<PAGE>1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997.
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 1-7369
WASHINGTON NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2663225
(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or No.)
organization)
300 Tower Parkway,
Lincolnshire, Illinois 60069
(Address of principal (Zip Code)
executive offices)
Registrant's Telephone Number, Including Area Code: (847) 793-3000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares of Common Stock, $5 par value outstanding as of
May 9, 1997 was 12,409,640.
<PAGE>2
CONTENTS
Part I. Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheet - March 31, 1997
and December 31, 1996 3
Consolidated Statement of Income - Three Months
Ended March 31, 1997 and 1996 4
Consolidated Condensed Statement of Cash Flows -
Three Months Ended March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements - March 31, 1997 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
<PAGE>3
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(000s Omitted)
<CAPTION>
March 31,
1997 December 31,
(Unaudited) 1996
<S> <C> <C>
ASSETS
Investments
Fixed maturities - available for sale at
fair value (cost: $1,892,055; $1,899,130) $1,875,917 $1,931,129
Mortgage loans on real estate 250,729 257,635
Real estate and joint ventures 20,137 20,044
Policy loans 56,408 55,798
Other long-term 11,388 11,812
Short-term 83,849 103,345
Total Investments 2,298,428 2,379,763
Cash 3,252 3,081
Deferred acquisition costs 261,325 242,488
Reinsurance recoverables and prepaid premiums 110,513 109,555
Accrued investment income 32,129 31,671
Insurance premiums in course of collection 11,509 12,051
Property and equipment 13,227 13,472
Goodwill 17,503 17,679
Separate Account 39,968 39,643
Other 13,160 19,793
Total Assets $2,801,014 $2,869,196
LIABILITIES
Policy liabilities $2,260,506 $2,282,537
General expenses and other liabilities 103,039 129,784
Mortgage payable 592 740
Income taxes (current: $2,884; $550) 5,447 12,548
Separate Account 39,968 39,643
Total Liabilities 2,409,552 2,465,252
SHAREHOLDERS' EQUITY
Convertible preferred stock 710 712
Common stock 129,940 128,960
Retained earnings 322,029 315,661
Net unrealized investment gains (losses) (3,220) 16,608
Cost of common treasury stock (57,997) (57,997)
Total Shareholders' Equity 391,462 403,944
Total Liabilities and Shareholders' Equity $2,801,014 $2,869,196
See notes to consolidated financial statements
</TABLE>
<PAGE>4
<TABLE>
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
(000s Omitted, Except Per Share Data)
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Revenues
Insurance premiums and policy charges $41,035 $38,750
Net investment income 40,028 41,164
Realized investment gains (losses) 1,416 (610)
Other 544 1,401
Total Revenues 83,023 80,705
Benefits and Expenses
Insurance benefits paid or provided 52,517 53,840
Insurance and general expenses 10,607 10,332
Amortization of deferred acquisition costs 6,579 5,787
Total Benefits and Expenses 69,703 69,959
Income from continuing operations before income taxes 13,320 10,746
Income taxes on continuing operations 3,514 4,068
Income from Continuing Operations 9,806 6,678
Loss from discontinued operations - net of tax - (1,244)
Net Income $9,806 $5,434
Primary Earnings Per Share
Income from continuing operations $0.77 $0.53
Loss from discontinued operations - net of tax - (0.10)
Net Income Per Share $0.77 $0.43
Average Shares and Equivalents Outstanding 12,554 12,397
Fully Diluted Earnings Per Share
Income from continuing operations $0.76 $0.53
Loss from discontinued operations - net of tax - (0.10)
Net Income Per Share $0.76 $0.43
Average Shares and Equivalents Outstanding 12,821 12,666
Dividends Paid Per Common Share $0.27 $0.27
See notes to consolidated financial statements
</TABLE>
<PAGE>5
<TABLE>
WASHINGTON NATIONAL CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Unaudited)
(000s Omitted)
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Net Cash Provided (Used) by Operating Activities ($2,053) $10,688
Investing Activities
Proceeds from sales
Fixed maturities - available for sale 5,999 53,970
Mortgage loans, real estate and other 2,187 330
Proceeds from maturities, redemptions and distributions
Fixed maturities - available for sale 38,542 28,101
Mortgage loans, real estate and other 5,255 17,928
Cost of purchases
Fixed maturities - available for sale (35,276) (91,713)
Real estate and other investments (468) (2,241)
Increase in policy loans (610) (113)
Purchases of property and equipment (67) (152)
Net payments related to discontinued operations (9,860) -
Net change in short-term investments 19,496 18,244
Net Cash Provided by Investing Activities 25,198 24,354
Financing Activities
Policyholder account deposits 38,372 34,691
Policyholder account withdrawals (58,719) (61,528)
Dividends to shareholders (3,438) (3,394)
Change in short-term notes payable - (3,100)
Proceeds from issuance of common stock 959 258
Repayment of mortgage payable (148) (139)
Net Cash Used by Financing Activities (22,974) (33,212)
Increase in Cash 171 1,830
Cash at Beginning of Period 3,081 8,331
Cash at End of Period $3,252 $10,161
See notes to consolidated financial statements
</TABLE>
<PAGE>6
Item 1. Financial Statements (continued)
WASHINGTON NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1997
A. Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles (GAAP) for interim periods. In the opinion of
management, all adjustments (consisting primarily of normal,
recurring accruals) considered necessary for a fair presentation
have been included.
