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 June 30, 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 June 30, 1997: 69,769,338
<PAGE>
WESTERN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- -----------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
------
INVESTMENTS:
Fixed maturities - actively managed at fair value
(amortized cost: 1997-$9,442.1; 1996-$8,738.4) . . . . . . . $ 9,534.0 $ 8,842.5
Credit-tenant loans. . . . . . . . . . . . . . . . . . . . . . 216.6 208.5
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . 105.5 122.7
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . 64.4 66.8
Short-term investments . . . . . . . . . . . . . . . . . . . . 222.0 109.6
Due from brokers . . . . . . . . . . . . . . . . . . . . . . . 109.8 0.4
Other invested assets. . . . . . . . . . . . . . . . . . . . . 34.8 25.6
--------- ---------
Total investments. . . . . . . . . . . . . . . . . . . . . . 10,287.1 9,376.1
Accrued investment income. . . . . . . . . . . . . . . . . . . 171.2 156.6
Funds held by reinsured and reinsurance receivables. . . . . . 160.8 98.0
Cost of policies purchased . . . . . . . . . . . . . . . . . . 52.1 50.4
Cost of policies produced. . . . . . . . . . . . . . . . . . . 446.7 380.2
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . 11.1 13.4
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 31.8 20.8
--------- ---------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . $11,160.8 $10,095.5
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Insurance liabilities. . . . . . . . . . . . . . . . . . . . . $ 9,307.0 $ 8,679.9
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . 148.1 148.0
Investment borrowings and due to brokers . . . . . . . . . . . 518.1 156.3
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . 105.8 98.4
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . 111.3 98.1
--------- ---------
Total Liabilities. . . . . . . . . . . . . . . . . . . . . 10,190.3 9,180.7
SHAREHOLDERS' EQUITY:
Preferred stock (par value $.001 per share; 50,000,000 shares
authorized; issued and outstanding: 1997-0; 1996-7,254,464). - -
Common stock and additional paid-in capital (par value
$.001 per share, 500,000,000 shares authorized; issued and
outstanding: 1997-69,769,338; 1996-62,441,423) . . . . . . . 474.6 473.1
Net unrealized appreciation of securities,
net of applicable deferred income taxes:
1997-$21.6; 1996-$21.1 . . . . . . . . . . . . . . . . . . . 40.0 39.1
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . 455.9 402.6
--------- ---------
Total Shareholders' Equity . . . . . . . . . . . . . . . . 970.5 914.8
--------- ---------
Total Liabilities and Shareholders' Equity . . . . . . . . $11,160.8 $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>
QUARTER ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
-------------- --------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
REVENUES:
Insurance policy and fee income . . . $ 31.9 $ 22.9 $ 71.2 $ 38.0
Net investment income 200.8 172.1 391.5 343.8
Net realized gains (losses) . . . . . 3.1 (5.3) 3.7 (4.9)
------ ------- ------ -------
Total revenues. . . . . . . . . . 235.8 189.7 466.4 376.9
BENEFITS AND EXPENSES:
Insurance policy benefits . . . . . . 25.9 27.8 53.9 55.9
Change in future policy benefits and
other liabilities . . . . . . . . . 28.1 17.0 63.2 26.6
Interest expense on annuities and
financial products. . . . . . . . . 105.7 93.0 205.8 184.5
Interest expense on notes payable . . 2.6 2.6 5.3 5.3
Interest expense on investment and
short-term borrowings . . . . . . 5.6 2.0 8.8 4.9
Amortization related to operations. . 12.0 10.2 22.9 20.0
Amortization and change in future
policy benefits related to net
realized gains (losses) . . . . . . 1.1 (0.9) 1.7 (0.6)
Other operating costs and expenses. . 5.8 5.2 11.3 10.6
------ ------- ------ -------
Total benefits and expenses . . . 186.8 156.9 372.9 307.2
Income before income taxes. . . . . . . 49.0 32.8 93.5 69.7
Income tax expense. . . . . . . . . . . 18.8 11.4 34.7 24.3
------ ------- ------ -------
Net income. . . . . . . . . . . . $ 30.2 $ 21.4 $ 58.8 $ 45.4
====== ======= ====== =======
EARNINGS PER COMMON SHARE
AND COMMON EQUIVALENT SHARE:
Weighted average shares . . . . . . . 70.6 62.9 70.5 62.8
Net income $ 0.43 $ 0.34 $ 0.83 $ 0.72
====== ======= ====== =======
</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>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
------ ------
<S> <C> <C>
Preferred stock:
Balance, beginning of period . . . . . . . . . . . . . . . $ - $ -
Conversion of 7,254,464 Series A shares to common stock
($.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 shares of common stock related to restricted
stock awards and options and 401(k) matching
(1997-73,451 shares; 1996-72,073 shares) 1.5 1.1
------- --------
Issuance of 7,254,464 shares of common stock pursuant
to conversion of Series A Preferred Stock. . . . . . . . - -
Balance, end of period $474.6 $ 347.9
======= ========
Net unrealized appreciation (depreciation) of securities,
net of applicable deferred income taxes (benefits):
Balance, beginning of period $ 39.1 $ 125.2
Change in unrealized appreciation (depreciation) 0.9 (141.6)
------- --------
Balance, end of period $ 40.0 $ (16.4)
======= ========
Retained earnings:
Balance, beginning of period $402.6 $ 313.6
Net income 58.8 45.4
Dividends on common stock (5.3) (4.9)
Dividends on preferred stock (0.2) -
------- --------
Balance, end of period $455.9 $ 354.1
======= ========
Total shareholders' equity $970.5 $ 685.6
======= ========
</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>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . $ 58.8 $ 45.4
Adjustments to reconcile net income to net cash
provided by operations:
Amortization and depreciation 25.5 21.9
Realized (gains) losses on investments, net . . . (5.2) 1.3
Income taxes. . . . . . . . . . . . . . . . . . . (1.9) 8.8
Increase in insurance liabilities . . . . . . . . (6.3) 35.9
Interest credited to insurance liabilities. . . . 211.5 188.3
Fees charged to insurance liabilities . . . . . . (2.9) (2.0)
Amortization (accrual) of investment income . . . (16.5) (23.5)
Deferral of cost of policies produced . . . . . . (77.9) (56.8)
Other . . . . . . . . . . . . . . . . . . . . . . (1.6) 10.4
---------- ----------
Net cash provided by operating activities . . . . . 183.5 229.7
---------- ----------
Cash flows from investing activities:
Sales of investments
Maturities and redemptions of investments . . . . . 216.7 259.2
Purchases of investments. . . . . . . . . . . . . . (2,681.1) (1,901.2)
---------- ----------
Net cash used in investing activities . . . . . . . (687.9) (481.5)
---------- ----------
Cash flows from financing activities:
Deposit to insurance liabilities. . . . . . . . . . 1,070.4 743.4
Withdrawals from insurance liabilities. . . . . . . (708.4) (729.3)
Dividends on common stock . . . . . . . . . . . . . (5.3) (4.9)
Dividends on preferred stock. . . . . . . . . . . . (0.2) -
Investment borrowings, net. . . . . . . . . . . . . 260.3 (147.9)
---------- ----------
Net cash provided by (used in) financing activities 616.8 (138.7)
---------- ----------
Net increase (decrease) in short-term investments . 112.4 (390.5)
Short-term investments - beginning of period. . . . 109.6 417.6
---------- ----------
Short-term investments - end of period. . . . . . . $ 222.0 $ 27.1
========== ==========
Supplemental cash flow disclosure:
Income taxes (refunded) paid, net . . . . . . . . . $ 35.8 $ (31.1)
========== ==========
Interest paid on notes payable and investment
borrowings. . . . . . . . . . . . . . . . . . . . $ 13.6 $ 9.1
========== ==========
</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 June 30, 1997, and
for the three-month and six-month periods ended June 30, 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 June 30, 1997 and December 31, 1996.
