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, 1995 Commission file number 1-7369
WASHINGTON NATIONAL CORPORATION
(Exact name of registrant as specified in charter)
DELAWARE 36-2663225
(State of incorporation) (I.R.S. Employer
Identification No.)
300 TOWER PARKWAY
LINCOLNSHIRE, ILLINOIS 60069-3665
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (847) 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 February 29, 1996.
Common Stock, $5 par value-$273,108,682
Convertible Preferred Stock, $5 par value-$6,571,894
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-12,237,113
(excluding 3,383,473 shares held in the Treasury) as of February 29, 1996
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1995 Annual Report to Shareholders and 1996 Proxy
Statement are incorporated by reference into Part I, II, III and IV.
<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). At December 31, 1995,
WNC and its affiliates had 1,011 full-time employees.
Since 1991, the Company has focused on the following businesses:
interest-sensitive individual life insurance and annuities
(underwritten by UPI) and specialty health insurance, which is
comprised of employee-paid disability insurance and other
specialty insurance products for educators, individual health
insurance (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 and stop-loss insurance for employers
with from 2 to 1,000 employees (all underwritten by WNIC).
Late in 1994, WNC began a broad review of its corporate strategy.
During its review, WNC is considering a number of alternatives to
increase the value of the Company for shareholders. WNC expects
to announce any update to its strategy in 1996.
GENERAL DESCRIPTION OF THE BUSINESS OF THE INDUSTRY SEGMENTS
WNC is an insurance holding company which, through WNIC and UPI,
provides life insurance, annuities, and specialty health
insurance products to individuals and groups in carefully
targeted markets. WNC has three segments: life insurance and
annuities; specialty health insurance; and corporate and other.
The corporate and other segment is comprised of the operations of
WNC that do not specifically support the other segments.
The registrant hereby incorporates by reference Note O of the
Notes to Consolidated Financial Statements on page 46 of the 1995
Annual Report to Shareholders, which provides further information
about WNC's three business segments. WNIC's group products
premiums which are included in the specialty health insurance
segment were 31%, 32%, and 35% of WNC's total revenues in 1995,
1994, and 1993, respectively. A component of specialty health
premiums is premiums for WNIC's disability insurance for
educators which accounted for 10% of WNC's revenues for each of
the years 1995, 1994, and 1993.
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's insurance products are primarily sold by salaried group
insurance representatives and by field marketing organizations.
The sector of WNIC's field force that distributes group health
insurance and educator disability products consists of 54 field
representatives, including 16 managers, all of whom are salaried
employees of WNIC. Their activities are supported by 40 other
field employees. WNIC markets individual health products through
brokers who are contracted through field marketing organizations
under standard brokerage contracts. At December 31, 1995, WNIC
had approximately 54,000 brokers contracted through 130 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. 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 administers a closed block of life insurance and
annuities that was originally underwritten by WNIC. Business of
this type is no longer sold by WNIC. Operating results of UPI and
the WNIC closed blocks are reported in the life insurance and
annuities segment.
Sales for UPI 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, but is dependent on product lines remaining
competitive with those being offered by other companies.
New Products of the Segments
In 1995, UPI introduced a new universal life insurance product
with a low death benefit designed for the middle income market
and a high benefit/low cost universal life insurance product. In
1996, UPI plans to introduce three new universal life insurance
products to complement its existing portfolio.
In 1995, WNIC introduced new voluntary dental insurance and life
insurance products for the education market, a small-group health
indemnity product, and new individual major medical and
disability products. New products anticipated in 1996 for the
specialty health insurance segment are new disability coverage
for spouses and accidental death and dismemberment coverage for
the education market and enhancements to existing products and
new managed care products for the Company's group and individual
major medical markets.
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.
The ability of an insurance company to compete successfully also
depends, in part, on its financial strength, operating
performance, and claims-paying ability as rated by A. M. Best and
other rating agencies. The insurance subsidiaries are each
currently rated "A- (Excellent)" by A. M. Best, based on their
1994 statutory financial results and operating performance. Many
of the insurance companies' competitors have A. M. Best ratings
of "A-" or lower, and WNC 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.
Each of the Company's businesses operates in highly competitive
markets, in many cases competing against companies with long-
established operating records and substantial financial
resources.
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Neither WNC nor any active 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 WNIC has a one-third interest.
WNIC also 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 12 percent of this building
and leases the remainder to nonaffiliated commercial enterprises.
At December 31, 1995, the outstanding balance on the mortgage
loan secured by this property was $1,309,000. WNIC also occupies
26 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 and WNIC, and the three individual trustees
of the Washington National Insurance Company Home Office Group
Insurance Plan (the Plan). The plaintiffs purported 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 was brought under the Employee Retirement Income
Security Act (ERISA) and alleged that WNC, WNIC and the trustees
took and threatened to take actions to modify, amend or terminate
the Plan in violation of the terms of the Plan. The alleged
violations included 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 sought 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 elected not to appeal and
the appeal period has lapsed.
Item 4. Submission of Matters to a Vote of Security Holders
a. The Registrant's Annual Meeting of Stockholders was held on
June 16, 1995.
b. Not applicable.
c. Stockholders voted on five nominees for director, four Class B
nominees, each of whom was elected for a three year term and
one Class C nominee, Lee M. Ellis, who was elected to serve
the remaining one year in a Class C term. The results of the
voting were as follows:
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
W. Francis Brennan 11,200,158 79,627
Lee A. Ellis 11,205,245 74,540
John R. Haire 11,194,306 85,479
George P. Kendall, Jr. 11,228,957 50,828
Rex Reade 11,197,675 82,110
</TABLE>
<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 58, joined WNIC as Executive Vice President and
Chief Information Officer in June, 1993. From 1990 to 1993, Mr.
Brown was President of Integrated Technology Consultants, 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 49, President of WNIC's Health Division as of
October, 1993, joined WNIC as President of the Individual Health
Division in October, 1989. Mr. Fuhrmann is a Director of UPI and
WNIC and serves on WNIC's Executive and Finance Committees.
Kenneth A. Grubb
Mr. Grubb, age 56, 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 53, 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 47, 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. Mr. Plato is a
Director of WNIC.
Thomas Pontarelli
Mr. Pontarelli, age 46, has been Executive Vice President of WNC
and WNIC and head of the Staff Division of WNIC since 1989. Mr.
Pontarelli began his career 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 49, 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
Common Stock market prices and dividends on page 48 of the 1995
Annual Report to Shareholders are incorporated herein by
reference.
Item 6. Selected Financial Data
Selected financial data on page 27 of the 1995 Annual Report to
Shareholders are incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and
Results of Operations on pages 15 through 26 of the 1995 Annual
Report to Shareholders is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data on pages 28
through 46 of the 1995 Annual Report to Shareholders are
incorporated herein by reference.
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 1996 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 1996 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 1996 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
1996 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 1996 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
included in the 1995 Annual Report to Shareholders are
incorporated by reference in Item 8:
Annual
Report
Page(s)
Consolidated Balance Sheet, December 31, 1995 and 1994 28
Consolidated Statement of Income,
Years Ended December 31, 1995, 1994, and 1993 29
Consolidated Statement of Cash Flows,
Years Ended December 31, 1995, 1994, and 1993 30
Consolidated Statement of Shareholders' Equity,
Years Ended December 31, 1995, 1994 and 1993 31
Capital Stock Activity,
Years Ended December 31, 1995, 1994, and 1993 31
Notes to Consolidated Financial Statements 32-46
Quarterly Information 48
(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 7, 1996 /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 7, 1996 /c/ Frederick R. Blume
Frederick R. Blume
Director
Date: March 7, 1996 /c/ Elaine R. Bond
Elaine R. Bond
Director
Date: March 7, 1996
Ronald L. Bornhuetter
Director
Date: March 7, 1996 /c/ W. Francis Brennan
W. Francis Brennan
Director
Date: March 7, 1996 /c/ Joan K. Cohen
Joan K. Cohen
Vice President, Controller and
Treasurer
Date: March 7, 1996 /c/ Lee A. Ellis
Lee A. Ellis
Director
Date: March 7, 1996 /c/ John R. Haire
John R. Haire
Director
Date: March 7, 1996 /c/ Stanley P. Hutchison
Stanley P. Hutchison
Director
Date: March 7, 1996 /c/ George P. Kendall, Jr.
George P. Kendall, Jr.
Director
Date: March 7, 1996 /c/ Frank L. Klapperich, Jr.
Frank L. Klapperich, Jr.
Director
Date: March 7, 1996 /c/ Lee M. Mitchell
Lee M. Mitchell
Director
Date: March 7, 1996 /c/ Robert W. Patin
Robert W. Patin
Chairman of the Board, President
and Chief Executive Officer and Director
Date: March 7, 1996 /c/ Rex Reade
Rex Reade
Director
Date: March 7, 1996 /c/ Thomas C. Scott
Thomas C. Scott
Executive Vice President and
Chief Financial Officer
<PAGE>
INDEX TO FINANCIAL SCHEDULES
WASHINGTON NATIONAL CORPORATION
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
December 31, 1995
<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 available for sale:
Bonds:
U.S. government and government
agencies and authorities $ 75,750 $ 80,544 $ 80,544
States, municipalities and political
subdivisions 78,824 82,420 82,420
Mortgage-backed securities 634,236 653,013 653,013
Foreign governments 27,950 31,645 31,645
Public utilities 147,206 155,126 155,126
All other corporate bonds 988,304 1,056,943 1,056,943
Redeemable preferred stocks 1,044 1,019 1,019
TOTAL FIXED MATURITIES AVAILABLE
FOR SALE 1,953,314 $2,060,710 2,060,710
Mortgage loans on real estate* 324,554 317,249
Real estate and joint ventures:
Investment properties* 39,082 23,578
Acquired in satisfaction of debt* 13,289 10,502
Policy loans 56,279 56,279
Other long-term* 27,358 27,744
Short-term 48,594 48,594
TOTAL INVESTMENTS $2,462,470 $2,544,656
<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, fair value
adjustment, and undistributed equity in joint ventures and venture capital investments.
</TABLE>
<TABLE>
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
WASHINGTON NATIONAL CORPORATION
(Parent Corporation Only)
<CAPTION>
BALANCE SHEET
December 31,
(000s omitted) 1995 1994
<S> <C> <C>
ASSETS
Cash $ 3,407 $ 3,548
Short-term investments 618 692
Equity in net assets of subsidiaries * 437,183 302,414
Amounts due from subsidiaries * 4,639 4,173
Real estate 162 162
Other 1,261 1,440
Total Assets $447,270 $312,429
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Dividends payable $ 3,389 $ 3,374
Short-term notes payable 3,100 -
Amounts due to subsidiaries * 1,128 1,090
Other 1,734 1,642
Total Liabilities 9,351 6,106
SHAREHOLDERS' EQUITY
Convertible preferred stock 718 723
Common stock 125,953 124,842
Retained earnings (including equity in retained earnings
of subsidiaries: 1995 - $311,159; 1994 - $286,555) 323,087 302,759
Net unrealized investment gains (losses)
of subsidiaries 49,798 (61,356)
Unfunded pension loss of subsidiaries (3,640) (2,648)
Cost of common treasury stock (57,997) (57,997)
Total Shareholders' Equity 437,919 306,323
Total Liabilities and Shareholders' Equity $447,270 $312,429
<FN>
* Eliminated in consolidation.
