase in investment income on the Company's surplus funds from the
secondary stock offering of 2.1 million shares in 1993 which generated $47.3
million.
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 insurance 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
interest rate risk. The Company's investment portfolio consists principally 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, 1994, the Company had invested assets with a carrying value of
$2.3 billion. Certain information about the Company's investment portfolio as of
that date follows (dollars in millions):
<TABLE>
<CAPTION>
Percent
of Total
Carrying Carrying
Value Value
<S> <C> <C>
Fixed maturity investments:
United States government
obligations $ 70.3 3.1%
Obligations of states and
political subdivisions 93.7 4.1
Public utilities 117.6 5.1
Industrial and miscellaneous 835.6 36.5
Mortgage-backed securities 613.7 26.9
Other 31.7 1.4
Total fixed maturity investments 1,762.6 77.1
Mortgage loans on real estate 357.6 15.6
Real estate 27.0 1.2
Policy loans 54.4 2.4
Equity securities 13.0 0.6
Other long-term 17.6 0.8
Short-term 52.4 2.3
Total invested assets $2,284.6 100.0%
</TABLE>
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards 115, "Accounting for Certain Investments in Debt and Equity
Securities." As a result, most of the Company's fixed maturity investments are
classified as available for sale and carried at fair value at December 31, 1994.
The remaining fixed maturity investments are classified as held to maturity and
carried at amortized cost, less write-downs for other-than-temporary
impairments. See Note A to the Consolidated Financial Statements for further
information.
Fixed Maturity Investments
The carrying value of fixed maturity investments at December
31, 1994 was $1.8 billion, or 77.1% of the Company's invested assets. The
amortized cost of the Company's fixed maturity portfolio increased $120 million
to $1.9 billion at December 31, 1994 from $1.8 billion at December 31, 1993. Due
to the increase in market interest rates in 1994, the carrying value of the
Company's fixed maturity investments compared to amortized cost declined,
resulting in an unrealized loss on fixed maturity investments of $119.5 million.
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 December 31, 1994, 7% of fixed maturity investments were rated with
comparable NAIC ratings, the majority of which is $61.7 million of BBB-rated and
$45.0 million of investments rated BB and lower.
The composition of the Company's fixed maturity portfolio at December 31, 1994,
based on ratings follows (dollars in millions):
<TABLE>
<CAPTION>
Carrying Value
as a Percent of
-----------------------
Carrying Fixed Invested
Value Maturities Assets
<S> <C> <C> <C>
AAA/Aaa $ 726.6 41.2% 31.8%
AA/Aa 134.0 7.6 5.8
A 505.4 28.7 22.1
BBB/Baa 305.7 17.3 13.4
BB/Ba and lower 90.9 5.2 4.0
Total Fixed Maturities $1,762.6 100.0% 77.1%
</TABLE>
The carrying value of the Company's high-yield investments (rated BB and lower)
at December 31, 1994, was $90.9 million or 4.0% of the Company's invested
assets, essentially unchanged from December 31, 1993. The Company does not
anticipate any significant new investments in high-yield fixed maturity
investments.
At December 31, 1994, 26.9% of the Company's invested assets were in mortgage-
backed fixed maturity investments, including collateralized mortgage
obligations (CMOs) and mortgage-backed pass-through securities. Mortgage-backed
securities generally are collateralized by mortgages backed by the Government
National Mortgage Association (GNMA), the Federal National Mortgage
Association, 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
December 31, 1994 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 $247.3 40.3% 10.8%
Sequential classes 8.2 1.3 0.4
Support classes 5.1 0.9 0.2
Accrual classes 7.9 1.3 0.4
Total agency CMOs 268.5 43.8 11.8
Non-agency CMOs
Planned amortization classes 11.6 1.9 0.5
Sequential classes 9.2 1.5 0.4
Accrual classes 2.0 0.3 0.1
Total non-agency CMOs 22.8 3.7 1.0
Total CMOs 291.3 47.5 12.8
Non-agency mortgage-backed pass-through securities 4.3 0.7 0.2
Agency mortgage-backed pass-through securities 318.1 51.8 13.9
Total mortgage-backed securities $613.7 100.0% 26.9%
</TABLE>
In some instances, the Company invests in non-agency mortgage-backed securities,
primarily highly-rated CMOs. At December 31, 1994, $20.2 million, or 88.2%, of
the Company's non-agency CMOs were rated AAA. The credit risk associated with
non-agency mortgage-backed securities is generally greater than that of agency
mortgage-backed securities.
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 11.3% of the Company's invested assets at December 31, 1994,
are designed to amortize in a manner that shifts the primary risk of prepayment
of the underlying collateral to investors in other tranches of the CMO.
Sequential classes, which comprised 0.8% of the Company's invested assets at
December 31, 1994, may have prepayment characteristics similar to mortgage-
backed pass-through securities. Accrual classes, which comprised 0.5% of the
Company's invested assets at December 31, 1994, have prepayment characteristics
similar to sequential classes when receiving principal payments. Support
classes, which comprised 0.2% of the Company's invested assets at December 31,
1994, are the most sensitive to prepayment risk.
Mortgage Loans
The Company's mortgage loan portfolio at December 31, 1994,
shown by geographic distribution, year of maturity, and property type follows
(dollars in millions):
<TABLE>
Geographic Distribution of Mortgage Loans - Top Eight States
At December 31, 1994
<CAPTION>
Percent Amount
------------------
<S> <C> <C>
California 17.2% $61.4
Indiana 13.0 46.4
Illinois 12.6 45.0
Florida 9.0 32.2
Texas 8.9 31.7
North Carolina 5.5 19.7
Georgia 3.8 13.7
Wisconsin 3.1 11.1
</TABLE>
<TABLE>
Mortgage Loans by Year of Maturity
<CAPTION>
Scheduled
Principal Balloon
Payments Payments Total
<S> <C> <C> <C>
1995 $ 8.9 $ 21.3 $ 30.2
1996 9.6 33.3 42.9
1997 10.2 23.9 34.1
1998 10.5 13.0 23.5
1999 10.8 9.5 20.3
2000 and thereafter 88.3 118.3 206.6
Total $138.3 $219.3 $357.6
</TABLE>
<TABLE>
Property Type Distribution of Mortgage Loans
At December 31, 1994
<S> <C>
Retail 59.3%
Office 11.7
Industrial 8.8
Medical 6.6
Other 13.6
Total 100.0%
</TABLE>
The Company had investments in mortgage
loans of $357.6 million at December 31, 1994 compared to $391.7 million at
December 31, 1993. Investments in mortgage loans declined primarily due to
prepayments and amortization of the mortgage loan portfolio during 1994. Of the
outstanding loans at December 31, 1994, loans with a carrying value of $1.6
million (net of allowances of $0.3 million) or 0.5% 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 $16.6
million at December 31, 1994 compared to $16.9 million at December 31, 1993.
In the first quarter of 1994, the Company decided that in order to provide
better matching between the characteristics of its assets and liabilities to no
longer make new investments in mortgage loans except for purchase money loans
and expansion of the Company's properties. The Company will retain its existing
mortgage loans.
Real Estate
The Company's real estate investments totaled $27.0 million
(net of allowances of $2.5 million) at December 31, 1994 compared to $39.1
million (net of allowances of $8.6 million) at December 31, 1993. At December
31, 1994, $4.7 million of the real estate investments were acquired through
mortgage loan foreclosure, compared to $14.6 million at December 31, 1993. The
decline was primarily due to sales of foreclosed real estate investments. The
Company does not anticipate any new acquisition of real estate other than
through foreclosure of mortgage loans.
Equity Securities
At December 31, 1994, the Company had investments in common
stocks and nonredeemable preferred stocks of $1.7 million that are carried at
fair value. The remaining $11.3 million of equity securities is the Company's
investment in its Separate Account and is carried at cost. The Company does not
anticipate any significant change in the size of its equity securities
portfolio.
Liquidity and Capital Resources
Cash Flows. During 1994, the Company's operating activities
generated cash of $84.3 million compared to $104.7 million in 1993. The decrease
in cash provided by operations in 1994 resulted primarily from increased
benefits, the return of funds held for a terminated group life insurance
contract, and an increase in income taxes paid.
Investing activities (purchases and sales of investments) used cash of $48.4
million in 1994 compared to $130.8 million in 1993, primarily for the purchase
of fixed maturity investments in both periods. Sales of short-term securities
partially funded these purchases. The decrease in purchases was primarily due
to the use of cash by financing activities combined with the decrease in cash
generated by operating activities discussed above.
Financing activities used cash of $39.1 million in 1994 and provided cash of
$27.1 million in 1993. In 1993, $48.2 million of cash was provided by the sale
of the Company's Common Stock, partially offset by the payment of $17.4 million
of short-term notes payable and $9.5 million of mortgage and other notes
payable. The decrease in cash from financing was also caused by increased
policyholder withdrawals primarily at WNIC, where the Company maintains a closed
block of interest-sensitive business.
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 6%.
In addition, rising interest rates could result in increased surrenders of life
insurance policies and annuities (as current policy and contract holders seek
higher returns elsewhere) causing the Company to sell fixed maturity investments
below cost. In order to minimize the need to sell fixed maturity investments
below cost, the Company seeks to maintain sufficient levels of cash and short-
term investments.
The Company held cash and short-term investments of $59.7 million at December
31, 1994. 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.
Dividends. The Company's primary sources of funds to pay dividends to
shareholders are investments held at the parent and dividends from WNIC. These
dividends are subject to restrictions set forth by the Illinois Insurance
Department. Illinois 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.
