WNIC also owns a 335,000 square-foot office building in Evanston, Illinois. WNIC occupies approximately 7 percent of this building and leases the remainder to nonaffiliated commercial enterprises. At December 31, 1993, the outstanding balance on the mortgage loan secured by this property was $2,434,000. WNIC also occupies 28 field offices throughout the country, all of which are leased.
Overview Washington National Corporation (WNC or the Company) is an insurance holding company that, through its two principal operating subsidiaries, Washington National Insurance Company (WNIC) and United Presidential Life Insurance Company (UPI), provides life, annuity, health, disability, and specialty insurance products to individuals and groups in carefully targeted markets that the Company believes are underserved by other insurance carriers. In 1991, the Company completed a three-year corporate restructuring that narrowed its focus to three core businesses, improved its operating performance, and in management's view, positioned the Company for profitable expansion.
The Company's three core businesses are: (i) life insurance and annuities: universal life insurance and other interest-sensitive life insurance and annuity products marketed to individuals and small businesses; (ii) group products: employee-paid disability and other specialty insurance products for teachers and other employers with 100 to 1,000 employees; and (iii) individual health: individual health insurance products, primarily major medical and hospital coverage for persons under the age of 65 without employer-sponsored insurance.
Corporate Restructuring In 1988, the Company commenced a major restructuring effort to narrow its focus to three core businesses, reduced its work force by over two-thirds, and recruited new operating managers with many years of insurance industry experience. The Company decentralized decision-making and implemented performance-based management compensation in order to promote greater accountability at the operating business level. The Company also invested approximately $40 million in its operating businesses to improve computer systems, technical expertise, administrative facilities, and distribution systems. In addition, the Company implemented underwriting and pricing changes in its three core businesses to improve profitability, and upgraded the quality of its investment portfolio.
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 individual health insurance premiums of $52.3 million and group products premiums of $4.1 million resulting from an increased amount of business in force and rate increases for both segments and $23.2 million of premium revenues from an individual health reinsurance transaction entered into in the second quarter of 1993. See "Segment Information - Group Products" and "Segment Information - Individual Health," 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 $7.8 million, $2.0 million, and $0.4 million on fixed maturity investments, mortgage loans on real estate, and equity securities, respectively, were offset by losses of $10.6 million on real estate investments. 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.
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 primarily to improved operations in the Company's individual health and life insurance and annuities segments, offset in part by lower pretax income from the group products segment.
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. Included in income taxes for 1993 is a tax credit of $3.2 million related to realized investment losses. Also in 1993, the Company's federal income tax rate increased from 34% to 35%, retroactive to January 1, 1993, due to legislation enacted in August, 1993.
Changes in Accounting Principles (Net of Taxes). The Company recorded a one-time charge of $1.6 million after taxes effective the first quarter 1993 for the adoption of a new accounting standard on accounting for postemployment benefits. The adoption did not have a material impact on income before accounting changes. 1992 included a $22.8 million after-tax charge relating to the first quarter 1992 adoption of new accounting standards, related to postretirement benefits other than pensions and income taxes.
Segment Information Life Insurance and Annuities. Revenues for the life insurance and annuities segment, which is comprised of new business sold by UPI to individuals and small businesses and closed blocks of life insurance and annuities written by WNIC prior to 1990, were $229.0 million for 1993, down from $233.5 million in 1992. A decline in investment income of $5.8 million resulted from lower portfolio yield rates, offset in part by an increase in invested assets. A $1.5 million improvement in insurance revenues was primarily due to an increase in life insurance in force combined with higher policy charges at UPI, offset in part by a decline in insurance revenues on the closed blocks of business at WNIC.
Individual Health. Revenues for the individual health insurance segment increased 48.7% to $159.9 million in 1993 compared to $107.6 million in 1992. Revenues for this segment increased in part as a result of a reinsurance transaction that added a total of $23.2 million of premium revenue in 1993. In addition to the reinsurance transaction, the amount of business in force (based on the average number of policies in force) increased approximately 13% in 1993 compared to 1992 and premium rates increased an average of 7% in 1993.
Pretax income for the individual health insurance segment was $5.4 million for 1993 compared to a loss of $3.2 million in 1992. The improvement was primarily due to a larger premium base over which to spread fixed operating expenses.
In 1994, the Company entered into a reinsurance agreement with National Casualty Company, a subsidiary of Nationwide Corporation, whereby the Company will reinsure 50% of a block of individual major medical health insurance, effective January 1, 1994. The block had approximately $60 million of premium revenue in 1993. Beginning in 1994, the Company will administer the entire block of business for a fee paid by National Casualty. In addition, WNIC will market its products through the existing National Casualty Company sales force.
