UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR SECTION 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: January 8, 1997
WASHINGTON NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 1-7369 36-2663225
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
300 TOWER PARKWAY, LINCOLNSHIRE, ILLINOIS 60069
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (847) 793-3000
<PAGE>
ITEM 5. OTHER EVENTS
Amendments to the 1995 Annual Report on Form 10-K dated as of
January 8, 1997, a copy of which is attached as Exhibit 99.
The 1995 Annual Report Form 10-K has been amended to reflect
the 1996 sale of the Company's health insurance business. The
Company has reflected the health insurance business as
discontinued operations and the financial information included
in the previously filed 1995 Form 10-K has been reclassified
accordingly.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
Exhibits
99. Certain Restated Information in the Annual Report on
Form 10-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WASHINGTON NATIONAL CORPORATION
(Registrant)
Date: January 8, 1997 By: /c/ Joan K. Cohen
------------------------------------------
Joan K. Cohen, Vice President,
Controller and Treasurer
<PAGE>
INDEX TO EXHIBITS
Exhibit Number
- --------------
99 Certain Restated Information in the Annual Report on
Form 10-K.
EXHIBIT 99
AMENDMENTS TO THE 1995 ANNUAL REPORT ON
FORM 10-K
DATED AS OF JANUARY 8, 1997
<PAGE>
PART I
Item 1. Business
General Development of Business
Washington National Corporation (WNC) was incorporated as a general
business corporation under the Delaware General Corporation Law on February 26,
1968, for the initial purpose of becoming the parent company and sole
shareholder of Washington National Insurance Company (WNIC), an Illinois
insurance corporation dating back to 1911. WNC was organized in order to permit
diversification into the broader field of financial services and is admitted to
do business in Delaware, Indiana, and Illinois. Its executive offices are
located at 300 Tower Parkway, Lincolnshire, Illinois 60069-3665.
The primary operating companies of WNC are WNIC and United Presidential
Life Insurance Company (UPI). At December 31, 1995, WNC and its affiliates had
1,011 full-time employees.
In June 1996, WNC announced its plans to dispose of its health insurance
business. As a result, WNC's health insurance business is being accounted for
as discontinued operations. Additionally, in November 1996, the Company
announced a definitive plan to merge with PennCorp Financial Group, Inc.
("PennCorp"). Under the terms of the merger, the separate corporate existence
of the Company shall cease and PennCorp shall continue as the surviving
corporation. The merger is anticipated to close during the first quarter of
1997, pending the receipt of the required shareholder and regulatory approval.
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 insurance 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 underwritten by
WNIC).
GENERAL DESCRIPTION OF THE BUSINESS OF THE INDUSTRY SEGMENTS
WNC is an insurance holding company which, through WNIC and UPI,
provides life insurance, annuities, and specialty insurance products for
educators. 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.
Further information as required by Item 1 is presented in a separate section of
this report and is preceded by the caption "Note O."
DESCRIPTION OF INSURANCE SUBSIDIARIES
Washington National Insurance Company
WNIC is a legal reserve stock life insurance company organized under
the laws of Illinois in 1926 and is the successor to other companies dating
back to 1911. WNIC's home office is located at 300 Tower Parkway, Lincolnshire,
Illinois 60069-3665. WNIC is licensed to do business in all states of the
United States (except New York) and the District of Columbia.
WNIC's insurance products are primarily sold by salaried group insurance
representatives. WNIC's field force that distributes speciality insurance
products to educators consists of 43 field representatives, including 10
managers, all of whom are salaried employees of WNIC. Their activities are
supported by 21 other field employees.
United Presidential Life Insurance Company
UPI, an Indiana life insurance company, began business in 1965 and
currently is licensed to do business in 45 states and the District of Columbia.
UPI's parent company, United Presidential Corporation (UPC), was incorporated
in 1961 as an Indiana corporation for the purpose of becoming the parent
company and sole shareholder of UPI and is 71% owned by WNIC and 29% owned by
WNC. Both UPC and UPI have executive offices located at One Presidential
Parkway, Kokomo, Indiana 46904-9006. UPI's primary business is the marketing
and underwriting of individual life insurance and annuities. Its primary
marketing focus is interest-sensitive products such as universal life
insurance and annuities. UPI administers a closed block of life insurance and
annuities that was originally underwritten by WNIC. Business of this type is no
longer sold by WNIC. Operating results of UPI and the WNIC closed blocks are
reported in the insurance operations segment.
Sales for UPI are made through approximately 5,000 insurance agents and
brokers having an independent contractor relationship with UPI. Such persons
may also be independent insurance brokers. UPI has no internal or captive sales
force and accordingly, has negligible training, maintenance, or financing
expenses. This marketing system facilitates sales force expansion without
significant cost, but is dependent on product lines remaining competitive with
those being offered by other companies.
New Products of the Segments
In 1995, UPI introduced a new universal life insurance product with a
low death benefit designed for the middle income market and a high benefit/low
cost universal life insurance product. In 1996, UPI plans to introduce three
new universal life insurance products to complement its existing portfolio.
In 1995, WNIC introduced new voluntary dental insurance and life
insurance products for the education market.
Competitive Conditions of the Segments
The insurance subsidiaries, along with other insurance companies with
whom they are in competition, are subject to regulation and supervision by the
state insurance departments in each jurisdiction in which they are licensed to
do business, greatly affecting the competitive environment in which they
operate. The state insurance departments have broad administrative powers,
including those relating to the granting and revocation of licenses to transact
business, licensing of agents, approval of policy forms, establishing reserve
requirements, the form and content of required financial statements, conducting
of periodic examinations, and the investment laws and regulations of their
states of incorporation. This regulation and supervision is primarily for the
protection of policyowners and not shareholders.
The ability of an insurance company to compete successfully also
depends, in part, on its financial strength, operating performance, and
claims-paying ability as rated by A. M. Best and other rating agencies. The
insurance subsidiaries are each currently rated "A- (Excellent)" by A. M. Best,
based on their 1994 statutory financial results and operating performance. Many
of the insurance companies' competitors have A. M. Best ratings of "A-" or
lower, and WNC believes the insurance subsidiaries' A. M. Best ratings are
adequate to enable them to compete successfully. A. M. Best ratings are based
upon factors of concern to policyholders, agents, and intermediaries and are
directed toward the protection of policyholders, not investors.
Each of the Company's businesses operates in highly competitive
markets, in many cases competing against companies with long-established
operating records and substantial financial resources.
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Neither WNC nor any active affiliated company is licensed to do
business outside of the United States.
<PAGE>
PART II
Item 6. Selected Financial Data
The selected financial data required by Item 6 are presented in a separate
section of Exhibit 13 of this report and are preceded by the caption "Five Year
Summary."
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations is presented in a separate section of Exhibit 13 of this report and
is preceded by the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are presented in Exhibit 13 of
this report.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following consolidated financial statements of WNC are included in
Item 8:
Consolidated Balance Sheet, December 31, 1995 and 1994
Consolidated Statement of Income, Years Ended December 31, 1995, 1994,
and 1993
Consolidated Statement of Cash Flows, Years Ended December 31, 1995,
1994, and 1993
Consolidated Statement of Shareholders' Equity, Years Ended December 31,
1995, 1994, and 1993
Capital Stock Activity, Years Ended December 31, 1995, 1994, and 1993
Notes to Consolidated Financial Statements
Quarterly Information
(a)(2) The financial schedules required by Item 14(d) are
presented in a separate section of this report and are
preceded by the Index to Financial Schedules.
All other schedules pursuant to Regulation S-X are not
submitted because they are not applicable, not required, or
the required information is included in the consolidated
financial statements, including the notes thereto.
(a)(3) The exhibits filed with this Form 10-K are listed in the
Exhibit Index located elsewhere herein. All management
contracts and compensatory plans or arrangements set forth
in such list are marked with a double asterisk (**).
(b) WNC filed no reports on Form 8-K during the last quarter of
the period covered by this report.
(c) Included in 14(a)(3) above.
(d) Included in 14(a)(2) above.
<PAGE>
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>
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
WASHINGTON NATIONAL CORPORATION
December 31, 1995
<TABLE>
<CAPTION>
(000s omitted)
COLUMN A COLUMN B COLUMN C COLUMN D
Fair Amount Shown in
Type of Investment Cost Value the Balance Sheet
<S> <C> <C> <C>
Fixed maturities available for sale:
Bonds:
U.S. government and government
agencies and authorities $ 75,750 $ 80,544 $ 80,544
States, municipalities and political
subdivisions 78,824 82,420 82,420
Mortgage-backed securities 634,236 653,013 653,013
Foreign governments 27,950 31,645 31,645
Public utilities 147,206 155,126 155,126
All other corporate bonds 988,304 1,056,943 1,056,943
Redeemable preferred stocks 1,044 1,019 1,019
TOTAL FIXED MATURITIES AVAILABLE
FOR SALE 1,953,314 $2,060,710 2,060,710
Mortgage loans on real estate (*) 324,554 317,249
Real estate and joint ventures:
Investment properties (*) 39,082 23,578
Acquired in satisfaction of debt (*) 13,289 10,502
Policy loans 56,279 56,279
Other long-term (*) 27,358 27,744
Short-term 48,594 48,594
TOTAL INVESTMENTS $2,462,470 $2,544,656
</TABLE>
(*) Difference between cost and carrying value results from certain valuation
allowances, declines in value that are other than temporary, accumulated
depreciation on real estate, fair value adjustment, and undistributed
equity in joint ventures and venture capital investments.
<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
WASHINGTON NATIONAL CORPORATION
(Parent Corporation Only)
<TABLE>
<CAPTION>
BALANCE SHEET
December 31,
(000s omitted) 1995 1994
<S> <C> <C>
ASSETS
Cash $ 3,407 $ 3,548
Short-term investments 618 692
Equity in net assets of subsidiaries (*) 437,183 302,414
Amounts due from subsidiaries (*) 4,639 4,173
Real estate 162 162
Other 1,261 1,440
Total Assets $447,270 $312,429
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Dividends payable $ 3,389 $ 3,374
Short-term notes payable 3,100 -
Amounts due to subsidiaries (*) 1,128 1,090
Other 1,734 1,642
Total Liabilities 9,351 6,106
SHAREHOLDERS' EQUITY
Convertible preferred stock 718 723
Common stock 125,953 124,842
Retained earnings (including equity in retained earnings
of subsidiaries: 1995 - $311,159; 1994 - $286,555) 323,087 302,759
Net unrealized investment gains (losses)
of subsidiaries 49,798 (61,356)
Unfunded pension loss of subsidiaries (3,640) (2,648)
Cost of common treasury stock (57,997) (57,997)
Total Shareholders' Equity 437,919 306,323
Total Liabilities and Shareholders' Equity $447,270 $312,429
(*) Eliminated in consolidation.
</TABLE>
<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Continued
WASHINGTON NATIONAL CORPORATION
(Parent Corporation Only)
<TABLE>
<CAPTION>
STATEMENT OF INCOME
Year Ended December 31,
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
REVENUES
Dividends from subsidiary (*) $ 9,100 $ 5,975 $ 7,709
Management fee from subsidiary (*) 2,146 1,613 -
Interest 68 447 274
Realized investment losses (1) (105) -
Total Revenues 11,313 7,930 7,983
GENERAL AND ADMINISTRATIVE EXPENSES 2,013 1,743 1,768
INCOME BEFORE TAXES AND EQUITY IN UNDISTRIBUTED
NET INCOME OF SUBSIDIARIES 9,300 6,187 6,215
Income tax expense (benefit) 44 370 (237)
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARIES 9,256 5,817 6,452
Equity in undistributed net income of subsidiaries (*) 24,604 25,484 20,214
NET INCOME (**) $33,860 $31,301 $26,666
</TABLE>
(*) Eliminated in consolidation.
(**) Includes $7,154, $6,686 and $9,551 of income from discontinued
operations, net of tax, for 1995, 1994 and 1993, respectively.
<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Continued
WASHINGTON NATIONAL CORPORATION
(Parent Corporation Only)
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
Year Ended December 31,
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 33,860 $ 31,301 $ 26,666
Adjustments to reconcile to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (24,604) (25,484) (20,214)
Net change in amount due from subsidiaries (428) (2,962) -
Other, net 532 742 900
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,360 3,597 7,352
INVESTING ACTIVITIES
Net change in short-term investments 74 7,207 (7,515)
Net change in investment properties - 45 -
Net change in indebtedness from subsidiaries - - (7,250)
Investment in subsidiary - - (25,382)
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 74 7,252 (40,147)
FINANCING ACTIVITIES
Dividends to shareholders (13,532) (13,480) (12,236)
Proceeds from sale of common stock 857 596 48,181
Change in short-term notes payable 3,100 - (2,600)
Return of deposit - 2,200 -
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (9,575) (10,684) 33,345
INCREASE (DECREASE) IN CASH (141) 165 550
Cash at beginning of year 3,548 3,383 2,833
CASH AT END OF YEAR $ 3,407 $ 3,548 $ 3,383
</TABLE>
<PAGE>
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION (1)
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ---------------------------------------------------------------------------------------------------------
Future Policy Insurance
Benefits, Other Policy Premiums
Segment Deferred Losses, Claims Claims and and
Acquisition and Loss Unearned Benefits Policy
Costs Expenses Premiums Payable Charges
- ---------------------------------------------------------------------------------------------------------
(000s omitted)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
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
Year ended December 31, 1993
Insurance Operations $225,644 $2,007,154 $ 1,550 $ 75,155 $ 126,340
Corporate and other - - 19,657 9,200 757
Discontinued Operations 31,312 43,518 13,442 161,795 -
TOTAL $256,956 $2,050,672 $ 34,649 $ 246,150 $ 127,097
</TABLE>
(1) Items have been reclassified for discontinued operations.
