SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
November 2, 1995 was 12,210,693.
Page 1 of 22
CONTENTS
Part I. Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheet - September 30, 1995
and December 31, 1994 3
Consolidated Statement of Operations - Nine and
Three Months Ended September 30, 1995 and 1994 4
Consolidated Condensed Statement of Cash Flows -
Nine Months Ended September 30, 1995 and 1994 5
Notes to Consolidated Financial Statements -
September 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>
September 30,
1995 December 31,
(Unaudited) 1994
<S> <C> <C>
ASSETS
Investments
Fixed maturities -
Available for sale at fair value (cost: $1,844,352; $1,768,181) $1,886,517 $1,649,453
Held to maturity at cost (fair value: $97,310; $112,368) 93,806 113,116
Mortgage loans on real estate 329,445 357,641
Real estate and joint ventures 35,164 26,997
Policy loans 55,722 54,368
Equity securities at fair value (cost: $2,243; $1,891) 2,007 1,720
Other long-term 27,412 28,952
Short-term 35,790 52,387
Total Investments 2,465,863 2,284,634
Cash 5,183 7,272
Deferred acquisition costs 256,386 293,850
Reinsurance recoverables and prepaid premiums 52,289 54,842
Accrued investment income 33,493 33,084
Insurance premiums in course of collection 15,073 14,857
Property and equipment 20,262 22,988
Goodwill 18,562 19,092
Separate Account 49,596 42,178
Other 40,497 37,771
Total Assets $2,957,204 $2,810,568
LIABILITIES
Policy liabilities $2,364,943 $2,354,818
General expenses and other liabilities 118,205 121,685
Mortgage payable 1,445 1,907
Income taxes (current: $(157); $316) 16,463 (16,343)
Separate Account 49,596 42,178
Total Liabilities 2,550,652 2,504,245
SHAREHOLDERS' EQUITY
Convertible Preferred Stock 723 723
Common Stock 125,628 124,842
Retained earnings 317,190 302,759
Net unrealized gains (losses) on investments 23,657 (61,356)
Unfunded pension loss (2,649) (2,648)
Cost of Common Treasury Stock (57,997) (57,997)
Total Shareholders' Equity 406,552 306,323
Total Liabilities and Shareholders' Equity $2,957,204 $2,810,568
See Notes to Consolidated Financial Statements
</TABLE>
Page 3 of 22
<TABLE>
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
(000s Omitted, Except Per Share Data)
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues
Premiums and policy charges $371,893 $349,047 $125,130 $118,610
Net investment income 138,260 135,941 46,227 46,458
Realized investment gains (losses) (914) 293 (308) (41)
Other 8,533 4,945 2,724 2,733
Total Revenues 517,772 490,226 173,773 167,760
Benefits and Expenses
Benefits paid or provided 349,455 325,445 118,834 111,528
Insurance and general expenses 103,268 103,614 33,662 34,716
Amortization of deferred insurance costs 29,110 27,072 9,723 9,766
Total Benefits and Expenses 481,833 456,131 162,219 156,010
Income Before Income Taxes 35,939 34,095 11,554 11,750
Income Taxes 11,365 9,513 3,167 2,623
Net Income $24,574 $24,582 $8,387 $9,127
Primary Earnings Per Share
Earnings Per Share $1.98 $1.99 $0.67 $0.74
Average Shares and Equivalents Outstanding 12,258 12,225 12,296 12,227
Fully Diluted Earnings Per Share
Earnings Per Share $1.95 $1.97 $0.67 $0.73
Average Shares and Equivalents Outstanding 12,585 12,496 12,597 12,505
Dividends Paid Per Common Share $0.81 $0.81 $0.27 $0.27
See Notes to Consolidated Financial Statements
</TABLE>
Page 4 of 22
<TABLE>
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Unaudited)
(000s Omitted)
<CAPTION>
Nine Months Ended
September 30,
1995 1994
<S> <C> <C>
Net Cash Provided by Operating Activities $57,830 $51,287
Investing Activities
Proceeds from sales
Fixed maturities - available for sale 189,366 101,584
Equities, mortgage loans, real estate, and other investments 6,361 12,131
Proceeds from maturities and redemptions
Fixed maturities - available for sale 67,464 123,391
Fixed maturities - held to maturity 11,751 14,573
Equities, mortgage loans, real estate, and other investments 29,806 45,958
Cost of purchases
Fixed maturities - available for sale (333,964) (335,664)
Fixed maturities - held to maturity - (3,000)
