Washington National Insurance Company
Consolidated Financial Statements as of December 31,
1999 and 1998, and for the years ended December
31, 1999 and 1998,
the one month ended December 31, 1997, and
the eleven months ended November 30, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Washington National Insurance Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, shareholder's equity and cash flows
present fairly, in all material respects, the financial position of Washington
National Insurance Company (the "Company") at December 31, 1999 and 1998, and
the results of its operations and its cash flows for the years ended December
31, 1999 and 1998 and the one month ended December 31, 1997, in conformity with
accounting principles generally accepted in the United States. We have also
audited the accompanying consolidated statements of operations, shareholder's
equity and cash flows of the Company for the eleven months ended November 30,
1997, based on the basis of accounting applicable to periods prior to the
adoption of push down accounting upon Conseco, Inc.'s purchase of all common
shares of Washington National Corporation, the parent of the Company (see Note 1
of the notes to financial statements regarding the adoption of push down
accounting). These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
\s\PricewaterhouseCoopers LLP
-----------------------------
PricewaterhouseCoopers LLP
April 13, 2000
1
<PAGE>
<TABLE>
<CAPTION>
WASHINGTON NATIONAL INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
December 31, 1999 and 1998
(Dollars in millions)
ASSETS
1999 1998
---- ----
<S> <C> <C>
Investments:
Actively managed fixed maturities at fair value (amortized cost:
1999 - $1,780.4; 1998 - $1,789.8)............................................... $1,670.1 $1,793.6
Mortgage loans..................................................................... 86.0 126.4
Policy loans....................................................................... 55.3 56.7
Other invested assets ............................................................. 64.0 93.7
-------- --------
Total investments............................................................ 1,875.4 2,070.4
Cash and cash equivalents.............................................................. 115.7 65.8
Accrued investment income.............................................................. 35.1 28.0
Cost of policies purchased............................................................. 257.6 207.2
Cost of policies produced.............................................................. 39.2 22.2
Reinsurance receivables................................................................ 91.0 75.1
Goodwill............................................................................... 60.7 62.5
Assets held in separate accounts....................................................... 59.1 52.1
Other assets........................................................................... 7.0 21.0
-------- --------
Total assets................................................................. $2,540.8 $2,604.3
======== ========
</TABLE>
(continued on next page)
The accompanying notes are an
integral part of the financial
statements.
2
<PAGE>
<TABLE>
<CAPTION>
WASHINGTON NATIONAL INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (Continued)
December 31, 1999 and 1998
(Dollars in millions, except per share amount)
LIABILITIES AND SHAREHOLDER'S EQUITY
1999 1998
---- ----
<S> <C> <C>
Liabilities:
Insurance liabilities.............................................................. $1,891.7 $2,029.4
Liabilities related to separate accounts........................................... 59.1 52.1
Income tax liabilities............................................................. 17.5 9.0
Investment borrowings.............................................................. 69.7 48.1
Other liabilities.................................................................. 97.3 115.4
-------- --------
Total liabilities.......................................................... 2,135.3 2,254.0
-------- --------
Minority interest...................................................................... - 56.1
Shareholder's equity:
Common stock and additional paid-in capital (par value $5.00 per share, 5,250,000
shares authorized, 5,007,370 shares issued and outstanding)..................... 382.9 273.2
Accumulated other comprehensive loss............................................... (27.7) (.9)
Retained earnings.................................................................. 50.3 21.9
-------- --------
Total shareholder's equity................................................. 405.5 294.2
-------- --------
Total liabilities and shareholder's equity................................. $2,540.8 $2,604.3
======== ========
</TABLE>
The accompanying notes are an
integral part of the financial
statements.
3
<PAGE>
<TABLE>
<CAPTION>
WASHINGTON NATIONAL INSURANCE COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions)
Prior basis
-----------
Years ended One month Eleven months
December 31, ended ended
--------------------- December 31, November 30,
1999 1998 1997 1997
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income....................... $150.5 $161.1 $14.2 $149.1
Net investment income......................... 156.3 148.5 12.0 146.1
Net gains (losses) from sale of investments... (6.9) 9.9 (.1) 4.3
Other ........................................ (.4) 6.2 - 8.0
------ ------ ----- ------
Total revenues............................ 299.5 325.7 26.1 307.5
------ ------ ----- ------
Benefits and expenses:
Insurance policy benefits..................... 168.2 205.1 17.3 193.8
Amortization of cost of policies produced
and purchased .............................. 20.8 29.8 1.2 24.2
Other operating costs and expenses............ 24.1 27.7 3.1 44.3
------ ------ ----- ------
Total benefits and expenses............... 213.1 262.6 21.6 262.3
------ ------ ----- ------
Income before income taxes, minority
interest and discontinued operations.... 86.4 63.1 4.5 45.2
Income tax expense............................... 30.1 23.2 1.6 16.6
------ ------ ----- ------
Income before minority interest and
discontinued operations................. 56.3 39.9 2.9 28.6
Minority interest................................ 3.9 6.3 .6 4.6
------ ------ ----- ------
Income from continuing operations......... 52.4 33.6 2.3 24.0
Income from discontinued operations, net
of income taxes............................... - - - 1.8
------ ------ ----- ------
Net income................................ $ 52.4 $ 33.6 $ 2.3 $ 25.8
====== ====== ===== ======
</TABLE>
The accompanying notes are an
integral part of the financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
WASHINGTON NATIONAL INSURANCE COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(Dollars in millions)
Common stock Accumulated other
and additional comprehensive Retained
Total paid-in capital income (loss) earnings
----- --------------- ------------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 (a).............................. $347.6 $ 68.3 $ 14.4 $264.9
Comprehensive income, net of tax:
Net income (a)......................................... 25.8 - - 25.8
Change in unrealized appreciation (depreciation) of
securities (net of applicable income tax expense
of $1.2) (a)....................................... 10.2 - 10.2 -
------
Total comprehensive income (a)..................... 36.0 - - -
Dividends on common stock (a)............................ (28.0) - - (28.0)
------ ------ ------- ------
Balance, November 30, 1997 (a).............................. 355.6 68.3 24.6 262.7
Comprehensive income, net of tax:
Net income............................................. 2.3 - - 2.3
Change in unrealized appreciation (depreciation) of
securities (net of applicable income expense
of $1.2)............................................. 6.6 - 6.6 -
------
Total comprehensive income......................... 8.9
Dividends on common stock................................ (73.7) - - (73.7)
Adjustment for new accounting basis...................... (8.7) 204.9 (24.6) (189.0)
------ ------ ------ -------
Balance, December 31, 1997.................................. 282.1 273.2 6.6 2.3
Comprehensive income, net of tax:
Net income............................................... 33.6 - - 33.6
Change in unrealized depreciation of
securities (net of applicable income tax
benefit of $.5)........................................ (7.5) - (7.5) -
------
Total comprehensive income......................... 26.1
Dividends on common stock................................ (14.0) - - (14.0)
------ ------ ------ ------
Balance, December 31, 1998.................................. 294.2 273.2 (.9) 21.9
Comprehensive income, net of tax:
Net income............................................... 52.4 - - 52.4
Change in unrealized depreciation of securities (net
of applicable income tax benefit of $12.5)............. (23.2) - (23.2) -
------
Total comprehensive income......................... 29.2
Cash capital contribution from parent.................... 50.0 50.0 - -
Contribution of remaining equity interest in subsidiary
by parent.............................................. 56.1 59.7 (3.6) -
Dividends on common stock................................ (24.0) - - (24.0)
------ ------ ------ -------
Balance, December 31, 1999.................................. $405.5 $382.9 $(27.7) $ 50.3
====== ====== ====== ======
<FN>
- --------------------
(a) Prior basis.