UPI is wholly owned by United Presidential Corporation, an insurance holding
company that is 71% owned by WNIC and 29% owned by WNC. UPI is not considered a
source of funds for dividends to shareholders of the Company for the foreseeable
future in order to conserve capital at that subsidiary.
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 shareholders' equity of $47.3
million and a decrease in 1993 primary earnings of 4.3% or $.11 per share.
Health Care Reform
Congress adjourned in the fall of 1994 without passing a health
care reform proposal. However, the Company expects that health care reform will
again be an issue before Congress in 1995. With the make-up of the new Congress
decidedly different than last year, there is speculation that the legislature
would attempt steps at insurance reform, as opposed to large-scale health care
reform.
In addition to reform proposals on a national basis, legislative efforts to
reform health care at the state level may intensify. The potential reform plans
at the federal and state levels may: (i) partially or fully replace products
sold by insurers; (ii) limit the ability of insurers to charge higher rates to
or decline to cover insureds who present greater risks; (iii) limit the ability
of insurers to exclude coverage for pre-existing conditions; (iv) mandate the
types of insurance benefits to be provided in certain instances; (v) impose
insurance rate regulation or additional taxes on insurance premiums or benefits;
(vi) increase competition by expanding employee choice of insurance plans and by
requiring the employee to bear the full cost increment for higher priced plans;
or (vii) establish programs run by the government that would compete with or
replace business written by the Company.
The Company has monitored and will continue to monitor all aspects of the
developments surrounding this issue and is preparing strategic responses to its
possible outcomes. The Company's health businesses have begun to diversify into
product areas, such as supplemental insurance products and disability products,
that the Company believes are consistent with its targeted market focus and may
be less affected or unaffected by health care reform. Health care reform at the
federal and state levels may have a material adverse effect on the Company's
operating results and financial position, but it is not possible at this time to
predict the nature and effects of health care reform or how soon its measures
will be adopted and implemented.
A.M. Best Ratings
The ability of an insurance company to compete successfully
depends, in part, on its financial strength, operating performance, and claims-
paying ability as rated by A.M. Best and other rating agencies. The Company's
insurance subsidiaries are each currently rated "A- (Excellent)" by A.M. Best,
based on their 1993 statutory financial results and operating performance.
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.
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 reimbursed by governmental plans and HMOs to
private insurers. WNIC's health insurance pricing assumptions regarding these
factors declined significantly in 1994 reflecting a decline in medical care
inflation and stability in the general inflation rate. For the first quarter of
1995, these assumptions have not changed materially.
The effect of inflation on operating expense has not been significant.
Item 8. Financial Statements and Supplementary Data
<TABLE>
Consolidated Balance Sheet
(000s omitted)
<CAPTION>
December 31, 1994 1993
----------------------------
<S> <C> <C>
Assets Investments
Fixed maturities-
Available for sale at fair value (cost: $1,768,181) $1,649,453 $ _
Held to maturity at cost (fair value: $112,368; $134,448) 113,116 128,184
Held for sale at cost (fair value: $1,708,677) _ 1,632,609
Mortgage loans on real estate 357,641 391,667
Real estate 26,997 39,086
Policy loans 54,368 52,285
Equity securities at fair value (cost: $13,218; $15,903) 13,047 15,860
Other long-term 17,625 21,032
Short-term 52,387 75,302
Total Investments 2,284,634 2,356,025
Cash 7,272 10,441
Deferred acquisition costs 293,850 256,956
Reinsurance recoverables and prepaid premiums 54,842 56,314
Accrued investment income 33,084 32,386
Insurance premiums in course of collection 14,857 25,159
Property and equipment 22,988 26,198
Goodwill 19,092 21,772
Separate Account 42,178 44,589
Other 37,771 24,579
Total Assets $2,810,568 $2,854,419
Liabilities Policy liabilities $2,354,818 $2,331,471
General expenses and other liabilities 121,685 121,916
Mortgage payable 1,907 2,434
Income taxes (1994 current: $316) (16,343) 5,064
Separate Account 42,178 44,589
Total Liabilities 2,504,245 2,505,474
Shareholders' Convertible Preferred Stock 723 723
Equity Common Stock 124,842 124,145
Retained earnings 302,759 284,938
Net unrealized losses on investments (61,356) (43)
Unfunded pension loss (2,648) (2,821)
Cost of Common Treasury Stock (57,997) (57,997)
Total Shareholders' Equity 306,323 348,945
Total Liabilities and Shareholders' Equity $2,810,568 $2,854,419
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
Consolidated Statement of Operations
(000s omitted, except per share amounts)
<CAPTION>
Year Ended December 31, 1994 1993 1992
----------------------------------
<S> <C> <C> <C>
Revenues Insurance premiums and policy charges $468,386 $438,822 $380,970
Net investment income 182,007 183,735 187,137
Realized investment losses (1,606) (354) (4,618)
Other 8,142 6,324 6,953
Total Revenues 656,929 628,527 570,442
Benefits and Insurance benefits paid or provided 435,802 420,358 409,840
Expenses Insurance and general expenses 138,428 131,512 107,092
Amortization of deferred acquisition costs 38,053 37,943 27,120
Total Benefits and Expenses 612,283 589,813 544,052
Earnings Income before income taxes and cumulative
effect of changes in accounting principles 44,646 38,714 26,390
Income taxes 13,345 10,498 9,538
Income before cumulative effect of changes
in accounting principles 31,301 28,216 16,852
Cumulative effect of changes in accounting
principles-net of related tax effects - (1,550) (22,819)
Net Income (Loss) $ 31,301 $ 26,666 $ (5,967)
Share Data Primary Earnings Per Share
Income before cumulative effect $ 2.53 $ 2.59 $ 1.65
Cumulative effect of changes in accounting
principles - (.14) (2.28)
Net Income (Loss) Per Share $ 2.53 $ 2.45 $ (.63)
Average shares and equivalents outstanding 12,225 10,755 9,989
Fully Diluted Earnings Per Share
Income before cumulative effect $ 2.50 $ 2.56 $ 1.65
Cumulative effect of changes in accounting
principles - (.14) (2.28)
Net Income (Loss) Per Share $ 2.50 $ 2.42 $ (.63)
Average shares and equivalents outstanding 12,496 11,026 9,989
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
Consolidated Statement of Cash Flows
(000s omitted)
<CAPTION>
Year Ended December 31, 1994 1993 1992
-------------------------------------------
<S> <C> <C> <C>
Operating Net income (loss) $ 31,301 $ 26,666 $ (5,967)
Activities Adjustments to reconcile to net cash provided
by operating activities
Increase in policy liabilities 48,998 80,440 82,513
Deferred acquisition costs (3,894) (15,282) (30,788)
Change in premiums in course of collection 10,302 (12,077) 6,963
Change in reinsurance receivable (11,387) 4,587 -
Changes in accounting principles - net of tax - 1,550 22,819
Other, net 8,938 18,797 17,729
Net Cash Provided by Operating Activities 84,258 104,681 93,269
Investing Proceeds from sales
Activities Fixed maturities - available for sale 113,375 - -
Fixed maturities - 261,313 123,549
Equities, mortgage loans, real estate, and other 18,449 55,354 68,854
Proceeds from maturities and redemptions
Fixed maturities - available for sale 155,684 - -
Fixed maturities - held to maturity 17,313 - -
Fixed maturities - 266,217 435,506
Equities, mortgage loans, real estate, and other 58,666 73,763 85,864
Cost of purchases
Fixed maturities - available for sale (399,418) - -
Fixed maturities - held to maturity (5,000) - -
Fixed maturities - (726,358) (775,858)
Equities, mortgage loans, real estate, and other (26,258) (40,661) (110,140)
Increase in policy loans (2,083) (784) (1,815)
Purchases of property and equipment (2,008) (7,824) (5,369)
Net (increase) decrease in short-term investments 22,915 (11,866) 39,436
Net Cash Used by Investing Activities (48,365) (130,846) (139,973)
Financing Policyholder account deposits 143,627 142,871 174,841
Activities Policyholder account withdrawals (169,278) (124,795) (128,815)
Change in short-term notes payable - (17,350) 10,714
Repayment of mortgage and long-term notes payable (527) (9,536) (822)
Proceeds from mortgage and long-term notes payable - - 4,400
Dividends to shareholders (13,480) (12,236) (11,050)
Proceeds from sale of Common Stock 596 48,181 428
Purchase of Common Stock - - (21)
Net Cash Provided (Used) by Financing Activities (39,062) 27,135 49,675
Change in Increase (Decrease) in Cash (3,169) 970 2,971
Cash Cash at Beginning of Year 10,441 9,471 6,500
Cash at End of Year $ 7,272 $ 10,441 $ 9,471
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
Consolidated Statement of Shareholders' Equity
(000s omitted)
<CAPTION>
Year Ended December 31, 1994 1993 1992
-------------------------------------
<S> <C> <C> <C>
Convertible
Preferred Stock Balance at end of year $ 723 $ 723 $ 727
Common Stock Balance at beginning of year 124,145 75,960 75,527
and Additional Sale on open market - 47,263 -
Paid-In Capital Other issuances 697 922 433
Balance at end of year 124,842 124,145 75,960
Retained Balance at beginning of year 284,938 270,508 287,525
Earnings Net income (loss) 31,301 26,666 (5,967)
Common stock dividends (13,118) (11,874) (10,686)
Preferred stock dividends (362) (362) (364)
Balance at end of year 302,759 284,938 270,508
Net Unrealized Balance at beginning of year (43) 111 (3,248)
Gains (Losses) on Effect of change in accounting principle 41,644 - -
Investments Change during year (102,957) (154) 3,359
Balance at end of year (61,356) (43) 111
Unfunded Pension Balance at beginning of year (2,821) (1,269) (2,498)
Loss Change during year 173 (1,552) 1,229
Balance at end of year (2,648) (2,821) (1,269)
Cost of Common
Treasury Stock Balance at beginning and end of year (57,997) (57,997) (57,997)
Shareholders' Equity Total Shareholders' Equity at End of Year $306,323 $348,945 $288,040
</TABLE>
<TABLE>
Capital Stock Activity
(000s omitted)
<CAPTION>
Year Ended December 31, 1994 1993 1992
-------------------------------------
<S> <C> <C> <C>
Convertible
Preferred Stock Shares at end of year 145 145 145
Common Stock Shares at beginning of year 15,501 13,295 13,262
Sale on open market - 2,133 -
Other issuances 45 73 33
Shares at end of year 15,546 15,501 13,295
Common Treasury
Stock Shares at end of year (3,383) (3,383) (3,383)
Common Shares Outstanding at End of Year 12,163 12,118 9,912
<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 1993 and 1992 financial statements have been
reclassified to conform to the 1994 presentation.