ADJUSTMENTS TO ACTIVELY MANAGED FIXED MATURITIES
(IN MILLIONS)
<TABLE>
<CAPTION>
JUNE 30, 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 $9,442.1 $ 91.9 $9,534.0 $8,738.4 $104.1 $8,842.5
Other invested assets . . . . . . 32.7 2.1 34.8 24.7 0.9 25.6
--------- ------- --------- --------- ------- ---------
9,474.8 94.0 9,568.8 8,763.1 105.0 8,868.1
OTHER BALANCE SHEET ITEMS:
Cost of policies purchased. . . . 68.8 (16.7) 52.1 71.5 (21.1) 50.4
Cost of policies produced . . . . 464.4 (17.7) 446.7 408.3 (28.1) 380.2
Other liabilities . . . . . . . . (113.3) 2.0 (111.3) (102.5) 4.4 (98.1)
Deferred income tax liability . . (84.2) (21.6) (105.8) (77.3) (21.1) (98.4)
------- -------
Unrealized appreciation
of investments, net . . . . . . $ 40.0 $ 39.1
======= =======
</TABLE>
3. CHANGES IN COMMON STOCK AND PREFERRED STOCK
On June 1, 1997, the Company paid a common stock dividend of $.04 per
share. The total amount paid in common stock dividends for the second quarter
was $2.8 million. For the first six months of 1997, the Company paid $5.3
million of dividends on common stock and $0.2 million of dividends on the
Series A Preferred Stock. At the Company's 1997 Annual Meeting, held on May
14, 1997, the Company's common stockholders approved the issuance of 7,254,464
shares of common stock, and all outstanding shares of Series A Preferred Stock
automatically converted to common stock on a share-for-share basis.
On July 22, 1997, the board of directors declared a common stock dividend
of $.04 per share payable on September 2, 1997, to shareholders of record at
the close of business on August 12, 1997. The total dividend payment will be
approximately $2.8 million.
During the first half of this year, 920 common shares were issued
pursuant to the exercise of stock options, 47,000 shares of restricted stock
were awarded to certain executive officers, and 25,531 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 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>
SIX MONTHS ENDED JUNE 30,
------------------------------
1997 1996
------ ------
<S> <C> <C>
Basic. . $0.91 $0.73
Dilutive $0.83 $0.72
</TABLE>
The primary reason for the differences between basic and dilutive
earnings per share for the six months ended June 30, 1997, is the exclusion of
Series A Preferred Stock during the period the stock was outstanding.
<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
$10.2 billion of statutory assets at June 30, 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 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, substantially mitigates 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 2.19% at
June 30, 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. The 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 2.24% since first quarter 1994, and
was 2.24% for second 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, liability mix, crediting rates, and investment yields.
Operating income (which excludes realized investment gains (losses) net
of applicable adjustments to amortization, expenses and taxes) for the quarter
was $30.1 million, or $0.43 per share, up from $24.3 million, or $0.39 per
share, in the second quarter 1996. For the six months ended June 30, 1997,
operating income was $58.7 million, or $0.83 per share, compared to $48.2
million, or $0.77 per share, in the first half of 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 income is the best indicator
of earnings capacity for financial services organizations such as Western.
The following table sets forth operating and net income for the periods
indicated (in millions):
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
-------------- --------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
OPERATING INCOME:
Operating revenues. . . . . . . . . $232.7 $195.0 $462.7 $381.8
Benefits and expenses . . . . . . . 185.7 157.8 371.2 307.8
------ ------- ------ -------
Pre-tax operating income. . . . . . 47.0 37.2 91.5 74.0
Income tax expense from operations. 16.9 12.9 32.8 25.8
------ ------- ------ -------
Net operating income. . . . . . . . 30.1 24.3 58.7 48.2
Realized gains net of amortization,
expenses and taxes. . . . . . . . 0.1 (2.9) 0.1 (2.8)
------ ------- ------ -------
Net income. . . . . . . . . . . . . $ 30.2 $ 21.4 $ 58.8 $ 45.4
====== ======= ====== =======
</TABLE>
Net investment income. Net investment income for the second quarter 1997
increased 17% to $200.8 million from $172.1 million in the second quarter
1996, and year-to-date increased 14% to $391.5 million from $343.8 million for
the year-earlier period. This category of earnings, net of interest expense
on short-term investment borrowings, was $195.2 million for the second quarter
1997 compared to $170.1 million for the second quarter 1996. Year-to-date net
investment income, excluding interest expense on short-term borrowings, was
$382.7 million, compared to $338.9 million for the year-earlier period. The
year-to-date increase in net investment income is primarily attributable to a
$1.2 billion increase in average net invested assets to $9.7 billion from $8.5
billion and a slight increase in average annualized investment yield (based on
amortized cost) to 8.25% from 8.21%. This increase was partially offset by a
$1.2 million decrease in prepayment revenue to $2.5 million for the first half
of 1997 from $3.7 million in the corresponding 1996 period. Prepayment
revenue for second quarter 1997 only decreased slightly to $1.1 million from
$1.4 million in the corresponding 1996 quarter. The year-to-date increase in
net investment income was also partially offset by a decrease in income
attributable to partnership investments. Income from partnership investments
was not material for the first half of 1997 compared to $2.8 million for the
corresponding 1996 period, which was attributable to a single partnership
investment liquidated in third quarter 1996.
Net realized investment gains (losses). Net realized investment gains
for second quarter and year-to-date were $3.1 million and $3.7 million,
respectively, compared to losses of $5.3 million and $4.9 million,
respectively, in the corresponding 1996 periods. Net of related adjustments
to amortization, reserves, related expenses, and taxes, net realized
investment gains for both the second quarter 1997 and year-to-date were $0.1
million, compared to losses of $2.9 million and $2.8 million in the
corresponding periods. Included in the second quarter and year-to-date net
realized investment gains/losses is a $1.2 million charge related to capital
gain and loss items arising from the Internal Revenue Service ("IRS") audit
of the Company's 1993 and short-period 1994 returns. 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 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
$1.1 million in the second quarter and $1.7 million year-to-date, compared to
decreases of $0.9 million and $0.6 million, respectively, in the second
quarter and first half of 1996.
Insurance policy and fee income. Insurance policy and fee income was
$31.9 million and $22.9 million, respectively, in the second quarters of 1997
and 1996. The year-to-date level for 1997 was $71.2 million, which was a
$33.2 million increase from the year-earlier period. 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 increases in
insurance policy and fee income for the second quarter and year-to-date are
primarily attributable to $26.6 million and $60.8 million, respectively, of
premium income resulting from the modified coinsurance agreement with American
General Life Insurance Company ("AGLIC "), compared to $18.4 million and $29.3
million, respectively, from this source in the corresponding 1996 periods.
Insurance policy benefits and other liabilities. Total second quarter
1997 insurance policy benefits (including changes in future policy benefits),
which relate solely to policies with mortality and morbidity features,
increased $9.2 million to $54.0 million from $44.8 million in the year-earlier
quarter. Insurance policy benefits for the first six months of 1997 and 1996
were $117.1 million and $82.5 million, respectively. The increases in this
expense item for the second quarter and year-to-date were primarily
attributable to the establishment of $26.6 million and $60.8 million,
respectively, of reserves resulting from the modified coinsurance agreement
with AGLIC, compared to $18.4 million and $29.3 million, respectively, of such
reserves for the corresponding 1996 periods. Second quarter 1997 and 1996
reflected favorable mortality experience of $0.7 million and $1.7 million,
respectively, on life contingent SPIA contracts. Mortality experience was
essentially equal to expected for the first half of 1997, compared to a
favorable mortality experience of $3.4 million for the first half of 1996.
Mortality experience varies from period to period as differences between
actual and expected mortality occur. Such differences may be favorable or
unfavorable.
Interest expense on annuities and financial products. Interest expense
on annuities and financial products increased by $12.7 million in the second
quarter 1997 and by $21.3 million year-to-date compared to the corresponding
year-earlier periods. This increase is primarily attributable to an increase
in reserves to $9.3 billion at June 30, 1997, from $8.2 billion at June 30,
1996. The average rate credited on all insurance liabilities declined to
approximately 6.0% at June 30, 1997, from 6.2% a year earlier. 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 reduction in average interest rates on the Company's deferred annuity
business. 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 crediting rate will generally
tend to decrease as well.
Amortization related to operations. Amortization related to operations,
which excludes the effects of realized gains and losses, of the cost of
policies produced and the cost of policies purchased increased by $1.8 million
in the second quarter 1997 and by $2.9 million year-to-date compared to the
corresponding year-earlier periods. The quarter and year-to-date increases
are 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 half of 1997 or 1996.
