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.
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.
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).
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.
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.
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
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%
_________________________ (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 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. 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 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 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 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:
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 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:
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
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
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. 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:
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. (2) Loss ratios and combined ratios have been calculated in accordance with accounting principles prescribed or permitted by state regulatory agencies.
ITEM 7:
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 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.
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 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:
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:
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 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.
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.
ITEM 12.
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:
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:
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
Consolidated Balance Sheets - December 31, 1997 and 1996.
Consolidated Statements of Income - Years ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Shareholders Equity - Years ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements
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.
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.
(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.
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
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Financial Statemen ts
Independent Auditors' Report
Consolidated Balance Sheets December 31, 1997 and 1996
Consolidated Statements of Income Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows Years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
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
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
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.
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.
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.
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.
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
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.
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
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
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.
(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:
(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
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:
(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
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.
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
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.
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
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
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
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
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
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
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.
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