UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to _________
Commission file number 0-16267
_________________________WALSHIRE ASSURANCE COMPANY_____________________
(Exact name of registrant as specified in its charter)
_________Pennsylvania__________ _________23-2023240________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3350 Whiteford Road, P. O. Box 3849, York, PA. 17402-0138
(Address of principal executive offices) (Zip Code)
Registrant s telephone number, including area code (717) 757-0000
Securities registered pursuant to Section 12(b) of the Act: NONE
Title of each class Name of each exchange on which registered
________________________ _____________________________________________
________________________ _____________________________________________
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share__________4,066,359_______________
(Title of class) (Number of Shares Outstanding
as of February 29, 1995)
Indicate by check mark whether the registrant (i) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (ii) has been
subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. X
This aggregate market value of voting stock held by non-affiliates
of the Registrant is $48,274,159(1).
DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified
under applicable items herein)
Certain portions of the Company s Annual Report to Shareholders for
the year ended December 31, 1995, are incorporated by reference in Parts
II and IV of this Report.
With the exception of the information incorporated by reference in
Parts II and IV of this Report, the Company s Annual Report to
Shareholders for the year ended December 31, 1995, is not to be deemed
filed with the Securities and Exchange Commission for any purpose.
Certain portions of the Company s Proxy Statement to be filed in
connection with its 1996 Annual Meeting are incorporated by reference in
Part III of this Report.
Other documents incorporated by reference are listed in the Exhibit
Index.
___________________________
(1) The aggregate dollar amount of the voting stock set forth equals
the number of shares of the Company s Common Stock outstanding,
reduced by the amount of Common Stock held by officers, directors
and shareholders owning in excess of 10% of the Company s Common
Stock on February 29, 1996. The information provided shall in no
way be construed as an admission that any officer, director or 10%
shareholder in the Company may or may not be deemed an affiliate of
the Company or that he is the beneficial owner of the shares
reported as being held by him, and any such inference is hereby
disclaimed. The information provided herein is included solely for
recordkeeping purposes of the Securities and Exchange Commission.
INDEX
PAGE
PART I
Item 1. Business
General .............................................. 1
Risk Factors ......................................... 2
Business Written ..................................... 4
Marketing ............................................ 4
Reinsurance .......................................... 5
Rates ................................................ 6
Claims ............................................... 6
Liabilities for Unpaid Claims and Claim Settlement
Expenses ........................................... 6
Investments .......................................... 7
Competition .......................................... 9
Regulation ........................................... 9
Employees ............................................ 11
Item 2. Properties ........................................... 11
Item 3. Legal Proceedings .................................... 11
Item 4. Submission of Matters to a Vote of Security Holders .. 11
Item 4.1 Executive Officers of the Registrant ................. 11
PART II
Item 5. Market for the Registrant s Common Equity and
Related Stockholder Matters .......................... 12
Item 6. Selected Financial Data .............................. 12
Item 7. Management s Discussion and Analysis of Financial
Condition and Results of Operations .................. 12
Item 8. Financial Statements and Supplementary Data .......... 12
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .................. 12
(i)
INDEX (Continued)
PAGE
PART III
Item 10. Directors and Executive Officers of the Registrant ... 12
Item 11. Executive Compensation ............................... 12
Item 12. Security Ownership of Certain Beneficial Owners
and Management ....................................... 13
Item 13. Certain Relationships and Related Transactions ....... 13
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K .......................................... 13
(ii)
PART I
ITEM 1: BUSINESS
General
Walshire Assurance Company ( Company ) is an insurance holding
company headquartered in York, Pennsylvania. Through its wholly owned
subsidiary, Lincoln General Insurance Company ( Lincoln General ), the
Company primarily provides a specialized line of property and casualty
insurance principally in Pennsylvania, and to a lesser extent, in
Missouri, Georgia, Maryland, Alabama and in certain other states located
in the mid-Atlantic, South, Southeastern and Midwest regions of the
country. The Company recently organized Comp America Insurance Company
( Comp ) as an insurance company in Pennsylvania. Through 1995, no
business has been written by Comp.
The Company principally offers commercial automobile physical damage
and liability coverages for trucks, tractors, trailers, buses and other
commercial vehicles as well as workers compensation coverages for
trucking employees. To a lesser extent, the Company offers certain
commercial coverages for cargo in transit and other property, commonly
called inland marine coverage, as well as personal automobile physical
damage, surety and fidelity coverages. The Company also provides
adjusting services for claims covered by the Company and certain third
parties, and financing for insurance premiums payable by customers of the
Company and others. See Business Written and Claims .
Since 1991, the Company has offered commercial automobile physical
damage and commercial automobile liability coverages as well as surety
bonds. In 1992, the Company began to offer personal automobile physical
damage insurance, and in 1994, the Company began to offer workers
compensation coverages. The following table sets forth the direct
premiums written by the Company for the years ended December 31, 1995,
1994 and 1993 by line of business.
(in thousands)
Years Ended December 31,__
__1995_ 1994_ 1993__
Auto Liability ............ $24,004 $18,666 $14,860
Auto Physical Damage ...... 18,977 16,740 14,762
Workers Compensation ..... 5,329 1,864 -
Inland Marine ............. 2,656 2,154 1,385
Other ..................... 1,054 680 497
$52,020 $40,104 $31,504
For the past several years, the Company s principal strategy has been
to position itself within its geographical markets as a consistent and
reliable provider of commercial automobile coverages for the
transportation industry. The Company believes that it has been able to
operate successfully in the commercial automobile market due to five
principal factors: (i) the Company s comprehensive knowledge of the
transportation industry and the geographical markets in which the Company
operates, which enables the Company to be more selective of the risks it
underwrites and to settle claims within reasonable amounts, (ii) the
Company s nineteen-year record of operations, which evidences the
Company s willingness and ability to provide a consistent market for
1
commercial automobile coverages, (iii) the Company s strong agency force,
which the Company has been able to build through careful selection, (See
Business-Marketing), (iv) the Company s reputation for service, which the
Company has been able to build through an agency force that is
knowledgeable of the trucking industry and a claims department and
adjusters which settle claims relatively quickly, and (v) the Company s
degree of automation, which management believes is unusual for a company
of its size and which permits prompt and efficient service to
policyholders and agents.
The Company is a Pennsylvania corporation organized in December,
1976. The Company s principal executive offices are located at 3350
Whiteford Road, P. O. Box 3849, York, Pennsylvania 17402-0138, telephone
(717) 757-0000. Unless the context otherwise requires, the Company
refers to Walshire Assurance Company and its consolidated subsidiaries.
Risk Factors
In analyzing whether to make or to continue an investment in the
Company, investors should consider carefully all the information contained
or incorporated by reference in this Annual Report on Form 10-K and, in
particular, the following:
Importance of Key Individual. The continued participation of Kenneth
R. Taylor, its President and Chief Executive Officer is important to the
Company s business. The Company has entered into an employment agreement
with Mr. Taylor, expiring in 1997, which contains, among other things, a
covenant not to compete during the term of the agreement and for one year
thereafter. Although Mr. Taylor may voluntarily terminate his employment
under this agreement, he has no present intention to do so. Mr. Taylor
devotes such time to the Company as he believes is appropriate, although
his employment agreement provides that he is not required to devote his
entire business time to the Company. The loss of the services of Mr.
Taylor could adversely affect the Company s business. The Company does
not maintain key-man life insurance on Mr. Taylor. See - Item 10:
Directors and Executive Officers of the Registrant and Item 11:
Executive Compensation .
Importance of Key Agent. During 1995, 1994 and 1993, one of the
Company s agents accounted for 23%, 24% and 30%, respectively, of the
total premiums written by the Company. The loss of this agent could
adversely affect the Company s business. See Item 1: BUSINESS -
Marketing .
Restrictions on Dividends and Other Distributions from Insurance
Subsidiaries. One of the Company s sources of cash with which to pay
dividends on its outstanding securities is dividends from Lincoln General
and Comp ( Insurance Subsidiaries ). The Insurance Subsidiaries are
subject to state laws which restrict the amount of dividends and other
distributions they may pay. As of December 31, 1995, the Insurance
Subsidiaries had $3,238,000 available for the payment of dividends to the
Company, without the prior approval of insurance regulatory authorities.
The Insurance Subsidiaries are also subject to risk-based capital
requirements which may further restrict their ability to pay dividends.
See Item 1: BUSINESS - Regulation and Note 11 of the Notes to
Consolidated Financial Statements, incorporated by reference.
2
Regulation. Insurance companies are subject to the supervision, laws
and regulations of the states in which they transact business. These laws
and regulations cover many aspects of their business, including licensure,
the payment of dividends, the establishment of premium rates, the
settlement of claims, the transfer of control and the requirement to
participate in assigned risk pools. Certain changes in such laws and
regulations could have a material adverse effect on the operations of
insurance companies, including the Company. Specific regulatory
developments which could have a material adverse effect on the operations
of the insurance industry include, but are not limited to, the potential
repeal of the McCarran-Ferguson Act (which exempts insurance companies
from a variety of federal regulatory requirements) and possible rate
rollback legislation. In addition, the administration of such regulations
is vested in state agencies which have broad powers and are concerned
primarily with the protection of policyholders. Under the Pennsylvania
Insurance Company Law, subject to certain exceptions, no person may make
an offer to acquire control (as defined by statute) or acquire control
of the Company without the prior approval of the Pennsylvania Insurance
Department. Control is presumed to exist if any person, directly or
indirectly, owns, controls, holds with the power to vote, or holds proxies
representing 10% or more of the voting securities of the Company. See
Item 1: BUSINESS - Regulation .
Competition: The property and casualty insurance industry is highly
competitive on the basis of both price and service. There are numerous
companies competing for business in the geographic markets in which the
Company operates, and no single company dominates. See Item 1: BUSINESS
- Competition .
Reinsurance. The Company relies upon reinsurance agreements to limit
its maximum net loss from large single risks or risks in concentrated
areas, and to increase its capacity to write insurance. Reinsurance does
not relieve the primary insurer from liability to its policyholders. To
the extent that a reinsurer may be unable to pay losses for which it is
liable under the terms of a reinsurance agreement, the Company is exposed
to the risk of continued liability for such losses. However, the Company
requires all of its reinsurers to have a Best s rating of A (Excellent )
or better. Additional premiums incurred under certain reinsurance
arrangements as a result of catastrophic events could adversely affect the
profitability of the Company. See Item 1: BUSINESS - Reinsurance .
Certain Provisions of the Company s Articles of Incorporation and Bylaws.
The Company s Articles of Incorporation and Bylaws provide, among other
things, that (i) the Board of Directors may, without further action of the
shareholders of the Company, issue up to 2,000,000 shares of preferred
Stock with such terms as may be determined by the Board of Directors,
subject to certain limitations; (ii) directors are to be elected to
staggered three-year terms; (iii) directors may only be removed by a vote
of shareholders entitled to cast at least 75% of the votes that all
shareholders are entitled to cast thereon and, in certain cases only for
cause; (iv) there is no cumulative voting for the election of directors;
and (v) any proposed amendment to the Company s Articles of Incorporation
or Bylaws, which is not approved by the Board of Directors, must be
approved by the vote of shareholders entitled to cast at least 75% of the
votes that all shareholders are entitled to cast thereon. Pursuant to
these provisions, the Company issued 141,700
shares of 6 1/2% Cumulative Convertible Preferred Stock with certain
3
preferred and special rights. These provisions could adversely affect the
rights of the holders of 6 1/2% Cumulative Convertible Preferred Stock and
Common Stock and may have the effect of discouraging offers to acquire the
Company. In addition, as a result of the super-majority voting provisions
relating to an amendment of the Company s Articles of Incorporation and
Bylaws and the percentage of the outstanding shares of the Company s
Common Stock that certain directors and/or officers of the Company
beneficially own, such directors and/or officers will be able to defeat
any amendment to such Articles or Bylaws not approved by them. No
dividends may be declared or paid with respect to the Common Stock until
all accrued dividends on the 6 1/2% Cumulative Convertible Preferred Stock
have been paid or set apart for payment. Copies of the Company s Articles
of Incorporation and Bylaws are on file with the Securities Exchange
Commission.
Business Written
Insurance underwriting opportunities are evaluated, and the decision
to write a particular risk is made, by the underwriting department of the
Company or by the Company s agents, subject in the latter case to final
approval by the underwriting department. The decision to write a
particular risk is based on a number of factors, including the experience
and past claims of the insured, the value and type of property to be
insured and the type and location of the operation conducted by the
insured.
The following table sets forth direct premiums written, net premiums
earned and the combined ratio of the Company for the last three fiscal
years. The combined ratio is a traditional measure of underwriting
profitability. The ratio is the sum of (i) the ratio of incurred losses
and associated expenses to net premiums earned ( loss ratio ) and (ii) the
ratio of expenses incurred for commissions, premium taxes, administrative
and other underwriting expenses to net premiums written ( expense ratio ).