</FN>
</TABLE>
The accompanying notes are an
integral part of the financial
statements.
5
<PAGE>
<TABLE>
<CAPTION>
WASHINGTON NATIONAL INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
Prior basis
-------------
Years ended One month Eleven months
December 31, ended ended
--------------------- December 31, November 30,
1999 1998 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 52.4 $ 33.6 $ 2.3 $ 25.8
Adjustments to reconcile net income to net
cash provided (used) by operating
activities:
Amortization and depreciation........... 22.9 34.3 1.2 26.3
Income taxes............................ 25.7 5.8 10.5 (4.3)
Insurance liabilities................... (8.4) (28.1) (.4) (14.0)
Accrual and amortization of investment
income................................ (1.0) 9.4 1.2 1.7
Deferral of cost of policies produced
and purchased......................... (20.1) (28.1) (2.7) (30.5)
Income (loss) from discontinued
operations, net of tax................ - - - (1.8)
Net (gains) losses from sale of
investments........................... 6.9 (9.9) .1 (4.3)
Other................................... (32.9) (18.9) (29.7) 10.3
------- --------- ------ --------
Net cash provided (used) by
operating activities............... 45.5 (1.9) (17.5) 9.2
------- --------- ------ --------
Cash flows from investing activities:
Sales of investments.......................... 702.6 1,568.2 26.8 64.0
Maturities and redemptions.................... 39.5 283.3 2.0 205.5
Purchases of investments...................... (643.5) (1,748.5) - (139.2)
Net payments on sale of discontinued
operations.................................. - - - (24.0)
------- --------- ------ --------
Net cash provided by
investing activities............... 98.6 103.0 28.8 106.3
------- --------- ------ --------
Cash flows from financing activities:
Capital contribution.......................... 50.0 - - -
Deposits to insurance liabilities............. 87.4 119.8 12.7 134.7
Investment borrowings......................... 21.6 48.1 - -
Withdrawals from insurance liabilities........ (229.2) (232.8) (18.8) (215.8)
Dividends paid on common stock................ (24.0) (14.0) (73.7) (28.0)
------- --------- ------ --------
Net cash used by financing activities. (94.2) (78.9) (79.8) (109.1)
------- --------- ------ --------
Net increase (decrease) in cash and
cash equivalents................... 49.9 22.2 (68.5) 6.4
Cash and cash equivalents, beginning of period... 65.8 43.6 112.1 105.7
------- --------- ------ --------
Cash and cash equivalents, end of period......... $ 115.7 $ 65.8 $ 43.6 $ 112.1
======= ========= ====== ========
</TABLE>
The accompanying notes are an
integral part of the financial
statements.
6
<PAGE>
WASHINGTON NATIONAL INSURANCE COMPANY
Notes to Financial Statements
------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
On December 5, 1997, Conseco, Inc. ("Conseco") an Indiana company,
completed the acquisition of Washington National Insurance Company ("we" or the
"Company"). Shareholders of the Company's former parent received $33.25 in cash
per common share. The acquisition was accounted for using the push-down purchase
method of accounting with an effective date of December 1, 1997. Under this
method, the total cost to acquire the Company was allocated to the assets and
liabilities based on their fair value, with the excess of the total purchase
cost over the fair value of the net assets acquired recorded as goodwill.
Conseco is a financial services holding company operating throughout the
United States. Conseco's life insurance subsidiaries develop, market and
administer supplemental health insurance, annuity, individual life insurance,
individual and group major medical insurance and other insurance products.
Conseco's finance subsidiaries originate, purchase, sell and service consumer
and commercial finance loans. On March 31, 2000, Conseco announced its plan to
explore the sale of its finance subsidiaries and its hiring of Lehman Brothers
to assist in the planned sale.
The Company and its subsidiary are life insurance companies domiciled in
Illinois and Indiana, respectively, which develop, market and administer
annuity, individual life insurance, individual and group accident and health
insurance and other insurance products.
On June 30, 1999, our parent made a contribution to our capital consisting
of the 28.7 percent interest in United Presidential Life Insurance Company
("UPI") we did not previously own. The value contributed of $56.1 million was
recorded based on carrying value. Prior to June 30, 1999, the operations of UPI
were consolidated in our financial statements, with our parent's ownership
interest recorded as minority interest.
The consolidated balance sheets as of December 31, 1999 and 1998, and the
consolidated statement of operations, shareholder's equity and cash flows for
the years ended December 31, 1999 and 1998 and the one month ended December 31,
1997, are reported under the push-down purchase method of accounting. The
consolidated statements of operations, shareholder's equity and cash flows for
the eleven months ended November 30, 1997 are the historical financial data of
the Company ("prior basis").