B. Merger With PennCorp Financial Group, Inc.
In November, 1996, WNC signed a definitive agreement to merge with
PennCorp Financial Group, Inc. (PennCorp). Under the terms of the
merger, the separate corporate existence of WNC will cease and
PennCorp will continue as the surviving entity. The transaction is
subject to approval by WNC and PennCorp shareholders and certain
regulatory agencies. The merger has been approved by the Illinois
and Indiana insurance departments. The joint proxy statement for
the merger has not yet cleared the Securities and Exchange Commission;
therefore, it will not be possible to complete the merger by the
May 30 date set in the merger agreement after which either party
may have the right to terminate. The Company and PennCorp have agreed
to extend the completion date to August 30, 1997. As part of the
extension, the Company has agreed to allow PennCorp the right to
increase the cash portion of the purchase price consideration to a
maximum of 45% of the transaction value. The Company expects the
merger to be completed prior to July 31, 1997.
C. Discontinued Operations
The operating results of the Company's sold health insurance
business have been reported in the Consolidated Statement of
Income as discontinued operations. As permitted, the Consolidated
Balance Sheet has not been segregated between continuing and
discontinued operations. At March 31, 1997, the business had
remaining assets of approximately $192.0 million consisting
primarily of invested assets and a $72.8 million reinsurance
receivable, and liabilities of approximately $192.0 million
consisting primarily of policy liabilities.
Revenues for the discontinued operations were $17.5 million and
$96.1 million for the three months ended March 31, 1997 and 1996,
respectively.
D. Reinsurance
The effect of reinsurance on insurance premiums and policy charges
on continuing operations for the three month period ended March 31
follows:
<TABLE>
<CAPTION>
(000s omitted) 1997 1996
<S> <C> <C>
Direct premiums and policy charges $53,078 $53,536
Premiums ceded (12,043) (14,786)
Net premiums and policy charges $41,035 $38,750
</TABLE>
Reinsurance benefits ceded from continuing operations were $7.5
million and $4.9 million at March 31, 1997 and 1996, respectively.
At March 31, 1997, approximately 66% of WNC's total reinsurance
receivables related to the Company's discontinued operations. Of
the 66%, 85% was from Pioneer Life Insurance Company
<PAGE>7
Item 1. Financial Statements (continued)
WASHINGTON NATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
March 31, 1997
as a result of the sale of the individual health insurance and the
small group life and health insurance business and 12% was due from
the UNUM Life Insurance Company. Of WNC's total reinsurance
recoverables, 20% were due from Combined Life Insurance Company
of America.
E. Financial Guarantees
The Company has entered into certain financial guarantees. A
financial guarantee is a conditional commitment to guarantee the
payment of an obligation by an unrelated entity to a third party
and has off-balance sheet credit risk. The exposure to credit risk
is represented by the amount the Company would be required to pay
under certain circumstances.
At both March 31, 1997 and December 31, 1996, the Company had three
financial guarantees totaling $11.5 million with related letters of
credit of $2.1 million, and a construction completion guarantee.
The Company feels it has adequate reserves for related potential
losses.
