SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995.
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 1-7369
WASHINGTON NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2663225
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
300 Tower Parkway,
Lincolnshire, Illinois 60069
(Address of principal (Zip Code)
executive offices)
Registrant's Telephone Number, Including Area Code: (708) 793-3000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares of Common Stock, $5 par value outstanding as of
August 1, 1995 was 12,197,342.
Page 1 of 22
<PAGE>
CONTENTS
Part I. Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheet - June 30, 1995
and December 31, 1994 3
Consolidated Statement of Operations - Six and Three
Months Ended June 30, 1995 and 1994 4
Consolidated Condensed Statement of Cash Flows -
Six Months Ended June 30, 1995 and 1994 5
Notes to Consolidated Financial Statements - June 30, 1995 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. Other Information
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Page 2 of 22
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(000s Omitted)
<CAPTION>
June 30,
1995 December 31,
(Unaudited) 1994
<S> <C> <C>
ASSETS
Investments
Fixed maturities -
Available for sale at fair value (cost: $1,832,073; $1,768,181) $1,871,217 $1,649,453
Held to maturity at cost (fair value: $104,445; $112,368) 100,605 113,116
Mortgage loans on real estate 342,840 357,641
Real estate 30,315 26,997
Policy loans 55,451 54,368
Equity securities at fair value (cost: $1,865; $1,891) 1,616 1,720
Other long-term 26,590 28,952
Short-term 33,172 52,387
Total Investments 2,461,806 2,284,634
Cash 3,229 7,272
Deferred acquisition costs 254,007 293,850
Reinsurance recoverables and prepaid premiums 52,527 54,842
Accrued investment income 32,811 33,084
Insurance premiums in course of collection 16,750 14,857
Property and equipment 21,040 22,988
Goodwill 18,738 19,092
Separate Account 48,649 42,178
Other 37,376 37,771
Total Assets $2,946,933 $2,810,568
LIABILITIES
Policy liabilities $2,362,717 $2,354,818
General expenses and other liabilities 120,183 121,685
Mortgage payable 1,631 1,907
Income taxes (current: $(1,591); $316) 15,503 (16,343)
Separate Account 48,649 42,178
Total Liabilities 2,548,683 2,504,245
SHAREHOLDERS' EQUITY
Convertible Preferred Stock 723 723
Common Stock 125,407 124,842
Retained earnings 312,187 302,759
Net unrealized gains (losses) on investments 20,579 (61,356)
Unfunded pension loss (2,649) (2,648)
Cost of Common Treasury Stock (57,997) (57,997)
Total Shareholders' Equity 398,250 306,323
Total Liabilities and Shareholders' Equity $2,946,933 $2,810,568
See Notes to Consolidated Financial Statements
Page 3 of 22
</TABLE>
<TABLE>
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
(000s Omitted, Except Per Share Data)
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues
Premiums and policy charges $246,763 $230,437 $126,052 $116,567
Net investment income 92,033 89,483 46,497 44,546
Realized investment gains (losses) (606) 334 9 (132)
Other 5,809 2,212 3,067 1,069
Total Revenues 343,999 322,466 175,625 162,050
Benefits and Expenses
Benefits paid or provided 230,621 213,917 117,717 105,479
Insurance and general expenses 69,606 68,898 34,354 35,755
Amortization of deferred insurance costs 19,387 17,306 9,958 8,669
Total Benefits and Expenses 319,614 300,121 162,029 149,903
Income Before Income Taxes 24,385 22,345 13,596 12,147
Income Taxes 8,198 6,890 4,699 3,726
Net Income $16,187 $15,455 $ 8,897 $ 8,421
Primary Earnings Per Share
Earnings Per Share $1.31 $1.25 $0.72 $0.68
Average Shares and Equivalents Outstanding 12,245 12,222 12,254 12,222
Fully Diluted Earnings Per Share
Earnings Per Share $1.29 $1.24 $0.71 $0.67
Average Shares and Equivalents Outstanding 12,530 12,493 12,538 12,493
Dividends Paid Per Common Share $0.54 $0.54 $0.27 $0.27
See Notes to Consolidated Financial Statements
Page 4 of 22
</TABLE>
<TABLE>
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Unaudited)
(000s Omitted)
<CAPTION>
Six Months Ended
June 30,
1995 1994
<S> <C> <C>
Net Cash Provided by Operating Activities $44,763 $27,138
Investing Activities
Proceeds from sales
Fixed maturities - available for sale 110,342 49,535
Equities, mortgage loans, real estate, and other investments 5,523 8,564
Proceeds from maturities and redemptions
Fixed maturities - available for sale 43,083 102,135
Fixed maturities - held to maturity 9,706 12,091
Equities, mortgage loans, real estate, and other investments 15,917 28,487
Cost of purchases
Fixed maturities - available for sale (217,635) (227,305)
Fixed maturities - held to maturity - (3,106)
Equities, mortgage loans, real estate, and other investments (3,995) (13,388)
