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
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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__________4,710,907_______________
(Title of class) (Number of Shares Outstanding
as of February 27, 1998)
Indicate by check mark whether the registrant (1) 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, (or for such shorter
period that the registrant was required to file such reports) and (2) 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 $33,918,050(1).
DOCUMENTS INCORPORATED BY REFERENCE
(Specific sections incorporated are identified
under applicable items herein)
Certain portions of the Company s Proxy Statement to be filed in
connection with its 1998 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 market value of a share of the Company's Common Stock times
the number of shares outstanding, reduced by the market value of
Common Stock held by officers, directors and shareholders owning in
excess of 10% of the Company's Common Stock on February 27, 1998.
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
Business Written ..................................... 2
Marketing ............................................ 3
Reinsurance .......................................... 3
Rates ................................................ 4
Claims ............................................... 4
Liabilities for Unpaid Claims and Claim Settlement
Expenses ........................................... 4
Investments .......................................... 7
Competition .......................................... 8
Regulation ........................................... 8
Employees ............................................ 10
Risk Factors ......................................... 10
Item 2. Properties ........................................... 13
Item 3. Legal Proceedings .................................... 13
Item 4. Submission of Matters to a Vote of Security Holders .. 13
Item 4.1 Executive Officers of the Registrant ................. 14
PART II
Item 5. Market for the Registrant s Common Equity and
Related Stockholder Matters .......................... 14
Item 6. Selected Financial Data .............................. 15
Item 7. Management s Discussion and Analysis of Financial
Condition and Results of Operations .................. 16
Item 8. Financial Statements and Supplementary Data .......... 19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .................. 19
(i)
INDEX (Continued)
PAGE
PART III
Item 10. Directors and Executive Officers of the Registrant ... 19
Item 11. Executive Compensation ............................... 19
Item 12. Security Ownership of Certain Beneficial Owners
and Management ....................................... 20
Item 13. Certain Relationships and Related Transactions ....... 20
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K .......................................... 20
(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 Georgia,
Missouri, Ohio, Tennessee, Kentucky, 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 homeowners, fire, farmowners,
personal automobile physical damage, surety and fidelity coverages. The
Company also provides adjusting services for claims covered by the Company
and certain third parties, and financing for insurance premiums payable by
customers of the Company and others. See Item 1: BUSINESS - Business
Written and Claims .
The following table sets forth the direct premiums written by the
Company for the years ended December 31, 1997, 1996 and 1995 by line of
business. (in thousands)
Years Ended December 31,__
__1997_ 1996_ 1995__
Auto Liability ............ $25,350 $26,140 $24,004
Auto Physical Damage ...... 16,777 22,782 18,977
Workers Compensation ..... 4,000 6,272 5,329
Inland Marine ............. 3,208 3,322 2,656
Homeowners ................ 2,787 707 -
Other ..................... 4,704 1,872 1,054
$56,826 $61,095 $52,020
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-one 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
Item 1: 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.
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 gross 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,___
1997_ 1996_ 1995_
Gross premiums written ............. $56,914 $61,199 $52,138
Net premiums earned ................ 41,248 47,002 36,191
Combined ratio (1) ................. 114% 104% 87%
_________________________
(1) Combined ratios have been calculated in accordance with accounting
principles prescribed or permitted by state regulatory agencies.
In June, 1997, Lincoln received its current rating A+ (Superior)
and Yorktowne received its current rating "B+" (Very Good) from A. M.
Best Company. Comp is currently not rated by A. M. Best. Best s ratings
are based upon factors relevant to policyholders and are not necessarily
directed toward the protection of investors.
2
Marketing
The Company s insurance services are marketed through approximately
410 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 1997, one of the Company s agents
accounted for 11% 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 .
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. The Company also maintains 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. In 1998, automobile physical damage and inland
marine were excluded from the latter treaty.
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
$5,000,000).
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 also maintains contingency excess of
loss reinsurance covering non-trucking automobile liability losses in
excess of $1,000,000 (to a maximum of $5,000,000).
3
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 $20,000,000 are reinsured. Any loss in
excess of $20,000,000 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.
For further information relating to the Company s reinsurance
arrangement, see Note 2 of the Notes to Consolidated Financial Statements.
Rates
The Company develops its rate structure from various sources. For
some of the Company s products, rates are derived from rating bureaus such
as the Insurance Services Office ( ISO ), the National Council on
Compensation Insurance ( NCCI ), the American Association of Insurance
Services ( AAIS ) and the Surety Association of America ( SAA ). When
developing rates utilizing material provided by these organizations, the
Company will use the rates promulgated by the bureau or it will apply its
own expense and profit factors to the specific organization-generated loss
costs. For other products, the Company has developed its own rate
structure independent of any rating bureau. All necessary rate changes
requiring approval are submitted to the appropriate regulatory authorities
for review and approval prior to use.
Claims
All claims operations, including review of initial reports of claims
and the determination of liability amounts, are conducted by the Company s
claims department. The Company employs a staff of 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 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.
4
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 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, 1997, 1996 and 1995 and the age of
such claims based upon the date the claim occurred.
(in thousands)
Years Ended December 31,___
1997 1996 1995
Unpaid claims and claim
settlement expenses at the
end of the period ............ $48,964 $36,551 $20,153
Age of unpaid claims and claim
settlement expenses at the
end of the period:
Zero to three months ......... $11,624 $ 8,469 $ 4,836
Three to six months .......... 6,945 5,366 2,579
Six months to one year ....... 11,001 7,323 3,639
Over one year ................ 19,394 15,393 9,099
The following table sets forth the unpaid claims and claim settlement
expenses as of December 31 of each of the past ten years, as well as the
cumulative deficiency (excess) for each year.
5
<PAGE>
<TABLE>
<CAPTION>
Disclosures concerning unpaid claims and claim settlement
expenses of property-casualty underwriters
(in thousands)
Year Ended December31
1997 1996 1995 1994 1993 1992
1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C>
<C> <C> <C> <C>
Net liability at end of
year for unpaid claims
and claim settlement
expenses. . . . . . . . . $ 26,667 $ 22,342 $ 13,149 $ 9,001 $ 6,443 $ 2,810
$ 1,548 $ 1,808 $ 1,389 $ 899
Net liability
reestimated as of:
One year later. . . . . . 25,010 16,388 9,327 6,282 2,849
1,187 1,125 2,339 241
Two years later . . . . . 18,892 10,649 6,284 2,907
1,251 1,135 2,150 989
Three years later . . . . 12,177 6,781 2,952
1,349 1,173 2,231 960
Four years later. . . . . 7,346 3,145
1,315 1,155 2,244 954
Five years later. . . . . 3,371
1,439 1,087 2,212 930
Six years later . . . . .
1,642 1,270 2,177 928
Seven years later . . . .
1,461 2,158 886
Eight years later . . . .
2,158 883
Nine years later . . . .
880
Cumulative deficiency
(excess). . . . . . . . . 2,668 5,743 3,176 903 561
94 ( 347) 769 ( 19)
Cumulative amount of
liability paid through:
One year later. . . . . . $12,045 $ 8,214 $ 4,982 $ 3,200 $ 1,850
$ 1,132 $ 1,099 $ 1,988 $ 206
Two years later . . . . . 12,930 7,804 4,303 2,402
1,234 1,163 2,161 989
Three years later . . . . 10,056 5,623 2,506
1,330 1,134 2,211 960
Four years later. . . . . 6,531 2,995
1,223 1,180 2,187 954
Five years later. . . . . 3,289
1,458 1,073 2,224 932
Six years later . . . . .
1,640 1,275 2,160 930
Seven years later . . . .
1,461 2,159 886
Eight years later . . . .
2,158 883
Nine years later . . . .
880
</TABLE>
Year Ended December 31,
1997 1996
Gross liability at end of year . . . . . . $48,964 $36,551
Reinsurance recoverable. . . . . . . . . . 22,297 14,209
Net liability at end of year . . . . . . . 26,667 22,342
Gross reestimated liability -- latest. . . 38,280
Reestimated recoverable -- latest. . . . . 13,270
Net reestimated liability -- latest. . . . 25,010
Gross cumulative deficiency. . . . . . . . 1,729
6
Investments
The following table sets forth the classification of the Company s
investment portfolio as of December 31, 1997, 1996, and 1995. As of
December 31, 1997, less than 2% 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,_______________
1997_____ 1996_____ 1995_____
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 ........... $ 7,062 10% $ 6,758 9% $ 4,141 7%
Obligations of
states and political
subdivisions ....... 8,527 11 11,165 16 11,076 19
Corporate securities. 1,639 2 - - - -
Total held to
maturity (1) ....... 17,228 23 17,923 25 15,217 26
Available for sale:
Fixed Maturities:
U.S. Treasury securi-
ties and obligations
of U.S. government
corporations and
agencies............. 30,366 41 26,437 38 4,594 8
Obligations of states
and political subdi-
visions .............. 448 1 7,190 10 20,981 36
Debt securities issued
by foreign govern-
ments ................ 35 - 35 - 35 -
Corporate securities .. 7,333 10 3,694 5 1,605 3
Total fixed
maturities (2) ...... 38,182 52 37,356 53 27,215 47
Equity securities (3) .. 8,205 11 8,930 12 8,720 15
Total available
for sale ............ 46,387 63 46,286 65 35,935 62
Mortgage loans .......... 97 - 107 - 116 -
Other investments ....... 2,559 4 1,944 3 1,751 3
Short term
investments (4) ........ 7,531 _10 4,758 _ 7 5,191 _ 9
Total investments ... $73,802 100% $71,018 100% $58,210 100%
7
_________________________
(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 $17,754 at December 31,
1997, $18,158 at December 31, 1996 and $15,712 at December 31,
1995.
(2) Fixed maturities available for sale are valued at fair value.
Total amortized cost of fixed maturities available for sale was
$37,722 at December 31, 1997, $37,512 at December 31, 1996 and
$27,007 at December 31, 1995.
(3) Equity securities are valued at fair value. Total costs of equity
securities were $8,268 at December 31, 1997, $8,711 at December 31,
1996 and $8,189 at December 31, 1995.
(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, 1997.
(in thousands
except percentages)
December 31, 1997_
Amount Percent
Due in one year or less ................... $ 1,974 4%
Due after one year through five years ..... 23,952 43
Due after five years through ten years .... 12,782 23
Due after ten years ....................... 16,702 30
Totals $55,410 100%
Mercantile Safe Deposit & Trust Company, Baltimore, Maryland, acts
as investment adviser to the Company in connection with its fixed income
investment portfolio.
Competition
The property and casualty insurance industry is highly competitive
on the basis of both price and service. In recent years, the property and
casualty insurance industry has been characterized by relatively high
levels of competition, low 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
8
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, 1997, the amount of such insolvency assessments paid by the
Company was not material.
The property and casualty insurance industry continues to receive a
considerable amount of publicity. New regulations and legislation are
being proposed to roll back premium rates, to limit damage awards, to
control plaintiffs counsel fees, to bring the industry under regulation
by the federal government and to control premiums, policy terminations and
other policy terms. It is not possible to predict whether, in what form
or in which jurisdictions these proposals might be adopted or the effect,
if any, on the Company.
Under Pennsylvania law, the Company, as the insurance holding
company for the Insurance Subsidiaries, is subject to various registration
and periodic reporting requirements. In addition, the Insurance
Subsidiaries are subject to various restrictions on the amount of
dividends they may pay to the Company. Under Pennsylvania law, the
Insurance Subsidiaries are permitted to pay, without the prior approval
of the Pennsylvania Insurance Commissioner, cash or property dividends to
the Company within any twelve month period in an amount up to the greater
of (i) 10% of the Insurance Subsidiary's surplus as shown in its most
recent annual statement on file with the Pennsylvania Insurance
Department, or (ii) the net income 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, 1997, each Insurance Subsidiary is above required
capital levels.
9
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.
Employees
As of December 31, 1997 the Company had approximately 85 employees.
None of the employees of the Company is covered by a collective bargaining
contract. The Company believes that its employee relations are excellent.
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
10
relatively high premium rates. See "Item 7: 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
with respect to reported and incurred but not reported 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, 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
"Item 1: BUSINESS - Liabilities for Unpaid Claims and Claim Settlement
Expenses".