</TABLE>
<TABLE>
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Continued
WASHINGTON NATIONAL CORPORATION
(Parent Corporation Only)
<CAPTION>
STATEMENT OF INCOME
Year Ended December 31,
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
REVENUES
Dividends from subsidiary * $ 9,100 $ 5,975 $ 7,709
Management fee from subsidiary * 2,146 1,613 -
Interest 68 447 274
Realized investment losses (1) (105) -
Total Revenues 11,313 7,930 7,983
GENERAL AND ADMINISTRATIVE EXPENSES 2,013 1,743 1,768
INCOME BEFORE TAXES AND EQUITY IN UNDISTRIBUTED
NET INCOME OF SUBSIDIARIES 9,300 6,187 6,215
Income tax expense (benefit) 44 370 (237)
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARIES 9,256 5,817 6,452
Equity in undistributed net income of subsidiaries * 24,604 25,484 20,214
NET INCOME $33,860 $31,301 $26,666
<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) 1995 1994 1993
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 33,860 $ 31,301 $ 26,666
Adjustments to reconcile to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (24,604) (25,484) (20,214)
Net change in amount due from subsidiaries (428) (2,962) -
Other, net 532 742 900
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,360 3,597 7,352
INVESTING ACTIVITIES
Net change in short-term investments 74 7,207 (7,515)
Net change in investment properties - 45 -
Net change in indebtedness from subsidiaries - - (7,250)
Investment in subsidiary - - (25,382)
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 74 7,252 (40,147)
FINANCING ACTIVITIES
Dividends to shareholders (13,532) (13,480) (12,236)
Proceeds from sale of common stock 857 596 48,181
Change in short-term notes payable 3,100 - (2,600)
Return of deposit - 2,200 -
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (9,575) (10,684) 33,345
INCREASE (DECREASE) IN CASH (141) 165 550
Cash at beginning of year 3,548 3,383 2,833
CASH AT END OF YEAR $ 3,407 $ 3,548 $ 3,383
</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, 1995
Life insurance and annuities $193,126 $2,027,468 $ - $ 18,027 $ 75,529
Specialty health insurance 42,373 39,469 20,433 231,160 426,043
Corporate and other - - 16,949 9,823 -
TOTAL $235,499 $2,066,937 $ 37,382 $ 259,010 $ 501,572
Year ended December 31, 1994
Life insurance and annuities $256,979 $2,026,973 $ - $ 18,103 $ 71,784
Specialty health insurance 36,871 42,173 14,361 224,751 396,601
Corporate and other - - 18,859 9,598 1
TOTAL $293,850 $2,069,146 $ 33,220 $ 252,452 $ 468,386
Year ended December 31, 1993
Life insurance and annuities $219,780 $2,006,713 $ - $ 17,407 $ 64,915
Specialty health insurance 37,176 43,959 14,992 219,543 373,150
Corporate and other - - 19,657 9,200 757
TOTAL $256,956 $2,050,672 $ 34,649 $ 246,150 $ 438,822
</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
Investment Settlement Acquisition Expenses Premiums
Income Expenses Costs (1) Written
- ---------------------------------------------------------------------------------------------------------
(000s omitted)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Life insurance and annuities $154,386 $162,377 $19,550 $ 18,226 $ -
Specialty health insurance 20,459 303,674 21,402 119,376 397,769
Corporate and other 9,370 234 - 2,015 -
TOTAL $184,215 $466,285 $40,952 $139,617 $397,769
Year ended December 31, 1994
Life insurance and annuities $154,414 $159,661 $18,202 $ 18,692 $ -
Specialty health insurance 20,003 275,878 19,851 119,358 361,251
Corporate and other 7,590 263 - 378 -
TOTAL $182,007 $435,802 $38,053 $138,428 $361,251
Year ended December 31, 1993
Life insurance and annuities $158,981 $160,341 $19,831 $ 20,650 $ -
Specialty health insurance 21,148 258,926 18,112 106,024 336,756
Corporate and other 3,606 1,091 - 4,838 -
TOTAL $183,735 $420,358 $37,943 $131,512 $336,756
- ---------------------------------------------------------------------------------------------------------
<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, 1995
Life insurance in force $21,619,386 $3,672,146 $ - $17,947,240 -
Insurance premiums and policy
charges:
Life insurance and annuities $ 86,854 $ 11,325 $ - $ 75,529 -
Specialty health insurance 377,017 4,188 53,214 426,043 12 %
Corporate and other 41,758 41,758 - - -
TOTAL $ 505,629 $ 57,271 $53,214 $ 501,572 11 %
Year ended December 31, 1994
Life insurance in force $21,034,835 $3,081,697 $ - $17,953,138 -
Insurance premiums and policy
charges:
Life insurance and annuities $ 82,967 $ 11,183 $ - $ 71,784 -
Specialty health insurance 344,786 4,825 56,640 396,601 14 %
Corporate and other 45,690 45,689 - 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 $ - $19,044,637 -
Insurance premiums and policy
charges:
Life insurance and annuities $ 75,899 $ 10,983 $ 1 $ 64,917 -
Specialty 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 %
- ----------------------------------------------------------------------------------------------------------
</TABLE>
EXHIBIT INDEX
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
EXHIBITS FILED PURSUANT TO ITEM 14(a)(3)
Page Number
3.1 Certificate of Incorporation, as amended, on Form 10-K,
for the year ended December 31, 1987 *
3.2 By-laws, as amended, on Form 10-K, for the year ended
December 31, 1986 *
4 Rights agreement between WNC and The First National Bank
of Chicago, on Form 8-K dated December 23, 1986 *
10.1 Employment agreements with R. W. Patin, T. Pontarelli,
T. C. Scott, and C. L. Fuhrmann, on Form 10-K,
for the year ended December 31, 1991 ** *
10.2 Employment agreements with K. A. Grubb and J. N. Plato,
on Form 10-K, for the year ended December 31, 1992 ** *
10.3 Employment agreement with W. G. Brown on Form 10-Q, for
the period ended September 30, 1993 ** *
10.4 Form of Indemnification Agreement between Registrant and
each Director and Executive Officer of Registrant on
Form 10-Q, for the period ended June 30, 1993** *
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
13 Pages 15 through 46 and page 48 of WNC's Annual Report
to Shareholders for the year ended December 31, 1995 *
21 Subsidiaries of WNC see below
23 Consent of Ernst & Young LLP, 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,
1995 1994 1993
----------------------------------------
<S> <C> <C> <C>
PRIMARY
Average common shares outstanding 12,194 12,144 10,643
Assumed exercise of stock options 56 81 112
TOTAL 12,250 12,225 10,755
Income before cumulative effect of change
in accounting principle and dividend
requirement on Preferred Stock $33,860 $31,301 $28,216
Dividend requirement on Preferred Stock (361) (362) (362)
Income before cumulative effect of change
in accounting principle 33,499 30,939 27,854
Cumulative effect of change in accounting
principle - - (1,550)
NET INCOME APPLICABLE TO COMMON
STOCK AND EQUIVALENTS $33,499 $30,939 $26,304
Income per share before cumulative effect $2.73 $2.53 $2.59
Cumulative effect of change in accounting
principle per share - - (.14)
NET INCOME PER SHARE $2.73 $2.53 $2.45
FULLY DILUTED
Average common shares outstanding 12,194 12,144 10,643
Assumed conversion of Preferred Stock 269 271 271
Assumed exercise of stock options 176 81 112
TOTAL 12,639 12,496 11,026
Income before cumulative effect of change
in accounting principle $33,860 $31,301 $28,216
Cumulative effect of change in accounting
principle - - (1,550)
NET INCOME APPLICABLE TO COMMON
STOCK AND EQUIVALENTS $33,860 $31,301 $26,666
Income per share before cumulative effect $2.68 $2.50 $2.56
Cumulative effect of change in accounting
principle per share - - (.14)
NET INCOME PER SHARE $2.68 $2.50 $2.42
</TABLE>
EXHIBIT 13
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Washington National Corporation (WNC or the Company) is an
insurance holding company that is engaged primarily in
marketing and underwriting life insurance, annuities, and
specialty health 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.
Late in 1994, the Company began a broad review of its
corporate strategy. During its review, the Company is
considering a number of alternatives to increase the value
of the Company for shareholders. The Company expects to
announce any update to its strategy in 1996.
<TABLE>
Analysis of Net Income
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Pretax operating income
(loss) (a)
Life insurance and
annuities $33,974 $33,177 $27,637
Specialty health insurance 9,541 5,895 11,500
Corporate and other 7,230 7,180 (560)
Total pretax operating income 50,745 46,252 38,577
Income taxes on operations 17,531 16,097 13,520
Net operating income 33,214 30,155 25,057
Other components of
income (net of taxes)
Net realized investment
gains (b) 646 1,146 2,840
Gains from benefit plan
changes _ _ 319
Cumulative effect of
change in accounting
principle (c) _ _ (1,550)
Net income $33,860 $31,301 $26,666
<FN>
(a) Pretax income (loss) before net realized investment
gains, gains from benefit plan changes, and cumulative
effect of accounting change.
(b) 1995, 1994, and 1993 include tax benefits of $2,063,
$2,752, and $3,194, respectively.
(c) Employers' Accounting for Postemployment Benefits.
</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
1995
<S>
Revenues <C> <C> <C> <C>
Insurance premiums and policy charges $ 75,529 $426,043 $ - $501,572
Net investment income 154,386 20,459 9,370 184,215
Other revenues 4,212 7,491 109 11,812
Total revenues excluding realized investment losses 234,127 453,993 9,479 697,599
Benefits and expenses
Insurance benefits paid or provided 162,377 303,674 234 466,285
Insurance and general expenses 18,226 119,376 2,015 139,617
Amortization of deferred acquisition costs 19,550 21,402 - 40,952
Total benefits and expenses 200,153 444,452 2,249 646,854
Pretax operating income $ 33,974 $ 9,541 $7,230 $ 50,745
</TABLE>
<TABLE>
<CAPTION>
1994
<S>
Revenues <C> <C> <C> <C>
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 paid or provided 159,661 275,878 263 435,802
Insurance and general 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>
Revenues <C> <C> <C> <C>
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 paid or provided 160,341 258,926 1,091 420,358
Insurance and general 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>
Year Ended December 31, 1995 Compared to
Year Ended December 31, 1994
Insurance Premiums and Policy Charges. Insurance premiums
and policy charges increased $33.2 million, or 7.1%, from
$468.4 million in 1994 to $501.6 million in 1995. The
improvement was primarily due to an increase of $29.4
million in premiums in the specialty health insurance
segment resulting from a higher amount of individual health
insurance and education disability products in force. In
addition, insurance premiums and policy charges in the life
insurance and annuities segment improved by $3.7 million due
to an increase in life insurance in force and higher policy
charges. See "Segment Information," below.
Net Investment Income. Net investment income was $184.2
million in 1995, essentially unchanged from 1994. While the
amortized cost of the Company's investment portfolio
increased $32.6 million during 1995, the portfolio yield
(based on amortized cost) declined from 7.7% in 1994 to 7.6%
due to lower market interest rates.
