-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RE9n+YxOikEbHxH+a4Z4uwDZneAiJ4ovwQqaW3UlB53DC+U1MYv48+06/PNwiYDc qAk533HigS4GuWdExKFO/w== 0000818155-97-000005.txt : 19970328 0000818155-97-000005.hdr.sgml : 19970328 ACCESSION NUMBER: 0000818155-97-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WALSHIRE ASSURANCE COMPANY CENTRAL INDEX KEY: 0000818155 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 232023240 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16267 FILM NUMBER: 97565306 BUSINESS ADDRESS: STREET 1: 3350 WHITEFORD RD STREET 2: PO BOX 3849 CITY: YORK STATE: PA ZIP: 17402 BUSINESS PHONE: 7177570000 MAIL ADDRESS: STREET 1: 3350 WHITEFORD RD STREET 2: PO BOX 3849 CITY: YORK STATE: PA ZIP: 174020138 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from __________ to _________ Commission file number 0-16267 _________________________WALSHIRE ASSURANCE COMPANY_____________________ (Exact name of registrant as specified in its charter) _________Pennsylvania__________ _________23-2023240________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3350 Whiteford Road, P. O. Box 3849, York, PA. 17402-0138 (Address of principal executive offices) (Zip Code) Registrant s telephone number, including area code (717) 757-0000 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share__________4,653,193_______________ (Title of class) (Number of Shares Outstanding as of February 28, 1997) Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (ii) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __ The aggregate market value of voting stock held by non-affiliates of the Registrant is $45,792,518(1). DOCUMENTS INCORPORATED BY REFERENCE (Specific sections incorporated are identified under applicable items herein) Certain portions of the Company s Annual Report to Shareholders for the year ended December 31, 1996, are incorporated by reference in Parts II and IV of this Report. With the exception of the information incorporated by reference in Parts II and IV of this Report, the Company s Annual Report to Shareholders for the year ended December 31, 1996, is not to be deemed filed with the Securities and Exchange Commission for any purpose. Certain portions of the Company s Proxy Statement to be filed in connection with its 1997 Annual Meeting are incorporated by reference in Part III of this Report. Other documents incorporated by reference are listed in the Exhibit Index. ___________________________ (1) The aggregate dollar amount of the voting stock set forth equals the number of shares of the Company s Common Stock outstanding, reduced by the amount of Common Stock held by officers, directors and shareholders owning in excess of 10% of the Company s Common Stock on February 28, 1997. The information provided shall in no way be construed as an admission that any officer, director or 10% shareholder in the Company may or may not be deemed an affiliate of the Company or that he is the beneficial owner of the shares reported as being held by him, and any such inference is hereby disclaimed. The information provided herein is included solely for recordkeeping purposes of the Securities and Exchange Commission. INDEX PAGE PART I Item 1. Business General .............................................. 1 Risk Factors ......................................... 2 Business Written ..................................... 5 Marketing ............................................ 5 Reinsurance .......................................... 6 Rates ................................................ 7 Claims ............................................... 7 Liabilities for Unpaid Claims and Claim Settlement Expenses ........................................... 7 Investments .......................................... 8 Competition .......................................... 10 Regulation ........................................... 10 Employees ............................................ 12 Item 2. Properties ........................................... 12 Item 3. Legal Proceedings .................................... 12 Item 4. Submission of Matters to a Vote of Security Holders .. 12 Item 4.1 Executive Officers of the Registrant ................. 12 PART II Item 5. Market for the Registrant s Common Equity and Related Stockholder Matters .......................... 12 Item 6. Selected Financial Data .............................. 12 Item 7. Management s Discussion and Analysis of Financial Condition and Results of Operations .................. 13 Item 8. Financial Statements and Supplementary Data .......... 13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................. 13 (i) INDEX (Continued) PAGE PART III Item 10. Directors and Executive Officers of the Registrant ... 13 Item 11. Executive Compensation ............................... 13 Item 12. Security Ownership of Certain Beneficial Owners and Management ....................................... 13 Item 13. Certain Relationships and Related Transactions ....... 13 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .......................................... 13 (ii) PART I ITEM 1: BUSINESS General Walshire Assurance Company ( Company ) is an insurance holding company headquartered in York, Pennsylvania. Through its wholly owned subsidiaries, Lincoln General Insurance Company ( Lincoln ), Comp America Insurance Company ("Comp") and Yorktowne Insurance Company ("Yorktowne"), the Company primarily provides a specialized line of property and casualty insurance principally in Pennsylvania, and to a lesser extent, in Missouri, Georgia, Kentucky, Ohio, Maryland, Iowa and in certain other states located in the mid-Atlantic, South, Southeastern and Midwest regions of the country. The Company principally offers commercial automobile physical damage and liability coverages for trucks, tractors, trailers, buses and other commercial vehicles as well as workers compensation coverages for trucking employees. To a lesser extent, the Company offers certain commercial coverages for cargo in transit and other property, commonly called inland marine coverage, as well as personal automobile physical damage, homeowners, fire, farmowners, surety and fidelity coverages. The Company also provides adjusting services for claims covered by the Company and certain third parties, and financing for insurance premiums payable by customers of the Company and others. See Business Written and Claims . The following table sets forth the direct premiums written by the Company for the years ended December 31, 1996, 1995 and 1994 by line of business. (in thousands) Years Ended December 31,__ __1996_ 1995_ 1994__ Auto Liability ............ $26,140 $24,004 $18,666 Auto Physical Damage ...... 22,782 18,977 16,740 Workers Compensation ..... 6,272 5,329 1,864 Inland Marine ............. 3,322 2,656 2,154 Other ..................... 2,579 1,054 680 $61,095 $52,020 $40,104 For the past several years, the Company s principal strategy has been to position itself within its geographical markets as a consistent and reliable provider of commercial automobile coverages for the transportation industry. The Company believes that it has been able to operate successfully in the commercial automobile market due to four principal factors: (i) the Company s comprehensive knowledge of the transportation industry which enables the Company to be more selective of the risks it underwrites and to settle claims within reasonable amounts, (ii) the Company s twenty-year record of operations, which evidences the Company s willingness and ability to provide a consistent market for commercial automobile coverages, (iii) the Company s strong agency force, which the Company has been able to build through careful selection, (See Business-Marketing), and (iv) the Company s reputation for service, which the Company has been able to build through an agency force that is knowledgeable of the trucking industry and a claims department and adjusters which settle claims relatively quickly. 1 The Company is a Pennsylvania corporation organized in December, 1976. The Company s principal executive offices are located at 3350 Whiteford Road, P. O. Box 3849, York, Pennsylvania 17402-0138, telephone (717) 757-0000. Unless the context otherwise requires, the Company refers to Walshire Assurance Company and its consolidated subsidiaries. Risk Factors In analyzing whether to make or to continue an investment in the Company, investors should consider carefully all the information contained or incorporated by reference in this Annual Report on Form 10-K and, in particular, the following: Forward Looking Statements. Certain information contained in this Annual Report on Form 10-K contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder), including without limitation, statements as to the allowances for doubtful accounts and credit losses, liabilities for unpaid claims and claim settlement expenses, the classification of the Company's investment portfolio and other statements as to management's beliefs, expectations or opinions. Such forward looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward looking statements. Nature of the Company's Business. All of the Company's premiums written are attributable to property and casualty insurance, which industry historically has been cyclical in nature and characterized by periods of relatively high levels of competition and pricing and aggressive marketing, followed by periods of capital shortages and relatively high premium rates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". The profitability of property and casualty insurers is affected by many factors, including competition, weather conditions, natural disasters, the severity and frequency of claims, state regulation of premium rates, interest rates, crime rates, general business conditions and regulations, and court decisions that define the extent of coverage. One of the distinguishing features of the property and casualty insurance business is that its product must be priced before the costs are known, because premium rates generally are set before losses are reported. As a result, property and casualty insurers have experienced significant year- to-year fluctuations in underwriting results. Adequacy of Loss Reserves. The Company maintains reserves to cover its estimated ultimate liability for claims and claim settlement expenses ("LAE") with respect to reported and incurred but not reported ("IBNR") claims as of the end of each accounting period. At any given time, these reserves are estimates of what the Company expects the ultimate settlement and administration of claims will cost, and are based on facts and circumstances then known, predictions of future events, estimates of future trends in claims severity and other variable, subjective factors. Although management uses many resources to calculate reserves, there is no precise method for accurately estimating the ultimate liability. In addition, a number of United States courts have in the past issued, and could in the future issue, decisions expanding concepts of civil liability. Such decisions have resulted in higher damage awards to injured parties. In many cases, 2 such decisions have also resulted in increased losses to property and casualty insurers. This possibility of expansion of insurers' liability has added to the inherent uncertainty of reserving for property and casualty losses. No assurances can be given that reserve estimates will accurately reflect actual losses incurred by the Company. Any material deficiency in reserve estimates, as compared to actual losses, could have a material adverse effect on the Company. See "Business - Liabilities for Unpaid Claims and Claim Settlement Expenses". Importance of Key Individual. The continued participation of Kenneth R. Taylor, the Company's President and Chief Executive Officer is important to the Company s business. The Company has entered into an employment agreement with Mr. Taylor, expiring in 1997, which contains, among other things, a covenant not to compete during the term of the agreement and for one year thereafter. Although Mr. Taylor may voluntarily terminate his employment under this agreement, he has no present intention to do so. Mr. Taylor devotes such time to the Company as he believes is appropriate, although his employment agreement provides that he is not required to devote his entire business time to the Company. The loss of the services of Mr. Taylor could adversely affect the Company s business. The Company does not maintain key-man life insurance on Mr. Taylor. See - Item 10: Directors and Executive Officers of the Registrant and Item 11: Executive Compensation . Importance of Key Agent. During 1996, 1995 and 1994, one of the Company s agents accounted for 16%, 23% and 24%, respectively, of the total premiums written by the Company. The loss of this agent could adversely affect the Company s business. See Item 1: BUSINESS - Marketing . Restrictions on Dividends and Other Distributions from Insurance Subsidiaries. One of the Company s sources of cash with which to pay dividends on its outstanding securities is dividends from Lincoln, Comp and Yorktowne ( Insurance Subsidiaries ). The Insurance Subsidiaries are subject to state laws which restrict the amount of dividends and other distributions they may pay. As of December 31, 1996, the Insurance Subsidiaries had $3,277,000 available for the payment of dividends to the Company, without the prior approval of insurance regulatory authorities. The Insurance Subsidiaries are also subject to risk-based capital requirements which may further restrict their ability to pay dividends. See Item 1: BUSINESS - Regulation and Note 11 of the Notes to Consolidated Financial Statements, incorporated by reference. Regulation. Insurance companies are subject to the supervision, laws and regulations of the states in which they transact business. These laws and regulations cover many aspects of their business, including licensure, the payment of dividends, the establishment of premium rates, the settlement of claims, the transfer of control and the requirement to participate in assigned risk pools. Certain changes in such laws and regulations could have a material adverse effect on the operations of insurance companies, including the Company. Specific regulatory developments which could have a material adverse effect on the operations of the insurance industry include, but are not limited to, the potential repeal of the McCarran-Ferguson Act (which exempts insurance companies from a variety of federal regulatory requirements) and possible rate rollback legislation. In addition, the administration 3 of such regulations is vested in state agencies which have broad powers and are concerned primarily with the protection of policyholders. Under the Pennsylvania Insurance Company Law, subject to certain exceptions, no person may make an offer to acquire control (as defined by statute) or