STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FIXED AND VARIABLE DEFERRED ANNUITY CONTRACTS
WITH FLEXIBLE PURCHASE PAYMENTS
issued by
WNL SEPARATE ACCOUNT A
AND
WESTERN NATIONAL LIFE INSURANCE COMPANY
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE
READ IN CONJUNCTION WITH THE PROSPECTUS DATED MAY 1, 1996, FOR THE INDIVIDUAL
FIXED AND VARIABLE DEFERRED ANNUITY CONTRACTS WITH FLEXIBLE PURCHASE PAYMENTS
WHICH ARE REFERRED TO HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION FOR A PROSPECTIVE INVESTOR.
FOR A COPY OF THE PROSPECTUS CALL (800) 910-4455 OR WRITE THE COMPANY AT: P.O.
BOX 361, 95 BRIDGE STREET, HADDAM, CT 06438-0361.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED MAY 1, 1996.
TABLE OF CONTENTS
PAGE
Company................................................................. 3
Experts................................................................. 3
Legal Opinions.......................................................... 3
Distributor............................................................. 3
Yield Calculation For The Global Advisors Money Market
Sub-Account....................................................... 3
Performance Information................................................. 4
Annuity Provisions...................................................... 5
Financial Statements.................................................... 6
COMPANY
Information regarding Western National Life Insurance Company (the "Company")
and its ownership is contained in the Prospectus.
The Company contributed the initial capital to the Separate Account. As of
December 31, 1995, the initial capital contributed by the Company represented
approximately 95% of the total assets of the Separate Account. The Company
currently intends to remove these assets from the Separate Account on a pro
rata basis in proportion to money invested in the Separate Account by Owners.
EXPERTS
The balance sheet of the Company as of December 31, 1995 and 1994, and the
related statements of income, shareholder's equity and cash flows for each of
the three years in the period ended December 31, 1995, and the balance sheet
of the Separate Account as of December 31, 1995, and the related statements
of operations and changes in net assets for the period from October 10, 1995
(commencement of operations) through December 31, 1995, all of which are
included in the Statement of Additional Information, have been included herein
in reliance on the reports of Coopers & Lybrand, L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
LEGAL OPINIONS
Legal matters in connection with the Contracts described herein are being
passed upon by the law firm of Blazzard, Grodd & Hasenauer, P.C., Westport,
Connecticut.
DISTRIBUTOR
WNL Brokerage Services, Inc. ("WNL Brokerage") acts as the distributor. WNL
Brokerage is an affiliate of the Company. The offering is on a continuous
basis.
YIELD CALCULATION FOR THE GLOBAL ADVISORS MONEY MARKET SUB-ACCOUNT
The Global Advisors Money Market Sub-Account of the Separate Account will
calculate its current yield based upon the seven days ended on the date of
calculation.
The current yield of the Global Advisors Money Market Sub-Account is computed
by determining the net change (exclusive of capital changes) in the value of a
hypothetical pre-existing Owner account having a balance of one Accumulation
Unit of the Sub-Account at the beginning of the period, subtracting the
Mortality and Expense Risk Charge, the Administrative Charge and the Contract
Maintenance Charge, dividing the difference by the value of the account at the
beginning of the same period to obtain the base period return and multiplying
the result by (365/7). As of December 31, 1995, the annualized effective
yield for the Global Advisors Money Market Sub-Account was 3.07% and the yield
was 3.02%. The calculation does not take into account any applicable
Enhanced Death Benefit Charge.
As of December 31, 1995, the annualized effective yield and yield for the
Global Advisors Money Market Sub-Account calculated with the applicable
Enhanced Death Benefit Charge was 2.91% and 2.87%, respectively.
The Global Advisors Money Market Sub-Account computes its effective compound
yield according to the method prescribed by the Securities and Exchange
Commission. The effective yield reflects the reinvestment of net income
earned daily on Global Advisors Money Market Sub-Account assets.
Net investment income for yield quotation purposes will not include either
realized capital gains and losses or unrealized appreciation and depreciation,
whether reinvested or not.
The yields quoted should not be considered a representation of the yield of
the Global Advisors Money Market Sub-Account in the future since the yield is
not fixed. Actual yields will depend not only on the type, quality and
maturities of the investments held by the Global Advisors Money Market
Sub-Account and changes in the interest rates on such investments, but also on
changes in the Global Advisors Money Market Sub-Account's expenses during the
period.
Yield information may be useful in reviewing the performance of the Global
Advisors Money Market Sub-Account and for providing a basis for comparison
with other investment alternatives. However, the Global Advisors Money Market
Sub-Account's yield fluctuates, unlike bank deposits or other investments
which typically pay a fixed yield for a stated period of time.
PERFORMANCE INFORMATION
From time to time, the Company may advertise performance data as described in
the Prospectus. Any such advertisement will include two sets of total return
figures for the time periods indicated in the advertisement. One set of such
total return figures will reflect the deduction of a 1.25% Mortality and
Expense Risk Charge, a .15% Administrative Charge, the investment advisory fee
and expenses for the underlying Portfolio being advertised and any applicable
Contract Maintenance Charge. The other set of such total return figures will
reflect the same deductions mentioned plus the deduction of a .15% Enhanced
Death Benefit Charge.
The hypothetical value of a Contract purchased for the time periods described
in the advertisement will be determined by using the actual Accumulation Unit
values for an initial $1,000 purchase payment, and deducting any applicable
Contract Maintenance Charge to arrive at the ending hypothetical value. The
average annual total return is then determined by computing the fixed interest
rate that a $1,000 purchase payment would have to earn annually, compounded
annually, to grow to the hypothetical value at the end of the time periods
described. The formula used in these calculations is:
n
P(1 + T) = ERV
<TABLE>
<CAPTION>
<S> <C> <C>
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the time periods used (or
fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the time periods used.
</TABLE>
In addition to total return data, the Company may include yield information in
its advertisements. For each Sub-Account (other than the Global Advisors
Money Market Sub-Account) for which the Company will advertise yield, it will
show a yield quotation based on a 30 day (or one month) period ended on the
date of the most recent balance sheet of the Separate Account included in the
registration statement, computed by dividing the net investment income per
Accumulation Unit earned during the period by the maximum offering price per
Unit on the last day of the period, according to the following formula:
<TABLE>
<CAPTION>
<S> <C> <C>
Where:
a = Net investment income earned during the period by the Portfolio
attributable to shares owned by the Sub-Account.
b = Expenses accrued for the period (net of reimbursements).
c = The average daily number of Accumulation Units outstanding
during the period.
d = The maximum offering price per Accumulation Unit on the
last day of the period.
</TABLE>
The Company may also advertise performance data which will be computed on a
different basis.
Investment operations for the Sub-Accounts which invest in Portfolios of
WNL Series Trust depicted in the chart below commenced on October 10, 1995
for the Money Market Sub-Account and on October 20, 1995 for the BEA Growth
and Income, Credit Suisse International Equity and Global Advisors Growth
Equity Sub-Accounts. Chart 1 below shows performance figures which reflect
the deduction of all charges and deductions (except the Enhanced Death
Benefit Charge) under the Contracts (see "Charges and Deductions" in the
prospectus) and also reflect the actual fees and expenses paid by the
underlying Portfolios. Chart 2 below is identical to Chart 1 except that
it also reflects the deduction of the Enhanced Death Benefit Charge,
where applicable.
Average Total Return for the Period ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Chart 1
- ---------
Sub-Accounts Return Since Inception
BEA Growth and Income 1.25 %
Credit Suisse International Equity (1.39)%
Global Advisors Growth Equity (1.75)%
Global Advisors Money Market (4.19)%
Chart 2
- ---------
Sub-Accounts Return Since Inception
BEA Growth and Income N/A%
Credit Suisse International Equity N/A%
Global Advisors Growth Equity N/A%
Global Advisors Money Market 4.23%
</TABLE>
Owners should note that the investment results of each Sub-Account will
fluctuate over time, and any presentation of the Sub-Account's total return or
yield for any period should not be considered a representation of what an
investment may earn or what an Owner's total return or yield may be in any
future period.
ANNUITY PROVISIONS
A Variable Annuity is an annuity with payments which: (1) are not
predetermined as to dollar amount; and (2) will vary in amount with the net
investment results of the applicable Sub-Accounts of the Separate Account.
Annuity Payments also depend upon the Age of the Annuitant and any Joint
Annuitant and the assumed interest factor utilized. The Annuity Table used
will depend upon the Annuity Option chosen. The dollar amount of Annuity
Payments after the first is determined as follows:
1. The dollar amount of the first Variable Annuity Payment is divided by
the value of an Annuity Unit for each applicable Sub-Account as of the Annuity
Date. This sets the number of Annuity Units for each monthly payment for the
applicable Sub-Account. The number of Annuity Units remains fixed during the
Annuity Period.
2. The fixed number of Annuity Units per payment in each Sub-Account is
multiplied by the Annuity Unit Value for that Sub-Account for the last
Valuation Period of the month preceding the month for which the payment is
due. This result is the dollar amount of the payment for each applicable
Sub-Account.
The total dollar amount of each Variable Annuity Payment is the sum of all
Sub-Account Variable Annuity Payments reduced by the applicable portion of the
Contract Maintenance Charge.
(See "Annuity Provisions" in the Prospectus.)
FINANCIAL STATEMENTS
The financial statements of the Company included herein should be considered
only as bearing upon the ability of the Company to meet its obligations under
the Contracts.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners of WNL Separate
Account A and Board of Directors of
Western National Life Insurance Company
We have audited the accompanying statement of assets and liabilities of WNL
Separate Account A as of December 31, 1995, and the related statements of
operations and changes in net assets for the period from October 10, 1995
(commencement of operations) through December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of shares owned as of December 31, 1995,
by correspondence with WNL Series Trust. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of WNL Separate Account A
as of December 31, 1995, and the results of its operations and the changes in
its net assets for the period from October 10, 1995 (commencement of
operations) through December 31, 1995 in conformity with generally accepted
accounting principles.