Insurance Benefits Paid or Provided. Insurance benefits paid or provided decreased $20.5 million, or 4.8%, from $430.3 million in 1991 to $409.8 million in 1992. The decrease was due to a $26.0 million decline in the group products segment's benefits resulting from the termination and restructuring of certain group health policies and a $7.5 million decline in benefits related to the 1991 sale of discontinued lines, offset in part by an $11.8 million rise in individual health benefits directly associated with the increased business in force discussed above.
Amortization of Deferred Insurance Costs. Amortization of deferred insurance costs increased $6.0 million, or 28.4%, from $21.1 million in 1991 to $27.1 million in 1992, due primarily to additional amortization resulting from the early recognition of investment income caused by the prepayment of certain mortgage-backed securities combined with the increase in the individual health block of business.
Income (Loss) Before Income Taxes and Changes in Accounting Principles. Income (loss) before income taxes and changes in accounting principles increased $26.8 million from a pretax loss of $0.4 million in 1991 to pretax income of $26.4 million in 1992. The largest items contributing to the increase were the $10.6 million improvement in the individual health segment's pretax income and the $15.0 million decrease in realized investment losses.
Changes in Accounting Principles (Net of Taxes). Effective January 1, 1992, the Company adopted SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and SFAS 109, "Accounting for Income Taxes." The cumulative effect of adopting these new accounting standards was a charge of $20.1 million and $2.7 million, respectively.
Segment Information Life Insurance and Annuities. Revenues for the life insurance and annuities segment were $233.5 million in 1992 compared to $227.1 million in 1991. The increase was primarily due to increased policy revenues and investment income at UPI, offset in part by declines in revenues in the closed blocks of business at WNIC.
Group Products. Revenues for the group products segment were $231.2 million in 1992 compared to $268.0 million in 1991. The decline was attributable to terminated cases and the conversion of several cost plus cases to a minimum premium basis.
Corporate and Other. The pretax loss for the corporate and other segment in 1992 was $2.5 million compared to a loss of $24.1 million in 1991. In 1992 realized investment losses were $4.6 million compared to losses of $19.6 million in 1991, which included losses of $10.0 million related to fixed maturity investments backed by guaranteed investment contracts. 1991 also included a loss of $1.2 million related to divestitures.
Investment Portfolio The Company's investment portfolio is managed by an experienced staff of in- house investment professionals, primarily at WNIC, and outside investment advisors, primarily the investment management group at Scudder, Stevens & Clark, Inc. Investments are made pursuant to strategies and guidelines approved by the Finance Committee of the Company's Board of Directors. The Company selects investments that match the needs of the businesses that the assets support in the areas of yield, liquidity, asset quality, and duration. The Company pursues a conservative investment philosophy by balancing a variety of objectives, including high credit quality, liquidity, high current income, preservation of capital, and protection against market and interest rate risk. The Company's investment portfolio consists primarily of investment grade, publicly-traded fixed maturity investments and mortgage loans on real estate. All investments made by WNIC and UPI are governed by Illinois and Indiana insurance laws and regulations, respectively.
The carrying value of the Company's high-yield investments (investments rated BB and lower) at December 31, 1993 was $94.0 million or 4.0% of the Company's invested assets compared to $108.3 million or 4.8% of invested assets at December 31, 1992. The fair value of this portfolio exceeded the carrying value by $6.2 million at December 31, 1993 and $6.1 million at December 31, 1992. The decline in the size of the high-yield portfolio in 1993 was primarily due to redemptions and sales, partially offset by downgrades.
At December 31, 1993, 29.5% 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 (FNMA), or the Federal Home Loan Mortgage Corporation (FHLMC), all of which are agencies of the U.S. Government. Only GNMA mortgage-backed securities 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 following details the carrying value and fair value of the Company's mortgage-backed securities portfolio at December 31, 1993:
Current and expected conditions in many real estate markets are depressed, with high vacancy rates and flat or declining rental rates. Moreover, the availability of financing is currently restricted as banks, insurance companies, and other lenders have reduced their exposure to real estate loans. In such an environment, the number of defaults on mortgage loans would be expected to remain at higher than historical average levels as borrowers' cash flows are insufficient to cover expenses. Additionally, the ability to rent investment real estate at favorable rates diminishes and properties may become vacant.