Other operating costs and expenses. Other operating costs and expenses
were $5.8 million for the second quarter 1997, which was a $0.6 million
increase from the year-earlier quarter. Year-to-date other operating costs
and expenses were $11.3 million, compared to $10.6 million in the
year-earlier period. The increases for second quarter and year-to-date were
primarily the result of higher levels of annuity sales and in-force business.
Interest expense on notes payable and investment borrowings. Interest
expense of $8.2 million for the second quarter 1997 was up from $4.6 million
in the year-earlier quarter. Second quarter 1997 interest expense consists of
$5.6 million in interest expense on investment and short-term borrowings and
$2.6 million in interest expense relating to the Senior Notes. Interest
expense for the first six months of 1997 was $14.1 million, compared to $10.2
million in the corresponding period. Year-to-date interest expense consists
of $8.8 million in interest expense on investment and short-term borrowings
and $5.3 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.
Investment borrowings were somewhat higher in the first half of 1997 from the
corresponding 1996 period, reflecting a favorable dollar roll market.
Income taxes. Second quarter 1997 income taxes increased to $18.8
million from $11.4 million in the year-earlier quarter, and year-to-date
income tax increased to $34.7 million from $24.3 million for the year-earlier
period. These increases resulted primarily from higher levels of net income
and a second quarter charge of $1.2 million relating to the settlement of
issues arising from the IRS audit of the Company's 1993 and short-period 1994
returns.
The components of deferred income tax included in the consolidated
balance sheet are as follows (in millions):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------- ------------
<S> <C> <C>
Deferred income tax assets:
Company net operating loss carryforward. . $ 11.1 $13.4
------ -----
Deferred income tax assets . . . . . . . . . $ 11.1 $13.4
====== =====
Deferred income tax liabilities:
Western's operations . . . . . . . . . . . $ 84.2 $77.3
Unrealized appreciation on invested assets 21.6 21.1
------ -----
Deferred income tax liabilities. . . . . . . $105.8 $98.4
====== =====
</TABLE>
The deferred income tax asset of $11.1 million at June 30, 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.
The deferred income tax liability of $105.8 million at June 30, 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 of
actively-managed fixed maturities, which are carried at market value in
accordance with the requirements of SFAS 115, contributed to the tax liability
at year-end 1996 and at June 30, 1997.
Net income. Second quarter 1997 net income was $30.2 million, up 41%
from $21.4 million for the prior year's second quarter. Year-to-date net
income was $58.8 million, up 30% from $45.4 million for the 1996 corresponding
period. The second quarter and year-to-date increases were a result of
increased operating earnings. Net income per share of $0.43 for the second
quarter was up 26% from $0.34 in the year-earlier quarter. Net income per
share of $0.83 for year-to-date was up 15% from $0.72 in the corresponding
1996 period. 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 62.8 million at June 30, 1996, to 70.5 million
at June 30, 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, which were converted to common
shares on May 14, 1997.
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 June 30, 1997, the Company had invested assets
with a total carrying value of approximately $10.3 billion. See Note 2 to the
unaudited Consolidated Financial Statements.
The following table shows Western's investment performance for the six
months ended June 30, 1997, and June 30, 1996 (in millions and before giving
effect to SFAS No. 115 adjustment).
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Net investment income (1) . . . . . . . . . . . . . $ 382.7 $ 338.9
Average net invested assets, at amortized cost (2). 9,571.3 8,464.8
Annualized yield on average net invested assets (3) 8.25% 8.21%
<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>
Market interest rates were up slightly at June 30, 1997 from the level
prevailing at the end of 1996. However, 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.
The following table sets forth the composition of the Company's fixed
maturity portfolio as of the dates indicated:
<TABLE>
<CAPTION>
FIXED MATURITIES BY TYPE JUNE 30, 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. . . $ 12.7 $ 21.4
Obligations of states and political subdivisions 182.5 222.0
Public utility securities. . . . . . . . . . . . 1,251.4 1,242.2
Other corporate securities . . . . . . . . . . . 4,944.6 4,687.4
Asset-backed securities. . . . . . . . . . . . . 409.9 351.9
Mortgage-backed securities . . . . . . . . . . . 2,732.9 2,317.6
-------- --------
Total fixed maturities . . . . . . . . . $9,534.0 $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 June 30, 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 GAAP GAAP GAAP CARRYING VALUE
--------------------------------------
QUALITY RATING AT CARRYING AMORTIZED AS % OF FIXED AS % OF AS % OF
JUNE 30, 1997 VALUE COST MATURITIES INV.ASSETS AMORT.COST
-------- --------- ------------- ---------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
AAA. . . . . . . . . . . . . . $2,928.7 $2,915.1 30.7% 28.5% 100.5%
AA . . . . . . . . . . . . . . 800.3 802.6 8.4 7.8 99.7
A. . . . . . . . . . . . . . . 2,462.4 2,438.3 25.8 23.9 101.0
BBB+ . . . . . . . . . . . . . 889.9 872.9 9.3 8.7 101.9
BBB. . . . . . . . . . . . . . 1,046.7 1,035.4 11.0 10.2 101.1
BBB- . . . . . . . . . . . . . 772.8 759.9 8.1 7.4 101.7
-------- -------- ------ ----- ------
Total investment grade . . . 8,900.8 8,824.2 93.3 86.5 100.9
BB+. . . . . . . . . . . . . . 163.4 158.4 1.7 1.6 103.1
BB . . . . . . . . . . . . . . 62.8 60.3 0.7 0.6 104.1
BB-. . . . . . . . . . . . . . 144.8 138.7 1.5 1.4 104.4
B+ and below . . . . . . . . . 262.2 260.5 2.8 2.6 100.7
-------- -------- ------ ----- ------
Total below investment grade 633.2 617.9 6.7 6.2 102.5
Total fixed maturities . . . $9,534.0 $9,442.1 100.0% 92.7% 101.0%
======== ======== ====== ===== ======
</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 6.2% of total invested assets and 6.7% of total fixed maturity
investments at June 30, 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 higher levels of indebtedness and are more sensitive to adverse
economic conditions, such as recession or increasing interest rates, than are
investment grade issuers. Western is sensitive to its risk exposure and
carefully monitors its below investment grade securities.
At June 30, 1997, the Company had fixed maturity investments of $0.6
million that were in substantive default (i.e., in default due to nonpayment
of interest or principal). There were no fixed maturity investments in
substantive default at June 30, 1996. The Company had no credit impairment
writedowns during the first six months of 1997 or 1996.
At June 30, 1997, the Company's actively managed fixed maturity portfolio
had net unrealized gains of $91.9 million compared with net unrealized gains
of $104.1 million as of December 31, 1996. The net gain at June 30, 1997
consisted of $186.1 million of unrealized gains and $94.2 million of
unrealized losses. 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.
Fixed maturity investments at June 30, 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"), mortgage-backed agency
pass-through securities, and commercial mortgage-backed securities.
At June 30, 1997, the Company held mortgage loans with a carrying value
of $105.5 million (or 1% of total invested assets) down from $122.7 million at
December 31, 1996. None of the Company's mortgage loans were 90 or more days
past due at June 30, 1997. Western recorded no writedowns for credit
impairment in its mortgage portfolio during the first six 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 June 30, 1997, the Company had outstanding interest
rate swap agreements with notional contract amounts totaling $260.0 million.
The agreements expire at various dates through 1999. Under the agreements
outstanding at June 30, 1997, the Company will receive fixed rates averaging
7.3% and will pay floating rates, primarily based on LIBOR, averaging 5.8%.
The swaps, which are marked to market in accordance with SFAS 115, had a
market value of a positive $2.0 million at June 30, 1997.
The Company has made commitments to partnerships aggregating $80.0
million at June 30, 1997, of which $8.8 million had been funded at that date.
Income from partnership investments was not material for the first six months
of 1997 compared to $2.8 million for the corresponding 1996 period, which was
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 second quarter 1997 were $579.5 million,
up 32% from the level in the corresponding 1996 quarter and up 12% from the
first quarter 1997. While sales levels are affected by market competition and
other factors, the second quarter of the year has historically been the best
sales quarter for the annuity industry generally. Year-to-date premiums
collected were $1.1 billion, up 55% from the corresponding period of 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.
