30878As filed with the Securities and Exchange Commission on
November 1, 1996
_________________________________________________________________
Registration No. 333-12779
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_______________________
OLD GUARD GROUP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 6331 23-2852984
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification
of incorporation Classification Number)
or organization) Code Number)
2929 Lititz Pike
Lancaster, Pennsylvania 17601
(717) 569-5361
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
_________________________
David E. Hosler
Chairman, President and Chief Executive Officer
Old Guard Group, Inc.
2929 Lititz Pike
Lancaster, Pennsylvania 17601
(717) 581-6700
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Jeffrey P. Waldron, Esquire John S. Chapman, Esquire
Stevens & Lee Richard A. Hemmings, Esquire
One Glenhardie Corporate Center Lord, Bissell & Brook
1275 Drummers Lane 115 South LaSalle Street
P.O. Box 236 Chicago, Illinois 60603
Wayne, Pennsylvania 19087 (312) 443-0700
(610) 293-4961
<PAGE>
Approximate date of commencement of proposed sale to the
public: As soon as practicable after this Registration Statement
becomes effective.
If any of the securities being registered on this form are
to be offered on a delayed or continuous basis pursuant to Rule
415 of the Securities Act of 1933, check the following box: [ X ]
If this Form is filed to register additional securities for
an offering pursuant to Rule 462(b) under the Securities Act of
1933, please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made
pursuant to Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
=================================================================
Proposed Proposed
Title of each maximum maximum
class of offering aggregate Amount of
securities to Amount to be price per offering registra-
be registered registered share price(1) tion fees
- -----------------------------------------------------------------
Common Stock, 4,396,660 $10.00 $43,966,000 $15,160.90
no par shares(2)
value per
share
=================================================================
(1) Estimated solely for the purpose of calculating the
registration fee in accordance with Rule 457(d) and based on
the maximum of the appraisal valuation range of the
Insurance Companies, as determined by an independent
appraiser, plus (i) 10% of such amount to reflect a possible
purchase by the registrant's employee stock ownership plan
and (ii) $1,500,000 which is equal to the outstanding
principal balance of a convertible surplus note to be
converted into common stock.
(2) Represents maximum number of shares to be issued in the
transactions contemplated by this Registration Statement.
The registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Securities and
Exchange Commission, acting pursuant to said Section 8(a), may
determine.
____________________________
<PAGE>
PROSPECTUS
[LOGO]
OLD GUARD GROUP, INC.
Up to 3,860,600 Shares of Common Stock
Old Guard Group, Inc. (the "Company"), a Pennsylvania
corporation and the proposed holding company for Old Guard Mutual
Insurance Company ("Old Guard Mutual"), Old Guard Mutual Fire
Insurance Company ("Old Guard Fire") and Goschenhoppen-Home
Mutual Insurance Company ("Goschenhoppen" and collectively with
Old Guard Mutual and Old Guard Fire, the "Insurance Companies"),
is offering up to 3,860,600 shares, subject to adjustment, of its
common stock, no par value per share (the "Common Stock"), in the
following order of priority to (i) eligible policyholders of the
Insurance Companies (as hereinafter defined), (ii) a tax-
qualified employee stock ownership plan of the Company (the
"ESOP"), (iii) directors, officers and employees of the Insurance
Companies, and (iv) members of the general public. The offering
is being made in connection with the conversion of the Insurance
Companies from mutual to stock form and the simultaneous
acquisition of the capital stock of each of the Insurance
Companies by the Company pursuant to a Joint Plan of Conversion
adopted by the Boards of Directors of the Insurance Companies on
May 31, 1996, as amended and restated on July 19, 1996 (the
"Plan"). The conversion of the Insurance Companies to stock
form, the issuance of capital stock of the Insurance Companies to
the Company and the offer and sale of the Common Stock by the
Company are collectively referred to herein as the "Conversion."
For more information, please call the Conversion Center at
1-800-______________.
Prospective investors should review and consider the
discussion under "Investment Considerations" beginning on
page 17.
THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION OR THE PENNSYLVANIA DEPARTMENT OF INSURANCE, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION OR THE PENNSYLVANIA DEPARTMENT OF INSURANCE PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Purchase Fees and Estimated Net
Price(1) Expenses(2) Proceeds(3)
--------- ----------- ------------
Per Share(4). . . . . . . $ 10.00 $ 0.99 $ 9.01
Total Minimum . . . . . . $28,535,000 $3,106,967 $25,428,033
Total Midpoint. . . . . . $33,570,000 $3,328,759 $30,241,241
Total Maximum . . . . . . $38,606,000 $3,550,594 $35,055,406
(1) The estimated aggregate purchase price of the Common
Stock is based on an independent appraisal by Berwind
Financial Group, L.P. ("Berwind"), as of August 19,
1996, of the pro forma market value of the Insurance
Companies, following the Conversion, as subsidiaries of
the Company. Based on such appraisal, the Company has
determined to offer up to 3,860,600 shares, subject to
adjustment, at a purchase price of $10.00 per share
(or, as permitted by the Plan, in the event the ESOP
purchases shares in excess of the maximum of the
Estimated Valuation Range in order to satisfy its 10%
subscription, up to 4,246,660 shares). The final
appraised value will be determined at the time of
closing of the offering and is subject to change due to
changing market conditions and other factors. If a
change in the final valuation is outside the estimated
valuation range, an appropriate adjustment will be made
in the number of shares being offered and subscribers
will be resolicited. Such upward or downward
adjustment will have a corresponding effect on the
estimated net proceeds of the Conversion and the pro
forma capitalization and per share data of the Company.
See "Use of Proceeds," "Capitalization" and "Pro Forma
Data."
(2) Includes estimated registration fees, printing, postage,
legal, accounting, appraisal and miscellaneous expenses that
will be incurred in connection with the Conversion. Also
includes estimated fees, sales commissions and reimbursable
expenses to be paid to Hopper Soliday & Co., Inc. ("Hopper
Soliday") as manager of the Subscription Offering and
Community Offering and Legg Mason Wood Walker, Incorporated
("Legg Mason") and McDonald & Company Securities, Inc.
("McDonald") as co-managers of the Public Offering. For
purposes of this estimate, the Company has assumed that 50%
of the shares offered hereby will be sold in the
Subscription and Community Offerings and 50% will be sold in
the Public Offering. The actual fees and expenses may vary
from the estimates. See "Use of Proceeds" and "Pro Forma
Data" for the assumptions used to arrive at these estimates.
The Company and the Insurance Companies have agreed to
indemnify Hopper Soliday, Legg Mason and McDonald against
certain liabilities, including liabilities under the
Securities Act of 1933. See "The Conversion -- Marketing
and Underwriting Arrangements for the Offering" and "-- The
Public Offering."
(3) Includes the expected purchase by the ESOP of 10% of the
shares issued in the Conversion with the proceeds of a loan
that, in accordance with generally accepted accounting
principles, will be deducted from the equity of the Company.
See "Use of Proceeds," for estimated net proceeds less the
ESOP debt. Does not reflect the conversion of an existing
$1,500,000 surplus note obligation of Old Guard Mutual into
150,000 shares of Common Stock. See "Capitalization," "Pro
Forma Data" and "The Conversion -- Surplus Note."
(4) Based on the midpoint of the estimated valuation range. The
estimated net proceeds per share at the minimum and maximum
are expected to be $8.91 and $9.08, respectively.
HOPPER SOLIDAY & CO., INC.
The date of this Prospectus is __________________, 1996
<PAGE>
The shares of Common Stock are being offered in a
subscription offering (the "Subscription Offering") pursuant to
nontransferable subscription rights in the following order of
priority: (i) named insureds under policies of insurance issued
by the Insurance Companies and in force as of the close of
business on May 31, 1996 ("Eligible Policyholders"), (ii) the
ESOP, and (iii) directors, officers and employees of the
Insurance Companies. Subscription rights received in any of the
foregoing categories will be subordinated to the subscription
rights received by those in a prior category. Subscription
rights are not transferable, and persons who attempt to transfer
their subscription rights will lose the right to purchase Common
Stock in the Conversion. Concurrently with the Subscription
Offering, Common Stock will be offered for sale to the general
public in a community offering (the "Community Offering"), giving
preference to: (i) natural persons and trusts of natural persons
(including individual retirement and Keogh retirement accounts)
who reside in designated Pennsylvania counties, (ii) principals
of Eligible Policyholders in the case of an Eligible Policyholder
that is not a natural person, (iii) holders of policies of
insurance originally issued after May 31, 1996, (iv) licensed
insurance agencies and their affiliates that have been appointed
by any of the Insurance Companies to market and distribute
policies of insurance, and (v) providers of goods or services to
any one or more of the Insurance Companies. Sales of Common
Stock in the Community Offering will be subject to the prior
rights of holders of subscription rights and the right of the
Company, in its absolute discretion, to reject orders in the
Community Offering in whole or in part (the Subscription Offering
and the Community Offering shall be collectively referred to
herein as the "Offering").
It is anticipated that shares not subscribed for in the
Offering, if any, will be sold in a firm commitment underwritten
public offering (the "Public Offering") to be managed by Legg
Mason and McDonald (the "Underwriters"), or, if the number of
remaining shares do not warrant a public offering, a private
placement ("Private Placement").
The total number of shares to be issued in the Conversion
may be increased or decreased within the estimated valuation
range without a resolicitation of subscribers to reflect market
and financial conditions and other factors just prior to the
completion of the Conversion. The aggregate purchase price of
all shares of Common Stock will be based on the estimated pro
forma market value of the Insurance Companies, following the
Conversion, as determined by Berwind's independent appraisal.
All shares of Common Stock will be sold for $10.00 per share (the
"Purchase Price"). Except for the ESOP, which intends to
purchase 10% of the total number of shares of Common Stock issued
in the Conversion, no Eligible Policyholder, together with
associates or persons acting in concert with such Eligible
Policyholder, may purchase more than 38,606 shares of Common
Stock in the Subscription Offering (1% of the shares sold at the
maximum of the estimated valuation range). In addition, no
purchaser, together with associates or persons acting in concert
with such person, may purchase, in the aggregate, more than
193,030 shares of Common Stock in the Conversion (5% of the
shares sold at the maximum of the estimated valuation range). In
addition, no person may purchase fewer than 25 shares. Directors
and executive officers of the Company and the Insurance Companies
as a group (18 persons), including their associates, are expected
to purchase approximately 50,750 shares of the Common Stock to be
issued in the Conversion (1.5% at the midpoint of the estimated
valuation range), not including 10% of the Common Stock (335,700
shares at the midpoint) expected to be purchased by the ESOP and
excluding additional shares that are expected to be issued (or
issuable) following the Conversion, subject to shareholder
approval, in connection with the implementation of the Company's
management recognition plan and 1996 Stock Compensation Plan.
The Subscription Offering will terminate at 1:00 p.m., local
time, on ____________________, 1996, unless extended by the
Company in its sole discretion for up to an additional 10 days
(the "Subscription Offering Termination Date"). Any shares not
sold in the Subscription Offering may be sold in the Community
Offering, which is also expected to terminate at 1:00 p.m., local
time on ______________, 1996, but may be extended up to an
additional 45 days after the Subscription Offering Termination
Date in the sole discretion of the Company (the "Community
Offering Termination Date"). Subscribers may purchase shares in
the Offering by completing and returning to the Company a stock
order form, together with full payment for all Common Stock
subscribed for at the Purchase Price. An executed stock order
form, once received by the Company, may not be modified, amended
or rescinded without the consent of the Company. Subscriptions
will be held in a separate escrow account at ____________
established specifically for this purpose. If the Conversion is
not completed within 45 days after the last day of the
Subscription Offering (which date will be no later than
______________, 1996) and the Pennsylvania Department of
Insurance consents to an extension of time to complete the
Conversion, subscribers will be given the opportunity to
(i) confirm their orders or (ii) modify or cancel their
subscriptions. If the Conversion is not completed within such
period or extended period, the Offering will be terminated and
all funds held will be promptly returned without interest. See
"The Conversion -- The Offering" and "-- Purchases in the
Offering."
The Company and the Insurance Companies have engaged Hopper
Soliday to consult with and advise the Company and the Insurance
Companies with respect to the Offering, and Hopper Soliday has
agreed to solicit subscriptions for shares of Common Stock in the
Offering. Neither Hopper Soliday nor any other registered
broker-dealer is obligated to purchase any shares of Common Stock
in the Offering. Hopper Soliday is a registered broker-dealer
and a member of the National Association of Securities Dealers,
Inc. ("NASD").
The Company anticipates that the Common Stock will be listed
for quotation on the Nasdaq National Market System ("Nasdaq
NMS"), under the symbol "OGGI" upon completion of the Conversion.
Prior to the Conversion, there was no market for the Common
Stock, and there can be no assurance that an active and liquid
trading market for the Common Stock will develop, or if
developed, will be maintained after completion of the Conversion.
Hopper Soliday, Legg Mason and McDonald each has advised the
Company that, upon completion of the Conversion, it intends to
act as a market maker in the Common Stock, subject to market
conditions and compliance with applicable laws and regulatory
requirements.
THE CONVERSION IS CONTINGENT UPON APPROVAL OF THE PLAN BY
ELIGIBLE POLICYHOLDERS OF EACH OF THE INSURANCE COMPANIES AT
SPECIAL MEETINGS OF ELIGIBLE POLICYHOLDERS CALLED FOR THAT
PURPOSE TO BE HELD ON ______________ (THE "SPECIAL MEETINGS") AND
THE SALE OF THE MINIMUM NUMBER OF SHARES OFFERED PURSUANT TO THE
PLAN.
IN CONNECTION WITH THE PUBLIC OFFERING, IF ANY, THE UNDERWRITERS
MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN
THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS
MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
FOR NORTH CAROLINA INVESTORS: THE COMMISSIONER OF INSURANCE
OF THE STATE OF NORTH CAROLINA HAS NOT APPROVED OR DISAPPROVED
THE OFFERING, NOR HAS SUCH COMMISSIONER PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS.
PENNSYLVANIA INSURANCE LAWS AND REGULATIONS PROVIDE THAT NO
PERSON MAY ACQUIRE CONTROL OF THE COMPANY, AND THUS INDIRECT
CONTROL OF ITS INSURANCE SUBSIDIARIES, UNLESS SUCH PERSON HAS
OBTAINED THE PRIOR APPROVAL OF THE PENNSYLVANIA INSURANCE
COMMISSIONER. UNDER PENNSYLVANIA LAW, ANY PURCHASER OF 10% OR
MORE OF THE VOTING STOCK OF AN INSURANCE HOLDING COMPANY IS
PRESUMED TO HAVE ACQUIRED CONTROL OF AFFILIATED OR SUBSIDIARY
INSURERS.
<PAGE>
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is
qualified in its entirety by the more detailed information and
the Combined Financial Statements and Notes thereto of the
Insurance Companies appearing elsewhere in this Prospectus.
Old Guard Group, Inc. The Company was formed under
Pennsylvania law in May 1996 for the
purpose of becoming the holding company
for the Insurance Companies upon
completion of the Conversion. Prior to
the Conversion, the Company will not
engage in any significant operations.
After the Conversion, the Company's
primary assets will be the outstanding
capital stock of the Insurance Companies
and a portion of the net proceeds of the
Conversion.
The Insurance Companies Old Guard Mutual, Old Guard Fire and
Goschenhoppen are each Pennsylvania
mutual insurance companies that
currently operate as members of the Old
Guard Insurance Group (the "Group"), a
group of mutual insurance companies
under common management. The Group also
includes Neffsville Mutual Fire
Insurance Company ("Neffsville"), which
is not a party to the Plan. Old Guard
Mutual, Old Guard Fire and Goschenhoppen
began operations in 1896, 1872, and
1843, respectively. The Insurance
Companies are property and casualty
insurers of farms, small and medium-
sized businesses and residents primarily
in rural and suburban communities in
Pennsylvania, Maryland and Delaware.
The Insurance Companies market
farmowners, homeowners and
businessowners policies, as well as
personal and commercial automobile,
workers' compensation and commercial
multi-peril coverages through
approximately 1,600 independent
agents.
For 1995, the Insurance Companies had
combined revenues of $72.4 million and a
net loss of $684,000. For the six-month
period ended June 30, 1996, the
Insurance Companies had combined
revenues of $29.9 million and a net loss
of $3.0 million. The losses for the
year ended December 31, 1995 and the
six-month period ended June 30, 1996
resulted directly from insured property
losses associated with late-1995 wind
storms and the severe winter weather
experienced in the Middle Atlantic
states in the first quarter of 1996. A
January blizzard in 1996 contributed to
record seasonal snowfalls for much of
the Insurance Companies' market area
that resulted in increased property loss
claims. At June 30, 1996, the Insurance
Companies had combined assets of
$137.8 million, total equity of
$37.0 million and over 140,000 property
and casualty policies in force.
Effective January 1, 1996, the Insurance
Companies entered into a quota share
reinsurance treaty designed to lessen
the potential financial impact of
catastrophic or severe weather losses.
This reinsurance treaty has had, and
will have, a material effect on the
financial condition and results of
operations of the Insurance Companies.
See "Business - Reinsurance."
The principal strategies of the Company
for the future are to:
- Achieve geographic diversification
of risk by acquisition of other
insurance companies or licensing of
the Insurance Companies in other
jurisdictions with reduced or
different loss exposure;
- Improve the mix of business by
increasing commercial writings and
emphasizing casualty coverages in
order to enhance profitability and
lessen the impact of property
losses on overall results; and
- Improve efficiency and maintain the
high level of personal service
delivered to agents and insureds
through continued enhancement of
the Company's management
information systems (MIS).
Management has taken steps to implement
each of these strategies and views the
Conversion as a critical component of
its strategic plan. The additional
capital generated by the Conversion will
permit the Insurance Companies to
accelerate implementation of these
strategies and the resulting holding
company structure will provide needed
flexibility to achieve the Company's
goals.
The Conversion As of May 31, 1996, the Boards of
Directors of Old Guard Mutual, Old Guard
Fire and Goschenhoppen adopted the Plan,
which was amended and restated on
July 19, 1996. Pursuant to the Plan
each Insurance Company will (i) convert
from a Pennsylvania-chartered mutual
insurance company to a Pennsylvania-
chartered stock insurance company, and
(ii) simultaneously issue shares of its
capital stock to the Company in exchange
for a portion of the net proceeds from
the sale of Common Stock in the
Conversion.
The Plan was approved by the
Pennsylvania Department of Insurance
(the "Department") on _________________,
1996 and is subject to the approval of
Eligible Policyholders at the Special
Meetings. The Company also has received
approval of the Department to acquire
control of the Insurance Companies.
Stock Pricing and Pennsylvania law requires that the
Number of Shares aggregate purchase price of the Common
to be Issued Stock to be issued in the Conversion be
consistent with an independent appraisal
of the estimated pro forma market value
of the Insurance Companies as
subsidiaries of the Company following
the Conversion. Berwind, a firm
experienced in corporate valuations, has
made an independent appraisal of the
estimated pro forma market value of the
Insurance Companies as subsidiaries of
the Company and has determined that, as
of August 19, 1996, such estimated pro
forma market value was $33,570,000. The
resulting valuation range in Berwind's
appraisal, which extends 15% below and
15% above the estimated value, is from
$28,535,000 to $38,606,000 (the
"Estimated Valuation Range"). The
Company, in consultation with its
advisors, has determined to offer the
shares in the Conversion at the Purchase
Price. Such appraisal is not intended
to be, and must not be construed as, a
recommendation of any kind as to the
advisability of purchasing Common Stock
or as assurance that, after the
Conversion, shares of Common Stock can
be resold at or above the Purchase
Price. The appraisal will be updated
immediately prior to completion of the
Conversion.
The total number of shares to be issued
in the Conversion may be increased or
decreased within the Estimated Valuation
Range without a resolicitation of
subscribers. Based on the Purchase
Price of $10.00 per share, the total
number of shares that may be issued
without a resolicitation of subscribers
is from 2,853,500 to 3,860,600 (or, as
permitted by the Plan, in the event the
ESOP purchases shares in excess of the
maximum of the Estimated Valuation Range
in order to satisfy its 10%
subscription, up to 4,246,660 shares).
For further information, see "The
Conversion -- Stock Pricing and Number
of Shares to be Issued."
The Subscription, The shares of Common Stock to be issued
Community and in the Conversion are being offered at
Public Offerings the Purchase Price in the Subscription
Offering pursuant to nontransferable
subscription rights in the following
order of priority: (i) Eligible
Policyholders, (ii) the ESOP, and
(iii) directors, officers and employees
of the Insurance Companies.
Subscription rights in any category will
be subordinated to subscription rights
in a prior category. Concurrently, and
subject to the prior rights of holders
of subscription rights, any shares of
Common Stock not subscribed for in the
Subscription Offering are being offered
at the Purchase Price in the Community
Offering to members of the general
public. Preference will be given in the
Community Offering to (i) natural
persons and trusts of natural persons
who are permanent residents of Berks,
Bucks, Chester, Cumberland, Dauphin,
Lancaster, Lebanon, Lehigh, Montgomery,
Northampton and York Counties,
Pennsylvania (the "Local Community"),
(ii) principals of Eligible
Policyholders in the case of an Eligible
Policyholder that is not a natural
person, (iii) licensed insurance agents
that have been appointed by any of the
Insurance Companies to market and
distribute policies of insurance,
(iv) named insureds under policies of
insurance issued by the Insurance
Companies after May 31, 1996, and
(v) providers of goods and services to
any or all of the Insurance Companies.
Subscription rights will expire if not
exercised by 1:00 p.m., local time, on
____________________, 1996, unless
extended by the Company in its sole
discretion for up to an additional 10
days. The Community Offering will
terminate on the Subscription Offering
Expiration Date, unless extended by the
Company, in its sole discretion, for up
to an additional 45 days. The Company
reserves the absolute right to accept or
reject any orders in the Community
Offering, in whole or in part, either
upon receipt of an order or as soon as
practicable following the Community
Offering Termination Date.
The Company and the Insurance Companies
have engaged Hopper Soliday to provide
sales assistance in connection with the
Offering. All shares of Common Stock
not purchased in the Offering (if
any) are expected to be offered in a
firm commitment public offering (the
"Public Offering") to be co-managed by
the Underwriters. See "The
Conversion -- Marketing and Underwriting
Arrangements in the Offering and --
Public Offering."
The Company has established a Conversion
Center to coordinate the Offering,
including tabulation of proxies and
orders and answering questions about the
Offering by telephone. The Conversion
Center will be managed by Hopper
Soliday. All subscribers will be
instructed to mail payment directly to
the Conversion Center. Payment for
shares of Common Stock may be made by
cash (if delivered in person), check or
money order. Such funds will not be
released until the Conversion is
completed or terminated. For more
information, please call the Conversion
Center at 1-800-_______________.
Purchase Limitations No person may purchase fewer than
25 shares in the Offering. The ESOP may
purchase up to an aggregate of 10% of
the shares of Common Stock to be issued
in the Conversion and is expected to do
so. With the exception of the ESOP, no
Eligible Policyholder may purchase more
than 1% of the maximum of the Estimated
Valuation Range, or 38,606 shares, of
the Common Stock sold in the
Subscription Offering and no person
(including Eligible Policyholders who
elect to purchase stock in the Community
Offering or the Public Offering),
together with associates or persons
acting in concert, may purchase in the
aggregate, more than 5% of the maximum
of the Estimated Valuation Range, or
193,030 shares, of the Common Stock sold
in the Conversion. The Boards of
Directors of the Company and the
Insurance Companies may increase or
decrease the purchase limitation at any
time, subject to any required regulatory
approval. In the event of an
oversubscription, shares will be
allocated as provided by the Plan. See
"The Conversion -- Limitations on
Purchases of Shares."
Purchase of Common The directors and executive officers of
Stock by Management the Company and the Insurance Companies,
together with their associates, propose
to purchase, in the aggregate,
approximately 50,750 shares of Common
Stock in the Conversion, or 1.5% of the
shares of Common Stock issued in the
Conversion, assuming an offering at the
midpoint of the Estimated Valuation
Range. See "The Conversion -- Proposed
Management Purchases."
Use of Proceeds Net proceeds from the Offering will
depend upon the total number of shares
sold and the expenses of the Conversion.
As a result, net proceeds from the
Offering cannot be determined until the
Conversion is completed. The Company
anticipates that net proceeds (less the
debt incurred to purchase the ESOP
shares) will be between approximately
$24.1 million and $32.7 million if the
aggregate purchase price is within the
Estimated Valuation Range. See "Use of
Proceeds" for the assumptions used to
arrive at these estimates.
The Company has received Department
approval to acquire all of the capital
stock of Old Guard Mutual, Old Guard
Fire and Goschenhoppen to be issued in
the Conversion in exchange for an
aggregate of $16.0 million. Assuming
net proceeds from the Offering of
between $24.1 million and $32.7 million,
the Company would retain between $8.1
and $16.7 million after acquiring the
stock of the Insurance Companies.
The net proceeds retained by the Company
will be available for a variety of
corporate purposes, including, but not
limited to, additional capital
contributions to the Insurance
Companies, repayment of $5.0 million in
acquisition financing incurred in
connection with the pending acquisition
of First Delaware Insurance Company,
future acquisitions and diversification
within the property and casualty
insurance industry, dividends to
shareholders and future repurchases of
Common Stock to the extent permitted by
Pennsylvania law and the Department.
With the exception of the payment of
dividends and the pending acquisition of
First Delaware Insurance Company and the
proposed investment in New Castle Mutual
Insurance Company, the Company currently
has no specific plans, intentions,
arrangements or understandings regarding
any of the foregoing activities. See
"Dividend Policy"; "The Company --
Acquisition of First Delaware Insurance
Company" and -- Investment in New Castle
Mutual Insurance Company."
Non-transferability of The Plan provides that no person shall
Subscription Rights transfer or enter into any agreement or
understanding to transfer the legal or
beneficial ownership of subscription
rights issued under the Plan or, prior
to exercise of the subscription rights,
the shares of Common Stock to be issued
upon their exercise. Persons violating
such prohibition will lose their right
to purchase Common Stock in the
Conversion. Each person exercising
subscription rights will be required to
certify that his or her purchase of
Common Stock is solely for the
purchaser's own account and that there
is no agreement or understanding
regarding the sale or transfer of such
shares.
Market for the Common The Company has received conditional
Stock approval to have the Common Stock quoted
on the Nasdaq NMS under the symbol
"OGGI" upon closing of the Conversion.
Hopper Soliday, Legg Mason and McDonald
have each advised the Company that, upon
completion of the Conversion, it intends
to act as a market maker in the Common
Stock, subject to market conditions and
compliance with applicable laws and
regulatory requirements. Prior to the
Offering, there was no public market for
the Common Stock and there can be no
assurance that an active and liquid
market for the Common Stock will develop
in the foreseeable future. Even if a
market develops, there can be no
assurance that shareholders will be able
to sell their shares at or above the
Purchase Price after completion of the
Conversion. See "Market for the Common
Stock."
Dividends Declaration of dividends by the Board of
Directors of the Company will depend on
a number of factors, including the
requirements of applicable law and the
determination by the Board of Directors
of the Company that the net income,
capital and financial condition of the
Company and the Insurance Companies,
industry trends, general economic
conditions and other factors justify the
payment of dividends. The Company
presently intends to pay an annual
dividend of $.10 per share, but no
assurance can be given that dividends in
such amount will ultimately be declared
and paid. See "Dividend Policy" and
"Business -- Regulation."
Antitakeover Provisions The Articles of Incorporation and
Bylaws of the Company, Pennsylvania
statutory provisions and employee
benefit arrangements, as well as certain
other provisions of state and federal
law, may have the effect of discouraging
or preventing a non-negotiated change in
control of the Company. For a detailed
discussion of those provisions, see
"Investment Considerations -- Articles
of Incorporation, Bylaw and Statutory
Provisions that could Discourage Hostile
Acquisitions of Control," "Management --
Certain Benefit Plans and Agreements,"
"Certain Restrictions on Acquisition of
the Company -- Pennsylvania Law" and --
"Certain Anti-Takeover Provisions in the
Articles of Incorporation and Bylaws"
and "Description of Capital Stock."
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The following table sets forth selected combined financial
data for the Insurance Companies prior to the Conversion at and
for the periods indicated and should be read in conjunction with
the Combined Financial Statements, and accompanying notes thereto
and other financial information included elsewhere herein, as
well as "Management's Discussion and Analysis of Financial
Condition and Results of Operations." See Note 3 in "Notes to
Combined Financial Statements" for a discussion of the principal
differences between generally accepted accounting principles
("GAAP") and statutory accounting practices, and for a
reconciliation of combined net income and equity, as reported in
conformity with GAAP, with combined statutory net income and
statutory surplus, as determined in accordance with statutory
accounting practices, as prescribed or permitted by the
Department. The combined statement of income data for the years
ended December 31, 1991 and 1992 and for the six months ended
June 30, 1995 and 1996 and the combined balance sheet data at
December 31, 1991, 1992 and 1993 and at June 30, 1995 and 1996
are derived from the unaudited combined financial statements of
the Insurance Companies. The Company believes that such
unaudited financial data fairly reflect the combined results of
operations and the combined financial condition of the Insurance
Companies for such periods.<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30 Year Ended December 31,
----------------------- --------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue Data:
Direct premiums written. . . . . . . . $ 40,745 $ 39,720 $ 78,832 $ 78,730 $ 74,756 $ 71,287 $67,699
Net premiums written . . . . . . . . . 20,354(1) 33,261 67,115 65,649 63,355 55,424 53,876
Statement of Income Data:
Net premiums earned. . . . . . . . 26,306(1) 32,321 66,663 63,465 60,986 54,013 53,050
Net investment income. . . . . . . 2,382 2,308 4,458 3,932 3,928 4,444 4,789
Net realized investment gains. . . 945 340 1,011 476 1,758 1,444 560
Other income . . . . . . . . . . . 260 112 274 266 244 264 197
-------- -------- -------- -------- -------- -------- --------
Total revenues . . . . . . . . . 29,893(1) 35,081 72,406 68,139 66,916 60,165 58,596
-------- -------- -------- -------- -------- -------- --------
Losses and Expenses:
Losses and loss adjustment expenses. 25,648 22,837 50,509 46,440 42,154 38,096 36,527
Other underwriting expenses. . . . . 8,599 11,635 23,265 22,087 20,991 19,551 18,830
Other expenses . . . . . . . . . . . 250 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total expenses . . . . . . . . . 34,497 34,472 73,774 68,527 63,145 57,647 55,357
-------- -------- -------- -------- -------- -------- --------
Income (loss) before federal income
taxes. . . . . . . . . . . . . . . . (4,604) 609 (1,368) (388) 3,771 2,518 3,239
Federal income tax expense (benefit) . (1,643) 114 (684) (532) 383 122 534
-------- -------- -------- -------- -------- -------- --------
Net income (loss)(2) . . . . . . . . . $ (2,961) $ 495 $ (684) $ 144 $ 3,388 $ 2,396 $ 2,705
======== ======== ======== ======== ======== ======== ========
Selected Balance Sheet Data (at period end):
Total investments and cash(3). . . . $ 90,406 $ 95,451 $100,488 $ 90,158 $ 99,623 $ 91,437 $ 85,270
Total assets . . . . . . . . . . . . 137,760 130,810 134,853 127,831 140,213 136,979 142,764
Subordinated debt . . . . . . . . . 2,250 2,250 2,250 3,000 3,750 4,500 5,250
Total liabilities. . . . . . . . . . 100,719 89,060 93,956 91,300 100,359 100,366 108,551
Total equity . . . . . . . . . . . . $ 37,041 $ 41,750 $ 40,897 $ 36,531 $ 39,854 $ 36,613 $ 34,212
GAAP Ratios:
Loss and loss adjustment expense
ratio(4) . . . . . . . . . . . . . 97.5% 70.7% 75.8% 73.2% 69.1% 70.5% 68.8%
Underwriting expense ratio(5). . . . 32.7%(1) 36.0% 34.9% 34.8% 34.4% 36.2% 35.5%
Combined ratio(6). . . . . . . . . . 130.2%(1) 106.7% 110.7% 108.0% 103.5% 106.7% 104.3%
Statutory Data (at period end):
Statutory combined ratio . . . . . . 134.7%(1) 108.5% 107.9% 106.3% 99.5% 106.2% 105.0%
Industry combined ratio(7) . . . . . -- -- 106.4% 108.4% 106.9% 115.7% 108.8%
Statutory surplus. . . . . . . . . . $ 29,930 $ 31,360 $ 32,249 $31,097 $ 31,487 $ 27,936 $ 26,607
Ratio of statutory net written
premiums to statutory
surplus(8) . . . . . . . . . . . . 1.36x(1) 2.12x 2.15x 2.16x 2.10x 2.00x 2.02x
_____________________
<FN>
(1) Effective January 1, 1996, the Insurance Companies and
American Re-Insurance Company entered into a quota share
reinsurance treaty pursuant to which the Insurance Companies
cede 20% of their liability remaining after cessions of
excess and catastrophic risks through other reinsurance
contracts. Pro rata cessions of unearned premiums as of
January 1, 1996 and the transfer of premiums written during
the six-month period ended June 30, 1996 accounted, in part,
for the decline in net premiums written, net premiums earned
and total revenues, the increase in the underwriting expense
ratio and the GAAP and statutory combined ratios and the
decrease in the ratio of statutory net written premiums to
statutory surplus, when the six-month period ended June 30,
1996 is compared to the six-month period ended June 30,
1995.
(2) Net income for the years ended December 31, 1994 and
1995 and the six-month period ended June 30, 1996 was
adversely affected by the frequency and severity of
weather-related property losses. See "Management's
Discussion and Analysis of Financial Condition and
Results of Operations."
(3) Due to the adoption by the Insurance Companies on January 1,
1994 of SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," total investments and equity
were adjusted to reflect changes in market value, which
resulted in a reduction of $4.2 million and an increase of
$1.5 million as of December 31, 1994 and 1995, respectively,
and an increase of $1.4 million and a decrease of $200,000
as of June 30, 1995 and 1996, respectively.
(4) Calculated by dividing losses and loss adjustment expenses
by net premiums earned.
(5) Calculated by dividing other underwriting expenses by net
premiums earned.
(6) The sum of the Loss and Loss Adjustment Expense Ratio and
the Underwriting Expense Ratio.
(7) As reported by A.M. Best Company, Inc., an independent
insurance rating organization. Data unavailable for the six
months ended June 30, 1996 and June 30, 1995.
(8) Annualized for the six-month periods ended June 30, 1996 and
1995.
/TABLE
<PAGE>
INVESTMENT CONSIDERATIONS
Before investing in the Common Stock offered hereby,
prospective investors should carefully consider all of the
information set forth in this prospectus and, in particular, the
matters presented below.
Catastrophe and Natural Peril Losses
In common with other property and casualty insurers, the
Insurance Companies are subject to claims arising from
catastrophes that may have a significant impact on their results
of operations and financial condition. The Insurance Companies
have experienced, and can be expected to experience in the
future, catastrophe losses that may materially affect financial
condition and results of operations. Catastrophe losses can be
caused by various events, including snow storms, ice storms,
freezing, hurricanes, earthquakes, tornadoes, wind, hail and
fires and their incidence and severity are inherently
unpredictable. The extent of net losses from catastrophes is a
function of three factors: the total amount of insured exposure
in the area affected by the event, the severity of the event and
the amount of reinsurance coverage.
The Insurance Companies' financial condition and results
of operations also are affected periodically by losses caused by
natural perils, regardless of whether such losses, because of
their magnitude, qualify as "catastrophes," as classified by the
Property Claims Service Division of American Insurance Services
Group, Inc., an insurance industry body. Because of the
geographic concentration of their business, the Insurance
Companies may be more exposed to losses of this type than other
property and casualty insurers. A multiplicity of such events,
all or some of which do not qualify as catastrophes, in the
aggregate, may materially affect the Company's financial
condition and results of operations. This is true, in part,
because losses from individual events may not permit recovery
under the Insurance Companies' catastrophe reinsurance coverage.
The frequency and severity of storms and freezes during 1994,
1995 and the first six months of 1996 that adversely affected the
Insurance Companies' results for these periods are examples of
this phenomenon. See "-- Geographic Concentration of Business,"
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Reinsurance."
Adequacy of Loss Reserves
The Insurance Companies are required to maintain reserves to
cover their estimated ultimate liability for losses and loss
adjustment expenses ("LAE") with respect to reported and
unreported claims incurred. Reserves are estimates involving
actuarial and statistical projections at a given time of what the
Insurance Companies expect to be the cost of the ultimate
settlement and administration of claims based on facts and
circumstances then known, predictions of future events, estimates
of future trends in claims severity and judicial theories of
liability, legislative activity and other variable factors, such
as inflation. The Insurance Companies' overall reserve practice
provides for ongoing claims evaluation and adjustment (if
necessary) based on the development of related data and other
relevant information pertaining to such claims. Loss and LAE
reserves, including reserves for claims that have been incurred
but not yet reported, are adjusted no less than monthly. The
uncertainties of estimating insurance reserves are greater for
certain types of property and casualty insurance lines written by
the Insurance Companies, particularly workers' compensation and
other liability coverages, because a longer period of time may
elapse before a definitive determination of ultimate liability
may be made and because of the changing judicial and political
climates relating to these types of claims.
The establishment of appropriate loss and loss adjustment
expense reserves is an inherently uncertain process and there can
be no assurance that ultimate losses will not exceed the
Insurance Companies' loss reserves. To the extent that reserves
prove to be inadequate in the future, the Insurance Companies
would have to increase reserves which would adversely affect
earnings in the period such reserves are increased and could have
a material adverse effect on the Company's results of operations
and financial condition. See "Business - Loss and LAE Reserves."
Fluctuation in Operating Results
The operating results of property and casualty insurers are
subject to significant fluctuation due to a number of factors,
including extreme weather conditions and natural disasters,
regulation, competition, judicial trends, changes in the
investment and interest rate environment and general economic
conditions. The Company's operating results may also be affected
by changes in supply of property and casualty insurance and
reinsurance, which has historically been subject to significant
fluctuations. The unpredictability of claims experience and
competitive nature of the property and casualty insurance
industry has contributed historically to significant
quarter-to-quarter and year-to-year fluctuations in the
underwriting results and net earnings of the Insurance Companies.
Because of these and other factors, historic results of
operations may not be indicative of future operations. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Geographic Concentration of Business
All direct premiums written by the Insurance Companies are
generated in Pennsylvania, Maryland and Delaware. For the years
ended December 31, 1993, 1994 and 1995 and for the six months
ended June 30, 1996, 94%, 94%, 93% and 93%, respectively, of the
Insurance Companies' direct premiums written were derived from
policies written in Pennsylvania. The revenues and profitability
of the Insurance Companies could be significantly affected by
legal and judicial trends and prevailing economic, regulatory,
demographic and other conditions in Pennsylvania as well as the
impact of catastrophe and natural peril losses in that state.
See "--Catastrophe and Natural Peril Losses."
Acquisition Strategy
The Company intends to pursue a strategy of growth through
acquisition of other insurance companies. The success of the
Company's growth strategy will depend largely upon its ability to
identify suitable acquisition candidates and effect acquisitions
at a reasonable cost. No assurance can be given that the Company
will be successful in doing so. Moreover, this growth strategy
may present special risks, such as the risk that the Insurance
Company will not efficiently integrate an acquisition with
present operations, the risk of dilution of book value and
earnings per share of the Company's Common Stock as a result of
an acquisition, the risk that the Company and the Insurance
Companies will not be able to attract and retain qualified
personnel needed for expanded operations, and the risk that
internal monitoring and control systems may prove inadequate.
Purchasers of Common Stock should also be aware that the Company,
in many instances, may be able to make an acquisition without any
requirement under law or Nasdaq listing rules to seek shareholder
approval of the acquisition.
Competition
The property and casualty insurance market is highly
competitive. Competition is based on many factors, including
perceived financial strength of the insurer, premiums charged,
policy terms and conditions, service, reputation and experience.
The Insurance Companies compete with stock insurance companies,
mutual companies, local cooperatives and other underwriting
organizations. Certain of these competitors have substantially
greater financial, technical and operating resources than the
Insurance Companies. Many of the lines of insurance written by
the Insurance Companies are subject to significant price
competition. Some companies may offer insurance at lower premium
rates through the use of salaried personnel, rather than the use
of agents paid on a commission basis as the Insurance Companies
do, or other methods. See "Business -- Competition."
A.M. Best Rating
Ratings assigned by A.M. Best Company, Inc. ("A.M. Best")
are an important factor influencing the competitive position of
insurance companies. A.M. Best ratings are based upon factors of
concern to policyholders and are not directed toward the
protection of investors. As such, the Company's A.M. Best rating
is not intended to provide a basis for the purchase of Common
Stock hereunder. A.M. Best affirmed an "A-" (Excellent) rating
(its fourth highest out of 15 rating categories) for the Group in
February 1996 based on year-end 1995 financial data. The
Insurance Companies had $3.7 million of net catastrophe losses
directly attributable to severe winter weather for the six-month
period ended June 30, 1996. Accordingly, there can be no
assurance that the Group will be able to maintain its current
rating. The Insurance Companies believe that their business is
sensitive to ratings and that a rating downgrade may affect their
ability to underwrite new business. As a result, if the Group
were to experience a rating downgrade, the Company's business and
results of operations could be materially adversely affected.
See "Business - A.M. Best Rating."
Effect of Regulation
The Insurance Companies are subject to substantial
regulation by government agencies in the states in which they do
business. Such regulation usually includes (i) regulating
premium rates, policy forms, and lines of business, (ii) setting
minimum capital and surplus requirements, (iii) imposing guaranty
fund assessments and requiring residual market participation,
(iv) licensing companies and agents, (v) approving accounting
methods and methods of setting loss and expense reserves,
(vi) setting requirements for and limiting the types and amounts
of investments, (vii) establishing requirements for the filing of
annual statements and other financial reports, (viii) conducting
periodic statutory examinations of the affairs of insurance
companies, (ix) approving proposed changes in control,
(x) limiting the amount of dividends that may be paid without
prior regulatory approval, (xi) regulating transactions with
affiliates, and (xii) regulating trade practices and market
conduct. Such regulation and supervision are primarily for the
benefit and protection of policyholders and not for the benefit
of investors. The insurance regulatory structure has been
subject to increased scrutiny in recent years by federal and
state legislative bodies and state regulatory authorities.
Various new regulatory standards have been adopted in recent
years as a result of accreditation requirements imposed by the
National Association of Insurance Commissioners (the "NAIC"). No
assurance can be given that future legislation or regulatory
changes will not adversely affect the business and results of
operations of the Insurance Companies. See "Business --
Regulation."
Adverse legislative and regulatory activity constraining the
Insurance Companies' ability adequately to price automobile,
workers' compensation and other insurance coverages may occur in
the future. In recent years, insurers have been under pressure
from certain state regulators, legislatures and special interest
groups to reduce, freeze or set rates at levels that may not
correspond with current underlying costs. In addition, as a
condition of their license to do business, the Insurance
Companies are required to participate in a variety of mandatory
residual market mechanisms (assigned risk plans and mandatory
pools) that provide certain insurance coverages (most notably
automobile insurance coverages) to consumers who are otherwise
unable to obtain such coverages from private insurers. Losses or
assessments from residual market mechanisms cannot be predicted
with certainty and could have a material adverse effect on the
Company's business and results of operations.
Effect of Holding Company Structure
Because the operations of the Company following the
Conversion will be conducted through its subsidiaries, the
Insurance Companies, the Company will be dependent upon dividends
and other payments from the Insurance Companies for funds to meet
its obligations. Pennsylvania law regulates the distribution of
dividends and other payments by the Insurance Companies to the
Company. Such restrictions or any subsequently imposed
restrictions may in the future affect the Company's ability to
pay debt, expenses and cash dividends to its shareholders. See
"Dividend Policy" and "Business -- Regulation."
Reinsurance Considerations
The Insurance Companies' insurance operations rely on the
use of reinsurance arrangements to limit and manage the amount of
risk retained, to stabilize underwriting results and increase
underwriting capacity. The availability and cost of reinsurance
are subject to prevailing market conditions and may vary
significantly over time. No assurance can be given that
reinsurance will continue to be available to the Insurance
Companies in the future at commercially reasonable rates. While
the Insurance Companies seek to obtain reinsurance with coverage
limits that they believe are appropriate for the risk exposures
assumed, there can be no assurance that losses experienced by the
Company will be within the coverage limits of the Insurance
Companies' reinsurance treaties and facultative arrangements.
The Insurance Companies also are subject to credit risk with
respect to their reinsurers because the ceding of risk to
reinsurers does not relieve the Insurance Companies of their
liability to insureds. The insolvency or inability of any
reinsurer to meet its obligations may have a material adverse
effect on the business and results of operations of the Company.
See "Business -- Reinsurance."
Potential Benefits of Conversion to Management and Impact of
Purchases by Management and Stock Benefit Plans
It is currently expected that directors and executive
officers of the Insurance Companies and their associates will
subscribe for approximately 50,750 shares of the Common Stock to
be issued in the Conversion, or 1.5% at the midpoint of the
Estimated Valuation Range, and that the ESOP will purchase 10% of
the shares to be issued in the Conversion. In addition,
following the Conversion, and subject to shareholder approval,
the Company will implement a management recognition plan (the
"MRP"), under which employees and directors would be awarded (at
no cost to them) an aggregate amount of Common Stock equal to 4%
of the shares issued in the Conversion and a stock compensation
plan (the "Compensation Plan"), under which employees and
directors would be granted (at no cost to them) options to
purchase an aggregate amount of Common Stock equal to 10% of the
shares issued in the Conversion at an exercise price equal to the
Purchase Price. At the minimum, midpoint and maximum of the
Estimated Valuation Range, assuming all options granted under the
Compensation Plan were exercised and all shares issued pursuant
to the exercise of the options and all shares held by the MRP
were newly issued shares, such persons would receive, in the
aggregate, 399,490, 469,980 and 540,484 shares, respectively, or
in each case, 12.3% of the then outstanding Common Stock. In
addition to the possible financial benefits under the stock
benefit plans, management could benefit from certain statutory
and regulatory provisions, as well as certain provisions in the
Company's Articles of Incorporation and Bylaws, that may tend to
promote the continuity of existing management and discourage
certain acquisition proposals.
As a result of the foregoing, management could acquire a
substantial interest in the Company and, if each member of
management were to act consistently with each other, could have
significant influence over the outcome of the election of
directors and any shareholder vote, especially matters requiring
the approval of 80% of the Company's outstanding Common Stock,
such as certain business combinations. Management might thus
have the power to authorize actions that may be viewed as
contrary to the best interests of non-affiliated holders of
Common Stock and might have substantial power to block actions
that such holders may deem to be in their best interests. See
"Pro Forma Data," "Management -- Certain Benefit Plans and
Agreements," "The Conversion -- Proposed Management Purchases,"
"Certain Restrictions on Acquisition of the Company."
Dilutive Effect of MRP and Stock Options
The Company has adopted the Compensation Plan and the MRP,
both of which will be subject to shareholder approval at the
Company's first annual meeting of shareholders after the
Conversion. Under the MRP, employees and directors would be
awarded, at no cost to them, an aggregate amount of Common Stock
equal to 4% of the shares issued in the Conversion, and under the
Compensation Plan, employees and directors would be granted
options to purchase an aggregate amount of Common Stock equal to
10% of the shares issued in the Conversion at the Purchase Price.
Under the MRP, the shares issued to directors and employees could
be newly issued shares or shares purchased in the open market.
In the event the shares issued to the MRP and pursuant to the
exercise of options granted under the Compensation Plan consist
of newly issued shares of Common Stock, the interests of existing
shareholders would be diluted. See "Pro Forma Data" and
"Management -- Certain Benefit Plans and Agreements -- Stock
Compensation Plan" and "-- Management Recognition Plan."
Articles of Incorporation, Bylaw and Statutory Provisions that
could Discourage Hostile Acquisitions of Control
The Company's Articles of Incorporation and Bylaws contain
certain provisions that may have the effect of discouraging a
non-negotiated tender or exchange offer for the Common Stock, a
proxy contest for control of the Company, the assumption of
control of the Company by a holder of a large block of Common
Stock or the removal of the Company's management, all of which
certain shareholders might deem to be in their best interests.
These provisions include, among other things (i) the
classification of the terms of the members of the Board of
Directors, (ii) supermajority provisions for the approval of
certain business combinations and amendment of the Articles of
Incorporation or Bylaws of the Company, (iii) elimination of
cumulative voting in the election of directors, and
(iv) restrictions on the voting of the Company's equity
securities by any individual, entity or group owning more than
10% of the Common Stock. The provisions in the Company's
Articles of Incorporation requiring a supermajority vote for the
approval of certain business combinations and containing
restrictions on voting of the Company's equity securities provide
that the supermajority voting requirements and voting
restrictions do not apply to business combinations and
acquisitions of voting Common Stock meeting specified Board of
Director approval requirements. The Articles of Incorporation
also authorize the issuance of 5,000,000 shares of preferred
stock as well as additional shares of Common Stock. These shares
could be issued without shareholder approval on terms or in
circumstances that could deter a future takeover attempt.
In addition, the Pennsylvania Business Corporation Law (the
"Pennsylvania BCL") provides for certain restrictions on
acquisition of the Company, and Pennsylvania law contains various
restrictions on acquisitions of control of insurance holding
companies.
The Articles of Incorporation, Bylaw and statutory
provisions, as well as certain other provisions of state and
federal law, may have the effect of discouraging or preventing a
future takeover attempt not supported by the Company's Board of
Directors in which shareholders of the Company otherwise might
receive a substantial premium for their shares over then-current
market prices. For a detailed discussion of those provisions,
see "Management -- Certain Benefit Plans and Agreements,"
"Certain Restrictions on Acquisition of the Company," "Certain
Anti-Takeover Provisions in the Articles of Incorporation and
Bylaws" and "Description of Capital Stock."
Absence of Prior Market for the Common Stock
The Company has never issued capital stock, and consequently
there is no established market for the Common Stock. The Company
has received preliminary approval to have the Common Stock quoted
on the Nasdaq NMS under the symbol "OGGI," conditioned upon
completion of the Conversion. Hopper Soliday, Legg Mason and
McDonald each have advised the Company that, upon completion of
the Conversion, it intends to act as a market maker in the Common
Stock, subject to market conditions and compliance with
applicable laws and regulatory requirements. There can be no
assurance that an active and liquid trading market for the Common
Stock will develop or that, if one develops, it will continue,
nor is there any assurance that persons purchasing Common Stock
will be able to sell the Common Stock at or above the Purchase
Price. See "Market for the Common Stock."