Realized Investment Losses. Realized investment losses
before taxes for 1995 were $1.4 million compared to $1.6
million in 1994. In 1995, realized losses of $0.5 million on
fixed maturity investments, $0.2 million on equity
securities, and $2.2 million on real estate and mortgage
loans were partially offset by gains on other invested
assets of $1.5 million. 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. The Company's income taxes included tax benefits of
$2.1 million and $2.8 million in 1995 and 1994,
respectively, related to realized investment losses.
Insurance Benefits Paid or Provided. Insurance benefits paid
or provided increased $30.5 million, or 7.0%, from $435.8
million in 1994 to $466.3 million in 1995. The increase was
mainly due to a higher amount of individual health insurance
in force which also increased premium revenues.
Insurance and General Expenses. Insurance and general
expenses were essentially flat, in spite of the increase in
premium revenues, resulting in a decline in the Company's
expense ratio (expenses as a percentage of premiums and net
investment income) from 21.3% in 1994 to 20.4% in 1995. The
stable amount of expenses was due, in part, to cost
containment efforts at the Company.
Amortization of Deferred Acquisition Costs. Amortization of
deferred acquisition costs increased $2.9 million, or 7.6%,
from $38.1 million in 1994 to $41.0 million in 1995. The
change was primarily due to improved sales in 1994 and 1995.
Income Taxes. Income taxes on operations increased $1.4
million to $17.5 million in 1995 compared to $16.1 million
in 1994 primarily as a result of the improvement in
operating income.
Net Income. Net income for 1995 was $33.9 million, an
increase of 8.2% as compared to $31.3 million in 1994. The
improvement resulted from increased earnings from
operations.
Segment Information
The Company has two operating business segments. The life
insurance and annuities segment consists of universal life
and other interest-sensitive life insurance and annuity
products marketed to individuals and small businesses by UPI
and a block of similar business at WNIC, which no longer
sells new business of this type. The second operating
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 (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 and stop-loss insurance 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 $234.1
million, compared to $229.7 million for 1994. The
improvement was attributable to higher insurance premiums
and policy charges of $3.7 million primarily due to an
increase in life insurance in force and policy charges at
UPI. UPI's increase in insurance premiums and policy charges
was offset in part by the expected decline in the closed
block of business at WNIC. The decline at WNIC is expected
to recur in 1996 since WNIC is not selling new policies in
this segment.
Pretax operating income for the life insurance and annuities
segment increased $0.8 million, or 2.4%, to $34.0 million in
1995 from $33.2 million in 1994, primarily as a result of
the revenue increase discussed above. UPI, the growth
portion of this segment, recorded earnings for the year of
$22.1 million, an increase of 17% over 1994. This increase
was partially offset by a decline in earnings of $2.5
million in WNIC's closed block due to the continuing
decrease in its size and narrower 1995 interest spreads.
Profitability for this segment is highly dependent on market
interest rates. The direction and volatility of the movement
of market rates affects the interest rate spread (the
difference between the rate earned on investments and the
rate credited to policyholders) on the segment's business.
Late in 1994 and early in 1995, credited interest rates were
increased on a substantial portion of the WNIC block of
business in response to the 1994 increase in market interest
rates, reducing spreads on this portion of the business in
1995. Market interest rates have subsequently declined and,
as a result, the credited rates on this block have declined
as well. The lower credited rates are expected to increase
interest rate spreads on the business in 1996.
Amortization of deferred acquisition costs increased in 1995
for the segment due to sales in 1994 and 1995 of interest-
sensitive life insurance and annuity products. In 1996,
amortization of deferred acquisition costs on a portion of
the WNIC closed block will be reduced by approximately $2
million.
The rate of amortization of deferred acquisition costs
associated with this segment is affected by policy lapses,
which in turn are affected by, among other factors,
competitive conditions in the market for similar products,
and rates of return on alternative policyholder investments.
The Company monitors lapsation levels and adjusts the rate
of amortization, if necessary, at least once per year.
Specialty Health Insurance. Revenues for the specialty
health insurance segment were $454.0 million in 1995
compared to $421.0 million in 1994, an increase of $33.0
million, or 7.8%. The improvement was due to increased
premium revenue from a higher amount of individual health
insurance and education disability business in force and fee
income (included in other income) for administering a
reinsured block of individual health insurance policies. The
increase in premium revenue from individual health insurance
was due in part to average rate increases of approximately
7% in 1995 on the direct portion of this business and an
increase in direct policies in force of 18%. Rate increases
on the employee benefits portion averaged 5% in 1995.
Sales of new individual health insurance policies increased
140% from 28,100 in 1994 to 67,200 in 1995. The increase was
due to sales of a more competitive product and an increase
in agents selling WNIC policies, primarily from the
reinsurance transactions described below. In 1995, the new
agents produced approximately 33% of WNIC's individual
health insurance sales.
The specialty health insurance segment reported pretax
operating income of $9.5 million in 1995 compared to $5.9
million in 1994. In addition to the revenue improvement
discussed above, 1995 operating income included
approximately $2.6 million resulting from the elimination of
group life insurance policy liabilities on certain disabled
insureds. The elimination of these liabilities resulted from
a program completed in 1995 to more effectively manage life
insurance claims related to disability. Partially offsetting
this improvement to income was an increase in the benefit
ratio (benefits as a percentage of premiums) for both
individual and group major medical health insurance. The
increase in the benefit ratio for individual health
insurance was primarily due to higher claims experience in
New Jersey (see discussion below).
Effective in 1993, the Company entered into a reinsurance
agreement that provides that the Company reinsures 100% of a
block of individual major medical business. In 1994, the
Company entered into another reinsurance agreement 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 $59.4 million and
$60.2 million, respectively, in 1995, compared to $61.0
million and $55.5 million, respectively, in 1994. The loss
from these reinsurance transactions in 1995 was primarily
due to high claims experience on policies written in New
Jersey, where the state has implemented certain adverse
restrictions on health insurers. The Company has implemented
rate actions in 1995 and early 1996 in response to the poor
experience that are expected to significantly reduce future
losses.
The Company expects the market for its products in the
specialty health insurance segment to remain competitive in
1996. Sales of individual health insurance policies for 1996
may be lower in total than in 1995, as a result, in part, of
the Company's decision to raise rates significantly in New
Jersey. In 1995, the segment introduced a new small group
product which was sold in only two states. Sales of this
product are expected to increase as it is introduced in
additional states.
Corporate and Other. For both 1995 and 1994, the corporate
and other segment had pretax operating income of $7.2
million. In 1995, revenues increased primarily due to higher
investment income on the Company's surplus funds. This
improvement was offset by an increase in expenses primarily
due to a change in the allocation of certain expenses to the
other segments.
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 - Specialty 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
mainly 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 a new accounting standard described above.
Segment Information
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, a reduction in operating expenses at UPI, and
the improvement in revenues.
Specialty Health Insurance. Revenues for the specialty
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 specialty 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.
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.
Investment Portfolio
At December 31, 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 Carrying
Value Value
<S> <C> <C>
Fixed maturity investments
United States government
obligations $ 80.5 3.2%
Obligations of states and
political subdivisions 82.4 3.2
Public utilities 155.1 6.1
Industrial and miscellaneous 1,058.0 41.6
Mortgage-backed securities 653.0 25.7
Other 31.7 1.2
Total fixed maturity investments 2,060.7 81.0
Mortgage loans on real estate 317.2 12.5
Real estate and joint ventures 34.1 1.3
Policy loans 56.3 2.2
Other long-term 27.8 1.1
Short-term 48.6 1.9
Total invested assets $2,544.7 100.0%
</TABLE>
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.
Fixed Maturity Investments
The Company's fixed maturity investments are carried at
fair value and totaled $2.1 billion, or 81% of the Company's
invested assets at December 31, 1995. At December 31, 1995,
the Company reclassified its entire portfolio of "held to
maturity" securities to "available for sale". Due to the
decline in market interest rates during 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 $107.4 million,
compared to an unrealized loss of $118.7 million at December
31, 1994. The amortized cost of the Company's fixed maturity
portfolio increased $72.0 million to $1.95 billion at
December 31, 1995.
The composition of the Company's fixed maturity portfolio at
December 31, 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 $ 844.6 41.0% 33.2%
AA/Aa 128.7 6.2 5.1
A 617.2 30.0 24.3
BBB/Baa 372.7 18.1 14.6
BB/Ba and lower 97.5 4.7 3.8
Total fixed maturities $2,060.7 100.0% 81.0%
</TABLE>
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, 1995, 5.2% of fixed maturity
investments were rated with comparable NAIC ratings, the
majority of which is $40.8 million of investments rated BBB
and $41.1 million of investments rated BB and lower.
The carrying value of the Company's high-yield investments
(rated BB and lower) at December 31, 1995, was $97.5 million
or 3.8% of the Company's invested assets, up from $90.9
million at December 31, 1994, due to declining interest
rates and rating downgrades. The Company does not anticipate
any significant new investments in high-yield fixed maturity
investments.
The Company's fixed maturity portfolio at December 31, 1995,
includes $653.0 million of mortgage-backed securities,
detailed as 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 amortization classes $202.9 31.1% 8.0%
Target amortization classes 10.5 1.6 0.4
Sequential classes 5.4 0.8 0.2
Support classes 6.0 0.9 0.2
Accrual classes 7.2 1.1 0.3
Total agency CMOs 232.0 35.5 9.1
Non-agency planned amortization class CMOs 26.5 4.1 1.1
Total CMOs 258.5 39.6 10.2
Non-agency mortgage-backed pass-through securities 3.2 0.5 0.1
Agency mortgage-backed pass-through securities 391.3 59.9 15.4
Total mortgage-backed securities $653.0 100.0% 25.7%
</TABLE>
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 carry an
implicit AAA credit rating.
The Company uses collateralized mortgage obligations (CMOs)
to earn a higher yield than alternative corporate or
government investments of similar quality. At December 31,
1995, 10.2% of the Company's invested assets were in CMOs
and 15.5% of the Company's invested assets were in mortgage-
backed pass-through securities. Both of these investment
types are subject to mortgage prepayment risk. Prepayment
risk arises when, 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.
To mitigate prepayment risk, the Company primarily invests
in CMO classes that have, at time of investment, the most
stable prepayment structure. Such CMO classes are termed
"planned amortization class" (PAC) which comprised 88.7% of
the Company's CMO portfolio at December 31, 1995. The next
most stable class of CMOs is "target amortization class"
(TAC) which comprised 4.1% of the Company's CMO portfolio at
December 31, 1995. PACs and TACs are designed to protect
against prepayment risk and may therefore have more
predictable cash flows than pass-through mortgage-backed
securities.
As market interest rates have declined over the past several
years, prepayments on certain PAC and TAC investments have
increased resulting in a loss of some prepayment protection.
Approximately two-thirds of the Company's PAC and TAC
investments at December 31, 1995, have lost some of this
protection. However, the Company believes the yield earned
on these issues continues to adequately compensate for the
reduced prepayment protection.
At December 31, 1995, all 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.
Mortgage Loans
The Company had investments in mortgage loans of $317.2
million (net of allowances of $7.3 million) at December 31,
1995 compared to $357.6 million at December 31, 1994.
