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 March 31, 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
April 30, 1996 was 12,245,584.
Page 1 of 20
<PAGE>
CONTENTS
Part I. Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheet - March 31, 1996
and December 31, 1995 3
Consolidated Statement of Income - Three Months
Ended March 31, 1996 and 1995 4
Consolidated Condensed Statement of Cash Flows -
Three Months Ended March 31, 1996 and 1995 5
Notes to Consolidated Financial Statements - March 31, 1996 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
Page 2 of 20
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(000s Omitted)
<CAPTION>
March 31,
1996 December 31,
(Unaudited) 1995
<S> <C> <C>
ASSETS
Investments
Fixed maturities - available for sale at
fair value (cost: $1,961,690; $1,953,314) $1,982,253 $2,060,710
Mortgage loans on real estate 301,261 317,249
Real estate and joint ventures 35,443 34,080
Policy loans 56,392 56,279
Other long-term 27,323 27,744
Short-term 30,350 48,594
Total Investments 2,433,022 2,544,656
Cash 10,161 8,331
Deferred acquisition costs 275,666 235,499
Reinsurance recoverables and prepaid premiums 47,626 49,502
Accrued investment income 33,153 32,652
Insurance premiums in course of collection 14,722 14,718
Property and equipment 17,539 18,259
Goodwill 18,209 18,385
Separate Account 52,673 51,005
Other 33,012 39,891
Total Assets $2,935,783 $3,012,898
LIABILITIES
Policy liabilities $2,344,687 $2,363,329
General expenses and other liabilities 113,479 125,194
Mortgage payable 1,170 1,309
Short-term notes payable - 3,100
Income taxes (current: $1,218; $944) 15,894 31,042
Separate Account 52,673 51,005
Total Liabilities 2,527,903 2,574,979
SHAREHOLDERS' EQUITY
Convertible preferred stock 718 718
Common stock 126,260 125,953
Retained earnings 325,127 323,087
Net unrealized investment gains 17,412 49,798
Unfunded pension loss (3,640) (3,640)
Cost of common treasury stock (57,997) (57,997)
Total Shareholders' Equity 407,880 437,919
Total Liabilities and Shareholders' Equity $2,935,783 $3,012,898
See notes to consolidated financial statements
</TABLE>
Page 3 of 20
<TABLE>
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
(000s Omitted, Except Per Share Data)
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Revenues
Insurance premiums and policy charges $128,467 $119,382
Net investment income 44,919 45,536
Realized investment losses (610) (615)
Other 2,827 2,742
Total Revenues 175,603 167,045
Benefits and Expenses
Insurance benefits paid or provided 122,161 111,575
Insurance and general expenses 33,743 35,252
Amortization of deferred acquisition costs 10,984 9,429
Total Benefits and Expenses 166,888 156,256
Income Before Income Taxes 8,715 10,789
Income Taxes 3,281 3,499
Net Income $5,434 $7,290
Primary Earnings Per Share
Earnings Per Share $0.43 $0.59
Average Shares and Equivalents Outstanding 12,397 12,237
Fully Diluted Earnings Per Share
Earnings Per Share $0.43 $0.58
Average Shares and Equivalents Outstanding 12,666 12,508
Dividends Paid Per Common Share $0.27 $0.27
See notes to consolidated financial statements
</TABLE>
Page 4 of 20
<TABLE>
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Unaudited)
(000s Omitted)
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Net Cash Provided by Operating Activities $10,688 $22,034
Investing Activities
Proceeds from sales
Fixed maturities - available for sale 53,970 51,302
Mortgage loans, real estate and other 330 2,110
Proceeds from maturities, redemptions and distributions
Fixed maturities - available for sale 28,101 14,546
Fixed maturities - held to maturity - 6,973
Mortgage loans, real estate and other 17,928 6,163
Cost of purchases
Fixed maturities - available for sale (91,713) (87,730)
Real estate and other investments (2,241) (3,042)
Increase in policy loans (113) (111)
Purchases of property and equipment (152) (34)
Net change in short-term investments 18,244 (457)
Net Cash Provided (Used) by Investing Activities 24,354 (10,280)
Financing Activities
Policyholder account deposits 34,691 40,664
Policyholder account withdrawals (61,528) (53,296)
Dividends to shareholders (3,394) (3,378)
Change in short-term notes payable (3,100) -
Proceeds from sale of common stock 258 236
Repayment of long-term borrowings (139) (137)
Net Cash Used by Financing Activities (33,212) (15,911)
Increase (Decrease) in Cash 1,830 (4,157)
Cash at Beginning of Period 8,331 7,272
Cash at End of Period $10,161 $3,115
See notes to consolidated financial statements
</TABLE>
Page 5 of 20
<PAGE>
Item 1. Financial Statements (continued)
WASHINGTON NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 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.