Equity Securities At December 31, 1993, $7.0 million or 0.3% of the Company's invested assets consisted of common stocks and common stock mutual funds, $3.5 million or 0.2% of invested assets consisted of nonredeemable preferred stocks, and $5.4 million or 0.2% of invested assets consisted of fixed maturity and money-market mutual funds. Nonredeemable preferred stocks, common stocks, and common stock mutual funds are carried on the Company's balance sheet at fair value. The Company does not anticipate any significant change in the size of its equity securities portfolio.
Investing activities (principally purchases and sales of investments) used cash of $130.8 million in 1993 compared to $140.0 million in 1992, primarily for the purchase of fixed maturity investments in both periods.
The Company held cash and short-term investments of $85.7 million at December 31, 1993, compared to $60.2 million at December 31, 1992. The balance of cash and short-term investments plus cash inflow from premium revenues, investment income, and investment maturities is considered to be more than sufficient to meet the requirements of the Company and its subsidiaries.
Stock Offering During the third quarter of 1993, the Company issued 2,133,000 shares of Common Stock in a secondary stock offering. The sale of the additional shares resulted in an increase in stockholders' equity of $47.3 million and a decrease in 1993 primary earnings of 4.3% or $.11 per share. See Note E for additional information.
UPI is wholly owned by United Presidential Corporation, an insurance holding company which in turn is 71% owned by WNIC and 29% owned by WNC. UPI is not considered a source of funds for dividends to stockholders of the Company. Management expects UPI to pay no dividends in the foreseeable future in order to conserve capital at that subsidiary.
A.M. Best Ratings The ability of an insurance company to compete successfully depends, in part, on its financial strength, operating performance, and claims-paying ability as rated by A.M. Best and other rating agencies. The Company's insurance subsidiaries are each currently rated "A- (Excellent)" by A.M. Best, based on their 1992 statutory financial results and operating performance.
In June 1993, the Company was advised by A.M. Best that, after review of the 1992 statutory financial results and operating performance, both WNIC and UPI were assigned ratings of "A- (Excellent)," an adjustment from their previous ratings of "A (Excellent)." Many of the Company's competitors have A.M. Best ratings of "A-" or lower, and the Company believes that its A.M. Best ratings are adequate to enable its insurance subsidiaries to compete successfully.
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) and include the accounts and operations of Washington National Corporation and its subsidiaries (WNC or the Company). Significant intercompany transactions have been eliminated.
Fixed maturity investments are securities that mature more than one year after issuance. They include bonds, notes, and redeemable preferred stocks. All fixed maturities are intended to be used by WNC as part of its asset/liability matching strategy. Effective March 31, 1993, the Company reclassified its fixed maturity investments into investments that are "held for sale" and investments that are "held to maturity." Fixed maturity investments held to maturity generally are carried at amortized cost, less write-downs for other-than-temporary impairments. Fixed maturity investments that are held for sale are those securities that may be sold in response to unanticipated policy surrenders, policy loan demand, or infrequent transactions. These fixed maturity investments are carried, on an aggregate basis, at the lower of amortized cost, less write-downs for other-than- temporary impairments and an allowance for below-investment grade securities, or fair value. Unrealized losses in aggregate on fixed maturity investments held for sale would be recorded in stockholders' equity, net of applicable deferred income taxes. At December 31, 1993 and 1992, the fair value of all fixed maturity investments exceeded carrying value by $82,332,000 and $56,894,000, respectively.
Equity securities represent investments in mutual funds, nonredeemable preferred stocks, and common stocks. These securities are carried at fair value which is determined primarily through published quotes of trading values. Changes in the valuation allowance necessary to adjust the carrying amount of the equity securities for temporary changes in fair value are reported directly in stockholders' equity. Other-than-temporary declines below cost are recorded as realized losses.
When an investment is sold, its selling price may be higher or lower than its carrying value. The difference between the selling price and the carrying value is recorded as a realized gain or loss, using the specific identification method. Investments that have declined in fair value below cost, and 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 and below-investment grade bonds are included in realized investment losses.
GAAP requires the disclosure of fair value information about certain financial instruments for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. The fair values are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in the immediate settlement of the instrument. As the fair value of all of WNC's assets and liabilities is not presented, the aggregate fair value of the amounts presented does not represent the underlying value of WNC.
A pricing cap is put on mortgage loans that carry significant above-market interest rate yields to reflect the illiquid nature of the mortgage loans and the risk that such loans could be prepaid.