Investments in mortgage loans declined primarily due to
prepayments and amortization of the mortgage loan portfolio
during 1995. Of the outstanding loans at December 31, 1995,
loans with a carrying value of $3.1 million, or less than
1%, were delinquent 60 days or more as to interest or
principal, far better than the recent industry average.
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 occurred and which are considered current investments,
had a carrying value of $15.1 million at December 31, 1995,
a decrease of $1.5 million from December 31, 1994.
The Company's mortgage loan portfolio at December 31, 1995,
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, 1995
<CAPTION>
Amount
<S> <C>
California $56,337
Illinois 39,223
Indiana 35,185
Florida 31,210
Texas 26,091
North Carolina 17,555
Virgina 14,860
Georgia 12,989
</TABLE>
<TABLE>
Mortgage Loans by Year of Maturity
<CAPTION>
Scheduled
Principal Balloon
Payments Payments Total
<S> <C> <C> <C>
1996 $ 8.9 $ 32.0 $ 40.9
1997 9.4 27.0 36.4
1998 9.6 11.8 21.4
1999 10.2 10.0 20.2
2000 10.9 11.5 22.4
2001 and thereafter 74.3 101.6 175.9
Total $123.3 $193.9 $317.2
</TABLE>
<TABLE>
Property Type Distribution of Mortgage Loans
At December 31, 1995
<S> <C>
Retail 60.5%
Office 10.8
Industrial 9.6
Medical 5.9
Other 13.2
Total 100.0%
</TABLE>
In 1994, the Company decided that in order to provide
better matching between the characteristics of its assets
and liabilities it would 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 (including real
estate joint ventures) totaled $34.1 million at December 31,
1995, compared to $27.0 million at December 31, 1994. The
increase was primarily due to foreclosures, partially offset
by sales. At December 31, 1995, $10.5 million of the real
estate investments were acquired through mortgage loan
foreclosure, compared to $4.7 million at December 31, 1994.
The Company does not anticipate any new acquisitions of real
estate other than through foreclosure of mortgage loans.
Liquidity and Capital Resources
Cash Flows. During 1995, the Company's operating activities
generated cash of $89.4 million compared to $84.3 million in
1994. The increase in cash provided by operations in 1995
resulted from increased sales of the Company's insurance
products and an increase in fee income for administering a
closed block of individual health insurance policies, offset
in part by increased benefits.
Cash used for financing activities increased from $39.1
million in 1994 to $53.7 million in 1995, primarily due to
annuity policyholder withdrawals outpacing deposits. In
1995, UPI's deposits exceeded withdrawals by $58.8 million.
For the WNIC closed block, withdrawals exceeded deposits by
$102.3 million.
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, while in periods of declining interest rates, the
fair value of the Company's fixed maturity investments
increases. 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%.
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 $56.9 million at December 31, 1995.
Management believes the balance of cash and short-term
investments plus cash inflow from premium revenues,
investment income, and investment maturities is more than
sufficient to meet the requirements of the Company and its
subsidiaries.
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 that can be withdrawn
from WNIC to the greater of the previous year's statutory
earnings or 10% of statutory capital and surplus.
Health Care Reform
No federal health care reform legislation was passed in
1995. However, a pending insurance reform bill, generally
referred to as the Kassebaum-Kennedy bill, is designed,
among other objectives, to improve insurance availability.
If this bill were to become law, insurers would be limited
in their ability to refuse coverage for pre-existing medical
conditions. Also, the bill would bar insurers from dropping
coverage when an insured or family member becomes ill.
Lastly, for certain individuals who have quit their job or
who have been laid off, insurers would be required to offer
individual insurance coverage. This bill is expected to be
considered by the Senate in the first half of 1996.
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 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. It is not
possible at this time to predict the nature of health care
reform or how soon its measures will be adopted and
implemented or the impact on the Company's operating results
or financial position.
Approximately three-fourths of the Company's specialty
health insurance premiums might be affected by health care
reform. Of this amount, approximately 39% (or 18% of the
Company's total revenues) were written in the states of
Texas, Illinois, New Jersey, and Louisiana. Because of this
concentration, health care reform measures in those states
could have an adverse impact on the Company's revenues and
net income.
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 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.
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 1995 results.
Inflation and Changing Prices
Inflation and changing prices are anticipated by the
Company in the pricing of its insurance products. WNIC's
health insurance pricing assumptions take into account the
increased cost of medical care, including both the medical
care inflation rate and the increase in policyholder
utilization of medical services. Pricing assumptions in 1995
regarding these items increased from 1994. For the first
quarter of 1996, these assumptions are not expected to
change materially from 1995.
The effect of inflation on operating expense has not been
significant.
<TABLE>
Five Year Summary
<CAPTION>
(000s omitted, except per share amounts)
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Total revenues $ 696,182 $ 656,929 $ 628,527 $ 570,442 $ 578,044
Operating income (a)
Pretax operating income 50,745 46,252 38,577 26,975 20,370
Net operating income 33,214 30,155 25,057 18,808 17,381
Income (loss) before cumulative effect
of changes in accounting principles 33,860 31,301 28,216 16,852 (2,964)
Net income (loss) 33,860 31,301 26,666 (5,967) (2,964)
Average common shares
and equivalents outstanding (b) 12,250 12,225 10,755 9,989 9,980
Per share
Net operating income $ 2.68 $ 2.44 $ 2.30 $ 1.84 $ 1.71
Income (loss) before cumulative
effect of changes in
accounting principles 2.73 2.53 2.59 1.65 (.33)
Net income (loss) 2.73 2.53 2.45 (.63) (.33)
Common dividends declared 1.08 1.08 1.08 1.08 1.08
Book value 34.54 24.51 27.92 27.93 29.32
Book value excluding net unrealized
investment gains and losses 30.61 29.44 27.92 27.92 29.64
Total assets 3,012,898 2,810,568 2,854,419 2,712,783 2,554,999
Mortgage and long-term notes payable 1,309 1,907 2,434 13,870 14,042
Shareholders' equity 437,919 306,323 348,945 288,040 300,062
Shareholders' equity excluding net
unrealized investment gains (losses) 388,121 367,679 348,988 287,929 303,310
Life insurance in force (in millions) 21,619 21,035 22,215 25,454 24,227
<FN>
(a) Income before realized investment 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 2.1 million newly issued shares in the third
quarter of 1993.
</TABLE>
<TABLE>
Consolidated Balance Sheet
(000s omitted)
<CAPTION>
December 31, 1995 1994
<S> <C> <C>
Assets Investments
Fixed maturities-
Available for sale at fair value
(cost: $1,953,314; $1,768,181) $2,060,710 $1,649,453
Held to maturity at cost (fair value: $112,368) - 113,116
Mortgage loans on real estate 317,249 357,641
Real estate and joint ventures 34,080 26,997
Policy loans 56,279 54,368
Other long-term 27,744 30,672
Short-term 48,594 52,387
Total Investments 2,544,656 2,284,634
Cash 8,331 7,272
Deferred acquisition costs 235,499 293,850
Reinsurance recoverables and prepaid premiums 49,502 54,842
Accrued investment income 32,652 33,084
Insurance premiums in course of collection 14,718 14,857
Property and equipment 18,259 22,988
Goodwill 18,385 19,092
Separate Account 51,005 42,178
Other 39,891 37,771
Total Assets $3,012,898 $2,810,568
Liabilities Policy liabilities $2,363,329 $2,354,818
General expenses and other liabilities 125,194 121,685
Mortgage payable 1,309 1,907
Short-term notes payable 3,100 -
Income taxes (current: $944; $316) 31,042 (16,343)
Separate Account 51,005 42,178
Total Liabilities 2,574,979 2,504,245
Shareholders' Convertible preferred stock 718 723
Equity Common stock 125,953 124,842
Retained earnings 323,087 302,759
Net unrealized investment gains (losses) 49,798 (61,356)
Unfunded pension loss (3,640) (2,648)
Cost of common treasury stock (57,997) (57,997)
Total Shareholders' Equity 437,919 306,323
Total Liabilities and Shareholders' Equity $3,012,898 $2,810,568
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
Consolidated Statement of Income
(000s omitted, except per share amounts)
<CAPTION>
Year Ended December 31, 1995 1994 1993
<S> <C> <C> <C>
Revenues Insurance premiums and policy charges $501,572 $468,386 $438,822
Net investment income 184,215 182,007 183,735
Realized investment losses (1,417) (1,606) (354)
Other 11,812 8,142 6,324
Total Revenues 696,182 656,929 628,527
Benefits and Insurance benefits paid or provided 466,285 435,802 420,358
Expenses Insurance and general expenses 139,617 138,428 131,512
Amortization of deferred acquisition costs 40,952 38,053 37,943
Total Benefits and Expenses 646,854 612,283 589,813
Earnings Income before income taxes and cumulative
effect of change in accounting principle 49,328 44,646 38,714
Income Taxes 15,468 13,345 10,498
Income before cumulative effect of change
in accounting principle 33,860 31,301 28,216
Cumulative effect of change in accounting
principle-net of tax - - (1,550)
Net Income $ 33,860 $ 31,301 $ 26,666
Share Data Primary Earnings Per Share
Income before cumulative effect $ 2.73 $ 2.53 $ 2.59
Cumulative effect of change in accounting
principle-net of tax - - (.14)
Net Income Per Share $ 2.73 $ 2.53 $ 2.45
Average Shares and Equivalents Outstanding 12,250 12,225 10,755
Fully Diluted Earnings Per Share
Income before cumulative effect $ 2.68 $ 2.50 $ 2.56
Cumulative effect of change in accounting
principle - - (.14)
Net Income Per Share $ 2.68 $ 2.50 $ 2.42
Average Shares and Equivalents Outstanding 12,639 12,496 11,026
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
Consolidated Statement of Cash Flows
(000s omitted)
<CAPTION>
Year Ended December 31, 1995 1994 1993
<S> <C> <C> <C>
Operating Net income $ 33,860 $ 31,301 $ 26,666
Activities Adjustments to reconcile to net cash
provided by operating activities
Increase in policy liabilities 52,048 48,998 80,440
Deferred acquisition costs (11,561) (3,894) (15,282)
Change in reinsurance receivable 4,058 (11,387) 4,587
Other, net 11,039 19,240 8,270
Net Cash Provided by Operating Activities 89,444 84,258 104,681
Investing Proceeds from sales
Activities Fixed maturities - available for sale 308,663 113,375 -
Fixed maturities - held to maturity 1,950 - 261,313
Mortgage loans, real estate, and other 4,744 18,449 55,354
Proceeds from maturities and redemptions
Fixed maturities - available for sale 96,188 155,684 -
Fixed maturities - held to maturity 19,417 17,313 266,217
Mortgage loans, real estate, and other 46,828 58,666 73,763
Cost of purchases
Fixed maturities - available for sale (507,084) (399,418) -
Fixed maturities - held to maturity - (5,000) (726,358)
Mortgage loans, real estate, and other (6,495) (26,258) (40,661)
Increase in policy loans (1,911) (2,083) (784)
Purchases of property and equipment (768) (2,008) (7,824)
Net change in short-term investments 3,793 22,915 (11,866)
Net Cash Used by Investing Activities (34,675) (48,365) (130,846)
Financing Policyholder account deposits 150,469 143,627 142,871
Activities Policyholder account withdrawals (194,006) (169,278) (124,795)
Dividends to shareholders (13,532) (13,480) (12,236)
Change in short-term notes payable 3,100 - (17,350)
Proceeds from sale of common stock 857 596 48,181
Repayment of long-term borrowings (598) (527) (9,536)
Net Cash Provided (Used) by Financing
Activities (53,710) (39,062) 27,135
Change in Increase (Decrease) in Cash 1,059 (3,169) 970
Cash Cash at Beginning of Year 7,272 10,441 9,471
Cash at End of Year $ 8,331 $ 7,272 $ 10,441
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
Consolidated Statement of Shareholders' Equity
(000s omitted)
<CAPTION>
Year Ended December 31, 1995 1994 1993
<S> <C> <C> <C>
Convertible Balance at beginning of year $ 723 $ 723 $ 723
Preferred Stock Conversion to common stock (5) - -
Balance at end of year 718 723 723
Common Stock Balance at beginning of year 124,842 124,145 75,960
and Additional Sale on open market - - 47,263
Paid-In Capital Other issuances 1,111 697 922
Balance at end of year 125,953 124,842 124,145
Retained Earnings Balance at beginning of year 302,759 284,938 270,508
Net income 33,860 31,301 26,666
Common stock dividends (13,171) (13,118) (11,874)
Preferred stock dividends (361) (362) (362)
Balance at end of year 323,087 302,759 284,938
Net Unrealized Balance at beginning of year (61,356) (43) 111
Investment Gains Effect of change in accounting principle - 41,644 -
(Losses) Change during year 111,154 (102,957) (154)
Balance at end of year 49,798 (61,356) (43)
Unfunded Pension Balance at beginning of year (2,648) (2,821) (1,269)
Loss Change during year (992) 173 (1,552)
Balance at end of year (3,640) (2,648) (2,821)
Cost of Common
Treasury Stock Balance at beginning and end of year (57,997) (57,997) (57,997)
Total Shareholders' Equity at End of Year $437,919 $306,323 $348,945
</TABLE>
<TABLE>
Capital Stock Activity
(000s omitted)
<CAPTION>
Year Ended December 31, 1995 1994 1993
<S> <C> <C> <C>
Convertible Shares at beginning of year 145 145 145
Preferred Stock Conversion to common stock (1) - -
Shares at end of year 144 145 145
Common Stock Shares at beginning of year 15,546 15,501 13,295
Sale on open market - - 2,133
Other issuances 60 45 73
Shares at end of year 15,606 15,546 15,501
Common Treasury
Stock Shares at beginning and end of year (3,383) (3,383) (3,383)
Common Shares Outstanding at End of Year 12,223 12,163 12,118
<FN>
See notes to consolidated financial statements.