Impact of Year 2000 Issue. An issue exists for all companies that
rely on computers as the year 2000 approaches. The "Year 2000" problem
is the result of the past practice in the computer industry of using two
digits rather than four to identify the applicable year. This practice
will result in incorrect results when computers perform arithmetic
operations, comparisons or data field sorting involving years later than
1999. The Company has completed plans to ensure year 2000 compliance and
started conversions of applications beginning in 1995. These
modifications and replacements are expected to be completed by mid year
1999. Costs in connection with any such modifications are not expected
to be material. However, if such modifications are not completed in a
timely manner, the Year 2000 problem may have a material adverse impact
on the operations of the Company. See "Item 7: MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Other".
Importance of Key Individual. The continued participation of Kenneth
R. Taylor, the Company's Chairman, 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 1998, 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
11
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 1997, 1996 and 1995, one of the
Company s agents accounted for 11%, 16% and 23%, 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, 1997, the Insurance
Subsidiaries had $2,682,000 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.
Regulation. Insurance companies are subject to the supervision,
laws and regulations of the states in which they transact business. These
laws and regulations cover many aspects of their business, including
licensure, the payment of dividends, the establishment of premium rates,
the settlement of claims, the transfer of control and the
requirement to participate in assigned risk pools. Certain changes in
such laws and regulations could have a material adverse effect on the
operations of insurance companies, including the Company. Specific
regulatory developments which could have a material adverse effect on the
operations of the insurance industry include, but are not limited to, the
potential repeal of the McCarran-Ferguson Act (which exempts insurance
companies from a variety of federal regulatory requirements) and possible
rate rollback legislation. In addition, the administration
of such regulations is vested in state agencies which have broad powers
and are concerned primarily with the protection of policyholders. Under
the Pennsylvania Insurance Company Law, subject to certain exceptions, no
person may make an offer to acquire control (as defined by statute) or
acquire control of the Company without the prior approval of the
Pennsylvania Insurance Department. Control is presumed to exist if any
person, directly or indirectly, owns, controls, holds with the power to
vote, or holds proxies representing 10% or more of the voting securities
of the Company. See Item 1: BUSINESS - Regulation .
Competition. The property and casualty insurance industry is highly
competitive on the basis of both price and service. There are numerous
companies competing for business in the geographic markets in which the
Company operates, and no single company dominates. See Item 1: BUSINESS
- Competition .
Reinsurance. The Company relies upon reinsurance agreements to limit
its maximum net loss from large single risks or risks in
12
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 the 6 1/2% Cumulative Convertible Preferred Stock
and Common Stock and may have the effect of discouraging offers to acquire
the Company. In addition, as a result of the super-majority voting
provisions relating to an amendment of the Company s Articles of
Incorporation and Bylaws and the percentage of the outstanding shares of
the Company s Common Stock that certain directors and/or officers of the
Company beneficially own, such directors and/or officers will be able to
defeat any amendment to such Articles or Bylaws not approved by them. No
dividends may be declared or paid with respect to the Common Stock
until all accrued dividends on the 6 1/2% Cumulative Convertible Preferred
Stock have been paid or set apart for payment.
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
13
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 37 Vice President - Secretary and
General Counsel of the Company
Robert W. Runk 47 President of Yorktowne
Glenn E. Sell, Jr. 54 Vice President-Underwriting of
Lincoln and Comp
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. Runk joined the Company in September, 1996 when the Company
acquired Yorktowne. Mr. Runk was elected President of Yorktowne in 1986.
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
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.
1996 High Low Dividend
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 . . . . . . . . . . . . . 15-3/4 10-3/8 .065
2nd Quarter . . . . . . . . . . . . . 11-3/8 9-1/2 .065
3rd Quarter . . . . . . . . . . . . . 14 9-3/4 .065
4th Quarter . . . . . . . . . . . . . 12-5/8 10-1/2 .065
1998
1st Quarter (through February 27) . . 11 9-1/2 -
As of February 27, 1998, there were approximately 1,200 shareholders
of record and beneficial shareholders of the Company's Common Stock. The
last sale price on February 27, 1998, as reported on the NASDAQ National
Market System, was $10.25 per share.
The above amounts for stock prices and cash dividends have been
adjusted, where necessary, to reflect the 10% stock dividend paid to
shareholders of record on December 11, 1996.
14
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 "Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Liquidity and Capital
Resources".
ITEM 6: SELECTED FINANCIAL DATA
(In thousands, except per share data and ratios)
Year Ended December 31,
1997 1996 1995 1994 1993_
Total Revenues $ 49,433 $ 52,679 $39,927 $32,607 $25,920
Net Income 1,900 1,922 5,483 3,788 2,619
Basic Net Income
Per Share (1) .32 .33 1.13 .78 .64
Diluted Net Income
Per share (1) .32 .33 1.04 .76 .61
Dividends Paid on
Common Stock 1,215 1,083 955 846 779
Dividends Per Common
Share (1) .26 .236 .215 .193 .189
Gross Premiums Written 56,914 61,199 52,138 40,199 31,583
Loss Ratio (2) 81% 75% 59% 59% 55%
Combined Ratio (2) 114% 104% 87% 89% 90%
December 31,
1997 1996 1995 1994 1993_
Total Investments $ 73,802 $ 71,018 $ 58,210 $50,540 $40,324
Total Assets 134,442 130,936 101,627 83,068 66,345
Long-Term Debt 558 1,076 1,481 1,921 16
Shareholders' Equity 47,491 46,834 46,014 40,014 32,041
Book Value Per Common
Share (1) 8.83 8.75 8.82 7.55 7.36
Common Shares
Outstanding (1) 4,710 4,651 4,470 4,402 4,359
(1) These amounts reflect the following events: (i) in January and May,
1993, the Company converted $4,709 of its 10% Convertible Subordinated
Debentures into 572 shares of common stock, (ii) in November, 1994,
the Company declared a 5% stock dividend, (iii) in October, 1995 the
Company converted 4 shares of its 6 1/2% Convertible Preferred Stock
into 39 shares of common stock, (iv) in December, 1996 the Company
declared a 10% stock dividend, and (v) in December, 1997 the Company
converted 5 shares of its 6 1/2% Convertible Preferred Stock into 23
shares of common stock. 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.
15
(2) Loss ratios and combined ratios have been calculated in accordance
with accounting principles prescribed or permitted by state regulatory
agencies.
ITEM 7: MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
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
1997 vs. 1996
Revenues. Revenues decreased from $52.7 million to $49.4 million, or
6%, in 1997, primarily as a result of a decrease in net premiums earned,
offset, in part, by increases in net investment income and net realized
gains on investments. Even though net premiums earned decreased, premiums
earned in 1997 increased $3.6 million, or 6%, over premiums earned in 1996
due to a greater amount of in force premiums in 1997. The decrease in net
premiums earned is a result of the Company ceding more premiums to
reinsurers in 1997 than it did in 1996. The primary reason for the
increase in ceded premiums in 1997 was a quota share reinsurance treaty
for commercial auto physical damage and liability premiums which was not
in place in 1996. This treaty was canceled on December 31, 1997, on a cut
off basis. Direct premiums written decreased $4.3 million, or 7%, in 1997
when compared to 1996. The most significant decreases in direct premiums
written were auto physical damage, where the company reduced the amount
of private passenger business written due to poor underwriting results,
and workers' compensation, which realized substantial rate reductions.
The increases in net investment income were a result of a larger average
investable portfolio as well as a shift from tax-free to taxable
investments. The increase in net realized gains on investments resulted
from the sale of investments available for sale and other investments.
Expenses. Expenses for 1997 decreased $3.7 million, or 7%, from expenses
for 1996. The decrease was primarily the result of decreases in net
claims and claim settlement expenses and the amortization of deferred
acquisition costs. The decrease in net claims and claim settlement
expenses was the result of a decrease in net premiums earned, offset, in
part, by an increase in the statutory loss ratio from 75% in
16
1996 to 81% in 1997. The increase in the loss ratio was due primarily to
increases in the loss ratio of the Company's auto liability and auto
physical damage products, offset, in part, by a reduction in the provision
for workers' compensation claims. Included in net claims and claim
settlement expenses in 1997 were $2.9 million of adjustments of estimates
relating to losses that occurred prior to 1997. The decrease in the
amortization of deferred acquisition costs was primarily the result of
increases in ceding commission income and decreases in net premiums
earned. The statutory combined ratio for 1997 was 114%, an increase from
104% for 1996. The increase in the effective tax rate from 0% in 1996 to
21% in 1997 was primarily the result of a reduction in tax-exempt
interest.
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. The 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 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 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% in 1995 to 0% in
1996 was primarily the result of a greater percentage of tax exempt
interest.
Selected Ratios
In 1997, the Company's statutory loss ratio increased to 81% from 75% in
1996 and the Company's statutory combined ratio increased to 114% from
104% in 1996. The increase in the loss ratio and combined ratio in 1997
were the result of a higher loss ratio on both property and casualty
coverages. 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.
17
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, 1997, less
than 2% 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, 1997, the Company, on a consolidated basis, had
cash and short-term investments aggregating approximately $7.8 million and
a line of credit of $10.0 million, $5.5 million of which was available.
On a parent company only basis, available cash and short-term investments
aggregate approximately $857,000.
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.
Other
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", was issued by the Financial Accounting Standards
Board (FASB) in 1997. As defined in SFAS 130, comprehensive income is
composed of net income, as well as other revenues, expenses, gains and
losses that are currently excluded from net income, but are accounted for
separately in the shareholders' equity section of the balance sheet. SFAS
130 requires that all items of comprehensive income be reported in
18
a financial statement. This statement is effective for fiscal years
beginning after December 31, 1997. The Company will adopt the statement
in 1998.
In 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," was issued and established standards for the way
public business enterprises report information about operating segments in
annual financial statements. The statement requires that those
enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. The statement is effective for fiscal years
beginning after December 15, 1997. The Company is in the process of
determining the effect of this statement upon its financial reporting
requirements.
In February, 1998, SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits", was issued. It revises
employer's disclosures about pensions and other postretirement benefit
plans. It does not change the measurement or recognition of these plans.
SFAS No. 132 is effective for fiscal years beginning after December 15,
1997. The Company intends to adopt SFAS No. 132 in 1998.
Many computer systems in use today were designed and developed using
two digits, rather than four, to specify the year. As a result, such
systems will recognize the year 2000 as "00". This could cause many
computer applications to fail completely or to create erroneous results
unless corrective measures are taken. The Company utilizes software and
related computer technologies essential to its operations that will be
affected by the Year 2000 issue. The Company has completed much of the
work necessary to make its computer systems Year 2000 compliant. The
additional expense associated with these actions cannot presently be
determined, but it is not anticipated to be material.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information required
by this item are presented following Item 14 in Part IV of this report.
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 1998 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 1998 proxy statement to
be filed pursuant to General Instruction G(3) to the Form 10-K.
19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Company s 1998 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 1998 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.
Independent Auditors' Report F-2
Consolidated Balance Sheets -
December 31, 1997 and 1996. F-3
Consolidated Statements of Income -
Years ended December 31, 1997, 1996 and 1995. F-4
Consolidated Statements of Shareholders Equity -
Years ended December 31, 1997, 1996 and 1995. F-5
Consolidated Statements of Cash Flows -
Years ended December 31, 1997, 1996 and 1995. F-6
Notes to Consolidated Financial Statements F-7
B. Schedules.
I. Summary of Investments Other Than
Investments in Related Parties -
December 31, 1997. S-1
II. Condensed Financial Information of Registrant -
December 31, 1997 and 1996 and Years
ended December 31, 1997, 1996 and 1995 S-2
III. Supplementary Insurance Information -
Years Ended December 31, 1997, 1996 and 1995 S-5
IV. Reinsurance -
Years Ended December 31, 1997, 1996 and 1995 S-6
V. Valuation and Qualifying Accounts -
Years Ended December 31, 1997, 1996 and 1995. S-7
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.
20
C. Exhibits filed pursuant to Item 601 of Regulation S-K. (Manage-
ment 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.
(*) (1) 10.1 The Company s 1987 Stock Option Plan.
(*) (1) 10.2 The Company s Employee Stock Purchase Plan.
(*) (7) 10.3 The Company's 1997 Equity Incentive 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) 21.1 Subsidiaries of the Company.