F. Net Unrealized Gains (Losses) on Investments
The components of net unrealized gains (losses) on investments
are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
(000s omitted) 1997 1996
<S> <C> <C>
Unrealized gains (losses) $(13,730) $33,653
Adjustment to deferred acquisition costs 8,815 (8,115)
Deferred income tax 1,695 8,930
Net unrealized gains (losses) on investments $ (3,220) $16,608
</TABLE>
G. New Accounting Standards
In February 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard 128, "Earnings Per Share,"
which is effective for financial statements issued for periods ending
after December 15, 1997. The Statement changes the computation of
earnings per share (EPS) by replacing primary and fully diluted EPS
with basic and dilutive EPS and requires additional disclosure.
The difference between basic and primary EPS is that the
denominator of the new calculation only uses the average shares
outstanding for the period versus average shares and equivalents
used in primary EPS. For WNC, this means that common share
equivalents for outstanding stock options are not added to the
denominator. The effect on WNC, which is not material, is to
slightly increase EPS. For WNC, the difference between dilutive
EPS and fully diluted EPS is the treatment of restricted
stock, which is immaterial and has no impact on the calculation.
H. Subsequent Event
The Company announced on May 1, 1997 its intent to redeem in cash
all of the issued and outstanding $2.50 convertible shares of
preferred stock on June 2, 1997 for $55.00 per share plus accrued
dividends. Preferred stockholders have the option to (1) convert
their preferred stock into the Company's $5.00 par value common
stock at a conversion rate of 1.875 shares of common for each share
of preferred stock prior to the redemption date, or (2) have their
preferred shares redeemed on the redemption date. On May 9, 1997,
there were approximately 142,024 issued and outstanding shares of
preferred stock.
<PAGE>8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following updates and should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and
Results of Operations section of the Company's 1996 Annual Report on
Form 10-K, copies of which may be obtained by contacting: Craig
Simundza, Vice President, Financial Reporting, Washington National
Corporation, 300 Tower Parkway, Lincolnshire, Illinois 60069
(telephone: (847) 793-3053 or facsimile: (847) 793-3700).
<TABLE>
Analysis of Net Income
<CAPTION>
(000s omitted) Three Months Ended March 31,
1997 1996
<S> <C> <C>
Pretax operating income from continuing operations (1)
Insurance operations $10,971 $10,303
Corporate and other 933 1,053
Total pretax operating income from continuing operations 11,904 11,356
Income taxes on operating income from continuing
operations 4,139 4,073
Net operating income from continuing operations 7,765 7,283
Other components of income (net of tax)
Net realized investment gains (losses) (2) 2,041 (605)
Discontinued operations - (1,244)
Net income $ 9,806 $5,434
<FN>
(1) Pretax income before net realized investment gains and losses.
(2) 1997 and 1996 include tax benefits of $625 and $5, respectively.
</FN>
</TABLE>
Corporate Merger
In November, 1996, WNC signed a definitive agreement to merge with
PennCorp Financial Group, Inc. (PennCorp). Under the terms of the
merger, the separate corporate existence of WNC will cease and
PennCorp will continue as the surviving entity. The transaction is
subject to approval by WNC and PennCorp shareholders and certain
regulatory agencies. The merger has been approved by the Illinois
and Indiana insurance departments. The joint proxy statement for
the merger has not yet cleared the Securities and Exchange Commission;
therefore, it will not be possible to complete the merger by the
May 30 date set in the merger agreement after which either party
may have the right to terminate. The Company and PennCorp have agreed
to extend the completion date to August 30, 1997. As part of the
extension, the Company has agreed to allow PennCorp the right to
increase the cash portion of the purchase price consideration to a
maximum of 45% of the transaction value. The Company expects the
merger to be completed prior to July 31, 1997.