When the combined ratio is under 100%, underwriting results are generally
considered profitable. Conversely, when the combined ratio is over 100%,
underwriting results are generally considered unprofitable. The combined
ratio does not reflect investment income, federal income taxes or other
non-operating income or expenses.
(in thousands, except percentages)
Years Ended December 31,___
1995_ 1994_ 1993_
Gross premiums written ............. $52,138 $40,199 $31,583
Net premiums earned ................ 36,191 28,848 22,511
Combined ratio (1) ................. 87% 89% 90%
In February 1995, the Company received its current rating A+
(Superior) from A. M. Best Company. Best s ratings are based upon factors
relevant to policyholders and are not necessarily directed toward the
protection of investors.
Marketing
The Company s insurance services are marketed through approximately
360 independent insurance agents. The Company selects agents based on
_________________________
(1) Combined ratios have been calculated in accordance with accounting
principles prescribed or permitted by state regulatory agencies.
4
their comprehensive knowledge of the industries to which the Company
provides insurance coverages and the Company s product markets,
including in particular the transportation industry, and of the geographic
market in which the agents operate. During 1995, one of the Company s
agents accounted for 23% of the total premiums written by the Company and
another agent accounted for 6% of the total premiums written by the
Company. See Item 13: Certain Relationships and Related Transactions .
The Company continually monitors and evaluates each agent s
performance in terms of premiums written and loss experience. The Company
maintains a contingent commission program for its agents. Under this
program, certain agents, who underwrite specific amounts of insurance, are
entitled to receive additional commissions based upon the profitability to
the Company of the business placed by the particular agent. For 1995,
aggregate contingent commissions represented 7% of all commissions for
such year. The Company believes this program helps it to retain quality
agents and encourages those agents to generate profitable business for the
Company.
Reinsurance
The Company reinsures a portion of its exposure by paying to
reinsurers a portion of the premiums received on all policies. Insurance
is ceded primarily to reduce the net liability on individual risks and to
protect against catastrophic losses. Although reinsurance does not
legally discharge an insurer from its primary liability for the full
amount of the coverage, it does make the assuming reinsurer liable to the
insurer to the extent of the losses reinsured.
The Company maintains excess catastrophe reinsurance covering
commercial automobile physical damage and inland marine losses and excess
loss reinsurance covering commercial automobile physical damage and inland
marine losses occurring at a terminal.
Pursuant to another reinsurance treaty, the Company maintains excess
of loss reinsurance covering commercial automobile liability losses.
Under this treaty, the Company s maximum loss exposure on any one loss
occurrence (at a maximum coverage of $1,000,000) is $250,000. The Company
also maintains contingency excess of loss reinsurance covering commercial
automobile liability losses in excess of $1,000,000 (to a maximum of
$3,000,000).
The Company also maintains excess of loss reinsurance covering non-
trucking automobile liability losses. Under this treaty, the Company s
maximum loss exposure on any one risk (at a maximum coverage of
$1,000,000) is $250,000. Also the Company maintains excess of loss
reinsurance covering extraordinary medical benefit losses. Under this
excess of loss reinsurance treaty, the Company s maximum loss exposure on
any one risk (at a maximum coverage of $1,000,000) is $250,000. The
Company reinsures all loss exposures in excess of the maximum loss
exposure under each of these liability loss reinsurance treaties.
Pursuant to another reinsurance treaty, the Company maintains excess
of loss reinsurance covering workers compensation losses. Under this
treaty, the Company retains $250,000 of each occurrence. Losses in excess
of $250,000 to a limit of $5,000,000 are reinsured. Any loss in excess of
$5,000,000 is the obligation of the Company.
5
The Company s policy is to maintain reinsurance only with insurance
companies with a Best s rating A (Excellent) or better. The Company
generally has experienced little difficulty in obtaining reinsurance or
in receiving timely payment from its reinsurers. The Company does not
believe allowances for potentially uncollectible reinsurance are needed.
For further information relating to the Company s reinsurance
arrangement, see Note 2 of the Notes to Consolidated Financial Statements.
Rates
The Company develops its rate structure from various sources. For
some of the Company s products, rates are derived from rating bureaus such
as the Insurance Services Office ( ISO ), the National Council on
Compensation Insurance ( NCCI ), the American Association of Insurance
Services ( AAIS ) and the Surety Association of America ( SAA ). When
developing rates utilizing material provided by these organizations, the
Company will use the rates promulgated by the bureau or it will apply its
own expense and profit factors to the specific organization-generated loss
costs. For other products, the Company has developed its own rate
structure independent of any rating bureau. All necessary rate changes
requiring approval are submitted to the appropriate regulatory authorities
for review and approval prior to use.
Claims
All claims operations, including review of initial reports of claims
and the determination of liability amounts, are conducted by the Company s
claims department. The Company employs a staff of attorneys and adjusters
specializing in the transportation industry for the purpose of adjusting
claims covered by the Company and certain third parties. The Company
believes that by using attorneys and adjusters with an expertise in the
transportation industry, it is able to settle claims within a relatively
short period of time and within reasonable amounts. When appropriate, the
Company also uses outside attorneys and adjusters.
Liabilities for Unpaid Claims and Claim Settlement Expenses
The Company maintains liabilities for future payments of claims and
claim settlement expenses. Claim liabilities are estimates of the
ultimate amount that will be required to be paid for claims and consist
of reported claims and incurred but not reported claims. Claim settlement
expense liabilities are intended to cover the estimated costs of settling
all claims, including investigation and litigation costs, and are
determined on the basis of historical experience.
The amount of claim liabilities for reported claims is based upon an
evaluation of the type of risk involved, knowledge of the specific
circumstances surrounding each claim and the policy provisions relating
to the type of claim. Claim liabilities for incurred but not reported
claims are calculated based upon historical experience and current
conditions. Liabilities for unpaid claims are closely monitored and are
recomputed periodically by the Company using updated information on
reported claims.
6
Prior to 1994, the majority of the insurance written by the Company
was on property risks. Property claims tend to be reported quickly and
generally are settled within a relatively short period of time compared
to other lines of business. As a result of this short tail , the Company
was not required to monitor and recompute liabilities for unpaid claims
over an extended period of time on these coverages. Moreover, because of
the relatively short period of time within which these claims are settled,
the effect of inflation on loss development was not significant. In 1992,
the Company began to write more liability coverages, and in 1994, the
majority of the business written by the Company was liability coverages.
As a result, the Company is required to monitor liabilities for unpaid
claims over a longer period of time than was the case when the Company
principally wrote property coverages. To date, the Company has not had to
make significant recomputations for unpaid claims and the effect of
inflation has not been significant.
The following table sets forth the unpaid claims, claim settlement
expenses and claims drafts outstanding as of December 31, 1995, 1994 and
1993, and the age of such claims based upon the date the claim occurred.
(in thousands)
Years Ended December 31,___
1995 1994 1993
Unpaid claims, claim settlement
expenses and claims drafts
outstanding at end of period.. $20,153 $14,292 $11,764
Age of unpaid claims, claim
settlement expenses and claims
drafts outstanding at end of
period:
Zero to three months ......... $ 4,836 $ 3,314 $ 4,650
Three to six months .......... 2,579 1,297 3,247
Six months to one year ....... 3,639 2,980 1,698
Over one year ................ 9,099 6,701 2,169
Investments
The following table sets forth the classification of the Company s
investment portfolio as of December 31, 1995, 1994, and 1993. As of
December 31, 1995, less than 4% of the debt securities in the Company s
investment portfolio were considered below investment grade, principally
because such securities were not rated.
(in thousands, except percentages)
December 31,_______________
1995_____ 1994_____ 1993_____
Amount Percent Amount Percent Amount Percent
Held to Maturity:
Fixed Maturities:
U.S. Treasury securi-
ties and obligations
of U.S. government
corporations and
agencies ........... $ 4,141 7% $ 1,629 3% $ - -%
7
Obligations of
states and political
subdivisions ....... 11,076 19 14,879 30 13,283 33
Total held to
maturity (1) ....... 15,217 26 16,508 33 13,283 33
Available for sale:
Fixed Maturities:
U.S. Treasury securi-
ties and obligations
of U.S. government
corporations and
agencies ............. 4,594 8 4,988 10 3,446 9
Obligations of states
and political subdi-
visions .............. 20,981 36 14,939 30 11,039 27
Debt securities issued
by foreign govern-
ments ................ 35 - 35 - 35 -
Corporate securities .. 1,605 3 1,702 3 1,105 3
Total fixed
maturities (2) ...... 27,215 47 21,664 43 15,625 39
Equity securities (3) .. 8,720 15 7,611 15 6,076 15
Total available
for sale ............ 35,935 62 29,275 58 21,701 54
Mortgage loans .......... 116 - 124 - 132 -
Other investments ....... 1,751 3 744 1 770 2
Short term
investments (4) ........ 5,191 _ 9 3,889 _ 8 4,438 _11
Total investments ... $58,210 100% $50,540 100% $40,324 100%
_________________________
(1) Securities held to maturity are valued at cost, which has been
adjusted for amortization of discount or premium. Total fair
value of securities held to maturity was $15,712 at December 31,
1995, $16,140 at December 31, 1994 and $13,922 at December 31,
1993.
(2) Beginning in 1994, fixed maturities available for sale are valued
at fair value. Prior to 1994, fixed maturities available for
sale were valued at the lower of aggregate amortized cost or
fair value. Total amortized cost of fixed maturities available
for sale was $27,007 at December 31, 1995 and $22,588 at December
31, 1994. Total fair value of fixed maturities available for
sale was $15,885 at December 31, 1993.
(3) Equity securities are valued at fair value. Total costs of equity
securities were $8,189 at December 31, 1995, $8,263 at December 31,
1994 and $5,164 at December 31, 1993.
(4) Short-term investments are valued at cost, which approximates
fair value.
8
The following table sets forth the maturities of the Company s
investment portfolio of fixed maturities as of December 31, 1995.
(in thousands
except percentages)
December 31, 1995_
Amount Percent
Due in one year or less ................... $ 1,534 4%
Due after one year through five years ..... 14,367 34
Due after five years through ten years .... 14,017 33
Due after ten years ....................... 12,514 29
Totals $42,432 100%
Mercantile Safe Deposit & Trust Company, Baltimore, Maryland, acts
as investment adviser to the Company in connection with its fixed income
investment portfolio.
Competition
The property and casualty insurance industry is highly competitive
on the basis of both price and service. There are numerous companies
competing for business in the geographic markets in which the Company
operates, and no single company dominates. Some of the Company s
competitors are national in scope and some have substantially greater
financial resources than those of the Company. The Company believes it
has been able to compete successfully by providing a consistent market for
commercial automobile coverages and by providing quality service through
agents and a staff who are knowledgeable of the transportation industry.
Regulation
Insurance companies are subject to supervision and regulation in the
states in which they transact business. Such supervision and regulation
relates to numerous aspects of an insurance company s business and
financial condition. The primary purpose of such regulation is the
protection of policyholders. The extent of such regulation varies, but
generally derives from state statutes which delegate regulatory,
supervisory and administrative authority to state insurance departments.
The authority of state insurance departments includes licensing of
insurers and agents, approval of policy forms, establishment of standards
of solvency for insurers, adoption of rules governing investments and
premium rates for property and casualty insurance, and adoption of rules
governing provisions for current losses
and future liabilities and deposits of securities for the benefit of
policyholders. State insurance departments also conduct periodic
examinations of the affairs of insurance companies and require the filing
of annual and other reports relating to the financial condition of
insurance companies.
The majority of the states in which the Company does business and
proposes to do business have guaranty fund laws under which insurers
9
doing business in such states can be assessed on the basis of premiums
written by the insurer in those states in order to fund policyholder
liabilities of insolvent companies. In general, under these laws, an
insurer is subject to assessment, depending upon its market share of a
given line of business, to assist in the payment of certain policyholders
claims against insolvent insurers. The Company has made accruals for its
portion of assessments related to such insolvencies based upon the most
current information furnished by the guaranty associations. During the
year ended December 31, 1995, the amount of such insolvency assessments
paid by the Company was not material.
The property and casualty insurance industry continues to receive a
considerable amount of publicity. New regulations and legislation are
being proposed to roll back premium rates, to limit damage awards, to
control plaintiffs counsel fees, to bring the industry under regulation
by the federal government and to control premiums, policy terminations and
other policy terms. It is not possible to predict whether, in what form
or in which jurisdictions these proposals might be adopted or the effect,
if any, on the Company.
Under Pennsylvania law, the Company, as the insurance holding company
for the Insurance Subsidiaries, is subject to various registration and
periodic reporting requirements. In addition, the Insurance Subsidiaries
are subject to various restrictions on the amount of dividends they may
pay to the Company. Under Pennsylvania law, the Insurance Subsidiaries
are permitted to pay, without the prior approval of the Pennsylvania
Insurance Commissioner, cash or property dividends to the Company within
any twelve month period in an amount up to the greater of (i) 10% of the
Insurance Subsidiaries surplus as shown in its most recent annual
statement on file with the Pennsylvania Insurance Department, or (ii) the
net investment income earned, excluding net realized capital gains or
losses, shown in such statement. The Pennsylvania Insurance Company Law
also provides that the Insurance Subsidiaries may pay dividends to the
Company only from its profits as determined by statute.