B. Reinsurance
The effect of reinsurance on insurance premiums and policy charges
earned for short duration and long duration contracts for the
period ended March 31 follows:
<TABLE>
<CAPTION>
Short Long
(000s omitted) Duration Duration Total
1996
<S> <C> <C> <C>
Direct premiums and policy charges $81,375 $53,237 $134,612
Premiums assumed 9,291 357 9,648
Premiums ceded (1,000) (14,793) (15,793)
Net premiums and policy charges $89,666 $38,801 $128,467
</TABLE>
<TABLE>
<CAPTION>
1995
<S> <C> <C> <C>
Direct premiums and policy charges $69,771 $49,714 $119,485
Premiums assumed 13,887 471 14,358
Premiums ceded (430) (14,031) (14,461)
Net premiums and policy charges $83,228 $36,154 $119,382
</TABLE>
The Company's written premiums for short duration contracts do not
vary materially from premiums earned.
Reinsurance benefits ceded were $5,646,000 and $4,598,000 at March
31, 1996 and 1995, respectively.
C. 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 March 31, 1996 and December 31, 1995, the Company had three
financial guarantees totaling $13,733,000, as well a construction
completion guarantee. The Company feels it has adequate reserves
for related potential losses.
Page 6 of 20
Item 1. Financial Statements (continued)
WASHINGTON NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
March 31, 1996
D. Net Unrealized Gains on Investments
The components of net unrealized gains on investments is as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
<S> <C> <C>
Net unrealized gains on securities $22,366 $108,533
Adjustment to deferred acquisition costs (1,300) (37,700)
Deferred income tax (3,654) (21,035)
Net unrealized gains on investments $17,412 $ 49,798
</TABLE>
Page 7 of 20
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following updates 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
<CAPTION>
Three Months Ended
March 31,
(000s omitted) 1996 1995
<S> <C> <C>
Pretax operating income (loss)(a)
Life insurance and annuities $10,003 $ 8,386
Specialty health insurance (2,981) 1,403
Corporate and other 2,303 1,615
Total pretax operating income 9,325 11,404
Income taxes on operations 3,286 4,006
Net operating income 6,039 7,398
Net realized investment losses (b) (605) (108)
Net income $ 5,434 $ 7,290
<FN>
(a) Pretax income before realized investment losses.
(b) 1996 and 1995 include tax benefits of $5 and $507, respectively.
</TABLE>
<TABLE>
Consolidated Results of Operations
Components of Pretax Operating Income by Segment
<CAPTION>
Life Insurance Specialty Health Corporate
(000s omitted) and Annuities Insurance and Other Total
Three Months Ended March 31, 1996
<S> <C> <C> <C> <C>
Revenues
Insurance premiums and policy
charges $18,618 $109,849 $ - $128,467
Net investment income 38,106 5,114 1,699 44,919
Other revenues 1,140 1,453 234 2,827
Total revenues excluding realized
investment losses 57,864 116,416 1,933 176,213
Benefits and expenses
Insurance benefits 38,321 83,780 60 122,161
Expenses 4,920 29,253 (430) 33,743
Amortization of deferred
acquisition costs 4,620 6,364 - 10,984
Total benefits and expenses 47,861 119,397 (370) 166,888
Pretax operating income (loss) $10,003 $ (2,981) $2,303 $ 9,325
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1995
<S> <C> <C> <C> <C>
Revenues
Insurance premiums and policy
charges $17,721 $101,661 $ - $119,382
Net investment income 38,406 4,789 2,341 45,536
Other revenues 725 2,034 (17) 2,742
Total revenues excluding realized
investment losses 56,852 108,484 2,324 167,660
Benefits and expenses
Insurance benefits 38,919 72,582 74 111,575
Expenses 4,777 29,840 635 35,252
Amortization of deferred
acquisition costs 4,770 4,659 - 9,429
Total benefits and expenses 48,466 107,081 709 156,256
Pretax operating income $ 8,386 $ 1,403 $1,615 $ 11,404
</TABLE>
Page 8 of 20
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Three Months Ended March 31, 1996 Compared to Three Months Ended
March 31, 1995
Insurance Premiums and Policy Charges. Insurance premiums and policy
charges increased $9.1 million, or 7.6%, from $119.4 million in 1995
to $128.5 million in 1996. The improvement was primarily due to an
increase in the amount of individual health insurance in force.