(7) 23.1 Consent of KPMG Peat Marwick LLP
_________________________
(1) Incorporated by reference from the Company s Registration
Statement on Form S-1, and all amendments thereto,
(Registration No. 33-15549), which was declared effective
on September 3, 1987.
(2) Incorporated by reference from the Company s Form 10-K
(Commission File No. 0-16267), dated March 28, 1990.
(3) Incorporated by reference from the Company s Form 10-K
(Commission File No. 0-16267), dated March 28, 1991.
(4) Incorporated by reference from the Company s Form 10-K
(Commission File No. 0-16267), dated March 28, 1994.
21
(5) Incorporated by reference from the Company s Form 10-K
(Commission File No. 0-16267), dated March 27, 1995.
(6) Incorporated by reference from the Company's Form 10-K
(Commission File No. 0-16267), dated March 21, 1997.
(7) Filed herewith.
II. Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December
31, 1997.
22
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 18, 1998 BY: /s/ KENNETH R. TAYLOR_ _____
KENNETH R. TAYLOR,
Chairman, 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 18, 1998.
SIGNATURES TITLE
/s/ KENNETH R. TAYLOR_______
KENNETH R. TAYLOR Chairman, President & Chief
Executive Officer and Director
(Principal Executive Officer)
/s/ GARY J. ORNDORFF________
GARY J. ORNDORFF Vice President/Treasurer, Chief
Financial Officer 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
23
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Financial Statemen ts
Independent Auditors' Report F-2
Consolidated Balance Sheets
December 31, 1997 and 1996 F-3
Consolidated Statements of Income
Years ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedules
Summary of Investments Other Than Investments in Related Parties
December 31, 1997 S-1
Condensed Financial Information of Registrant
December 31, 1997 and 1996 and Years ended
December 31, 1997, 1996 and 1995 S-2
Supplementary Insurance Information
Years Ended December 31, 1997, 1996 and 1995 S-5
Reinsurance - Years Ended December 31, 1997, 1996 and 1995 S-6
Valuation and Qualifying Accounts
Years Ended December 31, 1997, 1996 and 1995 S-7
F-1
Independent Auditors Report
The Board of Directors and Shareholders
Walshire Assurance Company:
We have audited the consolidated financial statements of Walshire
Assurance Company and subsidiaries as listed in the accompanying index.
In connection with our audits of the consolidated financial statements,
we also have audited the financial statement schedules as listed in the
accompanying index. These consolidated financial statements and the
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements and the financial statement schedules
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 as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles. Also in our
opinion, the related 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
March 2, 1998
F-2
Walshire Assurance Company and Subsidiaries
Consolidated Balance Sheets
December 31 (in thousands, except
per share data)
Assets 1997 1996
Investments:
Held to Maturity:
Fixed maturities (fair value $17,754 and
$18,158 . . . . . . . . . . . . . . . . . . $ 17,228 $ 17,923
Available for sale:
Fixed maturities (cost $37,722 and $37,512) . 38,182 37,356
Equity securities (cost $8,268 and $8,711). . 8,205 8,930
Short-term investments. . . . . . . . . . . . 7,531 4,758
Other investments . . . . . . . . . . . . . . 2,656 2,051
Total investments . . . . . . . . . . . . . . 73,802 71,018
Cash. . . . . . . . . . . . . . . . . . . . . . . 254 637
Accrued investment income receivable. . . . . . . 800 847
Amounts receivable from reinsurers. . . . . . . . 3,698 1,837
Amounts receivable from reinsured company . . . . 542 563
Agents' balances and direct bill receivable (net
of allowance for doubtful accounts of $120) . . 7,411 8,501
Installment premiums receivable . . . . . . . . . 7,681 8,514
Agents' balances and installment premiums
receivable from related parties . . . . . . . . 1,897 3,073
Premium finance receivables (net of unearned
finance charges and allowance for credit
losses of $84 and $135) . . . . . . . . . . . . 4,283 4,836
Reinsurance receivable. . . . . . . . . . . . . . 24,370 19,699
Deferred acquisition costs. . . . . . . . . . . . 4,778 5,193
Property and equipment (net of accumulated
depreciation of $2,194 and $1,725). . . . . . . 3,462 4,526
Other assets. . . . . . . . . . . . . . . . . . . 1,464 1,692
Total assets. . . . . . . . . . . . . . . . . $134,442 $130,936
Liabilities and Shareholders' Equity
Liabilities:
Unpaid claims and claim settlement expenses . . $ 48,964 $ 36,551
Unearned premiums . . . . . . . . . . . . . . . 27,384 33,250
Short-term notes payable. . . . . . . . . . . . 5,015 7,293
Long-term notes payable . . . . . . . . . . . . 558 1,076
Deposits by insureds. . . . . . . . . . . . . . 2,445 2,380
Commissions payable to agents . . . . . . . . . 1,442 1,681
Commissions payable to related parties. . . . . 163 401
Other liabilities . . . . . . . . . . . . . . . 980 1,470
Total liabilities . . . . . . . . . . . . . . 86,951 84,102
Shareholders' equity:
Preferred stock, par value $.01 per share;
2,000 shares authorized; 123 and 128 shares
issued and outstanding. . . . . . . . . . . . 1 1
Common stock, par value $.01 per share; 10,000
shares authorized; 4,710 and 4,651 shares
issued and outstanding. . . . . . . . . . . . 47 47
Additional paid-in capital. . . . . . . . . . . 38,812 38,648
Unrealized gains on investments available for
sale (net of deferred taxes of $135 and $21). 262 42
Retained earnings . . . . . . . . . . . . . . . 8,369 8,096
Shareholders' equity. . . . . . . . . . . . . 47,491 46,834
Total liabilities and shareholders' equity. . $134,442 $130,936
*See accompanying notes to consolidated financial statements.
F-3
Consolidated Statements of Income
(in thousands, except per share data)
Years ended December 31, 1997 1996 1995
Revenues:
Premiums earned . . . . . . . . . . $ 62,589 $ 59,020 $ 45,648
Premiums ceded. . . . . . . . . . . (21,341) (12,018) ( 9,457)
Net premiums earned . . . . . . . . 41,248 47,002 36,191
Net investment income . . . . . . . 4,269 3,168 2,721
Net realized gains on investments . 3,282 1,778 316
Other . . . . . . . . . . . . . . . 634 731 699
Total revenues. . . . . . . . . . 49,433 52,679 39,927
Expenses:
Claims and claim settlement
expenses. . . . . . . . . . . . . 50,907 41,030 23,045
Reinsurance recoveries. . . . . . . (18,033) ( 6,428) ( 2,668)
Net claims and claim settlement
expenses. . . . . . . . . . . . . 32,874 34,602 20,377
Amortization of deferred
acquisition costs . . . . . . . . 5,438 7,424 5,447
Underwriting, general and
administrative expenses . . . . . 7,849 8,110 6,930
Dividends to policyholders. . . . . 213 153 -
Interest. . . . . . . . . . . . . . 667 488 290
Total expenses. . . . . . . . . . 47,041 50,777 33,044
Income before income taxes. . . . . . 2,392 1,902 6,883
Provision for income taxes (benefit). 492 ( 20) 1,400
Net income. . . . . . . . . . . . . . 1,900 1,922 5,483
Less dividends on convertible
preferred stock . . . . . . . . . . 412 424 458
Net income available for common
stock . . . . . . . . . . . . . . . $ 1,488 $ 1,498 $ 5,025
Net income per common share and
common equivalent share:
Basic:
Net income. . . . . . . . . . . . $ .32 $ .33 $ 1.13
Weighted average shares
outstanding . . . . . . . . . . 4,673 4,563 4,437
Diluted:
Net income. . . . . . . . . . . . $ .32 $ .33 $ 1.04
Weighted average shares
outstanding . . . . . . . . . . 4,673 4,563 5,289
*See accompanying notes to consolidated financial statements.
F-4
Consolidated Statements of Shareholders' Equity
(in thousands, except per share data)
Years ended December 31, 1997 1996 1995
Preferred Stock
Shares outstanding
Balance at beginning of year . . . . 128 138 142
Shares converted to common stock . . ( 5) ( 10) ( 4)
Balance at end of year . . . . . . . 123 128 138
Preferred Stock (par value $.01)
Balance at beginning and end of year $ 1 $ 1 $ 1
Common Stock
Shares outstanding
Balance at beginning of year . . . . 4,651 4,064 3,638
Dividend reinvestment. . . . . . . . 2 2 -
Conversion of preferred stock. . . . 23 39 15
Stock dividend . . . . . . . . . . . - 423 369
Restricted stock award . . . . . . . 3 - -
Exercise of stock options. . . . . . 53 134 36
Stock tendered to exercise options . ( 28) ( 18) -
Employee stock purchase plan . . . . 6 7 6
Balance at end of year . . . . . . . 4,710 4,651 4,064
Common Stock (par value $.01)
Balance at beginning of year . . . . $ 47 $ 41 $ 36
Conversion of preferred stock. . . . - 1 -
Stock dividend . . . . . . . . . . . - 4 4
Exercise of stock options. . . . . . - 1 1
Balance at end of year . . . . . . . 47 47 41
Additional Paid-In Capital
Balance at beginning of year . . . . 38,648 31,918 25,751
Dividend reinvestment. . . . . . . . 22 23 4
Stock dividend . . . . . . . . . . . - 5,811 5,838
Exercise of stock options. . . . . . 373 1,059 258
Stock tendered to exercise options . ( 295) ( 250) -
Employee stock purchase plan . . . . 64 87 67
Balance at end of year . . . . . . . 38,812 38,648 31,918
Unrealized gains (losses) on
investments available for sale
Balance at beginning of year . . . . 42 558 ( 1,042)
Unrealized gains (losses) on
investments available for sale . . 220 ( 516) 1,600
Balance at end of year . . . . . . . 262 42 558
Retained Earnings
Balance at beginning of year . . . . 8,096 13,496 15,268
Net income . . . . . . . . . . . . . 1,900 1,922 5,483
Cash dividends - common stock
(per share $.26; $.236; $.215) . . ( 1,215) ( 1,083) ( 955)
- preferred stock
(per share $3.25; $3.25; $3.25). . ( 412) ( 424) ( 458)
Stock dividends on common stock. . . - ( 5,815) ( 5,842)
Balance at end of year . . . . . . . 8,369 8,096 13,496
Shareholders' Equity . . . . . . . . $ 47,491 $ 46,834 $ 46,014
*See accompanying notes to consolidated financial statements.
F-5
Consolidated Statements of Cash Flows (in thousands)
Years ended December 31, 1997 1996 1995
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . $ 1,900 $ 1,922 $ 5,483
Adjustments to reconcile net income to
net cash provided by operating
activities
Net realized gains on investments. . ( 3,282) ( 1,778) ( 316)
Decrease (increase) in assets:
Accrued investment income
receivable . . . . . . . . . . . 47 17 31
Amounts receivable from
reinsurers . . . . . . . . . . . ( 1,861) 1,478 ( 671)
Amounts receivable from
reinsured company. . . . . . . . 21 32 730
Agents' balances, direct bill
and installment premiums
receivable . . . . . . . . . . . 1,923 ( 5,510) ( 4,206)
Agents' balances and installment
premiums receivable from
related parties. . . . . . . . . 1,176 582 ( 1,436)
Premium finance receivables. . . . 553 1,698 ( 1,856)
Reinsurance receivable . . . . . . ( 4,671) (11,084) ( 2,260)
Deferred acquisition costs . . . . 415 ( 362) ( 1,040)
Other, net . . . . . . . . . . . . 902 ( 972) 809
(Decrease) increase in liabilities:
Unpaid claims and claim settlement
expenses . . . . . . . . . . . . 12,413 16,398 5,861
Unearned premiums. . . . . . . . . ( 5,866) 5,695 6,490
Deposits by insureds . . . . . . . 65 892 741
Other liabilities. . . . . . . . . ( 491) 304 347
Other, net . . . . . . . . . . . . ( 477) 560 737
Net cash provided by operating
activities . . . . . . . . . . . . . . 2,767 9,872 9,444
Cash flows from investing activities:
Purchase of investments:
Held to maturity . . . . . . . . . . . ( 2,338) ( 4,463) ( 3,805)
Available for sale . . . . . . . . . . (35,562) (44,818) (10,539)
Sale of investments:
Available for sale . . . . . . . . . . 33,657 32,711 9,234
Maturity of investments. . . . . . . . . 7,663 4,221 1,910
Net (purchase) sale of short term and
other investments. . . . . . . . . . . ( 2,703) 254 ( 2,212)
Purchase of property and equipment . . . ( 254) ( 1,853) ( 1,210)
Sale of property and equipment . . . . . 644 11 135
Other, net . . . . . . . . . . . . . . . 3 548 ( 335)
Net cash provided by (used in)
investing activities. . . . . . . . . . 1,110 (13,389) ( 6,822)
Cash flows from financing activities:
Cash dividends paid. . . . . . . . . . . ( 1,628) ( 1,507) ( 1,412)
Issuance of common stock . . . . . . . . 164 924 330
Proceeds from notes payable. . . . . . . - 5,118 1,770
Payment of notes payable . . . . . . . . ( 2,796) ( 480) ( 3,395)
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . ( 4,260) 4,055 ( 2,707)
Net increase (decrease) in cash. . . . . ( 383) 538 ( 85)
Cash at beginning of the year. . . . . . 637 99 184
Cash at the end of the year. . . . . . . $ 254 $ 637 $ 99
*See accompanying notes to consolidated financial statements.
