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
/ / 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 1-12540
WESTERN NATIONAL CORPORATION
(Exact name of registrant as specified in its articles of incorporation)
DELAWARE 75-2502064
(State of incorporation) (I.R.S. Employer Identification No.)
5555 SAN FELIPE ROAD, SUITE 900, HOUSTON, TEXAS 77056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 888-7800
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---
Shares of common stock outstanding as of March 31, 1997: 62,509,412
<PAGE>
WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- -----------
(unaudited) (audited)
<S> <C> <C>
ASSETS
------
Investments:
Fixed maturities - actively managed
at fair value (amortized cost:
1997-$9,170.5; 1996-$8,738.4) $ 9,094.9 $ 8,842.5
Credit-tenant loans 215.4 208.5
Mortgage loans 117.3 122.7
Policy loans 65.2 66.8
Short-term investments 194.4 109.6
Due from brokers 91.7 0.4
Other invested assets 28.6 25.6
----------- -------------
Total investments 9,807.5 9,376.1
Accrued investment income 163.1 156.6
Funds held by reinsurer and
reinsurance receivables 132.8 98.0
Cost of policies purchased 84.6 50.4
Cost of policies produced 449.5 380.2
Deferred income taxes 11.0 13.4
Other assets 23.3 20.8
----------- -------------
Total Assets $ 10,671.8 $ 10,095.5
=========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------
Liabilities:
Insurance liabilities $ 9,060.6 $ 8,679.9
Notes payable 148.1 148.0
Investment borrowings and due to brokers 412.9 156.3
Deferred income taxes 63.2 98.4
Other liabilities 112.8 98.1
----------- -------------
Total Liabilities 9,797.6 9,180.7
----------- -------------
Shareholders' Equity:
Preferred stock (par value $.001 per share;
50,000,000 shares authorized; issued and
outstanding: 7,254,464) - -
Common stock and additional paid-in capital
(par value $.001 per share, 500,000,000
shares authorized; issued and outstanding:
1997-62,509,412; 1996-62,441,423) 474.5 473.1
Net unrealized appreciation (depreciation)
of securities, net of applicable deferred
income taxes (benefit): 1997-$(15.4);
1996-$21.1 (28.8) 39.1
Retained earnings 428.5 402.6
----------- -------------
Total Shareholders' Equity 874.2 914.8
----------- -------------
Total Liabilities and Shareholders'
Equity $ 10,671.8 $ 10,095.5
=========== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS - EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1997 1996
------ ------
<S> <C> <C>
REVENUES:
Insurance policy and fee income $ 39.3 $ 15.1
Net investment income 190.7 171.7
Net realized gains 0.6 0.4
------ ------
Total revenues 230.6 187.2
BENEFITS AND EXPENSES:
Insurance policy benefits 28.0 28.1
Change in future policy benefits
and other liabilities 35.1 9.6
Interest expense on annuities and
financial products 100.1 91.5
Interest expense on notes payable 2.7 2.7
Interest expense on investment and
short-term borrowings 3.2 2.9
Amortization related to operations 10.9 9.8
Amortization and change in future
policy benefits related to net
realized gains 0.6 0.3
Other operating costs and expenses 5.5 5.4
------ ------
Total benefits and expenses 186.1 150.3
------ ------
Income before income taxes 44.5 36.9
Income tax expense 15.9 12.9
------ ------
NET INCOME $ 28.6 $ 24.0
====== ======
EARNINGS PER COMMON SHARE AND
COMMON EQUIVALENT SHARE:
Weighted average shares 70.4 62.7
Net income $ 0.41 $ 0.38
====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1997 1996
---- ----
<S> <C> <C>
Preferred stock:
Balance, beginning of period $ - $ -
Issuance of 7,254,464 Series A
shares ($.001 per share
liquidation preference) - -
------- -------
Balance, end of period $ - $ -
======= =======
Common stock and additional paid-in capital:
Balance, beginning of period $473.1 $ 346.8
Issuance of common shares
related to restricted stock awards
and options, and 401(k) matching
(1997-67,989 shares; 1996-71,873 shares) 1.4 1.2
------- --------
Balance, end of period $474.5 $ 348.0
======= ========
Net unrealized appreciation
(depreciation) of securities:
Balance, beginning of period $ 39.1 $ 125.2
Change in unrealized
appreciation (depreciation) (67.9) (100.4)
------- --------
Balance, end of period $(28.8) $ 24.8
======= ========
Retained earnings:
Balance, beginning of period $402.6 $ 313.6
Net income 28.6 24.0
Dividends on common stock (2.5) (2.4)
Dividends on preferred stock (0.2) -
------- --------
Balance, end of period $428.5 $ 335.2
======= ========
Total shareholders' equity $874.2 $ 708.0
======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1997 1996
---------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 28.6 $ 24.0
Adjustments to reconcile net income
to net cash provided by operations:
Amortization and depreciation 11.9 11.2
Realized gains on investments, net (2.4) (2.3)
Income taxes 3.7 13.0
Increase in insurance liabilities 36.6 19.4
Interest credited to insurance
liabilities 104.1 93.1
Fees charged to insurance
liabilities (1.2) (0.9)
Amortization (accrual) of
investment income (8.5) (22.1)
Deferral of cost of policies
produced (37.0) (22.4)
Other (2.7) 63.0
---------- --------
Net cash provided by
operating activities 133.1 176.0
---------- --------
Cash flows from investing activities:
Sales of investments 793.2 592.4
Maturities and redemptions of
investments 106.8 98.6
Purchases of investments (1,362.2) (984.3)
---------- --------
Net cash used in investing
activities (462.2) (293.3)
---------- --------
Cash flows from financing activities:
Deposit to insurance liabilities 499.8 292.6
Withdrawals from insurance
liabilities (293.5) (341.4)
Dividends on common stock (2.5) (2.4)
Dividends on preferred stock (0.2) -
Investment borrowings, net 210.3 (191.1)
---------- --------
Net cash provided by (used in)
financing activities 413.9 (242.3)
---------- --------
Net increase (decrease) in
short-term investments 84.8 (359.6)
Short-term investments -
beginning of period 109.6 417.6
---------- --------
Short-term investments -
end of period $ 194.4 $ 58.0
========== ========
Supplemental cash flow disclosure:
Income taxes (refunded)
paid, net $ 12.0 $ (37.7)
========== ========
Interest paid $ 8.1 $ 5.5
========== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following notes should be read in conjunction with the notes to
consolidated financial statements contained in the 1996 Annual Report on Form
10-K of Western National Corporation (the "Company").
1. SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements as of March 31, 1997,
and for the three-month periods ended March 31, 1997 and 1996, reflect all
adjustments, consisting only of normal recurring items that are necessary in
the opinion of management to present fairly the Company's financial position,
results of operations and cash flows on a basis consistent with that of the
prior audited consolidated financial statements. Intercompany amounts and
transactions were eliminated.
2. ADJUSTMENT TO ACTIVELY MANAGED FIXED MATURITIES
All of the Company's fixed maturity investments are classified as
"actively managed", and are carried at estimated fair value in accordance with
SFAS 115. The adjustment to carry actively managed fixed maturity investments
at fair value resulted in the following cumulative adjustments to balance
sheet accounts as of March 31, 1997 and December 31, 1996.
ADJUSTMENTS TO ACTIVELY MANAGED FIXED MATURITIES
(IN MILLIONS)
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
---------------- -------------------
EFFECT OF EFFECT OF
COST FAIR VALUE CARRYING COST FAIR VALUE CARRYING
BASIS ADJUSTMENTS VALUE BASIS ADJUSTMENTS VALUE
------------------ ------------- ---------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENTS:
Actively managed
fixed maturities $ 9,170.5 $ (75.6) $ 9,094.9 $8,738.4 $ 104.1 $ 8,842.5
Other invested
assets 27.7 0.9 28.6 24.7 0.9 25.6
------------------ ------------- ---------- --------- ------------- ----------
9,198.2 (74.7) 9,123.5 8,763.1 105.0 8,868.1
OTHER BALANCE SHEET ITEMS:
Cost of policies
purchased 70.1 14.5 84.6 71.5 (21.1) 50.4
Cost of policies
produced 435.2 14.3 449.5 408.3 (28.1) 380.2
Other liabilities (114.5) 1.7 (112.8) (102.5) 4.4 (98.1)
Deferred income tax
liability (78.6) 15.4 (63.2) (77.3) (21.1) (98.4)
------------- -------------
Unrealized appreciation
(depreciation) of
investments, net $ (28.8) $ 39.1
============ ============
</TABLE>
3. CHANGES IN COMMON STOCK AND PREFERRED STOCK
On March 3, 1997, the Company paid a dividend of $.04 per share for
outstanding Common Stock and Series A Preferred Stock. The total amount paid
was $2.7 million for the quarter.
During the first three months of 1997, no common shares were issued
pursuant to the exercise of stock options, 47,000 shares of restricted stock
were awarded to certain executive officers, and 20,989 shares of newly-issued
common stock were contributed to employee benefit plans.
4. IMPENDING CHANGE IN DISCLOSURE OF EARNINGS PER SHARE DATA
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share ( SFAS
128"). SFAS 128 specifies the computation, presentation, and disclosure
requirements for earnings per share. SFAS 128 is effective for financial
statements issued for periods ending
<PAGE>
after December 15, 1997, including interim periods. Earlier application is
not permitted. However, an entity is permitted to disclose pro forma earnings
per share amounts computed using SFAS 128 in the notes to financial statements
in periods prior to adoption. When adopted, SFAS 128 requires restatement of
earnings per share data for all prior periods presented. SFAS 128 is designed
to improve the earnings per share information provided in financial statements
by simplifying the existing computational guidelines of Accounting Principles
Board Opinion No. 15, Earnings Per Share ( APB 15"). Some of the changes made
by SFAS 128 to simplify the earnings per share computations include: (a)
eliminating the presentation of primary earnings per share and replacing it
with basic earnings per share, with the principal difference being that common
stock equivalents resulting from stock options and convertible securities are
not considered in computing basic earnings per share, (b) eliminating the
modified treasury stock method in computing common stock equivalents for
dilutive earnings per share, and (c) revising the contingent share provisions
and the supplemental earnings per share date requirements. SFAS 128 requires
dual presentation of basic and diluted earnings per share on the face of the
income statement for all entities with complex capital structures regardless
of whether basic and diluted earnings per share are the same; it also requires
a reconciliation of the numerator and denominator used in computing basic and
diluted earnings per share. Following is pro forma earnings per share
data assuming SFAS 128 had been adopted in the accompanying consolidated
interim financial statements:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------
1997 1996
----- -----
<S> <C> <C>
Basic $0.46 $0.39
Dilutive $0.41 $0.38
</TABLE>
The primary reason for the differences between basic and dilutive
earnings per share for the three months ended March 31, 1997, is the exclusion
of Series A Preferred Stock from basic earnings per share. Series A Preferred
Stock will be included in basic earnings per share as of the anticipated
conversion date in May 1997.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BACKGROUND
Western National Corporation (the "Company") is a Delaware corporation
organized in October 1993 to serve as the holding company for Western National
Life Insurance Company ("Western"), a Texas life insurance company founded in
1944. Western is a leading provider of retirement annuity products, with
approximately $10 billion of statutory assets at March 31, 1997. Unless the
context otherwise requires, references to the "Company" are references to
Western National Corporation and its consolidated subsidiaries.
Approximately 46.2% of the Company's outstanding common stock (including
approximately 7.2 million shares of a series of non-voting preferred stock
that is a common stock equivalent) is owned by a subsidiary of American
General Corporation, a Texas corporation ("AGC"). References to "American
General" are references to AGC and its direct and indirect majority controlled
subsidiaries.
RESULTS OF OPERATIONS
General
The Company's operating earnings are primarily a function of its
investment spread, the amount of its invested assets, and its operating
expenses. Accordingly, management's principal emphasis is on generating
profits through adequate pricing of its insurance products and maintaining
appropriate investment spreads throughout the life of the policies sold.
