WNIC also owns a 335,000 square-foot office building in Evanston, Illinois. WNIC occupies approximately 8 percent of this building and leases the remainder to nonaffiliated commercial enterprises. At December 31, 1994, the outstanding balance on the mortgage loan secured by this property was $1,907,000. WNIC also occupies 25 field offices throughout the country, all of which are leased.
The Company targets markets that it believes are underserved by other insurance companies. It has a decentralized operating structure and utilizes distinct distribution systems to access each of its targeted markets and to provide timely, individualized service to its customers. The Company emphasizes the sale of market-driven products, a profit-oriented, rather than a volume-oriented approach to underwriting, tight expense controls, and a proactive approach to market and regulatory changes. It continually evaluates new products and markets in order to capitalize on potential opportunities and to anticipate and respond effectively to business and regulatory changes.
The Company believes these factors contributed to a substantial improvement in operations thus far in the 1990s. From 1990 to 1994, pretax operating income increased from $4.6 million to $46.3 million.
Net Investment Income. Net investment income decreased $1.7 million, or 0.9%, to $182.0 million in 1994 from $183.7 million in 1993. The decrease was due primarily to a decline in the Company's portfolio yield (based on amortized cost) from 8.0% in 1993 to 7.7% in 1994.
Realized Investment Losses. Realized investment losses before taxes for 1994 were $1.6 million compared to $0.4 million in 1993. In 1994, realized losses of $1.7 million on fixed maturity investments and $2.0 million on real estate and mortgage loans were partially offset by gains on equity securities and other invested assets of $2.1 million. In 1993, realized gains of $8.2 million on fixed maturity investments and equity securities were offset by losses of $8.5 million on real estate investments, mortgage loans, and other invested assets. The Company's income taxes included tax benefits of $2.8 million and $3.2 million in 1994 and 1993, respectively, from previous years' realized investment losses.
Insurance Benefits Paid or Provided. Insurance benefits paid or provided increased $15.4 million, or 3.7%, from $420.4 million in 1993 to $435.8 million in 1994. The increase was primarily due to higher benefits of $17.0 million in the health insurance segment primarily due to additional business from individual health reinsurance transactions which also increased premium revenues.
Net Income. Net income for 1994 was $31.3 million compared to $26.7 million in 1993. The improvement in net income resulted from increased earnings from operations and the charge in the first quarter of 1993 relating to the adoption of the new accounting standard described above.
Effective December 31, 1994, the Company redefined its reporting segments, merging the previous individual health insurance and group products segments to better align them with its operating organization. All prior years' segment information has been restated to be comparable.
Life Insurance and Annuities. Revenues for the life insurance and annuities segment for 1994 were $229.7 million, compared to $229.0 million for 1993. The improvement was attributable to higher insurance premiums and policy charges of $6.9 million, primarily due to an increase in life insurance in force and policy charges at UPI, mostly offset by a $4.6 million decrease in investment income resulting primarily from a lower portfolio yield. UPI's increase in insurance premiums and policy charges was offset in part by a decline at WNIC where no new policies are being sold in this segment.
Pretax operating income for the life insurance and annuities segment increased $5.6 million, or 20.0%, to $33.2 million in 1994 from $27.6 million in 1993, due to improved interest rate spreads (as the interest credited on account balances was reduced more than the decrease in the yield on invested assets), a reduction in operating expenses at UPI, and the improvement in revenues.
Generally, in an environment of rising interest rates, the Company may have difficulty maintaining the spread between the rates credited to policyholders and the rate earned on its investment portfolio, resulting in lower profit margins for this segment. While the Company was able to maintain its spread for 1994 as market interest rates rose, the Company expects spreads to decline in 1995. For 1994, maintenance of interest rate spreads higher than the Company's long-term spread assumptions resulted in additional pretax income of approximately $5 million. The future profitability of the Company's closed blocks of life insurance and annuities is highly dependent upon maintaining a minimum expected interest rate spread and level of persistency. A significant deterioration in policy persistency would reduce future profits.