F-6
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies
Organization and Business
The Company is organized as a regional insurance holding company and
operates in 26 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 have been included in the consolidated
financial statements. The Company's major lines of business in 1997 and
their percentages of total net earned premiums were Automobile Liability
(38%), Automobile Physical Damage (37%), Workers' Compensation (9%) and
Inland Marine (7%). 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.
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 state
F-7
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.
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.
The Company's investments are classified 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.
Available-for-Sale Securities - Debt securities not classified as held-
to-maturity and equity 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; 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.
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.
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.
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.
F-8
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.
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.
Premium Revenue
Premium revenue is recognized as earned on the semi-monthly pro-rata basis
over the terms of the policies.
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.
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
F-9
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.
Net Income Per Share
In 1997, SFAS No. 128 "Earnings Per Share" was issued and replaced the
calculation of primary and fully diluted net income per share with basic
and diluted net income per share. Basic net income per share is computed
by dividing net income by the weighted average number of common shares
outstanding during the year. Diluted earnings per share includes the
additional shares that would have been outstanding had the 6 1/2%
Convertible Preferred Stock been converted to common, if dilutive, as well
as the diluted effect of the stock option and stock purchase plans
described in Note 12. Earnings per share data for 1996 and 1995 have been
restated to conform to SFAS No. 128. Share and per share amounts have
been retroactively adjusted to reflect 10% stock dividends in 1996 and
1995.
Stock Option Plan
The Company accounts 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. 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 had been applied are shown in Note 12.
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, 1997 and
1996, 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
F-10
included in developing the liability for claims and claim settlement
expenses were $22,297,000 and $14,209,000 at December 31, 1997 and 1996,
respectively.
At December 31, 1997, reinsurance receivable with a carrying value
of $8,974,000 was associated with a single reinsurer.
The effect of reinsurance on premiums written is as follows:
(in thousands)
Years Ended December 31,
1997 1996 1995
Direct . . . . . . . . . . . . . . . . . $ 56,826 $ 61,095 $ 52,020
Assumed. . . . . . . . . . . . . . . . . 88 104 118
Ceded. . . . . . . . . . . . . . . . . . (19,301) (12,229) ( 9,569)
Net premiums written . . . . . . . . . . $ 37,613 $ 48,970 $ 42,569
The effect of reinsurance on premiums earned is as follows:
(in thousands)
Years Ended December 31,
1997 1996 1995
Direct . . . . . . . . . . . . . . . . . $ 62,495 $ 58,912 $ 45,527
Assumed. . . . . . . . . . . . . . . . . 94 108 121
Ceded. . . . . . . . . . . . . . . . . . (21,341) (12,018) ( 9,457)
Net premiums earned. . . . . . . . . . . $ 41,248 $ 47,002 $ 36,191
(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,
1997 1996 1995
Premiums on policies written . . . . . . $3,630 $9,520 $11,415
Commissions. . . . . . . . . . . . . . . 1,418 1,852 2,050
(in thousands)
December 31,
1997 1996
Agents' balances receivable. . . . . . . . . . . . . $ 874 $1,233
Installment premiums receivable. . . . . . . . . . . 1,023 1,840
Commissions payable. . . . . . . . . . . . . . . . . 163 401
Walshire pays legal fees to a corporation with which an officer of
Walshire is affiliated. In 1997, these fees amounted to $666,000. This
corporation paid Walshire $114,000 in management fees and rent in 1997.
No fees were paid in 1996 and 1995.
(4) Major Agencies
During 1997, 1996 and 1995, one of the Company's agents with which a
director of Walshire is affiliated, accounted for 11%, 16% and 23%,
respectively, of the total premiums written. Agents' balances and
installment premiums receivable from this agency were $1,718,000 and
$2,653,000 as December 31, 1997 and 1996, respectively. See Note 3.
Another agent accounted for 5%, 5% and 6% of the total premiums written
during 1997, 1996 and 1995, respectively. Agents' balances and
installment premiums receivable from this agent was $1,590,000 and
$1,020,000 as of December 31, 1997 and 1996, respectively.
F-11
(5) Investments
Net investment income, comprised primarily of interest and dividends, is
derived from the following sources:
(in thousands)
Years Ended December 31,
1997 1996 1995
Fixed maturities . . . . . . . . . . . . $ 3,515 $ 2,628 $ 2,311
Equity securities. . . . . . . . . . . . 377 303 300
Short-term investments . . . . . . . . . 432 373 253
Other. . . . . . . . . . . . . . . . . . 106 78 13
4,430 3,382 2,877
Investment expenses. . . . . . . . . . . ( 161) ( 214) ( 156)
Net investment income. . . . . . . . . . $ 4,269 $ 3,168 $ 2,721
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,
1997 1996 1995
Increase (decrease) during period in
difference between fair value and cost
of investments available for sale:
Fixed maturities . . . . . . . . . . $ 616 $( 364) $ 1,132
Equity securities. . . . . . . . . . ( 282) ( 312) 1,183
334 ( 676) 2,315
Deferred income taxes. . . . . . . . . . ( 114) 160 ( 715)
Increase (decrease) in net unrealized
gains of investments available for
sale . . . . . . . . . . . . . . . . . $ 220 $( 516) $ 1,600
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,
1997 1996 1995
Fixed maturities:
Gross gains. . . . . . . . . . . . . . . $ 504 $ 224 $ 553
Gross losses . . . . . . . . . . . . . . ( 44) ( 380) ( 345)
Equity securities:
Gross gains. . . . . . . . . . . . . . . 609 1,130 1,260
Gross losses . . . . . . . . . . . . . . ( 672) ( 911) ( 729)
397 63 739
Deferred income taxes. . . . . . . . . . . 135 21 181
Net unrealized investment gains. . . . . . $ 262 $ 42 $ 558
The amortized cost and fair values of investments in fixed maturities
as of December 31, 1997 are as follows:
F-12
(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 . . . $ 7,062 $ 141 $ 6 $ 7,197
Obligations of states and
political subdivisions. . . . . 8,527 389 8 8,908
Corporate securities. . . . . . . 1,639 10 - 1,649
Total held to maturity. . . . . 17,228 540 14 17,754
Available for sale
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies . . . 30,025 355 14 30,366
Obligations of states and
political subdivisions. . . . . 438 10 - 488
Debt securities issued by foreign
governments . . . . . . . . . . 35 - - 35
Corporate securities. . . . . . . 7,224 138 29 7,333
Total available for sale. . . . 37,722 503 43 38,182
Total fixed maturities. . . . . $54,950 $1,043 $57 $55,936
The amortized cost and fair value of fixed maturities at December 31,
1997, 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 . . . . . . . . . . . . $ 1,228 $ 1,229
Due after one year through five years . . . . . 8,228 8,392
Due after five years through ten years. . . . . 5,765 5,998
Due after ten years . . . . . . . . . . . . . . 2,007 2,135
Total held to maturity. . . . . . . . . . . . 17,228 17,754
Available for Sale
Due in one year or less . . . . . . . . . . . . 744 746
Due after one year through five years . . . . . 15,597 15,724
Due after five years through ten years. . . . . 6,967 7,017
Due after ten years . . . . . . . . . . . . . . 14,414 14,695
Total available for sale. . . . . . . . . . . 37,722 38,182
Total fixed maturities. . . . . . . . . . . . $54,950 $55,936
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 42 11,389
Total held to maturity. . . . . 17,923 329 94 18,158
F-13
Available for sale
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies . . . 26,532 59 154 26,437
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
Proceeds from sales and maturities 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,
1997 1996 1995
Proceeds from sales and maturities . . . . $41,318 $37,550 $11,324
Gross gains
Fixed maturities . . . . . . . . . . . $ 404 $ 308 $ 114
Equity securities. . . . . . . . . . . 4,134 1,807 895
Total gross gains. . . . . . . . . . 4,538 2,115 1,009
Gross losses
Fixed maturities . . . . . . . . . . . 109 79 25
Equity securities. . . . . . . . . . . 1,147 258 668
Total gross losses . . . . . . . . . 1,256 337 693
Net realized gains on investments. . $ 3,282 $ 1,778 $ 316
As of December 31, 1997, fixed maturities with an amortized cost totaling
$5,076,000 were held by regulatory agencies, as required by law.
(6) Deferred Acquisition Costs
Changes in deferred acquisition costs are as follows:
(in thousands)
Years Ended December 31,
1997 1996 1995
Balance, January 1 . . . . . . . . . . . . $ 5,193 $ 4,831 $ 3,791
Acquisition costs deferred . . . . . . . . 5,023 7,786 6,487
Amortization charged to earnings . . . . . (5,438) (7,424) (5,447)
Balance, December 31 . . . . . . . . . . . $ 4,778 $ 5,193 $ 4,831
(7) Federal Income Taxes
Walshire and its wholly-owned subsidiaries file a consolidated tax return
and are taxed essentially the same as other corporations. The provision
for income taxes is comprised of the following components:
(in thousands)
Years Ended December 31,
1997 1996 1995
Current. . . . . . . . . . . . . . . . . . $ 694 $ 382 $ 1,739
Deferred . . . . . . . . . . . . . . . . . (202) (402) ( 339)
$ 492 $( 20) $ 1,400
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:
F-14
(in thousands)
Years Ended December 31,
1997 1996 1995
Computed at statutory federal rate (34%). . $ 813 $ 647 $ 2,340
Tax exempt interest and dividend received
deduction . . . . . . . . . . . . . . . . (360) (711) ( 679)
Reduction of prior year tax provisions. . . - - ( 277)
Miscellaneous items . . . . . . . . . . . . 39 44 16
$ 492 $( 20) $ 1,400
The tax effects of temporary differences that give rise to deferred
tax assets and deferred tax liabilities are presented below:
(in thousands)
December 31,
1997 1996
Deferred tax assets:
Unearned premiums . . . . . . . . . . . . . . $1,824 $1,993
Unpaid claims and claim settlement expenses . 1,303 1,016
Allowance for doubtful accounts . . . . . . . 48 51
3,175 3,060
Deferred tax liabilities:
Deferred acquisition costs. . . . . . . . . . 1,625 1,766
Unrealized gain on investments available for
sale. . . . . . . . . . . . . . . . . . . . 135 21
Other . . . . . . . . . . . . . . . . . . . . 96 42
1,856 1,829
Net deferred tax asset. . . . . . . . . . . . . . $1,319 $1,231
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 1997, 1996 and 1995, the Company made cash payments of $200,000,
$1,630,000 and $1,748,000 respectively, for income taxes.