<PAGE>9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Consolidated Results of Operations
Components of Pretax Operating Income from Continuing Operations by
Segment:
<TABLE>
<CAPTION>
Insurance Corporate
(000s omitted) Operations and Other Total
Three months ended March 31, 1997
<S> <C> <C> <C>
Revenues
Insurance premiums and policy charges $41,035 $ - $41,035
Net investment income 37,872 2,156 40,028
Other revenues 376 168 544
Total revenues excluding realized investment gains 79,283 2,324 81,607
Benefits and expenses
Insurance benefits paid or provided 52,463 54 52,517
Insurance and general expenses 9,270 1,337 10,607
Amortization of deferred acquisition costs 6,579 - 6,579
Total benefits and expenses 68,312 1,391 69,703
Pretax operating income from continuing operations $10,971 $ 933 $11,904
</TABLE>
<TABLE>
<CAPTION>
Insurance Corporate
(000s omitted) Operations and Other Total
Three months ended March 31, 1996
<S> <C> <C> <C>
Revenues
Insurance premiums and policy charges $38,750 $ - $38,750
Net investment income 39,465 1,699 41,164
Other revenues 1,167 234 1,401
Total revenues excluding realized investment losses 79,382 1,933 81,315
Benefits and expenses
Insurance benefits paid or provided 53,780 60 53,840
Insurance and general expenses 9,512 820 10,332
Amortization of deferred acquisition costs 5,787 - 5,787
Total benefits and expenses 69,079 880 69,959
Pretax operating income from continuing operations $10,303 $1,053 $11,356
</TABLE>
Three Months Ended March 31, 1997 Compared to Three Months Ended
March 31, 1996
Insurance Premiums and Policy Charges. Insurance premiums and
policy charges increased $2.3 million, or 5.9%, from $38.8 million
in the first three months of 1996 to $41.0 million in 1997. The
improvement was primarily due to increases from educator disability
products and life insurance policy charges at UPI offset in part by
a decline in the closed block of life insurance and annuities at
WNIC. See "Segment Information," below.
Net Investment Income. Net investment income was $40.0 million in
the first three months of 1997, compared to $41.2 in the same period
of 1996. The amortized cost of the Company's investment portfolio at
March 31, 1997, was $2.3 billion, compared to $2.4 billion at March
31, 1996. The portfolio yield (based on amortized cost) declined
from 7.4% in the first three months of 1996 to 7.3% in the first
three months of 1997 primarily due to the reinvestment of proceeds
from sales of fixed maturity investments and mortgage loan paydowns
in lower yielding short-term investments.
<PAGE>10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Realized Investment Gains and Losses. Realized investment gains
before taxes for the first three months of 1997 were $1.4 million
compared to losses of $0.6 million in the first three months of
1996. In 1997, realized investment gains were comprised primarily of
gains on fixed maturity investments and equity securities. These
gains were largely offset by realized investment losses of $1.4
million on mortgage loans and other invested assets. The Company's
income taxes included tax benefits of $0.6 million in 1997 related
to realized investment losses.
In the first three months of 1996, realized losses of $0.9 million
each on fixed maturity investments and real estate were partially
offset by gains of $0.3 million on mortgage loans and equity
securities.
Insurance Benefits Paid or Provided. Insurance benefits paid or
provided were $52.5 million in the first quarter of 1997 and $53.8
million in the first quarter of 1996. Increased benefits primarily
for education disability and universal life insurance at UPI were
more than offset by a decline in benefits in the closed block of
life insurance and annuities as this particular business continues
to decline in size over time.
Insurance and General Expenses. The Company's expense ratio
(expenses as a percentage of premiums and net investment income) was
13.1% in the first quarter of 1997 and 12.9% in the first quarter of
1996. The increase was due to increased operating expenses in the
corporate and other segment due, in part, to the pending merger with
PennCorp.
Amortization of Deferred Acquisition Costs. Amortization of
deferred acquisition costs was $6.6 million in the first three
months of 1997, up 13.7% from $5.8 million in the same period of
1996. The increase was due to growth of insurance in force due to
sales at UPI.
Income Taxes. Income taxes on operating income from continuing
operations were $4.1 million in both the first quarter of 1997 and
1996. The effective tax rate on pretax operating income in the first
quarter of 1997 was 34.8%, compared to 35.9% in the same period of
1996.
Loss from Discontinued Operations, Net of Tax. The 1996 loss from
discontinued operations resulted primarily from a high benefits
ratio (benefits as a percentage of premiums) for both the group
employee benefits portion of discontinued operations and the
individual health insurance portion. The group employee benefits
ratio was high due to increased competition for group medical
insurance and adverse group life insurance mortality experience. The
increase in individual health insurance resulted primarily from poor
claims experience on policies written in New Jersey, which had
implemented certain adverse restrictions on health insurers.
Net Income. Net income for the first quarter of 1997 was $9.8
million, compared to $5.4 million in the first quarter of 1996. The
increase in net income resulted from operating improvement in the
Company's insurance operations, net realized investment gains in
1997 versus net realized investment losses in 1996 and the loss on
discontinued operations in the first quarter of 1996.