THE COMPANY
General
The Company was incorporated under the laws of the
Commonwealth of Pennsylvania in May 1996 for the purpose of
serving as a holding company for the Insurance Companies upon the
acquisition of all of their capital stock in connection with the
Conversion. The Company has received approval from the
Department to acquire control of the Insurance Companies subject
to satisfaction of certain conditions. Prior to the Conversion,
the Company has not engaged and will not engage in any
significant operations. Upon completion of the Conversion, the
Company's primary assets will be the outstanding capital stock of
the Insurance Companies and a portion of the net proceeds of the
Conversion.
Management believes that the holding company structure will
permit the Company to expand the services beyond those currently
offered through the Insurance Companies, although there are no
definitive plans or arrangements for such expansion at present.
As a holding company, the Company will have greater flexibility
to diversify its business activities through existing or newly
formed subsidiaries or through the issuance of capital stock to
facilitate acquisitions or mergers or to obtain additional
financing in the future. See "First Delaware Insurance Company
Acquisition" and "New Castle Insurance Company Investment" below.
The portion of the net proceeds from the sale of Common Stock in
the Conversion that the Company will contribute to the Insurance
Companies will substantially increase the Insurance Companies'
surplus which will, in turn, enhance policyholder protection and
increase the amount of funds available to support both current
operations and future growth. After the Conversion, the Company
will be classified as a holding company and will be subject to
regulation by the Department.
The Company's executive offices are located at 2929 Lititz
Pike, Lancaster, Pennsylvania 17604, and its main telephone
number is (717) 581-6700.
First Delaware Insurance Company Acquisition
Management expects that in November 1996, Old Guard
Investment Holding Company, Inc. a subsidiary of the Insurance
Companies ("Old Guard Investment") will execute an agreement with
First Delaware Insurance Company ("First Delaware"), a Delaware
insurance company, and International Corporation ("IC"), First
Delaware's sole shareholder, pursuant to which Old Guard
Investment will acquire 80% of the capital stock of First
Delaware. The acquisition will be made through a combination of
(i) a $3 million cash investment in First Delaware in exchange
for a number of shares of First Delaware common stock equal to
$3 million divided by 1.5 times the GAAP book value per share of
First Delaware as of the month end immediately preceding the
closing date and (ii) the purchase from IC for cash of a number
of additional shares of First Delaware, at a price per share
equal to 1.5 times the GAAP book value per share of First
Delaware, such that Old Guard Investment will hold 80% of the
stock of First Delaware after closing. Management estimates that
the total acquisition price will equal approximately
$4.8 million. Old Guard Investment expects to finance the
acquisition of the common stock of First Delaware with the
proceeds of a $5.0 million preferred stock investment in Old
Guard Investment by American Re that will be redeemed with a
portion of the proceeds from the sale of Common Stock in the
Conversion.
At closing, which is expected to occur in January 1997,
Old Guard Investment and IC will execute a shareholder agreement
that, among other things, will prohibit IC from transferring its
remaining 20% interest in First Delaware prior to December 31,
2003 to anyone other than Old Guard Investment or an affiliate of
Old Guard Investment. The shareholder agreement also gives the
parties certain "put" and "call" rights prior to December 31,
2003 during specified periods with respect to the remaining 20%
of the common stock of First Delaware held by IC at a purchase
price of between 1 and 1.5 times then current GAAP book value per
share. The exercise price of the put or call varies depending
upon the time period when the put or call is exercised and is
payable in cash or Common Stock at the election of the party
exercising the put or call right. In addition, after
December 30, 1999, IC can relinquish its put right and extinguish
Old Guard Investment's call right in exchange for a payment from
Old Guard Investment to IC of 10% of the put price.
Upon closing, the First Delaware Board of Directors will
consist of up to five members, three of whom will be elected by
Old Guard Investment. David E. Hosler, the Chairman of the
Company, will become Chairman of First Delaware. First Delaware
and Commonwealth Insurance Managers, Inc. ("CIMI"), a subsidiary
of Old Guard Investment, also will execute a management agreement
pursuant to which CIMI will provide management advice on
actuarial services, reinsurance purchasing, investment
management, management information systems, security custody
services, independent accounting/auditing services, human
resource services and employee benefits. In order to retain the
services of the two principals of First Delaware, First Delaware
will enter into employment agreements acceptable to Old Guard
Investment with such principals.
The acquisition of First Delaware furthers the Company's
strategic goals of geographic and product line diversification
because First Delaware's business is principally commercial
lines, including surety business in the Delaware and Maryland
markets. The Insurance Companies intend to renew their current
commercial writings in Delaware and the Eastern Shore of Maryland
to First Delaware and support a planned expansion of First
Delaware into Virginia. At June 30, 1996, First Delaware had
$4.3 million in assets and $1.8 million in equity. For the six
months ended June 30, 1996, First Delaware had direct premiums
written of $2.0 million and net income of $126,000. For the year
ended December 31, 1995, First Delaware had direct premiums
written of $3.3 million and net income of $150,000.
New Castle Insurance Company Investment
Management expects that in November 1996 Old Guard
Investment will execute an Investment Agreement with New Castle
Mutual Insurance Company ("New Castle"), a Delaware insurance
company that is licensed in Delaware and Pennsylvania and sells
primarily homeowners and other personal property and casualty
lines through independent agents. Pursuant to the Investment
Agreement, Old Guard Investment, or an affiliate designated by
Old Guard Investment, will purchase a $1.0 million convertible
surplus note and, from time to time, will purchase up to an
additional $3.0 million of convertible surplus notes based on
cancellation of reinsurance or an increase in the ratio of net
premiums written to statutory surplus to an amount in excess of
2.9. Old Guard Investment expects to finance this investment by
drawing on an existing unused $4.0 million line of credit. The
Investment Agreement contains customary representations,
warranties, covenants and conditions to closing.
The surplus notes will be convertible into common stock of
New Castle if, but only if, New Castle converts from mutual to
stock form. The surplus notes will be convertible into that
number of shares of common stock of New Castle equal to the
greater of (i) the principal balance of the surplus notes divided
by (A) the price at which a share of common stock of New Castle
is offered and sold in a mutual to stock conversion of New
Castle, if such an offering is made, or (B) the value assigned to
a share of New Castle common stock distributed to New Castle
policyholders in a mutual to stock conversion of New Castle, if
such a distribution is made, or (ii) the number of authorized
shares of common stock of New Castle multiplied by a fraction the
numerator of which is the principal amount of the surplus notes
and the denominator of which is the statutory surplus of New
Castle on the last day of the month immediately preceding a
mutual to stock conversion of New Castle. New Castle has
covenanted to use its best efforts to convert from mutual to
stock form within three years from the date of the initial
surplus note purchase.
New Castle has also agreed that it will reconstitute its
board to consist of seven members with three members nominated
for election as proposed by Old Guard Investment. Subject to
election, David E. Hosler will become Chairman of New Castle.
New Castle also will enter into a management contract with CIMI
pursuant to which CIMI will provide advice on actuarial services,
reinsurance purchasing, investment management, security custody
services, independent accounting/auditing services, human
resource services and employee benefits.
The surplus note investment in New Castle furthers the
Company's strategic goal of geographic diversification because
New Castle's business is principally located in the Delaware
market. At June 30, 1996, New Castle had $5.0 million in assets
on a statutory basis and $1.7 million in statutory surplus. For
the six months ended June 30, 1996, New Castle had direct
premiums written of $5.3 million and statutory net loss of
$49,000. For the year ended December 31, 1995, New Castle had
direct premiums written of $10.7 million and a statutory net loss
of $749,000.
THE INSURANCE COMPANIES
Old Guard Mutual, Old Guard Fire and Goschenhoppen are
each Pennsylvania mutual insurance companies that currently
operate as members of the Group. The Group also includes
Neffsville, which is not a party to the Plan. The Insurance
Companies are property and casualty insurers of farms, small and
medium-sized businesses and residents primarily in rural and
suburban communities in Pennsylvania, Maryland and Delaware. The
Insurance Companies market farmowners, homeowners and
businessowners policies, as well as personal and commercial
automobile, workers' compensation and commercial multi-peril
coverages through approximately 1,600 independent agents.
The Insurance Companies operate under a reinsurance pooling
agreement pursuant to which all premium revenue, loss and loss
adjustment expense are ceded to Old Guard Mutual and a fixed
percentage of those items is retroceded by Old Guard Mutual to
Old Guard Fire and Goschenhoppen. The allocation of pooled
revenue and expense is determined by the parties and is currently
as follows: Old Guard Mutual - 60%, Old Guard Fire - 29% and
Goschenhoppen - 11%. Investment income and investment gains and
losses are not pooled. In addition, Neffsville reinsures 90% of
its book of business with Old Guard Mutual.
Old Guard Mutual. Old Guard Mutual was originally
chartered in 1896. At June 30, 1996, Old Guard Mutual had total
assets of $115.9 million and equity of $22.1 million.
Old Guard Fire. Old Guard Fire was originally chartered
in 1872. At June 30, 1996, Old Guard Fire had total assets of
$36.7 million and equity of $10.9 million.
Goschenhoppen. Goschenhoppen was originally chartered in
1843. At June 30, 1996, Goschenhoppen had total assets of
$23.7 million and equity of $4.1 million.
The Insurance Companies are subject to examination and
comprehensive regulation by the Department. See "Business --
Regulation."
USE OF PROCEEDS
The Company has received Department approval to acquire all
of the capital stock of Old Guard Mutual, Old Guard Fire and
Goschenhoppen to be issued in the Conversion in exchange for an
aggregate of approximately $16.0 million in cash. The Company
will retain the balance of the net proceeds.
The net proceeds retained by the Company will be available
for a variety of corporate purposes, including additional capital
contributions, future acquisitions and diversification of
business and dividends to shareholders. Management of the
Company estimates that the acquisition price for First Delaware
will be approximately $4.8 million and will be financed with the
proceeds of a $5.0 million preferred stock investment by
American Re in Old Guard Investment that will be redeemed with a
portion of the net proceeds from the sale of Common Stock in the
Conversion. With the exception of dividends and the pending
acquisition of First Delaware Insurance Company and the proposed
investment in New Castle Mutual Insurance Company, the Company
currently has no specific plans, arrangements or understandings
regarding any of the foregoing activities. See "Dividend
Policy," "The Company -- Acquisition of First Delaware Insurance
Company" and -- Investment in New Castle Mutual Insurance
Company."
The net proceeds used to acquire the stock of the Insurance
Companies will become part of their capital, thereby expanding
underwriting capacity and permitting diversification of their
businesses. Any payment of dividends to the Company will be
limited by regulatory restrictions on capital distributions by
the Insurance Companies. See "Business -- Regulation."
The amount of proceeds from the sale of Common Stock in
the Offering will depend upon the total number of shares actually
sold, the relative percentages of Common Stock sold in the
Subscription, Community and Public Offerings and the actual
expenses of the Conversion. As a result, the net proceeds from
the sale of Common Stock cannot be determined until the
Conversion is completed. Set forth below are the estimated net
proceeds to the Company, assuming the sale of Common Stock at the
minimum, midpoint and maximum of the Estimated Valuation Range,
based upon the following assumptions: (i) shares of Common Stock
will be sold as follows: (a) 50% of the shares will be sold in
the Subscription and Community Offerings of which (1) 38.5% of
the shares will be sold to policyholders and the community with
respect to which the Company will pay a 3% commission to Hopper
Soliday and (2) 11.5% of the shares will be sold to the ESOP and
directors, officers and employees with respect to which no
commission will be paid to Hopper Soliday, (b) 50% of the shares
will be sold in the Public Offering with respect to which the
Underwriters will receive an underwriting discount of 6.5%; and
(c) American Re, the holder of a surplus note having an
outstanding principal balance of $1.5 million, will convert such
surplus note into 150,000 shares of Common Stock pursuant to
existing contractual rights; (ii) the purchase of the shares sold
to the ESOP will be financed with the proceeds of a loan; and
(iii) other Conversion expenses, not including sales commissions,
will be approximately $1.5 million. The foregoing assumptions
regarding estimated purchases in the Subscription, Community and
Public Offerings are illustrative only and are not based on
comparable transactions. The Company is not aware of any recent
comparable transactions. Actual expenses may vary from those
estimated.
Minimum of Midpoint of Maximum of
2,853,500 3,357,000 3,860,600
shares at shares at shares at
$10.00 $10.00 $10.00
per share per share per share
--------- --------- ---------
(In thousands)
Gross proceeds of
Offering. . . . . . . . $28,535 $33,570 $38,606
Conversion of surplus note 1,500 1,500 1,500
------- ------- -------
Total proceeds. . . . . . 30,035 35,070 40,106
Less estimated
expenses, including
underwriting fees . . 3,107 3,329 3,551
------- ------- -------
Estimated net proceeds. . 26,928 31,741 36,555
Less ESOP debt. . . . . 2,854 3,357 3,861
------- ------- -------
Estimated net proceeds. . $24,074 $28,384 $32,694
======= ======= =======
DIVIDEND POLICY
Payment of dividends on the Common Stock is subject to
determination and declaration by the Company's Board of
Directors. Any dividend policy of the Company will depend upon
the financial condition, results of operations and future
prospects of the Company. At present, the Company intends to pay
an annual dividend of $.10 per share. However, there can be no
assurance that dividends will be paid or, if paid initially, that
they will continue to be paid in the future. In addition,
because the Company initially will have no significant source of
income other than dividends from the Insurance Companies and
earnings from investment of the net proceeds of the Conversion
retained by the Company, the payment of dividends by the Company
will depend significantly upon receipt of dividends from the
Insurance Companies, which is subject to significant regulatory
restrictions. See "Business -- Regulation."
Unlike the Insurance Companies, the Company is not subject
to regulatory restrictions on the payment of dividends to
shareholders. The Company is subject to the requirements of the
Pennsylvania BCL, which generally permits dividends or
distributions to be paid as long as, after making the dividend or
distribution, the Company will be able to pay its debts in the
ordinary course of business and the Company's total assets will
exceed its total liabilities plus the amount that would be needed
to satisfy the preferential rights upon dissolution of holders of
stock with senior liquidation rights if the Company were to be
dissolved at the time the dividend or distribution is paid.
MARKET FOR THE COMMON STOCK
The Company has never issued any capital stock.
Consequently, there is no established market for the Common
Stock. The Common Stock has been approved for quotation on the
Nasdaq NMS under the symbol "OGGI" upon completion of the
Conversion.
Hopper Soliday, Legg Mason and McDonald each have advised
the Company that, upon completion of the Conversion, it intends
to act as a market maker in the Common Stock, subject to market
conditions and compliance with applicable laws and regulatory
requirements. The development of a public market having the
desirable characteristics of depth, liquidity and orderliness,
however, depends upon the presence in the marketplace of a
sufficient number of willing buyers and sellers at any given
time, over which neither the Company nor any market maker has any
control. Accordingly, there can be no assurance that an
established and liquid market for the Common Stock will develop,
or if one develops, that it will continue. Furthermore, there
can be no assurance that purchasers will be able to resell their
shares of Common Stock at or above the Purchase Price after the
Conversion.
CAPITALIZATION
The following table sets forth information regarding the
combined historical capitalization of the Insurance Companies at
June 30, 1996 and the pro forma consolidated capitalization of
the Company giving effect to the sale of Common Stock at the
minimum, midpoint and maximum of the Estimated Valuation Range
based upon the assumptions set forth under "Use of Proceeds."
For additional financial information regarding the Insurance
Companies, see the Combined Financial Statements and related
Notes appearing elsewhere herein. Depending on market and
financial conditions, the total number of shares to be issued in
the Conversion may be significantly increased or decreased above
or below the midpoint of the Estimated Valuation Range. No
resolicitation of subscribers and other purchasers will be made
unless the final appraised value of the Insurance Companies is
below the minimum or above the maximum of the Estimated Valuation
Range. A change in the number of shares to be issued in the
Conversion may materially affect the Company's pro forma
capitalization. See "Use of Proceeds" and "The Conversion --
Stock Pricing and Number of Shares to be Issued."<PAGE>
<TABLE>
<CAPTION>
Pro Forma Consolidated
Capitalization of the Company
Based on the Sale of
---------------------------------
Historical
Combined
Capitalization
of the 2,853,500 3,357,000 3,860,600
Insurance shares at shares at shares at
Companies at $10.00 $10.00 $10.00
June 30, 1996 per share per share per share
-------------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Subordinated debt(1) $ 1,500 $ -- $ -- $ --
Shareholders' equity:
Common stock, no par value
per share: authorized -
15,000,000 shares; shares to
be outstanding - as
shown(1)(2)(3)(4). . . . . -- 28,069 33,084 38,099
Retained earnings --
substantially restricted. . 35,944 35,944 35,944 35,944
Unrealized gains. .. . . . . 1,097 1,097 1,097 1,097
Less: Common Stock acquired
by ESOP with
borrowed funds(4). . -- (2,854) (3,357) (3,861)
Common Stock acquired
by MRP(3). . . . . . -- (1,141) (1,343) (1,544)
------- ------- ------- -------
Total(4) . . . . . . . . . . . $38,541 $61,115 $65,425 $69,735
======== ======== ======= =======
____________
</TABLE>
(1) Subordinated debt consists of a surplus note payable by Old
Guard Mutual to American Re having an assumed outstanding
principal balance of $1.5 million. The table assumes that
this surplus note is converted into 150,000 shares of Common
Stock upon completion of the Conversion which will be in
addition to the shares of Common Stock sold in the
Conversion (the actual outstanding principal balance at
June 30, 1996 was $2.25 million but a $750,000 principal
payment was made in July 1996).
(2) Does not reflect additional shares of Common Stock that
could be purchased pursuant to the Compensation Plan, if
implemented, under which directors, executive officers and
other employees of the Company would be granted options to
purchase an aggregate amount of Common Stock equal to 10% of
the shares issued in the Conversion (335,700 shares at the
midpoint of the Estimated Valuation Range) at an exercise
price equal to the Purchase Price. Implementation of the
Compensation Plan requires shareholder approval. See
"Management -- Certain Benefit Plans and Agreements -- Stock
Compensation Plan" and "Investment Considerations --
Dilutive Effect of MRP and Stock Options."
(3) Assumes that newly issued shares of Common Stock equal to 4%
of the Common Stock to be sold in the Conversion will be
purchased by the MRP. The dollar amount of the Common Stock
to be purchased by the MRP is based on the Purchase Price in
the Conversion, represents unearned compensation and is
reflected as a reduction of capital. Such amount does not
reflect possible increases or decreases in the value of such
stock relative to the Purchase Price. As the Company
accrues compensation expense to reflect the vesting of such
shares pursuant to the MRP, the charge against capital will
be reduced accordingly. Implementation of the MRP requires
shareholder approval. See "Management -- Certain Benefit
Plans and Agreements -- Management Recognition Plan," "Pro
Forma Data" and "Investment Considerations -- Dilutive
Effect of MRP and Stock Options."
(4) Assumes that 10% of the shares of Common Stock to be sold in
the Conversion are purchased by the ESOP, and that the funds
used to purchase such shares are borrowed from an
unaffiliated lender. Although repayment of such debt will
be secured solely by the shares purchased by the ESOP, the
Company expects to make discretionary contributions to the
ESOP in an amount at least equal to the principal and
interest payments on the ESOP debt. The approximate amount
expected to be borrowed by the ESOP is not reflected in this
table as borrowed funds but is reflected as a reduction of
capital. See "Management -- Certain Benefit Plans and
Agreements -- Employee Stock Ownership Plan" and "Pro Forma
Data."
(5) Pro forma shareholders' equity is not intended to represent
the fair market value of the Common Stock, the net fair
market value of the Company's assets and liabilities or the
amounts, if any, that would be available for distribution to
shareholders in the event of liquidation. Such pro forma
data may be materially affected by a change in the number of
shares to be sold in the Conversion and by other factors.
PRO FORMA DATA
The following table sets forth the historical pro forma
consolidated income, shareholders' equity and other data of the
Company after giving effect to the Conversion at or for the
periods ended June 30, 1996 and December 31, 1995. Unaudited pro
forma consolidated income and related data have been calculated
for the periods, as if the Common Stock had been sold at the
beginning of each such period, and the estimated net proceeds had
been invested at the beginning of each period at rates of 4.03%
and 3.89%, respectively. The foregoing yields approximate the
after-tax yield on the investment portfolio of the Insurance
Companies for the six months ended June 30, 1996 and for the year
ended December 31, 1995, respectively, based on an effective tax
rate of 34% for the periods. Historical and pro forma per share
amounts have been calculated by dividing historical and pro forma
amounts by the indicated number of shares of Common Stock. No
effect has been given in the pro forma shareholders' equity
calculations for the assumed earnings on the net proceeds.
The shareholders' equity and related data presented herein
are not intended to represent the fair market value of the Common
Stock, the current value of assets or liabilities or the amounts,
if any, that would be available for distribution to shareholders
in the event of liquidation. The pro forma income and related
data derived from the assumptions set forth above should not be
considered indicative of the actual results of operations of the
Company for any period. Such pro forma data may be materially
affected by a change in the number of shares to be issued in the
Conversion and other factors. See "The Conversion -- Stock
Pricing and Number of Shares to be Issued."
<PAGE>
At or for the Six Months Ended
June 30, 1996
---------------------------------
2,853,500 3,357,000 3,860,600
shares at shares at shares at
$10.00 $10.00 $10.00
per share per share per share
--------- --------- ---------
(Dollars in thousands,
except per share amounts)
Total proceeds(1) . . . . . . . $30,035 $35,070 $40,106
Less estimated expenses . . . . 3,107 3,329 3,551
------- ------- -------
Estimated net proceeds. . . . 26,928 31,741 36,555
Less ESOP funded by the
Company . . . . . . . . . . 2,854 3,357 3,861
------- ------- -------
Estimated net proceeds. . . . $24,074 $28,384 $32,694
======= ======= =======
Historical earnings:
Historical earnings . . . . . $(2,961) $(2,961) $(2,961)
Pro forma earnings on net
proceeds. . . . . . . . . . 485 572 659
Pro forma ESOP adjustment(2). (137) (161) (185)
Pro forma MRP adjustment(3) . (75) (89) (102)
------- ------- -------
Total . . . . . . . . . $(2,688) $(2,639) $(2,589)
======== ======== ========
Earnings per share(1):
Historical earnings . . . . . $ (.95) $ (.81) $ (.71)
Pro forma earnings on net
proceeds. . . . . . . . . . .16 .16 .16
Pro forma ESOP adjustment(2). (.04) (.04) (.04)
Pro forma MRP adjustment(3) . (.02) (.02) (.02)
------- ------- -------
Total . . . . . . . . . . $ (.86) $ (.72) $ (.61)
======= ======= =======
Shareholders' equity:
Historical retained
earnings. . . . . . . . . . $35,944 $35,944 $35,944
Unrealized gains. . . . . . . 1,097 1,097 1,097
Pro forma increase due to
the sale of Common Stock
in the Conversion(1)(3) . . 28,069 33,084 38,099
Less: Common Stock acquired
by ESOP(2). . . . . . (2,854) (3,357) (3,861)
Common Stock acquired
by MRP(3) . . . . . . (1,141) (1,343) (1,544)
------- ------- -------
Total . . . . . . . . . . $61,115 $65,425 $69,735
======= ======= =======
Shareholders' equity per
share(1):
Historical retained
earnings. . . . . . . . . . $ 11.53 $ 9.87 $ 8.63
Unrealized gains. . . . . . . .35 .30 .26
Pro forma increase due to
the sale of Common Stock
in the Conversion(1)(3) . . 9.00 9.09 9.15
Less: Common Stock acquired
by ESOP(2). . . . . . (.92) (.92) (.93)
Common Stock acquired
by MRP(3) . . . . . . (.37) (.37) (.37)
------- ------- -------
Total . . . . . . . . . . $ 19.59 $ 17.97 $ 16.74
======= ======= =======
Offering price as a
percentage of pro forma
shareholders' equity per
share . . . . . . . . . . . . 51.05% 55.65% 59.74%
======= ======= =======
<PAGE>
At or for the Year Ended
December 31, 1995
---------------------------------
2,853,500 3,357,000 3,860,600
shares at shares at shares at
$10.00 $10.00 $10.00
per share per share per share
--------- --------- ---------
(Dollars in thousands,
except per share amounts)
Total proceeds(1) . . . . . . $30,035 $35,070 $40,106
Less estimated expenses . . . 3,107 3,329 3,551
------- ------- -------
Estimated net proceeds. . . 26,928 31,741 36,555
Less ESOP funded by the
Company . . . . . . . . . 2,854 3,357 3,861
------- ------- -------
Estimated net proceeds. . . $24,074 $28,384 $32,694
======= ======= =======
Historical earnings:
Historical earnings . . . . $ (684) $ (684) $ (684)
Pro forma earnings on net
proceeds. . . . . . . . . 936 1,104 1,272
Pro forma ESOP
adjustment(2) . . . . . . (274) (323) (371)
Pro forma MRP adjustment(3) (151) (177) (204)
------- ------- -------
Total . . . . . . . . $ (173) $ (80) $ 13
======= ======= =======
Earnings per share(1):
Historical earnings . . . . $ (.22) $ (.19) $ (.16)
Pro forma earnings on net
proceeds. . . . . . . . . .30 .30 .31
Pro forma ESOP
adjustment(2) . . . . . . (.09) (.09) (.09)
Pro forma MRP
adjustment(3) . . . . . . (.05) (.05) (.05)
------- ------- -------
Total . . . . . . . . . $ (.06) $ (.03) $ .01
======= ======= =======
Shareholders' equity:
Historical retained
earnings. . . . . . . . . $38,905 $38,905 $38,905
Unrealized gains. . . . . . 1,992 1,992 1,992
Pro forma increase due to
the sale of Common Stock
in the Conversion(1)(3) . 28,069 33,084 38,099
Less: Common Stock acquired
by ESOP(2). . . . . (2,854) (3,357) (3,861)
Common Stock acquired
by MRP(3) . . . . . (1,141) (1,343) (1,544)
------- ------- -------
Total . . . . . . . . . $64,971 $69,281 $73,591
======= ======= =======
Shareholders' equity per
share(1):
Historical retained
earnings. . . . . . . . . $ 12.48 $ 10.68 $ 9.34
Unrealized gains. . . . . . .64 .55 .48
Pro forma increase due to
the sale of Common Stock
in the Conversion(1)(3) . 9.00 9.08 9.15
Less: Common Stock acquired
by ESOP(2). . . . . (.92) (.92) (.93)
Common Stock acquired
by MRP(3) . . . . . (.37) (.37) (.37)
------- ------- -------
Total . . . . . . . . . $ 20.83 $ 19.02 $ 17.67
======= ======= =======
Offering price as a
percentage of pro forma
shareholders' equity per
share . . . . . . . . . . . 48.00% 52.58% 56.59%
======= ======= =======
_________________________
(1) Includes the conversion of a surplus note payable by Old
Guard Mutual to American Re-Insurance Company with an
outstanding principal balance of $1.5 million into
150,000 shares of Common Stock.
(2) Assumes 10% of the shares to be sold in the Conversion
are purchased by the ESOP, and that the funds used to
purchase such shares are borrowed from an unaffiliated
lender. The approximate amount expected to be borrowed
by the ESOP is not reflected as a liability but is
reflected as a reduction of capital. Although
repayment of such debt will be secured solely by the
shares purchased by the ESOP, the Company expects to
make discretionary contributions to the ESOP in an
amount at least equal to the principal and interest
payments on the ESOP debt. Pro forma net income has
been adjusted to give effect to such contributions,
based upon a fully amortizing debt bearing interest at
8% with a ten year term payable in monthly
installments. For purposes of this table the Purchase
Price was utilized to calculate the ESOP expense. The
Company intends to record compensation expense related
to the ESOP in accordance with SOP 93-6. As a result,
to the extent the value of the Common Stock appreciates
over time, compensation expense related to the ESOP
will increase. SOP 93-6 also changes the earnings per
share computation for companies with leveraged ESOPs to
include as outstanding only shares that have been
committed to be released to participants. For purposes
of the preceding tables, it was assumed that all ESOP
shares purchased in the Conversion were committed to be
released at June 30, 1996 and December 31, 1995. If it
is assumed that no ESOP shares were committed to be
released at those dates, the application of SOP 93-6
would result in a loss per share, based on the sale of
shares at the minimum, midpoint and maximum of the
Estimated Valuation Range, of $(.95), $(.80) and $(.69)
for the six-month period ended June 30, 1996 and
$(.06), $(.02) and $.00 for the year ended December 31,
1995. See "Management -- Certain Benefit Plans and
Agreements -- Employee Stock Ownership Plan."
(3) Assumes a number of newly issued shares of Common Stock
equal to 4% of the Common Stock to be sold in the Conversion
will be purchased by the MRP and will vest over a five-year
period. The dollar amount of Common Stock to be purchased
by the MRP is based on the Purchase Price in the Conversion
and represents unearned compensation and is reflected as a
reduction of capital. Such amount does not reflect possible
increases or decreases in the value of such stock relative
to the Purchase Price. As the Company accrues compensation
expense to reflect the vesting of such shares pursuant to
the MRP, the charge against capital will be reduced
accordingly. Implementation of the MRP requires shareholder
approval. For purposes of this table, it is assumed that
the MRP will be approved by the Company's shareholders, and
that the MRP will purchase the shares of Common Stock within
the year following the Conversion out of authorized but
unissued shares. See "Management -- Certain Benefit Plans
and Agreements -- Management Recognition Plan" and
"Investment Considerations -- Dilutive Effect of MRP and
Stock Options."
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Company has only recently been formed and, accordingly,
has no results of operations. As a result, this discussion
relates to the Insurance Companies.
This analysis of the Insurance Companies' combined financial
condition and results of operations should be read in conjunction
with the Insurance Companies' Combined Financial Statements and
the other financial data regarding the Insurance Companies found
elsewhere in this Prospectus. The discussion covers the
Insurance Companies' combined financial condition and results of
operations for the six months ended June 30, 1996 and June 30,
1995 and for the three years ended December 31, 1995. The
Insurance Companies' fiscal years end on December 31, and
reference herein to a particular year means, unless otherwise
stated, the fiscal year ending on December 31 of that year.
Results of Operations
Six Months Ended June 30, 1996 Compared to Six Months
Ended June 30, 1995
Premiums. Net premiums written decreased $12.9 million, or
38.8%, for the six months ended June 30, 1996 to $20.4 million
from $33.3 million for the six months ended June 30, 1995. For
the same comparative periods, net premiums earned decreased
$6.0 million, or 18.6%, to $26.3 million from $32.3 million. The
decreases in net premiums written and net premiums earned were
directly attributable to the effects of instituting a quota share
reinsurance treaty between the Insurance Companies and
American-Re Insurance Company ("American Re") effective
January 1, 1996. Under the treaty, the Insurance Companies cede
20% of all premium revenue, after all other reinsurance ceded, in
exchange for American Re assuming 20% of all losses and loss
adjustment expense. The Insurance Companies receive a 35%
commission under the treaty on the business ceded. Net premiums
written and net premiums earned ceded under the treaty amounted
to $13.2 million and $6.7 million, respectively, for the six
months ended June 30, 1996. This reinsurance treaty is designed
to lessen the potential financial impact of catastrophic or
severe weather-related losses and has had, and will continue to
have, a material effect on the financial condition and results of
operations of the Insurance Companies.
Direct premiums written increased 3% for the six months
ended June 30, 1996, compared to the same period in 1995.
Personal automobile grew by 12.9% during the six months ended
June 30, 1996 compared to the corresponding period in 1995, while
all other lines were either relatively stable or declined
slightly in the same period. The continuing focus on liability
business is intended to balance the overall book of business
between property and liability exposures. The declines in volume
in other lines is attributable to premium rate sensitivity of
insureds. The farmowners line also grew, by 4.2%, during the six
months ended June 30, 1996 due to rate increases and reacquiring
business lost due to pricing competition in 1994 and 1995.
Personal automobile now represents 22.4% of the total book of
business, up from 20.3% at June 30, 1995, while homeowners is
down slightly to 25.2% and farmowners has increased slightly to
20.9%.
Net Investment Income. Cash and invested assets increased
$2.6 million, or 2.8%, to $95.4 million for the six months ended
June 30, 1996 compared to $92.8 million for the six months ended
June 30, 1995. The yield on cash and invested assets remained
stable at 5.0% for the six months ended June 30, 1996 and 1995.
As a result of the increase in cash and invested assets, net
investment income increased $73,000, or 3.1%, to $2.4 million for
the six months ended June 30, 1996 compared to the six months
ended June 30, 1995. The increase was produced by additional
invested funds in the bond portfolio and reflects an increase in
dividends on common stocks during the respective time periods.
Decreases in income from preferred stocks, due to prior portfolio
restructuring away from such investments and a decrease in income
from short-term investments, offset the improved bond and common
stock portfolios. Additional interest income of $45,000 in 1996
also was generated from funds advanced to Neffsville. These
advances were necessary due to the abnormal claim activity and
the method of billing premiums employed by Neffsville.
Net Realized Investment Gains. Net realized investment
gains were $945,000 for the six months ended June 30, 1996
compared to $340,000 for the same period in 1995, an increase of
177.9%. The adverse claims experience of the first half of 1996
placed a severe burden on the Insurance Companies' cash flow and,
accordingly, certain investments in bonds and preferred stocks
were liquidated to meet cash needs. In addition, certain
investment portfolio restructurings took place during the first
six months of 1996. Interest rate and general economic
conditions in 1996 also created capital gains opportunities.
Losses and Loss Adjustment Expenses. Losses and loss
adjustment expenses increased by $2.8 million, or 12.3%, to
$25.6 million for the six months ended June 30, 1996 from
$22.8 million for the six months ended June 30, 1995. Net losses
and loss adjustment expenses increased during 1996 due to
substantial numbers of insurance claims arising out of abnormally
severe winter storms during January 1996. Net catastrophic
losses arising directly out of these storms amounted to
$3.7 million. In addition, non-storm related losses and loss
adjustment expenses increased by $8.3 million for the six months
ended June 30, 1996 compared to the six months ended June 30,
1995 primarily because of increases in winter fire and wind
related claims. The magnitude of the difference in non-storm
related losses and loss adjustment expenses between the six
months ended June 30, 1996 and the six months ended June 30, 1995
was accentuated by exceptionally favorable experience during the
first six months of 1995. These net losses and loss adjustment
expenses for the six months ended June 30, 1996, totalling
$12.0 million, were reduced by implementation of the 20% quota
share reinsurance treaty effective January 1, 1996 pursuant to
which the Insurance Companies ceded $6.7 million of losses and
loss adjustment expenses during the six months ended June 30,
1996. Also, the Insurance Companies recovered reinsurance of
$2.5 million from their aggregate excess of loss reinsurer. Loss
and loss adjustment expenses were 97.5% of net premiums earned
for the six months ended June 30, 1996, compared to 70.7% of net
premiums earned in the same period in 1995.
Underwriting Expenses. Underwriting expenses were
$8.6 million for the six months ended June 30, 1996, a decrease
of $3.0 million, or 26.1%, compared to the same period in 1995.
The reduction is primarily due to a $3.0 million reduction in
amortization of policy acquisition costs arising out of the
implementation of the quota share reinsurance treaty.
A nonrecurring expense incurred in the first six months of
1996 was the writeoff of a $250,000 surplus note investment in an
unaffiliated Missouri insurance company whose surplus is
impaired. Old Guard Mutual had an agreement to acquire this
company but the agreement was terminated by Old Guard Mutual
because of a deterioration in the financial condition of that
company. See Note 15 to the Combined Financial Statement.
Federal Income Tax Expense (Benefit). Federal income tax
benefit for the six months ended June 30, 1996, was $1.6 million
compared to an expense of $114,000 for the six months ended
June 30, 1995. The decrease in the Insurance Companies'
effective federal income tax rate was attributable to the loss
for the six months ended June 30, 1996.
Net Income. The Insurance Companies had a net loss of
$3.0 million for the six months ended June 30, 1996 compared to a
gain of $495,000 for the six months ended June 30, 1995,
primarily as a result of the foregoing factors.
Year Ended December 31, 1995 Compared to Year Ended
December 31, 1994
Premiums. The Insurance Companies experienced a slight
increase in direct premiums written in 1995 of $102,000 that was
concentrated in personal automobile, which grew 5.5%, and
homeowners, which grew 3.2%. Farmowners and workers'
compensation direct premiums declined by 3.6% and 2.4%,
respectively. The increases in personal lines premiums were the
result of new business as well as modest rate increases.
Farmowners writings declined due to competitive rate pressures
and workers' compensation writings declined due to rate decreases
arising out of improvements in loss experience attributable to
legislative initiatives in 1993.
Premiums ceded to reinsurers decreased $1.4 million for the
year ended December 31, 1995 compared to the year ended
December 31, 1994. The decrease in premiums ceded in 1995 arose
from: (i) a $1.5 million reduction in catastrophe reinsurance
premiums due primarily to charges in 1994 for reinstatements of
coverage as well as a mid-term placement of an additional cover
in 1994, both of which arose directly as a result of 1994 winter
storm events, and (ii) a redetermination of the expected ultimate
premium rate for retrospectively rated casualty excess of loss
reinsurance coverage. This result was offset slightly by an
increase in certain pro rata cessions on farmowners business due
to revisions in the manner in which such business is classified
for reinsurance coverage purposes.
Net premiums written increased $1.5 million, or 2.2%, for
the year ended December 31, 1995 to $67.1 million from
$65.6 million in 1995. For the same comparative periods, net
premiums earned increased by $3.2 million, or 5.2%, to
$66.7 million from $63.5 million. The increase in net premiums
earned was the result of the previously discussed increase in
direct premiums written, the decrease in premiums ceded to
reinsurers and an increase in the change in unearned premiums of
$1.7 million.
Net Investment Income. Cash and invested assets increased
$10.3 million, or 11.4%, to $100.5 million for the year ended
December 31, 1995 from $90.2 million for the year ended
December 31, 1994. For the year ended December 31, 1995, the
yield on invested assets was 4.7% compared to 4.1% for the year
ended December 31, 1994. The net result of these changes was
that net investment income increased $526,000, or 15.4%, to
$4.5 million for the year ended December 31, 1995 from
$3.9 million in 1994. Components of the increase in net
investment income arose from an increase in gross income from
fixed income securities of $785,000, or 21.4%, a decrease in
income from the preferred stock portfolio of $431,000 and a
decrease in investment expenses of $101,000. Income from the
common stock portfolio increased $134,000, and income from short-
term and other investments decreased by $63,000 accounting for
the balance of the increase in net investment income.
The increase in income from fixed income securities was
attributable to a shift in the portfolio from collateralized
mortgage obligations ("CMOs") to corporate obligations. The
corporate obligations provided slightly higher yields on a level
investment base. The CMOs experienced an increase in the rate of
principal repayment as interest rates fell during 1995 and
therefore became a less attractive utilization of investment
capital.
Limited cash flow in 1994 and early 1995, as well as
declines in short-term interest rates, caused short-term
investment income to decline by $74,000 in 1995 as compared to
1994.
The common stock portfolio, comprised primarily of growth
stocks, experienced an increase in dividend income due to the
favorable results of the equities comprising the portfolio. The
composition of the portfolio and general increases in dividend
rates provided the Insurance Companies with the aforementioned
increase in investment income from this segment of the portfolio.
Net Realized Investment Gains. Net realized investment
gains were $1.0 million for the year ended December 31, 1995
compared to $476,000 in 1994. The increase in investment gains
occurred as part of the previously discussed portfolio
restructuring; a similar shift in the composition of the
portfolio did not occur in 1994 and far fewer securities were
sold.
Underwriting Results. For the year ended December 31,
1995 the Insurance Companies had an underwriting loss of $7.1
million and a combined ratio of 110.7% compared to an
underwriting loss of $5.1 million and a combined ratio of 108.0%
for the year ended December 31, 1994. In both years the
underwriting loss was primarily attributable to severe weather in
the Insurance Companies' territory.
Losses and Loss Adjustment Expenses. Net losses and loss
adjustment expenses incurred increased by $4.1 million, or 8.8%,
to $50.5 million for the year ended December 31, 1995 from
$46.4 million in 1994. Loss and loss adjustment expenses were
75.8% of net premiums earned for the year ended December 31, 1995
compared to 73.2% in 1994.
Affecting losses and loss adjustment expenses in both 1995
and 1994 were several significant weather events that
individually resulted in increased property loss claims. In 1995
a series of localized wind storms produced $3.2 million of net
claims. Because none of these events met the definition of a
catastrophe under the Insurance Companies' catastrophe
reinsurance programs, no catastrophe reinsurance recovery was
made in 1995. The year 1994 produced the single most significant
claim event in the Insurance Companies' history. Winter snow and
ice storms produced nearly $19.2 million in gross claims. After
recoveries under catastrophe reinsurance programs, the Insurance
Companies incurred $3.1 million of net losses and loss adjustment
expenses from these winter storms. The respective impact of
these storms on the loss ratio was 4.8 percentage points and 4.9
percentage points for 1995 and 1994, respectively. For the five
year period preceding 1994 the Insurance Companies never had a
single event resulting in claims in excess of $2.7 million. The
1996 catastrophe reinsurance retention limit is $3.5 million.
Adjustments to loss reserves are made when analysis shows
that reserve levels were estimated higher or lower than is
necessary. Any adjustment to reserves is reflected as a charge
or addition to income in the period in which it is made. The
increase in net losses and loss adjustment expenses incurred in
1995 was attributable to the adverse development of prior year
losses and loss adjustment expense reserves of $2.4 million;
favorable loss reserve development occurred in 1994 and reduced
losses and loss adjustment expenses by $5.5 million. The effect
of the adverse development in 1995 increased the loss and loss
adjustment expense ratio by 3.7 percentage points while the
favorable development in 1994 decreased the ratio by 8.7
percentage points. On an accident year basis the loss and loss
adjustment expense ratio was 72.1% in 1995 and 81.9% in 1994.
Underwriting Expenses. Underwriting expenses increased
by $1.2 million, or 5.3%, for the year ended December 31, 1995 to
$23.3 million from $22.1 million for 1994. This 5.3% increase in
underwriting expenses is attributable to increased policy
acquisition costs and closely parallels the associated 5.2%
increase in net premiums earned for the year ended December 31,
1995 compared to the year ended December 31, 1994. For the year
ended December 31, 1995 the Insurance Companies had an
underwriting expense ratio of 34.9% compared to 34.8% for the
year ended December 31, 1994.
Federal Income Tax Expense. Federal income tax expense
decreased $152,000, resulting in a tax benefit of $684,000 in
1995 compared to a $532,000 tax benefit in 1994. The decrease in
federal income tax expense is attributable to the decrease in
taxable income in 1995 compared to 1994 offset by a decrease in
tax exempt income of $644,000 for 1995 compared to 1994.
Net Income. Net income decreased $828,000 to a $684,000
loss in 1995 from net income of $144,000 in 1994 primarily as a
result of the foregoing factors.
Year Ended December 31, 1994 Compared to Year Ended
December 31, 1993
Premiums. Direct premiums written increased $4.0 million,
or 5.3% for the year ended December 31, 1994 to $78.8 million
from $74.8 million for the year ended December 31, 1993. This
increase in direct premiums written was concentrated in personal
lines of business as homeowners and automobile writings increased
in 1994 by 7.6% and 19.1%, respectively. These increases were
the result of new business as well as modest rate increases. The
workers' compensation line of business experienced an 11.9%
decline in direct premiums written in 1994 due primarily to
legislative action in Pennsylvania that required a roll back in
premium rates. These roll backs were deemed appropriate due to
corresponding legislation intended to assist in controlling
insurers' costs associated with workers' compensation claims.
Premiums ceded to reinsurers increased $1.7 million in 1994.
This increase in premiums ceded arose primarily due to an
increase in the Insurance Companies' catastrophe reinsurance
premiums in 1994 arising out of reinstatement charges that were
required to be paid and management's decision to purchase
additional mid-year coverages. The additional premiums were the
result of severe winter weather in early 1994 that resulted in
substantial claim activity and ultimately in recoveries of losses
under the catastrophe reinsurance program.
Net premiums written increased $2.2 million, or 3.5%, for
the year ended December 31, 1994 to $65.6 million from
$63.4 million in 1993. For the same comparative periods, net
premiums earned increased $2.5 million, or 4.1%, to $63.5 million
from $61.0 million. The increase in net premiums earned was
comprised of the $4.0 million increase in direct premiums written
and an increase in the change in unearned premiums of $200,000,
offset by a $1.7 million increase in premiums ceded to
reinsurers. The increase in net unearned premiums arose from the
increase in direct writings as well as the restructuring of the
Goschenhoppen reinsurance program from a pro rata program to an
excess of loss program.
Net Investment Income. Cash and invested assets decreased
$9.5 million, or 9.5%, to $90.2 million for the year ended
December 31, 1994 from $99.7 million for the year ended
December 31, 1993. Although the 1994 year end balance in cash
and invested assets declined significantly, the average cash and
invested assets balance and the yield on cash and invested assets
for 1994 of $94.9 million and 4.1%, respectively, were
substantially unchanged compared to 1993. The net result of
these changes was that net investment income was essentially
flat, totaling $3.9 million for the years ended December 31, 1994
and 1993. This was primarily due to demands on cash flow
associated with the severe winter in 1994 that did not permit the
Insurance Companies to significantly add to the average balance
of investment securities. Changes did occur, however, in the
components of net investment income. Investment income from
investments in fixed income securities, cash and cash equivalents
and other investments increased $150,000 or 3.7% and investment
expenses decreased $11,000, or 0.8%, in 1994, while investment
income from investments in preferred and common stock decreased
$157,000, or 12.2%, from 1993 to 1994. The shift in the mix of
securities comprising the portfolio resulted in the
aforementioned shift in the composition of investment income.
During 1994, preferred stocks were de-emphasized and the focus
shifted to U.S. Government and corporate bonds. The primary
motivation for this shift arose from income tax considerations.
Net Realized Investment Gains. Net realized investment
gains were $476,000 for the year ended December 31, 1994 compared
to $1.8 million in 1993, a decline of $1.3 million or 72.2%. The
decrease in net realized investment gains was attributable to a
marked decline in the sale of available-for-sale securities in
1994 compared to 1993 because sales in 1994 would have generated
losses due to higher interest rates during the period.
Underwriting Results. For the year ended December 31,
1994 the Insurance Companies had an underwriting loss of $5.1
million and a combined ratio of 108.0% compared to an
underwriting loss of $2.2 million and a combined ratio of 103.5%
for the year ended December 31, 1993.
Losses and Loss Adjustment Expenses. Losses and loss
adjustment expenses increased $4.3 million, or 10.0%, to
$46.4 million for the year ended December 31, 1994 from
$42.2 million in 1993. Losses and loss adjustment expenses were
73.2% of premium revenue for the year ended December 31, 1994
compared to 69.1% for 1993. The majority of the aforementioned
increase was attributable to severe winter weather in early 1994.
Snow, ice and water damage claims produced record levels of loss
activity. After recovery from catastrophe reinsurers the net
increase in losses and loss adjustment expenses was $3.1 million,
or 4.9%, of net premiums earned in 1994.
Underwriting Expenses. Underwriting expenses increased
$1.1 million, or 5.2%, to $22.1 million for the year ended
December 31, 1994 from $21.0 million in 1993. This 5.2% increase
in underwriting expenses reflected an increase in policy
acquisition costs associated with the 4.1% increase in net
premiums earned for the year ended December 31, 1994 compared to
the year ended December 31, 1993 as well as additional costs
attributable to the restructuring of Goschenhoppen's reinsurance
program in 1994. For 1994, the underwriting expense ratio was
34.8% compared to an underwriting expense ratio of 34.4% in
1993.
Federal Income Tax Expense. The Insurance Companies
received a $533,000 federal income tax benefit for the year ended
December 31, 1994 compared to income tax expense of $383,000 for
1993. The decrease in federal income tax expense in 1994 was
attributable to the decrease in net income offset by a reduction
in tax exempt income of $1.2 million from amounts earned in
1993.
Net Income. The Insurance Companies had net income of
$144,000 for the year ended December 31, 1994 compared to net
income of $3.4 million in 1993, primarily as a result of the
foregoing factors.
Liquidity and Capital Resources
Historically, the principal sources of the Insurance
Companies' cash flow have been premiums, investment income,
maturing investments and proceeds from sales of invested assets.
In addition to the need for cash flow to meet operating expenses,
the liquidity requirements of the Insurance Companies relate
primarily to the payment of losses and loss adjustment expenses.
The short- and long-term liquidity requirements of the Insurance
Companies vary because of the uncertainties regarding the
settlement dates for liabilities for unpaid claims and because of
the potential for large losses, either individually or in the
aggregate.
The Insurance Companies and their subsidiaries have in place
unsecured lines of credit with local financial institutions under
which they may borrow up to an aggregate of $7.2 million. At
June 30, 1996, no amounts were outstanding on this line of
credit, which has an annual interest rate equal to the bank's
prime rate. Old Guard Investment intends to borrow $1 million
under one of these credit lines to finance its initial investment
in New Castle. See "The Company--New Castle Insurance Company
Investment." In addition, at June 30, 1996, Old Guard Mutual had
a $2.25 million surplus note outstanding. Pursuant to the terms
of the surplus note, Old Guard Mutual made a $750,000 payment
subsequent to June 30, 1996. The holder has elected to exchange
the remaining $1.5 million balance of the surplus note for
150,000 shares of Common Stock of the Company upon completion of
the Conversion. See "The Conversion -- Surplus Note."
Net cash provided by (used in) operating activities was
$(9.9) million during the six months ended June 30, 1996 and was
$4.9 million, ($2.9) million and $8.4 million during the years
ended December 31, 1995, 1994, and 1993, respectively. The
decrease in net cash provided by operating activities during the
six months ended June 30, 1996 was primarily attributable to the
net loss for the period and an increase in reinsurance
recoverable. The increase in net cash provided by operating
activities in 1995 was primarily attributable to the increase in
net income and a decrease in reinsurance recoverable. The
increase in net cash used in operating activities in 1994 was
primarily attributable to a net operating loss and an increase in
reserves for losses and loss adjustment expenses during 1994
compared to 1993, offset by an increase in deferred policy
acquisition costs.