Investment spread is the excess of net investment income over interest
credited to insurance liabilities, and is a function of the level of, and
yield on, invested assets and the interest crediting rates on insurance
liabilities. The Company's investment spread over recent periods has been
maintained through a combination of active investment management and the
ability to change rates credited on a majority of its insurance liabilities.
Management adjusts crediting rates based upon pricing objectives, current
investment performance, market interest rates, and competitive factors.
Although Western has the right to adjust interest crediting rates on most
products, such adjustments to crediting rates may not be sufficient to
maintain targeted investment spreads in all economic and market-rate
environments. Furthermore, competitive and other factors may limit Western's
ability to adjust crediting rates. A narrowing of spreads may adversely affect
operating results. Western believes that its policy structure, which
generally provides for resetting of policy crediting rates at least annually
and imposes withdrawal penalties during the first five to ten years a policy
is in force, mitigates substantially the potentially adverse effects of
interest rate changes, except in the case of sudden and dramatic changes in
market rates.
As of the last day of each quarter, Western calculates investment spread
on insurance liabilities by measuring the difference between the average yield
on invested assets and the average base liability crediting rate on such date.
Since first quarter 1994, investment spread, as so defined, has remained
between approximately 1.91% and 2.20%, and stood at approximately 2.20% at
March 31, 1997. Western also presents its average spread on insurance
liabilities for each quarter, which Western believes more accurately reflects
its experience during the reported period. Average investment spread
calculations exclude prepayment income and loss, income from the Company's
investment in limited partnerships and certain other equity-like investments,
and investment income from other non-scheduled sources. Average investment
spread has remained between approximately 1.96% and 2.21% since first quarter
1994, and was 2.21% for first quarter 1997. Western generally expects to
maintain a spread within the range of spreads it has achieved in recent years.
The level of the investment spread varies over time as a result of market
factors, competitive influences, crediting rates, and investment yields.
Operating earnings (which exclude realized investment gains (losses) net
of applicable adjustments to amortization, expenses and taxes) for the quarter
were $28.6 million, or $0.41 per share, up from $23.9 million, or $0.38 per
share in the first quarter 1996. Because the decision to realize investment
gains or losses lies to a great degree in management's discretion, and may
reflect tax or other considerations unrelated to core earning power,
management believes that operating earnings are the best indication of
earnings capacity for financial services organizations such as Western.
<PAGE>
The following table sets forth operating and net income for the period
ended March 31 (in millions):
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1997 1996
------ ------
<S> <C> <C>
Operating revenues $230.0 $186.8
Benefits and expenses 185.5 150.0
------ ------
Pre-tax operating income 44.5 36.8
Income tax expense from operations 15.9 12.9
------ ------
Net operating income 28.6 23.9
Realized gains net of amortization,
expenses and taxes - 0.1
------ ------
Net income $ 28.6 $ 24.0
====== ======
</TABLE>
Net investment income. Net investment income for first quarter 1997
increased $19.0 million, or 11%, to $190.7 million from $171.7 million in the
first quarter 1996. This category of earnings, net of interest expense on
short-term investment borrowings, also increased 11% to $187.5 million for the
first quarter 1997 compared to $168.8 million for the first quarter 1996. The
increase in net investment income for the first quarter is primarily
attributable to an increase of approximately $1 billion, to $9.4 billion, in
average net invested assets and a slight increase in average annualized
investment yield (based on amortized cost) to 8.23% from 8.20% in first
quarter 1996. This increase was partially offset by a decrease in prepayment
revenue of $0.7 million to approximately $1.4 million in the first quarter
1997 from first quarter 1996, as well as a decrease of $2.0 million in income
from partnerships.
Net realized investment gains. Net realized investment gains were $0.6
million in the first quarter 1997, compared to $0.4 million in the
corresponding 1996 period. Net realized gains adjusted for amortization,
reserves, related expenses, and taxes were immaterial for both periods. The
amount of investment gains or losses fluctuates depending on general market
conditions and interest rates as well as the level of activity in the
portfolio. Western follows an active strategy in the management of its
portfolio, in which decisions to buy, sell, or hold securities are dictated
principally by relative value analysis, or other portfolio management
considerations, rather than the gain or loss to be realized on any given
trade. Due to tax and yield considerations, management will normally seek to
manage the portfolio on a gain/loss neutral basis.
Amortization and change in future policy benefits related to net realized
investment gains. As described in Note 1 to the Consolidated Financial
Statements of the Company's 1996 Annual Report on Form 10-K, the realization
of investment gains and losses affects the timing of amortization of the cost
of policies purchased and amortization of the cost of policies produced. As a
result of the net realized investment gains from the sales of fixed
maturities, amortization of the cost of policies produced was increased by
$0.6 million in the first quarter 1997, compared to an increase of $0.3
million in the corresponding 1996 period.
Insurance policy and fee income. Insurance policy and fee income was
$39.3 million and $15.1 million in the first quarters of 1997 and 1996,
respectively. This income relates primarily to premiums from products with
mortality and morbidity features such as traditional life insurance and
certain single premium immediate annuities (SPIAs). It also includes
surrender charge income, primarily from deferred annuities, and fee income
from direct sales operations. The increase in this source of income was
primarily attributable to $34.2 million of premium income resulting from the
modified coinsurance agreement entered into with American General Life
Insurance Company ("AGLIC"), compared to $10.9 million of income from this
source in the first quarter of 1996.
Insurance policy benefits and other liabilities. Total first quarter
1997 insurance policy benefits (including changes in future policy benefits),
which relate solely to policies with mortality and morbidity features,
increased $25.4 million from the year-earlier quarter. The increase in this
expense item was primarily attributable to the establishment of $34.2 million
of reserves resulting from the modified coinsurance agreement entered into
with AGLIC, compared to $10.9 million of such reserves in the first quarter of
1996. The first quarter of 1997 also reflected unfavorable
<PAGE>
mortality experience of $0.7 million, compared to favorable mortality
experience of $1.7 million for first quarter 1996 on life contingent
SPIA contracts.