acquire control of the Company without the prior approval of the Pennsylvania Insurance Department. Control is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing 10% or more of the voting securities of the Company. See Item 1: BUSINESS - Regulation . Competition: The property and casualty insurance industry is highly competitive on the basis of both price and service. There are numerous companies competing for business in the geographic markets in which the Company operates, and no single company dominates. See Item 1: BUSINESS - Competition . Reinsurance. The Company relies upon reinsurance agreements to limit its maximum net loss from large single risks or risks in concentrated areas, and to increase its capacity to write insurance. The amount, availability and cost are subject to prevailing market conditions beyond the control of the Company, and such factors may affect the profitability of the Company. Reinsurance does not relieve the primary insurer from liability to its policyholders. To the extent that a reinsurer may be unable to pay losses for which it is liable under the terms of a reinsurance agreement, the Company is exposed to the risk of continued liability for such losses. However, the Company requires all of its reinsurers to have a Best s rating of A- (Excellent ) or better. Additional premiums incurred under certain reinsurance arrangements as a result of catastrophic events could adversely affect the profitability of the Company. See Item 1: BUSINESS - Reinsurance . Certain Provisions of the Company s Articles of Incorporation and Bylaws. The Company s Articles of Incorporation and Bylaws provide, among other things, that (i) the Board of Directors may, without further action of the shareholders of the Company, issue up to 2,000,000 shares of preferred stock with such terms as may be determined by the Board of Directors, subject to certain limitations; (ii) directors are to be elected to staggered three-year terms; (iii) directors may only be removed by a vote of shareholders entitled to cast at least 75% of the votes that all shareholders are entitled to cast thereon and, in certain cases only for cause; (iv) there is no cumulative voting for the election of directors; and (v) any proposed amendment to the Company s Articles of Incorporation or Bylaws, which is not approved by the Board of Directors, must be approved by the vote of shareholders entitled to cast at least 75% of the votes that all shareholders are entitled to cast thereon. Pursuant to these provisions, the Company issued 141,700 shares of 6 1/2% Cumulative Convertible Preferred Stock with certain preferred and special rights. These provisions could adversely affect the rights of the holders of 6 1/2% Cumulative Convertible Preferred Stock and Common Stock and may have the effect of discouraging offers to acquire the Company. In addition, as a result of the super-majority voting provisions relating to an amendment of the Company s Articles of Incorporation and Bylaws and the percentage of the outstanding shares of the Company s Common Stock that certain directors and/or officers of the Company beneficially own, such directors and/or officers will be able to defeat any amendment to such Articles or Bylaws not approved by them. No dividends may be declared or paid with respect to the Common Stock 4 until all accrued dividends on the 6 1/2% Cumulative Convertible Preferred Stock have been paid or set apart for payment. Copies of the Company s Articles of Incorporation and Bylaws are on file with the Securities Exchange Commission. Business Written Insurance underwriting opportunities are evaluated, and the decision to write a particular risk is made, by the underwriting department of the Company or by the Company s agents, subject in the latter case to final approval by the underwriting department. The decision to write a particular risk is based on a number of factors, including the experience and past claims of the insured, the value and type of property to be insured and the type and location of the operation conducted by the insured. The following table sets forth direct premiums written, net premiums earned and the combined ratio of the Company for the last three fiscal years. The combined ratio is a traditional measure of underwriting profitability. The ratio is the sum of (i) the ratio of incurred losses and associated expenses to net premiums earned ( loss ratio ) and (ii) the ratio of expenses incurred for commissions, premium taxes, administrative and other underwriting expenses to net premiums written ( expense ratio ). When the combined ratio is under 100%, underwriting results are generally considered profitable. Conversely, when the combined ratio is over 100%, underwriting results are generally considered unprofitable. The combined ratio does not reflect investment income, federal income taxes or other non-operating income or expenses. (in thousands, except percentages) Years Ended December 31,___ 1996_ 1995_ 1994_ Gross premiums written ............. $61,199 $52,138 $40,199 Net premiums earned ................ 47,002 36,191 28,848 Combined ratio (1) ................. 104% 87% 89% In May, 1996, Lincoln received its current rating A+ (Superior) from A. M. Best Company. Best s ratings are based upon factors relevant to policyholders and are not necessarily directed toward the protection of investors. Marketing The Company s insurance services are marketed through approximately 470 independent insurance agents. The Company selects agents based on their comprehensive knowledge of the industries to which the Company provides insurance coverages and the Company s product markets, including in particular the transportation industry, and of the geographic market in which the agents operate. During 1996, one of the Company s agents accounted for 16% of the total premiums written by the Company and another agent accounted for 5% of the total premiums written by the Company. See Item 13: Certain Relationships and Related Transactions . _________________________ (1) Combined ratios have been calculated in accordance with accounting principles prescribed or permitted by state regulatory agencies. 5 The Company continually monitors and evaluates each agent s performance in terms of premiums written and loss experience. The Company maintains a contingent commission program for its agents. Under this program, certain agents, who underwrite specific amounts of insurance, are entitled to receive additional commissions based upon the profitability to the Company of the business placed by the particular agent. The Company believes this program helps it to retain quality agents and encourages those agents to generate profitable business for the Company. Reinsurance The Company reinsures a portion of its exposure by paying to reinsurers a portion of the premiums received on all policies. Insurance is ceded primarily to reduce the net liability on individual risks and to protect against catastrophic losses. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the coverage, it does make the assuming reinsurer liable to the insurer to the extent of the losses reinsured. The Company maintains excess catastrophe reinsurance covering commercial automobile physical damage and inland marine losses and excess loss reinsurance covering commercial automobile physical damage and inland marine losses occurring at a terminal. In 1997, the Company will also maintain excess of loss reinsurance for all property coverages including automobile physical damage and inland marine. Under this latter treaty, the Company's maximum loss exposure on any one risk (at a maximum coverage of $2,500,000) is $50,000. Pursuant to another reinsurance treaty, the Company maintains excess of loss reinsurance covering commercial automobile liability losses. Under this treaty, the Company s maximum loss exposure on any one loss occurrence (at a maximum coverage of $1,000,000) is $250,000. The Company also maintains contingency excess of loss reinsurance covering commercial automobile liability losses in excess of $1,000,000 (to a maximum of $3,000,000). The Company also maintains excess of loss reinsurance covering non- trucking automobile liability losses. Under this treaty, the Company s maximum loss exposure on any one risk (at a maximum coverage of $1,000,000) is $250,000. The Company maintains excess of loss reinsurance covering extraordinary medical benefit losses. Under this excess of loss reinsurance treaty, the Company s maximum loss exposure on any one risk (at a maximum coverage of $1,000,000) is $250,000. The Company reinsures all loss exposures in excess of the maximum loss exposure under each of these liability loss reinsurance treaties. Pursuant to another reinsurance treaty, the Company maintains excess of loss reinsurance covering workers compensation losses. Under this treaty, the Company retains $250,000 of each occurrence. Losses in excess of $250,000 to a limit of $5,000,000 are reinsured. Any loss in excess of $5,000,000 is the obligation of the Company. The Company s policy is to maintain reinsurance only with insurance companies with a Best s rating A- (Excellent) or better. The Company generally has experienced little difficulty in obtaining reinsurance or in receiving timely payment from its reinsurers. The Company does not believe allowances for potentially uncollectible reinsurance are needed. 6 Further information relating to the Company s reinsurance arrangement, see Note 2 of the Notes to Consolidated Financial Statements. Rates The Company develops its rate structure from various sources. For some of the Company s products, rates are derived from rating bureaus such as the Insurance Services Office ( ISO ), the National Council on Compensation Insurance ( NCCI ), the American Association of Insurance Services ( AAIS ) and the Surety Association of America ( SAA ). When developing rates utilizing material provided by these organizations, the Company will use the rates promulgated by the bureau or it will apply its own expense and profit factors to the specific organization-generated loss costs. For other products, the Company has developed its own rate structure independent of any rating bureau. All necessary rate changes requiring approval are submitted to the appropriate regulatory authorities for review and approval prior to use. Claims All claims operations, including review of initial reports of claims and the determination of liability amounts, are conducted by the Company s claims department. The Company employs a staff of attorneys and adjusters specializing in the transportation industry for the purpose of adjusting claims covered by the Company and certain third parties. The Company believes that by using attorneys and adjusters with an expertise in the transportation industry, it is able to settle claims within a relatively short period of time and within reasonable amounts. When appropriate, the Company also uses outside attorneys and adjusters. Liabilities for Unpaid Claims and Claim Settlement Expenses The Company maintains liabilities for future payments of claims and claim settlement expenses. Claim liabilities are estimates of the ultimate amount that will be required to be paid for claims and consist of reported claims and incurred but not reported claims. Claim settlement expense liabilities are intended to cover the estimated costs of settling all claims, including investigation and litigation costs, and are determined on the basis of historical experience. The amount of claim liabilities for reported claims is based upon an evaluation of the type of risk involved, knowledge of the specific circumstances surrounding each claim and the policy provisions relating to the type of claim. Claim liabilities for incurred but not reported claims are calculated based upon historical experience and current conditions. Liabilities for unpaid claims are closely monitored and are recomputed periodically by the Company using updated information on reported claims. Prior to 1994, the majority of the insurance written by the Company was on property risks. Property claims tend to be reported quickly and generally are settled within a relatively short period of time compared to other lines of business. As a result of this short tail , the Company was not required to monitor and recompute liabilities for unpaid claims over an extended period of time on these coverages. Moreover, because of the relatively short period of time within which these claims are settled, the effect of inflation on loss development 7 was not significant. In 1992, the Company began to write more liability coverages, and beginning in 1994, the majority of the business written by the Company was liability coverages. As a result, the Company is required to monitor liabilities for unpaid claims over a longer period of time than was the case when the Company principally wrote property coverages. The following table sets forth the unpaid claims and claim settlement expenses as of December 31, 1996, 1995 and 1994 and the age of such claims based upon the date the claim occurred. (in thousands) Years Ended December 31,___ 1996 1995 1994 Unpaid claims and claim settlement expenses at the end of the period ............ $36,551 $20,153 $14,292 Age of unpaid claims and claim settlement expenses at the end of the period: Zero to three months ......... $ 8,469 $ 4,836 $ 3,314 Three to six months .......... 5,366 2,579 1,297 Six months to one year ....... 7,323 3,639 2,980 Over one year ................ 15,393 9,099 6,701 Investments The following table sets forth the classification of the Company s investment portfolio as of December 31, 1996, 1995, and 1994. As of December 31, 1996, less than 3% of the debt securities in the Company s investment portfolio were considered below investment grade, principally because such securities were not rated. (in thousands, except percentages) December 31,_______________ 1996_____ 1995_____ 1994_____ Amount Percent Amount Percent Amount Percent Held to Maturity: Fixed Maturities: U.S. Treasury securi- ties and obligations of U.S. government corporations and agencies ........... $ 6,758 9% $ 4,141 7% $ 1,629 3% Obligations of states and political subdivisions ....... 11,165 16 11,076 19 14,879 30 Total held to maturity (1) ....... 17,923 25 15,217 26 16,508 33 Available for sale: Fixed Maturities: U.S. Treasury securi- ties and obligations of U.S. government corporations and agencies............. 26,437 38 4,594 8 4,988 10 8 Obligations of states and political subdi- visions .............. 7,190 10 20,981 36 14,939 30 Debt securities issued by foreign govern- ments ................ 35 - 35 - 35 - Corporate securities .. 3,694 5 1,605 3 1,702 3 Total fixed maturities (2) ...... 37,356 53 27,215 47 21,664 43 Equity securities (3) .. 8,930 12 8,720 15 7,611 15 Total available for sale ............ 46,286 65 35,935 62 29,275 58 Mortgage loans .......... 