Effective December 31, 1994, the National Association of Insurance
Companies (NAIC) required insurance companies to calculate and report
information under a risk-based capital formula. Risk-based capital
requirements are intended to allow insurance regulators to identify
inadequately capitalized insurance companies based upon the type and
mixture of risks inherent in the company s operations. The formula
includes components for asset risk, liability risk, and other factors.
As of December 31, 1995, the Insurance Subsidiaries are above required
capital levels.
Under the Pennsylvania Insurance Company Law, without the prior
approval of the Pennsylvania Insurance Department, subject to certain
exceptions, no person (other than the Company) may: (i) make a tender
offer for or a request or invitation for tenders of, or enter into any
agreement to exchange securities or seek to acquire or acquire in the open
market or otherwise, any voting security of the Company if, after the
consummation thereof, such person would directly or indirectly, or by
conversion or by exercise of any right to acquire, be in control of the
Company, or (ii) enter into an agreement to merge with or otherwise to
acquire control of the Company. Control is defined as the possession,
direct or indirect, of the power to direct or cause the direction of the
management and policies of a person, whether through
10
the ownership of voting securities, by contract (other than a commercial
contract for goods or non-management services) or otherwise, unless the
power is the result of an official position with or corporate office held
by the person. Control is presumed to exist if any person, directly or
indirectly, owns, controls, holds with the power to vote or holds proxies
representing 10% or more of the voting securities of the Company. Such
presumption may be rebutted upon a showing that control does not exist.
The term voting security includes any security convertible into or
evidencing a right to acquire a voting security. As a condition to
approval, the Pennsylvania Insurance Department may require that such
offer remain open a specified minimum length of time, permit certain
withdrawals of shares deposited in connection with such offer and require
pro rata acceptance of any shares deposited pursuant to the offer.
Employees
As of December 31, 1995 the Company had approximately 110 employees.
None of the employees of the Company is covered by a collective bargaining
contract. The Company believes that its employee relations are excellent.
ITEM 2: PROPERTIES
The Company s headquarters are located in a 25,000 square foot
building in York, Pennsylvania, which is owned by the Company.
ITEM 3: LEGAL PROCEEDINGS
The Company currently is a party to certain lawsuits arising in the
ordinary course of its business. The Company believes that none of its
current legal proceedings would, if adversely determined, have a material
effect on its business or financial condition.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 4.1: EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information concerning the executive
officers of the Company who are not also directors.
Name Age Position with the Company
Gary J. Orndorff 38 Vice President-Treasurer and Chief
Financial Officer of the Company
and Lincoln General
Richard S. Kahlbaugh 35 General Counsel of the Company and
Secretary of Lincoln General
Glenn E. Sell, Jr. 52 Vice President-Underwriting of
Lincoln General
Mr. Orndorff was elected Vice President-Treasurer and Chief Financial
Officer of the Company and of Lincoln General in May, 1989. Mr. Orndorff
joined the Company in August, 1986.
11
Mr. Kahlbaugh was elected Secretary of Lincoln General in February,
1996. Mr. Kahlbaugh joined the Company in July, 1992. Prior thereto, Mr.
Kahlbaugh was an attorney with Ford New Holland, Inc.
Mr. Sell was elected Vice President-Underwriting of Lincoln General
in June, 1987. Mr. Sell joined the Company in January, 1987.
PART II
ITEM 5: MARKET FOR THE REGISTRANT S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Incorporated by reference from the section entitled Quarterly Common
Stock Prices and Cash Dividends Per Share in the Company s Annual Report
to Shareholders for the year ended December 31, 1995.
ITEM 6: SELECTED FINANCIAL DATA
Incorporated by reference from the section entitled Financials at
a Glance in the Company s Annual Report to Shareholders for the year
ended December 31, 1995.
ITEM 7: MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Incorporated by reference from the section entitled Management s
Discussion and Analysis of Financial Condition and Results of Operations
in the Company s Annual Report to Shareholders for the year ended December
31, 1995.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference from the Company s Financial Statements,
the notes thereto, and the independent auditors report included in the
Company s Annual Report to Shareholders for the year ended December 31,
1995.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the Company s 1996 proxy statement to
be filed pursuant to General Instruction G(3) to the Form 10-K,except
information concerning certain Executive Officers of the Company which is
set forth in Item 4.1 hereof.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Company s 1996 proxy statement to
be filed pursuant to General Instruction G(3) to the Form 10-K.
12
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Company s 1996 proxy statement to
be filed pursuant to General Instruction G(3) to the Form 10-K.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Company s 1996 proxy statement to
be filed pursuant to General Instruction G(3) to the Form 10-K.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
I. Documents filed as part of this report:
A. Financial Statements. The following consolidated financial
statements and the notes thereto of Walshire Assurance Company, which are
included in the Company s Annual Report to Shareholders for the year ended
December 31, 1995, have been incorporated by reference into Item 8 of this
Report on Form 10-K. The Independent Auditors Report, which covers the
Company s financial statement schedules, appears on page A-1 of this
Report on Form 10-K.
Consolidated Balance Sheets -
December 31, 1995 and 1994.
Consolidated Statements of Income -
Years ended December 31, 1995, 1994 and 1993.
Consolidated Statements of Shareholders Equity -
Years ended December 31, 1995, 1994 and 1993.
Consolidated Statements of Cash Flows -
Years ended December 31, 1995, 1994 and 1993.
Notes to Consolidated Financial Statements
B. Schedules.
Independent Auditors Report on Schedules A-1
I. Summary of Investments Other Than
Investments in Related Parties -
December 31, 1995. A-2
II. Condensed Financial Information of Registrant -
December 31, 1995 and 1994 and Years
ended December 31, 1995, 1994 and 1993 A-3
III. Supplementary Insurance Information -
Years Ended December 31, 1995, 1994 and 1993 A-6
IV. Reinsurance -
Years Ended December 31, 1995, 1994 and 1993 A-7
13
V. Valuation and Qualifying Accounts -
Years Ended December 31, 1995, 1994 and 1993. A-8
All other schedules not listed have been omitted since the required
information is included in the financial statements or the notes thereto,
or is not applicable or required.
C. Exhibits filed pursuant to Item 601 of Regulation S-K.
(Management contracts and compensation plans or arrangements are indicated
by (*)).
(1) 3.1 Amended and Restated Articles of Incorporation of
the Company.
(1) 3.2 Bylaws of the Company.
(5) 3.3 Statement with Respect to 6 1/2% Cumulative
Convertible Preferred Stock.
(1) 4.1 Specimen Common Stock Certificate of the Company.
(5) 4.2 Specimen Preferred Stock Certificate of the Company.
(*) (1) 10.1 The Company s 1987 Stock Option Plan.
(*) (1) 10.2 The Company s Employee Stock Purchase Plan.
(*) (5) 10.4 Second Amended and Restated Employment Agreement,
dated June 22, 1992, between the Company and Kenneth
R. Taylor
(*) (2) 10.6 The Company s 1990 Stock Option Plan for Non-Employee
Directors.
(3) 10.7 Mortgage and Note, dated July 10, 1989, between
Walshire Assurance Company and Gary J. Orndorff
(*) (3) 10.8 Walshire Assurance Company Master 401(k) Plan and
Trust
(6) 10.10 Term Loan Agreement, dated January 25, 1995, between
the Company and Mercantile Pennsylvania Corporation.
(5) 10.11 Lincoln General Insurance Company Quota Share
Fire-Burglary/Theft Reinsurance Contract
(4) 10.19 Lincoln General Insurance Company Bond Quota Share
Reinsurance Agreement
(*) (1) 10.22 Form of Director s Stock Option Agreement.
(7) 11.1 Computation of Per Share Earnings
(7) 13.1 Annual Report to Shareholders for the year ended
December 31, 1995 (such report, except for those
portions expressly incorporated by reference in this
Report on Form 10-K, is furnished for the information
14
of the Commission and is not to be deemed filed as
part of this Report on Form 10-K).
(5) 21.1 Subsidiaries of the Company.
(7) 23.1 Consent of KPMG Peat Marwick LLP
_________________________
(1) Incorporated by reference from the Company s Registration
Statement on Form S-1, and all amendments thereto,
(Registration No. 33-15549), which was declared effective
on September 3, 1987.
(2) Incorporated by reference from the Company s Form 10-K
(Commission File No. 0-16267), dated March 28, 1990.
(3) Incorporated by reference from the Company s Form 10-K
(Commission File No. 0-16267), dated March 28, 1991.
(4) Incorporated by reference from the Company s Form 10-K
(Commission File No. 0-16267), dated March 26, 1992.
(5) Incorporated by reference from the Company s Form 10-K
(Commission File No. 0-16267), dated March 28, 1994.
(6) Incorporated by reference from the Company s Form 10-K
(Commission File No. 0-16267), dated March 27, 1995.
(7) Filed herewith.
II. Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December
31, 1995.
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned thereunto duly authorized.
WALSHIRE ASSURANCE COMPANY
Date: March 25, 1996 BY: /s/ KENNETH R. TAYLOR_ _____
KENNETH R. TAYLOR,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on March 25, 1996.
SIGNATURES TITLE
/s/ CHARLES W. HASH, SR.____
CHARLES W. HASH, SR. Chairman of the Board of Directors
/s/ KENNETH R. TAYLOR_______
KENNETH R. TAYLOR President & Chief Executive Officer
(Principal Executive Officer)
/s/ GARY J. ORNDORFF________
GARY J. ORNDORFF Vice President/Treasurer (Principal
Financial and Accounting Officer)
/s/ PETER D. BENNETT________
PETER D. BENNETT Director
/s/ JOHN J. BUCHAN, JR._____
JOHN J. BUCHAN, JR. Director
/s/ CHARLES W. HASH, JR.____
CHARLES W. HASH, JR. Director
/s/ L. EDWARD SAUSMAN, JR.__
L. EDWARD SAUSMAN, JR. Director
/s/ WILLIAM R. TIERNEY, JR._
WILLIAM R. TIERNEY, JR. Director
16
Independent Auditors Report
The Board of Directors and Shareholders
Walshire Assurance Company:
Under date of February 29, 1996, we reported on the consolidated balance
sheets of Walshire Assurance Company and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of income,
shareholders equity, and cash flows for each of the years in the three-
year period ended December 31, 1995, as contained in the 1995 annual
report to shareholders. These consolidated financial statements and our
report thereon are incorporated by reference in the annual report on Form
10-K for the year 1995. In connection with our audits of the
aforementioned consolidated financial statements, we also have audited the
related financial statements schedules as listed at Item 14B. These
financial statement schedules are the responsibility of the Company s
management. Our responsibility is to express an opinion on these
financial statements schedules based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
February 29, 1996
A-1
Schedule I
WALSHIRE ASSURANCE COMPANY
AND SUBSIDIARIES
Summary of Investments Other Than
Investments in Related Parties
December 31, 1995
(in thousands)
Amount at which
Fair shown in the
Type of Investment Cost__ Value_ balance sheet_
Held to Maturity:
Fixed maturities:
U. S. Government and Agencies. $ 4,141 $ 4,246 $ 4,141
States and political
subdivisions ................ 11,076 11,466 11,076
Total held to maturity ...... 15,217 15,712 15,217
Available for sale:
Fixed maturities:
U. S. Government and Agencies. 4,499 4,594 4,594
States and political
subdivisions ................ 20,783 20,981 20,981
Foreign governments .......... 35 35 35
Corporate securities ......... 1,690 1,605 1,605
Total fixed maturities ...... 27,007 27,215 27,215
Equity securities:
Common Stocks:
Public Utilities ............ 97 168 168
Banks, trusts and insurance
companies .................. 2,629 3,341 3,341
Industries, miscellaneous
and all other .............. 4,331 4,095 4,095
Non-redeemable preferred
stock........................ 1,132 1,116 1,116
Total equity securities ..... 8,189 8,720 8,720
Total available for sale .... 35,196 35,935 35,935
Short-term investments ......... 5,191 5,191 5,191
Other investments .............. 1,867 1,867 1,867
$57,471 $58,705 $58,210
A-2
Schedule II
WALSHIRE ASSURANCE COMPANY
AND SUBSIDIARIES
Condensed Financial Information of Registrant
Walshire Assurance Company
Balance Sheets
(Parent Company)
December 31
(in thousands,
except per share data)
1995 1994
Assets:
Investments:
Available for sale:
Fixed maturates . . . . . . . . . . . . $ 1,430 $ 1,155
Equity securities . . . . . . . . . . . 4,034 3,788
Short-term investments. . . . . . . . . . 368 188
Other investments . . . . . . . . . . . . 1,857 858
Total investments . . . . . . . . . . . 7,689 5,989
Cash. . . . . . . . . . . . . . . . . . . . 45 83
Receivable from subsidiaries. . . . . . . . 897 2,293
Investment in subsidiaries. . . . . . . . . 40,344 33,827
Property and equipment, net . . . . . . . . 786 272
Other assets. . . . . . . . . . . . . . . . 369 103
Total assets. . . . . . . . . . . . . . $50,130 $42,567
Liabilities
Notes payable . . . . . . . . . . . . . . . $ 3,731 $ 2,401
Other liabilities . . . . . . . . . . . . . 385 152
Total liabilities . . . . . . . . . . . 4,116 2,553
Shareholders equity:
Preferred stock, par value $.01 per
share; 2,000 shares authorized;
142 shares issued; 138 and 142
shares outstanding . . . . . . . . . . . 1 1
Common stock, par value $.01 per
share; 10,000 shares authorized;
4,064 and 3,638 shares issued and
outstanding . . . . . . . . . . . . . . . 41 36
Additional paid-in capital. . . . . . . . . 31,918 25,751
Unrealized gain (loss) on investments
available for sale of parent and
subsidiaries (net of deferred taxes of
$181 and $(534). .. . . . . . . . . . . . 558 ( 1,042)
Retained earnings . . . . . . . . . . . . . 13,496 15,268
Shareholders equity. . . . . . . . . . 46,014 40,014
Total liabilities and
shareholders equity. . . . . . . . . $50,130 $42,567
See notes to consolidated financial statements.