The following summary explains the accounting policies we use to arrive at
the more significant numbers in our financial statements. We prepare our
financial statements in accordance with generally accepted accounting principles
("GAAP"). We follow the accounting standards established by the Financial
Accounting Standards Board, the American Institute of Certified Public
Accountants and the Securities and Exchange Commission. Significant intercompany
transactions have been eliminated. We reclassified certain amounts in our 1998
and 1997 financial statements and notes to conform with the 1999 presentation.
Investments
Fixed maturities are securities that mature more than one year after
issuance and include bonds, notes receivable and redeemable preferred stock.
Fixed maturities that we may sell prior to maturity are classified as actively
managed and are carried at estimated fair value, with any unrealized gain or
loss, net of tax and related adjustments, recorded as a component of
shareholder's equity. Fixed maturity securities that we intend to sell in the
near term are classified as trading and are included in other invested assets.
We include any unrealized gain or loss on trading securities in net investment
gains.
Equity securities include investments in common stocks and non-redeemable
preferred stock. We carry these investments at estimated fair value. We record
any unrealized gain or loss, net of tax and related adjustments, as a component
of shareholder's equity.
Mortgage loans held in our investment portfolio are carried at amortized
unpaid balances, net of provisions for estimated losses.
7
<PAGE>
WASHINGTON NATIONAL INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Policy loans are stated at their current unpaid principal balances.
Other invested assets include trading securities and certain
non-traditional investments. Non-traditional investments include investments in
certain limited partnerships, mineral rights and promissory notes; we account
for them using either the cost method, or for investments in partnerships over
whose operations the Company exercises significant influence, the equity method.
We defer any fees received or costs incurred when we originate investments
(primarily mortgage loans). We amortize fees, costs, discounts and premiums as
yield adjustments over the contractual lives of the investments. We consider
anticipated prepayments on mortgage-backed securities in determining estimated
future yields on such securities.
When we sell a security (other than a trading security), we report the
difference between our sale proceeds and its amortized cost (determined based on
specific identification) as an investment gain or loss.
We regularly evaluate all of our investments based on current economic
conditions, credit loss experience and other investee-specific developments. If
there is a decline in a security's net realizable value that is other than
temporary, we treat it as a realized loss and reduce our cost basis of the
security to its estimated fair value.
Cash and Cash Equivalents
Cash and cash equivalents include commercial paper, invested cash and other
investments purchased with maturities of less than three months. We carry them
at amortized cost, which approximates their estimated fair value.
Separate Accounts
Separate accounts are funds on which investment income and gains or losses
accrue directly to certain policyholders. The assets of these accounts are
legally segregated. They are not subject to the claims that may arise out of any
other business of the Company. We report separate account assets at market
value; the underlying investment risks are assumed by the contract holders. We
record the related liabilities at amounts equal to the market value of the
underlying assets. We record the fees earned for administrative and
contractholder services performed for the separate accounts in insurance policy
income.
Cost of Policies Produced
The costs that vary with, and are primarily related to, producing new
insurance business are referred to as cost of policies produced. We amortize
these costs using the interest rate credited to the underlying policy: (i) in
relation to the estimated gross profits for universal life-type and
investment-type products; or (ii) in relation to future anticipated premium
revenue for other products.
When we realize a gain or loss on investments backing our universal life or
investment-type products, we adjust the amortization to reflect the change in
estimated gross profits from the products due to the current realized gain or
loss and the effect of the event on future investment yields. We also adjust the
cost of policies produced for the change in amortization that would have been
recorded if actively managed fixed maturity securities had been sold at their
stated aggregate fair value and the proceeds reinvested at current yields. We
include the impact of this adjustment in accumulated other comprehensive income
(loss) within shareholders' equity.
Each year, we evaluate the recoverability of the unamortized balance of the
cost of policies produced. We consider estimated future gross profits or future
premiums, expected mortality or morbidity, interest earned and credited rates,
persistency and expenses in determining whether the balance is recoverable.
8
<PAGE>
WASHINGTON NATIONAL INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Cost of Policies Purchased
The cost assigned to the right to receive future cash flows from contracts
existing at the date of an acquisition is referred to as the cost of policies
purchased. We also defer renewal commissions paid in excess of ultimate
commission levels related to the purchased policies in this account. The balance
of this account is amortized, evaluated for recovery, and adjusted for the
impact of unrealized gains (losses) in the same manner as the cost of policies
produced described above.
The discount rate we use to determine the value of the cost of policies
purchased is the rate of return we need to earn in order to invest in the
business being acquired. In determining this required rate of return, we
consider many factors including: (i) the magnitude of the risks associated with
each of the actuarial assumptions used in determining expected future cash
flows; (ii) the cost of our capital required to fund the acquisition; (iii) the
likelihood of changes in projected future cash flows that might occur if there
are changes in insurance regulations and tax laws; (iv) the acquired company's
compatibility with other Company activities that may favorably affect future
cash flows; (v) the complexity of the acquired company; and (vi) recent prices
(i.e., discount rates used in determining valuations) paid by others to acquire
similar blocks of business.
Goodwill
Goodwill is the excess of the amount we paid to acquire the Company over
the fair value of its net assets. Our analysis indicates that the anticipated
ongoing cash flows from the earnings of the Company extends significantly beyond
the maximum 40-year period allowed for goodwill amortization. Accordingly, we
amortize goodwill on the straight-line basis generally over a 40-year period. We
continually monitor the value of our goodwill based on our estimates of future
earnings. We determine whether goodwill is fully recoverable from projected
undiscounted net cash flows from our earnings over the remaining amortization
period. If we were to determine that changes in such projected cash flows no
longer support the recoverability of goodwill over the remaining amortization
period, we would reduce its carrying value with a corresponding charge to
expense or shorten the amortization period (no such changes have occurred).
Recognition of Insurance Policy Income and Related Benefits and Expenses on
Insurance Contracts
Generally, we recognize insurance premiums for traditional life and
accident and health contracts as earned over the premium-paying periods. We
establish reserves for future benefits on a net-level premium method based upon
assumptions as to investment yields, mortality, morbidity, withdrawals and
dividends. We record premiums for universal life-type and investment-type
contracts that do not involve significant mortality or morbidity risk as
deposits to insurance liabilities. Revenues for these contracts consist of
mortality, morbidity, expense and surrender charges. We establish reserves for
the estimated present value of the remaining net costs of all reported and
unreported claims.
