<PAGE> 1
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, 1996Commission 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. (X)
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant as of February 28, 1997.
Common Stock, $5 par value-$353,470,395
Convertible Preferred Stock, $5 par value-$7,619,684
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-12,402,470
(excluding 3,383,473 shares held in the Treasury) as of February 28, 1997
<PAGE> 2
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 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, 1996,
WNC and its affiliates had 454 full-time employees.
Late in 1994, the Company began a broad review of its corporate
strategy. During its review, the Company considered a number of
alternatives to increase the value of the Company for
shareholders. In June 1996, the Company announced an agreement to
sell its individual and small group health insurance business to
Pioneer Life Insurance Company and its intent to sell its large
group life and health insurance business. In July 1996, the
Company announced an agreement to sell its large group life and
health insurance business to Trustmark Insurance Company
(Mutual).
In November 1996, the Company announced an agreement to merge
with PennCorp Financial Group, Inc. (PennCorp), an insurance
holding company headquartered in New York, NY. Under the terms of
the merger, the independent corporate existence of the Company
will cease and PennCorp will continue as the surviving public
corporation. The merger is subject to approval by PennCorp's and
the Company's shareholders and certain regulatory agencies and is
expected to be completed in the second quarter of 1997.
The Company has focused on the following businesses in its
continuing operations: interest-sensitive individual life
insurance and annuities (underwritten by UPI) and specialty
insurance products for educators, which is comprised of employee-
paid disability and other insurance products (underwritten by
WNIC).
The Company's discontinued operations primarily consist of
individual health insurance (primarily major-medical and hospital
indemnity coverage for persons under the age of 65 without
employer-sponsored insurance) and employer-sponsored group health
and associated life insurance and stop-loss insurance for
employers with from 2 to 1,000 employees (all formerly
underwritten by WNIC).
GENERAL DESCRIPTION OF THE BUSINESS OF THE INDUSTRY SEGMENTS
WNC is an insurance holding company that, through WNIC and UPI,
provides life insurance, annuities, and specialty health
insurance products to educators in carefully targeted markets.
With the sale of the health businesses, WNC has two segments:
insurance operations and corporate and other. The corporate and
other segment is comprised of the operations of WNC that do not
specifically support the insurance operations.
The registrant hereby incorporates by reference Note P of the
Notes to Consolidated Financial Statements on page 47 of this
filing, which provides further information about WNC's two
business segments.
<PAGE> 3
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 to 1911. WNIC and WNC'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. WNIC's field force that distributes
specialty insurance products to educators consists of 46 salaried
field representatives (including 9 managers) and 18 support
staff.
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 on
interest-sensitive products such as universal life insurance and
annuities. UPI administers a closed block of life insurance and
annuities that was originally underwritten and sold by WNIC.
Business of this type is no longer sold by WNIC.
Sales for UPI are made through approximately 5,600 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 Segment
In 1996, UPI introduced a "joint last to die" universal life
insurance product, a ten-year level term product, and a monthly
death benefit rider with benefits paid over twenty years. In
1997, UPI plans to introduce a new low premium universal life
insurance product and an income replacement rider for existing
policies.
WNIC introduced a new voluntary accidental death and
dismemberment insurance product and a discount service card for
eligible insureds in 1996 and plans to introduce a new spousal
disability insurance product, a school board paid life insurance
and long-term disability product, and individual life insurance
products in 1997.
Competitive Conditions of the Segments
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.
In addition, 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
<PAGE> 4
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
1995 statutory 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.
The National Association of Insurance Commissioners (NAIC)
calculates twelve financial ratios based on statutory financial
statements (IRIS ratios) to assist state regulators in monitoring
the financial condition of insurance companies. A "usual range"
of results for each ratio is used as a benchmark for analysis.
State insurance departments may make inquiries of the company
when at least four IRIS ratios are outside the usual range. These
inquiries could lead to restrictions on the amount of business
that a company may write in an individual state. For 1996, WNIC
had two IRIS ratios outside the usual range and UPI had one IRIS
ratio outside the usual range.
A risk based capital formula was adopted by the NAIC in 1993 for
U.S. life insurance companies that established capital
requirements relating to insurance risk, business risk, asset
risk, and interest rate risk. These requirements are intended to
facilitate identification by insurance regulators of inadequately
capitalized insurance companies based upon the type and mixture
of risks inherent in the insurer's operations. The formulas for
determining the amount of risk based capital specify various
weighting factors that are applied to financial balances or
various levels of activity based on the perceived degree of risk.
Regulatory compliance is determined by a ratio of the company's
regulatory total adjusted capital, as defined by the NAIC, to its
authorized control level risk based capital, as defined by the
NAIC. Companies below specific trigger points or ratios are
classified within certain levels, each of which requires
specified corrective action. The levels are: 1) company action,
2) regulatory action, 3) authorized control, and 4) mandatory
control.
Companies that have triggered a company action level event are
required to submit a detailed comprehensive financial plan to the
domiciliary state insurance department. In the regulatory action
level, in addition to submitting the comprehensive financial
plan, a company may be subjected to a detailed regulatory
investigation. The domiciliary state insurance department is
permitted, but not required, to place the insurance company under
regulatory control when it falls to the authorized control level.
Regulatory control is required in the mandatory control level.
At year-end 1996, both of the Company's insurance subsidiaries'
regulatory total adjusted capital, as defined by the NAIC,
continue to be substantially in excess of the company action
level of risk based capital.
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Neither WNC nor any active affiliated company is licensed to do
business outside of the United States.
<PAGE> 5
The Company's insurance subsidiaries' business is diverse
geographically, with only one state having more than 10% of
statutory direct premiums. The following table shows direct
premiums collected on a statutory basis for the year ended
December 31, 1996, by state in excess of four percent (in
millions of dollars):
<TABLE>
<CAPTION>
State Premiums Percent
<S> <C> <C>
New Jersey $ 32.5 13.0%
California 23.5 9.4
Texas 21.4 8.6
Washington 19.0 7.6
Florida 17.1 6.8
Indiana 16.1 6.4
Pennsylvania 13.3 5.3
Michigan 11.0 4.4
All other 96.2 38.5
Total $250.1 100.0%
</TABLE>
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 leased for a period of twenty years from a joint
venture partnership in which WNIC has a one-third interest. As a
result of the merger with PennCorp, the building is expected to
be sublet to an unaffiliated company.
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 the building is
leased for a period of twenty years.
WNIC occupies 13 leased field offices throughout the country.
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 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.
<PAGE> 6
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.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders
during the fourth quarter of the fiscal year covered by this
report.
<PAGE> 7
PART II
Item 5. Market For the Registrant's Common Equity and Related
Shareholder Matters
QUARTERLY INFORMATION (unaudited)
The following table summarizes selected unaudited quarterly information
for 1996 and 1995. As of March 1, 1997, WNC had approximately 9,207
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,
1996 1995 1996 1995 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues (1) $83,703 $80,505 $82,976 $77,939 $81,323 $80,487 $80,705 $78,185
Pretax operating income (2) 12,807 10,296 13,969 9,494 10,440 10,890 11,356 9,344
Income from continuing
operations 7,907 7,016 9,994 6,751 7,748 7,068 6,678 5,871
Income (loss) from
discontinued operations,
net of tax - 2,270 (60) 1,636 (24,695) 1,829 (1,244) 1,419
Net income (loss) 7,907 9,286 9,934 8,387 (16,947) 8,897 5,434 7,290
Earnings per share:
Income from continuing
operations .63 .56 .80 .54 .63 .57 .53 .47
Income (loss) from
discontinued operations,
net of tax - .18 (.01) .13 (2.02) .15 (.10) .12
Net income (loss) per share .63 .74 .79 .67 (1.39) .72 .43 .59
Market price
Common
High 29 7/8 29 1/4 30 3/4 25 28 21 30 1/2 20 1/8
Low 27 1/4 21 7/8 25 1/8 20 1/2 25 1/8 18 25 3/4 17 3/4
Close 27 1/2 27 5/8 28 7/8 24 7/8 25 3/4 20 5/8 26 3/4 18 1/2
Preferred
High 55 54 1/4 56 47 1/4 52 1/4 40 5/8 54 1/4 42 1/2
Low 51 1/2 42 1/2 50 3/8 40 50 36 1/4 52 38 1/2
Close 52 1/4 54 1/4 54 47 1/4 50 3/4 40 1/2 53 40
Common Stock dividends .27 .27 .27 .27 .27 .27 .27 .27
Preferred Stock dividends .625 .625 .625 .625 .625 .625 .625 .625
<FN>
(1) Revenues from continuing operations.
(2) Income from continuing operations before taxes and realized
investment gains and losses.
</FN>
</TABLE>
<PAGE> 8
Item 6. Selected Financial Data
<TABLE>
FIVE YEAR SUMMARY
<CAPTION>
(000s omitted, except per share amounts)
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Total revenues (1) $ 328,707 $ 317,116 $ 305,320 $ 300,174 $ 291,264
Operating income (2)
Pretax operating income from
continuing operations $ 48,572 $ 40,024 $ 36,577 $ 24,835 $ 15,757
Net operating income from
continuing operations 30,993 26,060 23,469 15,506 10,955
Income from continuing operations
before cumulative effect of
changes in accounting principles 32,327 26,706 24,615 18,665 8,999
Income (loss) from discontinued
operations, net of tax (3) (25,999) 7,154 6,686 9,551 7,853
Net income (loss) 6,328 33,860 31,301 26,666 (5,967)
Average common shares and
equivalents outstanding (4) 12,438 12,250 12,225 10,755 9,989
Per share
Net operating income from
continuing operations $ 2.46 $ 2.10 $ 1.89 $ 1.41 $ 1.06
Income from continuing
operations before
changes in accounting
principles 2.57 2.15 1.98 1.70 .86
Net income (loss) .48 2.73 2.53 2.45 (.63)
Common dividends declared 1.08 1.08 1.08 1.08 1.08
Book value 31.60 34.54 24.51 27.92 27.93
Book value excluding net
unrealized investment
gains and losses 30.30 30.61 29.44 27.92 27.92
Total assets $2,869,196 $3,012,898 $2,810,568 $2,854,419 $2,712,783
Mortgage and long-term
notes payable 740 1,309 1,907 2,434 13,870
Shareholders' equity 403,944 437,919 306,323 348,945 288,040
Shareholders' equity excluding
net unrealized investment
gains and losses 387,336 388,121 367,679 348,988 287,929
Life insurance in force (in millions) 20,254 21,619 21,035 22,215 25,454
<FN>
(1) Revenues from continuing operations.
(2) Income from continuing operations before realized
investment gains and losses, gains from curtailments of
benefit plans and the cumulative effect of accounting changes.
(3) 1996 includes an after-tax loss on sale of $25,080. See
Note D of the notes to consolidated financial statements.
(4) 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.
</FN>
</TABLE>
<PAGE> 9
Item 7. 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 educators. 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 considered a number of
alternatives to increase the value of the Company for
shareholders. In June of 1996, the Company announced an agreement
to sell its individual and small group health insurance business
to Pioneer Life Insurance Company. In July of 1996, the Company
announced an agreement to sell its large group life and health
insurance business to Trustmark Insurance Company (Mutual). As a
result of the sales, the operating results of the health
businesses are accounted for as discontinued operations and the
Company recorded an after-tax loss of $25.1 million.
Additionally, $5.0 million of annual corporate overhead and data
center expenses previously allocated to the health businesses has
been reallocated to the corporate and other segment.
In November of 1996, after completing its review of its corporate
strategy and the insurance industry, the Company announced an
agreement to merge with PennCorp Financial Group, Inc. (PennCorp)
with PennCorp being the surviving entity. The merger is subject
to approval by PennCorp's and the Company's shareholders and
certain regulatory agencies and is expected to be completed in
the second quarter of 1997.
The Company has two business segments. The insurance operations
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 closed
block), and specialty health insurance products for educators.
The second business segment, corporate and other, includes the
non-insurance operations of the Company.
<PAGE> 10
<TABLE>
Analysis of Net Income
<CAPTION>
(000s omitted) 1996 1995 1994
<S> <C> <C> <C>
Pretax operating income from continuing operations (1)
Insurance operations $44,361 $37,794 $34,397
Corporate and other 4,211 2,230 2,180
Total pretax operating income from continuing operations 48,572 40,024 36,577
Income taxes on operating income from continuing
operations 17,579 13,964 13,108
Net operating income from continuing operations 30,993 26,060 23,469
Other components of income (net of tax)
Net realized investment gains (2) 1,334 646 1,146
Discontinued operations (3) (25,999) 7,154 6,686
Net income $ 6,328 $33,860 $31,301
<FN>
(1) Pretax income before net realized investment gains and
losses.
(2) 1996, 1995, and 1994 include tax benefits of $700,
$2,063, and $2,752, respectively.
(3) 1996 includes a $25.1 million loss on the sale of the
health insurance business recorded in the second quarter.
</FN>
</TABLE>
Consolidated Results of Operations
Components of Pretax Operating Income from Continuing Operations
by Segment:
<TABLE>
<CAPTION>
Insurance Corporate
(000s omitted) Operations and Other Total
1996
<S>
Revenues <C> <C> <C>
Insurance premiums and policy charges $157,568 $ - $157,568
Net investment income 156,303 9,455 165,758
Other revenues 4,221 526 4,747
Total revenues excluding realized investment gains 318,092 9,981 328,073
Benefits and expenses
Insurance benefits paid or provided 214,031 221 214,252
Insurance and general expenses 36,957 5,549 42,506
Amortization of deferred acquisition costs 22,743 - 22,743
Total benefits and expenses 273,731 5,770 279,501
Pretax operating income from continuing operations $ 44,361 $4,211 $ 48,572
</TABLE>
<PAGE> 11
<TABLE>
<CAPTION>
Insurance Corporate
(000s omitted) Operations and Other Total
1995
<S> <C> <C> <C>
Revenues
Insurance premiums and policy charges $145,407 $ - $145,407
Net investment income 159,414 9,370 168,784
Other revenues 4,233 109 4,342
Total revenues excluding realized investment losses 309,054 9,479 318,533
Benefits and expenses
Insurance benefits paid or provided 214,042 234 214,276
Insurance and general expenses 34,105 7,015 41,120
Amortization of deferred acquisition costs 23,113 - 23,113
Total benefits and expenses 271,260 7,249 278,509
Pretax operating income from continuing operations $ 37,794 $2,230 $ 40,024
</TABLE>
<TABLE>
<CAPTION>
1994
<S> <C> <C> <C>
Revenues
Insurance premiums and policy charges $136,307 $ 1 $136,308
Net investment income 159,050 7,590 166,640
Other revenues 3,748 230 3,978
Total revenues excluding realized investment losses 299,105 7,821 306,926
Benefits and expenses
Insurance benefits paid or provided 209,490 263 209,753
Insurance and general expenses 34,290 5,378 39,668
Amortization of deferred acquisition costs 20,928 - 20,928
Total benefits and expenses 264,708 5,641 270,349
Pretax operating income from continuing operations $ 34,397 $2,180 $ 36,577
</TABLE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Insurance Premiums and Policy Charges. Insurance premiums and
policy charges increased $12.2 million, or 8.4%, from $145.4
million in 1995 to $157.6 million in 1996. The improvement was
primarily due to increases from educator disability products and
increased life insurance policy charges at UPI. See "Segment
Information," below.