Segment Information
Insurance Operations. For the first three months of 1997, revenues
for the insurance operations segment were $79.3 million, essentially
unchanged from the same period of 1996. Revenues from the educator
disability business and UPI increased 8.8% and 3.3%, respectively,
over the first quarter of 1996, due to increased insurance in force
for both businesses. For the educator disability business, the
number of insureds at March 31, 1997, increased 14.3% from a year
earlier. At UPI, insurance in force at the end of the first quarter
of 1997 increased 5% over a year earlier. Offsetting the increases
in revenues from the growth businesses was a decline in investment
income from the closed block attributable to its ongoing shrinkage.
For the current quarter, annuity account balances for the closed
block declined 3% from year-end 1996 and 12% from the end of the
first quarter of 1996. No new sales have been made in the closed
block since 1989.
<PAGE>11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Operating income for the insurance operations segment increased $0.7
million, or 6.5%, to $11.0 million in the first three months of 1997
from $10.3 million in the first three months of 1996. The increase
was primarily due to improved operations in the educator disability
business and at UPI, offset in part by a decline in the closed
block. The increase in operating income from the educator disability
business was from higher premium revenues and a lower expense ratio
(operating expenses as a percent of premiums and investment income)
in the 1997 quarter compared to the same period of 1996. The
improvement at UPI resulted from increased policy charges and
interest spreads (the difference between interest credited to
policyholders and the interest earned on investments). The decline
in the closed block was the result of its ongoing shrinkage, offset
in part by lower expenses and amortization of deferred insurance
costs.
Corporate and Other. The corporate and other segment had pretax
operating income of $0.9 million in the first quarter of 1997,
compared to $1.1 million in the first quarter of 1996. The decline
was primarily due to an increase in operating expenses resulting, in
part, from the pending merger with PennCorp.
Investment Portfolio
At March 31, 1997, the Company had invested assets with a carrying
value of $2.3 billion compared to $2.4 billion at December 31, 1996.
Certain information about the Company's investment portfolio follows
(dollars in thousands):
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
% of % of
Carrying Carrying Carrying Carrying
Value Value Value Value
<S> <C> <C> <C> <C>
Fixed maturity investments:
United States government obligations $ 70,636 3.1% $ 71,217 3.0%
Obligations of states and
political subdivisions 75,866 3.3 81,069 3.4
Public Utilities 142,373 6.2 150,146 6.3
Industrial and miscellaneous 984,540 42.8 1,025,079 43.1
Mortgage-backed securities 572,644 24.9 578,445 24.3
Other 29,858 1.3 25,173 1.0
Total fixed maturity investments 1,875,917 81.6 1,931,129 81.1
Mortgage loans on real estate 250,729 10.9 257,635 10.8
Real estate and joint ventures 20,137 0.9 20,044 0.8
Policy loans 56,408 2.5 55,798 2.4
Other long-term 11,388 0.5 11,812 0.5
Short-term 83,849 3.6 103,345 4.4
Total invested assets $2,298,428 100.0% $2,379,763 100.0%
</TABLE>
Fixed Maturity Investments
The Company's fixed maturity investments are carried at fair value.
Due to rising interest rates during 1997, the carrying value of the
Company's fixed maturity investments compared to amortized cost
decreased $48.1 million, resulting in an unrealized loss on fixed
maturity investments of $16.1 million, compared to an unrealized
gain of $32.0 million at December 31, 1996. The amortized cost of
the Company's fixed maturity portfolio decreased $7.1 million in
the first quarter of 1997 to $1.9 billion at March 31, 1997.
<PAGE>12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
The composition of the Company's fixed maturity portfolio at March
31, 1997, based on ratings follows (dollars in thousands):
<TABLE>
Carrying Value
as a Percent of
Carrying Fixed Invested
Value Maturities Assets
<S> <C> <C> <C>
AAA/Aaa $ 767,476 40.9% 33.3%
AA/Aa 104,949 5.6 4.6
A 574,049 30.6 25.0
BBB/Baa 367,523 19.6 16.0
BB/Ba and lower 61,920 3.3 2.7
Total fixed maturities $1,875,917 100.0% 81.6%
</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 March 31, 1997, $76.7 million or 4.1% of
fixed maturity investments were rated with comparable NAIC ratings,
the majority of which is $32.9 million of investments rated BBB and
$23.6 million of investments rated BB and lower.