Equities, mortgage loans, real estate, and other investments (4,742) (19,717)
Net increase in policy loans (1,354) (1,206)
Net purchases of property and equipment (440) (1,540)
Net decrease in short-term investments 16,597 29,131
Net Cash Used by Investing Activities (19,155) (34,359)
Financing Activities
Policyholder account deposits 118,187 106,565
Policyholder account withdrawals (148,949) (121,752)
Proceeds from sale of common stock 603 569
Repayment of mortgage (462) (259)
Cash dividends to shareholders (10,143) (10,105)
Change in short-term notes payable - 400
Net Cash Used by Financing Activities (40,764) (24,582)
Decrease in Cash (2,089) (7,654)
Cash at Beginning of Period 7,272 10,441
Cash at End of Period $5,183 $2,787
See Notes to Consolidated Financial Statements
</TABLE>
Page 5 of 22
<PAGE>
Item 1. Financial Statements (continued)
WASHINGTON NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 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. Certain amounts in the 1994 consolidated
financial statements have been reclassified to conform to the 1995
presentation.
B. 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>
September 30, 1995
<S> <C>
Impaired loans (net of a $135 allowance) $ 2,776
Impaired loans without allowances 5,156
Total impaired loans 7,932
Non-impaired loans (net of $7,171 allowance) 321,513
Total invested in mortgage loans $329,445
Year-to-date average investment in impaired loans $ 5,158
Income recognized on impaired loans 395
Income received on impaired loans 390
</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)
September 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 (1,126)
Additions 400
Balance September 30, 1995 $7,306
</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.
C. Reinsurance
At September 30, 1995, approximately 52 percent of WNC's total
reinsurance was ceded to Combined Life Insurance Company of
America, with approximately 18 percent ceded to UNUM Life Insurance
Company, and approximately 22 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 for the
nine months ended September 30, 1995 and 1994 follows (000s
omitted):
<TABLE>
<CAPTION>
September 30, September 30,
1995 1994
<S> <C> <C>
Direct premiums and policy charges $374,066 $353,977
Reinsurance assumed 41,621 42,284
Reinsurance ceded (43,794) (47,214)
Net Premiums and Policy Charges $371,893 $349,047
</TABLE>
Reinsurance benefits ceded were $17,114,000 and $17,548,000 at
September 30, 1995 and 1994, respectively.
Page 7 of 22
Item 1. Financial Statements (continued)
WASHINGTON NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
September 30, 1995
D. Financial Commitments and Guarantees
The Company has entered into financial guarantees which are
financial instruments with off-balance sheet credit risk. A
financial guarantee is a conditional commitment to guarantee the
payment of an obligation by an unrelated entity to a third party.
The exposure to credit risk is represented by the amount the
Company, under certain circumstances, would contractually have to
pay. These financial instruments were entered into for the fee
income and the potential to share in future capital appreciation of
the underlying assets.
At September 30, 1995, the Company had financial guarantees
totaling $9,595,000 which are collateralized by the underlying real
estate and related assets compared to financial guarantees totaling
$15,206,000 at December 31, 1994.
The Company has entered into a joint venture to develop its
previous home office site. Under the terms of the agreement the
Company will be issuing guarantees totaling $6.2 million which are
scheduled to expire in 1997 ($1.2 million was issued in the third
quarter and is included in the above total). In addition, the
Company will issue a project completion guarantee for an
unspecified amount. Under certain circumstances the Company's
partner in the joint venture would be required to share in these
guarantees.
The financial guarantees are scheduled to expire in 1996 and 1997,
however, the guarantees may be extended. The Company feels it has
adequate reserves for potential future losses.
