SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996.
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 1-7369
WASHINGTON NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2663225
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
300 Tower Parkway,
Lincolnshire, Illinois 60069
(Address of principal (Zip Code)
executive offices)
Registrant's Telephone Number, Including Area Code: (847) 793-3000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares of Common Stock, $5 par value outstanding as of
October 31, 1996 was 12,311,699.
Page 1 of 24
<PAGE>
CONTENTS
Part I. Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheet - September 30, 1996
and December 31, 1995 3
Consolidated Statement of Operations - Nine and Three Months
Ended September 30, 1996 and 1995 4
Consolidated Condensed Statement of Cash Flows -
Nine Months Ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements - September 30, 1996 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. Other Information
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
Page 2 of 24
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(000s Omitted)
<CAPTION>
September 30,
1996 December 31,
(Unaudited) 1995
<S> <C> <C>
ASSETS
Investments
Fixed maturities - available for sale at fair value
(cost: $1,964,784; $1,953,314) $1,965,750 $2,060,710
Mortgage loans on real estate 271,236 317,249
Real estate and joint ventures 23,060 34,080
Policy loans 56,404 56,279
Other long-term 13,305 27,744
Short-term 49,414 48,594
Total Investments 2,379,169 2,544,656
Cash 2,402 8,331
Deferred acquisition costs 248,313 235,499
Reinsurance recoverables and prepaid premiums 99,591 49,502
Accrued investment income 33,179 32,652
Insurance premiums in course of collection 16,566 14,718
Property and equipment 13,866 18,259
Goodwill 17,856 18,385
Separate Account 38,350 51,005
Other 19,869 39,891
Total Assets $2,869,161 $3,012,898
LIABILITIES
Policy liabilities $2,303,386 $2,363,329
General expenses and other liabilities 141,192 125,194
Mortgage payable 1,029 1,309
Short-term notes payable - 3,100
Income taxes (current: $1,492; $944) 1,866 31,042
Separate Account 38,350 51,005
Total Liabilities 2,485,823 2,574,979
SHAREHOLDERS' EQUITY
Convertible preferred stock 714 718
Common stock 127,558 125,953
Retained earnings 311,202 319,447
Net unrealized investment gains 1,861 49,798
Cost of common treasury stock (57,997) (57,997)
Total Shareholders' Equity 383,338 437,919
Total Liabilities and Shareholders' Equity $2,869,161 $3,012,898
See notes to consolidated financial statements
Page 3 of 24
</TABLE>
<TABLE>
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
(000s Omitted, Except Per Share Data)
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues
Insurance premiums and policy charges $116,810 $108,262 $39,127 $35,209
Net investment income 123,897 126,564 41,898 42,020
Realized investment gains (losses) 528 (914) 770 (308)
Other 3,769 2,699 1,181 1,018
Total Revenues 245,004 236,611 82,976 77,939
Benefits and Expenses
Insurance benefits paid or provided 161,418 162,336 52,934 54,887
Insurance and general expenses 31,434 28,922 10,198 8,724
Amortization of deferred acquisition costs 15,859 16,539 5,105 5,142
Total Benefits and Expenses 208,711 207,797 68,237 68,753
Income from continuing operations before income taxes 36,293 28,814 14,739 9,186
Income taxes on continuing operations 11,873 9,124 4,745 2,435
Income from Continuing Operations 24,420 19,690 9,994 6,751
Discontinued Operations
Income (loss) from discontinued operations - net of tax (919) 4,884 (60) 1,636
Loss on disposal - net of tax (25,080) - - -
Income (loss) from discontinued operations (25,999) 4,884 (60) 1,636
Net Income (Loss) ($1,579) $24,574 $9,934 $8,387
Primary Earnings Per Share
Income from continuing operations $1.97 $1.58 $0.80 $0.54
Income (loss) from discontinued
operations - net of tax (2.12) 0.40 (0.01) 0.13
Net Income (Loss) Per Share ($0.15) $1.98 $0.79 $0.67
Average Shares and Equivalents Outstanding 12,250 12,258 12,446 12,296
Fully Diluted Earnings Per Share
Income from continuing operations $1.97 $1.56 $0.78 $0.54
Income (loss) from discontinued
operations - net of tax (2.12) 0.39 - 0.13
Net Income (Loss) Per Share ($0.15) $1.95 $0.78 $0.67
Average Shares and Equivalents Outstanding 12,250 12,585 12,743 12,597
Dividends Paid Per Common Share $0.81 $0.81 $0.27 $0.27
See notes to consolidated financial statements
Page 4 of 24
</TABLE>
<TABLE>
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Unaudited)
(000s Omitted)
<CAPTION>
Nine Months Ended
September 30,
1996 1995
<S> <C> <C>
Net Cash Provided by Operating Activities $21,861 $57,830
Investing Activities
Proceeds from sales
Fixed maturities - available for sale 103,242 189,366
Mortgage loans, real estate and other 27,544 6,361
Proceeds from maturities, redemptions and distributions
Fixed maturities - available for sale 87,260 67,464
Fixed maturities - held to maturity - 11,751
Mortgage loans and other 53,027 29,806
Cost of purchases
Fixed maturities - available for sale (203,330) (333,964)
Mortgage loans, real estate and other (7,498) (4,742)
Increase in policy loans (125) (1,354)
Purchases of property and equipment (455) (440)
Net payments on sale of discontinued operations (10,496) -
Net change in short-term investments (820) 16,597
Net Cash Provided (Used) by Investing Activities 48,349 (19,155)
Financing Activities
Policyholder account deposits 111,305 118,187
Policyholder account withdrawals (175,452) (148,949)
Dividends to shareholders (10,190) (10,143)
Change in short-term notes payable (3,100) -
Proceeds from sale of common stock 1,578 603
Repayment of long-term borrowings (280) (462)
Net Cash Used by Financing Activities (76,139) (40,764)
Decrease in Cash (5,929) (2,089)
Cash at Beginning of Period 8,331 7,272
Cash at End of Period $2,402 $5,183
See notes to consolidated financial statements
Page 5 of 24
</TABLE>
<PAGE>
Item 1. Financial Statements (continued)
WASHINGTON NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 1996
A. Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles (GAAP) for interim periods. In the opinion of
management, all adjustments (consisting primarily of normal,
recurring accruals) considered necessary for a fair presentation
have been included.