Houston, Texas
February 16, 1996
<PAGE>
Western National Life Insurance Company
WNL Separate Account A
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
Global Advisors Global Advisors BEA Growth Credit Suisse
Money Market Growth Equity and Income International
Portfolio Portfolio Portfolio Portfolio
--------------- --------------- ---------- -------------
<TABLE>
<S> <C> <C> <C> <C>
ASSETS
Investments:
Net asset value
per share $ 1.00 $ 10.31 $ 10.46 $ 10.33
============ ========== ========== ==========
Number of shares 126,279 201,097 204,163 201,560
============ ========== ========== ==========
Identified cost $ 126,279 $2,011,298 $2,043,604 $2,016,107
============ ========== ========== ==========
Market value $ 126,279 $2,072,639 $2,136,310 $2,083,024
------------ ---------- ---------- ----------
NET ASSETS $ 126,279 $2,072,639 $2,136,310 $2,083,024
============ ========== ========== ==========
Net Assets
Attributable to:
Contract owners $ 25,107 $ 1,282 $ 4,906 $ 4,461
Western National
Life Insurance
Company (Note 7) 101,172 2,071,357 2,131,413 2,078,563
------------ ---------- ---------- ----------
$ 126,279 $2,072,639 $2,136,319 $2,083,024
============ ========== ========== ==========
ACCUMULATION UNITS OF CONTRACT OWNERS:
Standard benefit
units 2,464.4 124.2 461.8 430.6
Enhanced benefit
units 24.9 -- -- --
ACCUMULATION VALUE PER UNIT:
Standard benefit
units $ 10.086 $ 10.325 $ 10.624 $ 10.361
Enhanced benefit
units 10.083 -- -- --
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Western National Life Insurance Company
WNL Separate Account A
STATEMENT OF OPERATIONS
For the Period from October 10, 1995 (commencement of operations)
December 31, 1995
Global Advisors Global Advisors BEA Growth Credit Suisse
Money Market Growth Equity and Income International
Portfolio Portfolio Portfolio Portfolio
--------------- --------------- ---------- -------------
<TABLE>
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Income:
Dividends from
mutual funds
reinvested $ 1,234 $ 10,035 $ 28,948 $ 11,682
Expenses:
Mortality and
expense risk
charges 17 1 1 1
---------- --------- --------- ----------
NET INVESTMENT
INCOME 1,217 10,034 28,947 11,681
REALIZED AND
UNREALIZED GAIN
ON INVESTMENTS
Net unrealized
gain on
investments -- 61,341 92,715 66,917
Realized gain
distributions
reinvested -- -- 9,791 --
---------- --------- -------- ----------
NET REALIZED AND
UNREALIZED GAIN
ON INVESTMENTS -- 61,341 102,506 66,917
---------- --------- --------- ------------
INCREASE IN NET
ASSETS RESULTING
FROM OPERATIONS $ 1,217 $ 71,375 $ 131,453 $ 78,598
========== ========= ========= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Western National Life Insurance Company
WNL Separate Account A
STATEMENT OF CHANGES IN NET ASSETS
For the Period from October 10, 1995 (commencement of operations)
December 31, 1995
Global Advisors Global Advisors BEA Growth Credit Suisse
Money Market Growth Equity and Income International
Portfolio Portfolio Portfolio Portfolio
--------------- --------------- ---------- -------------
<TABLE>
<S> <C> <C> <C> <C>
Increase in
Net Assets
from Operations
Net investment
income $ 1,217 $ 10,034 $ 28,947 $ 11,681
Net unrealized
gain on
investments -- 61,341 92,715 66,917
Realized gain
distributions
reinvested -- -- 9,791 --
---------- --------- --------- ----------
Increase in
Net Assets
from Operations 1,217 71,375 131,453 78,598
Increase
(Decrease) in
Net Assets
from Unit
Transactions:
Contract purchase
payments 34,261 946 373 59
Transfers to
general account (21) -- -- --
Portfolio
transfers (9,178) 318 4,493 4,367
---------- --------- --------- ----------
Increase in Net
Assets from Unit
Transactions 25,062 1,264 4,866 4,426
Capital
contribution
from Western
National Life
Insurance
Company 100,000 2,000,000 2,000,000 2,000,000
---------- ---------- ---------- ----------
Total Increase
in Net Assets
and Net Assets
at End of
Period $ 126,279 $2,072,639 $2,136,319 $2,083,024
============ ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Western National Life Insurance Company
WNL Separate Account A
Notes to Financial Statements
1. ORGANIZATION
WNL Separate Account A (the "Separate Account") was established by Western
National Life Insurance Company (the "Company") on November 9, 1994, for funding
certain variable annuity insurance contracts issued by the Company. The
Separate Account is registered with the Securities and Exchange Commission as a
unit investment trust pursuant to the provisions of the Investment Company Act
of 1940, as amended. The Separate Account commenced operations on October 10,
1995.
The Separate Account is divided into eight sub-accounts. Each sub-account
invests in one portfolio of WNL Series Trust (the "Trust"). The Trust is
managed by WNL Investment Advisory Services, Inc. (the "Advisor"), an affiliate
of the Company. The Trust portfolios available to contract holders through the
various sub-accounts ("Portfolio") are as follows:
WNL Series Trust:
American Capital Emerging Growth Portfolio
BEA Growth and Income Portfolio
BlackRock Managed Bond Portfolio
Credit Suisse International Equity Portfolio
Global Advisors Growth Equity Portfolio
Global Advisors Money Market Portfolio
Quest for Value Asset Allocation Portfolio
Salomon Brothers U.S. Government Securities Portfolio
As of December 31, 1995, only the BEA Growth and Income Portfolio, Credit
Suisse International Equity Portfolio, Global Advisors Growth Equity Portfolio,
and Global Advisors Money Market Portfolio were actively funded.
Net premiums from the contracts are allocated to the sub-accounts and
invested in the Portfolios in accordance with contract owner instructions and
are recorded as unit transactions in the statement of changes in net assets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements of the Separate Account have been
prepared on the basis of generally accepted accounting principles. The
accounting principles followed by the Separate Account and the methods of
applying those principles are presented below or in the footnotes which follow:
INVESTMENT VALUATION - The investment shares of the Portfolios are valued
at the closing net asset value (market) per share as determined by the fund on
the day of measurement.
INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME - Investment
transactions are accounted for on the date the order to buy or sell is executed
(trade date). Dividend income and distributions of capital gains are recorded
on the ex-dividend date. Realized gains and losses from investment transactions
are reported on the basis of identified cost for financial reporting and federal
income tax purposes.
<PAGE>
ANNUITY RESERVES - At December 31, 1995, the Separate Account did not have
any contracts in the annuity payout phase; therefore, no reserves were required.
FEDERAL INCOME TAXES - The Company is taxed as a life insurance company
and includes the operations of the Separate Account in its federal income tax
return. As a result, the Separate Account is not taxed as a "Regulated
Investment Company" under subchapter M of the Internal Revenue Code. Under
existing laws, taxes are not currently payable on the investment income or on
the realized gains of the Separate Account. The Company reserves the right to
allocate to the Separate Account any federal, state or other tax liability that
may result in the future from maintenance of the Separate Account. No charges
are currently being made against the Separate Account for such tax.
3. CONTRACT CHARGES
Deductions for the administrative expense, and mortality and expense risks
assumed by the company are calculated daily, at an annual rate, on the average
daily net asset value of the Portfolios and are paid to the Company. The
annual rate as a percentage of each Portfolio's net asset value, for the
administrative expenses is .15% and the annual rate of the mortality and
expense risks is 1.25%. The annual rate for the enhanced death benefit option
is .15%. For the year ended December 31, 1995, deductions for administrative
expenses and mortality and expense risk charges totaled $20.
An annual maintenance charge of $30 on each contract may be imposed on the
contract anniversary during the accumulation period for the maintenance of the
contract. No maintenance charge is made if the contract value on the contract
anniversary is at least $40,000.
A contingent deferred sales charge is applicable to certain withdrawal
amounts pursuant to the contract and is payable to the Company. There were no
contingent deferred sales charges collected for 1995.
There are other deductions from, and expense (including management fees
paid to the investment adviser and other expenses) paid out of the assets of
the Trust. As full compensation for its services under the Investment Advisory
Agreement, the Trust incurs a monthly fee from the Adviser based on annual
rates which range from .45% to .90% based on the average daily net assets of
each Portfolio. The Advisor, has agreed to waive is advisory fee for each of
the Portfolios for the initial six (6) months of each Portfolios investment
operations.
4. INVESTMENTS
Fund shares are purchased at net asset value with net contract payments
(contract purchase payments less surrenders) and with reinvestment of
distributions made by the Portfolios. The aggregate cost of purchases and
proceeds from sales of investments for the period ended December 31, 1995, were
$6,212,552 and $15,264, respectively. The cost of total investments owned at
December 31, 1995, was the same for financial reporting and federal income tax
purposes. At December 31, 1995, total unrealized appreciation was $220,973.
5. NET INCREASE (DECREASE) IN ACCUMULATION UNITS
The increase (decrease) in accumulation units for the period from
October 10, 1995 (commencement of operations) through December 31, 1995, is as
follows:
Global Advisors Global Advisors BEA Growth Credit Suisse
Money Market Growth Equity and Income International
Portfolio Portfolio Portfolio Portfolio
--------------- --------------- ---------- -------------
<TABLE>
Standard Death
Benefit:
<S> <C> <C> <C> <C>
Increase for
payments
received $ 3,377.2 $ 92.4 $ 35.8 $ 5.8
Increase
(decrease) for
inter-fund
transfers (912.8) 31.8 426.0 424.8
----------- ----------- ----------- ----------
Units, at end of
period 2,464.4 124.2 461.8 430.6
=========== =========== =========== ==========
Enhanced Death
Benefit:
Increased for
payments
received 24.9 0 0 0
------------ ----------- ----------- ----------
Units, at end
of period 24.9 0 0 0
============ =========== =========== ==========
6. DISTRIBUTION AGREEMENT
WNL Brokerage Services, Inc. ("WNL Brokerage"), a wholly-owned subsidiary
of WNL Holding Corp., acts as the principal underwriter of the contracts funded
by the Separate Account. WNL Brokerage is registered as a broker-dealer under
the Securities Exchange Act of 1934 and is a member of the National Association
of Securities Dealers, Inc. The contracts are sold by registered
representatives of the Company, who are also insurance agents under state law.
