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, 1996
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
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share__________4,653,193_______________
(Title of class) (Number of Shares Outstanding
as of February 28, 1997)
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. __
The aggregate market value of voting stock held by non-affiliates of
the Registrant is $45,792,518(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, 1996, 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, 1996, 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 1997 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 28, 1997. 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 ..................................... 5
Marketing ............................................ 5
Reinsurance .......................................... 6
Rates ................................................ 7
Claims ............................................... 7
Liabilities for Unpaid Claims and Claim Settlement
Expenses ........................................... 7
Investments .......................................... 8
Competition .......................................... 10
Regulation ........................................... 10
Employees ............................................ 12
Item 2. Properties ........................................... 12
Item 3. Legal Proceedings .................................... 12
Item 4. Submission of Matters to a Vote of Security Holders .. 12
Item 4.1 Executive Officers of the Registrant ................. 12
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 .................. 13
Item 8. Financial Statements and Supplementary Data .......... 13
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .................. 13
(i)
INDEX (Continued)
PAGE
PART III
Item 10. Directors and Executive Officers of the Registrant ... 13
Item 11. Executive Compensation ............................... 13
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
subsidiaries, Lincoln General Insurance Company ( Lincoln ), Comp America
Insurance Company ("Comp") and Yorktowne Insurance Company ("Yorktowne"),
the Company primarily provides a specialized line of property and casualty
insurance principally in Pennsylvania, and to a lesser extent, in
Missouri, Georgia, Kentucky, Ohio, Maryland, Iowa and in certain other
states located in the mid-Atlantic, South, Southeastern and Midwest
regions of the country.
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, homeowners, fire, farmowners, 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 .
The following table sets forth the direct premiums written by the
Company for the years ended December 31, 1996, 1995 and 1994 by line of
business.
(in thousands)
Years Ended December 31,__
__1996_ 1995_ 1994__
Auto Liability ............ $26,140 $24,004 $18,666
Auto Physical Damage ...... 22,782 18,977 16,740
Workers Compensation ..... 6,272 5,329 1,864
Inland Marine ............. 3,322 2,656 2,154
Other ..................... 2,579 1,054 680
$61,095 $52,020 $40,104
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 four
principal factors: (i) the Company s comprehensive knowledge of the
transportation industry which enables the Company to be more selective of
the risks it underwrites and to settle claims within reasonable amounts,
(ii) the Company s twenty-year record of operations, which evidences the
Company s willingness and ability to provide a consistent market for
commercial automobile coverages, (iii) the Company s strong agency force,
which the Company has been able to build through careful selection, (See
Business-Marketing), and (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.
1
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:
Forward Looking Statements. Certain information contained in this
Annual Report on Form 10-K contains forward looking statements (as such
term is defined in the Securities Exchange Act of 1934 and the regulations
thereunder), including without limitation, statements as to the allowances
for doubtful accounts and credit losses, liabilities for unpaid claims and
claim settlement expenses, the classification of the Company's investment
portfolio and other statements as to management's beliefs, expectations or
opinions. Such forward looking statements are subject to risks and
uncertainties and may be affected by various factors which may cause
actual results to differ materially from those in the forward looking
statements.
Nature of the Company's Business. All of the Company's premiums
written are attributable to property and casualty insurance, which
industry historically has been cyclical in nature and characterized by
periods of relatively high levels of competition and pricing and
aggressive marketing, followed by periods of capital shortages and
relatively high premium rates. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
The profitability of property and casualty insurers is affected by
many factors, including competition, weather conditions, natural
disasters, the severity and frequency of claims, 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.
Adequacy of Loss Reserves. The Company maintains reserves to cover
its estimated ultimate liability for claims and claim settlement expenses
("LAE") with respect to reported and incurred but not reported ("IBNR")
claims as of the end of each accounting period. At any given time, these
reserves are estimates of what the Company expects the ultimate settlement
and administration of claims will cost, and are based on facts and
circumstances then known, predictions of future events, estimates of
future trends in claims severity and other variable, subjective factors.
Although management uses many resources to calculate reserves, there is no
precise method for accurately estimating the ultimate liability. In
addition, a number of United States courts have in the past issued, and
could in the future issue, decisions expanding concepts of civil
liability. Such decisions have resulted in higher damage awards to
injured parties. In many cases,
2
such decisions have also resulted in increased losses to property and
casualty insurers. This possibility of expansion of insurers' liability
has added to the inherent uncertainty of reserving for property and
casualty losses. No assurances can be given that reserve estimates will
accurately reflect actual losses incurred by the Company. Any material
deficiency in reserve estimates, as compared to actual losses, could have
a material adverse effect on the Company. See "Business - Liabilities for
Unpaid Claims and Claim Settlement Expenses".
Importance of Key Individual. The continued participation of
Kenneth R. Taylor, the Company's 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 1996, 1995 and 1994, one of the
Company s agents accounted for 16%, 23% and 24%, 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, Comp
and Yorktowne ( 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, 1996, the Insurance
Subsidiaries had $3,277,000 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.
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
3
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. The amount,
availability and cost are subject to prevailing market conditions beyond
the control of the Company, and such factors may affect the profitability
of the Company. 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
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
4
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,___
1996_ 1995_ 1994_
Gross premiums written ............. $61,199 $52,138 $40,199
Net premiums earned ................ 47,002 36,191 28,848
Combined ratio (1) ................. 104% 87% 89%
In May, 1996, Lincoln 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
470 independent insurance agents. The Company selects agents based on
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 1996, one of the Company s agents
accounted for 16% of the total premiums written by the Company and another
agent accounted for 5% of the total premiums written by the Company. See
Item 13: Certain Relationships and Related Transactions .
_________________________
(1) Combined ratios have been calculated in accordance with accounting
principles prescribed or permitted by state regulatory agencies.
5
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. 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. In 1997, the Company will also
maintain excess of loss reinsurance for all property coverages including
automobile physical damage and inland marine. Under this latter treaty,
the Company's maximum loss exposure on any one risk (at a maximum coverage
of $2,500,000) is $50,000.
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. 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.
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.
6
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.
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
7
was not significant. In 1992, the Company began to write more liability
coverages, and beginning 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.
The following table sets forth the unpaid claims and claim
settlement expenses as of December 31, 1996, 1995 and 1994 and the age of
such claims based upon the date the claim occurred.
(in thousands)
Years Ended December 31,___
1996 1995 1994
Unpaid claims and claim
settlement expenses at the
end of the period ............ $36,551 $20,153 $14,292
Age of unpaid claims and claim
settlement expenses at the
end of the period:
Zero to three months ......... $ 8,469 $ 4,836 $ 3,314
Three to six months .......... 5,366 2,579 1,297
Six months to one year ....... 7,323 3,639 2,980
Over one year ................ 15,393 9,099 6,701
Investments
The following table sets forth the classification of the Company s
investment portfolio as of December 31, 1996, 1995, and 1994. As of
December 31, 1996, less than 3% 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,_______________
1996_____ 1995_____ 1994_____
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 ........... $ 6,758 9% $ 4,141 7% $ 1,629 3%
Obligations of
states and political
subdivisions ....... 11,165 16 11,076 19 14,879 30
Total held to
maturity (1) ....... 17,923 25 15,217 26 16,508 33
Available for sale:
Fixed Maturities:
U.S. Treasury securi-
ties and obligations
of U.S. government
corporations and
agencies............. 26,437 38 4,594 8 4,988 10
8
Obligations of states
and political subdi-
visions .............. 7,190 10 20,981 36 14,939 30
Debt securities issued
by foreign govern-
ments ................ 35 - 35 - 35 -
Corporate securities .. 3,694 5 1,605 3 1,702 3
Total fixed
maturities (2) ...... 37,356 53 27,215 47 21,664 43
Equity securities (3) .. 8,930 12 8,720 15 7,611 15
Total available
for sale ............ 46,286 65 35,935 62 29,275 58
Mortgage loans .......... 107 - 116 - 124 -
Other investments ....... 1,944 3 1,751 3 744 1
Short term
investments (4) ........ 4,758 _ 7 5,191 _ 9 3,889 _ 8
Total investments ... $71,018 100% $58,210 100% $50,540 100%
_________________________
(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 $18,158 at December 31,
1996, $15,712 at December 31, 1995 and $16,140 at December 31,
1994.