Certain amounts in the 1995 consolidated financial statements
have been reclassified to conform to the 1996 presentation
including the restatement of the Statement of Operations for
discontinued operations.
B. Discontinued Operations
In May, 1996, the Company's Board of Directors approved a plan to
dispose of the Company's health insurance business. The sale of
the individual and small group health insurance business to
Pioneer Life Insurance Company (PLIC) closed on August 2, 1996
and provided that PLIC would purchase the Company's individual
and small group health business, through a reinsurance
transaction, for a purchase price of $19.0 million. The sale of
the remaining health insurance business - the large group
business - to Trustmark Insurance Company (Mutual) closed on
October 30, 1996, through a reinsurance transaction, that
provides that the Company will receive future consideration based
on persistency.
The transactions have resulted in the Company recording an
estimated net loss of $25.1 million, net of a tax credit of $13.5
million, in the second quarter. The loss consists principally of
the future operating losses of this business from the measurement
date for which the Company remains responsible, employee
severance costs, the cost to terminate one of the Company's
defined benefit pension plans, related net asset write-offs and
other related disposal costs net of the anticipated proceeds. The
loss is an estimate due to the nature of the transactions and may
change in future periods.
The operating results of the sold business have been reported in
the statement of operations as discontinued operations for 1996.
The September 30, 1995 statement of operations has been restated
to reflect the sale of the health insurance business as
discontinued operations. At September 30, 1996, the business had
remaining assets of approximately $240 million consisting
primarily of invested assets and approximately $240 million of
liabilities which consisted primarily of policyholder
liabilities.
Revenues and income from operations on the discontinued business
consist of the following, in millions:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
<S> <C> <C>
Revenues $223.2 $281.2
Income (loss) from operations,
(net of taxes: $(1.1); $2.2)* (4.7) 4.9
<FN>
* The September 30, 1996 loss from operations includes $3.6 million
(net of taxes of $1.9 million) for the period June through September
1996 that was reported as part of the loss on disposal.
</TABLE>
Page 6 of 24
Item 1. Financial Statements (continued)
WASHINGTON NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
September 30, 1996
In connection with the Company's plan of disposal, Washington
National Insurance Company's (WNIC's) defined benefit pension plan
(the Plan) was terminated on October 1, 1996. The termination
resulted in the Company recognizing additional pension expense of
approximately $6.9 million. This amount was included as part of the
loss on the disposal recorded in the second quarter and includes
$4.1 million of a previously unrealized loss that had been recorded
as a reduction of shareholders' equity. In addition, the
termination of the Plan will result in the Company purchasing
416,000 and 17,100 shares of the Company's common and preferred
stock, respectively, held by the Plan. These purchases are expected
to take place in late 1996 or early 1997 and are expected to be
financed using short-term borrowings or by sales of fixed maturity
investments.
C. Reinsurance
The effect of reinsurance on insurance premiums and policy charges
reported in continuing operations for the nine month period ended
September 30 follows:
<TABLE>
<CAPTION>
(000s omitted) 1996 1995
<S> <C> <C>
Direct premiums and policy charges $158,337 $148,942
Premiums ceded (41,527) (40,680)
Net premiums and policy charges $116,810 $108,262
</TABLE>
Reinsurance benefits ceded reported were $43.3 million and $15.4
million at September 30, 1996 and 1995, respectively.
As a result of past divestitures, the Company reinsures 100% of
certain health insurance, life insurance, and annuity business with
unaffiliated companies. At September 30, 1996, 51% of WNC's total
reinsurance recoverables were due from Pioneer Life Insurance
Company and 26% were due from Combined Insurance Company of
America. In addition, 9% were due from UNUM Life Insurance Company
in the normal course of business.