<PAGE>
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION (1)
Continued
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
COLUMN A COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
Benefits, Amortization
Claims, Losses of Deferred Other
Segment Net and Policy Operating
Investment Settlement Acquisition Expenses Premiums
Income Expenses Costs (2) Written
- ---------------------------------------------------------------------------------------------------------
(000s omitted)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Insurance operations $159,414 $214,042 $23,113 $ 39,105 $ 68,064
Corporate and other 9,370 234 - 2,015 -
TOTAL $168,784 $214,276 $23,113 $ 41,120 $ 68,064
Year ended December 31, 1994
Insurance operations $159,050 $209,490 $20,928 $ 39,290 $ 63,897
Corporate and other 7,590 263 - 378 -
TOTAL $166,640 $209,753 $20,928 $ 39,668 $ 63,897
Year ended December 31, 1993
Insurance operations $163,756 $206,017 $21,952 $ 41,304 $ 60,744
Corporate and other 3,606 1,091 - 4,838 -
TOTAL $167,362 $207,108 $21,952 $ 46,142 $ 60,744
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Items have been reclassified for discontinued operations.
(2) Allocations are based on certain assumptions and estimates. These
allocations would change if different methods were applied.
<PAGE>
SCHEDULE IV - REINSURANCE (1)
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
Ceded to Assumed Percentage of
Segment Gross Other from Other Net Amount
Amount Companies Companies Amount Assumed to Net
- ----------------------------------------------------------------------------------------------------------
(000s omitted)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Life insurance in force $21,619,386 $3,672,146 $ - $17,947,240 -
Insurance premiums and policy
charges:
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 -
Year ended December 31, 1993
Life insurance in force $22,215,104 $3,170,467 $ - $19,044,637 -
Insurance premiums and policy
charges:
Insurance operations $ 137,324 $ 10,983 $ 1 $ 126,342 -
Corporate and other 47,227 46,472 - 755 -
TOTAL $ 184,551 $ 57,455 $ 1 $ 127,097 -
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Items have been reclassified for discontinued operations.
<PAGE>
EXHIBIT INDEX
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
EXHIBITS FILED PURSUANT TO ITEM 14(a)(3)
Page Number
11 Computation of earnings per share see below
13 Selected Portions of Annual Report to Shareholders see below
23 Consent of Ernst & Young LLP, Independent Auditors see below
27 Financial Data Schedule see below
<PAGE>
EXHIBIT 11
WASHINGTON NATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
COMPUTATION OF PER SHARE EARNINGS (1)
(000s omitted, except per share amounts) Year Ended December 31,
1995 1994 1993
----------------------------------------
<S> <C> <C> <C>
PRIMARY
AVERAGE SHARES:
Average common shares outstanding 12,194 12,144 10,643
Assumed exercise of stock options 56 81 112
TOTAL AVERAGE SHARES 12,250 12,225 10,755
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS:
Income from continuing operations before cumulative
effect of change in accounting principle and
dividend requirement on Preferred Stock $26,706 $24,615 $18,665
Dividend requirement on Preferred Stock (361) (362) (362)
Income from continuing operations before cumulative
effect of change in accounting principle 26,345 24,253 18,303
Cumulative effect of change in accounting
principle, net of tax - - (1,550)
Income from continuing operations 26,345 24,253 16,753
Income from discontinued operations,
net of tax 7,154 6,686 9,551
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $33,499 $30,939 $26,304
PRIMARY EARNINGS PER SHARE:
Income from continuing operations per share
before cumulative effect $2.15 $1.98 $1.70
Cumulative effect of change in accounting
principle per share, net of tax - - (.14)
Income from continuing operations 2.15 1.98 1.56
Income from discontinued operations, net of tax 0.58 0.55 0.89
NET INCOME PER SHARE $2.73 $2.53 $2.45
FULLY DILUTED
AVERAGE SHARES:
Average common shares outstanding 12,194 12,144 10,643
Assumed conversion of Preferred Stock 269 271 271
Assumed exercise of stock options 176 81 112
TOTAL AVERAGE SHARES 12,639 12,496 11,026
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
Income from continuing operations
before cumulative effect of change
in accounting principle $26,706 $24,615 $18,665
Cumulative effect of change in accounting
principle, net of tax - - (1,550)
Income from continuing operations 26,706 24,615 17,115
Income from discontinued
operations, net of tax 7,154 6,686 9,551
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS: $33,860 $31,301 $26,666
FULLY DILUTED EARNINGS PER SHARE:
Income from continuing operations
per share before cumulative effect $2.11 $1.97 $1.69
Cumulative effect of change in accounting
principle per share, net of tax - - (.14)
Income from continuing operations 2.11 1.97 1.55
Income from discontinued
operations, net of tax 0.57 0.53 0.87
NET INCOME PER SHARE $2.68 $2.50 $2.42
(1) Items have been reclassified for discontinued operations.
</TABLE>
<PAGE>
EXHIBIT 13
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Washington National Corporation (WNC or the Company) is an insurance
holding company that is engaged primarily in marketing and underwriting life
insurance, annuities, and specialty health insurance for 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 business to
Trustmark Insurance Company (Mutual). As a result of the sales, the health
businesses are accounted for as discontinued operations. Additionally,
$5.0 million of annual corporate overhead and data center expenses previously
allocated to the health businesses has been retained in continuing operations
in the corporate and other segment.
In November of 1996, the Company announced an agreement to merge with PennCorp
Financial Group, Inc. The merger is expected to be completed in the first
quarter of 1997.
<TABLE>
<CAPTION>
Analysis of Net Income
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Pretax operating income
(loss) from continuing
operations (a)
Insurance operations $37,794 $34,397 $30,395
Corporate and other 2,230 2,180 (5,560)
Total pretax operating income
from continuing operations 40,024 36,577 24,835
Income taxes on operating income
from continuing operations 13,964 13,108 9,329
Net operating income from
continuing operations 26,060 23,469 15,506
Other components of
income (net of taxes)
Net realized investment
gains (b) 646 1,146 2,840
Gains from benefit plan
changes _ _ 319
Cumulative effect of
change in accounting
principle (c) _ _ (1,550)
Discontinued operations 7,154 6,686 9,551
Net income $33,860 $31,301 $26,666
</TABLE>
(a) Pretax income (loss) from continuing operations before net realized
investment gains, gains from benefit plan changes, discontinued
operations, and cumulative effect of accounting change.
(b) 1995, 1994, and 1993 include tax benefits of $2,063,
$2,752, and $3,194, respectively.
(c) Employers' Accounting for Postemployment Benefits.
<TABLE>
<CAPTION>
Consolidated Results of Operations
Components of Pretax Operating Income from Continuing Operations by Segment
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
1994
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
1993
Revenues
Insurance premiums and policy charges $ 126,340 $ 757 $127,097
Net investment income 163,756 3,606 167,362
Other revenues 5,063 1,006 6,069
Total revenues excluding realized investment losses 295,159 5,369 300,528
Benefits and expenses
Insurance benefits paid or provided 206,017 1,091 207,108
Insurance and general expenses 36,795 9,838 46,633
Amortization of deferred acquisition costs 21,952 - 21,952
Total benefits and expenses 264,764 10,929 275,693
Pretax operating income (loss) from continuing operations $ 30,395 $(5,560) $ 24,835
</TABLE>
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,
partially offset by a decline in the closed blocks of life insurance and
annuities. See "Segment Information," below.
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
from rate increases and an increase in policies in force and the elimination of
group life insurance policy liabilities on certain disabled insureds. The
elimination of these liabilities resulted from a program completed in 1995 to
more effectively manage life insurance claims related to disability. Partially
offsetting this improvement to income was an increase in the benefit ratio
(benefits as a percentage of premiums) for both individual and group major
medical health insurance. The increase in the benefit ratio for individual
health insurance was primarily due to higher claims experience in New Jersey.
Segment Information
The Company has two business segments. Prior to the sale of the Company's
health business, the Company had three business segments (see Note A of Notes
to Consolidated Financial Statements). 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
"closed" block of similar business at WNIC, which no longer sells new business
of this type, and specialty insurance products for educators. The second
business segment is corporate and other and includes the non-insurance
operations of the Company.
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 life insurance in force and policy charges at UPI.
The increase in insurance premiums and policy charges was offset in part by
the expected decline in the closed block of business at WNIC. The decline at
WNIC is expected to recur in 1996 since WNIC is not selling new policies in
this segment.
Pretax operating income for the insurance operations increased $3.4 million to
$37.8 million in 1995 primarily due to a 17.0% increase at UPI, the growth
portion of the life insurance and annuity business. The increase was primarily
due to revenue increases discussed above. This increase was partially offset
by a decline in earnings of $2.5 million in WNIC's closed block due to the
continuing decrease in its size and narrower 1995 interest spreads.
Profitability for the interest-sensitive life insurance and annuity portion of
the segment is highly dependent on market interest rates. The direction and
volatility of the movement of market rates affects the interest rate spread
(the difference between the rate earned on investments and the rate credited
to policyholders) on the segment's business. Late in 1994 and early in 1995,
credited interest rates were increased on a substantial portion of the WNIC
block of business in response to the 1994 increase in market interest rates,
reducing spreads on this portion of the business in 1995. Market interest
rates have subsequently declined and, as a result, the credited rates on this
block have declined as well. The lower credited rates are expected to increase
interest rate spreads on the business in 1996.
Amortization of deferred acquisition costs increased in 1995 for the segment
due to sales in 1994 and 1995. In 1996, amortization of deferred acquisition
costs on a portion of the WNIC closed block will be reduced by approximately
$2 million.
The rate of amortization of deferred acquisition costs is affected by policy
lapses, which in turn are affected by, among other factors, competitive
conditions in the market for similar products, and rates of return on
alternative policyholder investments. The Company monitors lapsation levels
and adjusts the rate of amortization, if necessary, at least once per year.
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 on the Company's surplus funds. This
improvement was offset in part by an increase in expenses primarily due to a
change in the allocation of certain expenses to the other segment.
Year Ended December 31, 1994 Compared to
Year Ended December 31, 1993
Insurance Premiums and Policy Charges. Insurance premiums and policy charges
increased $9.2 million, or 7.2%, from $127.1 million in 1993 to $136.3 million
in 1994. The change was primarily due to an increase in life insurance in
force and an increase in policy charges. See "Segment Information," below.
Net Investment Income. Net investment income was $166.6 million in 1994,
essentially unchanged from 1993. The Company's portfolio yield (based on
amortized cost) was 7.7% in 1994 and 8.0% in 1993.
Realized Investment Losses. Realized investment losses before taxes for 1994
were $1.6 million compared to $0.4 million in 1993. In 1994, realized losses of
$1.7 million on fixed maturity investments and $2.0 million on real estate and
mortgage loans were partially offset by gains on equity securities and other
invested assets of $2.1 million. In 1993, realized gains of $8.2 million on
fixed maturity investments and equity securities were offset by losses of $8.5
million on real estate investments, mortgage loans, and other invested assets.
The Company's income taxes included tax benefits of $2.8 million and $3.2
million in 1994 and 1993, respectively, from previous years' realized
investment losses.
Insurance Benefits Paid or Provided. Insurance benefits paid or provided
increased $2.6 million, or 1.3%, from $207.1 million in 1993 to $209.8 million
in 1994. The increase was mainly due to a greater amount of business in force
at UPI and higher benefits in the educator disability line, partially offset by
a decline in benefits in the closed blocks of life insurance and annuities.
Insurance and General Expenses. Insurance and general expenses decreased $6.5
million, or 14.0%, from $46.1 million in 1993 to $39.7 million in 1994,
due to expenses in 1993 related to the relocation of the Company's
headquarters and the favorable 1994 effects of an expense re-engineering
carried out at UPI in 1993.
Income Taxes. Income taxes on continuing operations increased $3.6 million to
$13.1 million in 1994 compared to $9.5 million in 1993 primarily due to
increased operating income.
Change in Accounting Principle. In the first quarter of 1993, the Company
recorded a one-time charge of $1.6 million after taxes for the adoption of
a new accounting standard, Employers' Accounting for Postemployment Benefits.
The adoption did not have a material impact on income before accounting
changes.
Income from Discontinued Operations, Net of Tax. Income from discontinued
operations, net of tax, was $6.7 million in 1994, compared to $9.6 million in
1993, a 30.0% decrease. The decline was primarily due to an increase in the
benefit ratio (insurance benefits divided by insurance premiums) of the group
products business.