Increase in policy loans (1,083) (429)
Purchases of property and equipment (156) (764)
Net decrease in short-term investments 19,215 27,203
Net Cash Used by Investing Activities (19,083) (16,977)
Financing Activities
Policyholder account deposits 81,832 71,016
Policyholder account withdrawals (104,988) (77,941)
Proceeds from sale of common stock 468 449
Repayment of mortgage (276) (259)
Cash dividends to shareholders (6,759) (6,735)
Net Cash Used by Financing Activities (29,723) (13,470)
Decrease in Cash (4,043) (3,309)
Cash at Beginning of Period 7,272 10,441
Cash at End of Period $3,229 $7,132
See Notes to Consolidated Financial Statements
Page 5 of 22
</TABLE>
<PAGE>
Item 1. Financial Statements (continued)
WASHINGTON NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 1995
A. Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles (GAAP) for interim periods. In the opinion of
management, all adjustments (consisting primarily of normal,
recurring accruals) considered necessary for a fair presentation
have been included.
B. Reclassifications
Certain amounts in the 1994 consolidated financial statements have
been reclassified to conform to the 1995 presentation.
C. New Accounting Standards
1. Effective January 1, 1995, the Company adopted Statement of
Financial Accounting Standards (SFAS) 114, (as amended by SFAS
118) relating to the impairment of mortgage loans. This
statement provides measurement criteria for determining the
carrying value when it is probable that a loan is impaired and
for disclosing information about investments in impaired loans.
A loan is considered impaired when it is probable that the
Company will not collect all amounts due under the contractual
terms. The impairment is recognized by a valuation allowance
which may be subsequently increased or decreased based on
changes in the measurement criteria. The statement applies to
essentially all loans in the Company's mortgage loan portfolio.
Restatement of prior period financial statements is not
required.
The Company's investments in impaired mortgage loans is
summarized below (000s omitted):
<TABLE>
<CAPTION>
June 30, 1995
<S> <C>
Impaired loans (net of a $135 allowance) $ 2,792
Impaired loans without allowances 5,124
Total impaired loans 7,916
Non-impaired loans (net of $7,446 allowance) 334,924
Total invested in mortgage loans $342,840
Year-to-date average investment in impaired loans $ 3,711
Income recognized on impaired loans 261
Income received on impaired loans 246
</TABLE>
At January 1, 1995, the Company had no loans that met the
criteria for impairment. The Company recognizes interest income
on impaired loans on a cash basis for loans for which interest
and principal are delinquent by more than three periodic
payments and on an accrual basis for all others.
Page 6 of 22
Item 1. Financial Statements (continued)
WASHINGTON NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
June 30, 1995
A rollforward of the allowance for mortgage loan losses
follows (000s omitted):
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1994 $8,032
Deductions (851)
Additions 400
Balance June 30, 1995 $7,581
</TABLE>
2. In March of 1995 SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
was issued, which WNC must adopt effective January 1, 1996.
This statement requires a review for impairment of an asset
whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. WNC is
currently in the process of determining the effect of the
adoption of this new standard; however the new standard is not
expected to have a material effect on WNC's financial
statements.
D. Reinsurance
At June 30, 1995, approximately 50 percent of WNC's total
reinsurance was ceded to Combined Life Insurance Company of
America, with approximately 16 percent ceded to UNUM Life Insurance
Company, and approximately 15 percent ceded to American Founders
Life Insurance Company. The reinsurance with Combined Life and
American Founders is a result of divestitures of supplemental
health insurance, life insurance and annuity business.
Substantially all of the reinsurance ceded by the Company is to
entities rated "A" or better by A. M. Best, or to entities
required to maintain assets in an independent trust fund whose fair
value is sufficient to discharge the obligations of the reinsurer.
To the extent that any reinsurance company is unable to meet their
obligations under the agreements, WNC's insurance subsidiaries
would remain liable.
Amounts paid or deemed to have been paid for reinsurance contracts
are recorded as reinsurance receivables. The cost of reinsurance
related to long-duration contracts is accounted for over the life
of the underlying reinsured policies using assumptions consistent
with those used to account for the underlying policies.