</TABLE>
Notes To Consolidated Financial Statements
Note A
Nature of Operations
Washington National Corporation and its subsidiaries (WNC
or the Company) are engaged primarily in marketing and
underwriting specialty health insurance and life insurance
and annuity products for individuals and groups throughout
the United States. Based on assets and income, the life
insurance and annuity products account for more than two-
thirds of WNC's business. The specialty health insurance
products account for the remainder.
The markets for WNC's life insurance and annuities products
include individuals and small businesses seeking universal
life insurance and other interest-sensitive life insurance
and annuity products.
The markets for the Company's specialty health insurance
products include: individuals without employer-sponsored
insurance in need of major medical coverage; educators and
other school district employees purchasing disability
insurance and other specialty insurance products; and
employers with from 2 to 1,000 employees seeking employer-
sponsored health insurance and associated life insurance and
stop-loss insurance.
Note B
Significant Accounting Policies and Practices
Basis of Presentation
The accompanying consolidated financial statements have
been prepared in accordance with generally accepted
accounting principles (GAAP) and include the accounts and
operations of the Company. Significant intercompany
transactions have been eliminated. The preparation of
financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the
amounts reported. Actual results could differ from these
estimates. Certain amounts applicable to prior years'
financial statements have been reclassified to conform to
the 1995 presentation.
Investments
Fixed Maturities. Fixed maturities include bonds,
redeemable preferred stocks, and mortgage-backed securities
with contractual maturities greater than one year. Fixed
maturities classified as "available for sale" are carried at
fair value and fixed maturities classified as "held to
maturity" are carried at amortized cost. The carrying value
of the Company's fixed maturity portfolio is inversely
impacted by increases and decreases in market interest rates
which may change significantly in short time periods.
The amortized cost of fixed maturities is adjusted for
amortization of premiums and accretion of discounts. This
adjustment is included in investment income. The difference
between amortized cost for "available for sale" securities
and their fair value, net of applicable deferred income
taxes and certain deferred acquisition costs, is reflected
as a component of shareholders' equity as an unrealized
investment gain or loss. If a security's fair value has a
decline that is considered to be other-than-temporary, the
carrying value is reduced to its net realizable value. Such
reductions in value are included in realized investment
gains and losses.
As a result of newly issued guidance from the Financial
Accounting Standards Board (FASB), the Company transferred
its $84,146,000 of "held to maturity" fixed maturities to
"available for sale" at December 31, 1995, resulting in a
$5,337,000 increase to unrealized investment gains. The
Company no longer holds any fixed maturities as "held to
maturity."
Mortgage Loans on Real Estate. Mortgage loans on real
estate are carried at unpaid principal balances, net of
allowance for losses. The allowance is based on estimated
uncollectible amounts considering past credit loss
experience and current economic conditions and is subject to
fluctuation based on actual experience. Loans considered
permanently impaired are written down to their net
realizable value and the write-down is recognized as a
realized investment loss.
Real Estate and Joint Ventures. 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 estimated fair value less expected costs
of disposal. Joint ventures are accounted for principally
using the equity method.
Policy Loans. Loans to policyholders are carried at the
unpaid principal balance.
Other Long-term Investments. Other long-term investments
consist of investments in Washington National Insurance
Company's (WNIC) Separate Account, equity securities
reported at fair value, and venture capital investments that
are accounted for under the equity method.
Short-term Investments. Short-term investments include
commercial paper, variable demand notes, and money market
funds and are carried at amortized cost.
Net Investment Income. Net investment income consists
primarily of interest and dividends less expenses. Interest
on fixed maturities and performing mortgage loans, adjusted
for any amortization of discount or premium, is recorded as
income when earned and includes adjustments resulting from
prepayments or expected changes in prepayments on mortgage-
backed securities. Dividends are recorded as income on ex-
dividend dates. Income on impaired loans and real estate is
recorded principally on a cash basis. Income on investments
accounted for under the equity method is recognized as it
becomes earned. Investment expenses are accrued as incurred.
Realized Investment Gains and Losses. Realized investment
gains and losses are recognized using the specific
identification method and include write-downs on investments
having an other-than-temporary decline in value.
Depreciation
Depreciation for real estate investments and property and
equipment is based on the estimated useful life of the asset
primarily using the straight-line method. Information on
depreciation follows:
<TABLE>
<CAPTION>
Accumulated Depreciation
(000s omitted) 1995 1994
<S> <C> <C>
Property and equipment $ 3,571 $ 2,434
Real estate investments 12,635 25,086
</TABLE>
<TABLE>
<CAPTION>
Depreciation Expense
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Property and equipment $ 1,137 $ 1,333 $ 2,768
Real estate investments 1,320 1,453 1,480
</TABLE>
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 on a pro rata basis over the
policy period. 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 (DAC)
Certain costs associated with acquiring new business are
deferred and amortized to income over time. Amortization of
costs for traditional life insurance and health products is
over the premium paying period and is based on assumptions
consistent with those used in determining policy benefit
reserves. Actual results may differ significantly from these
assumptions. For certain interest-sensitive products, costs
are amortized over the estimated life of those products in
proportion to the present value of estimated gross profits
from surrender charges and investment, mortality, and
expense margins. Changes in the amount or timing of
estimated gross profits will result in adjustments in the
cumulative amortization of these costs.
To the extent that unrealized investment gains or losses on
fixed maturities would result in an adjustment of DAC had
those investment gains or losses been realized, the related
unamortized DAC is adjusted and included in shareholders'
equity.
The unamortized cost of purchased insurance in force is
included in DAC and amortized in proportion to the present
value of estimated gross profits over an estimated twenty-
one year remaining life 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) 1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of year $45,282 $41,902 $47,039
Interest on unamortized
balance 2,915 3,136 3,436
Amortization (5,635) (6,026) (8,573)
Effect of unrealized
investment (gains) losses (13,432) 6,270 -
Balance at end of year $29,130 $45,282 $41,902
</TABLE>
The estimated percentage of the December 31, 1995 balance
before the effect of unrealized investment gains and losses
to be amortized over the next five years follows:
<TABLE>
<S> <C>
1996 14.6%
1997 14.1%
1998 13.0%
1999 12.8%
2000 12.6%
</TABLE>
Policy Liabilities
Liabilities for future policy benefits for traditional life
insurance products are provided on the net level premium
method. The Company bases reserve calculations on the
present value of future net premiums, benefits, and
expenses, using 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% at December 31, 1995.
Withdrawal assumptions are based principally on Company
experience and vary by issue age, type of coverage, and
duration.
Liabilities for future policy benefits of certain interest-
sensitive products are based on policy account balances
prior to applicable surrender charges, deferred policy
initiation fees that are recognized as income over the term
of the policies, and a provision for the return of insurance
charges. Policy benefits and claims that are charged to
expense include benefit claims in excess of related policy
accounts incurred in the period, interest credited to policy
balances, and a provision for the return of the cost of
insurance charges. Credited interest rates for these
products ranged from 3.0% to 7.3% at December 31, 1995.
Liabilities for policy and contract claims are determined
using statistical analyses and case-basis evaluations and
represent estimates of the expected cost of incurred claims.
Revisions to these estimates are recognized in the
Consolidated Statement of Income in the period when the
revisions are made.
Goodwill
The amount paid to acquire a company over the fair value of
its net assets is reported as goodwill and is amortized on a
straight-line basis, generally over a thirty-five year
period. The value of goodwill is considered appropriate
based on the prospect of continued growth and the long-term
nature of the insurance policies sold. Accumulated
amortization of goodwill was $6,744,000 and $6,038,000 at
December 31, 1995 and 1994, 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. The assets are
legally segregated from the Company's assets and are not
subject to any claims that arise from any other business of
WNC. Investment income and realized investment gains and
losses accrue directly to the contract holders and are
excluded from the accompanying Consolidated Statement of
Income.
Income Taxes
The Company files a consolidated life/nonlife federal
income tax return. The Company establishes deferred tax
provisions for temporary differences between the financial
reporting basis and the tax basis of assets and liabilities
at the enacted tax rate expected to be in effect when the
temporary differences reverse. A valuation allowance for
deferred tax assets is provided for the portion of the asset
not expected to be realized.
Reinsurance
In the normal course of business, the insurance companies
of WNC minimize their exposure to loss by reinsuring a
portion of their life insurance, annuity, and health
insurance risks with other insurance companies. The
Company's policy on claim exposure for life insurance and
annuity products is to retain a maximum of $300,000 of life
insurance exposure on any one individual ($400,000 with
accidental death coverage). Paid-claim exposure for group
insurance products is limited to $750,000 per claim for
major medical coverage and $250,000 per claim for individual
stop-loss in any one calendar year. The Company retains a
maximum of 50% of all long-term disability and long-term
care claims. WNC'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.