Net Investment Income. Net investment income was $44.9 million in
the first quarter of 1996, down 1.4% from the same period of 1995.
The yield on the Company's investment portfolio (based on amortized
cost) declined from 7.6% in 1995 to 7.4% due to lower market
interest rates on new investments in 1995. The amortized cost of the
portfolio at March 31, 1996, decreased approximately 1% from
December 31, 1995.
Realized Investment Losses. Realized investment losses before taxes
for the first quarter of both 1996 and 1995 were $0.6 million. In
the first quarter of 1996, realized losses of $0.5 million each on
fixed maturity investments and real estate were partially offset by
gains of $0.3 million on mortgage loans and $0.1 million on equity
securities. In the first quarter of 1995, the Company had realized
losses of $0.3 million each on fixed maturity investments and real
estate. The Company's income taxes included a tax benefit of $0.5
million in the first quarter of 1995 related to realized investment
losses.
Insurance Benefits Paid or Provided. Insurance benefits paid or
provided increased $10.6 million, or 9.5%, from $111.6 million in
1995 to $122.2 million in 1996. The increase was mainly due to a
higher amount of individual health insurance in force, combined with
adverse claim experience in the specialty health insurance segment
(see "Segment Information," below).
Insurance and General Expenses. Insurance and general expenses were
$33.7 million in the first quarter of 1996, down 4.3% or $1.5
million from 1995. The Company's expense ratio (expenses as a
percentage of premiums and net investment income) decreased from
21.4% in the first quarter of 1995 to 19.5% in 1996. The reduction
in the expense ratio was due primarily to lower individual health
insurance expenses in the specialty health insurance segment
combined with higher premiums.
Amortization of Deferred Acquisition Costs. Amortization of deferred
acquisition costs increased $1.6 million, or 16.5%, from $9.4
million in 1995 to $11.0 million in 1996. The increase was primarily
due to amortization of costs associated with sales of individual
health and education products in the specialty health insurance
segment and sales at UPI in the life insurance and annuities
segment. Offsetting this increase in part was an expected decline in
amortized deferred acquisition costs on a portion of the closed
blocks of life insurance and annuities at WNIC which were fully
amortized in 1995.
Income Taxes. Income taxes on operations decreased $0.7 million to
$3.3 million in 1996 compared to $4.0 million in 1995, primarily as
a result of the lower operating income. The effective tax rate on
operations was 35.2% in the first quarter of 1996, essentially the
same as last year.
Net Income. Net income for 1996 was $5.4 million, a decrease of
25.5% as compared to $7.3 million in 1995. The decline resulted from
decreased earnings from operations in the specialty health insurance
segment primarily due to adverse claims experience, partially offset
by improved life insurance and annuities earnings due to higher policy
charges and interest spreads.
Page 9 of 20
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Segment Information
The Company has two operating business segments. The life insurance
and annuities segment consists of universal life 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 the first quarter of 1996 were $57.9 million,
compared to $56.9 million for the same period of 1995. The
improvement was attributable to higher insurance premiums and policy
charges of $0.9 million, primarily due to an increase in life
insurance in force and policy charges at UPI. UPI's increase in
revenues was offset in part by the expected revenue decline in the
closed block of business at WNIC.