The effect of reinsurance on premiums and policy charges was as
follows (000s omitted):
<TABLE>
<CAPTION>
June 30, June 30,
1995 1994
<S> <C> <C>
Direct premiums and policy charges $247,182 $233,699
Reinsurance assumed 28,698 28,323
Reinsurance ceded (29,117) (31,585)
Premiums and Policy Charges $246,763 $230,437
</TABLE>
Reinsurance benefits ceded were $11,284,000 and $11,953,000 at June
30, 1995 and 1994, respectively.
Page 7 of 22
Item 1. Financial Statements (continued)
WASHINGTON NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
June 30, 1995
E. Financial Commitments and Guarantees
The Company has entered into financial guarantees which are
financial instruments with off-balance sheet credit risk. The
exposure to credit risk is represented by the amount the Company,
under certain circumstances, would contractually have to pay out.
These financial instruments were entered into for the fee income
and the potential to share in future capital appreciation of the
underlying assets.
A financial guarantee is a conditional commitment to guarantee the
payment of an obligation by an unrelated entity to a third party.
At June 30, 1995, the Company had two financial guarantees totaling
$8,501,000 which are collateralized by the underlying real estate
and related assets compared to financial guarantees totaling
$15,206,000 at December 31, 1994.
The financial guarantees are scheduled to expire in 1995 and 1996,
however, the guarantees may be extended. The Company feels it has
adequate reserves for potential losses in the future.
Page 8 of 22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following updates and should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and
Results of Operations section of the Company's 1994 Annual Report,
copies of which may be obtained by contacting: Craig Simundza, Vice
President, Financial Reporting Department, Washington National
Corporation, 300 Tower Parkway, Lincolnshire, Illinois 60069
(telephone (708) 793-3053).
<TABLE>
Analysis of Net Income
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(000s omitted) 1995 1994 1995 1994
<S> <C> <C> <C> <C>
Pretax operating income (a)
Life insurance and annuities $ 8,636 $ 8,712 $17,022 $16,437
Specialty health insurance 2,285 2,546 3,688 1,453
Corporate and other 2,666 1,021 4,281 4,121
Total pretax operating income 13,587 12,279 24,991 22,011
Income taxes on operations 4,645 4,454 8,651 7,783
Net operating income 8,942 7,825 16,340 14,228
Net realized investment gains (losses) (b) (45) 596 (153) 1,227
Net income $ 8,897 $ 8,421 $16,187 $15,455
<FN>
(a) Pretax income before realized investment gains and losses.
(b) 1995 and 1994 include taxes (benefits) of $54 and $(728), for
the three months ended June 30, and $(453) and $(893), for the six
months ended June 30, respectively.
</TABLE>
<TABLE>
Consolidated Results of Operations
Components of Pretax Operating Income by Segment
<CAPTION>
Life Specialty
Insurance Health Corporate
(000s omitted) and Annuities Insurance and Other Total
Three Months Ended June 30, 1995
<S> <C> <C> <C> <C>
Revenues
Insurance and other revenues $20,253 $108,996 $ (130) $129,119
Net investment income 38,387 5,202 2,908 46,497
Total revenues excluding realized
investment losses 58,640 114,198 2,778 175,616
Benefits and expenses
Insurance benefits 40,544 77,102 71 117,717
Expenses 4,562 29,751 41 34,354
Amortization of deferred
acquisition costs 4,898 5,060 _ 9,958
Total benefits and expenses 50,004 111,913 112 162,029
Pretax operating income $ 8,636 $ 2,285 $2,666 $ 13,587
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1994
<S> <C> <C> <C> <C>
Revenues
Insurance and other revenues $17,821 $ 99,778 $ 37 $117,636
Net investment income 37,936 5,035 1,575 44,546
Total revenues excluding realized
investment gains 55,757 104,813 1,612 162,182
Benefits and expenses
Insurance benefits 38,038 67,333 108 105,479
Expenses 4,980 30,292 483 35,755
Amortization of deferred
acquisition costs 4,027 4,642 _ 8,669
Total benefits and expenses 47,045 102,267 591 149,903
Pretax operating income $ 8,712 $ 2,546 $1,021 $ 12,279
</TABLE>
Page 9 of 22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
<TABLE>
<CAPTION>
Life Specialty
Insurance Health Corporate
(000s omitted) and Annuities Insurance and Other Total
Six Months Ended June 30, 1995
<S> <C> <C> <C> <C>
Revenues
Insurance and other revenues $40,028 $212,691 $ (147) $252,572
Net investment income 76,793 9,991 5,249 92,033
Total revenues excluding realized
investment losses 116,821 222,682 5,102 344,605
Benefits and expenses
Insurance benefits 80,792 149,684 145 230,621
Expenses 9,339 59,591 676 69,606
Amortization of deferred