New Accounting Standards
Effective January 1, 1994, WNC adopted Statement of Financial
Accounting Standards (SFAS) 115, "Accounting for Certain Investments in Debt and
Equity Securities," issued by the Financial Accounting Standards Board (FASB) in
1993. The statement requires the Company to segregate its fixed maturity
portfolio into three separate classifications: investments held to maturity,
trading securities, and investments available for sale.
Investments held to maturity are those fixed maturities that
the Company has a positive intent and ability to hold to maturity. These
securities are carried at amortized cost less write-downs for other-than-
temporary impairments. Trading securities consist of those fixed maturity and
equity securities held for short periods of time and are carried on the balance
sheet at fair value, with any change in value reported as a component of income.
Available for sale investments consist of those securities that do not meet the
criteria of either investments held to maturity or trading securities and are
carried on the balance sheet at fair value. Changes in fair values of available
for sale securities, after adjustment of deferred acquisition costs (DAC), are
reported as unrealized gains or losses directly in shareholders' equity and,
accordingly, have no effect on net income. The DAC offsets represent valuation
adjustments or reinstatements of DAC that would have been required as charges or
credits to operations had such unrealized amounts been realized. The effect of
the adjustment to fair value and the change to DAC is tax effected. If a
decrease in the value of fixed maturity investments is other-than-
temporary, the loss is recognized as a realized loss. The effect of the
adoption of this standard on shareholders' equity is as follows:
<TABLE>
<CAPTION>
(000s omitted) 12/31/94 1/1/94
<S> <C> <C>
Fair value adjustment to available
for sale fixed maturity securities $(118,728) $ 74,273
DAC adjustment 33,000 (18,630)
Deferred tax adjustment 24,543 (13,999)
Net unrealized gain(loss) on
fixed maturities available for sale $ (61,185) $ 41,644
</TABLE>
At December 31, 1994, the unrealized loss was primarily due to
the increase in interest rates in 1994.
In 1993, these securities were primarily classified as held for
sale and carried at the lower of market or amortized cost less write-downs for
other- than-temporary impairments.
The Company foresees that this standard will continue to result
in an increase in the volatility of shareholders' equity as the standard does
not permit a corresponding adjustment to the liabilities that these assets
support.
In October 1994, the FASB issued SFAS 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments." The
statement requires additional disclosure of information on derivative financial
instruments such as forward, futures, swap, and option contracts. The Company
does not have any such instruments. However, the Company does have certain
financial commitments to extend credit and fund investments that are included in
the disclosure requirements of this statement and these are discussed in Note H.
Effective December 1994, the Company adopted the American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)
94-5, "Disclosure of Certain Matters in the Financial Statements of Insurance
Enterprises." This SOP requires additional disclosure on statutory accounting
that is included in Note I.
SFAS 114, "Accounting by Creditors for Impairment of a Loan,"
and its amendments, will be adopted by the Company effective January 1, 1995.
The standard provides measurement criteria for determining the carrying value
when it is probable that a loan has been impaired and for disclosing of
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. The adoption will not have a material impact on the
financial statements.
Cumulative Effect of Accounting Changes
Net income in 1993 includes a one-time cumulative effect adjustment
of $1,550,000, net of taxes of $834,000, for the adoption of SFAS 112
"Employers' Accounting for Postemployment Benefits." Net income in 1992 includes
one-time cumulative effect adjustments of $20,126,000, net of taxes of
$10,368,000, for the adoption of SFAS 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions," and $2,693,000 for the adoption of
SFAS 109, "Accounting for Income Taxes."
Investments
Fixed Maturities. Fixed maturity investments are securities that
mature more than one year after issuance. They include bonds, notes, and
redeemable preferred stocks. Investments in fixed maturities are intended to be
used by WNC as part of its asset/liability matching strategy. Effective in 1994
with the adoption of SFAS 115, the Company classifies its fixed maturity
investments as either available for sale investments or held to maturity
investments.
Equity Securities. Equity securities include an investment
of Washington National Insurance Company's (WNIC) funds in its Separate Account,
nonredeemable preferred stocks, and common stocks. The Separate Account
investment is carried at cost. The stocks of non-related companies are carried
at fair value derived from either a major securities exchange or the National
Association of Securities Dealers Automated Quotation System. Unrealized gains
and losses on these securities are recorded directly in shareholders' 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 net of unearned discount and allowance for
possible loan losses. Allowance for mortgage loan losses is based on an
evaluation of the mortgage loan portfolio, past credit loss experience, and
current economic conditions. Loans considered permanently impaired are written
down to their net realizable value.
Real Estate Investments. Real estate investments are
principally carried at cost less allowances for depreciation and possible
losses. Foreclosed real estate is considered available 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 and 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, which approximates fair value.
Investment Income. Interest on fixed maturities, loans, and
notes is recorded as income as it is earned. Income is adjusted for any
amortization of premium or discount on these investments including adjustments
resulting from prepayments or expected changes in prepayments on mortgage-backed
securities. Income on impaired loans, real estate, and other long-term
investments is recorded principally on a cash basis. Dividends are recorded as
income on ex-dividend dates. Investment expenses are accrued as incurred.
Realized Investment Gains or Losses. When an investment is
sold, its selling price may be higher or lower than its carrying value. Using
the specific identification method, the difference between the selling price and
the carrying value is recorded as a realized gain or loss. Investments that have
declined in fair value below cost, 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 are included in realized investment
losses.
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 $25,086,000 and $24,184,000 in 1994 and 1993, respectively.
Accumulated depreciation on home office property and equipment at December 31
was $2,434,000 and $1,101,000 in 1994 and 1993, respectively.
Insurance Premiums and Policy Charges
Insurance premiums and policy charges include reinsurance
premiums assumed and are net of reinsurance ceded. Health insurance premiums are
earned and recognized pro rata over the terms of the policies. Premiums for
traditional life insurance products 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 surrender
charges.
Deferred Acquisition Costs
Costs directly associated with the acquisition of new business are
generally 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 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. Amortization for the products is adjusted periodically to reflect
differences in actual and assumed gross profits.
DAC is increased for the estimated effect of realizing
unrealized investment losses and decreased for the estimated effect of realizing
unrealized investment gains. The offset to these amounts is recorded
directly to shareholders' equity.
The unamortized cost of purchased insurance in force is
included in DAC. Amortization is primarily in relation to the present value of
estimated gross profits over the estimated twenty-two year remaining life of the
related insurance in force with interest rates ranging from 7.5% to 8.5%.
The changes in the unamortized cost of purchased insurance in
force for the years ended December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1994 1993 1992
<S> <C> <C> <C>
Balance at beginning of year $41,902 $47,039 $33,996
Interest on unamortized
balance 3,136 3,436 4,016
Amortization (6,026) (8,573) (8,486)
Effect of unrealized
investment losses 6,270 - -
Change in accounting
principle for income taxes - - 17,513
Balance at end of year $45,282 $41,902 $47,039
</TABLE>
The estimated percentage of the December 31, 1994 balance
before the effect of unrealized investment losses to be amortized over the next
five years follows:
<TABLE>
<S> <C>
1995 14.6%
1996 14.4%
1997 14.0%
1998 13.1%
1999 12.9%
</TABLE>
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 ranged 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 are policy account balances before applicable surrender
charges, certain deferred policy initiation fees that are recognized as income
over the term of the policies, and a provision for the return of the 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 provision for the
return of the cost of insurance charges. Credited interest rates for these
products ranged from 4.0% to 7.3% at December 31, 1994.
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. Any required
revisions in these estimates are included in operations in the period when the
revisions are made.
Goodwill
The cost of purchased businesses in excess of net assets acquired
is reported as goodwill and is amortized on a straight-line basis, generally
over thirty-five years. Goodwill is evaluated based on the prospect of continued
growth and the long-term nature of the insurance policies sold. The asset value
is considered appropriate. Accumulated amortization of goodwill was
$6,842,000 and $6,023,000 at December 31, 1994 and 1993, respectively.
Separate Account
Separate Account assets and liabilities are principally carried at
fair value and represent funds that are separately administered for annuity
contracts 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 Statement
of Operations.
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, DAC, certain investments, 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
insurance, annuity, and health insurance risks with other insurance companies to
minimize their exposure to loss. The Company's policy on claim exposure for the
life insurance and annuity business is to retain a maximum of $300,000 of life
insurance exposure on any one individual ($400,000 with accidental death
coverage). For group insurance products, 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 long-term disability and long-term care claim, and limits
its group term life insurance exposure to $200,000 per life ($400,000 with
accidental death coverage). The Company's reinsurance for individual health
insurance claims is designed to protect the Company from an excessive amount of
claims over $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 remain liable.