(2) Fixed maturities available for sale are valued at fair value.
Total amortized cost of fixed maturities available for sale was
$37,512 at December 31, 1996, $27,007 at December 31, 1995 and
$22,588 at December 31, 1994.
(3) Equity securities are valued at fair value. Total costs of equity
securities were $8,711 at December 31, 1996, $8,189 at December 31,
1995 and $8,263 at December 31, 1994.
(4) Short-term investments are valued at cost, which approximates
fair value.
The following table sets forth the maturities of the Company s
investment portfolio of fixed maturities as of December 31, 1996.
(in thousands
except percentages)
December 31, 1996_
Amount Percent
Due in one year or less ................... $ 3,331 6%
Due after one year through five years ..... 26,209 47
Due after five years through ten years .... 16,390 30
Due after ten years ....................... 9,349 17
Totals $55,279 100%
9
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. In recent years, the property and
casualty insurance industry has been characterized by relatively high
levels of competition and pricing and aggressive marketing. 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 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, 1996, 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
10
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 Subsidiary's 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 each Insurance
Subsidiary 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, 1996, each Insurance Subsidiary is 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
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.
11
Employees
As of December 31, 1996 the Company had approximately 150 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
Richard S. Kahlbaugh 36 Vice President - Secretary and
General Counsel of the Company
Glenn E. Sell, Jr. 53 Vice President-Underwriting of
Lincoln
Mr. Kahlbaugh was elected Vice President - Secretary of the Company
in November, 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 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, 1996.
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, 1996.
12
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, 1996.
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,
1996.
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 1997 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 1997 proxy statement to
be filed pursuant to General Instruction G(3) to the Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Company s 1997 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 1997 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, 1996, 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.
13
Consolidated Balance Sheets -
December 31, 1996 and 1995.
Consolidated Statements of Income -
Years ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Shareholders Equity -
Years ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows -
Years ended December 31, 1996, 1995 and 1994.
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, 1996. A-2
II. Condensed Financial Information of Registrant -
December 31, 1996 and 1995 and Years
ended December 31, 1996, 1995 and 1994 A-3
III. Supplementary Insurance Information -
Years Ended December 31, 1996, 1995 and 1994 A-6
IV. Reinsurance -
Years Ended December 31, 1996, 1995 and 1994 A-7
V. Valuation and Qualifying Accounts -
Years Ended December 31, 1996, 1995 and 1994. A-8
VI. Disclosures concerning unpaid claims and claim
settlement expenses of property-casualty
underwriters A-9
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.
(4) 3.3 Statement with Respect to 6 1/2% Cumulative
Convertible Preferred Stock.
(1) 4.1 Specimen Common Stock Certificate of the Company.
(4) 4.2 Specimen Preferred Stock Certificate of the Company.
14
(*) (1) 10.1 The Company s 1987 Stock Option Plan.
(*) (1) 10.2 The Company s Employee Stock Purchase Plan.
(*) (4) 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
(5) 10.10 Term Loan Agreement, dated January 25, 1995, between
the Company and Mercantile Pennsylvania Corporation.
(*) (1) 10.22 Form of Director s Stock Option Agreement.
(6) 11.1 Computation of Per Share Earnings
(6) 13.1 Annual Report to Shareholders for the year ended
December 31, 1996 (such report, except for 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).
(6) 21.1 Subsidiaries of the Company.
(6) 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 28, 1994.
(5) Incorporated by reference from the Company s Form 10-K
(Commission File No. 0-16267), dated March 27, 1995.
(6) Filed herewith.
II. Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December
31, 1996.
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 21, 1997 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 21, 1997.
SIGNATURES TITLE
/s/ KENNETH R. TAYLOR_______
KENNETH R. TAYLOR President & Chief Executive Officer
and Director (Principal Executive
Officer)
/s/ GARY J. ORNDORFF________
GARY J. ORNDORFF Vice President/Treasurer and
Director (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 28, 1997, we reported on the consolidated balance
sheets of Walshire Assurance Company and subsidiaries as of December 31,
1996 and 1995, 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, 1996, as contained in the 1996 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 1996. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the
related financial statement 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 statement 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
Harrisburg, Pennsylvania
February 28, 1997
A-1
Schedule I
WALSHIRE ASSURANCE COMPANY
AND SUBSIDIARIES
Summary of Investments Other Than
Investments in Related Parties
December 31, 1996
(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. $ 6,758 $ 6,769 $ 6,758
States and political
subdivisions ................ 11,165 11,389 11,165
Total held to maturity ...... 17,923 18,158 17,923
Available for sale:
Fixed maturities:
U. S. Government and Agencies. 26,532 26,437 26,437
States and political
subdivisions ................ 7,238 7,190 7,190
Foreign governments .......... 35 35 35
Corporate securities ......... 3,707 3,694 3,694
Total fixed maturities ...... 37,512 37,356 37,356
Equity securities:
Common Stocks:
Public Utilities ............ 545 551 551
Banks, trusts and insurance
companies .................. 2,278 2,481 2,481
Industries, miscellaneous
and all other .............. 4,487 4,412 4,412
Non-redeemable preferred
stock........................ 1,401 1,486 1,486
Total equity securities ..... 8,711 8,930 8,930
Total available for sale .... 46,223 46,286 46,286
Short-term investments ......... 4,758 4,758 4,758
Other investments .............. 2,051 2,051 2,051
$70,955 $71,253 $71,018
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)
1996 1995
Assets:
Investments:
Available for sale:
Fixed maturities. . . . . . . . . . . . $ 1,570 $ 1,430
Equity securities . . . . . . . . . . . 3,900 4,034
Short-term investments. . . . . . . . . . 98 368
Other investments . . . . . . . . . . . . 2,041 1,857
Total investments . . . . . . . . . . . 7,609 7,689
Cash. . . . . . . . . . . . . . . . . . . . 154 45
Receivable from subsidiaries. . . . . . . . 1,641 897
Investment in subsidiaries. . . . . . . . . 44,255 40,344
Property and equipment, net . . . . . . . . 1,301 786
Other assets. . . . . . . . . . . . . . . . 397 369
Total assets. . . . . . . . . . . . . . $55,357 $50,130
Liabilities
Notes payable . . . . . . . . . . . . . . . $ 8,256 $ 3,731
Other liabilities . . . . . . . . . . . . . 267 385
Total liabilities . . . . . . . . . . . 8,523 4,116
Shareholders equity:
Preferred stock, par value $.01 per
share; 2,000 shares authorized;
128 and 138 shares issued and
outstanding. . . . . . . . . . . . . . . 1 1
Common stock, par value $.01 per
share; 10,000 shares authorized;
4,651 and 4,064 shares issued and
outstanding . . . . . . . . . . . . . . . 47 41
Additional paid-in capital. . . . . . . . . 38,648 31,918
Unrealized gains on investments available
for sale of parent and subsidiaries (net
of deferred taxes of $21 and $181). . . . 42 558
Retained earnings . . . . . . . . . . . . . 8,096 13,496
Shareholders equity. . . . . . . . . . 46,834 46,014
Total liabilities and
shareholders equity. . . . . . . . . $55,357 $50,130
See notes to consolidated financial statements.