acquisition costs 9,668 9,719 _ 19,387
Total benefits and expenses 99,799 218,994 821 319,614
Pretax operating income $17,022 $ 3,688 $4,281 $ 24,991
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1994
<S> <C> <C> <C> <C>
Revenues
Insurance and other revenues $36,740 $195,848 $ 61 $232,649
Net investment income 76,120 10,044 3,319 89,483
Total revenues excluding realized
investment gains 112,860 205,892 3,380 322,132
Benefits and expenses
Insurance benefits 78,878 134,867 172 213,917
Expenses 9,685 60,126 (913) 68,898
Amortization of deferred
acquisition costs 7,860 9,446 _ 17,306
Total benefits and expenses 96,423 204,439 (741) 300,121
Pretax operating income $16,437 $ 1,453 $4,121 $ 22,011
</TABLE>
Six Months Ended June 30, 1995 Compared to Six Months Ended
June 30, 1994
Total Revenues Excluding Realized Investment Gains and Losses. Total
revenues excluding realized investment gains and losses increased
$22.5 million, or 7.0%, from $322.1 million to $344.6 million
primarily due to increased insurance and other revenue in the
specialty health insurance segment, discussed below.
Insurance Benefits. Insurance benefits increased $19.5 million, or
6.5%, from $300.1 million in 1994 to $319.6 million in 1995. The
increase was primarily due to higher benefits in the specialty
health insurance segment, discussed below.
Realized Investment Gains and Losses. Realized investment losses for
1995 were $0.6 million ($0.2 million after taxes) compared to
realized investment gains of $0.3 million ($1.2 million after taxes)
in 1994. The losses in 1995 were due primarily to sales of fixed
maturity investments while the gains in 1994 were due mainly to
sales of equity securities.
Page 10 of 22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Segment Information
The Company has two operating business segments. The life insurance
and annuities segment consists of universal life insurance and other
interest-sensitive life insurance and annuity products marketed to
individuals and small businesses by United Presidential Life
Insurance Company (UPI) and a block of similar business at
Washington National Insurance Company (WNIC), which no longer sells
new business of this type. The second segment is the specialty
health insurance segment, which consists primarily of employee-paid
disability insurance and other specialty insurance products for
educators, individual health insurance products (primarily major
medical and hospital indemnity coverage for persons under the age of
65 without employer-sponsored insurance), and employer-sponsored
health and associated life insurance, stop-loss insurance, and
administrative services only for employers with from 2 to 1,000
employees. A third segment, corporate and other, includes the non-
insurance operations of the Company.
Life Insurance and Annuities. Revenues for the life insurance and
annuities segment for 1995 were $116.8 million, compared to $112.9
million for 1994. The improvement was primarily attributable to
higher insurance premiums and policy charges of $3.3 million,
resulting from an increase in life insurance in force and policy
charges as well as increased investment income at UPI.
Pretax operating income for the life insurance and annuities segment
increased $0.6 million, or 3.6%, to $17.0 million in 1995 from $16.4
million in 1994 as a result of increased investment income, better
mortality experience, and an improved expense ratio, offset in part
by an anticipated decline in interest rate spreads (the difference
between what the Company earns on its investments and what is
credited to policyholders).
In the second half of 1994, as market interest rates rose, the
Company increased credited interest rates to its policyholders and
contract holders, primarily at WNIC. As a result, interest-rate
spreads in the first two quarters of 1995 have declined below the
levels of late 1994. Because market interest rates have now
declined, credited rates on these policies are being reduced where
appropriate.
Specialty Health Insurance. Revenues for the specialty health
insurance segment were $222.7 million in 1995 compared to $205.9
million in 1994, an increase of $16.8 million, or 8.2%. The
improvement was primarily due to increased premium revenue from
individual health insurance products and fee income for
administering a reinsured block of individual health policies,
improved sales and rate increases on employee benefit group
products, and increased sales of education disability products. Also
contributing to the increase was an adjustment in 1994 of $2.5
million to unpaid premiums related to employee benefit group health
insurance products that reduced revenues.