7. RELATED PARTIES
Through December 31, 1995, the Company contributed capital in the amount
of $6.1 million to the Separate Account. The capital was contributed to
provide diversification and to enhance investment performance. The capital
contributions were made to the Portfolios as participants made specific
selections within the options available to them. The capital will be removed
as the funds grow large enough to meet the diversification requirements without
the additional capital. Dividend income reinvested, realized gain distribution
reinvested and unrealized gains related to the contributed capital for the year
ended December 31, 1995, was $51,829, $9,778 and $220,899, respectively.
<PAGE>
7. RELATED PARTIES (CONTINUED)
Subsequent to year end, the remaining Portfolios, American Capital
Emerging Growth Portfolio, BlackRock Managed Bond Portfolio, Quest for Value
Asset Allocation Portfolio, and Salomon Brothers U.S. Government Securities
Portfolio, were funded by the Company in the following amounts:
</TABLE>
<TABLE>
<S> <C>
American Capital Emerging Growth Portfolio $ 500,000
BlackRock Managed Bond Portfolio 3,000,000
Quest for Value Asset Allocation Portfolio 1,000,000
Salomon Brothers U.S. Government Securities Portfolio 2,000,000
-------------
$ 6,500,000
=============
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants F-2
Balance Sheet as of December 31, 1995 and 1994 F-3
Statement of Operations for the years ended December 31, 1995,
1994 and 1993 F-4
Statement of Shareholder's Equity for the years ended December 31,
1995, 1994 and 1993 F-5
Statement of Cash Flows for the years ended December 31, 1995,
1994 and 1993 F-6
Notes to Financial Statements F-7
Report of Independent Accountants on Financial Statement Schedule F-26
Financial Statement Schedule:
Schedule VI-Reinsurance for the years ended December 31, 1995,
1994 and 1993 F-27
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Western National Life Insurance Company
We have audited the accompanying balance sheet of Western National Life
Insurance Company as of December 31, 1995 and 1994, and the related
statements of operations, shareholder's equity, and cash flows for each of
the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Western National
Life Insurance Company as of December 31, 1995 and 1994, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 1, 1996
F-2
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEET
DECEMBER 31, 1995 AND 1994
(DOLLARS IN MILLIONS)
ASSETS 1995 1994
------ ---- ----
</TABLE>
<TABLE>
<S> <C> <C>
Investments:
Fixed maturities-actively managed
at fair value (amortized cost:
1995-$7,654.5; 1994-$7,604.8) $7,996.7 $6,999.5
Fixed maturities-held to maturity
at amortized cost (fair value:
1995-$2.1; 1994-$1.6) 1.1 1.1
Equity securities at fair value
(cost: 1995-$0.8; 1994 $5.7) 0.8 5.3
Mortgage loans 86.5 87.3
Credit-tenant loans 249.7 243.7
Policy loans 68.3 72.6
Other invested assets 24.5 11.4
Short-term investments 414.8 25.8
-------- --------
Total investments 8,842.4 7,446.7
Accrued investment income 131.7 134.6
Reinsurance receivables 1.8 75.1
Cost of policies purchase 35.8 104.2
Cost of policies produced 228.7 365.3
Deferred income taxes - 151.6
Other assets 20.8 30.5
-------- --------
Total assets $9,261.2 $8,308.0
======== ========
</TABLE>
LIABILITIES AND SHAREHOLDER'S EQUITY
____________________________________
<TABLE>
<S> <C> <C>
Liabilities:
Insurance liabilities $7,915.8 $7,776.1
Investment borrowings 257.3 30.6
Deferred income taxes 118.4 -
Other liabilities 25.0 19.3
________ ________
Total liabilities 8,316.5 7,826.0
________ ________
Shareholder's equity:
Common stock and additional
paid-in capital (par value $50 per share;
authorized: 1995 100,000; 1994 30,000;
issued and outstanding: 1995 50,000;
1994 30,000) 322.6 322.6
Unrealized appreciation (depreciation)
of investments, net 125.2 (322.1)
Retained earnings 496.9 481.5
-------- --------
Total shareholder's equity 944.7 482.0
-------- --------
Total liabilities and shareholder's equity $9,261.2 $8,308.0
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN MILLIONS)
1995 1994 1993
---- ---- ----
<TABLE>
<S> <C> <C> <C>
Revenues: Insurance policy income $ 26.4 $ 26.3 $ 21.8
Net investment income 666.0 638.2 610.1
Net trading income - 3.7 49.6
Net realized gains (losses) (126.2) (52.9) 92.7
-------- ------- -------
Total revenues 566.2 615.3 774.2
-------- ------- -------
Benefits and expenses:
Insurance policy benefits 108.3 104.7 101.9
Change in future policy benefits
and other liabilities 14.1 13.6 19.3
Interest expense on annuities
and financial products 364.9 344.2 333.1
Interest expense on investment
borrowings 8.6 7.3 6.2
Amortization related to operations 37.1 20.1 16.5
Amortization and change in future
policy benefits related to
realized gains (losses) (29.8) (16.8) 84.3
Other operating costs and expenses 41.3 16.1 8.4
-------- ------- -------
Total benefits and expenses 544.5 489.2 569.7
-------- ------- -------
Income before income taxes 21.7 126.1 204.5
Income tax expense 6.3 45.1 74.5
-------- ------- -------
Net income $ 15.4 $ 81.0 $ 130.0
======== ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN MILLIONS)
1995 1994 1993
---- ---- ----
<TABLE>
<S> <C> <C> <C>
Common stock and additional
paid-in capital:
Balance, beginning of year $ 322.6 $ 322.6 $ 263.8
Capital contribution - - 58.8
------- ------- -------
Balance, end of year $ 322.6 $ 322.6 $ 322.6
======= ======= =======
Unrealized appreciation
(depreciation) of investments,
net:
Balance, beginning of year $(322.1) $ 37.8 $ 14.2
Change in unrealized
appreciation
(depreciation), net 447.3 (359.9) 23.6
------- ------- -------
Balance, end of year $ 125.2 $(322.1) $ 37.8
======= ======= =======
Retained earnings:
Balance, beginning of year $ 481.5 $ 400.5 $ 344.3
Net income 15.4 81.0 130.0
Dividends on common stock - - (73.8)
------- ------- -------
Balance, end of year $ 496.9 $ 481.5 $ 400.5
======= ======= =======
Total shareholder's equity $ 944.7 $ 482.0 $ 760.9
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN MILLIONS)
1995 1994 1993
---- ---- ----
<TABLE>
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 15.4 $ 81.0 $ 130.0
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization and depreciation 7.3 0.9 63.2
Realized (gains) losses on
investments, net 119.4 47.1 (97.9)
Income taxes 60.7 26.6 (39.8)
Increase in insurance liabilities 116.0 22.3 46.0
Interest credited to insurance
liabilities 370.2 348.7 340.4
Fees charged to insurance
liabilities (4.2) (4.7) (4.1)
Amortization (accrual) of
investment income, net 3.7 (14.2) (37.1)
Deferral of cost of policies
produced (62.2) (57.4) (42.2)
Change in trading account
securities - 60.8 71.7
Other (0.4) 6.4 (89.1)
-------- -------- --------
Net cash provided by
operating activities 625.9 517.5 341.1
-------- -------- --------
Cash flows from investing activities:
Sales of investments 3,151.9 3,482.8 3,705.7
Maturities and redemptions of
investments 376.3 441.6 1,145.6
Purchases of investments (3,686.4) (4,568.5) (5,309.1)
-------- -------- --------
Net cash used in
investing activities (158.2) (644.1) (457.8)
-------- -------- --------
Cash flows from financing activities:
Deposits to insurance liabilities 747.2 728.8 545.0
Withdrawals from insurance
liabilities (1,052.5) (662.2) (456.6)
Capital contributions - - 58.8
Dividends on common stock - - (73.8)
Investment borrowings, net 226.6 (189.9) 127.4
-------- -------- --------
Net cash provided by (used in)
financing activities (78.7) (123.3) 200.8
-------- -------- --------
Net increase (decrease) in
short-term investments 389.0 (249.9) 84.1
Short-term investments-beginning
of year 25.8 275.7 191.6
-------- -------- --------
Short-term investments-end of year $ 414.8 $ 25.8 $ 275.7
======== ======== ========
Supplemental cash flow disclosure:
Income taxes (refunded) paid, net $ (4.7) $ 17.9 $ 111.9
======== ======== ========
Interest paid on investment
borrowings $ 8.0 $ 7.9 $ 5.7
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
____________________
1. SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Western National Life Insurance Company (the "Company") is a State of
Texas domiciled life insurance company that was founded in 1944. The Company
is a wholly-owned subsidiary of Western National Corporation ("Western
National"). Effective December 31, 1993, the Company's former parent,
Bankers National Life Insurance Company ("Bankers National"), a life
insurance company domiciled in the State of Texas and wholly-owned subsidiary
of Conseco, Inc. ("Conseco"), sold all of the outstanding shares of the
Company to an insurance holding company subsidiary of Conseco ("Conseco
Holding"). In February 1994, Conseco Holding transferred ownership of the
Company to Western National, an insurance holding company formed by Conseco.
The transactions were approved by the Texas Department of Insurance. Western
National completed an initial public offering of its common stock in February
1994 whereby Conseco Holding retained approximately 40% ownership of Western
National's common stock. In December 1994, a wholly-owned life insurance
subsidiary of American General Corporation acquired Conseco Holding's shares
of Western National's common stock.
Certain amounts from prior periods were reclassified to be consistent
with the 1995 statement of cash flows classification. The Company
reclassified realized gains on investments in the amounts of $97.7 million in
1993 as reductions from cash provided from operating activities rather than
as reductions in sales proceeds of investments (which are classified as
investing activities). This reclassification decreased cash flows from
operating activities and increased cash flows from investing activities for
1993 as compared with the amount previously reported, by the amount of the
realized gain.
The Company develops, markets and issues annuity products through niche
distribution channels. The Company sells single premium deferred annuities
to the savings and retirement markets through financial institutions
(primarily banks and thrifts), flexible and single premium deferred annuities
to the tax-qualified and nonqualified retirement markets through personal
producing general agents, and single premium immediate annuities to the
structured settlement market through specialty brokers. The Company also
markets Single Premium Immediate Annuities ("SPIAs"), other than structured
settlement SPIAs, through its financial institutions and personal producing
general agent distribution channels. Additionally, the Company directly
markets single and flexible premium deferred annuities through an affiliate.