Pretax operating income for the life insurance and annuities segment
increased $1.6 million, or 19.3%, to $10.0 million in 1996 from $8.4
million in 1995. UPI, the growth portion of this segment, recorded
earnings of $6.2 million, an increase of 21.3% over 1995, due to
increased policy charges and increased life insurance and annuity
spreads. WNIC's closed block reported an increase in earnings due to
reduced amortization of deferred acquisition costs on this portion
of the segment and improved interest spreads, offset in part by
lower investment income and increased mortality expense.
Specialty Health Insurance. The following table shows revenues for
the specialty health insurance by product line (000s omitted):
<TABLE>
<CAPTION>
Revenues 1996 1995 Change
<S> <C> <C> <C>
Individual Health Insurance $ 58,234 $ 51,387 $6,847
Group Life and Health Insurance 37,873 38,802 (929)
Education Disability Insurance 20,309 18,295 2,014
Total Specialty Health $116,416 $108,484 $7,932
</TABLE>
Sales of new individual health insurance policies, as measured by
new policies written, were 15,600 in the first quarter of 1996,
compared to 10,900 in 1995. The increase was due to a transition to
a more competitive product in 1995.
The specialty health insurance segment reported a pretax operating
loss of $3.0 million in the first quarter of 1996, compared to
pretax operating income of $1.4 million in 1995. The decline was due
to an increase in the benefits ratio (benefits as a percentage of
premiums) for both individual and group major medical health
insurance and adverse group life insurance mortality experience.
The high individual health benefits ratio resulted primarily from
poor claims experience on policies written in New Jersey, which has
implemented certain adverse restrictions on health insurers. The
loss from the poor New Jersey claims experience is mostly
attributable to a block of reinsured individual health insurance
policies. The Company began increasing rates on these policies in
the 1995 fourth quarter and continued these increases into the first
quarter of 1996. Excluding the reinsured blocks of business, the
Company's individual health insurance business reported operating
income of $1.0 million in the first quarter of 1996, compared to a
loss of $0.1 million in 1995.
Page 10 of 20
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The benefits ratio for group medical insurance increased in the
first quarter of 1996 over 1995 due to increased competition within
this marketplace and a $0.5 million premium refund settlement for
one large case.
Corporate and Other. For the first quarter of 1996, the corporate
and other segment had pretax operating income of $2.3 million,
compared to $1.6 million in 1995. The increase in operating income
was due primarily to lower expenses.
Investment Portfolio
At March 31, 1996, the Company had invested assets with a carrying
value of $2.4 billion. Certain information about the Company's
investment portfolio as of that date follows (dollars in millions):
<TABLE>
<CAPTION>
Percent of Total
Carrying Value Carrying Value
<S> <C> <C>
Fixed maturity investments:
United States government obligations $ 79.1 3.2%
Obligations of states and
political subdivisions 79.3 3.3
Public utilities 149.4 6.1
Industrial and miscellaneous 1,019.0 41.9
Mortgage-backed securities 626.0 25.7
Other 29.5 1.3
Total fixed maturity investments 1,982.3 81.5
Mortgage loans on real estate 301.3 12.4
Real estate and joint ventures 35.4 1.5
Policy loans 56.4 2.3
Other long-term 27.3 1.1
Short-term 30.3 1.2
Total invested assets $2,433.0 100.0%
</TABLE>
Fixed Maturity Investments
The Company's fixed maturity investments are carried at fair value.
Due to the increase in market interest rates during the first
quarter of 1996, the carrying value of the Company's fixed maturity
investments compared to amortized cost decreased $86.8 million,
resulting in an unrealized gain on fixed maturity investments of
$20.6 million, compared to an unrealized gain of $107.4 million at
December 31, 1995. The amortized cost of the Company's fixed
maturity portfolio increased $8.4 million to $1.96 billion at March
31, 1996.