The health insurance segment reported pretax operating income of $5.9 million in 1994 compared to $11.5 million in 1993. The decrease was primarily due to an increase in the benefit ratio (insurance benefits divided by insurance premiums) of the group products portion of this segment.
Effective in the 1993 second quarter, the Company entered into a reinsurance agreement with The Harvest Life Insurance Company (Harvest Life) that provides that the Company reinsures 100% of a block of individual major medical business issued by Harvest Life. In 1994, the Company entered into a reinsurance agreement with National Casualty Company (National Casualty), whereby the Company reinsures 50% and administers 100% of a block of individual major medical health insurance.
The combined effect of these reinsurance transactions was to increase revenues and benefits and expenses by $61.0 million and $55.5 million, respectively, in 1994, compared to $23.4 million and $22.3 million, respectively, in 1993. Because these two reinsurance transactions are comprised of closed blocks of business, revenues and income from these transactions are expected to decline over the next several years.
In 1995, the Company plans to change its allocation to the operating segments of income and expense items in this segment to more accurately reflect these savings. This will result in lower earnings for this segment and higher earnings for the other segments but will have no affect on net income.
Year Ended December 31, 1993 Compared to Year Ended December 31, 1992
Insurance Premiums and Policy Charges. Insurance premiums and policy charges increased $57.8 million, or 15.2%, from $381.0 million in 1992 to $438.8 million in 1993. The increase was primarily due to an increase in health insurance segment premiums arising from individual health insurance premiums of $52.3 million, offset in part by a decline in group products premiums. The premium decline was due primarily to policy lapses, including the termination of a large contract with approximately $6 million of both premium revenue and benefits and expenses in 1993 and $11 million of premium revenue and expenses in 1992. See "Segment Information - Health Insurance," below.
Realized Investment Losses. Realized investment losses for 1993 were $0.4 million compared to $4.6 million in 1992. In 1993, realized gains of $8.2 million on fixed maturity investments and equity securities were offset by losses of $8.5 million on real estate investments, mortgage loans, and other invested assets. In 1992, realized gains of $5.6 million on fixed maturity investments were offset by losses of $4.9 million on mortgage loans on real estate, $3.6 million on real estate investments, and $1.7 million on equity securities. The Company's 1993 income taxes included a tax benefit of $3.2 million from previous years' realized investment losses.
Insurance Benefits Paid or Provided. Insurance benefits paid or provided increased $10.6 million, or 2.6%, from $409.8 million in 1992 to $420.4 million in 1993. The increase was primarily due to higher health insurance benefits of $27.2 million resulting primarily from the individual health reinsurance transaction entered into in 1993. Partially offsetting this was a decline in life insurance and annuities benefits of $16.6 million resulting from a decrease in interest credited on interest-sensitive products, improved mortality experience, and the annual review of benefits assumptions, discussed in "Amortization of Deferred Acquisition Costs," below.
Income Taxes. Income taxes increased $1.0 million to $10.5 million in 1993 compared to $9.5 million in 1992, primarily due to improved income from operations. Also in 1993, the Company's federal income tax rate increased from 34% to 35%.
Net Income (Loss). Net income for 1993 was $26.7 million compared to a net loss of $6.0 million in 1992. The improvement in net income resulted primarily from the charges in the first quarter of 1992 relating to the adoption of two new accounting standards described above and improved operations from all three of the Company's segments, partially offset by a charge relating to the new accounting standard in the first quarter of 1993.
At December 31, 1994, the Company had invested assets with a carrying value of $2.3 billion. Certain information about the Company's investment portfolio as of that date follows (dollars in millions):
Fixed Maturity Investments The carrying value of fixed maturity investments at December 31, 1994 was $1.8 billion, or 77.1% of the Company's invested assets. The amortized cost of the Company's fixed maturity portfolio increased $120 million to $1.9 billion at December 31, 1994 from $1.8 billion at December 31, 1993. Due to the increase in market interest rates in 1994, the carrying value of the Company's fixed maturity investments compared to amortized cost declined, resulting in an unrealized loss on fixed maturity investments of $119.5 million.
