Insurance Premiums and Policy Charges. Insurance premiums and policy charges increased $29.6 million, or 6.7%, from $438.8 million in 1993 to $468.4 million in 1994. The change was primarily due to an increase of $23.5 million in premiums in the health insurance segment, the result of higher premiums from individual health reinsurance transactions, partially offset by a decline in group products premiums. In addition, insurance premiums and policy charges in the life insurance and annuities segment increased by $6.9 million due to an increase in life insurance in force and an increase in policy charges. See "Segment Information - Health Insurance and Life Insurance and Annuities," below.
Health Insurance. Revenues for the health insurance segment were $421.0 million in 1994 compared to $394.6 million in 1993, an increase of $26.4 million, or 6.7%. The improvement was primarily due to two individual health reinsurance transactions that added $61.0 million of revenues in 1994, compared to $23.4 million of revenues in 1993. The increase was also due in part to average rate increases of approximately 6% in 1994 on the direct portion of the individual health insurance in force, offset in part by a decline of 2.1% in the total number of policies in force for this part of the business. The increase in revenues from the reinsurance transactions was partially offset by a reduction in group products premiums of $14.8 million primarily due to policy lapses, including the termination of a large group life insurance contract in 1993, with approximately $6 million of premium revenues in 1993. The termination of the large group life contract, which had approximately $3 billion of life insurance in force, did not materially affect net income as there was a corresponding decrease in benefits and expenses.
Income Before Income Taxes and Changes in Accounting Principles. Income before income taxes and changes in accounting principles increased $12.3 million, or 46.7%, to $38.7 million in 1993 compared to $26.4 million in 1992. The increase was due to improvement in the operations of all of the Company's segments.
Planned amortization class and target amortization class tranches, which together comprised 11.3% of the Company's invested assets at December 31, 1994, are designed to amortize in a manner that shifts the primary risk of prepayment of the underlying collateral to investors in other tranches of the CMO.
Investing activities (purchases and sales of investments) used cash of $48.4 million in 1994 compared to $130.8 million in 1993, primarily for the purchase of fixed maturity investments in both periods. Sales of short-term securities partially funded these purchases. The decrease in purchases was primarily due to the use of cash by financing activities combined with the decrease in cash generated by operating activities discussed above.
Liquidity. The fair value of the Company's investment portfolio, primarily fixed maturity investments, is affected by changing interest rates. When interest rates rise, the fair value of the Company's fixed maturity investments declines. In addition, the value of the Company's policy liabilities decreases. In periods of declining interest rates, the fair value of the Company's fixed maturity investments increases, accompanied by an increase in the value of its policy liabilities. The Company estimates that a one percentage point change in market interest rates would have an inverse effect on the fair value of its fixed maturity investments of approximately 6%.
Real Estate Investments. Real estate investments are principally carried at cost less allowances for depreciation and possible losses. Foreclosed real estate is considered available for sale and is recorded at the lower of current carrying value or fair value less estimated costs of disposal.
The following reconciles the difference between the actual tax provision and the amounts obtained by applying the statutory federal income tax rates of 35% for 1994 and 1993 and 34% for 1992 to the income before income taxes and cumulative effect of changes in accounting principles:
WNC has 60,000,000 authorized shares of $5 par value Common Stock including treasury shares. At December 31, 1994, 13,768,000 shares of WNC's Common Stock were reserved for future issuance. Of this amount, 12,163,000 shares were reserved for future exercises of Purchase Rights, 271,000 shares were reserved for conversion of outstanding Convertible Preferred Stock, 1,314,000 shares were reserved for exercise of options to purchase Common Stock and for use in connection with the restricted stock grants, and 20,000 shares were reserved for issuance of Common Stock in connection with the dividend reinvestment plan. The annual dividend paid on WNC Common Stock in 1994, 1993, and 1992 was $1.08 per share.
Plan assets are invested principally in mutual funds, bonds, and stocks. Assets of the WNIC retirement plan include Common and Preferred Stock of WNC of $8,580,000 and $10,863,000, at fair value, at December 31, 1994 and 1993, respectively. Dividends of $492,000 were received on the WNC Common and Preferred Stock in both 1994 and 1993. No WNC shares were purchased or sold during 1994 or 1993.
WNC's insurance subsidiaries prepare statutory financial statements in accordance with accounting principles and practices prescribed or permitted by the insurance department of their state of domicile. Prescribed statutory accounting practices currently include state laws, regulations, and general administrative rules applicable to all insurance enterprises domiciled in a particular state, as well as practices described in National Association of Insurance Commissioners' (NAIC) publications. Permitted practices include practices not prescribed, but allowed, by the domiciliary state insurance department. The prescribed and permitted statutory accounting practices followed by WNC's insurance subsidiaries differ from GAAP.
Activity in the liability for unpaid claims (a component of policy and contract claims) and claim adjustment expense (a component of general expenses and other liabilities) follows:
Fair values for liabilities under investment-type insurance contracts are estimated using discounted cash flow calculations, based on interest rates currently being offered for similar contracts with similar maturities.
Fair values for real estate development guarantees are based on estimates of fees to guarantee similar developments. Fair values for lending commitments are based on the commitment fees of the loans in question.