The composition of the Company's fixed maturity portfolio at
March 31, 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 $ 821.8 41.5% 33.8%
AA/Aa 119.5 6.0 4.9
A 586.3 29.6 24.1
BBB/Baa 361.8 18.2 14.9
BB/Ba and lower 92.9 4.7 3.8
Total fixed maturities $1,982.3 100.0% 81.5%
Page 11 of 20
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 March 31, 1996, 5.2% of fixed maturity
investments were rated with comparable NAIC ratings, the majority of
which is $38.8 million of investments rated BBB and $39.0 million of
investments rated BB and lower.
The Company's fixed maturity portfolio at March 31, 1996, includes
$626.0 million of mortgage-backed securities, detailed as follows
(dollars in millions):
</TABLE>
<TABLE>
<CAPTION>
Carrying Value as a Percent of
Mortgage-
Carrying Backed Invested
Value Securities Assets
<S> <C> <C> <C>
Agency CMOs
Planned amortization classes $186.9 29.8% 7.7%
Target amortization classes 15.4 2.5 0.6
Sequential classes 5.0 0.8 0.2
Support classes 5.5 0.9 0.2
Accrual classes 6.7 1.1 0.3
Total agency CMOs 219.5 35.1 9.0
Non-agency CMOs (1)
Planned amortization classes 14.1 2.3 0.5
Accrual classes 1.6 0.2 0.1
Sequential classes 9.1 1.5 0.4
Total non-agency CMOs 24.8 4.0 1.0
Total CMOs 244.3 39.1 10.0
Non-agency mortgage-backed
pass-through securities 2.7 0.4 0.1
Agency mortgage-backed
pass-through securities 379.0 60.5 15.6
Total mortgage-backed securities $626.0 100.0% 25.7%
<FN>
(1) All of the Company's non-agency CMO investments were rated AAA at
March 31, 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 82.3% of the Company's CMO portfolio at March 31, 1996.
The next most stable class of CMOs is "target amortization class"
(TAC) which comprised 6.3% of the Company's CMO portfolio at March
31, 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 64%
of the Company's PAC and TAC investments at March 31, 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 12 of 20
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 $301.3 million (net
of allowances of $7.1 million) at March 31, 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 quarter of 1996. Of the outstanding loans
at March 31, 1996, loans with a carrying value of $3.1 million, or
approximately 1%, were delinquent 60 days or more as to interest or
principal, far better than the recent industry average.
Restructured loans, where modifications of the terms of the mortgage
loan have occurred and which are considered current investments, had
a carrying value of $15.0 million at March 31, 1996, essentially
unchanged from December 31, 1995.
The Company's mortgage loan portfolio at March 31, 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 $ 53.4 17.7%
Illinois 38.1 12.6
Indiana 31.3 10.4
Florida 30.9 10.3
Texas 25.8 8.6
North Carolina 17.5 5.8
Virginia 14.6 4.8
Wisconsin 10.1 3.4
All other 79.6 26.4
Total $301.3 100.0%
</TABLE>
<TABLE>
<CAPTION>
Mortgage Loans by Year of Maturity
Scheduled
Principal Balloon
Payments (1) Payments Total
<C> <C> <C> <C>
1996 $ 9.1 $ 25.7 $ 34.8
1997 12.6 23.1 35.7
1998 12.8 6.7 19.5
1999 13.5 6.1 19.6
2000 13.9 6.0 19.9
2001 and thereafter 81.8 90.0 171.8
Total $143.7 $157.6 $301.3
<FN>
(1) Includes scheduled payments on balloon loans
</TABLE>
<TABLE>
<CAPTION>
Property Type
<S> <C> <C>
Retail $184.9 61.4%
Office 31.0 10.3
Industrial 27.0 9.0
Medical 18.3 6.1
All other 40.1 13.2
Total $301.3 100.0%
</TABLE>
Page 13 of 20
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
Cash Flows. During the first quarter of 1996, the Company's
operating activities generated cash of $10.7 million compared to
$22.0 million in 1995. The decrease in cash provided by operations
in the 1996 first quarter resulted primarily from increased health
insurance benefits paid.
Cash used for financing activities increased from $15.9 million in
the first quarter 1995 to $33.2 million in 1996, primarily due to
annuity contract holder withdrawals outpacing deposits. In the first
quarter of 1996, UPI's deposits exceeded withdrawals by $6.7
million, compared to $17.3 million in 1995. For the WNIC closed
block, withdrawals exceeded deposits by $33.6 million in the first
quarter of 1996, compared to $29.9 million in 1995.