A-3
Schedule II
(continued)
WALSHIRE ASSURANCE COMPANY
AND SUBSIDIARIES
Condensed Financial Information of Registrant
Walshire Assurance Company
Statements of Income
(Parent Company)
Years Ended December 31
(in thousands)
1995 1994 1993
Revenues:
Net investment income . . . . . . $ 949 $ 479 $ 1,352
Net realized gains on
investments . . . . . . . . . . 160 539 459
Management fees:
Subsidiaries. . . . . . . . . . 247 216 173
Other . . . . . . . . . . . . . - - 32
Other . . . . . . . . . . . . . . 9 - -
Total revenues. . . . . . . . 1,365 1,234 2,016
Expenses:
General and administrative. . . . 1,109 1,004 794
Interest. . . . . . . . . . . . . 247 193 332
Total expenses. . . . . . . . 1,356 1,197 1,126
Income before (recovery of)
income taxes and equity in
net income of subsidiaries. . . . 9 37 890
(Recovery of) income taxes. . . . . ( 176) ( 74) 3
Income before equity in net
income of subsidiaries. . . . . . 185 111 887
Equity in net income of
subsidiaries, including
$61,000 in 1993 from the
cumulative effect of the
change in accounting for
income taxes. . . . . . . . . . . 5,298 3,677 1,732
Net income. . . . . . . . . . . . . $ 5,483 $ 3,788 $ 2,619
See notes to consolidated financial statements.
A-4
Schedule II
(continued)
WALSHIRE ASSURANCE COMPANY AND SUBSIDIARIES
Condensed Financial Information of Registrant
Walshire Assurance Company
Statement of Cash Flow
(Parent Company)
Years ended December 31
(in thousands)
1995 1994 1993
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . $ 5,483 $ 3,788 $ 2,619
Equity in net income of subsidiaries . . (5,298) ( 3,677) (1,732)
Receivable from subsidiaries . . . . . . 1,396 1,553 ( 640)
Other. . . . . . . . . . . . . . . . . . ( 76) ( 661) ( 177)
Net cash provided by operating activities. 1,505 1,003 70
Cash flows from investing activities:
Purchase of investments. . . . . . . . . (5,314) (15,630) (8,994)
Sale or maturity of investments. . . . . 4,275 13,575 9,306
Decrease (increase) in investment in
subsidiaries . . . . . . . . . . . . . (1,218) 968 ( 181)
Capital contribution to subsidiaries . . - ( 4,725) -
Other, net . . . . . . . . . . . . . . . 470 ( 717) ( 10)
Net cash provided by (used in) investing
activities . . . . . . . . . . . . . . . (1,787) ( 6,529) 121
Cash flows from financing activities:
Cash dividends paid. . . . . . . . . . . (1,416) ( 1,104) ( 779)
Issuance of treasury stock . . . . . . . - - 12
Issuance of common stock . . . . . . . . 330 284 528
Issuance of preferred stock. . . . . . . - 6,777 -
Proceeds from notes payable. . . . . . . 1,770 - 323
Payment of bonds and notes payable . . . ( 440) ( 355) ( 325)
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . 244 5,602 ( 241)
Net increase (decrease) in cash. . . . . . ( 38) 76 ( 50)
Cash at beginning of the year. . . . . . . 83 7 57
Cash at the end of the year. . . . . . . . $ 45 $ 83 $ 7
See notes to consolidated financial statements.
A-5
<TABLE>
Schedule III
WALSHIRE ASSURANCE COMPANY
AND SUBSIDIARIES
Supplementary Insurance Information
(in thousands)
<CAPTION>
Unpaid claims, Other Net
claim settlement policy claims Amortization
Deferred expenses and claims Net Net and claim of deferred
acquisition claims Unearned benefits premium investment settlement acquisition
costs___ drafts__ premiums payable revenue income__ expenses costs___
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Period
Year ended December 31, 1995
Property-Casualty $4,831 20,153 27,555 - 36,191 2,721 20,377 5,447
Year ended December 31, 1994
Property-Casualty $3,791 14,292 21,065 - 28,848 2,310 16,435 5,266
Year ended December 31, 1993
Property-Casualty $3,215 11,764 16,644 - 22,511 1,999 11,969 4,666
Other Net
operating premiums
expenses written
6,930 42,569
5,759 33,147
5,263 25,528
</TABLE>
A-6
<TABLE>
Schedule IV
WALSHIRE ASSURANCE COMPANY
AND SUBSIDIARIES
Reinsurance
(in thousand, except percentages)
<CAPTION>
Ceded to Assumed Percentage
Gross other from other Net of amount
Type of Premiums Amount companies companies amount assumed to net
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Premiums written:
Property-Casualty $52,020 9,569 118 42,569 .3%
Year ended December 31, 1994
Premiums written:
Property-Casualty $40,104 7,052 95 33,147 .3%
Year ended December 31, 1993
Premiums written:
Property-Casualty $31,504 6,055 79 25,528 .3%
</TABLE>
A-7
<TABLE>
Schedule V
WALSHIRE ASSURANCE COMPANY
AND SUBSIDIARIES
Valuation and Qualifying Accounts
(in thousands)
<CAPTION>
Additions Deductions-
Balance at Charged to Charged to Amounts Balance at
beginning of costs and other written end of
period expense accounts off period
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Agents balances reserve for
bad debts $100 6 - ( 6) 100
Premium finance receivables
reserve for bad debts 48 22 ( 3) 67
Total $148 28 - ( 9) 167
Year ended December 31, 1994
Agents balances reserve for
bad debts $100 29 - (29) 100
Premium finance receivables
reserve for bad debts 42 12 - ( 6) 48
Total $142 41 - (35) 148
Year ended December 31, 1993
Agents balances reserve for
bad debts $100 12 - (12) 100
Premium finance receivables
reserve for bad debts 31 12 - ( 1) 42
Total $131 24 - (13) 142
</TABLE>
A-8
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
Exhibits
to
Annual Report on Form 10-K
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
______________________________________
Walshire Assurance Company
INDEX
Exhibits to Annual Report on 10-K
Sequential
Number Title of Document Page No.
(1) 3.1 Amended and Restated Articles of
Incorporation of the Company.
(1) 3.2 Bylaws of the Company.
(5) 3.3 Statement with Respect to 6 1/2%
Cumulative Convertible Preferred Stock.
(1) 4.1 Specimen Common Stock Certificate of the
Company.
(5) 4.2 Specimen Preferred Stock Certificate of
the Company.
(*) (1) 10.1 The Company s 1987 Stock Option Plan.
(*) (1) 10.2 The Company s Employee Stock Purchase Plan.
(*) (5) 10.4 Second Amended and Restated Employment
Agreement, dated June 22, 1992, between
the Company and Kenneth R. Taylor.
(*) (2) 10.6 The Company s 1990 Stock Option Plan for
Non-Employee Directors.
(3) 10.7 Mortgage and Note, dated July 10, 1989,
between Walshire Assurance Company
and Gary J. Orndorff.
(*) (3) 10.8 Walshire Assurance Company Master 401(k)
Plan and Trust.
(6) 10.10 Term Loan Agreement, dated January 25,
1995 between the Company and Mercantile
Pennsylvania Corporation.
(5) 10.11 Lincoln General Insurance Company Quota
Share Fire-Burglary/Theft Reinsurance
Contract.
(4) 10.19 Lincoln General Insurance Company Bond
Quota Share Reinsurance Agreement.
(*) (1) 10.22 Form of Director s Stock Option Agreement.
(7) 11.1 Computation of Per Share Earnings
(7) 13.1 Annual Report to Shareholders for the year
ended December 31, 1995 (such report, except
those portions expressly incorporated by
reference in this Report on Form 10-K, is
furnished for the information of the
Commission and is not to be deemed filed
as part of this Report on Form 10-K).
INDEX (continued)
Exhibits to Annual Report on 10-K
Sequential
Number Title of Document Page No.
(5) 21.1 Subsidiaries of the Company.
(7) 23.1 Consent of KPMG Peat Marwick LLP
__________________________
(1) Incorporated by reference from the Company s
Registration Statement on Form S-1, and all
amendments thereto, (Registration No. 33-15549),
which was declared effective on September 3, 1987.
(2) Incorporated by reference from the Company s
Form 10-K (Commission File No. 0-16267), dated
March 28, 1990.
(3) Incorporated by reference from the Company s
Form 10-K (Commission File No. 0-16267), dated
March 28, 1991.
(4) Incorporated by reference from the Company s
Form 10-K (Commission File No. 0-16267), dated
March 26, 1992.
(5) Incorporated by reference from the Company s
Form 10-K (Commission File No. 0-16267), dated
March 28, 1994.
(6) Incorporated by reference from the Company s
Form 10-K (Commission File No. 0-16267), dated
March 27, 1995.
(7) Filed herewith.
EXHIBIT 11.1
EXHIBIT 11.1
COMPUTATION OF PER SHARE EARNINGS
1995 1994 1993
Primary Earnings Per Share
Earnings Per Share Based on Average
Shares Outstanding $ 1.25 $ .86 $ .71
Impact of Stock Options Utilizing
Treasury Stock Method ( .06) ( .03) ( .04)
Earnings Per Share Before Cumulative
Effect of the Change in Accounting
for Income Taxes 1.19 .83 .67
Cumulative Effect of the Change
in Accounting for Income Taxes -__ - .01
Primary Earnings Per Share $ 1.19 $ .83 $ .68
Fully Diluted Earnings Per Share
Earnings Per Share Based on Average
Shares Outstanding $ 1.25 $ .86 $ .71
Impact of Stock Options Utilizing
Treasury Stock Method ( .08) ( .03) ( .04)
Impact of Conversion of 6 1/2%
Convertible Preferred Stock ( .04) - -
Impact of Conversion of 10% Convertible
Subordinated Debentures - - ( .01)
Earnings Per Share Before Cumulative
Effect of the Change in Accounting
for Income Taxes 1.13 .83 .66
Cumulative Effect of the Change
in Accounting for Income Taxes - - .01
Fully Diluted Earnings Per Share $ 1.13 $ .83 $ .67
EXHIBIT 13.1
Corporate Profile
Walshire Assurance Company is an insurance holding company with
headquarters in York, Pennsylvania. Through its subsidiaries, Walshire
conducts business in three insurance-related areas: property and
casualty
insurance (Lincoln General Insurance Company and Comp America Insurance
Company), insurance premium finance (Agents Budget Corporation Consumer
Discount Company, Inc. and Yorktowne Premium Finance Company) and
claims adjustment services (King American Ltd.).
Table Of Contents
Financials at a Glance 1
Letter from the President 2
Expanding the Company's Product Line
Overview 4
Liability Coverages 6
Property Coverages 8
Other Services 10
Ahead in 1996 11
Management's Discussion and Analysis 12
Management Report 14
Independent Auditors' Report 14
Financial Statements 15
Quarterly Common Stock Prices and Cash Dividends Per Share 28
Board of Directors, Officers, Subsidiaries
and Corporate Information Inside Back Cover
About The Cover
Walshire is a provider of insurance
products to niche markets. Primarily
operating within the trucking industry,
the Company provides the insurance
coverages as shown, and further defined
within the text of this report.