Interest expense on annuities and financial products. Interest expense
on annuities and financial products increased by $8.6 million to $100.1
million in the first quarter 1997 compared to the corresponding year-earlier
quarter. This increase is primarily attributable to an increase in reserves
to $7.6 billion at March 31, 1997, from $6.6 billion at March 31, 1996. The
average rate credited on all insurance liabilities declined to approximately
6.0% in the first quarter of 1997 from 6.2% a year earlier. Average crediting
rates on annuities may increase if market interest rates rise, or as lower
cost policies lapse, are repriced, or are replaced with policies having higher
crediting rates. Conversely, if market interest rates generally decrease, the
average credited rate will generally tend to decrease as well. The decrease
in average crediting rate reflects in part the reduced percentage of total
insurance liabilities accounted for by the Company's SPIA policies, which
generally have higher implicit interest rates than its other policies, as well
as a slight reduction in average interest rates on certain of the Company's
other blocks of business.
Amortization related to operations. Amortization related to operations,
which excludes the effects of realized gains and losses, of the cost of
policies produced and purchased increased by $1.1 million in the first quarter
1997 compared to the corresponding year-earlier period. The increase is
primarily the result of increases in the amount of in-force business. Asset
balances and scheduled amortization of costs of policies produced and
purchased are reviewed annually for products governed by SFAS 97 and may be
reviewed more frequently if circumstances dictate. This accounting standard
requires that the asset balances and future amortization be unlocked; i.e.,
recomputed based on actual past experience and updated expectations of future
experience. This unlocking may result in both one-time adjustments related to
prior amortization as well as changes to ongoing amortization rates. No
unlocking adjustments were made in the first quarters of 1997 or 1996.
Other operating costs and expenses. Other operating costs and expenses
were $5.5 million for the first quarter 1997, which was a $0.1 million
increase from the year-earlier quarter.
Interest expense on notes payable and investment borrowings. Interest
expense of $5.9 million for the first quarter 1997 was up from $5.6 million in
the year-earlier quarter. First quarter 1997 interest expense consisted of
$3.2 million in interest expense on investment and short-term borrowings and
$2.7 million in interest expense relating to the Senior Notes. The amount of
investment interest expense will vary substantially from time to time based on
the level of market interest rates and the volume of investment borrowings.
Income taxes. First quarter 1997 income taxes increased to $15.9 million
from the first quarter 1996 level of $12.9 million, primarily as a result of
increased net income.
The components of deferred income taxes included in the consolidated
balance sheet are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
---------------- -------------------
(DOLLARS IN MILLIONS)
-----------------------
<S> <C> <C>
Deferred income tax assets:
Company net operating loss
carryforward $ 11.0 $13.4
------- -----
Deferred income tax assets $ 11.0 $13.4
======= =====
Deferred income tax liabilities:
Western's operations $ 78.6 $77.3
Unrealized (depreciation)
appreciation on invested assets (15.4) 21.1
------- -----
Deferred income tax liabilities $ 63.2 $98.4
======= =====
</TABLE>
The deferred income tax asset of $11.0 million at March 31, 1997, was
attributable to net operating losses incurred by the Company that could not be
utilized by Western since each files separate federal income tax returns.
<PAGE>
The deferred income tax liability of $63.2 million at March 31, 1997, was
primarily the result of the temporary differences between tax and financial
bases of the cost of policies produced, the cost of policies purchased,
invested assets and insurance liabilities. The temporary differences between
tax and financial bases related to net unrealized appreciation or depreciation
of actively-managed fixed maturities, which are carried at market value
in accordance with the requirements of SFAS 115, contributed to the tax
liability for 1996, when the portfolio had net unrealized appreciation,
but decreased the tax liability at March 31, 1997, when the portfolio
had net unrealized depreciation.
Net income. First quarter 1997 net income was $28.6 million, up 19% from
$24.0 million for the prior year's first quarter. The 19% increase was a
result of increased operating earnings. Net income per share of $.41 was up
8% from $.38 in the year-earlier quarter. The percentage change in net income
per share was less than the percentage change in net income due to an increase
in the number of common and common equivalent shares from 62.7 million in the
first quarter of 1996 to 70.4 million in the first quarter of 1997. This
increase is due principally to the issuance of 7.2 million common equivalent
shares to American General in third quarter 1996 for $126 million of net
proceeds to the Company.
INVESTMENTS
The Company's investment strategy is to maintain a diversified portfolio
consisting largely of readily-marketable, investment grade fixed maturity
securities, to provide adequate liquidity through active asset/liability
management for expected liability cash flows and other requirements, and
maximize return through active investment management. The Company's
investment strategy places strong emphasis on active asset/liability
management as a principal tool to mitigate variations in investment spread and
disintermediation risk. At December 31, 1996, the Company had invested assets
with a total carrying value of approximately $9.8 billion. See Note 2 to
the unaudited Consolidated Financial Statements.
The following table shows the Company's investment performance for the
three months ended March 31, 1997, and March 31, 1996 (in millions and before
giving effect to SFAS No. 115 adjustment).
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Net investment income (1) $ 187.5 $ 168.8
Average net invested assets, at amortized cost (2) 9,422.0 8,408.0
Annualized yield on average net invested assets (3) 8.2% 8.2%
<FN>
_____________
(1) Net of interest expense on short-term investment borrowings.
(2) Net of short-term investment borrowings.
(3) Excludes prepayment income (loss), income from partnerships and
certain other equity like investments, and investment income from other
non-scheduled sources.
</TABLE>
Although market interest rates have increased so far in 1997 from the
level prevailing in late 1996, changes in market rates affect the portfolio
yield only slowly due to the relatively small volume of new investments in any
one period in relation to the size of the overall portfolio. In addition,
because the portfolio includes a mix of securities with yields both above or
below the average portfolio yield (as well as both above and below current
market interest rates), changes in portfolio yield will not necessarily
parallel changes in market interest rates, except over longer periods of time.
Securities that are sold or otherwise redeemed, or that are partially prepaid,
may be yielding rates above or below the portfolio yield or current market
interest rates.