The specialty health insurance segment reported pretax operating
income of $3.7 million in 1995 compared to $1.5 million in 1994. The
increase was primarily due to the higher revenue discussed above and
improvement in the segment's expense ratio offset in part by an
expected increase in the segment's benefit ratio (insurance benefits
divided by insurance premiums). The improvement in the segment's
expense ratio was due to the previous combination of the individual
health and employee benefits divisions at WNIC.
Effective in the 1993 second quarter, the Company entered into a
reinsurance agreement with The Harvest Life Insurance Company
(Harvest Life) that provides that the Company reinsures 100% of a
block of individual major medical business issued by Harvest Life.
In the second quarter of 1994, the Company entered into a
reinsurance agreement with National Casualty Company (National
Casualty), whereby the Company reinsures 50% and administers 100% of
a block of individual major medical health insurance. The Company
receives a fee for administering this block of business.
Page 11 of 22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The combined effect of these reinsurance transactions was to
increase revenues and benefits and expenses by $32.2 million and
$20.4 million, respectively, in 1995, from $28.5 million and $17.7
million, respectively, in 1994. Because these two reinsurance
transactions are comprised of closed blocks of business, revenues
and income from these transactions are expected to decline over the
next several years.
Over the last several quarters, including the second quarter of
1995, the sales environment for the Company's group and individual
major medical health insurance products has become more competitive
as other insurance companies have priced their products more
aggressively in order to obtain additional market share in these
product lines. The sales environment has caused the segment to
experience an increase in the level of major medical health
insurance policy lapses and an increase in the benefit ratio. These
trends may continue during the remainder of 1995 and in 1996.
The Company prices its products to emphasize the maintenance of
desired profit margins. As a result of the more competitive sales
environment, sales of new business declined in 1994. To help offset
this decline, the Company has increased its distribution network for
individual major medical health insurance products. As part of the
reinsurance transactions discussed above, the National Casualty
sales force began to sell WNIC health insurance products in the
first quarter of 1995. For the second quarter of 1995, sales of new
individual health insurance policies increased to 18,700 policies,
from 6,700 policies in the second quarter of 1994. For the six
months of 1995, total new policies written were 29,600, compared to
13,800 in 1994.
Beginning in 1994, the Company implemented various organizational
changes in order to obtain expense savings. These organizational
changes, plus additional economies of scale attributed to added
business, have resulted in a lower expense ratio for this segment in
1995 compared to 1994 and have offset in large part the increase in
the benefit ratio described above.
Corporate and Other. For 1995, the corporate and other segment had
pretax operating income of $4.3 million compared to $4.1 million in
1994. The increase was due to improved investment income on the
Company's surplus offset in part by higher expenses. During 1994,
the Company sold certain real estate investments that did not
produce current income and invested the proceeds in income
producing fixed maturity investments. The increase in expenses was
due to a change in the allocation of expenses to the life insurance
and annuities and specialty health insurance segments to more
accurately report where the expenses are incurred, offset in part by
real estate expenses related to the Company's previous home office
in 1994 but not in 1995.
Comparison of Quarter Ended June 30, 1995 to June 30, 1994
The nature and reasons for any significant variations between
quarters ended June 30, 1995 and June 30, 1994 are the same as those
discussed above for the respective six-month periods, except where
otherwise noted.
Page 12 of 22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Investment Portfolio
At June 30, 1995, the Company had invested assets with a carrying
value of $2.5 billion. Certain information about the Company's
investment portfolio as of that date follows (dollars in millions):
<TABLE>
<CAPTION>
Percent of Total
Carrying Value Carrying Value
<S> <C> <C>
Fixed maturity investments:
United States government
obligations $ 76.8 3.1%
Obligations of states and
political subdivisions 92.0 3.7
Public utilities 140.6 5.7
Industrial and miscellaneous 947.3 38.5
Mortgage-backed securities 679.2 27.6
Other 35.9 1.5
Total fixed maturity investments 1,971.8 80.1
Mortgage loans on real estate 342.8 13.9
Real estate 30.3 1.2
Policy loans 55.5 2.3
Equity securities 1.6 0.1
Other long-term 26.6 1.1
Short-term 33.2 1.3
Total invested assets $2,461.8 100.0%
</TABLE>
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.
Due to the decline in market interest rates in the first six months
of 1995, the carrying value of the Company's fixed maturity
investments compared to amortized cost increased and resulted in an
unrealized gain on fixed maturity investments of $39.1 million
compared to an unrealized loss of $119.5 million at December 31,
1994. The amortized cost of the Company's fixed maturity portfolio
was $1.9 billion at June 30, 1995, unchanged from December 31, 1994.