The Company introduced a variable annuity product in late 1995, which it
markets through its financial institution, PPGA and direct-marketing
channels. Sales of single premium deferred annuities comprised 79%, 82%, and
72% of net premiums collected in 1995, 1994, and 1993, respectively.
OVERALL EFFECT OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVESTMENTS
Fixed maturity investments ("fixed maturities") are debt securities that
have original maturities greater than one year and are comprised of
investments such as U.S.Treasury securities, mortgage-backed securities,
corporate bonds and redeemable preferred stocks. Equity securities would
include common and non-redeemable preferred stocks. Effective December
31,1993, the Company adopted Statement of Financial Accounting Standards No.
115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES ("SFAS
115"), and, accordingly, classifies its fixed maturities and equity
securities into the following categories:
F-7
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
- Actively managed fixed maturities and equity securities are
securities that may be sold prior to maturity due to changes that
might occur in market interest rates, changes in prepayment risk,
the Company's management of its income tax position, general
liquidity needs, increase in loan demand, the need to increase
regulatory capital or similar factors. Actively managed securities
are carried at estimated fair value and the net unrealized gains
(losses) are recorded as a component of shareholder's equity, net of
tax and related adjustments described below. All but $1.1 million
of the Company's fixed maturities and equity securities were
classified as actively managed as of December 31, 1995 and 1994.
- Held to maturity securities are those debt securities which the
Company has the ability and positive intent to hold to maturity, and
are carried at amortized cost. The Company may dispose of such
securities under certain unforeseen circumstances, such as issuer
credit deterioration or changes in regulatory requirements. The
Company had $1.1 million of securities classified as held to
maturity as of December 31, 1995 and 1994.
- Trading account securities are fixed maturity and equity securities
that are bought and held primarily for the purpose of selling them
in the near term. Trading account securities are carried at
estimated fair value and the net unrealized gains (losses) are
included as a component of net trading income. The Company
suspended its trading account activities in 1994 and, accordingly,
had no securities classified as trading as of December 31, 1995 and
1994.
Changes in interest rates have a direct, inverse impact on the market
value of fixed-income investments. It is reasonably possible that changes in
interest rates will occur in the near term and, as a result of SFAS 115, such
changes will have a material impact on the carrying value of actively managed
fixed maturity and equity securities, with an offsetting effect to
stockholder's equity, net of the related effects on cost of policies
purchased and produced and deferred income taxes.
Anticipated returns, including realized gains and losses, from the
investment of policyholder balances are considered in determining the
amortization of the cost of policies purchased and the cost of policies
produced. When actively managed fixed maturity and equity securities are
stated at fair value, an adjustment is made to the cost of policies purchased
and the cost of policies produced equal to the change in amortization that
would have been recorded if such securities had been sold at their fair value
and the proceeds reinvested at current yields. Furthermore, if future yields
expected to be earned on such securities decline, it may be necessary to
increase certain insurance liabilities. Adjustments to such liabilities are
required when their balances, in addition to future net cash flows including
investment income, are insufficient to cover future benefits and expenses.
Mortgage loans and credit-tenant loans are carried at amortized cost.
Policy loans are carried at their current unpaid principal balance. Fees
received and costs incurred in connection with the Company's origination of
these loans are deferred, and are amortized as yield adjustments over their
remaining contractual lives in accordance with SFAS 91. Short-term
investments, which principally include commercial paper, cash and other
financial instruments with original maturities of typically 90 days or less,
are carried at amortized cost.
Discounts and premiums of investment securities to par are amortized as
yield adjustments over the contractual lives of the underlying securities and
callable corporate bonds. Principal prepayments can alter the cash flow
pattern and yield of prepayment-sensitive investments such as mortgage-backed
securities ("MBS"). The accretion of discount and amortization of premium
takes into consideration actual and estimated principal prepayments. In the
case of MBS, the Company utilizes estimated prepayment speed information
obtained from published sources or from estimates developed by its investment
advisor. The effects on the yield of a security from changes in principal
prepayments are recognized retrospectively, except for interest only or
residual interests in structured securities which are recognized
prospectively. The degree to which a security is susceptible to yield
adjustments is influenced by the difference between its carrying value and
par, the relative sensitivity of the underlying assets backing the securities
to changing interest rates, and the repayment priority of the securities in
the overall securitization structure. Prepayments may also reduce future
yield to the extent that proceeds are reinvested in a lower rate environment.
F-8
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
The Company manages the extent of these risks by (i) principally
purchasing securities which are backed by collateral with lower prepayment
sensitivity (such as MBS priced at or near par value that are highly
seasoned), (ii) avoiding securities with values heavily influenced by changes
in prepayments (such as interest-only and principal-only securities), and
(iii) purchasing securities with prepayment protected structures.
The specific identification method is used to account for the
disposition of investments. The differences between the sales proceeds and
the carrying values are reported as gains (losses), or in the case of
prepayments, as adjustments to investment income. Declines in values of
investments which are considered other than temporary are recognized as
realized losses. Subsequent recoveries in value are recognized only when the
investments are sold.
The Company occasionally uses derivative financial instruments to alter
interest rate exposure arising from mismatches between assets and
liabilities. Certain of the Company's fixed maturities are floating-rate
instruments. In an effort to reasonably closely match the average duration
of assets and liabilities, the Company has entered into interest rate swap
contracts that effectively convert the floating-rate securities to fixed-rate
instruments. Specifically, the Company contracts with counterparties to
exchange, at specified intervals, the difference 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, with
the net difference charged or credited as an adjustment to investment income.
The Company's investment guidelines provide that all swap contracts must be
either (i) with parties rated "A" or better by a nationally recognized
statistical rating service, and/or (ii) secured by collateral approved by the
Company's Investment Committee.
The Company occasionally enters into mortgage dollar roll and reverse
repurchase transactions (collectively, "dollar rolls") when earnings
enhancement opportunities arise. Dollar rolls are agreements with an outside
source, usually broker/dealers, to sell mortgage- backed securities and then,
at a predetermined date, to buy back "substantially the same securities".
The Company's investment guidelines require that the original term of a
dollar roll be no longer than 30 days and that all proceeds of such
short-term transactions be invested in short-term investments. The
securities involved must also have been issued, assumed or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), or the Federal Home Loan Mortgage Corporation
("FHLMC").
The Company enters into dollar rolls whenever a positive spread can be
realized from the implicit interest cost of the investment borrowings and the
reinvestment of the proceeds in short-term financial instruments. Because
both sides of the transaction are entered into on the basis of short-term,
money-market rates, dollar rolls involve no duration risk while providing an
enhancement to investment income. The Company's dollar rolls are accounted
for as short-term investment borrowings, with like amounts included in
short-term investments. The carrying values of the Company's investment
borrowings are assumed to approximate estimated fair value.
COST OF POLICIES PURCHASED
The cost of policies purchased represents the portion of Conseco's cost
of acquiring the Company in 1987 that was attributable to the value of the
right to receive future cash flows from insurance contracts existing at the
date of acquisition. The value of the cost of policies purchased is the
actuarially determined present value of the projected future cash flows from
the acquired policies.
Expected future cash flows used in determining the cost of policies
purchased are based on actuarially determined projections of future premium
collection, mortality, surrenders, benefit payments, operating expenses,
changes in insurance liabilities, investment yields on the assets held to
back such policy liabilities and other factors. These projections take into
account all factors known or expected at the valuation date based on the
collective judgment of the management of the Company. Actual experience on
purchased business may vary from projections due to differences in renewal
premiums collected, investment spread, investment gains (losses), mortality
and morbidity costs and other factors. These variances from original
projections, whether positive or negative, are included in net income as they
occur. To the extent that these variances indicate that future cash flows
will differ from those reflected in the scheduled amortization of the cost of
policies purchased, current and future amortization is adjusted. Therefore,
when the Company sells fixed
F-9
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
maturities and recognizes a gain (loss) it also reduces (increases) the
future investment spread because the proceeds from the sale of investments
are reinvested at a lower (higher) earnings rate and amortization is
increased (decreased) to reflect the change in the incidence of cash flows.
The discount rate used to determine such value is the current rate of return
the Company would require to justify the investment.
The cost of policies purchased is amortized (with interest at the same
rate used to determine the discounted value of the asset) based on the
incidence of the expected cash flows. Recoverability of the cost of policies
purchased is evaluated regularly by comparing the current estimate of
expected future cash flows (discounted at the rate of interest that accrues
to the policies) to the unamortized asset balance by line of insurance
business. If such current estimate indicates that the existing insurance
liabilities, together with the present value of future net cash flows from
the business, will not be sufficient to recover the cost of policies
purchased, the difference is charged to expense. Amortization is also
adjusted for the current and future years to reflect (i) the revised estimate
of future cash flows and (ii) the revised interest rate (but not greater than
the rate initially used and not lower than the rate of interest earned on
invested assets) at which the discounted present value of such expected
future profits equals the unamortized asset balance. Expected future cash
flows used in determining the amortization pattern and recoverability of cost
of policies purchased is based on historical gross profits and management's
estimates and assumptions regarding future investment spreads, maintenance
expenses, and persistency of the block of business. The accuracy of the
estimates and assumptions are impacted by several factors, including factors
outside the control of management such as movements in interest rates and
competition from other investment alternatives. It is reasonably possible
that conditions impacting the estimates and assumptions will change and that
such changes will result in future adjustments to cost of policies purchased.
COST OF POLICIES PRODUCED
Costs of producing new business (primarily commissions and certain costs
of policy issuance and underwriting) which vary with and are primarily
related to the production of new business, are deferred to the extent
recoverable from future profits. Such costs are amortized with interest as
follows:
- For universal life-type contracts and investment-type contracts, in
relation to the present value of expected gross profits from these
contracts, discounted using the interest rate credited to the
policy;
- For immediate annuities with mortality risks, in relation to the
present value of benefits to be paid;
- For traditional life contracts, in relation to future anticipated
premium revenue using the same assumptions that are used in
calculating the insurance liabilities.