Net cash provided by investing activities was $7.5 million
during the six months ended June 30, 1996. Net cash provided by
investing activities was ($3.3) million, $2.2 million, and
($9.5) million during the years ended December 31, 1995, 1994 and
1993, respectively. The increase in net cash provided by
investing activities during the six months ended June 30, 1996
primarily resulted from a decrease in the Insurance Companies'
fixed-income securities. The increase in net cash used in
investing activities in 1995 as compared to 1994 resulted
primarily from the net increase in cash available from the
Company's operations during 1995. The increase in net cash
provided by investing activities in 1994 as compared to 1993
resulted primarily from the sale of fixed income and equity
securities materially exceeding the purchase of such securities.
The principal source of liquidity for the Company will be
dividend payments and other fees received from the Insurance
Companies. Pennsylvania law regulates the distribution of
dividends and other payments to the Company by the Insurance
Companies. See "Business -- Regulation." Such restrictions or
any subsequently imposed restrictions may in the future affect
the Company's liquidity.
Effects of Inflation
The effects of inflation on the Insurance Companies are
implicitly considered in estimating reserves for unpaid losses
and loss adjustment expenses, and in the premium rate-making
process. The actual effects of inflation on the Insurance
Companies' results of operations cannot be accurately known until
the ultimate settlement of claims. However, based upon the
actual results reported to date, it is management's opinion that
the Insurance Companies' loss reserves, including reserves for
losses that have been incurred but not yet reported, make
adequate provision for the effects of inflation.
BUSINESS
General
The Company was organized at the direction of the Boards of
Directors of the Insurance Companies for the purpose of becoming
a holding company for all of the outstanding capital stock of the
Insurance Companies. Upon Conversion, the Insurance Companies
will become wholly-owned subsidiaries of the Company.
The Insurance Companies underwrite property and casualty
insurance, concentrating on providing insurance to farms, small
to medium-sized businesses and residents primarily in rural and
suburban communities in Pennsylvania, Maryland and Delaware.
Pennsylvania accounted for in excess of 93% of the direct
premiums written for the six-month period ended June 30, 1996 and
for each of the years in the three-year period ended December 31,
1995. The Insurance Companies market farmowners, homeowners and
businessowners policies, as well as personal and commercial
automobile, workers' compensation and commercial multi-peril
coverages through approximately 1,600 independent agents located
primarily in rural and suburban communities. As of June 30,
1996, the Insurance Companies had over 140,000 property and
casualty policies in force.
Old Guard Mutual, Old Guard Fire and Goschenhoppen have
underwritten property and casualty insurance since 1896, 1872 and
1843, respectively. Old Guard Mutual and Old Guard Fire are
licensed to underwrite property and casualty insurance in
Delaware, Maryland and Pennsylvania. Goschenhoppen is licensed
only in Pennsylvania. At June 30, 1996, the consolidated assets
of the Insurance Companies were $137.8 million.
Strategy
The Company's principal strategies for the future are to:
- Achieve geographic diversification of risk by
acquisition of other insurance companies or licensing
of the Insurance Companies in other jurisdictions with
reduced or different loss exposure;
- Improve the mix of business by increasing commercial
writings and emphasizing casualty coverages in order to
enhance profitability and lessen the impact of property
losses on overall results; and
- Improve efficiency and maintain the high level of
personal service delivered to agents and insureds
through continued enhancement of the Company's
management information systems (MIS).
Management has taken steps to implement each of these
strategies and views the Conversion as a critical component of
its strategic plan. The additional capital generated by the
Conversion will permit the Insurance Companies to accelerate
implementation of these strategies and the resulting holding
company structure will provide needed flexibility to achieve the
Company's goals.
Geographic Diversification. The Company's goal is to
achieve geographic diversification of risk outside Pennsylvania
to areas with reduced or different catastrophic loss exposure and
in which management believes insurers generally have been
permitted to manage risk selection and pricing without undue
regulatory interference. Concentration of property insurance in
Pennsylvania has caused the Insurance Companies to be susceptible
to localized catastrophic events primarily related to severe
weather. The Company expects to accomplish geographic
diversification principally through acquisition but expects also
to seek authority for the Insurance Companies to do business in
additional jurisdictions. The acquisition of an 80% interest in
First Delaware Insurance Company and the investment in New Castle
Insurance Company represent initial steps to diversify
geographically. See "The Company -- Acquisition of First
Delaware Insurance Company" and "-- Investment in New Castle
Insurance Company."
Upon completion of the Conversion, the Company plans to seek
additional acquisitions outside Pennsylvania. The Company is
currently targeting for acquisitions companies located in
jurisdictions adjacent to its current markets and in the upper
Midwest. Completion of the conversion will provide funds for
cash acquisitions and the holding company structure will
facilitate the use of capital stock for acquisitions as well.
The Company expects that any insurance companies acquired will be
added to the existing reinsurance pool among the Insurance
Companies. All participants in the pool will then benefit from
increased dispersion of risk.
Diversification of Lines of Business. The Insurance
Companies have taken, and will continue to take, steps to
increase commercial and casualty premium volume, both to reduce
property loss exposure and to provide greater product
diversification from personal into commercial lines that may
provide a countercyclical balance to personal lines.
One such initiative is the introduction in the third quarter
of 1996 of new commercial multi-peril packages tailored to
specific business and industry segments chosen based on the
experience of the underwriting staff and market opportunities
available to existing agents. These packages should permit the
Insurance Companies to serve larger commercial accounts as well
as to sell accompanying workers' compensation and commercial
automobile coverages. Another initiative is the introduction of
tiered pricing for workers' compensation coverage through a
policy with more attractive pricing and the opportunity for
dividends. The acquisition of First Delaware Insurance Company,
which has a commercial book of business, also furthers the goal
of diversification into commercial lines.
Management believes that it has the opportunity to increase
the volume of casualty business by focused marketing to existing
agents, many of whom have traditionally associated the Insurance
Companies with farm-related property insurance and may not
identify and choose the Insurance Companies for their customers
as providers of casualty line products. For example, currently
less than 20% of the Insurance Companies' farm and homeowner
customers purchase auto policies from the Insurance Companies.
Management believes an increasing share of this market is
desirable and attainable given the existing relationships among
the Insurance Companies, its agents and its insureds.
Completion of the Conversion will supply the additional
surplus necessary to support substantially increased commercial
and casualty premium volume.
Service Capabilities. Management believes the Insurance
Companies have a strong reputation for personal attention to
agents and insureds. The Insurance Companies have undertaken a
program to enhance their MIS capabilities, with the goal of
improving efficiency, internal reporting and service to agents
and insureds, as well as facilitating acquisitions. Over the
past two years, management has selected a new MIS environment and
has begun the process of converting from a single mainframe
processing unit to a personal computer-based wide area network.
This new MIS environment should permit a greater volume of
business to be processed by the same or fewer number of staff.
It will also allow direct agent interface to enhance service to
agents and insureds and build upon the Insurance Companies'
strong reputation in this area.
Products
The Insurance Companies offer a variety of property and
casualty insurance products primarily designed to meet the
insurance needs of the rural and suburban communities in which
the Insurance Companies do business, including their agricultural
clients. The following tables set forth the direct premiums
written, net premiums earned and net loss ratios for the
Insurance Companies for the periods indicated:
<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
------------------------------- -----------------------------------------------
% of % of % of % of % of
1996 Total 1995 Total 1995 Total 1994 Total 1993 Total
---- ----- ---- ----- ---- ----- ---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Direct Premiums Written:
Farmowners. . . . . . . . . . . . . $ 8,511 20.9% $ 8,169 20.6% $15,494 19.7% $16,080 20.4% $15,319 20.5%
Homeowners. . . . . . . . . . . . . 10,275 25.2 10,038 25.3 21,157 26.8 20,509 26.1 19,067 25.5
Businessowners and commercial
multi-peril . . . . . . . . . . . 5,366 13.2 5,459 13.7 11,083 14.1 10,587 13.4 10,367 13.9
Personal automobile . . . . . . . . 9,117 22.4 8,074 20.3 16,810 21.3 15,928 20.2 13,376 17.9
Commercial automobile . . . . . . . 498 1.2 450 1.1 776 0.9 815 1.0 807 1.0
Workers' compensation . . . . . . . 3,103 7.6 3,172 8.0 5,432 6.9 5,563 7.1 6,312 8.4
Fire, allied, inland marine . . . . 3,133 7.7 3,646 9.2 6,763 8.6 7,917 10.1 8,192 11.0
Other liability . . . . . . . . . . 742 1.8 712 1.8 1,317 1.7 1,331 1.7 1,316 1.8
-------- ----- ------- ----- ------- ----- -------- ----- -------- -----
Total. . . . . . . . . . . . . $40,745 100.0% $39,720 100.0% $78,832 100.0% $78,730 100.0% $74,756 100.0%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
--------------------------------- -----------------------------------------------
% of % of % of % of % of
1996(1) Total 1995(1) Total 1995 Total 1994 Total 1993 Total
------- ----- ------- ----- ---- ----- ---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Premiums Earned
Farmowners. . . . . . . . . . . . . $ 4,915 18.7% $ 6,538 20.2% $13,413 20.1% $13,315 21.0% $13,368 21.9%
Homeowners. . . . . . . . . . . . . 7,401 28.1 9,130 28.3 18,391 27.6 16,755 26.4 14,622 24.0
Businessowners and commercial
multi-peril . . . . . . . . . . . 3,500 13.3 4,216 13.1 8,828 13.2 8,387 13.2 8,548 14.0
Personal automobile . . . . . . . . 6,153 23.4 6,718 20.8 14,459 21.7 12,521 19.8 11,402 18.7
Commercial automobile . . . . . . . 265 1.0 338 1.0 769 1.2 717 1.1 675 1.1
Workers' compensation . . . . . . . 1,703 6.5 1,998 6.2 4,233 6.4 4,266 6.7 4,394 7.2
Fire, allied, inland marine . . . . 2,242 8.5 3,212 9.9 6,294 9.4 6,930 10.9 7,465 12.3
Other liability . . . . . . . . . . 127 0.5 171 0.5 276 0.4 574 0.9 512 0.8
-------- ----- ------- ----- ------- ----- -------- ----- -------- -----
Total. . . . . . . . . . . . . $26,306 100.0% $32,321 100.0% $66,663 100.0% $63,465 100.0% $60,986 100.0%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
<CAPTION>
Net Loss Ratio
<S> <C> <C> <C> <C> <C>
Farmowners. . . . . . . . . . . . . 112.6% 82.1% 78.7% 78.8% 71.2%
Homeowners. . . . . . . . . . . . . 123.2 82.5 80.8 98.0 83.3
Businessowners and commercial
multi-peril . . . . . . . . . . . 99.5 70.4 62.2 47.8 51.6
Personal automobile . . . . . . . . 74.2 66.2 90.4 70.9 73.2
Commercial automobile . . . . . . . 98.6 80.7 70.9 53.8 35.1
Workers' compensation . . . . . . . 39.8 26.3 43.0 58.3 74.3
Fire, allied, inland marine . . . . 85.6 39.5 53.4 49.7 50.1
Other liability . . . . . . . . . . 71.8 270.1 326.3 49.9 83.9
Total. . . . . . . . . . . . . . . 97.5% 70.7% 75.8% 73.2% 69.1%
</TABLE>
- ----------------
(1) Effective January 1, 1996, the Insurance Companies and
American Re entered into a quota share reinsurance treaty
pursuant to which the Insurance Companies cede 20% of their
liability remaining after cessions of excess and
catastrophic risks through other reinsurance contracts.
Pro rata cessions of unearned premiums as of January 1, 1996
and the transfer of premiums written during the six months
ended June 30, 1996 accounts, in part, for the decline in
net premiums earned when the six months ended June 30, 1996
is compared to the six months ended June 30, 1995.
Farmowners Policy. The farmowners policy, developed in
1975, is a flexible, multi-line package of insurance coverages.
As a result of its flexible features, this product can be adapted
to meet the needs of a variety of agricultural and related
businesses, including a package designed for farmers with large
dairy operations. The farmowners policy combines property and
liability insurance for the farm owner, as well as owners of
other agricultural related businesses, such as nurseries and
greenhouses. The largest numbers of farmowners policies written
by the Insurance Companies are for dairy, beef, horse and crop
farming risks. In general, standing crops are not insured except
under limited circumstances but harvested and stored crops
generally are insured. Policyholders may select property damage
coverages for specific peril groups, such as basic perils that
include fire and allied lines, extended coverage and vandalism or
broad form and special perils. Personal liability coverage
insures policyholders against third party liability from
accidents occurring on their premises or arising out of their
operations or from their products. The farmowners policy
contains a limited liability extension of pollution-type coverage
for damages caused to third persons or their crops resulting from
above-ground, off-premises contamination, such as overspray of
fertilizers and pesticides. As of June 30, 1996, the Insurance
Companies had approximately 11,500 farmowner policies in force.
Homeowners Policy. The Insurance Companies' homeowners
policy, introduced in 1963, is a multi-peril policy providing
property and liability coverages and optional inland marine
coverage. The homeowners policy is sold to provide coverage for
the insured's principal residence. As of June 30, 1996, the
Insurance Companies had approximately 72,000 homeowners policies
in force.
Businessowners. The Insurance Companies introduced a
businessowners policy in 1983 that provides property and
liability coverages to small businesses within its rural and
suburban markets. This product is marketed to six distinct
groups: (i) apartment owners with relatively small property-
based risks; (ii) condominium owners; (iii) landlords with
dwelling properties of up to four family units; (iv) mercantile
businessowners, such as florists, gift shops and antique dealers,
with property-based risks; (v) offices with owner and/or tenant
occupancies; and (vi) religious institutions consisting of
smaller, rural properties. As of June 30, 1996, approximately
6,600 businessowners policies were in force.
Personal Automobile. The Insurance Companies' personal
automobile policy insures individuals against claims resulting
from injury and property damage and can be marketed in
conjunction with the Insurance Companies' other products, such as
the farmowners policy, the businessowners policy or the
homeowners policy. As of June 30, 1996, the Insurance Companies
had approximately 20,000 personal automobile policies in force.
Commercial Automobile. The Insurance Companies' commercial
automobile policies are generally marketed in conjunction with
farmowners, businessowners or commercial multi-peril policies.
Commercial automobile is one of the Insurance Companies' lower
volume products. As of June 30, 1996, the Insurance Companies
had approximately 1,000 commercial automobile insurance policies
in force.
Commercial Multi-Peril. The Insurance Companies also issue
a number of commercial multi-peril policies providing property
and liability coverage to accounts that, because of their larger
size, do not meet the eligibility requirements for the
businessowners product. As of June 30, 1996, approximately
1,600 such policies were in force. The Insurance Companies are
working to increase market penetration for this product because
it includes commercial casualty risks that helps to diversify
risk and lessen the impact of property losses on overall results.
One such marketing initiative is the promotion of commercial
multi-peril packages targeted to the following businesses:
(i) food processing, (ii) retailing, (iii) manufacturing,
(iv) metal working, (v) offices, and (vi) service operations.
These packages are being written using existing policies and
forms and were chosen based on the experience of the underwriting
staff and market opportunities available to existing agents. The
packages are of a type generally written by larger companies and
should permit the Insurance Companies to sell commercial packages
as well as accompanying workers' compensation and commercial
automobile coverages to larger accounts.
Workers' Compensation. The Insurance Companies generally
write workers' compensation policies in conjunction with
farmowners policies, businessowners policies or other commercial
packages. However, the Insurance Companies may write stand-alone
workers' compensation policies. A recent initiative is tiered
pricing for workers' compensation coverage with the introduction
of a policy with more attractive pricing and the opportunity for
dividends. As of June 30, 1996, approximately 80% of the
Insurance Companies' in force workers' compensation policies were
written in connection with farmowners, businessowners, or
commercial multi-peril policies.
Umbrella Liability. The Insurance Companies write
commercial and personal line excess liability policies covering
business, farm and personal liabilities in excess of amounts
covered under the farmowners, homeowners, businessowners,
commercial multi-peril and automobile policies. Such policies
are available generally with limits of $1 million to $5 million.
The Insurance Companies do not generally market excess liability
policies to individuals and farmowners unless they also write an
underlying liability policy. However, the Insurance Companies
may write excess liability coverage for commercial accounts
without all underlying liability coverages.
Commercial General Liability. The Insurance Companies write
a stand-alone commercial general liability policy for certain
business situations that do not meet the criteria for liability
coverage under a farmowners, businessowners or commercial
multi-peril policy. The policy insures businesses against third
party liability from accidents occurring on their premises or
arising out of their operations or products. Most of the
Insurance Companies' products liability line is written as part
of the commercial general liability product.
Marketing
The Insurance Companies market their property and casualty
insurance products in Pennsylvania, Maryland and Delaware through
approximately 483 independent agencies: 454 in Pennsylvania, 27
in Maryland and 2 in Delaware. These agencies collectively
employ a force of 1,600 agents. The Insurance Companies manage
their agents through quarterly business reviews (with underwriter
participation) and establishment of benchmarks/goals for premium
volume. The Insurance Companies have managed a decline in the
number of agencies in recent years to eliminate low volume
agencies and reduce concentration in southern Pennsylvania. Most
of the Insurance Companies' independent agents represent multiple
carriers and are established residents of the rural and suburban
communities in which they operate. The Insurance Companies'
independent agents generally market and write the full range of
the Insurance Companies' products. The Insurance Companies
consider their relationships with agents to be good.
As of June 30, 1996, no agency accounted for over 5% of
direct premiums written, with the top 10 agencies accounting for
18% of direct premiums written. Average volume per agency is
$163,000, with the largest agency generating approximately
$3.0 million in premium revenue for the Insurance Companies.
The Insurance Companies emphasize personal contact between
their agents and the policyholders. The Insurance Companies
believe that their name recognition, policyholder loyalty and
policyholder satisfaction with agent and claims relationships are
the principal sources of new customer referrals, cross-selling of
additional insurance products and policyholder retention.
The Insurance Companies' policies are marketed exclusively
through their network of independent agents. The Insurance
Companies depend upon their agency force to produce new business
and to provide customer service. The network of independent
agents also serves as an important source of information about
the needs of the communities served by the Insurance Companies.
This information is utilized by the Insurance Companies to
develop new products and new product features.
Agency compensation is based on one of three compensation
plans. Each agency may elect: fixed base commission only, fixed
base commission with some opportunity for bonus commission based
on the agency's loss experience, or floating base commission
based on the agency's three year loss ratio with some opportunity
to earn bonus commission depending on the agency's one-year loss
experience.
The Insurance Companies' independent agencies are supervised
and supported by agent representatives, who are employees of the
Insurance Companies and who have principal responsibility for
recruiting agencies and training new agents. To support its
marketing efforts, the Insurance Companies develop and produce
print and radio advertising and hold seminars for agents.
Agencies are then able to purchase advertising (using prepared
materials) in local markets. The Insurance Companies and agent
representatives conduct training programs that provide both
technical training about products and sales training on how to
market insurance products.
The Insurance Companies provide personal computer software
to agencies that allows them to quote rates on homeowners,
farmowners, businessowners and personal auto. In addition, a
home page has been established on the Internet for the public
that is periodically updated with pertinent information about the
Insurance Companies and their products.
Underwriting
The Insurance Companies seek to write their commercial and
personal lines by evaluating each risk with consistently applied
standards. The Insurance Companies maintain information on all
aspects of their business that is regularly reviewed to determine
product line profitability. The Insurance Companies' staff of
24 underwriters generally specialize in farm, personal or
commercial lines. Specific information is monitored with regard
to individual insureds that is used to assist the Insurance
Companies in making decisions about policy renewals or
modifications. The Insurance Companies' underwriters have an
average of over 14 years of experience as underwriters. The
Insurance Companies believe their extensive knowledge of local
markets is a key underwriting advantage.
The Insurance Companies rely on information provided by
their independent agents, who, subject to certain guidelines,
also act as field underwriters and pre-screen policy applicants.
The independent agents have the authority to sell and bind
insurance coverages in accordance with pre-established
guidelines. Agents' underwriting results are monitored and on
occasion agents with historically poor loss ratios have had their
binding authority removed until more profitable underwriting
results were achieved.
Claims
Claims on insurance policies written by the Insurance
Companies are usually investigated and settled by one of the
Insurance Companies' staff claims representatives who work in
teams led by a supervisor. Supervisors report to the claims
manager. As of June 30, 1996, the Insurance Companies' claim
staff included 28 claims representatives and 6 supervisors. The
Insurance Companies claims philosophy emphasizes timely
investigation, evaluation and fair settlement of claims, while
maintaining adequate case reserves and controlling claim
adjustment expenses. The claims philosophy is designed to
support the Insurance Companies marketing efforts by providing
prompt service and making the claims process a positive
experience for agents and policyholders.
Claims settlement authority levels are established for each
representative and claims manager based upon their level of
experience. Claims are typically reported by the agents.
Multi-line teams exist to handle all claims. Subrogation is
centralized in the Lancaster, Pennsylvania office. The claims
department is responsible for reviewing all claims, obtaining
necessary documentation, estimating the loss reserves and
resolving the claims. The Insurance Companies engage independent
appraisers and adjusters to evaluate and settle claims as claims
volume or specialized needs require.
The Insurance Companies attempt to minimize claims costs by
encouraging the use of alternative dispute resolution procedures.
Less than 3% of all claims result in litigation. Litigated
claims are assigned to outside counsel, who then work closely as
a team with a staff claims representative. Outside counsel must
comply with a formal litigation management plan and all bills are
audited.
Reinsurance
Reinsurance Ceded
In accordance with insurance industry practice, the
Insurance Companies reinsure a portion of their exposure and pay
to the reinsurers a portion of the premiums received on all
policies reinsured. Insurance is ceded principally to reduce net
liability on individual risks, to mitigate the effect of
individual loss occurrences (including catastrophic losses), to
stabilize underwriting results and to increase the Insurance
Companies' underwriting capacity. Although reinsurance does not
legally discharge the ceding insurer from primary liability for
the full amount of the policies ceded, the assuming reinsurer is
liable to the extent of the coverage ceded. The Insurance
Companies determine the amount and scope of reinsurance coverage
to purchase each year based upon their evaluation of the risks
accepted, consultations with reinsurance representatives and a
review of market conditions, including the availability and
pricing of reinsurance. For the year ended December 31, 1995,
the Insurance Companies ceded to reinsurers $11.6 million of
earned premiums. For the six months ended June 30, 1996, the
Insurance Companies ceded to reinsurers $13.4 million of earned
premiums. The significant increase in ceded premiums in the
six-month period ended June 30, 1996 reflects the effect of a new
quota share reinsurance treaty that was effective as of
January 1, 1996 and which is described herein.
The Insurance Companies' reinsurance arrangements are placed
with non-affiliated reinsurers, principally American Re, and are
generally renegotiated annually. Coverages described herein are
generally for the year ended December 31, 1996.
Except for certain excluded classes of property and losses
due to flood, the largest exposure retained by the Insurance
Companies on any one individual property risk is $150,000.
Individual property risks in excess of $150,000 are covered on an
excess of loss basis up to $500,000 per risk by American Re and
Munich-American Reinsurance Company ("Munich Re"). Except for
certain excluded classes of property and losses due to flood and
auto physical damage, per risk property losses in excess of
$500,000 but less than $2 million are reinsured on a proportional
basis by American Re and Munich Re. Facultative coverage also is
available for certain property risks in excess of $2 million per
risk.
Individual casualty risks for most lines of business,
excluding umbrella liability, that are in excess of $100,000 are
covered on an excess of loss basis, up to $2 million per
occurrence by American Re. In addition, casualty losses arising
from workers' compensation claims are reinsured on a per
occurrence and per person basis by various reinsurers up to
$10 million. Umbrella liability losses are reinsured by American
Re on a 95% quota share basis up to $1 million and a 100% quota
share basis in excess of $2 million up to $5 million with a
ceding commission of 27.5%.
Catastrophic reinsurance protects the ceding insurer from
significant aggregate loss exposure arising from a single event
such as windstorm, hail, tornado, hurricane, earthquake, riot,
blizzard, freezing temperatures or other extraordinary events.
The Insurance Companies have purchased reinsurance for
catastrophic property losses for 1996, under which the Insurance
Companies reinsure 97.5% of losses per occurrence over
$3.5 million up to a maximum of $10 million and 100% of the
losses between $13.5 million and $30 million per occurrence. The
Insurance Companies also have an underlying catastrophe and
aggregate excess of loss reinsurance agreement with American Re
designed to protect against multiple events each of which is
below the $3.5 million retention under the primary catastrophe
reinsurance treaty. Under this agreement, losses are reinsured
to the extent of (i) (A) 95% of $1.5 million in excess of
$3.5 million on property catastrophe losses or (B) aggregate net
losses exceeding a 75% loss ratio in any accident year up to the
lesser of a 78.33% loss ratio or $3 million, and (ii) 100% of
losses in excess of $2 million for winter storm losses during
specified periods, up to a maximum of $3 million. The Insurance
Companies recovered under this latter coverage provision for
losses attributable to the January 1996 blizzard.
Effective January 1, 1996, the Insurance Companies and
American Re entered into a quota share reinsurance treaty. Under
the terms of the treaty, the Insurance Companies cede 20% of
their liability remaining after cessions of excess and
catastrophic risks through other reinsurance contracts. The
result of the new quota share treaty is a pro rata sharing of
risk (80% of losses and loss adjustment expenses are borne by the
Insurance Companies and 20% by American Re) with both the
Insurance Companies and American Re benefiting from other excess
and catastrophe reinsurance. This treaty protects the Insurance
Companies' surplus from high frequency and low severity type
losses. The Insurance Companies pay American Re a reinsurance
premium equal to 20% of premiums collected net of other
reinsurance costs. Reinsurance premiums due American Re on the
quota share treaty are reduced by a ceding allowance equal to 35%
of the reinsurance premium. This reinsurance treaty is designed
to stabilize underwriting results.
Quota share reinsurance may be used to moderate the adverse
impact of underwriting losses to the ceding company but also
decreases underwriting profits which would otherwise be retained
by the ceding company. The quota share reinsurance treaty
entered into by the Insurance Companies with American Re has had,
and will have, a material effect on the financial condition and
results of operations of the Insurance Companies during the term
of the reinsurance treaty.
The insolvency or inability of any reinsurer to meet its
obligations to the Insurance Companies could have a material
adverse effect on the results of operations or financial
condition of the Insurance Companies. As of June 30, 1996,
substantially all of the Insurance Companies' reinsurance program
(excluding mandatory pools) was provided by reinsurers which were
rated A (Excellent) or above by A.M. Best.
Loss and LAE Reserves
Property and Casualty Reserves. The Insurance Companies are
required by applicable insurance laws and regulations to maintain
reserves for payment of losses and loss adjustment expenses
("LAE") for claims, both reported and incurred but not reported
("IBNR"), arising from the policies they have issued. These laws
and regulations require that provision be made for the ultimate
cost of those claims without regard to how long it takes to
settle them or the time value of money. The determination of
reserves involves actuarial and statistical projections of what
the Insurance Companies expect to be the cost of the ultimate
settlement and administration of such claims based on facts and
circumstances then known, estimates of future trends in claims
severity, and other variable factors such as inflation and
changing judicial theories of liability.
The estimation of ultimate liability for losses and LAE is
an inherently uncertain process and does not represent an exact
calculation of that liability. The Insurance Companies' reserve
policy recognizes this uncertainty by maintaining reserves at a
level providing for the possibility of adverse development
relative to the estimation process. The Insurance Companies do
not discount their reserves to recognize the time value of money.
When a claim is reported to the Insurance Companies, claims
personnel establish a "case reserve" for the estimated amount of
the ultimate payment. This estimate reflects an informed
judgment based upon general insurance reserving practices and on
the experience and knowledge of the estimator regarding the
nature and value of the specific claim, the severity of injury or
damage, and the policy provisions relating to the type of loss.
Case reserves are adjusted by the Insurance Companies' claims
staff as more information becomes available. It is the Insurance
Companies' policy to settle each claim as expeditiously as
possible.
The Insurance Companies maintain IBNR reserves to provide
for future reporting of already incurred claims and developments
on reported claims. The IBNR reserve is determined by estimating
the Insurance Companies' ultimate net liability for both reported
and IBNR claims and then subtracting the case reserves for
reported claims.
Each month, the Insurance Companies compute their estimated
ultimate liability using principles and procedures applicable to
the lines of business written. Such reserves are also considered
annually by the Insurance Companies' independent auditors in
connection with their audit of the Insurance Companies' combined
financial statements. However, because the establishment of loss
reserves is an inherently uncertain process, there can be no
assurance that ultimate losses will not exceed the Insurance
Companies' loss reserves. Adjustments in aggregate reserves, if
any, are reflected in the operating results of the period during
which such adjustments are made. As required by insurance
regulatory authorities, the Insurance Companies submit to the
various jurisdictions in which they are licensed a statement of
opinion by its appointed actuary concerning the adequacy of
statutory reserves. The results of these actuarial studies have
consistently indicated that reserves are adequate.
The following table provides a reconciliation of beginning
and ending loss and LAE reserve balances of the Insurance
Companies for the years ended December 31, 1993, 1994 and 1995
and for the six months ended June 30, 1996 as computed in
accordance with GAAP.
<TABLE>
<CAPTION>
Reconciliation of Reserve for Losses
and Loss Adjustment Expenses
Six Months
Ended June 30, Year Ended December 31,
1996 1995 1995 1994 1993
(In thousands)
<S> <C> <C> <C> <C> <C>
Reserves for losses and loss adjustment
expenses at the beginning of period . . . . . . . . . $52,091 $51,309 $51,309 $59,057 $59,629
Less: Reinsurance recoverables and receivables . . . . 16,000 18,499 18,499 22,175 24,963
Net reserves for losses and loss adjustment
expenses at beginning of period . . . . . . . . . . 36,091 32,810 32,810 36,882 34,666
Add: Provision for losses and loss adjustment
expenses for claims occurring in:
The current year . . . . . . . . . . . . . . . . 25,700 24,398 48,067 51,959 44,950
Prior years . . . . . . . . . . . . . . . . . . (52) (1,562) 2,442 (5,519) (2,796)
Total incurred losses and loss adjustment
expenses . . . . . . . . . . . . . . . . . . . 25,648 22,836 50,509 46,440 42,154
Less: Loss and loss adjustment expenses
payments for claims occurring in:
The current year . . . . . . . . . . . . . . . . 16,047 11,261 29,970 35,196 25,952
Prior years . . . . . . . . . . . . . . . . . . 11,437 11,046 17,258 15,316 13,986
Total losses and loss adjustment expenses. . . . 27,484 22,307 47,228 50,512 39,938
Net reserves for losses and loss adjustment
expenses at end of period . . . . . . . . . . . . . 34,255 33,339 36,091 32,810 36,882
Add: Reinsurance recoverables and receivables . . . . 24,686 16,298 16,000 18,499 22,175
Reserves for losses and loss adjustment
expenses at end of period . . . . . . . . . . . . . $58,941 $49,637 $52,091 $51,309 $59,057
======= ======= ======= ======= =======
</TABLE>
The following table shows the development of the reserves
for unpaid losses and LAE from 1985 through 1995 for the
Insurance Companies on a GAAP basis. The top line of the table
shows the liabilities at the balance sheet date, including losses
incurred but not yet reported. The upper portion of the table
shows the cumulative amounts subsequently paid as of successive
years with respect to the liability. The lower portion of the
table shows the reestimated amount of the previously recorded
liability based on experience as of the end of each succeeding
year. The estimates change as more information becomes known
about the frequency and severity of claims for individual years.
The redundancy (deficiency) exists when the reestimated liability
at each December 31 is less (greater) than the prior liability
estimate. The "cumulative redundancy (deficiency)" depicted in
the table, for any particular calendar year, represents the
aggregate change in the initial estimates over all subsequent
calendar years.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990
---- ---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses and LAE
net of reinsurance recoverable . . . $5,895 $5,427 $7,132 $8,692 $13,175 $13,812
Cumulative amount of liability paid
through:
One year later . . . . . . . . . . . 3,252 2,966 3,492 4,356 7,391 7,368
Two years later. . . . . . . . . . . 3,908 3,603 4,814 5,635 8,945 9,231
Three years later. . . . . . . . . . 4,175 4,493 5,866 6,675 10,397 11,070
Four years later . . . . . . . . . . 4,320 4,923 6,433 7,299 11,084 12,119
Five years later . . . . . . . . . . 4,414 5,216 6,638 7,682 11,567 12,586
Six years later. . . . . . . . . . . 4,433 5,373 6,851 8,105 11,695
Seven years later. . . . . . . . . . 4,503 5,550 6,982 8,273
Eight years later. . . . . . . . . . 4,548 5,830 7,020
Nine years later . . . . . . . . . . 4,576 5,673
Ten years later. . . . . . . . . . . 4,657
Liability estimated as of:
One year later . . . . . . . . . . . 5,299 4,610 6,479 8,616 12,929 13,495
Two years later. . . . . . . . . . . 4,957 4,869 7,548 8,586 13,016 14,104
Three years later. . . . . . . . . . 4,693 5,439 7,410 8,670 12,763 13,753
Four years later . . . . . . . . . . 4,645 5,676 7,293 8,740 12,905 13,265
Five years later . . . . . . . . . . 4,614 5,785 7,388 8,841 12,186 13,295
Six years later. . . . . . . . . . . 4,654 5,660 7,254 8,509 12,109
Seven years later. . . . . . . . . . 4,578 5,622 7,189 8,523
Eight years later. . . . . . . . . . 4,607 5,898 7,142
Nine years later . . . . . . . . . . 4,603 5,729
Ten years later. . . . . . . . . . . 4,680
Cumulative total redundancy
(deficiency) . . . . . . . . . . . . 1,215 (302) (10) 169 1,066 517
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Liability for unpaid losses and LAE
net of reinsurance recoverable . . . $14,719 $17,271 $17,487 $16,978 $18,414
Cumulative amount of liability paid
through:
One year later . . . . . . . . . . . 6,676 8,675 8,641 10,523 --
Two years later. . . . . . . . . . . 8,593 11,370 12,111
Three years later. . . . . . . . . . 10,094 12,625
Four years later . . . . . . . . . . 11,354
Five years later . . . . . . . . . .
Six years later. . . . . . . . . . .
Seven years later. . . . . . . . . .
Eight years later. . . . . . . . . .
Nine years later . . . . . . . . . .
Ten years later. . . . . . . . . . .
Liability estimated as of:
One year later . . . . . . . . . . . 13,809 14,948 15,122 18,424
Two years later. . . . . . . . . . . 13,587 13,666 16,918 --
Three years later. . . . . . . . . . 13,047 13,686
Four years later . . . . . . . . . . 12,399
Five years later . . . . . . . . . .
Six years later. . . . . . . . . . .
Seven years later. . . . . . . . . .
Eight years later. . . . . . . . . .
Nine years later . . . . . . . . . .
Ten years later. . . . . . . . . . .
Cumulative total redundancy
(deficiency) . . . . . . . . . . . . 2,320 3,585 569 (1,446) --
</TABLE>
The following table is derived from the preceding table and
summarizes the effect of reserve reestimates, net of reinsurance,
on calendar year operations for the same ten-year period ended
December 31, 1995. The total of each column details the amount
of reserve reestimates made in the indicated calendar year and
shows the accident years to which the reestimates are applicable.
The amounts in the total accident year column on the far right
represent the cumulative reserve reestimates for the indicated
accident year(s).
<PAGE>
<TABLE>
<CAPTION>
Cumulative
Deficiency
Effect of Reserve Reestimates on Calendar Year Operations (Redundancy)
---------------------------------------------------------------------------------------------- from
Increase (Decrease) in Reserves for Calendar Year Reestimates
---------------------------------------------------------------------------------------------- for Each
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Accident Year
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Accident Years
1985. . . . . (596) (342) (264) (48) (31) 40 (76) 29 (4) 77 (1,215)
1986. . . . . (817) 259 570 237 109 (125) (38) 276 (169) 302
1987. . . . . (653) 1,069 (138) (117) 95 (134) (65) (47) 10
1988. . . . . (76) (30) 84 70 101 (332) 14 (169)
1989. . . . . (246) 87 (253) 142 (719) (77) (1,066)
1990. . . . . (317) 609 (351) (488) 30 (517)
1991. . . . . (910) (222) (540) (648) (2,320)
1992. . . . . (2,323) (1,282) 20 (3,585)
1993. . . . . (2,365) 1,796 (569)
1994. . . . . 1,446 1,446
Total calendar
year effect . (596) (1,159) (658) 1,515 (208) (114) (590) (2,796) (5,519) 2,442 (7,683)
</TABLE>
Investments
All of the Insurance Companies' investment securities are
classified as available for sale in accordance with SFAS No. 115.
An important component of the operating results of the
Insurance Companies has been the return on invested assets. The
Insurance Companies' investment objective is to maximize current
yield while maintaining safety of capital together with adequate
liquidity for its insurance operations. The Insurance Companies'
investments are managed by outside investment advisors.
<PAGE>
The following table sets forth certain combined information
concerning the Insurance Companies' investments.
<TABLE>
<CAPTION>
At June 30, 1996 At December 31, 1995 At December 31, 1994
------------------------ ------------------------ ------------------------
Market Market Market
Cost(2) Value(3) Cost(2) Value(3) Cost(2) Value(3)
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Fixed income securities(1)
United States government and
government agencies and
authorities . . . . . . . . . . . $31,132 $30,510 $33,419 $33,380 $33,270 $30,382
Obligations of states,
municipalities and
political subdivisions. . . . . . 60 61 1,553 1,566 3,687 3,666
Corporate obligations . . . . . . . 27,927 28,386 25,868 27,015 16,155 15,414
Collateralized mortgage
obligations . . . . . . . . . . . 8,341 8,431 9,564 9,840 17,916 17,364
Other obligations . . . . . . . . 4,412 4,320 6,626 6,727 3,356 3,334
Total Fixed Maturities. . . . . . 71,872 71,708 77,030 78,528 74,384 70,160
Equity securities . . . . . . . . . . 9,543 11,437 12,031 13,579 12,930 12,528
Cash and cash equivalents . . . . . . 6,966 6,966 8,153 8,153 7,279 7,279
Other invested assets . . . . . . . . 278 295 242 228 191 191
Total . . . . . . . . . . . . . . $88,659 $90,406 $97,456 $100,488 $94,784 $90,158
======= ======= ======= ======== ======= =======
<FN>
____________
(1) Fixed income securities (bonds, redeemable preferred stocks
and mortgage-backed securities) and equity securities are
carried at market value in the combined financial statements
of the Insurance Companies. Cash and cash equivalents and
other invested assets are carried at cost, which
approximates market value.
(2) Original cost of equity securities; original cost of fixed
income securities adjusted for amortization of premium and
accretion of discount.
(3) The Insurance Companies primarily obtain market value
information through its independent investment advisor.
Market values are also obtained, to a lesser extent from
various brokers who provide price quotes.
/TABLE
<PAGE>
The Insurance Companies' investments in fixed maturity
securities are composed primarily of intermediate term investment
grade securities. The table below contains additional
information concerning the investment ratings of the Insurance
Companies' fixed maturity investments at June 30, 1996.
Type/Ratings of Amortized Market
Investment(1) Cost Value Percentages(2)
- --------------- --------- ------ --------------
(Dollars in thousands)
U.S. Government and
agencies. . . . . . . . $31,132 $30,510 42.6%
AAA . . . . . . . . . . . 24,167 24,052 33.5
AA. . . . . . . . . . . . 5,135 5,123 7.1
A . . . . . . . . . . . . 7,014 7,228 10.1
BBB . . . . . . . . . . . 4,165 4,445 6.2
------- ------- -----
Total BBB or Better . . $71,613 $71,358 99.5%
BB. . . . . . . . . . . . 259 350 0.5
------- ------- -----
Total . . . . . . . . . $71,872 $71,708 100.0%
======= ======= ======
____________
(1) The ratings set forth in this table are based on the
ratings, if any, assigned by Standard & Poor's Corporation
("S&P"). If S&P's ratings were unavailable, the equivalent
ratings supplied by Moody's Investors Services, Inc., Fitch
Investors Service, Inc. or the NAIC were used where
available.
(2) Represents percent of market value for classification as a
percent of total for each portfolio.
<PAGE>
The table below sets forth the maturity profile of the
Insurance Companies' combined fixed maturity investments as of
June 30, 1996 (substituting average life for mortgage-backed
securities):
Amortized Market
Maturity Cost(1) Value Percentages(2)
- -------- --------- ------ --------------
(Dollars in thousands)
1 year or less . . . . . .. $ 5,278 $ 5,247 7.3%
More than 1 year
through 5 years . . . . . 21,171 21,135 29.5
More than 5 years through
10 years . . . . . . . . 4,823 5,126 7.2
More than 10 years . . . . 5,352 5,325 7.4
Securities subject to
scheduled paydown. . . . 35,248 34,875 48.6
------- ------- -----
Total. . . . . . . . . $71,872 $71,708 100.0%
======= ======= ======
____________
(1) Fixed maturities are carried at market value in the combined
financial statements of the Insurance Companies.
(2) Represents percent of market value for classification as a
percent of total for each portfolio.
The average duration of the Insurance Companies' fixed
maturity investments, excluding securities subject to paydown, as
of June 30, 1996 was approximately 2.8 years. As a result, the
market value of the Company's investments may fluctuate
significantly in response to changes in interest rates. In
addition, the Company also may experience investment losses to
the extent its liquidity needs require the disposition of fixed
maturity securities in unfavorable interest rate environments.
The Insurance Companies' net investment income, average
cash and invested assets and return on average cash and invested
assets for the three years ended December 31, 1993, 1994 and 1995
and the six months ended June 30, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
------------------ -----------------------------
(Dollars In thousands)
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average cash and invested assets . . . $95,447 $92,804 $95,323 $94,891 $95,530
Net investment income . . . . . . . . 2,382 2,308 4,458 3,932 3,928
Return on average cash and
invested assets. . . . . . . . . . . 5.0% 5.0% 4.7% 4.1% 4.1%
</TABLE>
A.M. Best Rating
A.M. Best, which rates insurance companies based on factors
of concern to policyholders, currently assigns an "A-"
(Excellent) rating (its fourth highest rating category out of
15 categories) to the Insurance Companies as a group. A.M. Best
assigns "A" or "A-" ratings to companies which, in its opinion,
have demonstrated excellent overall performance when compared to
the standards established by A.M. Best. Companies rated "A" and
"A-" have a strong ability to meet their obligations to
policyholders over a long period of time. In evaluating a
company's financial and operating performance, A.M. Best reviews
the company's profitability, leverage and liquidity, as well as
the company's book of business, the adequacy and soundness of its
reinsurance, the quality and estimated market value of its
assets, the adequacy of its loss reserves, the adequacy of its
surplus, its capital structure, the experience and competency of
its management and its market presence. No assurance can be
given that A.M. Best will not reduce the Insurance Companies'
current rating in the future. See "Investment Considerations --
A.M. Best Rating."
Competition
The property and casualty insurance market is highly
competitive. The Insurance Companies compete with stock
insurance companies, mutual companies, local cooperatives and
other underwriting organizations. Certain of these competitors
have substantially greater financial, technical and operating
resources than the Insurance Companies. The Insurance Companies'
ability to compete successfully in their principal markets is
dependent upon a number of factors, many of which (including
market and competitive conditions) are outside the Insurance
Companies' control. Many of the lines of insurance written by
the Insurance Companies are subject to significant price
competition. Some companies may offer insurance at lower premium
rates through the use of salaried personnel or other methods,
rather than through independent agents paid on a commission
basis, as the Insurance Companies do. In addition to price,
competition in the lines of business written by the Insurance
Companies is based on quality of the products, quality and speed
of service (including claims service), financial strength,
ratings, distribution systems and technical expertise.
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 supervision and 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. Accordingly, the authority of the state
insurance departments includes the establishment of standards of
solvency which must be met and maintained by insurers, the
licensing to do business of insurers and agents, the nature of
and limitations on investments, premium rates for property and
casualty insurance, the provisions which insurers must make for
current losses and future liabilities, the deposit of securities
for the benefit of policyholders, the approval of policy forms,
notice requirements for the cancellation of policies and the
approval of certain changes in control. 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.
In addition to state-imposed insurance laws and regulations,
in December 1993 the National Association of Insurance
Commissioners (the "NAIC") adopted a new risk-based capital
system for assessing the adequacy of statutory capital and
surplus effective in 1994 which augments the states' current
fixed dollar minimum capital requirements for insurance
companies. At December 31, 1995, the Insurance Companies
exceeded the required levels of capital. There can be no
assurance that the capital requirements applicable to the
business of the insurance companies will not increase in the
future.
The states in which the Insurance Companies do business
(Pennsylvania, Maryland and Delaware), 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 that
state in order to fund policyholder liabilities of insolvent
insurance companies. Under these laws in general, an insurer is
subject to assessment, depending upon its market share of a given
line of business, to assist in the payment of policyholder claims
against insolvent insurers. The insurance companies make
accruals for their portion of assessments related to such
insolvencies when notified of assessments by the guaranty
associations.
The property and casualty insurance industry has recently
received a considerable amount of publicity because of rising
insurance costs and the unavailability of insurance. New
regulations and legislation are being proposed to limit damage
awards, to control plaintiffs' counsel fees, to bring the
industry under regulation by the federal government and to
control premiums, policy terminations and other policy terms. It
is not possible to predict whether, in what form or in what
jurisdictions any of these proposals might be adopted or the
effect, if any, on the company.
Most states have enacted legislation that regulates
insurance holding company systems. Each insurance company in the
holding company system is required to register with the insurance
supervisory agency of its state of domicile and furnish
information concerning the operations of companies within the
holding company system that may materially affect the operations,
management or financial condition of the insurers within the
system. Pursuant to these laws, the respective insurance
departments may examine the Insurance Companies, the Company and
their respective insurance subsidiaries at any time, require
disclosure of material transactions by the Insurance Companies
and the Company and require prior approval of certain
transactions, such as "extraordinary dividends" from the
Insurance Companies to the Company.
All transactions within the holding company system affecting
the Insurance Companies, the Company and their respective
subsidiaries must be fair and equitable. Approval of the
applicable insurance commissioner is required prior to
consummation of transactions affecting the control of an insurer.
In some states, including Pennsylvania, the acquisition of 10% or
more of the outstanding capital stock of an insurer or its
holding company is presumed to be a change in control. These
laws also require notice to the applicable insurance commissioner
of certain material transactions between an insurer and any
person in its holding company system and, in some states, certain
of such transactions cannot be consummated without the prior
approval of the applicable insurance commissioner.
The Company's insurance subsidiaries are restricted by the
insurance laws of their respective states of domicile as to the
amount of dividends or other distributions they may pay to the
Company without the prior approval of the respective state
regulatory authorities. Generally, the maximum amount that may
be paid by an insurance subsidiary during any year after notice
to, but without prior approval of the insurance commissioners of
these states is limited to a stated percentage of that
subsidiary's statutory capital and surplus as of a certain date,
or the net income or net investment income not including realized
capital gains of the subsidiary for the preceding year. As of
December 31, 1995, amounts available for payment of dividends in
1996 without the prior approval of the Department were
approximately $2.0 million, $879,000 and $494,000 from Old Guard
Mutual, from Old Guard Fire and from Goschenhoppen, respectively.
Legal Proceedings
The Insurance Companies are parties to litigation in the
normal course of business. Based upon information presently
available to them, the Insurance Companies' do not consider any
threatened or pending litigation to be material. However, given
the uncertainties attendant to litigation, there can be no
assurance that the Insurance Companies' results of operations and
financial condition will not be materially adversely affected by
any threatened or pending litigation.
Subsidiaries
The Insurance Companies jointly own all the capital stock of
Old Guard Investment Holding Company, Inc., a Delaware
corporation ("Old Guard Investment"). This company, in turn owns
all the capital stock of Commonwealth Insurance Managers, Inc., a
Pennsylvania corporation ("CIMI"). CIMI is a management company
that employs and pays senior management of the Insurance
Companies. CIMI derives all its revenues from management
agreements with the Insurance Companies. Old Guard Investment
also owns 2929 Service Corp., a licensed insurance agency that
distributes products of the Insurance Companies to customers
whose agents are no longer in business or no longer an agent for
the Insurance Companies. After completion of the Conversion, the
Insurance Companies intend to dividend the stock of Old Guard
Investment to the Company and, as a result, Old Guard Investment
will become a direct subsidiary of the Company and CIMI will
become a second tier subsidiary of the Company.
2929 Service Corp. owns a 30% interest in Commonwealth
Insurance Consultants, Inc. ("CIC"). CIC provides certain
consulting services to other insurance companies but its
financial condition and results of operations are immaterial to
the Insurance Companies.
Properties
The Company's and Insurance Companies' main offices are
located at 2929 Lititz Pike, Lancaster, Pennsylvania in a 33,000
square foot facility owned by Old Guard Mutual. Old Guard Fire
owns a 25,000 square foot office facility near the main office at
147 West Airport Road in Lancaster. Goschenhoppen leases
5,000 square feet of office space in Quakertown, Pennsylvania.
Old Guard Investment is currently negotiating to purchase a
20,000 square foot facility on a parcel of land adjacent to the
Company's headquarters. The purchase price is expected to be
$1.1 million. The parcel of land will allow expansion to include
an additional 50,000 square foot facility. If a purchase
agreement for the adjacent parcel is executed, Old Guard Fire
will list the Airport Road facility for sale.
Employees
As of June 30, 1996, the total number of full-time
equivalent employees of the Insurance Companies was 193. None of
these employees are covered by a collective bargaining agreement
and the Insurance Companies believe that employee relations are
good.
MANAGEMENT OF THE COMPANY
Directors
The Board of Directors of the Company consists of James W.
Appel, John E. Barry, Luther R. Campbell, Jr., M. Scott Clemens,
David E. Hosler, Richard B. Neiley, Jr., G. Arthur Weaver and
Robert Wechter, each of whom presently serves as a director of
one or more of the Insurance Companies. The Board is divided
into three classes with directors serving for three-year terms
with approximately one-third of the directors being elected at
each annual meeting of shareholders, beginning with the first
annual meeting of shareholders following the Conversion. Messrs.