A-3
Schedule II
(continued)
WALSHIRE ASSURANCE COMPANY
AND SUBSIDIARIES
Condensed Financial Information of Registrant
Walshire Assurance Comp any
Statements of Income
(Parent Company)
Years Ended December 31
(in thousands)
1996 1995 1994
Revenues:
Net investment income . . . . . . $ 1,353 $ 949 $ 479
Net realized gains on
investments . . . . . . . . . . 596 160 539
Management fees-subsidiaries. . . 210 247 216
Other . . . . . . . . . . . . . . 4 9 -
Total revenues. . . . . . . . 2,163 1,365 1,234
Expenses:
General and administrative. . . . 914 1,109 1,004
Interest. . . . . . . . . . . . . 487 247 193
Total expenses. . . . . . . . 1,401 1,356 1,197
Income before (recovery of)
income taxes and equity in
net income of subsidiaries. . . . 762 9 37
(Recovery of) income taxes. . . . . ( 316) ( 176) ( 74)
Income before equity in net
income of subsidiaries. . . . . . 1,078 185 111
Equity in net income of
subsidiaries. . . . . . . . . . . 844 5,298 3,677
Net income. . . . . . . . . . . . . $ 1,922 $ 5,483 $ 3,788
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)
1996 1995 1994
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . $ 1,922 $ 5,483 $ 3,788
Equity in net income of subsidiaries . . ( 844) (5,298) ( 3,677)
(Increase)decrease in receivable
from subsidiaries . . . . . . . . . . . ( 744) 1,396 1,553
Other. . . . . . . . . . . . . . . . . . ( 554) ( 76) ( 661)
Net cash (used in)provided by
operating activities. . . . . . . . . . ( 220) 1,505 1,003
Cash flows from investing activities:
Purchase of investments. . . . . . . . . (5,988) (5,314) (15,630)
Sale or maturity of investments. . . . . 6,843 4,275 13,575
Decrease (increase) in investment in
subsidiaries . . . . . . . . . . . . . 570 (1,218) 968
Capital contribution to subsidiaries . . (3,637) - ( 4,725)
Net purchase of property and equipment . ( 698) ( 637) ( 78)
Other, net . . . . . . . . . . . . . . . ( 695) 1,107 ( 639)
Net cash used in investing activities. . . (3,605) (1,787) ( 6,529)
Cash flows from financing activities:
Cash dividends paid. . . . . . . . . . . (1,515) (1,416) ( 1,104)
Issuance of common stock . . . . . . . . 924 330 284
Issuance of preferred stock. . . . . . . - - 6,777
Proceeds from notes payable. . . . . . . 5,005 1,770 -
Payment of bonds and notes payable . . . ( 480) ( 440) ( 355)
Net cash provided by financing activities. 3,934 244 5,602
Net increase (decrease) in cash. . . . . . 109 ( 38) 76
Cash at beginning of the year. . . . . . . 45 83 7
Cash at the end of the year. . . . . . . . $ 154 $ 45 $ 83
See notes to consolidated financial statements.
A-5
Schedule III
WALSHIRE ASSURANCE COMPANY
AND SUBSIDIARIES
Supplementary Insurance Information
(in thousands)
Unpaid
Other Net
claims and
policy claims Amortization
Deferred claim
claims Net Net and claim of deferred Other
Net
acquisition settlement Unearned
benefits premium investment settlement acquisition
operating premiums
costs___ expenses_ premiums
payable revenue income__ expenses costs___
expenses written_
Period
Year ended December 31, 1996
Property-Casualty $5,193 36,551 33,250
- 47,002 3,168 34,602 7,424 8,110
48,970
Year ended December 31, 1995
Property-Casualty $4,831 20,153 27,555
- 36,191 2,721 20,377 5,447 6,930
42,569
Year ended December 31, 1994
Property-Casualty $3,791 14,292 21,065
- 28,848 2,310 16,435 5,266 5,759
33,147
A-6<PAGE>
Schedule IV
WALSHIRE ASSURANCE COMPANY
AND SUBSIDIARIES
Reinsurance
(in thousand, except percentages)
Ceded to
Assumed Percentage
Gross other from
other Net of amount
Type of Premiums Amount companies
companies amount assumed to net
Year ended December 31, 1996
Premiums written:
Property-Casualty $61,095 12,229 104
48,970 .2%
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%
A-7<PAGE>
Schedule V
WALSHIRE ASSURANCE COMPANY
AND SUBSIDIARIES
Valuation and Qualifying Accounts
(in thousands)
_Additions(Recoveries)
Deductions-
Balance at Charged to Charged to
Amounts Balance at
beginning of costs and other
written end of
period expense accounts
off period
Year ended December 31, 1996
Agents balances reserve for
bad debts $100 57 -
(37) 120
Premium finance receivables
reserve for bad debts 67 ( 6) -
(12) 49
Total $167 51 -
(49) 169
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
A-8
<PAGE>
Schedule VI
WALSHIRE ASSURANCE COMPANY
AND SUBSIDIARIES
Disclosures concerning unpaid claims and claim settlement
expenses of property-casualty underwriters
(in thousands)
Year Ended December 31
1996 1995
1994 1993 1992 1991 1990 1989
1988 1987
Net liability at end of
year for unpaid claims
and claim settlement
expenses. . . . . . . . . $ 22,342 $ 13,149 $
9,001 $ 6,443 $ 2,810 $ 1,548 $ 1,808 $ 1,389
$ 899 $ 586
Net liability
reestimated as of:
One year later. . . . . . 16,388
9,327 6,282 2,849 1,187 1,125 2,339
241 677
Two years later . . . . .
10,649 6,284 2,907 1,251 1,135
2,150 989 677
Three years later . . . .
6,781 2,952 1,349 1,173 2,231
960 677
Four years later. . . . .
3,145 1,315 1,155 2,244
954 677
Five years later. . . . .
1,439 1,087 2,212
930 679
Six years later . . . . .
1,270 2,177
928 678
Seven years later . . . .
2,158
886 668
Eight years later . . . .
883 658
Nine years later . . . .
658
Cumulative deficiency
(excess). . . . . . . . . 3,239
1,648 338 335 ( 109) ( 538) 769
( 16) 72
Cumulative amount of
liability paid through:
One year later. . . . . . $ 8,214 $
4,982 $ 3,200 $ 1,850 $ 1,132 $ 1,099 $ 1,988
$ 206 $ 677
Two years later . . . . .
7,804 4,303 2,402 1,234 1,163 2,161
989 677
Three years later . . . .
5,623 2,506 1,330 1,134 2,211
960 677
Four years later. . . . .
2,995 1,223 1,180 2,187
954 677
Five years later. . . . .
1,458 1,073 2,224
932 679
Six years later . . . . .