Benefit amounts paid directly by the Company for insurance
claims covered under reinsurance ceded agreements are recorded as reinsurance
recoverables to the extent not already reimbursed. 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, 1994, relates to individual health insurance. It is on a 50% or
100% coinsurance basis and is accounted for in a manner similar to the direct
business.
Note B
Investments
Fixed Maturities
A comparison of amortized cost to fair value of fixed maturity
investments by category at December 31, 1994 and 1993 follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(000s omitted) Cost Gains Losses Value
Fixed maturities 1994
--------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
United States government obligations $ 74,293 $ 265 $ 4,577 $ 69,981
Obligations of states and political subdivisions 75,555 1,215 5,286 71,484
Public utilities 131,184 20 13,650 117,554
Industrial and miscellaneous 798,018 5,091 53,406 749,703
Mortgage-backed securities 655,286 3,232 49,315 609,203
Other 33,845 63 2,380 31,528
Total available for sale 1,768,181 9,886 128,614 1,649,453
Held to maturity
United States government obligations 251 - - 251
Obligations of states and political subdivisions 22,109 860 45 22,924
Industrial and miscellaneous 86,027 845 2,591 84,281
Mortgage-backed securities 4,529 181 - 4,710
Other 200 2 - 202
Total held to maturity 113,116 1,888 2,636 112,368
Total fixed maturities $1,881,297 $11,774 $131,250 $1,761,821
</TABLE>
<TABLE>
<CAPTION>
1993
--------------------------------------------------
<S> <C> <C> <C> <C>
Held for sale
United States government obligations $ 52,010 $ 3,784 $ 93 $ 55,701
Obligations of states and political subdivisions 55,947 3,888 538 59,297
Public utilities 137,132 5,501 1,701 140,932
Industrial and miscellaneous 655,068 41,643 849 695,862
Mortgage-backed securities 695,246 24,410 1,571 718,085
Other 37,206 2,382 788 38,800
Total held for sale 1,632,609 81,608 5,540 1,708,677
Held to maturity
United States government obligations 3,636 2 - 3,638
Obligations of states and political subdivisions 27,182 1,817 - 28,999
Industrial and miscellaneous 90,566 3,918 - 94,484
Mortgage-backed securities 6,540 507 - 7,047
Other 260 20 - 280
Total held to maturity 128,184 6,264 - 134,448
Total fixed maturities $1,760,793 $87,872 $ 5,540 $1,843,125
<FN>
(a) Amortized cost is net of other-than-temporary
impairments in 1994 and 1993 and an allowance for high-yield bonds in 1993.
</TABLE>
Fixed maturities had an increase (decrease) in unrealized gains
(the excess of fair value over amortized cost) of $(201,808,000), $25,438,000
and $(4,245,000) in 1994, 1993, and 1992, respectively.
The amortized cost and fair value of fixed maturities
at December 31, 1994, by contractual maturity, follow. 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>
Available for sale:
Fixed maturities, excluding
mortgage-backed securities
Due in 1995 $ 3,599 $ 3,583
Due in 1996 - 1999 114,384 114,093
Due in 2000 - 2004 397,876 375,100
Due after 2004 597,036 547,474
Mortgage-backed securities 655,286 609,203
Total available for sale $1,768,181 $1,649,453
Held to maturity:
Fixed maturities, excluding
mortgage-backed securities
Due in 1995 $ 1,150 $ 1,159
Due in 1996 - 1999 34,366 34,353
Due in 2000 - 2004 35,929 36,101
Due after 2004 37,142 36,045
Mortgage-backed securities 4,529 4,710
Total held to maturity $ 113,116 $ 112,368
Total fixed maturities $1,881,297 $1,761,821
</TABLE>
At December 31, 1994, gross unrealized gains and losses on
investments in equity securities amounted to $88,000 and $259,000, respectively.
Mortgage Loans
A rollforward of the allowance for mortgage loan losses follows:
<TABLE>
<CAPTION>
(000s omitted) 1994 1993
<S> <C> <C>
Balance at January 1 $12,031 $11,618
Net additions 1,501 3,475
Deductions 5,500 3,062
Balance at December 31 $ 8,032 $12,031
</TABLE>
Investment Gains and Losses
Details of realized investment gains (losses) for the years ended
December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1994 1993 1992
<S> <C> <C> <C>
Fixed maturities:
Gross gains $ 2,026 $ 20,650 $ 9,798
Gross losses (3,760) (12,532) (4,177)
Total fixed maturities (1,734) 8,118 5,621
Equity securities 1,371 47 (1,746)
Mortgage loans (82) (377) (4,934)
Real estate and other (1,161) (8,142) (3,559)
Realized investment losses $(1,606) $ (354) $(4,618)
</TABLE>
Investment Income
Major sources of net investment income for the years ended
December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1994 1993 1992
<S> <C> <C> <C>
Fixed maturities $147,396 $141,809 $136,409
Equity securities 301 1,505 3,530
Mortgage loans 34,982 42,030 49,147
Real estate and other 7,924 11,431 11,241
Policy loans 3,459 3,460 3,369
Short-term investments 2,765 2,398 3,938
Gross investment income 196,827 202,633 207,634
Investment expenses 14,820 18,898 20,497
Net investment income $182,007 $183,735 $187,137
</TABLE>
Investment expenses consist primarily of real estate expenses.
As of December 31, 1994, the carrying value of investments that
produced no income for the previous twelve month period was $17,374,000 or less
than 1% of invested assets.
Other
During 1994, 1993, and 1992, non-cash investing activities totaled
$4,009,000, $4,869,000, and $14,302,000, respectively and consisted of real
estate acquired through foreclosure of mortgage loans and in 1994 a venture
capital distribution of common stock.
Note C
Income Taxes
Components of WNC's deferred tax liabilities and assets at December
31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1994 1993
<S> <C> <C>
Deferred tax liabilities:
DAC $ 97,322 $ 85,114
Accrued bond discount 1,312 1,038
Joint ventures and venture
capital investments 1,025 1,525
Other 2,791 2,749
Total deferred tax liabilities 102,450 90,426
Deferred tax assets:
Policy liability adjustments 63,349 66,091
Unrealized investment losses 41,452 -
Liabilities for employee benefits 13,858 13,930
Realized investment losses 11,557 15,586
Other 4,599 4,658
Total deferred tax assets 134,815 100,265
Valuation allowance (15,706) (14,903)
Deferred tax assets, net of
valuation allowance 119,109 85,362
Net deferred tax (assets) liabilities $(16,659) $ 5,064
</TABLE>
The nature of WNC's deferred tax assets and liabilities is such
that the general reversal pattern for these temporary differences is expected to
result in a full realization of WNC's deferred tax assets other than capital
gain or loss items.
At December 31, 1994, WNC had capital loss carryforwards for
tax return purposes of $1,510,000 that expire in 1996. For financial reporting
purposes, a valuation allowance of $15,706,000 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 increased by $803,000 in 1994 and reduced by
$3,272,000 in 1993.
The Omnibus Budget Reconciliation Act of 1993 changed WNC's
prevailing federal income tax rate from 34% to 35% effective January 1, 1993.
The following reconciles the difference between the actual tax
provision and the amounts obtained by applying the statutory federal income tax
rates of 35% for 1994 and 1993 and 34% for 1992 to the income before income
taxes and cumulative effect of changes in accounting principles:
<TABLE>
<CAPTION>
(000s omitted) 1994 1993 1992
<S> <C> <C> <C>
Income tax at statutory rate
applied to income before
taxes and cumulative effect
of changes in accounting
principles $15,626 $13,550 $ 8,973
Tax benefit (expense) not
recognized on certain
GAAP-basis capital
gains or losses (2,179) (2,870) 1,437
Investment income not taxed (732) (1,035) (1,514)
Amortization of purchase
accounting adjustments 523 247 333
Other 107 606 309
Provision for income taxes $13,345 $10,498 $ 9,538
Comprised of:
Current expense $ 9,432 $ 4,328 $ 9,884
Deferred expense (benefit) 3,913 6,170 (346)
Income tax expense $13,345 $10,498 $ 9,538
</TABLE>
Prior to 1984, WNC's life insurance subsidiaries were required
to accumulate certain untaxed amounts in a memorandum "policyholders' surplus
account." Under the Tax Reform Act of 1984, the "policyholders' surplus account"
balances were "capped" at December 31, 1983 and the balances will be taxed only
to the extent distributed to shareholders or when they exceed certain prescribed
limits. WNC's life insurance subsidiaries do not intend to make any taxable
distributions or exceed the prescribed limits in the foreseeable future;
therefore, no income tax provision has been made for those purposes. However, if
such taxes were assessed, the amount of tax payable would be $19,851,000. As of
December 31, 1994, the combined "policyholders' surplus account" of WNC's life
insurance subsidiaries approximates $56,717,000.
Under current and prior law, income of WNC's life insurance
subsidiaries taxed on a current basis is accumulated in a shareholders' surplus
account and can be distributed without tax to WNC. At December 31, 1994, this
shareholders' surplus was $256,043,000.
Federal income taxes paid by WNC were $8,120,000, $4,100,000,
and $8,700,000 in 1994, 1993, and 1992, respectively. WNC has a nonlife net
operating loss carryforward for tax purposes of $451,000 that will begin to
expire in 2008.