107 - 116 - 124 - Other investments ....... 1,944 3 1,751 3 744 1 Short term investments (4) ........ 4,758 _ 7 5,191 _ 9 3,889 _ 8 Total investments ... $71,018 100% $58,210 100% $50,540 100% _________________________ (1) Securities held to maturity are valued at cost, which has been adjusted for amortization of discount or premium. Total fair value of securities held to maturity was $18,158 at December 31, 1996, $15,712 at December 31, 1995 and $16,140 at December 31, 1994. (2) Fixed maturities available for sale are valued at fair value. Total amortized cost of fixed maturities available for sale was $37,512 at December 31, 1996, $27,007 at December 31, 1995 and $22,588 at December 31, 1994. (3) Equity securities are valued at fair value. Total costs of equity securities were $8,711 at December 31, 1996, $8,189 at December 31, 1995 and $8,263 at December 31, 1994. (4) Short-term investments are valued at cost, which approximates fair value. The following table sets forth the maturities of the Company s investment portfolio of fixed maturities as of December 31, 1996. (in thousands except percentages) December 31, 1996_ Amount Percent Due in one year or less ................... $ 3,331 6% Due after one year through five years ..... 26,209 47 Due after five years through ten years .... 16,390 30 Due after ten years ....................... 9,349 17 Totals $55,279 100% 9 Mercantile Safe Deposit & Trust Company, Baltimore, Maryland, acts as investment adviser to the Company in connection with its fixed income investment portfolio. Competition The property and casualty insurance industry is highly competitive on the basis of both price and service. In recent years, the property and casualty insurance industry has been characterized by relatively high levels of competition and pricing and aggressive marketing. There are numerous companies competing for business in the geographic markets in which the Company operates, and no single company dominates. Some of the Company s competitors are national in scope and some have substantially greater financial resources than those of the Company. The Company believes it has been able to compete successfully by providing a consistent market for commercial automobile coverages and by providing quality service through agents and a staff who are knowledgeable of the transportation industry. Regulation Insurance companies are subject to supervision and regulation in the states in which they transact business. Such supervision and regulation relates to numerous aspects of an insurance company s business and financial condition. The primary purpose of such regulation is the protection of policyholders. The extent of such regulation varies, but generally derives from state statutes which delegate regulatory, supervisory and administrative authority to state insurance departments. The authority of state insurance departments includes licensing of insurers and agents, approval of policy forms, establishment of standards of solvency for insurers, adoption of rules governing investments and premium rates for property and casualty insurance, and adoption of rules governing provisions for current losses and future liabilities and deposits of securities for the benefit of policyholders. State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies. The majority of the states in which the Company does business and proposes to do business have guaranty fund laws under which insurers doing business in such states can be assessed on the basis of premiums written by the insurer in those states in order to fund policyholder liabilities of insolvent companies. In general, under these laws, an insurer is subject to assessment, depending upon its market share of a given line of business, to assist in the payment of certain policyholders claims against insolvent insurers. The Company has made accruals for its portion of assessments related to such insolvencies based upon the most current information furnished by the guaranty associations. During the year ended December 31, 1996, the amount of such insolvency assessments paid by the Company was not material. The property and casualty insurance industry continues to receive a considerable amount of publicity. New regulations and legislation are being proposed to roll back premium rates, to limit damage awards, to control plaintiffs counsel fees, to bring the industry under regulation 10 by the federal government and to control premiums, policy terminations and other policy terms. It is not possible to predict whether, in what form or in which jurisdictions these proposals might be adopted or the effect, if any, on the Company. Under Pennsylvania law, the Company, as the insurance holding company for the Insurance Subsidiaries, is subject to various registration and periodic reporting requirements. In addition, the Insurance Subsidiaries are subject to various restrictions on the amount of dividends they may pay to the Company. Under Pennsylvania law, the Insurance Subsidiaries are permitted to pay, without the prior approval of the Pennsylvania Insurance Commissioner, cash or property dividends to the Company within any twelve month period in an amount up to the greater of (i) 10% of the Insurance Subsidiary's surplus as shown in its most recent annual statement on file with the Pennsylvania Insurance Department, or (ii) the net investment income earned, excluding net realized capital gains or losses, shown in such statement. The Pennsylvania Insurance Company Law also provides that each Insurance Subsidiary may pay dividends to the Company only from its profits as determined by statute. Effective December 31, 1994, the National Association of Insurance Companies (NAIC) required insurance companies to calculate and report information under a risk-based capital formula. Risk-based capital requirements are intended to allow insurance regulators to identify inadequately capitalized insurance companies based upon the type and mixture of risks inherent in the company s operations. The formula includes components for asset risk, liability risk, and other factors. As of December 31, 1996, each Insurance Subsidiary is above required capital levels. Under the Pennsylvania Insurance Company Law, without the prior approval of the Pennsylvania Insurance Department, subject to certain exceptions, no person (other than the Company) may: (i) make a tender offer for or a request or invitation for tenders of, or enter into any agreement to exchange securities or seek to acquire or acquire in the open market or otherwise, any voting security of the Company if, after the consummation thereof, such person would directly or indirectly, or by conversion or by exercise of any right to acquire, be in control of the Company, or (ii) enter into an agreement to merge with or otherwise to acquire control of the Company. Control is defined as the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract (other than a commercial contract for goods or non-management services) or otherwise, unless the power is the result of an official position with or corporate office held by the person. Control is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote or holds proxies representing 10% or more of the voting securities of the Company. Such presumption may be rebutted upon a showing that control does not exist. The term voting security includes any security convertible into or evidencing a right to acquire a voting security. As a condition to approval, the Pennsylvania Insurance Department may require that such offer remain open a specified minimum length of time, permit certain withdrawals of shares deposited in connection with such offer and require pro rata acceptance of any shares deposited pursuant to the offer. 11 Employees As of December 31, 1996 the Company had approximately 150 employees. None of the employees of the Company is covered by a collective bargaining contract. The Company believes that its employee relations are excellent. ITEM 2: PROPERTIES The Company s headquarters are located in a 25,000 square foot building in York, Pennsylvania, which is owned by the Company. ITEM 3: LEGAL PROCEEDINGS The Company currently is a party to certain lawsuits arising in the ordinary course of its business. The Company believes that none of its current legal proceedings would, if adversely determined, have a material effect on its business or financial condition. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 4.1: EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below is certain information concerning the executive officers of the Company who are not also directors. Name Age Position with the Company Richard S. Kahlbaugh 36 Vice President - Secretary and General Counsel of the Company Glenn E. Sell, Jr. 53 Vice President-Underwriting of Lincoln Mr. Kahlbaugh was elected Vice President - Secretary of the Company in November, 1996. Mr. Kahlbaugh joined the Company in July, 1992. Prior thereto, Mr. Kahlbaugh was an attorney with Ford New Holland, Inc. Mr. Sell was elected Vice President-Underwriting of Lincoln in June, 1987. Mr. Sell joined the Company in January, 1987. PART II ITEM 5: MARKET FOR THE REGISTRANT S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated by reference from the section entitled Quarterly Common Stock Prices and Cash Dividends Per Share in the Company s Annual Report to Shareholders for the year ended December 31, 1996. ITEM 6: SELECTED FINANCIAL DATA Incorporated by reference from the section entitled Financials at a Glance in the Company s Annual Report to Shareholders for the year ended December 31, 1996. 12 ITEM 7: MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference from the section entitled Management s Discussion and Analysis of Financial Condition and Results of Operations in the Company s Annual Report to Shareholders for the year ended December 31, 1996. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated by reference from the Company s Financial Statements, the notes thereto, and the independent auditors report included in the Company s Annual Report to Shareholders for the year ended December 31, 1996. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference from the Company s 1997 proxy statement to be filed pursuant to General Instruction G(3) to the Form 10-K, except information concerning certain Executive Officers of the Company which is set forth in Item 4.1 hereof. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the Company s 1997 proxy statement to be filed pursuant to General Instruction G(3) to the Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from the Company s 1997 proxy statement to be filed pursuant to General Instruction G(3) to the Form 10-K. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from the Company s 1997 proxy statement to be filed pursuant to General Instruction G(3) to the Form 10-K. PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K I. Documents filed as part of this report: A. Financial Statements. The following consolidated financial statements and the notes thereto of Walshire Assurance Company, which are included in the Company s Annual Report to Shareholders for the year ended December 31, 1996, have been incorporated by reference into Item 8 of this Report on Form 10-K. The Independent Auditors Report, which covers the Company s financial statement schedules, appears on page A-1 of this Report on Form 10-K. 13 Consolidated Balance Sheets - December 31, 1996 and 1995. Consolidated Statements of Income - Years ended December 31, 1996, 1995 and 1994. Consolidated Statements of Shareholders Equity - Years ended December 31, 1996, 1995 and 1994. Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994. Notes to Consolidated Financial Statements B. Schedules. Independent Auditors Report on Schedules A-1 I. Summary of Investments Other Than Investments in Related Parties - December 31, 1996. A-2 II. Condensed Financial Information of Registrant - December 31, 1996 and 1995 and Years ended December 31, 1996, 1995 and 1994 A-3 III. Supplementary Insurance Information - Years Ended December 31, 1996, 1995 and 1994 A-6 IV. Reinsurance - Years Ended December 31, 1996, 1995 and 1994 A-7 V. Valuation and Qualifying Accounts - Years Ended December 31, 1996, 1995 and 1994. A-8 VI. Disclosures concerning unpaid claims and claim settlement expenses of property-casualty underwriters A-9 All other schedules not listed have been omitted since the required information is included in the financial statements or the notes thereto, or is not applicable or required. C. Exhibits filed pursuant to Item 601 of Regulation S-K. (Management contracts and compensation plans or arrangements are indicated by (*)). (1) 3.1 Amended and Restated Articles of Incorporation of the Company. (1) 3.2 Bylaws of the Company. (4) 3.3 Statement with Respect to 6 1/2% Cumulative Convertible Preferred Stock. (1) 4.1 Specimen Common Stock Certificate of the Company. (4) 4.2 Specimen Preferred Stock Certificate of the Company. 14 (*) (1) 10.1 The Company s 1987 Stock Option Plan. (*) (1) 10.2 The Company s Employee Stock Purchase Plan. (*) (4) 10.4 Second Amended and Restated Employment Agreement, dated June 22, 1992, between the Company and Kenneth R. Taylor (*) (2) 10.6 The Company s 1990 Stock Option Plan for Non-Employee Directors. (3) 10.7 Mortgage and Note, dated July 10, 1989, between Walshire Assurance Company and Gary J. Orndorff (*) (3) 10.8 Walshire Assurance Company Master 401(k) Plan and Trust (5) 10.10 Term Loan Agreement, dated January 25, 1995, between the Company and Mercantile Pennsylvania Corporation. (*) (1) 10.22 Form of Director s Stock Option Agreement. (6) 11.1 Computation of Per Share Earnings (6) 13.1 Annual Report to Shareholders for the year ended December 31, 1996 (such report, except for those portions expressly incorporated by reference in this Report on Form 10-K, is furnished for the information of the Commission and is not to be deemed filed as part of this Report on Form 10-K). (6) 21.1 Subsidiaries of the Company. (6) 23.1 Consent of KPMG Peat Marwick LLP _________________________ (1) Incorporated by reference from the Company s Registration Statement on Form S-1, and all amendments thereto, (Registration No. 33-15549), which was declared effective on September 3, 1987. (2) Incorporated by reference from the Company s Form 10-K (Commission File No. 0-16267), dated March 28, 1990. (3) Incorporated by reference from the Company s Form 10-K (Commission File No. 0-16267), dated March 28, 1991. (4) Incorporated by reference from the Company s Form 10-K (Commission File No. 0-16267), dated March 28, 1994. (5) Incorporated by reference from the Company s Form 10-K (Commission File No. 0-16267), dated March 27, 1995. (6) Filed herewith. II. Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended December 31, 1996. 