The Company's policy for rating fixed maturity investments is to use
the rating determined by Standard & Poor's Company or Moody's
Investor Service, Inc. for publicly-traded investments. For
privately-traded securities, the ratings of Duff & Phelps Credit
Rating Company and Fitch Investors Service, Inc. are also recognized
in defining rated securities. If an investment has a split rating
(i.e., different ratings from the rating services) the Company
categorizes the investment under the lowest rating. For those
investments that do not have a rating from these services, the
Company categorizes those investments on ratings assigned by the
National Association of Insurance Commissioners (NAIC), whose
ratings are as follows: NAIC Class 1 is considered equivalent to a
AAA/Aaa, AA/Aa, or A rating; NAIC Class 2, BBB/Baa; and NAIC Classes
3-6, BB/Ba and below. At June 30, 1995, 6.1% of fixed maturity
investments were rated with comparable NAIC ratings, the majority of
which is $50.7 million of BBB-rated and $52.8 million of investments
rated BB and lower.
Page 13 of 22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The composition of the Company's fixed maturity portfolio at June
30, 1995, 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 $ 837.5 42.5% 34.0%
AA/Aa 142.7 7.2 5.8
A 566.3 28.7 23.0
BBB/Baa 320.4 16.3 13.0
BB/Ba and lower 104.9 5.3 4.3
Total Fixed Maturities $1,971.8 100.0% 80.1%
</TABLE>
The carrying value of the Company's high-yield investments (rated BB
and lower) at June 30, 1995, was $104.9 million or 4.3% of the
Company's invested assets, up from $90.9 million at December 31,
1994, due to rating downgrades. The Company does not anticipate any
significant new investments in high-yield fixed maturity
investments.
At June 30, 1995, 27.6% of the Company's invested assets were in
mortgage-backed fixed maturity investments, including collateralized
mortgage obligations (CMOs) and mortgage-backed pass-through
securities. Mortgage-backed securities generally are collateralized
by mortgages backed by the Government National Mortgage Association
(GNMA), the Federal National Mortgage Association, 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 June 30, 1995 follows (dollars in millions):
<TABLE>
<CAPTION>
Carrying Value as a Percent of
Mortgage-
Carrying Backed Invested
Value Securities Assets
<S> <C> <C> <C>
Agency CMOs
Planned and target amortization
classes $279.6 41.2% 11.4%
Sequential classes 5.6 0.8 0.2
Support classes 5.7 0.8 0.2
Accrual classes 7.8 1.2 0.3
Total agency CMOs 298.7 44.0 12.1
Non-agency CMOs
Planned amortization classes 14.9 2.2 0.6
Sequential classes 6.8 1.0 0.3
Accrual classes 1.7 0.3 0.1
Total non-agency CMOs 23.4 3.5 1.0
Total CMOs 322.1 47.5 13.1
Non-agency mortgage-backed
pass-through securities 3.5 0.5 0.1
Agency mortgage-backed
pass-through securities 353.6 52.0 14.4
Total mortgage-backed securities $679.2 100.0% 27.6%
</TABLE>
Page 14 of 22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
In some instances, the Company invests in non-agency mortgage-backed
securities, primarily highly-rated CMOs. The credit risk associated
with non-agency mortgage-backed securities is generally greater than
that of agency mortgage-backed securities. At June 30, 1995, $20.6
million, or 88%, of the Company's non-agency CMOs were rated AAA.
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 43.4% of the Company's mortgage-backed
securities at June 30, 1995, are designed to amortize in a manner
that shifts the primary risk of prepayment of the underlying
collateral to investors in other tranches of the CMO.
Mortgage Loans
The Company's mortgage loan portfolio at June 30, 1995, shown by
geographic distribution, year of maturity, and property type follows
(dollars in millions):
<TABLE>
<CAPTION>
Geographic Distribution
<S> <C> <C>
California $ 58.5 17.1%
Indiana 42.8 12.5
Illinois 42.2 12.3
Florida 31.7 9.2
Texas 29.5 8.6
North Carolina 17.7 5.2
Virginia 15.0 4.4
Georgia 13.3 3.9
All other 92.1 26.8
Total $342.8 100.0%
</TABLE>
<TABLE>
<CAPTION>
Property Type
<S> <C> <C>
Retail $203.8 59.4%
Office 39.3 11.5
Industrial 31.3 9.1
Medical 22.5 6.6
All other 45.9 13.4
Total $342.8 100.0%
</TABLE>
<TABLE>
<CAPTION>
Scheduled
Principal Balloon
Payments Payments Total
<S> <C> <C> <C>
Mortgage Loans by Year of Maturity:
1995 $ 4.4 $ 13.6 $ 18.0
1996 9.5 32.0 41.5
1997 10.1 24.6 34.7
1998 10.4 11.8 22.2
1999 10.7 10.3 21.0
2000 and thereafter 89.5 115.9 205.4
Total $134.6 $208.2 $342.8
</TABLE>
Page 15 of 22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The Company had investments in mortgage loans of $342.8 million at
June 30, 1995 compared to $357.6 million at December 31, 1994.