D. 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 both September 30, 1996 and December 31, 1995, the Company had
three financial guarantees totaling $13.7 million, as well as a
construction completion guarantee. The Company feels it has
adequate reserves for related potential losses.
Page 7 of 24
Item 1. Financial Statements (continued)
WASHINGTON NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
September 30, 1996
E. Net Unrealized Gains on Investments
The components of net unrealized gains on investments are as
follows:
<TABLE>
<CAPTION>
September 30, December 31,
(000s omitted) 1996 1995
<S> <C> <C>
Unrealized gains on investments $2,587 $108,533
Adjustment to deferred acquisition costs - (37,700)
Deferred income tax (726) (21,035)
Net unrealized gains on investments $1,861 $ 49,798
</TABLE>
Page 8 of 24
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following updates, and should be read in conjunction with, the
Management's Discussion and Analysis of Financial Condition and
Results of Operations section of the Company's 1995 Annual Report,
copies of which may be obtained by contacting: Craig Simundza, Vice
President, Financial Reporting Department, Washington National
Corporation, 300 Tower Parkway, Lincolnshire, Illinois 60069
(telephone (847) 793-3053).
<TABLE>
Analysis of Net Income (Loss)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(000s omitted) 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Pretax operating income from
continuing operations (a)
Insurance operations $12,144 $8,406 $32,056 $26,859
Corporate and other 1,825 1,088 3,709 2,869
Total pretax operating income from
continuing operations 13,969 9,494 35,765 29,728
Income taxes on continuing operations 4,717 3,410 12,505 10,552
Net operating income from continuing operations 9,252 6,084 23,260 19,176
Net realized investment gains (b) 742 667 1,160 514
Discontinued operations, net of taxes (c) (60) 1,636 (25,999) 4,884
Net income (loss) $ 9,934 $8,387 $(1,579) $24,574
<FN>
(a) Pretax income before realized investment gains and income or
loss from discontinued operations.
(b) 1996 and 1995 include (taxes) benefits of $(28) and $975, for
the three months ended September 30 and $632 and $1,428, for the
nine months ended September 30, respectively.
(c) Nine months ended September 30, 1996, includes the loss on
sale of health insurance business.
</TABLE>
Continuing Operations and Corporate Strategy
In the second quarter of 1996, the Company announced its intent to
sell its individual health insurance and group life and health
insurance business (see "Health Business Disposal," below).
Management believes that the health business sales will create
greater operating focus. The Company now focuses on its universal
life insurance and annuities line of business, written by United
Presidential Life Insurance Company (UPI), and specialty health
insurance for educators, written by WNIC.
Page 9 of 24
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
<TABLE>
Consolidated Results of Continuing Operations
Components of Pretax Operating Income From Continuing Operations
<CAPTION>
(000s omitted) Three months ended September 30, 1996 Three months ended September 30, 1995
Insurance Corporate Insurance Corporate
Operations and Other Total Operations and Other Total
<S> <C> <C> <C> <C> <C> <C>
Revenues
Insurance premiums and policy
charges $39,127 $ - $39,127 $35,209 $ - $35,209
Net investment income 39,371 2,527 41,898 40,516 1,504 42,020
Other revenues 900 281 1,181 1,069 (51) 1,018
Total revenues excluding realized
investment gains 79,398 2,808 82,206 76,794 1,453 78,247
Benefits and expenses
Insurance benefits 52,874 60 52,934 54,812 75 54,887
Expenses 9,275 923 10,198 8,434 290 8,724
Amortization of deferred
acquisition costs 5,105 - 5,105 5,142 - 5,142
Total benefits and expenses 67,254 983 68,237 68,388 365 68,753
Pretax operating income from continuing operations $12,144 $ 1,825 $13,969 $ 8,406 $ 1,088 $ 9,494
</TABLE>
<TABLE>
<CAPTION>
(000s omitted) Nine months ended September 30, 1996 Nine months ended September 30, 1995
Insurance Corporate Insurance Corporate
Operations and Other Total Operations and Other Total
<S> <C> <C> <C> <C> <C> <C>
Revenues
Insurance premiums and policy
charges $116,810 $ - $116,810 $108,262 $ - $108,262
Net investment income 117,481 6,416 123,897 119,811 6,753 126,564
Other revenues 3,247 522 3,769 2,897 (198) 2,699
Total revenues excluding realized
investment gains 237,538 6,938 244,476 230,970 6,555 237,525
Benefits and expenses
Insurance benefits 161,238 180 161,418 162,116 220 162,336
Expenses 28,385 3,049 31,434 25,456 3,466 28,922
Amortization of deferred
acquisition costs 15,859 - 15,859 16,539 - 16,539
Total benefits and expenses 205,482 3,229 208,711 204,111 3,686 207,797
Pretax operating income from continuing operations $ 32,056 $ 3,709 $ 35,765 $ 26,859 $ 2,869 $ 29,728
Page 10 of 24
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Nine months ended September 30, 1996 Compared to Nine months ended
September 30, 1995
Insurance Premiums and Policy Charges. Insurance premiums and policy
charges increased $8.5 million, or 7.9%, from $108.3 million in 1995
to $116.8 million in 1996. The improvement was primarily due to
increased premiums from the education disability line of business
and universal life insurance at UPI.