Net Investment Income. Net investment income was $165.8 million
in 1996, compared to $168.8 in 1995. The amortized cost of the
Company's investment portfolio at December 31, 1996, was $2.3
billion, compared to $2.4 billion at December 31, 1995. The
portfolio yield (based on amortized cost) declined from 7.6% in
1995 to 7.5% in 1996 primarily due to the reinvestment of
proceeds from sales of fixed maturity investments and mortgage
loan paydowns in lower yielding fixed maturity investments and
short-term investments.
Realized Investment Gains and Losses. Realized investment gains
before taxes for 1996 were $0.6 million compared to losses of
$1.4 million in 1995. In 1996, total realized investment gains
were comprised primarily of gains of $6.1 million on other
invested assets, $0.5 million on fixed maturity investments, and
$0.4 million on equity securities. These gains were largely
offset by realized investment losses of $6.5 million on real
estate and joint ventures.
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
<PAGE> 12
of $1.5 million. The Company's income taxes included tax benefits
of $0.7 million and $2.1 million in 1996 and 1995, respectively,
related to realized investment losses.
Insurance Benefits Paid or Provided. Insurance benefits paid or
provided were $214.3 million in 1996 and 1995. Increased benefits
primarily for universal life insurance at UPI and education
disability were offset by a decline in benefits in the closed
block of life insurance and annuities as this particular business
continues to diminish.
Insurance and General Expenses. The Company's expense ratio
(expenses as a percentage of premiums and net investment income)
was 13.1% in both 1996 and 1995. Increases in insurance
operations (primarily in the educator disability line) were
partially offset by a decline in corporate and other.
Amortization of Deferred Acquisition Costs. Amortization of
deferred acquisition costs was $22.7 million in 1996, down 1.6%
from $23.1 million in 1995. The decline was due to a decrease of
$2.4 million in amortization for a portion of the closed block
where such costs were fully amortized in 1995. Partially
offsetting this decline was increased amortization primarily at
UPI resulting from improved interest spreads and expense margins
in 1996 over 1995.
Income Taxes. Income taxes on operating income from continuing
operations increased $3.6 million to $17.6 million in 1996
compared to $14.0 million in 1995 primarily as a result of the
improvement in operating income. The effective tax rate on pretax
operating income in 1996 was 36.2%, compared to 34.9% in 1995.
The increase in the rate was due to certain non-deductible
expenses recorded in the fourth quarter related to the Company's
pending merger with PennCorp.
Loss from Discontinued Operations, Net of Tax. The Company
reported a loss of $25.1 million, net of tax, from the sale of
its health insurance business (see "Overview," above). In
addition, the 1996 loss from discontinued operations includes
$0.9 million relating to the loss on operations from January 1,
1996 through May 31, 1996, the measurement date for the disposal
of the health business, compared to income of $7.2 million for
the full year of 1995. The loss in 1996 resulted primarily from a
benefit ratio (benefits as a percentage of premiums) for the
group employee benefits portion of discontinued operations of 87%
through the measurement date compared to 79% for all of 1995. The
increase in the group benefit ratio was in part due to a higher
level of medical claims and in part due to the 1995 release of
approximately $2.6 million of policy liabilities on certain
disabled policyholders. In addition to an increase in the group
benefit ratio, the ratio for individual health insurance
increased to 66% through the measurement date compared to 63% in
the full year of 1995. The increase was due to higher claims
experience in New Jersey.
Net Income. Net income for 1996 was $6.3 million, compared to
$33.9 million in 1995. The decline in net income resulted from
the loss on the sale of the health business and the operating
loss from discontinued operations in 1996 (compared to income
from discontinued operations in 1995), offset in part by
improvements in continuing operations.
Segment Information
Insurance Operations. Revenues for the insurance operations
segment for 1996 were $318.1 million, compared to $309.1 million
for 1995, an increase of $9.0 million, or 2.9%. The improvement
was attributable to an increased amount of products in force in
the growth portions of this segment. For the educator disability
business, the number of insureds increased 15.9% for 1996 over
that for 1995. At UPI, insurance in force increased 5.1% for 1996
over 1995. Partially offsetting the increase was a decline in
investment income from the closed block attributable to the
ongoing shrinkage of the block in 1996. During 1996, annuity
account balances for the closed block declined 11.9% and
insurance in force declined 7.3%.
Operating income for the insurance operations segment increased
$6.6 million, or 17.4%, to $44.4 million in 1996 from $37.8
million in 1995, primarily due to a $4.7 million improvement in
interest rate spreads
<PAGE> 13
(the difference between interest credited to policyholders and
the interest earned on investments) and a decrease of $2.4 million
in amortization of deferred insurance costs for a portion of the
closed block where such costs were fully amortized in 1995.
Corporate and Other. The corporate and other segment had pretax
operating income of $4.2 million in 1996, compared to $2.2
million in 1995. The improvement was primarily due to a decline
in real estate expenses of $2.6 million due to fewer properties
combined with lower taxes, offset in part by merger-related
expenses of approximately $1 million.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Insurance Premiums and Policy Charges. Insurance premiums and
policy charges increased $9.1 million, or 6.7%, from $136.3
million in 1994 to $145.4 million in 1995. The improvement was
primarily due to a higher amount of educator disability products
and universal life insurance in force and higher policy charges.
See "Segment Information," below.
Net Investment Income. Net investment income was $168.8 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 $4.5 million, or 2.2%, from $209.8 million in
1994 to $214.3 million in 1995. The increase was mainly due to
higher benefits in the educator disability line and a greater
amount of universal life business in force, offset by a decline
in the closed block of life insurance and annuities.
Insurance and General Expenses. The Company's expense ratio
(expenses as a percentage of premiums and net investment income)
was 13.1% in 1995, unchanged from 1994. The stable expense ratio
was due, in part, to cost containment efforts at the Company.
Amortization of Deferred Acquisition Costs. Amortization of
deferred acquisition costs increased $2.2 million, or 10.4%, from
$20.9 million in 1994 to $23.1 million in 1995. The change was
primarily due to improved sales in 1994 and 1995.
Income Taxes. Income taxes on continuing operations increased
$0.9 million to $14.0 million in 1995 compared to $13.1 million
in 1994 primarily as a result of the improvement in operating
income.
Income from Discontinued Operations, Net of Tax. Income from
discontinued operations, net of tax, was $7.2 million in 1995,
compared to $6.7 million in 1994, a 7.0% increase. The increase
was primarily due to improved revenue, resulting from average
rate increases of approximately 7% and 5% on the direct
individual and group employee benefits businesses, respectively.
Additionally, revenues improved as sales of individual health
insurance policies increased from 28,100 in 1994 to 67,200 in
1995 due to a more competitive product and in increase in agents
selling these products. In addition to the increase in revenue,
1995 income from discontinued operations included approximately
$2.6 million, before taxes, 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
<PAGE> 14
insurance claims related to disability. Partially offsetting this
improvement to pretax income from discontinued operations was an
increase in the benefit ratio for both individual and group major
medical health insurance.
The individual health benefit ratio increase was primarily due to
higher claims experience in New Jersey, where that state
implemented certain adverse restrictions on health insurers. To
offset this experience, the Company implemented rate increases to
significantly reduce future losses.
Net Income from Continuing Operations. Net income from
continuing operations for 1995 was $26.7 million, an increase of
8.5% as compared to $24.6 million in 1994. The improvement
resulted from increased earnings from insurance operations.
Segment Information
Insurance Operations. Revenues for the insurance operations
segment for 1995 were $309.1 million, compared to $299.1 million
for 1994. The improvement was attributable to higher insurance
premiums and policy charges of $9.1 million primarily due to a
higher amount of educator disability business in force and an
increase in insurance premiums and policy charges at UPI due to
an increase in insurance in force. For the educator disability
business, the number of insureds increased 3.9% for 1995 over
1994. At UPI, insurance in force increased 4.7% for 1995 over
1994. The increase in insurance premiums and policy charges was
offset in part by the expected decline in the closed block of
business at WNIC.
Pretax operating income for the insurance operations segment
increased $3.4 million to $37.8 million in 1995 primarily due to
a 17% increase at UPI, the growth portion of the life insurance
and annuity business. UPI's improved operating income was
primarily due to increased policy charges and greater investment
income yield of $1.3 million each. This increase was partially
offset by a decline in earnings of $2.5 million in WNIC's closed
block due to a 4.8% decrease in its size and $3.5 million due to
narrower 1995 interest rate spreads.
Corporate and Other. For both 1995 and 1994, the corporate and
other segment had pretax operating income of $2.2 million. In
1995, revenues increased primarily due to higher investment
income of $1.8 million on the Company's surplus funds. This
improvement was mostly offset by an increase in expenses of $1.6
million primarily due to a change in the allocation of certain
expenses to the other segments.
<PAGE> 15
Investment Portfolio
At December 31, 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>
December 31, 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 $ 71.2 3.0% $ 80.5 3.2%
Obligations of states and political subdivisions 81.1 3.4 82.4 3.2
Public Utilities 150.1 6.3 155.1 6.1
Industrial and miscellaneous 1,025.1 43.1 1,058.0 41.6
Mortgage-backed securities 578.4 24.3 653.0 25.7
Other 25.2 1.0 31.7 1.2
Total fixed maturity investments 1,931.1 81.1 2,060.7 81.0
Mortgage loans on real estate 257.6 10.8 317.2 12.5
Real estate and joint ventures 20.1 0.8 34.1 1.3
Policy loans 55.8 2.4 56.3 2.2
Other long-term 11.8 0.5 27.8 1.1
Short-term 103.4 4.4 48.6 1.9
Total invested assets $2,379.8 100.0% $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. Due to rising interest rates during 1996, the carrying
value of the Company's fixed maturity investments compared to
amortized cost decreased $75.4 million, resulting in an
unrealized gain on fixed maturity investments of $32.0 million at
December 31, 1996, compared to $107.4 million at December 31,
1995. The amortized cost of the Company's fixed maturity
portfolio decreased $54.2 million during 1996 to $1.9 billion at
December 31, 1996. The decrease was largely due to sales of fixed
maturity investments to fund the continued run off of the closed
life insurance and annuity block and the Company's divestiture of
its health business.
<PAGE> 16
The composition of the Company's fixed maturity portfolio at
December 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 $ 776.4 40.2% 32.6%
AA/Aa 113.2 5.9 4.8
A 606.6 31.4 25.5
BBB/Baa 362.9 18.8 15.2
BB/Ba and lower 72.0 3.7 3.0
Total fixed maturities $1,931.1 100.0% 81.1%
</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 lower. At December 31,
1996, $78.1 million or 4.0% of fixed maturity investments were
rated with comparable NAIC ratings, the majority of which is
$36.7 million of investments rated BBB and $27.9 million of
investments rated BB and lower.
<PAGE> 17
The Company's fixed maturity portfolio at December 31, 1996,
includes $578.4 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 $135.8 23.4% 5.7%
Target amortization classes 6.6 1.1 0.3
Sequential classes 3.9 0.7 0.2
Support classes 5.6 1.0 0.2
Accrual classes 3.4 0.6 0.1
Total agency CMOs 155.3 26.8 6.5
Non-agency CMOs (1)
Planned amortization classes 18.0 3.1 0.7
Accrual classes 1.3 0.2 0.1
Sequential classes 7.4 1.3 0.3
Total non-agency CMOs 26.7 4.6 1.1
Total CMOs 182.0 31.4 7.6
Non-agency mortgage-backed pass-through securities 1.6 0.3 0.1
Agency mortgage-backed pass-through securities 394.8 68.3 16.6
Total mortgage-backed securities $578.4 100.0% 24.3%
<FN>
(1) All of the Company's non-agency collateralized mortgage
obligation (CMO) investments were rated AAA at December 31,
1996. The credit risk associated with non-agency mortgage-
backed securities is generally greater than that of agency
mortgage-backed securities.
</FN>
</TABLE>
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 82.3% of the Company's
CMO portfolio at December 31, 1996. The next most stable class of
CMOs is "target amortization class" (TAC) which comprised 3.6% of
the Company's CMO portfolio at December 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 59.0% of the Company's PAC and TAC investments at
December 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.
Mortgage Loans
The Company had investments in mortgage loans of $257.6 million
(net of allowances of $6.7 million) at December 31, 1996 compared
to $317.2 million at December 31, 1995. Investments in mortgage
loans declined primarily due to prepayments and amortization. Of
the outstanding loans at December 31, 1996, loans with a carrying
value of $6.2 million, or approximately 2.4%, were delinquent 60
days or more as to interest or principal.
Restructured loans, where modifications of the terms of the
mortgage loan have occurred and which are considered current
investments, had a carrying value of $11.6 million at December
31, 1996, a decrease of $3.5 million from December 31, 1995,
resulting primarily from impairments recognized. Impaired loans,
where compliance with the terms of the mortgage is in doubt,
total $9.4 million, a decrease of $1.0 million from December 31,
1995.
<PAGE> 18
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 1996, the Company's operating activities
generated cash of $15.9 million compared to $89.4 million in
1995. The decrease in cash provided by operations resulted
primarily from the discharge of certain policy and claim
liabilities related to the divested health insurance businesses,
an increase in the benefits ratio on the discontinued operations,
and certain cash expenditures related to the divestiture. As a
result of the health sales, the Company expects that it will
require additional cash of approximately $86 million in 1997 to
discharge certain policyholder benefit liabilities and to pay
expenses related to the sales. The Company has anticipated this
need by the build-up of short-term investments (see "Liquidity,"
below).