Investments in mortgage loans declined primarily due to prepayments
and amortization of the mortgage loan portfolio during the first two
quarters of 1995. Of the outstanding loans at June 30, 1995, 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 $12.6
million at June 30, 1995, a decrease of $4.0 million from December
31, 1994.
Real Estate
The Company's real estate investments totaled $30.3 million (net of
allowances of $2.0 million) at June 30, 1995 compared to $27.0
million (net of allowances of $2.5 million) at December 31, 1994. At
June 30, 1995, $7.4 million of the real estate investments were
acquired through foreclosures, compared to $4.7 million at December
31, 1994. The Company does not anticipate any new acquisition of
real estate other than through foreclosure of mortgage loans.
Liquidity and Capital Resources
Cash Flows. During the first six months of 1995, the Company's
operating activities generated cash of $44.8 million compared to
$27.1 million in the second quarter of 1994. The increase in cash
provided by operations in 1995 was partially augmented by the return
in the first quarter of 1994 of $4 million of funds held for a
terminated group life insurance contract.
Investing activities (purchases and sales of investments) used cash
of $19.1 million in the first six months of 1995 compared to $17.0
million in 1994, primarily for the purchase of fixed maturity
investments in both periods.
Financing activities used cash of $29.7 million in the first six
months of 1995 and $13.5 million in 1994. The increase in cash
used for financing activities was primarily due to higher
policyholder withdrawals of interest-sensitive life insurance and
annuity business offset in part by a smaller increase in interest-
sensitive life insurance and annuity account deposits.
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 fair
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
fair value of its policy liabilities. The Company estimates that a
one percentage point change in market interest rates would have an
inverse effect on the fair value of its fixed maturity investments
of approximately 5.8%.
In addition, rising interest rates could result in increased
surrenders of life insurance policies and annuities (as current
policy and contract holders seek higher returns elsewhere) causing
the Company to sell fixed maturity investments below cost. In order
to minimize the need to sell fixed maturity investments below cost,
the Company seeks to maintain sufficient levels of cash and short-
term investments.
The Company held cash and short-term investments of $36.4 million at
June 30, 1995. Management believes the balance of cash and short-
term investments plus cash inflow from premium revenues, investment
income, and investment maturities is more than sufficient to meet
the liquidity requirements of the Company and its subsidiaries.
Page 16 of 22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Corporate Strategy
As a result of changing business and regulatory climates, the
Company began a detailed review of its corporate strategy late in
1994. During the process of developing a new strategy, the Company
is considering a number of business proposals to maximize the value
of the Company for shareholders. The completion and announcement of
the Company's new business strategy are expected in the second half
of 1995.
A.M. Best Ratings
The ability of an insurance company to compete successfully depends,
in part, on its financial strength, operating performance, and
claims-paying ability as rated by A.M. Best and other rating
agencies. A. M. Best uses a variety of qualitative and
quantitative measures in determining a company's rating and surplus
adequacy. The Company's insurance subsidiaries are each currently
rated "A- (Excellent)" by A.M. Best, based on their 1994 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.
Page 17 of 22
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
WNC and certain affiliated companies have been named in various
pending legal proceedings considered to be ordinary routine
litigation incidental to the business of such companies. A number
of other legal actions have been filed which demand compensatory and
punitive damages aggregating material dollar amounts. WNC believes
that such suits are substantially without merit and that valid
defenses to them exist. WNC's management and its chief legal
officer are of the opinion that such litigation will not have a
material effect on WNC's results of operations or consolidated
financial position. The amount involved in any proceeding, or group
of proceedings presenting in large degree the same issues, does not
exceed the materiality standard for disclosure contained in
Instruction 2 to Item 103 of Regulation S-K.