Net Investment Income. Net investment income was $123.9 million in
1996, down 2.1% from the same period of 1995. The yield on the
Company's investment portfolio (based on amortized cost) declined
from 7.0% in 1995 to 6.9% in 1996. The decline was primarily due to
lower market interest rates on new investments. The amortized cost
of the portfolio at September 30, 1996, decreased approximately 2.4%
from December 31, 1995, due in part to a nine percent decline in
account balances in the WNIC closed annuity block, offset in part by
a 4.1% increase in assets at UPI. Due to the nature of the closed
block which has no new sales, the Company expects the decline in
account balances in this portion of the business to continue. See
interest rate spread discussion in "Insurance Benefits Paid or
Provided," below.
Realized Investment Losses. Realized investment gains for the first
nine months of 1996 were $0.5 million ($1.2 million after taxes)
compared to a loss of $0.9 million ($0.5 million gain after taxes)
in 1995. In 1996, realized gains on other invested assets and equity
securities were mostly offset by real estate write-downs.
Insurance Benefits Paid or Provided. Insurance benefits paid or
provided decreased $0.9 million, or 0.6%, from $162.3 million in
1995 to $161.4 million in 1996. The decline was mainly due to a
decrease in the WNIC closed blocks of life insurance and annuities
partially offset by increased benefits in the education disability
line and at UPI. The decrease in the closed block was a result of
the previously mentioned decline in account balances, along with
lower credited rates beginning in the third quarter of 1995. The
Company currently anticipates that credited rates will remain the
same in 1997 as in 1996. Benefits for life insurance and annuities
were increased by $1.2 million in both the third quarter and nine
months of 1996 as a result of the annual review of benefits
assumptions for this business. This increase was offset by a related
decrease in amortization of deferred acquisition costs, described
below.
During the third quarter, the education disability line had an
unusually high level of claim recoveries on long-term disability
claims, where the level of claims tends to fluctuate from period to
period, which positively affected earnings.
Insurance and General Expenses. Insurance and general expenses were
$31.4 million in 1996, up 8.7% or $2.5 million from 1995, due
primarily to higher operating expenses in the education disability
line of business. As a result of the Company's strategy for its
education business, certain start-up costs to develop products and
relationships with other companies, estimated to be approximately $2
million, will be incurred in 1997. First-year revenues from these
new products and relationships will only partially offset these
expenses.
Amortization of Deferred Acquisition Costs. Amortization of deferred
acquisition costs decreased $0.7 million, or 4.1%, from $16.5
million in 1995 to $15.9 million in 1996. The decrease was primarily
due to a decline of $1.9 million in amortized deferred acquisition
costs on a portion of the closed blocks of life insurance and
annuities at WNIC because such costs were fully amortized in 1995.
During the third quarter, the Company performed its annual review of
amortization assumptions for its life insurance and annuity business
which resulted in a decrease of $1.3 million in amortization expense
for both the third quarter and nine months of 1996. Partially
offsetting these declines were increases at UPI and for the
education disability business due mainly to business growth.
Page 11 of 24
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Income Taxes. Income taxes on continuing operations were $12.5
million in 1996 compared to $10.6 million in 1995. The effective tax
rate on operations was 35.0% in 1996, essentially the same as last
year.
Net Income from Continuing Operations. Income from continuing
operations for the first nine months of 1996 was $24.4 million,
compared to $19.7 million for the same period of 1995. The increase
was primarily due to improved pretax income from insurance
operations, mainly due to improved interest rate spreads, the
decline of amortized deferred insurance costs, and an increase in
policy charges on the Company's life insurance and annuity business.
Discontinued Operations, Net of Income Taxes. The Company reported a
loss of $25.1 million, net of income taxes, resulting from the
disposal of its health insurance business in the second quarter of
1996. See discussion under "Health Business Disposal," below. In
addition, the operating loss from the discontinued health insurance
business was $0.9 million through May 31, 1996, the measurement date
for the disposal of the health business, compared to income of $4.9
million in the first three quarters of 1995. The 1996 loss resulted
primarily from adverse experience as compared to 1995.
Net Income (Loss). Net loss through the third quarter of 1996 was
$1.6 million, compared to net income of $24.6 million in the 1995
comparable period. The decline resulted primarily from the loss on
sale of the health business and the 1996 loss from discontinued
operations, compared to income from discontinued operations in 1995,
partially offset by improvements in the Company's life insurance and
annuity business.
For the third quarter, net income in 1996 was $9.9 million, compared
to $8.4 million in 1995. The increase was due to improved pretax
operating income from insurance operations as described above.