Cash provided from investing activities was $77.3 million in
1996, compared to cash used of $34.7 million in 1995. The
increase in cash provided from investing activities resulted
primarily from a reduction in fixed maturity investment purchases
and from increased mortgage loan paydowns in 1996.
Cash used for financing activities was $98.4 million in 1996,
compared to $53.7 million in 1995. The increase was primarily due
to increased annuity policyholder withdrawals. In 1996, UPI's
deposits exceeded withdrawals by $43.9 million, compared to $58.8
million in 1995. For the WNIC closed block, withdrawals exceeded
deposits by $128.0 million and $102.3 million in 1996 and 1995,
respectively.
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 $106.4 million at December 31, 1996, compared
to $56.9 million at December 31, 1995. Management believes the
Company has adequate liquidity to meet its ongoing cash
requirements as well as the requirements relating to the sale of
its health insurance businesses.
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
without the approval of the Illinois Insurance Department to the
greater of the previous year's statutory earnings or 10% of
statutory capital and surplus.
A.M. Best Ratings
The ability of an insurance company to compete successfully
depends, in part, on its financial strength, operating
performance, and claims-paying ability as rated by A.M. Best and
other rating agencies. A. M. Best uses a variety of qualitative
and quantitative measures in determining a company's rating and
surplus adequacy. The Company's insurance subsidiaries are each
currently rated "A- (Excellent)" by A.M. Best, based on their
1995 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
<PAGE> 19
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.
Inflation and Changing Prices
Inflation and changing prices are anticipated by the Company in
the pricing of its insurance products. The Company monitors
market interest rates to determine the rates it will credit on
its interest-sensitive life insurance and annuity products in
order to achieve adequate interest rate spreads. The effect of
inflation on operating expense has not been significant.
<PAGE> 20
Item 8. Financial Statements and Supplementary Data
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
Washington National Corporation
We have audited the accompanying consolidated balance sheet
of Washington National Corporation as of December 31, 1996
and 1995, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. Our audits also
included the financial statement schedules listed in the
Index at Item 14(a). These financial statements and
financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements and financial
statement schedules are free of material misstatement. An
audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Washington National Corporation at
December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, 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, the Company changed its method of
accounting for certain investments in debt and equity
securities in 1994.
/c/ ERNST & YOUNG, LLP
Chicago, Illinois
March 7, 1997
<PAGE> 21
<TABLE>
CONSOLIDATED BALANCE SHEET
<CAPTION>
(000s omitted)
December 31, 1996 1995
<S> <C> <C>
Assets Investments
Fixed maturities-Available for sale at fair
value (cost: $1,899,130; $1,953,314) $1,931,129 $2,060,710
Mortgage loans on real estate 257,635 317,249
Real estate and joint ventures 20,044 34,080
Policy loans 55,798 56,279
Other long-term 11,812 27,744
Short-term 103,345 48,594
Total Investments 2,379,763 2,544,656
Cash 3,081 8,331
Deferred acquisition costs 242,488 235,499
Reinsurance recoverables and prepaid premiums 109,555 49,502
Accrued investment income 31,671 32,652
Insurance premiums in course of collection 12,051 14,718
Property and equipment 13,472 18,259
Goodwill 17,679 18,385
Separate Account 39,643 51,005
Other 19,793 39,891
Total Assets $2,869,196 $3,012,898
Liabilities Policy liabilities $2,282,537 $2,363,329
General expenses and other liabilities 129,784 125,194
Mortgage payable 740 1,309
Short-term notes payable - 3,100
Income taxes (current: $550; $944) 12,548 31,042
Separate Account 39,643 51,005
Total Liabilities $2,465,252 $2,574,979
Shareholders' Convertible preferred stock 712 718
Equity Common stock 128,960 125,953
Retained earnings 315,661 319,447
Net unrealized investment gains 16,608 49,798
Cost of common treasury stock (57,997) (57,997)
Total Shareholders' Equity 403,944 437,919
Total Liabilities and Shareholders' Equity $2,869,196 $3,012,898
See notes to consolidated financial statements.
</TABLE>
<PAGE> 22
<TABLE>
CONSOLIDATED STATEMENT OF INCOME
<CAPTION>
(000s omitted, except per share amounts)
Year Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
Revenues Insurance premiums and policy charges $157,568 $145,407 $136,308
Net investment income 165,758 168,784 166,640
Realized investment gains (losses) 634 (1,417) (1,606)
Other 4,747 4,342 3,978
Total Revenues 328,707 317,116 305,320
Benefits and Insurance benefits paid or provided 214,252 214,276 209,753
Expenses Insurance and general expenses 42,506 41,120 39,668
Amortization of deferred acquisition costs 22,743 23,113 20,928
Total Benefits and Expenses 279,501 278,509 270,349
Earnings Income from continuing operations
before income taxes 49,206 38,607 34,971
Income taxes on continuing operations 16,879 11,901 10,356
Income From Continuing Operations 32,327 26,706 24,615
Discontinued Operations
Income (loss) from discontinued operations,
net of tax (919) 7,154 6,686
Loss on disposal, net of tax (25,080) - -
Income (Loss) From Discontinued Operations (25,999) 7,154 6,686
Net Income $ 6,328 $ 33,860 $ 31,301
Share Data Primary Earnings Per Share
Income from continuing operations $ 2.57 $ 2.15 $ 1.98
Income (loss) from discontinued operations,
net of tax (2.09) .58 .55
Net Income Per Share $ .48 $ 2.73 $ 2.53
Average Shares and Equivalents Outstanding 12,438 12,250 12,225
Fully Diluted Earnings Per Share
Income from continuing operations $ 2.57 $ 2.11 $ 1.97
Income (loss) from discontinued operations,
net of tax (2.09) .57 .53
Net Income Per Share $ .48 $ 2.68 $ 2.50
Average Shares and Equivalents Outstanding 12,446 12,639 12,496
See notes to consolidated financial statements.
</TABLE>
<PAGE> 23
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
(000s omitted)
Year Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
Operating Net income $ 6,328 $ 33,860 $ 31,301
Activities Adjustments to reconcile to net cash
provided by operating activities
Increase in policy liabilities 63,240 52,048 48,998
Change in reinsurance receivable (45,958) 4,058 (11,387)
Loss from discontinued operations,
net of tax 25,080 - -
Deferred acquisition costs (13,265) (11,561) (3,894)
Other, net (19,544) 11,039 19,240
Net Cash Provided by Operating Activities 15,881 89,444 84,258
Investing Proceeds from sales
Activities Fixed maturities - available for sale 209,200 308,663 113,375
Fixed maturities - held to maturity - 1,950 -
Mortgage loans, real estate, and other 31,107 4,744 18,449
Proceeds from maturities, redemptions,
and distributions
Fixed maturities - available for sale 72,996 96,188 155,684
Fixed maturities - held to maturity - 19,417 17,313
Mortgage loans, real estate, and other 69,404 46,828 58,666
Cost of purchases
Fixed maturities - available for sale (228,961) (507,084) (399,418)
Fixed maturities - held to maturity - - (5,000)
Mortgage loans, real estate, and other (9,887) (6,495) (26,258)
Change in policy loans 481 (1,911) (2,083)
Net payments on sale of discontinued
operations (11,702) - -
Purchases of property and equipment (591) (768) (2,008)
Net change in short-term investments (54,751) 3,793 22,915
Net Cash Provided (Used) by Investing
Activities 77,296 (34,675) (48,365)
Financing Policyholder account deposits 149,924 150,469 143,627
Activities Policyholder account withdrawals (234,036) (194,006) (169,278)
Dividends to shareholders (13,616) (13,532) (13,480)
Change in short-term notes payable (3,100) 3,100 -
Proceeds from sale of common stock 2,970 857 596
Repayment of mortgage payable (569) (598) (527)
Net Cash Used by Financing Activities (98,427) (53,710) (39,062)
Change in Cash Increase (Decrease) in Cash (5,250) 1,059 (3,169)
Cash at Beginning of Year 8,331 7,272 10,441
Cash at End of Year $ 3,081 $ 8,331 $ 7,272
See notes to consolidated financial statements.
</TABLE>
<PAGE> 24
<TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<CAPTION>
(000s omitted)
Year Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
Convertible Balance at beginning of year $ 718 $ 723 $ 723
Preferred Stock Conversion to common stock (6) (5) -
Balance at end of year 712 718 723
Common Stock Balance at beginning of year 125,953 124,842 124,145
and Additional Common stock issuances 3,007 1,111 697
Paid-In Capital Balance at end of year 128,960 125,953 124,842
Retained Balance at beginning of year 319,447 300,111 282,117
Earnings Net income 6,328 33,860 31,301
Common stock dividends (13,259) (13,171) (13,118)
Preferred stock dividends (357) (361) (362)
Change in unfunded pension loss 3,502 (992) 173
Balance at end of year 315,661 319,447 300,111
Net Unrealized Balance at beginning of year 49,798 (61,356) (43)
Investment Effect of change in accounting principle - - 41,644
Gains (Losses) Change during year (33,190) 111,154 (102,957)
Balance at end of year 16,608 49,798 (61,356)
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 $403,944 $437,919 $306,323
</TABLE>
<TABLE>
CAPITAL STOCK ACTIVITY
<CAPTION>
(000s omitted)
Year Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
Convertible Shares at beginning of year 144 145 145
Preferred Stock Conversion to common stock (1) (1) -
Shares at end of year 143 144 145
Common Stock Shares at beginning of year 15,606 15,546 15,501
Common stock issuances 135 60 45
Shares at end of year 15,741 15,606 15,546
Common
Treasury Stock Shares at beginning and end of year (3,383) (3,383) (3,383)
Common Shares Outstanding at End of Year 12,358 12,223 12,163
See notes to consolidated financial statements.
</TABLE>
<PAGE> 25
Notes To Consolidated Financial Statements
Note A
Nature of Operations
Washington National Corporation (WNC or the Company) and its
subsidiaries are engaged primarily in marketing and underwriting
life insurance and annuities for individuals and specialty health
insurance for educators. Based on assets and income, the life
insurance and annuity products account for more than eighty
percent of WNC's business. The Company's surplus and specialty
health insurance products for educators account for the
remainder.
The markets for WNC's life insurance and annuity 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
for educators consist primarily of school district employees.
In November 1996, WNC signed a definitive agreement to merge with
PennCorp Financial Group, Inc. (PennCorp). The transaction, which
is subject to approval by WNC and PennCorp shareholders and
certain regulatory agencies, is expected to be completed in the
second quarter of 1997. Under the terms of the merger, the
separate corporate existence of WNC will cease and PennCorp will
continue as the surviving entity.
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
1996 presentation.
Investments
Fixed Maturities. Fixed maturities include bonds, redeemable
preferred stocks, and mortgage-backed securities with contractual
maturities greater than one year. All of the Company's fixed
maturities are classified as "available for sale" and are carried
at fair value. 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.
In 1995, the Company transferred its $84,146,000 of "held to
maturity" fixed maturities to "available for sale" 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 balance, 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 for which the Company determines that it is
probable that all amounts due under the contractual terms will
not be collected, are deemed to be impaired and are reported at
the lower of amortized cost or fair value of the underlying
collateral, less estimated costs to sell.
<PAGE> 26
Real Estate and Joint Ventures. In general, real estate
investments are considered available for sale and carried at the
lower of book or fair value less estimated costs to sell. Joint
ventures are accounted for 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 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.
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.
Unrealized Investment Gains and Losses. Unrealized investment
gains and losses on investments carried at fair value, net of
deferred taxes and adjustments for certain deferred acquisition
costs, are recorded directly in shareholders' equity.
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 related to continuing operations follows:
<TABLE>
<CAPTION>
Accumulated Depreciation
(000s omitted) 1996 1995
<S> <C> <C>
Real estate investments $13,175 $12,635
Property and equipment 4,355 3,571
</TABLE>
<TABLE>
<CAPTION>
Depreciation Expense
(000s omitted) 1996 1995 1994
<S> <C> <C> <C>
Real estate investments $ 940 $ 1,320 $ 1,453
Property and equipment 784 1,137 1,333
</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.
<PAGE> 27
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 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) 1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $29,130 $45,282 $41,902
Interest on unamortized balance 2,702 2,915 3,136
Amortization (6,038) (5,635) (6,026)
Effect of unrealized investment gains and losses 5,620 (13,432) 6,270
Balance at end of year $31,414 $29,130 $45,282
</TABLE>
The estimated percentage of the December 31, 1996 balance before
the effect of unrealized investment gains and losses to be
amortized over the next five years follows:
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001
<S> <C> <C> <C> <C> <C>
Percent Amortization 15.25% 14.22% 13.72% 13.48% 13.30%
</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 yields, 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, 1996. 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,
for certain policies, a provision for the return of cost 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
4.0% to 6.75% at December 31, 1996.
<PAGE> 28
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 being amortized on a
straight-line basis, over a thirty-five year period. The value of
goodwill is considered appropriate based on the long-term nature
of the insurance policies sold. Accumulated amortization of
goodwill was $7,450,000 and $6,744,000 at December 31, 1996 and
1995, 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 Company minimizes its
exposure to loss by reinsuring a portion of its 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. The Company
retains 100% of all long-term disability and a maximum of 50% of
all long-term care claims.
For continuing operations, 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 is accounted for over the life of the
underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies.
For the Company's discontinued operations, 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. WNC's reinsurance for individual
health insurance claims was designed to protect the Company from
an excessive amount of claims over $250,000 on an individual
claim basis.
<PAGE> 29
Note C
New Accounting Standards
Accounting Standard Adopted in 1996. For year-end 1996, the
Company adopted the disclosure requirements of Statement of
Financial Accounting Standards (SFAS) 123, "Accounting for Stock-
Based Compensation," which establishes accounting and reporting
requirements for stock-based compensation arrangements. As
permitted, the Company has elected to continue under the current
accounting standards of Accounting Principles Board Opinion No.
25 and, accordingly, no compensation expense has been recognized
for options granted. The pro forma impact on net income and
earnings per share can be found in Note J. The fair value of
stock options is reported in Note I.