E. Net Unrealized Gains (Losses) on Investments
The components of net unrealized gains (losses) on investments is
as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
<S> <C> <C>
Net unrealized gains (losses) on securities $43,484 $(118,899)
Deferred income tax expense (benefit) (7,678) 24,543
Adjustment to deferred acquisition costs (12,149) 33,000
Net unrealized gains (losses) on investments $23,657 $ (61,356)
</TABLE>
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 Nine Months Ended
September 30, September 30,
(000s omitted) 1995 1994 1995 1994
<S> <C> <C> <C> <C>
Pretax operating income (a)
Life insurance and annuities $ 8,119 $ 8,096 $25,141 $24,533
Specialty health insurance 1,405 1,971 5,093 3,424
Corporate and other 2,338 1,724 6,619 5,845
Total pretax operating income 11,862 11,791 36,853 33,802
Income taxes on operations 4,142 3,925 12,793 11,708
Net operating income 7,720 7,866 24,060 22,094
Net realized investment gains (b) 667 1,261 514 2,488
Net income $ 8,387 $ 9,127 $24,574 $24,582
<FN>
(a) Pretax income before realized investment gains and losses.
(b) 1995 and 1994 include tax benefits of $975 and $1,302, for
the three months ended September 30, and $1,428 and $2,195 for the
nine months ended September 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 September 30, 1995
<S> <C> <C> <C> <C>
Revenues
Insurance and other $19,133 $108,772 $ (51) $127,854
Net investment income 39,134 5,589 1,504 46,227
Total revenues excluding realized
investment losses 58,267 114,361 1,453 174,081
Benefits and expenses
Insurance benefits 41,418 77,341 75 118,834
Expenses 4,492 30,130 (960) 33,662
Amortization of deferred
acquisition costs 4,238 5,485 - 9,723
Total benefits and expenses 50,148 112,956 (885) 162,219
Pretax operating income $ 8,119 $ 1,405 $2,338 $ 11,862
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1994
<S> <C> <C> <C> <C>
Revenues
Insurance and other $18,792 $102,404 $ 147 $121,343
Net investment income 38,815 5,035 2,608 46,458
Total revenues excluding realized
investment losses 57,607 107,439 2,755 167,801
Benefits and expenses
Insurance benefits 39,998 71,433 97 111,528
Expenses 4,606 29,176 934 34,716
Amortization of deferred
acquisition costs 4,907 4,859 - 9,766
Total benefits and expenses 49,511 105,468 1,031 156,010
Pretax operating income $ 8,096 $ 1,971 $1,724 $ 11,791
</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
Nine Months Ended September 30, 1995
<S> <C> <C> <C> <C>
Revenues
Insurance and other $ 59,161 $321,463 $ (198) $380,426
Net investment income 115,927 15,580 6,753 138,260
Total revenues excluding realized
investment losses 175,088 337,043 6,555 518,686
Benefits and expenses
Insurance benefits 122,210 227,025 220 349,455
Expenses 13,831 89,721 (284) 103,268
Amortization of deferred
acquisition costs 13,906 15,204 - 29,110
Total benefits and expenses 149,947 331,950 (64) 481,833
Pretax operating income $ 25,141 $ 5,093 $6,619 $ 36,853
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1994
<S> <C> <C> <C> <C>
Revenues
Insurance and other $ 55,532 $298,252 $ 208 $353,992
Net investment income 114,935 15,079 5,927 135,941
Total revenues excluding realized
investment gains 170,467 313,331 6,135 489,933
Benefits and expenses
Insurance benefits 118,876 206,300 269 325,445
Expenses 14,291 89,302 21 103,614
Amortization of deferred
acquisition costs 12,767 14,305 - 27,072
Total benefits and expenses 145,934 309,907 290 456,131
Pretax operating income $ 24,533 $ 3,424 $5,845 $ 33,802
</TABLE>
Nine Months Ended September 30, 1995 Compared to Nine Months Ended
September 30, 1994
Total Revenues Excluding Realized Investment Gains and Losses. Total
revenues excluding realized investment gains and losses increased
$28.8 million, or 5.9%, from $489.9 million to $518.7 million,
primarily due to increased insurance and other revenues in the
specialty health insurance segment, discussed below.
Insurance Benefits. Insurance benefits increased $24.1 million, or
7.4%, from $325.4 million in 1994 to $349.5 million in 1995. The
increase was primarily due to higher benefits in the specialty
health insurance segment, discussed below.