The following table sets forth premium generated by distribution channel
(in millions):
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
-------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
PREMIUMS AND DEPOSITS COLLECTED:
Financial institutions
Proprietary . . . . . . . . . . . $375.0 $244.0 $ 719.0 $293.1
Retail. . . . . . . . . . . . . . 118.5 122.5 207.2 275.4
------- ------- --------- -------
Total . . . . . . . . . . . . . 493.5 366.5 926.2 568.5
Personal producing general agents . 44.7 37.0 80.9 70.4
Specialty sales . . . . . . . . . . 40.4 35.7 86.7 68.8
Direct marketing. . . . . . . . . . 1.3 1.2 3.6 2.3
------- ------- --------- -------
Total direct premiums and deposits
collected . . . . . . . . . . . . 579.9 440.4 1,097.4 710.0
Reinsurance ceded . . . . . . . . . (0.4) (0.3) (0.5) (0.7)
------- ------- --------- -------
Net premiums and deposits collected $579.5 $440.1 $1,096.9 $709.3
======= ======= ========= =======
</TABLE>
Western has recently expanded the number of jurisdictions in which it
does business by becoming licensed to market life insurance and annuities in
Maine and Puerto Rico. Western is now licensed to market life insurance and
annuities in 49 jurisdictions.
FINANCIAL INSTITUTIONS. Sales through financial institutions accounted
for 85% of Western's overall sales in the second quarter and 84% of overall
sales year-to date 1997. Second quarter sales in this area were up 35% to
$493.5 million, compared to $366.5 million for the second quarter 1996.
Financial institution sales for the first six months of 1997 were $926.2
million, compared to $568.5 million for the year-earlier period.
Western's second 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 80%
of financial institution sales in the second quarter 1997, compared to 70% for
second 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 second quarter 1997: First Union 46%, Home Savings 15%, First of
America 8%, Fleet 6%, and U.S. Bancorporation 5%.
Of the $493.5 million in total financial institution sales for the second
quarter 1997, 76% were proprietary sales and 24% were retail sales. The
$926.2 million of financial institution sales year-to-date consisted of 78%
proprietary sales and 22% retail sales.
Proprietary Sales. In 1995, Western initiated its first proprietary
------------------
fixed annuity distribution arrangement in the financial institution market.
Western's proprietary annuity programs have become the primary focus of its
marketing strategy. Under these programs, Western and a 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 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 to its customers and receives an investment management fee.
Western is solely responsible for policy administration and insurance
regulatory compliance, and retains the right to establish policy crediting
rates. Western believes that it is currently the only insurance company to
have implemented a proprietary fixed annuity program that also provides for
the selling financial institution to manage the resulting assets. Because
Western's proprietary program generally provides for the financial institution
to receive an investment management fee based on the resulting assets, the
financial institution has an economic interest in both the successful
distribution of Western's annuities and in the persistency of such business.
At June 30, 1997, Western had established proprietary fixed annuity
programs at ten financial institutions, the largest of which was First Union.
The Western/First Union proprietary fixed annuity program was launched in
March 1996. First Union proprietary annuity sales for the second quarter and
first six months of 1997 were $223.7 million and $467.1 million, compared to
$172.2 million and $182.8 million for the corresponding 1996 periods.
Total proprietary annuity sales for second quarter 1997 were $375.0
million, up 54% from $244.0 million in the corresponding 1996 quarter.
Because certain large proprietary relationships had reached full-scale
production by the third quarter 1996, the Company does not expect similar
large increases in proprietary sales for the third and fourth quarters 1997
over the corresponding 1996 quarters. Year-to-date proprietary sales were
$719.0 million, compared to $293.1 million for the corresponding 1996 period.
The year-to-date increase reflects the implementation of proprietary
arrangements entered into in 1995 and 1996 and growth in sales through the
major proprietary accounts.
Retail Sales. Second quarter 1997 retail sales, which include all
-------------
non-proprietary sales through financial institutions, were down 3% to $118.5
million, compared to $122.5 million for the second quarter 1996. Retail sales
for the first six months of 1997 were $207.2 million, down 25% from retail
sales of $275.4 million for the year-earlier period. The decreases reflect
Western's increased focus on its proprietary marketing efforts, as well as the
conversion of certain accounts from retail to proprietary status.
PERSONAL PRODUCING GENERAL AGENTS. Second quarter sales through PPGAs
increased 21% to $44.7 million from $37.0 million in the second quarter 1996.
For the first six months of 1997, PPGA sales were $80.9 million, compared to
$70.4 million in 1996. The increases in this channel were primarily the
result of improved sales in the Company's wholesale PPGA marketing activities,
reflecting increased emphasis on that market niche.
DIRECT MARKETING. Western's conservation unit, which is part of its
direct sales operations, effected $20.8 million of internal exchanges in the
second quarter 1997, compared to $19.7 million in the second quarter 1996.
Internal exchanges for the first six months of 1997 and 1996 totaled $36.8
million and $60.9 million, respectively. The year-to-date 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 $1.3 million for the second quarter
1997, compared to $1.2 million for the second quarter 1996. Such sales were
$3.6 million and $2.3 million for the first six months of 1997 and 1996,
respectively. In the second quarter and first six months of 1997, IAF sold
$7.6 million and $14.3 million, respectively, of annuity and life products of
nonaffiliated life insurance companies, compared to $8.2 million and $15.9
million for the corresponding periods in 1996.
SPECIALTY. Second quarter specialty sales, which include SPIAs,
supplemental contracts, and life insurance, increased 13% to $40.4 million,
compared to $35.7 million for the second quarter 1996. Year-to-date specialty
sales increased 26% to $86.7 million, compared to $68.8 million for the
year-earlier period. This increase was due principally to $64.1 million of
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.
VARIABLE ANNUITIES. In the second quarter and first six months of 1997,
premiums collected from sales of Western's variable annuity product were $7.1
million and $9.4 million, respectively, compared to $1.5 million and $2.7
million, respectively, for the corresponding 1996 periods. The quarter and
year-to-date increases in variable annuity sales reflect an increase in the
number of marketing relationships that offer this product.
PREMIUM AND DEPOSIT DATA
Western excludes internal exchanges from its deposit and withdrawal data.
Western had $41.4 million and $64.6 million of internal exchanges for the
second quarter and first six months of 1997, respectively, compared to $38.1
million and $86.5 million in the corresponding 1996 periods.
The following table indicates sales by product line for the periods
indicated (in millions):
PREMIUM AND DEPOSIT DATA
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
-------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
FIRST-YEAR PREMIUMS AND DEPOSITS:
Single premium deferred annuities (1). . . $517.1 $386.3 $ 971.0 $604.7
Flexible premium deferred annuities. . . . 1.5 3.3 3.3 6.7
Single premium immediate annuities . . . . 39.5 33.2 84.8 64.1
Variable annuities . . . . . . . . . . . . 7.1 1.5 9.4 2.7
------- ------- --------- -------
Total first-year . . . . . . . . . . . 565.2 424.3 1,068.5 678.2
------- ------- --------- -------
RENEWAL PREMIUMS AND DEPOSITS:
Flexible premium deferred annuities. . . . 13.7 15.1 27.0 29.8
Life products. . . . . . . . . . . . . . . 1.0 1.0 1.9 2.0
------- ------- --------- -------
Total renewal. . . . . . . . . . . . . 14.7 16.1 28.9 31.8
------- ------- --------- -------
Total premiums and deposits collected. 579.9 440.4 1,097.4 710.0
Reinsurance ceded. . . . . . . . . . . . . (0.4) (0.3) (0.5) (0.7)
------- ------- --------- -------
Net Premiums and Deposits Collected. . $579.5 $440.1 $1,096.9 $709.3
======= ======= ========= =======
<FN>
_______________
(1) Includes certain deferred annuity products that allow for additional
deposits, but generally have been utilized by policyholders as SPDAs.
</TABLE>
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 . . . . . 642.2 29.5 671.7
Distributions (1). (599.3) (41.8) (641.1)
Credited interest. 169.9 17.1 187.0
--------- ------- ---------
June 30, 1996. . . . $6,333.8 $419.3 $6,753.1
========= ======= =========
December 31, 1996. . $6,839.4 $418.7 $7,258.1
Deposits . . . . . 1,001.9 25.3 1,027.2
Distributions (1). (620.5) (37.0) (657.5)
Credited interest. 197.5 16.9 214.4
--------- ------- ---------
June 30, 1997. . . . $7,418.3 $423.9 $7,842.2
========= ======= =========
<FN>
_______________
(1) Includes withdrawals, deaths and annuitizations.