The carrying value of the Company's high-yield investments (rated BB and lower) at December 31, 1994, was $90.9 million or 4.0% of the Company's invested assets, essentially unchanged from December 31, 1993. The Company does not anticipate any significant new investments in high-yield fixed maturity investments.
At December 31, 1994, 26.9% of the Company's invested assets were in mortgage- backed fixed maturity investments, including collateralized mortgage obligations (CMOs) and mortgage-backed pass-through securities. Mortgage-backed securities generally are collateralized by mortgages backed by the Government National Mortgage Association (GNMA), the Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation, all of which are agencies of the U.S. Government. Only GNMA mortgages are backed by the full faith and credit of the U.S. Government. Agency mortgage-backed securities are considered to have a AAA credit rating.
The carrying value of the Company's mortgage-backed securities portfolio at December 31, 1994 follows (dollars in millions):
Certain mortgage-backed securities are subject to significant prepayment risk. This is due to the fact that in periods of declining interest rates, mortgages may be repaid more rapidly than scheduled as individuals refinance higher-rate mortgages to take advantage of lower rates. As a result, holders of mortgage- backed securities may receive large prepayments on their investments that cannot be reinvested at interest rates comparable to the rates on the prepaid mortgages. Conversely, in periods of rising interest rates, mortgage prepayments may slow down which would result in holders of mortgage-backed securities having less funds to reinvest at higher rates.
Cash Flows. During 1994, the Company's operating activities generated cash of $84.3 million compared to $104.7 million in 1993. The decrease in cash provided by operations in 1994 resulted primarily from increased benefits, the return of funds held for a terminated group life insurance contract, and an increase in income taxes paid.
In addition, rising interest rates could result in increased surrenders of life insurance policies and annuities (as current policy and contract holders seek higher returns elsewhere) causing the Company to sell fixed maturity investments below cost. In order to minimize the need to sell fixed maturity investments below cost, the Company seeks to maintain sufficient levels of cash and short- term investments.
In addition to reform proposals on a national basis, legislative efforts to reform health care at the state level may intensify. The potential reform plans at the federal and state levels may: (i) partially or fully replace products sold by insurers; (ii) limit the ability of insurers to charge higher rates to or decline to cover insureds who present greater risks; (iii) limit the ability of insurers to exclude coverage for pre-existing conditions; (iv) mandate the types of insurance benefits to be provided in certain instances; (v) impose insurance rate regulation or additional taxes on insurance premiums or benefits; (vi) increase competition by expanding employee choice of insurance plans and by requiring the employee to bear the full cost increment for higher priced plans; or (vii) establish programs run by the government that would compete with or replace business written by the Company.
The Company has monitored and will continue to monitor all aspects of the developments surrounding this issue and is preparing strategic responses to its possible outcomes. The Company's health businesses have begun to diversify into product areas, such as supplemental insurance products and disability products, that the Company believes are consistent with its targeted market focus and may be less affected or unaffected by health care reform. Health care reform at the federal and state levels may have a material adverse effect on the Company's operating results and financial position, but it is not possible at this time to predict the nature and effects of health care reform or how soon its measures will be adopted and implemented.
A. M. Best's 15 categories of rating for insurance companies currently range from "A++ (Superior)" to "F (In Liquidation)." According to A. M. Best, an "A" or "A-" rating is assigned to companies which, in A. M. Best's opinion, have achieved excellent overall performance when compared to the standards of the life insurance industry and generally have demonstrated a strong ability to meet their obligations to policyholders over a long period of time. Many of the Company's competitors have A.M. Best ratings of "A-" or lower, and the Company believes the insurance subsidiaries' A.M. Best ratings are adequate to enable them to compete successfully. A.M. Best ratings are based upon factors of concern to policyholders, agents, and intermediaries and are directed toward the protection of policyholders, not investors.
Inflation and changing prices are anticipated by the Company in the pricing of its insurance products. Significant components of health insurance benefits are the medical care inflation rate, policyholder utilization of medical services, and cost-shifting, which is the transfer of medical care provider expenses that are not reimbursed by governmental plans and HMOs to private insurers. WNIC's health insurance pricing assumptions regarding these factors declined significantly in 1994 reflecting a decline in medical care inflation and stability in the general inflation rate. For the first quarter of 1995, these assumptions have not changed materially.