Net Income. Net income for 1994 was $31.3 million compared to $26.7 million in
1993. The improvement in net income resulted from increased earnings from
continuing operations, which was partially offset by the decline in income from
discontinued operations, and the charge in the first quarter of 1993 relating
to the adoption of a new accounting standard described above.
Segment Information
Insurance Operations. Revenues for the insurance operations segment for 1994
were $299.1 million, compared to $295.2 million for 1993. The improvement was
attributable to higher insurance premiums and policy charges of
$10.0 million, primarily due to an increase in life insurance in force and
policy charges at UPI and increased premiums from the educator disability
business, partly offset by a decline in revenues from the WNIC closed blocks
where no new policies are being sold.
Pretax operating income for the insurance operations segment increased $4.0
million, or 13.2%, to $34.4 million in 1994 from $30.4 million in 1993,
primarily due to improved interest rate spreads, a reduction in operating
expenses at UPI, and the improvement in revenues.
Corporate and Other. For 1994, the corporate and other segment had pretax
operating income of $2.2 million compared to a loss of $5.6 million in 1993.
The improvement was due to increased investment income on the Company's surplus
funds in 1994 and expenses in 1993 related to the relocation of the Company's
headquarters.
Investment Portfolio
At December 31, 1995, the Company had invested assets with a carrying value of
$2.5 billion. Certain information about the Company's investment portfolio as
of that date follows (dollars in millions):
<TABLE>
<CAPTION>
Percent
of Total
Carrying Carrying
Value Value
<S> <C> <C>
Fixed maturity investments
United States government
obligations $ 80.5 3.2%
Obligations of states and
political subdivisions 82.4 3.2
Public utilities 155.1 6.1
Industrial and miscellaneous 1,058.0 41.6
Mortgage-backed securities 653.0 25.7
Other 31.7 1.2
Total fixed maturity investments 2,060.7 81.0
Mortgage loans on real estate 317.2 12.5
Real estate and joint ventures 34.1 1.3
Policy loans 56.3 2.2
Other long-term 27.8 1.1
Short-term 48.6 1.9
Total invested assets $2,544.7 100.0%
</TABLE>
The Company's investment portfolio is managed by an experienced staff of
in-house investment professionals, primarily at WNIC, and outside investment
advisors, primarily the insurance investment management group at Scudder,
Stevens & Clark, Inc. Investments are made pursuant to strategies and
guidelines approved by the Finance Committee of the Company's Board of
Directors. The Company selects investments that match the needs of the
businesses that the assets support in the areas of yield, liquidity, asset
quality, and duration. The Company pursues a conservative investment philosophy
by balancing a variety of objectives, including high credit quality, liquidity,
high current income, preservation of capital, and protection against market
interest rate risk. The Company's investment portfolio consists principally of
investment grade, publicly-traded fixed maturity investments, and mortgage
loans on real estate. All investments made by WNIC and UPI are governed by
Illinois and Indiana insurance laws and regulations, respectively.
Fixed Maturity Investments
The Company's fixed maturity investments are carried at fair value and totaled
$2.1 billion, or 81% of the Company's invested assets at December 31, 1995. At
December 31, 1995, the Company reclassified its entire portfolio of "held to
maturity" securities to "available for sale". Due to the decline in market
interest rates during 1995, the carrying value of the Company's fixed maturity
investments compared to amortized cost increased and resulted in an unrealized
gain on fixed maturity investments of $107.4 million, compared to an unrealized
loss of $118.7 million at December 31, 1994. The amortized cost of the
Company's fixed maturity portfolio increased $72.0 million to $1.95 billion at
December 31, 1995.
The composition of the Company's fixed maturity portfolio at
December 31, 1995, based on ratings follows (dollars in
millions):
<TABLE>
<CAPTION>
Carrying Value
as a Percent of
---------------------
Carrying Fixed Invested
Value Maturities Assets
<S> <C> <C> <C>
AAA/Aaa $ 844.6 41.0% 33.2%
AA/Aa 128.7 6.2 5.1
A 617.2 30.0 24.3
BBB/Baa 372.7 18.1 14.6
BB/Ba and lower 97.5 4.7 3.8
Total fixed maturities $2,060.7 100.0% 81.0%
</TABLE>
The Company's policy for rating fixed maturity investments is to use the rating
determined by Standard & Poor's Company or Moody's Investor Service, Inc. for
publicly-traded investments. For privately-traded securities, the ratings of
Duff & Phelps Credit Rating Company and Fitch Investors Service, Inc. are
also recognized in defining rated securities. If an investment has a split
rating (i.e., different ratings from the rating services) the Company
categorizes the investment under the lowest rating. For those investments that
do not have a rating from these services, the Company categorizes those
investments on ratings assigned by the National Association of Insurance
Commissioners (NAIC), whose ratings are as follows: NAIC Class 1 is considered
equivalent to a AAA/Aaa, AA/Aa, or A rating; NAIC Class 2, BBB/Baa; and NAIC
Classes 3-6, BB/Ba and below. At December 31, 1995, 5.2% of fixed maturity
investments were rated with comparable NAIC ratings, the majority of which is
$40.8 million of investments rated BBB and $41.1 million of investments rated
BB and lower.
The carrying value of the Company's high-yield investments (rated BB and lower)
at December 31, 1995, was $97.5 million or 3.8% of the Company's invested
assets, up from $90.9 million at December 31, 1994, due to declining
interest rates and rating downgrades. The Company does not anticipate any
significant new investments in high-yield fixed maturity investments.
The Company's fixed maturity portfolio at December 31, 1995, includes $653.0
million of mortgage-backed securities, detailed as follows (dollars in
millions):
<TABLE>
<CAPTION>
Carrying Value
as a Percent of
--------------------
Mortgage-
Carrying Backed Invested
Value Securities Assets
<S> <C> <C> <C>
Agency CMOs
Planned amortization classes $202.9 31.1% 8.0%
Target amortization classes 10.5 1.6 0.4
Sequential classes 5.4 0.8 0.2
Support classes 6.0 0.9 0.2
Accrual classes 7.2 1.1 0.3
Total agency CMOs 232.0 35.5 9.1
Non-agency planned amortization class CMOs 26.5 4.1 1.1
Total CMOs 258.5 39.6 10.2
Non-agency mortgage-backed pass-through securities 3.2 0.5 0.1
Agency mortgage-backed pass-through securities 391.3 59.9 15.4
Total mortgage-backed securities $653.0 100.0% 25.7%
</TABLE>
Mortgage-backed securities generally are collateralized by mortgages backed by
the Government National Mortgage Association (GNMA), the Federal National
Mortgage Association, and the Federal Home Loan Mortgage Corporation, all of
which are agencies of the U.S. Government. Only GNMA mortgages are backed by
the full faith and credit of the U.S. Government. Agency mortgage-backed
securities carry an implicit AAA credit rating.
The Company uses collateralized mortgage obligations (CMOs) to earn a higher
yield than alternative corporate or government investments of similar quality.
At December 31, 1995, 10.2% of the Company's invested assets were in CMOs and
15.5% of the Company's invested assets were in mortgage-backed pass-through
securities. Both of these investment types are subject to mortgage prepayment
risk. Prepayment risk arises when, in periods of declining interest rates,
mortgages may be repaid more rapidly than scheduled as individuals refinance
higher-rate mortgages to take advantage of lower rates. As a result, holders of
mortgage-backed securities may receive large prepayments on their investments
that cannot be reinvested at interest rates comparable to the rates on the
prepaid mortgages. Conversely, in periods of rising interest rates, mortgage
prepayments may slow down, which would result in holders of mortgage-backed
securities having less funds to reinvest at higher rates.
To mitigate prepayment risk, the Company primarily invests in CMO classes that
have, at time of investment, the most stable prepayment structure. Such CMO
classes are termed "planned amortization class" (PAC) which comprised 88.7% of
the Company's CMO portfolio at December 31, 1995. The next most stable class of
CMOs is "target amortization class" (TAC) which comprised 4.1% of the Company's
CMO portfolio at December 31, 1995. PACs and TACs are designed to protect
against prepayment risk and may therefore have more predictable cash flows than
pass-through mortgage-backed securities.
As market interest rates have declined over the past several years, prepayments
on certain PAC and TAC investments have increased resulting in a loss of some
prepayment protection. Approximately two-thirds of the Company's PAC and TAC
investments at December 31, 1995, have lost some of this protection. However,
the Company believes the yield earned on these issues continues to adequately
compensate for the reduced prepayment protection.
At December 31, 1995, all of the Company's non-agency CMOs were rated AAA. The
credit risk associated with non-agency mortgage-backed securities is generally
greater than that of agency mortgage-backed securities.
Mortgage Loans
The Company had investments in mortgage loans of $317.2 million (net of
allowances of $7.3 million) at December 31, 1995 compared to $357.6 million at
December 31, 1994. Investments in mortgage loans declined primarily due to
prepayments and amortization of the mortgage loan portfolio during 1995. Of the
outstanding loans at December 31, 1995, loans with a carrying value of $3.1
million, or less than 1%, were delinquent 60 days or more as to interest or
principal, far better than the recent industry average.
The Company actively manages its non-current investments through restructuring
of mortgages and sales and leasing of foreclosed real estate in order to
achieve the highest current return as well as to preserve capital. Restructured
loans, where modifications of the terms of the mortgage loan have occurred and
which are considered current investments, had a carrying value of $15.1 million
at December 31, 1995, a decrease of $1.5 million from December 31, 1994.
The Company's mortgage loan portfolio at December 31, 1995, shown by geographic
distribution, year of maturity, and property type follows (dollars in
millions):
Geographic Distribution of Mortgage Loans - Top Eight States
At December 31, 1995
<TABLE>
<CAPTION>
Amount
<S> <C>
California $56,337
Illinois 39,223
Indiana 35,185
Florida 31,210
Texas 26,091
North Carolina 17,555
Virgina 14,860
Georgia 12,989
</TABLE>
Mortgage Loans by Year of Maturity
<TABLE>
<CAPTION>
Scheduled
Principal Balloon
Payments Payments Total
<S> <C> <C> <C>
1996 $ 8.9 $ 32.0 $ 40.9
1997 9.4 27.0 36.4
1998 9.6 11.8 21.4
1999 10.2 10.0 20.2
2000 10.9 11.5 22.4
2001 and thereafter 74.3 101.6 175.9
Total $123.3 $193.9 $317.2
</TABLE>
Property Type Distribution of Mortgage Loans
At December 31, 1995
<TABLE>
<S> <C>
Retail 60.5%
Office 10.8
Industrial 9.6
Medical 5.9
Other 13.2
Total 100.0%
</TABLE>
In 1994, the Company decided that in order to provide better matching between
the characteristics of its assets and liabilities it would no longer make new
investments in mortgage loans except for purchase money loans and expansion of
the Company's properties. The Company will retain its existing mortgage loans.
Real Estate
The Company's real estate investments (including real estate joint ventures)
totaled $34.1 million at December 31, 1995, compared to $27.0 million at
December 31, 1994. The increase was primarily due to foreclosures, partially
offset by sales. At December 31, 1995, $10.5 million of the real estate
investments were acquired through mortgage loan foreclosure, compared to $4.7
million at December 31, 1994. The Company does not anticipate any new
acquisitions of real estate other than through foreclosure of mortgage loans.
Liquidity and Capital Resources
Cash Flows. During 1995, the Company's operating activities generated
cash of $89.4 million compared to $84.3 million in 1994. The increase in cash
provided by operations in 1995 resulted from increased sales of the Company's
insurance products and an increase in fee income for administering a closed
block of individual health insurance policies included in discontinued
operations, offset in part by increased benefits.
Cash used for financing activities increased from $39.1 million in 1994 to
$53.7 million in 1995, primarily due to annuity policyholder withdrawals
outpacing deposits. In 1995, UPI's deposits exceeded withdrawals by $58.8
million. For the WNIC closed block, withdrawals exceeded deposits by $102.3
million.
Liquidity. The fair value of the Company's investment portfolio, primarily
fixed maturity investments, is affected by changing interest rates. When
interest rates rise, the fair value of the Company's fixed maturity investments
declines, while in periods of declining interest rates, the fair value of the
Company's fixed maturity investments increases. The Company estimates that a
one percentage point change in market interest rates would have an inverse
effect on the fair value of its fixed maturity investments of approximately 5%.
In addition, rising interest rates could result in increased surrenders of life
insurance policies and annuities (as current policy and contract holders seek
higher returns elsewhere) causing the Company to sell fixed maturity
investments below cost. In order to minimize the need to sell fixed maturity
investments below cost, the Company seeks to maintain sufficient levels of
cash and short-term investments. The Company held cash and short-term
investments of $56.9 million at December 31, 1995. Management believes the
balance of cash and short-term investments plus cash inflow from premium
revenues, investment income, and investment maturities is more than sufficient
to meet the requirements of the Company and its subsidiaries.
Dividends. The Company's primary sources of funds to pay dividends to
shareholders are investments held at the parent and dividends from WNIC. These
dividends are subject to restrictions set forth by the Illinois Insurance
Department. Illinois regulations limit the amount that can be withdrawn from
WNIC to the greater of the previous year's statutory earnings or 10% of
statutory capital and surplus.