Insurance and General Expenses. Insurance and general expenses of
$103.3 million in 1995 were down slightly from 1994 despite a 5.9%
increase in revenues, primarily due to cost containment efforts
throughout the Company.
Realized Investment Gains and Losses. Realized investment losses for
1995 were $0.9 million ($0.5 million gain after taxes) compared to
realized investment gains of $0.3 million ($2.5 million after taxes)
in 1994. The losses in 1995 were due primarily to sales of real
estate, fixed maturity, and mortgage loan investments offset in part
by gains on equity securities and other invested assets. The gains
in 1994 were due mainly to sales of equity securities and other
invested assets offset by losses on fixed maturity and real estate
investments.
Income Taxes. Income tax expense increased $1.9 million for the 1995
period primarily due to higher operating income combined with a tax
benefit of $2.2 million ($1.3 million for the third quarter)
recognized in 1994 on realized investment losses in 1994 and prior
periods. The Company's income taxes as a percent of pretax income
is lower than the statutory rate of 35% mainly due to income tax
benefits on realized investment gains and losses.
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 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 $175.1 million, compared to $170.5
million for 1994. The improvement was primarily attributable to
increases in life insurance in force and policy charges of $3.6
million as well as higher investment income at UPI.
Pretax operating income for the life insurance and annuities segment
increased $0.6 million, or 2.5%, to $25.1 million in 1995, from
$24.5 million in 1994, as a result of increased revenues mentioned
above, improved mortality experience, and lower expenses, offset 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 three 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. Improved interest rate spreads are anticipated for
this segment for the fourth quarter of 1995 and into 1996.
Deferred insurance costs associated with a portion of the closed
block of business in this segment at WNIC will be fully amortized in
1995. Annual amortization of this deferred asset has been
approximately $2 million per year.
Specialty Health Insurance. Revenues for the specialty health
insurance segment were $337.0 million in 1995 compared to $313.3
million in 1994, an increase of $23.7 million, or 7.6%. The
improvement was primarily due to increased premium revenue from
individual health insurance sales, fee income for administering a
reinsured block of individual health policies, and higher sales of
education disability products.
The specialty health insurance segment reported pretax operating
income of $5.1 million in 1995 compared to $3.4 million in 1994. In
addition to the revenue improvement discussed above, operating
income for the first three quarters of 1995 includes approximately
$2 million resulting from the elimination of group life claim
reserves on disabled insureds. The elimination of these reserves
resulted from an on-going, successful program to more effectively
manage these claims. The program will continue in the 1995 fourth
quarter. Offsetting these, in part, was an expected increase in the
segment's medical claims.
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 $46.6 million and
$45.9 million, respectively, in 1995, from $44.3 million and $41.8
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 third 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 both the level of major medical health
insurance policy lapses and the benefit ratio. During the first
three quarters of 1995, policy lapses of group major medical
insurance policies increased 38%, as measured by annualized premium
volume. Due to the continuing competitive environment for products
of this type, these trends may continue during the remainder of 1995
and into 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 individual health insurance products
in the first quarter of 1995. For the third quarter of 1995, sales
of new individual health insurance policies increased to 19,400
policies, from 7,200 policies in the third quarter of 1994. For the
nine months of 1995, total new policies written were 49,000,
compared to 21,000 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 $6.6 million compared to $5.8 million in
1994. Expenses for the segment decreased in 1995 due to a one-time
reduction of corporate liabilities of approximately $1 million in
the third quarter. This decrease in expenses was partially offset
by a change in the allocation of expenses to the two other segments
to more accurately report where the expenses are incurred.