Accounting Standard Adopted in Prior Years. 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.
Note D
Discontinued Operations
In May, 1996, the Company's Board of Directors approved a plan to
dispose of the Company's health insurance business. The Company
ceased the writing of this type of business effective November 1,
1996. The sale of the individual and small group health insurance
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 $19,000,000.
The $19,000,000 was received at the close of the transaction.
PLIC has assumed the risks incurred related to this business
after August 1, 1996 except for a small run-off block of New
Jersey guaranteed issue business. The Company believes it has
made adequate provisions in the accrual for the loss on the sale
for the claims incurred prior to August 1, 1996 and the risks not
assumed by PLIC.
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 future consideration to be received is .5% of
premiums and premium equivalents, during the first three years on
groups that renew with Trustmark. The Company has estimated this
amount to be approximately $1,300,000 based on past persistency
and premium levels. The Company has retained responsibility for
the profit or loss on this business through the next renewal date
of each group. As a result, the Company has recorded a provision
for future losses on this business in the accrual for the loss on
sale.
The transactions resulted in the Company recording an estimated
net loss of $25,080,000, net of a tax credit of $12,500,000. The
loss consists principally of the future operating losses of this
business for which the Company remains responsible after the
measurement date, 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 consolidated statement of income as discontinued operations.
As permitted, the consolidated balance sheet has not been
segregated between continuing and discontinued operations. At
December 31, 1996, the business had remaining assets of
approximately $220,444,000 consisting primarily of invested
assets and a $72,840,000 reinsurance receivable, and liabilities
of approximately $220,444,000 consisting primarily of policy
liabilities.
Revenues for the discontinued operations were $268,746,000,
$379,066,000, and $351,609,000 in 1996, 1995, and 1994,
respectively.
<PAGE> 30
Note E
Policy Liabilities
Detail of WNC's policy liabilities at December 31 follows:
<TABLE>
<CAPTION>
(000s omitted) 1996 1995
<S> <C> <C>
Future policy benefits
Annuities $1,144,935 $1,228,947
Life 865,155 837,990
Policy and contract claims 212,074 219,755
Unearned premiums 37,633 37,382
Other 22,740 39,255
Total policy liabilities $2,282,537 $2,363,329
</TABLE>
Activity in the liability for short duration unpaid claims and
short duration claim adjustment expense reported in continuing
operations (included in policy and contract claims and a
component of general expenses and other liabilities) follows:
<TABLE>
<CAPTION>
(000s omitted) 1996 1995 1994
<S> <C> <C> <C>
Balance at January 1 $59,417 $58,333 $55,137
Incurred relating to:
Current year 55,978 53,247 54,395
Prior years 1,970 988 (3,400)
Total incurred 57,948 54,235 50,995
Paid relating to:
Current year 23,375 23,436 22,727
Prior years 31,423 29,715 25,072
Total paid 54,798 53,151 47,799
Net balance at December 31 $62,567 $59,417 $58,333
</TABLE>
<PAGE> 31
Note F
Investments
Fixed Maturities
A comparison of amortized cost to fair value of fixed maturity
investments by category at December 31 follows:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
(000s omitted) Cost Gains Losses Value
1996
<S> <C> <C> <C> <C>
United States government obligations $ 70,150 $ 1,604 $ 536 $ 71,218
Obligations of states and political subdivisions 78,993 2,426 350 81,069
Public utilities 149,986 2,567 2,408 150,145
Industrial and miscellaneous 1,000,227 33,921 9,070 1,025,078
Mortgage-backed securities 575,902 9,385 6,842 578,445
Other 23,872 1,376 74 25,174
Total fixed maturities $1,899,130 $ 51,279 $19,280 $1,931,129
</TABLE>
<TABLE>
<CAPTION>
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>
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, 1996, 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. In
addition, corporate requirements may result in sales before
maturity.
<TABLE>
<CAPTION>
Amortized Fair
(000s omitted) Cost Value
<S> <C> <C>
Due in 1997 $ 23,091 $ 23,349
Due in 1998 - 2001 223,938 229,792
Due in 2002 - 2006 453,073 462,647
Due after 2006 623,126 636,896
Mortgage-backed securities 575,902 578,445
Total fixed maturities $1,899,130 $1,931,129
</TABLE>
<PAGE> 32
Mortgage Loans on Real Estate
Mortgage loan diversification at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Carrying % of
(000s omitted) Value Total
<S> <C> <C>
Property type
Retail $155,054 60.2%
Office 28,307 11.0
Industrial 22,097 8.6
Medical 16,610 6.4
Multi-family residential 11,309 4.4
All other (1) 24,258 9.4
Total $257,635 100.0%
Geographic distribution
California $ 42,760 16.6%
Illinois 33,754 13.1
Florida 29,463 11.4
Indiana 29,189 11.3
Texas 17,666 6.9
North Carolina 16,231 6.3
Virginia 14,062 5.5
All other (1) 74,510 28.9
Total $257,635 100.0%
<FN>
(1) No holdings in any other property
type or state exceed $10,000,000.
</FN>
</TABLE>
Information on mortgage loan maturities at December 31, 1996
follows:
<TABLE>
<CAPTION>
Scheduled
Principal Balloon
(000s Omitted) Payments Payments Total
<S> <C> <C> <C>
1997 $ 10,724 $ 29,096 $ 39,820
1998 11,691 6,847 18,538
1999 12,544 4,699 17,243
2000 13,083 5,051 18,134
2001 13,218 20,310 33,528
Due after 2001 70,362 60,010 130,372
Total $131,622 $126,013 $257,635
</TABLE>
Information on mortgage loan impairment for the years ended
December 31 follows:
<TABLE>
<CAPTION>
(000s omitted) 1996 1995
<S> <C> <C>
Non-impaired loans (net of allowance: $6,721; $7,171) $248,217 $306,847
Impaired loans (without allowance) 9,418 7,640
Impaired loans (net of allowance: $-; $135) - 2,762
Total mortgage loans $257,635 $317,249
Average investment in impaired mortgage loans $ 9,641 $ 5,812
Income recognized on impaired mortgage loans 584 732
Income received on impaired mortgage loans 534 714
</TABLE>
<PAGE> 33
A rollforward of the allowance for mortgage loan losses follows:
<TABLE>
<CAPTION>
(000s omitted) 1996 1995 1994
<S> <C> <C> <C>
Balance at January 1 $7,306 $ 8,032 $12,031
Additions - 400 1,501
Deductions (585) (1,126) (5,500)
Balance at December 31 $6,721 $ 7,306 $ 8,032
</TABLE>
Realized Investment Gains and Losses
Details of realized investment gains (losses) for the years ended
December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1996 1995 1994
<S> <C> <C> <C>
Fixed maturities
Gross gains $ 4,054 $ 7,257 $ 2,026
Gross losses (3,524) (7,740) (3,760)
Total fixed maturities 530 (483) (1,734)
Mortgage loans on real estate 101 (52) (82)
Equity securities 355 (192) 1,371
Real estate and other (352) (690) (1,161)
Realized investment
gains (losses) $ 634 $(1,417) $(1,606)
</TABLE>
Investment Income
Major sources of net investment income from continuing operations
for the years ended December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1996 1995 1994
<S> <C> <C> <C>
Fixed maturities $139,039 $138,998 $134,866
Mortgage loans on real estate 25,668 27,981 32,008
Real estate and other 5,129 7,133 8,225
Policy loans 3,828 3,643 3,459
Short-term 2,751 2,969 2,530
Gross investment income 176,415 180,724 181,088
Investment expenses 10,657 11,940 14,448
Net investment income $165,758 $168,784 $166,640
</TABLE>
Investment expenses consist primarily of real estate and
portfolio management expenses.
At December 31, 1996, the carrying value of investments that
produced no income for the previous twelve month period was
$4,286,000 or less than 1% of invested assets.
<PAGE> 34
Unrealized Investment Gains and Losses
The following table details the net unrealized investment gains
and losses included in shareholders' equity:
<TABLE>
<CAPTION>
(000s omitted) 1996 1995
<S> <C> <C>
Gross unrealized gains $53,692 $112,849
Gross unrealized losses (20,039) (4,316)
DAC (8,115) (37,700)
Deferred income taxes (8,930) (21,035)
Net unrealized investment gains $16,608 $ 49,798
</TABLE>
The change in gross unrealized net gains and losses for fixed
maturity investments was $(75,397,000), $226,872,000, and
$(201,808,000) in 1996, 1995, and 1994, respectively.
Non-Cash Investing Activities
During 1996, 1995, and 1994, non-cash investing activities
totaled $8,461,000, $10,707,000, and $4,009,000, 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.
Note G
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.
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 continuing operations for the defined contribution
plans in 1996, 1995, and 1994 was $1,633,000, $1,237,000, and
$928,000, respectively. As a result of the Company's decision to
dispose of the health business in 1996, the plans are considered
partially terminated under present income tax law. The affect of
the partial termination is an accelerated vesting schedule which
vests at 100% those employees who leave the Company under certain
conditions on or after August 1, 1996. Active employees who
remain with the Company are not 100% vested until they meet the
service requirements of the plans.
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, 1996 and 1995, the unfunded liability for the supplemental
retirement plan was not material. This Plan will be terminated at
the completion of the merger with PennCorp and the benefits
distributed to the participants.
The Company has two defined benefit retirement plans, the
Washington National Retirement Plan ("WNIC Plan") and the United
Presidential Corporation Employees' Retirement Plan ("UPI Plan")
both of which cover certain grandfathered employees and agents.
Benefits are based principally on years of service and
compensation. In connection with the Company's disposal of the
health business, the WNIC Plan was terminated on October 1, 1996.
The Company is committed to fund amounts sufficient to meet all
benefit obligations under the WNIC Plan which are not covered by
plan assets. The distribution of plan assets to participants will
occur through the first half of 1997. The UPI Plan has been amended to
<PAGE> 35
terminate the accrual of future benefits. The funding
policy is to contribute annually at least the minimum amounts
required by the IRC.
The components of net periodic pension income reported in income
from continuing operations for the defined benefit plans for the
years ended December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1996 1995 1994
<S> <C> <C> <C>
Interest cost on projected benefit obligations $ 1,773 $ 1,734 $ 1,824
Actual return on plan assets (2,838) (3,419) (419)
Net amortization and deferral 176 1,118 (2,054)
Net periodic pension income $ (889) $ (567) $ (649)
</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) 1996 1995
<S> <C> <C>
Actuarial present value of accumulated benefit obligations:
Vested $(24,005) $(26,501)
Non-vested (81) (78)
Accumulated benefit obligations $(24,086) $(26,579)
Projected benefit obligations $(24,086) $(26,579)
Plan assets at fair value 24,624 25,482
Plan assets in excess of (less than) projected benefit
obligations $ 538 $ (1,097)
Comprised of:
Prepaid pension cost $ 4,389 $ 3,190
Unrecognized actuarial net loss (6,464) (8,207)
Unrecognized transition asset 2,613 3,920
Total $ 538 $ (1,097)
</TABLE>
In addition, WNC's Consolidated Balance Sheet includes an accrual
of $3,500,000 for the estimated funding for the termination of
the WNIC Plan.
Plan assets are invested principally in mutual funds, stocks, and
venture capital funds. The WNIC Plan held 415,564 shares of WNC
Common and 17,108 shares of WNC Preferred Stock at both December
31, 1996 and 1995 with a fair market value of $12,322,000 and
$12,408,000, respectively. Dividends of $492,000 were received on
the WNC Common and Preferred Stock in both 1996 and 1995. No WNC
shares were purchased or sold during 1996 or 1995. The Company
will repurchase the shares from the WNIC Plan in 1997 in
connection with the distribution of plan assets to participants.
The actuarial assumptions used to measure the projected benefit
obligations include:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Weighted-average discount rate 7.0% 7.0% 7.5%
Weighted-average expected rate of return on plan assets 7.6% 7.6% 7.6%
</TABLE>
The UPI Plan and the WNIC Plan (prior to the WNIC's Plan
termination) 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 exceeded certain limits.
<PAGE> 36
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). The Plan pays a stated percentage of most medical
expenses, reduced for deductibles and payments made by government
programs or other group coverage. 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 were invested
in a short-term government money market fund and corporate
demand notes at December 31, 1996.
The components of net periodic postretirement benefit expense for
continuing operations for the years ended December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1996 1995 1994
<S> <C> <C> <C>
Interest cost $1,657 $1,537 $1,654
Service cost 53 40 46
Return on plan assets (234) (181) (23)
Net amortization and deferral 51 68 188
Net periodic postretirement benefit expense $1,527 $1,464 $1,865
</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) 1996 1995
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees, dependents, and disabled participants $(22,024) $(27,578)
Fully eligible active plan participants (680) (997)
Other active plan participants (263) (1,048)
Total accumulated postretirement benefit obligation (22,967) (29,623)
Fair value of plan assets 6,568 4,516
Accumulated postretirement benefit obligation in excess of plan assets $(16,399) $(25,107)
Comprised of
Accrued postretirement benefit expense $(21,700) $(23,074)
Unrecognized actuarial net gain (loss) 5,134 (2,215)
Unrecognized prior service cost 167 182
Total $(16,399) $(25,107)
</TABLE>
<PAGE> 37
The actuarial assumptions used to measure the postretirement
benefit obligation include:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Weighted-average discount rate 7.25% 7.00% 7.50%
Weighted-average after-tax expected rate of
return on plan assets 4.60% 4.60% 4.60%
Estimated income tax rate 34.00% 34.00% 34.00%
</TABLE>
The health care cost trend rate in 1996 was 11.1% for pre-age 65
and 9.3% for post-age 65 participants, graded evenly to 5.0% in
13 years. 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 5.0% in 14 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 $1,939,000 at December 31,
1996 and the aggregate of the service and interest cost
components of net periodic postretirement benefit expense by
$197,000 in 1996.
Note H
Reinsurance
The effect of reinsurance on insurance premiums and policy
charges earned from continuing operations for the years ended
December 31 follows:
<TABLE>
<CAPTION>
(000s omitted) 1996 1995 1994
<S> <C> <C> <C>
Direct premiums and policy charges $206,659 $198,803 $193,181
Premiums ceded (49,091) (53,396) (56,873)
Net premiums and policy charges $157,568 $145,407 $136,308
</TABLE>
Reinsurance benefits ceded from continuing operations were
$19,837,000, $19,619,000, and $19,134,000, in 1996, 1995, and
1994, respectively.