Recoverability of the unamortized balance of the cost of policies
produced is evaluated regularly. For universal life-type contracts and
investment-type contracts, the accumulated amortization is adjusted (whether
an increase or a decrease) whenever there is a material change in the
estimated gross profits expected over the life of a block of business in
order to maintain a constant relationship between cumulative amortization and
the present value (discounted at the rate of interest that accrues to the
policies) of expected gross profits. For most other contracts, the
unamortized asset balance is reduced by a charge to income only when the sum
of the present value of future cash flows and the policy liabilities is not
sufficient to cover such asset balance.
Expected gross profits used in determining the amortization pattern and
recoverability of cost of policies produced is based on historical gross
profits and management's estimates and assumptions regarding future
investment spreads, maintenance expenses, and persistency of the block of
business. The accuracy of the estimates and assumptions are impacted by
several factors, including factors outside the control of management such as
movements in interest rates and competition from other investment
alternatives. It is reasonably possible that conditions impacting the
estimates and assumptions will change and that such changes will result in
future adjustments to cost of policies produced.
F-10
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
INSURANCE LIABILITIES, RECOGNITION OF INSURANCE POLICY INCOME
AND RELATED BENEFITS AND EXPENSES
Reserves for universal life-type and investment-type contracts are based
on the contract account balance, if future benefit payments in excess of the
account balance are not guaranteed, or on the present value of future benefit
payments when such payments are guaranteed. Additional increases to insurance
liabilities are made if future cash flows, including investment income, are
insufficient to cover future benefits and expenses.
For investment contracts without mortality risk (such as deferred
annuities and immediate annuities with benefits paid for a period certain)
and for contracts that permit the Company or the insured to make changes in
the contract terms (such as single premium whole life and universal life),
premium deposits and benefit payments are recorded as increases or decreases
in a liability account rather than as revenue and expense. Amounts charged
against the liability account for the cost of insurance, policy
administration and surrender penalties are recorded as revenues. Interest
credited to the liability account and benefit payments made in excess of the
contract liability account balance are charged to expense.
Reserves for traditional and limited-payment contracts are generally
calculated using the net level premium method and assumptions as to
investment yields, mortality, withdrawals and dividends. The assumptions are
based on projections of past experience and include provisions for possible
adverse deviation. These assumptions are made at the time the contract is
issued or, in the case of contracts acquired by purchase, at the purchase
date.
For traditional insurance contracts, premiums are recognized as income
when due. Benefits and expenses are associated with earned premiums so as to
result in their recognition over the premium-paying period of the contracts.
Such recognition is accomplished through the provision for future policy
benefits and the amortization of deferred policy acquisition costs.
For contracts with mortality risk, but with premiums paid for only a
limited period (such as single premium immediate annuities with benefits paid
for the life of the annuitant), the accounting treatment is similar to
traditional contracts. However, the excess of the gross premium over the net
premium is deferred and recognized in relation to the present value of
expected future benefit payments.
Liabilities for incurred claims are determined using historical
experience and represent an estimate of the present value of the ultimate net
cost of all reported and unreported claims. Management believes these
estimates are adequate. Such estimates are periodically reviewed and any
adjustments are reflected in current operations.
REINSURANCE
In the normal course of business, the Company seeks to limit its
exposure to loss on any single policy and to recover a portion of benefits
paid by ceding reinsurance to other insurance enterprises or reinsurers under
excess coverage and coinsurance contracts. The Company has set its retention
limit for acceptance of risk on life insurance policies at various levels up
to $0.8 million. Assets and liabilities relating to reinsurance contracts
are reported gross of the effects of reinsurance. Reinsurance receivables
and prepaid reinsurance premiums, including amounts related to insurance
liabilities, are reported as assets.
INCOME TAXES
Pursuant to a tax sharing agreement, the Company was included in
Conseco's consolidated tax return beginning January 1, 1993. Under the
agreements, income taxes were allocated based upon separate return
calculations with certain adjustments. Commencing with the income tax
reporting period ended December 31, 1994, the Company has filed separate life
insurance company tax returns.
Deferred income taxes are provided for the future tax effects of
temporary differences between the tax bases of assets and liabilities and
their financial reporting amounts, measured using the enacted tax rates and
laws that will be in effect
F-11
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
when the differences are expected to reverse. The Company provides a
valuation allowance, if necessary, to reduce deferred tax assets, if any, to
their estimated realizable value.
2. INVESTMENTS:
The amortized cost, gross unrealized gains and losses, estimated fair
value and carrying value of actively managed and held to maturity fixed
maturities were as follows:
December 31, 1995
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
---------- ---------- ---------- --------- --------
(Dollars in millions)
<TABLE>
<S> <C> <C> <C> <C> <C>
Actively managed:
U.S. Treasury
securities and
obligations of
U.S. government
corporations
and agencies $ 57.8 $ 2.2 $ - $ 60.0 $ 60.0
Obligations of
states and
political
subdivisions 169.8 5.7 2.7 172.8 172.8
Public utility
securities 1,335.1 51.1 10.2 1,376.0 1,376.0
Other corporate
securities 3,800.3 241.9 9.2 4,033.0 4,033.0
Mortgage-backed
securities 2,291.5 0.3 6.9 2,354.9 2,354.9
-------- ------ ------- --------- ---------
Total actively
managed $7,654.5 $371.2 $ 29.0 $ 7,996.7 $ 7,996.7
======== ====== ======= ========= =========
Held to maturity-
obligations of
states and
political
subdivisions $ 1.1 $ 1.0 $ - $ 2.1 $ 1.1
======== ====== ======= ========= =========
</TABLE>
December 31, 1995
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
---------- ---------- ---------- --------- --------
(Dollars in millions)
<TABLE>
<S> <C> <C> <C> <C> <C>
Actively managed:
U.S. Treasury
securities and
obligations of
U.S. government
corporations
and agencies $ 76.7 $ - $ 8.3 $ 68.4 $ 68.4
Obligations of
states and
political
subdivisions 226.6 - 18.8 207.8 207.8
Public utility
securities 1,767.9 6.7 190.3 1,584.3 1,584.3
Other corporate
securities 3,299.6 17.3 251.0 3,065.9 3,065.9
Mortgage-backed
securities 2,234.0 15.4 176.3 2,073.1 2,073.1
--------- ------ -------- --------- ---------
Total actively
managed $ 7,604.8 $ 39.4 $ 644.7 $ 6,999.5 $ 6,999.5
========= ====== ======== ========= =========
Held to maturity-
obligations
of states and
political
subdivisions $ 1.1 $ 0.5 $ - $ 1.6 $ 1.1
========= ====== ======== ========= =========
</TABLE>
F-12
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
The following table sets forth the amortized cost and estimated fair
value of fixed maturities as of December 31, 1995, based upon the source of
the estimated fair value:
Estimated
Amortized Fair
Cost Value
--------- ---------
(Dollars in millions)
<TABLE>
<S> <C> <C>
Nationally recognized pricing services $ 6,608.0 $ 6,907.7
Broker-dealer market makers 1,028.1 1,072.6
Internally developed methods 19.5 18.5
--------- ---------
Total fixed maturities $ 7,655.6 $ 7,998.8
========= =========
</TABLE>
The following table sets forth the quality of total fixed maturities as
of December 31, 1995, classified in accordance with the highest rating by a
nationally recognized statistical rating organization or, as to $96.5 million
of fixed maturities not commercially rated, then based on ratings assigned by
the National Association of Insurance Commissioners ("NAIC") as follows (for
purposes of the table, and only for fixed maturities not commercially rated:
NAIC Class 1 securities would be included in the "A" rating; Class 2, "BBB-";
Class 3, "BB-"; and Classes 4-6, "B" and below):
Estimated Fair Value as a % of:
--------------------------------
Commercial Amortized Carrying Fair Fixed Amortized Total
Rating Cost Value Value Maturities Cost Investments
- ---------- --------- -------- ------ ---------- --------- -----------
(Dollars in millions)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
AAA $2,570.1 $2,641.3 $2,641.3 33.0% 102.8% 29.9%
AA 760.8 788.5 788.5 9.9 103.7 8.9
A 1,999.4 2,107.3 2,107.3 26.3 105.4 23.8
BBB+ 730.4 790.1 790.1 9.9 108.2 9.0
BBB 854.8 902.9 902.9 11.3 105.6 10.2
BBB- 428.1 449.2 449.2 5.6 104.9 5.1
-------- -------- -------- ----- ----- -----
Total
investment
grade 7,343.6 7,679.3 7,679.3 96.0 104.6 86.9
BB+ 38.4 40.2 40.2 0.5 104.6 0.4
BB 65.0 67.8 67.8 0.9 104.3 0.8
BB- 118.9 120.2 120.2 1.5 101.1 1.4
B and below 89.7 90.3 91.3 1.1 101.8 1.0
-------- -------- -------- ----- ----- -----
Total below
investment
grade 312.0 318.5 319.5 4.0 102.4 3.6
-------- -------- -------- ----- ----- -----
Total fixed
maturities $7,655.6 $7,997.8 $7,998.8 100.0% 104.5% 90.5%
======== ======== ======== ===== ===== =====
</TABLE>
F-13
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
The amortized cost and estimated fair value of fixed maturities by
contractual maturity as of December 31, 1995 were as follows:
Estimated
Amortized Fair
Cost Value
_________ _________
(Dollars in millions)
<TABLE>
<S> <C> <C>
Actively managed:
Due in one year or less $ 6.8 $ 6.8
Due after one year through five years 568.0 588.3
Due after five years through ten years 1,947.6 2,054.1
Due after ten years 2,840.6 2,992.6
--------- --------
Subtotal 5,363.0 5,641.8
Mortgage-backed securities 2,291.5 2,354.9
--------- --------
Total actively managed 7,654.5 7,996.7
Held to maturity:
Due after ten years 1.1 2.1
--------- ---------
Total fixed maturities $ 7,655.6 $ 7,998.8
========= =========
</TABLE>
Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations, with or without
call or prepayment penalties, and because most mortgage-backed securities
provide for periodic payments throughout their lives.