<PAGE>
The following table sets forth the composition of the Company's fixed
maturity portfolio as of the dates indicated:
<TABLE>
<CAPTION>
<PAGE>
FIXED MATURITIES BY TYPE AT MARCH 31, AT DECEMBER 31,
(IN MILLIONS, BASED ON CARRYING VALUE) 1997 1996
- ------------------------------------------- ------------- ----------------
<S> <C> <C>
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $ 13.5 $ 21.4
Obligations of states and political
subdivisions 167.8 222.0
Public utility securities 1,205.9 1,242.2
Other corporate securities 4,791.4 4,687.4
Asset-backed securities 329.8 351.9
Mortgage-backed securities 2,586.5 2,317.6
------------- ----------------
Total fixed maturities $ 9,094.9 $ 8,842.5
============= ================
</TABLE>
The following table sets forth the quality of Western's fixed maturities
(which do not include short-term investments) as of March 31, 1997, classified
in accordance with the highest rating by a nationally recognized statistical
rating organization or, as to fixed maturities not commercially rated, based
on ratings assigned by the National Association of Insurance Commissioners
("NAIC"):
<TABLE>
<CAPTION>
FIXED MATURITIES BY
QUALITY RATING AT GAAP GAAP GAAP CARRYING VALUE
---------------------
AT MARCH 31, 1997
CARRYING AMORTIZED AS % OF FIXED AS % OF AS % OF
VALUE COST MATURITIES INV. ASSETS AMORT. COST
-------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
AAA $2,746.6 $2,789.3 30.2% 28.1% 98.5%
AA 797.4 813.3 8.8 8.1 98.0
A 2,450.3 2,451.1 26.9 25.0 100.0
BBB+ 775.2 779.1 8.5 7.9 99.5
BBB 1,043.7 1,054.5 11.5 10.6 99.0
BBB- 639.7 646.2 7.0 6.5 99.0
-------- -------- ----------- ------------ ------------
Total investment
grade 8,452.9 8,533.5 92.9 86.2 99.0
BB+ 161.2 161.2 1.8 1.6 100.0
BB 50.4 49.7 0.6 0.5 101.4
BB- 187.1 182.4 2.1 1.9 102.6
B+ and below 243.3 243.7 2.6 2.5 99.8
-------- -------- ----------- ------------ ------------
Total below
investment
grade 642.0 637.0 7.1 6.5 100.8
Total fixed
maturities $9,094.9 $9,170.5 100.0% 92.7% 99.2%
======== ======== =========== ============ ============
</TABLE>
Investments in fixed maturity securities that are rated below investment
grade as determined by nationally recognized statistical rating organizations
(or, if not rated by such firms, with ratings below Class 2 assigned by the
NAIC) were 6.5% of total invested assets and 7.1% of total fixed maturity
investments at March 31, 1997. The Company intends to maintain approximately
the present percentage of its portfolio invested in fixed maturity securities
that are rated below investment grade, although such percentages may vary by
several percentage points from time to time. Investments in below investment
grade corporate debt securities generally have greater risks than other
corporate debt investments. Risk of loss upon default by the borrower is
greater with such securities because they generally are unsecured and often
are subordinated to other creditors of the issuers. Furthermore, the issuers
usually have high levels of indebtedness and are more sensitive to adverse
economic conditions, such as recession or increasing interest rates, than are
investment grade issuers. The Company is sensitive to its risk exposure and
carefully monitors its below investment grade securities.
At March 31, 1997, the Company had fixed maturity investments of $0.6
million which were in substantive default (i.e., in default due to nonpayment
of interest or principal). There were no fixed maturity investments in
<PAGE>
substantive default as of March 31, 1996. The Company had no credit
impairment writedowns during the first three months of 1997 or 1996.
At March 31, 1997, the Company's actively managed fixed maturity
portfolio had net unrealized losses of $75.6 million. The net unrealized
loss, which consisted of $133.1 million of unrealized gains and $208.7 million
of unrealized losses, compares with net unrealized gains of $104.1 million
at December 31, 1996. Estimated fair values for managed fixed maturity
investments are primarily based on estimates from nationally recognized
pricing services and broker-dealer market makers. The amounts of
unrealized gains and losses fluctuate due to both credit factors and
changes in market interest rates. The market value of fixed income
securities generally decreased during the first three months of 1997, as a
result of the rise in market interest rates during that period.
Fixed maturity investments at March 31, 1997, consisted primarily of debt
securities of the U.S. government, public utilities and other corporations,
and mortgage-backed securities. Investments in mortgage-backed securities
include collateralized mortgage obligations ("CMOs") and mortgage-backed
pass-through securities.
At March 31, 1997, the Company held mortgage loans with a carrying value
of $117.3 million (or 1.2% of total invested assets), none of which were 90 or
more days past due. The Company recorded no writedowns for credit impairment
in its mortgage portfolio during the first three months of 1997.
The Company occasionally uses derivative financial instruments,
consisting primarily of interest rate swaps, to alter interest rate exposure
arising from mismatches between assets and liabilities. Under the terms of the
interest rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the differences between fixed rate and floating-rate
interest amounts calculated by reference to an agreed notional amount. The
Company pays the floating rate and receives the fixed rate under the
contracts, with the net amount paid or received being charged or credited to
net investment income. At March 31, 1997, the Company had outstanding
interest rate swap agreements with notional contract amounts totaling $300.0
million. The agreements expire at various dates through 1999. Under the
agreements the Company principally received fixed rates averaging 7.3% and
paid floating rates, primarily based on LIBOR, averaging 5.6% during the first
three months of 1997. The swaps, which are marked to market in accordance
with SFAS 115, had a market value of a positive $1.7 million as of March 31,
1997.
The Company has made commitments to limited partnerships and similar
equity or equity-like investments aggregating $50 million at March 31, 1997,
of which $4.1 million had been funded at that date. Income attributable to
such investments was not material in the first quarter of 1997. First quarter
1996 income from partnerships was $2.1 million, attributable to a single
partnership investment liquidated in third quarter 1996. Income from these
investments is expected to vary substantially from period to period.