At December 31, 1996, approximately 66% of WNC's total
reinsurance recoverables related to the Company's discontinued
operations. Of the 66%, 85% was from PLIC as a result of the sale
of the individual and small group business and 12% was due from
UNUM Life Insurance Company. Of WNC's total reinsurance
recoverables, 21% were due from Combined Insurance Company of
America.
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 $8,018,000 and $8,202,000 at
December 31, 1996 and 1995, respectively. These transactions do
not materially impact the Company's GAAP financial statements.
Note I
Stock and Incentive Plans
WNC sponsors a Stock Benefit Plan (the Plan) which is
administered by the Compensation Committee (the Committee) of
WNC's Board of Directors. The Plan allows for awards of non-
qualified and incentive stock options and stock appreciation
rights to key managerial employees. Employees are eligible for
awards of restricted stock that may be granted or sold in tandem
with the grants of a stock option. The Plan also provides for
grants of non-qualified stock options to non-employee directors.
There were no incentive stock options or stock appreciation
rights outstanding in 1994, 1995, or 1996.
<PAGE> 38
Non-qualified stock options issued to key employees and non-
employee directors prior to March 12, 1993 were originally
exercisable up to 20 years from the date of grant. Non-qualified
stock options issued on or after March 12, 1993 to key employees
were originally exercisable up to 10 years from the date of
grant. Non-qualified stock options issued to non-employee
directors on or after March 12, 1993 were originally exercisable
at anytime from six months to 10 years after the date of grant.
The Committee passed an amendment to the Plan during the fourth
quarter of 1996 which deemed that all of the outstanding stock
options and restricted stock will be 100% vested as of the date
of the merger with PennCorp and will be exchanged for cash at
that time.
The pretax compensation expense relating to restricted stock
which was recognized in the financial statements was $84,000 and
$262,000 in 1996 and 1995, respectively.
Additional information on the WNC Stock Benefit Plan follows:
<TABLE>
<CAPTION>
Issuable Under Outstanding Options
1996 1995 1994
Available Weighted Weighted Weighted
For Grant Average Average Average
During Exercise Exercise Exercise
1996 Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C> <C>
January 1 balance 393,543 889,093 $21.80 777,649 $22.10 685,244 $21.38
Stock Options
Granted (180,000) 180,000 26.77 174,500 18.82 167,500 24.14
Exercised (126,038) 21.06 (31,832) 12.24 (22,367) 11.77
Forfeited 11,300 (11,300) 22.21 (31,224) 22.36 (52,728) 23.66
Restricted Stock
Issued (4,900)
Canceled 9,375
December 31 balance 229,318 931,755 $22.86 889,093 $21.80 777,649 $22.10
Options exercisable 534,285 21.99 511,102 21.54 420,975 21.30
</TABLE>
Information about stock options outstanding at December 31, 1996,
is summarized as follows:
<TABLE>
<CAPTION>
Options Outstanding (1) Options Exercisable (1)
Weighted Weighted Weighted
Range of Number Average Remaining Average Number Average
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$10.21 - $13.51 78,855 4.05 $10.30 78,855 $10.30
15.04 - 17.44 12,750 14.83 16.17 12,750 16.17
18.38 - 19.74 148,700 7.81 18.56 45,740 18.98
20.46 - 22.91 121,450 6.29 21.62 116,160 21.58
24.06 - 27.21 570,000 6.74 26.13 280,780 26.20
<FN>
(1) All outstanding options will be fully vested as of the
date of the merger with PennCorp and settled in cash.
</FN>
</TABLE>
The weighted average fair value per share of options granted was
$2.15 and $2.28 in 1996 and 1995, respectively. The weighted
average fair value per share of awards of restricted stock issued
in 1995 and 1996 was $29.50.
<PAGE> 39
The fair value of each option is estimated on the date of grant
using the Black-Scholes option pricing model. The following
weighted average assumptions were used for both 1996 and 1995
grants: dividend yield of 3.91 percent and an expected stock
price volatility of 19.5 percent. A risk free interest rate of
5.80 percent and 6.68 percent was used for 1996 and 1995 grants,
respectively. The assumption for the expected life of an option
was .96 years and 1.95 years for 1996 and 1995, respectively, due
to the pending merger.
Note J
Capital Stock
Convertible Preferred Stock
WNC has 10,000,000 authorized shares of $5 par value Preferred
Stock with 143,000 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. All outstanding shares will be redeemed in connection
with the merger with PennCorp.
Stock Purchase Rights
At December 31, 1996 and 1995, WNC had one outstanding Common
Stock Purchase Right for each outstanding share of Common Stock.
All of the Rights expired in January 1997.
The Rights would have become exercisable only if a person or
group acquired 20% or more of WNC's Common Stock or announced a
tender offer following which it would hold 30% or more of such
Common Stock. If the Rights had become exercisable, a holder
would have been entitled to buy from WNC one share of WNC Common
Stock at a price of $100 per share. If, after the Rights had
become exercisable, WNC was acquired in a merger or other
business combination or more than 50% of WNC's assets or earning
power were sold, each Right would have entitled 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 acquired 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 have become exercisable
for that number of shares of WNC Common Stock which have a fair
value of twice the exercise price of the Right. One additional
Right was distributed with each share of WNC Common Stock issued
in the future. The Rights were redeemable 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, 1996, 13,820,000
shares of WNC's Common Stock were reserved for future issuance:
12,358,000 shares for future exercises of Purchase Rights that
expired in January 1997; 267,000 shares for conversion of
outstanding Convertible Preferred Stock; 1,161,000 shares for
exercise of options to purchase Common Stock and for use in
connection with the restricted stock grants; and 34,000 shares
for issuance of Common Stock in connection with the dividend
reinvestment plan. The annual dividend paid on WNC Common Stock
in 1996, 1995, and 1994 was $1.08 per share.
<PAGE> 40
Earnings Per Share
The number of shares used in computing earnings per share
follows:
<TABLE>
<CAPTION>
(000s omitted) 1996 1995 1994
<S> <C> <C> <C>
Primary
Average common shares outstanding 12,270 12,194 12,144
Assumed exercise of options 168 56 81
Total average shares 12,438 12,250 12,225
Fully Diluted
Average common shares outstanding 12,270 12,194 12,144
Assumed conversion of preferred stock - 269 271
Assumed exercise of options 176 176 81
Total average shares 12,446 12,639 12,496
</TABLE>
Pro forma Net Income and Earnings Per Share
The pro forma impact on net income and earnings per share of
computing compensation cost for the Company's stock options and
restricted stock based on the fair value at the date of grant
follows:
<TABLE>
<CAPTION>
(000s omitted) 1996 1995
<S> <C> <C>
Net Income
As reported $6,328 $33,860
Pro forma 5,847 33,833
Primary Earnings Per Share
As reported 0.48 2.73
Pro forma 0.44 2.73
Fully Diluted Earnings Per Share
As reported 0.48 2.68
Pro forma 0.44 2.68
</TABLE>
The pro forma effects on income and earnings per share are not
likely to be representative of the effects on reported net income
in future years as 1995 and 1996 pro forma amounts include only
the 1995 and 1996 grants, and reflects these grants fully vesting
in 1996 instead of over five years.
<PAGE> 41
Note K
Income Taxes
Components of WNC's deferred tax liabilities and assets at
December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1996 1995
<S> <C> <C>
Deferred tax liabilities:
DAC $76,641 $ 75,789
Unrealized investment gains 11,288 33,768
Accrued bond discount 1,791 1,630
Joint ventures and venture capital investments 1,781 2,150
Other 871 1,739
Total deferred tax liabilities 92,372 115,076
Deferred tax assets:
Policy liability adjustments 57,469 65,576
Liabilities for employee benefits 13,192 14,004
Realized investment losses 8,384 5,826
Net liabilities related to discontinued business 4,924 -
Other 4,286 4,768
Total deferred tax assets 88,255 90,174
Valuation allowance (7,881) (5,196)
Deferred tax assets, net of valuation allowance 80,374 84,978
Net deferred tax liabilities $11,998 $ 30,098
</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, 1996, WNC had capital loss carryforwards for tax
return purposes of $110,000, which will expire 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 increased by $2,685,000 in 1996 and decreased
by $10,510,000 in 1995.
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 $19,922,000. At
December 31, 1996, 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, 1996, this shareholders' surplus was
$279,711,000.
<PAGE> 42
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) 1996 1995 1994
<S> <C> <C> <C>
Income tax at statutory rate applied to income from
continuing operations before income taxes $17,222 $13,512 $12,240
Tax expense not recognized on certain GAAP-basis
capital gains or losses (920) (1,484) (2,179)
Investment income not taxed (286) (299) (452)
Merger related expenses 544 - -
Amortization of purchase accounting adjustments 247 266 523
Other 72 (94) 224
Income tax expense from continuing operations 16,879 11,901 10,356
Comprised of:
Current expense 15,161 9,879 7,173
Deferred expense 1,718 2,022 3,183
Income tax expense from continuing operations 16,879 11,901 10,356
Income tax expense (benefit) from discontinued operations (13,088) 3,567 2,989
Total income tax expense $ 3,791 $15,468 $13,345
</TABLE>
Deferred income taxes (benefits) of $(11,526,000), $45,045,000,
and $(24,451,000) have been provided in 1996, 1995, and 1994,
respectively, which are recorded as a direct charge to
shareholders' equity rather than net income. These taxes
primarily relate to the change in net unrealized investment gains
and losses.
Income taxes paid by WNC were $10,759,000, $12,969,000, and
$8,120,000 in 1996, 1995, and 1994, respectively.
The Internal Revenue Service is currently examining the Company's
tax returns for 1992 through 1994.
Note L
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 the Company'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, 1996 follow:
<TABLE>
<CAPTION>
(000s omitted)
<S> <C>
1997 $ 6,393
1998 5,084
1999 4,247
2000 3,925
2001 3,620
Thereafter 40,952
Total minimum lease commitments $64,221
</TABLE
Of the above future minimum lease commitments, $6,378,000 has
been accrued for as part of the loss on sale of discontinued
operations.
<PAGE> 43
Rental expenses for continuing operations were $2,658,000,
$3,348,000, and $2,893,000, in 1996, 1995, and 1994,
respectively.
As a result of the proposed merger with PennCorp, the Company is
exploring the subleasing of its home office building. A sublease
could result in a charge to earnings in future periods.
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, 1996 the Company had three financial guarantees
totaling $11,460,000 with related letters of credit totaling
$2,104,000 and a construction completion guarantee. At December
31, 1995 the Company had three financial guarantees totaling
$11,600,000, related letters of credit of $2,133,000 and a
construction completion guarantee. The Company feels it has
adequate reserves for related potential losses.
Litigation
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> 44
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
$1,137,000, $1,934,000, and $2,850,000 in state guaranty fund
assessments in 1996, 1995, and 1994, respectively, and had
accrued liabilities of $4,483,000 and $3,478,000 for estimated
future assessments at December 31, 1996 and 1995, respectively.
For 1996, $327,000 and $1,606,000 of the above paid and accrued
guaranty fund assessments, respectively, relate to the
discontinued operations.
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 if the Company expects to utilize the asset. At December
31, 1996 and 1995, other assets included $2,799,000 and
$5,226,000, 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.
Note M
Mortgage Payable and Credit Arrangements
Mortgage Payable
Mortgage payable consisted of $740,000 and $1,309,000 at December
31, 1996 and 1995, respectively, for a mortgage on investment
real estate, with an interest rate of 6.5% that matures in July,
1997. The property is pledged as collateral, with a carrying
value of $6,753,000 at December 31, 1996.
Interest paid on borrowings by WNC was $74,000, $110,000, and
$406,000, in 1996, 1995, and 1994, respectively.
Credit Arrangements
WNC has a line of credit available with a bank for short-term
borrowings amounting to $10,000,000 which was unused at December
31, 1996. The line of credit arrangement is renewable annually,
but credit can be withdrawn at the bank's option.
In addition, WNC has four letters of credit with varying terms
and conditions totaling $2,184,000. As of December 31, 1996, all
of the letters of credit were unused.
Note N
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 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.
<PAGE> 45
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.
A summary of statutory net income and capital and surplus as of
and for the years ended December 31 follows:
</TABLE>
<TABLE>
<CAPTION>
(000s omitted) 1996 1995 1994
<S> <C> <C> <C>
Statutory net income $ 19,482 $ 18,278 $ 18,633
Statutory capital and surplus 240,034 231,930 221,270
</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 $23,950,000 in dividend distributions to WNC in 1997
without the prior approval of regulatory authorities. WNC
received dividends of $11,200,000 from WNIC in 1996. In
connection with the pending merger, the Illinois Insurance
Department has approved WNIC's request to pay an extraordinary
dividend of $75,000,000 in 1997.
<PAGE> 46
Note O
Fair Value of Financial Instruments
The fair values of certain financial instruments along with their
corresponding carrying values at December 31, 1996, and 1995
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>
1996 1995
Fair Carrying Fair Carrying Valuation
(000s omitted) Value Value Value Value Method
<S> <C> <C> <C> <C> <C>
Financial assets
Fixed maturities $1,931,129 $1,931,129 $2,060,710 $2,060,710 (1)
Equity securities 1,745 1,745 1,994 1,994 (1)
Mortgage loans on real estate 271,965 257,635 336,366 317,249 (2)
Policy loans 54,258 55,798 53,665 56,279 (3)
Cash and short-term investments 106,426 106,426 56,925 56,925 (4)
Investment proceeds receivable 1,092 1,092 2,289 2,289 (4)
Accrued investment income 31,671 31,671 32,652 32,652 (4)
Separate Account investment - - 11,840 11,840 (4)
Financial liabilities
Investment-type insurance contracts 1,043,707 1,070,581 1,131,665 1,161,263 (3)
Mortgage payable 757 740 1,328 1,309 (2)
Short-term borrowings - - 3,100 3,100 (4)
Off-balance sheet guarantees
Real estate developments 110 - 157 - (5)
<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 L for further
discussion of guarantees.