</TABLE>
As a percentage of average deferred annuity liabilities, the year-to-date
average annualized distribution rate for the first six months of 1997 was
16.7%, compared to 18.3% for the first six months of 1996. The renewal
crediting rate for a block of out-of-surrender charge PPGA business was
lowered during January 1997, generating higher levels of surrenders in the
second quarter than occurred in the first quarter. Withdrawals from Western's
other blocks of business did not differ significantly from anticipated levels
for the second quarter and first half of 1997. 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 June 30, 1997, and 1996. See also, "Sales-Specialty", above.
Additionally, Western is a party to a stand-by coinsurance agreement with an
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 pass-through securities) or other short-term borrowings.
Of Western's total insurance liabilities at June 30, 1997, 19% could not
be surrendered, 51% could be surrendered only by incurring a surrender charge,
and 30% 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 3.5 years and
the surrender charge averaged approximately 4.9% of accumulated policy value
at June 30, 1997.
Payment characteristics of insurance liabilities at June 30, 1997, were
as follows (in millions):
<TABLE>
<CAPTION>
<S> <C>
Payments under contracts containing fixed payment dates:
Due in one year or less . . . . . . . . . . . . . . . . . . . $ 188.2
Due after one year through five years . . . . . . . . . . . . 677.0
Due after five years through ten years. . . . . . . . . . . . 785.9
Due after ten years . . . . . . . . . . . . . . . . . . . . . 4,043.0
--------
Total gross payments with payment dates fixed by contract 5,694.1
Less amounts representing future interest on such contracts . . 3,906.0
--------
Insurance liabilities with payment dates fixed by contract. . . 1,788.1
Insurance liabilities with payment dates not fixed by contract. 7,518.9
--------
Total insurance liabilities . . . . . . . . . . . . . . . . $9,307.0
========
</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 June 30, 1997,
Western had fixed maturities, short-term investments, and due from brokers,
net of investment borrowings and due to brokers, with a total market value of
$9.3 billion, or 96% of net 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 June 30, 1997, was two and a half times
the company action risk-based capital level.
Holding Company Liquidity and Capital
At June 30, 1997, shareholders' equity was $970.5 million, compared to
$914.8 million at December 31, 1996. Book value at June 30, 1997, was $13.92
per share, compared with $13.14 per share at December 31, 1996. The increase
is primarily due to net income of $58.8 million in the first half of 1997.
Excluding the effects of SFAS No. 115, shareholders' equity would have been
$930.5 million, or $13.35 per share, at June 30, 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 to the Consolidated
Financial Statements of the Company's 1996 Annual Report on Form 10-K).
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.
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 that 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 February 20, 1997, 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 have agreed to extend
credit to the Company on a revolving basis, upon the Company's request, in an
aggregate principal amount up to $150.0 million. 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 June 30, 1997, the Company had $66.0 million
outstanding under the Credit Agreement.
On June 1, 1997, the Company paid a common stock dividend of $.04 per
share. The total amount paid in common stock dividends for the second quarter
was $2.8 million. For the first six months of 1997, the Company paid $5.3
million of dividends on common stock and $0.2 million of dividends on the
Series A Preferred Stock. At the Company's 1997 Annual Meeting, held on May
14, 1997, the Company's common stockholders approved the issuance of 7,254,464
shares of common stock, and all outstanding shares of Series A Preferred Stock
automatically converted to common stock on a share-for-share basis.
On July 22, 1997, the board of directors declared a common stock dividend
of $.04 per share payable on September 2, 1997, to shareholders of record at
the close of business on August 12, 1997. The total dividend payment will be
approximately $2.8 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.
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Shareholders (the "Annual Meeting") was
held on May 14, 1997. The results of the matters voted upon at the Annual
Meeting were as follows:
Election of Directors. The following directors, constituting the
-----------------------
Company's entire board, were elected to terms ending in 1998:
--
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
NAME VOTES FOR VOTES WITHHELD
---- ---------- ---------------
<S> <C> <C>
Don G. Baker . . . . . 58,795,739 246,449
Alan R. Buckwalter III 58,798,739 243,449
John A. Graf . . . . . 58,794,939 247,249
Robert M. Hermance . . 58,798,739 243,449
Sydney F. Keeble . . . 58,793,039 249,149
Michael J. Poulos. . . 58,795,332 246,856
Alan Richards. . . . . 58,793,039 249,149
Richard W. Scott . . . 58,794,932 247,256
</TABLE>
Independent Auditors. The appointment of Coopers & Lybrand, L.L.P. as
---------------------
the Company's independent auditors for the year 1997 was ratified with
58,999,233 votes for, 10,154 votes against, and 32,801 abstentions/broker
non-votes.
Issuance of 7,254,464 Shares of Common Stock. On September 17, 1996, the
--------------------------------------------
Company sold 7,254,464 shares (the "Preferred Shares") of Series A
Participating Convertible Preferred Stock to American General. The
Certificate of Designation for the Preferred Shares provided that the
Preferred Shares would automatically convert with no further action on the
part of the Company or its holder into shares of the Company's common stock on
a share-for-share basis, following approval of the Company's common
stockholders of the issuance of the common stock. The Company's shareholders
approved the issuance of the common stock with 58,718,790 votes for, 280,087
votes against, and 43,311 absentions/broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
*10.1 Amendment to Employment Agreement, dated as of May 14,
1997, by and between the Company and Michael J. Poulos (incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993, Exhibit 10.3 of the Report on Form 8-K of the
Company dated December 2, 1994, and Exhibit 10.4 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994).
*10.2 Amendment to Employment Agreement, dated as of May 14,
1997, by and between the Company and Richard W. Scott (incorporated by
reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993 and Exhibit 10.4 of the Report on Form 8-K of the
Company dated December 2, 1994).
*10.3 Amendment to Employment Agreement, dated as of May 14,
1997, by and between the Company and John A. Graf (incorporated by reference
to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993 and Exhibit 10.5 of the Report on Form 8-K of the
Company dated December 2, 1994).
*10.4 Amendment to Employment Agreement, dated as of May 14,
1997, by and between the Company and Arthur R. McGimsey (incorporated by
reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993 and Exhibit 10.6 of the Report on Form 8-K of the
Company dated December 2, 1994).
*10.5 Amendment to Termination Agreement, dated as of May 14,
1997, by and between the Company and Michael J. Akers (incorporated by
reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996).
*10.6 Amendment to Termination Agreement, dated as of May 14,
1997, by and between the Company and Bruce R. Abrams (incorporated by
reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996).
*10.7 Letter Agreement, dated as of May 14, 1997, by and between
the Company and Michael J. Poulos amending the Promissory Note and Security
Agreement, dated February 15, 1994 (incorporated by reference to Exhibit 10.26
to the Company's Annual Report on Form 10-K for the year ended December 31,
1993).
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: August 13, 1997
<PAGE>
WESTERN NATIONAL CORPORATION AND SUBSIDIARIES EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
(DOLLARS IN MILLIONS - EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
--------------
ENDED JUNE 30,
--------------
1997
-------
<S> <C>
PRIMARY:
Weighted average shares outstanding. . . 69.8
Common equivalent shares related to:
Stock options at average market price
(as determined by application of the
treasury stock method) . . . . . . . . 0.7
-----
Weighted average shares and common
stock equivalents. . . . . . . . . . . 70.5
=====
Net income . . . . . . . . . . . . . . $58.8
=====
Net income per common share. . . . . . $0.83
=====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
--------------
ENDED JUNE 30,
--------------
1997
-------
<S> <C>
FULLY DILUTED:. . . . . . . . . . . . . . 0.00
Weighted average shares outstanding . . . 69.8
Common equivalent shares related to:
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 . . . . . . . . . . . . . . 70.6
=====
Net income. . . . . . . . . . . . . . . $58.8
=====
Net income per common share . . . . . . $0.83
=====
</TABLE>
EXHIBIT 10.1
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement ("Amendment"), entered into as of
this 14th day of May, 1997, by and between Western National Corporation, a
Delaware corporation (the "Company"), and Michael J. Poulos ("Executive").