Note D
Capital Stock
Convertible Preferred Stock
WNC has 10,000,000 authorized shares of $5 par value Preferred
Stock 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 of WNC 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 fair value of twice the exercise price of the Right. Alternatively, if
a 20% WNC shareholder acquires WNC by means of a merger in which WNC and its
Common Stock survive or that shareholder 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 fair 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. At December 31, 1994, 13,768,000 shares of WNC's
Common Stock were reserved for future issuance. Of this amount, 12,163,000
shares were reserved for future exercises of Purchase Rights, 271,000 shares
were reserved for conversion of outstanding Convertible Preferred Stock,
1,314,000 shares were reserved for exercise of options to purchase Common Stock
and for use in connection with the restricted stock grants, and 20,000 shares
were reserved for issuance of Common Stock in connection with the dividend
reinvestment plan. The annual dividend paid on WNC Common Stock in 1994, 1993,
and 1992 was $1.08 per share.
Earnings Per Share
The number of shares used in computing earnings per share follows:
<TABLE>
<CAPTION>
(000s omitted) 1994 1993 1992
<S> <C> <C> <C>
Primary
Average common shares
outstanding 12,144 10,643 9,892
Assumed exercise of
options 81 112 97
Total average shares 12,225 10,755 9,989
Fully Diluted
Average common shares
outstanding 12,144 10,643 9,892
Assumed conversion
of preferred 271 271 -
Assumed exercise of
options 81 112 97
Total average shares 12,496 11,026 9,989
</TABLE>
Primary and fully diluted earnings per share were the same for
1992 because the computation of fully diluted earnings per share resulted in a
smaller loss per share.
Note E
Reinsurance
The effect of reinsurance on premiums and policy charges for the
years ended December 31 follows:
<TABLE>
<CAPTION>
(000s omitted) 1994 1993 1992
<S> <C> <C> <C>
Direct premiums and policy
charges $473,443 $470,617 $440,574
Reinsurance assumed 56,640 31,022 2,570
Reinsurance ceded (61,697) (62,817) (62,174)
Premiums and policy
charges $468,386 $438,822 $380,970
</TABLE>
Reinsurance benefits ceded were $22,850,000, $22,685,000, and
$22,516,000, in 1994, 1993, and 1992, respectively.
As a result of past divestitures, the Company reinsures 100% of
certain supplemental health insurance, life insurance, and annuity business with
unaffiliated companies. At December 31, 1994, 50% of WNC's total reinsurance
recoverables were ceded to Combined Life Insurance Company of America, and 16%
were ceded to American Founders Life Insurance Company. In addition, 16% of
reinsurance ceded was to UNUM Life Insurance Company in the normal course of
business.
For 1994, 42% and 57% of reinsurance premiums assumed were from
Harvest Life Insurance Company (Harvest Life) and National Casualty Company
(National Casualty), respectively. These reinsurance agreements provide that the
Company will reinsure blocks of individual major medical business issued by
National Casualty and Harvest Life on a 50% and 100% coinsurance basis,
respectively. The Company also administers 100% of the National Casualty
business.
The Company uses yearly renewable term reinsurance at its
subsidiary United Presidential Life Insurance Company (UPI) to maintain
statutory profitability and other statutory financial requirements while
sustaining UPI's growth. At December 31, 1994, such reinsurance, all entered
into prior to 1994, net of related taxes, had contributed $9,044,000 of
statutory capital to UPI. These transactions do not materially impact the
Company's GAAP financial statements.
Note F
Stock Benefit Plan
WNC has a stock benefit plan under which the compensation committee of WNC's
Board of Directors may grant stock options, stock appreciation rights, 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 1994 1994 1993 1992
<S> <C> <C> <C> <C>
January 1 balance 663,666 685,244 594,659 572,850
Stock options
Granted (167,500) 167,500 216,500 58,500
Exercised (22,367) (53,321) (19,700)
Forfeited 52,728 (52,728) (72,594) (16,991)
Restricted stock
Issued (11,350)
Forfeited 1,200
December 31
balance 538,744 777,649 685,244 594,659
Options exercisable 420,975 346,032 276,100
</TABLE>
Stock options granted from 1992 to 1994 ranged from $17.55 to
$26.57 per share. Stock options exercised from 1992 to 1994 ranged from $10.21
to $21.70 per share. Exercise prices on stock options outstanding ranged 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 and are
subject to certain terms and conditions defined in the plan. Options for 7,500
restricted shares granted in tandem with options were granted in 1992.
Note G
Defined Benefit and Contribution Plans
Retirement Plans
The Company has three qualified defined contribution retirement
plans: a non-contributory money-purchase retirement plan, a non-contributory
discretionary profit sharing plan, and a contributory 401(k) plan. The plans
cover substantially all employees who have met the prescribed requirements for
participation. The Company contribution to the money-purchase retirement plan is
3% of each employee's compensation plus an additional 3% of compensation in
excess of the Social Security wage base. The Company contribution to the profit
sharing plan is at the discretion of the insurance subsidiaries' Boards of
Directors in consultation with the WNC Board of Directors and is based on
financial performance. Employees' may contribute up to 12% of compensation to
the 401(k) plan. The Company matches employee contributions dollar for
dollar up to a maximum of 3% of compensation. The net pension expense for
the defined contribution plans in 1994, 1993, and 1992 was $3,006,000,
$3,760,000, and $2,808,000, respectively. The Company has a non-qualified
supplemental retirement plan under which benefits are paid to certain employees
equal to the amounts by which the qualified plan benefits are reduced due to
provisions of the Internal Revenue Code (IRC). At December 31, 1994 and 1993,
the unfunded liability for the supplemental retirement plan was immaterial.
Both WNIC and UPI have a defined benefit retirement plan that
covers certain grandfathered employees and agents. Both plans have been amended
to terminate the accrual of future benefits which resulted in the Company
recording a curtailment gain. Benefits are based principally on years of service
and compensation. Generally, the funding policies are to contribute
annually at least the minimum amounts required by the IRC. Contributions are
intended to provide benefits attributed to service to date.
A summary of the components of the net periodic pension expense
(income) for the defined benefit retirement plans follows:
<TABLE>
<CAPTION>
(000s omitted) 1994 1993 1992
<S> <C> <C> <C>
Interest cost on projected
benefit obligations $ 1,824 $ 1,923 $ 2,275
Service cost for benefits earned - 99 300
Actual return on plan assets (419) (2,035) (5,167)
Net amortization and deferral (2,054) (642) 2,996
Curtailment gain - (491) -
Net periodic pension
expense (income) $ (649) $(1,146) $ 404
</TABLE>
The defined benefit retirement plans' funded status and amounts
reported in WNC's consolidated balance sheets as part of other
liabilities at December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1994 1993
<S> <C> <C>
Actuarial present value of
accumulated benefit obligations:
Vested $(23,759) $(28,696)
Non-vested (118) (254)
Accumulated benefit obligations $(23,877) $(28,950)
Projected benefit obligations for
service provided to date $(23,877) $(28,950)
Plan assets at fair value 22,794 26,429
Projected benefit obligations in
excess of plan assets $ (1,083) $ (2,521)
Comprised of:
Prepaid pension cost $ 1,526 $ 512
Unrecognized investment and
actuarial net loss (7,835) (9,566)
Unrecognized transition asset 5,226 6,533
Total $ (1,083) $ (2,521)
</TABLE>
The unrecognized transition asset in the preceding schedule is
the amount by which the plans' net assets exceeded the actuarial present value
of projected benefit obligations, net of amortization, as of January 1, 1985,
the date current pension accounting standards were adopted. The transition asset
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.
GAAP requires employers to recognize a minimum liability at
least equal to the unfunded accumulated benefit obligation. When the accrued or
prepaid pension cost is less than the minimum liability, an adjustment is made
to the liability with the offset directly to shareholders' equity. At December
31, 1994 and 1993, the pretax adjustment was $2,769,000 and $3,033,000,
respectively.
The weighted-average discount rates used in calculating the
projected benefit obligations at December 31, 1994 and 1993 were 7.5% and 6.7%,
respectively. The expected weighted-average rate of return on plan assets was
7.6% in 1994 and 7.5% in 1993 and 1992.
Plan assets are invested principally in mutual funds, bonds,
and stocks. Assets of the WNIC retirement plan include Common and Preferred
Stock of WNC of $8,580,000 and $10,863,000, at fair value, at December 31, 1994
and 1993, respectively. Dividends of $492,000 were received on the WNC Common
and Preferred Stock in both 1994 and 1993. No WNC shares were purchased or sold
during 1994 or 1993.
Postretirement Benefits
In addition to WNC's retirement programs, WNIC provides medical and
life insurance benefits to eligible retired employees under the WNIC Group
Insurance Plan. The plan was amended effective December 31, 1992 to limit future
eligibility. Active WNIC employees who were at least age 50 on December 31, 1992
are eligible for medical and life insurance benefits after reaching a
combination of age and service requirements. The plan pays a stated percentage
of most medical expenses reduced for deductibles and payments made by government
programs or other group coverage. Retirees contribute to the plan based on a
schedule which averages 13% for single coverage and 21% for dependent coverage
of the benefits paid. Active WNIC employees who were not at least age 50 on
December 31, 1992 are eligible for $10,000 of life insurance benefits under the
plan after reaching a combination of age and service requirements. The 1992
plan curtailment resulted in a gain of $4,033,000 recorded as part of
operations in that year. The Company has reserved the right to change or
eliminate these benefits at any time.