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. WALSHIRE ASSURANCE COMPANY Date: March 21, 1997 BY: /s/ KENNETH R. TAYLOR_ _____ KENNETH R. TAYLOR, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 21, 1997. SIGNATURES TITLE /s/ KENNETH R. TAYLOR_______ KENNETH R. TAYLOR President & Chief Executive Officer and Director (Principal Executive Officer) /s/ GARY J. ORNDORFF________ GARY J. ORNDORFF Vice President/Treasurer and Director (Principal Financial and Accounting Officer) /s/ PETER D. BENNETT________ PETER D. BENNETT Director /s/ JOHN J. BUCHAN, JR._____ JOHN J. BUCHAN, JR. Director /s/ CHARLES W. HASH, JR.____ CHARLES W. HASH, JR. Director /s/ L. EDWARD SAUSMAN, JR.__ L. EDWARD SAUSMAN, JR. Director /s/ WILLIAM R. TIERNEY, JR._ WILLIAM R. TIERNEY, JR. Director 16 Independent Auditors Report The Board of Directors and Shareholders Walshire Assurance Company: Under date of February 28, 1997, we reported on the consolidated balance sheets of Walshire Assurance Company and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders equity, and cash flows for each of the years in the three- year period ended December 31, 1996, as contained in the 1996 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1996. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules as listed at Item 14B. These financial statement schedules are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Harrisburg, Pennsylvania February 28, 1997 A-1 Schedule I WALSHIRE ASSURANCE COMPANY AND SUBSIDIARIES Summary of Investments Other Than Investments in Related Parties December 31, 1996 (in thousands) Amount at which Fair shown in the Type of Investment Cost__ Value_ balance sheet_ Held to Maturity: Fixed maturities: U. S. Government and Agencies. $ 6,758 $ 6,769 $ 6,758 States and political subdivisions ................ 11,165 11,389 11,165 Total held to maturity ...... 17,923 18,158 17,923 Available for sale: Fixed maturities: U. S. Government and Agencies. 26,532 26,437 26,437 States and political subdivisions ................ 7,238 7,190 7,190 Foreign governments .......... 35 35 35 Corporate securities ......... 3,707 3,694 3,694 Total fixed maturities ...... 37,512 37,356 37,356 Equity securities: Common Stocks: Public Utilities ............ 545 551 551 Banks, trusts and insurance companies .................. 2,278 2,481 2,481 Industries, miscellaneous and all other .............. 4,487 4,412 4,412 Non-redeemable preferred stock........................ 1,401 1,486 1,486 Total equity securities ..... 8,711 8,930 8,930 Total available for sale .... 46,223 46,286 46,286 Short-term investments ......... 4,758 4,758 4,758 Other investments .............. 2,051 2,051 2,051 $70,955 $71,253 $71,018 A-2 Schedule II WALSHIRE ASSURANCE COMPANY AND SUBSIDIARIES Condensed Financial Information of Registrant Walshire Assurance Company Balance Sheets (Parent Company) December 31 (in thousands, except per share data) 1996 1995 Assets: Investments: Available for sale: Fixed maturities. . . . . . . . . . . . $ 1,570 $ 1,430 Equity securities . . . . . . . . . . . 3,900 4,034 Short-term investments. . . . . . . . . . 98 368 Other investments . . . . . . . . . . . . 2,041 1,857 Total investments . . . . . . . . . . . 7,609 7,689 Cash. . . . . . . . . . . . . . . . . . . . 154 45 Receivable from subsidiaries. . . . . . . . 1,641 897 Investment in subsidiaries. . . . . . . . . 44,255 40,344 Property and equipment, net . . . . . . . . 1,301 786 Other assets. . . . . . . . . . . . . . . . 397 369 Total assets. . . . . . . . . . . . . . $55,357 $50,130 Liabilities Notes payable . . . . . . . . . . . . . . . $ 8,256 $ 3,731 Other liabilities . . . . . . . . . . . . . 267 385 Total liabilities . . . . . . . . . . . 8,523 4,116 Shareholders equity: Preferred stock, par value $.01 per share; 2,000 shares authorized; 128 and 138 shares issued and outstanding. . . . . . . . . . . . . . . 1 1 Common stock, par value $.01 per share; 10,000 shares authorized; 4,651 and 4,064 shares issued and outstanding . . . . . . . . . . . . . . . 47 41 Additional paid-in capital. . . . . . . . . 38,648 31,918 Unrealized gains on investments available for sale of parent and subsidiaries (net of deferred taxes of $21 and $181). . . . 42 558 Retained earnings . . . . . . . . . . . . . 8,096 13,496 Shareholders equity. . . . . . . . . . 46,834 46,014 Total liabilities and shareholders equity. . . . . . . . . $55,357 $50,130 See notes to consolidated financial statements. A-3 Schedule II (continued) WALSHIRE ASSURANCE COMPANY AND SUBSIDIARIES Condensed Financial Information of Registrant Walshire Assurance Comp any Statements of Income (Parent Company) Years Ended December 31 (in thousands) 1996 1995 1994 Revenues: Net investment income . . . . . . $ 1,353 $ 949 $ 479 Net realized gains on investments . . . . . . . . . . 596 160 539 Management fees-subsidiaries. . . 210 247 216 Other . . . . . . . . . . . . . . 4 9 - Total revenues. . . . . . . . 2,163 1,365 1,234 Expenses: General and administrative. . . . 914 1,109 1,004 Interest. . . . . . . . . . . . . 487 247 193 Total expenses. . . . . . . . 1,401 1,356 1,197 Income before (recovery of) income taxes and equity in net income of subsidiaries. . . . 762 9 37 (Recovery of) income taxes. . . . . ( 316) ( 176) ( 74) Income before equity in net income of subsidiaries. . . . . . 1,078 185 111 Equity in net income of subsidiaries. . . . . . . . . . . 844 5,298 3,677 Net income. . . . . . . . . . . . . $ 1,922 $ 5,483 $ 3,788 See notes to consolidated financial statements. A-4 Schedule II (continued) WALSHIRE ASSURANCE COMPANY AND SUBSIDIARIES Condensed Financial Information of Registrant Walshire Assurance Company Statement of Cash Flow (Parent Company) Years ended December 31 (in thousands) 1996 1995 1994 Cash flows from operating activities: Net income . . . . . . . . . . . . . . . $ 1,922 $ 5,483 $ 3,788 Equity in net income of subsidiaries . . ( 844) (5,298) ( 3,677) (Increase)decrease in receivable from subsidiaries . . . . . . . . . . . ( 744) 1,396 1,553 Other. . . . . . . . . . . . . . . . . . ( 554) ( 76) ( 661) Net cash (used in)provided by operating activities. . . . . . . . . . ( 220) 1,505 1,003 Cash flows from investing activities: Purchase of investments. . . . . . . . . (5,988) (5,314) (15,630) Sale or maturity of investments. . . . . 6,843 4,275 13,575 Decrease (increase) in investment in subsidiaries . . . . . . . . . . . . . 570 (1,218) 968 Capital contribution to subsidiaries . . (3,637) - ( 4,725) Net purchase of property and equipment . ( 698) ( 637) ( 78) Other, net . . . . . . . . . . . . . . . ( 695) 1,107 ( 639) Net cash used in investing activities. . . (3,605) (1,787) ( 6,529) Cash flows from financing activities: Cash dividends paid. . . . . . . . . . . (1,515) (1,416) ( 1,104) Issuance of common stock . . . . . . . . 924 330 284 Issuance of preferred stock. . . . . . . - - 6,777 Proceeds from notes payable. . . . . . . 5,005 1,770 - Payment of bonds and notes payable . . . ( 480) ( 440) ( 355) Net cash provided by financing activities. 3,934 244 5,602 Net increase (decrease) in cash. . . . . . 109 ( 38) 76 Cash at beginning of the year. . . . . . . 45 83 7 Cash at the end of the year. . . . . . . . $ 154 $ 45 $ 83 See notes to consolidated financial statements. A-5 Schedule III WALSHIRE ASSURANCE COMPANY AND SUBSIDIARIES Supplementary Insurance Information (in thousands) Unpaid Other Net claims and policy claims Amortization Deferred claim claims Net Net and claim of deferred Other Net acquisition settlement Unearned benefits premium investment settlement acquisition operating premiums costs___ expenses_ premiums payable revenue income__ expenses costs___ expenses written_ Period Year ended December 31, 1996 Property-Casualty $5,193 36,551 33,250 - 47,002 3,168 34,602 7,424 8,110 48,970 Year ended December 31, 1995 Property-Casualty $4,831 20,153 27,555 - 36,191 2,721 20,377 5,447 6,930 42,569 Year ended December 31, 1994 Property-Casualty $3,791 14,292 21,065 - 28,848 2,310 16,435 5,266 5,759 33,147 A-6 Schedule IV WALSHIRE ASSURANCE COMPANY AND SUBSIDIARIES Reinsurance (in thousand, except percentages) Ceded to Assumed Percentage Gross other from other Net of amount Type of Premiums Amount companies companies amount assumed to net Year ended December 31, 1996 Premiums written: Property-Casualty $61,095 12,229 104 48,970 .2% Year ended December 31, 1995 Premiums written: Property-Casualty $52,020 9,569 118 42,569 .3% Year ended December 31, 1994 Premiums written: Property-Casualty $40,104 7,052 95 33,147 .3% A-7 Schedule V WALSHIRE ASSURANCE COMPANY AND SUBSIDIARIES Valuation and Qualifying Accounts (in thousands) _Additions(Recoveries) Deductions- Balance at Charged to Charged to Amounts Balance at beginning of costs and other written end of period expense accounts off period Year ended December 31, 1996 Agents balances reserve for bad debts $100 57 - (37) 120 Premium finance receivables reserve for bad debts 67 ( 6) - (12) 49 Total $167 51 - (49) 169 Year ended December 31, 1995 Agents balances reserve for bad debts $100 6 - ( 6) 100 Premium finance receivables reserve for bad debts 48 22 - ( 3) 67 Total $148 28 - ( 9) 167 Year ended December 31, 1994 Agents balances reserve for bad debts $100 29 - (29) 100 Premium finance receivables reserve for bad debts 42 12 - ( 6) 48 Total $142 41 - (35) 148 A-8 Schedule VI WALSHIRE ASSURANCE COMPANY AND SUBSIDIARIES Disclosures concerning unpaid claims and claim settlement expenses of property-casualty underwriters (in thousands) Year Ended December 31 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 Net liability at end of year for unpaid claims and claim settlement expenses. . . . . . . . . $ 22,342 $ 13,149 $ 9,001 $ 6,443 $ 2,810 $ 1,548 $ 1,808 $ 1,389 $ 899 $ 586 Net liability reestimated as of: One year later. . . . . . 16,388 9,327 6,282 2,849 1,187 1,125 2,339 241 677 Two years later . . . . . 10,649 6,284 2,907 1,251 1,135 2,150 989 677 Three years later . . . . 6,781 2,952 1,349 1,173 2,231 960 677 Four years later. . . . . 3,145 1,315 1,155 2,244 954 677 Five years later. . . . . 1,439 1,087 2,212 930 679 Six years later . . . . . 1,270 2,177 928 678 Seven years later . . . . 2,158 886 668 Eight years later . . . . 883 658 Nine years later . . . . 658 Cumulative deficiency (excess). . . . . . . . . 3,239 1,648 338 335 ( 109) ( 538) 769 ( 16) 72 Cumulative amount of liability paid through: One year later. . . . . . $ 8,214 $ 4,982 $ 3,200 $ 1,850 $ 1,132 $ 1,099 $ 1,988 $ 206 $ 677 Two years later . . . . . 7,804 4,303 2,402 1,234 1,163 2,161 989 677 Three years later . . . . 5,623 2,506 1,330 1,134 2,211 960 677 Four years later. . . . . 2,995 1,223 1,180 2,187 954 677 Five years later. . . . . 1,458 1,073 2,224 932 679 Six years later . . . . . 1,275 2,160 930 678 Seven years later . . . . 2,159 886 668 Eight years later . . . . 883 658 Nine years later . . . . 658 Year Ended December 31, 1996 1995 Gross liability at end of year . . . . . . $36,551 $20,153 Reinsurance recoverable. . . . . . . . . . 14,209 7,004 Net liability at end of year . . . . . . . 22,342 13,149 Gross reestimated liability -- latest. . . 26,781 Reestimated recoverable -- latest. . . . . 10,393 Net reestimated liability -- latest. . . . 16,388 Gross cumulative deficiency. . . . . . . . 6,628 A-9 SECURITIES AND EXCHANGE COM MISSION Washington, D.C. 20549 ___________________________ ________ Exhibits to Annual Report on Form 10-K Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ______________________________________ Walshire Assurance Company INDEX Exhibits to Annual Report on 10-K Sequential Number Title of Document Page No. (1) 3.1 Amended and Restated Articles of Incorporation of the Company. (1) 3.2 Bylaws of the Company. (4) 3.3 Statement with Respect to 6 1/2% Cumulative Convertible Preferred Stock. (1) 4.1 Specimen Common Stock Certificate of the Company. (4) 4.2 Specimen Preferred Stock Certificate of the Company. (*) (1) 10.1 The Company s 1987 Stock Option Plan. (*) (1) 10.2 The Company s Employee Stock Purchase Plan. (*) (4) 10.4 Second Amended and Restated Employment Agreement, dated June 22, 1992, between the Company and Kenneth R. Taylor. (*) (2) 10.6 The Company s 1990 Stock Option Plan for Non-Employee Directors. (3) 10.7 Mortgage and Note, dated July 10, 1989, between Walshire Assurance Company and Gary J. Orndorff. (*) (3) 10.8 Walshire Assurance Company Master 401(k) Plan and Trust. (5)10.10 Term Loan Agreement, dated January 25, 1995 between the Company and Mercantile Pennsylvania Corporation. (*) (1) 10.22 Form of Director s Stock Option Agreement. (6) 11.1 Computation of Per Share Earnings (6) 13.1 Annual Report to Shareholders for the year ended December 31, 1996 (such report, except those portions expressly incorporated by reference in this Report on Form 10-K, is furnished for the information of the Commission and is not to be deemed filed as part of this Report on Form 10-K). (6) 21.1 Subsidiaries of the Company. (6) 23.1 Consent of KPMG Peat Marwick LLP ____________________ (1) Incorporated by reference from the Company s Registration Statement on Form S-1, and all amendments thereto, (Registration No. 33-15549), which was declared effective on September 3, 1987. (2) Incorporated by reference from the Company s Form 10-K (Commission File No. 0-16267), dated March 28, 1990. (3) Incorporated by reference from the Company s Form 10-K (Commission File No. 0-16267), dated March 28, 1991. (4) Incorporated by reference from the Company s Form 10-K (Commission File No. 0-16267), dated March 28, 1994. (5) Incorporated by reference from the Company s Form 10-K (Commission File No. 0-16267), dated March 27, 1995. (6) Filed herewith. EXHIBIT 11.1 EXHIBIT 11.1 COMPUTATION OF PER SHARE EARNINGS 1996 1995 1994 Primary Earnings Per Share Earnings Per Share Based on Average Shares Outstanding $ .33 $ 1.14 $ .79 Impact of Stock Options Utilizing Treasury Stock Method ( .02) ( .06) ( .03) Primary Earnings Per Share $ .31 $ 1.08 $ .76 Fully Diluted Earnings Per Share Earnings Per Share Based on Average Shares Outstanding $ .33 $ 1.14 $ .79 Impact of Stock Options Utilizing Treasury Stock Method ( .02) ( .07) ( .03) Impact of Conversion of 6 1/2% Convertible Preferred Stock - ( .04) -__ Fully Diluted Earnings Per Share $ .31 $ 1.03 $ .76 EXHIBIT 13.1 Corporate Profile Walshire Assurance Company is an insurance holding company with headquarters in York, Pennsylvania. Through its subsidiaries, Walshire conducts business in three insurance-related areas: property and casualty insurance (Lincoln General Insurance Company, Comp America Insurance Company and Yorktowne Insurance Company), insurance premium finance (Agents Budget Corporation Consumer Discount Company, Inc. and Yorktowne Premium Finance Company) and claims adjustment services (King American Ltd.). Table Of Contents Financials at a Glance 3 Letter from the President 4 A Decade of Achievements 6 A Decade of Product Line Growth 8 A Decade of Premium Growth 10 A Decade of Commitment 12 Management's