WITNESSETH:
WHEREAS, the Employment Agreement, as amended, between the Company and
Executive, dated as of September 9, 1993, provides for the employment of
Executive by the Company (the "Agreement"); and
WHEREAS, the Company has from time to time made awards to Executive under
the 1993 Stock and Incentive Plan or otherwise entered into agreements with
Executive; and
WHEREAS, the Company and Executive hereby wish mutually to amend the
Agreement, such awards and any other agreements between the Company and
Executive;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements contained herein, the parties hereby agree as
follows:
1. The Agreement (and any award or other agreement between the Company and
Executive) is hereby amended by the inclusion of the following provision,
which shall supersede and replace any provision relating to the subject matter
hereof:
Certain Additional Payments by the Company. Notwithstanding anything to the
- --------------------------------------------
contrary in this Agreement, any award or other agreement, in the event that
any payment or distribution by the Company to or for the benefit of Executive,
whether paid or payable or distributed or distributable pursuant to the terms
of this Agreement or otherwise (a "Payment"), would be subject to the excise
tax imposed by Section 4999 of the Code or any interest or penalties with
respect to such excise tax (such excise tax, together with any such interest
or penalties, are hereinafter collectively referred to as the "Excise Tax"),
the Company shall pay to Executive an additional payment (a "Gross-up
Payment") in an amount such that after payment by Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including any Excise Tax imposed on any Gross-up Payment, Executive retains an
amount of the Gross-up Payment equal to the Excise Tax imposed upon the
Payments. The Company and Executive shall make an initial determination as to
whether a Gross-up Payment is required and the amount of any such Gross-up
Payment. Executive shall notify the Company immediately in writing of any
claim by the Internal Revenue Service which, if successful, would require the
Company to make a Gross-up Payment (or a Gross-up Payment in excess of that,
if any, initially determined by the Company and Executive) within ten days of
the receipt of such claim. The Company shall notify Executive in writing at
least ten days prior to the due date of any response required with respect to
such claim if it plans to contest the claim. If the Company decides to
contest such claim, Executive shall cooperate fully with the Company in such
action; provided, however, the Company shall bear and pay directly or
indirectly all costs and expenses (including additional interest and
penalties) incurred in connection with such action and shall indemnify and
hold Executive harmless, on an after-tax basis, for any Excise Tax, income tax
or other tax, including interest and penalties with respect thereto, imposed
as a result of the Company's action. If, as a result of the Company's action
with respect to a claim, Executive receives a refund of any amount paid by the
Company with respect to such claim, Executive shall promptly pay such refund
to the Company. If the Company fails to timely notify Executive whether it
will contest such claim or the Company determines not to contest such claim,
then the Company shall immediately pay to Executive the portion of such claim,
if any, which it has not previously paid to Executive.
2. Subject to the modification provided for in paragraph 1 hereof, the
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.
WESTERN NATIONAL CORPORATION
By: /s/ Richard W. Scott
---------------------------
Richard W. Scott
Vice Chairman
Executive
By: /s/ Michael J. Poulos
----------------------
Michael J. Poulos
EXHIBIT 10.2
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement ("Amendment"), entered into as of
this 14th day of May, 1997, by and between Western National Corporation, a
Delaware corporation (the "Company"), and Richard W. Scott ("Executive").
WITNESSETH:
WHEREAS, the Employment Agreement, as amended, between the Company and
Executive, dated as of February 8, 1994, provides for the employment of
Executive by the Company (the "Agreement"); and
WHEREAS, the Company has from time to time made awards to Executive under
the 1993 Stock and Incentive Plan or otherwise entered into agreements with
Executive; and
WHEREAS, the Company and Executive hereby wish mutually to amend the
Agreement, such awards and any other agreements between the Company and
Executive;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements contained herein, the parties hereby agree as
follows:
1. The Agreement (and any award or other agreement between the Company and
Executive) is hereby amended by the inclusion of the following provision,
which shall supersede and replace any provision relating to the subject matter
hereof:
Certain Additional Payments by the Company. Notwithstanding anything to the
- --------------------------------------------
contrary in this Agreement, any award or other agreement, in the event that
any payment or distribution by the Company to or for the benefit of Executive,
whether paid or payable or distributed or distributable pursuant to the terms
of this Agreement or otherwise (a "Payment"), would be subject to the excise
tax imposed by Section 4999 of the Code or any interest or penalties with
respect to such excise tax (such excise tax, together with any such interest
or penalties, are hereinafter collectively referred to as the "Excise Tax"),
the Company shall pay to Executive an additional payment (a "Gross-up
Payment") in an amount such that after payment by Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including any Excise Tax imposed on any Gross-up Payment, Executive retains an
amount of the Gross-up Payment equal to the Excise Tax imposed upon the
Payments. The Company and Executive shall make an initial determination as to
whether a Gross-up Payment is required and the amount of any such Gross-up
Payment. Executive shall notify the Company immediately in writing of any
claim by the Internal Revenue Service which, if successful, would require the
Company to make a Gross-up Payment (or a Gross-up Payment in excess of that,
if any, initially determined by the Company and Executive) within ten days of
the receipt of such claim. The Company shall notify Executive in writing at
least ten days prior to the due date of any response required with respect to
such claim if it plans to contest the claim. If the Company decides to
contest such claim, Executive shall cooperate fully with the Company in such
action; provided, however, the Company shall bear and pay directly or
indirectly all costs and expenses (including additional interest and
penalties) incurred in connection with such action and shall indemnify and
hold Executive harmless, on an after-tax basis, for any Excise Tax, income tax
or other tax, including interest and penalties with respect thereto, imposed
as a result of the Company's action. If, as a result of the Company's action
with respect to a claim, Executive receives a refund of any amount paid by the
Company with respect to such claim, Executive shall promptly pay such refund
to the Company. If the Company fails to timely notify Executive whether it
will contest such claim or the Company determines not to contest such claim,
then the Company shall immediately pay to Executive the portion of such claim,
if any, which it has not previously paid to Executive.
2. Subject to the modification provided for in paragraph 1 hereof, the
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.
WESTERN NATIONAL CORPORATION
By: /s/ Michael J. Poulos
-------------------------
Michael J. Poulos
President
Executive
By: /s/ Richard W. Scott
---------------------
Richard W. Scott
EXHIBIT 10.3
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement ("Amendment"), entered into as of
this 14th day of May, 1997, by and between Western National Corporation, a
Delaware corporation (the "Company"), and John A. Graf ("Executive").
WITNESSETH:
WHEREAS, the Employment Agreement, as amended, between the Company and
Executive, dated as of February 8, 1994, provides for the employment of
Executive by the Company (the "Agreement"); and
WHEREAS, the Company has from time to time made awards to Executive under
the 1993 Stock and Incentive Plan or otherwise entered into agreements with
Executive; and
WHEREAS, the Company and Executive hereby wish mutually to amend the
Agreement, such awards and any other agreements between the Company and
Executive;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements contained herein, the parties hereby agree as
follows:
1. The Agreement (and any award or other agreement between the Company and
Executive) is hereby amended by the inclusion of the following provision,
which shall supersede and replace any provision relating to the subject matter
hereof:
Certain Additional Payments by the Company. Notwithstanding anything to the
- --------------------------------------------
contrary in this Agreement, any award or other agreement, in the event that
any payment or distribution by the Company to or for the benefit of Executive,
whether paid or payable or distributed or distributable pursuant to the terms
of this Agreement or otherwise (a "Payment"), would be subject to the excise
tax imposed by Section 4999 of the Code or any interest or penalties with
respect to such excise tax (such excise tax, together with any such interest
or penalties, are hereinafter collectively referred to as the "Excise Tax"),
the Company shall pay to Executive an additional payment (a "Gross-up
Payment") in an amount such that after payment by Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including any Excise Tax imposed on any Gross-up Payment, Executive retains an
amount of the Gross-up Payment equal to the Excise Tax imposed upon the
Payments. The Company and Executive shall make an initial determination as to
whether a Gross-up Payment is required and the amount of any such Gross-up
Payment. Executive shall notify the Company immediately in writing of any
claim by the Internal Revenue Service which, if successful, would require the
Company to make a Gross-up Payment (or a Gross-up Payment in excess of that,
if any, initially determined by the Company and Executive) within ten days of
the receipt of such claim. The Company shall notify Executive in writing at
least ten days prior to the due date of any response required with respect to
such claim if it plans to contest the claim. If the Company decides to
contest such claim, Executive shall cooperate fully with the Company in such
action; provided, however, the Company shall bear and pay directly or
indirectly all costs and expenses (including additional interest and
penalties) incurred in connection with such action and shall indemnify and
hold Executive harmless, on an after-tax basis, for any Excise Tax, income tax
or other tax, including interest and penalties with respect thereto, imposed
as a result of the Company's action. If, as a result of the Company's action
with respect to a claim, Executive receives a refund of any amount paid by the
Company with respect to such claim, Executive shall promptly pay such refund
to the Company. If the Company fails to timely notify Executive whether it
will contest such claim or the Company determines not to contest such claim,
then the Company shall immediately pay to Executive the portion of such claim,
if any, which it has not previously paid to Executive.