The fair value of long-term debt is estimated using discounted cash flow analyses, based on current incremental borrowing rates for similar types of borrowing arrangements.
Fair values for real estate development guarantees, to the extent practicable, are based on estimates of fees to guarantee similar developments. Fair values for lending commitments are based on the commitment fee of the loans in question.
Provisions for depreciation of real estate investments and home office properties are computed using primarily the straight-line method over the estimated useful lives. Accumulated depreciation on real estate investments at December 31, was $24,184,000 in 1993 and $10,834,000 in 1992. Accumulated depreciation on home office properties at December 31, was $1,122,000 and $13,495,000 in 1993 and 1992, respectively. In 1993, the Company's previous home office real estate and related accumulated depreciation were transferred to investment real estate.
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 range from 4.5% to 7.5%. Withdrawal assumptions are based principally on experience and vary by issue age, type of coverage, and duration.
The carrying amounts, net of deferred insurance costs, for investment-type insurance contracts, principally included with future policy benefits of annuities were $1,226,238,000 and $1,197,340,000, at December 31, 1993 and 1992, respectively. The estimated fair values at December 31, 1993 and 1992 were $1,224,550,000 and $1,176,435,000, respectively.
Costs directly associated with the acquisition of new business are 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 that are 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.
The unamortized cost of purchased insurance in force is included in deferred insurance costs. Amortization is in relation to the present value of estimated gross profits over the estimated remaining life of the related insurance in force of 23 years, with interest rates ranging from 7.5% to 8.5%.
The estimated percentage of the December 31, 1993 balance to be amortized over the next five years is as follows:
In 1992, WNC adopted the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 109, "Accounting for Income Taxes." The accounting policies of WNC result in deferred taxes being provided for significant temporary differences between financial statement and tax return bases, using the asset and liability method. These differences result primarily from policy reserves, insurance acquisition costs, and reserves for postretirement benefits. WNC and its subsidiaries file a consolidated life/nonlife federal income tax return.
The insurance subsidiaries of WNC reinsure a portion of their life, annuity, and health risks with other insurance companies to minimize their exposure to loss. In particular, for the life insurance and annuity business, the Company's policy is to retain a maximum of $300,000 of life insurance exposure on any one individual ($400,000 with accidental death). For the group products business, 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 employee benefits long-term disability claim, and limits its group term life exposure to $200,000 per life ($400,000 with accidental death). The Company's reinsurance for individual health claims is designed to protect the Company from an excessive amount of claims in excess of $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 would remain liable.
Substantially all of the reinsurance assumed by the Company as of December 31, 1993 is on a 100% coinsurance basis and is accounted for in a manner similar to the direct business.
In 1992, the FASB issued SFAS 112, "Employers' Accounting for Postemployment Benefits," which WNC adopted effective January 1, 1993. This standard requires employers to recognize the costs and obligations of all types of postemployment benefits provided to former or inactive employees, their beneficiaries, and covered dependents. Under the standard, vested benefits are to be accrued over the relevant service period rather than expensed as they are paid, as was the practice. For postemployment benefits that do not vest or accumulate, employers are to accrue a liability and recognize the expected cost when it is probable that a benefit obligation has been incurred and the amount is reasonably estimable. The adoption resulted in a one-time cumulative adjustment of $1,550,000, net of taxes of $834,000, relating to benefits previously recorded on a pay-as-you-go basis. The adoption of SFAS 112 did not have a material effect on 1993 pretax income and is not expected to have a material impact on future years' earnings.
Realized investment gains (losses) for years ended December 31 are comprised of the following:
The amortized cost and fair value of fixed maturities at December 31, 1993, by contractual maturity, are shown in the following table. Expected maturities differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Borrowings of $2,434,000 at December 31, 1993 consist of a mortgage on investment real estate with an interest rate of 6.5% that matures in March 1998. Payments of $526,000, $562,000, $599,000, $613,000 and $134,000 will be required in 1994, 1995, 1996, 1997, and 1998, respectively. The property is pledged as collateral.
The fair value of WNC's mortgage and long-term notes payable at December 31, 1993 and 1992 was estimated to be $2,438,000 and $14,107,000, respectively.
In addition, WNC has three letters of credit available from one bank totaling $1,892,000 with varying terms and conditions. As of December 31, 1993, the entire amount was unused.
Effective January 1, 1992, WNC adopted SFAS 109, "Accounting for Income Taxes." Amounts prior to 1992 are presented under the previous accounting rules.