Campbell and Wechter have terms of office expiring at the first
annual meeting, Messrs. Appel, Clemens, and Weaver have terms of
office expiring at the annual meeting to be held one year
thereafter, and Messrs. Barry, Hosler, and Neiley have terms of
office expiring at the annual meeting to be held two years
thereafter.
The following table sets forth certain information regarding
the directors of the Company.
<TABLE>
<CAPTION>
Age at Business Experience
September 30, Director for the Last Five Years;
1996 Since(1) Other Directorships
-------- -------- ------------------------------------------
<S> <C> <C> <C>
James W. Appel 52 1980Director, the Company and the Insurance
Companies; Partner, Appel & Yost LLP (law
firm); Vice President, Aardvark
Abstracting, Inc. (title insurance
agency).
John E. Barry 70 1971Director, the Company and Old Guard Fire;
Retired Representative, Hopper Soliday &
Co., Inc. (investment banking and
brokerage firm); prior thereto, Registered
Representative, Hopper Soliday & Co., Inc.
Luther R. Campbell, Jr. 68 1992Director, the Company, Old Guard Mutual
and Goschenhoppen; Partner, Campbell
Rappold & Yurasits LLP (C.P.A. firm);
Director, Piel & Egan P.C. (law firm);
Member, First Union North Advisory Board
and First Union Lehigh Valley Advisory
Board; prior thereto, Director, First
Fidelity Bancorporation.
M. Scott Clemens 49 1994(1)Director, the Company and Old Guard
Mutual; President/Owner, John T. Fretz
Insurance Agency, Inc.; prior thereto,
Insurance Agent, P/C Insurance Agency.
David E. Hosler 45 1985(1)Chairman, President, Chief Executive
Officer and Director, the Company;
Director and Chairman, the Insurance
Companies; President and Chief Executive
Officer, Old Guard Mutual and Old Guard
Fire; Chief Executive Officer,
Goschenhoppen.
Richard B. Neiley , Jr. 70 1991(1)Director, the Company, Old Guard Mutual,
Old Guard Fire and Goschenhoppen; Retired
Insurance Executive, Harleysville
Insurance Group; prior thereto Independent
Insurance Consultant.
G. Arthur Weaver 63 1966(1)Director, Old Guard Mutual and Old Guard
Fire; Insurance and Real Estate Agent,
George A. Weaver, Inc.; also, Director of
Sovereign Bancorp, Inc. and Sovereign
Bank, F.S.B.
Robert L. Wechter 67 1956(1)Director, the Company, Old Guard Mutual
and Old Guard Fire; Owner, Robert L.
Wechter Insurance Agency; prior thereto,
Vice-President, Claims Department, Old
Guard Mutual.
_______________
</TABLE>
(1) Indicates year first elected as a director of one or more of
the Insurance Companies. All members of the Board of
Directors of the Company have served as directors of the
Company since its incorporation.
Following the Conversion, directors will be paid an annual
retainer of $10,000. Directors who are employees of the Company
will not be paid an annual retainer fee or other additional
compensation for services performed in their capacity as
directors. No director of the Company has received any
remuneration from the Company since its formation. Directors of
Old Guard Mutual, Old Guard Fire and Goschenhoppen receive an
annual retainer of $5,400, $2,400 and $900, respectively, and
each director is entitled to receive a minimum annual retainer of
$2,600 regardless of the number of boards on which he serves.
Directors also receive up to $150 for each committee meeting
attended. Directors of the Insurance Companies who receive a
salary from the Insurance Companies or their affiliates are not
entitled to receive an annual retainer or other additional
compensation for services rendered as directors or committee
members.
Executive Officers
The executive officers of the Company are elected annually
and hold office until their respective successors have been
elected and qualified or until death, resignation or removal by
the Board of Directors of the Company.
The following table sets forth certain information regarding
the executive officers of the Company.
<TABLE>
<CAPTION>
Age at Executive
September 30, Officer Business Experience
Name 1996 Since(1) Title For the Last Five Years
------ -------- --------- --------- -----------------------
<S> <C> <C> <C> <C>
David E. Hosler 45 1980 Chairman of theChairman, President,
Board, PresidentChief Executive Officer
and Chief and Director, the
Executive OfficerCompany; Chairman;
President, Chief
Executive Officer and
Director, the Insurance
Companies.
Mark J. Keyser 43 1991 Chief FinancialChief Financial Officer
Officer andand Treasurer, the
Treasurer Company and the
Insurance Companies.
Steven D. Dyer 39 1991 Secretary andSecretary and General
General CounselCounsel, the Company and
the Insurance Companies.
Scott A. Orndorff 40 1993 Executive ViceExecutive Vice President
President of Operations, the
Company and the
Insurance Companies;
Vice President of
Claims, the Insurance
Companies; prior
thereto, Vice President
of Claim Operations,
Gulf Insurance Group.
Donald W. Manley 43 1986 Vice PresidentVice President of
Underwriting, the
Company and the
Insurance Companies.
</TABLE>
____________________
(1) Indicates year first appointed as an executive officer of
one or more of the Insurance Companies. Each executive
officer of the Company was first appointed on May 24, 1996.
Executive Compensation
The executive officers of the Company have received no
compensation from the Company since its formation. The following
table sets forth information regarding the compensation of the
Chief Executive Officer, the Chief Financial Officer and the
Executive Vice President of the Company for each of the fiscal
years ended December 31, 1993, 1994 and 1995. The amounts below
represent the aggregate compensation paid in 1994 and 1995 to
such executive officers by CIMI pursuant to CIMI's management
agreements with the Insurance Companies. Amounts paid in 1993
were paid by Old Guard Mutual. No other executive officer of the
Company received compensation in excess of $100,000 for the
fiscal year ended December 31, 1995.
<TABLE>
<CAPTION>
Other All Other
Name and Annual Compen-
Principal Salary Compen- sation
Position Year (1) Bonus sation(2) (3)(4)
- ------------------- ---- -------- ----- --------- ---------
<S> <C> <C> <C> <C> <C>
David E. Hosler 1995 $174,769 $10,501 $0 $16,370(5)
Chairman, President 1994 163,192 15,000 0 16,053(5)
and Chief Executive 1993 136,269 18,500 0 18,208(5)(8)
Officer
Mark J. Keyser, 1995 101,539 8,000 0 8,540
Chief Financial 1994 95,962 15,000 0 8,040
Officer and 1993 84,554 15,600 0 7,565
Treasurer
Scott A. Orndorff, 1995 85,777 10,000 0 7,466
Executive Vice 1994 77,731 6,000 0 8,552(6)
President 1993 46,792 -- -- 10,557(7)(8)
</TABLE>
(1) Includes amounts which were deferred pursuant to Old Guard
Mutual's 401(k) plan. Under the 401(k) plan, employees who
elect to participate may elect to have earnings reduced and
to cause the amount of such reduction to be contributed to
the 401(k) plan's related trust in an amount up to 12% of
earnings. Any employee who has completed 1 year of service
and has worked 1,000 hours in a plan year is eligible to
participate in the 401(k) plan.
(2) CIMI provided other benefits to the executive officers in
connection with their employment. The value of such
personal benefits, which is not directly related to job
performance, is not included in the table above because the
value of such benefits does not exceed the lesser of $50,000
or 10% of the salary and bonus paid to any executive
officer.
(3) Includes amounts contributed under a 401(k) plan for the
benefit of the executive officer. Old Guard Mutual will
make a matching contribution equal to 100% of the employee's
salary reduction up to a maximum of 3% of the employee's
salary.
(4) Includes amounts contributed under a Profit Sharing Plan for
the benefit of the executive officer.
(5) Includes the amount of insurance premiums paid by the
Insurance Companies with respect to a split dollar term life
insurance policy.
(6) Includes fair rental value of residential property owned by
Old Guard Mutual.
(7) The amount includes the amount of moving expenses paid by
the Insurance Companies.
(8) Includes the value of unused vacation purchased from the
executive officer under a one-time exception to customary
policy.
Certain Benefit Plans and Agreements
In connection with the Conversion, the Company's Board of
Directors has approved certain stock incentive plans and
employment agreements with the executive officers of the Company.
In addition, Old Guard Mutual has an existing 401(k) plan and
profit sharing plan in which the executive officers of the
Company will be eligible to participate after the Conversion.
Implementation of certain of these stock incentive plans requires
shareholder approval.
Stock Compensation Plan.
On ___________ 1996, the Company's Board of Directors
adopted the Stock Compensation Plan (the "Compensation Plan"),
subject to receipt of shareholder approval at the Company's first
annual meeting of shareholders after the Conversion.
The purpose of the Compensation Plan is to provide
additional incentive to directors and employees of the Company
and the Insurance Companies by facilitating their purchase of
stock in the Company. The Compensation Plan will have a term of
ten years from the date of its approval by the Company's
shareholders (unless the plan is earlier terminated by the Board
of Directors of the Company) after which no awards may be made.
Pursuant to the Compensation Plan, a number of shares equal to
10% of the shares of Common Stock that are issued in the
Conversion would be reserved for future issuance by the Company,
in the form of newly-issued or treasury shares, upon exercise of
stock options ("Options") or stock appreciation rights ("SARs"),
or the grant of restricted stock ("Restricted Stock"). Options,
SARs, and Restricted Stock are collectively referred to herein as
"Awards." If Awards should expire, become unexercisable or be
forfeited for any reason without having been exercised or without
becoming vested in full, the shares of Common Stock subject to
such Awards would, unless the Compensation Plan shall have been
terminated, be available for the grant of additional Awards under
the Compensation Plan.
The Compensation Plan will be administered by a committee of
at least three directors of the Company who are designated by the
Board of Directors and who are "non-employee directors" within
the meaning of the federal securities laws (the "Compensation
Committee"). It is expected that the Compensation Committee will
initially consist of Directors James W. Appel, Luther R.
Campbell, Jr., and Richard B. Neiley, Jr. The Compensation
Committee will select the employees to whom Awards are to be
granted, the number of shares to be subject to such Awards, and
the terms and conditions of such Awards (provided that any
discretion exercised by the Compensation Committee must be
consistent with the terms of the Compensation Plan).
It is intended that Options granted under the Compensation
Plan will constitute both incentive stock options (options that
afford favorable tax treatment to recipients upon compliance with
certain restrictions pursuant to Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), and that do not
result in tax deductions to the Company unless participants fail
to comply with Section 422 of the Code) ("ISOs") and options that
do not so qualify ("Non-ISOs"). The exercise price for Options
will be the price at which the Common Stock is sold in the
Offering. The Compensation Plan permits the Compensation
Committee to impose transfer restrictions, such as a right of
first refusal, on the Common Stock that optionees may purchase.
It is possible that the Compensation Committee will impose
transfer restrictions on shares subject to options granted on the
Compensation Plan's effective date. No Option shall be
exercisable after the expiration of ten years from the date it is
granted; provided, however, that in the case of any employee who
owns more than 10% of the outstanding Common Stock at the time an
ISO is granted, the option price for the ISO shall not be less
than 110% of the price at which the Common Stock is sold in the
Offering, and the ISO shall not be exercisable after the
expiration of five years from the date it is granted. An
otherwise unexpired Option, unless otherwise determined by the
Compensation Committee, shall cease to be exercisable upon (i) an
employee's termination of employment for "just cause" (as defined
in the Compensation Plan), (ii) the date three months after an
employee terminates service for a reason other than just cause,
death, or disability, (iii) the date one year after an employee
terminates service due to disability, or (iv) the date two years
after termination of such service due to the employee's death.
Options granted to non-employee directors will automatically
expire one year after termination of service on the Board of
Directors (two years in the event of death). Options granted at
the time of the implementation of the Compensation Plan are
expected to be exercisable six months after the date such options
are granted.
A SAR may be granted in tandem with all or any part of any
Option or without any relationship to any Option. Whether or not
a SAR is granted in tandem with an Option, exercise of the SAR
will entitle the optionee to receive, as the Compensation
Committee prescribes in the grant, all or a percentage of the
excess of the then fair market value of the shares of Common
Stock subject to the SAR at the time of its exercise, over the
aggregate exercise price of the shares subject to the SAR.
Payment to the optionee may be made in cash or shares of Common
Stock, as determined by the Compensation Committee.
Restricted Stock is Common Stock which is nontransferable
and forfeitable until a grantee's interest vests. Nevertheless,
the grantee is entitled to vote the Restricted Stock and to
receive dividends and other distributions made with respect to
the Restricted Stock. To the extent that a grantee becomes
vested in his Restricted Stock at any time during the
"Restriction Period" (as defined in the Compensation Plan) and
has satisfied applicable income tax withholding obligations, the
Company may deliver unrestricted shares of Common Stock to the
grantee. Vesting of Restricted Stock may be accelerated at the
discretion of the Compensation Committee. At the end of the
Restriction Period, the grantee will forfeit to the Company any
shares of Restricted Stock as to which he did not earn a vested
interest during the Restriction Period.
The Company will receive no monetary consideration for the
granting of Awards under the Compensation Plan, and will receive
no monetary consideration other than the Option exercise price
for each share issued to optionees upon the exercise of Options.
The Option exercise price may be paid in cash or Common Stock.
The exercise of Options and SARs and the conditions under which
Restricted Stock vests will be subject to such terms and
conditions established by the Compensation Committee as are set
forth in a written agreement between the Compensation Committee
and the optionee (to be entered into at the time an Award is
granted). In the event that the fair market value per share of
the Common Stock falls below the option price of previously
granted Options or SARs, the Compensation Committee will have the
authority, with the consent of the optionee, to cancel
outstanding Options or SARs and to reissue new Options or SARs at
the then current fair market price per share of the Common Stock.
Although directors and officers of the Company generally
would be prohibited under the federal securities laws from
profiting from certain purchases and sales of shares of Common
Stock within any six-month period, they generally will not be
prohibited by such laws from exercising options and immediately
selling the shares they receive. As a result, the Company's
directors and officers generally will be permitted to benefit in
the event the market price for the shares exceeds the exercise
price of their Options, without being subject to loss in the
event the market price falls below the exercise price.
Notwithstanding the provisions of any Award that provides
for its exercise or vesting in installments, all shares of
Restricted Stock shall become fully vested upon a "change in
control" (as defined in the Compensation Plan) and, for a period
of 60 days beginning on the date of such change in control, all
Options and SARs shall be immediately exercisable and fully
vested. In the event of a change in control, the Compensation
Committee may permit the holders of exercisable Options to
surrender their Options in exchange for cash in an amount equal
to the excess of the fair market value of the Common Stock
subject to the Options over their exercise price. No Award is
assignable or transferable except by will or the laws of descent
and distribution, or pursuant to the terms of a "qualified
domestic relations order" (within the meaning of Section 414(p)
of the Code and the regulations and rulings thereunder).
The initial grant of Options under the Compensation Plan is
expected to take place on the date of the receipt of shareholder
and regulatory approval of the Compensation Plan, and the Option
exercise price would be the price at which the Common Stock is
sold in the Offering. No decisions concerning the number of
options to be granted to any director or officer have been made
at this time. No SARs or Restricted Stock Awards are expected to
be granted when the Compensation Plan becomes effective, and no
Awards would be made prior to the receipt of shareholder approval
of the Compensation Plan.
Employee Stock Ownership Plan.
In connection with the Conversion, the Company's Board of
Directors has adopted the Company's Employee Stock Ownership Plan
(the "ESOP") for the exclusive benefit of participating
employees, to be implemented upon the completion of the
Conversion. Participating employees are all employees of the
Company and its subsidiaries who have attained age 21 and
completed one year of service with the Company or its
subsidiaries. The Company will submit to the IRS an application
for a letter of determination as to the tax-qualified status of
the ESOP. Although no assurances can be given, the Company
expects that the ESOP will receive a favorable letter of
determination from the IRS.
The ESOP intends to borrow funds from an unaffiliated lender
in an amount sufficient to purchase 10% of the Common Stock
issued in the Conversion. The loan will bear an 8% interest
rate, and will require the ESOP to make monthly payments of
approximately $32,000 for a term of 10 years. The loan will be
secured by the shares of Common Stock purchased and earnings
thereon. Shares purchased with such loan proceeds will be held
in a suspense account for allocation among participants as the
loan is repaid. The Company expects to contribute sufficient
funds to the ESOP to repay such loan, plus such other amounts as
the Company's Board of Directors may determine in its discretion.
Contributions to the ESOP and shares released from the
suspense account will be allocated among participants on the
basis of their annual wages subject to federal income tax
withholding, plus any amounts withheld under a plan qualified
under Sections 125 or 401(k) of the Code and sponsored by the
Company or an affiliate of the Company. Participants must be
employed at least 500 hours in a calendar year in order to
receive an allocation. A participant becomes 100% vested in his
or her right to ESOP benefits only after completing 5 years of
service. For vesting purposes, a year of service means any year
in which an employee completes at least 1,000 hours of service.
Vesting will be accelerated to 100% upon a participant's
attainment of age 65, death, or disability or a change in control
of the Company. Forfeitures will be reallocated to participants
on the same basis as other contributions. Benefits are payable
upon a participant's retirement, death, disability, or separation
from service, and will be paid in a lump sum in whole shares of
Common Stock (with cash paid in lieu of fractional shares).
Dividends paid on allocated shares are expected to be credited to
participant accounts within the ESOP or paid to participants, and
dividends on unallocated shares are expected to be used to repay
the ESOP loan.
The Company will administer the ESOP, and an unaffiliated
bank or trust company will be appointed as trustee of the ESOP
(the "ESOP Trustee"). The ESOP Trustee must vote all allocated
shares held in the ESOP in accordance with the instructions of
the participants. Unallocated shares and allocated shares for
which no timely direction is received will be voted by the ESOP
Trustee in the same proportion as the participant-directed voting
of allocated shares.
Management Recognition Plan.
On _________________, 1996, the Company's Board of Directors
adopted a management recognition plan (the "MRP") subject to
receipt of shareholder approval at the Company's first annual
meeting of shareholders after the Conversion.
The objective of the MRP is to enable the Company to reward
and retain key personnel. Those eligible to receive benefits
under the MRP will be directors and executive officers of the
Company and the Insurance Companies who are selected by members
of the Compensation Committee.
The MRP will be managed through a separate trust (the
"MRP Trust"). The Trustees of the MRP Trust (the "MRP
Trustees"), who are expected to be the members of the
Compensation Committee, have the responsibility to invest all
funds contributed to the MRP Trust. The Company will contribute
sufficient funds to the MRP Trust so that the MRP Trust can
purchase, from the Company, up to an aggregate number of shares
equal to 4% of the shares of the Common Stock that were issued in
the Conversion. Because the MRP will be acquiring additional
authorized but unissued shares after the Conversion, the
interests of existing shareholders will be diluted. See "Pro
Forma Data." It is possible that the Company's Board of
Directors will impose certain transfer restrictions on the shares
of Common Stock that the Company sells to the MRP, and that these
restrictions will reduce their value, for financial reporting
purposes, to a price below the fair market value of freely
transferable shares as of the date of such sale.
It is anticipated that all shares of Common Stock purchased
by the MRP Trust will be granted to eligible directors and
executive officers at no cost to them pursuant to the terms of
the MRP. Unless the Compensation Committee decides to the
contrary (which is not expected to occur in the case of awards
made on the MRP's effective date), vesting will occur at the rate
of 20% per year of service following the award date. Unvested
shares held in the MRP Trust shall be voted by the MRP Trustees
in the same proportion as the trustee of the Company's ESOP trust
votes Common Stock held therein, and shall be distributed as the
award vests. Dividends on unvested shares will be held in the
MRP Trust for payment as vesting occurs. At the election of the
participant, but subject to approval by the Compensation
Committee, unvested shares that would otherwise be held by the
MRP Trust may be distributed to the participant in the form of
restricted stock subject to forfeiture. A participant who has
received restricted stock may vote such shares, will receive any
dividends paid thereon (subject to the same vesting rules
applicable to the restricted stock), and will be able to exchange
restricted shares for unrestricted shares as vesting occurs.
If an employee terminates employment for reasons other than
retirement at or after age 65 death, or disability, he or she
forfeits all rights to the allocated shares under restriction.
If the employee's termination is caused by retirement at or after
age 65 death, or disability, all restrictions expire and all
shares allocated become vested and, consequently, unrestricted.
The same vesting rules apply to directors except that the
director retirement age is 70. The MRP provides that in the
event of a change in control of the Company, all shares of the
Common Stock subject to outstanding awards will be immediately
payable to the holders of the awards.
Participants will recognize compensation income when their
interests vest, or at such earlier date pursuant to a
participant's election to accelerate income recognition pursuant
to Section 83(b) of the Code.
The Company's Board of Directors intends to seek shareholder
approval of the MRP at the first annual meeting of shareholders
following completion of the Conversion and can terminate the MRP
at any time, and, if it does so, any shares not allocated will
revert to the Company. No decisions have been made concerning
the number of MRP awards to be granted to any director or
officer. Assuming shares are sold equal to the maximum of the
Estimated Valuation Range in the Conversion, and further assuming
that share awards of restricted stock have a value of $10 per
share, the maximum aggregate value of MRP awards to employees and
non-employee directors upon the MRP's receipt of shareholder
approval would be $1.5 million. No awards will be made prior to
shareholder approval of the MRP.
Employment Agreements.
Chief Executive Officer. As of June 1, 1996, Mr. David E.
Hosler entered into an Employment Agreement with the Company and
Commonwealth Insurance Managers, Inc. ("CIMI"). The Employment
Agreement has an initial three-year term and provides for
automatic annual one-year extensions commencing on June 1, 1997
and continuing on each June 1 thereafter unless the Company or
Mr. Hosler gives prior written notice of nonrenewal. Under the
Employment Agreement, Mr. Hosler is entitled to receive an annual
base salary of not less than $180,000. In addition, Mr. Hosler
is entitled to participate in any other incentive compensation
and employee benefit plans that the Company maintains.
In the event the Company terminates Mr. Hosler's employment
for "Cause" as defined in the Employment Agreement, Mr. Hosler
would be entitled to receive his accrued but unpaid base salary
and an amount for all accumulated but unused leave time.
In the event the Company terminates Mr. Hosler's employment
without Cause, Mr. Hosler would be entitled to receive an annual
amount equal to the greater of (i) his highest base salary
received during one of the two years immediately preceding the
year in which he is terminated, or (ii) his base salary in effect
immediately prior to his termination for the remainder of the
term of the Employment Agreement. In addition, Mr. Hosler would
be entitled to continuation annually during the remaining term of
the Employment Agreement, of (i) an amount equal to the higher of
the aggregate bonuses paid to him in one of the two years
immediately preceding the year in which he is terminated and
(ii) an amount equal to the sum of the highest annual
contribution made on his behalf (other than his own salary
reduction contributions) to each of the Company's tax qualified
and non-qualified defined contribution plans (as such term is
defined in Section 3(35) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) in the year in which
he is terminated or in one of the two years immediately preceding
such year. Mr. Hosler would also be entitled to certain
retirement, health and welfare benefits.
In the event Mr. Hosler terminates his employment with the
Company with "Good Reason," as defined in the Employment
Agreement, Mr. Hosler would be entitled to receive the same
amounts and benefits he would receive if terminated without
Cause. In the event Mr. Hosler terminates his employment with
the Company without Good Reason, Mr. Hosler would be entitled to
receive his accrued but unpaid base salary until the date of
termination and an amount for all accumulated but unused leave
time.
In the event of Mr. Hosler's death or disability during the
term of his Employment, Mr. Hosler and his eligible dependents or
his spouse and her eligible dependents, as the case may be, would
be entitled to receive certain cash amounts and certain health
and welfare benefits.
In the event that Mr. Hosler is required to pay any excise
tax imposed under Section 4999 of the Code (or any similar tax
imposed under federal, state or local law) as a result of any
compensation and benefits received under the Employment Agreement
in connection with a change in control, the Company will pay to
Mr. Hosler an additional amount such that the net amount retained
by him, after the payment of such excise taxes (and any
additional income tax resulting from such payment by the
Company), equals the amount he would have received but for the
imposition of such taxes.
The Employment Agreement further provides that in the event
Mr. Hosler's employment is terminated for Cause or without Good
Reason prior to a "Change in Control," as defined in the
Employment Agreement, Mr. Hosler may not, for a period of twelve
months after the date of termination, without the prior written
consent of the Company's Board of Directors, become an officer,
director or a shareholder or equity owner of 4.9% or more of any
entity engaged in the property and casualty insurance business
with its corporate headquarters located within fifty miles of
Lancaster, Pennsylvania. In addition, during Mr. Hosler's
employment and for a period of 12 months following the
termination of his employment, except following a Change in
Control, Mr. Hosler may not solicit, endeavor to entice away from
the Company, its subsidiaries or affiliates, or otherwise
interfere with the relationship of the Company or its
subsidiaries or affiliates with any person who is, or was within
the then most recent 12-month period, an employee or associate of
the Company or any of its subsidiaries or affiliates.
Other Named Executive Officers. As of June 1, 1996,
Mr. Mark J. Keyser, Steven D. Dyer, Scott A. Orndorff and
Donald W. Manley entered into Employment Agreements with the
Company and CIMI. The Employment Agreements have an initial
three-year term and provide for automatic annual one-year
extensions commencing on June 1, 1997 and continuing on each
June 1 thereafter. Under the Employment Agreements, the
Executive Officers are entitled to receive the annual base salary
specified therein.
In the event the Company terminates an Executive Officer's
employment for "Cause," as defined in the Employment Agreement,
the executive would be entitled to receive his accrued but unpaid
base salary and an amount for all accumulated but unused leave
time.
In the event the Company terminates an Executive Officer's
employment without Cause, the Executive Officer would be entitled
to receive an amount equal to the greater of (i) his highest base
salary received during one of the two years immediately preceding
the year in which he is terminated, or (ii) his base salary in
effect immediately prior to his termination for the two-year
period, beginning with the date of termination. In addition, the
Executive Officer would be entitled to continuation, for two
years, of (i) an amount equal to the higher of the aggregate
bonuses paid to him in one of the two years immediately preceding
the year in which he is terminated and (ii) an amount equal to
the sum of the highest annual contribution made on his behalf
(other than his own salary reduction contributions) to each of
the Company's tax qualified and non-qualified defined
contribution plans (as such term is defined in Section 3(35) of
ERISA), in the year in which he is terminated or in one of the
two years immediately preceding such year. The Executive Officer
would also be entitled to certain retirement, health and welfare
benefits.
In the event the Executive Officer terminates his employment
with the Company with "Good Reason," as defined in the Employment
Agreement, the Executive Officer would be entitled to receive the
same amounts and benefits he would receive if terminated without
Cause. In the event the Executive Officer terminates his
employment with the Company without Good Reason, the Executive
Officer would be entitled to receive his accrued but unpaid base
salary and an amount for all accumulated but unused leave time.
In the event of the Executive Officer's death or disability
during the term of the Employment Agreement, the Executive
Officer and his eligible dependents or his spouse and her
eligible dependents, as the case may be, would be entitled to
receive certain cash amounts and certain health and welfare
benefits.
In the event that the Executive Officer is required to pay
any excise tax imposed under Section 4999 of the Code (or any
similar tax imposed under federal, state or local law) as a
result of any compensation and benefits received under his
Employment Agreement in connection with a change in control, the
Company will pay to the Executive Officer an additional amount
such that the net amount retained by him, after the payment of
such excise taxes (and any additional tax resulting from such
payment by the Company), equals the amount he would have received
but for the imposition of such taxes.
The Employment Agreement for each Executive Officer further
provides that in the event the Executive Officer's employment is
terminated for Cause or he voluntarily terminates his employment
prior to a "Change in Control," as defined in the Employment
Agreement, the Executive Officer may not for a period of twelve
months after the date of termination, without the prior written
consent of the Company's Board of Directors, become an officer,
director or a shareholder or equity owner of 4.9% or more of any
entity engaged in the property and casualty insurance business
with its corporate headquarters located within fifty miles of
Lancaster, Pennsylvania. In addition, during the Executive
Officer's employment and for a period of 12 months following the
termination of his employment, except following a Change in
Control, the Executive Officer may not solicit, endeavor to
entice away from the Company, its subsidiaries or affiliates, or
otherwise interfere with the relationship of the Company or its
subsidiaries or affiliates with any person who is, or was within
the most recent 12-month period, an employee or associate of the
Company or any of its subsidiaries or affiliates.
THE CONVERSION
The Plan has been approved by the Department, subject to the
Plan's approval by the policyholders of the Insurance Companies
entitled to vote and the satisfaction of certain other conditions
imposed by the Department in its approval. Approval by the
Department does not constitute a recommendation or endorsement of
the Plan.
General
On May 31, 1996, the Board of Directors of each of the
Insurance Companies unanimously adopted, subject to approval by
the Department and the policyholders of each of the Insurance
Companies, the Plan, pursuant to which each of the Insurance
Companies will convert from a Pennsylvania mutual insurance
company to a Pennsylvania stock insurance company and become a
wholly-owned subsidiary of the Company. Each Board of Directors
unanimously adopted amendments to the Plan on July 19, 1996. The
Department has approved the Plan subject to its approval by the
policyholders of each of the Insurance Companies at their
respective Special Meetings called for that purpose to be held on
___________, 1996.
The Conversion will be accomplished through the filing with
the Department of State of the Commonwealth of Pennsylvania
amended and restated Articles of Incorporation of each of the
Insurance Companies. The Company has received Department
approval to purchase all of the capital stock of Old Guard
Mutual, Old Guard Fire and Goschenhoppen to be issued in the
Conversion in exchange for approximately $16.0 million in cash in
the aggregate. See "Use of Proceeds." Upon issuance of the
shares of capital stock of the Insurance Companies to the
Company, the Insurance Companies will be wholly-owned
subsidiaries of the Company. The Conversion will be effected
only upon completion of the sale of at least the minimum of the
shares of Common Stock to be issued by the Company pursuant to
the Plan.
The aggregate purchase price of the Common Stock to be
issued in the Conversion will be within the Estimated Valuation
Range of between $28,535,000 and $38,606,000, based upon an
independent appraisal of the estimated pro forma market value of
the Common Stock prepared by Berwind Financial Group, L.P.
("Berwind"). All shares of the Common Stock to be issued and
sold in the Conversion will be sold at the same price. The
independent appraisal will be updated, if necessary, and the
final price of the shares of Common Stock will be determined at
the completion of the Offering, and, if necessary, the Public
Offering. Berwind is a consulting firm experienced in corporate
valuations. For additional information, see "Stock Pricing and
Number of Shares to be Issued" herein.
The following is a summary of certain aspects of the
Conversion. The summary is qualified in its entirety by
reference to the provisions of the Plan, a copy of which is
attached to each of the proxy statements for the Special
Meetings. A copy of the Plan is available for inspection at the
Company's principal executive offices located at 2929 Lititz
Pike, Lancaster, Pennsylvania. The Plan is also filed as an
exhibit to the Registration Statement of which this Prospectus is
a part, copies of which may be obtained from the SEC. See
"Additional Information."
Offering of Common Stock
Under the Plan, the Company is offering shares of Common
Stock in a subscription offering (the "Subscription Offering")
first to the Eligible Policyholders, second to the ESOP, and
third to the directors, officers and employees of the Insurance
Companies. Subscription rights received in any of the foregoing
categories will be subordinated to the subscription rights
received by those in a prior category. The Company is also
concurrently offering Common Stock to the general public in a
Community Offering (the "Community Offering"). The Subscription
Offering and the Community Offering shall be collectively
referred to herein as the "Offering." See "The Offering" herein.
The Offering will be managed by Hopper Soliday.
It is anticipated that all shares not purchased in the
Offering will be sold to a syndicate of underwriters to be
managed by Legg Mason and McDonald (collectively, the
"Underwriters") for resale to the general public in a Public
Offering. See "Public Offering" herein. The Plan provides that
in the event a Public Offering does not appear feasible, the
Company will consult with the Department to determine the most
practical alternative available to complete the Conversion,
including the sale of the remaining shares of Common Stock in a
private placement or a reduction in the Estimated Valuation
Range. Should no viable alternative exist, the Company may
discontinue the Conversion and terminate the Plan in accordance
with the provisions of the Plan.
The completion of the Offering and the Public Offering are
subject to market conditions and other factors beyond the
Company's control. No assurance can be given as to the length of
time that will be required to complete the sale of Common Stock
to be offered in the Conversion after approval of the Plan by
Eligible Policyholders at the Special Meetings. If delays are
experienced, significant changes may occur in the estimated pro
forma market value of the Company, together with corresponding
changes in the offering price and the net proceeds realized by
the Company from the sale of the Common Stock. The Insurance
Companies would also incur substantial additional legal,
accounting and other expenses in completing the Conversion. In
the event that the Conversion is not completed, the Insurance
Companies will remain as mutual insurance companies and all
subscription funds will be promptly returned to subscribers
without interest. In addition, the Insurance Companies would be
required to charge all Conversion expenses against current
income.
Business Purposes
The Company was formed to serve as the holding company for
all of the issued and outstanding capital stock of the Insurance
Companies upon completion of the Conversion. The portion of the
net proceeds from the sale of Common Stock in the Conversion that
the Company will contribute to the Insurance Companies will
substantially increase the Insurance Companies' surplus which
will, in turn, enhance policyholder protection and increase the
amount of funds available to support both current operations and
future growth. The holding company structure also will provide
greater flexibility for diversification of business activities
and geographic operations. Management believes that this
increased capital and operating flexibility will enable the
Company and the Insurance Companies to compete more effectively
with other insurance companies. In addition, the Conversion will
enhance the future access of the Company and the Insurance
Companies to the capital markets.
After completion of the Conversion, the unissued Common
Stock and preferred stock authorized by the Company's Articles of
Incorporation will permit the Company to raise additional equity
capital through further sales of securities and to issue
securities in connection with possible acquisitions. At the
present time, the Company has no plans with respect to additional
offerings of securities following the Conversion, other than the
proposed issuance of additional shares under the MRP and
Compensation Plan, if implemented. Following completion of
Conversion, the Company also will be able to use stock-related
incentive programs to attract, motivate and retain highly
qualified employees for itself and its subsidiaries. See
"Management of the Company."
Effect of Conversion on Policyholders
General.
Each policyholder in a mutual insurance company, including
each policyholder of the Insurance Companies, has certain
interests in its policy issuing insurance company in addition to
the contractual right to insurance coverage afforded by the
policyholder's policy of insurance. These interests are (i) the
right to vote with respect to the election of directors of the
company and certain other fundamental corporate transactions,
such as an amendment to the articles of incorporation of the
company or a merger of the company, (ii) the right to receive
dividends if, as and when declared by the board of directors of
the company (the Insurance Companies have never declared a
policyholder dividend and have no intention of doing so in the
future), and (iii) in the unlikely event of a solvent dissolution
of the company, the right to receive a pro rata distribution of
any surplus remaining after the satisfaction of all claims and
other liabilities of the company. However, these interests are
incident to, and contingent upon the existence of, the underlying
insurance policy. These interests have no tangible market value
separate from such insurance policy and a policyholder who
terminates his policy automatically forfeits the interests in the
company described above. Policyholder interests other than
contract rights under policies of insurance will be terminated as
a result of the Conversion.
If the Plan is not approved by the Eligible Policyholders or
if the Conversion fails to be completed for any other reason, the
Insurance Companies will continue their existence as mutual
insurance companies and Eligible Policyholders will retain the
rights described above.
Continuity of Insurance Coverage and Business Operations.
The Conversion will not affect the contractual rights of
policyholders to insurance protection under their individual
insurance policies with the Insurance Companies. During and
after the Conversion, the normal business of the Insurance
Companies of issuing insurance policies in exchange for premium
payments and processing and paying claims will continue without
change or interruption. After the Conversion, the Insurance
Companies will continue to provide services for policyholders
under current policies and by its present management and staff.
The Board of Directors of each of the Insurance Companies at
the time of the Conversion will continue to serve as the Boards
of Directors of the Insurance Companies after the Conversion.
The Board of Directors of the Company will consist of the
following persons, each of whom is an existing director of one or
more of the Insurance Companies: James W. Appel, John E. Barry,
Luther R. Campbell, Jr., M. Scott Clemens, David E. Hosler,
Richard B. Neiley, Jr., G. Arthur Weaver and Robert Wechter. See
"Management of the Company -- Directors." All officers of each
of the Insurance Companies at the time of the Conversion will
retain their positions with the Insurance Companies after the
Conversion.
Voting Rights.
Upon completion of the Conversion, the voting rights of all
policyholders in each Insurance Company will terminate and
policyholders will no longer have the right to elect the
directors of such Insurance Company or approve transactions
involving the Insurance Company. Instead, voting rights in the
Insurance Companies will be vested exclusively in the Company,
which will own all the capital stock of the Insurance Companies.
Voting rights in the Company will be vested exclusively in the
shareholders of the Company. Each holder of Common Stock shall
be entitled to vote on any matter to be considered by the
shareholders of the Company, subject to the terms of the
Company's Articles of Incorporation, Bylaws and to the provisions
of Pennsylvania and federal law.
Dividends.
The Conversion will not affect the right of a policyholder
to receive dividends from the Insurance Companies in accordance
with the terms of the policyholder's existing policy of
insurance, which provides that dividends will be paid only if, as
and when declared by the Boards of Directors of the Insurance
Companies. However, the Insurance Companies have never declared
a policyholder dividend and have no present intention of doing so
in the future, whether or not the Insurance Companies convert to
stock form.
Rights Upon Dissolution.
After the Conversion, policyholders will no longer have the
right to receive a pro rata distribution of any remaining surplus
in the unlikely occurrence of a solvent dissolution of the
Insurance Companies. Instead, this right will vest in the
Company as the sole shareholder of the Insurance Companies.
The Offering
Subscription Offering.
Nontransferable subscription rights to purchase shares of
Common Stock have been issued to all persons entitled to purchase
stock in the Subscription Offering at no cost to such persons.
The amount of Common Stock that these parties may purchase will
be determined, in part, by the total number of shares of Common
Stock to be issued and the availability of Common Stock for
purchase under the categories set forth in the Plan.
Preference categories have been established for the
allocation of Common Stock to the extent that shares are
available. These categories are as follows:
Subscription Category No. 1 is reserved for Eligible
Policyholders of the Insurance Companies, i.e., those
persons who are named insureds at the close of business on
May 31, 1996 (the "Eligibility Record Date") under an
existing insurance policy issued by any of the Insurance
Companies. Each Eligible Policyholder will receive, without
payment, subscription rights to purchase up to one percent
(1%) of that number of shares of Common Stock equal to the
maximum of the Estimated Valuation Range divided by the
Purchase Price; provided, however, that the maximum number
of shares that may be purchased by Eligible Policyholders in
the aggregate shall be equal to the maximum of the Estimated
Valuation Range divided by $10.00. In the event of an
oversubscription, shares of Common Stock will be allocated
among subscribing Eligible Policyholders, as follows.
First, shares of Common Stock will be allocated among
subscribing Eligible Policyholders so as to permit each such
Eligible Policyholder, to the extent possible, to purchase
the lesser of (i) 100 shares, or (ii) the number of shares
for which such Eligible Policyholder subscribed. Second,
any shares of Common Stock remaining after such initial
allocation will be allocated among the subscribing Eligible
Policyholders whose subscriptions remain unsatisfied in the
proportion in which the aggregate premiums payable to the
Insurance Companies by each such Eligible Policyholder in
respect of all policies issued to such Eligible Policyholder
and in force on the Eligibility Record Date, bears to the
aggregate premiums payable to the Insurance Companies in
respect of all policies issued to all such Eligible
Policyholders and in force on the Eligibility Record Date;
provided, however, that no fractional shares of Common Stock
shall be issued. To ensure a proper allocation of Common
Stock, each Eligible Account Holder must list on his Stock
Order Form all policies issued by the Insurance Companies
under which he is the named insured as of the close of
business on May 31, 1996. Failure to list a policy could
result in fewer shares being allocated than if all policies
had been disclosed.
Subscription Category No. 2 is reserved for the
Company's tax-qualified employee stock benefit plans, i.e.,
the ESOP, which shall receive, without payment,
nontransferable subscription rights to purchase, in the
aggregate, up to 10% of the shares of Common Stock to be
issued in the Conversion. The ESOP is expected to purchase
10% of the Common Stock issued in the Conversion.
Subscription Category No. 3 is reserved for directors,
officers and employees of the Insurance Companies. Each
director, officer and employee of each Insurance Company
will receive, without payment, subscription rights to
purchase up to 1% of that number of shares of Common Stock
equal to the maximum of the Estimated Valuation Range
divided by $10.00; provided, however, that such subscription
rights shall be subordinated to the subscription rights
received by the Eligible Policyholders and the ESOP and may
be exercised only to the extent that there are shares of
Common Stock that could have been purchased by Eligible
Policyholders, but which remain unsold after satisfying the
subscriptions of all Eligible Policyholders. In the event
of an oversubscription among the directors, officers and
employees, shares of Common Stock shall be allocated among
them on the basis of a point system under which one point
will be assigned for each year of service to each Insurance
Company, one point for each then current annual salary
increment of $5,000, and one point for each office held in
each Insurance Company. If any director, officer or
employee does not subscribe for his full allocation of
shares, the shares not subscribed for shall be allocated
among the directors, officers and employees whose
subscriptions remain unsatisfied in proportion to their
respective subscriptions. A director, officer or employee
of an Insurance Company who subscribes to purchase shares of
Common Stock and who is also eligible to purchase shares of
Common Stock as an Eligible Policyholder will be deemed to
purchase Common Stock first in his or her capacity as an
Eligible Policyholder.
The Company will make reasonable efforts to comply with the
securities laws of all states in the United States in which
persons entitled to subscribe for Common Stock pursuant to the
Plan reside. However, no person will be offered or allowed to
purchase any Common Stock under the Plan if he or she resides in
a foreign country or in a state of the United States with respect
to which any or all of the following apply: (i) a small number
of persons otherwise eligible to subscribe for shares under the
Plan reside in such state or foreign country; (ii) the granting
of subscription rights or the offer or sale of shares of Common
Stock to such persons would require the Company or the Insurance
Companies or their employees to register, under the securities
laws of such state, as a broker, dealer, salesman or agent or to
register or otherwise qualify its securities for sale in such
state or foreign country; or (iii) such registration or
qualification would be impracticable for reasons of cost or
otherwise. No payments will be made in lieu of the granting of
subscription rights to any such person.
Community Offering.
Concurrently with the Subscription Offering, the Company is
offering shares of the Common Stock to the general public in a
Community Offering. Preference in the Community Offering will be
given to (i) natural persons and trusts of natural persons who
are permanent residents of Berks, Bucks, Chester, Cumberland,
Dauphin, Lancaster, Lebanon, Lehigh, Montgomery, Northampton and
York Counties, Pennsylvania (the "Local Community"),
(ii) principals of Eligible Policyholders in the case of an
Eligible Policyholder that is a corporation, partnership, limited
liability company or other entity, (iii) licensed insurance
agents who have been appointed by any of the Insurance Companies
to market and distribute insurance products, (iv) named insureds
under policies of insurance issued by any Insurance Company after
May 31, 1996, and (v) providers of goods or services to any one
or more of the Insurance Companies. The term "resident," as used
in relation to the preference afforded natural persons in the
Local Community, means any natural person who occupies a dwelling
within the Local Community, has an intention to remain within the
Local Community for a period of time (manifested by establishing
a physical, ongoing, non-transitory presence within one of the
counties in the Local Community) and continues to reside in the
Local Community at the time of the Community Offering. The
Company may utilize policyholder records or such other evidence
provided to it to make the determination whether a person is a
resident of the Local Community. In the case of a corporation or
other business entity, such entity shall be deemed to be a
resident of the Local Community only if its principal place of
business or headquarters is located within the Local Community.
All determinations as to the status of a person as a resident of
the Local Community shall be made by the Insurance Companies in
their sole and absolute discretion. Subscriptions for Common
Stock received from members of the general public in the
Community Offering will be subject to the availability of shares
of Common Stock after satisfaction of all subscriptions in the
Subscription Offering, as well as the maximum and minimum
purchase limitations set forth in the Plan. Furthermore, the
right of any person to purchase shares in the Community Offering,
including the preferred subscribers described in clauses (i)-(v)
above, is subject to the absolute right of the Company to accept
or reject such purchases in whole or in part. The Company
presently intends to terminate the Community Offering when it has
received orders for at least the minimum number of shares
available for purchase in the Conversion.
Stock Pricing and Number of Shares to be Issued
The Plan requires that the purchase price of the Common
Stock be based on the appraised pro forma market value of the
Insurance Companies as subsidiaries of the Company, as determined
on the basis of an independent valuation by an appraiser who is
experienced in corporate valuation. The Company has retained
Berwind to prepare such appraisal. Berwind will receive a fee of
approximately $75,000 for its appraisal.
Berwind has determined that, as of August 19, 1996, the
estimated pro forma market value of the Insurance Companies as
subsidiaries of the Company was $33,570,000. Under the Plan, the
aggregate purchase price of the common Stock to be offered in the
Conversion must equal the pro forma market value of the Insurance
Companies as subsidiaries of the Company. The Company, in
consultation with its advisors, has determined to offer the
shares in the Conversion at a price of $10.00 per share, and by
dividing the price per share into the estimated aggregate value,
initially plans to issue 3,357,000 shares of the Common Stock, at
the midpoint of the Estimated Valuation Range, in the Conversion.
The Plan requires that an appraiser establish a valuation
range (the "Estimated Valuation Range") consisting of a midpoint
valuation, a valuation 15 percent (15%) above the midpoint
valuation (the "Maximum of the Valuation Range") and a valuation
15 percent (15%) below the midpoint valuation (the "Minimum of
the Valuation Range"). Accordingly, Berwind has established a
range of value from $28,535,000 to $38,606,000. Upon completion
of the Offering, after taking into account factors similar to
those involved in its prior appraisal, Berwind will submit to the
Company and to the Department its updated estimate of the pro
forma fair market value of the Insurance Companies as
subsidiaries of the Company as of the last day of the Offering.
If such updated estimated valuation does not fall within the
Estimated Valuation Range, then in such event the Company, after
consultation with the Department, may cancel the Offering and
terminate the Plan, establish a new Estimated Valuation Range,
extend, reopen or hold a new Offering or take such other action
as may be authorized by the Department.
If the updated estimated valuation Berwind submits to the
Company and the Department upon completion of the Offering falls
within the Estimated Valuation Range, the following steps will be
taken:
Subscription Offering Meets or Exceeds Maximum.
If, upon conclusion of the Subscription Offering and the
Community Offering, the number of shares subscribed for by
participants in the Subscription Offering multiplied by the
Purchase Price is equal to or greater than the Maximum of the
Valuation Range, then in such event the Conversion shall be
promptly consummated and the Company shall on the effective
date of the Conversion (the "Effective Date") issue shares of
Common Stock to the subscribing participants; provided, however,
that the number of shares of Common Stock issued shall not exceed
the number of shares of Common Stock offered in the Offering. In
the event of an oversubscription in the Subscription Offering,
shares of Common Stock shall be allocated among the subscribing
participants in the priorities set forth in the Plan; provided,
however, that no fractional shares of Common Stock shall be
issued. See "-- Subscription Offering," herein.
Subscription Offering Meets or Exceeds Minimum.
If, upon conclusion of the Subscription Offering and the
Community Offering, the number of shares of Common Stock
subscribed for by participants in the Subscription Offering
multiplied by the Purchase Price is equal to or greater than the
Minimum of the Valuation Range, but less than the Maximum of the
Valuation Range, then in such event the Conversion shall be
promptly consummated and the Company shall on the Effective Date
issue to the subscribing participants shares of Common Stock in
an amount sufficient to satisfy the subscriptions of such
participants in full. To the extent that shares of Common Stock
remain unsold after the subscriptions of all participants in the
Subscription Offering have been satisfied in full, the Company
shall have the right in its absolute discretion to accept, in
whole or in part, subscriptions received from any or all
subscribers in the Community Offering and/or to sell shares of
Common Stock to purchasers in a Public Offering or Private
Placement; provided, however, that the number of shares of Common
Stock issued shall not exceed the number of shares of Common
Stock offered in the Offering; and, provided further, that no
fractional shares of Common Stock shall be issued.
Subscription Offering Does Not Meet Minimum.
If, upon conclusion of the Subscription Offering and the
Community Offering, the number of shares of Common Stock
subscribed for by participants in the Subscription Offering
multiplied by the Purchase Price is less than the Minimum of the
Valuation Range, then in such event the Company shall accept
subscriptions received from subscribers in the Community Offering
and/or sell shares of Common Stock to purchasers in a Public
Offering or Private Placement. If the aggregate number of shares
of Common Stock subscribed for in the Subscription Offering, the
Community Offering and in any Public Offering or Private
Placement multiplied by the Purchase Price is equal to or greater
than the Minimum of the Valuation Range, then in such event the
Conversion shall be consummated promptly and the Company shall on
the Effective Date: (i) issue to subscribing participants in the
Subscription Offering shares of Common Stock in an amount
sufficient to satisfy the subscriptions of such participants in
full, and (ii) issue to subscribers in the Community Offering
and/or to purchasers in any Public Offering or Private Placement
such additional number of shares of Common Stock such that the
aggregate number of shares of Common Stock to be issued to
subscribing participants, to subscribers in the Community
Offering and/or to purchasers in any Public Offering or Private
Placement multiplied by the Purchase Price shall be equal to the
Minimum of the Valuation Range; provided, however, that no
fractional shares of Common Stock shall be issued. The Company
may in its absolute discretion elect to issue shares of Common
Stock to subscribers in the Community Offering and/or to
purchasers in any Public Offering in excess of the number
determined by reference to clause (ii) of the preceding sentence;
provided, however, that the number of shares of Common Stock
issued shall not exceed the number of shares of Common Stock
offered in the Offering.
Offering Does Not Meet Minimum.
If the aggregate number of shares of Common Stock subscribed
for in the Subscription Offering, the Community Offering and in
any Public Offering or Private Placement multiplied by the
Purchase Price is less than the Minimum of the Estimated
Valuation Range, then in such event the Company, in consultation
with the Department, may cancel the Offering and terminate the
Plan, establish a new Estimated Valuation Range, extend, reopen
or hold a new Offering or take such other action as may be
authorized by the Department.