Reinsurance
In the normal course of business, we seek to limit our exposure to loss on
any single insured or to certain groups of policies by ceding reinsurance to
other insurance enterprises. We currently retain no more than $.3 million of
mortality risk on any one policy. We diversify the risk of reinsurance loss by
using a number of reinsurers that have strong claims-paying ratings. If any
reinsurer could not meet its obligations, the Company would assume the
liability. The likelihood of a material loss being incurred as the result of the
failure of one of our reinsurers is considered remote. The cost of reinsurance
is recognized over the life of the reinsured policies using assumptions
consistent with those used to account for the underlying policy. The cost of
reinsurance ceded totaled $50.4 million, $41.7 million, $8.9 million and $37.7
million for the years ended December 31, 1999 and 1998, the one month ended
December 31, 1997 and the eleven months ended November 30, 1997, respectively. A
receivable is recorded for the reinsurance portion of insurance policy benefits
paid and liabilities for insurance products. Reinsurance recoveries netted
against insurance policy benefits totaled $21.7 million, $29.5 million, $3.6
million and $18.7 million for the years ended December 31, 1999 and 1998, the
one month ended December 31, 1997, and the eleven months ended November 30,
1997, respectively.
9
<PAGE>
WASHINGTON NATIONAL INSURANCE COMPANY
Notes to Financial Statements
------------------------------
At December 31, 1999, 1998 and 1997, approximately 34 percent, 51 percent
and 58 percent, respectively, of our total reinsurance recoverables related to
our sale of the health business to a subsidiary of Conseco.
We use yearly renewable term reinsurance 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 $3.7 million, $5.5 million and $6.1 million for the years
ended December 31, 1999, 1998 and 1997, respectively. These transactions do not
materially impact the Company's GAAP financial statements.
Income Taxes
Our income tax expense includes deferred income taxes arising from
temporary differences between the tax and financial reporting bases of assets
and liabilities. In assessing the realization of deferred income tax assets, we
consider whether it is more likely than not that the deferred income tax assets
will be realized. The ultimate realization of deferred income tax assets depends
upon generating future taxable income during the periods in which temporary
differences become deductible. If future income is not generated as expected,
deferred income tax assets may need to be written off (no such write-offs have
occurred).
Minority Interest
Prior to June 30, 1999, our consolidated financial statements included all
of the assets, liabilities, revenues and expenses of UPI, even though we did not
own all of UPI's common stock. We made a charge against consolidated income for
the share of earnings allocable to minority interests. We recorded the equity of
UPI allocable to the minority interest separately on our consolidated balance
sheet. On June 30, 1999, our parent made a contribution to our capital
consisting of the 28.7 percent interest in UPI we did not previously own.
Accordingly, there was no need for the minority interest charge in periods after
that date.
Investment Borrowings
As part of our investment strategy, we may enter into reverse repurchase
agreements and dollar-roll transactions to increase our investment return or to
improve our liquidity. We account for these transactions as collateral
borrowings, where the amount borrowed is equal to the sales price of the
underlying securities. Reverse repurchase agreements involve a sale of
securities and an agreement to repurchase the same securities at a later date at
an agreed-upon price. Dollar rolls are similar to reverse repurchase agreements
except that, with dollar rolls, the repurchase involves securities that are only
substantially the same as the securities sold. Such borrowings averaged
approximately $53.0 million and $12.4 million during 1999 and 1998,
respectively. These borrowing were collateralized by investment securities with
fair values approximately equal to the loan value. The weighted average interest
rate on short-term collateralized borrowings was 6.1 percent and 4.8 percent in
1999 and 1998, respectively. The primary risk associated with short-term
collateralized borrowings is that a counterparty will be unable to perform under
the terms of the contract. Our exposure is limited to the excess of the net
replacement cost of the securities over the value of the short-term investments
(such excess was not material at December 31, 1999). We believe the
counterparties to our reverse repurchase and dollar-roll agreements are
financially responsible and that the counterparty risk is minimal.
Use of Estimates
When we prepare financial statements in conformity with GAAP, we are
required to make estimates and assumptions that significantly affect various
reported amounts of assets and liabilities, and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting periods. For example, we use significant estimates
and assumptions in calculating values for the cost of policies produced, the
cost of policies purchased, goodwill, insurance liabilities, liabilities related
to litigation, guaranty fund assessment accruals and deferred income taxes. If
our future experience differs materially from these estimates and assumptions,
our financial statements could be affected.
10
<PAGE>
WASHINGTON NATIONAL INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Fair Values of Financial Instruments
We use the following methods and assumptions to determine the estimated
fair values of financial instruments:
Investment securities. For fixed maturity securities (including redeemable
preferred stocks) and for equity and trading securities, we use quotes from
independent pricing services, where available. For investment securities
for which such quotes are not available, we use values obtained from
broker-dealer market makers or by discounting expected future cash flows
using a current market rate appropriate for the yield, credit quality, and
(for fixed maturity securities) the maturity of the investment being
priced.
Cash and cash equivalents. The carrying amount for these instruments
approximates their estimated fair value.
Mortgage loans and policy loans. We discount future expected cash flows for
loans included in our investment portfolio based on interest rates
currently being offered for similar loans to borrowers with similar credit
ratings. We aggregate loans with similar characteristics in our
calculations.
Other invested assets. We use quoted market prices, where available. When
quotes are not available, we estimate the fair value based on: (i)
discounted future expected cash flows; or (ii) independent transactions
which establish a value for our investment. When we are unable to estimate
a fair value, we assume a market value equal to carrying value.
Insurance liabilities for interest-sensitive products. We discount future
expected cash flows based on interest rates currently being offered for
similar contracts with similar maturities.
Investment borrowings. We use discounted cash flow analyses based on our
current incremental borrowing rates for similar types of borrowing
arrangements.