2. Subject to the modification provided for in paragraph 1 hereof, the
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.
WESTERN NATIONAL CORPORATION
By: /s/ Michael J. Poulos
-------------------------
Michael J. Poulos
President
Executive
By: /s/ John A. Graf
-----------------
John A. Graf
EXHIBIT 10.4
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement ("Amendment"), entered into as of
this 14th day of May, 1997, by and between Western National Corporation, a
Delaware corporation (the "Company"), and Arthur R. McGimsey ("Executive").
WITNESSETH:
WHEREAS, the Employment Agreement, as amended, between the Company and
Executive, dated as of November 9, 1993, provides for the employment of
Executive by the Company (the "Agreement"); and
WHEREAS, the Company has from time to time made awards to Executive under
the 1993 Stock and Incentive Plan or otherwise entered into agreements with
Executive; and
WHEREAS, the Company and Executive hereby wish mutually to amend the
Agreement, such awards and any other agreements between the Company and
Executive;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements contained herein, the parties hereby agree as
follows:
1. The Agreement (and any award or other agreement between the Company and
Executive) is hereby amended by the inclusion of the following provision,
which shall supersede and replace any provision relating to the subject matter
hereof:
Certain Additional Payments by the Company. Notwithstanding anything to the
- --------------------------------------------
contrary in this Agreement, any award or other agreement, in the event that
any payment or distribution by the Company to or for the benefit of Executive,
whether paid or payable or distributed or distributable pursuant to the terms
of this Agreement or otherwise (a "Payment"), would be subject to the excise
tax imposed by Section 4999 of the Code or any interest or penalties with
respect to such excise tax (such excise tax, together with any such interest
or penalties, are hereinafter collectively referred to as the "Excise Tax"),
the Company shall pay to Executive an additional payment (a "Gross-up
Payment") in an amount such that after payment by Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including any Excise Tax imposed on any Gross-up Payment, Executive retains an
amount of the Gross-up Payment equal to the Excise Tax imposed upon the
Payments. The Company and Executive shall make an initial determination as to
whether a Gross-up Payment is required and the amount of any such Gross-up
Payment. Executive shall notify the Company immediately in writing of any
claim by the Internal Revenue Service which, if successful, would require the
Company to make a Gross-up Payment (or a Gross-up Payment in excess of that,
if any, initially determined by the Company and Executive) within ten days of
the receipt of such claim. The Company shall notify Executive in writing at
least ten days prior to the due date of any response required with respect to
such claim if it plans to contest the claim. If the Company decides to
contest such claim, Executive shall cooperate fully with the Company in such
action; provided, however, the Company shall bear and pay directly or
indirectly all costs and expenses (including additional interest and
penalties) incurred in connection with such action and shall indemnify and
hold Executive harmless, on an after-tax basis, for any Excise Tax, income tax
or other tax, including interest and penalties with respect thereto, imposed
as a result of the Company's action. If, as a result of the Company's action
with respect to a claim, Executive receives a refund of any amount paid by the
Company with respect to such claim, Executive shall promptly pay such refund
to the Company. If the Company fails to timely notify Executive whether it
will contest such claim or the Company determines not to contest such claim,
then the Company shall immediately pay to Executive the portion of such claim,
if any, which it has not previously paid to Executive.
2. Subject to the modification provided for in paragraph 1 hereof, the
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.
WESTERN NATIONAL CORPORATION
By: /s/ Michael J. Poulos
-------------------------
Michael J. Poulos
President
Executive
By: /s/ Arthur R. McGimsey
-----------------------
Arthur R. McGimsey
EXHIBIT 10.5
AMENDMENT TO TERMINATION AGREEMENT
This Amendment to Termination Agreement ("Amendment"), entered into as of
this 14th day of May, 1997, by and between Western National Corporation, a
Delaware corporation (the "Company"), and Michael J. Akers ("Executive").
WITNESSETH:
WHEREAS, the Termination Agreement between the Company and Executive,
dated as of February 10, 1997, provides for the employment of Executive by the
Company (the "Agreement"); and
WHEREAS, the Company has from time to time made awards to Executive under
the 1993 Stock and Incentive Plan or otherwise entered into agreements with
Executive; and
WHEREAS, the Company and Executive hereby wish mutually to amend the
Agreement, such awards and any other agreements between the Company and
Executive;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements contained herein, the parties hereby agree as
follows:
1. The Agreement (and any award or other agreement between the Company and
Executive) is hereby amended by the inclusion of the following provision,
which shall supersede and replace any provision relating to the subject matter
hereof:
Certain Additional Payments by the Company. Notwithstanding anything to the
- --------------------------------------------
contrary in this Agreement, any award or other agreement, in the event that
any payment or distribution by the Company to or for the benefit of Executive,
whether paid or payable or distributed or distributable pursuant to the terms
of this Agreement or otherwise (a "Payment"), would be subject to the excise
tax imposed by Section 4999 of the Code or any interest or penalties with
respect to such excise tax (such excise tax, together with any such interest
or penalties, are hereinafter collectively referred to as the "Excise Tax"),
the Company shall pay to Executive an additional payment (a "Gross-up
Payment") in an amount such that after payment by Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including any Excise Tax imposed on any Gross-up Payment, Executive retains an
amount of the Gross-up Payment equal to the Excise Tax imposed upon the
Payments. The Company and Executive shall make an initial determination as to
whether a Gross-up Payment is required and the amount of any such Gross-up
Payment. Executive shall notify the Company immediately in writing of any
claim by the Internal Revenue Service which, if successful, would require the
Company to make a Gross-up Payment (or a Gross-up Payment in excess of that,
if any, initially determined by the Company and Executive) within ten days of
the receipt of such claim. The Company shall notify Executive in writing at
least ten days prior to the due date of any response required with respect to
such claim if it plans to contest the claim. If the Company decides to
contest such claim, Executive shall cooperate fully with the Company in such
action; provided, however, the Company shall bear and pay directly or
indirectly all costs and expenses (including additional interest and
penalties) incurred in connection with such action and shall indemnify and
hold Executive harmless, on an after-tax basis, for any Excise Tax, income tax
or other tax, including interest and penalties with respect thereto, imposed
as a result of the Company's action. If, as a result of the Company's action
with respect to a claim, Executive receives a refund of any amount paid by the
Company with respect to such claim, Executive shall promptly pay such refund
to the Company. If the Company fails to timely notify Executive whether it
will contest such claim or the Company determines not to contest such claim,
then the Company shall immediately pay to Executive the portion of such claim,
if any, which it has not previously paid to Executive.
2. Subject to the modification provided for in paragraph 1 hereof, the
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.
WESTERN NATIONAL CORPORATION
By: /s/ Michael J. Poulos
-------------------------
Michael J. Poulos
President
Executive
By: /s/ Michael J. Akers
---------------------
Michael J. Akers
EXHIBIT 10.6
AMENDMENT TO TERMINATION AGREEMENT
This Amendment to Termination Agreement ("Amendment"), entered into as of
this 14th day of May, 1997, by and between Western National Corporation, a
Delaware corporation (the "Company"), and Bruce R. Abrams ("Executive").