Comparison of Quarter Ended September 30, 1995 to September 30, 1994
The nature and reasons for any significant variations between
quarters ended September 30, 1995 and September 30, 1994 are the
same as those discussed above for the respective nine-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 September 30, 1995, the Company had invested assets with a
carrying value of $2.5 billion. The Company's investment portfolio
consists of the following (dollars in millions):
<TABLE>
<CAPTION>
Percent of Total
Carrying Value Carrying Value
<S> <C> <C>
Fixed maturity investments:
United States government
obligations $ 73.7 3.0%
Obligations of states and
political subdivisions 82.3 3.3
Public utilities 149.0 6.0
Industrial and miscellaneous 921.8 37.5
Mortgage-backed securities 663.7 26.9
Other 89.8 3.6
Total fixed maturity investments 1,980.3 80.3
Mortgage loans on real estate 329.5 13.3
Real estate and joint ventures 35.2 1.4
Policy loans 55.7 2.3
Equity securities 2.0 0.1
Other long-term 27.4 1.1
Short-term 35.8 1.5
Total invested assets $2,465.9 100.0%
</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 nine 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 available for sale of
$42.2 million compared to an unrealized loss of $118.7 million at
December 31, 1994. The amortized cost of the Company's fixed
maturity portfolio was $1.9 billion at September 30, 1995, unchanged
from December 31, 1994.
The Company's policy for rating publicly traded fixed maturity
investments is to use the rating determined by Standard & Poor's
Company or Moody's Investor Service, Inc. 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
September 30, 1995, 6.0% of fixed maturity investments were rated
with comparable NAIC ratings, the majority of which is $44.1 million
of BBB-rated and $50.9 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
September 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 $ 827.1 41.8% 33.5%
AA/Aa 126.2 6.4 5.1
A 578.3 29.2 23.5
BBB/Baa 345.1 17.4 14.0
BB/Ba and lower 103.6 5.2 4.2
Total Fixed Maturities $1,980.3 100.0% 80.3%
</TABLE>
The carrying value of the Company's high-yield investments (rated BB
and lower) at September 30, 1995, was $103.6 million or 4.2% of the
Company's invested assets, up from $90.9 million at December 31,
1994, primarily due to declining interest rates and rating
downgrades. The Company does not anticipate any significant new
investments in high-yield fixed maturity investments.
At September 30, 1995, 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 September 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 $258.1 38.9% 10.5%
Sequential classes 5.5 0.8 0.2
Support classes 5.8 0.9 0.2
Accrual classes 7.6 1.1 0.3
Total agency CMOs 277.0 41.7 11.2
Non-agency CMOs
Planned amortization classes 14.6 2.2 0.6
Sequential classes 6.6 1.0 0.3
Accrual classes 1.7 0.3 0.1
Total non-agency CMOs 22.9 3.5 1.0
Total CMOs 299.9 45.2 12.2
Non-agency mortgage-backed
pass-through securities 3.3 0.5 0.1
Agency mortgage-backed
pass-through securities 360.5 54.3 14.6
Total mortgage-backed securities $663.7 100.0% 26.9%
</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. At September 30, 1995,
$20.1 million, or 87.5%, 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 11.1% of the Company's invested assets and
41.1% of its mortgage-backed securities at September 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 September 30, 1995, shown
by geographic distribution, year of maturity, and property type
follows (dollars in millions):
<TABLE>
<CAPTION>
Geographic Distribution
<S> <C> <C>
California $ 56.8 17.2%
Illinois 40.4 12.3
Indiana 40.3 12.2
Florida 31.5 9.6
Texas 28.5 8.7
North Carolina 17.6 5.3
Georgia 13.2 4.0
Wisconsin 10.3 3.1
Virginia 9.7 3.0
All other 81.2 24.6
Total $329.5 100.0%
</TABLE>
<TABLE>
<CAPTION>
Property Type
<S> <C> <C>
Retail $196.7 59.7%
Office 39.3 11.9
Indistrual 30.8 9.4
Medical 19.7 6.0
All other 43.0 13.0
Total $329.5 100.0%
</TABLE>
<TABLE>
<CAPTION>
Scheduled
Principal Balloon
Payments Payments Total
<S> <C> <C> <C>
Mortgage Loans by Year of Maturity:
1995 $ 2.1 $ 9.9 $ 12.0
1996 9.2 27.3 36.5
1997 9.8 27.0 36.8
1998 10.0 11.6 21.6
1999 10.5 9.9 20.4
2000 and thereafter 88.7 113.5 202.2
Total $130.3 $199.2 $329.5
</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 $329.5 million (net
of allowances of $7.3 million) at September 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 three quarters of 1995. Of
the outstanding loans at September 30, 1995, loans with a carrying
value of $0.3 million (net of allowances of $0.3 million) or 0.1%
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 $15.1
million at September 30, 1995, a decrease of $1.5 million from
December 31, 1994.