</FN>
</TABLE>
<PAGE> 47
Note P
Segment Information
WNC has two business segments: insurance operations and corporate
and other. The corporate and other segment includes realized
investment gains and losses and operations that do not
specifically support the insurance operations. 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, pretax
income from continuing operations, and assets by segment for the
years ended and at December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1996 1995 1994
<S> <C> <C> <C>
Revenues from continuing operations
Insurance operations $ 318,092 $ 309,054 $ 299,105
Corporate and other 10,615 8,062 6,215
Consolidated total $ 328,707 $ 317,116 $ 305,320
Pretax income from continuing operations
Insurance operations $ 44,361 $ 37,794 $ 34,397
Corporate and other 4,845 813 574
Consolidated total $ 49,206 $ 38,607 $ 34,971
Assets
Insurance operations $2,431,614 $2,512,050 $2,345,240
Corporate and other 217,138 213,692 215,082
Discontinued operations 220,444 287,156 250,246
Consolidated total $2,869,196 $3,012,898 $2,810,568
</TABLE>
Actuarial estimates are used in determining certain policy
liabilities and deferred acquisition costs which in turn effect
the reported profitability of the insurance operations segment.
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 insurance operations 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 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.
<PAGE> 48
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors of the Registrant
Certain information about the directors of WNC is set forth
below. WNC's board is divided into three classes: Class A
directors-Frederick R. Blume, Elaine R. Bond, Stanley P.
Hutchison, and Robert W. Patin; Class B directors-W. Francis
Brennan, John R. Haire, George P. Kendall, Jr., and Rex Reade;
and Class C directors-Ronald L. Bornhuetter, Lee A. Ellis, Frank
L. Klapperich, Jr., and Lee M. Mitchell. The terms of office of
Class A, Class B and Class C directors expire in 1997, 1998, and
1999, respectively, or in each case until the election and
qualification of their successors.
Frederick R. Blume-Managing Partner, Founder, Capital Health
Venture Partners, Denver, Colorado
Frederick R. Blume, age 54, was elected a director of WNC in
1993, and he serves on the audit and compensation committees. Mr.
Blume is founder and managing partner of Capital Health Venture
Partners, a Denver-based venture capital management company
established in 1985. Previously, Mr. Blume was a managing
director of PaineWebber Capital Markets and has also been vice
president of corporate finance for A.G. Becker & Company and
Kidder, Peabody & Co., Inc. In addition to being on the faculty
of Carroll Graduate School of Management, Boston College, Mr.
Blume also serves as a director of US Servis, Inc. and Cytyc
Corporation.
Elaine R. Bond-Former Senior Consultant and Chase Manhattan Bank
Fellow, The Chase Manhattan Bank, N.A., New York, New York
Ms. Bond, age 61, was elected a director of WNC in 1992, and she
serves on the audit and compensation committees. Ms. Bond was
associated with The Chase Manhattan Bank, N.A. from 1981 as
senior vice president and corporate staff head for the use of
technology in the bank, until her retirement in December 1994. In
1993, she became a Chase Manhattan Bank Fellow and Senior
Consultant and was responsible for overseeing research projects,
consulting with executives of the bank, and influencing industry
directions. From 1957 to 1981, Ms. Bond was associated with IBM
Corporation where she served in a number of capacities, including
the position of director of information services. Ms. Bond also
serves as a director of Novell, Inc.
Ronald L. Bornhuetter-Chairman of the Board and Chief Executive
Officer of NAC Re Corporation, Greenwich, Connecticut
Mr. Bornhuetter, age 64, was elected a director of WNC in 1992,
and he serves on the executive, finance and compensation
committees, the last of which he serves as chairman. Mr.
Bornhuetter is chairman of the board and chief executive officer
of NAC Re Corporation, a publicly held property and casualty
reinsurance company. Prior to his employment with NAC Re
Corporation, Mr. Bornhuetter was associated with General Re
Corporation from 1966 to 1985, where he served in a number of
capacities, including the position of chief financial officer.
Mr. Bornhuetter also is a trustee of the College of Wooster,
Wooster, Ohio.
<PAGE> 49
W. Francis Brennan-Former Executive Vice President, UNUM
Corporation, Portland, Maine
Mr. Brennan, age 60, was elected by the board as a director of
WNC in 1995, and he serves on the finance and board affairs
committees. He retired from UNUM Corporation in December 1994 as
executive vice president, a position he held since 1991. In his
10 years with UNUM, Mr. Brennan developed and executed the
company's corporate development and international expansion
strategies.
Lee A. Ellis-Former Senior Vice President for Business and
Finance, Northwestern University, Evanston, Illinois
Mr. Ellis, age 67, was elected a director of WNC in 1982, and he
serves on the compensation, executive, finance and board affairs
committees, the last of which he serves as chairman. He was
associated with Northwestern University, a private institution of
higher education, as senior vice president for business and
finance from 1976 until his retirement in 1990.
John R. Haire-Chairman, Committee of Independent Directors, Dean
Witter Group of Investment Companies, New York, New York
Mr. Haire, age 72, has been a director of WNC since 1969, and he
serves on the finance and board affairs committees. In 1989, he
was elected chairman of the committee of independent directors of
the Dean Witter Group of Investment Companies. Between 1978 and
1989 he was president and chief executive officer of the Council
for Aid to Education, Inc., a not-for-profit corporation
promoting financial aid to higher education. Mr. Haire is also a
director of the Dean Witter Group of Mutual Funds.
Stanley P. Hutchison-Former Chairman of the Board and Chief
Executive Officer, WNC and Washington National Insurance Company,
Lincolnshire, Illinois
Mr. Hutchison, age 73, was elected a director of WNC in 1968, and
he serves on the audit and finance committees. In 1988, he
retired as chairman of the board and chief executive officer of
WNC, positions he held since 1983 and 1978, respectively. From
1976 until his retirement, he also was chairman of the board and
chief executive officer of WNIC.
George P. Kendall, Jr.-Former Vice Chairman, WNC, and former
President, Washington National Insurance Company, Lincolnshire,
Illinois
Mr. Kendall, age 62, was elected a director of WNC in 1974, and
he serves on the executive, board affairs and audit committees,
the last of which he serves as chairman. He retired in January
1991 as vice chairman of WNC, a position he held since 1984.
After holding various positions at WNIC for 16 years, Mr. Kendall
was elected its president and a director in 1983, serving as a
member of the executive committee and as chairman of the finance
committee of the board of directors until his retirement in
January 1991.
Frank L. Klapperich, Jr.-President, Charter Capital Corporation,
Chicago, Illinois
Mr. Klapperich, age 62, was elected a director of WNC in 1991,
and he serves on the compensation, executive and finance
committees, the last of which he serves as chairman. He is
president of Charter Capital Corporation, a private investment
company. Prior thereto, Mr. Klapperich had a 29-year investment
banking career with Kidder Peabody & Co., Inc. and was a senior
vice president of that firm at the time of his retirement in
1990. Mr. Klapperich also serves as a director of TC
Manufacturing Co., Inc. and Newcor, Inc.
<PAGE> 50
Lee M. Mitchell-Principal, Golder, Thoma, Cressey, Rauner, Inc.,
Chicago, Illinois
Lee M. Mitchell, age 54, was elected a director of WNC in 1993,
and he serves on the audit, compensation and board affairs
committees. Mr. Mitchell is a principal in the private equity
investment firm of Golder, Thoma, Cressey, Rauner, Inc.,
("GTCR"), which specializes in the acquisition or
recapitalization of companies in fragmented, consolidating
industries in partnership with leading executives. Prior to
joining GTCR in 1994, Mr. Mitchell was the president and CEO of
The Field Corporation and its predecessor, Field Enterprises,
Inc., private management and holding companies with interests in
publishing, communications, paper manufacturing and commercial
real estate. Mr. Mitchell also was a partner in the law firm of
Sidley & Austin, where he maintained a corporate and federal
regulatory practice. He serves as a member of the Board of
Governors of The Chicago Stock Exchange and as a director of
Paging Network, Inc., American Medserve Corp., ERO, Inc. and a
number of private companies.
Robert W. Patin-Chairman of the Board, President and Chief
Executive Officer, WNC, Lincolnshire, Illinois
Mr. Patin, age 54, 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. Mr. Patin served as chairman of
the board, president and CEO of WNIC until June 1996. Mr. Patin,
a director of WNIC, serves on WNIC's finance committee. He also
is a director of certain affiliated companies of WNC, including
UPC and UPI. Mr. Patin also is a director of Evanston Hospital
Corporation.
Rex Reade-Former Chairman of the Board, Rust-Oleum Corporation,
Vernon Hills, Illinois
Mr. Reade, age 72, was elected a director of WNC in 1983, and he
serves on the audit and board affairs committees. He was
associated with Rust-Oleum Corporation, a manufacturer of rust-
preventive coatings, since 1959 and was chairman of that company
until his retirement in 1988.
Executive Officers of the Registrant
Certain information about executive officers of WNC is set forth
below. The executive officers of WNC are elected annually by the
board of directors at the first meeting of the board held after
the annual meeting of stockholders. Executive officers continue
to hold office until their successors are duly elected and
qualified or until their death, resignation or removal by the
board.
Wade G. Brown
Mr. Brown, age 59, joined WNC and 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.
Robert W. Patin
See discussion above.
James N. Plato
Mr. Plato, age 48, was elected chairman of the board, president
and chief executive officer of UPC and its principal subsidiary,
UPI, effective February 1994. From January 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 also a
director of WNIC.
<PAGE> 51
Thomas Pontarelli
Mr. Pontarelli, age 47, was elected chairman of the board,
president and chief executive officer of WNIC in July 1996. Mr.
Pontarelli began his career at WNIC in 1974 and was elected vice
president, general counsel and corporate secretary of WNC in
1984. Prior to his current position, Mr. Pontarelli was executive
vice president, law and administration of both WNC and WNIC,
positions he was elected to in 1989. In addition to chairing
WNIC's board and executive committee, he is a member of its
finance committee and UPC and UPI's board of directors.
Thomas C. Scott
Mr. Scott, age 50, 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 November
1974. He currently serves on the boards 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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on WNC's review of reports on Forms 3, 4 and 5 and
amendments thereto furnished to it pursuant to Rule 16a-3(e) of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and certain written representations, during its most recent
fiscal year, no person who, at any time during the fiscal year,
was a director, officer or beneficial owner of more than ten
percent of any class of equity securities of WNC registered
pursuant to Section 12 of the Exchange Act, failed to file on a
timely basis reports required by Section 16(a) of the Exchange
Act during the most recent fiscal year.
<PAGE> 52
Item 11. Executive Compensation
The following tables set forth the compensation information for the
years 1994 through 1996 with respect to WNC's chief executive
officer and the four most highly compensated executive officers of
WNC whose cash compensation exceeded $100,000 in 1996.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term
Annual Compensation Compensation
Awards All
(Securities Other
Name and Other Annual Underlying- Compensation
Principal Position Year Salary Bonus Compensation Option/(#)) Payouts (3)(4)
<S> <C> <C> <C> <C> <C> <C> <C>
R. W. Patin 1996 $573,620 $425,891 $ 23,137 (1) 25,000 $85,178 (2) $142,136
Chairman of the Board, 1995 546,990 330,000 14,886 25,000 81,510 81,486
President and CEO 1994 521,398 275,000 16,703 25,000 81,210
WNC
W. G. Brown 1996 194,489 111,390 10,721 (1) 10,000 22,278 (2) 47,781
Executive Vice 1995 183,927 88,000 60,061 10,000 21,318 30,947
President and Chief 1994 178,773 77,500 110,637 10,000 20,472
Information Officer
WNC and WNIC
J. N. Plato 1996 307,015 182,010 17,346 (1) 20,000 36,402 (2) 46,457
Chairman of the Board, 1995 259,868 135,000 13,910 10,000 30,402 40,526
President and CEO 1994 235,300 111,000 10,163 10,000 38,867
UPI
T. Pontarelli 1996 253,405 151,230 13,506 (1) 15,000 30,246 (2) 58,692
Chairman of the Board, 1995 233,428 115,500 10,407 10,000 27,090 36,417
President and CEO 1994 222,190 96,000 11,519 10,000 34,784
WNIC
T. C. Scott 1996 246,000 142,290 7,512 (1) 10,000 28,458 (2) 56,893
Executive Vice 1995 234,832 113,500 4,653 10,000 27,234 36,273
President and Chief 1994 223,132 93,000 4,049 10,000 34,743
Financial Officer
WNC and WNIC
<FN>
(1) Includes $23,137, $10,721, $17,346, $13,506, and $7,512 paid
to Messrs. Patin, Brown, Plato, Pontarelli and Scott,
respectively, for payment of taxes incurred primarily in
connection with company-provided automobiles and company-related
travel.
(2) Paid to Messrs. Patin, Brown, Plato, Pontarelli and Scott,
respectively, under the 1994-1996 Long-Term Pay-At-Risk Plan.
(3) Includes $124,288, $28,962, $30,338, $41,529, and $39,729 in
contributions made pursuant to WNC's Supplemental Executive
Retirement Plan to Messrs. Patin, Brown, Plato, Pontarelli and
Scott, respectively.
(4) Includes $16,119 in contributions made pursuant to WNC's
defined contribution plans to each of Messrs. Patin, Brown,
Plato, Pontarelli and Scott.
</FN>
</TABLE>
<PAGE> 53
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
Individual Grants
Number of % of Total Potential Realizable
Securities Options Value at Assumed
Underlying Granted to Exercise Annual Rates of Stock
Options Employees or Base Price Appreciation for
Granted in Fiscal Price Expiration Option Term
Name (#) Year ($/Sh) (3) Date 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
R. W. Patin 25,000(1) 13.89% $26.75 3/14/06 $420,573 $1,065,815
W. G. Brown 10,000(1) 5.56% 26.75 3/14/06 168,229 426,326
J. N. Plato 20,000(1) 11.11% 26.75 3/14/06 336,459 852,652
T. Pontarelli 10,000(1) 5.56% 26.75 3/14/06 168,229 426,326
5,000(2) 2.78% 26.81 6/06/06 84,303 213,641
T. C. Scott 10,000(1) 5.56% 26.75 3/14/06 168,229 426,326
<FN>
(1) Twenty percent of the options granted may be exercised
each year beginning on March 14, 1997.
(2) Twenty percent of the options granted may be exercised
each year beginning on June 6, 1997.