1,275 2,160
930 678
Seven years later . . . .
2,159
886 668
Eight years later . . . .
883 658
Nine years later . . . .
658
Year Ended December 31,
1996
1995
Gross liability at end of year . . . . . . $36,551
$20,153
Reinsurance recoverable. . . . . . . . . . 14,209
7,004
Net liability at end of year . . . . . . . 22,342
13,149
Gross reestimated liability -- latest. . .
26,781
Reestimated recoverable -- latest. . . . .
10,393
Net reestimated liability -- latest. . . .
16,388
Gross cumulative deficiency. . . . . . . .
6,628
A-9<PAGE>
SECURITIES AND EXCHANGE COM MISSION
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.
(4) 3.3 Statement with Respect to 6 1/2%
Cumulative Convertible Preferred Stock.
(1) 4.1 Specimen Common Stock Certificate of the
Company.
(4) 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.
(*) (4) 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.
(5)10.10 Term Loan Agreement, dated January 25,
1995 between the Company and Mercantile
Pennsylvania Corporation.
(*) (1) 10.22 Form of Director s Stock Option Agreement.
(6) 11.1 Computation of Per Share Earnings
(6) 13.1 Annual Report to Shareholders for the year
ended December 31, 1996 (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).
(6) 21.1 Subsidiaries of the Company.
(6) 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 28, 1994.
(5) Incorporated by reference from the Company s
Form 10-K (Commission File No. 0-16267), dated
March 27, 1995.
(6) Filed herewith.
EXHIBIT 11.1
EXHIBIT 11.1
COMPUTATION OF PER SHARE EARNINGS
1996 1995 1994
Primary Earnings Per Share
Earnings Per Share Based on Average
Shares Outstanding $ .33 $ 1.14 $ .79
Impact of Stock Options Utilizing
Treasury Stock Method ( .02) ( .06) ( .03)
Primary Earnings Per Share $ .31 $ 1.08 $ .76
Fully Diluted Earnings Per Share
Earnings Per Share Based on Average
Shares Outstanding $ .33 $ 1.14 $ .79
Impact of Stock Options Utilizing
Treasury Stock Method ( .02) ( .07) ( .03)
Impact of Conversion of 6 1/2%
Convertible Preferred Stock - ( .04) -__
Fully Diluted Earnings Per Share $ .31 $ 1.03 $ .76
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, Comp America Insurance
Company and Yorktowne 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 3
Letter from the President 4
A Decade of Achievements 6
A Decade of Product Line Growth 8
A Decade of Premium Growth 10
A Decade of Commitment 12
Management's Discussion and Analysis 14
Management Report 16
Independent Auditors' Report 16
Financial Statements 17
Quarterly Common Stock Prices and Cash Dividends Per Share 32
Board of Directors, Officers, Subsidiaries
and Corporate Information Inside Back Cover
Financials
at a Glance
(In thousands, except per share data and ratios)
Year Ended December 31, 1996 1995 1994 1993 1992
Total Revenues $ 52,679 $ 39,927 $32,607 $25,920 $19,933
Net Income 1,922 5,483 3,788 2,619 2,563
Primary Net Income Per Share (1) .31 1.08 .76 .62 .85
Fully-Diluted Net Income
Per Share (1) .31 1.03 .76 .61 .71
Dividends Paid on Common Stock 1,083 955 846 779 503
Dividends Per Common Share (1) .236 .215 .193 .189 .167
Gross Premiums Written 61,199 52,138 40,199 31,583 24,252
Loss Ratio (2) 75% 59% 59% 55% 47%
Combined Ratio (2) 104% 87% 89% 90% 82%
December 31,1996 1995 1994 1993 1992
Total Investments $ 71,018 $ 58,210 $50,540 $40,324 $32,074
Total Assets 130,936 101,627 83,068 66,345 54,279
Long-Term Debt 1,076 1,481 1,921 16 5,208
Shareholders' Equity 46,834 46,014 40,014 32,041 24,829
Book Value Per Common Share (1) 8.75 8.82 7.55 7.36 7.03
Common Shares Outstanding (1) 4,651 4,470 4,402 4,359 3,533
(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, (vi) in
December, 1995 the Company declared a 10% stock dividend, (vii)
throughout 1996, the
Company converted 10 shares of its 6%1/2% Convertible Preferred Stock
into 39 shares of
common stock, and (viii) in December, 1996 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 $.06
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations and
their cash flows for
each of the years in the three-year period ended December 31, 1996, in
conformity with
generally accepted accounting principles.
Harrisburg, Pennsylvania KPMG Peat Marwick LLP
February 28, 1997
Walshire Assurance Company and Subsidiaries
Consolidated Balance Sheets
December 31
(in thousands, except
per share data)
1996 1995
Assets
Investments:
Held to maturity:
Fixed maturities (fair value $18,158 and $15,712) $ 17,923 $ 15,217
Available for sale:
Fixed maturities (cost $37,512 and $27,007) 37,356 27,215
Equity securities (cost $8,711 and $8,189) 8,930 8,720
Short-term investments 4,758 5,191
Other investments 2,051 1,867
Total investments 71,018 58,210
Cash 637 99
Accrued investment income receivable 847 864
Amounts receivable from reinsurers 1,837 3,315
Amounts receivable from reinsured company 563 595
Agents' balances and direct bill receivable
(net of allowance for doubtful accounts of $120 and $100) 8,501 5,501
Installment premiums receivable 8,514 5,965
Agents' balances and installment premiums
receivable from related parties 3,073 3,694
Premium finance receivables (net of unearned finance
charges and allowance for credit losses of
$109 and $135) 4,836 6,534
einsurance receivable 19,699 8,615
Deferred acquisition costs 5,193 4,831
Property and equipment (net of accumulated depreciation
of $1,725 and $1,284) 4,526 3,270
Other assets 1,692 134
Total assets $130,936 $101,627
Liabilities and Shareholders' Equity
Liabilities:
Unpaid claims and claim settlement expenses $ 36,551 $ 20,153
Unearned premiums 33,250 27,555
Short-term notes payable 7,293 2,250
Long-term notes payable 1,076 1,481
Deposits by insureds 2,380 1,488
Commissions payable to agents 1,681 1,049
Commissions payable to related parties 401 473
Other liabilities 1,470 1,164
Total liabilities 84,102 55,613
Shareholders' equity:
Preferred stock, par value $.01 per share; 2,000 shares authorized;
128 and 138 shares issued and outstanding 1 1
Common stock, par value $.01 per share; 10,000 shares
authorized; 4,651 and 4,064 shares issued and outstanding 47 41
Additional paid-in capital 38,648 31,918
Unrealized gains on investments available for sale
(net of deferred taxes of $21 and $181) 42 558
Retained earnings 8,096 13,496
Shareholders' equity 46,834 46,014
Total liabilities and shareholders' equity $130,936 $101,627
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, 1996 1995 1994
Revenues:
Premiums earned $59,020 $45,648 $35,778
Premiums ceded (12,018) (9,457) (6,930)
Net premiums earned 47,002 36,191 28,848
Net investment income 3,168 2,721 2,310
Net realized gains on investments 1,778 316 743
Other 731 699 706
Total revenues 52,679 39,927 32,607
Expenses:
Claims and claim settlement expenses 41,030 23,045 18,254
Reinsurance recoveries (6,428) (2,668) (1,819)
Net claims and claim settlement expenses 34,602 20,377 16,435
Amortization of deferred acquisition costs 7,424 5,447 5,266
Underwriting, general and administrative expenses 8,110 6,930 5,759
Dividends to policyholders .153 -- --
Interest 488 290 264
Total expenses 50,777 33,044 27,724
Income before income taxes 1,902 6,883 4,883
Provision for income taxes (benefit) (20) 1,400 1,095
Net income 1,922 5,483 3,788
Less dividends on convertible preferred stock 424 458 374
Net income available for common stock $1,498 $5,025 $3,414
Net income per common share and common equivalent share:
Primary:
Net income $.31 $1.08 $.76
Weighted average shares outstanding 4,791 4,649 4,507
Fully diluted:
Net income $.31 $1.03 $.76
Weighted average shares outstanding 4,791 5,348 4,507
See accompanying notes to consolidated financial statements.