WITNESSETH:
WHEREAS, the Termination Agreement between the Company and Executive,
dated as of May 15, 1996, provides for the employment of Executive by the
Company (the "Agreement"); and
WHEREAS, the Company has from time to time made awards to Executive under
the 1993 Stock and Incentive Plan or otherwise entered into agreements with
Executive; and
WHEREAS, the Company and Executive hereby wish mutually to amend the
Agreement, such awards and any other agreements between the Company and
Executive;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements contained herein, the parties hereby agree as
follows:
1. The Agreement (and any award or other agreement between the Company and
Executive) is hereby amended by the inclusion of the following provision,
which shall supersede and replace any provision relating to the subject matter
hereof:
Certain Additional Payments by the Company. Notwithstanding anything to the
- --------------------------------------------
contrary in this Agreement, any award or other agreement, in the event that
any payment or distribution by the Company to or for the benefit of Executive,
whether paid or payable or distributed or distributable pursuant to the terms
of this Agreement or otherwise (a "Payment"), would be subject to the excise
tax imposed by Section 4999 of the Code or any interest or penalties with
respect to such excise tax (such excise tax, together with any such interest
or penalties, are hereinafter collectively referred to as the "Excise Tax"),
the Company shall pay to Executive an additional payment (a "Gross-up
Payment") in an amount such that after payment by Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including any Excise Tax imposed on any Gross-up Payment, Executive retains an
amount of the Gross-up Payment equal to the Excise Tax imposed upon the
Payments. The Company and Executive shall make an initial determination as to
whether a Gross-up Payment is required and the amount of any such Gross-up
Payment. Executive shall notify the Company immediately in writing of any
claim by the Internal Revenue Service which, if successful, would require the
Company to make a Gross-up Payment (or a Gross-up Payment in excess of that,
if any, initially determined by the Company and Executive) within ten days of
the receipt of such claim. The Company shall notify Executive in writing at
least ten days prior to the due date of any response required with respect to
such claim if it plans to contest the claim. If the Company decides to
contest such claim, Executive shall cooperate fully with the Company in such
action; provided, however, the Company shall bear and pay directly or
indirectly all costs and expenses (including additional interest and
penalties) incurred in connection with such action and shall indemnify and
hold Executive harmless, on an after-tax basis, for any Excise Tax, income tax
or other tax, including interest and penalties with respect thereto, imposed
as a result of the Company's action. If, as a result of the Company's action
with respect to a claim, Executive receives a refund of any amount paid by the
Company with respect to such claim, Executive shall promptly pay such refund
to the Company. If the Company fails to timely notify Executive whether it
will contest such claim or the Company determines not to contest such claim,
then the Company shall immediately pay to Executive the portion of such claim,
if any, which it has not previously paid to Executive.
2. Subject to the modification provided for in paragraph 1 hereof, the
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.
WESTERN NATIONAL CORPORATION
By: /s/ Michael J. Poulos
-------------------------
Michael J. Poulos
President
Executive
By: /s/ Bruce R. Abrams
--------------------
Bruce R. Abrams
EXHIBIT 10.7
May 14, 1997
Mr. Michael J. Poulos
2121 Kirby Drive #73
Houston, Texas 77019
Dear Mr. Poulos:
The purpose of this letter is to set forth the mutual agreement of Western
National Corporation (the "Company") and you with respect to the tax treatment
of an existing arrangement between you and the Company involving an
interest-bearing, non-recourse loan (the "Loan") made by the Company to you,
enabling you to purchase 100,000 shares (the "Shares") of the Common Stock of
the Company, which have been pledged to secure the Loan. You and the Company
agree as follows:
1. BACKGROUND.
----------
a. You purchased the Shares at the time of the Company's initial public
offering for $1,136,500 from Conseco, Inc., and borrowed the purchase price
from the Company by incurring the Loan. The Loan bears interest at the
Bankers Trust Company of New York prime rate and is payable, as to both
principal and interest, in one installment at maturity.
b. In all Securities Exchange Commission filings and other public
documents the Company has represented and described the transaction as a stock
purchase and related loan, and the Shares have been reflected in the
description of your stock ownership contained in all Company filings and in
your own Form 3, 4 and 5 filings with the Securities Exchange Commission.
c. It has been the intention of the parties at all times that the
transaction be treated for all purposes as a purchase of stock and the
incurrence of non-recourse indebtedness.
2. TAX TREATMENT.
--------------
a. Tax counsel has recently advised the Compensation Committee of the
Board of Directors of the Company that the treatment of the above described
transaction for federal income tax purposes would more likely than not differ
from that ordinarily accorded a stock purchase financed by borrowed money.
<PAGE>
Page Two
May 14, 1997
b. The Committee has been advised that the transaction would probably be
recharacterized by the Internal Revenue Service as involving the grant and
exercise of a non-qualified stock option, giving rise to ordinary income
(measured in one of several ways depending on the circumstances in which the
Loan is repaid) to you (the taxpayer) and creating a deduction for
compensation expense to the Company (as your employer).
c. It is the mutual desire of you and the Company that the transaction
be reported for federal income tax purposes consistently on the Company's tax
return and on your personal tax return. It is the mutual desire of the
parties to avoid a tax controversy. However, the Company acknowledges that
adopting a consistent, conservative tax position will result in an anticipated
additional tax liability to you, and a corresponding tax benefit to the
Company.
3. TAX AGREEMENT.
--------------
a. You agree to (i) take a reporting position on your federal income tax
return that reflects treatment of the purchase of Shares and related Loan as
the exercise of a non-qualified stock option and (ii) refrain from taking any
action triggering such a reporting obligation at a time when the deductibility
to the Company of compensation expense paid to you is limited by Section
162(m) of the Internal Revenue Code. The Company agrees to make a payment to
you computed in accordance with the worksheet attached hereto as Annex A
(reduced by any amount necessary to give effect to Section 3(b) of the
Agreement).
b. In no event shall the Company make any payment to you that would
result in a net economic benefit from the transaction less favorable on an
after-tax basis to the Company that would have been the result had the
transaction received the tax characterization originally intended by the
parties.
c. It is the fundamental intention of the parties to this agreement that
the economic result to you of the purchase of the Shares and related Loan be
the same, on an after-tax basis, as if the transaction, for federal income tax
purposes, were treated as a purchase of stock and incurrence of related
indebtedness, rather than as the grant and exercise of a non-qualified stock
option. Accordingly, to the extent that any obligation hereunder of either
party requires modification to give effect to that intention, it shall be
deemed so modified.
<PAGE>
Page Three
May 14, 1997
If the foregoing represents your understanding of our agreement, please
execute this letter in the space provided below.
Very truly yours,
/s/ Richard W. Scott
- --------------------
Richard W. Scott
Accepted and agreed to as of the date set forth above:
/s/ Michael J. Poulos
- ---------------------
Michael J. Poulos
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 7,978
<DEBT-CARRYING-VALUE> 1
<DEBT-MARKET-VALUE> 2
<EQUITIES> 17
<MORTGAGE> 127
<REAL-ESTATE> 0
<TOTAL-INVEST> 8,649
<CASH> 232
<RECOVER-REINSURE> 2
<DEFERRED-ACQUISITION> 379
<TOTAL-ASSETS> 9,299
<POLICY-LOSSES> 7,982
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 2
<POLICY-HOLDER-FUNDS> 132
<NOTES-PAYABLE> 148
0
0
<COMMON> 3
<OTHER-SE> 683
<TOTAL-LIABILITY-AND-EQUITY> 9,299
8
<INVESTMENT-INCOME> 344
<INVESTMENT-GAINS> (3)
<OTHER-INCOME> 1
<BENEFITS> 238
<UNDERWRITING-AMORTIZATION> 20
<UNDERWRITING-OTHER> 11
<INCOME-PRETAX> 74
<INCOME-TAX> 26
<INCOME-CONTINUING> 48
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45
<EPS-PRIMARY> .72
<EPS-DILUTED> .72
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
WESTERN NATIONAL CORPORATION AND SUBSIDIARIES EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
(DOLLARS IN MILLIONS - EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
-----------
ENDED JUNE 30,
----------------
1997
-------
<S> <C>
PRIMARY:
Weighted average shares outstanding. . . 69.8
Common equivalent shares related to:
Stock options at average market price
(as determined by application of the
treasury stock method) . . . . . . . . 0.7
-----
Weighted average shares and common
stock equivalents. . . . . . . . . . . 70.5
=====
Net income . . . . . . . . . . . . . . $58.8
=====
Net income per common share. . . . . . $0.83
=====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
-----------
ENDED JUNE 30,
----------------
1997
-------
<S> <C>
FULLY DILUTED:
Weighted average shares outstanding . . . 69.8
Common equivalent shares related to:
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 . . . . . . . . . . . . . . 70.6
=====
Net income. . . . . . . . . . . . . . . $58.8
=====
Net income per common share . . . . . . $0.83
=====
</TABLE>