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995
The nature and reasons for any significant variations between
quarters ended September 30, 1996 and September 30, 1995 are the
same as those discussed above for the respective nine-month periods,
except where otherwise noted.
Health Business Disposal
On June 4, 1996, the Company announced an agreement to sell its
individual health insurance and small group life and health
insurance businesses. The sale closed August 2, 1996 and occurred
through a reinsurance transaction for cash proceeds of $19.0
million. On July 8, 1996, the Company announced an agreement to sell
its large group life and health insurance business. This
transaction, which closed on October 30, 1996, also occurred through
reinsurance and provides that the Company will receive future
consideration based on the persistency of the business.
As a result of the sales of the health business, regulatory capital
of approximately $50 million, which previously was required to
support the health business, will become available to the Company
for other uses. The Company expects to utilize a portion of this
capital to repurchase 416,000 shares of its common stock and 17,100
shares of its preferred stock currently held by one of its defined
benefit pension plans. The Company is considering several possible
uses for the remainder of the available capital, including
additional share repurchases or investment in the Company's
remaining businesses.
Page 12 of 24
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Following the sales of the health business, the Company expects to
carry out a number of steps to reduce expenses previously allocated
to the businesses sold. These steps include (1) the establishment
of a smaller data center and the sublease of the existing data
center; (2) the elimination of certain positions in the Company's
support functions; (3) the sublease of three of the five floors in
the Company's headquarters building; and (4) the termination of an
under-funded defined benefit pension plan. These steps are expected
to eliminate approximately $8 million of the $13 million of annual
corporate overhead and data center expenses previously allocated to
the health business. The Company is continuing to explore steps for
eliminating the remaining $5 million of such expense but does not
expect any conclusions to be reached until 1997. As such, the $5
million of such annual expenses remaining has been allocated to the
Corporate and Other line.
As a result of the sales, the first nine months of 1996 includes an
after-tax loss of $25.1 million, which was recorded in the 1996
second quarter. The loss arose from proceeds being more than offset
by employee-related costs and other expenses of approximately $44.0
million (including $11.4 million for the Company's share of
individual and group health insurance risks retained), net asset
write-offs of approximately $15.1 million (including deferred
acquisition costs and excess claims reserves), and a tax credit of
approximately $13.5 million. Due to the nature of the sales
transactions, the loss calculation involves a number of estimates
that may change in future periods.
Under the conditions of these two sales agreements, the Company will
retain the risk for selected portions of the individual and group
health business. These include future losses on certain individual
health policies written in New Jersey and on group medical
conversion policies. In addition, the sale of the large group
business will occur in stages, typically at the next annual renewal
date of each account occurring on or after December 1, 1996, with
the Company retaining the risk until that time. Estimated costs for
these risks are provided for in the calculation of the loss on
disposition, discussed above.
The operating results of the individual health and large and small
group life and health business are reported as discontinued
operations. Consolidated statements of operations for previous
periods have been restated. The restatement did not affect net
income or net income per share. As permitted by accounting rules,
assets and liabilities related to the health businesses have not
been shown separately from those of the continuing operations.
Page 13 of 24
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Investment Portfolio
At September 30, 1996, the Company had invested assets with a
carrying value of $2.4 billion compared to $2.5 billion at December
31, 1995. Certain information about the Company's investment
portfolio follows (dollars in millions):
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
% of % of
Carrying Carrying Carrying Carrying
Value Value Value Value
<S> <C> <C> <C> <C>
Fixed maturity investments:
United States government obligations $ 75.4 3.2% $ 80.5 3.2%
Obligations of states and
political subdivisions 76.2 3.2 82.4 3.2
Public utilities 147.9 6.2 155.1 6.1
Industrial and miscellaneous 1,044.2 43.9 1,058.0 41.6
Mortgage-backed securities 597.6 25.1 653.0 25.7
Other 24.5 1.0 31.7 1.2
Total fixed maturity investments 1,965.8 82.6 2,060.7 81.0
Mortgage loans on real estate 271.2 11.3 317.2 12.5
Real estate and joint ventures 23.1 1.0 34.1 1.3
Policy loans 56.4 2.4 56.3 2.2
Other long-term 13.3 0.6 27.8 1.1
Short-term 49.4 2.1 48.6 1.9
Total invested assets $2,379.2 100.0% $2,544.7 100.0%
</TABLE>
Fixed Maturity Investments
The Company's fixed maturity investments are carried at fair value.
Due to rising interest rates during 1996, the carrying value of the
Company's fixed maturity investments compared to amortized cost
decreased $106.4 million, resulting in an unrealized gain on fixed
maturity investments of $1.0 million, compared to $107.4 million at
December 31, 1995. The amortized cost of the Company's fixed
maturity portfolio increased $11.5 million in the first three
quarters of 1996 to $2.0 billion at September 30, 1996, primarily
due to the reinvestment of proceeds from the disposal of other
assets.