In December 1993, the Company established a Voluntary
Employees' Beneficiary Association (VEBA) trust under section 501(c)(9) of the
IRC. Prior to this time, postretirement benefits were unfunded. In December 1994
and 1993, the Company contributed $1,600,000 and $1,100,000, respectively, to
the VEBA trust. The amounts funded were based on the difference between the net
periodic postretirement benefit expense as measured by statutory accounting
rules and the retiree medical claims incurred during the respective periods,
subject to certain IRC limitations. Assets of the VEBA trust were invested in
two-year U.S. Treasury notes and corporate demand notes at December 31, 1994.
Components of the net periodic postretirement benefit expense
for the year ended December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1994 1993 1992
<S> <C> <C> <C>
Interest cost $1,994 $2,061 $ 2,198
Service cost 56 61 557
Return on plan assets (28) - -
Net amortization and deferral 227 (14) -
Curtailment gain - - (4,033)
Net periodic postretirement
benefit expense (income) $2,249 $2,108 $(1,278)
</TABLE>
The funded status of the plan and the amounts recognized in
WNC's consolidated balance sheet at December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1994 1993
<S> <C> <C>
Accumulated postretirement
benefit obligation
Retirees $(25,022) $(26,080)
Fully eligible active plan
participants (846) (1,300)
Other active plan participants (661) (1,269)
Total accumulated postretirement
benefit obligation (26,529) (28,649)
Fair value of plan assets 2,726 1,100
Accumulated postretirement benefit
obligation in excess of plan assets $(23,803) $(27,549)
Comprised of
Accrued postretirement benefit
expense $(24,392) $(26,198)
Unrecognized net gain (loss) 393 (1,561)
Unrecognized prior service cost 196 210
Total $(23,803) $(27,549)
</TABLE>
The accumulated postretirement benefit obligation is based on
actuarial assumptions for the weighted-average discount rate and the health care
cost trend rate. The weighted-average discount rate was 7.5% in 1994 and 7.0% in
1993. The health care cost trend rate used in 1994 was 12% for pre-65 and 10%
for post-65 participants, graded evenly to 5% in 15 years. The health care cost
trend rate in 1993 was 14% graded evenly to 6% in 29 years. The weighted-average
of the expected long-term rate of return on plan assets net of estimated taxes
on investment income was 4.62% in 1994. The estimated income tax rate for the
VEBA trust was 34% in 1994. 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
$2,215,000 and $2,825,000 at December 31, 1994 and 1993, respectively, and the
aggregate of the service and interest cost components of the net periodic
postretirement benefit expense for 1994 and 1993 by $196,000 and $200,000,
respectively.
Note H
Commitments and Contingencies
Leases
WNC has noncancelable operating leases primarily for office space
and office equipment, the most significant of which is 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, 1994 follow:
<TABLE>
<CAPTION>
(000s omitted)
<S> <C>
1995 $ 8,401
1996 7,607
1997 6,980
1998 5,265
1999 4,389
Thereafter 48,522
Total minimum lease commitments $81,164
</TABLE>
Rental expenses were $6,189,000, $6,900,000, and $2,871,000,
in 1994, 1993, and 1992, respectively.
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
December 31, 1994, the Company had two financial guarantees totaling $15,206,000
which are collateralized by the underlying real estate and related assets
compared to financial guarantees totaling $24,132,000 at December 31, 1993. 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
1997. The Company has not funded any of its financial guarantees to date and
feels it has adequate reserves for potential losses in the future.
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 that 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 and its chief legal
officer believe that such litigation will not have a material effect on WNC's
consolidated results of operations or financial position.
In September 1994, two retired employees filed a lawsuit in the
United States District Court for the Northern District of Illinois against WNC,
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 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, with respect to these actions, an award of attorneys'
fees and other relief, and a certification of the class.
WNC, WNIC, and the trustees believe that valid defenses exist
and intend to contest vigorously the material allegations made in the complaint.
Health Care Reform
See Management's Discussion and Analysis, page 26, 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 $2,850,000, $2,500,000, and $1,800,000 in state guaranty fund
assessments in 1994, 1993, and 1992, respectively, and had accrued liabilities
of $3,128,000 and $2,800,000 for future assessments at December 31, 1994 and
1993, respectively. 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 an asset any such payments in those states
where current law allows an offset against future premium taxes. At December 31,
1994 and 1993, other assets included $5,464,000 and $5,100,000, respectively, of
deferred payments to state guaranty funds. Generally, these amounts will be used
to offset future premium tax payments over periods from five to ten years. In
the event of a change in the state laws pertaining to prior tax offsets, such
amounts might become unrecoverable.
Note I
Statutory Financial Information
WNC's insurance subsidiaries prepare statutory financial statements
in accordance with accounting principles and practices prescribed or permitted
by the insurance department of their state of domicile. Prescribed statutory
accounting practices currently include state laws, regulations, and general
administrative rules applicable to all insurance enterprises domiciled in a
particular state, as well as practices described in National Association of
Insurance Commissioners' (NAIC) publications. Permitted practices include
practices not prescribed, but allowed, by the domiciliary state insurance
department. The prescribed and permitted statutory accounting practices followed
by WNC's insurance subsidiaries differ from GAAP.
Current statutory practice does not address reserves for
certain endowment features of several life insurance products marketed by one of
the Company's subsidiaries. The subsidiary uses a practice permitted by its
state of domicile and discounts the future benefit using mortality and interest
rate assumptions.
The NAIC is currently working on a project to codify statutory
accounting practices (SAP). This process will result in a single source of SAP,
possibly eliminating the concept of permitted practices.
Statutory to GAAP Reconciliation
A reconciliation of SAP capital and surplus to GAAP shareholders'
equity at December 31 follows:
<TABLE>
<CAPTION>
(000s omitted) 1994 1993
<S> <C> <C>
SAP capital and surplus $ 221,270 $ 206,841
DAC 293,850 256,956
Adjustments to policy liabilities (119,521) (126,325)
Goodwill 19,092 21,772
Asset valuation and interest
maintenance reserves 29,005 30,666
Deferred income taxes 16,659 (5,064)
Postretirement and pension
liabilities (28,313) (31,113)
Unrealized loss on fixed maturities (118,728) -
Other, net (6,991) (4,788)
GAAP shareholders' equity $ 306,323 $ 348,945
</TABLE>
A reconciliation of SAP net income to GAAP net income (loss)
for the years ended December 31 follows:
<TABLE>
<CAPTION>
(000s omitted) 1994 1993 1992
<S> <C> <C> <C>
SAP net income $18,633 $10,954 $ 36
DAC 3,894 15,282 30,788
Cumulative effect of changes
in accounting principles - (1,550) (22,819)
Adjustments to policy
benefits 1,270 401 (14,812)
Financial reinsurance - (3,500) (7,500)
Deferred income taxes (3,913) (6,180) 346
Other, net 11,417 11,259 7,994
GAAP net income (loss) $31,301 $26,666 $ (5,967)
</TABLE>
Dividends From Subsidiaries
Regulatory restrictions limit the dollar amount of dividends
available for distribution to WNC from its insurance subsidiaries without prior
approval by regulatory authorities. The amount of dividends available is based
on the greater of: a) 10% of the insurance subsidiaries' statutory capital and
surplus as of the preceding year end; or b) the insurance subsidiaries'
statutory net income from operations for the preceding year. Based on these
restrictions, WNC's insurance subsidiaries are permitted a maximum of
$22,127,000 in dividend distributions to WNC in 1995. In 1994, WNC received
dividends of $5,975,000 from WNIC.
Note J
Borrowings and Credit Arrangements
Borrowings
Borrowings of $1,907,000 at December 31, 1994 are for a mortgage on
investment real estate with an interest rate of 6.5% that matures in April,
1998. Payments of $504,000, $672,000, $655,000, and $296,000 will be required
in 1995, 1996, 1997, and 1998, respectively. The property, with a carrying value
of $11,922,000, is pledged as collateral.
Interest paid on borrowings by WNC was $406,000, $1,673,000,
and $1,313,000, in 1994, 1993, and 1992, respectively.
Credit Arrangements
WNC has a line of credit with one bank available for short-term
borrowings amounting to $10,000,000, all unused at December 31, 1994. The line
of credit arrangement is renewable annually, but credit can be withdrawn at the
bank's option.
In addition, WNC has seven letters of credit with varying terms
and conditions totaling $4,895,000. As of December 31, 1994, the entire amount
was unused.
Note K
Policy Liabilities
WNC's policy liabilities at December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1994 1993
<S> <C> <C>
Future policy
benefits-annuities $1,278,252 $1,250,225
Future policy
benefits-life 790,894 800,447
Policy and contract
claims 213,572 206,963
Unearned premiums 33,220 34,649
Other 38,880 39,187
Total policy liabilities $2,354,818 $2,331,471
</TABLE>
Activity in the liability for unpaid claims (a component of
policy and contract claims) and claim adjustment expense (a component of general
expenses and other liabilities) follows:
<TABLE>
<CAPTION>
(000s omitted) 1994 1993 1992
<S> <C> <C> <C>
Balance at January 1 $210,348 $202,322 $195,538
Less: reinsurance
recoverables 11,547 11,956 14,039
Net balance at January 1 198,801 190,366 181,499
Incurred relating to:
Current year 291,209 260,144 227,604
Prior years (31,296) (26,638) (20,231)
Total incurred 259,913 233,506 207,373
Paid relating to:
Current year 179,762 151,989 124,379
Prior years 75,342 73,082 74,127
Total paid 255,104 225,071 198,506
Net balance at December 31 203,610 198,801 190,366
Add: reinsurance
recoverables 11,741 11,547 11,956
Balance at December 31 $215,351 $210,348 $202,322
</TABLE>
Note L
Fair Value of Financial Instruments
Valuation Methods and Assumptions
The disclosure of fair value information about certain financial
instruments is based primarily on quoted market prices. In cases where quoted
market prices are not available, fair values are based on estimates using
present value or other valuation techniques. These estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in the immediate settlement of the instrument.