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 5.3%.
The increase in market interest rates since year-end 1995 has
resulted in an $86.8 million decrease in the carrying value of the
Company's fixed maturity investments. 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 March
31, 1996, the increase to shareholders' equity for unrealized gains
on fixed maturity investments was $16.2 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 $40.5 million at March 31, 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 requirements of the Company and its
subsidiaries.
Health Care Reform
No federal health care reform legislation was passed in the first
quarter of 1996. However, insurance reform bills were passed by the
House of Representatives in March and the Senate in April and are
designed, among other objectives, to improve insurance availability.
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.
Page 14 of 20
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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.
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 15 of 20
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
WNC and certain affiliated companies have been named in various
pending legal proceedings considered to be ordinary routine
litigation incidental to the business of such companies. A number
of other legal actions have been filed which demand compensatory and
punitive damages aggregating material dollar amounts. WNC believes
that such suits are substantially without merit and that valid
defenses to them exist. WNC's management and its chief legal
officer are of the opinion that such litigation will not have a
material effect on WNC's results of operations or consolidated
financial position. The amount involved in any proceeding, or group
of proceedings presenting in large degree the same issues, does not
exceed the materiality standard for disclosure contained in
Instruction 2 to Item 103 of Regulation S-K.
Page 16 of 20
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 11 - Computation of Per Share Earnings.
b. Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter ended
March 31, 1996.
Page 17 of 20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
WASHINGTON NATIONAL CORPORATION
May 6, 1996 /s/ Joan K. Cohen
Joan K. Cohen
Vice President, Controller and Treasurer
(Duly Authorized Officer and Chief
Accounting Officer)
Page 18 of 20
<PAGE>
EXHIBIT INDEX
PAGE
Exhibit 11 - Computation of Per Share Earnings. 20
Page 19 of 20
<TABLE>
WASHINGTON NATIONAL CORPORATION
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
Primary and Fully Diluted
(000s Omitted Except Per Share Amounts)
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Primary
Average Shares:
Average common shares outstanding 12,234 12,172
Assumed exercise of stock options 163 65
Total Average Shares 12,397 12,237
Net Income Available to Common Shareholders:
Income before Preferred Stock dividend
requirement $5,434 $7,290
Preferred Stock dividend requirement (90) (90)
Net Income Available to Common Shareholders $5,344 $7,200
Primary Earnings Per Share $0.43 $0.59
Fully Diluted
Average Shares:
Average common shares outstanding 12,234 12,172
Assumed conversion of preferred stock 269 271
Assumed exercise of stock options 163 65
Total Average Shares 12,666 12,508
Net Income Available to Common Shareholders $5,434 $7,290
Fully Diluted Earnings Per Share $0.43 $0.58
</TABLE>
Page 20 of 20
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 1,982,253
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,069
<MORTGAGE> 301,261
<REAL-ESTATE> 35,443
<TOTAL-INVEST> 2,433,022
<CASH> 10,161
<RECOVER-REINSURE> 47,626
<DEFERRED-ACQUISITION> 275,666
<TOTAL-ASSETS> 2,935,783
<POLICY-LOSSES> 2,046,645
<UNEARNED-PREMIUMS> 38,061
<POLICY-OTHER> 221,323
<POLICY-HOLDER-FUNDS> 38,658
<NOTES-PAYABLE> 1,170
<COMMON> 126,260<F1>
0
718
<OTHER-SE> 280,902
<TOTAL-LIABILITY-AND-EQUITY> 2,935,783
128,467
<INVESTMENT-INCOME> 44,919
<INVESTMENT-GAINS> (610)
<OTHER-INCOME> 2,827
<BENEFITS> 122,161
<UNDERWRITING-AMORTIZATION> 10,984
<UNDERWRITING-OTHER> 33,743
<INCOME-PRETAX> 8,715
<INCOME-TAX> 3,281
<INCOME-CONTINUING> 5,434
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,434
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
<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 $48,132.
</FN>
</TABLE>