The Company's fixed maturity portfolio at March 31, 1997, includes
$572.6 million of mortgage-backed securities, detailed as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Carrying Value as a Percent of
Mortgage-
Carrying Backed Invested
Value Securities Assets
<S> <C> <C> <C>
Agency CMOs
Planned amortization classes $132,550 23.1% 5.9%
Target amortization classes 5,647 1.0 0.2
Sequential classes 3,704 0.6 0.2
Support classes 5,504 1.0 0.2
Accrual classes 3,159 0.6 0.1
Total agency CMOs 150,564 26.3 6.6
Non-agency CMOs (1)
Planned amortization classes 13,702 2.4 0.6
Accrual classes 1,245 0.2 0.1
Sequential classes 5,942 1.0 0.2
Total non-agency CMOs 20,889 3.6 0.9
Total CMOs 171,453 29.9 7.5
Non-agency mortgage-backed
pass-through securities 1,395 0.2 0.1
Agency mortgage-backed
pass-through securities 399,796 69.9 17.3
Total mortgage-backed securities $572,644 100.0% 24.9%
<FN>
(1) All of the Company's non-agency CMO investments were rated AAA at
March 31, 1997. The credit risk associated with non-agency
mortgage-backed securities is generally greater than that of
agency mortgage-backed securities.
</FN>
</TABLE>
<PAGE>13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
To mitigate prepayment risk, the Company primarily invests in
collateralized mortgage obligation (CMO) classes that have, at time
of investment, the most stable prepayment structure. Such CMO
classes are termed "planned amortization class" (PAC) which
comprised 85.3% of the Company's CMO portfolio at March 31, 1997.
The next most stable class of CMOs is "target amortization class"
(TAC) which comprised 3.3% of the Company's CMO portfolio at March
31, 1997. 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
56.7% of the Company's PAC and TAC investments at March 31, 1997,
have lost some of this protection. However, the Company believes the
yield earned on these issues continues to adequately compensate for
the reduced prepayment protection.
Mortgage Loans
The Company had investments in mortgage loans of $250.7 million (net
of allowances of $6.7 million) at March 31, 1997 compared to $257.6
million at December 31, 1996. Investments in mortgage loans declined
primarily due to prepayments and amortization. Of the outstanding
loans at March 31, 1997, loans with a carrying value of $8.9
million, or approximately 3.5%, were delinquent 60 days or more as
to interest or principal.
Restructured loans, where modifications of the terms of the mortgage
loan have occurred and which are considered current investments, had
a carrying value of $10.5 million at March 31, 1997, a decrease of
$1.1 million from December 31, 1996, resulting primarily from
impairments recognized. Impaired loans, where compliance with the
terms of the mortgage is in doubt, total $10.5 million, an increase
of $1.0 million from December 31, 1996.
The Company no longer makes new investments in mortgage loans except
for purchase money loans and expansion of the Company's properties.
The Company will retain its existing mortgage loans.
The Company's mortgage loan portfolio at March 31, 1997, by
geographic distribution, year of maturity, and property type follows
(dollars in thousands):
<TABLE>
<CAPTION>
Geographic Distribution of
Mortgage Loans
<S> <C> <C>
California $ 42,290 16.9%
Illinois 33,392 13.3
Florida 29,196 11.6
Indiana 28,679 11.4
Texas 19,476 7.8
North Carolina 15,983 6.4
Virginia 13,979 5.6
All other 67,734 27.0
Total $250,729 100.0%
</TABLE>
<PAGE>14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
<TABLE>
<CAPTION>
Mortgage Loans by Year of Maturity
Scheduled
Principal Balloon
Payments (1) Payments Total
<S> <C> <C> <C>
1997 $ 8,466 $ 27,269 $ 35,735
1998 11,503 6,646 18,149
1999 12,417 2,815 15,232
2000 12,958 5,709 18,667
2001 13,044 20,312 33,356
2002 and thereafter 68,867 60,723 129,590
Total $127,255 $123,474 $250,729
<FN>
(1) Includes scheduled payments on balloon loans
</FN>
</TABLE>
<TABLE>
<CAPTION>
Property Type
<S> <C> <C>
Retail $151,439 60.4%
Office 30,160 12.0
Industrial 21,530 8.6
Medical 13,001 5.2
Multi-Family Residential 11,062 4.4
All other 23,537 9.4
Total $250,729 100.0%
</TABLE>
Liquidity and Capital Resources
Cash Flows. During the first quarter of 1997, the Company's
operating activities used cash of $2.1 million compared to cash
generated of $10.7 million in the first quarter of 1996. The
decrease in cash from operations resulted primarily from the
discharge of $17.5 million of certain policy and claim liabilities
related to the divested health insurance businesses and certain
other cash expenditures related to the divestiture. The Company
expects that it will require additional cash of approximately $30 -
35 million in the remainder of 1997 for such purposes. The Company
has anticipated this need by maintaining a sufficient level of short-
term investments (see "Liquidity," below).