Walshire Assurance Company and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Years ended December 31, 1996 1995 1994
Cash flows from operating activities:
Net income $1,922 $5,483 $3,788
Adjustments to reconcile net income to
net cash provided by operating activities
Net realized gains on investments (1,778) (316) (743)
Decrease (increase) in assets:
Accrued investment income receivable 17 31 (109)
Amounts receivable from reinsurers 1,478 (671) (1,708)
Amounts receivable from reinsured company 32 730 (10)
Agents' balances, direct bill and installment
premiums receivable (5,510) (4,206) (2,844)
Agents' balances and installment
premiums receivable from related parties 582 (1,436) 65
Premium finance receivables 1,698 (1,856) (586)
Reinsurance receivable (11,084) (2,260) (513)
Deferred acquisition costs (362) (1,040) (576)
Other, net (972) 809 196
(Decrease) increase in liabilities:
Unpaid claims and claim settlement expenses 16,398 5,861 2,528
Unearned premiums 5,695 6,490 4,421
Deposits by insureds 892 741 48
Other liabilities 304 347 (267)
Other, net 560 737 185
Net cash provided by operating activities 9,872 9,444 3,875
Cash flows from investing activities:
Purchase of investments:
Held to maturity (4,463) (3,805) (5,078)
Available for sale (44,818) (10,539) (19,227)
Sale of investments:
Available for sale 32,711 9,234 9,654
Maturity of investments 4,221 1,910 1,925
Net (purchase) sale of short term and
other investments 254 (2,212) 583
Purchase of property and equipment (1,853) (1,210) (426)
Sale of property and equipment 11 135 84
Other, net 548 (335) 1,085
Net cash used in investing activities (13,389) (6,822) (11,400)
Cash flows from financing activities:
Cash dividends paid (1,507) (1,412) (1,104)
Issuance of common stock 924 330 284
Issuance of preferred stock -- -- 6,777
Proceeds from notes payable 5,118 1,770 2,145
Payment of notes payable.(480) (3,395) (449)
Net cash provided by (used in) financing activities 4,055 (2,707) 7,653
Net increase (decrease) in cash 538 (85) 128
Cash at beginning of the year 99 184 56
Cash at end of the year $637 $99 $184
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, 1996 1995 1994
Preferred Stock
Shares outstanding
Balance at beginning of year 138 142 --
Shares issued pursuant to private placement offering -- -- 142
Shares converted to common stock (10) (4) --
Balance at end of year 128 138 142
Preferred Stock (par value $.01)
Balance at beginning of year $1 $1 $--
Shares issued pursuant to private placement offering -- -- 1
Balance at end of year $1 $1 $1
Common Stock
Shares Outstanding
Balance at beginning of year 4,064 3,638 3,431
Dividend reinvestment 2 -- --
Conversion of preferred stock 39 15 --
Stock dividend 423 369 173
Exercise of stock options 134 36 30
Stock tendered to exercise options (18) -- --
Employee stock purchase plan 7 6 4
Balance at end of year 4,651 4,064 3,638
Common Stock (par value $.01)
Balance at beginning of year $41 $36 $34
Conversion of preferred stock 1 -- --
Stock dividend 4 4 2
Exercise of stock options 1 1 --
Balance at end of year 47 41 36
Additional Paid-In Capital
Balance at beginning of year 31,918 25,751 16,831
Dividend reinvestment 23 4 --
Stock dividend 5,811 5,838 1,860
Exercise of stock options 1,059 258 239
Stock tendered to exercise options (250) -- --
Employee stock purchase plan 87 67 45
Issuance of preferred stock -- -- 6,776
Balance at end of year 38,648 31,918 25,751
Unrealized gains (losses) on investments available for sale
Balance at beginning of year 558 (1,042) 613
Unrealized gains (losses) on investments available for sale (516) 1,600
(1,827)
Effect of change in accounting for investments
available for sale -- -- 172
Balance at end of year 42 558 (1,042)
Retained Earnings
Balance at beginning of year 13,496 15,268 14,562
Net income 1,922 5,483 3,788
Cash dividends -- common stock
(per share $.236; $.215; $.193) (1,083) (955) (846)
-- preferred stock
(per share $3.25; $3.25; $2.64) (424) (458) (374)
Stock dividends on common stock (5,815) (5,842) (1,862)
Balance at end of year 8,096 13,496 15,268
Shareholders' Equity $46,834 $46,014 $40,014
See accompanying notes to consolidated financial statements.
Walshire Assurance Company and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies
(a) Organization and Business
The Company was organized as a regional insurance holding company and
operates in 23 eastern, southeastern and
midwest 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), Comp
America Insurance Company (Comp) and Yorktowne Insurance Company
(Yorktowne); insurance premium finance,
Agents Budget Corporation Consumer Discount Company, Inc. (ABCO) and
Yorktowne Premium Finance Company
(YPFCO); and claims adjustment services, King American Ltd. (King).
Yorktowne was acquired on September 30, 1996
and was accounted for by the purchase method of accounting. Yorktowne's
financial position and results of
operations since acquisition, while not material, have been included in
the consolidated financial statements. The
Company's major lines of business in 1996 and their percentages of total
net earned premiums were Automobile
Physical Damage (44%), Automobile Liability (38%), Workers' Compensation
(9%) and Inland Marine (6%). Lincoln,
Comp and Yorktowne (``the Insurance Subsidiaries'') are subject to
regulation by insurance departments in those states
in which they operate and undergo periodic examination by these
departments. The Insurance Subsidiaries 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, Yorktowne and YPFCO, and are
collectively referred to herein as the ``Company.'' Significant inter-
company balances and transactions have been
eliminated in consolidation.
The accounts of the Insurance Subsidiaries 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 the Insurance Subsidiaries 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
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) Reinsurance
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
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. 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.
(l) Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of
Accounting Principles Board (``APB'') Opinion No. 25, Accounting for
Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market
price of the underlying stock exceeded the exercise price. On January 1,
1996, the Company adopted SFAS No. 123,
Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined
in SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of SFAS No. 123. See
Note 12.
(m) 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, 1996 and 1995, are not included in the
accompanying Consolidated Balance Sheets.
(2) Reinsurance
The Insurance Subsidiaries assume reinsurance from and cede 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 the Insurance Subsidiaries'
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.
The Insurance Subsidiaries have catastrophic and excess per risk
reinsurance contracts for which they pay
premiums based upon their gross earned premiums derived from covered
business. The reinsured amounts included
in developing the liability for claims and claim settlement expenses
were $14,209,000 and $7,004,000 at December
31, 1996 and 1995, respectively.