Here are the estimated fair values of our financial instruments:
<TABLE>
<CAPTION>
1999 1998
------------------------ -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Financial assets:
Actively managed fixed maturities............................ $1,670.1 $1,670.1 $1,793.6 $1,793.6
Mortgage loans............................................... 86.0 86.7 126.4 139.6
Policy loans................................................. 55.3 55.3 56.7 56.7
Other invested assets........................................ 64.0 64.0 93.7 93.7
Cash and cash equivalents.................................... 115.7 115.7 65.8 65.8
Financial liabilities:
Insurance liabilities for investment contracts (1)........... 771.1 771.1 900.6 900.6
Investment borrowings........................................ 69.7 69.7 48.1 48.1
<FN>
- --------------------
(1) The estimated fair value of the liabilities for interest-sensitive products was approximately equal to its carrying value at
December 31, 1999 and 1998. This was because interest rates credited on the vast majority of account balances
approximate current rates paid on similar products and because these rates are not generally guaranteed beyond one year.
We are not required to disclose fair values for insurance liabilities, other than those for interest-sensitive products.
However, we take into consideration the estimated fair values of all insurance liabilities in our overall management of
interest rate risk. We attempt to minimize exposure to changing interest rates by matching investment maturities with
amounts due under insurance contracts.
</FN>
</TABLE>
11
<PAGE>
WASHINGTON NATIONAL INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by
Statement of Financial Accounting Standards No. 137, "Deferral of the Effective
Date of FASB Statement No. 133" requires all derivative instruments to be
recorded on the balance sheet at estimated fair value. Changes in the fair value
of derivative instruments are to be recorded each period either in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, on the type of hedge
transaction. SFAS 133 is required to be implemented in year 2001. We are
currently evaluating the impact of SFAS 133; at present, we do not believe it
will have a material effect on our consolidated financial position or results of
operations. Because of ongoing changes to implementation guidance, we do not
plan on adopting the new standard until the first quarter of 2001.
We implemented the Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1") on
January 1, 1999. SOP 98-1 defines internal use software and when the costs
associated with internal use software should be capitalized. The implementation
of SOP 98-1 did not have a material effect on our consolidated financial
position or results of operations.
2. INVESTMENTS:
At December 31, 1999, the amortized cost and estimated fair value of
actively managed fixed maturity securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
----- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Investment grade:
Corporate securities................................................ $1,092.9 $.3 $ 81.4 $1,011.8
United States Treasury securities and obligations of
United States government corporations and agencies................ 21.9 - .5 21.4
States and political subdivisions................................... 11.9 - .1 11.8
Debt securities issued by foreign governments....................... 12.3 - .9 11.4
Mortgage-backed securities ......................................... 547.3 .1 26.2 521.2
Below-investment grade (primarily corporate securities)................ 94.1 .3 1.9 92.5
-------- ---- ------- ---------
Total actively managed fixed maturities........................... $1,780.4 $.7 $111.0 $1,670.1
======== === ====== ========
</TABLE>
At December 31, 1998, the amortized cost and estimated fair value of
actively managed fixed maturity securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Investment grade:
Corporate securities................................................ $1,086.8 $17.5 $15.2 $1,089.1
United States Treasury securities and obligations of
United States government corporations and agencies................ 41.4 .7 .1 42.0
States and political subdivisions................................... 13.0 .3 - 13.3
Debt securities issued by foreign governments....................... 10.7 .5 - 11.2
Mortgage-backed securities ......................................... 547.8 5.6 2.0 551.4
Below-investment grade (primarily corporate securities)................ 90.1 .1 3.6 86.6
-------- ----- ----- --------
Total actively managed fixed maturities........................... $1,789.8 $24.7 $20.9 $1,793.6
======== ===== ===== ========
</TABLE>
12
<PAGE>
WASHINGTON NATIONAL INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Accumulated other comprehensive loss included in shareholder's equity as of
December 31, 1999 and 1998, is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
(Dollars in millions)
<S> <C> <C>
Unrealized gains (losses) on investments............................................................. $(109.1) $ 1.1
Adjustments to cost of policies purchased and cost of policies produced.............................. 65.8 (2.2)
Minority interest.................................................................................... - (.2)
Deferred income tax asset............................................................................ 15.6 .4
------- -----
Accumulated other comprehensive loss..........................................................$ (27.7) $ (.9)
======== =====
</TABLE>
The following table sets forth the amortized cost and estimated fair value
of actively managed fixed maturities at December 31, 1999, by contractual
maturity. Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Most of the mortgage-backed securities shown below
provide for periodic payments throughout their lives.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Due in one year or less........................................................................ $ 29.6 $ 29.4
Due after one year through five years.......................................................... 238.3 231.2
Due after five years through ten years......................................................... 329.1 308.9
Due after ten years............................................................................ 632.2 575.6
-------- --------
Subtotal.................................................................................. 1,229.2 1,145.1
Mortgage-backed securities (a)................................................................. 551.2 525.0
-------- --------
Total actively managed fixed maturities ............................................... $1,780.4 $1,670.1
======== ========
<FN>
- --------------------
(a) Includes below-investment grade mortgage-backed securities with an amortized
cost and estimated fair value of $3.9 million and $3.8 million,
respectively.
</FN>
</TABLE>
Net investment income consisted of the following:
<TABLE>
<CAPTION>
Year ended One month Eleven months
December 31, ended ended
--------------------- December 31, November 30,
1999 1998 1997 1997
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Actively managed fixed maturity securities....... $125.0 $121.6 $10.7 $124.4
Mortgage loans................................... 10.0 16.7 1.5 19.4
Policy loans..................................... 3.7 3.8 .4 3.4
Other invested assets............................ 16.2 7.2 (.1) 2.4
Cash and cash equivalents........................ 2.4 2.9 .1 4.5
------ ------ ----- ------
Gross investment income....................... 157.3 152.2 12.6 154.1
Investment expenses.............................. 1.0 3.7 .6 8.0
------ ------ ----- ------
Net investment income....................... $156.3 $148.5 $12.0 $146.1
====== ====== ===== ======
</TABLE>
13
<PAGE>
WASHINGTON NATIONAL INSURANCE COMPANY
Notes to Financial Statements
------------------------------
The Company had no significant fixed maturity investments and mortgage
loans that were not accruing investment income during the years ended December
31, 1999 and 1998, the one month ended December 31, 1997 and the eleven months
ended November 30, 1997.