Cash provided from investing activities was $25.2 million in the
first three months of 1997, compared to $24.4 million in the same
period of 1996. The increase in cash provided from investing
activities resulted primarily from a reduction in fixed maturity
investment purchases in 1997.
Cash used for financing activities was $23.0 million in the first
quarter of 1997, compared to $33.2 million in the first quarter of
1996. The decrease in cash used for financing resulted from an
increase in policy receipts at UPI of $3.9 million and a decline in
cash surrenders in the WNIC closed block of $4.4 million. In
addition, the first quarter of 1996 included a net payment of $3.1
million for short-term notes payable.
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.
<PAGE>15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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 $87.1 million at March 31, 1997, compared to $106.4
million at December 31, 1996. Management believes the Company has
adequate liquidity to meet its ongoing cash requirements.
A.M. Best Ratings
The ability of an insurance company to compete successfully depends,
in part, on its financial strength, operating performance, and
claims-paying ability as rated by A.M. Best and other rating
agencies. A. M. Best uses a variety of qualitative and quantitative
measures in determining a company's rating and surplus adequacy. The
Company's insurance subsidiaries are each currently rated "A-
(Excellent)" by A.M. Best, based on their 1995 statutory financial
results and operating performance.
A. M. Best's 15 categories of rating for insurance companies
currently range from "A++ (Superior)" to "F (In Liquidation)."
According to A. M. Best, an "A" or "A-" rating is assigned to
companies which, in A. M. Best's opinion, have achieved excellent
overall performance when compared to the standards of the 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.
<PAGE>16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
WNC and certain affiliated companies have been named in various
pending legal proceedings considered to be ordinary routine
litigation incidental to the business of such companies. A number of
other legal actions have been filed which demand compensatory and
punitive damages aggregating material dollar amounts. WNC believes
that such suits are substantially without merit and that valid
defenses exist. WNC's management and its chief legal officer are of
the opinion that such litigation will not have a material effect on
WNC's results of operations or consolidated financial position. The
amount involved in any proceeding, or group of proceedings
presenting in large degree the same issues, does not exceed the
materiality standard for disclosure contained in Instruction 2 to
Item 103 of Regulation S-K.
In June 1996, the estate of a retired employee filed a lawsuit in
the United States District Court for the Northern District of
Illinois against WNC, WNC's wholly-owned subsidiary, WNIC, and the
three individual trustees of the Washington National Insurance
Company Home Office Group Insurance Plan (the "Plan"), and the Plan.
The plaintiff purports to represent a class consisting of eligible
retirees under the Plan who retired before January 1, 1992.
This complaint, brought under the Employee Retirement Income
Security Act, centers around a January 1992 amendment to the Plan
which resulted in a different coordination of benefits with
Medicare. Also, at that time the retirees were first required to
contribute a portion of their premium, whereas previously the
Company paid 100% of retiree medical premium. Plaintiff seeks
certification of the class, permanent no-cost retiree medical
benefits, an accounting and repayment of premium contributions,
attorney fees, costs and expenses, plus other appropriate equitable
relief. Plaintiff utilizes several theories of recovery, namely,
promissory estoppel, equitable estoppel, negligent
misrepresentation, breach of fiduciary duty, and entitlement.
WNC, WNIC and the individual trustees believe that valid defenses
exist and intend to contest vigorously the allegations made in the
complaint.
On April 7, 1997, a suit captioned Menachem Limor v. United
Presidential Life Insurance Company was filed against UPI in the
Circuit Court of Davidson County, Tennessee by Menachem Limor, a UPI
policyholder. The Plaintiff purports to represent a class consisting
of owners of UPI's "1/20" and "10/20" universal life policies.