At December 31, 1996, reinsurance receivables with a carrying value of
$7,010,000 were associated with a single
reinsurer.
The effect of reinsurance on premiums written is as follows:
(in thousands)
Years Ended December 31,
1996 1995 1994
Direct $61,095 $52,020 $40,104
Assumed 104 118 95
Ceded (12,229) (9,569) (7,052)
Net premiums written $48,970 $42,569 $33,147
The effect of reinsurance on premiums earned is as follows:
(in thousands)
Years Ended December 31,
1996 1995 1994
Direct $58,912 $45,527 $35,700
Assumed 108 121 78
Ceded (12,018) (9,457) (6,930)
Net premiums earned $47,002 $36,191 $28,848
(3) Related Party Transactions
Lincoln pays agency commissions for business placed with it to four
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,
1996 1995 1994
Premiums on policies written $9,520 $11,415 $9,467
Commissions 1,852 2,050 1,987
(in thousands)
December 31,
1996 1995
Agents' balances receivable $1,233 $1,609
Installment premiums receivable 1,840 2,085
Commissions payable 401 473
(4) Major Agencies
During 1996, 1995 and 1994, one of the Company's agents with which a
director of Walshire is affiliated, accounted
for 16%, 23% and 24%, respectively, of the total premiums written.
Agents' balances and installment premiums
receivable from this agency were $2,653,000 and $3,116,000 as of
December 31, 1996 and 1995, respectively. See
Note 3. Another agent accounted for 5% and 6% of the total premiums
written during 1996 and 1995, respectively,
while three agents accounted for 21% of the total premiums written
during 1994. Agents' balances and installment
premiums receivable from these agents were $1,020,000 and $321,000 as of
December 31, 1996 and 1995,
respectively.
(5) Investments
Net investment income, comprised primarily of interest and dividends, is
derived from the following sources:
(in thousands)
Years Ended December 31,
1996 1995 1994
Fixed maturities $2,628 $2,311 $1,833
Equity securities 303 300 322
Short-term investments 373 253 314
Other 78 13 (16)
3,382 2,877 2,453
Investment expenses (214) (156) (143)
Net investment income $3,168 $2,721 $2,310
The changes in net unrealized gains on investments available for sale,
less applicable deferred income taxes, is as
follows:
(in thousands)
Years Ended December 31,
1996 1995 1994
Increase (decrease) during period in difference between
fair value and cost of investments available for sale:
Fixed maturities $(364) $1,132 $(924)
Equity securities (312) 1,183 (1,564)
(676) 2,315 (2,488)
Deferred income taxes 160 (715) 833
Increase (decrease) in net unrealized gains of
investments available for sale $(516) $1,600 $(1,655)
Unrealized investment gains and losses on fixed maturities available for
sale and equity securities, less applicable
deferred income taxes, were as follows:
(in thousands)
Years Ended December 31,
1996 1995 1994
Fixed maturities:
Gross gains $224 $553 $94
Gross losses (380) (345) (1,018)
Equity securities:
Gross gains 1,130 1,260 619
Gross losses (911) (729) (1,271)
63 739 (1,576)
Deferred income taxes (benefit) 21 181 (534)
Net unrealized investment gains (losses) $42 $558 $(1,042)
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, 1996 are as follows:
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held to maturity
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $6,758 $63 $52 $6,769
Obligations of states and political subdivisions 11,165 266 421 1,389
Total held to maturity 17,923 329 941 8,158
Available for sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies 26,532 591 542 6,437
Obligations of states and political subdivisions 7,238 47 95 7,190
Debt securities issued by foreign governments 35 -- -- 35
Corporate securities 3,707 118 131 3,694
Total available for sale 37,512 224 380 37,356
Total fixed maturities $55,435 $553 $474 $55,514
The amortized cost and fair value of fixed maturities at December 31,
1996, 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.
(in thousands)
Amortized Fair
Cost Value
Held to maturity
Due in one year or less $1,562 $1,579
Due after one year through five years 6,343 6,401
Due after five years through ten years 7,022 7,098
Due after ten years 2,996 3,080
Total held to maturity 17,923 18,158
Available for Sale
Due in one year or less 1,717 1,769
Due after one year through five years 20,059 19,866
Due after five years through ten years 9,432 9,368
Due after ten years 6,304 6,353
Total available for sale 37,512 37,356
Total fixed maturities $55,435 $55,514
The amortized cost and fair values of investments in fixed maturities as
of December 31, 1995 are as follows:
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Held to maturity
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $4,141 $1,105 $-- $4,246
Obligations of states and political subdivisions 11,076 46 311,466
Total held to maturity 15,217 568 731 5,712
Available for sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies 4,499 95 -- 4,594
Obligations of states and political subdivisions 20,783 396 198 20,981
Debt securities issued by foreign governments 35 -- -- 35
Corporate securities 1,690 621 47 1,605
Total available for sale 27,007 553 345 27,215
Total fixed maturities $42,224 $1,121 $418 $42,927
Proceeds from sales of fixed maturities available for sale and equity
securities and the gross gains and gross losses
realized on those sales were as follows:
(in thousands)
Years Ended December 31,
1996 1995 1994
Proceeds from sales $37,550 $11,324 $9,400
Gross gains
Fixed maturities $308 $114 $68
Equity securities 1,807 895 1,013
Total gross gains 2,115 1,009 1,081
Gross losses
Fixed maturies 792 560
Equity securities 258 668 278
Total gross losses 337 693 338
Net realized gains on investments $1,778 $316 $743
As of December 31, 1996, fixed maturities with an amortized cost
totaling $4,586,000 were held by regulatory
agencies, as required by law.
(6) Deferred Acquisition Costsr
Changes in deferred acquisition costs are as follows:
(in thousands)
Years Ended December 31,
1996 1995 1994
Balance, January 1 $4,831 $3,791 $3,215
Acquisition costs deferred 7,786 6,487 5,842
Amortization charged to earnings (7,424) (5,447) (5,266)
Balance, December 31 $5,193 $4,831 $3,791
(7) Federal Income Taxesr
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:
(in thousands)
Years Ended December 31,
1996 1995 1994
Current:
Federal $382 $1,741 $1,302
State -- (2) 8
Deferred (402) (339) (215)
$(20) $1,400 $1,095
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,
1996 1995 1994
Computed at statutory federal rate (34%) $647 $2,340 $1,660
Tax exempt interest and dividend received deduction (711) (679) (637)
Reduction of prior year tax provisions -- (277) --
Miscellaneous items 44 16 72
$(20) $1,400 $1,095
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,
1996 1995
Deferred tax assets:
Unearned premiums $1,993 $1,838
Unpaid claims and claim settlement expenses 1,016 613
Allowance for doubtful accounts 5157
$3,060 $2,508
Deferred tax liabilities:
Deferred acquisition costs $1,766 $1,643
Unrealized gain on investments available for sale 211 81
Other 42 15
$1,829 $1,839
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 assets in 1996 and other
liabilities in 1995.
In 1996, 1995 and 1994, the Company made cash payments of $1,630,000,
$1,748,000 and $938,000
respectively, for income taxes.