The composition of the Company's fixed maturity portfolio at
September 30, 1996, 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 $ 801.8 40.8% 33.7%
AA/Aa 113.6 5.8 4.8
A 605.2 30.8 25.4
BBB/Baa 361.4 18.3 15.2
BB/Ba and lower 83.8 4.3 3.5
Total fixed maturities $1,965.8 100.0% 82.6%
</TABLE>
Page 14 of 24
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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 September 30, 1996, $95.7 million or 4.9%
of fixed maturity investments were rated with comparable NAIC
ratings, the majority of which is $38.7 million of investments rated
BBB and $32.9 million of investments rated BB and lower.
The Company's fixed maturity portfolio at September 30, 1996,
includes $597.6 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 $163.5 27.3% 6.9%
Target amortization classes 7.5 1.3 0.3
Sequential classes 4.2 0.7 0.2
Support classes 5.5 0.9 0.2
Accrual classes 5.8 1.0 0.2
Total agency CMOs 186.5 31.2 7.8
Non-agency CMOs (1)
Planned amortization classes 13.9 2.3 0.5
Accrual classes 1.4 0.2 0.1
Sequential classes 8.7 1.5 0.4
Total non-agency CMOs 24.0 4.0 1.0
Total CMOs 210.5 35.2 8.8
Non-agency mortgage-backed
pass-through securities 2.1 0.4 0.1
Agency mortgage-backed
pass-through securities 385.0 64.4 16.2
Total mortgage-backed securities $597.6 100.0% 25.1%
<FN>
(1) All of the Company's non-agency CMO investments were rated AAA at
September 30, 1996. The credit risk associated with non-agency
mortgage-backed securities is generally greater than that of
agency mortgage-backed securities.
</TABLE>
To mitigate prepayment risk, the Company primarily invests in
collateralized mortgage obligation (CMO) classes that have, at time
of investment, the most stable prepayment structure. Such CMO
classes are termed "planned amortization class" (PAC) which
comprised 84.3% of the Company's CMO portfolio at September 30,
1996. The next most stable class of CMOs is "target amortization
class" (TAC) which comprised 3.6% of the Company's CMO portfolio at
September 30, 1996. 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
61.8% of the Company's PAC and TAC investments at September 30,
1996, 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.
Page 15 of 24
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Mortgage Loans
The Company had investments in mortgage loans of $271.2 million (net
of allowances of $6.7 million) at September 30, 1996 compared to
$317.2 million at December 31, 1995. Investments in mortgage loans
declined primarily due to prepayments and amortization of the
mortgage loan portfolio during the first three quarters of 1996. Of
the outstanding loans at September 30, 1996, loans with a carrying
value of $4.0 million, or approximately 1.5%, were delinquent 60
days or more as to interest or principal, far better than the recent
industry average.
Impaired loans, where the Company has determined that it is unlikely
that loan terms will be met, had a carrying value of $9.4 million at
September 30, 1996, a decrease of $1.0 million from December 31,
1995.
The Company's mortgage loan portfolio at September 30, 1996, by
geographic distribution, year of maturity, and property type follows
(dollars in millions):
<TABLE>
<CAPTION>
Geographic Distribution of
Mortgage Loans
<S> <C> <C>
California $ 43.2 15.9%
Illinois 34.1 12.6
Indiana 30.6 11.3
Florida 30.3 11.2
Texas 22.1 8.1
North Carolina 17.3 6.4
Virginia 14.1 5.2
All other 79.5 29.3
Total $271.2 100.0%
</TABLE>
<TABLE>
<CAPTION>
Mortgage Loans by Year of Maturity
Scheduled
Principal Balloon
Payments (1) Payments Total
<S> <C> <C> <C>
1996 $ 2.2 $ 13.2 $ 15.4
1997 12.0 21.3 33.3
1998 12.2 6.8 19.0
1999 12.9 4.3 17.2
2000 13.4 5.9 19.3
2001 and thereafter 83.4 83.6 167.0
Total $136.1 $135.1 $271.2
<FN>
(1) Includes scheduled payments on balloon loans
</TABLE>
The Company believes that approximately 30% of the mortgage loan
portfolio maturing in the remainder of 1996 and 1997 may be
refinanced by the Company.
<TABLE>
<CAPTION>
Property Type
<S> <C> <C>
Retail $167.0 61.6%
Office 27.9 10.3
Industrial 22.9 8.4
Medical 17.3 6.4
All other 36.1 13.3
Total $271.2 100.0%
</TABLE>
Page 16 of 24
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The Company no longer makes 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.
Liquidity and Capital Resources
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 5.5%.
Changes in unrealized gains or losses on fixed maturity investments
(net of adjustments for deferred acquisition costs and deferred
taxes) are reported directly in shareholders' equity and have no
effect on net income. At September 30, 1996, the increase to
shareholders' equity for unrealized gains (net of amortization of
deferred insurance costs and deferred income taxes) on fixed
maturity investments was $0.8 million, compared to $49.1 million at
December 31, 1995.