Financials
at a Glance
Book Value Per Common Share (1)
(In thousands, except per share data and ratios)
Year Ended December 31,1995 1994 1993 1992 1991
Total Revenues$39,927$32,607$25,920$19,933$19,001
Net Income5,4833,7882,6192,5633,216
Primary Net Income Per Share (1)1.19.83.68.931.23
Fully-Diluted Net Income
Per Share (1)1.13.83.67.78.95
Dividends Paid on Common Stock955846779503417
Dividends Per Common Share (1).236.212.208.184.165
Gross Premiums Written52,13840,19931,58324,25218,449
Loss Ratio (2)59 59 55 47 42
Combined Ratio (2)87 89 90 82 81
December 31,1995 1994 1993 1992 1991
Total Investments$58,210$50,540$40,324$32,074$26,877
Total Assets101,62783,06866,34554,27943,238
Long-Term Debt1,4811,921165,20811,160
Shareholders' Equity46,01440,01432,04124,82918,370
Book Value Per Common Share (1)9.708.308.097.737.19
Common Shares Outstanding (1)4,0644,0023,9633,2122,557
(1)These amounts reflect the following events: (i) in August, 1992, the
Company declared a
5 stock dividend, (ii) in October and November, 1992, the Company
converted $4,522
of its 10 Convertible Subordinated Debentures into 549 shares of common
stock, (iii)
in January and May, 1993, the Company converted $4,709 of its 10
Convertible
Subordinated Debentures into 572 shares of common stock, (iv) in
November, 1994, the
Company declared a 5 stock dividend, (v) in October, 1995 the Company
converted 4
shares of its 6%1/2 Convertible Preferred Stock into 15 shares of
common stock, and (vi)
in December, 1995 the Company declared a 10 stock dividend. Included in
1992
earnings per share were extraordinary expenses of $112, or $.04 per
share ($.03 per
share fully-diluted), relating to the redemption of $1,333 of the 10
Convertible
Subordinated Debentures. Included in 1993 earnings per share was
additional income of
$61, or $.01 per share, resulting from the change in accounting for
income taxes.
Included in 1994 book value per common share was an additional $.07 per
share,
resulting from the change in accounting for debt and equity securities.
(2)Loss ratios and combined ratios have been calculated in accordance
with accounting
principles prescribed or permitted by state regulatory agencies.
Management
Report
The Company's management is responsible for the integrity and accuracy
of the financial
information contained in this annual report. Management believes that
the financial
statements have been prepared in conformity with generally accepted
accounting principles
appropriate in the circumstances and that the other information in this
annual report is
consistent with those statements. In preparing the financial statements,
management makes
informed judgments and estimates where necessary to reflect the expected
effects of
pending events and transactions.
The Company maintains a system of internal controls which provides
reasonable
assurance that assets are safeguarded and that financial records reflect
the transactions of the
Company. Management conducts periodic reviews of this system to assure
the adequacy of
the controls in place.
The Company's independent auditors, KPMG Peat Marwick LLP, were engaged
to
perform an audit of the consolidated financial statements. Their audit
provides an objective
outside review of management's responsibilities to report operating
results and financial
condition.
The Audit Committee of the Board of Directors is comprised of directors
who are
neither officers nor employees of the Company. The Committee meets
periodically with
management and the independent auditors to review the adequacy of the
internal controls
and financial reporting. The independent auditors have unrestricted
access to the Committee
with and without the presence of management.
Kenneth R. Taylor Gary J. Orndorff
President and Vice President/Treasurer and
Chief Executive Officer Chief Financial Officer
Independent
Auditors'
Report
The Board of Directors and Shareholders
Walshire Assurance Company:
We have audited the accompanying consolidated balance sheets of Walshire
Assurance
Company and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated
statements of income, shareholders' equity, and cash flows for each of
the years in the
three-year period ended December 31, 1995. These consolidated financial
statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on
these consolidated 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 consolidated financial statements referred to above
present fairly, in
all material respects, the financial position of Walshire Assurance
Company and subsidiaries
at December 31, 1995 and 1994, and the results of their operations and
their cash flows for
each of the years in the three-year period ended December 31, 1995, in
conformity with
generally accepted accounting principles.
Harrisburg, PennsylvaniaKPMG Peat Marwick LLP
February 29, 1996
Walshire Assurance Company and Subsidiaries
Consolidated Balance Sheets
December 31
(in thousands, except
per share data)
1995 1994
Assets
Investments:
Held to maturity:
Fixed maturities (fair value $15,712 and $16,140) .$15,217$16,508
Available for sale:
Fixed maturities (cost $27,007 and $22,588) .27,21521,664
Equity securities (cost $8,189 and $8,263) .8,7207,611
Short-term investments .5,1913,889
Other investments .1,867868
Total investments .58,21050,540
Cash .99184
Accrued investment income receivable .864895
Amounts receivable from reinsurers .3,3152,644
Amounts receivable from reinsured company .5951,325
Agents' balances (net of allowance for doubtful
accounts of $100) .5,5013,627
Installment premiums receivable .5,9653,633
Agents' balances and installment premiums
receivable from related parties .3,6942,258
Premium finance receivables (net of unearned finance
charges and allowance for credit losses of
$135 and $123) .6,5344,678
einsurance receivable .8,6156,355
Deferred acquisition costs .4,8313,791
Property and equipment (net of accumulated depreciation
of $1,284 and $1,054) .3,2702,656
Other assets .134482
Total assets .$101,627$83,068
Liabilities and Shareholders' Equity
Liabilities:
Unpaid claims, claim settlement expenses and claims drafts
.$20,153$14,292
Unearned premiums .27,55521,065
Short-term notes payable .2,2503,435
Long-term notes payable .1,4811,921
Deposits by insureds .1,488747
Commissions payable to agents .1,049571
Commissons payable to related parties .473214
Other liabilities .1,164809
Total liabilities .55,61343,054
Shareholders' equity:
Preferred stock, par value $.01 per share; 2,000 shares authorized;
142 shares issued; 138 and 142 shares outstanding .11
Common stock, par value $.01 per share; 10,000 shares
authorized; 4,064 and 3,638 shares issued and outstanding .4136
Additional paid-in capital .31,91825,751
Unrealized gain (loss) on investments available for sale
(net of deferred taxes of $181 and $(534)) .558( 1,042)
Retained earnings .13,49615,268
Shareholders' equity .46,01440,014
Total liabilities and shareholders' equity .$101,627$83,068
See accompanying notes to consolidated financial statements.
Walshire Assurance Company and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share data)
Years ended December 31, 1995 1994 1993
Revenues:
Premiums earned .$45,648$35,778$28,480
Premiums ceded .( 9,457)( 6,930)( 5,969)
Net premiums earned .36,19128,84822,511
Net investment income .2,7212,3101,999
Net realized gains on investments .316743768
Other .699706642
Total revenues .39,92732,60725,920
Expenses:
Claims and claim settlement expenses .23,04518,25414,259
Reinsurance recoveries .( 2,668)( 1,819)( 2,290)
Net claims and claim settlement expenses .20,37716,43511,969
Amortization of deferred acquisition costs .5,4475,2664,666
Underwriting, general and administrative expenses .6,9305,7595,263
Interest .290264376
Reorganization of King American Ltd. .-- -- 289
Total expenses .33,04427,72422,563
Income before income taxes and cumulative effect
of the change in accounting for income taxes .6,8834,8833,357
Provision for income taxes .1,4001,095799
Income before cumulative effect of the
change in accounting for income taxes .5,4833,7882,558
Cumulative effect of the change in accounting for income taxes .-- -- 61
Net income .5,4833,7882,619
Less dividends on convertible preferred stock .458374--
Net income available for common stock .$ 5,025$ 3,414$ 2,619
Net income per common share and common equivalent share:
Primary:
Income before cumulative effect of the change
in accounting for income taxes .$ 1.19$ .83$ .67
Cumulative effect of the change in accounting for income taxes .-- --
.01
Net income .$ 1.19$ .83$ .68
Weighted average shares outstanding .4,2264,0973,829
Fully diluted:
Income before cumulative effect of the change
in accounting for income taxes .$ 1.13$ .83$ .66
Cumulative effect of the change in accounting for income taxes .-- --
.01
Net income .$ 1.13$ .83$ .67
Weighted average shares outstanding .4,8624,0974,075
See accompanying notes to consolidated financial statements.
Walshire Assurance Company and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Years ended December 31,1995 1994 1993
Cash flows from operating activities:
Net income .$ 5,483$ 3,788$ 2,619
Adjustments to reconcile net income to
net cash provided by operating activities
Net realized gains on investments .( 316)( 743)( 768)
Decrease (increase) in assets:
Accrued investment income receivable .31( 109)( 112)
Amounts receivable from reinsurers .( 671)( 1,708)531
Amounts receivable from reinsured company .730( 10)1,125
Agents' balances and installment
premiums receivable .( 4,206)( 2,844)( 2,123)
Agents' balances and installment
premiums receivable from related parties .( 1,436)65181
Premium finance receivables .( 1,856)( 586)( 1,097)
Reinsurance receivable .( 2,260)( 513)( 2,727)
Deferred acquisition costs .( 1,040)( 576)( 667)
Deposits by insureds .74148390
Other, net .809196505
(Decrease) increase in liabilities:
Unpaid claims, claim settlement expenses
and claim drafts outstanding .5,8612,5285,951
Unearned premiums .6,4904,4213,102
Other liabilities .347( 267)424
Other, net .737185( 83)
Net cash provided by operating activities .9,4443,8757,251
Cash flows from investing activities:
Purchase of investments:
Held to maturity .( 3,805)( 5,078)( 8,725)
Available for sale .( 10,539)( 19,227)( 13,534)
Sale of investments:
Available for sale .9,2349,65414,072
Maturity of investments .1,9101,9252,332
Net (purchase) sale of short term and
other investments .( 2,212)583( 1,199)
Purchase of property and equipment .( 1,210)( 426)( 432)
Sale of property and equipment .13584273
Other, net .( 335)1,085( 41)
Net cash used in investing activities .( 6,822)( 11,400)( 7,254)
Cash flows from financing activities:
Cash dividends paid .( 1,412)( 1,104)( 779)
Issuance of treasury stock .-- -- 12
Issuance of common stock .330284528
Issuance of preferred stock .-- 6,777--
Proceeds from notes payable .1,7702,145638
Payment of notes payable .( 3,395)( 449)( 470)
Net cash provided by (used in) financing activities .( 2,707)7,653( 71)
Net increase (decrease) in cash .( 85)128( 74)
Cash at beginning of the year .18456130
Cash at end of the year .$ 99$ 184$ 56
See accompanying notes to consolidated financial statements.
Walshire Assurance Company and Subsidiaries
Consolidated Statements of Shareholders' Equity
(in thousands, except per share data)
Years ended December 31,1995 1994 1993
Preferred Stock
Shares outstanding
Balance at beginning of year .142-- --
Shares issued pursuant to private placement offering .-- 142--
Shares converted to common stock .( 4)-- --
Balance at end of year .138142--
Preferred Stock (par value $.01)
Balance at beginning of year .$ 1$ -- $ --
Shares issued pursuant to private placement offering .-- 1--
Balance at end of year .$ 1$ 1$ --
Common Stock
Shares Outstanding
Balance at beginning of year .3,6383,4312,884
Conversion of bonds .-- -- 470
Conversion of preferred stock .15-- --
Stock dividend .369173--
Exercise of stock options .363077
Employee stock purchase plan .64--
Balance at end of year .4,0643,6383,431
Common Stock (par value $.01)
Balance at beginning of year .$ 36$ 34$ 29
Conversion of bonds .-- -- 4
Stock dividend .42--
Exercise of stock options .1-- 1
Balance at end of year .413634
Additional Paid-In Capital
Balance at beginning of year .25,75116,83112,600
Conversion of bonds .-- -- 3,702
Stock dividend .5,8381,860--
Dividend reinvestment .4-- --
Exercise of stock options .258239529
Employee stock purchase plan .6745--
Issuance of preferred stock .-- 6,776--
Balance at end of year .31,91825,75116,831
Unrealized gains (losses) on investments available for sale
Balance at beginning of year .( 1,042)613228
Unrealized gains on equity securities .-- -- 385
Unrealized gains (losses) on investments available for sale .1,600(
1,827)--
Effect of change in accounting for investments
available for sale .-- 172--
Balance at end of year .558( 1,042)613
Retained Earnings
Balance at beginning of year .15,26814,56212,722
Net income .5,4833,7882,619
Cash dividends -- common stock
(per share $.236; $.212; $.207) .( 955)( 846)( 779)
-- preferred stock
(per share $3.25; $2.64; $0) .( 458)( 374)--
Stock dividends on common stock .( 5,842)( 1,862)--
Balance at end of year .13,49615,26814,562
Treasury Stock
Balance at beginning of year .-- -- ( 750)
Conversion of bonds .-- -- 740
Exercise of options .-- -- 10
Balance at end of year .-- -- --
Shareholders' Equity .$46,014$40,014$32,040
See accompanying notes to consolidated financial statements.
<PAGE>
FILE #2
Walshire Assurance Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(1)Summary of Significant Accounting Policies
(a)Organization and Business
The Company was organized as a regional insurance holding company and
operates in 20 eastern and southern states.