(8) Unpaid Claims and Claim Settlement Expenses
Activity in the unpaid claims and claim settlement expenses is summarized
as follows:
(in thousands)
1997 1996 1995
Balances, January 1 . . . . . . . . . . . . $36,551 $20,153 $14,292
Less reinsurance recoverables . . . . . . 14,209 7,004 5,291
Net balance, January 1. . . . . . . . . . . 22,342 13,149 9,001
Incurred related to:
Current year. . . . . . . . . . . . . . . 29,967 32,276 20,062
Prior years . . . . . . . . . . . . . . . 2,907 2,326 315
Total incurred. . . . . . . . . . . . . . . 32,874 34,602 20,377
Paid related to:
Current year. . . . . . . . . . . . . . . 16,340 18,522 11,259
Prior years . . . . . . . . . . . . . . . 12,209 6,887 4,970
Total paid. . . . . . . . . . . . . . . . . 28,549 25,409 16,229
Net balance, December 31. . . . . . . . . . 26,667 22,342 13,149
Plus reinsurance recoverables . . . . . . 22,297 14,209 7,004
Balance, December 31. . . . . . . . . . . . $48,964 $36,551 $20,153
F-15
The unfavorable development of $2,907,000 and $2,326,000 in 1997 and
1996 respectively, 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,
1997 1996
Note payable (prime interest rate), monthly
payment of $40 plus interest, due December, 1999. . $ 1,001 $ 1,481
Note payable (no interest) monthly payments of $3,
due December, 1999. . . . . . . . . . . . . . . . . 75 113
Line of credit (prime interest rate), due on demand . 4,497 6,325
Other . . . . . . . . . . . . . . . . . . . . . . . . - 450
5,573 8,369
Current portion . . . . . . . . . . . . . . . . . . . (5,015) (7,293)
Long-term notes payable . . . . . . . . . . . . . . . $ 558 $ 1,076
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 1997, 1996 and 1995, the Company made cash payments of $715,000,
$458,000 and $298,000 respectively, for interest expense.
Walshire and its subsidiaries have a combined line of credit of
$10,000,000 at December 31, 1997, $5,503,000 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 September, 1998.
(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 $137,000, $128,000 and
$109,000 in 1997, 1996 and 1995, 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, 1997, $2,621,000
and $61,000 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.
F-16
Dividends paid by Lincoln to Walshire for the years ended December
31, 1997, 1996 and 1995 were $2,900,000, $1,000,000 and $700,000,
respectively. The dividend paid by Comp and ABCO to Walshire for the year
ended December 31, 1997 was $300,000 and $50,000, respectively. No
dividends were paid by Comp and ABCO in 1996 and 1995. In addition,
Walshire declared 10% stock dividends in 1996 and 1995.
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 1997, 1996 and
1995, 5,100, 9,500 and 4,000 shares were converted into 23,139, 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,
1997 1996 1995
Statutory net income for insurance
subsidiaries . . . . . . . . . . . . . . . $ 1,378 $ 1,190 $ 4,223
Deferred acquisition costs . . . . . . . . . ( 415) 362 1,040
Salvage and subrogation. . . . . . . . . . . - - 500
Deferred income taxes. . . . . . . . . . . . 216 407 310
Write down of securities . . . . . . . . . . ( 481) ( 49) ( 29)
Taxes. . . . . . . . . . . . . . . . . . . . 25 ( 53) -
Ceding commissions . . . . . . . . . . . . . 775 ( 74) -
Depreciation . . . . . . . . . . . . . . . . 140 53 -
Sale of fixed assets . . . . . . . . . . . . ( 226) - -__
GAAP net income for insurance subsidiaries . 1,412 1,836 6,044
Net income (loss) of Walshire and other
non-insurance subsidiaries 488 86 ( 561)
Consolidated GAAP net income . . . . . . . . $ 1,900 $ 1,922 $ 5,483
A reconciliation of statutory capital and surplus for the insurance
subsidiaries to consolidated GAAP equity is as follows:
(in thousands)
December 31,
1997 1996
Statutory capital and surplus for insurance
subsidiaries . . . . . . . . . . . . . . . . $33,137 $ 37,236
Deferred acquisition costs . . . . . . . . . . 4,778 5,193
Non-admitted assets. . . . . . . . . . . . . . 1,447 1,647
Ceding commissions . . . . . . . . . . . . . . - ( 775)
Statutory reserves . . . . . . . . . . . . . . 2,088 176
Deferred income taxes. . . . . . . . . . . . . 1,258 1,220
Adjustment for market value of investments
available for sale . . . . . . . . . . . . . 408 ( 138)
Insurance deductible . . . . . . . . . . . . . 20 20
GAAP equity for insurance subsidiaries . . . . 43,136 44,579
Equity of Walshire and other non-insurance
subsidiaries . . . . . . . . . . . . . . . . 4,355 2,255
Consolidated GAAP equity . . . . . . . . . . . $47,491 $ 46,834
F-17
The National Association of Insurance Companies (NAIC) requires
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, 1997, the Insurance
Subsidiaries are above required capital levels.
(12) Stock Plans
As of December 31, 1997, the Company has four stock-based
compensation plans, which are described below. No compensation cost has
been recognized for such plans. If the fair-value based method of
accounting were applied to grants made in 1995 and future years, the
Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below:
(in thousands)
December 31,
1997 1996
Net income . . . . . . . . . . . . As Reported $1,900 $1,922
Pro forma $1,712 $1,670
Basic and diluted earnings per
share. . . . . . . . . . . . . . As Reported $ .32 $ .33
Pro forma $ .27 $ .27
Pro forma net income reflects only grants in 1997, 1996 and 1995.
Therefore, the full impact of calculating compensation cost for all stock
options is not reflected in the pro forma net income amounts presented
above because compensation cost is reflected over the vesting period and
compensation cost for grants prior to January 1, 1995 is not considered.
(a) Employee Stock Purchase Plan
The 1987 Employee Stock Purchase Plan ("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 the Common Stock and no option
may be granted which, at the date the option is granted, would permit such
person's rights to purchase stock under the Stock Purchase Plan and all
other employee stock purchase plans of Walshire to accrue at a rate
exceeding $25,000 of the fair market value of such stock (determined at
the time such option is granted) for each year such option is outstanding.
The option price per share must not be less than the lesser of: (a) 85% of
the fair market value of the stock on the date of grant, or (b) 85% of the
fair market value on the date of exercise.
Changes in outstanding Common Stock options granted under the 1987
Employee Stock Purchase Plan are summarized below.
F-18
1997 1996 1995
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
Balance at beginning
of year . . . . . . . - - -
Options granted . . . . 6,474 $ 9.89 7,351 $12.06 6,986 $9.62
Options exercised . . . 6,474 9.89 7,351 12.06 6,986 9.62
Balance at end of year. - - - -
(b) 1987 Stock Option 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
Stock Option Plan ("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 1997 and 1996; dividend yield of
2.51 percent; expected volatility of 30.17 percent; risk-free interest
rate of 5.77 percent; and expected lives of 7.61 years.
Changes in outstanding Common Stock options granted under the 1987
Stock Option Plan are summarized below.
1997 1996 1995
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
Balance at beginning
of year . . . . . . . 344,463 $ 8.38 384,226 $ 7.00 367,722 $ 6.51
Options granted . . . . - - 76,174 12.83 34,163 11.84
344,463 460,400 401,885
Options exercised . . . 19,543 6.64 114,232 6.66 17,659 6.18
Options terminated or
cancelled . . . . . . 2,394 11.12 1,705 12.17 -___ -
Balance at end of year. 322,526 8.46 344,463 8.38 384,226 7.00
F-19
Options exercisable at
year-end. . . . . . . 322,526 8.46 317,246 7.98 357,330 6.63
Weighted-average fair
value of options
granted during the
year. . . . . . . . . $ - $ 3.62 $ 3.24
At December 31, 1997, the range of exercise prices and weighted-
average remaining contractual life of outstanding options was $11.57 -
$14.00 and 5.10 years, respectively.
(c) 1990 Stock Option Plan
Options to purchase up to 260,452 shares of Common Stock may be granted
to Non-Employee Directors of Walshire under the terms of the 1990 Stock
Option Plan for Non-Employee Directors ("1990 Plan").
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 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 1997 and 1996: dividend yield of
2.51 percent; expected volatility of 30.17 percent; risk free interest
rate of 5.71 percent; and expected lives of 4.94 years.
Changes in outstanding Common Stock options granted under the 1990
Stock Option Plan are summarized below.
1997 1996 1995
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
Balance at beginning
of year . . . . . . . 175,029 $ 9.53 190,021 $ 8.87 179,067 $ 7.90
Options granted . . . . 5,000 9.75 18,356 15.46 36,300 11.57
180,029 208,377 215,367
Options exercised . . . 33,346 7.31 33,348 9.00 25,346 5.91
Balance at end of year. 146,683 10.04 175,029 9.53 190,021 8.87
F-20
Options exercisable at
year-end. . . . . . . 146,683 10.04 175,029 9.53 190,021 8.87
Weighted-average fair
value of options
granted during the
year. . . . . . . . . $ 2.77 $ 4.52 $ 3.39
At December 31, 1997, the range of exercise prices and weighted-
average remaining contractual life of outstanding options was $9.75 -
$15.46 and 1.94 years, respectively.
(d) 1997 Equity Incentive Plan
All current and future key employees of the Company, including officers
and directors who are employed by the Company, and all other persons or
entities, including directors of the Company who are not employees, are
eligible to receive options under the 1997 Equity Incentive Plan ("1997
Plan"). The 1997 Plan is administered by the Board 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 1997 Plan, options may be granted with respect to an
aggregate of 500,000 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 vests at the discretion of the
Board. 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 vests at the discretion of the Board. 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 1997; dividend yield of 2.51
percent; expected volatility of 30.17 percent; risk-free interest rate of
5.77 percent; and expected lives of 7.61 years.
Changes in outstanding Common Stock options granted under the 1997
Equity Incentive Plan are summarized below.
1997 _____
Number Average
of Exercise
Shares Price_
Balance at beginning of year . . . . . . . . . . - $ -
Options granted. . . . . . . . . . . . . . . . . 12,925 10.31
Balance at end of year . . . . . . . . . . . . . 12,925 10.31
Options exercisable at year-end. . . . . . . . . - -
Weighted-average fair value of options granted
during the year. . . . . . . . . . . . . . . . $ 3.47
F-21
At December 31, 1997, the exercise price and weighted-average
remaining contractual life of outstanding options was $10.31 and 9.62
years, respectively.
(e) Restricted Stock Award
On November 20, 1996, the Board of Directors awarded an officer 3,300
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.
(13) Net Income Per Share
The computation of basic and diluted net income per share is as
follows:
(dollars in thousands,
except per share data)
1997 1996 1995_
Numerator for basic net income per share:
Net income . . . . . . . . . . . . . $1,488 $1,498 $5,025
Effect of convertible preferred stock. . - - 458
Numerator for diluted net income per
share. . . . . . . . . . . . . . . . . $1,488 $1,498 $5,483
Denominator for basic net income per
share:
Weighted average shares outstanding. . 4,673 4,563 4,437
Effect of convertible preferred stock. . - - 640
Effect of stock option plans . . . . . . - - 212
Denominator for diluted net income per
share. . . . . . . . . . . . . . . . . 4,673 4,563 5,289
Basic net income per share . . . . . . . $ .32 $ .33 $ 1.13
Diluted net income per share . . . . . . $ .32 $ .33 $ 1.04
F-22
Schedule I
WALSHIRE ASSURANCE COMPANY
AND SUBSIDIARIES
Summary of Investments Other Than
Investments in Related Parties
December 31, 1997
(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. $ 7,062 $ 7,197 $ 7,062
States and political
subdivisions ................ 8,527 8,908 8,527
Corporate securities.......... 1,639 1,649 1,639
Total held to maturity ...... 17,228 17,754 17,228
Available for sale:
Fixed maturities:
U. S. Government and Agencies. 30,025 30,366 30,366
States and political
subdivisions ................ 438 448 448
Foreign governments .......... 35 35 35
Corporate securities ......... 7,224 7,333 7,333
Total fixed maturities ...... 37,722 38,182 38,182
Equity securities:
Common Stocks:
Public Utilities ............ 757 694 694
Banks, trusts and insurance
companies .................. 669 787 787
Industries, miscellaneous
and all other .............. 4,935 4,757 4,757
Non-redeemable preferred
stock........................ 1,907 1,967 1,967
Total equity securities ..... 8,268 8,205 8,205
Total available for sale .... 45,990 46,387 46,387
Short-term investments ......... 7,531 7,531 7,531
Other investments .............. 2,656 2,656 2,656
$73,405 $74,328 $73,802
S-1
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)
1997 1996
Assets:
Investments:
Available for sale:
Fixed maturities. . . . . . . . . . . . $ 841 $ 1,570
Equity securities . . . . . . . . . . . 4,247 3,900
Short-term investments. . . . . . . . . . 820 98
Other investments . . . . . . . . . . . . 2,646 2,041
Total investments . . . . . . . . . . . 8,554 7,609
Cash. . . . . . . . . . . . . . . . . . . . 36 154
Receivable from subsidiaries. . . . . . . . 855 1,641
Investment in subsidiaries. . . . . . . . . 42,763 44,255
Property and equipment, net . . . . . . . . 1,137 1,301
Other assets. . . . . . . . . . . . . . . . 109 397
Total assets. . . . . . . . . . . . . . $53,454 $55,357
Liabilities
Notes payable . . . . . . . . . . . . . . . $ 5,497 $ 8,256
Other liabilities . . . . . . . . . . . . . 466 267
Total liabilities . . . . . . . . . . . 5,963 8,523
Shareholders equity:
Preferred stock, par value $.01 per
share; 2,000 shares authorized;
123 and 128 shares issued and
outstanding. . . . . . . . . . . . . . . 1 1
Common stock, par value $.01 per
share; 10,000 shares authorized;
4,710 and 4,651 shares issued and
outstanding . . . . . . . . . . . . . . . 47 47
Additional paid-in capital. . . . . . . . . 38,812 38,648
Unrealized gains on investments available
for sale of parent and subsidiaries (net
of deferred taxes of $135 and $21). . . . 262 42
Retained earnings . . . . . . . . . . . . . 8,369 8,096
Shareholders equity. . . . . . . . . . 47,491 46,834
Total liabilities and
shareholders equity. . . . . . . . . $53,454 $55,357
*See notes to consolidated financial statements.