Plaintiff seeks certification of the class, compensatory damages and
equitable relief. In the suit, the plaintiff alleges breach of
contract, breach of fiduciary duty and breach of the duty of good
faith and fair dealing arising out of UPI's charges for the cost of
insurance and the determination of the interest rate used in
crediting accumulated cash values for "1/20" and "10/20" universal
life policies issued by UPI.
Plaintiff alleges that UPI increased the cost of insurance rates
even though it had no expectation that future mortality experience
would increase and did not have any reasonable basis to expect that
future mortality experience would increase. Plaintiff further
alleges that UPI reduced interest rates used in crediting
accumulated cash values during the 1990's to those which were lower
than UPI's expectations as to future interest rates. As this suit
was recently filed, UPI and its counsel are in the early stages of
investigating the facts and circumstances relating to the
allegations made in the complaint. UPI believes that valid defenses
exist and intends to contest vigorously the allegations made in the
complaint.
<PAGE>17
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 11 - Computation of Per Share Earnings.
b. Reports on Form 8-K
On January 8, 1997, WNC filed Form 8-K to amend the 1995 Annual
Report Form 10-K to reflect the 1996 sale of the Company's health
insurance business. The financial information previously filed in
the 1995 Annual Report Form 10-K has been reclassified to reflect
the sale of the health insurance business as discontinued
operations.
<PAGE>18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
WASHINGTON NATIONAL CORPORATION
May 15, 1997 /s/ Joan K. Cohen
Joan K. Cohen
Vice President, Controller and Treasurer
(Duly Authorized Officer and Chief
Accounting Officer)
<PAGE>19
EXHIBIT INDEX
PAGE
Exhibit 11 - Computation of Per Share Earnings. 20
<PAGE>20
<TABLE>
WASHINGTON NATIONAL CORPORATION
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
Primary and Fully Diluted
(000s Omitted Except Per Share Amounts)
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Primary
Average Shares:
Average common shares outstanding 12,391 12,234
Assumed exercise of stock options 163 163
Total Average Shares 12,554 12,397
Net Income Available to Common Shareholders:
Income from continuing operations before
Preferred Stock dividend requirement $9,806 $6,678
Preferred Stock dividend requirement (89) (90)
Income from continuing operations 9,717 6,588
Loss from discontinued operations - net of taxes - (1,244)
Net Income Available to Common Shareholders $9,717 $5,344
Primary Earnings Per Share:
Income from continuing operations $0.77 $0.53
Loss from discontinued operations - net of taxes - (0.10)
Net Income Per Share $0.77 $0.43
Fully Diluted
Average Shares:
Average common shares outstanding 12,391 12,234
Assumed conversion of preferred stock 267 269
Assumed exercise of stock options 163 163
Total Average Shares 12,821 12,666
Net Income Available to Common Shareholders:
Income from continuing operations $9,806 $6,678
Loss from discontinued operations - net of taxes - (1,244)
Net Income Available to Common Shareholders $9,806 $5,434
Fully Diluted Earnings Per Share:
Income from continuing operations $0.76 $0.53
Loss from discontinued operations - net of taxes - (0.10)
Net Income Per Share $0.76 $0.43
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 1,875,917
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,102
<MORTGAGE> 250,729
<REAL-ESTATE> 20,137
<TOTAL-INVEST> 2,298,428
<CASH> 3,252
<RECOVER-REINSURE> 110,513
<DEFERRED-ACQUISITION> 261,325
<TOTAL-ASSETS> 2,801,014
<POLICY-LOSSES> 1,994,893
<UNEARNED-PREMIUMS> 38,641
<POLICY-OTHER> 204,324
<POLICY-HOLDER-FUNDS> 22,648
<NOTES-PAYABLE> 592
<COMMON> 129,940<F1>
0
710
<OTHER-SE> 260,812
<TOTAL-LIABILITY-AND-EQUITY> 2,801,014
41,035
<INVESTMENT-INCOME> 40,028
<INVESTMENT-GAINS> 1,416
<OTHER-INCOME> 544
<BENEFITS> 52,517
<UNDERWRITING-AMORTIZATION> 6,579
<UNDERWRITING-OTHER> 10,607
<INCOME-PRETAX> 13,320
<INCOME-TAX> 3,514
<INCOME-CONTINUING> 9,806
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,806
<EPS-PRIMARY> .77
<EPS-DILUTED> .76
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>INCLUDES ADDITIONAL PAID-IN CAPITAL OF $51,006.
</FN>
</TABLE>