Through its wholly owned subsidiaries, it provides products primarily to
the trucking industry in three insurance-related areas: property and
casualty insurance, Lincoln General Insurance Company (Lincoln) and Comp
America
Insurance Company (Comp); insurance premium finance, Agents Budget
Corporation Consumer Discount Company,
Inc. (ABCO) and Yorktowne Premium Finance Company (Yorktowne); and
claims adjustment services, King American
Ltd. (King). The Company's major lines of business in 1995 and their
percentages of total net earned premiums were
Automobile Physical Damage (48%), Automobile Liability (40%), Workers'
Compensation (6%) and Inland Marine
(6%). Lincoln and Comp are subject to regulation by insurance
departments in those states in which they operate and
undergo periodic examination by these departments. Lincoln and Comp are
also subject to competition from other
insurance carriers in their operating areas.
(b)Principles of Consolidation and Basis of Presentation
The consolidated financial statements include Walshire Assurance Company
(Walshire) and its subsidiaries, ABCO,
Ashford Reinsurance Intermediaries Corporation (Ashford), Comp, King,
Lincoln, and Yorktowne, collectively referred
to herein as the ``Company.'' Significant inter-company balances and
transactions have been eliminated in
consolidation.
The accounts of Lincoln and Comp have been included in the accompanying
consolidated financial statements on
the basis of generally accepted accounting principles (GAAP), which
differ in some respects from the statutory
accounting practices employed by Lincoln and Comp in the preparation of
their financial reports to the Insurance
Department of the Commonwealth of Pennsylvania. See note 11.
In preparing the consolidated financial statements, management is
required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses
for the period. Actual results could differ significantly from those
estimates.
Material estimates that are particularly susceptible to significant
change in the near term relate to the
determination of the liabilities for unpaid claims and claim settlement
expenses. While management uses available
information to provide for such liabilities, future additions to these
liabilities may be necessary based on changes in
trends in claim frequency and severity. In addition, various insurance
departments, as an integral part of their examination process,
periodically review
the Company's liabilities for unpaid claims and claim settlement
expenses. Such departments may require the
Company to recognize additions to the liabilities based on their
judgments about information available to them at the
time of their examination. Management believes that such liabilities are
adequate.
Certain reclassifications have been made to the prior years' financial
statements to correspond to the current year
presentation.
(c)Investments
Fixed maturities, which include bonds and redeemable preferred stocks,
are purchased to support the investment
strategies of the Company, which are developed based on many factors
including rate of return, maturity, credit risk,
tax considerations and regulatory requirements. Equity securities
include common stocks and non-redeemable
preferred stocks.
In 1994, the Company adopted Financial Accounting Standards Board
Statement No. 115, ``Accounting for Certain
Investments in Debt and Equity Securities,'' (SFAS 115). SFAS 115
addresses the accounting and reporting for
investments in equity securities that have readily determinable fair
values (other than those accounted for under the
equity method or as investments in consolidated subsidairies) and all
investments in debt securities. SFAS 115
provides that a company use its current intent at the time of adoption
in classifying investments.
These investments are classified into three categories as follows:
Held-to-Maturity Securities -- Debt securities that the company has the
positive intent and ability to hold to maturity; reported at amortized
cost.
Trading Securities -- Debt and equity securities that are bought and
held principally for the purpose of selling them
in the near term; reported at fair value, with unrealized gains and
losses included in earnings.
Available-for-Sale Securities -- Debt and equity securities not
classified as either held-to-maturity securities or
trading securities; reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a
separate component of shareholders' equity (net of tax effects).
Short term investments, which have an original maturity of one year or
less, are carried at amortized cost which
approximates fair value.
Realized gains and losses on the sale of investments are determined on
the basis of the cost of the specific
investments sold and are credited or charged to income. Unrealized gains
or losses on investments available for sale,
net of applicable deferred income tax, are excluded from income and
credited or charged directly to a separate
component of shareholders' equity.
(d)Deferred Acquisition Costs
Acquisition costs, consisting of commissions, premium taxes, and certain
underwriting expenses related to the
production of property and casualty business, are deferred to the extent
recoverable and are amortized ratably over
the period in which the related premiums are earned. Anticipated claims
and claim settlement expenses, expenses for
maintenance of policies in force and anticipated investment income are
considered in the determination of the
recoverability of deferred acquisition costs.
(e)Property and Equipment
Property and equipment are included in the financial statements at cost.
Depreciation of property has been provided
by the straight-line method with an estimated useful life of 20 to 40
years. Depreciation of equipment has been
provided by the straight-line method with estimated useful lives of
three to ten years.
(f)Unpaid Claims and Claim Settlement Expenses
Unpaid claims and claim settlement expenses are based on individual case
estimates for reported claims and estimates,
based on experience and industry averages, for unreported claims and
claim settlement expenses. The provision for
unpaid claims and claim settlement expenses, net of estimated salvage
recoverable, has been established to cover the
estimated net cost of insured claims. The amounts are necessarily based
on estimates and while they are believed to
be adequate, the ultimate liability may exceed such estimates. Any
change in such estimates will be recorded in the
year the change occurs.
The provision for unpaid claims and claim settlement expenses for surety
business have been established using
management's best estimates of the cost of claims. The Company also
holds funds as collateral which can be used to
offset claims should a default occur. Because the Company has no
interest in these funds unless a default occurs,
these amounts have not been reflected in the financial statements.
The Company has no material exposures to environmental risks.
(g)Fair Values of Financial Instruments
Pursuant to Statement of Financial Accounting Standards No. 107,
``Disclosures about Fair Value of Financial
Instruments'' (SFAS 107), the Company has used the following methods and
assumptions in estimating its fair value
disclosures:
Investments and Cash -- Fair values for fixed maturity securities are
based on quoted market prices, when available. If quoted market prices
are not available, fair values are based on quoted market prices of
comparable instruments or values obtained from independent pricing
services through a bank trustee. The fair values
for equity securities are based on quoted market prices. The carrying
amounts reported in the balance sheets for cash,
short-term and other investments approximate their fair values.
Notes Payable -- The carrying amounts reported in the balance sheets for
these instruments approximate their fair
values.
(h)Premium Revenue
Premium revenue is recognized as earned on the semi-monthly pro-rata
basis over the terms of the policies.
(i)einsurance
In the normal course of business, the Company seeks to reduce the loss
that may arise from catastrophes or other
events that cause unfavorable underwriting results by reinsuring certain
levels of risk in various areas of exposure
with other insurance enterprises or reinsurers.
Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with
the reinsured policy. The Company reports reinsurance receivables
(including amounts related to claims incurred but
not yet reported) and prepaid reinsurance premiums as assets.
(j)Income Taxes
The Company follows the asset and liability method of SFAS 109,
``Accounting for Income Taxes,'' under which
deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes
the enactment date.
(k)Net Income Per Share
Net income per share is computed after recognition of preferred stock
dividend requirements and is based on the
weighted average number of shares of common stock and common stock
equivalents outstanding. Fully diluted net
income per share is computed after recognition of preferred stock
dividend requirements and is based on the
weighted average number of shares of common stock and common stock
equivalents outstanding for the period and
assume conversion of the 10%p convertible subordinated debentures into
common stock. The computation assumes
the addition to income of the after-tax interest expense applicable to
such bonds.
(l)Fiduciary Funds
In its capacity as a reinsurance intermediary, the Company collects
premiums from reinsured companies and, after
deducting its commission, remits the premiums to the respective
reinsuring companies; the Company also collects
claims or refunds from the reinsuring companies. Until remittance, these
funds are held in a fiduciary capacity.
Net uncollected premiums due from reinsured companies and payable to
reinsuring companies amounting to
$1,719,000 as of December 31, 1995 and 1994, are not included in the
accompanying Consolidated Balance Sheets.
(2)einsurance
Lincoln assumes reinsurance from and cedes insurance to other insurers
and reinsurers under various contracts which
cover individual risks or entire classes of business. These reinsurance
arrangements provide greater diversification of
business and minimize Lincoln's losses arising from large risks or from
hazards of an unusual nature. The ceding of
insurance does not discharge the original insurer from its primary
liability to its policyholders.
Lincoln has catastrophic and excess per risk reinsurance contracts for
which it pays premiums based upon its
gross earned premiums derived from covered business. The reinsured
amounts included in developing the liability for
claims and claim settlement expenses were $7,004,000 and $5,291,000 at
December 31, 1995 and 1994, respectively.
At December 31, 1995, reinsurance receivables with a carrying value of
$5,130,000 were associated with a single
reinsurer.
The effect of reinsurance on premiums written is as follows:
(in thousands)
Years Ended December 31,
1995 1994 1993
Direct $52,020$40,104$31,504
Assumed 1189579
Ceded ( 9,569)( 7,052)( 6,055)
Net premiums written $42,569$33,147$25,528
The effect of reinsurance on premiums earned is as follows:
(in thousands)
Years Ended December 31,
1995 1994 1993
Direct $45,527$35,700$26,921
Assumed 121781,559
Ceded ( 9,457)( 6,930)( 5,969)
Net premiums earned $36,191$28,848$22,511
(3)elated Party Transactions
Lincoln pays agency commissions for business placed with it to five
corporations with which directors of Walshire are
affiliated.
For these related parties, the following is a summary of their
transactions and balances after deducting the
reinsurance portion, where applicable.
(in thousands)
Years Ended December 31,
51995 1994 1993
Premiums on policies written $11,415$9,467$8,997
Commissions 2,0501,9872,031
(in thousands)
December 31,
1995 1994
Agents' balances receivable $1,609$1,274
Installment premiums receivable 2,085984
Commissions payable 473214
(4)Major Agencies
During 1995, 1994 and 1993, one of the Company's agents with which a
director of Walshire is affiliated, accounted
for 23%, 24% and 30%, respectively, of the total premiums written.
Agents' balances and installment premiums
receivable from this agency were $3,116,000 and $1,587,000 as of
December 31, 1995 and 1994, respectively. See
Note 3. Another agent accounted for 6% of the total premiums written
during 1995, while three agents accounted for
21% of the total premiums written during 1994 and one agent accounted
for 6% of the total premiums written
during 1993. Agents' balances and installment premiums receivable from
these agents were $321,000 and $3,479,000
as of December 31, 1995 and 1994, respectively.
(5)Investments
Net investment income, comprised primarily of interest and dividends, is
derived from the following sources:
(in thousands)
Years Ended December 31,
1995 1994 1993
Fixed maturities $2,311$1,833$1,653
Equity securities 300322176
Short-term investments 253314160
Other 13( 16)133
Investment expenses ( 156)( 143)( 123)
Net investment income $2,721$2,310$1,999
The changes in net unrealized gains, less applicable federal income
taxes, is as follows:
(in thousands)
Years Ended December 31,
1995 1994 1993
Increase (decrease) during period in difference between
fair value and cost of investments available for sale:
Fixed maturities $1,132$(924)$ --
Equity securities 1,183(1,564)576
,315(2,488)576
Deferred income taxes ( 715)833(191)
Increase (decrease) in net unrealized gains of
investments available for sale $1,600$(1,655)$ 385
Gross unrealized gains and losses on equity securities were $1,260,000
and $729,000 respectively, as of December
31, 1995.
During December 1995, as permitted by the Financial Accounting Standards
Board one-time ``window'', the
Company transferred $4,131,000 of investments from its held to maturity
portfolio to its available for sale portfolio.
The fair value of such investments was $4,208,000. The transfer of
securities was made to provide the Company with
increased flexibility in managing its liquidity position.
The amortized cost and fair values of investments in fixed maturities as
of December 31, 1995 are as follows:
Amortized Unrealized Unrealized Estimated
(in thousands)
GrossGross
AmortizedUnrealizedUnrealizedFair
CostGainsLossesValue
Held to maturity
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $4,141$105$--$4,246
Obligations of states and political subdivisions . 11,0764637311,466
Total held to maturity .15,2175687315,712
Available for sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies .4,49995--4,594
Obligations of states and political subdivisions .20,78339619820,981
Debt securities issued by foreign governments .35-- -- 35
Corporate securities .1,690621471,605
Total available for sale .27,00755334527,215
Total fixed maturities .$42,224$1,121$418$42,927
The amortized cost and fair value of fixed maturities at December 31,
1995, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Amortized Estimated
(in thousands)
AmortizedFair
CostValue
Due in one year or less . $1,560 $1,569
Due after one year through five years .14,23514,513
Due after five years through ten years .14,02814,222
Due after ten years .12,40112,623
Totals .$42,224$42,927
The amortized cost and fair values of investments in fixed maturities as
of December 31, 1994 are as follows:
Amoritzed Unrealized Unrealized Estimated
(in thousands)
GrossGross
AmortizedUnrealizedUnrealizedFair
CostGainsLossesValue
Held to maturity
U.S. Treasury securities and obligations of
U.S. government corporations and agencies . $1,629 $-- $72 $1,556
Obligations of states and political subdivisions 14,8798337914,584
Total held to maturity 16,5088345116,140
Available for sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies 5,074-- 1584,988
Obligations of states and political subdivisions 15,7131201,18914,939
Debt securities issued by foreign governments 35----35
Corporate securities 1,766581221,702
Total available for sale 22,5881781,46921,664
Total fixed maturities .$39,096$261$1,920$37,804
Proceeds from sales of fixed maturities and the gross gains and gross
losses realized on those sales were as
follows:
(in thousands)
Years Ended December 31,
1995 1994 1993
Proceeds from sales $5,957$4,799$9,596
Gross gains 11468207
Gross losses 2560118
As of December 31, 1995, fixed maturities with an amortized cost
totaling $4,513,000 were held by regulatory
agencies, as required by law.