Investment gains (losses), net of investment expenses, were included in
revenue as follows:
<TABLE>
<CAPTION>
Year ended One month Eleven months
December 31, ended ended
--------------------- December 31, November 30,
1999 1998 1997 1997
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Fixed maturities:
Gross gains................................... $ 3.7 $17.1 $ - $ 5.9
Gross losses.................................. (5.0) (3.7) - (1.0)
----- ----- ---- -----
Net investment gains (losses) from
fixed maturities before expenses........ (1.3) 13.4 - 4.9
Other............................................ .4 - (.1) (.6)
----- ----- ---- ------
Net investment gains (losses) before
expenses................................ (.9) 13.4 (.1) 4.3
Investment expenses.............................. 6.0 3.5 - -
----- ----- ---- -----
Net investment gains (losses)............. $(6.9) $ 9.9 $(.1) $ 4.3
===== ===== ==== =====
</TABLE>
At December 31, 1999, the mortgage loan balance was primarily comprised of
commercial loans. Approximately 21 percent, 16 percent, 10 percent and 6 percent
of the mortgage loan balance were on properties located in California, Illinois,
Indiana and Texas, respectively. No other state comprised greater than 6 percent
of the mortgage loan balance. Noncurrent mortgage loans were insignificant at
December 31, 1999. At December 31, 1999, our allowance for loss on mortgage
loans was $2.0 million.
Life insurance companies are required to maintain certain investments on
deposit with state regulatory authorities. Such assets had an aggregate carrying
value of $11.5 million at December 31, 1999.
At December 31, 1999, the Company had investments in Carmel Fifth LLC, a
real estate investment company, with an amortized cost and carrying value of
$47.8 million and $47.7 million, respectively. The Company had no other
investments in any single entity in excess of 10 percent of shareholder's equity
at December 31, 1999, other than investments issued or guaranteed by the United
States government or a United States government agency.
14
<PAGE>
WASHINGTON NATIONAL INSURANCE COMPANY
Notes to Financial Statements
------------------------------
3. INSURANCE LIABILITIES:
These liabilities consisted of the following:
<TABLE>
<CAPTION>
Interest
Withdrawal Mortality rate
assumption assumption assumption 1999 1998
---------- ---------- ---------- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Future policy benefits:
Interest-sensitive products:
Investment contracts............................ N/A N/A (b) $ 771.1 $ 900.6
Universal life-type contracts................... N/A N/A (b) 760.5 750.4
-------- --------
Total interest-sensitive products............. 1,531.6 1,651.0
-------- --------
Traditional products:
Limited-payment contracts....................... Company (a) 4.8% 103.9 110.9
experience,
if applicable
Other traditional products...................... N/A N/A N/A 169.0 188.9
-------- --------
Total traditional products.................... 272.9 299.8
-------- --------
Claims payable and other policyholder funds ........ N/A N/A N/A 87.2 78.6
-------- --------
Total........................................... $1,891.7 $2,029.4
======== ========
<FN>
- -------------
(a) Principally modifications of the 1965 - 70 Basic Tables.
(b) This balance represents account balances because future benefits are not
guaranteed.
</FN>
</TABLE>
4. INCOME TAXES:
Income tax liabilities were comprised of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
(Dollars in millions)
<S> <C> <C>
Deferred income tax liabilities (assets):
Investments (primarily actively managed fixed maturities).................................. $ 12.7 $ 14.6
Cost of policies purchased and cost of policies produced................................... 74.6 74.1
Insurance liabilities...................................................................... (58.6) (69.1)
Unrealized depreciation.................................................................... (15.6) (.4)
Net operating loss carryforward............................................................ - (1.7)
Other...................................................................................... - (4.5)
------ ------
Deferred income tax liabilities....................................................... 13.1 13.0
Current income tax liabilities (assets)........................................................ 4.4 (4.0)
------ ------
Income tax liabilities................................................................ $ 17.5 $ 9.0
====== ======
</TABLE>
15
<PAGE>
WASHINGTON NATIONAL INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Income tax expense was as follows:
<TABLE>
<CAPTION>
Year ended One month Eleven months
December 31, ended ended
--------------------- December 31, November 30,
1999 1998 1997 1997
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Current tax provision (benefit)................... $14.6 $17.2 $(2.9) $ 6.2
Deferred tax provision............................ 15.5 6.0 4.5 10.4
----- ----- ----- -----
Income tax expense from continuing
operations............................... 30.1 23.2 1.6 16.6
Income tax benefit from discontinued operations... - - - (1.8)
----- ----- ----- -----
Total income tax expense................... $30.1 $23.2 $ 1.6 $14.8
===== ===== ===== =====
</TABLE>
A reconciliation of the income tax provisions based on the U.S. statutory
corporate tax rate to the provisions reflected in the statement of operations is
as follows:
<TABLE>
<CAPTION>
Year ended One month Eleven months
December 31, ended ended
--------------------- December 31, November 30,
1999 1998 1997 1997
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Tax on income before income taxes at statutory
rate........................................... 35.0% 35.0% 35.0% 35.0%
Other............................................. (.2)% 1.8% .6% 1.7%
--- ---- ---- ----
Income tax expense from continuing
operations............................. 34.8% 36.8% 35.6% 36.7%
==== ==== ==== ====
</TABLE>
At December 31, 1998, the Company had a net operating loss carryforward of
$4.8 million for tax return purposes. During 1999, the Company used all net
operating loss carryforwards for tax return purposes.
The Company is currently being examined by the Internal Revenue Service for
the 1995 and 1996 tax years. The Company believes that the outcome of this
examination will not have a material impact on its financial position or results
of operations.
