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