For a discussion regarding the effects of changing interest rates on the
Company's investments, see the Company's 1996 Annual Report on Form 10-K,
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations-Effects of Changing Interest Rates on Investments".
SALES
Total premiums collected in the first quarter 1997 were $517.4 million,
up 92% from the level in the corresponding 1996 quarter and up 11% from the
fourth quarter 1996. Western utilizes four marketing distribution channels -
financial institutions, personal producing general agents ("PPGAs"), direct
marketing, and specialty. Additionally, Western markets a variable annuity
product through its financial institution, PPGA and direct marketing channels.
<PAGE>
The following table sets forth premium generated by distribution channel:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
PREMIUMS AND DEPOSITS COLLECTED:
Financial institutions
Proprietary $344.0 $ 49.1
Retail 88.7 152.9
------- -------
Total 432.7 202.0
Personal producing general agents 36.2 33.4
Specialty sales 46.3 33.1
Direct marketing 2.3 1.1
------- -------
Total direct premiums and deposits collected 517.5 269.6
Reinsurance ceded (0.1) (0.4)
------- -------
Net premiums and deposits collected $517.4 $269.2
======= =======
</TABLE>
FINANCIAL INSTITUTIONS. Sales through financial institutions accounted
for 84% of Western's overall sales in the first quarter 1997. First quarter
sales in this area were up 114% to $432.7 million, compared to $202.0 million
for the first quarter 1996.
Western's first quarter 1997 sales in the financial institution market
reflected high levels of production from relatively few large bank
distribution relationships. The largest five relationships accounted for 84%
of sales in the first quarter 1997, compared to 75% of sales for first quarter
1996. This increased concentration may make Western's sales levels more
vulnerable to the loss of any single major relationship. Each of the largest
five relationships accounted for the following percentage of sales in the
first quarter 1997: First Union 57%, Home Savings of America 12%, Fleet 8%,
First of America 4%, and U.S. Bancorporation 3%.
Western has recently been selected by Chase Bank to be a preferred
provider of fixed annuities. Because Western is not licensed to issue
annuities in New York, a significant portion of the production anticipated
from this relationship may be written through an American General subsidiary
which is licensed in that state. With respect to that production, Western
will be compensated for marketing and administrative services. Because
definitive agreements for this relationship have not yet been entered into,
the Company cannot predict when production under the arrangement will begin,
or what volume of production can be anticipated.
Of the $432.7 million in total financial institution sales for the first
quarter 1997, 80% were proprietary sales and 20% were retail sales.
Proprietary Sales. In 1995, Western initiated its first proprietary
------------------
fixed annuity distribution arrangement in the financial institution market.
In these proprietary arrangements, Western and the distributing financial
institution jointly develop a product to be offered solely through that
institution, and jointly establish product specifications and target spreads.
This process requires a mutual agreement regarding policy benefits, sales
compensation and profitability. In most cases, the distributing financial
institution, subject to investment guidelines established and monitored by
Western, manages Western's general account assets resulting from annuity sales
of its proprietary product and receives an investment management fee. Western
is solely responsible for policy administration, service and insurance
regulatory compliance, and retains the right to establish interest crediting
rates. Western believes that it was the first insurance company to develop a
proprietary fixed annuity program that provides for the selling financial
institution to also manage the resulting assets, and expects this program to
provide it with a competitive advantage in the financial institution
marketplace.
At March 31, 1997, Western had established, or had agreements to
establish, proprietary fixed annuity programs at nine financial institutions,
the largest of which was First Union. Proprietary annuity sales for the first
quarter 1997 were $344.0 million, compared to $49.1 million for the first
quarter of 1996. The increase reflected the full implementation of
proprietary arrangements entered into in 1995 and 1996, strong sales for the
quarter generally, and the conversion of certain accounts, notably First
Union, from retail to proprietary status during 1996.
<PAGE>
Retail Sales. First quarter 1997 retail sales, which include all non-
-------------
proprietary sales through financial institutions, were $88.7 million, down
42% from retail sales of $152.9 million for the first quarter 1996. The
decrease reflects Western's increased focus on its proprietary marketing
efforts, as well as the conversion of certain accounts from retail to
proprietary status during 1996 as discussed above.
PERSONAL PRODUCING GENERAL AGENTS. First quarter sales through PPGAs
increased 8% to $36.2 million from $33.4 million in the first quarter 1996.
The first quarter increase in this channel was primarily the result of
improved sales in the Company's wholesale PPGA marketing activities,
reflecting increased marketing emphasis on that market niche.
DIRECT MARKETING. Western's conservation unit, which is part of its
direct sales operations, effected $16.0 million of internal exchanges in the
first quarter 1997, compared to $41.2 million in the first quarter 1996. The
decrease reflects a reduction in the amount of business exiting surrender
charge protection, which is a principal focus of this unit. Sales of Western
products through the Company's direct marketing subsidiary, Independent
Advantage Financial and Insurance Services, Inc. ("IAF"), were $2.3 million
for the first quarter 1997, compared to first quarter 1996 sales of $1.1
million. IAF also sold $6.7 million of annuity and life products of
nonaffiliated life insurance companies in the first quarter 1997, compared to
$7.7 million in the first quarter 1996.
SPECIALTY. First quarter specialty sales, which include SPIAs,
supplemental contracts, and life insurance, increased 40% to $46.3 million,
compared to $33.1 million for the first quarter 1996. This increase was due
to additional structured settlement sales under a modified coinsurance
agreement with AGLIC. The agreement provides for the parties to jointly
market SPIA policies in the structured settlement market and for such policies
to be administered by Western. Under the agreement, AGLIC issues the
policies, and a portion of each risk, normally 50%, is reinsured to Western
(which portion is reported by Western as specialty sales). Sales pursuant to
the agreement commenced in the fourth quarter 1995.
VARIABLE ANNUITIES. First quarter 1997 premiums collected from sales of
Western's variable annuity product were $2.3 million, compared to $1.2
million for the first quarter of 1996, reflecting an increase in the marketing
relationships offering this product line.