If, following a reduction in the Valuation Range approved by
the Department, the aggregate number of shares of Common Stock
subscribed for in the Offering multiplied by the Purchase Price
is equal to or greater than the Minimum of the Valuation Range
(as such Estimated Valuation Range has been reduced), then in
such event the Conversion shall be promptly consummated. The
Company shall on the Effective Date: (i) issue shares of Common
Stock to participants in the Subscription Offering in an amount
sufficient to satisfy the subscriptions of such subscribers in
full, and (ii) issue to subscribers in the Community Offering
and/or to purchasers in any Public Offering or Private Placement
such additional number of shares of Common Stock such that the
aggregate number of shares of Common Stock to be issued
multiplied by the purchase price shall be equal to the Minimum of
the Valuation Range (as such Estimated Valuation Range has been
reduced).
Notwithstanding anything to the contrary set forth in the
Plan, the Company shall have the right in its absolute discretion
and without liability to any subscriber, purchaser, underwriter
or any other person: (i) to determine which subscriptions, if
any, to accept in the Community Offering and to accept or reject
any such subscription in whole or in part for any reason or for
no reason, and (ii) to determine whether and to what extent
shares of Common Stock are to be sold in a Public Offering or
Private Placement.
An increase in the number of shares to be issued in the
Conversion (assuming no change in the per share Purchase Price)
would decrease both a subscriber's ownership interest and the
Company's pro forma net income and shareholders' equity on a per
share basis while increasing pro forma net income and
shareholders' equity on an aggregate basis. A decrease in the
number of shares to be issued in the Conversion (assuming no
change in the Purchase Price) would increase both a subscriber's
ownership interest and the Company's pro forma net income and
shareholders' equity on a per share basis while decreasing pro
forma net income and shareholders' equity on an aggregate basis.
For a presentation of the effects of such changes, see "Pro Forma
Data."
The appraisal is not intended, and must not be construed, as
a recommendation of any kind as to the advisability of purchasing
Common Stock. In preparing the valuation, Berwind has relied
upon and assumed the accuracy and completeness of financial and
statistical information provided by the Company and the Insurance
Companies. Berwind did not independently verify the financial
statements and other information provided by the Company and the
Insurance Companies, and Berwind did not value independently the
assets and liabilities of the Company and the Insurance
Companies. The valuation considers the Company and the Insurance
Companies only as a going concern and should not be considered as
an indication of the liquidation value of the Company and the
Insurance Companies. Moreover, because such valuation is
necessarily based upon estimates and projections of a number of
matters, all of which are subject to change from time to time, no
assurance can be given that persons purchasing Common Stock will
thereafter be able to sell such shares at or above the initial
purchase price. Copies of the appraisal report of Berwind
setting forth the method and assumptions for such appraisal are
on file and available for inspection at the principal executive
offices of the Company. Any subsequent updated appraisal report
of Berwind also will be available for inspection.
Promptly after completion of the sale of all of the Common
Stock, Berwind will confirm to the Department, if such is the
case, that, to the best of its knowledge and judgment, nothing of
a material nature has occurred (taking into account all of the
relevant factors including those that would be involved in a
cancellation of the Subscription and Community Offerings and
Public Offering, if any) that would cause it to conclude that the
aggregate dollar amount of shares ordered in the Conversion was
incompatible with its estimate of the consolidated pro forma
market value of the Insurance Companies as subsidiaries of the
Company. If, however, the facts do not justify such a statement,
the Subscription and Community Offerings or other sale may be
cancelled, a new Estimated Valuation Range set, and a
resolicitation of subscribers and other purchasers held.
Tax Effects.
General.
The Insurance Companies have applied to the Internal Revenue
Service (the "IRS") for a private letter ruling concerning the
material tax effects of the Conversion and the Subscription
Offering to the Insurance Companies, Eligible Policyholders, and
certain other participants in the Subscription Offering. If the
IRS provides the rulings in the form requested by the Insurance
Companies, the rulings will confirm, among other things, that the
Conversion of each of the Insurance Companies from a mutual to
stock form of corporation will constitute a reorganization within
the meaning of Section 368(a)(1)(E) of the Internal Revenue Code
of 1986, as amended (the "Code"), and that, for federal income
tax purposes: (i) no gain or loss will be recognized by any of
the Insurance Companies in their pre-Conversion mutual or post-
Conversion stock form as a result of the Conversion; (ii) each
Insurance Company's basis in its assets, holding period for its
assets, net operating loss carryforward, if any, capital loss
carryforward, if any, minimum tax credit carryforward, if any,
earnings and profits and accounting methods will not be affected
by the Conversion; (iii) as discussed below, Eligible
Policyholders will be required to recognize gain upon the receipt
of subscription rights if and to the extent that the subscription
rights that are allocated to an Eligible Policyholder are
determined to have fair market value; (iv) the basis of the
Common Stock purchased by an Eligible Policyholder pursuant to
the exercise of subscription rights will equal the sum of the
purchase price of such Common Stock, plus the gain, if any,
recognized by the Eligible Policyholder on the subscription
rights that are exercised by the Eligible Policyholder; and
(v) the holding period of the Common Stock purchased by an
Eligible Policyholder pursuant to the exercise of subscription
rights will begin on the date on which the subscription rights
are exercised. In all other cases, the holding period of Common
Stock purchased by an Eligible Policyholder will begin on the
date following the date on which the Common Stock is purchased.
The Conversion and the Subscription Offering present several
novel issues of tax law. Accordingly, there can be no assurance
that the IRS will provide the rulings requested by the Insurance
Companies or that the IRS will complete its analysis or make a
final determination on the rulings prior to the date set for the
Conversion. In the event the IRS fails or refuses to provide the
rulings on or before the date set for the Conversion, the
Insurance Companies may request an opinion from legal counsel
that the Conversion will constitute a reorganization under
Section 368(a) of the Code. Nevertheless, because the Conversion
and the Subscription Offering present several novel issues of tax
law, there can be no assurance that legal counsel can provide its
opinion, or that, if provided, such opinion will be acceptable to
the Insurance Companies. Counsel's opinion, if provided, would
be based, in part, upon, and subject to the continuing validity
through the Effective Date of certain representations by the
Insurance Companies and certain assumptions and qualifications,
including the assumption that the Conversion will be completed in
the manner and according to the terms provided in the Plan.
Counsel's opinion also would be based on the Code, the final,
temporary and proposed Income Tax Regulations promulgated under
the Code, administrative rulings and practice and judicial
decisions, all of which are subject to change. Such change may
be made with retroactive effect. Unlike private letter rulings,
an opinion of counsel is not binding on the IRS, and there can be
no assurance that the IRS will not take positions that are
contrary to the opinions provided by counsel, or that counsel's
opinions would be upheld by the courts if challenged by the IRS.
Subscription Rights.
The federal income tax consequences of the receipt, exercise
and lapse of subscription rights are uncertain. They present
novel issues of tax law which are not addressed by any direct
authorities. The discussion below is based on (i) an analysis of
current law, some of which is uncertain because of a lack of
legal precedent, and (ii) private letter rulings issued by the
IRS for analogous conversion transactions, which, while
instructive, are not legal precedent. In several private letter
rulings for analogous transactions, the IRS has declined to rule
on the tax consequences of the receipt, exercise or lapse of
subscription rights to purchase stock.
The IRS has ruled privately in analogous thrift conversion
transactions that any gain realized as a result of the receipt of
subscription rights with a fair market value must be recognized,
whether or not such rights are exercised. Under the analysis of
these rulings, the amount of gain recognized by the Eligible
Policyholder would equal the fair market value of subscription
rights received by the Eligible Policyholder. The Eligible
Policyholder would also be entitled to an offsetting loss to the
extent such subscription rights are not exercised by the Eligible
Policyholder. If an Eligible Policyholder is required to
recognize gain on the receipt of subscription rights and does not
exercise some or all of such subscription rights, such Eligible
Policyholder should recognize a corresponding loss upon the
expiration of such subscription rights. The amount of such loss
should equal the gain previously recognized upon receipt of such
expired subscription rights, although such loss may not have the
same character as the corresponding gain and may be recognized in
a taxable year that is different than the taxable year in which
the gain is recognized. Although not free from doubt, provided
the subscription rights are capital assets in the hands of an
Eligible Policyholder, any gain resulting from the receipt of the
subscription rights should constitute a capital gain, and
provided the Common Stock that an Eligible Policyholder would
have received upon exercise of the lapsed subscription rights
would have constituted a capital asset, the resulting loss upon
expiration of such subscription rights should constitute a
capital loss. For purposes of determining gain, it is unclear
how the subscription rights would be valued or how to determine
the number of subscription rights that would be taxable to an
Eligible Policyholder upon their receipt.
In at least one private letter ruling involving a thrift
transaction, the IRS ruled that a recipient of subscription
rights will recognize gain if and only to the extent such
recipient exercises such subscription rights. Under this
analysis, the amount of the gain would be the fair market value
of the subscription rights that are actually exercised. Since
the subscription rights are nontransferable, nonnegotiable
personal rights that may be exercised only in connection with the
Conversion and the Subscription Offering, the amount of gain a
recipient should be required to recognize under this analysis
should be approximately equal to the excess of (a) the fair
market value of the Common Stock purchased by the Eligible
Policyholder pursuant to the exercise of subscription rights on
the date such stock is purchased, over (b) the purchase price
payable by the Eligible Policyholder pursuant to the exercise of
such rights. Although not free from doubt, provided the
subscription rights are capital assets in the hands of an
Eligible Policyholder, any gain resulting from the exercise of
the subscription rights should constitute a capital gain.
Under the analysis of the private letter rulings described
above, Eligible Policyholders should not realize or recognize any
income, gain, loss or deduction upon the receipt of subscription
rights, or upon the exercise or lapse of such subscription
rights, because the fair market value of the Common Stock that an
Eligible Policyholder could elect to purchase on the exercise of
subscription rights should not exceed the purchase price payable
by the Eligible Policyholder pursuant to the exercise of such
rights. In other words, under the analysis of the rulings
described above, the subscription rights should be treated as
having no fair market value, and Eligible Policyholders should
not realize or recognize any income or gain on the receipt or
exercise of such rights, because the purchase price payable by
the Eligible Policyholder upon the exercise of such rights is
equal to the fair market value of the Common Stock on the
Effective Date.
Nevertheless, if the subscription rights are treated as
having fair market value, it is likely that each Eligible
Policyholder will be required to recognize gain equal to (i) the
fair market value of the rights that are allocated to the
Eligible Policyholder in the Subscription Offering, or (ii) the
fair market value of the rights that are exercised by the
Eligible Policyholder, depending upon the analysis of the
Conversion and the Subscription Offering that may be asserted by
the IRS. Eligible Policyholders may be required to recognize
such gain even though Eligible Policyholders will not receive any
cash in the proposed transactions. Moreover, the IRS may also
assert that the Insurance Companies should recognize gain on the
distribution of the subscription rights in an amount equal to the
aggregate fair market value of the subscription rights.
In the opinion of Berwind, the subscription rights do not
have any fair market value, inasmuch as such rights are
nontransferable, personal rights of short duration, that are
provided to Eligible Policyholders and other participants in the
Subscription Offering without charge, and afford the holder only
the right to purchase shares of Common Stock in the Subscription
Offering at a price equal to its estimated fair market value,
which is the same price at which such stock will be sold to
purchasers in the Community Offering or the Public Offering, if
any. Nevertheless, Eligible Policyholders are encouraged to
consult with their tax advisors about the tax consequences of the
Conversion and the Subscription Offering.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT
PURPORT TO CONSIDER ALL ASPECTS OF FEDERAL INCOME TAXATION THAT
MAY BE RELEVANT TO EACH ELIGIBLE POLICYHOLDER ENTITLED TO SPECIAL
TREATMENT UNDER THE CODE, SUCH AS TRUSTS, INDIVIDUAL RETIREMENT
ACCOUNTS, OTHER EMPLOYEE BENEFIT PLANS, INSURANCE COMPANIES, AND
ELIGIBLE POLICYHOLDERS WHO ARE NOT CITIZENS OR RESIDENTS OF THE
UNITED STATES. DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES,
EACH ELIGIBLE POLICYHOLDER IS URGED TO CONSULT HIS OR HER TAX AND
FINANCIAL ADVISOR AS TO THE EFFECT OF SUCH FEDERAL INCOME TAX
CONSEQUENCES ON HIS OR HER OWN PARTICULAR FACTS AND
CIRCUMSTANCES, INCLUDING THE RECEIPT AND EXERCISE OF SUBSCRIPTION
RIGHTS, AND ALSO AS TO ANY STATE, LOCAL, FOREIGN OR OTHER TAX
CONSEQUENCES ARISING OUT OF THE CONVERSION.
Purchases in the Offering.
Termination Dates.
The Subscription Offering will expire at __:__ _.m., local
time, on ___________, 1996, unless extended by the Board of
Directors of the Company with regulatory approval for up to an
additional ________ days (the "Subscription Offering Termination
Date"). Subscription rights not exercised prior to the
Subscription Offering Termination Date will be void. The
Community Offering will terminate on the Subscription Offering
Termination Date, unless extended by the Board of Directors of
the Company for up to an additional ___ days (the "Community
Offering Termination Date").
Orders will not be executed by the Company until at least
the minimum number of shares of Common Stock offered have been
subscribed for or sold. If at least the minimum number of shares
of Common Stock offered have not been subscribed for or sold
within 45 days of the end of the Subscription Offering (unless
such period is extended with consent of the Department), all
funds delivered to the Company pursuant to the Subscription
Offering will be promptly returned to subscribers.
Use of Order Forms.
Rights to subscribe may be exercised only by completion of a
Stock Order Form. Any person who desires to subscribe for shares
of Common Stock must do so prior to the Subscription Offering
Termination Date or Community Offering Termination Date, as the
case may be, by delivering (by mail or in person) to the
Company's principal executive offices located at 2929 Lititz
Pike, Lancaster, Pennsylvania 17601 a properly executed and
completed Stock Order Form and an acknowledgement form, together
with full payment for all shares for which the subscription is
made. All checks or money orders must be made payable to
"______________________________." All subscription rights under
the Plan will expire on the Subscription Offering Termination
Date whether or not the Company has been able to locate each
person entitled to such subscription rights. Once tendered,
orders to purchase Common Stock in the Offering cannot be
revoked. In order to ensure that Eligible Policyholders are
properly identified as to their stock purchase priorities, such
persons must list all of their insurance policies with the
Insurance Companies on the Stock Order Form.
To ensure that each purchaser receives a prospectus at least
48 hours prior to the Subscription Offering Termination Date in
accordance with Rule 15c2-8 under the Exchange Act, no Prospectus
will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date.
Execution of the Stock Order Form will confirm receipt or
delivery in accordance with Rule 15c2-8. Stock Order Forms will
be distributed only with a Prospectus. An acknowledgement form
is required to be signed and returned with a Stock Order Form.
The Company will accept for processing only orders submitted on
original Stock Order Forms. Photocopies and facsimile copies of
Stock Order Forms will not be accepted. Payment by cash, check
or money order must accompany the Stock Order Form. No wire
transfers will be accepted.
Each subscription right may be exercised only by the
Eligible Policyholder to whom it is issued and only for his or
her own account. The subscription rights granted under the Plan
are nontransferable. Each Eligible Policyholder subscribing for
shares of Common Stock is required to represent to the Company
that such Eligible Policyholder is purchasing such shares for
such Eligible Policyholder's own account and that such Eligible
Policyholder has no agreement or understanding with any other
person for the sale or transfer of such shares.
In the event a Stock Order Form (i) is not delivered and is
returned to the sender by the United States Postal Service or the
Company is unable to locate the addressee, (ii) is not returned
or is received after the Subscription Offering Termination Date
or Community Offering Termination Date, as the case may be,
(iii) is defectively completed or executed, or (iv) is not
accompanied by payment in full for the shares of Common Stock
subscribed for, the subscription rights of the Eligible
Policyholder to whom such rights have been granted will not be
honored or the subscriber participating in the Community
Offering, as the case may be, will be treated as having failed to
return the completed Stock Order Form within the time period
specified therein. Alternatively, the Company may (but will not
be required to) waive any irregularity relating to any Stock
Order Form or require the submission of a corrected Stock Order
Form or the remittance of full payment for the shares of Common
Stock subscribed for by such date as the Company may specify.
Subscription orders, once tendered, may not be revoked. The
Company's interpretations of the terms and conditions of the Plan
and determinations with respect to the acceptability of the Stock
Order Forms will be final, conclusive and binding upon all
persons and neither the Company nor any Insurance Company (or the
directors, officers, employees and agents of any of them) shall
be liable to any person in connection with any such
interpretation or determination.
Payment for Shares.
Payment in full for all subscribed shares of Common Stock is
required to accompany all completed Stock Order Forms for
subscriptions to be considered complete. Payment for subscribed
shares of Common Stock may be made by cash, check or money order
in U.S. Dollars. Payments made by cash, check or money order
will be placed in an Escrow Account at
______________________________. The Escrow Account will be
administered by ______________________________ (the "Escrow
Agent"). An executed Stock Order Form, once received by the
Company, may not be modified, amended or rescinded without the
consent of the Company, unless the Conversion is not completed
within 45 days of the termination of the Subscription Offering or
Community Offering, as the case may be. Payments accompanying
such Stock Order Forms would not be available to subscribers for
such 45-day period, and may not be available for up to an
additional period of time if an extension of the period of time
for completion of the Conversion is approved by the Department
and subscribers affirm or modify but do not rescind their orders
after the initial 45-day period. If an extension of the period
of time to complete the Conversion is approved by the Department,
subscribers will be resolicited and must confirm their orders
prior to the expiration of the extension granted by the
Department. Subscribers who do not confirm their orders upon
resolicitation during an extension period granted by the
Department will be deemed to have cancelled their subscriptions
and their subscription funds will be promptly refunded. During
an extension period granted by the Department, subscribers may
also modify or cancel their subscriptions. No interest will be
paid on such funds during the 45-day period or any approved
extension period.
The ESOP will not be required to pay for the shares
subscribed for at the time it subscribes, but may pay for such
shares upon completion of the Offering.
Delivery of Certificates.
Certificates representing shares of the Common Stock will be
delivered to subscribers promptly after completion of the
Offering and the Public Offering. Until certificates for the
Common Stock are available and delivered to subscribers,
subscribers may not be able to sell the shares of Common Stock
for which they subscribed even though trading of the Common Stock
will have commenced.
Marketing Arrangements in the Offering
The Company has engaged Hopper Soliday to serve as financial
advisor to the Company and the Insurance Companies with respect
to the Offering. Hopper Soliday is a registered broker-dealer
and is a member of the NASD. Hopper Soliday will assist the
Company and the Insurance Companies in the Conversion by, among
other things, (i) developing marketing materials; (ii) targeting
potential investors in the Subscription Offering and other
investors eligible to participate in the Community Offering;
(iii) soliciting potential investors by phone or in person;
(iv) training management and staff to perform tasks in connection
with the Conversion; (v) establishing and managing the Conversion
Center; and (vi) managing the subscription campaign.
Subject to the limitations described below, for Hopper
Soliday's services in the Offering, the Company has paid Hopper
Soliday a financial advisory fee equal to $50,000. Upon
completion of the Offering, Hopper Soliday will also receive an
advisory and administrative fee equal to 3% of the dollar value
of all stock sold in the Offering, except for sales to the ESOP,
shares sold to directors, officers and employees of the Company
and the Insurance Companies and the associates of such directors,
officers and employees, and certain designated providers of goods
and services. Hopper Soliday shall be reimbursed for its
expenses, including its legal fees, up to $40,000. The Company
will reimburse Hopper Soliday for any expenses in excess of
$40,000 if Hopper Soliday incurred such expenses with the written
consent of the Company. If the Conversion is not completed,
Hopper Soliday will be entitled to retain the $50,000 financial
advisory fee and will be reimbursed for all out-of-pocket
expenses. The Company has also agreed to indemnify Hopper
Soliday against certain liabilities arising in connection with
the Conversion and the Offering. See "Public Offering" herein.
Description of Sales Activities in the Offering
The Common Stock will be offered in the Offering principally
by the distribution of this Prospectus and through activities
conducted at the Conversion Center, which is expected to operate
during normal business hours throughout the Offering. Employees
of Hopper Soliday will manage the Conversion Center and will have
overall responsibility for mailing materials relating to the
Offering, responding to questions regarding the Conversion and
processing proxies and stock order forms. It is anticipated that
certain employees of the Insurance Companies will be present in
the Conversion Center to assist employees of Hopper Soliday with
administrative matters and proxy and stock order solicitation.
In addition to the activity in the Conversion Center,
certain officers of the Insurance Companies will participate in
marketing the Offering and may contact potential offerees. It is
also expected that the President of the Company and members of
the Company's Board of Directors may contact potential offerees
to discuss the Offering.
During the Offering, officers of the Company and the
Insurance Companies will be available to answer questions about
the Offering and also may hold informational meetings for
interested persons. Such officers will not be permitted to make
statements about the Insurance Companies unless such information
is also set forth in the Prospectus, nor may they render
investment advice. None of the Insurance Companies' employees or
directors who participate in marketing the Offering, either in
the Conversion Center or otherwise, will receive any special
compensation or other remuneration for such activities.
None of the Company's or Insurance Companies' personnel
participating in marketing the Offering are registered or
licensed as a broker or dealer or an agent of a broker or dealer.
Personnel of the Company and the Insurance Companies will assist
in the above-described sales activities pursuant to an exemption
from registration as a broker or dealer provided by Rule 3a4-1
("Rule 3a4-1") promulgated under the Exchange Act. Rule 3a4-1
generally provides that an "associated person of an issuer" of
securities shall not be deemed a broker solely by reason of
participation in the sale of securities of such issuer if the
associated person meets certain conditions. Such conditions
include, but are not limited to, that the associated person
participating in the sale of an issuer's securities not be
compensated in connection therewith at the time of participation,
that such person not be associated with a broker or dealer and
that such person observe certain limitations on his or her
participation in the sale of securities. For purposes of this
exemption, "associated person of an issuer" is defined to include
any person who is a director, officer or employee of the issuer
or a company that controls, is controlled by or is under common
control with the issuer.
Public Offering
As a final step in the sale of shares of Common Stock to be
issued in the Conversion, all shares of Common Stock not
purchased in the Offering may be sold to a syndicate of
underwriters to be managed by the Underwriters for resale in a
firm commitment Public Offering. It is anticipated that the
Underwriters will purchase shares not subscribed for in the
Offering at the Purchase Price less an underwriting discount. An
underwriting agreement between the Company and the Underwriters,
as representatives for the syndicate, will not be entered into
until immediately prior to the Public Offering. Pursuant to the
underwriting agreement, the Underwriters will be obligated,
subject to certain conditions, to purchase all shares of Common
Stock that have not been subscribed for in the Offering. In the
event shares of Common Stock are sold in the Public Offering, the
Underwriters will be paid an underwriters' discount (gross
spread) of 6.5% of the aggregate purchase price of all shares
sold in the Public Offering (including the underwriting discount
on shares sold pursuant to the exercise of the Underwriters'
overallotment option of 15% of the shares sold in the Offering
and the Public Offering), subject to the Underwriters' right to
receive a minimum payment of $300,000, regardless of the number
of shares of Common Stock sold in the Public Offering.
In the event no shares of Common Stock are available for
sale after completion of the Offering, the Company will pay the
Underwriters $150,000. In the event the Conversion is abandoned
for any reason other than as a result of the Underwriters'
refusal to proceed, without cause, or the Conversion is not
completed by March 31, 1997, the Underwriters will be reimbursed
for their expenses up to $150,000, including any portion of such
expenses allocable to Hopper Soliday.
The number of shares offered in the Public Offering and the
amount of the overallotment option, if any, will be determined if
and when a Public Offering occurs. If an underwriting agreement
is entered into in connection with the Public Offering, it also
is expected to contain provisions under which the Company will
indemnify the Underwriters.
The Public Offering will commence as soon as practicable
following the later of the Subscription Offering Termination Date
or Community Offering Termination Date and must be completed
within 45 days after the Subscription Offering Termination Date
unless such period is extended with the approval of the
Department. In the event such an extension is approved by the
Department, subscribers would be given the opportunity to
increase, decrease or rescind their subscriptions. The
commencement and completion of the Public Offering will be
subject to market conditions and other factors beyond the
Company's control. Accordingly, no assurance can be given that
the Public Offering will commence immediately after the
Subscription Offering Termination Date or as to the length of
time that will be required to complete the sale of all shares of
Common Stock offered in the Conversion. If delays are
experienced in the commencement or completion of the Public
Offering, significant changes may occur in the estimated pro
forma market value of the Common Stock, together with
corresponding changes in the offering price, the number of shares
being offered and the net proceeds realized from the sale of the
Common Stock. In such event, additional printing, legal and
accounting expenses may be incurred by the Company to complete
the Conversion.
Surplus Note
Pursuant to the terms of a $6,000,000 promissory note, dated
December 20, 1989, as amended (the "Surplus Note"), payable by
Old Guard Mutual to American Re, American Re has the right to
convert the outstanding principal balance of the Surplus Note
into that number of shares of Common Stock equal to the
outstanding principal balance divided by the Purchase Price upon
completion of the Conversion. The outstanding principal balance
of the Surplus Note was $2.25 million at June 30, 1996; a
principal payment of $750,000 was made in July 1996 reducing the
outstanding principal balance to $1.5 million. American Re has
elected to convert the Surplus Note into 150,000 shares of Common
Stock. Upon the issuance of such shares, the Surplus Note shall
be cancelled. These shares are in addition to the shares of
Common Stock offered and sold in the Offering. See "Pro Forma
Data."
Limitations on Purchases of Common Stock
The Plan provides for certain limitations upon the purchase
of shares in the Conversion. No person may purchase fewer than
25 shares of Common Stock in the Conversion. No purchases of
shares of Common Stock in the Offering by any person, when
aggregated with purchases by such person's affiliates and
associations (as defined in the Plan), or by a group of persons
acting in concert (as defined in the Plan), shall exceed five
percent (5%) of that number of shares of Common Stock equal to
the maximum of the Estimated Valuation Range divided by the
Purchase Price, except that the ESOP may purchase up to ten
percent (10%) of the total shares of Common Stock equal to the
maximum of the Estimated Valuation Range divided by the Purchase
Price. Shares of Common Stock to be held by the ESOP and
attributable to a participant thereunder shall not be aggregated
with shares of Common Stock purchased by such participant or any
other purchaser of Common Stock in the Conversion. Officers and
directors of the Insurance Companies and the Company, together
with their associates, may not purchase, in the aggregate, more
than thirty-four percent (34%) of the shares of Common Stock.
Directors of the Company and of the Insurance Companies shall not
be deemed to be associates of one another or a group acting in
concert with other directors solely as a result of membership on
the Board of Directors of the Company or the Board of Directors
of any Insurance Company or any subsidiary of an Insurance
Company. Subject to any required regulatory approval and the
requirements of applicable law, the Company may increase or
decrease any of the purchase limitations at any time. In the
event that the individual purchase limitation is increased after
commencement of the Subscription Offering and the Community
Offering, the Company shall permit any person who subscribed for
the maximum number of shares of Common Stock to purchase an
additional number of shares, such that such person shall be
permitted to subscribe for the then maximum number of shares
permitted to be subscribed for by such person, subject to the
rights and preferences of any person who has priority
subscription rights. In the event that either the individual
purchase limitation or the number of shares of Common Stock to be
sold in the Conversion is decreased after commencement of the
Subscription Offering and the Community Offering, the order of
any person who subscribed for the maximum number of shares of
Common Stock shall be decreased by the minimum amount necessary
so that such person shall be in compliance with the then maximum
number of shares permitted to be subscribed for by such person.
Each person purchasing Common Stock in the Conversion shall
be deemed to confirm that such purchase does not conflict with
the purchase limitations under the Plan or otherwise imposed by
law. In the event that such purchase limitations are violated by
any person (including any associate or affiliate of such person
or person otherwise acting in concert with such person), the
Company shall have the right to purchase from such person at the
Purchase Price all shares acquired by such person in excess of
any such purchase limitation or, if such excess shares have been
sold by such person, to receive the difference between the
aggregate Purchase Price paid for such excess shares and the
proceeds received by such person from the sale of such excess
shares. This right of the Company to purchase such excess shares
shall be assignable by the Company.
Proposed Management Purchases
The following table sets forth information regarding the
approximate number of shares of Common Stock intended to be
purchased by each of the directors, trustees and executive
officers of the Company and the Insurance Companies, including
each such person's associates, and by all directors, trustees and
executive officers as a group, including all of their associates,
and other related information. For purposes of the following
table, it has been assumed that 3,357,000 shares of the Common
Stock will be sold at $10 per share, the midpoint of the
Estimated Valuation Range (see "The Conversion -- Stock Pricing
and Number of Shares to be Issued") and that sufficient shares
will be available to satisfy subscriptions in all categories.
Total
Name Shares(1)(2)(3)
Robert C. Alderfer (4) 500
James W. Appel (5) 1,000
John E. Barry (5) 1,000
Luther R. Campbell, Jr. (6) 3,000
M. Scott Clemens (6) 2,500
Steven D. Dyer (7) 5,000
Stanley E. Honig (8) 5,000
David E. Hosler (9) 12,000
William S. Huber (8) 1,000
Mark J. Keyser (10) 6,000
Noah W. Kreider, Jr. (11) 500
C. Donald Lechner (4) 500
Donald W. Manley (12) 5,000
Richard B. Neiley, Jr. (5) 500
Scott A. Orndorff (12) 6,000
Robert L. Spanninger (4) 500
G. Arthur Weaver (13) 500
Robert L. Wechter (13) 250
------
Total 50,750
____________
(1) Does not include shares that could be allocated to
participants in the ESOP, under which officers and other
employees would be allocated, in the aggregate, 10% of the
Common Stock issued in the Conversion.
(2) Does not include shares that would be awarded to
participants in the MRP, if implemented, under which
directors, officers and other employees would be awarded, at
no cost to them, an aggregate number of newly issued shares
equal to 4% of the Common Stock issued in the Conversion
(134,280 shares at the midpoint of the Estimated Valuation
Range). The dollar amount of the Common Stock to be
purchased by the MRP is based on the purchase price in the
Conversion and does not reflect possible increases or
decreases in the value of such stock relative to the price
per share in the Conversion. Implementation of the MRP
requires shareholder approval.
(3) Does not include shares that would be purchased by
participants in the Compensation Plan, if implemented, under
which directors, executive officers and other employees
would be granted options to purchase an aggregate amount of
Common Stock equal to 10% of the shares issued in the
Conversion (335,700 shares at the midpoint of the Estimated
Valuation Range) at exercise prices equal to the price at
which the Common Stock is sold in the Offering. Shares
issued pursuant to the exercise of options could be from
treasury stock or newly issued shares. Implementation of
the Compensation Plan requires shareholder approval.
(4) Director of Goschenhoppen.
(5) Director of the Company and the Insurance Companies.
(6) Director of the Company and Old Guard Mutual.
(7) Secretary and General Counsel of the Company.
(8) Director of Old Guard Fire.
(9) Chairman of the Board and Chief Executive Officer of the
Company and the Insurance Companies and President of the
Company, Old Guard Mutual and Old Guard Fire.
(10) Treasurer and Chief Financial Officer of the Company and the
Insurance Companies.
(11) Director of Old Guard Mutual and Old Guard Fire.
(12) Vice President of the Company and the Insurance Companies.
(13) Director of the Company, Old Guard Mutual and Old Guard
Fire.
Limitations on Resales
The Common Stock issued in the Conversion will be freely
transferable under the Securities Act of 1933, as amended (the
"1933 Act"); provided, however that (i) shares issued in a
Private Placement, if any, would be subject to transfer
restrictions under Rule 144 of the 1933 Act and (ii) shares
issued to directors and officers of any of the Insurance
Companies or of the Company would be restricted as to transfer
for a period of one year from the Effective Date pursuant to the
provisions of the Conversion Act and would be subject to
additional resale restrictions under Rule 144 of the 1933 Act.
Shares of Common Stock issued to directors and officers will bear
a legend giving appropriate notice of these restrictions and the
Company will give instructions to the transfer agent for the
Common Stock with respect to these transfer restrictions. Any
shares issued to directors and officers as a stock dividend,
stock split or otherwise with respect to restricted stock shall
be subject to the same restrictions. Shares acquired by
directors and officers other than in the Conversion will not be
subject to certain restrictions.
In addition, under guidelines of the NASD, members of the
NASD and their associates are subject to certain restrictions on
the transfer of securities purchased in accordance with
subscription rights and to certain reporting requirements upon
purchase of such securities.
Interpretation and Amendment of the Plan of Conversion
To the extent permitted by law, all interpretations of the
Plan by the Board of Directors of each Insurance Company and the
Board of Directors of the Company will be final. The Plan may be
amended at any time before it is approved by the Department by
the affirmative vote of two-thirds of the directors of the
Company and each Insurance Company. The Plan similarly may be
amended at any time after it is approved by the Department,
subject to the Department's approval of such amendment. The Plan
may be amended at any time after it is approved by the Eligible
Policyholders of each Insurance Company and prior to the
Effective Date by the affirmative vote of two-thirds of the
directors of the Company and of each Insurance Company then in
office; provided, however, that any such amendment shall be
subject to approval by the Department; and provided further,
that, if such amendment is determined by the Department to be
material, such amendment shall be subject to approval by the
affirmative vote of at least two-thirds of the votes cast at a
meeting of Eligible Policyholders called for that purpose.
In the event that the Department adopts mandatory
regulations applicable to the Conversion prior to the Effective
Date, the Plan may be amended to conform to such regulations at
any time prior to such Effective Date by the affirmative vote of
two-thirds of the directors of the Company and of each Insurance
Company, and no resolicitation of proxies or further approval by
Eligible Policyholders shall be required. In the event that the
Department adopts regulations applicable to the Conversion prior
to the Effective Date and if such regulations contain optional
provisions, the Plan may be amended to conform to any such
optional provision at any time before such Effective Date by the
affirmative vote of two-thirds of the directors of the Company
and of each Insurance Company, and no resolicitation of proxies
or further approval by Eligible Policyholders shall be required.
Termination
The Plan may be terminated at any time before it is approved
by the Department by the affirmative vote of two-thirds of the
directors of the Company and of each Insurance Company. The Plan
may be terminated at any time after it is approved by the
Department by the affirmative vote of two-thirds of the directors
of the Company and of each Insurance Company. The Plan may be
terminated at any time after it is approved by Eligible
Policyholders and prior to the Effective Date by the affirmative
vote of two-thirds of the directors of the Company and of each
Insurance Company; provided, however, that any such termination
shall be subject to approval by the Department.
Conditions
As required by the Plan, the Plan has been approved by the
Department and the Board of Directors of the Company and each of
the Insurance Companies. Completion of the Conversion also
requires approval of the Plan by the affirmative vote of at least
two-thirds of the votes cast by Eligible Policyholders of each of
the Insurance Companies. If the Eligible Policyholders do not
approve the Plan, the Plan will be terminated, and the Insurance
Companies will continue to conduct business as mutual insurance
companies.
CERTAIN RESTRICTIONS ON ACQUISITION
OF THE COMPANY
Pennsylvania Law
The Pennsylvania BCL contains certain provisions applicable
to the Company that may have the effect of impeding a change in
control of the Company. These provisions, among other things,
(a) require that, following any acquisition by any person or
group of 20% of a public corporation's voting power, the
remaining shareholders have the right to receive payment for
their shares, in cash, from such person or group in an amount
equal to the "fair value" of their shares, including an increment
representing a proportion of any value payable for acquisition of
control of the corporation; and (b) prohibit, for five years
after an interested shareholder's acquisition date, a "business
combination" (which includes a merger or consolidation of the
corporation or a sale, lease or exchange of assets having a
minimum specified aggregate value or representing a minimum
specified percentage earning power or net income of the
corporation) with a shareholder or group of shareholders
beneficially owning 20% or more of a public corporation's voting
power.
In 1990, the Pennsylvania legislature further amended the
Pennsylvania BCL to expand the antitakeover protections afforded
by Pennsylvania law by redefining the fiduciary duty of directors
and adopting disgorgement and control-share acquisition statutes.
To the extent applicable to the Company at the present time, this
legislation generally (a) expands the factors and groups
(including shareholders) that the Board of Directors can consider
in determining whether a certain action is in the best interests
of the corporation; (b) provides that the Board of Directors need
not consider the interests of any particular group as dominant or
controlling; (c) provides that directors, in order to satisfy the
presumption that they have acted in the best interests of the
corporation, need not satisfy any greater obligation or higher
burden of proof with respect to actions relating to an
acquisition or potential acquisition of control; (d) provides
that actions relating to acquisitions of control that are
approved by a majority of "disinterested directors" are presumed
to satisfy the directors' standard unless it is proven by clear
and convincing evidence that the directors did not assent to such
action in good faith after reasonable investigation; and
(e) provides that the fiduciary duty of directors is solely to
the corporation and may be enforced by the corporation or by a
shareholder in a derivative action, but not by a shareholder
directly. The 1990 amendments to the BCL explicitly provide that
the fiduciary duty of directors shall not be deemed to require
directors (a) to redeem any rights under, or to modify or render
inapplicable, any shareholder rights plan; (b) to render
inapplicable, or make determinations under, provisions of the BCL
relating to control transactions, business combinations, control-
share acquisitions or disgorgement by certain controlling
shareholders following attempts to acquire control; or (c) to act
as the board of directors, a committee of the board or an
individual director solely because of the effect such action
might have on an acquisition or potential or proposed acquisition
of control of the corporation or the consideration that might be
offered or paid to shareholders in such an acquisition. One of
the effects of these fiduciary duty provisions may be to make it
more difficult for a shareholder to successfully challenge the
actions of the Company's Board of Directors in a potential change
in control context. Pennsylvania case law appears to provide
that the fiduciary duty standard under the 1990 amendment to the
BCL grants directors the statutory authority to reject or refuse
to consider any potential or proposed acquisition of the
corporation.
Under the Pennsylvania control-share acquisition statute, a
person or group is entitled to voting rights with respect to
"control shares" only after shareholders (both disinterested
shareholders and all shareholders) have approved the granting of
such voting rights at a meeting of shareholders. "Control
shares" are shares acquired since January 1, 1988, that upon
acquisition of voting power by an "acquiring person," would
result in a "control-share acquisition." ("Control shares" also
include voting shares where beneficial ownership was acquired by
the "acquiring person" within 180 days of the control-share
acquisition or with the intention of making a control-share
acquisition.) An "acquiring person" is a person or group who
makes or proposes to make a "control-share acquisition." A
"control-share acquisition" is an acquisition, directly or
indirectly, of voting power over voting shares that would, when
added to all voting power of the person over other voting shares,
entitle the person to cast or direct the casting of such
percentage of votes for the first time with respect to any of the
following ranges that all shareholders would be entitled to cast
in an election of directors: (a) at least 20% but less than
33-1/3%; (b) at least 33-1/3 but less than 50%; or (c) 50% or
more. The effect of these provisions is to require a new
shareholder vote when each threshold is exceeded. In the event
shareholders do not approve the granting of voting rights, voting
rights are lost only with respect to "control shares."
A special meeting of shareholders is required to be called
to establish voting rights of control shares if an acquiring
person (a) files with the corporation an information statement
containing specified information, (b) makes a written request for
a special meeting at the time of delivery of the information
statement, (c) makes a control-share acquisition or a bona fide
written offer to make a control-share acquisition, and
(d) provides a written undertaking at the time of delivery of the
information statement to pay or reimburse the corporation for
meeting expenses. If the information statement is filed and a
control-share acquisition is made or proposed to be made, but no
request for a special meeting is made or no written undertaking
to pay expenses is provided, the issue of voting rights will be
submitted to shareholders at the next annual or special meeting
of shareholders of the corporation.
A corporation may redeem all "control shares" at the average
of the high and low sales price, as reported on a national
securities exchange or national quotation system or similar
quotation system, on the date the corporation provides notice of
redemption (a) at any time within 24 months after the date on
which the control-share acquisition occurs if the acquiring
person does not, within 30 days after the completion of the
control-share acquisition, properly request that shareholders
consider the issue of voting rights to be accorded to control
shares and (b) at any time within 24 months after the issue of
voting rights is submitted to shareholders and such voting rights
either are not accorded or are accorded and subsequently lapse.
Voting rights accorded to control shares by a vote of
shareholders lapse and are lost if any proposed control-share
acquisition is not consummated within 90 days after shareholder
approval is obtained.
A person will not be considered an "acquiring person" if the
person holds voting power within any of the ranges specified in
the definition of "control-share acquisition" as a result of a
solicitation of revocable proxies if such proxies (a) are given
without consideration in response to a proxy or consent
solicitation made in accordance with the Exchange Act and (b) do
not empower the holder to vote the shares except on the specific
matters described in the proxy and in accordance with the
instructions of the giver of the proxy.
The statute does not apply to certain control-share
acquisitions effected pursuant to a gift or laws of inheritance,
in connection with certain family trusts or pursuant to a merger,
consolidation or plan of share exchange if the corporation is a
party to the agreement.
The effect of this statutory provision is to deter the
accumulation of a substantial block of Common Stock, including
accumulation with a view to effecting a non-negotiated tender or
exchange offer for Common Stock.
Under the disgorgement provisions of the Pennsylvania BCL,
any profit realized by any person or group who is or was a
"controlling person or group" from the disposition of any equity
security of a corporation shall belong to and be recoverable by
the corporation where the profit is realized (i) within 18 months
after the person becomes a "controlling person or group" and
(ii) the equity security had been acquired by the "controlling
person or group" within 24 months prior to or 18 months after
obtaining the status of a "controlling person or group."
A "controlling person or group" is a person or group who
(a) has acquired, offered to acquire or, directly or indirectly,
publicly disclosed the intention of acquiring 20% voting power of
the corporation or (b) publicly disclosed that it may seek to
acquire control of the corporation.
A person will not be deemed a "controlling person or group"
if the person holds voting power as a result of a solicitation of
revocable proxies if, among other things, such proxies (a) are
given without consideration in response to a proxy or consent
solicitation made in accordance with the Exchange Act and (b) do
not empower the holder to vote the shares except on the specific
matters described in the proxy and in accordance with the
instructions of the giver of the proxy. This exception does not
apply to proxy contests in connection with or as a means toward
acquiring control of the Company.
The effect of this statutory provision is to deter the
accumulation of a substantial block of Common Stock with a view
to putting the Company "in play" and then selling shares at a
profit (whether to the Company, in the market or in connection
with an acquisition of the Company).
Certain Anti-Takeover Provisions in the Articles of Incorporation
and Bylaws
While the Board of Directors of the Company is not aware of
any effort that might be made to obtain control of the Company
after Conversion, the Board believes that it is appropriate to
include certain provisions as part of the Company's Articles of
Incorporation to protect the interests of the Company and its
shareholders from hostile takeovers that the Board might conclude
are not in the best interests of the Company or the Company's
shareholders. These provisions may have the effect of
discouraging a future takeover attempt that is not approved by
the Board but which individual shareholders may deem to be in
their best interests or in which shareholders may receive a
substantial premium for their shares over the then current market
price. As a result, shareholders who might desire to participate
in such a transaction may not have an opportunity to do so. Such
provisions will also render the removal of the Company's current
Board of Directors or management more difficult.
The following discussion is a general summary of certain
provisions of the Articles of Incorporation and Bylaws of the
Company that may be deemed to have such an "anti-takeover"
effect. The description of these provisions is necessarily
general and reference should be made in each case to the Articles
of Incorporation and Bylaws of the Company. For information
regarding how to obtain a copy of these documents without charge,
see "Additional Information."
Classified Board of Directors and Related Provisions
The Company's Articles of Incorporation provide that the
Board of Directors is to be divided into three classes which
shall be as nearly equal in number as possible. The directors in
each class will hold office following their initial appointment
to office for terms of one year, two years and three years,
respectively, and, upon reelection, will serve for terms of three
years thereafter. Each director will serve until his or her
successor is elected and qualified. The Articles of
Incorporation provide that a director may be removed by
shareholders only upon the affirmative vote of at least a
majority of the votes which all shareholders would be entitled to
cast. The Articles of Incorporation further provide that any
vacancy occurring in the Board of Directors, including a vacancy
created by an increase in the number of directors, shall be
filled for the remainder of the unexpired term by a majority vote
of the directors then in office.
A classified board of directors could make it more difficult
for shareholders, including those holding a majority of the
outstanding shares, to force an immediate change in the
composition of a majority of the Board of Directors. Because the
terms of only one-third of the incumbent directors expire each
year, it requires at least two annual elections for the
shareholders to change a majority, whereas a majority of a non-
classified board may be changed in one year. In the absence of
the provisions of the Articles of Incorporation classifying the
Board, all of the directors would be elected each year.
Management of the Company believes that the staggered
election of directors tends to promote continuity of management
because only one-third of the Board of Directors is subject to
election each year. Staggered terms guarantee that in the
ordinary course approximately two-thirds of the Directors, or
more, at any one time have had at least one year's experience as
directors of the Company, and moderate the pace of change in the
composition of the Board of Directors by extending the minimum
time required to elect a majority of Directors from one to two
years.
Other Antitakeover Provisions
The Company's Articles of Incorporation and Bylaws contain
certain other provisions that may also have the effect of
deterring or discouraging, among other things, a non-negotiated
tender or exchange offer for the Common Stock, a proxy contest
for control of the Company, the assumption of control of the
Company by a holder of a large block of the Common Stock and the
removal of the Company's management. These provisions:
(1) empower the Board of Directors, without shareholder approval,
to issue preferred stock, the terms of which, including voting
power, are set by the Board; (2) restrict the ability of
shareholders to remove directors; (3) require that shares with at
least 80% of total voting power approve mergers and other similar
transactions with a person or entity holding Common Stock with
more than 5% of the Company's voting power, if the transaction is
not approved, in advance, by the Board of Directors; (4) prohibit
shareholders' actions without a meeting; (5) require that shares
with at least 80%, or in certain instances a majority, of total
voting power approve the repeal or amendment of the Articles of
Incorporation; (6) require any person who acquires stock of the
Company with voting power of 25% or more to offer to purchase for
cash all remaining shares of the Company's voting stock at the
highest price paid by such person for shares of the Company's
voting stock during the preceding year; (7) limit the right of a
person or entity to vote more than 10% of the Company's voting
stock; (8) eliminate cumulative voting in elections of directors;
and (9) require that shares with at least 66-2/3% of total voting
power approve, repeal or amend the Bylaws.
DESCRIPTION OF CAPITAL STOCK
General
The Company is authorized to issue 15,000,000 shares of
Common Stock, without par value, and 5,000,000 shares of
preferred stock, having such par value as the Board of Directors
of the Company shall fix and determine. The Company currently
expects to issue between 2,853,450 and 4,010,600 shares, subject
to adjustment, of the Common Stock and no shares of preferred
stock in the Conversion. The Company has reserved for future
issuance under the Compensation Plan and MRP an amount of
authorized but unissued shares of Common Stock equal to 10% and
4%, respectively, of the shares to be issued in the Conversion.
Common Stock
Voting Rights
Each share of the Common Stock will have the same
relative rights and will be identical in all respects with every
other share of the Common Stock. The holders of the Common Stock
will possess exclusive voting rights in the Company, except to
the extent that shares of preferred stock issued in the future
may have voting rights, if any. Each holder of shares of the
Common Stock will be entitled to one vote for each share held of
record on all matters submitted to a vote of holders of shares of
the Common Stock. Holders of Common Stock will not be entitled
to cumulate their votes for election of directors.
Dividends
The Company may, from time to time, declare dividends to the
holders of Common Stock, who will be entitled to share equally in
any such dividends. For additional information as to cash
dividends, see "Dividend Policy."
Liquidation
In the event of any liquidation, dissolution or winding up
of any or all of the Insurance Companies, the Company, as holder
of all of the capital stock of the Insurance Companies, would be
entitled to receive all assets of the Insurance Companies after
payment of all debts and liabilities of the Insurance Companies.
In the event of a liquidation, dissolution or winding up of the
Company, each holder of shares of Common Stock would be entitled
to receive, after payment of all debts and liabilities of the
Company, a pro rata portion of all assets of the Company
available for distribution to holders of Common Stock. If any
preferred stock is issued, the holders thereof may have a
priority in liquidation or dissolution over the holders of the
Common Stock.
Other Characteristics
Holders of the Common Stock will not have preemptive rights
with respect to any additional shares of Common Stock that may be
issued. The Common Stock is not subject to call for redemption,
and the outstanding shares of Common Stock, when issued and upon
receipt by the Company of the full purchase price therefor, will
be fully paid and nonassessable.
Preferred Stock
None of the 5,000,000 authorized shares of preferred stock
of the Company will be issued in the Conversion. After the
Conversion is completed, the Board of Directors of the Company
will be authorized, without shareholder approval, to issue
preferred stock and to fix and state voting powers, designations,
preferences or other special rights of such shares and the
qualifications, limitations and restrictions thereof. The
preferred stock may rank prior to the Common Stock as to dividend
rights or liquidation preferences, or both, and may have full or
limited voting rights. The Board of Directors has no present
intention to issue any of the preferred stock. Should the Board
of Directors of the Company subsequently issue preferred stock,
no holder of any such stock shall have any preemptive right to
subscribe for or purchase any stock or any other securities of
the Company other than such, if any, as the Board of Directors,
in its sole discretion, may determine and at such price or prices
and upon such other terms as the Board of Directors, in its sole
discretion, may fix.
REGISTRATION REQUIREMENTS
The Company will register its Common Stock with the SEC
pursuant to the Exchange Act upon completion of the Conversion
and will not deregister said shares for a period of at least
three years following completion of the Conversion. Upon such
registration, the proxy and tender offer rules, insider trading
reporting and restrictions, annual and periodic reporting and
other requirements of the Exchange Act will be applicable.
LEGAL OPINIONS
The legality of the Common Stock will be passed upon for the
Company by Stevens & Lee, Reading, Pennsylvania. Stevens & Lee
has consented to the reference herein to its opinion. Certain
legal matters will be passed upon for Hopper Soliday and the
Underwriters by Lord, Bissell & Brook, Chicago, Illinois.