5. OTHER DISCLOSURES:
Leases
The Company rents office space, equipment and computer software under
noncancellable operating leases. As a result of the sale of the Company's health
insurance business in 1996 and the acquisition by Conseco, the Company entered
into an agreement to sublease its home office building to ACCO, a subsidiary of
American Brands. The building was leased from a joint venture partnership in
which WNIC has a one-third interest. ACCO took possession of approximately 80
percent of the building at the beginning of August 1997. A portion of the
Company's operations occupied the remaining 20 percent of the building through
February 15, 1998. The sublease resulted in the Company recording a $9.1 million
charge in the second quarter of 1997 for the difference between the rent
expected to be received and the remaining lease obligation on the original
lease. Total rental expense was $1.2 million in 1999, $1.3 million in 1998, $.2
million in the one month ended December 31,
16
<PAGE>
WASHINGTON NATIONAL INSURANCE COMPANY
Notes to Financial Statements
------------------------------
1997 and $10.7 million (including the previously described $9.1 million charge)
in the eleven months ended November 30, 1997. Future required minimum rental
payments as of December 31, 1999, were as follows (dollars in millions):
<TABLE>
<S> <C>
2000........................................................ $ 3.6
2001........................................................ 3.5
2002........................................................ 3.5
2003........................................................ 3.6
2004........................................................ 3.7
Thereafter.................................................. 33.8
-----
Total.................... $51.7
=====
</TABLE>
Postretirement Plan
The Company provides health care and life insurance benefits for certain
eligible retired employees under a partially funded plan. Such postretirement
benefit plan is contributory, with participants' contributions adjusted
annually. Amounts related to the postretirement benefit plan was as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
(Dollars in millions)
<S> <C> <C>
Benefit obligation, beginning of year......................................... $ 19.5 $ 19.0
Interest cost............................................................. 1.2 1.3
Plan participants' contributions.......................................... .4 .4
Actuarial loss (gain)..................................................... (3.4) .5
Benefits paid............................................................. (1.7) (1.7)
------ ------
Benefit obligation, end of year............................................... $ 16.0 $ 19.5
====== ======
Fair value of plan assets, beginning of year.................................. $ 5.1 $ 5.9
Actual return on plan assets.............................................. .3 .3
Plan participants' contributions.......................................... .4 .4
Benefits paid............................................................. (1.5) (1.5)
------ ------
Fair value of plan assets, end of year........................................ $ 4.3 $ 5.1
====== ======
Funded status................................................................. $(11.7) $(14.4)
Unrecognized net actuarial gain (loss)........................................ (12.3) (8.5)
------ ------
Accrued benefit liability.............................................. $(24.0) $(22.9)
====== ======
</TABLE>
We used the following weighted average assumptions to calculate benefit
obligations for our 1999 and 1998 valuations: discount rate of approximately 7.5
percent and 6.5 percent, respectively; and an expected return on plan assets of
approximately 4.6 percent and 4.6 percent, respectively. For measurement
purposes, we assumed a 9.0 percent annual rate of increase in the per capita
cost of covered health care benefits for 2000, decreasing gradually to 5.0
percent in 2011 and remaining level thereafter.
Components of the cost we recognized related to the postretirement plan
were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
(Dollars in millions)
<S> <C> <C>
Interest cost.................................................. $1.2 $1.3
Expected return of plan assets................................. (.2) (.2)
Amortization of prior service cost............................. (.5) (.5)
Recognized net actuarial loss.................................. - (.1)
---- ----
Net periodic benefit cost............................... $ .5 $ .5
==== ====
</TABLE>
17
<PAGE>
WASHINGTON NATIONAL INSURANCE COMPANY
Notes to Financial Statements
------------------------------
A one-percentage-point change in the assumed health care cost trend rates
would have an insignificant effect on the net periodic benefit cost of our
postretirement benefit obligation.
The Company has qualified defined contribution plans for which
substantially all employees are eligible. Company contributions, which match
certain voluntary employee contributions to the plan, totaled $.1 million in
1999, $.1 million in 1998, $.2 million in the one month ended December 31, 1997
and $2.2 million in the eleven months ended November 30, 1997. Matching
contributions may be made either in cash or in Conseco common stock.
Litigation
The Company and UPI are currently named as defendants in a lawsuit filed in
the Circuit Court of Claiborne County, Mississippi, cause number CV-99-0106 and
captioned "Carla Beaugez, et al. v. Conseco, Inc., Conseco Services, Inc.,
Washington National Co., United Presidential Life Ins. Co., and Larry Ratcliff."
The claims asserted, filed by 82 individuals who purchased universal life
policies from UPI, involve the changing interest rate climate between the 1980s
and the comparatively lower rates in the 1990s. The plaintiffs' claims include
fraud, negligent misrepresentation, breach of contract, unjust enrichment, and
reformation. The Company believes the case is without merit and is defending it
vigorously. The ultimate outcome of this lawsuit cannot be predicted with
certainty.
In addition, the Company and UPI are involved on an ongoing basis in
lawsuits related to its operations. Although the ultimate outcome of certain of
such matters cannot be predicted, such lawsuits currently pending against the
Company are not expected, individually or in the aggregate, to have a material
adverse effect on the Company's financial condition, cash flows or results of
operations.
Guaranty Fund Assessments
The balance sheet at December 31, 1999, includes: (i) accruals of $6.4
million, representing our estimate of all known assessments that will be levied
against the Company by various state guaranty associations based on premiums
written through December 31, 1999; and (ii) receivables of $2.2 million that we
estimate will be recovered through a reduction in future premium taxes as a
result of such assessments. These estimates are subject to change when the
associations determine more precisely the losses that have occurred and how such
losses will be allocated among the insurance companies. We recognized expense
for such assessments of $.2 million in 1999, $.3 million in 1998, $.2 million in
the one month ended December 31, 1997 and $1.2 million in the eleven months
ended November 30, 1997.
Related Party Transactions
The Company operates without direct employees through management and
service agreements with subsidiaries of Conseco. Fees for such services
(including data processing, executive management and investment management
services) are based on Conseco's direct and directly allocable costs plus a 10
percent margin. Total fees incurred by the Company under such agreements were
$33.1 million in 1999, $20.7 million in 1998 and $.3 million in the one month
ended December 31, 1997.
During 1998, the Company purchased $22.0 million par value of senior notes
and senior subordinated notes issued by subsidiaries of Conseco. Such notes had
a carrying value of $26.3 million at December 31, 1998 and are classified as
"other invested assets" in the accompanying balance sheet. In 1999, all such
notes were repurchased from the Company by Conseco or its subsidiaries. In
addition, during 1998, the Company purchased $40.0 million of preferred stock
issued by a subsidiary of Conseco, which is classified as "other invested
assets" in the accompanying balance sheet.