Discussion and Analysis 14 Management Report 16 Independent Auditors' Report 16 Financial Statements 17 Quarterly Common Stock Prices and Cash Dividends Per Share 32 Board of Directors, Officers, Subsidiaries and Corporate Information Inside Back Cover Financials at a Glance (In thousands, except per share data and ratios) Year Ended December 31, 1996 1995 1994 1993 1992 Total Revenues $ 52,679 $ 39,927 $32,607 $25,920 $19,933 Net Income 1,922 5,483 3,788 2,619 2,563 Primary Net Income Per Share (1) .31 1.08 .76 .62 .85 Fully-Diluted Net Income Per Share (1) .31 1.03 .76 .61 .71 Dividends Paid on Common Stock 1,083 955 846 779 503 Dividends Per Common Share (1) .236 .215 .193 .189 .167 Gross Premiums Written 61,199 52,138 40,199 31,583 24,252 Loss Ratio (2) 75% 59% 59% 55% 47% Combined Ratio (2) 104% 87% 89% 90% 82% December 31,1996 1995 1994 1993 1992 Total Investments $ 71,018 $ 58,210 $50,540 $40,324 $32,074 Total Assets 130,936 101,627 83,068 66,345 54,279 Long-Term Debt 1,076 1,481 1,921 16 5,208 Shareholders' Equity 46,834 46,014 40,014 32,041 24,829 Book Value Per Common Share (1) 8.75 8.82 7.55 7.36 7.03 Common Shares Outstanding (1) 4,651 4,470 4,402 4,359 3,533 (1) These amounts reflect the following events: (i) in August, 1992, the Company declared a 5% stock dividend, (ii) in October and November, 1992, the Company converted $4,522 of its 10% Convertible Subordinated Debentures into 549 shares of common stock, (iii) in January and May, 1993, the Company converted $4,709 of its 10% Convertible Subordinated Debentures into 572 shares of common stock, (iv) in November, 1994, the Company declared a 5% stock dividend, (v) in October, 1995 the Company converted 4 shares of its 6%1/2% Convertible Preferred Stock into 15 shares of common stock, (vi) in December, 1995 the Company declared a 10% stock dividend, (vii) throughout 1996, the Company converted 10 shares of its 6%1/2% Convertible Preferred Stock into 39 shares of common stock, and (viii) in December, 1996 the Company declared a 10% stock dividend. Included in 1992 earnings per share were extraordinary expenses of $112, or $.04 per share ($.03 per share fully-diluted), relating to the redemption of $1,333 of the 10% Convertible Subordinated Debentures. Included in 1993 earnings per share was additional income of $61, or $.01 per share, resulting from the change in accounting for income taxes. Included in 1994 book value per common share was an additional $.06 per share, resulting from the change in accounting for debt and equity securities. (2) Loss ratios and combined ratios have been calculated in accordance with accounting principles prescribed or permitted by state regulatory agencies. Management Report The Company's management is responsible for the integrity and accuracy of the financial information contained in this annual report. Management believes that the financial statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances and that the other information in this annual report is consistent with those statements. In preparing the financial statements, management makes informed judgments and estimates where necessary to reflect the expected effects of pending events and transactions. The Company maintains a system of internal controls which provides reasonable assurance that assets are safeguarded and that financial records reflect the transactions of the Company. Management conducts periodic reviews of this system to assure the adequacy of the controls in place. The Company's independent auditors, KPMG Peat Marwick LLP, were engaged to perform an audit of the consolidated financial statements. Their audit provides an objective outside review of management's responsibilities to report operating results and financial condition. The Audit Committee of the Board of Directors is comprised of directors who are neither officers nor employees of the Company. The Committee meets periodically with management and the independent auditors to review the adequacy of the internal controls and financial reporting. The independent auditors have unrestricted access to the Committee with and without the presence of management. Kenneth R. Taylor Gary J. Orndorff President and Vice President/Treasurer and Chief Executive Officer Chief Financial Officer Independent Auditors' Report The Board of Directors and Shareholders Walshire Assurance Company: We have audited the accompanying consolidated balance sheets of Walshire Assurance Company and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Walshire Assurance Company and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Harrisburg, Pennsylvania KPMG Peat Marwick LLP February 28, 1997 Walshire Assurance Company and Subsidiaries Consolidated Balance Sheets December 31 (in thousands, except per share data) 1996 1995 Assets Investments: Held to maturity: Fixed maturities (fair value $18,158 and $15,712) $ 17,923 $ 15,217 Available for sale: Fixed maturities (cost $37,512 and $27,007) 37,356 27,215 Equity securities (cost $8,711 and $8,189) 8,930 8,720 Short-term investments 4,758 5,191 Other investments 2,051 1,867 Total investments 71,018 58,210 Cash 637 99 Accrued investment income receivable 847 864 Amounts receivable from reinsurers 1,837 3,315 Amounts receivable from reinsured company 563 595 Agents' balances and direct bill receivable (net of allowance for doubtful accounts of $120 and $100) 8,501 5,501 Installment premiums receivable 8,514 5,965 Agents' balances and installment premiums receivable from related parties 3,073 3,694 Premium finance receivables (net of unearned finance charges and allowance for credit losses of $109 and $135) 4,836 6,534 einsurance receivable 19,699 8,615 Deferred acquisition costs 5,193 4,831 Property and equipment (net of accumulated depreciation of $1,725 and $1,284) 4,526 3,270 Other assets 1,692 134 Total assets $130,936 $101,627 Liabilities and Shareholders' Equity Liabilities: Unpaid claims and claim settlement expenses $ 36,551 $ 20,153 Unearned premiums 33,250 27,555 Short-term notes payable 7,293 2,250 Long-term notes payable 1,076 1,481 Deposits by insureds 2,380 1,488 Commissions payable to agents 1,681 1,049 Commissions payable to related parties 401 473 Other liabilities 1,470 1,164 Total liabilities 84,102 55,613 Shareholders' equity: Preferred stock, par value $.01 per share; 2,000 shares authorized; 128 and 138 shares issued and outstanding 1 1 Common stock, par value $.01 per share; 10,000 shares authorized; 4,651 and 4,064 shares issued and outstanding 47 41 Additional paid-in capital 38,648 31,918 Unrealized gains on investments available for sale (net of deferred taxes of $21 and $181) 42 558 Retained earnings 8,096 13,496 Shareholders' equity 46,834 46,014 Total liabilities and shareholders' equity $130,936 $101,627 See accompanying notes to consolidated financial statements. Walshire Assurance Company and Subsidiaries Consolidated Statements of Income (in thousands, except per share data) Years ended December 31, 1996 1995 1994 Revenues: Premiums earned $59,020 $45,648 $35,778 Premiums ceded (12,018) (9,457) (6,930) Net premiums earned 47,002 36,191 28,848 Net investment income 3,168 2,721 2,310 Net realized gains on investments 1,778 316 743 Other 731 699 706 Total revenues 52,679 39,927 32,607 Expenses: Claims and claim settlement expenses 41,030 23,045 18,254 Reinsurance recoveries (6,428) (2,668) (1,819) Net claims and claim settlement expenses 34,602 20,377 16,435 Amortization of deferred acquisition costs 7,424 5,447 5,266 Underwriting, general and administrative expenses 8,110 6,930 5,759 Dividends to policyholders .153 -- -- Interest 488 290 264 Total expenses 50,777 33,044 27,724 Income before income taxes 1,902 6,883 4,883 Provision for income taxes (benefit) (20) 1,400 1,095 Net income 1,922 5,483 3,788 Less dividends on convertible preferred stock 424 458 374 Net income available for common stock $1,498 $5,025 $3,414 Net income per common share and common equivalent share: Primary: Net income $.31 $1.08 $.76 Weighted average shares outstanding 4,791 4,649 4,507 Fully diluted: Net income $.31 $1.03 $.76 Weighted average shares outstanding 4,791 5,348 4,507 See accompanying notes to consolidated financial statements. Walshire Assurance Company and Subsidiaries Consolidated Statements of Cash Flows (in thousands) Years ended December 31, 1996 1995 1994 Cash flows from operating activities: Net income $1,922 $5,483 $3,788 Adjustments to reconcile net income to net cash provided by operating activities Net realized gains on investments (1,778) (316) (743) Decrease (increase) in assets: Accrued investment income receivable 17 31 (109) Amounts receivable from reinsurers 1,478 (671) (1,708) Amounts receivable from reinsured company 32 730 (10) Agents' balances, direct bill and installment premiums receivable (5,510) (4,206) (2,844) Agents' balances and installment premiums receivable from related parties 582 (1,436) 65 Premium finance receivables 1,698 (1,856) (586) Reinsurance receivable (11,084) (2,260) (513) Deferred acquisition costs (362) (1,040) (576) Other, net (972) 809 196 (Decrease) increase in liabilities: Unpaid claims and claim settlement expenses 16,398 5,861 2,528 Unearned premiums 5,695 6,490 4,421 Deposits by insureds 892 741 48 Other liabilities 304 347 (267) Other, net 560 737 185 Net cash provided by operating activities 9,872 9,444 3,875 Cash flows from investing activities: Purchase of investments: Held to maturity (4,463) (3,805) (5,078) Available for sale (44,818) (10,539) (19,227) Sale of investments: Available for sale 32,711 9,234 9,654 Maturity of investments 4,221 1,910 1,925 Net (purchase) sale of short term and other investments 254 (2,212) 583 Purchase of property and equipment (1,853) (1,210) (426) Sale of property and equipment 11 135 84 Other, net 548 (335) 1,085 Net cash used in investing activities (13,389) (6,822) (11,400) Cash flows from financing activities: Cash dividends paid (1,507) (1,412) (1,104) Issuance of common stock 924 330 284 Issuance of preferred stock -- -- 6,777 Proceeds from notes payable 5,118 1,770 2,145 Payment of notes payable.(480) (3,395) (449) Net cash provided by (used in) financing activities 4,055 (2,707) 7,653 Net increase (decrease) in cash 538 (85) 128 Cash at beginning of the year 99 184 56 Cash at end of the year $637 $99 $184 See accompanying notes to consolidated financial statements. Walshire Assurance Company and Subsidiaries Consolidated Statements of Shareholders' Equity (in thousands, except per share data) Years ended December 31, 1996 1995 1994 Preferred Stock Shares outstanding Balance at beginning of year 138 142 -- Shares issued pursuant to private placement offering -- -- 142 Shares converted to common stock (10) (4) -- Balance at end of year 128 138 142 Preferred Stock (par value $.01) Balance at beginning of year $1 $1 $-- Shares issued pursuant to private placement offering -- -- 1 Balance at end of year $1 $1 $1 Common Stock Shares Outstanding Balance at beginning of year 4,064 3,638 3,431 Dividend reinvestment 2 -- -- Conversion of preferred stock 39 15 -- Stock dividend 423 369 173 Exercise of stock options 134 36 30 Stock tendered to exercise options (18) -- -- Employee stock purchase plan 7 6 4 Balance at end of year 4,651 4,064 3,638 Common Stock (par value $.01) Balance at beginning of year $41 $36 $34 Conversion of preferred stock 1 -- -- Stock dividend 4 4 2 Exercise of stock options 1 1 -- Balance at end of year 47 41 36 Additional Paid-In Capital Balance at beginning of year 31,918 25,751 16,831 Dividend reinvestment 23 4 -- Stock dividend 5,811 5,838 1,860 Exercise of stock options 1,059 258 239 Stock tendered to exercise options (250) -- -- Employee stock purchase plan 87 67 45 Issuance of preferred stock -- -- 6,776 Balance at end of year 38,648 31,918 25,751 Unrealized gains (losses) on investments available for sale Balance at beginning of year 558 (1,042) 613 Unrealized gains (losses) on investments available for sale (516) 1,600 (1,827) Effect of change in accounting for investments available for sale -- -- 172 Balance at end of year 42 558 (1,042) Retained Earnings Balance at beginning of year 13,496 15,268 14,562 Net income 1,922 5,483 3,788 Cash dividends -- common stock (per share $.236; $.215; $.193) (1,083) (955) (846) -- preferred stock (per share $3.25; $3.25; $2.64) (424) (458) (374) Stock dividends on common stock (5,815) (5,842) (1,862) Balance at end of year 8,096 13,496 15,268 Shareholders' Equity $46,834 $46,014 $40,014 See accompanying notes to consolidated financial statements. Walshire Assurance Company and Subsidiaries Notes to Consolidated Financial Statements December 31, 1996, 1995 and 1994 (1) Summary of Significant Accounting Policies (a) Organization and Business The Company was organized as a regional insurance holding company and operates in 23 eastern, southeastern and midwest states. Through its wholly owned subsidiaries, it provides products primarily to the trucking industry in three insurance-related areas: property and casualty insurance, Lincoln General Insurance Company (Lincoln), Comp America Insurance Company (Comp) and Yorktowne Insurance Company (Yorktowne); insurance premium finance, Agents Budget Corporation Consumer Discount Company, Inc. (ABCO) and Yorktowne Premium Finance Company (YPFCO); and claims adjustment services, King American Ltd. (King). Yorktowne was acquired on September 30, 1996 and was accounted for by the purchase method of accounting. Yorktowne's financial position and results of operations since acquisition, while not material, have been included in the consolidated financial statements. The Company's major lines of business in 1996 and their percentages of total net earned premiums were Automobile Physical Damage (44%), Automobile Liability (38%), Workers' Compensation (9%) and Inland Marine (6%). Lincoln, Comp and Yorktowne (``the Insurance Subsidiaries'') are subject to regulation by insurance departments in those states in which they operate and undergo periodic examination by these departments. The Insurance Subsidiaries are also subject to competition from other insurance carriers in their operating areas. (b) Principles of Consolidation and Basis of Presentation The consolidated financial statements include Walshire Assurance Company (Walshire) and its subsidiaries, ABCO, Ashford Reinsurance Intermediaries Corporation (Ashford), Comp, King, Lincoln, Yorktowne and YPFCO, and are collectively referred to herein as the ``Company.'' Significant inter- company balances and transactions have been eliminated in consolidation. The accounts of the Insurance Subsidiaries have been included in the accompanying consolidated financial statements on the basis of generally accepted accounting principles (GAAP), which differ in some respects from the statutory accounting practices employed by the Insurance Subsidiaries in the preparation of their financial reports to the Insurance Department of the Commonwealth of Pennsylvania. See note 11. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the liabilities for unpaid claims and claim settlement expenses. While management uses available information to provide for such liabilities, future additions to these liabilities may be necessary based on changes in trends in claim frequency and severity. In addition, various insurance departments, as an integral part of their examination process, periodically review the Company's liabilities for unpaid claims and claim settlement expenses. Such departments may require the Company to recognize additions to the liabilities based on their judgments about information available to them at the time of their examination. Management believes that such liabilities are adequate. Certain reclassifications have been made to the prior years' financial statements to correspond to the current year presentation. (c) Investments Fixed maturities, which include bonds and redeemable preferred stocks, are purchased to support the investment strategies of the Company, which are developed based on many factors including rate of return, maturity, credit risk, tax considerations and regulatory requirements. Equity securities include common stocks and non-redeemable preferred stocks. In 1994, the Company adopted Financial Accounting Standards Board Statement No. 115, ``Accounting for Certain Investments in Debt and Equity Securities,'' (SFAS 115). SFAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values (other than those accounted for under the equity method or as investments in consolidated subsidairies) and all investments in debt securities. SFAS 115 provides that a company use its current intent at the time of adoption in classifying investments. These investments are classified into three categories as follows: Held-to-Maturity Securities -- Debt securities that the company has the positive intent and ability to hold to maturity; reported at amortized cost. Trading Securities -- Debt and equity securities that are bought and held principally for the purpose of selling them in the near term; reported at fair value, with unrealized gains and losses included in earnings. Available-for-Sale Securities -- Debt and equity securities not classified as either held-to-maturity securities or trading securities; reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity (net of tax effects). Short term investments, which have an original maturity of one year or less, are carried at amortized cost which approximates fair value. Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold and are credited or charged to income. Unrealized gains or losses on investments available for sale, net of applicable deferred income tax, are excluded from income and credited or charged directly to a separate component of shareholders' equity. (d) Deferred Acquisition Costs Acquisition costs, consisting of commissions, premium taxes, and certain underwriting expenses related to the production of property and casualty business, are deferred to the extent recoverable and are amortized ratably over the period in which the related premiums are earned. Anticipated claims and claim settlement expenses, expenses for maintenance of policies in force and anticipated investment income are considered in the determination of the recoverability of deferred acquisition costs. (e) Property and Equipment Property and equipment are included in the financial statements at cost. Depreciation of property has been provided by the straight-line method with an estimated useful life of 20 to 40 years. Depreciation of equipment has been provided by the straight-line method with estimated useful lives of three to ten years. (f) Unpaid Claims and Claim Settlement Expenses Unpaid claims and claim settlement expenses are based on individual case estimates for reported claims and estimates, based on experience and industry averages, for unreported claims and claim settlement expenses. The provision for unpaid claims and claim settlement expenses, net of estimated salvage recoverable, has been established to cover the estimated net cost of insured claims. The amounts are necessarily based on estimates and while they are believed to be adequate, the ultimate liability may exceed such estimates. Any change in such estimates will be recorded in the year the change occurs. The provision for unpaid claims and claim settlement expenses for surety business have been established using management's best estimates of the cost of claims. The Company also holds funds as collateral which can be used to offset claims should a default occur. Because the Company has no interest in these funds unless a default occurs, these amounts have not been reflected in the financial statements. The Company has no material exposures to environmental risks. (g) Fair Values of Financial Instruments The Company has used the following methods and assumptions in estimating its fair value disclosures: Investments and Cash -- Fair values for fixed maturity securities are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or values obtained from independent pricing services through a bank trustee. The fair values for equity securities are based on quoted market prices. The carrying amounts reported in the balance sheets for cash, short-term and other investments approximate their fair values. Notes Payable -- The carrying amounts reported in the balance sheets for these instruments approximate their fair values. (h) Premium Revenue Premium revenue is recognized as earned on the semi-monthly pro-rata basis over the terms of the policies. (I) Reinsurance In the normal course of business, the Company seeks to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. The Company reports reinsurance receivables (including amounts related to claims incurred but not yet reported) and prepaid reinsurance premiums as assets. (j) Income Taxes Deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. (k) Net Income Per Share Net income per share is computed after recognition of preferred stock dividend requirements and is based on the weighted average number of shares of common stock and common stock equivalents outstanding. Fully diluted net income per share is computed after recognition of preferred stock dividend requirements and is based on the weighted average number of shares of common stock and common stock equivalents outstanding for the period. (l) Stock Option Plan Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board (``APB'') Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. See Note 12. (m) Fiduciary Funds In its capacity as a reinsurance intermediary, the Company collects premiums from reinsured companies and, after deducting its commission, remits the premiums to the respective reinsuring companies; the Company also collects claims or refunds from the reinsuring companies. Until remittance, these funds are held in a fiduciary capacity. Net uncollected premiums due from reinsured companies and payable to reinsuring companies amounting to $1,719,000 as of December 31, 1996 and 1995, are not included in the accompanying Consolidated Balance Sheets. (2) Reinsurance The Insurance Subsidiaries assume reinsurance from and cede insurance to other insurers and reinsurers under various contracts which cover individual risks or entire classes of business. These reinsurance arrangements provide greater diversification of business and minimize the Insurance Subsidiaries' losses arising from large risks or from hazards of an unusual nature. The ceding of insurance does not discharge the original insurer from its primary liability to its policyholders. The Insurance Subsidiaries have catastrophic and excess per risk reinsurance contracts for which they pay premiums based upon their gross earned premiums derived from covered business. The reinsured amounts included in developing the liability for claims and claim settlement expenses were $14,209,000 and $7,004,000 at December 31, 1996 and 1995, respectively. At December 31, 1996, reinsurance receivables with a carrying value of $7,010,000 were associated with a single reinsurer. The effect of reinsurance on premiums written is as follows: (in thousands) Years Ended December 31, 1996 1995 1994 Direct $61,095 $52,020 $40,104 Assumed 104 118 95 Ceded (12,229) (9,569) (7,052) Net premiums written $48,970 $42,569 $33,147 The effect of reinsurance on premiums earned is as follows: (in thousands) Years Ended December 31, 1996 1995 1994 Direct $58,912 $45,527 $35,700 Assumed 108 121 78 Ceded (12,018) (9,457) (6,930) Net premiums earned $47,002 $36,191 $28,848 (3) Related Party Transactions Lincoln pays agency commissions for business placed with it to four corporations with which directors of Walshire are affiliated. For these related parties, the following is a summary of their transactions and balances after deducting the reinsurance portion, where applicable. (in thousands) Years Ended December 31, 1996 1995 1994 Premiums on policies written $9,520 $11,415 $9,467 Commissions 1,852 2,050 1,987 (in thousands) December 31, 1996 1995 Agents' balances receivable $1,233 $1,609 Installment premiums receivable 1,840 2,085 Commissions payable 401 473 (4) Major Agencies During 1996, 1995 and 1994, one of the Company's agents with which a director of Walshire is affiliated, accounted for 16%, 23% and 24%, respectively, of the total premiums written. Agents' balances and installment premiums receivable from this agency were $2,653,000 and $3,116,000 as of December 31, 1996 and 1995, respectively. See Note 3. Another agent accounted for 5% and 6% of the total premiums written during 1996 and 1995, respectively, while three agents accounted for 21% of the total premiums written during 1994. Agents' balances and installment premiums receivable from these agents were $1,020,000 and $321,000 as of December 31, 1996 and 1995, respectively. (5) Investments Net investment income, comprised primarily of interest and dividends, is derived from the following sources: (in thousands) Years Ended December 31, 1996 1995 1994 Fixed maturities $2,628 $2,311 $1,833 Equity securities 303 300 322 Short-term investments 373 253 314 Other 78 13 (16) 3,382 2,877 2,453 Investment expenses (214) (156) (143) Net investment income $3,168 $2,721 $2,310 The changes in net unrealized gains on investments available for sale, less applicable deferred income taxes, is as follows: (in thousands) Years Ended December 31, 1996 1995 1994 Increase (decrease) during period in difference between fair value and cost of investments available for sale: Fixed maturities $(364) $1,132 $(924) Equity securities (312) 1,183 (1,564) (676) 2,315 (2,488) Deferred income taxes 160 (715) 833 Increase (decrease) in net unrealized gains of investments available for sale $(516) $1,600 $(1,655) Unrealized investment gains and losses on fixed maturities available for sale and equity securities, less applicable deferred income taxes, were as follows: (in thousands) Years Ended December 31, 1996 1995 1994 Fixed maturities: Gross gains $224 $553 $94 Gross losses (380) (345) (1,018) Equity securities: Gross gains 1,130 1,260 619 Gross losses (911) (729) (1,271) 63 739 (1,576) Deferred income taxes (benefit) 21 181 (534) Net unrealized investment gains (losses) $42 $558 $(1,042) During December 1995, as permitted by the Financial Accounting Standards Board one-time ``window'', the Company transferred $4,131,000 of investments from its held to maturity portfolio to its available for sale portfolio. The fair value of such investments was $4,208,000. The transfer of securities was made to provide the Company with increased flexibility in managing its liquidity position. The amortized cost and fair values of investments in fixed maturities as of December 31, 1996 are as follows: (in thousands) Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Held to maturity U.S. Treasury securities and obligations of U.S. government corporations and agencies $6,758 $63 $52 $6,769 Obligations of states and political subdivisions 11,165 266 421 1,389 Total held to maturity 17,923 329 941 8,158 Available for sale U.S. Treasury securities and obligations of U.S. government corporations and agencies 26,532 591 542 6,437 Obligations of states and political subdivisions 7,238 47 95 7,190 Debt securities issued by foreign governments 35 -- -- 35 Corporate securities 3,707 118 131 3,694 Total available for sale 37,512 224 380 37,356 Total fixed maturities $55,435 $553 $474 $55,514 The amortized cost and fair value of fixed maturities at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. (in thousands) Amortized Fair Cost Value Held to maturity Due in one year or less $1,562 $1,579 Due after one year through five years 6,343 6,401 Due after five years through ten years 7,022 7,098 Due after ten years 2,996 3,080 Total held to maturity 17,923 18,158 Available for Sale Due in one year or less 1,717 1,769 Due after one year through five years 20,059 19,866 Due after five years through ten years 9,432 9,368 Due after ten years 6,304 6,353 Total available for sale 37,512 37,356 Total fixed maturities $55,435 $55,514 The amortized cost and fair values of investments in fixed maturities as of December 31, 1995 are as follows: (in thousands) Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value Held to maturity U.S. Treasury securities and obligations of U.S. government corporations and agencies $4,141 $1,105 $-- $4,246 Obligations of states and political subdivisions 11,076 46 311,466 Total held to maturity 15,217 568 731 5,712 Available for sale U.S. Treasury securities and obligations of U.S. government corporations and agencies 4,499 95 -- 4,594 Obligations of states and political subdivisions 20,783 396 198 20,981 Debt securities issued by foreign governments 35 -- -- 35 Corporate securities 1,690 621 47 1,605 Total available for sale 27,007 553 345 27,215 Total fixed maturities $42,224 $1,121 $418 $42,927 Proceeds from sales of fixed maturities available for sale and equity securities and the gross gains and gross losses realized on those sales were as follows: (in thousands) Years Ended December 31, 1996 1995 1994 Proceeds from sales $37,550 $11,324 $9,400 Gross gains Fixed maturities $308 $114 $68 Equity securities 1,807 895 1,013 Total gross gains 2,115 1,009 1,081 Gross losses Fixed maturies 792 560 Equity securities 258 668 278 Total gross losses 337 693 338 Net realized gains on investments $1,778 $316 $743 As of December 31, 1996, fixed maturities with an amortized cost totaling $4,586,000 were held by regulatory agencies, as required by law. (6) Deferred Acquisition Costsr Changes in deferred acquisition costs are as follows: (in thousands) Years Ended December 31, 1996 1995 1994 Balance, January 1 $4,831 $3,791 $3,215 Acquisition costs deferred 7,786 6,487 5,842 Amortization charged to earnings (7,424) (5,447) (5,266) Balance, December 31 $5,193 $4,831 $3,791 (7) Federal Income