The Company cedes reinsurance to entities with A.M. Best
ratings of "A" or better or to entities required to maintain
assets in an independent trust fund whose fair value is
sufficient to discharge the obligations of the reinsurer.
Reinsurance contracts do not discharge the Company from its
obligations to the policyholders.
Benefit amounts paid directly by the Company for insurance
claims covered under ceded reinsurance 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.
Reinsurance costs related to short-duration contracts are
amortized over the remaining contract period in proportion
to the protection provided.
Substantially all of the reinsurance assumed by the Company
as of December 31, 1995, relates to individual health
insurance. This reinsurance is on a 50% or 100% coinsurance
basis and is accounted for in a manner similar to the direct
business.
Note C
New Accounting Standards
Effective January 1, 1995, the Company adopted Statement of
Financial Accounting Standards (SFAS) 114 and SFAS 118,
issued by FASB, relating to the impairment of mortgage
loans. The statement requires that loans be identified as
impaired when it is probable that a creditor will be unable
to collect all amounts contractually due. The impairment is
measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate, at
the loan's observable market price, or at the fair value of
the collateral if the loan is collateral dependent. The
adoption of this statement did not have an effect on the
Company at January 1, 1995, as the Company had no loans that
met the criteria for impairment.
In December 1995, the Company adopted SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." This statement establishes
guidance for recognizing and measuring impairment losses for
long-lived assets, certain identifiable intangibles, and
goodwill related to those assets. The statement applies to
those assets to be held and used and those to be disposed.
This statement did not have a material effect on the
Company.
In November 1995, the FASB issued SFAS 123, "Accounting for
Stock-Based Compensation," which the Company will adopt in
1996. This statement establishes accounting and reporting
standards for stock-based employee compensation plans. The
statement defines a fair value method of accounting that
would result in an income statement charge or permits
entities to continue using the current accounting treatment.
The Company has elected to continue using the current
accounting treatment and will disclose the required pro
forma results of the new provisions in the 1996 financial
statements.
Effective January 1, 1994, the Company adopted SFAS 115,
"Accounting for Certain Investments in Debt and Equity
Securities." The effect of the adoption resulted in an
increase to shareholders' equity of $41,644,000.
Effective January 1, 1993, the Company adopted SFAS 112,
"Employers' Accounting for Postemployment Benefits"
resulting in a one-time cumulative effect adjustment to net
income of $1,550,000, net of taxes of $834,000.
Note D
Policy Liabilities
Detail of WNC's policy liabilities at December 31 follows:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994
<S> <C> <C>
Future policy benefits
Annuities $1,228,947 $1,278,252
Life 837,990 790,894
Policy and contract claims 219,755 213,572
Unearned premiums 37,382 33,220
Other 39,255 38,880
Total policy liabilities $2,363,329 $2,354,818
</TABLE>
Activity in the liability for short duration unpaid claims
and short duration claim adjustment expense (included in
policy and contract claims and component of general expenses
and other liabilities) follows:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Balance at January 1 $215,351 $210,348 $202,322
Less: reinsurance
recoverables 11,741 11,547 11,956
Net balance at January 1 203,610 198,801 190,366
Incurred relating to:
Current year 313,291 291,209 260,144
Prior years (19,562) (31,296) (26,638)
Total incurred 293,729 259,913 233,506
Paid relating to:
Current year 203,924 179,762 151,989
Prior years 83,905 75,342 73,082
Total paid 287,829 255,104 225,071
Net balance at December 31 209,510 203,610 198,801
Add: reinsurance
recoverables 10,248 11,741 11,547
Balance at December 31 $219,758 $215,351 $210,348
</TABLE>
Note E
Investments
Fixed Maturities
A comparison of amortized cost to fair value of fixed
maturity investments by category at December 31 follows:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized --------------------- Fair
(000s omitted) Cost Gains Losses Value
1995
----------------------------------------------------
<S> <C> <C> <C> <C>
United States government obligations $ 75,750 $ 4,860 $ 66 $ 80,544
Obligations of states and political subdivisions 78,824 3,685 89 82,420
Public utilities 147,206 8,216 296 155,126
Industrial and miscellaneous 989,348 71,124 2,510 1,057,962
Mortgage-backed securities 634,236 19,404 627 653,013
Other 27,950 3,695 - 31,645
Total fixed maturities $1,953,314 $110,984 $ 3,588 $2,060,710
</TABLE>
<TABLE>
<CAPTION>
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>
During 1995, the Company sold one "held to maturity"
investment with an amortized cost of $2,000,000. The sale,
which resulted in a realized investment loss of $50,000, was
made as a result of significant deterioration of the bond
issuer's creditworthiness.
The amortized cost and fair value of fixed maturities at
December 31, 1995, by contractual maturity, follow. Expected
maturities differ from contractual maturities as borrowers
may have the right to call or prepay obligations with or
without penalties.
<TABLE>
<CAPTION>
Amortized Fair
(000s omitted) Cost Value
<S> <C> <C>
Due in 1996 $ 8,144 $ 8,186
Due in 1997 - 2000 201,403 210,561
Due in 2001 - 2005 460,056 486,563
Due after 2005 649,475 702,387
Mortgage-backed securities 634,236 653,013
Total fixed maturities $1,953,314 $2,060,710
</TABLE>
Mortgage Loans on Real Estate
Information on mortgage loans on real estate at
December 31, 1995 is as follows:
<TABLE>
<CAPTION>
(000s omitted)
<S> <C>
Impaired loans
With allowance (net of $135 allowance) $ 2,762
Without allowance 7,640
Total impaired loans 10,402
Non-impaired loans (net of $7,171 allowance) 306,847
Total mortgage loans $317,249
</TABLE>
In 1995, the Company's average investment in impaired
mortgage loans was $5,812,000. Income recognized and
received on these loans was $732,000 and $714,000,
respectively.
A rollforward of the allowance for mortgage loan losses
follows:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Balance at January 1 $ 8,032 $12,031 $11,618
Additions 400 1,501 3,475
Deductions (1,126) (5,500) (3,062)
Balance at December 31 $ 7,306 $ 8,032 $12,031
</TABLE>
Non-Cash Investing Activities
During 1995, 1994, and 1993, non-cash investing activities
totaled $10,707,000, $4,009,000, and $4,869,000,
respectively, and consisted of real estate acquired through
foreclosure of fixed maturities and mortgage loans on real
estate, purchase money mortgages, and venture capital
distributions of common stock.
Realized Investment Gains and Losses
Details of realized investment gains (losses) for the years
ended December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Fixed maturities
Gross gains $ 7,257 $ 2,026 $ 20,650
Gross losses (7,740) (3,760) (12,532)
Total fixed maturities (483) (1,734) 8,118
Mortgage loans on real estate (52) (82) (377)
Real estate and other (882) 210 (8,095)
Realized investment losses $(1,417) $(1,606) $ (354)
</TABLE>
Investment Income
Major sources of net investment income for the years ended
December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Fixed maturities $151,944 $147,396 $141,809
Mortgage loans on real estate 30,587 34,982 42,030
Real estate and other 7,133 8,225 12,936
Policy loans 3,643 3,459 3,460
Short-term 3,245 2,765 2,398
Gross investment income 196,552 196,827 202,633
Investment expenses 12,337 14,820 18,898
Net investment income $184,215 $182,007 $183,735
</TABLE>
Investment expenses consist primarily of real estate
expenses.
As of December 31, 1995, the carrying value of investments
that produced no income for the previous twelve month period
was $5,412,000 or less than 1% of invested assets.
Unrealized Investment Gains and Losses
The following table details the net unrealized investment
gains and losses included in shareholders' equity:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994
<S> <C> <C>
Gross unrealized gains $112,849 $ 9,974
Gross unrealized losses (4,316) (128,873)
DAC (37,700) 33,000
Deferred income taxes (21,035) 24,543
Net unrealized investment
gains (losses) $ 49,798 $ (61,356)
</TABLE>
Fixed maturities had an increase (decrease) in unrealized
investment gains of $226,872,000, ($201,808,000), and
$25,438,000 in 1995, 1994, and 1993, respectively.
Note F
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 WNC's 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 1995, 1994, and 1993 was
$3,251,000, $3,006,000 and $3,760,000, 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
both December 31, 1995 and 1994, the unfunded liability for
the supplemental retirement plan was not material.
The Company has defined benefit retirement plans that cover
certain grandfathered employees and agents. Benefits are
based principally on years of service and compensation. The
funding policies are to contribute annually at least the
minimum amounts required by the IRC. The plans have been
amended to terminate the accrual of future benefits which
resulted in a curtailment gain. Contributions are intended
to provide benefits attributed to service to date.
Plan assets are invested principally in mutual funds,
bonds, and stocks. The fair value of WNC Common and
Preferred Stock held by one of the retirement plans was
$12,408,000 and $8,580,000, at December 31, 1995 and 1994,
respectively. Dividends of $492,000 were received on the WNC
Common and Preferred Stock in both 1995 and 1994. No WNC
shares were purchased or sold during 1995 or 1994.
The components of net periodic pension income for the
defined benefit plans for the years ended December 31
follow:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Interest cost on projected
benefit obligations $ 1,734 $ 1,824 $ 1,923
Actual return on plan assets (3,419) (419) (2,035)
Net amortization and deferral 1,118 (2,054) (642)
Curtailment gain - - (491)
Service cost for benefits earned - - 99
Net periodic pension
income $ (567) $ (649) $(1,146)
</TABLE>
The funded status and the amounts reported in WNC's
Consolidated Balance Sheet as part of other liabilities for
the defined benefit plans at December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994
<S> <C> <C>
Actuarial present value of
accumulated benefit obligations:
Vested $(26,501) $(23,759)
Non-vested (78) (118)
Accumulated benefit obligations $(26,579) $(23,877)
Projected benefit obligations $(26,579) $(23,877)
Plan assets at fair value 25,482 22,794
Projected benefit obligations in
excess of plan assets $ (1,097) $ (1,083)
Comprised of:
Prepaid pension cost $ 3,190 $ 1,526
Unrecognized actuarial net loss (8,207) (7,835)
Unrecognized transition asset 3,920 5,226
Total $ (1,097) $ (1,083)
</TABLE>
The actuarial assumptions used to measure the projected
benefit obligation include:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Weighted-average discount
rate 7.0% 7.5% 6.7%
Weighted-average expected
rate of return on plan assets 7.6% 7.6% 7.5%
</TABLE>
The transition asset is being amortized over a fourteen-
year period. Actuarial gains and losses are deferred and
then amortized over a fourteen-year period when the
cumulative deferred amounts exceed certain limits.
GAAP requires employers to recognize a minimum liability at
least equal to the unfunded accumulated benefit obligation.
WNC's prepaid pension cost was less than the unfunded
accumulated benefit obligation requiring a pretax adjustment
of $4,287,000 and $2,769,000 at December 31, 1995 and 1994,
respectively, with an offset to shareholders' equity.
Postretirement Benefit Plan
In addition to WNC's retirement programs, the Company
provides a contributory group life and medical insurance
plan to certain eligible retirees and certain grandfathered
active employees who have met a combination of age and
service requirements. The plan was amended in 1992 to limit
the future eligibility of benefits for active employees. The
plan pays a stated percentage of most medical expenses,
reduced for deductibles and payments made by government
programs or other group coverage. Certain active employees
who are not included in the grandfathered group are eligible
for $10,000 of life insurance benefits under the plan after
reaching a combination of age and service requirements.