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 $51.8 million at
September 30, 1996. 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 operational requirements of the Company and its
subsidiaries, other than the cash needed as a result of the health
sale and cash to repurchase certain shares of the Company's stock.
As a result of the sales of the health business, the Company expects
that it will require cash totaling approximately $126 million
through the end of 1997 to discharge the remaining policyholder
benefit liabilities and expenses of its exit from the health
insurance business. The cash will be generated primarily by the
sale of fixed maturity investments. Cash to purchase the shares of
the Company's common and preferred stock held by the terminated
defined benefit pension plan will be generated by either short-term
borrowings or sales of fixed maturity investments.
Cash Flows. During the first three quarters of 1996, the Company's
operating activities generated cash of $21.9 million compared to
$57.8 million in 1995. The decrease in cash provided by operations
in the first three quarters of 1996 resulted in part from increased
education benefits paid and a decrease in investment income
received.
Cash provided by investing activities was $48.3 million in the first
three quarters of 1996 compared to cash used by investing activities
of $19.1 million in the same period of 1995. The increase in cash
provided in 1996 was due to sales of real estate and other
investments, mortgage loan maturities, and fewer purchases of fixed
maturity investments.
Cash used for financing activities increased from $40.8 million in
the first three quarters of 1995 to $76.1 million in the same period
of 1996, primarily due to annuity contract holder withdrawals
exceeding deposits. In 1996, UPI's deposits exceeded withdrawals by
$33.3 million, compared to $47.3 million in 1995. For the WNIC
closed block, withdrawals exceeded deposits by $97.5 million in
1996, compared to $78.1 million in 1995.
Page 17 of 24
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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 1995 statutory
financial results and operating performance.
Page 18 of 24
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
WNC and certain affiliated companies have been named in various
pending legal proceedings considered to be ordinary routine
litigation incidental to the business of such companies. A number
of other legal actions have been filed which demand compensatory and
punitive damages aggregating material dollar amounts. WNC believes
that such suits are substantially without merit and that valid
defenses exist. WNC's management and its chief legal officer are of
the opinion that such litigation will not have a material effect on
WNC's results of operations or consolidated financial position. The
amount involved in any proceeding, or group of proceedings
presenting in large degree the same issues, does not exceed the
materiality standard for disclosure contained in Instruction 2 to
Item 103 of Regulation S-K.
In June 1996, the estate of a retired employee filed a lawsuit in
the United States District Court for the Northern District of
Illinois against WNC, WNC's wholly-owned subsidiary, WNIC, and the
three individual trustees of the Washington National Insurance
Company Home Office Group Insurance Plan (the "Plan"), and the Plan.
The plaintiff purports to represent a class consisting of eligible
retirees under the Plan who retired before January 1, 1992.
This complaint, brought under the Employee Retirement Income
Security Act, centers around a January 1992 amendment to the Plan
which resulted in a different coordination of benefits with
Medicare. Also, at that time the retirees were first required to
contribute a portion of their premium, whereas previously the
Company paid 100% of retiree medical premium. Plaintiff seeks
certification of the class, permanent no-cost retiree medical
benefits, an accounting and repayment of premium contributions,
attorney fees, costs and expenses, plus other appropriate equitable
relief. Plaintiff utilizes several theories of recovery, namely,
promissory estoppel, equitable estoppel, negligent
misrepresentation, breach of fiduciary duty, and entitlement.
WNC, WNIC and the individual trustees believe that valid defenses
exist and intend to contest vigorously the allegations made in the
complaint.
Page 19 of 24
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 10.1 - Form of Amendment to Employment Agreements**
between Registrant and each of the following Executive Officers
of Registrant: R. W. Patin, T. Pontarelli and T. C. Scott
(original Employment Agreement filed as an exhibit to the Form 10-
K for the year ended December 31, 1991); K. A. Grubb and J. N.
Plato (original Employment Agreement filed as an exhibit to the
Form 10-K for the year ended December 31, 1992); and W. G. Brown
(original Employment Agreement filed as an exhibit to the Form 10-
Q for the period ended June 30, 1993).
Exhibit 11 - Computation of Per Share Earnings.
b. Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended
September 30, 1996.
** Management contract or compensatory plans or arrangements.
Page 20 of 24
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
WASHINGTON NATIONAL CORPORATION
November 13, 1996 /s/ Joan K. Cohen
Joan K. Cohen
Vice President, Controller and Treasurer
(Duly Authorized Officer and Chief
Accounting Officer)
Page 21 of 24
<PAGE>
EXHIBIT INDEX
PAGE
Exhibit 10.1 - Form of Amendment to Employment Agreements. 23
Exhibit 11 - Computation of Per Share Earnings. 24
Page 22 of 24
WASHINGTON NATIONAL CORPORATION
EXHIBIT 10.1 - FORM OF AMENDMENT TO EMPLOYMENT AGREEMENTS
Date:_____________________
Name
Address
Dear ______________:
This letter is intended to clarify the interpretation of the
Employment Agreement made as of the _______________________, by and
among Washington National Insurance Company, Washington National
Corporation and you to provide you with a two year severance period
(or, if less than two years, until you reach age 65). The intent of
the Agreement is that if your employment is terminated for any
reason other than Good Cause (as defined in the Agreement), or if
you terminate your employment for Good Reason (as defined in the
Agreement) you will receive, within 10 days after the Date of
Termination (as defined in the Agreement), a lump sum payment in an
amount equal to your salary (at your then current fixed annual
salary level) and your bonus under the Incentive Compensation Plan
for a severance period equal to the balance of the term of your
employment under the Agreement as it exists at the time of your
termination of employment. That severance period will commence on
the date of your termination of employment and end on the first to
occur of the second anniversary thereof and the last day of the
calendar year in which you attain age 65.