Net investment income consisted of the following:
1995 1994 1993
------ ------ ------
(Dollars in millions)
<TABLE>
<S> <C> <C> <C>
Fixed maturities $610.1 $593.8 $568.8
Equity securities 0.2 0.9 1.1
Mortgage loans 9.4 11.7 7.2
Credit-tenant loans 23.9 20.9 21.1
Policy loans 4.4 4.4 4.4
Other invested assets 9.8 2.8 1.7
Short-term investments 12.8 11.3 12.3
------ ------ ------
Gross investment income 670.6 645.8 616.6
Investment expenses 4.6 7.6 6.5
------ ------ ------
Net investment income $666.0 $638.2 $610.1
====== ====== ======
</TABLE>
The carrying value of investments not accruing investment income totaled
$0.6 million, $13.6 million, and $7.1 million at December 31, 1995, 1994 and
1993, respectively. The Company had no fixed maturities in default as to
the payment of principal or interest at December 31, 1995, as compared to
$13.6 million at December 31, 1994 and $7.1 million at December 31, 1993.
During 1995, 1994 and 1993, the Company recorded writedowns of fixed
maturities totaling $6.4 million, $0.4 million and $7.7 million,
respectively.
The proceeds from sales of actively managed fixed maturities were
$3,151.9 million, $3,482.8 million, and $3,705.7 million for the years ended
December 31, 1995, 1994 and 1993, respectively. Since September 30, 1992,
there have been no purchases, maturities or sales of fixed maturities
classified as held to maturity.
F-14
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
Net trading income was as follows:
1995 1994 1993
------ ------ ------
(Dollars in millions)
<TABLE>
<S> <C> <C> <C>
Gross trading gains $ - $ 6.2 $ 70.8
Gross trading losses - (1.7) (18.4)
------- ------ ------
Net realized gains from trading account
securities before expenses - 4.5 52.4
Trading expenses - 0.8 2.8
------- ------ ------
Net trading income $ - $ 3.7 $ 49.6
======= ====== ======
</TABLE>
During 1994 and 1993, the Company transferred trading account securities
with carrying values of $73.3 million and $120.5 million, respectively, to
the actively managed fixed maturities category. The Company suspended
trading account activities during 1994.
Net realized gains (losses) were as follows:
1995 1994 1993
-------- -------- --------
(Dollars in millions)
<TABLE>
<S> <C> <C> <C>
Fixed maturities:
Gross realized gains $ 17.8 $ 34.4 $129.9
Gross realized losses (128.6) (80.4) (17.2)
Decline in net realizable value
that is other than temporary (6.4) (0.4) (7.7)
------- ------ ------
(117.2) (46.4) 105.0
Equity securities 0.8 - (1.1)
Mortgages loans - - (5.9)
Other (3.0) (0.7) (0.1)
------- ------ ------
Net realized gains (losses) before
expenses (119.4) (47.1) 97.9
Investment expenses 6.8 5.8 5.2
------- ------ ------
Net realized gains (losses) $(126.2) $(52.9) $ 92.7
======= ====== ======
</TABLE>
Changes in unrealized appreciation (depreciation) on investments carried
at estimated fair value, net of the effects on other balance sheet accounts,
were as follows:
1995 1994 1993
------ -------- -------
(Dollars in millions)
<TABLE>
<S> <C> <C> <C>
Investments carried at estimated
fair value:
Actively managed fixed maturities $947.5 $(837.2) $118.6
Equity securities 0.4 (0.4) 0.3
Trading account securities - - (1.1)
Other 11.0 - -
------ ------- ------
Change in unrealized appreciation
(depreciation), gross 958.9 (837.6) 117.8
Less effect on other balance sheet
accounts:
Cost of policies purchased (63.7) 44.9 (0.9)
Cost of policies produced (196.7) 215.9 (68.1)
Insurance liabilities (36.3) 36.9 (12.1)
Other liabilities 25.8 (13.6) -
Deferred income taxes (240.7) 193.6 (13.1)
------- ------- ------
Change in unrealized appreciation
(depreciation), net $ 447.3 $(359.9) $ 23.6
======= ======= ======
</TABLE>
F-15
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
At December 31, 1995, the aggregate carrying value of the Company's MBS
portfolio was $2,354.9 million, consisting of $1,253.4 million of agency
pass-throughs and $1,101.5 million of collateralized mortgage obligations
("CMOs"). The following table sets forth the carrying value of the Company's
MBS portfolio by structural type and underlying collateral coupon class as of
December 31, 1995:
Collateral Coupon Class
-------------------------------------------------------
7% and 7.01- 8.01- 9.01%
MBS Type Below 8.00% 9.00% and Above Total
-------- -------- -------- -------- --------- --------
(Dollars in millions)
<TABLE>
<S> <C> <C> <C> <C> <C>
Agency pass-throughs $ 744.7 $ 460.1 $ 36.1 $ 12.5 $1,253.4
CMOs:
PACs, TACs and VADMs 185.0 114.6 5.2 2.9 307.7
Sequentials 2.6 91.5 140.0 224.2 458.3
Supports and other 19.9 20.8 5.3 3.6 49.6
Mezzanines and
subordinates - 24.3 7.3 8.2 39.8
Z-tranches - - 2.7 22.9 25.6
ARMs and floaters (a) (a) (a) (a) 220.5
--------
Total CMOs 1,101.5
--------
Total MBS $2,354.9
========
</TABLE>
_______________
(a) The collateral coupon rates are not meaningful as they reset
periodically in accordance with changes in market interest rates.
At December 31, 1995, the Company had total mortgage loans of $86.5
million, or 1.0% of total invested assets, consisting of $49.2 million of
commercial mortgages, $0.1 million of residential and farm mortgages, and
$37.2 million of mortgage investments in junior and residual interests of
CMOs ("CMO residuals"). Approximately 70% of the commercial mortgages were
on properties located in four states - Florida (28%), Indiana (22%), Texas
(11%) and Virginia (9%), respectively. No other state comprised greater than
7% of the total commercial mortgage loan balance.
The CMO residuals entitle the Company to the excess cash flows arising
from the difference between (i) the cash flows required to make principal and
interest payments on the other tranches of the CMO and (ii) the actual cash
flows received on the mortgage loan assets backing the CMO. If prepayments
or credit losses on the underlying mortgage loan assets vary from
projections, the total cash flows to the Company could differ from
projections. Changes in projected cash flows which impact the yields of the
CMO residuals are recognized in investment income prospectively. If the
carrying value of CMO residuals exceed the projected cash flows discounted at
a risk free rate, the carrying value is adjusted to fair value and a realized
loss is recognized.
During 1993, the Company realized losses on mortgage loans of
approximately $5.9 million, consisting principally of $5.8 million of
permanent writedowns on the mortgage residuals. There were no mortgage loan
writedowns in 1994 or 1995. At December 31, 1995, the Company had $0.6
million of mortgage loans on nonaccrual status, which were subsequently paid
in full.
At December 31, 1995, the Company held $249.7 million, or 2.8% of total
invested assets, of credit-tenant loans ("CTLs"). CTLs are mortgage loans
for commercial properties which require, as stipulated by the Company's
underwriting guidelines, (i) the lease of the principal tenant to be assigned
to the Company (including the direct receipt by the Company of the tenant's
lease payments) and to produce adequate cash flow to fund the requirements of
the loan and (ii) the principal tenant (or the guarantor of such tenant's
obligations) to have a credit rating of generally at least "BBB" or its
equivalent. The underwriting guidelines take into account such factors as
the lease terms on the subject
F-16
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
property; the borrower's management ability, including business experience,
property management capabilities and financial soundness; and such economic,
demographic or other factors that may affect the income generated by the
property or its value. The underwriting guidelines also require a
loan-to-value ratio of 75% or less. Because CTLs are principally
underwritten on the basis of the creditworthiness of the tenant rather than
on the value of the underlying property, they are classified as a separate
class of securities for financial reporting purposes. As with commercial
mortgage loans, CTLs are additionally secured by liens on the underlying
property.
As part of its investment strategy, the Company enters into mortgage
dollar roll and reverse repurchase transactions principally to increase
investment earnings and to improve liquidity. These transactions are
terminable after 30 days and are accounted for as short-term investment
borrowings, with the proceeds of such borrowings reinvested in short-term
financial instruments. They are collateralized by mortgage-backed agency
pass-throughs with fair values approximating the underlying loan value. Such
borrowings were $257.3 million and $30.6 million at December 31, 1995, and
1994, respectively.
At December 31, 1995, the Company had outstanding interest rate swap
agreements with total notional contract amounts of $330.0 million and which
expire at various dates through 1999. At December 31, 1995, the average
contractual floating-pay and fixed-receipt rates approximated 5.9% and 7.3%,
respectively. Based on these rates, the Company's interest rate swaps had an
estimated fair value of a positive $12.2 million as of December 31, 1995.
The Company had no investments in any entity in excess of 10% of
shareholder's equity as of December 31, 1995, other than investments issued,
assumed or guaranteed by the U.S. government, such as agency pass-throughs.
3. INSURANCE LIABILITIES:
Insurance liabilities consisted of the following:
Interest
Withdrawal Mortality Rate December 31,
---------------------
Assumption Assumption Assumption 1995 1994
---------- ---------- ---------- -------- --------
(Dollars in millions)
<TABLE>
<S> <C> <C> <C> <C> <C>
Future policy
benefits:
Investment
contracts N/A N/A (d) $6,566.5 $6,476.6
Limited-
payment
contracts None (b) 4%-11% 1,267.2 1,215.6
Traditional
life
insurance
contracts (a) (c) (e) 32.7 32.8
Universal
life-type
contracts N/A N/A N/A 47.7 49.9
Claims payable
and other
policyholders'
funds N/A N/A N/A 1.7 1.2
------- --------
Total
insurance
liabilities $7,915.8 $7,776.1
======== ========
</TABLE>
(a) Company experience.
(b) Principally the 1984 United States Population Table.
(c) Principally modifications of the 1965-70 Basic, Select and Ultimate
Tables.
(d) In 1995 and 1994, approximately 93% of this liability represented
account balances where future benefits were not guaranteed and 7%
represented the present value of guaranteed future benefits determined
using interest rates ranging from 3% to 12%.
(e) Various, ranging from 3% to 6% in 1995 and 1994.
Realized gains on fixed maturities during 1994 and 1993 reduced the
expected future yields on the investment of policyholder balances to the
extent that future cash flows on certain products were insufficient to cover
future benefits and expenses. Accordingly, additional estimated insurance
liabilities of $2.2 million and $37.1 million were established by a charge to
expense in 1994 and 1993, respectively. No additions to liabilities were
required in 1995.