S-2
Schedule II
(continued)
WALSHIRE ASSURANCE COMPANY
AND SUBSIDIARIES
Condensed Financial Information of Registrant
Walshire Assurance Company
Statements of Income
(Parent Company)
Years Ended December 31
(in thousands)
1997 1996 1995
Revenues:
Net investment income . . . . . . $ 3,579 $ 1,353 $ 949
Net realized gains on
investments . . . . . . . . . . 1,654 596 160
Management fees-subsidiaries. . . 165 210 247
Other . . . . . . . . . . . . . . 14 4 9
Total revenues. . . . . . . . 5,412 2,163 1,365
Expenses:
General and administrative. . . . 1,068 914 1,109
Interest. . . . . . . . . . . . . 666 487 247
Total expenses. . . . . . . . 1,734 1,401 1,356
Income before (recovery of)
income taxes and equity in
net income of subsidiaries. . . . 3,678 762 9
(Recovery of) income taxes. . . . . ( 59) ( 316) ( 176)
Income before equity in net
income of subsidiaries. . . . . . 3,737 1,078 185
Equity in net income of
subsidiaries. . . . . . . . . . . (1,837) 844 5,298
Net income. . . . . . . . . . . . . $ 1,900 $ 1,922 $ 5,483
*See notes to consolidated financial statements.
S-3
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)
1997 1996 1995
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . $ 1,900 $ 1,922 $ 5,483
Equity in net income of subsidiaries . . 1,837 ( 844) ( 5,298)
(Increase)decrease in receivable
from subsidiaries . . . . . . . . . . . 786 ( 744) 1,396
Other. . . . . . . . . . . . . . . . . . ( 954) ( 554) ( 76)
Net cash (used in)provided by
operating activities. . . . . . . . . . 3,569 ( 220) 1,505
Cash flows from investing activities:
Purchase of investments. . . . . . . . . (8,750) (5,988) ( 5,314)
Sale or maturity of investments. . . . . 9,261 6,843 4,275
Decrease (increase) in investment in
subsidiaries . . . . . . . . . . . . . ( 345) 570 ( 1,218)
Capital contribution to subsidiaries . . - (3,637) -
Net purchase of property and equipment . ( 59) ( 698) ( 637)
Other, net . . . . . . . . . . . . . . . 432 ( 695) 1,107
Net cash used in investing activities. . . 539 (3,605) ( 1,787)
Cash flows from financing activities:
Cash dividends paid. . . . . . . . . . . (1,628) (1,515) ( 1,416)
Issuance of common stock . . . . . . . . 164 924 330
Proceeds from notes payable. . . . . . . - 5,005 1,770
Payment of bonds and notes payable . . . (2,762) ( 480) ( 440)
Net cash provided by financing activities. (4,226) 3,934 244
Net increase (decrease) in cash. . . . . . ( 118) 109 ( 38)
Cash at beginning of the year. . . . . . . 154 45 83
Cash at the end of the year. . . . . . . . $ 36 $ 154 $ 45
See notes to consolidated financial statements.
S-4
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, 1997
Property-Casualty $4,778 48,964 27,384
- - 41,248 4,269 32,874 5,438 7,849 37,613
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
S-5<PAGE>
Schedule IV
WALSHIRE ASSURANCE COMPANY
AND SUBSIDIARIES
Reinsurance
(in thousands, 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, 1997
Premiums written:
Property-Casualty $56,826 19,301 88
37,613 .2%
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%
S-6
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, 1997
Agents balances reserve for
bad debts $120 44 -
(44) 120
Premium finance receivables
reserve for bad debts 49 32 -
(37) 44
Total $169 76 -
(81) 164
Year ended December 31, 1996
Agents balances reserve for
bad debts $100 57 -
(37) 120
Premium finance receivables
reserve for bad debts 67 ( 8) -
(10) 49
Total $167 49 -
(47) 169
Year ended December 31, 1995
Agents balances reserve for
bad debts $100 6 -
( 6) 100
Premium finance receivables
reserve for bad debts 48 20 -
( 1) 67
Total $148 26 -
( 7) 167
S-7
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
Exhibits
to
Annual Report on Form 10-K
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
_________________________________
Walshire Assurance Company
INDEX
Exhibits to Annual Report on 10-K
Number Title of Document Sequential
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.
(*) (7) 10.3 The Company's 1997 Equity Incentive 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) 21.1 Subsidiaries of the Company.
(7) 23.1 Consent of KPMG Peat Marwick LLP.
(1) Incorporated by reference from the Company's Registration
Statement on Form S-1, and all amendments thereto,
(Registration No. 33-15549), which was declared effective
on September 3, 1987.
(2) Incorporated by reference from the Company's Form 10-K
(Commission File No. 0-16267), dated March 28, 1990.
(3) Incorporated by reference from the Company's Form 10-K
(Commission File No. 0-16267), dated March 28, 1991.
(4) Incorporated by reference from the Company's Form 10-K
(Commission File No. 0-16267), dated March 28, 1994.
(5) Incorporated by reference from the Company's Form 10-K
(Commission file No. 0-16267), dated March 27, 1995.
(6) Incorporated by reference from the Company's Form 10-K
(Commission File No. 0-16267), dated March 21, 1997.
(7) Filed herewith.
<TABLE>
<CAPTION>
Walshire Assurance Company
1997 Equity Incentive Plan
<S> <C>
1. Purpose
The purpose of the Walshire Assurance Company 1997 Equity Incentive Plan
(the "Plan") is to promote the long-term retention of key employees of Walshire
Assurance Company ("Walshire") and its current and future subsidiaries
(collectively, the "Company") and other persons or entities who are in a
position to make significant contributions to the success of the Company, to
further reward these employees and other persons or entities for their
contributions to the Company's success, to provide additional incentive to
these employees and other persons or entities to continue to make similar
contributions in thefuture, and to further align the interests of these
employees and other personsor entities with those of the Company's stockholders.
These purposes will be achieved by granting to such employees and other persons
and entities, in accordance with the provisions of this Plan, Options,
Restricted Stock or Unrestricted Stock Awards or Performance Awards, for shares
of the Company's common stock, par value $.01 per share ("Common Stock"), or
Loans or Supplemental Grants, or combinations thereof ("Awards").
2. Aggregate Number of Shares
2.1 The aggregate number of shares of Common Stock for which Awards may
be granted under the Plan will be 500,000 shares. Notwithstanding the
foregoing, if there is any change in the capitalization of Walshire, such as by
stock dividend, stock split, combination of shares, exchange of securities,
recapitalization or other event which the Board of Directors (the "Board") of
Walshire deems, in its sole discretion, to be similar circumstances, the
aggregate number and/or kind of shares for which Awards may be granted under the
Plan shall be appropriately adjusted in a manner determined by the Board. No
fractional shares of Common Stock will be delivered under the Plan.
2.2 Treasury shares, reacquired shares and unissued shares of Common
Stock may be used for purposes of the Plan, at Walshire's sole discretion.
2.3 Shares of Common Stock that were issuable pursuant to an Award that
has terminated but with respect to which such Award had not been exercised,
shares of Common Stock that are issued pursuant to an Award but that are
subsequently forfeited, and shares of Common Stock that were issuable pursuant
to an Award that was payable in Common Stock or cash but that was satisfied in
cash, shall be available for future Awards under the Plan.
3. Eligible Employees and Participants
3.1 All current and future key employees of the Company, including
officers and directors who are employed by the Company ("Employees"), and all
other persons or entities, including directors of the Company who are not
Employees, who in the opinion of the Board are in a position to make a
significant contribution to the success of the Company, shall be eligible to
receive Awards under the Plan (a "Participant"). No eligible Employee or such
other person or entity shall have any right to receive an Award except as
expressly provided in the Plan.
3.2 The Participants who shall actually receive Awards under the Plan
shall be determined by the Board in its sole discretion. In making such
determinations, the Board shall consider the positions and responsibilities of
eligible Participants, their past performance and contributions to the Company's
growth and expansion, the value of their services to the Company, the difficulty
of finding qualified replacements, and such other factors as the Board deems
pertinent in its sole discretion.
4. Administration
4.1 The Plan shall be administered by the Board, unless the Board
determines to delegate such administration to a committee of the Board. If the
Board makes such delegation, (i) the Committee shall consist of at least two
directors, (ii) each member of such committee shall be a "non-employee director"
within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as
amended (the "1934 Act"), and (iii) the provisions of the Plan relating to the
Board shall apply to such committee. In addition to its other authority and
subject to the provisions of the Plan, the Board shall have the authority to
determine, in its sole discretion, the Participants who shall be eligible to
receive Awards, the Participants who shall actually receive Awards, the size of
each Award, including the number of shares of Common Stock subject to the Award,
the type or types of each Award, the date on which each Award shall be granted,
the terms and conditions of each Award, whether to waive compliance by a
Participant with any obligations to be performed by the Participant under an
Award or waive any term or condition of an Award, whether to amend or cancel an
existing Award in whole or in part (except that the Board may not, without the
consent of the holder of an Award or unless specifically authorized by the terms
of an Award, take any action under this clause with respect to such Award if
such action would adversely affect the rights of such holder), and the form or
forms of instruments that are required or deemed appropriate under the Plan,
including any written notices and elections required of Participants.
4.2 The Board may adopt such rules for the administration of the Plan as
it deems necessary or advisable, in its sole discretion. For all purposes of
the Plan, a majority of the members of the Board shall constitute a quorum, and
the vote or written consent of a majority of the members of the Board on a
particular matter shall constitute the act of the Board on that matter. The
Board shall have the exclusive right to construe the Plan and any Award, to
settle all controversies regarding the Plan or any Award, to correct defects
and omissions in the Plan and in any Award, and to take such further actions as
the Board deems necessary or advisable, in its sole dise and intent of the Plan.
Such actions shall be final, binding and conclusive upon all parties concerned.
4.3 No member of the Board shall be liable for any act or omission
(whether or not negligent) taken or omitted in good faith, or for the good faith
exercise of any authority or discretion granted in the Plan to the Board, or for
any act or omission of any other member of the Board.
4.4 All costs incurred in connection with the administration and operation of
the Plan shall be paid by the Company. Except for the express obligations of
the Company under the Plan and under Awards granted in accordance with the
provisions of the Plan, the Company shall have no liability with respect to any
Award, or to any Participant or any transferee of shares of Common Stock from
any Participant, including, but not limited to, any tax liabilities, capital
losses, or othercosts or losses incurred by any Participant or any such
transferee.
5. Types of Awards
5.1 Options.
(a) An Option is an Award entitling the recipient on exercise thereof to
purchase Common Stock at a specified exercise price. Both "incentive stock
options," as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") (any Option intended to qualify as an incentive stock
option being hereinafter referred to as an "ISO"), and
Options that are not incentive stock options ("non-ISO"), may be granted under
the Plan. ISOs shall be awarded only to Employees.