EXPERTS
The combined financial statements of the Insurance Companies
as of December 31, 1995 and 1994, and the combined statements of
income, changes in surplus and cash flows for each of the years
in the three-year period ended December 31, 1995 have been
included in this prospectus in reliance upon the report of
Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
Berwind has consented to the publication herein of the
summary of its opinion as to the estimated pro forma aggregate
market value of the Common Stock to be issued in the Conversion
and the value of subscription rights to purchase the Common Stock
and to the use of its name and statements with respect to it
appearing herein.<PAGE>
GLOSSARY OF SELECTED INSURANCE TERMS
Acquisition costs . . . . . . Agents' or brokers' commissions,
premium taxes, marketing, and
certain underwriting expenses
associated with the production
of business.
Assumed reinsurance . . . . . Insurance or reinsurance
transferred from another
insurance or reinsurance entity.
Automobile Liability and
Automobile Physical Damage. . Automobile liability coverage
insures individuals and
businesses against claims
resulting from bodily injury and
property damage. Automobile
physical damage coverage insures
individuals and businesses
against claims resulting from
property damage to an insured's
vehicle.
Cede. . . . . . . . . . . . . To transfer to an insurer or a
reinsurer all or a part of the
insurance or reinsurance written
by an insurance or reinsurance
entity.
Combined ratio. . . . . . . . The sum of the expense ratio and
the loss ratio, determined
either in accordance with
statutory accounting practices
or GAAP. A combined ratio under
100% generally indicates an
underwriting profit and a
combined ratio over 100%
generally indicates an
underwriting loss. The extent
by which the combined ratio
deviates from 100% indicates
relative underwriting profit or
loss.
Commercial Multi-peril. . . . Commercial multi-peril coverage
insures against losses to
businesses and business personal
property, such as those caused
by fire, wind, hail, water
damage, theft and vandalism, as
well as comprehensive general
liability for injuries to
others. Optional coverages
written include inland marine,
crime and boiler and machinery.
Direct written premiums . . . Total premiums written by an
insurer other than premiums for
reinsurance assumed by an
insurer.
Earned premiums . . . . . . . The portion of net written
premiums applicable to the
expired period of policies.
Expense ratio . . . . . . . . Under statutory accounting
practices, the ratio of
underwriting expenses to net
written premiums.
Fire & Allied Lines . . . . . Fire and allied lines insurance
generally covers fire,
lightning, and removal and
extended coverage.
Gross premiums. . . . . . . . Total premiums for insurance
written and reinsurance assumed
during a given period.
Homeowners. . . . . . . . . . Homeowners coverage insures
individuals for losses to their
residences and personal
property, such as those caused
by fire, wind, hail, water
damage, theft and vandalism, and
against third party liability
claims.
Incurred losses . . . . . . . The sum of losses paid plus the
change in the estimated
liability for claims which have
been reported but which have not
been settled and claims which
have occurred but have not yet
been reported to the insurer.
Inland marine . . . . . . . . Inland marine coverage insures
merchandise or cargo in transit
and business and personal
property. It is also written as
an endorsement to a homeowner's
policy to provide coverage for
scheduled property, such as
antiques, fine art, sports
equipment, boats, firearms,
jewelry and camera equipment.
Loss adjustment expenses. . . The expenses of settling claims,
including legal and other fees
and the general expenses of
administering the claims
adjustment process.
Loss and LAE ratio. . . . . . Under statutory accounting
practices, the ratio of incurred
losses and loss adjustment
expenses to earned premiums.
Net earned premiums . . . . . The portion of written premiums
that is recognized for
accounting purposes as revenue
during a period.
Net premiums. . . . . . . . . Gross premiums written less
premiums ceded to reinsurers.
Net written premiums. . . . . Gross premiums written and
insured by an insurer less
premiums ceded to reinsurers.
Reinsurance . . . . . . . . . A procedure whereby an insurer
remits or cedes a portion of the
premiums to another insurer or
reinsurer as payment to that
insurer or reinsurer for
assuming a portion of the
related risk.
Residual market . . . . . . . The market consisting of those
persons (most frequently drivers
seeking automobile insurance)
who are unable to obtain
insurance coverage in the
voluntary market.
Statutory accounting
practices . . . . . . . . . . Recording transactions and
preparing financial statements
in accordance with the rules and
procedures prescribed or
permitted by statute or
regulatory authorities,
generally reflecting a
liquidating, rather than a going
concern, concept of accounting.
The principal differences
between statutory accounting
practices ("SAP") and GAAP for
property and casualty insurance
companies, are: (a) under SAP,
certain assets that are not
admitted assets are eliminated
from the balance sheet;
(b) under SAP, policy
acquisition costs are expenses
as incurred, while under GAAP,
they are deferred and amortized
over the term of the policies;
(c) under SAP, no provision is
made for deferred income taxes;
(d) under SAP, certain reserves
are recognized that are not
recognized under GAAP; and
(e) under SAP, fixed income
securities (bonds, redeemable
preferred stocks and mortgage-
backed securities) and equity
securities are carried at cost,
while under GAAP, they are
carried at market value.
Statutory surplus . . . . . . The sum remaining after all
liabilities are subtracted from
all assets, applying statutory
accounting practices. This sum
is regarded as financial
protection to policyholders in
the event an insurance company
suffers unexpected or
catastrophic losses.
Underwriting. . . . . . . . . The process whereby an insurer
reviews applications submitted
for insurance coverage and
determines whether it will
accept all or part of the
coverage being requested and
what the applicable premiums
should be. Underwriting also
includes an ongoing review of
existing policies and their
pricing.
Underwriting expenses . . . . The aggregate of policy
acquisition costs and the
portion of administrative,
general and other expenses
attributable to underwriting
operations.
Underwriting profit (loss). . The excess (deficiency),
determined under statutory
accounting practices, resulting
from the difference between
earned premiums and the sum of
incurred losses, loss adjustment
expenses and underwriting
expenses.
Voluntary market. . . . . . . The market consisting of those
persons who insurance companies
voluntarily choose to insure
because such companies believe
that they can do so profitably
at competitive rates.
Workers' Compensation . . . . Workers' compensation coverage
insures employers against
employee medical and indemnity
claims resulting from injuries
related to work as well as third
party employer's liability.<PAGE>
INDEX TO COMBINED FINANCIAL STATEMENTS
OF THE INSURANCE COMPANIES
Page
REPORT OF INDEPENDENT ACCOUNTANTS F-3
FINANCIAL STATEMENTS
COMBINED BALANCE SHEETS F-4
(As of December 31, 1995 and 1994)
COMBINED STATEMENTS OF INCOME F-6
(For the years ended December 31, 1995,
1994 and 1993)
COMBINED STATEMENTS OF CHANGES IN SURPLUS F-7
(For the years ended December 31, 1995,
1994 and 1993)
COMBINED STATEMENTS OF CASH FLOWS F-8
(For the years ended December 31, 1995,
1994 and 1993)
NOTES TO COMBINED FINANCIAL STATEMENTS F-10
FINANCIAL STATEMENTS (Unaudited)
COMBINED BALANCE SHEETS (Unaudited) F-27
(As of June 30, 1996 and 1995)
COMBINED STATEMENTS OF INCOME (Unaudited) F-28
(For the six months ended June 30, 1996 and 1995)
COMBINED STATEMENTS OF CHANGES IN SURPLUS (Unaudited) F-29
(For the six months ended June 30, 1996 and 1995)
COMBINED STATEMENTS OF CASH FLOWS (Unaudited) F-30
(For the six months ended June 30, 1996 and 1995)
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS F-31
(Unaudited)
<PAGE>
Report of Independent Accountants
To the Boards of Directors and Policyholders
Old Guard Mutual Insurance Company,
Old Guard Mutual Fire Insurance Company, and
Goschenhoppen-Home Mutual Insurance Company
and Subsidiary:
We have audited the accompanying combined balance sheets of
Old Guard Mutual Insurance Company, Old Guard Mutual Fire
Insurance Company, and Goschenhoppen-Home Mutual Insurance
Company and subsidiary (the Group) as of December 31, 1995 and
1994, and the related combined statements of income, changes in
surplus and cash flows for the years ended December 31, 1995,
1994 and 1993. These combined financial statements are the
responsibility of the Group's management. Our responsibility is
to express an opinion on these combined financial statements
based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred
to above present fairly, in all material respects, the combined
financial position of the Group as of December 31, 1995 and 1994,
and the combined results of their operations and their cash flows
for the years ended December 31, 1995, 1994 and 1993 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the combined financial statements, the
Group changed its method of accounting for investments in 1994.
/s/ Coopers & Lybrand L.L.P.
One South Market Square
Harrisburg, Pennsylvania
July 19, 1996
<PAGE>
OLD GUARD MUTUAL INSURANCE COMPANY,
OLD GUARD MUTUAL FIRE INSURANCE COMPANY, AND
GOSCHENHOPPEN-HOME MUTUAL INSURANCE COMPANY
AND SUBSIDIARY
Combined Balance Sheets
as of December 31, 1995 and 1994
ASSETS 1995 1994
------------ -------------
Investments and cash:
Fixed income securities,
available for sale, at fair
value $ 78,527,888 $ 70,160,387
Preferred stocks, at fair value 9,230,609 8,601,126
Common stocks, at fair value 4,348,463 3,926,543
Other invested assets 228,304 191,028
Cash and cash equivalents 8,153,125 7,279,176
------------ ------------
Total investments and cash 100,488,389 90,158,260
Premiums receivable 6,313,635 6,505,566
Reinsurance recoverables and
unearned premiums 10,274,527 14,041,030
Deferred policy acquisition costs,
net 7,180,779 7,103,411
Accrued investment income 1,033,140 1,045,869
Deferred income taxes, net 1,234,685 3,181,157
Property and equipment, net 5,656,074 3,970,478
Receivable from affiliate 214,582 385,465
Other assets 2,457,554 1,439,818
------------ ------------
Total assets $134,853,365 $127,831,054
============ ============
LIABILITIES AND SURPLUS
Liabilities:
Reserve for losses and loss
adjustment expenses 52,091,497 51,309,427
Unearned premiums 33,329,250 32,646,969
Accrued expenses 3,153,110 2,816,979
Subordinated debt 2,250,000 3,000,000
Other liabilities 3,132,194 1,526,233
------------ ------------
Total liabilities 93,956,051 91,299,608
------------ ------------
Commitments and contingent
liabilities (Notes 9 and 12)
Surplus:
Unassigned surplus 38,905,128 39,588,699
Unrealized capital gains (losses)
of securities, net of deferred
income taxes 1,992,186 (3,057,253)
------------ ------------
Total surplus 40,897,314 36,531,446
------------ ------------
Total liabilities and
surplus $134,853,365 $127,831,054
============ ============
The accompanying notes are an integral part of the combined
financial statements.
<PAGE>
OLD GUARD MUTUAL INSURANCE COMPANY,
OLD GUARD MUTUAL FIRE INSURANCE COMPANY, AND
GOSCHENHOPPEN-HOME MUTUAL INSURANCE COMPANY
AND SUBSIDIARY
Combined Statements of Income
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------ ------------ ------------
Revenue:
Net premiums written $67,114,947 $65,648,812 $63,354,790
Change in unearned
premiums (451,523) (2,184,227) (2,369,214)
----------- ----------- -----------
Net premiums earned 66,663,424 63,464,585 60,985,576
Investment income,
net of expenses 4,458,438 3,932,458 3,927,852
Net realized
investment gains 1,010,993 476,257 1,758,352
Other revenue 273,575 265,645 244,188
----------- ----------- -----------
Total revenue 72,406,430 68,138,945 66,915,968
----------- ----------- -----------
Expenses:
Losses and loss
adjustment expenses
incurred 50,509,295 46,439,908 42,153,837
Amortization of
deferred policy
acquisition costs 17,610,525 17,036,383 15,358,089
Operating expenses 5,654,712 5,051,112 5,632,637
----------- ----------- -----------
Total expenses 73,774,532 68,527,403 63,144,563
----------- ----------- -----------
Income (loss) before
provision for income
taxes (1,368,102) (388,458) 3,771,405
Income tax expense
(benefit) (684,531) (532,750) 383,048
----------- ----------- -----------
Net income (loss) $ (683,571) $ 144,292 $ 3,388,357
=========== =========== ===========
The accompanying notes are an integral part of the combined
financial statements.
<PAGE>
OLD GUARD MUTUAL INSURANCE COMPANY,
OLD GUARD MUTUAL FIRE INSURANCE COMPANY, AND
GOSCHENHOPPEN-HOME MUTUAL INSURANCE COMPANY
AND SUBSIDIARY
Combined Statements of Changes in Surplus
for the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
------------ ------------ ------------
Unassigned surplus:
Balance, beginning
of year $39,588,699 $39,444,407 $36,056,050
Net income (loss) (683,571) 144,292 3,388,357
----------- ----------- -----------
Balance, end of year $38,905,128 $39,588,699 $39,444,407
=========== =========== ===========
Unrealized capital
gains (losses) of
securities, net of
deferred income
taxes:
Balance, beginning
of year $(3,057,253) $ 409,152 $ 557,390
Cumulative effect of
classifying fixed
income securities
as available for
sale 629,225
Change in unrealized
capital gains
(losses) of
securities 5,049,439 (4,095,630) (148,238)
----------- ----------- -----------
Balance, end of year $ 1,992,186 $(3,057,253) $ 409,152
=========== =========== ===========
The accompanying notes are an integral part of the combined
financial statements.
<PAGE>
OLD GUARD MUTUAL INSURANCE COMPANY,
OLD GUARD MUTUAL FIRE INSURANCE COMPANY, AND
GOSCHENHOPPEN-HOME MUTUAL INSURANCE COMPANY
AND SUBSIDIARY
Combined Statements of Cash Flows
for the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- -------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (683,571) $ 144,292 $ 3,388,357
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation of property and equipment 629,858 563,325 598,788
Amortization of premium 396,224 647,935 498,887
Net realized investment gain (1,010,993) (476,257) (1,758,352)
Net realized (gain) loss on sale of
property and equipment 21,285 381 (5,080)
Deferred income tax provision (benefit) (661,728) (594,747) (440,616)
(Increase) decrease in assets:
Premiums receivable 191,931 350,611 619,140
Reinsurance receivable 3,766,503 5,913,152 5,763,312
Deferred policy acquisition costs (77,368) (644,443) (530,014)
Accrued investment income 12,729 155,889 38,738
Other assets, excluding receivable
for sale of security 9,260 (134,883) (523,159)
Receivable from affiliate 170,883 (385,465)
Increase (decrease) in liabilities:
Reserve for losses and loss
adjustment expenses 782,070 (7,747,121) (572,056)
Unearned premium 682,281 582,396 (127,060)
Accrued expenses 336,131 (1,016,647) 611,250
Other liabilities, excluding payable
for purchase of security 310,174 (284,262) 831,365
------------ ------------ ------------
Net cash provided by (used in)
operating activities 4,875,669 (2,925,844) 8,393,500
------------ ------------ ------------
Cash flows from investing activities:
Cost of purchases of fixed income
securities, available for sale (35,935,523) (27,873,564) (48,548,987)
Proceeds from sales of fixed income
securities, available for sale 32,594,494 19,345,631 41,598,495
Proceeds from maturities of fixed income
securities, available for sale 865,000 1,475,000 1,075,000
Cost of equity securities acquired (4,772,358) (1,235,743) (10,818,455)
Proceeds from sales of equity securities 5,800,281 11,074,709 7,469,958
Change in receivable/payable for
securities 268,009 155,759
Cost of purchases of other invested assets (50,000) (242,979)
Proceeds from sale of other invested
assets 190,000 53,921 198,526
Cost of purchase of property and equipment (2,405,430) (526,356) (593,261)
Proceeds from sale of property and
equipment 193,807 550 91,984
------------ ------------ ------------
Net cash provided by (used in)
investing activities (3,251,720) 2,226,928 (9,526,740)
------------ ------------ ------------
Cash flows from financing activities:
Repayment of subordinated debt (750,000) (750,000) (750,000)
------------ ------------ ------------
Net cash used in financing
activities (750,000) (750,000) (750,000)
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents 873,949 (1,448,916) (1,883,240)
Cash and cash equivalents at beginning
of year 7,279,176 8,728,092 10,611,332
------------ ------------ ------------
Cash and cash equivalents at end of year $ 8,153,125 $7,279,176 $ 8,728,092
============ ============ ============
Cash paid during the year for:
Interest $ 265,861 $ 309,254 $ 376,931
Income taxes $ 203,674 $ 691,785 $ 258,700
</TABLE>
The accompanying notes are an integral part of the combined
financial statements.
<PAGE>
Old Guard Mutual Insurance Company,
Old Guard Mutual Fire Insurance Company, and
Goschenhoppen-Home Mutual Insurance Company
and Subsidiary
Notes to Combined Financial Statements
1. Summary of Significant Accounting Policies:
Basis of Combination:
The combined financial statements include the accounts of
Old Guard Mutual Insurance Company (OGM), Old Guard Mutual
Fire Insurance Company (OGF) and Goschenhoppen-Home Mutual
Insurance Company (GHM) and their subsidiary Old Guard
Investment Holding Company, Inc. (OGIHC). 2929 Service
Corporation and Commonwealth Insurance Managers, Inc. (CIMI)
are wholly-owned subsidiaries of OGIHC. The companies
operate collectively as the Old Guard Insurance Group (the
Group).
Each of the insurance company members of the Group, as
described above, is a party to a joint application for
approval to convert from mutual to stock form of
organization which will be filed with the Insurance
Department of the Commonwealth of Pennsylvania (Insurance
Department). The application requests regulatory approval
for the formation of an insurance holding company,
incorporated in Pennsylvania, to purchase all of the
authorized stock of OGM, OGF and GHM, which will convert
from the mutual to the stock form of organization (see
Note 15).
The accompanying combined financial statements have been
prepared in conformity with generally accepted accounting
principles. All significant intercompany transactions have
been eliminated in combination.
Description of Business:
The Group sells personal, farm and commercial property and
casualty insurance in Pennsylvania, Delaware and Maryland,
with Pennsylvania comprising in excess of 95% of the direct
premiums written. The principal lines of business are
homeowners, farmowners, personal automobile and commercial
multi-peril which represent approximately 27%, 18%, 23% and
14%, respectively, of the net premiums written.
Cash and Cash Equivalents:
Cash and cash equivalents are carried at cost which
approximates market value. The Group considers all highly
liquid investments with a maturity of three months or less
when purchased to be cash equivalents.
Investments:
Effective January 1, 1994, the Group adopted Financial
Accounting Standards Board Statement No. 115, "Accounting
for Certain Investments in Debt and Equity Securities"
(SFAS 115). Under SFAS 115 debt and marketable equity
securities must be classified as held-to-maturity, trading,
or available-for-sale. Due to periodic shifts in the
portfolio arising out of income tax and asset-liability
matching, as well as securities markets and economic
factors, management considers the entire portfolio of fixed
income securities as available-for-sale. Each new security
is evaluated at the time of purchase and reevaluated at each
balance sheet date. Available-for-sale securities are
carried at fair value, with the unrealized gains and losses,
net of deferred income tax, reported as a separate component
of surplus. The cumulative effect as of January 1, 1994 of
adopting SFAS 115, representing the unrealized gains on
fixed income securities classified as available-for-sale,
net of deferred income tax, was to increase surplus by
$629,225.
Equity securities for all periods are stated at fair value
with changes in fair value, net of deferred income tax,
reflected in surplus. Realized gains and losses are
calculated on the specific identification basis.
The fair value of all investments is subject to various
market fluctuations which include changes in equity markets,
interest rate environment and general economic conditions.
Interest on fixed maturities and short-term investments is
credited to income as it accrues on the principal amounts
outstanding, adjusted for amortization of premiums and
accretion of discounts computed utilizing the effective
interest rate method.
Deferred Policy Acquisition Costs, Net:
Acquisition costs such as commissions, premium taxes and
certain other expenses which vary with and are directly
related to the production of business, are deferred and
amortized over the effective period of the related insurance
policies. The method followed in computing deferred policy
acquisition costs limits the amount of such deferred costs
to their estimated realizable value, which gives effect to
premiums to be earned, related investment income, loss and
loss adjustment expenses and certain other maintenance costs
expected to be incurred as the premiums are earned. To the
extent that deferred policy acquisition costs are not
realizable, the deficiency is charged to income currently.
Property and Equipment, Net:
Property and equipment are carried at cost less accumulated
depreciation. Property is depreciated on a straight-line
basis over the useful lives ranging from fifteen to fifty
years. Equipment is depreciated on a straight-line basis
with useful lives of five to ten years.
Premiums:
Premiums written are earned on a pro rata basis over the
terms of the respective policies. Unearned premiums
represent the unexpired portion of the policies in-force.
Losses and Loss Adjustment Expenses:
Reserves for losses and loss adjustment expenses include
amounts determined on the basis of claims adjusters'
evaluations, other estimates and estimates of losses
incurred but not reported, calculated using historical
experience. Any adjustments resulting from changes in
estimates are reflected in current operating results.
Estimated amounts of salvage and subrogation recoverable on
paid and unpaid losses are reflected as a reduction of
reserves for losses and loss adjustment expenses.
Income Taxes:
In accordance with Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes", deferred
income taxes are accounted for using the liability method,
wherein deferred tax assets or liabilities are calculated on
the differences between the bases of assets and liabilities
for financial statement purposes versus tax purposes
(temporary differences) using enacted tax rates in effect
for the year in which the differences are expected to
reverse. Tax expense in the combined statements of income
is equal to the sum of taxes currently payable, including
the effect of the alternative minimum tax, if any, plus an
amount necessary to adjust deferred tax assets and
liabilities to an amount equal to period-end temporary
differences at prevailing tax rates.
The Group members file individual federal income tax
returns.
Reinsurance:
The Group cedes insurance to, and assumes insurance from,
unrelated insurers to limit its maximum loss exposure
through risk diversification.
In accordance with Financial Accounting Standards Board
Statement No. 113, "Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts", reinsurance
receivables and unearned premiums are reported as assets,
and reserve liabilities are reported gross of reinsurance
credits. Reinsurance is primarily placed with one reinsurer
and assets and liabilities are netted on the balance sheet.
Net amounts recoverable from the primary reinsurer
aggregated approximately $6,700,000 at December 31, 1995.
Certain reinsurance contracts provide for retrospective rate
adjustments based on experience. Management estimates the
ultimate ceded premium based upon historical experience.
Any adjustments resulting from changes in estimates are
reflected in current operating results.
Assessments:
The Group's insurance members are subject to assessments in
the states in which each insurance company is licensed.
Assessments consist primarily of charges from the residual
markets and guaranty fund associations. The expense is
recognized upon notification.
Use of Estimates:
The preparation of the accompanying combined financial
statements requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities and disclosure of contingent assets and
liabilities at the date of the combined financial statements
and the results of their operations during the period. The
combined financial statements include estimates the most
significant of which are reserve for losses and loss
adjustment expenses, deferred policy acquisition costs and
reinsurance. Actual results may differ from those
estimates.
2. Statutory Information:
The Group's insurance companies which are domiciled in the
Commonwealth of Pennsylvania, prepare their statutory
financial statements in accordance with accounting
principles and practices prescribed or permitted by the
Insurance Department. Prescribed statutory accounting
practices include state laws, regulations, and general
administrative rules, as well as a variety of publications
of the National Association of Insurance Commissioners
(NAIC). Permitted statutory accounting practices encompass
all accounting practices that are not prescribed; such
practices differ from state to state, may differ from
company to company within a state, and may change in the
future. Furthermore, the NAIC has a project to codify
statutory accounting practices, the result of which is
expected to constitute the only source of "prescribed"
statutory accounting practices. Accordingly, that project
will likely change the definitions of what comprise
prescribed versus permitted statutory accounting practices,
and may result in changes to the accounting policies that
insurance enterprises use to prepare their statutory
financial statements. The effects of any such changes are
not presently determinable and will not likely affect
financial statements prepared under generally accepted
accounting principles.
Risk based capital is designed to measure the acceptable
amount of capital an insurer should have based on the
inherent risks of the insurer's business. Insurers failing
to meet adequate capital levels may be subject to insurance
department scrutiny and ultimately rehabilitation or
liquidation. Based on established standards, OGM, OGF and
GHM maintain surplus in excess of prescribed risk based
capital requirements.
3. Statutory Surplus:
Statutory surplus and net income (loss), determined in
accordance with accounting practices prescribed or permitted
by the Insurance Department for the Group, are as follows:
<TABLE>
<CAPTION>
Statutory Statutory
Surplus Net Income (Loss)
------------------------- -------------------------------------
1995 1994 1995 1994 1993
----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
OGM $19,973,068 $18,951,633 $(128,349) $ 822,297 $2,865,961
OGF 8,786,985 9,100,592 (265,828) (207,295) 1,753,945
GHM 3,489,304 3,044,383 494,455 (344,470) (253,167)
Other 20,503 21,136 1,564
----------- ----------- --------- --------- ----------
$32,249,357 $31,096,608 $ 120,781 $ 291,668 $4,368,303
=========== =========== ========= ========= ==========
</TABLE>
A reconciliation of the Group's statutory net income and
surplus to the Group's net income and surplus, under
generally accepted accounting principles (GAAP), is as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Net income:
Statutory net income $ 120,781 $ 291,668 $ 4,368,303
GAAP adjustments:
Increase (decrease) in deferred
policy acquisition costs 77,368 644,443 530,014
Provision for deferred income
taxes 661,728 594,747 444,217
Recognition of salvage and
subrogation (276,600)
Other (1,543,448) (1,386,566) (1,677,577)
----------- ----------- -----------
GAAP net income $ (683,571) $ 144,292 $ 3,388,357
=========== =========== ===========
Policyholders' surplus:
Statutory surplus $32,249,357 $31,096,608
GAAP adjustments:
Deferred policy acquisition
costs 7,180,779 7,103,411
Deferred income taxes 1,234,685 3,181,157
Restoration of nonadmitted
assets 463,246 464,648
Unrealized gain (loss) on
securities 1,722,410 (4,316,013)
Elimination of excess of
statutory over statement
reserves liability 657,158 127,173
Elimination of statutory
unauthorized reinsurance 77,800
Reclassification of
subordinated debt (2,250,000) (3,000,000)
Other (360,321) 1,796,662
----------- -----------
GAAP surplus $40,897,314 $36,531,446
=========== ===========
</TABLE>
Other includes adjustments as to the period of recognition
of income or expense items between statutory and GAAP
accounting.
At December 31, 1993, the Group changed its statutory method
of accounting for the reserve for losses and loss adjustment
expenses to include the effect of anticipated salvage and
subrogation. Previously, the reserve was reported without
consideration for salvage and subrogation.
The Group is required to maintain a minimum aggregate
surplus balance of $6,550,000 on a statutory basis of
accounting to satisfy regulatory requirements.
Each of the insurance companies must satisfy a minimum
surplus requirement of approximately $2,000,000
individually.
4. Investments:
Net investment income, net realized investment gains and
change in unrealized capital gains (losses) on investment
securities are as follows for each of the three years ended
December 31:
Net investment income and net realized investment gains:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- ------------
<S> <C> <C> <C>
Investment income:
Fixed income securities $4,457,884 $3,672,544 $ 3,615,180
Preferred stocks 623,396 1,054,803 1,194,867
Common stocks 211,545 77,895 94,669
Cash and cash equivalents 334,747 408,821 360,780
Other 116,899 105,847 60,961
---------- ---------- -----------
Gross investment income 5,744,471 5,319,910 5,326,457
---------- ---------- -----------
Less investment expenses 1,286,033 1,387,452 1,398,605
---------- ---------- -----------
Net investment income 4,458,438 3,932,458 3,927,852
---------- ---------- -----------
Realized gains (losses):
Fixed income securities 543,696 204,493 1,492,697
Preferred stocks 73,156 131,509 205,860
Common stocks 268,080 140,255 59,795
Other 126,061
---------- ---------- -----------
Net realized investment gains 1,010,993 476,257 1,758,352
---------- ---------- -----------
Net investment income and net
realized investment gains $5,469,431 $4,408,715 $ 5,686,204
========== ========== ===========
</TABLE>
Change in unrealized capital gains (losses) of securities:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ----------
<S> <C> <C> <C>
Fixed income securities $ 5,722,298 $(5,199,848) $
Preferred stocks 853,101 (736,763) 22,448
Common stocks 1,096,943 (264,265) 106,367
Other invested assets (14,703) (344,553)
Cumulative effect of accounting
change 953,371
----------- ----------- ---------
7,657,639 (5,247,505) (215,738)
Tax effect (2,608,200) 1,781,100 67,500
----------- ----------- ---------
$ 5,049,439 $(3,466,405) $(148,238)
=========== =========== =========
</TABLE>
The cost and estimated fair value of available-for-sale
investment securities at December 31, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
1995 Cost(1) Appreciation Depreciation Fair Value
- ------------------------------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Fixed income securities:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $33,419,508 $ 155,894 $195,038 $33,380,364
Obligations of states and
political subdivisions 1,552,670 13,421 1,566,091
Corporate obligations 25,867,568 1,293,989 147,123 27,014,434
Collateralized mortgage
obligations 9,564,068 280,348 4,904 9,839,512
Other obligations 6,625,805 101,682 6,727,487
----------- ---------- -------- -----------
Total fixed income
securities 77,029,619 1,845,334 347,065 78,527,888
Equity securities:
Preferred stocks 8,992,192 348,611 110,194 9,230,609
Common stocks 3,038,960 1,392,647 83,144 4,348,463
----------- ---------- -------- -----------
Total available-for-sale $89,060,771 $3,586,592 $540,403 $92,106,960
=========== ========== ======== ===========
</TABLE>
(1) Original cost of equity securities; original cost of fixed
income securities adjusted for amortization of premium and
accretion of discount.
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
1994 Cost(1) Appreciation Depreciation Fair Value
- -------------------------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Fixed income securities:
U.S. Treasury securities
and obligations of
U.S. Government
corporations and
agencies $33,270,002 $ 429 $2,888,262 $30,382,169
Obligations of states
and political
subdivisions 3,686,569 5,961 26,169 3,666,361
Corporate obligations 16,155,078 89,445 830,269 15,414,254
Collateralized mortgage
obligations 17,916,000 34,849 587,463 17,363,386
Other obligations 3,356,767 28,647 51,197 3,334,217
----------- -------- ---------- -----------
Total fixed income
securities 74,384,416 159,331 4,383,360 70,160,387
Equity securities:
Preferred stock 9,215,810 19,054 633,738 8,601,126
Common stock 3,713,983 680,760 468,200 3,926,543
----------- -------- ---------- -----------
Total available-
for-sale $87,314,209 $859,145 $5,485,298 $82,688,056
=========== ======== ========== ===========
</TABLE>
(1) Original cost of equity securities; original cost of
fixed income securities adjusted for amortization of
premium and accretion of discount.
The amortized cost and estimated fair value of fixed income
securities at December 31, 1995 by contractual maturity are
shown below:
Amortized Estimated
Cost Fair Value
----------- -----------
Due in one year or less $ 4,995,869 $ 4,978,017
Due after one year through five years 26,141,961 26,384,195
Due after five years through ten
years 4,104,017 4,437,992
Due after ten years 2,950,428 3,095,279
Securities subject to scheduled
paydown 38,837,344 39,632,405
----------- -----------
$77,029,619 $78,527,888
=========== ===========
Actual maturities may differ from contractual and
anticipated maturities because borrowers may have the right
to call or prepay obligations with or without call or
prepayment penalties.
The gross realized gains and losses on investment securities
for each of the years ended December 31, are as follows:
1995 1994 1993
------------ ---------- -----------
Gross realized gains $ 2,995,584 $ 886,774 $2,157,599
Gross realized losses (1,984,591) (410,517) (399,247)
----------- --------- ----------
Net realized gains
$ 1,010,993 $ 476,257 $1,758,352
=========== ========= ==========
Insurance laws require that certain amounts be deposited
with various state insurance departments for the benefit and
protection of policyholders. The amortized cost of fixed
income securities on deposit with governmental authorities
was $501,095 and $452,371 at December 31, 1995 and 1994,
respectively.
5. Losses and Loss Adjustment Expenses:
Activity in the reserve for losses and loss adjustment
expenses is summarized as follows:
1995 1994 1993
----------- ------------ ------------
Balance as of
January 1 $51,309,427 $59,056,548 $59,628,604
Less reinsurance
recoverables 18,499,642 22,175,358 24,962,955
----------- ----------- -----------
Net balance at
January 1 32,809,785 36,881,190 34,665,649
----------- ----------- -----------
Incurred related to:
Current year 48,067,295 51,958,607 44,949,599
Prior years 2,442,000 (5,518,699) (2,795,762)
----------- ----------- -----------
Total incurred 50,509,295 46,439,908 42,153,837
----------- ----------- -----------
Paid related to:
Current year 29,970,071 35,196,027 25,952,565
Prior years 17,258,165 15,315,286 13,985,731
----------- ----------- -----------
Total paid 47,228,236 50,511,313 39,938,296
----------- ----------- -----------
Net balance as of
December 31 36,090,844 32,809,785 36,881,190
Plus reinsurance
recoverables 16,000,653 18,499,642 22,175,358
----------- ----------- -----------
Balance at December 31 $52,091,497 $51,309,427 $59,056,548
=========== =========== ===========
The changes in the reserve estimates for prior years are
primarily attributable to the paid and incurred loss
development experience across all lines of business.
The reserve for losses and loss adjustment expenses reflect
management's best estimate of future amounts needed to pay
claims and related settlement costs with respect to insured
events which have occurred, including events that have not
been reported to the Group. In many cases, significant
periods of time, ranging up to several years, may elapse
between the occurrence of an insured loss, the reporting of
the loss, and the payment of that loss. As part of the
process in determining these amounts, historical data is
reviewed and consideration is given to the impact of various
factors, such as legal developments, changes in social
attitudes, and economic conditions.
Management believes that its reserve for losses and loss
adjustment expenses are fairly stated, in accordance with
generally accepted actuarial principles and practices.
However, estimating the ultimate claims liability is a
complex and judgmental process inasmuch as the amounts are
based on management's informed estimates and judgments using
data currently available. As additional experience and data
become available regarding claim payments and reporting
patterns, legislative developments, and economic conditions,
the estimates are revised accordingly and the impact is
reflected currently in the Group's combined financial
statements.
6. Property and Equipment, Net:
Property and equipment consisted of the following at
December 31, 1995 and 1994:
1995 1994
------------ ------------
Land $ 287,407 $ 287,407
Buildings and improvements 4,089,767 3,753,677
Furniture, fixtures and equipment 4,684,460 4,540,148
----------- -----------
Total property and equipment 9,061,634 8,581,232
Less accumulated depreciation and
amortization (4,493,992) (4,610,754)
----------- -----------
4,567,642 3,970,478
Computer software 1,088,432
----------- -----------
Property and equipment, net $ 5,656,074 $ 3,970,478
=========== ===========
7. Reinsurance:
The Group maintains reinsurance agreements, which include
coverage for excess of loss and catastrophe loss. These
reinsurance programs mitigate loss exposure from
individually large losses and an aggregation of losses
arising from a single loss event. The Group is contingently
liable for reinsured claims if the assuming reinsurers
cannot meet their obligations under the reinsurance
agreements.
The following amounts represent the Group's reinsurance
activity with unrelated insurers for each of the three years
ended December 31:
1995 1994 1993
----------- ------------ -----------
Ceded:
Premiums earned $ 9,362,861 $12,543,855 $12,217,139
Unearned premiums $ 1,469,316 $ 1,238,558 $ 2,836,257
Losses and loss
adjustment
expenses incurred $ 6,897,673 $19,217,783 $ 9,283,057
Assumed:
Premiums earned $ 114,395 $ (11,610) $ 1,949,850
Unearned premiums $ 22,431 $ 22,870 $ 631,362
Losses and loss
adjustment
expenses incurred $ 384,762 $ 83,347 $ 620,893
8. Subordinated Debt:
During 1989, OGM received an advance to surplus for
statutory purposes from a third party. Repayment of
principal began in April 1991 and continues annually through
1998 in the amount of $750,000 per year. Interest, at 9%,
is to be paid each December. Such repayments of principal
and payments of interest are subject to certain notification
and approval requirements of the Insurance Department.
Amounts not paid in accordance with the aforementioned
schedule will accrue interest at 9%. Certain additional
terms related to liquidation, merger or demutualization of
the Company provide for the principal to become due and
payable. OGM paid interest of $224,877, $309,025 and
$376,705 under the obligation in 1995, 1994 and 1993,
respectively.
9. Lines of Credit:
The insurance companies of the Group jointly maintain cash
management programs with a local financial institution. The
programs provide for draws by any member of the Group
against a line of credit in the event of overdrafts. The
line of credit is subject to a maximum of $2,250,000 and
bears interest at the prime rate. The Group must maintain
zero balances on the lines for one thirty-day period each
year and must meet certain demand deposit requirements. No
borrowings were outstanding under these arrangements during
the years or at December 31, 1995 and 1994.
During 1995, the insurance companies of the Group obtained a
$5,000,000 credit facility which provides for a five-year
term borrowing capacity at the prime interest rate less
1/4%. The credit facility is expected to be used in
connection with future acquisitions. During the year or at
December 31, 1995, there were no borrowings under this
credit facility.
10. Income Taxes:
The tax effect of significant temporary differences that
give rise to the Group's net deferred tax asset as of
December 31, is as follows:
1995 1994
---------- ----------
Unearned premium $1,815,247 $1,657,771
Reserve for losses and loss adjustment
expenses 2,166,680 2,135,772
Unrealized loss on investment
securities available-for-sale 1,568,900
Alternative minimum tax credit
carryforward 324,356 220,558
Net operating loss carryforward 536,254 698,056
Other 211,823 389,979
---------- ----------
Deferred tax asset 5,054,360 6,671,036
---------- ----------
Deferred policy acquisition costs 2,441,465 2,415,159
Unrealized gain on investment
securities 1,039,300
Depreciation and other 338,910 1,074,720
---------- ----------
Deferred tax liability 3,819,675 3,489,879
---------- ----------
Net deferred tax asset $1,234,685 $3,181,157
========== ==========
The net deferred tax asset has not been reduced by a
valuation allowance because management believes that, while
it is not assured, it is more likely than not that it will
generate sufficient future taxable income to utilize these
net excess tax deductions. The amount of the deferred tax
asset considered realizable, however, could be materially
reduced in the near term if estimates of future taxable
income in the years in which the differences are expected to
reverse are not realized.
Actual income tax expense (benefit) differed from expected
tax expense (benefit), computed by applying the United
States federal corporate tax rate of 34% to income before
income taxes, for each of the three years ended December 31
as follows:
1995 1994 1993
---------- ------------ -----------
Expected tax expense
(benefit) $(465,155) $ (132,076) $1,282,278
Tax-exempt interest (61,558) (227,249) (620,080)
Dividends received
deduction (161,764) (215,139) (236,902)
Other 3,946 41,714 (42,248)
--------- ----------- ----------
Income tax expense
(benefit) $(684,531) $ (532,750) $ 383,048
========= =========== ==========
The components of the provision (benefit) for income taxes
for each of the three years ended December 31 are as
follows:
1995 1994 1993
--------- ------------ ----------
Current federal income
tax expense (benefit) $ (22,803) $ 61,997 $ 827,265
Deferred federal income
tax (benefit) (661,728) (594,747) (444,217)
--------- ---------- ---------
Income tax expense
(benefit) $(684,531) $(532,750) $ 383,048
========= ========= =========
GHM has a net operating loss carryforward at December 31,
1995, of approximately $1,577,000. GHM utilized
approximately $476,000 of net operating loss carryforwards
in 1995 to offset current taxable income. GHM's net
operating loss carryforwards expire $243,000 in 2007,
$554,000 in 2008 and $780,000 in 2009.
As of December 31, 1995, OGM had alternative minimum tax
credit carryforwards of approximately $324,000 available to
offset future tax liability.
11. Retirement Programs:
The Group has a discretionary noncontributory profit sharing
plan covering eligible employees. The Group's contribution
to the plan amounted to $262,945, $233,214, and $208,734 for
the years ended December 31, 1995, 1994, and 1993,
respectively.
The Group also maintains a voluntary defined contribution
savings plan covering substantially all full-time employees.
The Group matches employee contributions up to 3% of
compensation. The Group's contribution to this plan
amounted to $144,367, $136,121, and $107,567 for the years
ended December 31, 1995, 1994, and 1993, respectively.
12. Commitments and Contingencies:
In the event a property and casualty insurer, operating in a
jurisdiction where the Group also operated becomes or is
declared insolvent, state insurance regulations provide for
the assessment of other insurers to fund any capital
deficiency of the insolvent insurer. Generally, this
assessment is based upon the ratio of an insurer's voluntary
written premiums to total written premiums for all insurers
in that particular state. The Group charges these
assessments to income in the period in which it is notified.
The Group is not aware of any material assessments which
have not been recorded at December 31, 1995.
13. Fair Values of Financial Instruments:
The carrying amounts of cash and cash equivalents, short-
term investments and subordinated debt approximate their
fair value.
Fixed income securities, preferred stocks and common stocks
are reported at fair value as established by quoted market
prices on secondary markets as of the balance sheet dates.
14. Related Party Transactions:
Neffsville Mutual Fire Insurance Company (NMF) is affiliated
with the Group through common management and reinsurance
programs.
NMF is provided senior management services by CIMI for a fee
as determined under the management agreement. Management
fees recognized by CIMI during 1995 and 1994 were
approximately $45,000 and $10,900, respectively.
NMF maintains a quota share reinsurance agreement with OGF
whereby 90% and 100% of NMF's business is assumed by OGF
during 1995 and 1994, respectively. There was no quota
share agreement with NMF in 1993. The following summarizes
the business ceded under the intercompany reinsurance
agreement as of and for each of the years ended December 31:
1995 1994
----------- ----------
Premiums written $2,094,759 $ 844,487
---------- ---------
Premiums earned 2,094,759 844,487
Losses and loss adjustment expenses (860,823) (332,965)
Commissions (837,904) (337,795)
---------- ---------
$ 396,032 $ 173,727
========== =========
Reserve for losses and loss adjustment
expenses $ 328,590 $ 199,167
Receivable from affiliate $ 214,582 $ 385,465
15. Subsequent Events:
Reinsurance Treaty:
Effective January 1, 1996 the Group executed a 20% quota
share reinsurance treaty with its primary reinsurer. The
treaty provides for a 35% flat ceding commission and is on
the net business written by the Group. This treaty is
intended to protect the Group from high frequency and low
severity type losses.
Demutualization:
In May 1996 the Group's Boards of Directors approved a plan
of conversion for changing the corporate form of OGM, OGF
and GHM from the mutual form to the stock form
(demutualization). Under the plan, policyholders and other
targeted groups will have the opportunity to acquire stock
in a newly formed holding company, Old Guard Group, Inc.
(OGGI).
OGGI will in turn acquire all of the newly issued stock of
OGM, OGF and GHM upon conversion. The demutualization plan
is subject to approval from the Insurance Department and
ultimately receipt of sufficient stock subscriptions to
effect the transaction. In addition, the Group is awaiting
a ruling from the Internal Revenue Service regarding the tax
treatment of the demutualization. In the event that the
plan is executed, the converted companies will be subject to
certain insurance laws and regulations specific to stock
insurance companies as well as regulations of the Securities
and Exchange Commission. Limitations on the payment of
dividends and Insurance Holding Company regulations are
among the types of regulatory requirements with which the
Group will have to comply.
NMF is not eligible for inclusion in the plan for
demutualization under the laws of the Insurance Department
of the Commonwealth of Pennsylvania and therefore is
excluded from these combined financial statements.
Proposed Plan of Affiliation:
In January 1996, OGM made a loan of $250,000 to a Missouri
domiciled property and casualty insurance exchange
(Exchange). The loan represented the initial phase of a
proposed plan of affiliation with the Exchange. In June,
1996 OGM withdrew from the plan of affiliation in accordance
with the terms of the controlling letter of intent.
Recovery of the loan is highly doubtful and accordingly the
Group is expecting to charge the advance against earnings in
1996.
Letter of Understanding:
In July 1996, OGIHC executed a letter of understanding with
a Delaware domiciled property and casualty insurance
company. The letter provides for the Delaware company to
secure insurance management services from CIMI and pursue
mutual to stock conversion and the Group to make
contributions of surplus up to $4.0 million. The agreement
is subject to satisfactory completion of due diligence
investigations by management and regulatory approval.
Operating Results (Unaudited):
Severe winter weather in January and February 1996 in the
geographic areas in which the Group writes business has
produced adverse operating results through June 1996.
Management believes that such results are consistent with
those of similar carriers in the same region. The Group
expects to report a net loss of approximately $4.0 million
through June 1996.
<PAGE>
OLD GUARD MUTUAL INSURANCE COMPANY,
OLD GUARD MUTUAL FIRE INSURANCE COMPANY,
GOSCHENHOPPEN-HOME MUTUAL INSURANCE COMPANY
AND SUBSIDIARY
COMBINED BALANCE SHEETS
as of June 30, 1996 and 1995
<TABLE>
<CAPTION>
June 30,
1996 1995
ASSETS
<S> <C> <C>
Investments and cash:
Fixed income securities, available for sale, at fair value $71,707,637 $72,920,130
Preferred stocks at fair value 5,351,234 9,321,141
Common stocks at fair value 6,085,782 4,507,661
Other invested assets 295,491 220,899
Cash and cash equivalents 6,965,715 8,480,679
Total investments and cash 90,405,859 95,450,510
Premiums receivable 7,241,608 8,120,836
Reinsurance recoverables and unearned premiums 21,032,717 11,034,663
Deferred policy acquisition costs, net 5,908,511 7,391,364
Accrued investment income 998,402 1,021,278
Deferred income taxes, net 2,643,810 650,104
Property and equipment, net 5,915,165 4,499,847
Receivable from affiliate 1,508,766 1,071,586
Other assets 2,104,972 1,569,755
Total assets $137,759,810 $130,809,943
============ ============
LIABILITIES & SURPLUS
Liabilities:
Reserve for losses and loss adjustment expenses $58,941,272 $49,637,443
Unearned premiums 34,407,141 33,670,113
Accrued expenses 1,615,225 1,916,299
Capital lease obligations 1,663,945 0
Subordinated debt 2,250,000 2,250,000
Other liabilities 1,840,986 1,585,761
Total liabilities 100,718,569 89,059,616
Surplus:
Unassigned surplus 35,944,013 40,084,060
Unrealized capital gains of securities,
net of deferred income taxes 1,097,228 1,666,267
Total surplus 37,041,241 41,750,327
Total liabilities and surplus $137,759,810 $130,809,943
============ ============
/TABLE
<PAGE>
OLD GUARD MUTUAL INSURANCE COMPANY,
OLD GUARD MUTUAL FIRE INSURANCE COMPANY,
GOSCHENHOPPEN-HOME MUTUAL INSURANCE COMPANY
AND SUBSIDIARY
COMBINED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
June 30,
1996 1995
<S> <C> <C>
Revenue:
Net premiums written $20,353,909 $33,261,368
Change in unearned premiums 5,592,340 (940,028)
Net premiums earned 26,306,249 32,321,340
Investment income, net of expenses 2,381,483 2,308,096
Net realized investment gains 945,395 340,020
Other revenue 260,387 111,706
Total revenue 29,893,514 35,081,162
Expenses:
Losses and loss adjustment expenses incurred 25,648,492 22,836,834
Amortization of deferred policy acquisition costs 5,682,035 8,711,331
Operating expenses 3,166,706 2,923,404
Total expenses 34,497,233 34,471,569
Income (loss) before provision for income tax (4,603,719) 609,593
Income tax expense (benefit) (1,642,604) 114,232
Net income (loss) ($2,961,115) $ 495,361
=========== ==========
/TABLE
<PAGE>
OLD GUARD MUTUAL INSURANCE COMPANY,
OLD GUARD MUTUAL FIRE INSURANCE COMPANY,
GOSCHENHOPPEN-HOME MUTUAL INSURANCE COMPANY
AND SUBSIDIARY
COMBINED STATEMENTS OF CHANGES IN SURPLUS
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
June 30,
1996 1995
<S> <C> <C>
Unassigned surplus:
Balance, beginning of year $38,905,128 $39,588,699
Net income (2,961,115) 495,361
Balance, end of six months $35,944,013 $40,084,060
=========== ===========
Unrealized capital gains (losses) of securities,
net of deferred income taxes:
Balance, beginning of year $1,992,186 ($3,057,253)
Net increase (decrease) in unrealized capital
gains of securities available for sale (894,958) 4,723,520
Balance, end of six months $1,097,228 $1,666,267
========== ==========
</TABLE>
<PAGE>
OLD GUARD MUTUAL INSURANCE COMPANY,
OLD GUARD MUTUAL FIRE INSURANCE COMPANY,
GOSCHENHOPPEN-HOME MUTUAL INSURANCE COMPANY
AND SUBSIDIARY
COMBINED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
June 30,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) (2,961,115) 495,361
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation of property and equipment 197,814 193,566
Amortization of discount/accretion of premium 168,121 199,137
Net realized investment gain (945,396) (340,020)
Net realized gain on sale of property and equipment (11,400) 0
Deferred income tax provision (benefit) (1,011,989) 69,343
(Increase) decrease in assets:
Premiums receivable (927,973) (1,615,270)
Reinsurance recoverable (10,758,190) 3,006,367
Deferred policy acquisition costs 1,272,268 (287,953)
Accrued investment income 34,738 24,591
Other assets, excluding receivable from sale of security (674,414) (129,937)
Receivable from affiliate (1,294,184) (686,121)
Increase (decrease) in liabilities:
Reserve for losses and loss adjustment expenses 6,849,775 (1,671,984)
Unearned premium 1,077,891 1,023,144
Accrued expenses (1,537,885) (900,680)
Other liabilities, excluding payable for purchase of security 668,750 215,287
Net cash used by operating activities (9,853,189) (405,169)
Cash flows from investing activities:
Cost of purchases of fixed income securities, available for sale (12,437,155) (13,274,023)
Proceeds from sales of fixed income securities, available for sale 16,628,133 15,567,286
Proceeds from maturities of fixed income securities, available for sale 1,500,000 615,000
Cost of equity securities acquired (2,349,873) (1,521,224)
Proceeds from sales of equity securities 5,098,272 1,878,328
Change in receivable/payable for securities (423,768) (155,759)
Cost of purchases of other invested assets (59,076) (30,000)
Proceeds from sale of other invested assets 0 0
Cost of purchase of property and equipment (456,905) (722,936)
Proceeds from sale of property and equipment 11,400 0
Net cash provided by investing activities 7,511,028 2,356,672
Cash flows from financing activities:
Proceeds from capital lease funding 1,154,751 0
Repayment of subordinated debt 0 (750,000)
Net cash provided by (used in) financing activities 1,154,751 (750,000)
Net increase (decrease) in cash and cash equivalents (1,187,410) 1,201,503
Cash and cash equivalents at beginning of year 8,153,125 7,279,176
Cash and cash equivalents at end of six months 6,965,715 8,480,679
Additional Disclosures:
Cash paid (received) during the six months for:
Interest $ 0 $ 0
Income taxes $ (45,843) $ 172,000
/TABLE
<PAGE>
Notes to Interim Combined Financial Statements
1. Accounting Policies:
The unaudited interim combined financial statements, which
reflect all adjustments (consisting only of normal recurring
items) that management believes necessary to present fairly
results of interim operations, should be read in conjunction
with the Notes to Combined Financial Statements (including
the Summary of Significant Accounting policies) included in
the Insurance Companies and subsidiary audited combined
financial statements for the years ended December 31, 1995,
1994 and 1993.