Health Care Reform
No federal health care reform legislation was passed in 1995. However, a
pending insurance reform bill, generally referred to as the Kassebaum-Kennedy
bill, is designed, among other objectives, to improve insurance availability.
If this bill were to become law, insurers would be limited in their ability to
refuse coverage for pre-existing medical conditions. Also, the bill would bar
insurers from dropping coverage when an insured or family member becomes ill.
Lastly, for certain individuals who have quit their job or who have been laid
off, insurers would be required to offer individual insurance coverage. This
bill is expected to be considered by the Senate in the first half of 1996.
In addition to reform proposals on a national basis, legislative efforts to
reform health care at the state level may intensify. The potential reform plans
at the federal and state levels may: (i) partially or fully replace products
sold by insurers; (ii) limit the ability of insurers to charge higher rates to
or decline to cover insureds who present greater risks; (iii) limit the ability
of insurers to exclude coverage for pre-existing conditions; (iv) mandate the
types of insurance benefits to be provided in certain instances; (v) impose
insurance rate regulation or additional taxes on insurance premiums or
benefits; (vi) increase competition by expanding employee choice of insurance
plans and by requiring the employee to bear the full cost increment for higher
priced plans; or (vii) establish programs run by the government that would
compete with or replace business written by the Company.
The Company will continue to monitor all aspects of the developments
surrounding this issue and is preparing strategic responses to its possible
outcomes. The Company's health businesses have begun to diversify into product
areas, such as supplemental insurance products and disability products, that
the Company believes are consistent with its targeted market focus and may be
less affected or unaffected by health care reform. It is not possible at this
time to predict the nature of health care reform or how soon its measures will
be adopted and implemented or the impact on the Company's operating results or
financial position.
Because a significant majority of the Company's business that would be
affected by health care reform is included in discontinued operations, it is
not anticipated that health care reform will have a material impact on the
Company's revenues and net income from continuing operations.
A.M. Best Ratings
The ability of an insurance company to compete successfully depends, in part,
on its financial strength, operating performance, and claims-paying ability as
rated by A.M. Best and other rating agencies. The Company's insurance
subsidiaries are each currently rated "A- (Excellent)" by A.M. Best, based on
their 1994 statutory financial results and operating performance.
A.M. Best's 15 categories of rating for insurance companies currently range
from "A++ (Superior)" to "F (In Liquidation)." According to A.M. Best, an "A"
or "A-" rating is assigned to companies which, in A.M. Best's opinion, have
achieved excellent overall performance when compared to the standards of the
life insurance industry and generally have demonstrated a strong ability to
meet their obligations to policyholders over a long period of time. Many of the
Company's competitors have A.M. Best ratings of "A-" or lower, and the Company
believes the insurance subsidiaries' A. M. Best ratings are adequate to enable
them to compete successfully. A. M. Best ratings are based upon factors of
concern to policyholders, agents, and intermediaries and are directed toward
the protection of policyholders, not investors.
A.M. Best uses a variety of qualitative and quantitative measures in
determining a company's rating and surplus adequacy. The Company expects that
both WNIC and UPI will continue to meet A.M. Best's standards for an "A-"
rating based on 1995 results.
Inflation and Changing Prices
Inflation and changing prices are anticipated by the Company in the
pricing of its insurance products. The pricing assumptions of WNIC's
discontinued health insurance operations take into account the increased
cost of medical care, including both the medical care inflation rate and the
increase in policyholder utilization of medical services. Pricing assumptions
in 1995 regarding these items increased from 1994. For the first quarter of
1996, these assumptions are not expected to change materially from 1995.
The effect of inflation on operating expense has not been significant.
<PAGE>
Financial Statements and Supplementary Data
Five Year Summary(a)
(000s omitted, except per share amounts)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Total revenues $ 317,116 $ 305,320 $ 300,174 $ 291,264 $ 307,700
Operating income (b)
Pretax operating income from
continuing operations 40,024 36,577 24,835 15,757 18,400
Net operating income from
continuing operations 26,060 23,469 15,506 10,955 16,700
Income (loss) from continuing operations
before cumulative effect
of changes in accounting principles 26,706 24,615 18,665 8,999 (4,164)
Net income (loss) 33,860 31,301 26,666 (5,967) (2,964)
Average common shares
and equivalents outstanding (c) 12,250 12,225 10,755 9,989 9,980
Per share
Net operating income from
continuing operations $ 2.10 $ 1.89 $ 1.41 $ 1.06 $ 1.64
Income (loss) from continuing
operations before cumulative
effect of changes in
accounting principles 2.15 1.98 1.70 .86 (.45)
Net income (loss) 2.73 2.53 2.45 (.63) (.33)
Common dividends declared 1.08 1.08 1.08 1.08 1.08
Book value 34.54 24.51 27.92 27.93 29.32
Book value excluding net unrealized
investment gains and losses 30.61 29.44 27.92 27.92 29.64
Total assets 3,012,898 2,810,568 2,854,419 2,712,783 2,554,999
Mortgage and long-term notes payable 1,309 1,907 2,434 13,870 14,042
Shareholders' equity 437,919 306,323 348,945 288,040 300,062
Shareholders' equity excluding net
unrealized investment gains
and losses 388,121 367,679 348,988 287,929 303,310
Life insurance in force (in millions) 21,619 21,035 22,215 25,454 24,227
</TABLE>
(a) Amounts related to the income statement have been reclassified to
reflect the 1996 sale of the health business as discontinued
operations (see Note A).
(b) Income from continuing operations before realized investment losses,
divestitures, gains from curtailments of benefit plans and the
cumulative effect of accounting changes.
(c) 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.
<PAGE>
Consolidated Balance Sheet
(000s omitted)
<TABLE>
<CAPTION>
December 31, 1995 1994
<S> <C> <C>
Assets Investments
Fixed maturities-
Available for sale at fair value
(cost: $1,953,314; $1,768,181) $2,060,710 $1,649,453
Held to maturity at cost (fair value: $112,368) - 113,116
Mortgage loans on real estate 317,249 357,641
Real estate and joint ventures 34,080 26,997
Policy loans 56,279 54,368
Other long-term 27,744 30,672
Short-term 48,594 52,387
Total Investments 2,544,656 2,284,634
Cash 8,331 7,272
Deferred acquisition costs 235,499 293,850
Reinsurance recoverables and prepaid premiums 49,502 54,842
Accrued investment income 32,652 33,084
Insurance premiums in course of collection 14,718 14,857
Property and equipment 18,259 22,988
Goodwill 18,385 19,092
Separate Account 51,005 42,178
Other 39,891 37,771
Total Assets $3,012,898 $2,810,568
Liabilities Policy liabilities $2,363,329 $2,354,818
General expenses and other liabilities 125,194 121,685
Mortgage payable 1,309 1,907
Short-term notes payable 3,100 -
Income taxes (current: $944; $316) 31,042 (16,343)
Separate Account 51,005 42,178
Total Liabilities 2,574,979 2,504,245
Shareholders' Convertible preferred stock 718 723
Equity Common stock 125,953 124,842
Retained earnings 323,087 302,759
Net unrealized investment gains (losses) 49,798 (61,356)
Unfunded pension loss (3,640) (2,648)
Cost of common treasury stock (57,997) (57,997)
Total Shareholders' Equity 437,919 306,323
Total Liabilities and Shareholders' Equity $3,012,898 $2,810,568
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Consolidated Statement of Income
(000s omitted, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
<S> <C> <C> <C>
Revenues Insurance premiums and policy charges $145,407 $136,308 $127,097
Net investment income 168,784 166,640 167,362
Realized investment losses (1,417) (1,606) (354)
Other 4,342 3,978 6,069
Total Revenues 317,116 305,320 300,174
Benefits and Insurance benefits paid or provided 214,276 209,753 207,108
Expenses Insurance and general expenses 41,120 39,668 46,142
Amortization of deferred acquisition costs 23,113 20,928 21,952
Total Benefits and Expenses 278,509 270,349 275,202
Earnings Income from continuing operations before
income taxes and cumulative effect of
change in accounting principle 38,607 34,971 24,972
Income Taxes 11,901 10,356 6,307
Income from continuing operations before
cumulative effect of change in accounting
principle 26,706 24,615 18,665
Income from discontinued operations,net
of tax 7,154 6,686 9,551
Income before cumulative effect of change
in accounting principle 33,860 31,301 28,216
Cumulative effect of change in accounting
principle,net of tax - - (1,550)
Net Income $ 33,860 $ 31,301 $ 26,666
Share Data Primary Earnings Per Share
Income from continuing operations before
cumulative effect $ 2.15 $ 1.98 $ 1.70
Income from discontinued operations,net
of tax .58 .55 .89
Cumulative effect of change in accounting
principle,net of tax - - (.14)
Net Income Per Share $ 2.73 $ 2.53 $ 2.45
Average Shares and Equivalents Outstanding 12,250 12,225 10,755
Fully Diluted Earnings Per Share
Income from continuing operations before
cumulative effect $ 2.11 $ 1.97 $ 1.69
Income from discontinued operations,net
of tax .57 .53 .87
Cumulative effect of change in accounting
principle,net of tax - - (.14)
Net Income Per Share $ 2.68 $ 2.50 $ 2.42
Average Shares and Equivalents Outstanding 12,639 12,496 11,026
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Consolidated Statement of Cash Flows
(000s omitted)
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
<S> <C> <C> <C>
Operating Net income $ 33,860 $ 31,301 $ 26,666
Activities Adjustments to reconcile to net cash
provided by operating activities
Increase in policy liabilities 52,048 48,998 80,440
Deferred acquisition costs (11,561) (3,894) (15,282)
Change in reinsurance receivable 4,058 (11,387) 4,587
Other, net 11,039 19,240 8,270
Net Cash Provided by Operating Activities 89,444 84,258 104,681
Investing Proceeds from sales
Activities Fixed maturities - available for sale 308,663 113,375 -
Fixed maturities - held to maturity 1,950 - 261,313
Mortgage loans, real estate, and other 4,744 18,449 55,354
Proceeds from maturities and redemptions
Fixed maturities - available for sale 96,188 155,684 -
Fixed maturities - held to maturity 19,417 17,313 266,217
Mortgage loans, real estate, and other 46,828 58,666 73,763
Cost of purchases
Fixed maturities - available for sale (507,084) (399,418) -
Fixed maturities - held to maturity - (5,000) (726,358)
Mortgage loans, real estate, and other (6,495) (26,258) (40,661)
Increase in policy loans (1,911) (2,083) (784)
Purchases of property and equipment (768) (2,008) (7,824)
Net change in short-term investments 3,793 22,915 (11,866)
Net Cash Used by Investing Activities (34,675) (48,365) (130,846)
Financing Policyholder account deposits 150,469 143,627 142,871
Activities Policyholder account withdrawals (194,006) (169,278) (124,795)
Dividends to shareholders (13,532) (13,480) (12,236)
Change in short-term notes payable 3,100 - (17,350)
Proceeds from sale of common stock 857 596 48,181
Repayment of long-term borrowings (598) (527) (9,536)
Net Cash Provided (Used) by Financing
Activities (53,710) (39,062) 27,135
Change in Increase (Decrease) in Cash 1,059 (3,169) 970
Cash Cash at Beginning of Year 7,272 10,441 9,471
Cash at End of Year $ 8,331 $ 7,272 $ 10,441
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Consolidated Statement of Shareholders' Equity
(000s omitted)
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
<S> <C> <C> <C>
Convertible Balance at beginning of year $ 723 $ 723 $ 723
Preferred Stock Conversion to common stock (5) - -
Balance at end of year 718 723 723
Common Stock Balance at beginning of year 124,842 124,145 75,960
and Additional Sale on open market - - 47,263
Paid-In Capital Other issuances 1,111 697 922
Balance at end of year 125,953 124,842 124,145
Retained Earnings Balance at beginning of year 302,759 284,938 270,508
Net income 33,860 31,301 26,666
Common stock dividends (13,171) (13,118) (11,874)
Preferred stock dividends (361) (362) (362)
Balance at end of year 323,087 302,759 284,938
Net Unrealized Balance at beginning of year (61,356) (43) 111
Investment Gains Effect of change in accounting principle - 41,644 -
(Losses) Change during year 111,154 (102,957) (154)
Balance at end of year 49,798 (61,356) (43)
Unfunded Pension Balance at beginning of year (2,648) (2,821) (1,269)
Loss Change during year (992) 173 (1,552)
Balance at end of year (3,640) (2,648) (2,821)
Cost of Common
Treasury Stock Balance at beginning and end of year (57,997) (57,997) (57,997)
Total Shareholders' Equity at End of Year $437,919 $306,323 $348,945
</TABLE>
<PAGE>
Capital Stock Activity
(000s omitted)
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
<S> <C> <C> <C>
Convertible Shares at beginning of year 145 145 145
Preferred Stock Conversion to common stock (1) - -
Shares at end of year 144 145 145
Common Stock Shares at beginning of year 15,546 15,501 13,295
Sale on open market - - 2,133
Other issuances 60 45 73
Shares at end of year 15,606 15,546 15,501
Common Treasury
Stock Shares at beginning and end of year (3,383) (3,383) (3,383)
Common Shares Outstanding at End of Year 12,223 12,163 12,118
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Notes To Consolidated Financial Statements
Note A
Nature of Operations
Washington National Corporation and its subsidiaries (WNC or the Company) are
engaged primarily in marketing and underwriting life insurance and annuity
for individuals and specialty insurance for educators. Based on
assets and income of the insurance products, the life insurance and annuity
products account for approximately ninety percent of WNC's business. The
specialty insurance products for educators account for the remainder.