(3) All options were granted at the then current market value
of one share of WNC's common stock.
</FN>
</TABLE>
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Value Options at Fiscal In-The-Money Options
Acquired On Realized Year-End (#) at Fiscal Year-End ($)
Name Exercise (#) ($) Exercisable Unexercisable Exercisable (2) Unexercisable
<S> <C> <C> <C> <C> <C> <C>
R. W. Patin - - 120,000 70,000 $701,050 $257,100
W. G. Brown - - 18,000 32,000 58,760 117,840
J. N. Plato 3,133 $27,735 (1) 25,050 41,750 99,166 128,940
T. Pontarelli - - 46,000 33,000 245,840 106,290
T. C. Scott - - 46,000 28,000 245,840 102,840
<FN>
(1) This amount represents the difference between the market
value of one share of WNC's common stock on the date of
exercise and the exercise price times the number of shares.
(2) This amount represents the difference between the market
value of one share of WNC's common stock on December 31, 1996
($27.50) and the exercise price times the number of shares.
</FN>
</TABLE>
<PAGE> 54
LONG-TERM INCENTIVE PLANS-AWARDS IN LAST FISCAL YEAR
Possible 1999 Payments as a Percentage of 1998 Annual Base Compensation
<TABLE>
<CAPTION>
Name Performance Period Threshold Target Maximum
<S> <C> <C> <C> <C>
R. W. Patin 1/96 through 12/98 0% 30% 75.0%
W. G. Brown 1/96 through 12/98 0% 25% 62.5%
J. N. Plato 1/96 through 12/98 0% 25% 62.5%
T. Pontarelli 1/96 through 12/98 0% 25% 62.5%
T. C. Scott 1/96 through 12/98 0% 25% 62.5%
</TABLE>
The table shows the percentage of annual base compensation in
effect on December 31, 1998 that would be payable as an incentive
award if WNC achieved certain return on equity and total
shareholder return goals set by the compensation committee for
the 1996-1998 performance period. The compensation committee
established a range of possible payments, including threshold,
target and maximum payments, based upon WNC's three-year average
return on equity and its three-year total shareholder return
relative to the Standard & Poor's SmallCap 600 Index and a peer
group of life and health insurance companies. No awards will be
made if WNC's insurance subsidiaries do not maintain an A- Best
rating or higher during the three-year performance period. If
earned, awards would be payable in cash in 1999.
Compensation of Directors
Directors who are not employees of WNC or its subsidiaries earn
an annual fee of $25,000, paid in quarterly installments, and
$1,000 for attendance at each meeting of the board of directors
and its committees. Directors who chair a committee also receive
a $2,500 annual fee. Directors employed by WNC or its
subsidiaries do not earn fees for their services as directors.
WNC directors may elect to defer payment of a portion of their
director compensation. The terms of the deferred compensation
agreements vary and the agreements may be amended on an annual
basis.
Following six years of service on the board, a director is
entitled to a retirement benefit for a period of the earlier to
occur of (i) five years from the payment commencement date and
(ii) the deaths of the director and his or her spouse. The annual
retirement benefit is equal to ten percent of the amount of the
director's annual retainer at the time of termination for each
year of independent (non-employee) director service to a maximum
of 100% of such amount. Effective January 1, 1997, no additional
retirement benefits accrue and existing benefits vest.
Pursuant to the current terms of the WNC Stock Benefit Plan, each
non-employee director of WNC automatically receives a non-
qualified stock option to purchase 2,000 shares of common stock
on the day following the annual meeting of the board of directors
in each calendar year that the plan is in existence. The option
may be exercised in whole or in part at any time after the date
of grant and shall expire 10 years after the date of grant.
Washington National Retirement Plan
WNC, Washington National Insurance Company and Washington
National Development Company are sponsoring employers of a tax-
qualified, non-contributory defined benefit retirement plan
entitled the Washington National Retirement Plan (the "Retirement
Plan"). Effective December 31, 1990, the Retirement Plan was
amended, resulting in no further accrual of benefits beyond that
date. The Retirement Plan is terminating in 1997 and the
previously accrued benefits of each participant will be paid to
eligible participants.
<PAGE> 55
As of December 31, 1996, Messrs. Patin, Pontarelli and Scott had,
respectively, 1, 16 and 16 years of credited benefit service
under the Retirement Plan and have accrued a frozen annual
benefit of $8,771, $35,985 and $32,481, respectively, payable at
age 65 and ending at their death without survivor benefits.
Messrs. Brown and Plato were not eligible to participate in the
Retirement Plan prior to the date on which the Retirement Plan
was amended and therefore are not entitled to any benefits
thereunder.
Employment Contracts
Messrs. Brown, Patin, Plato, Pontarelli and Scott have employment
agreements with WNC and/or its wholly-owned subsidiaries,
Washington National Insurance Company and United Presidential
Life Insurance Company (collectively referred to herein as the
"Employer"), which provide for continued employment during the
two-year period following the dates of the agreements, subject to
automatic extensions of one day for each day served during the
terms of the agreements and base compensation of at least
$193,076, $590,567, $315,484, $262,132 and $246,634,
respectively, plus any bonus payable under the Annual Pay-At-Risk
Plan. The agreements further provide that base compensation is
subject to annual review by the compensation committee of WNC's
board of directors but may not be reduced in any year without the
consent of the executive officer. The Employer or the executive
officer may terminate the agreement for any reason; however, if
the Employer terminates the employment of the executive officer
for other than "good cause" or if the executive officer
terminates his employment for "good reason," then the Employer
shall make a lump sum payment to the executive officer in an
amount equal to two years' salary and bonuses for both years
under the Annual Pay-At-Risk Plan (prorated for any partial year)
that is at least equal to the most recently paid bonus.
Messrs. Brown, Patin, Plato, Pontarelli and Scott have employment
termination agreements with WNC and/or their Employer which
provide certain benefits to the executive officer if his
employment is terminated under certain circumstances within 24
months after a change of control of WNC. The Employer or the
executive officer may terminate the agreement for any reason;
however, if the Employer terminates the employment of the
executive officer for other than "good cause," or if the
executive officer terminates his employment for "good reason,"
than the Employer shall make a lump sum payment to the executive
officer in an amount equal to one year's salary and bonuses under
the Annual Pay-At-Risk Plan and the Long-Term Pay-At-Risk Plans
(prorated for any partial year).
<PAGE> 56
Item 12.Security Ownership of Certain Beneficial Owners and Mana
gement
STOCK OWNERSHIP
The following table sets forth the stock ownership of all persons
known by WNC to be the beneficial owners of more than 5% of the
outstanding shares of common stock of WNC (exclusive of treasury
stock) as of January 31, 1997 (unless otherwise noted).
<TABLE>
<CAPTION>
Number of Shares
Beneficially Owned (1)
Name and Address of Beneficial Owner Number Percentage
<S> <C> <C>
George P. Kendall, Jr. (2)
300 Tower Parkway
Lincolnshire, IL 60069 1,478,764 11.92%
First Chicago NBD Corporation (3)
One First National Plaza
Chicago, IL 60670 1,350,948 10.89%
Shufro, Rose & Ehrman (4)
745 Fifth Avenue
New York, NY 10151 696,945 5.62%
SunTrust Banks, Inc. (5)
25 Park Place, N.E.
Atlanta, GA 30303 856,660 6.91%
<FN>
(1) The table includes common stock which could be acquired
within 60 days by exercise of a stock option. The table does
not include the beneficial ownership of WNC's preferred stock.
The only person known to WNC to own beneficially more than 5%
of the outstanding shares of the preferred stock is Melvin S.
Cutler, Cutler Associates Investments, Inc., P.O. Box 15049,
Worcester, Massachusetts 01615, who beneficially owned, as of
December 27, 1996, 38,600 shares or 27.1% of the preferred
stock according to a Schedule 13G filed with the Securities
and Exchange Commission on such date. Such shares, if fully
converted into shares of common stock, would constitute less
than 1% of the outstanding shares of common stock.
(2) George P. Kendall, Jr. beneficially owns 1,478,764 shares
of common stock, including 1,263,003 shares which are also
reported under First Chicago NBD Corporation's beneficial
ownership total. The 1,263,003 shares are held by various
trusts (including 510,169 shares held by the G. R. Kendall
Foundation and Trust) with respect to which George P. Kendall,
Jr. and First Chicago NBD Corporation, as well as other
members of the Kendall family, share voting and investment
power as co-trustees of such trusts. Excluding these 1,263,003
shares, George P. Kendall, Jr. beneficially owns 215,761
shares or 1.76% of the outstanding shares.
(3) According to its Schedule 13G filed with the Securities
and Exchange Commission on February 4, 1997, First Chicago NBD
Corporation beneficially owned 1,350,948 shares of common
stock on such date. First Chicago NBD Corporation indicated
that it had sole voting power over 48,158 shares, shared
voting power over 1,302,790 shares, sole investment power over
59,419 shares and shared investment power over 1,284,104
shares. Included in First Chicago NBD Corporation's beneficial
ownership total are 1,263,003 shares which are also reported
under George P. Kendall, Jr.'s beneficial ownership total
(including 510,169 shares held by the G. R. Kendall Foundation
and Trust) over which First Chicago NBD Corporation shares
voting and investment power in its capacity as co-trustee
with, among others, George P. Kendall, Jr., a director of WNC.
(4) According to its Schedule 13G filed with the Securities
and Exchange Commission on February 14, 1997, Shufro, Rose &
Ehrman beneficially owned on such date 696,945 shares of
common stock. Shufro, Rose & Ehrman indicated that it had sole
voting power over 80,300 shares and sole investment power over
696,945 shares.
(5) According to its Schedule 13G filed with the Securities
and Exchange Commission on January 31, 1997, SunTrust Banks,
Inc. beneficially owned 856,660 shares of common stock on such
date. SunTrust Banks, Inc. indicated that it had sole voting
power over 855,910 shares, sole investment power over 27,860
shares and shared investment power over 750 shares.
</FN>
</TABLE>
<PAGE> 57
The following table sets forth the beneficial ownership of WNC
stock by each director and each executive officer named in the
Summary Compensation Table, and all executive officers and
directors as a group as of January 31, 1997.
<TABLE>
<CAPTION>
Number of Shares
Name of Beneficial Owner Title of Class Beneficially Owned (1) Percentage (2)
<S> <C> <C> <C>
F. R. Blume common stock 6,950 (3)
E. R. Bond common stock 9,150 (3)
R. L. Bornhuetter common stock 15,250 (3)
W. F. Brennan common stock 5,400 (3)
W. G. Brown common stock 28,021 (3)
L. A. Ellis common stock 13,231 (3)
J. R. Haire common stock 13,400 (3)
S. P. Hutchison common stock 16,588 (3)
preferred stock 100
G. P. Kendall, Jr. common stock 1,478,764 (3)(4) 11.92%
preferred stock 2,300 1.61%
F. L. Klapperich, Jr. common stock 11,750 (3)
L. M. Mitchell common stock 7,000 (3)
R. W. Patin common stock 165,506 (3) 1.33%
J. N. Plato common stock 51,027 (3)
T. Pontarelli common stock 55,566 (3)
R. Reade common stock 10,500 (3)
T. C. Scott common stock 64,100 (3)
All Executive Officers and Directors common stock 1,952,202 (3)(5) 15.74%
as a Group (16 persons) preferred stock 2,400 1.69%
<FN>
(1) Unless otherwise indicated by footnote, persons owning
the indicated shares are deemed to have sole voting and
investment power over such shares.
(2) The percentage of ownership of the common stock assumes
conversion of preferred stock only by the person or officers
and directors as a group holding such stock and not by all
other holders of preferred stock. It also includes common
stock which could be acquired within 60 days by exercise of a
stock option. Unless otherwise indicated, the percentage of
ownership of each class of stock is less than one percent.
(3) Number of shares beneficially owned includes shares of
common stock issuable pursuant to stock options exercisable
within 60 days after January 31, 1997, as follows: Mr. Blume,
6,000 shares; Ms. Bond, 8,000 shares; Mr. Bornhuetter, 8,750
shares; Mr. Brennan, 4,000 shares; Mr. Brown, 28,000 shares;
Mr. Ellis, 10,250 shares; Mr. Haire, 10,250 shares; Mr.
Hutchison, 10,250 shares; Mr. Kendall, 8,750 shares; Mr.
Klapperich, 8,750 shares; Mr. Mitchell, 6,000 shares; Mr.
Patin, 140,000 shares; Mr. Plato, 46,300 shares; Mr.
Pontarelli, 54,000 shares; Mr. Reade, 10,250 shares; and Mr.
Scott, 54,000 shares.
(4) See footnote (2) on page 56 for information relating to
Mr. Kendall's beneficial ownership.
(5) The 1,952,202 shares of common stock shown include
1,263,003 shares beneficially owned by George P. Kendall, Jr.
that are reported above under both George P. Kendall, Jr.'s
and First Chicago NBD Corporation beneficial ownership totals.
</FN>
</TABLE>
<PAGE> 58
Item 13. Certain Relationships and Related Transactions
On March 24, 1994, WNC made a mortgage loan to Mr. Brown in the
amount of $100,000, in connection with his purchase of a
residence in Illinois. This loan has a 10-year term and 25-year
amortization schedule. The loan bears an interest rate of 6.35%
per annum and is secured by a mortgage on his Illinois residence
and by amounts payable under his employment agreement. As of
December 31, 1996, a principal balance of $96,735 remained
outstanding. The largest amount outstanding during 1996 was
$98,561.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The consolidated financial statements and notes thereto are
located in Part II, Item 8 of this report.
(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 in a separate section of this report.
All management contracts and compensatory plans or
arrangements set forth in such list are marked with a double
asterisk (**).
(b) WNC filed the following reports on Form 8-K after the Form 10-Q
filing for the quarterly period ended September 30, 1996:
On November 15, 1996, WNC filed Form 8-K announcing it has
signed a definitive agreement to merge with PennCorp
Financial Group, Inc.
On December 4, 1996, WNC filed Form 8-K to announce it has
entered into an Amended and Restated Agreement and Plan of
Merger with PennCorp Financial Group, Inc.
On January 8, 1997, WNC filed Form 8-K to amend the 1995
Annual Report Form 10-K to reflect the 1996 sale of the
Company's health insurance business. The financial
information previously filed in the 1995 Annual Report
Form 10-K has been reclassified to reflect the sale of the
health insurance business as discontinued operations.