The accounting policies of the Insurance Companies and
Subsidiary, as applied in the combined interim financial
statements presented herein, are consistent with those
applied in the audited financial statements for the years
ended December 31, 1995, 1994 and 1993.
2. Reinsurance:
Effective January 1, 1996, the Insurance Companies and
American Re-Insurance Company entered into a quota share
reinsurance treaty pursuant to which the Insurance Companies
cede 20% of their liability remaining after cessions of
excess and catastrophic risks through other reinsurance
contracts. Pro rata cessions of unearned premiums as of
January 1, 1996 and the transfer of premiums written during
the six months ended June 30, 1996 accounted, in part, for
the decline in net premiums written, net premiums earned and
total revenues.
3. Proposed Transactions:
First Delaware Insurance Company Acquisition
Management expects that in November 1996, Old Guard
Investment Holding Company, Inc. a subsidiary of the
Insurance Companies (Old Guard Investment) will execute an
agreement with First Delaware Insurance Company (First
Delaware), a Delaware insurance company, and International
Corporation (IC), First Delaware's sole shareholder,
pursuant to which Old Guard Investment will acquire 80% of
the capital stock of First Delaware. The acquisition will
be made through a combination of (i) a $3 million cash
investment in First Delaware in exchange for a number of
shares of First Delaware common stock equal to $3 million
divided by 1.5 times the GAAP book value per share of First
Delaware as of the month end immediately preceding the
closing date and (ii) the purchase from IC for cash of a
number of additional shares of First Delaware, at a price
per share equal to 1.5 times the GAAP book value per share
of First Delaware, such that Old Guard Investment will hold
80% of the stock of First Delaware after closing.
Management estimates that the total acquisition price will
equal approximately $4.8 million. Old Guard Investment
expects to finance the acquisition of the common stock of
First Delaware with the proceeds of a $5 million preferred
stock investment in Old Guard Investment by American Re that
will be redeemed with a portion of the proceeds from the
sale of Common Stock in the Conversion.
New Castle Insurance Company Investment
Management expects that in November 1996, Old Guard
Investment will execute an Investment Agreement with New
Castle Mutual Insurance Company (New Castle), a Delaware
insurance company that is licensed in Delaware and
Pennsylvania and sells primarily homeowners and other
personal property and casualty lines through independent
agents. Pursuant to the Investment Agreement, Old Guard
Investment, or an affiliate designated by Old Guard
Investment, will purchase a $1.0 million convertible surplus
note and, from time to time, at its discretion, will
purchase up to an additional $3.0 million of convertible
surplus notes based on cancellation of reinsurance or an
increase in the ratio of net premiums written to statutory
surplus to an amount in excess of 2.9% Old Guard Investment
expects to finance this investment by drawing on an existing
unused $4.0 million line of credit.
4. Termination of a Proposed Plan of Affiliation:
A nonrecurring expense incurred for the six month period
ended June 30, 1996 was the write off of a $250,000 surplus
note investment in an unaffiliated Missouri insurance
company whose surplus is impaired. Old Guard Mutual had an
agreement to affiliate with this company but the agreement
was terminated because of a deterioration in the financial
condition of that company. See Note 15 to the Combined
Financial Statements.<PAGE>
No dealer, salesman or any other person has been
authorized to
give any information or to make any representation other than as
contained in this Prospectus in connection with the offering made
hereby, and, if given or made, such information shall not be
relied upon as having been authorized by the Company, the
Insurance Companies, or Hopper Soliday Soliday & Co., Inc. This
Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any of the securities offered hereby to any
person in any jurisdiction in which such offer or solicitation is
not authorized or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom
it is unlawful. Neither the delivery of this Prospectus nor any
sale hereunder shall under any circumstances create any
implication that there has been no change in the affairs of the
Company or the Insurance Companies, since the date as of which
information is furnished herein or since the date hereof.
<PAGE>
Table of Contents
Page
Prospectus Summary ....................................
Selected Financial Information and
Other Data ..........................................
Investment Considerations .............................
The Company ...........................................
Use of Proceeds .......................................
Dividend Policy .......................................
Market for the Common Stock ...........................
Capitalization ........................................
Pro Forma Data ........................................
Management's Discussion and Analysis of
Financial Condition and Results of Operations........
Business ..............................................
Management of the Company .............................
The Conversion ........................................
Certain Restrictions on Acquisition of
the Company .........................................
Description of Capital Stock ..........................
Registration Requirements .............................
Legal Opinions ........................................
Experts ...............................................
Index to Combined Financial
Statements ..........................................
Until __________, 1997, all dealers effecting transactions in
the registered securities, whether or not participating in this
distribution, may be required to deliver a prospectus. This is in
addition to the obligation of dealers to deliver a prospectus
when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
OLD GUARD GROUP, INC.
Up to
3,860,600 Shares
COMMON STOCK
PROSPECTUS
HOPPER SOLIDAY & CO., INC.
__________, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expense of Issuance and Distribution.
The Company anticipates the following expenses:
SEC registration fee ......................... $ 15,161
Printing, postage, and mailing* .............. $ 500,000
Legal fees and expenses* ..................... $ 450,000
Accounting fees and expenses* ................ $ 250,000
Appraisal fee and expenses ................... $ 75,000
Blue sky fees and expenses
(including counsel fees)* .................. $ 25,000
Transfer and conversion agent fees
and expenses* .............................. $ 100,000
Miscellaneous* ............................... $ 84,839
Total $1,500,000
==========
___________________
*Estimated
Item 14. Indemnification of Directors and Officers.
Pennsylvania law provides that a Pennsylvania corporation
may indemnify directors, officers, employees, and agents of the
corporation against liabilities they may incur in such capacities
for any action taken or any failure to act, whether or not the
corporation would have the power to indemnify the person under
any provision of law, unless such action or failure to act is
determined by a court to have constituted recklessness or willful
misconduct. Pennsylvania law also permits the adoption of a
Bylaw amendment, approved by shareholders, providing for the
elimination of a director's liability for monetary damages for
any action taken or any failure to taken any action unless
(1) the director has breached or failed to perform the duties of
his/her office; and (2) the breach or failure to perform
constitutes self-dealing, willful misconduct or recklessness.
The Bylaws of the Company provide for (1) indemnification of
directors, officers, employees, and agents of the Company and its
subsidiaries; and (2) the elimination of a director's liability
for monetary damages, each to the fullest extent permitted by
Pennsylvania law.
Directors and officers are also insured against certain
liabilities for their actions as such by an insurance policy
obtained by the Company.
Item 15. Recent Sales of Unregistered Securities.
Not applicable.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
2.1 Joint Plan of Conversion, dated as of May 31, 1996, as
amended and restated July 19, 1996, of Old Guard Mutual
Insurance Group, Old Guard Mutual Fire Insurance
Company and Goschenhoppen-Home Mutual Insurance
Company*
3.1 Articles of Incorporation of Old Guard Group, Inc.*
3.2 Bylaws of Old Guard Group, Inc.*
4.1 Form of certificate evidencing shares of Old Guard
Group, Inc.**
5. Opinion of Stevens & Lee re: Legality**
10.1 Old Guard Group, Inc. - Management Recognition Plan**
10.2 Old Guard Group, Inc. - 1996 Stock Compensation Plan**
10.3 Old Guard Group, Inc. - Employee Stock Ownership Plan**
10.4 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and David E. Hosler*
10.5 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Mark J. Keyser*
10.6 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Steven D. Dyer*
10.7 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Scott A. Orndorff*
10.8 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Donald W. Manley*
10.9 Proportional Reinsurance Agreement for the year 1996,
dated January 1, 1996, between Old Guard Mutual
Insurance Company, Old Guard Mutual Fire Insurance
Company and Goschenhoppen - Home Mutual Insurance
Company.*
10.10 Surplus Note, as amended, issued by Old Guard Mutual
Insurance Company to American Re-Insurance Company.*
23.1 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Berwind Financial Group, L.P.
23.4 Consent of Stevens & Lee (contained in Exhibit 5)**
24 Power of Attorney (contained on signature page)*
27 Amended Financial Data Schedule
99.1 Revised Appraisal of Old Guard Mutual Insurance
Company, Old Guard Mutual Fire Insurance Company and
Goschenhoppen-Home Mutual Insurance Company by Berwind
Financial Group, L.P.
99.2 Stock Order Form**
99.3 Question and Answer Brochure**
99.4 Letters to prospective purchasers**
- ---------------
* Previously filed.
** To be filed by amendment.
(b) Financial Statement Schedules:
Schedule I - Summary of Investments - Other than
Investments in Related Parties.
Schedule II - Condensed Financial Information of Registrant
(Not Applicable).
Schedule IV - Reinsurance.
Schedule VI - Supplemental Information Concerning Property
- Casualty Insurance Operations.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Policyholders
Old Guard Mutual Insurance Company,
Old Guard Mutual Fire Insurance Company, and
Goschenhoppen-Home Mutual Insurance Company
and Subsidiary:
Our report on the combined financial statements of Old Guard
Mutual Insurance Company, Old Guard Mutual Fire Insurance
Company, and Goschenhoppen-Home Mutual Insurance Company and
Subsidiary (the Group) has been included in this Form S-1. In
connection with our audits of such financial statements, we have
also audited the related financial statement schedules I, IV and
VI of this Form S-1. These supplementary financial statement
schedules are the responsibility of the Group's management. Our
responsibility is to express an opinion on these supplementary
financial statement schedules based on our audit.
In our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
One South Market Square
Harrisburg, Pennsylvania
July 19, 1996<PAGE>
<TABLE>
<CAPTION>
OLD GUARD MUTUAL INSURANCE COMPANY,
OLD GUARD MUTUAL FIRE INSURANCE COMPANY, AND
GOSCHENHOPPEN-HOME MUTUAL INSURANCE COMPANY
AND SUBSIDIARY
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES AS OF
DECEMBER 31, 1995
- ------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D
- ------------------------------------------------------------------------------------------
Market Balance
Type of Investment Cost Value Sheet
- ------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
United States Government and Government
Agencies and Authorities $47,995 $48,273 $48,273
States, Municipalities and Political
Subdivisions 1,553 1,566 1,566
Convertibles and Bonds with Warrants
Attached 6,205 6,638 6,638
All Other Corporate Bonds 21,277 22,051 22,051
Redeemable Preferred Stock 6,920 7,036 7,036
------- ------- -------
Total Fixed Maturities $83,950 $85,564 $85,564
------- ------- -------
Equity Securities:
Common Stocks:
Public Utilities 0 0 0
Banks, Trust and Insurance Companies 475 720 720
Industrial, Miscellaneous and All Other 2,564 3,628 3,628
Non-redeemable Preferred Stock 2,072 2,195 2,195
------- ------- -------
Total Equity Securities 5,111 6,543 6,543
------- ------- -------
Other Long-Term Investments 242 228 228
------- ------- -------
Total Investments $89,303 $92,335 $92,335
======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OLD GUARD MUTUAL INSURANCE COMPANY,
OLD GUARD MUTUAL FIRE INSURANCE COMPANY, AND
GOSCHENHOPPEN-HOME MUTUAL INSURANCE COMPANY
AND SUBSIDIARY
SCHEDULE IV - REINSURANCE
FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -------- -------- --------- --------- -------- -----------
Assumed Percentage
Ceded to from of Amount
Gross Other Other Net Assumed
Amount Companies Companies Amount to Net
-------- --------- --------- -------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1995 $76,054 $11,600 $2,209 $66,663 3.3%
FOR THE YEAR ENDED DECEMBER 31. 1994 75,694 13,063 833 63,465 1.3%
FOR THE YEAR ENDED DECEMBER 31, 1993 73,194 13,442 1,234 60,986 2.0%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OLD GUARD MUTUAL INSURANCE COMPANY,
OLD GUARD MUTUAL FIRE INSURANCE COMPANY, AND
GOSCHENHOPPEN-HOME MUTUAL INSURANCE COMPANY
AND SUBSIDIARY
SCHEDULE VI - SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
AS OF AND FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
- -------- -------- -------- -------- -------- -------- -------- -------------- -------- -------- --------
RESERVE PAID
DEFERRED FOR DISCOUNT LOSSES
POLICY LOSSES IF ANY NET LOSSES AND LAE AND LOSS
AFFILIATION ACQUISI- AND DEDUCTED NET INVEST- INCURRED ADJUST- NET
WITH TION LOSS ADJ IN UNEARNED EARNED MENT CURRENT PRIOR AMORT MENT WRITTEN
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS INCOME YEAR YEAR OF DPAC EXPENSES PREMIUMS
- ----------- -------- -------- -------- -------- -------- -------- ------- ------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED PROPERTY
AND CASUALTY
ENTITIES
DECEMBER 31, 1995 $7,181 $52,091 $0 $33,329 $66,663 $4,458 $48,067 $ 2,442 $17,611 $47,228 $67,115
DECEMBER 31, 1994 7,103 51,309 0 32,647 63,465 3,932 51,959 (5,519) 17,036 50,511 65,649
DECEMBER 31, 1993 6,459 59,057 0 32,065 60,986 3,928 44,950 (2,796) 15,358 39,938 63,355
</TABLE>
<PAGE>
Item 17. Undertakings.
(a) Rule 415 Offering: The undersigned registrant hereby
undertakes:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to this
registration statement: (i) to include any prospectus required
by Section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the prospectus any fact or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement; and (iii) to include any
material information with respect to the plan of distribution not
previously disclosed in the registration statement or any
material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-
effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) Request for acceleration of effective date: Insofar as
indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the bylaws of the
registrant, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933
Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Lancaster, Commonwealth of
Pennsylvania, on November 1, 1996.
OLD GUARD GROUP, INC.
By:/s/ David E. Hosler
David E. Hosler,
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of
1933, this Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
Signature Capacity Date
/s/ David E. Hosler President, Chief November 1, 1996
David E. Hosler Executive Officer and
Director (Principal
Executive Officer)
* Director November 1, 1996
James W. Appel
* Director November 1, 1996
John E. Barry
* Director November 1, 1996
Luther R. Campbell, Jr.
* Director November 1, 1996
M. Scott Clemens
______________________ Director November 1, 1996
Richard B. Neiley, Jr.
______________________ Director November 1, 1996
G. Arthur Weaver
* Director November 1, 1996
Robert L. Wechter
/s/Mark J. Keyser Chief Financial November 1, 1996
Mark J. Keyser Officer and Treasurer
(Principal Financial
and Accounting Officer)
*By/s/ David E. Hosler
David E. Hosler
Attorney-in-fact
<PAGE>
EXHIBIT INDEX
Number Title
2.1 Joint Plan of Conversion, dated as of May 31, 1996, as
amended and restated July 19, 1996, of Old Guard Mutual
Insurance Group, Old Guard Mutual Fire Insurance
Company and Goschenhoppen-Home Mutual Insurance
Company*
3.1 Articles of Incorporation of Old Guard Group, Inc.*
3.2 Bylaws of Old Guard Group, Inc.*
4.1 Form of certificate evidencing shares of Old Guard
Group, Inc.**
5. Opinion of Stevens & Lee re: Legality**
10.1 Old Guard Group, Inc. - Management Recognition Plan**
10.2 Old Guard Group, Inc. - 1996 Stock Compensation Plan**
10.3 Old Guard Group, Inc. - Employee Stock Ownership Plan**
10.4 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and David E. Hosler*
10.5 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Mark J. Keyser*
10.6 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Steven D. Dyer*
10.7 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Scott A. Orndorff*
10.8 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Donald W. Manley*
10.9 Proportional Reinsurance Agreement for the year 1996,
dated January 1, 1996, between Old Guard Mutual
Insurance Company, Old Guard Mutual Fire Insurance
Company and Goschenhoppen - Home Mutual Insurance
Company.*
10.10 Surplus Note, as amended, issued by Old Guard Mutual
Insurance Company to American Re-Insurance Company.*
23.1 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Berwind Financial Group, L.P.
23.4 Consent of Stevens & Lee (contained in Exhibit 5)**
24 Power of Attorney (contained on signature page)*
27 Amended Financial Data Schedule
99.1 Revised Appraisal of Old Guard Mutual Insurance
Company, Old Guard Mutual Fire Insurance Company and
Goschenhoppen-Home Mutual Insurance Company by Berwind
Financial Group, L.P.*
99.2 Stock Order Form**
99.3 Question and Answer Brochure**
99.4 Letters to prospective purchasers**
- ----------------
* Previously filed.
** To be filed by amendment.
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the registration statement of
Old Guard Group, Inc. on Form S-1 of our reports dated July 19,
1996, on our audits of the combined financial statements and
financial statement schedules of Old Guard Mutual Insurance
Company, Old Guard Mutual Fire Insurance Company and
Goschenhoppen - Home Mutual Insurance Company and Subsidiary as
of December 31, 1995 and 1994 and for the three years then ended
December 31, 1995, 1994 and 1993. We also consent to the
reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P
One South Market Square
Harrisburg, Pennsylvania
November 1, 1996
EXHIBIT 23.3
BERWIND FINANCIAL GROUP, L.P.
Investment Banking
Merchant Banking
November 1, 1996
Board of Directors
Old Guard Group, Inc.
2929 Lititz Pike
Lancaster, PA 17601
Directors:
We hereby consent to the inclusion of our appraisal of the
estimated pro forma market value of Old Guard Mutual Insurance
Company, Old Guard Mutual Fire Insurance Company and
Goschenhoppen-Home Mutual Insurance Company as subsidiaries of
Old Guard Group, Inc. as an exhibit to the Old Guard Group, Inc.
Form S-1 Registration Statement.
Sincerely,
/s/ Berwind Financial Group, L.P.
BERWIND FINANCIAL GROUP, L.P.
3000 CENTRE SQUARE WEST, 1500 MARKET STREET
PHILADELPHIA, PENNSYLVANIA 19102
PHONE (215) 575-2395, FAX: (215)564-5402
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> JUN-30-1996 DEC-31-1996
<DEBT-HELD-FOR-SALE> 71,708 78,528
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 11,437 13,579
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 83,440 92,335
<CASH> 6,966 8,153
<RECOVER-REINSURE> 4,969 565
<DEFERRED-ACQUISITION> 5,910 7,181
<TOTAL-ASSETS> 137,760 134,853
<POLICY-LOSSES> 58,941 52,091
<UNEARNED-PREMIUMS> 34,407 33,329
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 2,250 2,250
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 37,041 40,897
<TOTAL-LIABILITY-AND-EQUITY> 137,760 134,853
26,306 66,663
<INVESTMENT-INCOME> 2,382 4,458
<INVESTMENT-GAINS> 945 1,011
<OTHER-INCOME> 261 274
<BENEFITS> 25,648 50,509
<UNDERWRITING-AMORTIZATION> 3,167 17,611
<UNDERWRITING-OTHER> 3,102 5,655
<INCOME-PRETAX> (4,604) (1,368)
<INCOME-TAX> (1,643) (684)
<INCOME-CONTINUING> (2,961) (684)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,961) (684)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<RESERVE-OPEN> 52,091 51,309
<PROVISION-CURRENT> 25,700 48,067
<PROVISION-PRIOR> (52) 2,442
<PAYMENTS-CURRENT> 16,047 29,970
<PAYMENTS-PRIOR> 11,437 17,258
<RESERVE-CLOSE> 58,941 52,091
<CUMULATIVE-DEFICIENCY> (7,735) (7,683)
</TABLE>
Exhibit 99.1
OLD GUARD GROUP, INC.
Pro Forma Appraisal Report
Joint Plan of Conversion from
Mutual to Stock Organization
Prepared by:
BERWIND FINANCIAL GROUP, L.P.
3000 Centre Square West
1500 Market Street
Philadelphia, Pennsylvania 19102
(215) 575-2395
Fax (215) 564-5402
<PAGE>
All facts and data set forth in this report are true and
accurate to the best of the appraiser's knowledge and belief.
Neither the fee nor payment thereof for this appraisal
report is contingent upon the values reported.
The information, estimates, and data contained in this
report were obtained from sources believed to be reliable, but
Berwind Financial Group, L.P. ("Berwind") assumes no
responsibility for their accuracy.
We have made a personal inspection of the business
appraised. Berwind has made no investigations of, and assumes no
responsibility for the titles to, or any liabilities against, the
business. Berwind further assumes that there are no hidden or
unexpected conditions of either the real or personal property
which would affect value.
Berwind does not have any present, prospective, direct or
indirect interest in the business herein appraised. All opinions
as to the appraised value of the business in total are presented
as the appraiser's considered opinion based on the facts and data
set forth in this report and may not be used out of the context
presented herein.
Neither all nor any part of the contents of this valuation
report shall be conveyed to the public through advertising,
public relations, news, sales or other media without the prior
written consent and approval of Berwind.
<PAGE>
TABLE OF CONTENTS
Page
1. APPRAISAL LETTER
2. INTRODUCTION ...........................................1-4
3. COMPANY BACKGROUND AND DESCRIPTION ....................5-18
General Overview ....................................5
Products and Services ...............................5
Customers ...........................................7
Pricing .............................................7
Marketing and Sales .................................8
Competition ........................................10
Facilities .........................................12
Employees ..........................................13
Management .........................................14
Environmental and Litigation .......................15
Regulatory .........................................17
4. MARKET AREA AND INDUSTRY DISCUSSION ..................19-30
5. FINANCIAL REVIEW .....................................31-41
6. APPRAISAL DISCUSSION .................................42-58
<PAGE>
August 19, 1996
PERSONAL & CONFIDENTIAL
Board of Directors
Old Guard Mutual Insurance Company,
Old Guard Mutual Fire Insurance Company, and
Goschenhoppen-Home Mutual Fire Insurance Company
c/o Mr. David E. Hosler, CPCU
President & Chief Executive Officer
Old Guard Insurance Group
2929 Lititz Pike
Lancaster, PA 17604
Directors:
Berwind Financial Group, L.P. ("Berwind") has been retained
by the Board of Directors to render an independent appraisal
("Appraisal") of the estimated pro forma fair market value of Old
Guard Mutual Insurance Company ("OGMIC"), Old Guard Mutual Fire
Insurance Company ("OGMFIC") and Goschenhoppen-Home Mutual
Insurance Company ("GHMIC") (collectively, "Insurance Companies")
as subsidiaries of Old Guard Group, Inc. ("OGGI" or the
"Company"). We understand that the Company will offer common
stock (the "Common Stock") in an amount equal to this pro forma
fair market value in an offering (the "Offering") conducted in
conjunction with a Joint Plan of Conversion (the "Plan").
Pursuant to the Plan, OGGI, an insurance holding company, will
purchase all the authorized stock of each of the Insurance
Companies, which will convert from mutual to stock form (the
"Reorganization"). References to OGGI, Company, OGMIC, OGMFIC,
GHMIC, and Insurance Companies herein shall include such entities
in their current (mutual) forms, or their post-Reorganization
form, as indicated by the context.
Upon completion of the Reorganization, the Company will have
shares of Common Stock issued and outstanding to the Company's
employee stock ownership and management stock bonus plans,
policyholders of the Insurance Companies, directors, officers and
employees of OGGI and the Insurance Companies, and potentially
members of the general public including members of the local
community. Pursuant to the Reorganization, the Company is filing
with the Pennsylvania Department of Insurance ("PDI") a joint
application for approval of the conversion. The Reorganization
shall be accomplished in accordance with the procedures set forth
in the Plan adopted by the Company's Board of Directors, the
requirements of applicable laws and regulations, and the policies
of the PDI.
Berwind, as part of its investment banking business, is
regularly engaged in the valuation of assets, securities, and
companies, in various types of asset and security transactions
including the valuation of assets, securities and companies in
mergers, acquisitions, capital raisings and leveraged buyouts.
In accordance with the terms of our engagement letter dated
June 3, 1996, we submit this Appraisal which includes our opinion
and summarizes the procedures used in arriving at our conclusion.
A. Documentation and Information Examined
As background for analysis of the proposed transaction,
we reviewed the history, current operations and future
prospects of OGGI with certain members of the Company's
management. Our financial analysis is based upon, but
not limited to, a review of the following documents and
information we examined during the course of our
analysis:
1. Agreement and Joint Plan of Conversion dated
May 31, 1996.
2. Audited financial statements for the two year
period ended December 31, 1995.
3. Internally-prepared financial statements for the
six months period ended June 30, 1996.
4. Internally prepared unaudited projected
consolidated income statements for the years 1997-
2001. Projections indicate earnings results under
particular assumptions indicated in the
projections.
5. Organizational charts for Old Guard Insurance
Group.
6. Other such items as provided by management in
fulfillment of the Information Request List
attached as Exhibit A.
B. Persons Interviewed
During the course of our analysis, we conducted
meetings and interviews with persons who, in our
judgment, were capable of providing us with information
necessary to complete the assignment. These interviews
and meetings included, but were not limited to: David
E. Hosler, President, Chief Executive Officer and
Chairman; Mark J. Keyser, Chief Financial Officer;
Steven D. Dyer, Esquire, Secretary and General Counsel;
Scott A. Orndorff, Executive Vice President; and Donald
W. Manley, Vice President of Underwriting.
C. Facilities Visited
As part of the development of information in our
appraisal, we visited the Company's corporate
headquarters in Lancaster, Pennsylvania.
D. Factors Considered
We also reviewed, among other factors, demographics of
the Company's primary market area and compared the
Company's financial condition and operating performance
with that of selected publicly-traded property/casualty
insurers. We reviewed conditions in the securities
markets in general and in the market for property/
casualty insurance company common stock in particular.
In arriving at our appraisal, we considered the
following factors, among others, which we deemed
relevant:
1. The operating history and management of the
Company.
2. The nature of the businesses operated by OGGI and
their future prospects.
3. The historical and current operating results of
OGGI and the factors affecting these results.
4. The historical and current financial condition of
the Company.
5. Projected operating results of the Company
entities for the years ending 1997 through 2001
prepared by management.
6. Price to earnings ratios, price to book value and
future growth prospects of publicly-traded
comparable companies.
7. Conditions in the general economy and the industry
in which the Company operates.
8. The financial terms and conditions of the proposed
transaction.
In addition, we conducted other such financial
analyses, studies and investigations as deemed
appropriate.
E. Access to Information and Personnel
During our analysis, we received access to all
materials and personnel which we deemed necessary and
adequate for the purpose of formulating the appraisal
expressed in this letter, and no limitations were
placed upon our investigations.
F. Assumptions and Limitations
We did not independently verify the financial
statements and other information provided by the
Company and its independent accountants, nor did we
independently value the assets or liabilities of OGGI.
The valuation considers the Company only as a going
concern.
Our Appraisal is subject to the following assumptions
and limitations, among others.
1. We express no opinion as to the tax consequences,
if any, to OGGI and its shareholders.
2. We have made no independent verification of the
financial and operating data supplied by
management including, but not limited to, internal
and audited financial statements and projected
data for the years 1997 through 2001 for the
Company and have accepted the information as
presented. In addition, since Berwind is not
qualified as an expert in detecting the presence
of potentially hazardous material, we have relied
upon management representation that there are no
known environmental problems that would have a
material affect on our Appraisal.
3. Our Appraisal is based upon market, economic,
financial and other conditions as they exist and
can be evaluated as of the date of this letter
and speaks to no other time period.
4. We assume that the proposed transaction is, in all
respects, lawful under applicable corporate law.
5. We have assumed and relied upon the accuracy and
completeness of the information reviewed by us and
the information provided to us by OGGI's
management without independent investigation.
With respect to financial projections, we have
assumed, for purposes of our appraisal, that they
have been reasonably prepared by the Company's
management on bases reflecting the best currently
available estimates and judgments of the future
financial performance of the Company.
G. Conclusions
As of August 19, 1996, our estimated pro forma market
value of OGGI as an insurance holding company was
$33.570 million within a range of $28.535 million to
$38.606 million representing an Offering at 15% below
and above the midpoint.
Our Appraisal is not intended, and must not be
construed, to be a recommendation of any kind as to the
advisability of purchasing shares of Common Stock in
the Offering. Moreover, because this Appraisal is
necessarily based upon estimates and projections of a
number of matters, all of which are subject to change
from time to time, no assurance can be given that
persons who purchase shares of stock in the Offering
will thereafter be able to sell such shares at prices
related to the foregoing estimate of pro forma market
value. Berwind is not a seller of securities within
the meaning of any federal or state securities laws and
any report prepared by Berwind shall not be used as an
offer or solicitation with respect to the purchase or
sale of any securities.
The Appraisal reported herein will be updated as
appropriate. These updates will consider, among other
factors, any developments or changes in the financial
condition and operating performance, management
policies, and current conditions in the securities
markets for property/casualty insurance company common
stock. Should any such developments or changes be
material, in our opinion, to the valuation of shares
offered in the Reorganization, appropriate adjustments
will be explained in detail at that time.
Sincerely,
BERWIND FINANCIAL GROUP, L.P.
<PAGE>
Exhibit A
INFORMATION REQUIRED FOR APPRAISAL ANALYSIS
Old Guard Insurance Group
The following list is intended to indicate the general areas
of information required by Berwind in the completion of its
appraisal analysis. Berwind understands that certain items may
only be available for "on site" review.
I. Financial - for Old Guard Mutual Insurance Company, Old
Guard Mutual Fire Insurance Company and Goschenhoppen-Home
Mutual Fire Insurance Company
A. Annual audited financial statements for the past five
fiscal years; most recent internal year to date
results; Fiscal Year 1996 estimated results; FY 1997
budget.
B. Any long-term financial projections or strategic plans.
C. Most recent statutory filings.
D. Loss Experience and Analysis - three years.
E. Best reports for the latest three years.
F. Schedule indicating adjusted, consolidated financial
statements for 3 entities, if combined (GAAP basis,
latest year and projection only).
II. Business Description - for Old Guard Mutual Insurance
Company, Old Guard Mutual Fire Insurance Company and
Goschenhoppen-Home Mutual Fire Insurance Company
A. Principal Markets (by geography and insurance lines)
and Competition.
1. Number of customers in market area served.
2. Customer concentration, if any.
3. Competition - include names, market shares, and
principal means of competing.
4. Demographic information utilized to substantiate
revenue projections.
5. The names of public companies that provide similar
services.
B. Significant policies with regard to:
1. Marketing.
2. Compensation and incentive and benefits programs
for executives and employees.
3. Claims/Loss assessment and reserves.
4. Investments.
5. Pricing and Regulation.
6. Capital Expenditures.
7. Commissions/Agent Relationships.
8. Reinsurance.
9. Underwriting and delegation of authority.
III. Description of Facilities and Operations including:
A. Location.
B. Capacities, rates of utilization and required Capital
Investment.
C. Schedule of fair market value of real estate owned
(include appraisals or cost-basis), if available.
D. Equipment description (include for significant
equipment only and give useful life remaining,
estimated replacement costs, etc.).
IV. Management and Personnel - for Old Guard Mutual Insurance
Company, Old Guard Mutual Fire Insurance Company and
Goschenhoppen-Home Mutual Fire Insurance Company
A. List of directors and their affiliations.
B. Organization chart
C. List of officers including title, age, length of
service, former affiliation, and salary.
D. Number of employees, union affiliations, strike record,
employee benefit plans (including post retirement).
E. Discussion of impact of FASB #106 (post-retirement
benefits).
F. Discussion of known and potential environmental
liabilities.
V. Other
A. Discussion of federal or state tax returns unsettled
and any tax treatments in contention.
B. Discussion of significant regulatory issues, in
particular, any issues in contention.
C. Discussion of significant or unusual leases.
D. Schedule of pending litigation.
E. Minutes for Director's meetings for past two years.
F. Most recent Insurance Department Examination.
G. Name of Actuary.
<PAGE>
INTRODUCTION
Background, Purpose and Limiting Conditions
This document is the independent appraisal, ("Appraisal")
prepared by Berwind Financial Group, L.P. ("Berwind"), of the
estimated pro forma fair market value of Old Guard Mutual
Insurance Company ("OGMIC"), Old Guard Mutual Fire Insurance
Company ("OGMFIC") and Goschenhoppen-Home Mutual Insurance
Company ("GHMIC") (collectively, "Insurance Companies") as
subsidiaries of Old Guard Group, Inc. ("OGGI" or the "Company").
We understand that the Company will offer common stock (the
"Common Stock") in an amount equal to this pro forma fair market
value in an offering (the "Offering") conducted in conjunction
with a Joint Plan of Conversion (the "Plan"). Pursuant to the
Plan, OGGI, an insurance holding company, will purchase all the
authorized stock of each of the Insurance Companies, which will
convert from mutual to stock form (the "Reorganization").
References to OGGI, Company, OGMIC, OGMFIC, GHMIC, and Insurance
Companies herein shall include such entities in their current
(mutual) forms, or their post-Reorganization form, as indicated
by the context. Old Guard Investment Holding Company,
Commonwealth Insurance Managers, Inc. and 2929 Service
Corporation are subsidiaries of OGGI; OGGI's consolidated
financial statements include results of these companies which do
not have a material effect on the Company's consolidated
financial position.
Upon completion of the Reorganization, the Company will have
shares of Common Stock issued and outstanding to the Company's
employee stock ownership and management stock bonus plans,
policyholders of the Insurance Companies, directors, officers and
employees of OGGI and the Insurance Companies, and, potentially,
members of the general public including members of the local
community. Pursuant to the Reorganization, the Company is filing
with the Pennsylvania Department of Insurance ("PDI") a joint
application for approval of the conversion. The Reorganization
shall be accomplished in accordance with the procedures set forth
in the Plan adopted by the Company's Board of Directors, the
requirements of applicable laws and regulations, and the policies
of the PDI.
In the course of preparing this report, we reviewed and
discussed with OGGI and the Insurance Companies' managements and
with the Company's independent accountants, the audited financial
statements of the Company's operations for the fiscal years ended
December 31, 1994 and 1995. We also reviewed and discussed with
management other financial matters of OGGI and the Insurance
Companies.
Where appropriate, we considered information based upon
other available public sources, which we believe to be reliable;
however, we cannot guarantee the accuracy or completeness of such
information. We have made a personal inspection of the Company;
however, Berwind has made no investigations of, and assumes no
responsibility for the titles to, or liabilities against, the
Company. Berwind further assumes that there are no hidden or
unexpected conditions of either the real or personal property
which would affect value. We visited the Company's primary
market area and examined selected demographic data. We also
examined the competitive environment within which the Company
operates and assessed the Company's relative strengths and
weaknesses.
We examined and compared OGGI's performance with selected
segments of the Property/Casualty industry ("P/C") and selected
publicly-traded P/C companies. We reviewed conditions in the
securities markets in general and the market for P/C company
common stock in particular. We included in our analysis an
examination of the potential effects of the Reorganization on the
Company's operating characteristics and financial performance as
they relate to the estimated pro forma market value of the
Company.
In preparing our Appraisal, we have relied upon and assumed
the accuracy and completeness of financial and statistical
information provided by OGGI, the Insurance Companies and their
independent accountants. We did not independently verify the
financial statements and other information provided by the
Company and its independent accountants, nor did we independently
value the assets or liabilities of the Company. Neither
Berwind's fee nor payment thereof for this Appraisal is
contingent upon the values we report.
Our Appraisal is not intended, and must not be construed, to
be a recommendation of any kind as to the advisability of
purchasing shares of Common Stock in the Offering. Moreover,
because such appraisal is necessarily based on estimates and
projections of a number of significant matters, all of which are
subject to change from time to time, no assurance can be given
that persons who purchase shares of Common Stock in the Offering
will thereafter be able to sell such shares at prices related to
the foregoing valuation of the pro forma market value thereof.
Berwind is not a seller of securities within the meaning of any
federal and state securities laws, and any report prepared by
Berwind shall not be used as an offer or solicitation with
respect to the purchase or sale of any securities.
The valuation reported herein will be updated as
appropriate. These updates will consider, among other factors,
any developments or changes in the Company's financial condition
and operating performance, management policies, and current
conditions in the securities markets for P/C company common
stock. Should any such developments or changes be material, in
our opinion, to the valuation of shares offered in the
Reorganization, appropriate adjustments to the estimated pro
forma market value will be made. The reasons for any such
adjustments will be explained in detail at that time.
Neither all nor any part of the contents of this Appraisal
shall be conveyed to the public through advertising, public
relations, news, or other media without the prior written consent
of Berwind.
<PAGE>
COMPANY BACKGROUND AND DESCRIPTION
General Overview
OGGI is an insurance holding company based in Lancaster,
Pennsylvania which was created to issue stock and use the
proceeds to purchase all the common stock of the Insurance
Companies which are planning to de-mutualize to stock form
pursuant to the Plan approved as of May 31, 1996. A brief
description of the Insurance Companies follows:
- OGMIC - Founded in 1896, OGMIC provides property/
casualty insurance to individuals and businesses in
Pennsylvania, Maryland and Delaware. Direct premiums
written by OGMIC were approximately $64 million in 1995
from policies such as: homeowners, automobile,
commercial property and casualty, workers' compensation
and farmowners.
- OGMFIC - Founded in 1872, provides property/casualty
insurance to individuals and businesses in
Pennsylvania, Maryland and Delaware. Types of policies
include commercial property and casualty and farmowners
(1995 direct premiums written were $3.2 million).
OGMFIC also reinsures 90% of Neffsville Mutual Fire
Insurance Company, a mutual affiliate of OGGI which is
not party to the Reorganization.
- GHMIC founded in 1843, provides property/casualty
insurance to individuals primarily in a ten county area
of Southeastern Pennsylvania. Types of policies
include homeowners and other personal lines coverages
which earned GHMIC $9.3 million in direct premiums
written in 1995.
Products and Services
As holding company, OGGI will not provide any services.
Insurance Companies provide property/casualty insurance primarily
to individuals and businesses in Pennsylvania, as well as in
neighboring regions of Delaware and Maryland. Approximately 94%
of direct premiums are generated in Pennsylvania with the
remainder in Delaware and Maryland.
Types of coverage include:
1995 Net Written(1) Percent of
Type of Policy Premiums (000s) Total
Homeowners $18,723 27.9
Personal Automobile 14,890 22.2
Farmowners 12,969 19.3
Commercial Property/Casualty 9,055 13.5
Workers' Compensation 4,281 6.4
Other 7,197 10.7
Total $67,115 100.0
__________
(1) Source: Company management.
The Insurance Companies are subject to an intercompany
pooling arrangement (entered into in 1992) which enables each to
maximize leverage and diversify lines of insurance. For 1995,
participations were: OGMIC - 60%; OGMFIC - 29%; and GHMIC - 11%.
Customers
Customer base currently consists of an estimated 107,000
individuals and businesses primarily in Pennsylvania, Maryland
and Delaware. Over 140,000 policies (estimated) were in force as
of May 31, 1996. Approximately 132,000 policies were written in
Pennsylvania, 5,400 in Maryland and 2,000 in Delaware. The
Company places particular emphasis on the following target
customers:
- Commercial - small to medium sized businesses in the
Company's core market area.
- Farmowners - general property/casualty lines customers
in the entire range of farmowners.
- Homeowners - homes appraised in the $150,000-$250,000
range in small cities and towns.
- Personal Auto - traditional modest risk profile
consumers.
Details regarding the Company's market area are found in "Market
Area" herein.
Pricing
The Insurance Companies' philosophy regarding pricing is to
be "slightly below the average" of competitors' pricing.
Management balances the need to be competitive in the marketplace
with a goal of not leading the market in any line of business,
with the possible exception of the farmowners line. In
farmowners, the Company's strongest niche, the Company is a
leader in the market in pricing, but not at the expense of a
prudent balance between loss activity and pricing.
Marketing and Sales
Insurance products are offered through approximately 483
independent agencies; 454 in Pennsylvania, 2 in Delaware and 27
in Maryland. The vast majority of agents represent multiple
carriers. No agent accounts for over 5% of Company revenues,
with the top 10 agents (by volume) accounting for 18% of premium
volume. Average volume with each agent is $140,000 with the
largest agent generating approximately $3.0 million in premium
revenue for the Company. The Company manages its agents through
quarterly business reviews (with underwriter participation) and
establishment of benchmarks/goals for premium volume.
Relationships with agents are deemed good with no material
problems occurring in recent years. A list of criteria used by
the companies to pre-qualify agencies seeking appointments is
provided in Exhibit A, as is a copy of the standards used in a
Company/Agency Agreement.
To support its agents' marketing efforts, the Company
develops and produces print and radio advertising and holds
seminars for its agents. Agents are then able to purchase
advertising (using the Company-prepared materials) in local
markets. The Company has carefully managed a decline in the
number of agents in recent years to reduce low volume agencies
and dilute its agent concentration in southern Pennsylvania.
Commissions are structured according to three plans (chosen
by the agents):
- Floating commission with rates based on three year loss
experience with profit sharing based on current year
results.
- Fixed commission with opportunity for contingent
commission based on three year loss experience.
- Fixed commission with no opportunity for contingent
commission.
The Company's commission rates tend to be at or near
industry standards except in the area of personal and commercial
automobile where it is lower in rate (percentage) to allow for
more aggressive pricing of policies leading to higher sales
volumes. The Company hopes an increase in volume will more
appropriately balance its mix of property and casualty lines.
OGMIC has written personal auto policies since 1985 and have not
experienced any atypical losses in these lines. Loss ratios for
the past three years were as follows:
1993 1994 1995
Personal Auto Net Loss and LAE Ratios 84.9% 88.7% 77.8%
Because of this experience, an increase in personal auto premiums
written is viewed by management as a profitable growth
opportunity.
Competition
The Insurance Companies compete directly in a competitive
market with 15-20 companies, even some that hold minimal market
share. The chart on the following pages illustrate market share
by type of policy. (Refer to "Industry Discussion" herein for
further discussion of the industry and competition.)
<PAGE>
<TABLE>
<CAPTION>
Market Share as of Dec. 31, 1995
by Policy Type (%)
Personal Commercial Workers'
Farmowners Homeowners Auto Multi-Peril Compensation
---------- ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Pennsylvania
Old Guard Group, Inc. 33.2 1.8 (a) (a) (a)
Nationwide Group 15.6 9.7 9.5
Everett Cash Mutual 7.4
Agway Insurance Company 6.4
Millville Mutual 3.1
Tuscarora-Wayne Mutual 2.9
State Farm Group 16.1 23.6
Erie Insurance Group 9.9 11.5 5.8 6.1
Allstate Insurance Group 9.5 14.0
Donegal Group 1.7 1.8
Harleysville Insurance Cos. 1.4 3.3 2.3
Continental 4.9
Cincinnati Financial Group 1.8
Penn National Insurance 2.8
Liberty Mutual Ins. Co. 2.8
Guard Insurance Group 2.2
Maryland
Old Guard Group, Inc. 7.0 (a) (a) (a) (a)
Brethren Mutual 32.0 2.5
Montgomery Insurance Cos. 18.3
Nationwide Group 13.4 8.9 9.1
State Farm Group 6.2 21.4 19.9 4.0
Travelers Group 1.9
Allstate Insurance Group 16.9 20.3
Erie Insurance Group 6.1 6.4 3.1 2.8
Harford Mutual Ins. Grp. 2.5
ITT Hartford Ins. Grp. 12.4
Liberty Mutual Ins. Co. 5.9
Guard Insurance Group 2.2
Delaware
Old Guard Group, Inc. 36.2 (a) (a) (a) (a)
Penn Mutual Insurance 15.9
Donegal Group 9.1 5.1 2.5
New Castle Mutual 9.1 7.4
Nationwide Group 6.9 15.0 25.3 3.7
Farm Family Ins. Cos.*
State Farm Group 22.5 24.5
Allstate Insurance Grp. 6.0 6.5
Liberty Mutual Ins. Cos. 4.9 15.5
ITT Hartford Ins. Co. 2.7 6.2
Harleysville Ins. Cos. 4.0 3.1
Continental 4.0
Harford Mutual Ins. 2.7
Selective Insurance Group 7.4
Penn National Insurance 2.7
</TABLE>
__________
(a) Indicates Company market share is less than 1%.
* Farm Family does not show any premium for the farmowner
line. Company management believes they may be reporting
premium for their farm product under monoline coverages.
<PAGE>
Facilities
The Company's corporate locations include company-owned
facilities in Lancaster, PA and leased facilities in Quakertown,
PA. The Company operates in a 33,000 square foot complex at 2929
Lititz Pike and 25,000 sq. ft. (8,000 sq. ft. of which is leased
to an unrelated party) at 147 W. Airport Road in Lancaster (both
Company-owned facilities), and 5,000 sq. ft. (leased) in
Quakertown, PA. All facilities are either new or have been
renovated since 1980. The Company's facilities contain adequate
space for existing operations and also include additional space
capable of supporting an expansion. In 1996, the Company signed
a purchase agreement to acquire a 20,000 square foot facility on
land adjoining its Lititz Pike location. The Company's intention
would be to sell its Airport Road location and consolidate
operations at Lititz Pike. Purchase price, $1.2 million, is
modestly below the asking price for the Company's Airport Road
location and therefore would not have a material impact on the
Company's consolidated financial position. Net book value for
the Company's facilities and equipment is $5.7 million as of
December 31, 1995.
Employees
OGGI, the Insurance Companies and subsidiaries employ 193
persons, 178 of whom are full-time and 15 of whom are part-time
employees. The employees are non-union, and relations are
reported to be excellent. A standard benefits package, including
medical (includes dental and disability), life, and 401(k) and
profit sharing, near-site child care and eye care is provided to
all full-time employees. Employer contribution to benefits costs
is on an unallocated basis (equal to a percent of salary) which
the employee designates among plans offered. The Company does
not provide post-retirement benefits. OGGI itself has no
employees.
Management
The Company's management team consists of 5 persons. The
President, Executive Vice President, Chief Financial Officer,
General Counsel, and Vice President were interviewed as part of
Berwind's information collection process. Management displays
strong knowledge of the Company and the industry. Brief
biographies follow:
David E. Hosler, CPCU, 46, President. Mr. Hosler joined Old
Guard in 1973 in underwriting, became Vice President of
Underwriting in 1980 and President and Chief Executive
Officer in 1985. Prior to joining Old Guard, he was a
corporate accountant with HMW Industries. Mr. Hosler is a
graduate of Elizabethtown College.
Scott A. Orndorff, CPCU, 40, Executive Vice President of
Operations. Mr. Orndorff, whose responsibilities include
Claims, Information Systems and Underwriting, joined Old
Guard in 1993 after four years with Gulf Insurance Company
and four years with Reliance Reinsurance Corporation.
Mr. Orndorff is a graduate of Mansfield State College and
Penn State University's Master in Management program.
Mark J. Keyser, 43, Chief Financial Officer and Treasurer.
Mr. Keyser joined Old Guard in 1991 after two years as
President of Commonwealth Insurance Consultants, Inc. and 14
years with KPMG Peat Marwick (Partner). Mr. Keyser is a CPA
and a graduate of Bloomsburg University.
Steven D. Dyer, CPCU, 39, Secretary. Mr. Dyer joined Old
Guard in 1980. He has served as field underwriter, director
of special projects and General Counsel (since 1991).
Mr. Dyer is a graduate of Western Maryland College and the
University of Baltimore Law School.
Donald W. Manley, CPCU, 43, Vice President of Underwriting.
Mr. Manley joined Old Guard in 1977 and has been Vice
President of Underwriting since 1986. Mr. Manley is a
graduate of Bloomsburg University.
A listing of directors and their affiliations is included in
Exhibit B. Organizational charts for various Old Guard entities
are also included in Exhibit C.
Environmental and Litigation
While subject to litigation as both plaintiff and defendant
in the ordinary course of business, there is no outstanding
litigation which could have a material effect on the Company's
financial condition. The Company is not aware of any potential
environmental liabilities with regard to the properties and
operations of OGGI.
In 1987, the Company restricted its farmowner policies to
pollution that is sudden and accidental to the lesser of the
policy limit or $300,000 each occurrence and annual aggregate.
Cleanup costs are excluded. At the same time it began offering a
limited pollution coverage for other than sudden and accidental.
The endorsement provides $2,500 each occurrence and a $10,000
annual aggregate. Cleanup costs for this type of loss are
included in the $2,500 and $10,000 limits.
In 1988, the Company began excluding pollution coverage on
its commercial liability policies. The industry standard
personal and commercial automobile and homeowners policies do not
contain environmental and pollution exclusions. The Company has
paid no material claims arising from environmental and pollution
related liabilities with respect to policies written either
before or after 1987. The Company does not believe that any
pending claims or administrative or judicial proceedings arising
from environmental and pollution related liabilities will have a
material adverse effect on the Company's financial condition, and
is not aware of any material threatened claims or administrative
or judicial proceedings arising from such liabilities. However,
there can be no assurance that the Company's exposure to
environmental and pollution liabilities with respect to policies
written either before or after 1987 will not have a material
adverse effect on the Company's results of operations or
financial condition.
Regulatory
The Insurance Companies are regulated in the states in which
they do business. Such regulation consists of: 1) regulation of
premium rates and forms; 2) minimum capital and surplus
requirements; 3) regulation of guaranty funds and assessments;
4) licensing of companies and agents; 5) approval of accounting
methods and methods of setting loss and expense reserves;
6) setting requirements for and limiting the types and amounts of
investments; 7) establishing requirements for the filing of
annual statements and other financial reports; 8) conducting
periodic statutory examinations of the affairs of insurance
companies; and, 9) approving proposed changes in control. Such
regulation and supervision is primarily for the benefit and
protection of policyholders.