The markets for WNC's life insurance and annuities products include individuals
and small businesses seeking universal life insurance and other
interest-sensitive life insurance and annuity products. The markets for the
Company's specialty insurance products for educators consists primarily
of school district employees.
The markets for the Company's discontinued operations include: individuals
without employer-sponsored insurance in need of major medical coverage; and
employers with 2 to 1,000 employees seeking employer-sponsored health
insurance and associated life insurance and stop-loss insurance.
Discontinued Operations
In May, 1996, the Company's Board of Directors approved a plan to dispose of
the Company's Health insurance business. The sale of the individual and small
group health insurance business closed on August 2, 1996 and provided that
Pioneer Life Insurance Company would purchase the Company's individual and
small group health insurance business, through a reinsurance transaction, for a
purchase price of $19,000,000. 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.
Previously reported income statement information related to the Company's
health insurance business has been reclassified to income from discontinued
operations.
Revenues and income from operations on the discontinued business consist of the
following:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Revenues $379,066 $351,609 $328,353
Income from operations, (net of
taxes: $3,567, $2,989 and
$4,191) 7,154 6,686 9,551
</TABLE>
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. Revenue and expense amounts related to the Company's
health business sold in 1996 have been reclassified to discontinued operations
(see "Discontinued Operations," above). The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions
that affect the amounts reported. Actual results could differ from these
estimates. Certain amounts applicable to prior years' financial statements have
been reclassified to conform to the 1995 presentation.
Investments
Fixed Maturities. Fixed maturities include bonds, redeemable preferred stocks,
and mortgage-backed securities with contractual maturities greater than one
year. Fixed maturities classified as "available for sale" are carried at fair
value and fixed maturities classified as "held to maturity" are carried at
amortized cost. The carrying value of the Company's fixed maturity portfolio is
inversely impacted by increases and decreases in market interest rates which
may change significantly in short time periods.
The amortized cost of fixed maturities is adjusted for amortization of premiums
and accretion of discounts. This adjustment is included in investment income.
The difference between amortized cost for "available for sale" securities and
their fair value, net of applicable deferred income taxes and certain deferred
acquisition costs, is reflected as a component of shareholders' equity as an
unrealized investment gain or loss. If a security's fair value has a decline
that is considered to be other-than-temporary, the carrying value is reduced
to its net realizable value. Such reductions in value are included in realized
investment gains and losses.
As a result of newly issued guidance from the Financial Accounting Standards
Board (FASB), the Company transferred its $84,146,000 of "held to maturity"
fixed maturities to "available for sale" at December 31, 1995, resulting in a
$5,337,000 increase to unrealized investment gains. The Company no longer holds
any fixed maturities as "held to maturity."
Mortgage Loans on Real Estate. Mortgage loans on real estate are carried at
unpaid principal balances, net of allowance for losses. The allowance is based
on estimated uncollectible amounts considering past credit loss experience and
current economic conditions and is subject to fluctuation based on actual
experience. Loans considered permanently impaired are written down to their net
realizable value and the write-down is recognized as a realized investment
loss.
Real Estate and Joint Ventures. Real estate investments are principally carried
at cost less allowances for depreciation and possible losses. Foreclosed real
estate is considered "available for sale" and is recorded at the lower of
current carrying value or estimated fair value less expected costs of disposal.
Joint ventures are accounted for principally using the equity method.
Policy Loans. Loans to policyholders are carried at the unpaid principal
balance.
Other Long-term Investments. Other long-term investments consist of investments
in Washington National Insurance Company's (WNIC) Separate Account, equity
securities reported at fair value, and venture capital investments that are
accounted for under the equity method.
Short-term Investments. Short-term investments include commercial paper,
variable demand notes, and money market funds and are carried at amortized
cost.
Net Investment Income. Net investment income consists primarily of interest and
dividends less expenses. Interest on fixed maturities and performing mortgage
loans, adjusted for any amortization of discount or premium, is recorded as
income when earned and includes adjustments resulting from prepayments or
expected changes in prepayments on mortgage-backed securities. Dividends are
recorded as income on ex-dividend dates. Income on impaired loans and real
estate is recorded principally on a cash basis. Income on investments
accounted for under the equity method is recognized as it becomes earned.
Investment expenses are accrued as incurred.
Realized Investment Gains and Losses. Realized investment gains and losses are
recognized using the specific identification method and include write-downs on
investments having an other-than-temporary decline in value.
Depreciation
Depreciation for real estate investments and property and equipment is based on
the estimated useful life of the asset primarily using the straight-line
method. Information on depreciation related to continuing operations follows:
<TABLE>
<CAPTION>
Accumulated Depreciation
(000s omitted) 1995 1994
<S> <C> <C>
Property and equipment $ 3,571 $ 2,434
Real estate investments 12,635 25,086
</TABLE>
<TABLE>
<CAPTION>
Depreciation Expense
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Property and equipment $ 1,137 $ 1,333 $ 2,768
Real estate investments 1,320 1,453 1,480
</TABLE>
Insurance Premiums and Policy Charges
Insurance premiums and policy charges are net of reinsurance ceded. Health
insurance premiums are earned on a pro rata basis over the policy period.
Premiums for traditional life insurance products are recognized as revenues
when due. Revenues for certain interest-sensitive products consist of charges
earned and assessed against policy account balances during the period for the
cost of insurance, policy initiation fees, policy administration expenses, and
surrender charges.
Deferred Acquisition Costs (DAC)
Certain costs associated with acquiring new business are deferred and amortized
to income over time. Amortization of costs for traditional life insurance and
health products is over the premium paying period and is based on assumptions
consistent with those used in determining policy benefit reserves. Actual
results may differ significantly from these assumptions. For certain
interest-sensitive products, costs are amortized over the estimated life of
those products in proportion to the present value of estimated gross profits
from surrender charges and investment, mortality, and expense margins. Changes
in the amount or timing of estimated gross profits will result in adjustments
in the cumulative amortization of these costs.
To the extent that unrealized investment gains or losses on fixed maturities
would result in an adjustment of DAC had those investment gains or losses been
realized, the related unamortized DAC is adjusted and included in shareholders'
equity.
The unamortized cost of purchased insurance in force is included in DAC and
amortized in proportion to the present value of estimated gross profits over an
estimated twenty-one year remaining life with interest rates ranging from 7.5%
to 8.5%.
The changes in the unamortized cost of purchased insurance in force for the
years ended December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of year $45,282 $41,902 $47,039
Interest on unamortized
balance 2,915 3,136 3,436
Amortization (5,635) (6,026) (8,573)
Effect of unrealized
investment (gains) losses (13,432) 6,270 -
Balance at end of year $29,130 $45,282 $41,902
</TABLE>
The estimated percentage of the December 31, 1995 balance before the effect of
unrealized investment gains and losses to be amortized over the next five years
follows:
<TABLE>
<S> <C>
1996 14.6%
1997 14.1%
1998 13.0%
1999 12.8%
2000 12.6%
</TABLE>
Policy Liabilities
Liabilities for future policy benefits for traditional life insurance products
are provided on the net level premium method. The Company bases reserve
calculations on the present value of future net premiums, benefits, and
expenses, using estimates of future investment yield, mortality, and withdrawal
rates, adjusted to provide for possible adverse deviation. Interest rate
assumptions are graded and ranged from 4.5% to 7.5% at December 31, 1995.
Withdrawal assumptions are based principally on Company experience and vary by
issue age, type of coverage, and duration.
Liabilities for future policy benefits of certain interest-sensitive products
are based on policy account balances prior to applicable surrender charges,
deferred policy initiation fees that are recognized as income over the term
of the policies, and a provision for the return of insurance charges. Policy
benefits and claims that are charged to expense include benefit claims in
excess of related policy accounts incurred in the period, interest credited to
policy balances, and a provision for the return of the cost of insurance
charges. Credited interest rates for these products ranged from 3.0% to 7.3%
at December 31, 1995.
Liabilities for policy and contract claims are determined using statistical
analyses and case-basis evaluations and represent estimates of the expected
cost of incurred claims. Revisions to these estimates are recognized in the
Consolidated Statement of Income in the period when the revisions are made.
Goodwill
The amount paid to acquire a company over the fair value of its net assets is
reported as goodwill and is amortized on a straight-line basis, generally over
a thirty-five year period. The value of goodwill is considered appropriate
based on the prospect of continued growth and the long-term nature of the
insurance policies sold. Accumulated amortization of goodwill was $6,744,000
and $6,038,000 at December 31, 1995 and 1994, respectively.
Separate Account
Separate Account assets and liabilities are principally carried at fair value
and represent funds that are separately administered for annuity contracts for
which the contract holders bear the investment risk. The assets are legally
segregated from the Company's assets and are not subject to any claims that
arise from any other business of WNC. Investment income and realized investment
gains and losses accrue directly to the contract holders and are excluded from
the accompanying Consolidated Statement of Income.
Income Taxes
The Company files a consolidated life/nonlife federal income tax return. The
Company establishes deferred tax provisions for temporary differences between
the financial reporting basis and the tax basis of assets and liabilities at
the enacted tax rate expected to be in effect when the temporary differences
reverse. A valuation allowance for deferred tax assets is provided for the
portion of the asset not expected to be realized.
Reinsurance
In the normal course of business, the insurance companies of WNC minimize their
exposure to loss by reinsuring a portion of their life insurance, annuity, and
health insurance risks with other insurance companies. The Company's policy on
claim exposure for life insurance and annuity products is to retain a maximum
of $300,000 of life insurance exposure on any one individual ($400,000 with
accidental death coverage).
The Company retains a maximum of 50% of all long-term group disability and
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 related to long-duration
contracts is accounted for over the life of the underlying reinsured policies
using assumptions consistent with those used to account for the underlying
policies.
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 is designed to protect the
Company from an excessive amount of claims over $250,000 on an individual claim
basis.
Note C
New Accounting Standards
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) 114 and SFAS 118, issued by FASB, relating to the
impairment of mortgage loans. The statement requires that loans be identified
as impaired when it is probable that a creditor will be unable to collect all
amounts contractually due. The impairment is measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate, at the loan's observable market price, or at the fair value of the
collateral if the loan is collateral dependent. The adoption of this statement
did not have an effect on the Company at January 1, 1995, as the Company had no
loans that met the criteria for impairment.
In December 1995, the Company adopted SFAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This
statement establishes guidance for recognizing and measuring impairment losses
for long-lived assets, certain identifiable intangibles, and goodwill related
to those assets. The statement applies to those assets to be held and used and
those to be disposed. This statement did not have a material effect on the
Company.
In November 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation," which the Company will adopt in 1996. This statement establishes
accounting and reporting standards for stock-based employee compensation plans.
The statement defines a fair value method of accounting that would result in an
income statement charge or permits entities to continue using the current
accounting treatment. The Company has elected to continue using the current
accounting treatment and will disclose the required pro forma results of the
new provisions in the 1996 financial statements.
Effective January 1, 1994, the Company adopted SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities." The effect of the adoption
resulted in an increase to shareholders' equity of $41,644,000.
Effective January 1, 1993, the Company adopted SFAS 112, "Employers' Accounting
for Postemployment Benefits" resulting in a one-time cumulative effect
adjustment to net income of $1,550,000, net of taxes of $834,000.