(b) The exercise price of an Option will be determined by the Board subject to
the following:
(1) The exercise price of an ISO shall not be less than 100% (110% in the case
of an ISO granted to a ten percent shareholder) of the fair market value
(as defined in Section 11.9) of the Common Stock subject to the ISO, determined
as of the time the ISO is granted. A "ten-percent shareholder" is any person
who at the time of grant owns, directly or indirectly, or is deemed to own by
reason of the attribution rules of Section 424(d) of the Code, stock
possessing more than 10% of the total combined voting power of all classes of
stock of Walshire or of any of its subsidiaries.
(2) The exercise price of a non-ISO shall be such price as may be determined as
of the time the non-ISO is granted, provided that the exercise price of a
non-ISO granted pursuant to a Performance Award may be determined either
as of the time the Performance Award is granted or as of the time the non-ISO is
granted pursuant to the Performance Award.
(3) In no case may the exercise price paid for Common Stock which is part of
an original issue of authorized Common Stock be less than the par value per
share of the Common Stock.
(c) The period during which an Option may be exercised will be determined by the Board, except that the period
during which an ISO may be exercised will not exceed ten years (five years, in the case of an ISO granted to a ten-percent
shareholder) from the day immediately preceding the date the Option was granted.
(d) An Option will become exercisable at such time or times, and on such terms and conditions, as the Board
may determine. The Board may at any time accelerate the time at which all or any part of the Option may be exercised. Any
exercise of an Option must be in writing, signed by the proper person and delivered or mailed to the Company, accompanied
by (1) any documents required by the Board and (2) payment in full in accordance with Section 5.1(e) below for the number
of shares for which the Option is exercised.
<PAGE>
(e) Stock purchased on exercise of an Option must be paid for as follows: (1) in cash or by check (acceptable
to Walshire in accordance with guidelines established for this purpose), bank draft or money order payable to the order of
Walshire or (2) if so permitted by the instrument evidencing the Option (or in the case of an Option which is not an ISO,
by the Board at or after grant of the Option), (i) through the delivery of shares of Common Stock which have been
outstanding for at least six months (unless the Board expressly approves a shorter period) and which have a fair market
value on the last business day preceding the date of exercise equal to the exercise price, or (ii) by delivery of a
promissory note of the Option holder to Walshire, payable on such terms and conditions as the Board may determine, or (iii)
by delivery of an ue price, or (iv) by any combination of the permissible forms of payment; provided, that if the Common
Stock delivered upon exercise of the Option is an original issue of authorized Common Stock, at least so much of the
exercise price as represents the par value of such Common Stock must be paid other than by the Option holder's promissory
note.
5.2 Restricted and Unrestricted Stock.
(a) A Restricted Stock Award entitles the recipient to acquire, for a purchase price not less than the par
value, shares of Common Stock subject to the restrictions described in Section 5.2(d) below ("Restricted Stock").
(b) A Participant who is granted a Restricted Stock Award shall have no rights with respect to such Award
unless the Participant accepts the Award by written instrument delivered or mailed to Walshire accompanied by payment in
full of the specified purchase price, if any, of the shares covered by the Award. Payment may be by certified or bank check
or other instrument acceptable to the Board.
(c) A Participant who receives Restricted Stock shall have all the rights of a stockholder with respect to
such stock, including voting and dividend rights, subject to the restrictions described in paragraph (d) below and any other
conditions imposed by the Board at the time of grant. Unless the Board otherwise determines, certificates evidencing shares
of Restricted Stock will remain in the possession of Walshire until such shares are free of all restrictions under the Plan.
(d) Except as otherwise specifically provided by the Plan or the Award, Restricted Stock may not be
transferred, sold, assigned, exchanged, pledged, gifted or otherwise disposed of, and if a Participant suffers a Status
Change (as defined in Section 6.1 below) for any reason, must be offered to Walshire for purchase for the amount of cash
paid for the such stock, or forfeited to Walshire if no cash was paid. T and conditions, as the Board may determine. The
Board may at any time accelerate the time at which the restrictions on all or any part of the shares will lapse.
(e) Any Participant making, or required by an Award to make, an election under Section 83(b) of the Code with
respect to Restricted Stock shall deliver to Walshire, within 10 days of the filing of such election with the Internal
Revenue Service, a copy of such election.
(f) The Board may, at the time any Award described in this Section 5 is granted, provide that any or all the
Common Stock delivered pursuant to the Award will be Restricted Stock.
(g) The Board may, in its sole discretion, approve the sale to any Participant of shares of Common Stock free
of restrictions under the Plan for a price which is not less than the par value of the Common Stock.
<PAGE>
5.3 Performance Awards. A Performance Award entitles the recipient to receive, without payment, an Award or Awards
described in this Section 5 following the attainment of such performance goals, during such measurement period or periods,
and on such other terms and conditions, all as the Board may determine. Performance goals may be related to overall
corporate performance, operating group or business unit performance, personal performance or such other category of
performance as the Board may determine. Financial performance may be measured by revenue, operating income, net income,
earnings per share, number of days sales outstanding in accounts receivable, productivity, return on equity, common stock
price, price-earnings multiple, or such other financial factors as the Board may determine.
5.4 Loans and Supplemental Grants.
(a) The Company may make a loan to a Participant ("Loan"), either in connection with the purchase of Common
Stock under the Award or the payment of any Federal, state and local income tax with respect to income recognized as a
result of the Award. The Board shall have the authority, in its sole discretion, to determine whether to make a Loan, the
amount, terms and conditions of the Loan, including the interest rate (which may be zero), whether the Loan is to be secured
or unsecured or with or without recourse against the borrower, the terms on which the Loan is to be repaid and the terms
and conditions, if any, under which the Loan may be forgiven. In no event shall any Loan have a term (including extensions)
in excess of ten years.
(b) In connection with any Award, the Board may grant a cash award to the Participant ("Supplemental Grant")
not to exceed an amount equal to (1) the amount of any Federal, state and local income tax on ordinary income for which the
Participant may be liable with respect to the Award, determined by assuming taxation at the highest marginal rate, plus (2)
an additional amount on a grossed-up basis intended to make the Participant whole on an after-tax basis after discharging
all the Participant's income tax liabilities arising from all payments under this Section 5. Any payments under this
Section 5.4(b) shall be made at the time the Participant incurs Federal income tax liability with respect to the Award.
6. Events Affecting Outstanding Awards
6.1 Termination of Service by Death or Disability. If a Participant ceases to be an Employee or if there is a
termination of the consulting service or other relationship in respect of which a non-Employee Participant was granted an
Award (such termination of employment or other relationship being hereinafter referred to as a "Status Change") by reason
of death or permanent disability (as determined by the Board), the following rules shall apply, unless otherwise determined
by the Board:
(a) All Options held by the Participant at the time of such Status Change, to the extent then exercisable,
will continue to be exercisable by the Participant's heirs, executor, administrator or other legal or personal
representative, for a period of one year after the Participant's Status Change. After the expiration of such one-year
period, all such Options shall terminate. In no event, however, shall an Option remain exercisable beyond the latest date
on which it could have been exercised without regard to this Section 6. All Options held by a Participant at the time of
such Status Change that are not then exercisable shall terminate upon such Status Change.
(b) All Restricted Stock held by the Participant at the time of such Status Change shall immediately become
free of all restrictions and conditions.
(c) Any payment or benefit under a Performance Award or Supplemental Grant to which the Participant was not
irrevocably entitled at the time of such Status Change shall be forfeited and the Award canceled as of the time of such
Status Change.
<PAGE>
6.2 Termination of Service Other Than by Death or Disability. If a Participant suffers a Status Change other than by
reason of death or permanent disability (as determined by the Board), the following rules shall apply, unless otherwise
determined by the Board at the time of grant of an Award:
(a) All Options held by the Participant at the time of such Status Change, to the extent then exercisable,
will continue to be exercisable by the Participant for a period of three months after the Participant's Status Change.
After the expiration of such three-month period, all such Options shall terminate. In no event, however, shall an Option
remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 6. All
Options held by a Participant at the time of such Status Change that are not then exercisable shall terminate upon such
Status Change.
(b) All Restricted Stock held by the Participant at the time of such Status Change shall immediately become
free of all restrictions and conditions, unless such Status Change results from a voluntary resignation or termination for
Cause (as defined in Section 6.2(d)), in which event all Restricted Stock held by the Participant at the time of the Status
Change shall be transferred to Walshire (and, in the event the certificates representing such Restricted Stock are held by
Walshire, such Restricted Stock shall be so transferred without any further action by the Participant) in accordance with
Section 5.2 above.
(c) Any payment or benefit under a Performance Award or Supplemental Grant to which the Participant was not
irrevocably entitled at the time of such Status Change shall be forfeited and the Award canceled as of the date of such
Status Change.
(d) A termination by the Company of a Participant's employment with or service to the Company shall be for
"Cause" only if: (1) the Board determined that the Participant (i) was guilty of gross negligence or willful misconduct
in the performance of his or her duties for the Company, or (ii) breached or violated, in a material respect, any agreement
between the Participant and the Company or any of the Company's policy statements regarding conflicts-of-interest, insider
trading or confidentiality, or (iii) committed a material act of dishonesty or breach of trust; (2) such determination was
made at a duly convened meeting of the Board with respect to which the Participant received at least 10 days prior written
notice, had a reasonable opportunity to make a statement and answer the allegations against him or her; and (3) either (i)
the Participant was given a reasonable opportunity to take remedial action but failed or refused to do so, or (ii) the Board
also determined, at such meeting, that an opportunity to take remedial action would not have been meaningful under the
circumstances.
(e) For all purposes of this Section 6.2 and Section 6.3, (1) if a Participant is an Employee of a subsidiary
of and such subsidiary ceases to be a subsidiary of Walshire, then the Participant's employment with the Company will be
deemed to have been terminated by the Company without Cause, unless the Participant is transferred to Walshire or another
subsidiary of Walshire; (2) the employment with the Company of a Participant will not be deemed to have been terminated if
the Participant is transferred from Walshire to a subsidiary of Walshire, or vice versa, or from one subsidiary of Walshire
to another; and (3) if a Participant terminates his or her employment with the Company following a reduction in his or her
rate of compensation, then the Participant's employment with the Company will be deemed to have been terminated by the
Company without Cause.
6.3 Change in Control
(a) In the event of a Change in Control (as defined in Section 6.3(b)), the following rules will apply, unless
otherwise expressly provided by the Board at the time of the grant of an Award or unless otherwise determined by the Board
in accordance with Section 6.3(c):
<PAGE>
(1) Each outstanding Option shall automatically become exercisable in full six months after the
occurrence of such Change in Control or, if sooner, upon a termination by the Company of the Participant's employment with
or service to the Company for any reason other than for Cause (as defined in Section 6.2(d)). This provision shall not
prevent an Option from becoming exercisable sooner as to Common Stock that would otherwise have become available under such
Option during such period.
(2) Each outstanding share of Restricted Stock shall automatically become free of all restrictions and
conditions six months after the occurrence of such Change in Control or, if sooner, upon a termination by the Company of
the Participant's employment with or service to the Company for any reason other than for Cause (as defined in Section
6.2(d)). This provision shall not prevent the earlier lapse of any restrictions or conditions on Restricted Stock that
would otherwise have lapsed during such period.
(3) Conditions on Performance Awards and Supplemental Grants which relate only to the passage of time
and continued employment shall automatically terminate six months after the occurrence of such Change in Control or, if
sooner, upon a termination by the Company of the Participant's employment with or service to the Company for any time and
continued employment that would otherwise have lapsed during such period. Performance or other conditions (other than
conditions relating only to the passage of time and continued employment) shall continue to apply unless otherwise provided
in the instrument evidencing the Awards or in any other agreement between the Participant and the Company or unless
otherwise agreed to by the Board.