The Insurance Companies are frequently in contact with the
Insurance Departments in the states in which they are licensed
regarding rate and form filings, policyholder complaints, and
holding company registration requirements. While not
insignificant, these contacts are considered routine.
OGMIC is preparing a filing under the Internal Revenue
Service's Voluntary Compliance Resolution (VCR) program. This
filing is being made to address assorted, minor errors that
occurred in the administration of the Old Guard Mutual Insurance
Company Profit Sharing and Retirement Savings Plan over the last
few years. Management indicates that there are no significant
issues in contention and that a positive response from the
Internal Revenue Service is expected by year-end 1996, but may
not be received until mid-1997.
<PAGE>
MARKET AREA AND INDUSTRY DISCUSSION
Market Area
The Company's primary market area consists of Pennsylvania
(94% of premiums written), with certain concentration in the
southern and southeastern portions of the state. The following
data therefore provides demographic information on Pennsylvania
as a market area.
From 1990 to 1994, the U.S. experienced a 4.7% population
growth rate while Pennsylvania's population grew 1.5%, from
11,882,842 in 1990 to 12,061,661 in 1994. The northeastern
region of Pennsylvania experienced much of Pennsylvania's growth,
having fifteen of the twenty-five fastest growing municipalities
in the state. However, the greatest numeric population growth
was seen in Pennsylvania's southeastern and south central
regions, where thirteen municipalities grew by at least 2,000
people. In contrast, western Pennsylvania contained the greatest
number of municipalities experiencing population losses (although
the major cities, regardless of region - Philadelphia, Pittsburgh
and Scranton - experienced the largest numeric drop in
population).
Since approximately 26% of OGGI's premiums are written for
homeowners, some housing information is useful for determining
the strength of the market in Pennsylvania. In 1990, there were
4,938,140 housing units in the Commonwealth of Pennsylvania,
64.3% of which were owner occupied, 26.7% of which were renter
occupied, and the remainder of which were vacant. The owner
occupied housing units had a mean value of $87,166. In 1994, new
construction of residential structures in Pennsylvania totaled
35,978 units, with the largest amount of new construction
occurring in the counties of Montgomery (3,171 units), Bucks
(3,083 units), York (2,284 units), Lancaster (2,202 units) and
Chester (2,100 units).
Farmowners' policies represent the Company's strongest
niche. The number of farms and amount of farmland decreased in
Pennsylvania from 1982 to 1992, although the number of large
farming operations exhibited some growth. During this period,
the number of farms in Pennsylvania decreased 19.2% from 55,535
farms in 1982 to 44,870 farms in 1992, while the amount of
agricultural acreage dropped 13.4% from 8,297,713 acres to
7,189,541 acres. However, the average farm size in 1992 was 160
acres compared to 149 acres in 1982, a 7.4% increase. The
average estimated market value of land and building per farm
increased 45.6% during the period, from $225,794 in 1982 to
$328,795 in 1992. Pennsylvania is one of the largest U.S. dairy
states and Lancaster County, Pennsylvania is a leading non-
irrigated farm area in terms of total farm production. There is
a heavy concentration of mushroom business in Chester County,
Pennsylvania, and a heavy concentration of poultry houses in the
Delmarva Peninsula of Delaware and Maryland (a secondary market
for the Company's insurance products).
Industry and Capital Markets Discussion
Overview
The property/casualty insurance industry has many external
forces to contend with, including interest rate fluctuations,
adverse weather conditions, and economic downturns, in addition
to more industry-specific issues, such as rate pricing cycles,
overcapacity, and reserve requirements. These issues, taken
together with the current economy and prevailing conditions, have
created a highly competitive environment for property/casualty
insurers and have made this industry less than attractive to
investors, as evidenced by the 1.72% drop in the Dow Jones
Property/Casualty industry segment from January 2, 1996 through
July 24, 1996 compared to a 1.74% rise in the S&P 500 during the
same time period. Several continuing factors support a view that
the industry's unattractiveness may not change in the near term
including: persistent underwriting losses, more modest
forecasted investment gains, loss reserve levels, intense
competition, pricing levels and overcapacity.
Standard & Poor's expects the industry to experience a
substantial underwriting loss in 1996, similar to the $22.2
billion loss in 1994. Because individual underwriting profits
have been small or negative, insurers' profitability has been
largely dependent on net realized investment gains and income
from investment portfolios. Therefore, changes in interest rates
and performance of the capital markets greatly affect an
insurer's performance. As interest rates rise, the value of an
insurer's bond portfolio will drop as bond prices decrease. The
same is true for a company's equity portfolio when equity markets
decline. In 1995, the property/casualty industry's investment
results were positively impacted by lower interest rates and the
strong securities markets that resulted. According to the
Insurance Services Office (ISO), net investment income for the
industry was $36.2 billion in 1995, a 7.5% increase over 1994,
and realized investment gains increased approximately 241% from
$1.7 billion in 1994 to $5.8 billion in 1995. Also, as a result
of the 1995 bond rally created by declining interest rates,
unrealized investment gains for 1995 totaled $20.5 billion, up
$22.3 billion from the $1.8 billion unrealized losses that
existed in 1994. In effect, the capital markets, not
underwriting, provided the industry's earnings.
The investment outlook for 1996 does not appear as bright.
Interest rates have been rising since the beginning of the year
and may continue to rise even higher (from January 1, 1996 to
July 30, 1996, the 30 year treasury bond rose from 5.94% to
7.03%). According to Standard & Poor's, if this upward trend
continues, net realized capital gains may be small (certainly not
at levels attained in 1995), and therefore, earnings may suffer.
In addition to market fluctuations, the property/casualty
insurance industry is negatively impacted by catastrophes, such
as hurricanes, earthquakes, fires and blizzards. Multiple severe
catastrophes have occurred since 1989: Hurricane Hugo, the
Phillips Petroleum plant explosion and the Exxon Valdez oil spill
in 1989; the San Francisco earthquake in 1990; the Oakland,
California fires in 1991; Hurricane Andrew and other major storms
on the U.S. east coast in 1992; winter storms and blizzards in
the mid-atlantic region in 1993, 1994 and 1996; the Northridge
earthquake in 1994; and Hurricane Opal, Texas hailstorms and the
Kobe earthquake in 1995. 1995 was the third-worst year on record
for catastrophes. Catastrophe losses for 1995 totaled $8.3
billion, which was $8.7 billion lower than the losses experienced
in 1994, the second-worst year for catastrophes on record.
Hurricane Opal, which hit Florida and several other southern
coastal states, caused the fourth-worst recorded insured
catastrophe loss, resulting in $2.1 billion in insured losses.
Personal lines insurers exposed to the coastal areas were hit the
hardest by these losses, which were concentrated in the
homeowners lines. The mid-Atlantic region, in which the Company
writes its business, experienced some of its most severe winter
storm and tornado activity on record during the first half of
1996.
The statutory loss ratio, or losses and related expenses
divided by net premiums earned, helps property/casualty insurers
determine the effect of underwriting losses on their performance.
For 1995, the loss ratio for the industry was 78.6%, which showed
signs of improvement over 1994's ratio of 81.3% and the 10-year
industry average of 81.1% due to fewer losses from catastrophes.
For the first quarter of 1996, A. M. Best estimates that
insured catastrophe losses will be $2.5 billion due to the
blizzard in January and the accompanying ice storms, becoming the
third-highest loss total during the first quarter in history. In
fact, the three highest first quarter loss totals in history
occurred in 1996, 1994 and 1993.
Loss reserves, which are funds set aside to pay for insured
claims, make up the largest portion of insurance company
liabilities and therefore, have a great impact on profitability.
If reserves are set extremely high, profitability will be
understated; conversely, if reserves are set too low,
profitability will be overstated. According to Standard &
Poor's, property/casualty insurers have been setting aside
inadequate reserves in recent years in order to make themselves
appear more profitable after suffering from weak premium pricing,
high catastrophe losses and moderate growth from investment
income. Loss reserves for the industry totaled $297.8 billion in
1995, only 2.7% higher than the $290.0 billion reserves in 1994.
If a major catastrophe occurs in the near future, the insurance
industry may not have sufficient funds to cover the severity of
losses incurred, according to Standard & Poor's. Therefore, the
insurance industry potentially could be forced to reassess its
level of loss reserves which could have a negative effect on
earnings.
Financial
The property/casualty industry is highly fragmented and
extremely competitive. As a result, insurers frequently cut
premium prices in order to maintain market share. 1996 is
expected to be the industry's eighth year of so called "soft
pricing." When premium prices drop, underwriting losses tend to
increase as revenues from premiums written are insufficient to
cover underwriting losses and expenses. Evidence can be seen by
examining the industry's expense ratio (underwriting expenses to
net premiums written). As net premiums written fail to keep pace
with expenses, this ratio rises. The expense ratio in 1995 was
26.3%, compared to 26.0% in 1994 and a 10-year average of 25.95%.
According to the Standard & Poor's Industry Survey, premium
growth most likely will remain sluggish for the foreseeable
future, and will not be sufficient to cover underwriting losses
and related costs.
The best measure insurers use to judge core profitability is
the combined ratio, which is calculated as the sum of the loss
ratio and the expense ratio. A company having a combined ratio
under 100% is profitable in its underwriting activities, while
one that has a ratio above 100% is experiencing underwriting
losses. The industry's combined ratio in 1995 was 106.3%
compared to 108.4% in 1994. The main reason for this improvement
is the lower loss ratio achieved by the less severe level of
catastrophe losses incurred in 1995 as compared to 1994. The 10-
year average combined ratio for the industry is 108.3%, implying
that the industry has relied on investment performance for
earnings. Although 1995's results appear to indicate that there
are signs of improvement for insurers, Standard & Poor's expects
the combined ratio to rise in 1996 as a result of the soft
premium pricing environment, high level of winter storm activity,
and weak level of premium renewals observed during the first
quarter.
Another measure used to compare and monitor insurance
companies' prospects for growth and financial solvency and to
determine current capacity utilization is statutory capital and
surplus (policyholders' surplus) and the ratio of net premiums
written to statutory capital and surplus. A ratio greater than
one-to-one indicates that a company is writing more premiums than
it has in capital. The higher the ratio, the greater amount of
leverage the company is employing. The "typical" benchmark ratio
for the industry is two-to-one. As displayed in the chart on the
following page, 1995 net premiums written totaled 1.12 times the
industry's policyholders' surplus, which was lower than the 1.30
times experienced in 1994, and the lowest in over 30 years. This
ratio is far below the benchmark ratio of 2:1 because of the low/
no growth in premiums written and growth in policyholders'
surplus. The low/no growth in premiums written results from
lower pricing ("soft" market) conditions created by increased
competition. According to ISO data, surplus for the property/
casualty industry was $231.7 billion in 1995, a 19.9% increase
over 1994's surplus of $193.3 billion. This increase is
attributable to modest profitability, as well as the growth in
unrealized and realized capital gains in 1995.
Due to intense competition and the resulting prolonged soft
pricing conditions which make profitable growth extremely
challenging, insurers are seeking to control their expenses in
order to compete effectively. Consolidation has become an
industry trend over the last few years, as companies merge in
order to cut overhead and distribution costs while increasing
premiums written through the addition of territories and regions.
As more and more companies merge, the industry should become more
efficient, and therefore, increased profitability should result.
Net Premiums Written to Policyholders' Surplus
1994 1995
Property/Casualty Industry(1) 1.30x 1.12x
__________
(1) Source: May 2, 1996 Standard & Poor's Industry Surveys
Summary of Investor Perceptions
According to Standard & Poor's Industry Surveys, 1995
results for property/casualty insurers were constrained by price
competition, catastrophic losses and environmental and asbestos
claims. The commercial multi-peril and personal lines areas have
particularly suffered because of: (i) great exposure to
catastrophes and (ii) a highly-competitive market and resulting
product pricing discounts.
According to the January 1996 Best's Review - Property/
Casualty, property/casualty operating returns have consistently
lagged behind those of other financial services, utilities, and
Fortune 500 Companies, making the property/casualty industry an
unattractive sector to investors. Evidence of this is displayed
in the chart obtained from Best's Review-Property/Casualty,
January 1996 on the following page.
<PAGE>
<TABLE>
<CAPTION>
COMPARABLE RETURNS ON EQUITY FOR SELECT INDUSTRIES
- ---------------------------------------- ----------------------------------------------------------------
Property/Casualty Insurance(1) Other Industries(2)
- ---------------------------------------- ----------------------------------------------------------------
Statutory GAAP Diversified Commercial
Year Accounting(3) Accounting(4) Financial(5) Banks Utilities Fortune 500(6)
- ---- ------------- ------------- ------------ ---------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
1985 2.8 4.0 9.4 13.0 13.0 11.6
1986 13.9 13.6 15.9 12.8 13.3 11.6
1987 13.2 15.8 16.3 11.1 12.8 14.4
1988 13.2 13.2 12.8 14.6 12.7 16.2
1989 9.1 9.9 13.0 13.6 12.4 15.0
1990 8.5 8.6 12.7 9.9 11.5 13.0
1991 9.5 9.2 13.9 11.9 11.5 13.0
1992 3.6 4.4 12.8 12.2 9.4 9.0
1993 11.2 10.4 17.1 14.9 11.1 11.9
1994 5.8 5.5 18.4 15.6 11.3 13.7
10-Year
Average 9.1 9.5 14.2 13.0 11.9 12.7
</TABLE>
__________
Source: Insurance Information Institute, 1996 Fact Book; through
Best's Review - Property/Casualty, January 1996.
(1) Statutory Accounting, A.M. Best data; GAAP accounting,
Insurance Services Office.
(2) Data are medians. Data for 1985 to 1990 include return on
preferred stock. Thereafter, return on preferred stock is
excluded.
(3) Net income after taxes, divided by year-end policyholders'
surplus.
(4) Revised by Insurance Services Office to reflect revisions to
the GAAP procedure and the Tax Reform Act of 1986.
(5) Composed largely of companies engaged in property/casualty
insurance, with or without life insurance, and other
financial services.
(6) Fortune 500 U.S. Industrial Corporations.
Evidence of the industry's lack of appeal can be observed by
the 1.7% drop in the Dow Jones Property/Casualty industry segment
from January 2, 1996 through July 24, 1996 compared to a 1.7%
rise in the S&P 500 during the same time period. OGGI appears to
fit the market's negative stereotype for a property/casualty
insurer based on its recent results as well as its operations and
financial position.
Demutualization
Many mutual insurers are considering demutualizing and
converting to stock form in order to gain greater access to
capital, and thereby better position themselves in the current
competitive environment. Other companies that have demutualized
successfully, such as the Equitable Society, have proven to
current mutuals that it can work. Additionally, many states'
policies for demutualization are becoming easier to interpret.
For example, Pennsylvania's statute is considered one of the most
progressive. Pennsylvania provides clear, easy to interpret
guidelines which are patterned after the enormously successful
conversion regulations governing mutual thrift conversions.
According to Best's Review, there have been 33 life insurer
conversions from 1902-1986 and 121 property-casualty conversions
from 1850-1992.
These numbers appear small when compared to the other major
U.S. financial services industry which contains a significant
number of mutual-owned companies - the savings and loan (thrift)
industry. Although there are different risk profiles between
insurers and the thrifts, the similarity of a consolidating
industry that has the option of demutualization is important to
note. In the last twenty years, more than 1,000 thrifts have
converted, with approximately $16 billion in new capital being
raised at valuations which averaged 50-60% or more below pro
forma book value historically. The high volume of thrift
conversions compared to mutual insurer conversions in the past is
largely due to the less complex, costly and time consuming
legislation regulating thrift conversions. Some insurers that
are currently in the process of demutualizing include Trigon Blue
Cross and Blue Shield in Richmond, Virginia and Farm Family
Holdings, Inc. in Albany, New York. FPIC Insurance Group, Inc.
of Jacksonville, Florida, a medical professional liability
insurer, demutualized in August, 1996.
<PAGE>
FINANCIAL REVIEW
Summary financial statements for the Company are included in
Exhibit D; audited financial statements are located in Exhibit E.
Revenues
<TABLE>
<CAPTION>
Revenues ($000s)
For the Year Ended 12/31,
----------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Premiums Earned $66,663 $63,465 $60,986 $54,013 $53,050
% Change (Year to Year) 5.0% 4.1% 12.9% 1.8% N/A
Total Revenue $72,406 $63,139 $66,916 $60,172 $58,596
% Change (Year to Year) 6.3% 1.8% 11.2% 2.7% N/A
</TABLE>
The Company has successfully grown premiums and total
revenues (5.9% and 5.4% per annum compounded growth rates since
1991 respectively) as a result of its core competency in
agribusiness, the acquisition of GHMIC, and product line growth
in workers' compensation and automobile. The Company's high
retention rate of 88% results in a significant base from which to
grow. Key elements of future growth include:
- Specialization in commercial lines - The Company seeks
to develop programs tailored to certain industries/
niches in which it is particularly effective.
- Cross-selling personal lines - Currently less than 20%
of the Company's homeowners and farm customers utilize
the Company's auto policies. Effective cross selling
is expected to enhance relationships and increase
premiums written.
- Leverage specialty in farmowners - The Company seeks to
leverage its dominant market share with agribusiness
lines into additional commercial policies.
The Company's quota share treaty (please refer to page 38 for
details) will have the effect of reducing Net Premiums Earned in
the future due to a 20% ceding to the Company's primary
reinsurer.
1995
Net Premiums % of 1994 %
Type of Policy Earned (000s) Total of Total
Homeowners 18,391 27.6% 26.4%
Personal Automobile 14,459 21.7% 19.7%
Farmowners 13,413 20.1% 21.0%
Commercial Property/Casualty 8,828 13.2% 13.2%
Workers' Compensation 4,233 6.4% 6.7%
Other 7,339 11.0% 13.0%
Total 66,663 100.0% 100.0%
Investment Portfolio and Performance
June 30, 1996
Investment Portfolio Composition ($000s)
Category Book Value %
ST Investment 3,276 3.6
Fixed Income 71,708 79.6
Preferred Stock 5,351 5.9
Equity - unaff. 6,086 6.8
Real Estate 3,355 3.7
Other Investments 295 0.3
90,071 100.0%(1)
__________
(1) Total may not sum to 100% due to rounding.
At June 30, 1996, the Company's investment portfolio market value
approximated book value.
1995 1994 1993 1992
Investment Results
(net of expenses)(1) (%) 5.6% 5.0% 6.0% 6.8%
__________
(1) (Net investment gains plus net investment income)/Average
Investments
The Company maintains a conservative investment policy and
portfolio. As illustrated above, 79.6% of the portfolio consists
of bonds with 6.8% common equity securities. The duration of the
portfolio as of 12/31/95 is only 2.3 years (the Company's goal is
between 2.2 and 3.0), indicating a short term portfolio which
minimizes interest rate exposure. The Company's cash flow has
allowed it to face multiple catastrophic losses in recent years
without significant liquidation of its investment portfolio.
Notwithstanding its liquid position, the Company chose to sell
certain common stocks which were below cost in 1995, in order to
seek improved returns on re-invested funds. Realized losses on
the sale amounted to $1.2 million.
Since 1990, the Company has outsourced its investment
management function to Asset Allocation and Management Company
(Chicago, IL), McHugh and Associates (Philadelphia, PA) and
Sanford Bernstein (New York, NY). McHugh and Sanford Bernstein
handle the Company's small equity portfolio while Asset
Allocation and Management Company handles fixed income, preferred
stock and convertible bonds.
Underwriting Performance
1995 1994 1993 1992 1991
GAAP Loss and LAE Ratio 75.8% 73.2% 69.1% 70.5% 68.9%
Pure Loss 68.7 64.7 60.6 60.0 60.0
Five Year GAAP Average 71.5 (Loss and LAE)
The Company targets a 68.7% Loss and LAE ratio as its goal.
Over the preceding five year period, the Company has been
adversely impacted by significant weather events resulting in a
shortfall from the targeted loss and loss adjustment expense
ratio.
A summary of these events and their effect on the loss and
loss adjustment expense ratio by year is presented below:
<TABLE>
<CAPTION>
Effect of Severe Weather
(000's Omitted)
1996 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
Event(s) Winter Wind Winter Wind, Wind Wind
Storms Storms Blizzard
Direct Losses $12,882 $3,676 $19,169 $4,093 $2,715 $1,870
Net Losses After $2,767 $3,159 $3,084 $3,221 $1,673 $1,854
All Recoveries
Effect on Loss 13.6% 4.7% 4.9% 5.3% 3.5% 3.5%
and LAE Ratio
</TABLE>
These events impacted homeowners and farmowners policies
most significantly. A schedule showing the direct claims arising
out of these events for these lines of business follows:
<TABLE>
<CAPTION>
(000's Omitted)
1996
YTD 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
Farmowners $4,663 $2,005 $ 5,384 $1,636 $1,031 $1,025
Homeowners 4,963 1,100 10,804 1,110 885 407
</TABLE>
For both 1995 and 1994 net underwriting losses reported may
be attributed almost entirely to these events. Direct
underwriting results for 1995 show a loss of nearly $2,000,000
resulting entirely from the storm losses. Other factors
impacting 1995 net results were high catastrophe reinsurance
costs, adverse loss development and a conscious decision to
liquidate certain stock holdings which were in substantial loss
positions.
<TABLE>
<CAPTION>
Loss Reserve Activity
1995 1994 1993
<S> <C> <C> <C>
Balance as of January 1 $51,309,427 $59,056,548 $59,628,604
Less reinsurance recoverables 18,499,642 22,175,358 24,962,955
----------- ----------- -----------
Net balance at January 1 $32,809,785 $36,881,190 $34,665,649
Incurred related to:
Current year $48,067,295 $51,958,607 $44,949,599
Prior year 2,442,000 (5,518,699) (2,795,762)
----------- ----------- -----------
Total Incurred $50,509,295 $46,439,908 $42,153,837
Paid related to:
Current year $29,970,071 $35,196,027 $25,952,565
Prior years 17,258,165 15,315,286 13,985,731
----------- ----------- -----------
Total paid $47,228,236 $50,511,313 $39,938,296
Net balance as of December 31 $36,090,844 $32,809,785 $36,881,190
Plus reinsurance recoverables 16,000,653 18,499,642 22,175,358
----------- ----------- -----------
Balance at December 31 $52,091,497 $51,309,427 $59,056,548
=========== =========== ===========
</TABLE>
The Company's claims experience is extremely favorable.
Very few (3-4%) claims against the Company result in litigation
as a result of several factors:
- The Company's strong Litigation Management Program
which emphasizes cost-effective settlements over
litigation.
- The Company's core marketplace consists of individuals
and businesses with traditional values which frequently
allow for amicable settlement of differences.
- Delegated authority to settle claims and provide
superior customer service in claims situations.
Operating Performance
GAAP Expense Ratio (%)
1995 1994 1993 1992 1991
34.9 34.8 34.4 36.2 35.5
GAAP Combined Ratio (%)
1995 1994 1993 1992 1991
110.7 108.0 103.5 106.7 104.4
5 Year Average - 106.7
__________
Reserve Adequacy
The Company's basic Property/Casualty product lines result
in quickly quantified losses with an average length of less than
2 years' development (workers' compensation is longer,
approximately 5-6 years). As indicated on page 31 the Company
has not experienced unfavorable development in loss reserves.
Equity
At June 30, 1996 Policyholders' Surplus totaled $37.0
million, down $3.9 million from December 31, 1995's balance of
$40.9 million. This reduction in surplus resulted from a $3.0
million net loss and a $.9 million decrease in unrealized capital
gains, net.
Currently a surplus note in the amount of $1,500,000 is
outstanding to American Re-Insurance Company (the "American Re
Surplus Note") which contains rights to purchase equity of the
Company in a de-mutualization transaction. According to Company
management and subject to negotiation, the American Re Surplus
Note will be converted into 150,000 shares of equity. Please
refer to "Appraisal Discussion" for a discussion of the impact of
this conversion on the pro forma valuation.
<PAGE>
<TABLE>
<CAPTION>
Summary of Selected GAAP Ratios YTD 1996 1995 5 Year Average
<S> <C> <C> <C>
Expense Ratio 33.6% 34.9% 35.2%
Loss Ratio 97.5 75.8 71.5
Combined Ratio 131.1 110.7 106.7
Return on Average Surplus N/A N/A N/A
Premium Earned Growth Rate N/A 5.0 5.9(1)
Net Prem. Earned/Surplus 1.42x 1.63x 1.60x
</TABLE>
__________
(1) Represents Compound Annual Growth Rate
1996 YTD Results
Old Guard Group, Inc.
June 30, 1996 Financial Summary
($000s)
June 30, December 31,
1996 1995
Balance Sheet
Cash & Investments 90,406 100,488
Premiums Receivable 7,242 6,314
Reinsurance Recoverables 21,033 10,275
Other Assets 19,079 17,776
137,760 134,853
Reserve for Losses and LAE 58,941 52,091
Unearned Premiums 34,407 33,329
Other Liabilities 7,371 8,536
Surplus 37,041 40,897
Six Months Six Months
Ended June Ended June
1996 1995
Income Statement
Net Premiums Earned 26,306 32,321
Net Investment Income 2,381 2,308
Other Revenue 1,206 452
Total Revenue 29,893 35,081
Losses Incurred & LAE 25,648 22,837
Other Expense 8,849 11,635
Income Before Taxes (4,604) 609
Income Tax Expense (1,643) 114
Net Income (2,961) 495
The worst blizzard in Pennsylvania history and additional
related winter storm activity resulted in a first half 1996 net
loss of almost $3 million compared to first half 1995's $0.5
million net profit. Losses from the blizzard as well as non-
catastrophic losses related to the harsh winter produced a net
underwriting loss in the first half of 1996 compared to
approximately breakeven underwriting during the first half of
1995 resulting from 1995's relatively mild winter. Net losses
and a decrease in unrealized capital gains reduced the Company's
surplus from $40.9 million to $37.0 million.
Effective January 1, 1996, the Company executed a 20% quota
share reinsurance treaty with American Re-insurance. The treaty
provides for a 35% ceding commission on net business written.
This treaty is designed to protect the Company from high
frequency and low severity type losses as occurred in the winter
of 1996. Because of this quota share treaty, the Company's net
premiums earned fell 18.6% from the first half of 1995 ($32.3
million) to $26.3 million in the first half of 1996 but the
Company's net loss was reduced substantially, according to
Company management.
Rationale for Demutualization Transaction
Company management identifies several factors which led the
Company to pursue the Demutualization Plan, including:
- Obtaining capital to:
- support expansion of business (premiums written)
- enable the Company to expand and diversify its
target market area
- improve the Company's prospects to make
acquisitions of other insurance companies
- strengthen policyholder protection
- Providing stock issuance as an alternative to a cash
structure for acquisitions.
- Providing capital to enhance rating agency review and
rating of the Company.
- Permit use of stock based compensation to motivate and
retain employees.<PAGE>
APPRAISAL DISCUSSION
Comparable Public Company Analysis
Methodology Background
Berwind arrived at an appraisal range for the Company by
comparing the Company to similar publicly-traded companies (the
"Comparable Group"). This widely utilized and accepted analysis
utilizes financial and market data for publicly-traded companies
to determine prevailing investor attitudes and expectations.
Representative market multiples are developed from public market
data and then applied to OGGI's book value, net earnings,
operating income, cash flows from underwriting activities plus
underwriting gains to determine preliminary indications of value.
Differences between OGGI and the Comparable Group are then
examined in order to determine a final indication of value.
(Please refer to Comparable Company exhibits for complete
comparable public company data and analysis.)
Comparable Companies Selected
In order to determine the value to be applied to OGGI,
Berwind selected a group of exchange-listed (AMEX, OTC, NYSE)
publicly-traded property/casualty insurance companies that
investors would likely compare to OGGI. The criteria used to
select the Comparable Group, a description of the companies
chosen, and a comparison of the Company's financial performance
to the Comparable Group are set forth in the following pages.
Approximately 94% of the Company's premiums are written in
the Commonwealth of Pennsylvania with the main focus on the
eastern and central southern regions. The balance of premiums
written by OGGI are in the states of Maryland and Delaware. OGGI
focuses its underwriting business on basic property/casualty
lines of insurance, including auto, homeowners, and farmowners,
of both a personal and commercial nature. Therefore, the most
appropriate public property/casualty insurance companies to use
as comparisons in order to arrive at a value for OGGI would offer
the same lines of insurance in the same market area.
Since no publicly-traded property/casualty companies fit the
above description exactly, Berwind expanded the criteria. While
remaining focused on those insurance companies that offer basic
property/casualty products, Berwind added those property/casualty
companies whose precise product mix varies from OGGI as well as
those that write premiums in defined states and regions of the
country, although not necessarily Pennsylvania, Maryland and
Delaware.
These companies might display similar attributes to OGGI,
with those writing premiums in Pennsylvania and its surrounding
areas being the best comparison. We located several companies
serving this region, including Donegal Group, Inc., Erie
Indemnity Company, and Harleysville Group, Inc. We also located
other companies that write business in only a limited number of
states. Although these companies may face different types of
demands due to the demographics of the markets served and
different climates and weather conditions, they potentially are a
fair comparison for OGGI. Companies exclusively offering such
products as non-standard auto, aviation or any other more
specialized products were excluded from the group.
A brief description of each of the publicly-traded companies
follows.
- Allied Group, Inc., based in Iowa, is a leading
regional property/casualty insurer specializing in
personal lines, which it sells predominantly in the
central and western United States. The company's
subsidiaries utilize independent agencies, exclusive
agencies, and direct response marketing to sell its
products. Allied Group focuses its underwriting on
private passenger auto and homeowners business, with
66% of its business in personal lines and 34% in
commercial lines.
- American Indemnity Financial Corporation is a
Galveston, Texas based holding company comprised of a
group of regional property and casualty insurance
companies that offer personal and commercial lines of
insurance through independent agents. It offers auto,
homeowners multiple peril, workers' compensation, fire
and allied lines, commercial multiple peril and general
casualty lines of insurance. The majority of the
company's business is written in Texas (over 70%);
other states where the company writes business include
Florida, Louisiana, Mississippi, Alabama, Tennessee,
Kentucky and six other states.
- The Commerce Group, Inc. is engaged primarily in
providing personal and commercial property and casualty
insurance in Massachusetts. Its principal insurance
line is motor vehicle insurance, primarily covering
personal automobiles. The company also offers
commercial automobile, homeowners, inland marine, fire,
general liability and commercial multi-peril insurance.
Through its 1995 acquisition of Western Pioneer
Insurance Company, a personal automobile insurer
located in Pleasanton, California, the company has the
ability to write insurance outside the state of
Massachusetts.
- Donegal Group Inc., headquartered in Marietta,
Pennsylvania, is a regional insurance holding company
offering property and casualty insurance in the states
of Pennsylvania, Delaware, Maryland, Ohio and Virginia
through its wholly-owned subsidiaries and through a
pooling agreement with its affiliate, Donegal Mutual
Insurance Company. The company is also licensed to
conduct business in Indiana, North Carolina and New
York. It offers full lines of personal and commercial
products, including businessowners, commercial multi-
peril, automobile, homeowners, boat owners, workers'
compensation and other coverages. Donegal Group Inc.
was formed in September 1986 by Donegal Mutual
Insurance Company, which owns 59% of the outstanding
common shares.
- Erie Indemnity Company is a Pennsylvania business
corporation that was formed in 1925 to be the attorney-
in-fact for Erie Insurance Exchange, a Pennsylvania-
domiciled reciprocal insurance exchange. The Erie
Insurance Exchange underwrites a broad line of personal
and commercial property and casualty insurance
coverages, including automobile, homeowners, commercial
multi-peril and workers' compensation. Erie Indemnity
Company's principal business consists of managing the
Erie Insurance Exchange, but it is also engaged in the
property/casualty business through its wholly-owned
subsidiaries. The company, together with the Exchange
and its subsidiaries and affiliates, operates
collectively under the name Erie Insurance Group. The
company operates in eight states and the District of
Columbia, although most of its business is written in
Pennsylvania, Ohio, West Virginia, Maryland, and
Virginia.
- Harleysville Group Inc. is a regional insurance holding
company headquartered in Harleysville, Pennsylvania
which, through its subsidiaries, underwrites a broad
line of commercial and personal property and casualty
insurance coverages, including automobile, homeowners,
commercial multi-peril, and workers' compensation.
These coverages are marketed primarily in the eastern
half of the United States. Regional offices are
maintained in Georgia, Illinois, Indiana, Maryland,
Massachusetts, Michigan, New Jersey, New York, North
Carolina, Ohio, Pennsylvania, Tennessee and Virginia.
Harleysville Group is approximately 56% owned by
Harleysville Mutual Insurance Company.
- Merchants Group, Inc., through its wholly-owned
subsidiary, Merchants Insurance Company of New
Hampshire, Inc., markets tailored property and casualty
insurance products to individuals and businesses in
market segments with identifiable individual risk
factors in the northeastern, mid-Atlantic, and
midwestern United States. The company is licensed to
underwrite most major lines of property and casualty
insurance, including personal and commercial
automobile, multi-peril, homeowners, and general
liability, with the majority of its business written in
New York, New Hampshire, and New Jersey.
- Meridian Insurance Group, Inc. is a regional holding
company that underwrites property and casualty
insurance through its wholly-owned subsidiary, Meridian
Security Insurance Company. Approximately 89% of the
company's 1995 business was written by Meridian Mutual
Insurance Company, an Indiana-domiciled mutual
insurance company that currently owns 46.5% of the
company's outstanding common stock. Meridian Mutual
writes a broad line of property and casualty insurance,
including personal and commercial automobile,
homeowner, farmowners and commercial multi-peril, and
worker's compensation. Business is written in the
states of Illinois, Indiana, Kentucky, Michigan, Ohio,
Tennessee, and Wisconsin. Meridian Security writes
personal and farm lines policies primarily in the rural
areas of Indiana, Kentucky, Ohio, Tennessee, and
Wisconsin.
- Penn-America Group, Inc., headquartered in Hatboro,
Pennsylvania, is an insurance holding company which,
through its wholly-owned subsidiary, Penn-America
Insurance Company, writes commercial property, general
liability and multi-peril insurance and personal
automobile insurance on a surplus lines or nonstandard
basis. The Company focuses on smaller, Main Street
businesses in the surplus lines market, such as
restaurants, taverns, retail businesses, contractors
and similar classes, that may not have access to
standard insurance, but drive the economies of rural
and suburban areas. The company does not write unique
or high risk policies. The company markets its
products nationally in small cities and towns, but
writes personal automobile coverage in only two states,
Washington and California.
- State Auto Financial Corporation is an insurance
holding company located in Columbus, Ohio. The company
and its subsidiaries are affiliated with State
Automobile Mutual Insurance Company, which owns 67% of
the company's common stock. The company, including its
subsidiaries and affiliates, currently writes property
and casualty insurance in twenty two midwestern and
southern states. Principal lines of business include
personal and commercial automobile, homeowners,
commercial multi-peril, workers' compensation, general
liability and fire insurance.
Financial Comparisons
Exhibit H (Comparative Statutory Financial Data) summarizes
certain key ratios for the comparable public company group used
by the insurance industry for valuation purposes. Data utilized
are for the 1994 and 1995 fiscal years. Ratios examined include
the loss ratio, expense ratio, combined ratio, and a leverage
ratio or net premiums written to policyholders' surplus.
The loss ratio is the ratio of incurred losses and loss
adjustment expenses to net premiums earned, or the amount paid
out for claims for every dollar that is collected in premiums.
The averages for the comparable group for 1995 and 1994 were
68.8% and 70.5%, respectively. OGGI's loss ratios for the same
periods were 73.7% and 71.8%, 4.9 and 1.3 percentage points above
(worse than) the group averages. This demonstrates that OGGI's
underwriting experience has been worse than its peer group.
Statutory Loss Ratios
1995 1994
Old Guard Group, Inc. 73.7% 71.8%
Comparable Group Average 68.8% 70.5%
The expense ratio is the ratio of underwriting expenses to
net premiums written. The Comparable Group averages for 1995 and
1994 were 31.9% and 31.6%, respectively. The expense ratios for
OGGI were 34.2% and 34.5%, 2.3 and 2.9 percentage points higher
than the Comparable Group, reflecting the fact that OGGI's
expenses for its underwriting activities has historically
exceeded those of its peers.
Statutory Expense Ratios
1995 1994
Old Guard Group, Inc. 34.2% 34.5%
Comparable Group Average 31.9% 31.6%
The combined ratio is a critical ratio for determining
profitability. A ratio below 100% means that financial results
from underwriting activities have been profitable for the year.
In 1995 and 1994, the average combined ratios for the comparative
group were 101.3% and 102.3%, respectively. These ratios were
below the industry averages of 106.3% and 108.5%, respectively,
as calculated by A.M. Best, indicating that the comparable group
achieved better results than the property/casualty industry
overall for the last two years. OGGI's combined ratios for 1995
and 1994 were 107.9% and 106.3%, indicating that the underwriting
activities are less profitable than its Comparable Group.
Statutory Combined Ratios
1995 1994
Old Guard Group, Inc. 107.9% 106.3%
Comparable Group Average 101.3% 102.3%
Industry Average(a) 106.3% 108.5%
__________
(a) Source: May 2, 1996 Standard & Poor's Industry Surveys
The final ratio examined in Exhibit H is the ratio of net
premiums written to statutory capital and surplus (policyholders'
surplus). This ratio determines the capacity available to write
insurance premiums. The lower the number, the higher the unused
capacity that is available. While the ratios for the industry
were 1.12 and 1.30, respectively for 1995 and 1994, the average
ratios for the Comparable Group were 1.81 and 1.78, respectively.
The ratios for the Comparable Group are significantly higher due
to the fact that the companies in the Comparable Group are
smaller than many property/casualty insurers, and utilize greater
operating leverage. The ratios for OGGI for 1995 and 1994 were
2.15 and 2.16, reflecting the fact that OGGI is even smaller than
the companies in its Comparable Group, utilizes greater operating
leverage and needs more capital. Without additional surplus, its
capacity to increase premiums written via leveraging is somewhat
less than its peers.
Net Premiums Written to Policyholders' Surplus
1995 1994
Old Guard Group, Inc. 2.15x 2.16x
Comparable Group Average 1.81 1.78
Industry Average(a) 1.12 1.30
__________
(a) Source: May 2, 1996 Standard & Poor's Industry Survey
Comparison with Comparable Group
In order to develop a better basis for arriving at a value
for OGGI, the comparable companies were separated into two groups
based on differences in their profitability. Profitability was
determined by analyzing such measures as return on average common
equity (22.56% median for higher profitability group vs. 10.93%
median for lower profitability group), return on average capital
(23.68% vs. 13.83%), return on average assets (6.64% vs. 3.16%),
and pretax return on revenue (14.04% vs. 6.72%). As evidenced by
the following table, in most cases, there is a significant and
meaningful difference between the higher and lower profitability
group medians.
<PAGE>
<TABLE>
<CAPTION>
Group Medians
Total
Price/ Market
Return on Pretax Book Capitali-
Average Return on Return on Return Value Price/Last zation/
Common Average Average on Per 12 Months Operating
Equity Capital Assets Revenue Share EPS Income
<S> <C> <C> <C> <C> <C> <C> <C>
Higher Profitability 22.56% 23.68% 6.64% 14.04% 1.63x 10.30x 8.50x
Lower Profitability 10.93% 13.83% 3.16% 6.72% .87x NM 8.28x
Lower Profitability as
a Percent of Higher
Profitability 48.45% 58.40% 47.59% 47.86% 53.37% NM 97.41%
Lower Profitability as
a Percent of Comparable
Group 68.43% 86.55% 66.35% 60.54% 70.73% NM 98.69%
===== ===== ===== ===== ===== == =====
</TABLE>
The lower profitability group, which includes Donegal Group,
Harleysville Group, Meridian Insurance, Merchants Group, and
American Indemnity, exhibited a median price to book value of
.87, or approximately 70% of the comparable group's median price
to book value per share of 1.23 for the quarter ended June 1996,
based on closing stock prices on August 19, 1996. Therefore, it
would appear that those companies which produce lower returns/
profitability exhibit lower price to book value per share ratios.
OGGI is less profitable than the median of even the lower
profitability group, implying that it should be valued below the
median of lower profitability group.
Comparison of Profitability
Return on
Average Return on Return on
Common Average Average
Equity Capital Assets
Old Guard Group, Inc. (1.77%) (3.29%) (0.52%)
Comparable Group Median 15.98 18.54 4.76
Higher Profitability Median 22.56 23.68 6.07
Lower Profitability Median 10.93 13.83 3.16
Other market ratios analyzed included total market
capitalization (the current market capitalization [current market
price times the number of shares outstanding] plus the book value
of total debt and preferred stock) divided by (i) underwriting
gains, (ii) cash flow from underwriting activities, and
(iii) operating income.
The median value for total market capitalization to
underwriting gains, defined as net premiums earned less total
underwriting expenses, was 37.57x. However, five of the ten
selected comparable companies experienced underwriting losses
during the twelve months ended June 30, 1996. OGGI also suffered
from an underwriting loss during the same twelve month period,
therefore the multiples calculated may not be meaningful and the
applications of such multiples would not result in a useful
value.
Cash flow from underwriting activities was calculated by
adding depreciation and amortization to the underwriting gain or
loss and then used as a comparison for total market
capitalization. The resulting median value equaled 28.49x,
meaning that total market capitalization exceeds underwriting
cash flows by 28.49 for every dollar of cash generated. However,
four of the ten selected comparable companies exhibited negative
cash flows. OGGI's underwriting cash flows were also negative,
therefore the multiples calculated may not be meaningful and the
applications of such multiples would not result in a useful
value.
A more meaningful ratio to use for this market analysis is
the ratio of total market capitalization to operating income
(defined as total revenues, including investment income and
gains, less total expenses, except for interest and taxes), as
all but two of the companies experienced positive operating
income. The median ratio for the comparable group was 8.39x, and
the median ratio for the lower profitability group was 8.28x.
Application of Comparable Multiples
Although we believe the group of companies selected for
valuation purposes is reasonably comparable to OGGI, there are
several important differences that must be considered in the
determination of a final value. Such differences (discussed
below) would meaningfully decrease OGGI's value below that
arrived at in the comparable analysis discussed thus far in this
Appraisal.
Profitability of OGGI - As displayed in Exhibit I and
discussed in the financial comparison section, OGGI is less
profitable and suffers from higher underwriting expenses and
losses than its comparable group. In addition, the Company
experienced extremely tight cash flows in the first half of
1996, which resulted in the rescheduling of a principal
payment on a surplus note due on April 20, 1996. Such cash
flow deficiencies are not viewed favorably in a public
market.
Because of OGGI's unprofitable underwriting activity, it is
more dependent on investment results to produce earnings.
For example, in 1995, OGGI generated $5.5 million of net
investment income and net investment gains while generating
a $1.4 million loss before tax. Since approximately 79% of
the book value of OGGI's investment portfolio is made up of
fixed income products, OGGI's interest income and investment
gains (and ultimately, net earnings) are heavily influenced
by interest rate movements. Uncertainty in today's capital
markets makes OGGI's valuation more variable than a company
with stronger underwriting earnings. Additionally,
continued poor performance could create concern with respect
to the Company's A.M. Best rating. A downgrade, if one
occurred, would be detrimental to the Company's business
operations and its valuation.
Because the Company's financial results and position do not
compare favorably with its peers and because it matches
investor's negative perceptions of the industry (refer to
page 27), OGGI should be valued not as the comparable group
taken as a whole but by focusing on multiples applied to the
lower profitability group discussed in the "Market
Comparison" section. Since the lower profitability group's
median price to book value ratio was .87x, approximately 71%
of the comparable group median (1.23x), a significant
discount should be applied to OGGI.
Geographic Concentration - Substantially all of the
Company's premiums (94%) are written in Pennsylvania, with
the balance in Maryland and Delaware. Therefore,
profitability of OGGI is subject to the prevailing economic,
regulatory, demographic, climatic and other conditions in
primarily one state, including the harsh winters suffered by
the Mid-Atlantic states over the last few years. Although
the companies in the comparable group also focus their
business on certain states, most enjoy greater diversity in
their target market regions. A discount to the comparable
peer group should be applied to the comparable company
valuation due to OGGI's high geographic concentration.
Size Disadvantage - OGGI's policyholders' surplus in 1995
was $40.9 million, substantially less than the comparable
group median of $143 million. Even a $34 million offering
will leave the Company at less than 50% of its peers. Net
premiums written of $66.7 also indicate a much smaller
company than the peer group (median of $127.4 million).
Larger companies with greater resources frequently are able
to be more competitive given their access to marketing and
management talent, economies of scale, sophistication and
greater diversification in underwriting. Additionally,
greater size may offer increased investor protection in the
event of extraordinary events and catastrophic losses.
OGGI's Business Strategy Means Additional Risk - In order to
increase revenues while mitigating weather and catastrophe-
related risks and to diversify its product offerings, OGGI
intends to modify its product mix and make acquisitions of
other insurance companies. Currently, the Company is party
to letters of intent to enter into affiliations with two
companies. Changing a proven product mix and merging with
other insurance companies present added risk for OGGI and
its potential shareholders because success (in the
completion of such moves or in the operations themselves) is
not guaranteed. For example, in 1996, the Company attempted
to acquire Lutheran Benevolent Insurance Exchange. After
the Company's Directors declined to pursue the opportunity,
it had incurred expenses as well as management time and
effort; additionally, the recovery of a surplus advance in
the amount of $250,000 has been written off. Since
investors require higher returns with increased risk, the
Company's valuation must be discounted from the comparable
group to make up for this additional risk.
No Prior Market for Common Stock - Because the Company
currently is a mutual insurance company, there has been no
public market for its common stock. As with any new issue,
there can be no assurance that an active trading market will
develop or be sustained or that there will be sufficient
demand for the Common Stock. Also, since uncertainty exists
regarding what the value of OGGI's stock will be once it
starts trading publicly, investors will require a higher
return on their initial investment. The more uncertainty
that arises from an offering, the lower the initial public
offering price should be to induce potential shareholders to
purchase stock.
First Mutual Conversion of an Insurance Company in
Pennsylvania under Act 79 - OGGI will be the first insurance
company to convert from a mutual company to a stock company
under the new Pennsylvania legislation. Since no prior
conversions have occurred in the Commonwealth of
Pennsylvania under this legislation, no precedents exist to
be used as examples for valuation purposes or to determine
how this process will be received by the policyholders and
the public. Policyholders may show little interest because
they may not fully understand what they are purchasing due
to the novel nature of the offering or because policyholders
may not have a strong affinity with their property/casualty
insurer. According to the Act, "the pro forma market value
may be the value that is estimated to be necessary to
attract full subscription for the shares as indicated by the
independent evaluation." Given the numerous uncertainties
associated with the first such conversion in Pennsylvania, a
discount in excess of a standard new issue discount must be
applied to induce potential shareholders to purchase shares
and attract a full subscription.
Upon consideration of the Comparable Group data as well as
the important differences between OGGI and Comparable Group
(discussed above and taken as a whole), an aggregate discount to
the valuation multiples derived in the Comparable Public Company
Analysis of 45% is warranted. The charts on the following pages
summarize the valuation discounts and their effect on OGGI pro
forma valuation.
The appraisal range listed below includes the effect of the
conversion of the American Re Surplus Note discussed in
"Financial Review". The conversion of debt increases the equity
account as well as the number of shares issued. Because the
effect of these changes is to decrease the pro forma book value
per share, the resulting price to book value ratio of the
Offering is inflated slightly, requiring a modest initial
discount to maintain the targeted price to book value estimate.
<PAGE>
Calculation of Multiples Applied to Old Guard Group, Inc.
Price to Book Value(1)
Comparable Group Multiple 1.23x
Profitability - Initial .87x
Discounts applied, including new
issue, profitability, geographic
concentration, business strategy
risk, size disadvantage, first
conversion under Act(2) 45%
Adjusted Multiple .48x
Applicable Valuation Multiples:
-15% .41x
Midpoint .48x
+15% .55x
__________
(1) Price to earnings multiples were not used due to OGGI's
currently depressed earnings as well as the historical
variability of the Company's earnings.
(2) Discounts must be viewed in the aggregate and taken as a
whole.
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Effect of Conversion Proceeds
As of June 30, 1996
(Dollar Amounts in Thousands, except per Share Data)
Minimum Midpoint Maximum
<S> <C> <C> <C>
Shares Offered 2,853,489 3,357,046 3,860,603
Price Per Share $10.00 $10.00 $10.00
Gross Proceeds 28,535 33,570 38,606
Estimated Expenses(a) (2,853) (3,357) (3,861)
--------- --------- ---------
Net Proceeds 25,681 30,213 34,745
Net Income(b) (4,140) (4,140) (4,140)
Income on Proceeds(c) 1,156 1,360 1,564
Less: MRP Adjustment(d) (148) (175) (201)
Less: ESOP Adjustment(e) (556) (654) (752)
--------- --------- ---------
Pro Forma Net Income (3,689) (3,609) (3,529)
Earnings Per Share ($1.29) ($1.08) ($0.91)
Book Value 37,041 37,041 37,041
Net Proceeds 25,681 30,213 34,745
Less: MRP Adjustment(d) (1,141) (1,343) (1,544)
Less: ESOP Adjustment(e) (2,853) (3,357) (3,861)
--------- --------- ---------
Pro Forma Book Value 58,728 62,555 66,382
Book Value Per Share $20.58 $18.63 $17.19
Pro Forma Ratios
Price/EPS nm(g) nm(g) nm(g)
Price/Book Value 0.49 0.54 0.58
Price/EPS-Normalized(f) 9.57 10.97 12.29
__________
</TABLE>
(a) Expenses equal 10% of gross proceeds.
(b) Net Income is for Latest Twelve Months' Period.
(c) Income on proceeds assumes 4.5% earnings after tax.
(d) MRP adjustment based on 4% of offering over 5 years.
(e) ESOP adjustment based on 8% pre-tax interest cost, seven
year amortization and 10% of offering.
(f) EPS adjusted by management for severe weather in second half
of 1995 and catastrophic losses in Winter 1996.
(g) nm = not meaningful.
<PAGE>
Valuation Conclusion
In Berwind's opinion, at August 19, 1996 OGGI's estimated
pro forma book value was $70.6 million implying an offering size
of $33.570 million. Assuming shares of Common Stock will be
offered at $10 per share, the Offering will range from a minimum
of 2,853,489 shares to a maximum of 3,860,603 shares.