The effect of inflation on operating expense has not been significant.
Certain amounts in the 1993 and 1992 financial statements have been reclassified to conform to the 1994 presentation.
Effective January 1, 1994, WNC adopted Statement of Financial Accounting Standards (SFAS) 115, "Accounting for Certain Investments in Debt and Equity Securities," issued by the Financial Accounting Standards Board (FASB) in 1993. The statement requires the Company to segregate its fixed maturity portfolio into three separate classifications: investments held to maturity, trading securities, and investments available for sale.
In October 1994, the FASB issued SFAS 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." The statement requires additional disclosure of information on derivative financial instruments such as forward, futures, swap, and option contracts. The Company does not have any such instruments. However, the Company does have certain financial commitments to extend credit and fund investments that are included in the disclosure requirements of this statement and these are discussed in Note H.
Effective December 1994, the Company adopted the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 94-5, "Disclosure of Certain Matters in the Financial Statements of Insurance Enterprises." This SOP requires additional disclosure on statutory accounting that is included in Note I.
Equity Securities. Equity securities include an investment of Washington National Insurance Company's (WNIC) funds in its Separate Account, nonredeemable preferred stocks, and common stocks. The Separate Account investment is carried at cost. The stocks of non-related companies are carried at fair value derived from either a major securities exchange or the National Association of Securities Dealers Automated Quotation System. Unrealized gains and losses on these securities are recorded directly in shareholders' equity. Other-than-temporary declines below cost are recorded as realized losses.
Other Long-term Investments. Other long-term investments consist principally of venture capital investments and are carried at cost less other-than-temporary impairments.
Short-term Investments. Short-term investments include commercial paper, variable demand notes, and money market funds and are carried at cost, which approximates fair value.
Investment Income. Interest on fixed maturities, loans, and notes is recorded as income as it is earned. Income is adjusted for any amortization of premium or discount on these investments including adjustments resulting from prepayments or expected changes in prepayments on mortgage-backed securities. Income on impaired loans, real estate, and other long-term investments is recorded principally on a cash basis. Dividends are recorded as income on ex-dividend dates. Investment expenses are accrued as incurred.
Realized Investment Gains or Losses. When an investment is sold, its selling price may be higher or lower than its carrying value. Using the specific identification method, the difference between the selling price and the carrying value is recorded as a realized gain or loss. Investments that have declined in fair value below cost, for which the decline is judged to be other- than-temporary, are written down to their estimated fair value. Write downs and allowances for losses on mortgage loans are included in realized investment losses.
Costs directly associated with the acquisition of new business are generally deferred and amortized. For traditional life insurance and health insurance products, costs are amortized over the premium-paying period of the products based on assumptions used in calculating policy benefit reserves. For certain interest-sensitive products, costs are generally amortized over the estimated lives of the products in relation to the present value of estimated gross profits from surrender charges and investment, mortality, and expense margins. Amortization for the products is adjusted periodically to reflect differences in actual and assumed gross profits.
The unamortized cost of purchased insurance in force is included in DAC. Amortization is primarily in relation to the present value of estimated gross profits over the estimated twenty-two year remaining life of the related insurance in force with interest rates ranging from 7.5% to 8.5%.
Liabilities for future policy benefits for traditional life insurance products are determined using the present value of future net premiums, benefits and expenses, and the net level valuation method, based on estimates of future investment yield, mortality, and withdrawal rates, adjusted to provide for possible adverse deviation. Interest rate assumptions are graded and ranged from 4.5% to 7.5%. Withdrawal assumptions are based principally on experience and vary by issue age, type of coverage, and duration.
Separate Account assets and liabilities are principally carried at fair value and represent funds that are separately administered for annuity contracts for which the contract holders bear the investment risk. Investment income and realized gains and losses allocable to Separate Accounts generally accrue to the contract holders and are excluded from the Consolidated Statement of Operations.
The insurance subsidiaries of WNC reinsure a portion of their life insurance, annuity, and health insurance risks with other insurance companies to minimize their exposure to loss. The Company's policy on claim exposure for the life insurance and annuity business is to retain a maximum of $300,000 of life insurance exposure on any one individual ($400,000 with accidental death coverage). For group insurance products, the Company limits its paid-claim exposure in any one calendar year to $750,000 per claim for major medical coverage and $250,000 per claim for individual stop-loss. The Company retains a maximum of 50% of each long-term disability and long-term care claim, and limits its group term life insurance exposure to $200,000 per life ($400,000 with accidental death coverage). The Company's reinsurance for individual health insurance claims is designed to protect the Company from an excessive amount of claims over $250,000 on an individual claim basis.
Substantially all of the reinsurance ceded by the Company is to entities rated "A" or better by A. M. Best, or to entities required to maintain assets in an independent trust fund whose fair value is sufficient to discharge the obligations of the reinsurer. To the extent that any reinsurance company is unable to meet its obligations under the agreements, WNC's insurance subsidiaries remain liable.
Fixed maturities had an increase (decrease) in unrealized gains (the excess of fair value over amortized cost) of $(201,808,000), $25,438,000 and $(4,245,000) in 1994, 1993, and 1992, respectively.
As of December 31, 1994, the carrying value of investments that produced no income for the previous twelve month period was $17,374,000 or less than 1% of invested assets.
During 1994, 1993, and 1992, non-cash investing activities totaled $4,009,000, $4,869,000, and $14,302,000, respectively and consisted of real estate acquired through foreclosure of mortgage loans and in 1994 a venture capital distribution of common stock.
The nature of WNC's deferred tax assets and liabilities is such that the general reversal pattern for these temporary differences is expected to result in a full realization of WNC's deferred tax assets other than capital gain or loss items.
Prior to 1984, WNC's life insurance subsidiaries were required to accumulate certain untaxed amounts in a memorandum "policyholders' surplus account." Under the Tax Reform Act of 1984, the "policyholders' surplus account" balances were "capped" at December 31, 1983 and the balances will be taxed only to the extent distributed to shareholders or when they exceed certain prescribed limits. WNC's life insurance subsidiaries do not intend to make any taxable distributions or exceed the prescribed limits in the foreseeable future; therefore, no income tax provision has been made for those purposes. However, if such taxes were assessed, the amount of tax payable would be $19,851,000. As of December 31, 1994, the combined "policyholders' surplus account" of WNC's life insurance subsidiaries approximates $56,717,000.
WNC has one outstanding Common Stock Purchase Right for each outstanding share of Common Stock. The Rights will become exercisable only if a person or group acquires 20% or more of WNC's Common Stock or announces a tender offer following which it would hold 30% or more of such Common Stock. If the Rights become exercisable, a holder will be entitled to buy from WNC one share of WNC Common Stock at a price of $100 per share. If, after the Rights become exercisable, WNC is acquired in a merger or other business combination or more than 50% of WNC's assets or earning power are sold, each Right will entitle its holder to buy that number of shares of Common Stock of the acquiring company having a fair value of twice the exercise price of the Right. Alternatively, if a 20% WNC shareholder acquires WNC by means of a merger in which WNC and its Common Stock survive or that shareholder engages in self-dealing transactions with WNC, each Right not owned by the 20% holder would become exercisable for that number of shares of WNC Common Stock which have a fair value of twice the exercise price of the Right. Until the Rights become exercisable, one additional Right will be distributed with each share of WNC Common Stock issued in the future. The Rights will expire in January 1997. The Rights may be redeemed by WNC at $.01 per Right prior to the time that 20% or more of WNC's Common Stock has been accumulated by a person or group or within ten days thereafter under certain circumstances.
The number of shares used in computing earnings per share follows:
Primary and fully diluted earnings per share were the same for 1992 because the computation of fully diluted earnings per share resulted in a smaller loss per share.
For 1994, 42% and 57% of reinsurance premiums assumed were from Harvest Life Insurance Company (Harvest Life) and National Casualty Company (National Casualty), respectively. These reinsurance agreements provide that the Company will reinsure blocks of individual major medical business issued by National Casualty and Harvest Life on a 50% and 100% coinsurance basis, respectively. The Company also administers 100% of the National Casualty business.
The Company uses yearly renewable term reinsurance at its subsidiary United Presidential Life Insurance Company (UPI) to maintain statutory profitability and other statutory financial requirements while sustaining UPI's growth. At December 31, 1994, such reinsurance, all entered into prior to 1994, net of related taxes, had contributed $9,044,000 of statutory capital to UPI. These transactions do not materially impact the Company's GAAP financial statements.
Stock options granted from 1992 to 1994 ranged from $17.55 to $26.57 per share. Stock options exercised from 1992 to 1994 ranged from $10.21 to $21.70 per share. Exercise prices on stock options outstanding ranged from $10.21 to $27.29 per share.
A summary of the components of the net periodic pension expense (income) for the defined benefit retirement plans follows:
The defined benefit retirement plans' funded status and amounts reported in WNC's consolidated balance sheets as part of other liabilities at December 31 follow:
GAAP requires employers to recognize a minimum liability at least equal to the unfunded accumulated benefit obligation. When the accrued or prepaid pension cost is less than the minimum liability, an adjustment is made to the liability with the offset directly to shareholders' equity. At December 31, 1994 and 1993, the pretax adjustment was $2,769,000 and $3,033,000, respectively.
In addition to WNC's retirement programs, WNIC provides medical and life insurance benefits to eligible retired employees under the WNIC Group Insurance Plan. The plan was amended effective December 31, 1992 to limit future eligibility. Active WNIC employees who were at least age 50 on December 31, 1992 are eligible for medical and life insurance benefits after reaching a combination of age and service requirements. The plan pays a stated percentage of most medical expenses reduced for deductibles and payments made by government programs or other group coverage. Retirees contribute to the plan based on a schedule which averages 13% for single coverage and 21% for dependent coverage of the benefits paid. Active WNIC employees who were not at least age 50 on December 31, 1992 are eligible for $10,000 of life insurance benefits under the plan after reaching a combination of age and service requirements. The 1992 plan curtailment resulted in a gain of $4,033,000 recorded as part of operations in that year. The Company has reserved the right to change or eliminate these benefits at any time.
In December 1993, the Company established a Voluntary Employees' Beneficiary Association (VEBA) trust under section 501(c)(9) of the IRC. Prior to this time, postretirement benefits were unfunded. In December 1994 and 1993, the Company contributed $1,600,000 and $1,100,000, respectively, to the VEBA trust. The amounts funded were based on the difference between the net periodic postretirement benefit expense as measured by statutory accounting rules and the retiree medical claims incurred during the respective periods, subject to certain IRC limitations. Assets of the VEBA trust were invested in two-year U.S. Treasury notes and corporate demand notes at December 31, 1994.
Components of the net periodic postretirement benefit expense for the year ended December 31 follow:
The accumulated postretirement benefit obligation is based on actuarial assumptions for the weighted-average discount rate and the health care cost trend rate. The weighted-average discount rate was 7.5% in 1994 and 7.0% in 1993. The health care cost trend rate used in 1994 was 12% for pre-65 and 10% for post-65 participants, graded evenly to 5% in 15 years. The health care cost trend rate in 1993 was 14% graded evenly to 6% in 29 years. The weighted-average of the expected long-term rate of return on plan assets net of estimated taxes on investment income was 4.62% in 1994. The estimated income tax rate for the VEBA trust was 34% in 1994. The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the trend rate by 1% per year would increase the accumulated postretirement benefit obligation by $2,215,000 and $2,825,000 at December 31, 1994 and 1993, respectively, and the aggregate of the service and interest cost components of the net periodic postretirement benefit expense for 1994 and 1993 by $196,000 and $200,000, respectively.
Rental expenses were $6,189,000, $6,900,000, and $2,871,000, in 1994, 1993, and 1992, respectively.
The Company has entered into financial guarantees which are financial instruments with off-balance sheet credit risk. The exposure to credit risk is represented by the amount the Company, under certain circumstances, would contractually have to pay out. These financial instruments were entered into for the fee income and the potential to share in future capital appreciation of the underlying assets.