Note D
Policy Liabilities
Detail of WNC's policy liabilities at December 31 follows:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994
<S> <C> <C>
Future policy benefits
Annuities $1,228,947 $1,278,252
Life 837,990 790,894
Policy and contract claims 219,755 213,572
Unearned premiums 37,382 33,220
Other 39,255 38,880
Total policy liabilities $2,363,329 $2,354,818
</TABLE>
Activity in the liability for short duration unpaid claims and short duration
claim adjustment expense reported in continuing operations (included in policy
and contract claims and component of general expenses and other liabilities)
follows:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Balance at January 1 $ 58,333 $ 55,137 $ 52,621
Incurred relating to:
Current year 53,247 54,395 48,535
Prior years 988 (3,400) (2,625)
Total incurred 54,235 50,995 45,910
Paid relating to:
Current year 23,436 22,727 19,747
Prior years 29,715 25,072 23,647
Total paid 53,151 47,799 43,394
Balance at December 31 $ 59,417 $ 58,333 $ 55,137
</TABLE>
Note E
Investments
Fixed Maturities
A comparison of amortized cost to fair value of fixed maturity investments by
category at December 31 follows:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized --------------------- Fair
(000s omitted) Cost Gains Losses Value
1995
----------------------------------------------------
<S> <C> <C> <C> <C>
United States government obligations $ 75,750 $ 4,860 $ 66 $ 80,544
Obligations of states and political subdivisions 78,824 3,685 89 82,420
Public utilities 147,206 8,216 296 155,126
Industrial and miscellaneous 989,348 71,124 2,510 1,057,962
Mortgage-backed securities 634,236 19,404 627 653,013
Other 27,950 3,695 - 31,645
Total fixed maturities $1,953,314 $110,984 $ 3,588 $2,060,710
</TABLE>
<TABLE>
<CAPTION>
1994
----------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
United States government obligations $ 74,293 $ 265 $ 4,577 $ 69,981
Obligations of states and political subdivisions 75,555 1,215 5,286 71,484
Public utilities 131,184 20 13,650 117,554
Industrial and miscellaneous 798,018 5,091 53,406 749,703
Mortgage-backed securities 655,286 3,232 49,315 609,203
Other 33,845 63 2,380 31,528
Total available for sale 1,768,181 9,886 128,614 1,649,453
Held to maturity
United States government obligations 251 - - 251
Obligations of states and political subdivisions 22,109 860 45 22,924
Industrial and miscellaneous 86,027 845 2,591 84,281
Mortgage-backed securities 4,529 181 - 4,710
Other 200 2 - 202
Total held to maturity 113,116 1,888 2,636 112,368
Total fixed maturities $1,881,297 $ 11,774 $131,250 $1,761,821
</TABLE>
During 1995, the Company sold one "held to maturity" investment with an
amortized cost of $2,000,000. The sale, which resulted in a realized investment
loss of $50,000, was made as a result of significant deterioration of the bond
issuer's creditworthiness.
The amortized cost and fair value of fixed maturities at December 31, 1995, by
contractual maturity, follow. Expected maturities differ from contractual
maturities as borrowers may have the right to call or prepay obligations with
or without penalties.
<TABLE>
<CAPTION>
Amortized Fair
(000s omitted) Cost Value
<S> <C> <C>
Due in 1996 $ 8,144 $ 8,186
Due in 1997 - 2000 201,403 210,561
Due in 2001 - 2005 460,056 486,563
Due after 2005 649,475 702,387
Mortgage-backed securities 634,236 653,013
Total fixed maturities $1,953,314 $2,060,710
</TABLE>
Mortgage Loans on Real Estate
Information on mortgage loans on real estate at December 31, 1995 is as
follows:
<TABLE>
<CAPTION>
(000s omitted)
<S> <C>
Impaired loans
With allowance (net of $135 allowance) $ 2,762
Without allowance 7,640
Total impaired loans 10,402
Non-impaired loans (net of $7,171 allowance) 306,847
Total mortgage loans $317,249
</TABLE>
In 1995, the Company's average investment in impaired mortgage loans was
$5,812,000. Income recognized and received on these loans was $732,000 and
$714,000, respectively.
A rollforward of the allowance for mortgage loan losses
follows:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Balance at January 1 $ 8,032 $12,031 $11,618
Additions 400 1,501 3,475
Deductions (1,126) (5,500) (3,062)
Balance at December 31 $ 7,306 $ 8,032 $12,031
</TABLE>
Non-Cash Investing Activities
During 1995, 1994, and 1993, non-cash investing activities totaled $10,707,000,
$4,009,000, and $4,869,000, respectively, and consisted of real estate acquired
through foreclosure of fixed maturities and mortgage loans on real estate,
purchase money mortgages, and venture capital distributions of common stock.
Realized Investment Gains and Losses
Details of realized investment gains (losses) for the years ended December 31
follow:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Fixed maturities
Gross gains $ 7,257 $ 2,026 $ 20,650
Gross losses (7,740) (3,760) (12,532)
Total fixed maturities (483) (1,734) 8,118
Mortgage loans on real estate (52) (82) (377)
Real estate and other (882) 210 (8,095)
Realized investment losses $(1,417) $(1,606) $ (354)
</TABLE>
Investment Income
Major sources of net investment income from continuing operations for the years
ended December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Fixed maturities $138,998 $134,866 $126,787
Mortgage loans on real estate 27,981 32,008 40,568
Real estate and other 7,133 8,225 12,936
Policy loans 3,643 3,459 3,460
Short-term 2,969 2,530 2,183
Gross investment income 180,724 181,088 185,934
Investment expenses 11,940 14,448 18,572
Net investment income $168,784 $166,640 $167,362
</TABLE>
Investment expenses consist primarily of real estate expenses.
As of December 31, 1995, the carrying value of investments that produced no
income for the previous twelve month period was $5,412,000 or less than 1% of
invested assets.
Unrealized Investment Gains and Losses
The following table details the net unrealized investment gains and losses
included in shareholders' equity:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994
<S> <C> <C>
Gross unrealized gains $112,849 $ 9,974
Gross unrealized losses (4,316) (128,873)
DAC (37,700) 33,000
Deferred income taxes (21,035) 24,543
Net unrealized investment
gains (losses) $ 49,798 $ (61,356)
</TABLE>
Fixed maturities had an increase (decrease) in unrealized investment gains of
$226,872,000, ($201,808,000), and $25,438,000 in 1995, 1994, and 1993,
respectively.
Note F
Defined Benefit and Contribution Plans
Retirement Plans
The Company has three qualified defined contribution retirement plans: a
non-contributory money-purchase retirement plan, a non-contributory
discretionary profit sharing plan, and a contributory 401(k) plan. The plans
cover substantially all employees who have met the prescribed requirements for
participation. The Company contribution to the money-purchase retirement plan
is 3% of each employee's compensation plus an additional 3% of compensation in
excess of the Social Security wage base. The Company contribution to the profit
sharing plan is at the discretion of the insurance subsidiaries' Boards of
Directors in consultation with WNC's Board of Directors and is based on
financial performance. Employees may contribute up to 12% of compensation to
the 401(k) plan. The Company matches employee contributions dollar for dollar
up to a maximum of 3% of compensation. The net pension expense from continuing
operations for the defined contribution plans in 1995, 1994, and 1993 was
$1,237,000, $928,000 and $1,804,000, respectively. The Company has a
non-qualified supplemental retirement plan under which benefits are paid to
certain employees equal to the amounts by which the qualified plan benefits are
reduced due to provisions of the Internal Revenue Code (IRC). At both December
31, 1995 and 1994, the unfunded liability for the supplemental retirement plan
was not material.
The Company has defined benefit retirement plans that cover certain
grandfathered employees and agents. Benefits are based principally on years of
service and compensation. The funding policies are to contribute annually at
least the minimum amounts required by the IRC. The plans have been amended to
terminate the accrual of future benefits which resulted in a curtailment gain.
Contributions are intended to provide benefits attributed to service to date.
Plan assets are invested principally in mutual funds, bonds, and stocks. The
fair value of WNC Common and Preferred Stock held by one of the retirement
plans was $12,408,000 and $8,580,000, at December 31, 1995 and 1994,
respectively. Dividends of $492,000 were received on the WNC Common and
Preferred Stock in both 1995 and 1994. No WNC shares were purchased or sold
during 1995 or 1994.
The components of net periodic pension income included in continuing
operations for the defined benefit plans for the years ended December 31
follow:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Interest cost on projected
benefit obligations $ 1,734 $ 1,824 $ 1,923
Actual return on plan assets (3,419) (419) (2,035)
Net amortization and deferral 1,118 (2,054) (642)
Curtailment gain - - (491)
Service cost for benefits earned - - 99
Net periodic pension
income $ (567) $ (649) $(1,146)
</TABLE>
The funded status and the amounts reported in WNC's Consolidated Balance Sheet
as part of other liabilities for the defined benefit plans at December 31
follow:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994
<S> <C> <C>
Actuarial present value of
accumulated benefit obligations:
Vested $(26,501) $(23,759)
Non-vested (78) (118)
Accumulated benefit obligations $(26,579) $(23,877)
Projected benefit obligations $(26,579) $(23,877)
Plan assets at fair value 25,482 22,794
Projected benefit obligations in
excess of plan assets $ (1,097) $ (1,083)
Comprised of:
Prepaid pension cost $ 3,190 $ 1,526
Unrecognized actuarial net loss (8,207) (7,835)
Unrecognized transition asset 3,920 5,226
Total $ (1,097) $ (1,083)
</TABLE>
The actuarial assumptions used to measure the projected benefit obligation
include:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Weighted-average discount
rate 7.0% 7.5% 6.7%
Weighted-average expected
rate of return on plan assets 7.6% 7.6% 7.5%
</TABLE>
The transition asset is being amortized over a fourteen-year period. Actuarial
gains and losses are deferred and then amortized over a fourteen-year period
when the cumulative deferred amounts exceed certain limits.
GAAP requires employers to recognize a minimum liability at least equal to the
unfunded accumulated benefit obligation.
WNC's prepaid pension cost was less than the unfunded accumulated benefit
obligation requiring a pretax adjustment of $4,287,000 and $2,769,000 at
December 31, 1995 and 1994, respectively, with an offset to shareholders'
equity.
Postretirement Benefit Plan
In addition to WNC's retirement programs, the Company provides a contributory
group life and medical insurance plan to certain eligible retirees and certain
grandfathered active employees who have met a combination of age and service
requirements. The plan was amended in 1992 to limit the future eligibility of
benefits for active employees. The plan pays a stated percentage of most
medical expenses, reduced for deductibles and payments made by government
programs or other group coverage. Certain active employees who are not included
in the grandfathered group are eligible for $10,000 of life insurance benefits
under the plan after reaching a combination of age and service requirements.
In 1993, the Company established a Voluntary Employees' Beneficiary Association
(VEBA) trust under section 501(c)(9) of the IRC for the purpose of paying out
postretirement benefits to plan participants. The VEBA is funded annually,
based on the difference between the net periodic postretirement benefit expense
as measured by statutory accounting rules and the retiree medical claims
incurred during the respective periods, subject to certain IRC limitations.
Assets of the VEBA trust are invested in two-year U.S. Treasury notes and
corporate demand notes.
The components of net periodic postretirement benefit expense from continuing
operations for the years ended December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Interest cost $1,537 $1,654 $1,530
Service cost 40 46 45
Return on plan assets (181) (23) -
Net amortization and deferral 68 188 (10)
Net periodic postretirement
benefit expense $1,464 $1,865 $1,565
</TABLE>
The funded status of the plan and the amount recognized in WNC's Consolidated
Balance Sheet as part of other liabilities at December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994
<S> <C> <C>
Accumulated postretirement
benefit obligation
Retirees, dependents, and disabled
participants $(27,578) $(25,022)
Fully eligible active plan
participants (997) (846)
Other active plan participants (1,048) (661)
Total accumulated postretirement
benefit obligation (29,623) (26,529)
Fair value of plan assets 4,516 2,726
Accumulated postretirement benefit
obligation in excess of plan assets $(25,107) $(23,803)
Comprised of
Accrued postretirement benefit
expense $(23,074) $(24,392)
Unrecognized net gain (loss) (2,215) 393
Unrecognized prior service cost 182 196
Accumulated postretirement benefit
obligation in excess of plan assets $(25,107) $(23,803)
</TABLE>
The actuarial assumptions used to measure the postretirement benefit obligation
include:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Weighted-average discount rate 7.0% 7.5%
Weighted-average after-tax expected
rate of return on plan assets 4.6% 4.6%
Estimated income tax rate 34% 34%
</TABLE>
The health care trend rate used in 1995 was 11.5% for pre-age 65 and 9.7% for
post-age 65 participants, graded evenly to 5% in 14 years. The health care cost
trend rate in 1994 was 12% for pre-age 65 and 10% for post-age 65 participants,
graded evenly to 5% in 15 years. The health care cost trend rate assumption has
a significant effect on the amounts reported. Increasing the trend rate by 1%
per year would increase the accumulated postretirement benefit obligation by
$2,713,000 at December 31, 1995 and the aggregate of the service and interest
cost components of net periodic postretirement benefit expense by $171,000 in
1995.
Note G
Reinsurance
The effect of reinsurance on insurance premiums and policy charges earned for
the years ended December 31 from continuing operations follows:
<TABLE>
<CAPTION>
(000s omitted)
1995 1994 1993
--------------------------------
<S> <C> <C> <C>
Direct premiums and policy charges $198,803 $193,181 $184,552
Premiums ceded (53,396) (56,873) (57,455)
Net premiums and policy charges $145,407 $136,308 $127,097
</TABLE>
Reinsurance benefits ceded from continuing operations were $19,619,000,
$19,134,000, and $19,318,000, in 1995, 1994, and 1993, respectively.
As a result of past divestitures, the Company reinsures 100% of certain
supplemental health insurance, life insurance, and annuity business with
unaffiliated companies. At December 31, 1995, 52% of WNC's total reinsurance
recoverables were due from Combined Insurance Company of America, and 14% were
due from American Founders Life Insurance Company. In addition, 18% of
reinsurance recoverables were due from UNUM Life Insurance Company in the
normal course of business.