F-17
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
4. REINSURANCE:
The Company enters into reinsurance agreements with various companies to
reinsure risks in excess of its retention limits. To the extent that
reinsuring companies are unable to meet obligations under these agreements,
the Company remains contingently liable. The Company evaluates the financial
conditions of its reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies.
Direct and assumed life insurance in force totaled $628.6 million,
$706.3 million and $799.2 million at December 31, 1995, 1994 and 1993,
respectively and ceded life insurance in force totaled $286.1 million, $329.1
million and $388.5 million at December 31, 1995, 1994 and 1993, respectively.
The cost of ceded policies containing mortality risks totaled $1.3
million in 1995 and 1994 and $2.0 million in 1993, and was deducted from
insurance premium revenue. Reinsurance recoveries netted against insurance
policy benefits totaled $4.5 million, $3.5 million and $8.9 million in 1995,
1994 and 1993, respectively.
Effective October 1, 1995 and March 31, 1993, the Company recaptured
certain annuity business with assets approximately equal to statutory
insurance liabilities of $71.8 million and $1,347.7 million, respectively,
that had previously been ceded. On June 30, 1993, the Company recaptured
certain annuity business with insurance liabilities of $156.5 million that
had previously been reinsured. Assets with a fair value approximating the
insurance liabilities were transferred to the Company.
5. INCOME TAXES:
The components of income tax included in the balance sheet are as
follows:
December 31,
---------------------
1995 1994
-------- --------
(Dollars in millions)
<TABLE>
<S> <C> <C>
Deferred income tax liabilities:
Investments $ 20.0 $ 18.5
Cost of policies produced and purchase 118.4 96.6
Unrealized appreciation of investments 67.5 -
Other - 2.9
------- -------
Gross deferred income tax liabilities 205.9 118.0
Deferred income tax assets:
Insurance liabilities 76.7 96.4
Unrealized depreciation of investments - 173.2
Other 10.8 -
------- -------
Gross deferred income tax assets 87.5 269.6
------- -------
Net deferred income tax assets (liabilities) $(118.4) $ 151.6
======= =======
</TABLE>
Income tax expense was as follows:
1995 1994 1993
-------- -------- --------
(Dollars in millions)
<TABLE>
<S> <C> <C> <C> <C>
Current tax provision (benefit) $ (23.0) $ (5.0) $ 105.3
Deferred tax provision (benefit) 29.3 50.1 (30.8)
------- ------- -------
Income tax expense $ 6.3 $ 45.1 $ 74.5
======= ======== =======
</TABLE>
F-18
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
Income tax expense differed from that computed at the applicable federal
statutory rate (35% during 1995, 1994 and 1993) for the following reasons:
1995 1994 1993
-------- -------- --------
(Dollars in millions)
<TABLE>
<S> <C> <C> <C>
Federal tax on income before income taxes
at statutory rates $ 7.6 $ 44.2 $ 71.6
State taxes 0.5 0.5 1.6
Additional tax on unrealized gains and
income of prior periods related to
increase in corporate income tax rate - - 0.5
Various adjustments (1.8) 0.4 0.8
-------- -------- --------
Income tax expense $ 6.3 $ 45.1 $ 74.5
======== ======== ========
</TABLE>
During 1995, the Company assigned its right to tax benefits related to
realized investment losses generated during 1995 to an affiliate in return
for cash payments equal to the tax benefits. During 1995, the Company
received $36.9 million and at December 31, 1995, $9.7 million, included in
other assets, related to the remaining 1995 tax benefits receivable from the
affiliate.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT
FAIR VALUES OF FINANCIAL INSTRUMENTS ("SFAS 107") requires disclosures of
fair value information about financial instruments, and includes assets and
liabilities recognized or not recognized in the balance sheet, for which it
is practicable to estimate their fair value. In cases where quoted market
prices are not available, fair values are based on estimates using discounted
cash flow or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rates and estimates
of the amount and timing of future cash flows. SFAS 107 excludes certain
insurance liabilities and other non-financial instruments from its disclosure
requirements, such as the amount for the value associated with customer or
agent relationships, the expected interest margin (interest earnings over
interest credited) to be earned in the future on investment-type products, or
other intangible items. Accordingly, the aggregate fair value amounts
presented herein do not necessarily represent the underlying value of the
Company; likewise, care should be exercised in deriving conclusions about the
Company's business or financial condition based on the fair value information
presented herein.
The following methods and assumptions were used by the Company in
determining estimated fair values of financial instruments:
FIXED MATURITIES AND EQUITY SECURITIES: The estimated fair values for
fixed maturities are based on quoted market prices, where available. For
fixed maturities not actively traded, the estimated fair values are
determined using values obtained from independent pricing services or,
in the case of private placements, are determined by discounting
expected future cash flows using a current market rate applicable to the
yield, credit quality, and maturity of the securities. The estimated
fair values for equity securities are based on quoted market prices.
SHORT-TERM INVESTMENTS: The carrying values approximate estimated fair
value.
MORTGAGE LOANS, CREDIT-TENANT LOANS, AND POLICY LOANS: The estimated
fair values for mortgage loans, CTLs and policy loans are determined by
discounting future expected cash flows using interest rates currently
being offered for similar loans to borrowers with similar credit
ratings.
OTHER INVESTED ASSETS: The estimated fair values are determined using
quoted market prices for similar instruments.
INSURANCE LIABILITIES FOR INVESTMENT CONTRACTS: The estimated fair
values are determined using discounted cash flow calculations based on
interest rates currently being offered for similar contracts with
maturities consistent with those remaining for the contracts being
valued. The estimated fair values of the insurance liabilities for
investment contracts
F-19
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
were approximately equal to the carrying values as of December 31, 1995
and 1994, because interest rates credited on the vast majority of
account balances approximate current rates paid on similar investments
and are not generally guaranteed beyond one year. Fair values for the
Company's insurance liabilities other than those for investment-type
insurance contracts are not required to be disclosed. However, the
estimated fair values of liabilities for all insurance contracts are
taken into consideration in the Company's overall management of interest
rate risk, which minimizes exposure to changing interest rates through
the matching of investment maturities with amounts due under insurance
contracts.
INVESTMENT BORROWINGS: The carrying values approximate estimated fair
value.
The estimated fair values and carrying values of the Company's financial
instruments were as follows:
December 31,
--------------------------------------
1995 1994
------------------ ------------------
Fair Carrying Fair Carrying
Value Value Value Value
-------- -------- -------- --------
(Dollars in millions)
<TABLE>
Assets:
<S> <C> <C> <C> <C>
Fixed maturities and equity
securities $7,999.6 $7,998.6 $7,006.4 $7,005.9
Mortgage loans, credit-tenant
loans and policy loans 400.0 404.5 377.6 403.6
Other invested assets 24.5 24.5 11.8 11.4
Short-term investments 414.8 414.8 25.8 25.8
Liabilities:
Insurance liabilities for
investment contracts 6,566.5 6,566.5 6,476.6 6,476.6
Investment borrowings 257.3 257.3 30.6 30.6
</TABLE>
7. SHAREHOLDER'S EQUITY:
Generally, dividends that can be paid by the Company during any
twelve-month period cannot exceed the greater of statutory net gain from
operations (excluding realized gains on investments) for the preceding year
or 10% of statutory surplus at the end of the preceding year. In 1996, the
Company can pay dividends of up to $42.4 million.
During 1995, the Company increased its authorized number of common stock
shares from 30,000 shares to 100,000 shares and issued a stock dividend of
20,000 shares. The stock dividend was accounted for as a stock split.
F-20
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
The components of the balance sheet caption "unrealized appreciation
(depreciation) of investments, net" in shareholder's equity are summarized as
follows:
December 31, 1995 December 31, 1994
---------------------------- ------------------------
Effect of Effect of
Cost Fair Value Carrying Cost Fair Value Carrying
Basis Adjustments Value Basis Adjustments Value
------ ----------- -------- ----- ---------- --------
(Dollars in millions)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
INVESTMENTS:
Actively managed
fixed maturities $7,654.5 $ 342.2 $7,996.7 $7,604.8 $(605.3) $6,999.5
Equity
securities 0.8 - 0.8 5.7 (0.4) 5.3
Other invested
assets 13.5 11.0 24.5 - - -
-------- ------- -------- -------- -------- --------
7,668.8 353.2 8,022.0 7,610.5 (605.7) 7,004.8
OTHER BALANCE
SHEET ITEMS:
Cost of policies
purchased 75.8 (40.0) 35.8 80.5 23.7 104.2
Cost of policies
produced 325.1 (96.4) 228.7 265.0 100.3 365.3
Insurance
liabilities (7,879.5) (36.3) (7,915.8) (7,776.1) - (7,776.1)
Other
liabilities (37.2) 12.2 (25.0) (5.7) (13.6) (19.3)
Deferred income
taxes (50.9) (67.5) (118.4) (21.6) 173.2 151.6
------ ------
Unrealized
appreciation
(depreciation)
of investments,
net $ 125.2 $(322.1)
======= =======
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
The Company leases office space and equipment under noncancellable
operating leases. The approximate future minimum lease rental commitments
under such leases as of December 31, 1995 are as follows (dollars in
thousands):
YEAR ENDING DECEMBER 31,
<TABLE>
<C> <C>
1996 $ 976
1997 989
1998 1,001
1999 992
2000 968
Thereafter 1,986
------
$6,912
======
</TABLE>
Rent expense was $752,000, $788,000 and $679,000 in 1995, 1994, and
1993, respectively.
The Company has an investment in a limited partnership that invests in
other insurance companies. The Company was committed to provide up to $25.0
million in additional capital contributions. At December 31, 1995, the
funded and unfunded portions of this commitment were $4.8 million and $20.2
million, respectively. Subsequent to year end, the general partner announced
its intention to terminate the limited partnership, and to make distributions
to the limited partners as soon as is practicable. If such termination
occurs, Western will no longer be committed to make additional capital
contributions.
CONTINGENCIES
Assessments are levied on the Company from time to time by guaranty fund
associations of states in which it is licensed to provide for payment of
covered claims or to meet other insurance obligations, subject to prescribed
limits, of insolvent insurance enterprises. Assessments are allocated to an
insurer based on the ratio of premiums written by an
F-21
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
insurer to total premiums written in the state. The terms of the assessments
depend on how each guaranty fund association elects to fund its obligations.