(b) A "Change in Control" means: (i) the occurrence of an event that would, if known to Walshire's
management, be required to be reported by Walshire under Item 1(a) of Form 8-K pursuant to the 1934 Act; or (ii) the
acquisition or receipt, in any manner, by any person (as defined for purposes of the 1934 Act) or any group of persons
acting in concert, of direct or indirect beneficial ownership (as defined for purposes of the 1934 Act) of 50% or more of
the combined voting securities ordinarily having the right to vote for the election of directors of Walshire; or (iii) a
change in the constituency of the Board with the result that individuals (the "Incumbent Directors") who are members of the
Board on the Effective Date (as specified in Section 9) cease for any reason to constitute at least a majority of the Board,
provided that any individual who is elected to the Board after the Effective Date and whose nomination for election was
unanimously approved by the Incumbent Directors shall be considered an Incumbent Director beginning on the date of his or
her election to the Board; or (iv) the sale, exchange or other disposition of all or a significant portion of the Company's
business or assets, or the execution by the Company of a binding agreement providing for such a transaction.
(c) The provisions of Section 6.3(a) shall not apply to the extent expressly determined by at least 75% of
the Incumbent Directors at a duly convened meeting of the Board held before the occurrence of a Change in Control.
7. Grant and Acceptance of Awards
7.1 The Board's approval of a grant of an Award under the Plan, including the names of Participants and the size
of the Award, including the number of shares of Common Stock subject to the Award, shall be reflected in minutes of meetings
held by the Board or in written consents signed by members of the Board. Once approved by the Board, each Award shall be
evidenced by such written instrument, containing such terms as are required by the Plan and such other terms, consistent
with the provisions of the Plan, as may be approved from time to time by the Board.
7.2 Each instrument may be in the form of agreements to be executed by both the Participant and Walshire, or
certificates, letters or similar instruments, which need not be executed by the Participant but acceptance of which shall
evidence agreement to the terms thereof. The receipt of an Award shall not impose any obligation on the Participant to
accept the Award.
<PAGE>
7.3 Except as specifically provided by the Plan or the instrument evidencing an Award, a Participant shall not become a
stockholder of Walshire until (i) the Participant makes any required payments in respect of the Common Stock issued or
issuable pursuant to the Award, (ii) the Participant furnishes Walshire with any required agreements, certificates, letters
or other instruments, and (iii) the Participant actually receives the shares of Common Stock. Subject to any terms and
conditions imposed by the Plan or the instrument evidencing an Award, upon the occurrence of all of the conditions set forth
in the immediately preceding sentence, a Participant shall have all rights of a stockholder with respect to shares of Common
Stock, including, but not limited to, the right to vote such shares and to receive dividends and other distributions paid
with respect to such shares. The Board may, upon such conditions as it deems appropriate, provide that a Participant will
receive a benefit in lieu of caock subject to the Participant's Award, had such Common Stock been outstanding. Without
limitation, the Board may provide for payment to the Participant of amounts representing such dividends, either currently
or in the future, or for the investment of such amounts on behalf of the Participant.
7.4 Notwithstanding any other provision of the Plan, the Company shall not be obligated to deliver any shares of
Common Stock pursuant to the Plan or to remove any restriction from shares of Common Stock previously delivered under the
Plan (a) until all conditions to the Award have been satisfied or removed, (b) until, in the opinion of counsel to Walshire,
all applicable Federal and state laws and regulations have been complied with, (c) if the outstanding Common Stock is at
the time listed on any stock exchange or included for quotation on an inter-dealer system, until the shares to be delivered
have been listed or included or authorized to be listed or included on such exchange or system upon official notice of
notice of issuance, (d) if it might cause Walshire to issue or sell more shares of Common Stock than Walshire is then
legally entitled to issue or sell, and (e) until all other legal matters in connection with the issuance and delivery of
such shares have been approved by counsel to Walshire. If the sale of Common Stock has not been registered under the
Securities Act of 1933, as amended, the Company may require, as a condition to exercise of an Award, such representations
or agreements as counsel to Walshire may consider appropriate to avoid violation of such Act and may require that the
certificates evidencing such Common Stock bear an appropriate legend restricting transfer. If an Award is exercised by the
Participant's legal representative, the Company shall be under no obligation to deliver Common Stock pursuant to such
exercise until the Company is satisfied as to the authority of such representative.
8. Tax Withholding
The Company shall withhold from any cash payment made pursuant to an Award an amount sufficient to satisfy all
Federal, state and local withholding tax requirements (the "withholding requirements"). In the case of an Award pursuant
to which Common Stock may be delivered, the Board shall have the right to require that the Participant or other appropriate
person remit to the Company an amount sufficient to satisfy the withholding requirements, or make other arrangements
satisfactory to the Board with regard to such requirements, prior to the delivery of any Common Stock. If and to the extent
that such withholding is required, the Board may permit a Participant to elect at such time and in such manner as the Board
may determine to have the Company hold back from the shares of Common Stock to be delivered, or to deliver to the Company,
Common Stock having a value calculated to satisfy the time an ISO is exercised, the Board determines that the Company could
be liable for withholding requirements with respect to a disposition of the Common Stock received upon exercise, the Board
may require as a condition of exercise that the person exercising the ISO agree (a) to inform the Company promptly of any
disposition (within the meaning of Section 424(c) of the Code) of Common Stock received upon exercise, and (b) to give such
security as the Board deems adequate to meet the potential liability of the Company for the withholding requirements and
to augment such security from time to time in any amount reasonably deemed necessary by the Board to preserve the adequacy
of such security.
<PAGE>
9. Stockholder Approval, Effective Date and Term of Plan
The Plan was adopted by the Board on August 14, 1997 ("Effective Date"). The Plan shall be submitted to Walshire's
stockholders within twelve months after the Effective Date. No ISOs granted under the Plan may be exercised until the Plan
is approved by Walshire s stockholders. If such stockholder approval is not obtained within twelve months after the
Effective Date, it shall not affect Awards granted under the Plan; provided, however, that all ISOs granted under the Plan
shall be treated as if such Options were non-ISOs. No Award shall be granted more than ten years after the Effective Date.
10. Effect, Amendment, Suspension and Termination
Neither adoption of the Plan nor the grant of Awards to a Participant will affect the Company's right to grant to such
Participant awards that are not subject to the Plan, to issue to such Participant Common Stock as a bonus or otherwise, or
to adopt other plans or arrangements under which Common Stock may be issued to Employees or other persons or entities. The
Board reserves the right, at any time and from time to time, to amend the Plan in any way, or to suspend or terminate the
Plan, effective as of the date specified by the Board when it takes such action, which date may be before or after the date
the Board takes such action; provided that any such action shall not affect any Awards granted before the actual date on
which such action is taken by the Board; and further provided that the approval of Walshire's stockholders shall be required
whenever necessary for the Plan to continue to satisfy the conditions of Section 422 of the Code with respect to the award
of ISOs (unless the Board determines that ISOs shall no longer be granted under the Plan), any bylaw, rule or regulation
of the primary market system or stock exchange on which Walshire's Common Stock is then listed or admitted to trading, or
any other applicable law, rule or regulation.
11. Other Provisions
11.1 Nothing contained in the Plan or any Award shall confer upon any Employee or other Participant the right to
continue in the employ of, or to continue to provide service to, the Company or any affiliated corporation, or interfere
in any way with the right of the Company or any affiliated corporation to terminate the employment or service of any
Employee or other Participant for any reason.
11.2 Corporate action constituting an offer by Walshire of Common Stock to any Participant under the terms of an
Award shall be deemed completed as of the date of grant of the Award, regardless of when the instrument, certificate, or
letter evidencing the Award is actually received or accepted by the Participant.
11.3 Except as otherwise specifically provided by an Award (other than an ISO), neither any Award nor a
Participant's rights under any Award or under the Plan may be assigned or transferred in any manner other than by will or
under the laws of descent and distribution. An Award may be exercised only by the Participant to whom such Award was
granted (or by such Participant's heirs, estate, beneficiary or personal or legal representative under Section 6.1). The
foregoing shall not, however, restrict a Participant's rights with respect to Unrestricted Stock or the outright transfer
of cash, nor shall it restrict the ability of a Participant's heirs, estate, beneficiaries, or personal or legal
representatives to enforce the terms of the Plan with respect to Awards granted to the Participant.
11.4 The Plan, and all Awards granted hereunder, shall be governed by and construed in accordance with the laws of
the Commonwealth of Pennsylvania. The headings of the Sections of the Plan are for convenience of reference only and shall
not affect the interpretation of the Plan. All pronouns and similar references in the Plan shall be construed to be of such
number and gender as the context requires or permits. If any provision of the Plan is determined to be unenforceable for
any reason, then that provision shall be deemed to have been deleted or modified to the extent necessary to make it
enforceable, and the remaining provisions of the Plan shall be unaffected.
11.5 All notices with respect to the Plan shall be in writing and shall be hand delivered or sent by certified mail
or reputable overnight delivery service, expenses hire's headquarters to the attention of its Chief Financial Officer.
Notices to any Participant or holder of shares of Common Stock issued pursuant to an Award shall be sufficient if delivered
or sent to such person's address as it appears in the regular records of the Company or Walshire's transfer agent.
11.6 If there is any change in the capitalization of Walshire, such as by stock dividend, stock split, combination
of shares, exchange of securities, recapitalization or other event which the Board deems, in its sole discretion, to be
similar circumstances, the Board may make such adjustments to the number and/or kind of shares of stock or securities
subject to Awards then outstanding or subsequently granted, any exercise prices relating to such Awards and any other
provision of such Awards affected by such change, as the Board may determine in its sole discretion. The Board may also
make such adjustments to take into account material changes in law or in accounting practices or principles, mergers,
consolidations, acquisitions, dispositions or similar corporate transactions, or any other event, as the Board may determine
in its sole discretion.
11.7 The Board may agree at any time, upon request of a Participant, to defer the date on which any payment under
an Award shall be made.
11.8 In any case that a Participant purchases Common Stock under an Award for a price equal to the par value of the
Common Stock, the Board may determine, in its sole discretion, that such price has been satisfied by past services rendered
by the Participant.
11.9 For the purposes of the Plan and any Award granted hereunder, unless otherwise determined by the Board, the term
"fair market value" of Common Stock on or as of a specified date shall mean either (i) in the case of an Option not granted
under a Performance Award, the last sale price (as defined below in this Section) for one share of Common Stock on the last
trading day on or before the specified date, or, if the foregoing does not apply, the market value determined by the Board;
or (ii) in the case of an Option granted under a Performance Award, the average of the last sale prices during the first
ten trading days beginning on or after the specified date, or the average of the last sale prices during such other period
of time beginning on or after the specified date as is determined by the Board, or, if the foregoing does not apply, the
market value determined by the Board. "Last sale price" means the last sale price reported on The Nasdaq Stock Market or
on such other primary market system or stock exchange on which Walshire's Common Stock is then listed or admitted to
trading.
</TABLE>
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 March 2, 1998, relating to the
consolidated balance sheets of Walshire Assurance Company and
subsidiaries as of December 31, 1997 and 1996 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, 1997 and all related
schedules, which report appears in the December 31, 1997 annual report on
Form 10-K of Walshire Assurance Company.
KPMG Peat Marwick LLP
Harrisburg, Pennsylvania
March 25, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 38,182
<DEBT-CARRYING-VALUE> 17,228
<DEBT-MARKET-VALUE> 17,7540
<EQUITIES> 8,205
<MORTGAGE> 97
<REAL-ESTATE> 0
<TOTAL-INVEST> 73,802
<CASH> 254
<RECOVER-REINSURE> 4,240
<DEFERRED-ACQUISITION> 4,778
<TOTAL-ASSETS> 134,442
<POLICY-LOSSES> 48,964
<UNEARNED-PREMIUMS> 27,384
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 2,445
<NOTES-PAYABLE> 5,573
<COMMON> 47
0
1
<OTHER-SE> 47,443
<TOTAL-LIABILITY-AND-EQUITY> 134,442
41,248
<INVESTMENT-INCOME> 42,689
<INVESTMENT-GAINS> 3,282
<OTHER-INCOME> 634
<BENEFITS> 32,874
<UNDERWRITING-AMORTIZATION> 5,438
<UNDERWRITING-OTHER> 7,849
<INCOME-PRETAX> 2,392
<INCOME-TAX> 492
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,900
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
<RESERVE-OPEN> 36,551
<PROVISION-CURRENT> 29,803
<PROVISION-PRIOR> 3,071
<PAYMENTS-CURRENT> 16,339
<PAYMENTS-PRIOR> 12,209
<RESERVE-CLOSE> 48,964
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