In 1993, the Company established a Voluntary Employees'
Beneficiary Association (VEBA) trust under section 501(c)(9)
of the IRC for the purpose of paying out postretirement
benefits to plan participants. The VEBA is funded annually,
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 are invested in two-
year U.S. Treasury notes and corporate demand notes.
The components of net periodic postretirement benefit
expense for the years ended December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Interest cost $1,904 $1,994 $2,061
Service cost 49 56 61
Return on plan assets (224) (28) -
Net amortization and deferral 84 227 (14)
Net periodic postretirement
benefit expense $1,813 $2,249 $2,108
</TABLE>
The funded status of the plan and the amount recognized in
WNC's Consolidated Balance Sheet as part of other
liabilities at December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994
<S> <C> <C>
Accumulated postretirement
benefit obligation
Retirees, dependents, and disabled
participants $(27,578) $(25,022)
Fully eligible active plan
participants (997) (846)
Other active plan participants (1,048) (661)
Total accumulated postretirement
benefit obligation (29,623) (26,529)
Fair value of plan assets 4,516 2,726
Accumulated postretirement benefit
obligation in excess of plan assets $(25,107) $(23,803)
Comprised of
Accrued postretirement benefit
expense $(23,074) $(24,392)
Unrecognized net gain (loss) (2,215) 393
Unrecognized prior service cost 182 196
Accumulated postretirement benefit
obligation in excess of plan assets $(25,107) $(23,803)
</TABLE>
The actuarial assumptions used to measure the
postretirement benefit obligation include:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Weighted-average discount rate 7.0% 7.5%
Weighted-average after-tax expected
rate of return on plan assets 4.6% 4.6%
Estimated income tax rate 34% 34%
</TABLE>
The health care trend rate used in 1995 was 11.5% for pre-
age 65 and 9.7% for post-age 65 participants, graded evenly
to 5% in 14 years. The health care cost trend rate in 1994
was 12% for pre-age 65 and 10% for post-age 65 participants,
graded evenly to 5% in 15 years. The health care cost trend
rate assumption has a significant effect on the amounts
reported. Increasing the trend rate by 1% per year would
increase the accumulated postretirement benefit obligation
by $2,713,000 at December 31, 1995 and the aggregate of the
service and interest cost components of net periodic
postretirement benefit expense by $171,000 in 1995.
Note G
Reinsurance
The effect of reinsurance on insurance premiums and policy
charges earned for short duration and long duration
contracts for the years ended December 31 follows:
<TABLE>
<CAPTION>
Short Long
(000s omitted) Duration Duration Total
--------------------------------
1995
--------------------------------
<S> <C> <C> <C>
Direct premiums and policy charges $302,151 $203,478 $505,629
Premiums assumed 51,463 1,751 53,214
Premiums ceded (3,671) (53,600) (57,271)
Net premiums and policy charges $349,943 $151,629 $501,572
</TABLE>
<TABLE>
<CAPTION>
1994
--------------------------------
<S> <C> <C> <C>
Direct premiums and policy charges $272,400 $201,043 $473,443
Premiums assumed 55,044 1,596 56,640
Premiums ceded (4,670) (57,027) (61,697)
Net premiums and policy charges $322,774 $145,612 $468,386
</TABLE>
<TABLE>
<CAPTION>
1993
--------------------------------
<S> <C> <C> <C>
Direct premiums and policy charges $274,828 $195,789 $470,617
Premiums assumed 23,210 7,812 31,022
Premiums ceded (5,047) (57,770) (62,817)
Net premiums and policy charges $292,991 $145,831 $438,822
</TABLE>
The Company's written premiums for short duration contracts
do not vary materially from premiums earned.
Reinsurance benefits ceded were $20,862,000, $22,850,000,
and $22,685,000, in 1995, 1994, and 1993, 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, 1995, 52% of WNC's total reinsurance
recoverables were due from Combined Insurance Company of
America, and 14% were due from American Founders Life
Insurance Company. In addition, 18% of reinsurance
recoverables were due from UNUM Life Insurance Company in
the normal course of business.
For 1995, 31% and 66% of reinsurance premiums assumed were
from Harvest Life Insurance Company and National Casualty
Company, respectively. These reinsurance agreements provide
that the Company reinsure blocks of individual major medical
business issued by National Casualty Company and Harvest
Life Insurance Company on a 50% and 100% coinsurance basis,
respectively. The Company also administers 100% of the
National Casualty Company business.
The Company uses yearly renewable term reinsurance at an
insurance subsidiary to maintain statutory profitability and
other statutory financial requirements while sustaining
growth. The cumulative contribution to statutory basis
capital and surplus from this reinsurance was $8,202,000 and
$9,044,000 at December 31, 1995 and 1994, respectively.
These transactions do not materially impact the Company's
GAAP financial statements.
Note H
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 table summarizes the changes in the
shares of Common Stock of WNC under the plan:
<TABLE>
<CAPTION>
Issuable Under
Available Outstanding Options
For Grant -----------------------------
During 1995 1995 1994 1993
<S> <C> <C> <C> <C>
January 1 balance 541,094 777,649 685,244 594,659
Stock options
Granted (174,500) 174,500 167,500 216,500
Exercised (31,832) (22,367) (53,321)
Forfeited 31,224 (31,224) (52,728) (72,594)
Restricted stock
Issued (6,050)
Cancelled 1,775
December 31 balance 393,543 889,093 777,649 685,244
Options exercisable 511,102 420,975 346,032
</TABLE>
Prices for stock options granted from 1993 to 1995 ranged
from $18.38 to $26.57 per share. Prices for stock options
exercised from 1993 to 1995 ranged from $10.21 to $26.57 per
share. Exercise prices on stock options outstanding ranged
from $10.21 to $27.29 per share.
Note I
Capital Stock
Convertible Preferred Stock
WNC has 10,000,000 authorized shares of $5 par value
Preferred Stock with 144,000 shares outstanding that are
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. 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. 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, 1995,
13,820,000 shares of WNC's Common Stock were reserved for
future issuance: 12,223,000 shares for future exercises of
Purchase Rights; 269,000 shares for conversion of
outstanding Convertible Preferred Stock; 1,282,000 shares
for exercise of options to purchase Common Stock and for use
in connection with the restricted stock grants; and 46,000
shares for issuance of Common Stock in connection with the
dividend reinvestment plan. The annual dividend paid on WNC
Common Stock in 1995, 1994, and 1993 was $1.08 per share.
Earnings Per Share
The number of shares used in computing earnings per share
follows:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Primary
Average common shares outstanding 12,194 12,144 10,643
Assumed exercise of options 56 81 112
Total average shares 12,250 12,225 10,755
Fully Diluted
Average common shares outstanding 12,194 12,144 10,643
Assumed conversion of preferred stock 269 271 271
Assumed exercise of options 176 81 112
Total average shares 12,639 12,496 11,026
</TABLE>
Note J
Income Taxes
Components of WNC's deferred tax liabilities and assets at
December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994
<S> <C> <C>
Deferred tax liabilities:
DAC $ 75,789 $ 97,322
Unrealized investment gains 33,768 _
Joint ventures and venture
capital investments 2,150 1,025
Accrued bond discount 1,630 1,312
Other 1,739 2,791
Total deferred tax liabilities 115,076 102,450
Deferred tax assets:
Policy liability adjustments 65,576 63,349
Liabilities for employee benefits 14,004 13,858
Realized investment losses 5,826 11,557
Unrealized investment losses _ 41,452
Other 4,768 4,599
Total deferred tax assets 90,174 134,815
Valuation allowance (5,196) (15,706)
Deferred tax assets, net of
valuation allowance 84,978 119,109
Net deferred tax (assets) liabilities $ 30,098 $(16,659)
</TABLE>
Other than capital gain or loss items, 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.
At December 31, 1995, WNC had capital loss carryforwards
for tax return purposes of $10,959,000, of which $1,498,000
will expire in 1996 and the remainder in 2000. For financial
reporting purposes, a valuation allowance 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 decreased by
$10,510,000 in 1995 and increased by $803,000 in 1994.
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 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 to 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 approximately $20,000,000. As of December
31, 1995, the combined "policyholders' surplus account" of
WNC's life insurance subsidiaries approximates $57,000,000.
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, 1995, this shareholders' surplus
was $270,000,000.
The following reconciles the difference between actual tax
expense and the amounts obtained by applying the statutory
federal income tax rate of 35%:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Income tax at statutory rate
applied to income before
income taxes and cumulative
effect of change in
accounting principle $17,265 $15,626 $13,550
Tax expense not recognized
on certain GAAP-basis
capital gains or losses (1,485) (2,179) (2,870)
Investment income not taxed (487) (732) (1,035)
Amortization of purchase
accounting adjustments 266 523 247
Other (91) 107 606
Income tax expense $15,468 $13,345 $10,498
Comprised of:
Current expense $13,597 $ 9,432 $ 4,328
Deferred expense 1,871 3,913 6,170
Income tax expense $15,468 $13,345 $10,498
</TABLE>
Income taxes paid by WNC were $12,969,000, $8,120,000, and
$4,100,000 in 1995, 1994, and 1993, respectively. WNC has a
nonlife net operating loss carryforward for tax purposes of
$273,000 that will begin to expire in 2008.
The Internal Revenue Service is currently examining the
Company's tax returns for 1992 through 1994.
Note K
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, 1995 follow:
<TABLE>
<CAPTION>
(000s omitted)
<S> <C>
1996 $ 7,828
1997 7,102
1998 5,364
1999 4,430
2000 3,974
Thereafter 44,569
Total minimum lease commitments $73,267
</TABLE>
Rental expenses were $7,161,000, $6,189,000, and
$6,900,000, in 1995, 1994, and 1993, respectively.
Financial Guarantees
The Company has entered into certain financial guarantees.
A financial guarantee is a conditional commitment to
guarantee the payment of an obligation by an unrelated
entity to a third party and has off-balance sheet credit
risk. The exposure to credit risk is represented by the
amount the Company would be required to pay under certain
circumstances.
At December 31, 1995, the Company had three financial
guarantees totaling $13,733,000, as well as a construction
completion guarantee. At December 31, 1994 the Company had
two financial guarantees totaling $15,206,000.
The Company feels it has adequate reserves for related
potential losses.
Litigation
WNC has 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 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.
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 $1,934,000,
$2,850,000, and $2,500,000 in state guaranty fund
assessments in 1995, 1994, and 1993, respectively, and had
accrued liabilities of $3,478,000 and $3,128,000 for
estimated future assessments at December 31, 1995 and 1994,
respectively.
The Company's accounting policy with regard to payments to
state guaranty funds is to treat as assets any such payments
in those states where current law allows an offset against
future premium taxes. At December 31, 1995 and 1994, other
assets included $5,226,000 and $5,464,000, 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. Under certain
circumstances, including changes in state laws and a change
in the Company's product mix, such amounts might become
unrecoverable.