Assessments levied by certain states may be recoverable through a reduction
in future premium taxes. The Company provides a liability, net of discount
and estimated premium tax offsets, for estimated future assessments of known
insolvencies. Expense recorded for guaranty fund assessments was $27.6
million, $5.7 million, and $1.7 million in 1995, 1994, and 1993,
respectively. Included in other liabilities is a reserve for guaranty fund
assessments of $29.2 million, $7.4 million and $4.8 million, at December 31,
1995, 1994 and 1993, respectively. The Company determines guaranty fund
liabilities by utilizing a report prepared annually by the National
Organization of Life and Health Insurance Guaranty Associations which
provides estimates of assessments by insolvency. Although management
believes the provision for guaranty fund assessments is adequate for all
known insolvencies, and does not currently anticipate the need for any
material additions to the reserve for known insolvencies. However, it is
reasonably possible that the estimates on which the provision is based will
change and that such changes will result in future adjustments.
From time to time, the Company is involved in lawsuits which are related
to its operations. In most cases, such lawsuits involve claims under
insurance policies or other contracts of the Company. None of the lawsuits
currently pending, either individually or in the aggregate, is expected to
have a material effect on the Company's financial condition or results of
operations.
9. EMPLOYEE BENEFIT PLAN:
The Company sponsors a qualified defined contribution plan (the "Plan")
covering all full-time employees. The Plan provides for the Company to
match, with equivalent value of Western National stock, 50% of a
participant's voluntary contributions up to 4% of a participant's
compensation (subject to certain Internal Revenue Code limitations). The
Company can also elect to make additional discretionary contributions to the
Plan. For 1995, the Company made a matching contribution in an amount equal
to 50% of each participant's elective contributions, up to 6% of annual
compensation (subject to Internal Revenue Code limitations). The Company's
Supplemental Plan is an unfunded, nonqualified plan that provides to certain
employees similar benefits that cannot be provided by a qualified defined
contribution plan due to Internal Revenue Code limitations. Participants can
also defer additional amounts of salary and bonus under the Supplemental
Plan, but there is no employer match for such additional contributions.
Expense recorded related to the Company's matching contributions under both
plans was approximately $232,000, $92,000 and $66,000 in 1995, 1994 and 1993,
respectively.
10. RELATED PARTY TRANSACTIONS:
The Company is a party to a modified coinsurance agreement with American
General Life Insurance Company, a subsidiary of American General, which
provides for the parties to jointly market annuity policies in the structured
settlement market and for such policies to be administered by the Company.
Under the agreement, American General Life Insurance Company issues the
policies, and a portion of each risk, normally 50%, is reinsured by the
Company. The parties share expenses and profits under the arrangement pro
rata.
Effective November 1, 1995, an affiliate provides the Company with
investment advisory services previously provided directly by Conseco.
Investment advisory expenses charged by the affiliate totalled $1.7 million
during 1995.
The Company was an affiliate of Conseco during all of 1993 and up until
December 23, 1994. The transactions described below occurred during 1993 and
1994.
Through December 31, 1993, the Company operated primarily without direct
employees through investment management and other management and service
agreements with subsidiaries of Conseco. Commencing in 1994, certain
functions not related to investments were staffed directly by the Company.
Total fees incurred by the Company under such agreements were $17.3 million
and $18.7 million for 1994 and 1993, respectively.
F-22
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
In addition, the Company received reimbursement for shared expenses from
subsidiaries and affiliates of Conseco through service agreements. Total
amounts received under such agreements were $0.7 million and $4.1 million for
1994 and 1993, respectively.
In December 1993, the Company paid Conseco a dividend of $73.8 million,
and Conseco made a $58.8 million capital contribution to the Company.
In December 1993, the Company sold to Conseco certain actively managed
fixed maturities and equity securities for $18.0 million and realized a $4.2
million gain. The proceeds from the sale were included in amounts due from
affiliates at December 31, 1993. The entire balance due from affiliates at
December 31, 1993 was collected in cash in February 1994.
Reinsurance receivables of $73.5 million and $73.0 million at December
31, 1994 and 1993, respectively, were related to insurance ceded to a Conseco
affiliate in 1991. This reinsurance was recaptured on October 1, 1995.
11. OTHER OPERATING STATEMENT DATA:
Insurance policy income consisted of the following:
1995 1994 1993
--------- --------- --------
(Dollars in millions)
<TABLE>
<S> <C> <C> <C>
Direct premiums collected $ 779.6 $ 751.9 $ 563.0
Reinsurance ceded (0.9) (1.2) (2.0)
--------- -------- --------
Premiums collected, net
of reinsurance 778.7 750.7 561.0
Less premiums on universal
life and investment contracts
without mortality risk which
are recorded as additions to
insurance liabilities (757.0) (729.6) (545.0)
--------- -------- --------
Premiums on products with
mortality risk, recorded
as insurance policy income 21.7 21.1 16.0
Amortization of deferred revenue 0.5 0.4 1.7
Fees and surrender charges 4.2 4.8 4.1
--------- -------- --------
Insurance policy income $ 26.4 $ 26.3 $ 21.8
========= ======== ========
</TABLE>
The changes in the cost of policies purchased were as follows:
1995 1994 1993
--------- --------- --------
(Dollars in millions)
<TABLE>
<S> <C> <C> <C>
Balance, beginning of year before
effect of fair value adjustments
of actively managed fixed maturities $ 80.5 $ 83.1 $ 99.8
Scheduled amortization (4.7) (4.9) (2.7)
Amortization related to realized
gains and losses - 2.3 (14.0)
-------- -------- ---------
Balance, end of year before effect
of fair value adjustments of
actively managed fixed maturities 75.8 80.5 83.1
Effect of fair value adjustment
of actively managed fixed maturities (40.0) 23.7 (21.2)
-------- -------- ---------
Balance, end of year $ 35.8 $ 104.2 $ 61.9
======== ======== =========
</TABLE>
F-23
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
The changes in the cost of policies produced were as follows:
1995 1994 1993
--------- --------- --------
(Dollars in millions)
<TABLE>
<S> <C> <C> <C>
Balance, beginning of year
before effect of fair value
adjustments of actively managed
fixed maturities $ 265.0 $ 200.5 $ 133.2
Acquisition costs incurred 62.2 62.4 42.2
Scheduled amortization (34.0) (15.1) (13.8)
Amortization related to
realized gains and losses 29.8 16.7 (33.2)
Amortization of deferred
revenue 0.5 0.5 1.7
Effects of reinsurance 1.6 - 70.4
-------- -------- --------
Balance, end of year before
effect of fair value
adjustments of actively
managed fixed maturities 325.1 265.0 200.5
Effect of fair value adjustment
of actively managed fixed
maturities (96.4) 100.3 (115.6)
-------- -------- --------
Balance, end of year $ 228.7 $ 365.3 $ 84.9
======== ======== ========
</TABLE>
Based on current conditions and assumptions as to future events on all
policies in force, approximately 5% to 6% of the cost of policies purchased
as of December 31, 1995, excluding the effect of fair value adjustments for
actively managed fixed maturities, is expected to be amortized in each of the
next five years. The average discount rate for the cost of policies purchased
was approximately 19% for the year ended December 31, 1995.
12. STATUTORY INFORMATION:
Statutory accounting practices prescribed or permitted for the Company
by regulatory authorities differ from generally accepted accounting
principles. The Company reported the following amounts to regulatory
agencies:
December 31,
---------------------
1995 1994
-------- --------
(Dollars in millions)
<TABLE>
<S> <C> <C>
Statutory capital and surplus $ 426.1 $ 375.7
Asset valuation reserve 91.1 81.3
Interest maintenance reserve 105.3 175.4
-------- --------
Total $ 622.5 $ 632.4
======== ========
</TABLE>
Statutory accounting practices require that certain investment-related
portions of surplus, called the asset valuation reserve ("AVR") and the
interest maintenance reserve ("IMR"), be appropriated and reported as
liabilities. The purpose of these reserves is to stabilize statutory surplus
against fluctuations in the market value of investments. The AVR captures
realized and unrealized investment gains and losses related to changes in
creditworthiness. The IMR captures realized investment gains and losses on
debt instruments resulting from changes in interest rates and provides for
subsequent amortization of such amounts into statutory net income on a basis
reflecting the remaining life of the assets sold.
F-24
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
The following table compares the pre-tax income determined on a
statutory accounting basis with such income reported herein in accordance
with generally accepted accounting principles:
1995 1994 1993
--------- --------- --------
(Dollars in millions)
<TABLE>
<S> <C> <C> <C>
Statutory net gain from operations $ 51.6 $ 68.8 $ 89.7
IMR amortization (8.7) (13.5) (8.9)
Realized gains (losses) (118.2) (39.4) 169.1
--------- --------- --------
Pre-tax statutory income before
transfers to and from and
amortization of tax IMR (75.3) 15.9 249.9
Net effect of adjustments for
generally accepted accounting
principles 97.0 110.2 (45.4)
--------- --------- --------
Pre-tax income, generally
accepted accounting principles $ 21.7 $ 126.1 $ 204.5
========= ========= ========
</TABLE>
F-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Western National Life Insurance Company
Our report on the financial statements of Western National Life
Insurance Company is included on page F-2 of this Form N-4. In connection
with our audits of such financial statements, we have also audited the
related financial statement schedules listed in the index on page F-1 of this
Form N-4.
In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information required to
be included therein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
February 1, 1996
F-26
<PAGE>
WESTERN NATIONAL LIFE INSURANCE COMPANY
SCHEDULE VI
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN MILLIONS)
1995 1994 1993
--------- --------- --------
(Dollars in millions)
<TABLE>
<S> <C> <C> <C>
Life insurance in force:
Direct $ 626.0 $ 703.1 $ 795.4
Assumed 2.6 3.2 3.8
Ceded (286.1) (329.1) (388.5)
--------- --------- --------
Net insurance in force $ 342.5 $ 377.2 $ 410.7
========= ========= ========
Percentage of assumed to net 0.7% 0.8% 0.9%
Premiums recorded as revenue for
generally accepted accounting
principles:
Direct 23.0 22.4 18.0
Ceded (1.3) (1.3) (2.0)
--------- --------- --------
Net premiums $ 21.7 $ 21.1 $ 16.0
========= ========= ========
Percentage of assumed to net -% -% -%
F-27
</TABLE>