The Company uses yearly renewable term reinsurance at an insurance subsidiary
to maintain statutory profitability and other statutory financial requirements
while sustaining growth. The cumulative contribution to statutory basis capital
and surplus from this reinsurance was $8,202,000 and $9,044,000 at December 31,
1995 and 1994, respectively. These transactions do not materially impact the
Company's GAAP financial statements.
Note H
Stock Benefit Plan
WNC has a stock benefit plan under which the compensation committee of WNC's
Board of Directors may grant stock options, stock appreciation rights, and
shares of restricted stock. The following table summarizes the changes in the
shares of Common Stock of WNC under the plan:
<TABLE>
<CAPTION>
Issuable Under
Available Outstanding Options
For Grant -----------------------------
During 1995 1995 1994 1993
<S> <C> <C> <C> <C>
January 1 balance 541,094 777,649 685,244 594,659
Stock options
Granted (174,500) 174,500 167,500 216,500
Exercised (31,832) (22,367) (53,321)
Forfeited 31,224 (31,224) (52,728) (72,594)
Restricted stock
Issued (6,050)
Cancelled 1,775
December 31 balance 393,543 889,093 777,649 685,244
Options exercisable 511,102 420,975 346,032
</TABLE>
Prices for stock options granted from 1993 to 1995 ranged from $18.38 to $26.57
per share. Prices for stock options exercised from 1993 to 1995 ranged from
$10.21 to $26.57 per share. Exercise prices on stock options outstanding ranged
from $10.21 to $27.29 per share.
Note I
Capital Stock
Convertible Preferred Stock
WNC has 10,000,000 authorized shares of $5 par value Preferred Stock with
144,000 shares outstanding that are designated as $2.50 Convertible Preferred
Stock. Each share is entitled to a cumulative annual dividend of $2.50 and a
preference of $50 in the event of involuntary liquidation of WNC and $55 in the
event of voluntary liquidation. Further, each share is convertible at any time
into 1.875 shares of Common Stock at the option of the holder and is redeemable
at $55 at the option of WNC. Each holder is entitled to one vote for each share
held. The $2.50 Convertible Preferred Stock and the Common Stock vote together
as one class.
Stock Purchase Rights
WNC has one outstanding Common Stock Purchase Right for each outstanding share
of Common Stock. The Rights will become exercisable only if a person or group
acquires 20% or more of WNC's Common Stock or announces a tender offer
following which it would hold 30% or more of such Common Stock. If the Rights
become exercisable, a holder will be entitled to buy from WNC one share of WNC
Common Stock at a price of $100 per share. If, after the Rights become
exercisable, WNC is acquired in a merger or other business combination or more
than 50% of WNC's assets or earning power are sold, each Right will entitle its
holder to buy that number of shares of Common Stock of the acquiring company
having a fair value of twice the exercise price of the Right. Alternatively,
if a 20% WNC shareholder acquires WNC by means of a merger in which WNC and
its Common Stock survive or that shareholder engages in self-dealing
transactions with WNC, each Right not owned by the 20% holder would become
exercisable for that number of shares of WNC Common Stock which have a fair
value of twice the exercise price of the Right. Until the Rights become
exercisable, one additional Right will be distributed with each share of WNC
Common Stock issued in the future. The Rights will expire in January 1997. The
Rights may be redeemed by WNC at $.01 per Right prior to the time that 20% or
more of WNC's Common Stock has been accumulated by a person or group or within
ten days thereafter under certain circumstances.
Common Stock
WNC has 60,000,000 authorized shares of $5 par value Common Stock including
treasury shares. At December 31, 1995, 13,820,000 shares of WNC's Common Stock
were reserved for future issuance: 12,223,000 shares for future exercises of
Purchase Rights; 269,000 shares for conversion of outstanding Convertible
Preferred Stock; 1,282,000 shares for exercise of options to purchase Common
Stock and for use in connection with the restricted stock grants; and 46,000
shares for issuance of Common Stock in connection with the dividend
reinvestment plan. The annual dividend paid on WNC Common Stock in 1995, 1994,
and 1993 was $1.08 per share.
Earnings Per Share
The number of shares used in computing earnings per share follows:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Primary
Average common shares outstanding 12,194 12,144 10,643
Assumed exercise of options 56 81 112
Total average shares 12,250 12,225 10,755
Fully Diluted
Average common shares outstanding 12,194 12,144 10,643
Assumed conversion of preferred stock 269 271 271
Assumed exercise of options 176 81 112
Total average shares 12,639 12,496 11,026
</TABLE>
Note J
Income Taxes
Components of WNC's deferred tax liabilities and assets at December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994
<S> <C> <C>
Deferred tax liabilities:
DAC $ 75,789 $ 97,322
Unrealized investment gains 33,768 _
Joint ventures and venture
capital investments 2,150 1,025
Accrued bond discount 1,630 1,312
Other 1,739 2,791
Total deferred tax liabilities 115,076 102,450
Deferred tax assets:
Policy liability adjustments 65,576 63,349
Liabilities for employee benefits 14,004 13,858
Realized investment losses 5,826 11,557
Unrealized investment losses _ 41,452
Other 4,768 4,599
Total deferred tax assets 90,174 134,815
Valuation allowance (5,196) (15,706)
Deferred tax assets, net of
valuation allowance 84,978 119,109
Net deferred tax (assets) liabilities $ 30,098 $(16,659)
</TABLE>
Other than capital gain or loss items, the nature of WNC's deferred tax assets
and liabilities is such that the general reversal pattern for these temporary
differences is expected to result in a full realization of WNC's deferred tax
assets.
At December 31, 1995, WNC had capital loss carryforwards for tax return
purposes of $10,959,000, of which $1,498,000 will expire in 1996 and the
remainder in 2000. For financial reporting purposes, a valuation allowance has
been recognized to offset the deferred tax assets related to those
carryforwards, investment loss reserves, and other capital-loss-related
deferred tax assets not expected to be realized. The valuation allowance was
decreased by $10,510,000 in 1995 and increased by $803,000 in 1994.
Prior to 1984, WNC's life insurance subsidiaries were required to accumulate
certain untaxed amounts in a memorandum "policyholders' surplus account." Under
the Tax Reform Act of 1984, the "policyholders' surplus account" balances were
capped at December 31, 1983 and taxed only to the extent distributed to
shareholders or when they exceed certain prescribed limits. WNC's life
insurance subsidiaries do not intend to make any taxable distributions or to
exceed the prescribed limits in the foreseeable future; therefore, no income
tax provision has been made for those purposes. However, if such taxes were
assessed, the amount of tax payable would be approximately $20,000,000. As of
December 31, 1995, the combined "policyholders' surplus account" of WNC's life
insurance subsidiaries approximates $57,000,000.
Under current and prior law, income of WNC's life insurance subsidiaries taxed
on a current basis is accumulated in a shareholders' surplus account and can be
distributed without tax to WNC. At December 31, 1995, this shareholders'
surplus was $270,000,000.
The following reconciles the difference between actual tax
expense and the amounts obtained by applying the statutory
federal income tax rate of 35%:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Income tax at statutory rate
applied to income from
continuing operations before
income taxes and cumulative
effect of change in
accounting principle $13,512 $12,240 $ 8,740
Tax expense not recognized
on certain GAAP-basis
capital gains or losses (1,485) (2,179) (2,870)
Investment income not taxed (299) (452) (638)
Amortization of purchase
accounting adjustments 266 523 247
Other (93) 224 828
Income tax expense from
continuing operations $11,901 $10,356 $ 6,307
Comprised of:
Current expense $ 9,879 $ 7,173 $ 1,301
Deferred expense 2,022 3,183 5,006
Income tax expense from
continuing operations $11,901 $10,356 $ 6,307
Income tax expense from
discontinued operations 3,567 2,989 4,191
Total income tax expense $15,468 $13,345 $10,498
</TABLE>
Income taxes paid by WNC were $12,969,000, $8,120,000, and $4,100,000 in 1995,
1994, and 1993, respectively. WNC has a nonlife net operating loss carryforward
for tax purposes of $273,000 that will begin to expire in 2008.
The Internal Revenue Service is currently examining the Company's tax returns
for 1992 through 1994.
Note K
Commitments and Contingencies
Leases
WNC has noncancelable operating leases primarily for office space and office
equipment, the most significant of which is a twenty-year lease of WNIC's home
office building with a related party as lessor. Future minimum lease payments
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year at December 31, 1995 follow:
<TABLE>
<CAPTION>
(000s omitted)
<S> <C>
1996 $ 7,828
1997 7,102
1998 5,364
1999 4,430
2000 3,974
Thereafter 44,569
Total minimum lease commitments $73,267
</TABLE>
Rental expenses from continuing operations were $3,348,000, $2,893,000, and
$3,226,000, in 1995, 1994, and 1993, respectively.
Financial Guarantees
The Company has entered into certain financial guarantees. A financial
guarantee is a conditional commitment to guarantee the payment of an obligation
by an unrelated entity to a third party and has off-balance sheet credit risk.
The exposure to credit risk is represented by the amount the Company would be
required to pay under certain circumstances.
At December 31, 1995, the Company had three financial guarantees totaling
$13,733,000, as well as a construction completion guarantee. At December 31,
1994, the Company had two financial guarantees totaling $15,206,000.
The Company feels it has adequate reserves for related potential losses.
Litigation
WNC has been named in various pending legal proceedings considered to be
ordinary routine litigation incidental to the business of such companies. A
number of other legal actions have been filed which demand compensatory and
punitive damages aggregating material dollar amounts. WNC believes that such
suits are substantially without merit and that valid defenses exist. WNC's
management and its chief legal officer are of the opinion that such litigation
will not have a material effect on WNC's results of operations or consolidated
financial position.
State Guaranty Funds
Under insolvency or guaranty laws in most states in which the Company's
insurance subsidiaries operate, insurers can be assessed for policyholder
losses incurred by insolvent insurance companies. At present, most
insolvency or guaranty laws provide for assessments based on the amount of
insurance underwritten in a given jurisdiction. The Company's insurance
subsidiaries paid $1,934,000, $2,850,000, and $2,500,000 in state guaranty fund
assessments in 1995, 1994, and 1993, respectively, and had accrued liabilities
of $3,478,000 and $3,128,000 for estimated future assessments at December 31,
1995 and 1994, respectively.
The Company's accounting policy with regard to payments to state guaranty funds
is to treat as assets any such payments in those states where current law
allows an offset against future premium taxes. At December 31, 1995 and
1994, other assets included $5,226,000 and $5,464,000, respectively, of
deferred payments to state guaranty funds. Generally, these amounts will be
used to offset future premium tax payments over periods from five to ten years.
Under certain circumstances, including changes in state laws and a change in
the Company's product mix, such amounts might become unrecoverable.
Note L
Mortgage Payable and Credit Arrangements
Mortgage Payable
Mortgage payable consisted of $1,309,000 and $1,907,000 at December 31,
1995 and 1994, respectively, for a mortgage on investment real estate with an
interest rate of 6.5% that matures in July, 1997. Payments of $480,000 and
$922,000 will be required in 1996, and 1997, respectively. The property, with a
carrying value of $14,007,000, is pledged as collateral.
Interest paid on borrowings by WNC was $110,000, $406,000, and $1,673,000,
in 1995, 1994, and 1993, respectively.
Credit Arrangements
WNC has a line of credit with one bank available for short-term borrowings
amounting to $10,000,000, of which $6,900,000 was unused at December 31, 1995.
The interest rate on this single borrowing was 6.9%. The line of credit
arrangement is renewable annually, but credit can be withdrawn at the bank's
option.
In addition, WNC has five letters of credit with varying terms and
conditions totaling $2,821,000. As of December 31, 1995, all of the letters of
credit were unused.
Note M
Statutory Financial Information
The insurance companies of WNC prepare statutory financial statements in
accordance with accounting principles and practices prescribed or permitted by
the insurance department of the applicable state of domicile. Prescribed
statutory accounting practices (SAP) currently include state laws, regulations,
and general administrative rules applicable to all insurance enterprises
domiciled in a particular state, as well as practices described in National
Association of Insurance Commissioners' publications. Permitted practices
include practices not prescribed, but allowed, by the domiciliary state
insurance department. The prescribed and permitted statutory accounting
practices differ from GAAP.
Current statutory practice does not address reserves for certain endowment
features of several life insurance products marketed by one of the Company's
subsidiaries. The subsidiary uses a practice permitted by its state of domicile
and discounts the future benefit using mortality and interest rate assumptions.