Health Care Reform
The Company's products are subject to governmental
regulation at both the federal and state level. Currently,
there are numerous health care reform proposals at both of
these levels, some of which, if enacted, could have a
significant impact on the Company's revenues and income. See
discussion of health care reform in the unaudited
Management's Discussion and Analysis of Financial Condition
and Results of Operations for further information.
Note L
Mortgage Payable and Credit Arrangements
Mortgage Payable
Mortgage payable consisted of $1,309,000 and $1,907,000 at
December 31, 1995 and 1994, respectively, for a mortgage on
investment real estate with an interest rate of 6.5% that
matures in July, 1997. Payments of $480,000 and $922,000
will be required in 1996, and 1997, respectively. The
property, with a carrying value of $14,007,000, is pledged
as collateral.
Interest paid on borrowings by WNC was $110,000, $406,000,
and $1,673,000, in 1995, 1994, and 1993, respectively.
Credit Arrangements
WNC has a line of credit with one bank available for short-
term borrowings amounting to $10,000,000, of which
$6,900,000 was unused at December 31, 1995. The interest
rate on this single borrowing was 6.9%. The line of credit
arrangement is renewable annually, but credit can be
withdrawn at the bank's option.
In addition, WNC has five letters of credit with varying
terms and conditions totaling $2,821,000. As of December 31,
1995, all of the letters of credit were unused.
Note M
Statutory Financial Information
The insurance companies of WNC prepare statutory financial
statements in accordance with accounting principles and
practices prescribed or permitted by the insurance
department of the applicable state of domicile. Prescribed
statutory accounting practices (SAP) 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' publications.
Permitted practices include practices not prescribed, but
allowed, by the domiciliary state insurance department. The
prescribed and permitted statutory accounting practices
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.
SAP to GAAP Reconciliation
A reconciliation of SAP capital and surplus to GAAP
shareholders' equity at December 31 follows:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994
<S> <C> <C>
SAP capital and surplus $ 231,930 $ 221,270
DAC 235,499 293,850
Adjustments to policy liabilities (115,937) (119,521)
Unrealized gain (loss) on
fixed maturities 107,396 (118,728)
Asset valuation and interest
maintenance reserves 34,700 29,005
Deferred income taxes (30,098) 16,659
Postretirement and pension liabilities (26,969) (28,313)
Goodwill 18,385 19,092
Other, net (16,987) (6,991)
GAAP shareholders' equity $ 437,919 $ 306,323
</TABLE>
A reconciliation of SAP net income to GAAP net income for
the years ended December 31 follows:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
SAP net income $18,278 $18,633 $10,954
DAC 11,561 3,894 15,282
Adjustments to policy benefits 1,653 1,270 401
Financial reinsurance 1,800 - (3,500)
Deferred income taxes (1,871) (3,913) (6,180)
Cumulative effect of change
in accounting principle - - (1,550)
Other, net 2,439 11,417 11,259
GAAP net income $33,860 $31,301 $26,666
</TABLE>
Dividends From Subsidiaries
The amount of dividends available for distribution without
prior regulatory approval is limited by regulatory
restrictions. This amount is 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.
WNC's insurance companies are permitted a maximum of
$23,193,000 in dividend distributions to WNC in 1996. WNC
received dividends of $9,000,000 from WNIC in 1995.
Note N
Fair Value of Financial Instruments
The fair values of certain financial instruments along with
their corresponding carrying values at December 31, 1995 and
1994 follow. As the fair value of all WNC's assets and
liabilities is not presented, this information in the
aggregate does not represent the underlying value of WNC.
WNC does not have any financial instruments held or issued
for trading purposes.
<TABLE>
<CAPTION>
1995 1994
-------------------------- ------------------------
Fair Carrying Fair Carrying Valuation
(000s omitted) Value Value Value Value Method
<S> <C> <C> <C> <C> <C>
Financial assets
Fixed maturities $2,060,710 $2,060,710 $1,761,821 $1,762,569 (1)
Equity securities 1,994 1,994 1,720 1,720 (1)
Mortgage loans on real estate 336,366 317,249 366,373 357,641 (2)
Policy loans 53,665 56,279 52,600 54,368 (3)
Separate Account investment 11,840 11,840 11,327 11,327 (4)
Cash and short-term investments 56,925 56,925 59,659 59,659 (4)
Investment proceeds receivable 2,289 2,289 1,094 1,094 (4)
Accrued investment income 32,652 32,652 33,084 33,084 (4)
Financial liabilities
Investment-type insurance contracts 1,131,665 1,161,263 1,174,017 1,203,608 (3)
Mortgage payable 1,328 1,309 1,854 1,907 (2)
Short-term borrowings 3,100 3,100 - - (4)
Off-balance sheet
Real estate development guarantees 157 - 80 - (5)
Lending commitments 15 - 105 - (6)
<FN>
(1) Fair values are based on publicly quoted market prices
at the close of trading on the last business day of the
year. In cases where publicly quoted market prices are not
available, fair values are based on estimates using values
obtained from independent pricing services, or, in the case
of private placements, by discounting expected future cash
flows using a current market rate applicable to the yield,
credit quality, and maturity of the investments.
(2) Fair values 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.
(3) Fair values are estimated using discounted cash flow
calculations, based on interest rates currently being
offered for similar contracts with similar maturities.
(4) Carrying value approximates fair value.
(5) Fair values are based on estimates of fees to guarantee
similar developments. In addition, the Company has a
construction completion guarantee pertaining to a joint
venture investment. The Company does not feel that
estimating a fair value for the instrument is practicable
due to the inability to estimate cash flows. See Note K for
further discussion of guarantees.
(6) Fair values are based on commitment fees of the loans
in question.
</TABLE>
Note O
Segment Information
WNC has three business segments: life insurance and
annuities; specialty health insurance; 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 and operations that do
not specifically support 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 change in accounting principle, and
assets by segment for the years ended and at December 31
follow:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Revenues
Life insurance and annuities $ 234,127 $ 229,732 $ 228,950
Specialty health insurance 453,993 420,982 394,562
Corporate and other 8,062 6,215 5,015
Consolidated total $ 696,182 $ 656,929 $ 628,527
Income (loss) before income taxes
and change in accounting principle
Life insurance and annuities $ 33,974 $ 33,177 $ 28,128
Specialty health insurance 9,541 5,895 11,500
Corporate and other 5,813 5,574 (914)
Consolidated total $ 49,328 $ 44,646 $ 38,714
Assets
Life insurance and annuities $2,431,653 $2,274,005 $2,291,529
Specialty health insurance 367,553 321,481 344,245
Corporate and other 213,692 215,082 218,645
Consolidated total $3,012,898 $2,810,568 $2,854,419
</TABLE>
Actuarial estimates are used in determining certain policy
liabilities and deferred acquisition costs which in turn
effect the reported profitability of the operating segments.
Actual results can differ materially from these actuarial
estimates. In addition, changes in these estimates, where
required, may have a significant effect on reported net
income, especially in the year of the change.
The profits of the life insurance and annuities segment are
highly dependent on interest rate spreads, which is the
difference between the amount earned on investments and the
amount credited to policyholders. Increases in market
interest rates could result in the need to credit higher
rates to policyholders without a comparable increase in the
rate earned on the Company's invested assets; they could
also result in customers surrendering their policies to
obtain higher rates from other insurance companies or
alternative products. Decreases in market interest rates
could result in inadequate spreads due to the inability to
lower credited rates below certain minimum guarantees as to
such rates.
The Company's health insurance profits are dependent in
part on the Company's ability to adequately predict and
price medical care inflation and increased policyholder
utilization of medical services. Actual results of these
items can differ significantly from the Company's
assumptions.
The profitability of most of the Company's products depends
on the ability to attract and retain customers at a price
level sufficient to cover the various expenses incurred by
the Company. The nature of these products is such that
customers can in most cases easily transfer to other
insurance carriers offering more attractive coverage. The
profitability of the products may change over time depending
on the degree of competition in the markets for such
products.
Quarterly Information (unaudited)
The following table summarizes selected unaudited quarterly
information for 1995 and 1994. As of March 1, 1996, WNC had
approximately 9,600 Common and Preferred shareholders,
including individual participants in security depository
position listings.
<TABLE>
<CAPTION>
(000s omitted, except per share amounts)
Quarter Ended December 31, September 30, June 30, March 31,
------------------- ------------------- ------------------- -------------------
1995 1994 1995 1994 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $178,410 $166,703 $173,773 $167,760 $175,625 $162,050 $168,374 $160,416
Pretax operating income (a) 13,892 12,450 11,862 11,791 13,587 12,279 11,404 9,732
Net income 9,286 6,719 8,387 9,127 8,897 8,421 7,290 7,034
Net income per share .74 .54 .67 .74 .72 .68 .59 .57
Market price
Common
High 29 1/4 22 3/4 25 22 7/8 21 23 1/4 20 1/8 25 1/8
Low 21 7/8 18 5/8 20 1/2 20 5/8 18 21 17 3/4 22 3/4
Close 27 5/8 19 24 7/8 22 7/8 20 5/8 21 1/4 18 1/2 23 1/2
Preferred
High 54 1/4 45 7/8 47 1/4 46 40 5/8 48 3/4 42 1/2 50
Low 42 1/2 40 40 44 3/8 36 1/4 46 38 1/2 48 5/8
Close 54 1/4 40 47 1/4 44 3/4 40 1/2 46 1/4 40 49 1/4
Common Stock dividends .27 .27 .27 .27 .27 .27 .27 .27
Preferred Stock dividends .625 .625 .625 .625 .625 .625 .625 .625
<FN>
(a) Income before taxes and realized investment gains and losses.
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
AS OF MARCH 7, 1996
<TABLE>
<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 8, 1996, included in the 1995 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, with respect to which the date is February 8, 1996,
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 C to the consolidated
financial statements in the 1995 Annual Report to Shareholders of
Washington National Corporation, the Company changed its method
of accounting for certain investments in debt and equity
securities in 1994 and postemployment benefits in 1993.
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 Numbers
33-48306 and 2-72599) of Washington National Corporation and the
related Prospectuses of our report dated February 8, 1996, 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 7, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 2,060,710
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,994
<MORTGAGE> 317,249
<REAL-ESTATE> 34,080
<TOTAL-INVEST> 2,544,656
<CASH> 8,331
<RECOVER-REINSURE> 49,502
<DEFERRED-ACQUISITION> 235,499
<TOTAL-ASSETS> 3,012,898
<POLICY-LOSSES> 2,066,937
<UNEARNED-PREMIUMS> 37,382
<POLICY-OTHER> 219,755
<POLICY-HOLDER-FUNDS> 39,255
<NOTES-PAYABLE> 4,409
<COMMON> 125,953<F1>
0
718
<OTHER-SE> 311,248
<TOTAL-LIABILITY-AND-EQUITY> 3,012,898
501,572
<INVESTMENT-INCOME> 184,215
<INVESTMENT-GAINS> (1,417)
<OTHER-INCOME> 11,812
<BENEFITS> 466,285
<UNDERWRITING-AMORTIZATION> 40,952
<UNDERWRITING-OTHER> 139,617
<INCOME-PRETAX> 49,328
<INCOME-TAX> 15,468
<INCOME-CONTINUING> 33,860
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,860
<EPS-PRIMARY> 2.73
<EPS-DILUTED> 2.68
<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 $47,918.
</FN>
</TABLE>