In September 1994, two retired employees filed a lawsuit in the
United States District Court for the Northern District of Illinois
against WNC, WNC's wholly owned subsidiary, Washington National
Insurance Company ("WNIC"), and the three individual trustees of the
Washington National Insurance Company Home Office Group Insurance
Plan (the "Plan"). The plaintiffs purport to act as members of a
class consisting of all home office employees of WNC and WNIC who
retired or tendered their irrevocable notice of retirement on or
before July 24, 1989 and who are eligible to receive benefits under
the Plan.
The complaint is brought under the Employee Retirement Income
Security Act ("ERISA") and alleges that WNC, WNIC and the trustees
have taken and threatened to take actions to modify, amend or
terminate the Plan in violation of written and oral promises and
representations, and the terms of the Plan. The alleged violations
include changing the method for computing claims payable under the
Plan, requiring retired employees to contribute to the payment of
premiums for their Medicare supplemental health insurance coverage
and maintaining that WNC, WNIC and the trustees have reserved the
right to modify or terminate benefits under the Plan. Plaintiffs
seek a declaration of their rights under the Plan, the reinstatement
of Medicare supplemental health insurance coverage for all members
of the class, an accounting of all funds obtained and claims not
paid as a result of the Plan modifications, an award of attorneys'
fees and other relief.
WNC, WNIC and the individual trustees believe that valid defenses
exist and intend to contest vigorously the allegations made in the
complaint.
Page 18 of 22
<PAGE>
PART II. OTHER INFORMATION (Continued)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 11 - Computation of Per Share Earnings.
b. Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended
June 30, 1995.
Page 19 of 22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
WASHINGTON NATIONAL CORPORATION
August 4, 1995 /s/ Joan K. Cohen
Joan K. Cohen
Vice President, Controller and Treasurer
(Duly Authorized Officer and Chief
Accounting Officer)
Page 20 of 22
<PAGE>
EXHIBIT INDEX
PAGE
Exhibit 11 - Computation of Per Share Earnings. 22
Page 21 of 22
<TABLE>
WASHINGTON NATIONAL CORPORATION
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
Primary and Fully Diluted
(000s Omitted Except Per Share Amounts)
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Primary
Average Shares:
Average common shares outstanding 12,180 12,134 12,188 12,140
Assumed exercise of stock options 65 88 66 82
Total Average Shares 12,245 12,222 12,254 12,222
Net Income Available to Common Shareholders:
Income before Preferred Stock dividend
requirement $16,187 $15,455 $ 8,897 $ 8,421
Preferred Stock dividend requirement (181) (181) (90) (90)
Net Income Available to Common Shareholders $16,006 $15,274 $ 8,807 $ 8,331
Primary Earnings Per Share $1.31 $1.25 $0.72 $0.68
Fully Diluted
Average Shares:
Average common shares outstanding 12,180 12,134 12,188 12,140
Assumed conversion of preferred stock 271 271 271 271
Assumed exercise of stock options 79 88 79 82
Total Average Shares 12,530 12,493 12,538 12,493
Net Income Available to Common Shareholders $16,187 $15,455 $ 8,897 $ 8,421
Fully Diluted Earnings Per Share $1.29 $1.24 $0.71 $0.67
Page 22 of 22
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 1,871,217
<DEBT-CARRYING-VALUE> 100,605
<DEBT-MARKET-VALUE> 104,445
<EQUITIES> 1,616
<MORTGAGE> 342,840
<REAL-ESTATE> 30,315
<TOTAL-INVEST> 2,461,806
<CASH> 3,229
<RECOVER-REINSURE> 52,527
<DEFERRED-ACQUISITION> 254,007
<TOTAL-ASSETS> 2,946,933
<POLICY-LOSSES> 2,065,816
<UNEARNED-PREMIUMS> 39,702
<POLICY-OTHER> 218,002
<POLICY-HOLDER-FUNDS> 39,197
<NOTES-PAYABLE> 1,631
<COMMON> 125,407<F1>
0
723
<OTHER-SE> 272,120
<TOTAL-LIABILITY-AND-EQUITY> 2,946,933
246,763
<INVESTMENT-INCOME> 92,033
<INVESTMENT-GAINS> (606)
<OTHER-INCOME> 5,809
<BENEFITS> 230,621
<UNDERWRITING-AMORTIZATION> 19,387
<UNDERWRITING-OTHER> 69,606
<INCOME-PRETAX> 24,385
<INCOME-TAX> 8,198
<INCOME-CONTINUING> 16,187
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,187
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.29
<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 $47,525.
</FN>
</TABLE>