(6)Deferred Acquisition Costs
Changes in deferred acquisition costs are as follows:
(in thousands)
Years Ended December 31,
1995 1994 1993
Balance, January 1 $3,791$3,215$2,548
Acquisition costs deferred 6,4875,8425,333
Amortization charged to earnings ( 5,447)( 5,266)( 4,666)
Balance, December 31 $4,831$3,791$3,215
(7)Federal Income Taxes
Walshire and its wholly-owned subsidiaries file a consolidated tax
return and are taxed essentially the same as other
corporations. The provision for income taxes is comprised of the
following components:
<PAGE>
FILE #3
(in thousands)
Years Ended December 31,
1995 1994 1993
Current:
Federal $1,741 $1,302 $ 944
State ( 2) 8 7
Deferred ( 339) ( 215) ( 152)
$1,400 $1,095 $ 799
Differences between the federal income tax rate and effective tax rates
as reflected in the financial statements on
income before income taxes are as follows:
(in thousands)
Years Ended December 31,
1995 1994 1993
Computed at statutory federal rate (34%) $2,340 $1,660 $1,142
Tax exempt interest and dividend received deduction ( 679) ( 637) (
423)
Reduction of prior year tax provisions ( 277) -- --
Miscellaneous items 16 72 80
$1,400 $1,095 $ 799
In accordance with SFAS 109, the tax effects of temporary differences
that give rise to significant portions of the
deferred tax assets and deferred tax liabilities are presented below:
(in thousands)
December 31,
1995 1994
Deferred tax assets:
Unearned premiums . $1,838 $1,404
Unrealized loss on investments available for sale . -- 534
Unpaid claims and claim settlement expenses . 613 425
Allowance for doubtful accounts . 57 50
$2,508 $2,413
Deferred tax liabilities:
Deferred acquisition costs . $1,643 $1,289
Unrealized gain on investments available for sale . 181 --
Other . 15 79
$1,839 $1,368
Management has determined that it is not required to establish a
valuation allowance for the deferred tax asset
since it is likely that the deferred tax asset will be realized through
carrybacks, future reversals of existing temporary
differences, future taxable income and tax planning strategies. The net
deferred tax asset is a component of other
liabilities in 1995 and other assets in 1994.
In 1995, 1994 and 1993, the Company made cash payments of $1,748,000,
$938,000 and $1,005,000
respectively, for income taxes.
(8) Unpaid Claims, Claims Settlement Expenses and Claims Drafts
Activity in the unpaid claims, claims settlement expenses and claims
drafts is summarized as follows:
(in thousands)
December 31,
1995 1994
Balance, January 1 . $14,292 $11,764
Less reinsurance recoverables . 5,291 5,321
Net balance, January 1 . 9,001 6,443
Incurred related to:
Current year . 20,062 16,311
Prior years . 315 124
Total incurred . 20,377 16,435
Paid related to:
Current year . 11,259 10,547
Prior years . 4,970 3,330
Total paid . 16,229 13,877
Net balance, December 31 . 13,149 9,001
Plus reinsurance recoverables . 7,004 5,291
Balance, December 31 . $20,153 $14,292
(9) Bonds and Notes Payable
Bonds and notes payable consisted of the following:
(in thousands)
December 31,
1995 1994
Note payable (prime interest rate), monthly payments of $40
plus interest, due December, 1999 . $1,961 $2,401
Line of credit (prime interest rate), due July, 1995 . -- 2,955
Line of credit (prime interest rate), due on demand . 1,770 --
3,731 5,356
Current portion . ( 2,250) ( 3,435)
Long-term notes payable . $1,481 $1,921
The estimated fair value of notes payable approximates the carrying
value based on the Company's current ability
to obtain loans at similar rates of interest.
In 1995, 1994 and 1993, the Company made cash payments of $298,000,
$246,000 and $451,000 respectively,
for interest expense.
Walshire and its subsidiaries have a combined line of credit of
$5,000,000 at December 31, 1995, $3,230,000 of
which is available. The line of credit requires Walshire to maintain a
net worth in excess of $40,000,000 and is
subject to reaffirmation in November, 1996.
(10) 401(k) Plan
Walshire and its subsidiaries contribute to a qualified 401(k) Plan. All
full time employees who meet certain eligibility
requirements may elect to participate in the Plan. Participants can
contribute no more than 20% of their base
compensation. The Company matches 100% of employee contributions, not to
exceed 5% of an employee's annual
compensation. The Company expense for 401(k) Plan benefits were
$109,000, $73,000 and $62,000 in 1995, 1994
and 1993, respectively.
The Company currently does not provide any post-retirement or post-
employment benefits.
(11) Shareholders' Equity
Lincoln and Comp are restricted by law as to the amount of dividends
they may pay to Walshire without the prior
approval of the insurance regulatory authorities. These authorities only
recognize statutory accounting practices for
determining the ability of an insurer to pay dividends to its
shareholders. At December 31, 1995, $2,863,000 and
$375,000 was available for the payment of dividends from Lincoln and
Comp, respectively, to Walshire without the
prior approval of the insurance regulatory authorities.
Dividends paid by Lincoln to Walshire for the years ended December 31,
1995 and 1993 were $700,000 and
$900,000, respectively. No dividends were paid by Lincoln to Walshire in
1994. Comp has paid no dividends. In
addition, Walshire declared 10% and 5% stock dividends in 1995 and 1994,
respectively.
In March of 1994, 141,700 shares of 61/2% Convertible Preferred Stock
were issued at $50 per share. The
Preferred Stock is convertible at any time, unless previously redeemed,
into shares of the Common Stock of Walshire
Assurance Company at a conversion price of $12.12 per share, subject to
adjustment under certain circumstances.
During 1995, 4,000 shares were converted into 16,500 shares of common
stock.
A reconciliation of the insurance subsidiaries statutory net income to
consolidated GAAP net income is as follows:
(in thousands)
Years Ended December 31,
1995 1994 1993
Statutory net income for insurance subsidiaries . $4,223 $2,822 $2,062
Deferred acquisition costs . 1,040 576 667
Salvage and subrogation . 500 98 ( 10)
Deferred income taxes . 310 219 182
Write down of securities . ( 29) 10 ( 10)
Insurance deductible . -- 20 --
GAAP net income for insurance subsidiaries . 6,044 3,745 2,891
Net income (loss) of Walshire and other non-insurance subsidiaries . (
561) 43 ( 272)
Consolidated GAAP net income . $5,483 $3,788 $2,619
A reconciliation of statutory capital and surplus for the insurance
subsidiaries to consolidated GAAP equity is as
follows:
(in thousands)
Years Ended December 31,
1995 1994
Statutory capital and surplus for insurance subsidiaries $32,377
$28,562
Deferred acquisition costs 4,831 3,791
Salvage and subrogation 1,388 888
Non-admitted assets 1,082 848
Statutory reserves 124 --
Deferred income taxes 535 825
Adjustment for market value of investments available for sale 319 (
820)
Insurance deductible 20 20
GAAP equity for insurance subsidiaries 40,676 34,114
Equity of Walshire and other non-insurance subsidiaries 5,338 5,900
Consolidated GAAP equity $46,014 $40,014
Effective December 31, 1994, the National Association of Insurance
Companies (NAIC) required insurance
companies to calculate and report information under a <dhrisk-based
capital formula. Risk-based capital requirements are
intended to allow insurance regulators to identify inadequately
capitalized insurance companies based upon the type
and mixture of risks inherent in the company's operations. The formula
includes components for asset risk, liability
risk, and other factors. As of December 31, 1995 Lincoln and Comp are
above required capital levels.
(12) Stock Plans
(a) Employee Stock Purchase Plan
On June 22, 1987, the Board of Directors adopted, and the shareholders
approved, the 1987 Employee Stock
Purchase Plan (``Stock Purchase Plan''), which is intended to qualify
under Section 423 of the Internal Revenue Code
of 1986, as amended. The Stock Purchase Plan is administered by the
Compensation Committee, which is authorized
to grant options to purchase up to 133,402 shares of Common Stock to
employees of Walshire and any current or
future parent or subsidiary of Walshire. The Committee has discretion to
determine the total number of options, if
any, granted in each year, the rate of exercisability, the price at
which each option is exercisable and the duration of
each option.
All options granted under the Stock Purchase Plan will expire five years
after the date of grant; provided,
however, that options exercised more than 27 months after the date of
grant must be exercised at an option price
equal to at least 85% of the fair market value of the shares on the date
of exercise. No option may be granted to any
person who immediately after the grant would own more than 5% of Common
Stock and no option may be granted
which, at the date the option is granted, would permit such person's
rights to purchase stock under the Stock
Purchase Plan and all other employee stock purchase plans of Walshire to
accrue at a rate exceeding $25,000 of the
fair market value of such stock (determined at the time such option is
granted) for each year such option is
outstanding. The option price per share must not be less than the lesser
of: (a) 85% of the fair market value of the
stock on the date of grant, or (b) 85% of the fair market value on the
date of exercise.
Changes in outstanding Common Stock options granted under the 1987
Employee Stock Purchase Plan are
summarized below.
1995 1994 1993
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
Balance at beginning of year . -- -- --
Options granted .6,351 $10.58 5,138 $8.76 3,332 $7.74
Options exercised . 6,351 10.58 5,138 8.76 3,332 7.74
Balance at end of year . -- -- --
(b) 1987 Stock Option Plan
On June 22, 1987, the Board of Directors adopted, and the shareholders
approved, the 1987 Stock Option Plan
(``1987 Plan''). All officers and key employees of Walshire or any
current or future parent or subsidiary of Walshire
are eligible to receive options under the 1987 Plan. The 1987 Plan is
administered by the Compensation Committee
which selects the optionees, determines the number of shares subject to
each option and prescribes other terms and
conditions of each option.
Pursuant to the 1987 Plan, options may be granted with respect to an
aggregate of 606,375 shares of Common
Stock. Options may be granted as incentive stock options intended to
qualify under Section 422A of the Internal
Revenue Code of 1986, as amended, or as options not intended to so
qualify. In addition, stock appreciation rights
may be granted in tandem with non-qualified stock options. In the case
of incentive stock options, the option price
must be equal to at least 100% of the fair market value of Walshire's
Common Stock on the date of grant. The
exercise price of incentive stock options granted to shareholders
possessing more than 10% of the total combined
voting power of all classes of stock of Walshire must not be less than
110% of the fair market value on the date of
grant. In the case of stock options not intended to qualify as incentive
stock options, the option price must be equal
to at least 85% of the fair market value of Walshire's Common Stock on
the date of grant. Payment of the option
exercise price may be made in cash, shares of Common Stock or a
combination of cash and Common Stock.
Changes in outstanding Common Stock options granted under the 1987 Stock
Option Plan are summarized
below.
1995 1994 1993
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
Balance at beginning of year 334,293 $7.16 332,230 $6.81 373,964 $6.55
Options granted 31,074 13.02 36,379 10.24 18,480 10.31
365,367 368,609 392,444
Options exercised 16,054 6.80 34,316 6.96 57,807 6.18
Options terminated or cancelled -- -- -- -- 2,407 9.86
Balance at end of year 349,313 7.70 334,293 7.16 332,230 6.81
At December 31, 1995, 1994 and 1993, options covering 324,846, 300,616
and 314,329 shares, respectively, were
exercisable.
(c) 1990 Stock Option Plan
On February 7, 1990, the Board of Directors adopted, and on May 8,
1990, the shareholders approved, the 1990
Stock Option Plan for Non-Employee Directors (``1990 Plan''). Options to
purchase up to 236,775 shares of Common
Stock may be granted to Non-Employee Directors of Walshire.
Pursuant to the 1990 Plan, each person who is not an employee of the
Company or any of the Company's
subsidiaries on the date of grant of an option under the 1990 Plan and
who on or after January 1, 1990, is (1) elected
or reelected as a director of the Company at any annual or special
meeting of shareholders of the Company, or (2)
continues as a director of the Company as of the date of the annual or
special meeting of shareholders of the
Company at which directors of the Company are elected or reelected
shall, as of the date of each such annual or
special meeting of shareholders, automatically be granted an option to
purchase shares of the Company's Common
Stock pursuant to the following schedule:
Years of Service
as a Director Number of Shares
Less than 2 years . 2,000
Between 2 and 5 years . 5,000
Over 5 years . 10,000
All options granted under the 1990 Plan are exercisable in whole or in
part and will expire five years after the
date of grant. The option price for options issued under the 1990 Plan
is equal to the fair market value of the
Company's Common Stock on the date of the grant of the option. Payment
of the option exercise price may be made
in cash, shares of Common Stock or a combination of cash and Common
Stock.
Changes in outstanding Common Stock options granted under the 1990 Stock
Option Plan are summarized
below.