The fair values of short-term investments, venture capital
partnerships, and accrued investment income approximate the carrying amounts
reported in the balance sheets.
Fair values for fixed maturity and equity 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 prepayment risk.
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 the mortgage payable is estimated by
discounting cash flows, using current incremental borrowing rates for similar
types of borrowing arrangements.
Fair values for real estate development guarantees are based on
estimates of fees to guarantee similar developments. Fair values for lending
commitments are based on the commitment fees of the loans in question.
Fair Value of Financial Instruments
The fair values of certain financial instruments along with their
corresponding carrying values at December 31, 1994 and 1993 follow. As the fair
value of all WNC's assets and liabilities are not presented, this information in
the aggregate does not represent the underlying value of WNC. WNC does not own
any financial instruments held or issued for trading purposes.
<TABLE>
<CAPTION>
1994 1993
---------------------- ----------------------
Fair Carrying Fair Carrying
(000s omitted) Value Value Value Value
<S> <C> <C> <C> <C>
Assets
Fixed maturities
Available for sale (a) $1,649,453 $1,649,453 $1,708,677 $1,632,609
Held to maturity 112,368 113,116 134,448 128,184
Equity securities 13,047 13,047 15,860 15,860
Mortgage loans on real estate 366,373 357,641 411,250 391,667
Policy loans 52,600 54,368 50,340 52,285
Liabilities
Investment-type insurance contracts 1,174,017 1,203,608 1,224,550 1,226,238
Mortgage payable 1,854 1,907 2,438 2,434
Off-balance sheet
Real estate development guarantees (b) 80 - 500 -
Lending commitments 105 - 358 -
<FN>
(a) Classified as held for sale in 1993.
(b) See Note H for further discussion of guarantees.
</TABLE>
Note M
Segment Information
WNC has three business segments: life insurance and annuities;
health insurance (previously reported as the individual health insurance and
group products segments); and corporate and other. The segments are based on
WNC's insurance products and organization. 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, and operations that do not specifically support one of the
other segments. Assets not individually identifiable by segment are
allocated, generally, based on the amount of segment liabilities.
Depreciation expense and capital expenditures are not 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 at
December 31 follows:
<TABLE>
<CAPTION>
(000s omitted) 1994 1993 1992
<S> <C> <C> <C>
Revenues
Life insurance and annuities $ 229,732 $ 228,950 $ 233,488
Health insurance 420,982 394,562 338,810
Corporate and other 6,215 5,015 (1,856)
Consolidated total $ 656,929 $ 628,527 $ 570,442
Income (loss) before income taxes
and cumulative effect
Life insurance and annuities $ 33,177 $ 28,128 $ 21,856
Health insurance 5,895 11,500 7,007
Corporate and other 5,574 (914) (2,473)
Consolidated total $ 44,646 $ 38,714 $ 26,390
Assets
Life insurance and annuities $2,274,005 $2,291,529 $2,184,660
Health insurance 321,481 344,245 306,698
Corporate and other 215,082 218,645 221,425
Consolidated total $2,810,568 $2,854,419 $2,712,783
</TABLE>
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Descriptions of WNC's directors are hereby incorporated by reference
from WNC's 1995 proxy statement under the caption "Election of
Directors." Information regarding compliance with Section 16(a) of
the Exchange Act is hereby incorporated by reference from WNC's 1995
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;
Robert W. Patin, Chairman of the Board and Chief Executive Officer,
WNC and WNIC; James N. Plato, Chairman of the Board, President and
Chief Executive Officer, United Presidential Life Insurance Company;
Thomas Pontarelli, Executive Vice President; and Thomas C. Scott,
Executive Vice President and Chief Financial Officer, are contained
in Part I of this Report, pursuant to General Instruction G.
Item 11. Executive Compensation
Executive compensation and transactions are hereby incorporated by
reference from WNC's 1995 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 hereby incorporated by reference from WNC's 1995 proxy
statement under the caption, "Stock Ownership."
Item 13. Certain Relationships and Related Transactions
A description of transactions with management is hereby incorporated
by reference from WNC's 1995 proxy statement under the caption,
"Transactions with Management."
<PAGE>
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 1994 Annual Report to Shareholders
are presented in Item 8:
Consolidated Balance Sheet, December 31, 1994 and 1993
Consolidated Statement of Operations,
Years Ended December 31, 1994, 1993, and 1992
Consolidated Statement of Cash Flows,
Years Ended December 31, 1994, 1993, and 1992
Consolidated Statement of Shareholders' Equity,
Years Ended December 31, 1994, 1993 and 1992
Capital Stock Activity,
Years Ended December 31, 1994, 1993, and 1992
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.
<PAGE>
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 21, 1995 /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 21, 1995 /c/ Frederick R. Blume
Frederick R. Blume
Director
Date: March 21, 1995 /c/ Elaine R. Bond
Elaine R. Bond
Director
Date: March 21, 1995 /c/ Ronald L. Bornhuetter
Ronald L. Bornhuetter
Director
Date: March 21, 1995
W. Francis Brennan
Director
Date: March 21, 1995 /c/ Joan K. Cohen
Joan K. Cohen
Vice President, Controller and
Treasurer
Date: March 21, 1995 /c/ Lee A. Ellis
Lee A. Ellis
Director
Date: March 21, 1995 /c/ John R. Haire
John R. Haire
Director
Date: March 21, 1995 /c/ Stanley P. Hutchison
Stanley P. Hutchison
Director
Date: March 21, 1995 /c/ George P. Kendall, Jr.
George P. Kendall, Jr.
Director
Date: March 21, 1995 /c/ Frank L. Klapperich, Jr.
Frank L. Klapperich, Jr.
Director
Date: March 21, 1995 /c/ Lee M. Mitchell
Lee M. Mitchell
Director
Date: March 21, 1995 /c/ Robert W. Patin
Robert W. Patin
Chairman of the Board, President and
Chief Executive Officer and Director
Date: March 21, 1995 /c/ Rex Reade
Rex Reade
Director
Date: March 21, 1995 /c/ Thomas C. Scott
Thomas C. Scott
Executive Vice President and Chief
Financial Officer
<PAGE>
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. Condensed Financial Information of Registrant
III. Supplementary Insurance Information
IV. Reinsurance
<TABLE>
SCHEDULE I SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
December 31, 1994
<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 held to maturity:
Bonds:
U.S. government and government
agencies and authorities $ 251 $ 251 $ 251
States, municipalities and political
subdivisions 22,109 22,924 22,109
Mortgage-backed securities 4,529 4,710 4,529
Foreign governments 200 202 200
All other corporate bonds 86,027 84,281 86,027
TOTAL FIXED MATURITIES HELD
TO MATURITY 113,116 $ 112,368 113,116
Fixed maturities available for sale:
Bonds:
U.S. government and government
agencies and authorities 74,293 69,981 69,981
States, municipalities and political
subdivisions 75,555 71,484 71,484
Mortgage-backed securities 655,286 609,203 609,203
Foreign governments 33,845 31,528 31,528
Public utilities 131,184 117,554 117,554
All other corporate bonds 796,013 747,635 747,635
Redeemable preferred stocks 2,005 2,068 2,068
TOTAL FIXED MATURITIES AVAILABLE
FOR SALE 1,768,181 $1,649,453 1,649,453
Equity securities:
Common stocks - industrial and miscellaneous 871 700 700
Separate account 11,327 11,327 11,327
Nonredeemable preferred stocks 1,020 1,020 1,020
TOTAL EQUITY SECURITIES 13,218 $ 13,047 13,047
Mortgage loans on real estate* 365,398 357,641
Real estate:
Investment properties* 48,102 22,296
Acquired in satisfaction of debt* 6,135 4,701
Policy loans 54,368 54,368
Other long-term invested assets* 18,478 17,625
Short-term investments 52,387 52,387
TOTAL INVESTMENTS $2,439,383 $2,284,634
<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 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
WASHINGTON NATIONAL CORPORATION
(Parent Corporation Only)
<CAPTION>
BALANCE SHEET
December 31,
(000s omitted) 1994 1993
<S> <C> <C>
ASSETS
Cash $ 3,548 $ 3,383
Short-term investments 692 7,899
Equity in net assets of subsidiaries * 302,414 338,139
Amounts due from subsidiaries * 4,173 2,857
Real estate 162 207
Other 1,440 3,979
Total Assets $312,429 $356,464
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Dividends payable $ 3,374 $ 3,361
Amounts due to subsidiaries * 1,090 2,736
Other liabilities 1,642 1,422
Total Liabilities 6,106 7,519
SHAREHOLDERS' EQUITY
Convertible preferred stock 723 723
Common stock 124,842 124,145
Retained earnings (including equity in retained earnings
of subsidiaries: 1994 - $286,555; 1993 - $261,071) 302,759 284,938
Net unrealized losses on investment securities
of subsidiaries (61,356) (43)
Unfunded pension loss of subsidiaries (2,648) (2,821)
Cost of common treasury stock (57,997) (57,997)
Total Shareholders' Equity 306,323 348,945
Total Liabilities and Shareholders' Equity $312,429 $356,464
<FN>
* Eliminated in consolidation.