During 1999, the Company's parent made a $50.0 million cash contribution to
the Company.
18
<PAGE>
WASHINGTON NATIONAL INSURANCE COMPANY
Notes to Financial Statements
------------------------------
6. OTHER OPERATING STATEMENT DATA:
Insurance policy income consisted of the following:
<TABLE>
<CAPTION>
Year ended One month Eleven months
December 31, ended ended
--------------------- December 31, November 30,
1999 1998 1997 1997
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Traditional products:
Direct premiums collected....................... $214.7 $250.1 $28.8 $247.3
Reinsurance ceded............................... (50.4) (41.7) (8.9) (37.7)
------ ------ ----- ------
Premiums collected, net of reinsurance...... 164.3 208.4 19.9 209.6
Less premiums on universal life and products
without mortality and morbidity risk which are
recorded as additions to insurance liabilities 87.4 119.8 12.7 134.7
------ ------ ----- ------
Premiums on traditional products with
mortality or morbidity risk,
recorded as insurance policy income....... 76.9 88.6 7.2 74.9
Fees and surrender charges on interest-sensitive
products........................................ 73.6 72.5 7.0 74.2
------ ------ ----- ------
Insurance policy income..................... $150.5 $161.1 $14.2 $149.1
====== ====== ===== ======
</TABLE>
The five states with the largest shares of 1999 collected premiums were New
Jersey (13 percent), Texas (9.3 percent), Pennsylvania (5.8 percent), California
(5.5 percent) and Illinois (5.2 percent). No other state accounted for more than
5 percent of total collected premiums.
Changes in the cost of policies purchased were as follows:
<TABLE>
<CAPTION>
Year ended One month Eleven months
December 31, ended ended
--------------------- December 31, November 30,
1999 1998 1997 1997
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Balance, beginning of year........................ $207.2 $218.5 $ 26.1 $31.4
Amortization................................... (17.5) (26.6) (1.2) (1.8)
Amounts related to fair value adjustment of
actively managed fixed maturities............ 66.1 3.2 (5.5) (3.7)
Adjustment of balance due to new accounting
basis........................................ - - 199.1 -
Other ......................................... 1.8 12.1 - .2
------ ------ ------ -----
Balance, end of year.............................. $257.6 $207.2 $218.5 $26.1
====== ====== ====== =====
</TABLE>
Based on current conditions and assumptions as to future events on all
policies in force, the Company expects to amortize approximately 9 percent of
the December 31, 1999, balance of cost of policies purchased in 2000, 8 percent
in 2001, 6 percent in 2002 and 5 percent in 2003. The discount rates used to
determine the amortization of the cost of policies purchased ranged from 4
percent to 7 percent and averaged 5.5 percent.
19
<PAGE>
WASHINGTON NATIONAL INSURANCE COMPANY
Notes to Financial Statements
------------------------------
Changes in the cost of policies produced were as follows:
<TABLE>
<CAPTION>
Year ended One month Eleven months
December 31, ended ended
--------------------- December 31, November 30,
1999 1998 1997 1997
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Balance, beginning of year....................... $22.2 $ 2.7 $ 203.4 $211.1
Additions..................................... 18.4 22.7 2.7 31.3
Amortization.................................. (3.3) (3.2) - (22.4)
Amounts related to fair value adjustment of
actively managed fixed maturities........... 1.9 - - (16.6)
Adjustment of balance due to new accounting
basis....................................... - - (203.4) -
----- ----- ------- ------
Balance, end of year............................. $39.2 $22.2 $ 2.7 $203.4
===== ===== ======= ======
</TABLE>
7. STATEMENT OF CASH FLOWS:
Income taxes paid totaled $5.2 million in 1999, $16.8 million in 1998 and
$10.2 million in the eleven months ended November 30, 1997. No income taxes were
paid in the one month ended December 31, 1997.
8. STATUTORY INFORMATION:
Statutory accounting practices prescribed or permitted by regulatory
authorities for insurance companies differ from GAAP. The Company reported the
following combined amounts to regulatory agencies:
<TABLE>
<CAPTION>
1999 1998
---- ----
(Dollars in millions)
<S> <C> <C>
Statutory capital and surplus.................................................. $209.3 $143.2
Asset valuation reserve........................................................ 19.1 17.8
Interest maintenance reserve................................................... 39.4 42.7
------ ------
Total...................................................................... $267.8 $203.7
====== ======
</TABLE>
Our combined statutory net income was $46.2 million, $29.6 million, and
$15.3 million in 1999, 1998 and 1997, respectively. Statutory net income differs
from net income presented in our financial statements prepared in accordance
with GAAP, primarily because for GAAP reporting we are required to defer and
amortize costs that vary with and are primarily related to the production of new
business as described in note 1.
State insurance laws generally restrict the ability of insurance companies
to pay dividends or make other distributions. We may pay dividends to our parent
in 2000 of $42.9 million without permission from state regulatory authorities.
In 1998, the National Association of Insurance Commissioners adopted
codified statutory accounting principles, which are expected to constitute the
only source of prescribed statutory accounting practices and are effective in
2001. The changes to statutory accounting practices resulting from the
codification are not expected to have a material effect on the statutory capital
and surplus or statutory operating earnings data shown above.
20
<PAGE>
WASHINGTON NATIONAL INSURANCE COMPANY
Notes to Financial Statements
------------------------------
9. DISCONTINUED OPERATIONS:
In 1996, the Company sold certain health and group insurance business. The
results for the one month period ended December 31, 1997 and the eleven months
ended November 30, 1997, include tax benefits of $0.3 million and $46.0 million,
respectively, related to this business. Such amounts were recognized in
conjunction with the settlement of prior year tax returns and are classified as
income from discontinued operations in the accompanying financial statements.
21
<PAGE>
The registrant hereby incorporates by reference the May 1, 2000 Scudder Variable
Life Investment Fund Prospectus, file number 811-04257, filed with the
Commission on April 27, 2000.