1995 1994 1993
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
Balance at beginning of year 162,789 $8.69 118,322 $8.45 83,672 $8.28
Options granted 33,000 12.73 44,467 9.31 34,650 8.88
195,789 162,789 118,322
Options exercised 23,040 6.50 -- -- -- --
Balance at end of year 172,749 9.75 162,789 8.69 118,322 8.45
(d) Other Stock Options
On October 6, 1988, the Board of Directors granted options to purchase
52,693 shares at $5.44 per share to four
directors. Such options were exercisable in whole or in part beginning
October 6, 1989. All previous options issued
under the Plan were cancelled concurrently. During 1993, options to
purchase 28,680 shares were exercised at $5.44
per share. As of December 31, 1995, no options remain outstanding.
Statement of Financial Accounting Standards No. 123, ``Accounting for
Stock-Based Compensation'' (SFAS 123) was
issued by the FASB in October of 1995 and will be effective for the
Company in 1996. Upon adoption of SFAS 123, the
Company will continue to measure compensation expense for its stock-
based employee compensation plans using the
intrinsic value method prescribed by APB Opinion No. 25, ``Accounting
for Stock Issued to Employees'' and will provide
pro forma disclosures of net income and earnings per share as if the
fair value-based method prescribed by SFAS 123 had
been applied in measuring compensation expense. The adoption of SFAS 123
will not have any effect on the Company's
financial position or results of operation.
Quarterly Common Stock Prices
and Cash Dividends Per Share
The Company's Common Stock trades on The NASDAQ Stock Market under the
symbol
WALS. The following table sets forth, for the periods indicated, the
high and low sale prices
of the Company's Common Stock as reported by NASDAQ and the cash
dividends paid by
the Company.
Price Cash
High Low Dividend
1994
1st Quarter 11-1/8 8-5/8 .0519
2nd Quarter 10-5/8 8-5/8 .0519
3rd Quarter 10-7/8 9-11/16 .0519
4th Quarter 9-5/8 8-5/8 .0563
1995
1st Quarter 11-1/2 9-3/16 .0591
2nd Quarter 15-11/16 11-1/4 .0591
3rd Quarter 15-7/16 14-3/16 .0591
4th Quarter 16-1/2 13-3/16 .0591
1996
1st Quarter (through February 29) 18-1/8 15-3/4 --
As of February 29, 1996, there were approximately 1,250 shareholders of
record and
beneficial shareholders of the Company's Common Stock. The last sale
price on February
29, 1996, as reported on the NASDAQ National Market System, was $17.125
per share.
The above amounts for stock prices and cash dividends have been
adjusted, where
necessary, to reflect the ten percent and five percent stock dividend
granted to shareholders
of record on December 6, 1995 and November 30, 1994, respectively.
While the Company anticipates that it will continue to pay quarterly
dividends, any
such payments will depend upon the financial condition, capital
requirements and earnings
of the Company, as well as such other factors as the Board of Directors
may deem relevant.
One of the Company's sources of cash with which to pay dividends would
be
dividends received from Lincoln and Comp. Lincoln and Comp are subject
to state laws
which restrict the amount of dividends that they may pay. See Note 11 of
the Notes to
Consolidated Financial Statements and Management's Discussion and
Analysis of Financial
Condition and Results of Operation-Liquidity and Capital Resources.
Walshire Assurance Company
Board of Directors Charles W. Hash, Sr.
Chairman of the Board,
Walshire Assurance Company
Kenneth R. Taylor
President, Walshire Assurance Company;
President, Taylor & Ochroch, Inc.,
King of Prussia, Pennsylvania
Peter D. Bennett, Ph.D.
Senior Associate Dean
and Professor of Marketing
Pennsylvania State University
State College, Pennsylvania
John J. Buchan, Jr.
Attorney at Law, Ebensburg, Pennsylvania;
Managing Director, Interstate
Insurance Management, Inc.,
Johnstown, Pennsylvania
Charles W. Hash, Jr., D.O.
General Surgeon,
York, Pennsylvania
L. Edward Sausman
President, Sausman Insurance Agency, Inc.
Thompsontown, Pennsylvania
William R. Tierney, Jr.
President, Insurance Markets, Inc.,
Clarks Summit, Pennsylvania
Officers Kenneth R. Taylor
President and Chief Executive Officer
Gary J. Orndorff, CPA
Vice President-Treasurer and
Chief Financial Officer
Charles W. Hash, Sr.
Secretary
Subsidiaries Agents Budget Corporation Consumer
Discount Company, Inc.
Ashford Reinsurance Intermediaries
Corporation
Comp America Insurance Company
King American Ltd.
Lincoln General Insurance Company
Yorktowne Premium Finance
Company
Corporate Information
Independent Public Accountants:
KPMG Peat Marwick LLP
225 Market Street
Harrisburg, PA 17108
General Counsel:
Blank, Rome, Comisky & McCauley
Four Penn Center
Philadelphia, PA 19103
Stock Transfer Agent and Registrar:
American Stock Transfer
and Trust Company
40 Wall Street
New York, NY 10005
Annual Meeting:
The annual meeting of shareholders will
be held at 10:00 a.m., May 16, 1996, at
the Out Door Country Club,
1157 Detwiler Drive, York, PA.
Additional Information:
Additional copies of this report and the
Corporation's Form 10-K Annual Report
to the Securities and Exchange
Commission may be obtained without
charge by writing to:
Chief Financial Officer
Walshire Assurance Company
3350 Whiteford Road
P.O. Box 3849
York, PA 17402-0138
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Business Operations
The profitability of property and casualty insurers is affected by many
factors, including competition, the severity
and frequency of claims, natural disasters, state regulation of premium
rates, interest rates, crime rates, general
business conditions and regulations, and court decisions that define the
extent of coverage. One of the
distinguishing features of the property and casualty insurance business
is that its product must be priced before the
costs are known, because premium rates generally are set before losses
are reported. As a result, property and
casualty insurers have experienced significant year-to-year fluctuations
in underwriting results.
The following discussion and analysis of the financial condition and
results of operations of the Company
should be read in conjunction with the Company's consolidated financial
statements, including the notes thereto,
and other financial information appearing elsewhere in this Report.
Results of Operations
1995 vs. 1994
RevenuesRevenues increased from $32.6 million to $39.9 million, or 22%,
in 1995, primarily the result of an
increase in net premiums earned. This increase in net premiums earned
was a direct result of the increases in all
major lines of business written by the Company. The increase in business
written reflects the increase in the
number of policies issued by the Company.
ExpensesExpenses increased from $27.7 million to $33.0 million, or 19%,
in 1995. This increase was primarily
the result of increased claims and claim settlement expenses and
underwriting, general and administrative expenses.
The increase in claims and claim settlement expenses was the result of
an increase in premiums earned, as the
statutory loss ratio for both years was 59%. Reinsurance recoveries
increased to $2.7 million in 1995 from $1.8
million in 1994. This increase was the result of a greater dollar value
of losses incurred that were recoverable from
reinsurers in 1995 than were recoverable in 1994. The increase in
underwriting, general and administrative
expenses was primarily the result of increases in premiums written.
Policy acquisition costs increased at a lesser
rate than the increase in premiums earned due to an increase in ceding
commission income in 1995. The decrease
in the effective tax rate from 22.4% in 1994 to 20.3% in 1995 was the
result of a reduction in prior year tax
provisions and a greater amount of tax exempt interest.
1994 vs. 1993
RevenuesRevenues increased from $25.9 million to $32.6 million, or 26%,
in 1994, primarily the result of an
increase in net premiums earned. The increase in net premiums earned was
the direct result of increases in all lines
of business written by the Company. The increase in business written
reflects the increase in the number of
policies issued by the Company.
ExpensesExpenses increased from $22.6 million to $27.7 million, or 23%,
in 1994. This increase was primarily
the result of increased claims and claim settlement expenses and
amortization of deferred acquisition costs. The
increase in claims and claim settlement expenses was the result of an
increase in premiums earned as well as an
increase in the statutory loss ratio from 55% to 59%. The increase in
premiums earned resulted in a pro-rata
increase in claims and claim settlement expenses. The increase in the
loss ratio reflects the higher percentage of
casualty business written by the Company, a higher loss ratio on
property coverages, primarily due to the severe
weather conditions in early 1994, and an increase in claims settlement
expenses relating to those coverages. The
increase in the amortization of deferred acquisition costs was the
result of increases in net premiums earned. The
decrease in the effective tax rate from 23.8% in 1993 to 22.4% in 1994
was the result of a greater amount of tax
exempt interest.
Selected Ratios
In 1995, the Company's statutory loss ratio was 59%, the same as 1994,
while the Company's statutory combined
ratio decreased to 87% from 89% in 1994. In 1994, the Company's
statutory loss ratio increased to 59% from
55% in 1993 and the Company's statutory combined ratio decreased to 89%
from 90% in 1993. The increase in
the loss ratio in 1994 was the result of a higher percentage of casualty
premiums earned as well as a higher loss
ratio on physical damage coverages. The decrease in the combined ratio
in 1995 and 1994 was the result of a
reduction of underwriting and administrative expenses when compared to
net premiums written.
Liquidity and Capital Resources
Historically, the Company has generated funds sufficient to support its
operations and has maintained a high degree
of liquidity in its investment portfolio. The primary source of funds to
meet the demands of claims and claim
settlement expenses and operating expenses are written premium and
investment income. The Company's funds
generally are invested in securities with maturities intended to provide
adequate funds to pay claims, claim
settlement expenses and operating expenses without the forced sale of
investments. As of December 31, 1995, less
than 4% of the debt securities in the Company's investment portfolio
were considered below investment grade,
primarily because such securities were not rated.
As of December 31, 1995, the Company, on a consolidated basis, had cash
and short-term investments
aggregating approximately $5.3 million and a line of credit of $5.0
million, $3.2 million of which was available. On
a parent company only basis, available cash and short-term investments
aggregated approximately $413,000.
The Company's insurance subsidiaries, Lincoln and Comp, are subject to
state insurance regulatory laws which
restrict their ability to pay dividends. They are also subject to risk-
based capital requirements which may further
restrict their ability to pay dividends. See Note 11 of Notes to
Consolidated Financial Statements.
The Company believes that its current cash and short-term investments,
together with funds generated from
operations and existing loan commitments, will be sufficient to meet its
operating and capital requirements for the
foreseeable future.
Impact of Inflation
Property and casualty insurance premiums are established before the
amount of claims and claim settlement
expenses, or the extent to which inflation may impact such expenses, is
known. Consequently, in establishing
premium rates, the Company attempts to anticipate the potential impact
of inflation. Generally, the longer the
period of time required to settle claims, the greater the impact of
inflation on final settlement costs. In recent
years, inflation has contributed to increased operating expenses and
claims. Historically, the majority of all of the
insurance written by the Company was on property risks, the losses on
which tend to be reported quickly and
settled within a relatively short period of time. As a result, the
effect of inflation on loss development was not
significant. However, as the Company writes more casualty business, the
losses on which tend to be settled over a
longer period of time, inflation may have more of an impact on loss
development.
Other
Statement of Financial Accounting Standards No. 121, ``Accounting for
the Impairment of Long-Living Assets and
for Long-Lived Assets to Be Disposed Of'' (SFAS 121) was issued by the
FASB in March of 1995. SFAS 121 provides
guidance for recognition and measurement of impairment of long-lived
assets, certain identifiable intangibles and
goodwill related both to assets to be held and used and assets to be
disposed of. SFAS 121 will be effective for the
Company in 1996. Management does not expect that the adoption of SFAS
121 will have a material impact on its
financial condition or results of operations.
Statement of Financial Accounting Standards No. 123, ``Accounting for
Stock-Based Compensation'' (SFAS 123)
was issued by the FASB in October of 1995 and will be effective for the
Company in 1996. Upon adoption of
SFAS 123, the Company will continue to measure compensation expense for
its stock-based employee
compensation plans using the intrinsic value method prescribed by APB
Opinion No. 25, ``Accounting for Stock
Issued to Employees'' and will provide pro forma disclosures of net
income and earnings per share as if the fair
value-based method prescribed by SFAS 123 had been applied in measuring
compensation expense. The adoption
of SFAS 123 will not have any effect on the Company's financial position
or results of operations.
EXHIBIT 23.1
The Board of Directors
Walshire Assurance Company
We consent to incorporation by reference in the registration statement
(Registration No. 33-84080) on Form S-8 and the registration statements
(Registration No. 33-85120 and No. 33-90256) on Form S-3 of Walshire
Assurance Company of our reports dated February 29, 1996, relating to the
consolidated balance sheets of Walshire Assurance Company and subsidiaries
as of December 31, 1995 and 1994, and the related consolidated statements
of income, shareholders equity, and cash flows for each of the years in
the three-year period ended December 31, 1995, and all related schedules,
which reports appear in or are incorporated by reference in the December
31, 1995 annual report on Form 10-K of Walshire Assurance Company.
Harrisburg, Pennsylvania
March 27, 1996
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<ARTICLE> 7
<S> <C>
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