(8) Unpaid Claims and Claim Settlement Expensesr
Activity in the unpaid claims and claim settlement expenses is
summarized as follows:
(in thousands)
December 31,
1996 1995 1994
Balance, January 1 $20,153 $14,292 $11,764
Less reinsurance recoverables 7,004 5,291 5,321
Net balance, January 1 13,149 9,001 6,443
Incurred related to:
Current year 32,276 20,062 16,311
Prior years 2,326 315 124
Total incurred 34,602 20,377 16,435
Paid related to:
Current year 18,522 11,259 10,547
Prior years 6,887 4,970 3,330
Total paid 25,409 16,229 13,877
Net balance, December 31 22,342 13,149 9,001
Plus reinsurance recoverables 14,209 7,004 5,291
Balance, December 31 $36,551 $20,153 $14,292
The unfavorable development of $2,326,000 in 1996 is primarily related
to strengthening of case and incurred but
not reported reserves.
(9) Bonds and Notes Payable
Bonds and notes payable consisted of the following:
(in thousands)
December 31,
1996 1995
Note payable (prime interest rate), monthly payments of $40
plus interest, due December, 1999 $1,481 $1,961
Note payable (no interest) monthly payments of $3,
due December, 1999 113 --
Line of credit (prime interest rate), due on demand 450 --
Line of credit (prime interest rate), due on demand 6,325 1,770
8,369 3,731
Current portion (7,293) (2,250)
Long-term notes payable $1,076 $1,481
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 1996, 1995 and 1994, the Company made cash payments of $458,000,
$298,000 and $246,000 respectively,
for interest expense.
Walshire and its subsidiaries have a combined line of credit of
$10,000,000 at December 31, 1996, $3,675,000 of
which is available. The line of credit requires Walshire to maintain
shareholders' equity in excess of $40,000,000 and
is subject to reaffirmation in July, 1997.
(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
$128,000, $109,000 and $73,000 in 1996, 1995
and 1994, respectively.
The Company currently does not provide any post-retirement or post-
employment benefits.
(11) Shareholders' Equity
The Insurance Subsidiaries 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, 1996, $2,911,000 and
$366,000 was available for the payment of dividends from Lincoln and
Comp, respectively, to Walshire without the
prior approval of the insurance regulatory authorities. Yorktowne may
not pay any dividends to Walshire without the
prior approval of the insurance regulatory authorities until September
30, 1999.
Dividends paid by Lincoln to Walshire for the years ended December 31,
1996 and 1995 were $1,000,000 and
$700,000, respectively. No dividends were paid by Lincoln to Walshire in
1994. Comp and Yorktowne have paid no
dividends. In addition, Walshire declared 10%, 10% and 5% stock
dividends in 1996, 1995 and 1994, respectively.
In March of 1994, 141,700 shares of 6%1/2% 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 $11.02 per share, subject to
adjustment under certain circumstances.
During 1996 and 1995, 9,500 and 4,000 shares were converted into 43,104
and 18,150 shares of common stock,
respectively.
A reconciliation of the insurance subsidiaries statutory net income to
consolidated GAAP net income is as follows:
(in thousands)
Years Ended December 31,
1996 1995 1994
Statutory net income for insurance subsidiaries $1,190 $4,223 $2,822
Deferred acquisition costs 362 1,040 576
Salvage and subrogation -- 500 98
Deferred income taxes 407 310 219
Write down of securities (49) (29) 10
Taxes (53) -- --
Ceding commissions (74) -- --
Depreciation 53 -- --
Insurance deductible -- -- 20
GAAP net income for insurance subsidiaries 1,836 6,044 3,745
Net income (loss) of Walshire and other non-insurance subsidiaries 86
(561) 43
Consolidated GAAP net income $1,922 $5,483 $3,788
A reconciliation of statutory capital and surplus for the insurance
subsidiaries to consolidated GAAP equity is as
follows:
(in thousands)
Years Ended December 31,
1996 1995
Statutory capital and surplus for insurance subsidiaries $37,236 $32,377
Deferred acquisition costs 5,193 4,831
Salvage and subrogation -- 1,388
Non-admitted assets 1,647 1,082
Ceding commissions (775) --
Statutory reserves 176 124
Deferred income taxes 1,220 535
Adjustment for market value of investments available for sale (138) 319
Insurance deductible 20 20
GAAP equity for insurance subsidiaries 44,579 40,676
Equity of Walshire and other non-insurance subsidiaries 2,255 5,338
Consolidated GAAP equity $46,834 $46,014
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, 1996, the Insurance
Subsidiaries are above required capital levels.
(12) Stock Plans
At December 31, 1996, the Company has three stock-based compensation
plans, which are described below. The
Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its 1987 Stock Option Plan, 1990 Stock Option Plan and
its Employee Stock Purchase Plan. Had compensation cost for the
Company's three stock-based compensation plans been determined
consistent with FASB Statement No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below:
(in thousands
except per share data)
Years Ended December 31,
1996 1995
Net Income As Reported $1,922 $5,483
Pro forma $1,670 $5,278
Primary earnings per share As Reported $ 31 $1.08
Pro forma $ 26 $1.04
Fully diluted earnings per share As Reported $ 31 $1.03
Pro forma $ 26 $ 99
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected
in the pro forma net income amounts
presented above because compensation cost is reflected over the options'
vesting period and compensation cost for
options granted prior to January 1, 1995 is not considered.
(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 146,742 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.r
Changes in outstanding Common Stock options granted under the 1987
Employee Stock Purchase Plan are summarized below.
1996 1995 1994
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 7,351 $12.06 6,986 $9.62 5,651 $7.97
Options exercised 7,351 12.06 6,986 9.62 5,651 7.97
Balance at end of year -- -- --
(b) 1987 Stock Option Planr
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 667,012 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
option's maximum term is ten years and vest at the end of one year. 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. The option's maximum term is
five years and vest at the end of one year. 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.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1996
and 1995: dividend yield of 1.46 percent;
expected volatility of 27.22 percent; risk-free interest rate of 6.12
percent; and expected lives of 4.40 years.
Changes in outstanding Common Stock options granted under the 1987 Stock
Option Plan are summarized below.
1996 1995 1994
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
Balance at beginning of year 384,226 $7.00 367,722 $6.51 365,453 $6.19
Options granted 76,174 12.83 34,163 11.84 40,016 9.31
460,400 401,885 405,469
Options exercised 114,232 6.66 17,659 6.18 37,747 6.33
Options terminated or cancelled 1,705 12.17 -- -- -- --
Balance at end of year 344,463 8.38 384,226 7.00 367,722 6.51
Options exercisable at year-end 317,246 7.98 357,330 6.63 330,677 6.19
Weighted-average fair value of options
granted during the year $3.62 $3.24
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $11.57 - $14.00
and 5.9 years, respectively.
(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 260,452 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. The
option has no vesting period. Payment of the option exercise price may
be made in cash, shares of Common Stock or a combination of cash and
Common Stock.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1996
and 1995: dividend yield of 1.46 percent;
expected volatility of 27.22 percent; risk free interest rate of 6.11
percent; and expected lives of 4.53 years.
Changes in outstanding Common Stock options granted under the 1990 Stock
Option Plan are summarized below.
1996 1995 1994
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
Balance at beginning of year 190,021 $8.87 179,067 $7.90 130,154 $7.68
Options granted 18,356 15.46 36,300 11.57 48,913 8.46
208,377 215,367 179,067
Options exercised 33,348 9.00 25,346 5.91 --
Balance at end of year 175,029 9.53 190,021 8.87 179,067 7.90
Options exercisable at year-end 175,029 9.53 190,021 8.87 179,067 7.90
Weighted-average fair value of options
granted during the year $4.52 $3.39
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $11.57 - $15.46
and 2.5 years, respectively.