(c) Included in 14(a)(3) above.
(d) Included in 14(a)(2) above.
<PAGE> 59
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, 1997 /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, 1997 /c/ Frederick R. Blume
Frederick R. Blume
Director
Date: March 7, 1997 /c/ Elaine R. Bond
Elaine R. Bond
Director
Date: March 7, 1997 /c/ Ronald L. Bornhuetter
Ronald L. Bornhuetter
Director
Date: March 7, 1997 /c/ W. Francis Brennan
W. Francis Brennan
Director
Date: March 7, 1997 /c/ Joan K. Cohen
Joan K. Cohen
Vice President, Controller and Treasurer
Date: March 7, 1997 /c/ Lee A. Ellis
Lee A. Ellis
Director
<PAGE> 60
Date: March 7, 1997 /c/ John R. Haire
John R. Haire
Director
Date: March 7, 1997 /c/ Stanley P. Hutchison
Stanley P. Hutchison
Director
Date: March 7, 1997 /c/ George P. Kendall, Jr.
George P. Kendall, Jr.
Director
Date: March 7, 1997 /c/ Frank L. Klapperich, Jr.
Frank L. Klapperich, Jr.
Director
Date: March 7, 1997 /c/ Lee M. Mitchell
Lee M. Mitchell
Director
Date: March 7, 1997 /c/ Robert W. Patin
Robert W. Patin
Chairman of the Board, President
and Chief Executive Officer and Director
Date: March 7, 1997 /c/ Rex Reade
Rex Reade
Director
Date: March 7, 1997 /c/ Thomas C. Scott
Thomas C. Scott
Executive Vice President and
Chief Financial Officer
<PAGE> 61
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
<PAGE> 62
<TABLE>
SCHEDULE I--SUMMARY OF INVESTMENTS--
OTHER THAN INVESTMENTS IN RELATED PARTIES
WASHINGTON NATIONAL CORPORATION
December 31, 1996
<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 $ 70,150 $ 71,218 $ 71,218
States, municipalities and political
subdivisions 78,993 81,069 81,069
Mortgage-backed securities 575,902 578,445 578,445
Other 23,872 25,174 25,174
Public utilities 149,986 150,145 150,145
Industrial and miscellaneous 1,000,227 1,025,078 1,025,078
TOTAL FIXED MATURITIES AVAILABLE FOR SALE 1,899,130 $1,931,129 1,931,129
Mortgage loans on real estate (1) 264,356 257,635
Real estate and joint ventures:
Investment properties (2) 40,137 15,898
Acquired in satisfaction of debt (2) 5,485 4,146
Policy loans 55,798 55,798
Other long-term (3) 10,718 11,812
Short-term 103,345 103,345
TOTAL INVESTMENTS $2,378,969 $2,379,763
<FN>
Differences between cost and carrying value result from:
(1) Valuation allowances.
(2) Accumulated depreciation and declines in value that are other than temporary.
(3) Fair value adjustments.
</FN>
</TABLE>
<PAGE> 63
<TABLE>
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
WASHINGTON NATIONAL CORPORATION
(Parent Corporation Only)
<CAPTION>
BALANCE SHEET
December 31,
(000s omitted) 1996 1995
<S> <C> <C>
ASSETS
Cash $ - $ 3,407
Short-term investments 566 618
Equity in net assets of subsidiaries * 405,639 437,183
Amounts due from subsidiaries * 579 4,639
Real estate 162 162
Other 4,298 1,261
Total Assets $411,244 $447,270
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Dividends payable $ 3,426 $ 3,389
Short-term notes payable - 3,100
Amounts due to subsidiaries * 1,562 1,128
Other 2,312 1,734
Total Liabilities 7,300 9,351
SHAREHOLDERS' EQUITY
Convertible preferred stock 712 718
Common stock 128,960 125,953
Retained earnings (including equity in retained earnings
of subsidiaries: 1996 - $309,304; 1995 - $311,159) 315,661 319,447
Net unrealized investment gains of subsidiaries 16,608 49,798
Cost of common treasury stock (57,997) (57,997)
Total Shareholders' Equity 403,944 437,919
Total Liabilities and Shareholders' Equity $411,244 $447,270
<FN>
* Eliminated in consolidation.
</FN>
</TABLE>
<PAGE> 64
<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) 1996 1995 1994
<S> <C> <C> <C>
REVENUES
Dividends from subsidiary * $8,100 $9,100 $5,975
Management fee from subsidiary * 1,659 2,146 1,613
Interest 65 68 447
Realized investment losses - (1) (105)
Total Revenues 9,824 11,313 7,930
GENERAL AND ADMINISTRATIVE EXPENSES 1,658 2,013 1,743
INCOME BEFORE TAXES AND EQUITY IN UNDISTRIBUTED
NET INCOME (LOSS) OF SUBSIDIARIES 8,166 9,300 6,187
Income tax expense (benefit) (17) 44 370
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARIES 8,183 9,256 5,817
Equity in undistributed net income (loss) of subsidiaries * (1,855) 24,604 25,484
NET INCOME ** $6,328 $33,860 $31,301
<FN>
* Eliminated in consolidation.
** Includes $(25,999), $7,154, and $6,686 of income (loss) from discontinued operations,
net of tax, for 1996, 1995, and 1994, respectively.
</FN>
</TABLE>
<PAGE> 65
<TABLE>
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
WASHINGTON NATIONAL CORPORATION
(Parent Corporation Only)
<CAPTION>
STATEMENT OF CASH FLOWS
Year Ended December 31,
(000s omitted) 1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,328 $33,860 $31,301
Adjustments to reconcile to net cash
provided by operating activities:
Equity in undistributed net (income) loss of subsidiaries 1,855 (24,604) (25,484)
Net change in amount due from/to subsidiaries 4,494 (428) (2,962)
Change in receivable (3,426) - -
Other, net 1,036 532 742
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,287 9,360 3,597
INVESTING ACTIVITIES
Net change in short-term investments 52 74 7,207
Net change in investment properties - - 45
NET CASH PROVIDED BY INVESTING ACTIVITIES 52 74 7,252
FINANCING ACTIVITIES
Dividends to shareholders (13,616) (13,532) (13,480)
Proceeds from issuance of common stock 2,970 857 596
Change in short-term notes payable (3,100) 3,100 -
Return of deposit - - 2,200
NET CASH USED BY FINANCING ACTIVITIES (13,746) (9,575) (10,684)
INCREASE (DECREASE) IN CASH (3,407) (141) 165
Cash at beginning of year 3,407 3,548 3,383
CASH AT END OF YEAR $ - $ 3,407 $ 3,548
</TABLE>
<PAGE> 66
<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
(000s omitted) Costs Expenses Premiums Payable Charges (1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Insurance operations $242,488 $1,980,964 $ 2,278 $ 93,158 $157,568
Corporate and other - 223 14,989 9,574 -
Discontinued operations - 28,903 20,366 132,082 -
TOTAL $242,488 $2,010,090 $37,633 $234,814 $157,568
Year ended December 31, 1995
Insurance operations $202,303 $2,027,565 $ 2,204 $ 80,809 $145,407
Corporate and other - - 16,949 9,823 -
Discontinued operations 33,196 39,372 18,229 168,378 -
TOTAL $235,499 $2,066,937 $37,382 $259,010 $145,407
Year ended December 31, 1994
Insurance operations $264,591 $2,027,406 $ 1,685 $ 78,725 $136,307
Corporate and other - - 18,859 9,598 1
Discontinued operations 29,259 41,740 12,676 164,129 -
TOTAL $293,850 $2,069,146 $33,220 $252,452 $136,308
<FN>
(1) Represents insurance premiums and policy charges from continuing operations.
</FN>
</TABLE>
<PAGE> 67
<TABLE>
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
COLUMN A COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
Benefits, Amortization
Net Claims, Losses of Deferred Other
Segment Investment and Policy Operating
Income Settlement Acquisition Expenses Premiums
(000s omitted) (1) Expenses Costs (1) Written
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Insurance operations $156,303 $214,031 $22,743 $36,957 $75,783
Corporate and other 9,455 221 - 5,549 -
TOTAL $165,758 $214,252 $22,743 $42,506 $75,783
Year ended December 31, 1995
Insurance operations $159,414 $214,042 $23,113 $34,105 $68,064
Corporate and other 9,370 234 - 7,015 -
TOTAL $168,784 $214,276 $23,113 $41,120 $68,064
Year ended December 31, 1994
Insurance operations $159,050 $209,490 $20,928 $34,290 $63,897
Corporate and other 7,590 263 - 5,378 -
TOTAL $166,640 $209,753 $20,928 $39,668 $63,897
- ---------------------------------------------------------------------------------------------------------
<FN>
(1) Allocations are based on certain assumptions and estimates. These allocations would change if
different methods were applied.
</FN>
</TABLE>
<PAGE> 68
<TABLE>
SCHEDULE IV--REINSURANCE (1)
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
<CAPTION>
- -----------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN E
Ceded to
Segment Gross Other Net
(000s omitted) Amount Companies Amount
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1996
Life insurance in force $20,254,343 $4,178,623 $16,075,720
Insurance premiums and policy
charges:
Insurance operations $169,971 $12,403 $157,568
Corporate and other 36,688 36,688 -
TOTAL $206,659 $49,091 $157,568
Year ended December 31, 1995
Life insurance in force $21,619,386 $3,672,146 $17,947,240
Insurance premiums and policy
charges:
Insurance operations $157,045 $11,638 $145,407
Corporate and other 41,758 41,758 -
TOTAL $198,803 $53,396 $145,407
Year ended December 31, 1994
Life insurance in force $21,034,835 $3,081,697 $17,953,138
Insurance premiums and policy
charges:
Insurance operations $147,491 $11,184 $136,307
Corporate and other 45,690 45,689 1
TOTAL $193,181 $56,873 $136,308
- -----------------------------------------------------------------------------
<FN>
(1) Columns D and F are omitted since there was no reinsurance assumed
for continuing operations.
</FN>
</TABLE>
<PAGE> 69
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 and
T. C. Scott, on Form 10-K, for the year ended
December 31, 1991 ** *
10.2 Employment agreement with 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 ** *
10.6 Form of Employment Security and Consulting Agreement dated
June 14, 1996 between Registrant and W. G. Brown, R. W. Patin,
J. N. Plato, T. Pontarelli and T. C. Scott on Form 10-Q, for
the period ended June 30, 1996** *
10.7 Form of Amendment to Employment Agreements between
Registrant and W. G. Brown, R. W. Patin, J. N. Plato,
T. Pontarelli and T. C. Scott on Form 10-Q, for the period
ended September 30, 1996 ** *
11 Computation of Per Share Earnings see below
21 Subsidiaries of the Registrant 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.
<PAGE> 70
<TABLE>
EXHIBIT 11
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
Year Ended December 31,
(000s omitted, except per share amounts) 1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
PRIMARY
Average Shares:
Average common shares outstanding 12,270 12,194 12,144
Assumed exercise of stock options 168 56 81
TOTAL AVERAGE SHARES 12,438 12,250 12,225
Net Income Available to Common Shareholders:
Income from continuing operations before
Preferred Stock dividend requirement $32,327 $26,706 $24,615
Dividend requirement on Preferred Stock (357) (361) (362)
Income from continuing operations 31,970 26,345 24,253
Income (loss) from discontinued operations,
net of tax (25,999) 7,154 6,686
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 5,971 $33,499 $30,939
Primary Earnings Per Share:
Income from continuing operations $2.57 $2.15 $1.98
Income (loss) from discontinued operations,
net of tax (2.09) 0.58 0.55
NET INCOME PER SHARE $0.48 $2.73 $2.53
FULLY DILUTED
Average Shares:
Average common shares outstanding 12,270 12,194 12,144
Assumed conversion of Preferred Stock - 269 271
Assumed exercise of stock options 176 176 81
TOTAL AVERAGE SHARES 12,446 12,639 12,496
Net Income Available to Common Shareholders:
Income from continuing operations before
Preferred Stock dividend requirement $32,327 $26,706 $24,615
Dividend requirement on Preferred Stock (357) - -
Income from continuing operations 31,970 26,706 24,615
Income (loss) from discontinued operations,
net of tax (25,999) 7,154 6,686
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 5,971 $33,860 $31,301
Fully Diluted Earnings Per Share:
Income from continuing operations $2.57 $2.11 $1.97
Income (loss) from discontinued operations,
net of tax (2.09) 0.57 0.53
NET INCOME PER SHARE $0.48 $2.68 $2.50
</TABLE>
<PAGE> 71
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
AS OF MARCH 7, 1997
<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
</FN>
</TABLE>
<PAGE> 72
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, Independent Auditors
We 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 plan (Form S-3 Numbers 33-48306 and 2-72599) of
Washington National Corporation and in the related Prospectuses
of our report dated March 7, 1997, with respect to the
consolidated financial statements and schedules of Washington
National Corporation included in this Annual Report (Form
10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
Chicago, Illinois
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 1,931,129
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,745
<MORTGAGE> 257,635
<REAL-ESTATE> 20,044
<TOTAL-INVEST> 2,379,763
<CASH> 3,081
<RECOVER-REINSURE> 109,555
<DEFERRED-ACQUISITION> 242,488
<TOTAL-ASSETS> 2,869,196
<POLICY-LOSSES> 2,010,090
<UNEARNED-PREMIUMS> 37,633
<POLICY-OTHER> 212,074
<POLICY-HOLDER-FUNDS> 22,740
<NOTES-PAYABLE> 740
<COMMON> 128,960<F1>
0
712
<OTHER-SE> 274,272
<TOTAL-LIABILITY-AND-EQUITY> 2,869,196
157,568
<INVESTMENT-INCOME> 165,758
<INVESTMENT-GAINS> 634
<OTHER-INCOME> 4,747
<BENEFITS> 214,252
<UNDERWRITING-AMORTIZATION> 22,743
<UNDERWRITING-OTHER> 42,506
<INCOME-PRETAX> 49,206
<INCOME-TAX> 16,879
<INCOME-CONTINUING> 32,327
<DISCONTINUED> (25,999)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,328
<EPS-PRIMARY> .48
<EPS-DILUTED> .48
<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 $50,250.
</FN>
</TABLE>