PREMIUM AND DEPOSIT DATA
Western excludes internal exchanges from its deposit and withdrawal data.
Western had $23.2 million of internal exchanges in the first quarter 1997 and
$48.4 million of internal exchanges in the first quarter 1996.
The following table indicates sales by product line for the periods
indicated (in millions):
PREMIUM AND DEPOSIT DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------
1997 1996
---- ----
(IN MILLIONS)
<S> <C> <C>
First-year Premiums and Deposits:
Single premium deferred
annuities (1) $453.9 $218.4
Flexible premium deferred
annuities 1.8 3.4
Single premium immediate
annuities 45.3 30.9
Variable annuities 2.3 1.2
------- -------
Total first-year 503.3 253.9
------- -------
Renewal Premiums and Deposits:
Flexible premium deferred
annuities 13.3 14.7
Life products 0.9 1.0
------- -------
Total renewal 14.2 15.7
------- -------
Total premiums and
deposits collected 517.5 269.6
Reinsurance ceded (0.1) (0.4)
------- -------
Net Premiums and
Deposits Collected $517.4 $269.2
======= =======
<FN>
_____________
(1) Includes certain deferred annuity products that allow for additional
deposits, but generally have been utilized by policyholders
as SPDAs.
</TABLE>
<PAGE>
The table below sets forth the change in contract values of annuities in
force, excluding annuities and supplemental contracts with life contingencies,
for the periods indicated (in millions):
<TABLE>
<CAPTION>
IMMEDIATE
ANNUITIES
DEFERRED WITHOUT LIFE
ANNUITIES CONTINGENCIES TOTAL
----------- --------------- ---------
<S> <C> <C> <C>
December 31, 1995 $ 6,121.0 $ 414.5 $6,535.5
Deposits 236.7 15.9 252.6
Withdrawals (268.3) (24.5) (292.8)
Credited interest 84.2 8.5 92.7
----------- --------------- ---------
March 31, 1996 $ 6,173.6 $ 414.4 $6,588.0
=========== =============== =========
December 31, 1996 $ 6,839.4 $ 418.7 $7,258.1
Deposits 468.4 11.7 480.1
Withdrawals (246.1) (21.1) (267.2)
Credited interest 95.6 8.4 104.0
----------- --------------- ---------
March 31, 1997 $ 7,157.3 $ 417.7 $7,575.0
=========== =============== =========
</TABLE>
As a percentage of average deferred annuity liabilities, the year-to-date
average annualized distribution rate for the first three months of 1997 was
13.3%, compared to 16.3% for the first three months of 1996. The withdrawals
for the 1997 period did not differ significantly from anticipated levels.
Because withdrawals tend to be sensitive to changes in market interest rates,
they may increase as a result of increases in market interest rates.
REINSURANCE
In conformity with industry practice, Western reinsures a portion of the
business it sells. Under such reinsurance arrangements, the original insurer
remains liable under the reinsured policies in the event the reinsurer is
unable to fulfill its obligations. Premiums ceded were not material in the
quarters ended March 31, 1997, and 1996. See also "Sales-Specialty", above.
Additionally, Western is a party to a stand-by coinsurance agreement with an
unaffiliated insurer under which the insurer has agreed to provide coinsurance
for selected Western policies upon the occurrence of certain contingencies.
FINANCIAL CONDITION
Liquidity for Insurance Operations
Western's business generally provides adequate cash flow from premium
collections and investment income to meet its obligations. The liabilities
related to insurance policies are primarily long term and generally are paid
from operating cash flows. Most assets are invested in bonds and other
securities, most of which are readily marketable. Although there is no
present need or intent to dispose of such investments to meet liquidity needs,
Western could liquidate portions of these investments if the need arose. To
increase its return on investments and improve liquidity, Western may from
time to time enter into reverse repurchase agreements, dollar roll
transactions (which are specialized forms of collateralized lending involving
mortgage-backed securities), and other short-term borrowings.
Of Western's total insurance liabilities at March 31, 1997, 19% could not
be surrendered, 50% could be surrendered only by incurring a surrender charge,
and 31% could be surrendered without penalty.
The extent of increases and decreases in the percentage of
interest-sensitive reserves subject to withdrawal without penalty will depend
on the level of new sales, as well as on the level of policyholder
withdrawals. In general, policy liabilities not subject to a surrender charge
are more likely to be withdrawn by policyholders than are those that remain
subject to such charges. Of those liabilities subject to surrender charge,
the average remaining surrender charge period was approximately 3.4 years and
the surrender charge averaged approximately 4.8% of accumulated policy value
at March 31, 1997.
<PAGE>
Payment characteristics of insurance liabilities at March 31, 1997, were
as follows (in millions):
<TABLE>
<CAPTION>
<S> <C>
Payments under contracts containing fixed payment dates:
Due in one year or less $ 182.9
Due after one year through five years 663.9
Due after five years through ten years 765.7
Due after ten years 3,844.3
--------
Total gross payments with payment dates
fixed by contract 5,456.8
Less amounts representing future interest
on such contracts 3,700.2
--------
Insurance liabilities with payment dates
fixed by contract 1,756.6
Insurance liabilities with payment dates
not fixed by contract 7,304.0
--------
Total insurance liabilities $9,060.6
========
</TABLE>
Of the above insurance liabilities under contracts containing fixed
payment dates, approximately 30% related to payments that will be made on such
date only if the contract holder is living. Expected mortality is considered
in determining the amount of this liability. The remainder of the insurance
liabilities with fixed payment dates were payable regardless of the contract
holder's survival.
Approximately 19% of insurance liabilities were subject to interest rates
ranging from 4% to 11%, fixed for the life of the contract. The remainder of
the liabilities, with limited exceptions, were subject to interest rates that
may be reset, subject to minimum guaranteed rates, at least annually.
Western believes that it has adequate short-term investments and readily
marketable securities to cover the payments under contracts containing fixed
payment dates plus any likely cash needs for surrenders. At March 31, 1997,
Western had fixed maturities and short-term investments, net of investment
borrowings, with a total market value of approximately $9.0 billion, or 91% of
invested assets. Western believes that most of these investments could be
readily sold or used to facilitate borrowings under dollar roll and reverse
repurchase agreements.