Taxesr Walshire and its wholly-owned subsidiaries file a consolidated tax return and are taxed essentially the same as other corporations. The provision for income taxes is comprised of the following components: (in thousands) Years Ended December 31, 1996 1995 1994 Current: Federal $382 $1,741 $1,302 State -- (2) 8 Deferred (402) (339) (215) $(20) $1,400 $1,095 Differences between the federal income tax rate and effective tax rates as reflected in the financial statements on income before income taxes are as follows: (in thousands) Years Ended December 31, 1996 1995 1994 Computed at statutory federal rate (34%) $647 $2,340 $1,660 Tax exempt interest and dividend received deduction (711) (679) (637) Reduction of prior year tax provisions -- (277) -- Miscellaneous items 44 16 72 $(20) $1,400 $1,095 In accordance with SFAS 109, the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below: (in thousands) December 31, 1996 1995 Deferred tax assets: Unearned premiums $1,993 $1,838 Unpaid claims and claim settlement expenses 1,016 613 Allowance for doubtful accounts 5157 $3,060 $2,508 Deferred tax liabilities: Deferred acquisition costs $1,766 $1,643 Unrealized gain on investments available for sale 211 81 Other 42 15 $1,829 $1,839 Management has determined that it is not required to establish a valuation allowance for the deferred tax asset since it is likely that the deferred tax asset will be realized through carrybacks, future reversals of existing temporary differences, future taxable income and tax planning strategies. The net deferred tax asset is a component of other assets in 1996 and other liabilities in 1995. In 1996, 1995 and 1994, the Company made cash payments of $1,630,000, $1,748,000 and $938,000 respectively, for income taxes. (8) Unpaid Claims and Claim Settlement Expensesr Activity in the unpaid claims and claim settlement expenses is summarized as follows: (in thousands) December 31, 1996 1995 1994 Balance, January 1 $20,153 $14,292 $11,764 Less reinsurance recoverables 7,004 5,291 5,321 Net balance, January 1 13,149 9,001 6,443 Incurred related to: Current year 32,276 20,062 16,311 Prior years 2,326 315 124 Total incurred 34,602 20,377 16,435 Paid related to: Current year 18,522 11,259 10,547 Prior years 6,887 4,970 3,330 Total paid 25,409 16,229 13,877 Net balance, December 31 22,342 13,149 9,001 Plus reinsurance recoverables 14,209 7,004 5,291 Balance, December 31 $36,551 $20,153 $14,292 The unfavorable development of $2,326,000 in 1996 is primarily related to strengthening of case and incurred but not reported reserves. (9) Bonds and Notes Payable Bonds and notes payable consisted of the following: (in thousands) December 31, 1996 1995 Note payable (prime interest rate), monthly payments of $40 plus interest, due December, 1999 $1,481 $1,961 Note payable (no interest) monthly payments of $3, due December, 1999 113 -- Line of credit (prime interest rate), due on demand 450 -- Line of credit (prime interest rate), due on demand 6,325 1,770 8,369 3,731 Current portion (7,293) (2,250) Long-term notes payable $1,076 $1,481 The estimated fair value of notes payable approximates the carrying value based on the Company's current ability to obtain loans at similar rates of interest. In 1996, 1995 and 1994, the Company made cash payments of $458,000, $298,000 and $246,000 respectively, for interest expense. Walshire and its subsidiaries have a combined line of credit of $10,000,000 at December 31, 1996, $3,675,000 of which is available. The line of credit requires Walshire to maintain shareholders' equity in excess of $40,000,000 and is subject to reaffirmation in July, 1997. (10) 401(k) Plan Walshire and its subsidiaries contribute to a qualified 401(k) Plan. All full time employees who meet certain eligibility requirements may elect to participate in the Plan. Participants can contribute no more than 20% of their base compensation. The Company matches 100% of employee contributions, not to exceed 5% of an employee's annual compensation. The Company expense for 401(k) Plan benefits were $128,000, $109,000 and $73,000 in 1996, 1995 and 1994, respectively. The Company currently does not provide any post-retirement or post- employment benefits. (11) Shareholders' Equity The Insurance Subsidiaries are restricted by law as to the amount of dividends they may pay to Walshire without the prior approval of the insurance regulatory authorities. These authorities only recognize statutory accounting practices for determining the ability of an insurer to pay dividends to its shareholders. At December 31, 1996, $2,911,000 and $366,000 was available for the payment of dividends from Lincoln and Comp, respectively, to Walshire without the prior approval of the insurance regulatory authorities. Yorktowne may not pay any dividends to Walshire without the prior approval of the insurance regulatory authorities until September 30, 1999. Dividends paid by Lincoln to Walshire for the years ended December 31, 1996 and 1995 were $1,000,000 and $700,000, respectively. No dividends were paid by Lincoln to Walshire in 1994. Comp and Yorktowne have paid no dividends. In addition, Walshire declared 10%, 10% and 5% stock dividends in 1996, 1995 and 1994, respectively. In March of 1994, 141,700 shares of 6%1/2% Convertible Preferred Stock were issued at $50 per share. The Preferred Stock is convertible at any time, unless previously redeemed, into shares of the Common Stock of Walshire Assurance Company at a conversion price of $11.02 per share, subject to adjustment under certain circumstances. During 1996 and 1995, 9,500 and 4,000 shares were converted into 43,104 and 18,150 shares of common stock, respectively. A reconciliation of the insurance subsidiaries statutory net income to consolidated GAAP net income is as follows: (in thousands) Years Ended December 31, 1996 1995 1994 Statutory net income for insurance subsidiaries $1,190 $4,223 $2,822 Deferred acquisition costs 362 1,040 576 Salvage and subrogation -- 500 98 Deferred income taxes 407 310 219 Write down of securities (49) (29) 10 Taxes (53) -- -- Ceding commissions (74) -- -- Depreciation 53 -- -- Insurance deductible -- -- 20 GAAP net income for insurance subsidiaries 1,836 6,044 3,745 Net income (loss) of Walshire and other non-insurance subsidiaries 86 (561) 43 Consolidated GAAP net income $1,922 $5,483 $3,788 A reconciliation of statutory capital and surplus for the insurance subsidiaries to consolidated GAAP equity is as follows: (in thousands) Years Ended December 31, 1996 1995 Statutory capital and surplus for insurance subsidiaries $37,236 $32,377 Deferred acquisition costs 5,193 4,831 Salvage and subrogation -- 1,388 Non-admitted assets 1,647 1,082 Ceding commissions (775) -- Statutory reserves 176 124 Deferred income taxes 1,220 535 Adjustment for market value of investments available for sale (138) 319 Insurance deductible 20 20 GAAP equity for insurance subsidiaries 44,579 40,676 Equity of Walshire and other non-insurance subsidiaries 2,255 5,338 Consolidated GAAP equity $46,834 $46,014 Effective December 31, 1994, the National Association of Insurance Companies (NAIC) required insurance companies to calculate and report information under a risk-based capital formula. Risk-based capital requirements are intended to allow insurance regulators to identify inadequately capitalized insurance companies based upon the type and mixture of risks inherent in the company's operations. The formula includes components for asset risk, liability risk, and other factors. As of December 31, 1996, the Insurance Subsidiaries are above required capital levels. (12) Stock Plans At December 31, 1996, the Company has three stock-based compensation plans, which are described below. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its 1987 Stock Option Plan, 1990 Stock Option Plan and its Employee Stock Purchase Plan. Had compensation cost for the Company's three stock-based compensation plans been determined consistent with FASB Statement No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: (in thousands except per share data) Years Ended December 31, 1996 1995 Net Income As Reported $1,922 $5,483 Pro forma $1,670 $5,278 Primary earnings per share As Reported $ 31 $1.08 Pro forma $ 26 $1.04 Fully diluted earnings per share As Reported $ 31 $1.03 Pro forma $ 26 $ 99 Pro forma net income reflects only options granted in 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to January 1, 1995 is not considered. (a) Employee Stock Purchase Plan On June 22, 1987, the Board of Directors adopted, and the shareholders approved, the 1987 Employee Stock Purchase Plan (``Stock Purchase Plan''), which is intended to qualify under Section 423 of the Internal Revenue Code of 1986, as amended. The Stock Purchase Plan is administered by the Compensation Committee, which is authorized to grant options to purchase up to 146,742 shares of Common Stock to employees of Walshire and any current or future parent or subsidiary of Walshire. The Committee has discretion to determine the total number of options, if any, granted in each year, the rate of exercisability, the price at which each option is exercisable and the duration of each option. All options granted under the Stock Purchase Plan will expire five years after the date of grant; provided, however, that options exercised more than 27 months after the date of grant must be exercised at an option price equal to at least 85% of the fair market value of the shares on the date of exercise. No option may be granted to any person who immediately after the grant would own more than 5% of Common Stock and no option may be granted which, at the date the option is granted, would permit such person's rights to purchase stock under the Stock Purchase Plan and all other employee stock purchase plans of Walshire to accrue at a rate exceeding $25,000 of the fair market value of such stock (determined at the time such option is granted) for each year such option is outstanding. The option price per share must not be less than the lesser of: (a) 85% of the fair market value of the stock on the date of grant, or (b) 85% of the fair market value on the date of exercise.r Changes in outstanding Common Stock options granted under the 1987 Employee Stock Purchase Plan are summarized below. 1996 1995 1994 Number Average Number Average Number Average of Exercise of Exercise of Exercise Shares Price Shares Price Shares Price Balance at beginning of year -- -- -- Options granted 7,351 $12.06 6,986 $9.62 5,651 $7.97 Options exercised 7,351 12.06 6,986 9.62 5,651 7.97 Balance at end of year -- -- -- (b) 1987 Stock Option Planr On June 22, 1987, the Board of Directors adopted, and the shareholders approved, the 1987 Stock Option Plan (``1987 Plan''). All officers and key employees of Walshire or any current or future parent or subsidiary of Walshire are eligible to receive options under the 1987 Plan. The 1987 Plan is administered by the Compensation Committee which selects the optionees, determines the number of shares subject to each option and prescribes other terms and conditions of each option. Pursuant to the 1987 Plan, options may be granted with respect to an aggregate of 667,012 shares of Common Stock. Options may be granted as incentive stock options intended to qualify under Section 422A of the Internal Revenue Code of 1986, as amended, or as options not intended to so qualify. In addition, stock appreciation rights may be granted in tandem with non-qualified stock options. In the case of incentive stock options, the option price must be equal to at least 100% of the fair market value of Walshire's Common Stock on the date of grant. The option's maximum term is ten years and vest at the end of one year. The exercise price of incentive stock options granted to shareholders possessing more than 10% of the total combined voting power of all classes of stock of Walshire must not be less than 110% of the fair market value on the date of grant. The option's maximum term is five years and vest at the end of one year. In the case of stock options not intended to qualify as incentive stock options, the option price must be equal to at least 85% of the fair market value of Walshire's Common Stock on the date of grant. Payment of the option exercise price may be made in cash, shares of Common Stock or a combination of cash and Common Stock. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995: dividend yield of 1.46 percent; expected volatility of 27.22 percent; risk-free interest rate of 6.12 percent; and expected lives of 4.40 years. Changes in outstanding Common Stock options granted under the 1987 Stock Option Plan are summarized below. 1996 1995 1994 Number Average Number Average Number Average of Exercise of Exercise of Exercise Shares Price Shares Price Shares Price Balance at beginning of year 384,226 $7.00 367,722 $6.51 365,453 $6.19 Options granted 76,174 12.83 34,163 11.84 40,016 9.31 460,400 401,885 405,469 Options exercised 114,232 6.66 17,659 6.18 37,747 6.33 Options terminated or cancelled 1,705 12.17 -- -- -- -- Balance at end of year 344,463 8.38 384,226 7.00 367,722 6.51 Options exercisable at year-end 317,246 7.98 357,330 6.63 330,677 6.19 Weighted-average fair value of options granted during the year $3.62 $3.24 At December 31, 1996, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $11.57 - $14.00 and 5.9 years, respectively. (c) 1990 Stock Option Plan On February 7, 1990, the Board of Directors adopted, and on May 8, 1990, the shareholders approved, the 1990 Stock Option Plan for Non-Employee Directors (``1990 Plan''). Options to purchase up to 260,452 shares of Common Stock may be granted to Non-Employee Directors of Walshire. Pursuant to the 1990 Plan, each person who is not an employee of the Company or any of the Company's subsidiaries on the date of grant of an option under the 1990 Plan and who on or after January 1, 1990, is (1) elected or reelected as a director of the Company at any annual or special meeting of shareholders of the Company, or (2) continues as a director of the Company as of the date of the annual or special meeting of shareholders of the Company at which directors of the Company are elected or reelected shall, as of the date of each such annual or special meeting of shareholders, automatically be granted an option to purchase shares of the Company's Common Stock pursuant to the following schedule: Years of Service as a Director Number of Shares Less than 2 years 2,000 Between 2 and 5 years 5,000 Over 5 years 10,000 All options granted under the 1990 Plan are exercisable in whole or in part and will expire five years after the date of grant. The option price for options issued under the 1990 Plan is equal to the fair market value of the Company's Common Stock on the date of the grant of the option. The option has no vesting period. Payment of the option exercise price may be made in cash, shares of Common Stock or a combination of cash and Common Stock. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995: dividend yield of 1.46 percent; expected volatility of 27.22 percent; risk free interest rate of 6.11 percent; and expected lives of 4.53 years. Changes in outstanding Common Stock options granted under the 1990 Stock Option Plan are summarized below. 1996 1995 1994 Number Average Number Average Number Average of Exercise of Exercise of Exercise Shares Price Shares Price Shares Price Balance at beginning of year 190,021 $8.87 179,067 $7.90 130,154 $7.68 Options granted 18,356 15.46 36,300 11.57 48,913 8.46 208,377 215,367 179,067 Options exercised 33,348 9.00 25,346 5.91 -- Balance at end of year 175,029 9.53 190,021 8.87 179,067 7.90 Options exercisable at year-end 175,029 9.53 190,021 8.87 179,067 7.90 Weighted-average fair value of options granted during the year $4.52 $3.39 At December 31, 1996, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $11.57 - $15.46 and 2.5 years, respectively. (d) Restricted Stock Award On November 20, 1996, the Board of Directors awarded an officer 3,000 shares of restricted common stock. Such shares vest ratably over a five-year period and may not be sold or transferred prior to vesting. In the event of termination of employment, all shares awarded which have not vested are subject to forfeiture. Quarterly Common Stock Prices and Cash Dividends Per Share The Company's Common Stock trades on the NASDAQ National Market tier of The NASDAQ Stock Market under the symbol : WALS. The following table sets forth, for the periods indicated, the high and low sale prices of the Company's Common Stock as reported by NASDAQ and the cash dividends paid by the Company. Stock Price Cash High Low Dividend 1995 1st Quarter 10-7/16 8-3/8 .0537 2nd Quarter 14-1/4 10-1/4 .0537 3rd Quarter 14-1/16 12-7/8 .0537 4th Quarter 15 12 .0537 1996 1st Quarter 16-1/2 15-1/4 .0591 2nd Quarter 16-3/8 12-3/4 .0591 3rd Quarter 13-7/8 11-13/16 .0591 4th Quarter 15 12-1/16 .0591 1997 1st Quarter (through February 28) 15-3/4 14-1/8 -- As of February 28, 1997, there were approximately 1,600 shareholders of record and beneficial shareholders of the Company's Common Stock. The last sale price on February 28, 1997, as reported on the NASDAQ National Market System, was $14.25 per share. The above amounts for stock prices and cash dividends have been adjusted, where necessary, to reflect the ten percent stock dividends granted to shareholders of record on December 11, 1996 and December 6, 1995, respectively. While the Company anticipates that it will continue to pay quarterly dividends, any such payments will depend upon the financial condition, capital requirements and earnings of the Company, as well as such other factors as the Board of Directors may deem relevant. One of the Company's sources of cash with which to pay dividends would be dividends received from the Insurance Subsidiaries. The Insurance Subsidiaries are subject to state laws which restrict the amount of dividends that they may pay. See Note 11 of the Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operation-Liquidity and Capital Resources.r Walshire Assurance Company Board of Directors Peter D. Bennett, Ph.D. Senior Associate Dean and Professor of Marketing Pennsylvania State University State College, Pennsylvania John J. Buchan, Jr. Attorney at Law, Ebensburg, Pennsylvania; Managing Director, Interstate Insurance Management, Inc., Johnstown, Pennsylvania Charles W. Hash, Jr., D.O. General Surgeon, York, Pennsylvania Gary J. Orndorff, CPA Vice President/Treasurer and Chief Financial Officer Walshire Assurance Company L. Edward Sausman President, Sausman Insurance Agency, Inc. Thompsontown, Pennsylvania Kenneth R. Taylor President, Walshire Assurance Company; President, Taylor & Ochroch, Inc., King of Prussia, Pennsylvania William R. Tierney, Jr. President, Insurance Markets, Inc., Clarks Summit, Pennsylvania Officers Kenneth R. Taylor President and Chief Executive Officer Gary J. Orndorff, CPA Vice President-Treasurer and Chief Financial Officer Richard S. Kahlbaugh Vice President-Secretary and General Counsel Subsidiaries Agents Budget Corporation Consumer Discount Company, Inc. Ashford Reinsurance Intermediaries Corporation Comp America Insurance Company King American Ltd. Lincoln General Insurance Company Yorktowne Insurance Company Yorktowne Premium Finance Company Corporate Information Independent Public Accountants: KPMG Peat Marwick LLP 225 Market Street Harrisburg, PA 17108 General Counsel: Blank, Rome, Comisky & McCauley Four Penn Center Philadelphia, PA 19103 Stock Transfer Agent and Registrar: American Stock Transfer and Trust Company 40 Wall Street New York, NY 10005 Annual Meeting: The annual meeting of shareholders will be held at 10:00 a.m., May 21, 1997, at the Out Door Country Club, 1157 Detwiler Drive, York, PA. Additional Information: Additional copies of this report and the Corporation's Form 10-K Annual Report to the Securities and Exchange Commission may be obtained without charge by writing to: Chief Financial Officer Walshire Assurance Company 3350 Whiteford Road P.O. Box 3849 York, PA 17402-0138 Management's Discussion and Analysis of Financial Condition and Results of Operations Business Operations The profitability of property and casualty insurers is affected by many factors, including competition, weather conditions, natural disasters, the severity and frequency of claims, state regulation of premium rates, interest rates, crime rates, general business conditions and regulations, and court decisions that define the extent of coverage. One of the distinguishing features of the property and casualty insurance business is that its product must be priced before the costs are known, because premium rates generally are set before losses are reported. As a result, property and casualty insurers have experienced significant year-to-year fluctuations in underwriting results. The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the Company's consolidated financial statements, including the notes thereto, and other financial information appearing elsewhere in this Report. Results of Operations 1996 vs. 1995 Revenues Revenues increased from $39.9 million to $52.7 million, or 32%, in 1996, primarily as a result of an increase in net premiums earned and net realized gains on investments. The increase in net premiums earned was the direct result of increases in all primary lines of business written by the Company. The increase in business written reflects the increase in the number of policies issued by the Company. The increase in net realized gains on investments was the result of the sale of investments available for sale at a gain. Expenses Expenses increased from $33.0 million to $50.8 million, or 54%, in 1996. This increase was primarily the result of increased claims and claim settlement expenses, amortization of deferred acquisition costs and underwriting general and administrative expenses. The increase in claims and claim settlement expenses was the result of an increase in premiums earned as well as an increase in the statutory loss ratio from 59% to 75%. The increase in premiums earned resulted in a pro-rata increase in claims and claim settlement expenses. The increase in the loss ratio reflects the higher percentage of casualty business written by the Company which historically has had a higher loss ratio than property coverages, a higher loss ratio on property coverages, primarily due to the severe weather conditions in early 1996, less premium dollars per dollar of exposure, an increase in claims settlement expenses relating to those coverages and a reserve strengthening of $3.7 million resulting from adverse loss development in the primary liability loss reserves. The increase in the amortization of deferred acquisition costs was the result of increases in net premiums earned. The increase in underwriting, general and administrative expenses was a result of increases in direct premiums written. The decrease in the effective tax rate from 20.3% in 1995 to 0% in 1996 was primarily the result of a greater percentage of tax exempt interest. 1995 vs. 1994 Revenues Revenues increased from $32.6 million to $39.9 million, or 22%, in 1995, primarily the result of an increase in net premiums earned. This increase in net premiums earned was a direct result of the increases in all major lines of business written by the Company. The increase in business written reflects the increase in the number of policies issued by the Company. Expenses Expenses increased from $27.7 million to $33.0 million, or 19%, in 1995. This increase was primarily the result of increased claims and claim settlement expenses, offset, in part, by increased reinsurance recoveries, and underwriting, general and administrative expenses. The increase in claims and claim settlement expenses was the result of an increase in premiums earned, as the statutory loss ratio for both years was 59%. Reinsurance recoveries increased to $2.7 million in 1995 from $1.8 million in 1994. This increase was the result of a greater dollar value of losses incurred that were recoverable from reinsurers in 1995 than were recoverable in 1994. The increase in underwriting, general and administrative expenses was primarily the result of increases in premiums written. Policy acquisition costs increased at a lesser rate than the increase in premiums earned due to an increase in ceding commission income in 1995. The decrease in the effective tax rate from 22.4% in 1994 to 20.3% in 1995 was the result of a reduction in prior year tax provisions and a greater amount of tax exempt interest. Selected Ratios In 1996, the Company's statutory loss ratio increased to 75% from 59% in 1995 and the Company's statutory combined ratio increased to 104% from 87% in 1995. The increase in the loss ratio and combined ratio in 1996 were the result of a higher loss ratio on both property and casualty coverages. In 1995, the Company's statutory loss ratio was 59%, the same as 1994, while the Company's statutory combined ratio decreased to 87% from 89% in 1994. The decrease in the combined ratio in 1995 was the result of a reduction of underwriting and administrative expenses when compared to net premiums written. Liquidity and Capital Resources Historically, the Company has generated funds sufficient to support its operations and has maintained a high degree of liquidity in its investment portfolio. The primary source of funds to meet the demands of claims and claim settlement expenses and operating expenses are written premiums, ceding commissions and investment income. The Company's funds generally are invested in securities with maturities intended to provide adequate funds to pay claims, claim settlement expenses and operating expenses without the forced sale of investments. As of December 31, 1996, less than 3% of the debt securities in the Company's investment portfolio were considered below investment grade, primarily because such securities were not rated. As of December 31, 1996, the Company, on a consolidated basis, had cash and short-term investments aggregating approximately $5.4 million and a line of credit of $10.0 million, $3.7 million of which was available. On a parent company only basis, available cash and short-term investments aggregated approximately $252,000. The Company's insurance subsidiaries, Lincoln, Comp and Yorktowne, are subject to state insurance regulatory laws which restrict their ability to pay dividends. They are also subject to risk-based capital requirements which may further restrict their ability to pay dividends. See Note 11 of Notes to Consolidated Financial Statements. The Company believes that its current cash and short-term investments, together with funds generated from operations and existing loan commitments, will be sufficient to meet its operating and capital requirements for the foreseeable future. Impact of Inflation Property and casualty insurance premiums are established before the amount of claims and claim settlement expenses, or the extent to which inflation may impact such expenses, is known. Consequently, in establishing premium rates, the Company attempts to anticipate the potential impact of inflation. Generally, the longer the period of time required to settle claims, the greater the impact of inflation on final settlement costs. Historically, the majority of all of the insurance written by the Company was on property risks, the losses on which tend to be reported quickly and settled within a relatively short period of time. As a result, the effect of inflation on loss development was not significant. However, as the Company writes more casualty business, the losses on which tend to be settled over a longer period of time, inflation may have more of an impact on loss development. While the Company believes that inflation in recent years has not significantly impacted operating expenses and claims, there is no assurance that inflation will remain at the levels experienced in recent years. EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY Jurisdiction of Names Under Which Name of Incorporation or Subsidiary Does Subsidiary Organization Business Lincoln General Lincoln General Insurance Company Pennsylvania Insurance Company King American Ltd. Pennsylvania King American Ltd. Agents Budget Agents Budget Corporation Consumer Corporation Consumer Discount Company, Inc. Pennsylvania Discount Company, Inc. Ashford Reinsurance Ashford Reinsurance Intermediaries Corp. New York Intermediaries Corp. Yorktowne Premium Yorktowne Premium Finance Company Pennsylvania Finance Company Comp America Comp America Insurance Company Pennsylvania Insurance Company Yorktowne Insurance Yorktowne Insurance Company Pennsylvania Company Yorktowne Insurance Yorktowne Insurance Agency, Inc. Pennsylvania Agency, Inc. EXHIBIT 23.1 The Board of Directors Walshire Assurance Company We consent to incorporation by reference in the registration statement (Registration No. 33-84080) on Form S-8 and the registration statements (Registration No. 33-85120 and No. 33-90256) on Form S-3 of Walshire Assurance Company of our report dated February 28, 1997, relating to the consolidated balance sheets of Walshire Assurance Company and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders equity, and cash flows for each of the years in the three-year period ended December 31, 1996 and all related schedules, which reports appear in or are incorporated by reference in the December 31, 1996 annual report on Form 10-K of Walshire Assurance Company. Harrisburg, Pennsylvania March 27, 1997 EX-27 2
7 9-MOS DEC-31-1996 DEC-31-1996 37,356 17,923 18,158 8,930 107 0 71,018 637 2,400 5,193 130,936 36,551 33,250 0 2,380 8,369 47 0 1 46,786 130,936 47,002 3,168 1,778 731 34,602 7,424 8,110 1,902 (20) 0 0 0 0 1,922 .31 .31 20,153 32,276 2,326 18,522 6,887 22,342 0
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