The Omnibus Budget Reconciliation Act of 1993 changed WNC's prevailing federal income tax rate from 34% to 35% effective January 1, 1993. The application of the 35% tax rate to the December 31, 1992 deferred income tax liability balance resulted in a $38,000 increase in federal income tax expense for 1993.
The components of the provision for deferred income taxes for the year ended December 31, 1991 are as follows:
At December 31, 1993, WNC had capital loss carryforwards for tax return purposes of $7,404,000 that expire in 1996. For financial reporting purposes, a valuation allowance of $14,903,000 has been recognized to offset the deferred tax assets related to those carryforwards, investment loss reserves, and other capital loss related deferred tax assets not expected to be realized. The valuation allowance was reduced by $3,272,000 and $500,000 in 1993 and 1992, respectively.
The following reconciles the difference between the actual tax provision and the amounts obtained by applying the statutory federal income tax rate of 35% for 1993 and 34% for 1992 and 1991 to the income or loss before income taxes and cumulative effect of changes in accounting principles:
At December 31, 1993, up to $19,851,000 (at a 35% tax rate) would be required for possible federal income taxes that might become due in future years, in whole or in part, if any portion of $56,717,000 of the insurance companies' gains from operations which accumulated under pre-1984 income tax laws, presently included in earned untaxed surplus and identified as tax "Policyholders' Surplus," becomes includable in taxable income. Also, distribution of amounts in excess of taxable "Shareholders' Surplus" ($221,591,000 at December 31, 1993) by the insurance companies under certain conditions may require payment of additional federal income taxes. However, WNC does not expect or intend that these taxable events will occur and, as such, the related deferred income taxes are not required to be provided.
WNC has 60,000,000 authorized shares of $5 par value Common Stock including treasury shares. In the third quarter of 1993, the Company completed a public offering of 2,133,000 newly issued shares for $23.75 per share. Capital contributions of $14,000,000 were made to a subsidiary out of the net proceeds. In addition, short-term indebtedness was reduced $11,000,000. The remainder is being used for other general corporate purposes.
At December 31, 1993, 13,768,000 shares of WNC's Common Stock were reserved for future issuance. Of this amount 12,118,000 shares were reserved for future exercises of Purchase Rights, 271,000 shares were reserved for conversion of outstanding Convertible Preferred Stock, 1,344,000 shares were reserved for exercise of options to purchase Common Stock and for use in connection with the restricted stock grants, and 35,000 shares were reserved for issuance of Common Stock in connection with the dividend reinvestment plan. The annual dividend paid on WNC Common Stock in 1993, 1992, and 1991 was $1.08 per share.
The number of shares used in computing primary earnings per share for 1993, 1992, and 1991 was 10,755,000, 9,989,000, and 9,980,000, respectively. These consisted of average shares outstanding plus the effect of dilutive stock options totalling 112,000 shares in 1993 and 97,000 shares in 1992. No effect was given to stock options in 1991 because the effect would have decreased the loss per share.
Primary and fully diluted earnings per share were the same for 1992 and 1991 because the computation of fully diluted earnings per share resulted in a smaller loss per share.
The following reconciles statutory net income (loss) to GAAP net income (loss) for the years ended December 31:
The net assets of WNC's insurance subsidiaries that are available for transfer to WNC generally are limited to the amounts by which such net assets, as determined in accordance with statutory accounting practices, exceed minimum statutory capital requirements. In addition, transfers in excess of certain amounts require approval of regulatory authorities. Retained earnings at December 31, 1993 includes $125,000,000 in excess of the statutory unassigned surplus of the insurance subsidiaries.
WNC has a stock benefit plan under which WNC's Compensation Committee may grant stock options, stock appreciation rights (SARs), and shares of restricted stock. The following summarizes the changes in the shares of Common Stock of WNC under the plan:
Shares of restricted stock may be granted either separately or in tandem with the grant of a stock option to key employees and others. These restricted shares are subject to certain terms and conditions defined in the plan. Options for 7,500 and 6,750 such shares were granted in 1992 and 1991, respectively.
The defined benefit retirement plans' funded status and amounts reported in WNC's consolidated balance sheets as of December 31 are as follows:
In determining the actuarial present value of the projected benefit obligation as of December 31, 1993 and 1992, the discount rate used was 6.7% and 6.9%, respectively. The rate of increase in compensation levels used in 1992 was 5% for the UPI plan. The expected rate of return on plan assets was 7.5% for 1993, 1992, and 1991.