A financial guarantee is a conditional commitment to guarantee the payment of an obligation by an unrelated entity to a third party. At December 31, 1994, the Company had two financial guarantees totaling $15,206,000 which are collateralized by the underlying real estate and related assets compared to financial guarantees totaling $24,132,000 at December 31, 1993. In the event of a sale or refinancing, the Company is entitled to share in the appreciation of the collateral.
WNC and certain affiliated companies have been named in various pending legal proceedings considered to be ordinary routine litigation incidental to the business of such companies. A number of other legal actions have been filed that demand compensatory and punitive damages aggregating material dollar amounts. WNC believes that such suits are substantially without merit and that valid defenses exist. WNC's management and its chief legal officer believe that such litigation will not have a material effect on WNC's consolidated results of operations or financial position.
WNC, WNIC, and the trustees believe that valid defenses exist and intend to contest vigorously the material allegations made in the complaint.
Under insolvency or guaranty laws in most states in which the Company's insurance subsidiaries operate, insurers can be assessed for policyholder losses incurred by insolvent insurance companies. At present, most insolvency or guaranty laws provide for assessments based on the amount of insurance underwritten in a given jurisdiction. The Company's insurance subsidiaries paid $2,850,000, $2,500,000, and $1,800,000 in state guaranty fund assessments in 1994, 1993, and 1992, respectively, and had accrued liabilities of $3,128,000 and $2,800,000 for future assessments at December 31, 1994 and 1993, respectively. Mandatory assessments can be partially recovered through a reduction in future premium taxes in some states.
Current statutory practice does not address reserves for certain endowment features of several life insurance products marketed by one of the Company's subsidiaries. The subsidiary uses a practice permitted by its state of domicile and discounts the future benefit using mortality and interest rate assumptions.
A reconciliation of SAP capital and surplus to GAAP shareholders' equity at December 31 follows:
Regulatory restrictions limit the dollar amount of dividends available for distribution to WNC from its insurance subsidiaries without prior approval by regulatory authorities. The amount of dividends available is based on the greater of: a) 10% of the insurance subsidiaries' statutory capital and surplus as of the preceding year end; or b) the insurance subsidiaries' statutory net income from operations for the preceding year. Based on these restrictions, WNC's insurance subsidiaries are permitted a maximum of $22,127,000 in dividend distributions to WNC in 1995. In 1994, WNC received dividends of $5,975,000 from WNIC.
Borrowings of $1,907,000 at December 31, 1994 are for a mortgage on investment real estate with an interest rate of 6.5% that matures in April, 1998. Payments of $504,000, $672,000, $655,000, and $296,000 will be required in 1995, 1996, 1997, and 1998, respectively. The property, with a carrying value of $11,922,000, is pledged as collateral.
Interest paid on borrowings by WNC was $406,000, $1,673,000, and $1,313,000, in 1994, 1993, and 1992, respectively.
WNC has a line of credit with one bank available for short-term borrowings amounting to $10,000,000, all unused at December 31, 1994. The line of credit arrangement is renewable annually, but credit can be withdrawn at the bank's option.
In addition, WNC has seven letters of credit with varying terms and conditions totaling $4,895,000. As of December 31, 1994, the entire amount was unused.
The fair values of short-term investments, venture capital partnerships, and accrued investment income approximate the carrying amounts reported in the balance sheets.
Fair values for fixed maturity and equity securities are based on quoted market prices where available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements, are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the investments.
Fair values for mortgage loans and policy loans are estimated using discounted cash flow analyses, based on interest rates currently being offered for similar loans to borrowers with similar credit ratings. A pricing cap is put on mortgage loans that carry significant above-market interest rate yields to reflect the prepayment risk.
The fair values of certain financial instruments along with their corresponding carrying values at December 31, 1994 and 1993 follow. As the fair value of all WNC's assets and liabilities are not presented, this information in the aggregate does not represent the underlying value of WNC. WNC does not own any financial instruments held or issued for trading purposes.