</TABLE>
<TABLE>
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Continued
WASHINGTON NATIONAL CORPORATION
(Parent Corporation Only)
<CAPTION>
STATEMENT OF OPERATIONS
Year Ended December 31,
(000s omitted) 1994 1993 1992
<S> <C> <C> <C>
REVENUES
Interest $ 447 $ 274 $ 85
Management fee from subsidiary * 1,613 0 0
Dividends from subsidiary * 5,975 7,709 9,915
Realized investment gains (losses) (105) 0 336
Total Revenues 7,930 7,983 10,336
GENERAL AND ADMINISTRATIVE EXPENSES 1,743 1,768 1,313
INCOME BEFORE TAXES, EQUITY IN UNDISTRIBUTED
NET INCOME (LOSS) OF SUBSIDIARIES, AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE 6,187 6,215 9,023
Income tax expense (benefit) 370 (237) (146)
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME
(LOSS) OF SUBSIDIARIES AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 5,817 6,452 9,169
Equity in undistributed net income (loss) of subsidiaries * 25,484 20,214 (7,547)
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 31,301 26,666 1,622
Cumulative effect of change in accounting
for income taxes 0 0 (7,589)
NET INCOME (LOSS) $31,301 $26,666 $(5,967)
<FN>
* Eliminated in consolidation.
</TABLE>
<TABLE>
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Continued
WASHINGTON NATIONAL CORPORATION
(Parent Corporation Only)
<CAPTION>
STATEMENT OF CASH FLOWS
Year Ended December 31,
(000s omitted) 1994 1993 1992
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $31,301 $26,666 $(5,967)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Equity in undistributed net (income) loss of subsidiaries (25,484) (20,214) 7,547
Change in accounting principle 0 0 7,589
Change in indebtedness from subsidiaries (2,962) 0 0
Other, net 742 900 1,542
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,597 7,352 10,711
INVESTING ACTIVITIES
Net (increase) decrease in short-term investments 7,207 (7,515) 867
Net decrease in investment properties 45 0 0
Change in indebtedness from subsidiaries 0 (7,250) 1,767
Investment in subsidiary 0 (25,382) 0
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 7,252 (40,147) 2,634
FINANCING ACTIVITIES
Cash dividends to shareholders (13,480) (12,236) (11,050)
Return of deposit 2,200 0 0
Proceeds from sale of common stock 596 48,181 428
Change in short-term notes payable 0 (2,600) (400)
Purchase of common stock for treasury 0 0 (21)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (10,684) 33,345 (11,043)
INCREASE IN CASH 165 550 2,302
Cash at beginning of year 3,383 2,833 531
CASH AT END OF YEAR $ 3,548 $ 3,383 $ 2,833
</TABLE>
<TABLE>
SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
---------------------------------------------------------------------------------------------------------
Future Policy Insurance
Benefits, Other Policy Premiums
Segment Deferred Losses, Claims Claims and and
Acquisition and Loss Unearned Benefits Policy
Costs Expenses Premiums Payable Charges
---------------------------------------------------------------------------------------------------------
(000s Omitted)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Life and annuities $256,979 $2,026,973 $ 0 $ 18,103 $ 71,784
Health insurance 36,871 42,173 14,361 224,751 396,601
Corporate and other 0 0 18,859 9,598 1
TOTAL $293,850 $2,069,146 $33,220 $252,452 $468,386
Year ended December 31, 1993
Life and annuities $219,780 $2,006,713 $ 0 $ 17,407 $ 64,915
Health insurance 37,176 43,959 14,992 219,543 373,150
Corporate and other 0 0 19,657 9,200 757
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 $ 0 $ 16,411 $ 63,400
Health insurance 29,347 42,948 13,953 197,982 316,775
Corporate and other 0 317 19,781 9,721 795
TOTAL $241,674 $1,975,107 $33,734 $224,114 $380,970
</TABLE>
<TABLE>
SCHEDULE III 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, 1994
Life and annuities $154,414 $159,661 $18,202 $ 18,692 $ 0
Health insurance 20,003 275,878 19,851 119,358 366,733
Corporate and other 7,590 263 0 378 0
TOTAL $182,007 $435,802 $38,053 $138,428 $366,733
Year ended December 31, 1993
Life and annuities $158,981 $160,341 $19,831 $ 20,650 $ 0
Health insurance 21,148 258,926 18,112 106,024 332,987
Corporate and other 3,606 1,091 0 4,838 0
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 $ 0
Health insurance 21,416 231,717 13,589 86,497 273,277
Corporate and other 967 1,174 0 (557) 0
TOTAL $187,137 $409,840 $27,120 $107,092 $273,277
---------------------------------------------------------------------------------------------------------
<FN>
(1) Allocations are based on certain assumptions and estimates. These allocations would change if
different methods were applied.
</TABLE>
<TABLE>
SCHEDULE IV 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, 1994
Life insurance in force $21,034,835 $3,081,697 $ 0 $17,953,138 -
Insurance premiums and policy
charges:
Life and annuities $ 82,967 $ 11,183 $ 0 $ 71,784 -
Health insurance 344,786 4,825 56,640 396,601 14 %
Corporate and other 45,690 45,689 0 1 -
TOTAL $ 473,443 $ 61,697 $56,640 $ 468,386 12 %
Year ended December 31, 1993
Life insurance in force $22,215,104 $3,170,467 $ 0 $19,044,637 -
Insurance premiums and policy
charges:
Life and annuities $ 75,899 $ 10,983 $ 1 $ 64,917 -
Health insurance 347,491 5,362 31,021 373,150 8 %
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 $ 0 $22,052,192 -
Insurance premiums and policy
charges:
Life and annuities $ 73,611 $ 10,212 $ 1 $ 63,400 -
Health insurance 319,392 5,186 2,569 316,775 1 %
Corporate and other 47,571 46,776 0 795 -
TOTAL $ 440,574 $ 62,174 $ 2,570 $ 380,970 1 %
----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
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** *
10.5 Form of Amendment to Employment Agreement between Registrant
and each Executive Officer on Form 10-Q, for the period ended
September 30, 1994** *
11 Computation of earnings per share see below
21 Subsidiaries of WNC see below
23 Consent of Ernst & Young, Independent Auditors see below
27 Financial Data Schedule 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,
1994 1993 1992
----------------------------------------
<S> <C> <C> <C>
PRIMARY
Average common shares outstanding 12,144 10,643 9,892
Net effect of dilutive stock options -
based on the treasury stock method
using average market price 81 112 97
TOTAL 12,225 10,755 9,989
Income before cumulative effect of changes
in accounting principles and dividend
requirement on Preferred Stock $31,301 $28,216 $16,852
Dividend requirement on Preferred Stock (362) (362) (364)
Income before cumulative effect of changes
in accounting principles 30,939 27,854 16,488
Cumulative effect of changes in accounting
principles 0 (1,550) (22,819)
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCK AND EQUIVALENTS $30,939 $26,304 $(6,331)
Income per share before cumulative effect $2.53 $2.59 $1.65
Cumulative effect of changes in accounting
principles per share 0 (.14) (2.28)
NET INCOME (LOSS) PER SHARE $2.53 $2.45 $(.63)
FULLY DILUTED
Average common shares outstanding 12,144 10,643 9,892
Assumed conversion of Preferred Stock 271 271 0
Net effect of dilutive stock options -
based on the treasury stock method
using average market price 81 112 97
TOTAL 12,496 11,026 9,989
Income before cumulative effect of changes
in accounting principles and dividend
requirement on Preferred Stock $31,301 $28,216 $16,852
Dividend requirement on Preferred Stock 0 0 (364)
Income before cumulative effect of changes
in accounting principles 31,301 28,216 16,488
Cumulative effect of changes in accounting
principles 0 (1,550) (22,819)
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCK AND EQUIVALENTS $31,301 $26,666 $(6,331)
Income per share before cumulative effect $2.50 $2.56 $1.65
Cumulative effect of changes in accounting
principles per share 0 (.14) (2.28)
NET INCOME (LOSS) PER SHARE $2.50 $2.42 $(.63)
<FN>
For 1992 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 20, 1995
<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 LLP, 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 13, 1995, included in the 1994 Annual
Report to Shareholders 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, the
Company changed its method of accounting for certain investments
in debt and equity securities in 1994, postemployment benefits in
1993, and income taxes and postretirement benefits other than
pensions in 1992.
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 13, 1995, 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 LLP
Chicago, Illinois
March 24, 1995
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<DEBT-HELD-FOR-SALE> 1,649,453
<DEBT-CARRYING-VALUE> 113,116
<DEBT-MARKET-VALUE> 112,368
<EQUITIES> 13,047
<MORTGAGE> 357,641
<REAL-ESTATE> 26,997
<TOTAL-INVEST> 2,284,634
<CASH> 7,272
<RECOVER-REINSURE> 54,842
<DEFERRED-ACQUISITION> 293,850
<TOTAL-ASSETS> 2,810,568
<POLICY-LOSSES> 2,069,146
<UNEARNED-PREMIUMS> 33,220
<POLICY-OTHER> 213,572
<POLICY-HOLDER-FUNDS> 38,880
<NOTES-PAYABLE> 1,907
<COMMON> 124,842<F1>
0
723
<OTHER-SE> 180,758
<TOTAL-LIABILITY-AND-EQUITY> 2,810,568
468,386
<INVESTMENT-INCOME> 182,007
<INVESTMENT-GAINS> (1,606)
<OTHER-INCOME> 8,142
<BENEFITS> 435,802
<UNDERWRITING-AMORTIZATION> 38,053
<UNDERWRITING-OTHER> 138,428
<INCOME-PRETAX> 44,646
<INCOME-TAX> 13,345
<INCOME-CONTINUING> 31,301
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,301
<EPS-PRIMARY> 2.53
<EPS-DILUTED> 2.50
<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 $47,109.
</FN>
</TABLE>