(d) Restricted Stock Award
On November 20, 1996, the Board of Directors awarded an officer 3,000
shares of restricted common stock. Such
shares vest ratably over a five-year period and may not be sold or
transferred prior to vesting. In the event of
termination of employment, all shares awarded which have not vested are
subject to forfeiture.
Quarterly Common Stock Prices
and Cash Dividends Per Share
The Company's Common Stock trades on the NASDAQ National Market tier of
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.
Stock Price Cash
High Low Dividend
1995
1st Quarter 10-7/16 8-3/8 .0537
2nd Quarter 14-1/4 10-1/4 .0537
3rd Quarter 14-1/16 12-7/8 .0537
4th Quarter 15 12 .0537
1996
1st Quarter 16-1/2 15-1/4 .0591
2nd Quarter 16-3/8 12-3/4 .0591
3rd Quarter 13-7/8 11-13/16 .0591
4th Quarter 15 12-1/16 .0591
1997
1st Quarter (through February 28) 15-3/4 14-1/8 --
As of February 28, 1997, there were approximately 1,600 shareholders of
record and
beneficial shareholders of the Company's Common Stock. The last sale
price on February
28, 1997, as reported on the NASDAQ National Market System, was $14.25
per share.
The above amounts for stock prices and cash dividends have been
adjusted, where
necessary, to reflect the ten percent stock dividends granted to
shareholders of record on
December 11, 1996 and December 6, 1995, 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 the Insurance Subsidiaries. The Insurance
Subsidiaries 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.r
Walshire Assurance Company
Board of Directors 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
Gary J. Orndorff, CPA
Vice President/Treasurer and
Chief Financial Officer
Walshire Assurance Company
L. Edward Sausman
President, Sausman Insurance Agency, Inc.
Thompsontown, Pennsylvania
Kenneth R. Taylor
President, Walshire Assurance Company;
President, Taylor & Ochroch, Inc.,
King of Prussia, 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
Richard S. Kahlbaugh
Vice President-Secretary and
General Counsel
Subsidiaries Agents Budget Corporation Consumer
Discount Company, Inc.
Ashford Reinsurance Intermediaries
Corporation
Comp America Insurance Company
King American Ltd.
Lincoln General Insurance Company
Yorktowne 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 21, 1997, 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, weather conditions, natural disasters,
the severity and frequency of claims, 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
1996 vs. 1995
Revenues Revenues increased from $39.9 million to $52.7 million, or 32%,
in 1996, primarily as a result of an increase in net premiums earned and
net realized gains on investments. The increase in net premiums earned
was the direct result of increases in all primary lines of business
written by the Company. The increase in business written reflects the
increase in the number of policies issued by the Company. The increase
in net realized gains on investments was the result of the sale of
investments available for sale at a gain.
Expenses Expenses increased from $33.0 million to $50.8 million, or 54%,
in 1996. This increase was primarily the result of increased claims and
claim settlement expenses, amortization of deferred acquisition costs
and underwriting general and administrative expenses. 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
59% to 75%. 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 which historically has had a higher loss ratio than
property coverages, a higher loss ratio on property coverages, primarily
due to the severe weather conditions in early 1996, less premium dollars
per dollar of exposure, an increase in claims settlement expenses
relating to those coverages and a reserve strengthening of $3.7 million
resulting from adverse
loss development in the primary liability loss reserves. The increase in
the amortization of deferred acquisition costs was the result of
increases in net premiums earned. The increase in underwriting, general
and administrative expenses was a result of increases in direct premiums
written. The decrease in the effective tax rate from 20.3% in 1995 to 0%
in 1996 was primarily the result of a greater percentage of tax exempt
interest.
1995 vs. 1994
Revenues Revenues 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.
Expenses Expenses 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, offset, in part, by increased reinsurance
recoveries, 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.
Selected Ratios
In 1996, the Company's statutory loss ratio increased to 75% from 59% in
1995 and the Company's statutory combined ratio increased to 104% from
87% in 1995. The increase in the loss ratio and combined ratio in 1996
were the result of a higher loss ratio on both property and casualty
coverages. 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. The decrease in the combined ratio in 1995 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
premiums, ceding commissions 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,
1996, less than 3% 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, 1996, the Company, on a consolidated basis, had cash
and short-term investments
aggregating approximately $5.4 million and a line of credit of $10.0
million, $3.7 million of which was available. On a parent company only
basis, available cash and short-term investments aggregated
approximately $252,000.
The Company's insurance subsidiaries, Lincoln, Comp and Yorktowne, 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. 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. While the
Company believes that inflation in recent years has not significantly
impacted operating expenses and claims, there is no assurance that
inflation will remain at the levels experienced in recent years.
<PAGE>
EXHIBIT 21.1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Jurisdiction of Names Under Which
Name of Incorporation or Subsidiary Does
Subsidiary Organization Business
Lincoln General Lincoln General
Insurance Company Pennsylvania Insurance Company
King American Ltd. Pennsylvania King American Ltd.
Agents Budget Agents Budget
Corporation Consumer Corporation Consumer
Discount Company, Inc. Pennsylvania Discount Company, Inc.
Ashford Reinsurance Ashford Reinsurance
Intermediaries Corp. New York Intermediaries Corp.
Yorktowne Premium Yorktowne Premium
Finance Company Pennsylvania Finance Company
Comp America Comp America
Insurance Company Pennsylvania Insurance Company
Yorktowne Insurance Yorktowne Insurance
Company Pennsylvania Company
Yorktowne Insurance Yorktowne Insurance
Agency, Inc. Pennsylvania Agency, Inc.
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 report dated February 28, 1997, relating to the
consolidated balance sheets of Walshire Assurance Company and subsidiaries
as of December 31, 1996 and 1995, 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, 1996 and all related schedules,
which reports appear in or are incorporated by reference in the December
31, 1996 annual report on Form 10-K of Walshire Assurance Company.
Harrisburg, Pennsylvania
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 37,356
<DEBT-CARRYING-VALUE> 17,923
<DEBT-MARKET-VALUE> 18,158
<EQUITIES> 8,930
<MORTGAGE> 107
<REAL-ESTATE> 0
<TOTAL-INVEST> 71,018
<CASH> 637
<RECOVER-REINSURE> 2,400
<DEFERRED-ACQUISITION> 5,193
<TOTAL-ASSETS> 130,936
<POLICY-LOSSES> 36,551
<UNEARNED-PREMIUMS> 33,250
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 2,380
<NOTES-PAYABLE> 8,369
<COMMON> 47
0
1
<OTHER-SE> 46,786
<TOTAL-LIABILITY-AND-EQUITY> 130,936
47,002
<INVESTMENT-INCOME> 3,168
<INVESTMENT-GAINS> 1,778
<OTHER-INCOME> 731
<BENEFITS> 34,602
<UNDERWRITING-AMORTIZATION> 7,424
<UNDERWRITING-OTHER> 8,110
<INCOME-PRETAX> 1,902
<INCOME-TAX> (20)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,922
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
<RESERVE-OPEN> 20,153
<PROVISION-CURRENT> 32,276
<PROVISION-PRIOR> 2,326
<PAYMENTS-CURRENT> 18,522
<PAYMENTS-PRIOR> 6,887
<RESERVE-CLOSE> 22,342
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