Real Estate
The Company's real estate investments totaled $35.2 million
(including real estate joint ventures) at September 30, 1995
compared to $27.0 million at December 31, 1994. The increase was
primarily due to foreclosures partially offset by sales. At
September 30, 1995, $12.2 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 nine months of 1995, the Company's
operating activities generated cash of $57.8 million compared to
$51.3 million in 1994. The increase was primarily due to improved
operations in 1995 augmented by the Company's 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 $19.2 million in the first nine months of 1995 compared to $34.4
million in 1994, primarily for the purchase of fixed maturity
investments in both periods.
Cash used by financing activities increased to $40.8 million in 1995
compared to $24.6 million in 1994. The increase was due to the
amount of policyholder withdrawals of interest-sensitive life
insurance and annuities exceeding deposits for this type of
business. As expected, deposits at UPI increased while deposits
from the closed block at WNIC decreased.
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 and the fair value of
the Company's policy liabilities decreases. 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.
Conversely, 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 5.4%.
The decline in interest rates since year-end 1994 has resulted in an
increase in the carrying value of the Company's fixed maturity
investments of $160.9 million.
Page 16 of 22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The Company held cash and short-term investments of $41.0 million at
September 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.
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 1996.
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.
By order dated October 25, 1995, the court dismissed plaintiffs'
complaint in its entirety. Plaintiffs have 30 days within which to
appeal.
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
September 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
November 7, 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>
Nine Months Ended Three Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Primary
Average Shares:
Average common shares outstanding 12,186 12,139 12,198 12,148
Assumed exercise of stock options 72 86 98 79
Total Average Shares 12,258 12,225 12,296 12,227
Net Income Available to Common Shareholders:
Income before Preferred Stock dividend
requirement $24,574 $24,582 $8,387 $9,127
Preferred Stock dividend requirement (271) (271) (90) (90)
Net Income Available to Common Shareholders $24,303 $24,311 $8,297 $9,037
Primary Earnings Per Share $1.98 $1.99 $0.67 $0.74
Fully Diluted
Average Shares:
Average common shares outstanding 12,186 12,139 12,198 12,148
Assumed conversion of preferred stock 271 271 271 271
Assumed exercise of stock options 128 86 128 86
Total Average Shares 12,585 12,496 12,597 12,505
Net Income Available to Common Shareholders $24,574 $24,582 $8,387 $9,127
Fully Diluted Earnings Per Share $1.95 $1.97 $0.67 $0.73
</TABLE>
Page 22 of 22
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 1,886,517
<DEBT-CARRYING-VALUE> 93,806
<DEBT-MARKET-VALUE> 97,310
<EQUITIES> 2,007
<MORTGAGE> 329,445
<REAL-ESTATE> 35,164
<TOTAL-INVEST> 2,465,863
<CASH> 5,183
<RECOVER-REINSURE> 52,289
<DEFERRED-ACQUISITION> 256,386
<TOTAL-ASSETS> 2,957,204
<POLICY-LOSSES> 2,067,850
<UNEARNED-PREMIUMS> 37,904
<POLICY-OTHER> 219,565
<POLICY-HOLDER-FUNDS> 39,624
<NOTES-PAYABLE> 1,445
<COMMON> 125,628<F1>
0
723
<OTHER-SE> 280,201
<TOTAL-LIABILITY-AND-EQUITY> 2,957,204
371,893
<INVESTMENT-INCOME> 138,260
<INVESTMENT-GAINS> (914)
<OTHER-INCOME> 8,533
<BENEFITS> 349,455
<UNDERWRITING-AMORTIZATION> 29,110
<UNDERWRITING-OTHER> 103,268
<INCOME-PRETAX> 35,939
<INCOME-TAX> 11,365
<INCOME-CONTINUING> 24,574
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,574
<EPS-PRIMARY> 1.98
<EPS-DILUTED> 1.95
<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 $47,704.
</FN>
</TABLE>