SAP to GAAP Reconciliation
A reconciliation of SAP capital and surplus to GAAP shareholders' equity at
December 31 follows:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994
<S> <C> <C>
SAP capital and surplus $ 231,930 $ 221,270
DAC 235,499 293,850
Adjustments to policy liabilities (115,937) (119,521)
Unrealized gain (loss) on
fixed maturities 107,396 (118,728)
Asset valuation and interest
maintenance reserves 34,700 29,005
Deferred income taxes (30,098) 16,659
Postretirement and pension liabilities (26,969) (28,313)
Goodwill 18,385 19,092
Other, net (16,987) (6,991)
GAAP shareholders' equity $ 437,919 $ 306,323
</TABLE>
A reconciliation of SAP net income to GAAP net income for the years ended
December 31 follows:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
SAP net income $18,278 $18,633 $10,954
DAC 11,561 3,894 15,282
Adjustments to policy benefits 1,653 1,270 401
Financial reinsurance 1,800 - (3,500)
Deferred income taxes (1,871) (3,913) (6,180)
Cumulative effect of change
in accounting principle - - (1,550)
Other, net 2,439 11,417 11,259
GAAP net income $33,860 $31,301 $26,666
</TABLE>
Dividends From Subsidiaries
The amount of dividends available for distribution without prior regulatory
approval is limited by regulatory restrictions. This amount is the greater of:
a) 10% of the insurance subsidiaries' statutory capital and surplus as of the
preceding year end; or b) the insurance subsidiaries' statutory net income from
operations for the preceding year. WNC's insurance companies are permitted a
maximum of $23,193,000 in dividend distributions to WNC in 1996. WNC received
dividends of $9,000,000 from WNIC in 1995.
Note N
Fair Value of Financial Instruments
The fair values of certain financial instruments along with their corresponding
carrying values at December 31, 1995 and 1994 follow. As the fair value of all
WNC's assets and liabilities is not presented, this information in the
aggregate does not represent the underlying value of WNC. WNC does not have any
financial instruments held or issued for trading purposes.
<TABLE>
<CAPTION>
1995 1994
-------------------------- ------------------------
Fair Carrying Fair Carrying Valuation
(000s omitted) Value Value Value Value Method
<S> <C> <C> <C> <C> <C>
Financial assets
Fixed maturities $2,060,710 $2,060,710 $1,761,821 $1,762,569 (1)
Equity securities 1,994 1,994 1,720 1,720 (1)
Mortgage loans on real estate 336,366 317,249 366,373 357,641 (2)
Policy loans 53,665 56,279 52,600 54,368 (3)
Separate Account investment 11,840 11,840 11,327 11,327 (4)
Cash and short-term investments 56,925 56,925 59,659 59,659 (4)
Investment proceeds receivable 2,289 2,289 1,094 1,094 (4)
Accrued investment income 32,652 32,652 33,084 33,084 (4)
Financial liabilities
Investment-type insurance contracts 1,131,665 1,161,263 1,174,017 1,203,608 (3)
Mortgage payable 1,328 1,309 1,854 1,907 (2)
Short-term borrowings 3,100 3,100 - - (4)
Off-balance sheet
Real estate development guarantees 157 - 80 - (5)
Lending commitments 15 - 105 - (6)
</TABLE>
(1) Fair values are based on publicly quoted market prices at the close of
trading on the last business day of the year. In cases where publicly
quoted market prices are not available, fair values are based on estimates
using values obtained from independent pricing services, or, in the case
of private placements, by discounting expected future cash flows using a
current market rate applicable to the yield, credit quality, and maturity
of the investments.
(2) Fair values are estimated using discounted cash flow analyses, based on
interest rates currently being offered for similar loans to borrowers with
similar credit ratings. A pricing cap is put on mortgage loans that carry
significant above-market interest rate yields to reflect the prepayment
risk.
(3) Fair values are estimated using discounted cash flow calculations, based
on interest rates currently being offered for similar contracts with
similar maturities.
(4) Carrying value approximates fair value.
(5) Fair values are based on estimates of fees to guarantee similar
developments. In addition, the Company has a construction completion
guarantee pertaining to a joint venture investment. The Company does not
feel that estimating a fair value for the instrument is practicable due to
the inability to estimate cash flows. See Note K for further discussion of
guarantees.
(6) Fair values are based on commitment fees of the loans in question.
Note O
Segment Information
WNC's continuing operations has two business segments: insurance operations and
corporate and other. Prior to the sale of the Company's health business, the
Company had three business segments (see Note A). 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, income or loss from continuing operations before income
taxes and cumulative effect of change in accounting principle, and assets by
segment for the years ended and at December 31 follow:
<TABLE>
<CAPTION>
(000s omitted) 1995 1994 1993
<S> <C> <C> <C>
Revenues from continuing
operations(A)
Insurance operations $ 309,054 $ 299,105 $ 295,159
Corporate and other 8,062 6,215 5,015
Consolidated total $ 317,116 $ 305,320 $ 300,174
Pretax income (loss) from
continuing operations (A)
Insurance operations $ 37,794 $ 34,397 $ 30,886
Corporate and other 813 574 (5,914)
Consolidated total $ 38,607 $ 34,971 $ 24,972
Assets
Insurance operations $2,512,050 $2,345,240 $2,359,735
Corporate and other 213,692 215,082 218,645
Discontinued operations 287,156 250,246 276,039
Consolidated Total $3,012,898 $2,810,568 $2,854,419
</TABLE>
(A) Amounts have been reclassified to reflect the discontinued operations of
the health business.
Actuarial estimates are used in determining certain policy liabilities and
deferred acquisition costs which in turn effect the reported profitability
of the operating segments. Actual results can differ materially from these
actuarial estimates. In addition, changes in these estimates, where
required, may have a significant effect on reported net income, especially
in the year of the change.
The profits of the 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.
Note P
Subsequent Event
In November 1996, the Company announced a definitive agreement to merge with
PennCorp Financial Group, Inc. (PennCorp). Under the terms of the merger, the
separate corporate existence of the Company shall cease and PennCorp shall
continue as the surviving corporation. The merger is anticipated to close
during the first quarter of 1997, pending the receipt of the required
shareholder and regulatory approval.
<PAGE>
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, 1995 and 1994, and
the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December
31, 1995. 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
finanical 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, 1995 and 1994, and
the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995, 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 and
postemployment benefits in 1993.
ERNST & YOUNG LLP
Chicago, Illinois
February 8, 1996, except for
Notes A and P, as to which
the date is December 20, 1996
<PAGE>
Quarterly Information (unaudited)(a)
The following table summarizes selected unaudited quarterly information for
1995 and 1994. As of March 1, 1996, WNC had approximately 9,600 Common and
Preferred shareholders, including individual participants in security
depository position listings.
<TABLE>
<CAPTION>
(000s omitted, except per share amounts)
Quarter Ended December 31, September 30, June 30, March 31,
------------------- ------------------- ------------------- -------------------
1995 1994 1995 1994 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $ 80,505 $ 76,447 $ 77,939 $ 77,804 $ 80,487 $ 74,844 $ 78,185 $ 76,225
Pretax operating income
from continuing operations (b) 10,296 8,728 9,494 7,437 10,890 9,047 9,344 11,365
Income from continuing
operations 7,016 4,147 6,751 6,118 7,068 6,187 5,871 8,163
Net income (loss) from
discontinued operations 2,270 2,572 1,636 3,009 1,829 2,234 1,419 (1,129)
Net income 9,286 6,719 8,387 9,127 8,897 8,421 7,290 7,034
Income from continuing
operations per share .56 .33 .54 .49 .57 .50 .47 .66
Net income (loss) from
discontinued operations
per share .18 .21 .13 .25 .15 .18 .12 (.09)
Net income per share .74 .54 .67 .74 .72 .68 .59 .57
Market price
Common
High 29 1/4 22 3/4 25 22 7/8 21 23 1/4 20 1/8 25 1/8
Low 21 7/8 18 5/8 20 1/2 20 5/8 18 21 17 3/4 22 3/4
Close 27 5/8 19 24 7/8 22 7/8 20 5/8 21 1/4 18 1/2 23 1/2
Preferred
High 54 1/4 45 7/8 47 1/4 46 40 5/8 48 3/4 42 1/2 50
Low 42 1/2 40 40 44 3/8 36 1/4 46 38 1/2 48 5/8
Close 54 1/4 40 47 1/4 44 3/4 40 1/2 46 1/4 40 49 1/4
Common Stock dividends .27 .27 .27 .27 .27 .27 .27 .27
Preferred Stock dividends .625 .625 .625 .625 .625 .625 .625 .625
</TABLE>
(a) All income statement information has been reclassified for discontinued
operations.
(b) Income before taxes and realized investment gains and losses.
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, Independent Auditors
We consent to the use of our report dated February 8, 1996, except for Notes A
and P as to which the date is December 20, 1996, included in the Annual Report
on Form 10-K of Washington National Corporation for the year ended
December 31, 1995, with respect to the consolidated financial statements and
schedules, as amended, included in this Form 8-K.
We also consent to the incorporation by reference in the Registration
Statements pertaining to the stock benefit plan (Form S-8 Numbers 33-28858,
33-10179, and 2-83640) and automatic dividend reinvestment and stock purchase
plan (Form S-3 Numbers 33-48306 and 2-72599) of Washington National Corporation
and the related Prospectuses of our report dated February 8, 1996, except for
Notes A and P as to which the date is December 20, 1996, with respect to the
financial statements and schedules of Washington National Corporation included
in the Annual Report on Form 10-K for the year ended December 31, 1995, as
amended, included in this Form 8-K.
ERNST & YOUNG LLP
Chicago, Illinois
January 8, 1997
<PAGE>
[ARTICLE] 7
[MULTIPLIER] 1,000
<TABLE>
<S> <C> <C> <C> <C>
[PERIOD-TYPE] YEAR YEAR YEAR YEAR
[FISCAL-YEAR-END] DEC-31-1995 DEC-31-1995 DEC-31-1995 DEC-31-1995
[PERIOD-END] DEC-31-1995 SEP-30-1995 JUN-30-1995 MAR-31-1995
[DEBT-HELD-FOR-SALE] 2,060,710 1,886,517 1,871,217 1,735,803
[DEBT-CARRYING-VALUE] 0 93,806 100,605 103,306
[DEBT-MARKET-VALUE] 0 97,310 104,445 104,410
[EQUITIES] 1,994 2,007 1,616 1,667
[MORTGAGE] 317,249 329,445 342,840 353,861
[REAL-ESTATE] 34,080 35,164 30,315 30,182
[TOTAL-INVEST] 2,544,656 2,465,863 2,461,806 2,358,717
[CASH] 8,331 5,183 3,229 3,115
[RECOVER-REINSURE] 49,502 52,289 52,527 53,814
[DEFERRED-ACQUISITION] 235,499 256,386 254,007 276,738
[TOTAL-ASSETS] 3,012,898 2,957,204 2,946,933 2,859,152
[POLICY-LOSSES] 2,066,937 2,067,850 2,065,816 2,066,951
[UNEARNED-PREMIUMS] 37,382 37,904 39,702 35,260
[POLICY-OTHER] 219,755 219,565 218,002 214,458
[POLICY-HOLDER-FUNDS] 39,255 39,624 39,197 38,688
[NOTES-PAYABLE] 4,409 1,445 1,631 1,770
[PREFERRED-MANDATORY] 0 0 0 0
[PREFERRED] 718 723 723 723
[COMMON] 125,953<F1> 125,628<F2> 125,407<F3> 125,116<F4>
[OTHER-SE] 311,248 280,201 272,120 217,102
[TOTAL-LIABILITY-AND-EQUITY] 3,012,898 2,957,204 2,946,933 2,859,152
[PREMIUMS] 145,407 108,262 73,053 36,142
[INVESTMENT-INCOME] 168,784 126,564 84,544 41,915
[INVESTMENT-GAINS] (1,417) (914) (606) (615)
[OTHER-INCOME] 4,342 2,699 1,681 743
[BENEFITS] 214,276 162,336 107,449 53,240
[UNDERWRITING-AMORTIZATION] 23,113 16,539 11,397 5,625
[UNDERWRITING-OTHER] 41,120 28,922 20,198 10,591
[INCOME-PRETAX] 38,607 28,814 19,628 8,729
[INCOME-TAX] 11,901 9,124 6,689 2,858
[INCOME-CONTINUING] 26,706 19,690 12,939 5,871
[DISCONTINUED] 7,154 4,884 3,248 1,419
[EXTRAORDINARY] 0 0 0 0
[CHANGES] 0 0 0 0
[NET-INCOME] 33,860 24,574 16,187 7,290
[EPS-PRIMARY] 2.73 1.98 1.31 .59
[EPS-DILUTED] 2.68 1.95 1.29 .58
[RESERVE-OPEN] 0 0 0 0
[PROVISION-CURRENT] 0 0 0 0
[PROVISION-PRIOR] 0 0 0 0
[PAYMENTS-CURRENT] 0 0 0 0
[PAYMENTS-PRIOR] 0 0 0 0
[RESERVE-CLOSE] 0 0 0 0
[CUMULATIVE-DEFICIENCY] 0 0 0 0
<FN>
<F1>INCLUDES ADDITIONAL PAID-IN CAPITAL OF $47,918.
<F2>INCLUDES ADDITIONAL PAID-IN CAPITAL OF $47,704.
<F3>INCLUDES ADDITIONAL PAID-IN CAPITAL OF $47,525.
<F4>INCLUDES ADDITIONAL PAID-IN CAPITAL OF $47,305.
</FN>
</TABLE>
<PAGE>
GRAPHIC APPENDIX
Included on page 23 of this Form 8-K are graphs depicting the mortgage loan
portfolio by geographic distribution and by property type. These graphs have
been converted to tables and are included in Exhibit 13.