In order to ensure that the language of the Agreement is consistent
with the intent of the parties, as described above, the definition
of Severance Period in Section 5 (a)(iv) of the Agreement is amended
to "mean the balance of the term of employment as it exists
immediately prior to the Date of Termination."
Please sign both copies of this letter to indicate your approval of
the matters set forth herein. Return one copy to C.R. Edwards and
keep the other for your records.
Very truly yours,
WASHINGTON NATIONAL INSURANCE COMPANY
By:___________________________________________
Thomas Pontarelli, Chairman of the Board,
President, and Chief Executive Officer
WASHINGTON NATIONAL CORPORATION
By:___________________________________________
Thomas C. Scott, Executive Vice President
and Chief Financial Officer
The matters set forth in the above letter are hereby approved on
this 24th day of September 1996.
___________________________________________
Name
Page 23 of 24
<TABLE>
WASHINGTON NATIONAL CORPORATION
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
Primary and Fully Diluted
(000s Omitted Except Per Share Amounts)
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Primary
Average Shares:
Average common shares outstanding 12,250 12,186 12,268 12,198
Assumed exercise of stock options - 72 178 98
Total Average Shares 12,250 12,258 12,446 12,296
Net Income (Loss) Available to Common Shareholders:
Income from continuing operations before
Preferred Stock dividend requirement $24,420 $19,690 $9,994 $6,751
Preferred Stock dividend requirement (268) (271) (89) (90)
Income from continuing operations 24,152 19,419 9,905 6,661
Income (loss) from discontinued operations - net of taxes (25,999) 4,884 (60) 1,636
Net Income (Loss) Available to Common Shareholders ($1,847) $24,303 $9,845 $8,297
Primary Earnings Per Share:
Income from continuing operations $1.97 $1.58 $0.80 $0.54
Income (loss) from discontinued operations - net of taxes (2.12) 0.40 (0.01) 0.13
Net Income (Loss) Per Share ($0.15) $1.98 $0.79 $0.67
Fully Diluted
Average Shares:
Average common shares outstanding 12,250 12,186 12,268 12,198
Assumed conversion of preferred stock - 271 268 271
Assumed exercise of stock options - 128 207 128
Total Average Shares 12,250 12,585 12,743 12,597
Net Income (Loss) Available to Common Shareholders:
Income from continuing operations before
Preferred Stock dividend requirement $24,420 $19,690 $9,994 $6,751
Preferred Stock dividend requirement (268) - - -
Income from continuing operations 24,152 19,690 9,994 6,751
Income (loss) from discontinued operations - net of taxes (25,999) 4,884 (60) 1,636
Net Income (Loss) Available to Common Shareholders ($1,847) $24,574 $9,934 $8,387
Fully Diluted Earnings Per Share:
Income from continuing operations $1.97 $1.56 $0.78 $0.54
Income (loss) from discontinued operations - net of taxes (2.12) 0.39 - 0.13
Net Income (Loss) Per Share ($0.15) $1.95 $0.78 $0.67
Page 24 of 24
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 1,965,750
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,727
<MORTGAGE> 271,236
<REAL-ESTATE> 23,060
<TOTAL-INVEST> 2,379,169
<CASH> 2,402
<RECOVER-REINSURE> 99,591
<DEFERRED-ACQUISITION> 248,313
<TOTAL-ASSETS> 2,869,161
<POLICY-LOSSES> 2,025,032
<UNEARNED-PREMIUMS> 39,056
<POLICY-OTHER> 202,382
<POLICY-HOLDER-FUNDS> 36,916
<NOTES-PAYABLE> 1,029
<COMMON> 127,558<F1>
0
714
<OTHER-SE> 255,066
<TOTAL-LIABILITY-AND-EQUITY> 2,869,161
116,810
<INVESTMENT-INCOME> 123,897
<INVESTMENT-GAINS> 528
<OTHER-INCOME> 3,769
<BENEFITS> 161,418
<UNDERWRITING-AMORTIZATION> 15,859
<UNDERWRITING-OTHER> 31,434
<INCOME-PRETAX> 36,293
<INCOME-TAX> 11,873
<INCOME-CONTINUING> 24,420
<DISCONTINUED> (25,999)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,579)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
<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 $49,157.
</FN>
</TABLE>