The Texas Department of Insurance, the NAIC and several other states
evaluate the sufficiency of an insurer's capital by computing a risk-adjusted
capital level which takes into consideration risks associated with the assets
and insurance products of the insurer. Using the NAIC's methodology,
Western's total adjusted capital at March 31, 1997, was more than two and a
half times the company action risk-based capital level.
Holding Company Liquidity and Capital
At March 31, 1997, shareholders' equity was $874.2 million, compared to
$914.8 million as of December 31, 1996. Book value at March 31, 1997 was
$12.54 per share, compared with $13.14 at December 31, 1996. The decrease is
due to the net adjustment made in the market value of the Company's investment
portfolio as required under SFAS No. 115. See Note 2 to the Consolidated
Financial Statements of the Company's 1996 Annual Report on Form 10-K.
Excluding the effects of SFAS No. 115, shareholders' equity would have been
$903.0 million or $12.96 per share at March 31, 1997, compared with $875.7
million or $12.58 per share at December 31, 1996. In general, SFAS No. 115
requires that actively managed portfolios of marketable securities be marked
to current market value, with the resulting unrealized gain or loss reported
as an adjustment to shareholders' equity (see Note 2). Because no
corresponding adjustment is made to liabilities, management of the Company is
of the view that SFAS No. 115 distorts the true economic effects of changes in
interest rates on the financial condition of financial services companies, and
that resulting equity and book value determinations are not meaningful
indicators of financial strength. Because SFAS No. 115 causes the Company's
reported book value to vary substantially with changes in market interest
rates, the Company expects its shareholders' equity to vary widely over time,
increasing during periods of declining interest rates and decreasing during
periods of rising interest rates.
Because Western is governed for insurance regulatory purposes by
statutory accounting principles that do not give effect to the adjustments
required by SFAS No. 115, the application of SFAS No. 115 does not affect
Western's statutory operations or regulatory capital position.
<PAGE>
As a result of the Company's holding company structure, the parent
company's ability to make required debt service payments and meet other cash
needs depends upon dividends and fees received from its wholly-owned
subsidiaries. Dividend payments by insurance companies, such as
Western, are subject to statutory limitations and in certain cases to the
approval of the insurance regulatory authorities. The maximum dividend
payment which Western may make without prior approval in 1997 is $57.0
million, which management believes is more than sufficient to meet the
Company's anticipated debt service obligations, dividends on common stock, and
operating expenses during the year.
On June 8, 1995, the Company entered into a five-year credit agreement
(the "Credit Agreement") with First Union National Bank of North Carolina and
certain other financial institutions (collectively referred to as the
"Lenders"). Under the Credit Agreement, the Lenders had agreed to extend
credit to the Company on a revolving basis, upon the Company's request, in an
aggregate principal amount of $100.0 million. On February 20, 1997, the
Company and the Lenders replaced the $100.0 million agreement with a new
five-year agreement that (i) provides for an aggregate principal amount of
$150.0 million and (ii) allows the Company to request bid loans, in addition
to committed loans based on either LIBOR plus a margin or First Union's prime
rate. The Credit Agreement contains certain provisions that require the
Company and its material subsidiaries to maintain specified levels of
financial solvency during the term of the agreement. At March 31, 1997, the
Company had $66.0 million outstanding under the Credit Agreement.
On March 3, 1997, the Company paid a common stock dividend of $.04 per
share on outstanding Common Stock and Series A Preferred Stock. The total
amount paid was $2.7 million.
OTHER INFORMATION
With respect to statements herein that may be construed as predictive of
future performance, readers should be aware that performance may differ from
that currently anticipated. Such differences may be either positive or
negative and may be significant. Differences may arise from, among other
things, changes in the economic, legal, and competitive environment in which
the Company operates. Reference is made to the Company's 1996 Annual Report
on Form 10-K for additional information on factors affecting the Company's
business.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
11.1 Computation of Earnings Per Share
27.1 Financial Data Schedule
b) Reports on Form 8-K
None.
<PAGE>
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.
WESTERN NATIONAL CORPORATION
By:/s/ Arthur R. McGimsey
-------------------------
Arthur R. McGimsey
Executive Vice President
and Chief Financial Officer
Dated: May 14, 1997
<PAGE>
WESTERN NATIONAL CORPORATION AND SUBSIDIARIES EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
(IN MILLIONS - EXCEPT PER SHARE DATA))
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997
-------------------
<S> <C>
PRIMARY:
Weighted average shares outstanding 62.5
Common equivalent shares related to:
Series A Preferred Stock 7.2
Stock options at average market price
(as determined by application of the
treasury stock method) 0.7
-------------------
Weighted average shares and common
stock equivalents 70.4
===================
Net income $ 28.6
===================
Net income per common share $ 0.41
===================
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997
-------------------
<S> <C>
FULLY DILUTED:
Weighted average shares outstanding 62.5
Common equivalent shares related to:
Series A Preferred Stock 7.2
Stock options at end of period price
(as determined by application of the
treasury stock method) 0.8
-------------------
Weighted average shares and common stock
equivalents 70.5
===================
Net income $ 28.6
===================
Net income per common share $ 0.41
===================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY'S FORM 10-Q FOR THE
YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 9,095
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 117
<REAL-ESTATE> 0
<TOTAL-INVEST> 9,808
<CASH> 194
<RECOVER-REINSURE> 133
<DEFERRED-ACQUISITION> 450
<TOTAL-ASSETS> 10,672
<POLICY-LOSSES> 9,059
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 2
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 148
0
0
<COMMON> 0
<OTHER-SE> 874
<TOTAL-LIABILITY-AND-EQUITY> 10,672
39
<INVESTMENT-INCOME> 191
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 163
<UNDERWRITING-AMORTIZATION> 11
<UNDERWRITING-OTHER> 6
<INCOME-PRETAX> 45
<INCOME-TAX> 16
<INCOME-CONTINUING> 29
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