Assets of the defined benefit plans are invested principally in mutual funds, bonds, and stocks. Assets of the WNIC retirement plan include Common and Preferred Stock of WNC of $10,863,000 and $10,332,000, at fair value, at December 31, 1993 and 1992, respectively. Dividends of $492,000 were received on the WNC Common and Preferred Stock in 1993 and 1992. No shares were purchased or sold during 1993.
In addition to WNC's various retirement programs, WNIC provides certain health care and life insurance benefits to eligible retired employees. Employees generally have become eligible for these benefits after reaching age 55 with 20 years of service or after reaching age 65 with 10 years of service. Generally, the health plans pay a stated percentage of most medical expenses reduced for deductibles and any payments made by government programs or other group coverage. Retirees contribute to the plan according to a schedule which averages 16% of the benefits paid. Effective January 1, 1992, WNC adopted SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Prior to December 1993, these benefits were unfunded. In December 1993, the Company contributed $1,100,000 to a Voluntary Employees' Beneficiary Association (VEBA) trust. The amount funded to the VEBA trust was based on the difference between the net periodic postretirement benefit expense and the retiree medical claims incurred during the period, subject to certain IRC limitations. Assets of the VEBA trust were invested in short-term variable demand notes at December 31, 1993.
Postretirement benefit expenses were recorded on a pay-as-you-go basis in 1991 and totaled $3,100,000.
As a result of past divestitures, the Company reinsures 100% of certain blocks of supplemental health insurance, life insurance, and annuity business with unaffiliated companies. At December 31, 1993, approximately 50% of WNC's total reinsurance recoverables were ceded to Combined Life Insurance Company of America and approximately 19% was ceded each to American Founders Life Insurance Company and UNUM Life Insurance Company. Of these three, two are related to divestitures. Also at December 31, 1993, 89% of reinsurance premiums assumed were from Harvest Life Insurance Company. The reinsurance agreement provides that the Company will reinsure a block of individual major medical business issued by Harvest Life on a 100% coinsurance basis.
The Company also uses yearly renewable term reinsurance at UPI to maintain statutory profitability and other financial requirements at UPI while sustaining growth. At December 31, 1993, such reinsurance, net of related taxes had contributed $9,300,000 of statutory capital to UPI. These transactions do not materially impact the Company's GAAP financial statements.
WNC has noncancelable operating leases primarily for office space and office equipment, the most significant of which relates to a twenty-year lease of WNIC's home office building with a related party as lessor. Future minimum lease payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at December 31, 1993 are as follows:
Commitments to extend credit are agreements to lend to an entity as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. An entity's credit worthiness is evaluated on a case-by-case basis and the amount of collateral obtained upon extension of credit is based on management's credit evaluation of the counterparty. Collateral held would include the related real estate investment properties. At December 31, 1993 and 1992, commitments to extend credit were $6,425,000 and $11,049,000, respectively. These commitments principally expire by July 1994.
Commitments to fund investments primarily for venture capital and fixed maturity investments amounted to $358,000 and $14,398,000 at December 31, 1993 and 1992, respectively. These commitments are on call and do not have a formal expiration date.
The Company also entered into financial guarantees that are integral and inseparable components of real estate and mortgage loan transactions. No consideration was received for these guarantees which relate primarily to the guarantee of debt repayment on three joint venture real estate investments. Accordingly, the fair value of these financial guarantees is zero.
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 against the Company that demand compensatory and punitive damages aggregating material dollar amounts. Management believes that such suits are substantially without merit and that valid defenses exist and are of the opinion that such litigation will not have a material effect on WNC's consolidated financial position.
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 $2,500,000, $1,800,000, and $2,000,000 in state guaranty fund assessments in 1993, 1992, and 1991, respectively and had accrued liabilities of $2,800,000 for future assessments at December 31, 1993 and 1992. Mandatory assessments can be partially recovered through a reduction in future premium taxes in some states.
WNC has four business segments: life insurance and annuities; group products; individual health insurance; and corporate and other. The segments are based on WNC's insurance products. The corporate and other segment includes realized investment gains and losses, a curtailment gain in 1992 of $4,033,000 resulting from a change to WNIC's postretirement health benefits program, operations that do not specifically support one of the other segments, and the operations and the net loss on divestitures in 1991. See Note J for further information on divestitures. Assets not individually identifiable by segment are allocated based on the amount of segment liabilities. Depreciation expense and capital expenditures are not considered material. Revenues, income or loss before income taxes and cumulative effect of changes in accounting principles, and assets by segment for the years ended and as of December 31 are as follows: