As filed with the Securities and Exchange Commission on
December 10, 1996
_________________________________________________________________
Registration No. 333-12779
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
AMENDMENT NO. 2
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 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) a tax-
qualified employee stock ownership plan (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 Wood Walker, Incorporated ("Legg Mason") and McDonald &
Company Securities, Inc. ("McDonald") (collectively, the
"Underwriters"), or, if the number of remaining shares do not
warrant a public offering, in one or more other registered
transactions. 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." The completion of the Conversion is contingent
upon the sale of a minimum of 2,853,500 shares of Common Stock in
the Offering and the Public Offering.
For more information, please call the Stock Information
Center toll-free at 1-888-262-7731.
Prospective investors should review and consider the
discussion under "Risk Factors" 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. As of August 19, 1996, the estimated pro
forma market value was $33,570,000, which is the Total
Midpoint in the above table. The resulting estimated
valuation range (the "Estimated Valuation Range") in
Berwind's appraisal, which extends 15% below and 15%
above the appraisal of $33,570,000, is from $28,535,000
(the "Total Minimum") to $38,606,000 (the "Total
Maximum"). 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 and 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. In accordance with generally accepted
accounting principles, the Company will report the loan
to the ESOP as a liability on the Company's combined
balance sheet with a corresponding charge to unearned
ESOP compensation, a contra-equity account. 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 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 number of shares
equal to the maximum of the estimated valuation range divided by
the Purchase Price). 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 number of shares equal to the
maximum of the estimated valuation range divided by the Purchase
Price). 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 ____________________, 1997, 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 ______________, 1997, 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
______________, 1997) and if 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 Common Stock has been approved for inclusion in 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 CompaniesOld 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
nine-month period ended September 30,
1996, the Insurance Companies had
combined revenues of $45.0 million and a
net loss of $2.5 million. The losses
for the year ended December 31, 1995 and
the nine-month period ended
September 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
September 30, 1996, the Insurance
Companies had combined assets of
$137.5 million, total equity of
$37.7 million and over 139,000 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.
Under this treaty, the Insurance
Companies cede 20% of their liability
remaining after cessions of excess and
catastrophic risks through other
reinsurance contracts in exchange for a
reinsurance premium equal to 20% of
premiums collected net of other
reinsurance costs and further reduced by
a ceding allowance to the Company equal
to 35% of the reinsurance premium. The
treaty has a moderating effect on the
underwriting losses or gains experienced
by the Insurance Companies because
underwriting risk is shared with the
reinsurer. Accordingly, this
reinsurance treaty has had, and will
continue to 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. The resulting
holding company structure will also
provide needed flexibility to achieve
the Company's goals by permitting the
Company to use its Common Stock and/or
preferred stock to effect future
acquisitions or raise additional
capital. See "The Conversion --
Business Purposes."
The Conversion 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 Conversion will be
accounted for as a simultaneous
reorganization, recapitalization and
share offering which will not change the
historical accounting basis of the
Insurance Companies' financial
statements.
Background and Reasons The Insurance Companies annually
For the Conversion review and adopt a strategic plan
expressly predicated upon company
independence and capital strength. The
Insurance Companies have considered
various capital formation alternatives
and have elected to proceed with the
Conversion in accordance with the
provisions of the Pennsylvania Insurance
Company Mutual to Stock Conversion Act
(the "Act"). The Act was passed by the
Pennsylvania General Assembly in early
December 1995. On December 12, 1995,
management was directed by the Boards of
Directors of each Insurance Company to
explore the process and feasibility of
conversion under the Act. On
January 12, 1996, the Boards of
Directors authorized further study and
requested a presentation with respect to
the process at its meeting on March 31,
1996. At a meeting of the Board of
Directors of each Insurance Company held
on April 22, 1996, management was
directed to prepare the Plan for
consideration at a special meeting to be
held in May. Effective May 31, 1996,
the Board of Directors of each of the
Insurance Companies unanimously adopted
the Plan, subject to approval by the
Department and the policyholders of each
of the Insurance Companies. Each Board
of Directors unanimously adopted
amendments to the Plan on July 19, 1996.
An application with respect to the
Conversion was filed by the Insurance
Companies with Pennsylvania Department
of Insurance (the "Department") on
August 21, 1996 and notice of the filing
and the opportunity to comment was
simultaneously mailed to all Eligible
Policyholders as required by law. The
Department informed the Insurance
Companies on November 27, 1996 that it
did not intend to hold any hearings
regarding the Conversion. The Plan was
approved by 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.
On November 19, 1996, the Company
received an unsolicited request from an
unrelated insurance holding company to
amend the Plan to provide for the merger
of the Company into such unrelated party
in exchange for an aggregate payment of
$27.5 million to all policyholders of
the Insurance Companies, or less than
$200 per policyholder assuming equal
distribution to all policyholders. Such
amount was proposed to be payable
one-half in cash and one-half in a new
class of preferred stock of the
unrelated company, the terms of which
were not specified. Because such a
transaction would not provide additional
capital to the Insurance Companies,
would be inconsistent with their
strategic plan of continued independence
and would be tantamount to a sale and
liquidation of the Insurance Companies,
the Boards of Directors of the Company
and the Insurance Companies declined to
further consider the request and
affirmed their course of independence
and commitment to the Plan.
An application to acquire the Company
was contemporaneously filed with the
Department by the unrelated party. The
Department informed the applicant that
its application was both deficient and
premature and, as a result, the
Department informed the applicant that
it is prohibited from (i) making any
public announcement of its request to
the Company to amend the Plan, and
(ii) soliciting policyholders of the
Insurance Companies in any way,
including in connection with the
policyholder votes to be held on the
Plan at the Special Meetings. If
Eligible Policyholders do not approve
the Plan, the Boards of Directors of the
Insurance Companies intend to maintain
their current course of independence.
See "The Conversion -- Background and
Reasons for the Conversion."
Organization Before and Set forth below are charts which
After the Conversion illustrate the organizational structure
of the Insurance Companies before the
Conversion and of the Company and the
Insurance Companies after the
Conversion.
[Organization Chart will appear here.]
(1) After completion of the
Conversion, the Insurance
Companies intend to transfer
all of the capital stock of
Old Guard Investment Holding
Company, Inc. ("Old Guard
Investment") to the Company
and, as a result, Old Guard
Investment will become a
direct wholly-owned subsidiary
of the Company.
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. If the updated appraisal is
different from the appraisal as of
August 19, 1996 but is within the
Estimated Valuation Range, the Company
will not notify subscribers of the
updated appraisal and the Conversion
will be consummated. If the updated
appraisal is not 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. Subscribers will be
notified of any such action by mail and,
if a new Estimated Valuation Range is
established, subscribers will be given
an opportunity to affirm, amend or
cancel their subscriptions.
Subscription orders may not be withdrawn
for any reason if the updated appraisal
is within the Estimated Valuation
Range.
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
and Community issued in the Conversion are being
Offerings offered at 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
____________________, 1997, unless
extended by the Company in its sole
discretion for up to an additional 10
days. The Community Offering will
terminate on the Community Offering
Termination 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. The sale of shares
of Common Stock in the Subscription
Offering and the Community Offering will
be conducted by Hopper Soliday on a best
efforts basis.
The Company has established a Stock
Information Center to coordinate the
Offering, including tabulation of
proxies and orders and answering
questions about the Offering by
telephone. The Stock Information Center
will be managed by Hopper Soliday. All
subscribers will be instructed to mail
payment directly to the Stock
Information 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 Stock Information Center
toll free at 1-888-262-7731. See "The
Conversion -- Marketing and Underwriting
Arrangements in the Offering."
The Public 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. The Public Offering will
commence as soon as practicable
following the later of the Subscription
Offering Termination Date or the
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. See
"The Conversion -- Marketing and
Underwriting Arrangements in the
Offering and -- Public Offering."
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 38,606 shares of Common Stock in
the Subscription Offering (1% of the
number of shares equal to the maximum of
the Estimated Valuation Range divided by
the Purchase Price) and no person
(including Eligible Policyholders who
elect to purchase stock in the
Conversion), together with associates or
persons acting in concert, may purchase
in the aggregate, more than 193,030
shares of Common Stock (5% of the number
of shares equal to the maximum of the
Estimated Valuation Range divided by the
Purchase Price). 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
$22.6 million and $31.2 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 exchange $16.0 million of
net proceeds from the Offering for all
of the capital stock of Old Guard
Mutual, Old Guard Fire and Goschenhoppen
to be issued in the Conversion.
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.
A portion of the net proceeds
retained by the Company will be used to
repay approximately $5.8 million in
financing incurred in connection with
the pending acquisition of First
Delaware Insurance Company and the
pending investment in New Castle Mutual
Insurance Company. The balance of 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, 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, as well as a
proxy contest for control of the Board
of Directors 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
nine months ended September 30, 1995 and 1996 and the combined
balance sheet data at December 31, 1991, 1992 and 1993 and at
September 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.
For a presentation of the pro forma effect of the Conversion and
related transactions on the Company, see "Pro Forma Data."
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30,
----------------------- -----------------------
1996 1995 1996 1995
---- ---- ____ ____
<S> <C> <C> <C> <C>
Revenue Data:
Direct premiums written. . . . . . . . $ 21,260 $ 19,776 $ 62,623 $ 59,729
Net premiums written(1). . . . . . . . 14,472 16,828 34,826 50.089
Statement of Income Data:
Net premiums earned(1) . . . . . . 13,298 16,214 39,705 48,536
Net investment income. . . . . . . 1,502 1,101 3,434 3,408
Net realized investment gains. . . 383 310 1,328 650
Other income . . . . . . . . . . . 224 60 484 172
------ ------ -------- --------
Total revenues(1) . . . . . . . 15,057 17,685 44,951 52,766
------ ------ -------- --------
Losses and Expenses:
Losses and loss adjustment expenses. 8,900 11,055 34,548 33,892
Other underwriting expenses. . . . . 5,560 6,071 14,159 17,706
Other expenses . . . . . . . . . . . -- -- 250 --
------ ------ ________ ________
Total expenses . . . . . . . . . 14,460 17,126 48,957 51,598
------ ------ ________ ________
Income (loss) before federal income
taxes. . . . . . . . . . . . . . . . 597 559 (4,006) 1,168
Federal income tax expense (benefit) . 184 138 (1,458) 252
-------- -------- -------- --------
Net income (loss)(2) . . . . . . . . . $ 413 $ 421 $ (2,548) $ 916
======== ======== ========= ========
Selected Balance Sheet Data (at period end):
Total investments(3). . . . . . . . $ 85,367 $ 98,477 $ 81,630 $ 91,951
Total assets . . . . . . . . . . . . 137,538 135,383 137,538 135,383
Subordinated debt . . . . . . . . . 1,500 2,250 1,500 2,250
Total liabilities. . . . . . . . . . 99,869 92,736 99,869 92,736
Total equity(3). . . . . . . . . . . $ 37,041 $ 42,648 $ 37,669 $ 42,648
GAAP Ratios:(3)
Loss and loss adjustment expenses
ratio(4) . . . . . . . . . . . . . 66.4% 68.2% 87.0% 69.8%
Underwriting expense ratio(1)(5) . . 41.5% 37.4% 35.7% 36.5%
Combined ratio(1)(6) . . . . . . . . 107.9% 105.6% 122.7% 106.3%
Statutory Data (at period end):
Statutory combined ratio(1). . . . . 104.8% 104.3% 124.7% 107.4%
Industry combined ratio(7) . . . . . -- -- --
Statutory surplus. . . . . . . . . . $ 30,265 $ 31,563 $ 30,265 $ 31,563
Ratio of statutory net written
premiums to statutory
surplus(1)(8). . . . . . . . . . . 1.91x 2.13x 1.53x 2.12x
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenue Data:
Direct premiums written. . . . . . . . $ 78,832 $ 78,730 $ 74,756 $ 71,287 $67,699
Net premiums written . . . . . . . . . 67,115 65,649 63,355 55,424 53,876
Statement of Income Data:
Net premiums earned. . . . . . . . 66,663 63,465 60,986 54,013 53,050
Net investment income. . . . . . . 4,458 3,932 3,928 4,444 4,789
Net realized investment gains. . . 1,011 476 1,758 1,444 560
Other income . . . . . . . . . . . 274 266 244 264 197
-------- -------- -------- -------- --------
Total revenues . . . . . . . . . 72,406 68,139 66,916 60,165 58,596
-------- -------- -------- -------- --------
Losses and Expenses:
Losses and loss adjustment expenses. 50,509 46,440 42,154 38,096 36,527
Other underwriting expenses. . . . . 23,265 22,087 20,991 19,551 18,830
Other expenses . . . . . . . . . . . -- -- -- -- --
-------- -------- -------- -------- --------
Total expenses . . . . . . . . . 73,774 68,527 63,145 57,647 55,357
-------- -------- -------- -------- --------
Income (loss) before federal income
taxes. . . . . . . . . . . . . . . . (1,368) (388) 3,771 2,518 3,239
Federal income tax expense (benefit) . (684) (532) 383 122 534
-------- -------- -------- -------- --------
Net income (loss)(2) . . . . . . . . . $ (684) $ 144 $ 3,388 $ 2,396 $ 2,705
======== ======== ======== ======== ========
Selected Balance Sheet Data (at period end):
Total investments and cash(3). . . . $ 92,335 $ 82,879 $ 90,895 $ 80,826 $ 76,099
Total assets . . . . . . . . . . . . 134,853 127,831 140,213 136,979 142,764
Subordinated debt . . . . . . . . . 2,250 3,000 3,750 4,500 5,250
Total liabilities. . . . . . . . . . 93,956 91,300 100,359 100,366 108,551
Total equity . . . . . . . . . . . . $ 40,897 $ 36,531 $ 39,854 $ 36,613 $ 34,212
GAAP Ratios:
Loss and loss adjustment expense
ratio(4) . . . . . . . . . . . . . 75.8% 73.2% 69.1% 70.5% 68.8%
Underwriting expense ratio(5). . . . 34.9% 34.8% 34.4% 36.2% 35.5%
Combined ratio(6). . . . . . . . . . 110.7% 108.0% 103.5% 106.7% 104.3%
Statutory Data (at period end):
Statutory combined ratio . . . . . . 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. . . . . . . . . . $ 32,249 $31,097 $ 31,487 $ 27,936 $ 26,607
Ratio of statutory net written
premiums to statutory
surplus(8) . . . . . . . . . . . . 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 three and
nine-month periods ended September 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 three and nine-month periods ended
September 30, 1996 are compared to the corresponding
periods.
(2)Net income for the years ended December 31, 1994 and 1995
and the nine-month period ended September 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 $1.9 million and a decrease of $122,000
as of September 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 periods ended September 30, 1996 and September 30,
1995.
(8) Annualized for the periods ended September 30, 1996 and
1995.
</TABLE>
<PAGE>
RISK FACTORS
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.
Possible Adverse Impact of Catastrophe and Natural Peril
Losses on Financial Condition and Results of Operations
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 nine 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."
Possible Adverse Impact of Inadequate Loss Reserves on
Financial Condition and Results of Operation
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.
Management believes that the Insurance Companies'
reserves for losses and loss adjustment expenses are adequate and
are in accordance with generally accepted actuarial principles
and practices. However, 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."
Possible Significant Fluctuations 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 the supply of, and the pricing for, property and
casualty insurance and reinsurance, which historically have been
highly cyclical. 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."
Possible Adverse Impact Due to 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 nine
months ended September 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."
Possible Adverse or Inadequate Impact of 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.
Highly Competitive Nature of Insurance Industry
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."
Possible Adverse Impact of Change in 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
should not be relied upon as a basis for an investment decision
to purchase 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 nine-month period ended September 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."
Possible Adverse Impact of Regulatory Changes
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.
In 1990, the National Association of Insurance
Commissioners (the "NAIC") began an accreditation program to
ensure that states have adequate procedures in place for
effective insurance regulation, especially with respect to
financial solvency. The accreditation program requires that a
state meet specific minimum standards in over 5 regulatory areas
to be considered for accreditation. The accreditation program is
an ongoing process and once accredited, a state must enact any
new or modified standards approved by the NAIC within two years
following adoption. As of September 30, 1996, Pennsylvania, the
state in which the Insurance Companies are domiciled, was
accredited.
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 in certain states have
been under pressure from regulators, legislatures and special
interest groups to reduce, freeze or set rates at levels that may
not correspond with current underlying costs. The Insurance
Companies presently do not operate in such states and management
of the Company has no present intent to operate in such states
absent favorable prospects for approval of adequate rates. 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.
Dependence upon Dividends from Insurance Companies
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."
Availability and Adequacy of Reinsurance
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."
Reliance on Existing Management
The operations of the Company and the Insurance Companies
to date have been largely dependent on existing management. The
loss to the Company or the Insurance Companies of one or more of
their existing executive officers could have a material adverse
effect on their business and results of operations. The Company
has entered into employment agreements with the executive
officers of the Company and the Insurance Companies. See
"Management of the Company -- Executive Officers," "-- Certain
Benefit Plans and Agreements."
Management's Discretion in Allocation of Proceeds
The Company has received Department approval to exchange
$16.0 million of net proceeds from the Offering for all of the
capital stock of Old Guard Mutual, Old Guard Fire and
Goschenhoppen to be issued in the Conversion. 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. However, management has discretion in
determining the actual manner in which net proceeds will be
applied. The precise use, amounts and timing of the application
of proceeds will depend upon, among other things, the funding
requirements of the Insurance Companies, the availability of
other funds, and the existence of acquisition opportunities. See
"Use of Proceeds."
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) 569-5361.
First Delaware Insurance Company Acquisition
Management expects that in January 1997, Old Guard
Investment Holding Company, Inc. ("Old Guard Investment"), a
subsidiary of the Insurance Companies (Old Guard, Old Guard Fire
and Goschenhoppen own 79.0%, 15.4% and 5.6% of Old Guard
Investment, respectively), 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 by drawing on
an existing $7.0 million line of credit with Dauphin Deposit Bank
and Trust Company ("Dauphin") which provides for advances for
terms not to exceed 60 months, an amortization schedule not to
exceed 120 months, monthly payments and an interest rate equal to
either (i) Dauphin's floating base rate, less 1/2% or (ii) a
fixed rate offered at Dauphin's sole discretion (the "Line of
Credit").
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
with First Delaware and support a planned expansion of First
Delaware into Virginia. At September 30, 1996, First Delaware
had $4.3 million in assets and $1.8 million in equity. For the
nine months ended September 30, 1996, First Delaware had direct
premiums written of $2.8 million and net income of $120,000. 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 December 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 prior to the Conversion. After the Conversion, Old
Guard Investment, or an affiliate designated by Old Guard
Investment, will purchase, from time to time, 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%. The
surplus notes will bear interest payable monthly at a floating
rate equal to Dauphin's base rate with a maximum interest rate of
10%. All principal amounts under the surplus notes will be due
at maturity on January 1, 2007. Old Guard Investment expects to
finance this investment by drawing on the 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 September 30, 1996, New Castle had $5.2 million in
assets on a statutory basis and $1.6 million in statutory
surplus. For the nine months ended September 30, 1996, New
Castle had direct premiums written of $7.6 million and statutory
net loss of $215,000. 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 September 30, 1996, Old Guard Mutual had
total assets of $116.1 million (prior to the elimination of
intercompany accounts in consolidation) and equity of
$22.5 million.
Old Guard Fire. Old Guard Fire was originally chartered
in 1872. At September 30, 1996, Old Guard Fire had total assets
of $36.1 million (prior to the elimination of intercompany
accounts in consolidation) and equity of $11.0 million.
Goschenhoppen. Goschenhoppen was originally chartered in
1843. At September 30, 1996, Goschenhoppen had total assets of
$23.4 million (prior to the elimination of intercompany accounts
in consolidation) 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 exchange
$16.0 million of net proceeds from the Offering for all of the
capital stock of Old Guard Mutual, Old Guard Fire and
Goschenhoppen to be issued in the Conversion. 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. The
Company expects to use approximately $5.8 million of the net
proceeds to repay Dauphin under the Line of Credit used by Old
Guard Investment in connection with the acquisition of First
Delaware and the investment in New Castle. 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 effect the exchange of 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, and (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%;
(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(1) . . . . . . $28,535 $33,570 $38,606
Less estimated
expenses, including
underwriting fees . . 3,107 3,329 3,551
------- ------- -------
Estimated net proceeds. . 25,428 30,241 35,055
Less ESOP debt. . . . . 2,854 3,357 3,861
------- ------- -------
Estimated net proceeds. . $22,574 $26,884 $31,194
======= ======= =======
(1)Does not include the conversion of the American Re Surplus
Note because such conversion results only in the conversion
of debt to equity but no additional proceeds.
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
September 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
September 30, 1996(1) per share per share per share
--------------------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Long-term ESOP debt(2) . . . . $ -- $(2,854) $(3,357) $(3,861)
Subordinated debt(3) . . . . . 1,500 -- -- --
Shareholders' equity(4):
Common stock, no par value
per share: authorized -
15,000,000 shares; shares to
be outstanding - as
shown(5). . . . . . . . . -- 26,928 31,741 36,555
Retained earnings --
substantially restricted. . 36,357 36,357 36,357 36,357
Unrealized gains. .. . . . . 1,312 1,312 1,312 1,312
------- ------- ------- -------
Total . . . . . . . . . . . . . $39,169 $61,743 $66,053 $70,363
======= ======= ======= =======
____________
</TABLE>
(1) Subsequent to September 30, 1996 and prior to
completion of the Conversion, Old Guard Investment
expects to borrow an aggregate of approximately
$5.8 million under the Line of Credit in connection
with the acquisition of First Delaware and the
investment in New Castle. See "The Company -- First
Delaware Insurance Company Acquisition" and "-- New
Castle Insurance Company Investment." The Company will
repay the amount borrowed by Old Guard Investment in
connection with these transactions from proceeds of the
Offering. See "Use of Proceeds."
(2) 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 reflected in
this table as borrowed funds. See "Management --
Certain Benefit Plans and Agreements -- Employee Stock
Ownership Plan" and "Pro Forma Data."
(3) Subordinated debt consists of a surplus note payable by
Old Guard Mutual to American Re. This surplus note
will be converted into 150,000 shares of Common Stock
upon completion of the Conversion.
(4) 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.
(5)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."
PRO FORMA DATA
The following pro forma condensed combined balance sheet
as of September 30, 1996 gives effect to the Conversion and
implementation of the ESOP as if they had occurred as of
September 30, 1996 and assumes that 2,853,500 shares of Common
Stock (the minimum number of such shares required to be sold) are
sold in the Offering and the Public Offering. The following pro
forma condensed combined statements of income for the year ended
December 31, 1995 and the nine months ended September 30, 1996
present combined operating results for the Insurance Companies as
if the Conversion and implementation of the ESOP had occurred as
of January 1, 1995. The pro forma financial statements combine
the accounts of Old Guard Mutual, Old Guard Fire and
Goschenhoppen. Pursuant to the Plan, each of the Insurance
Companies will convert from a Pennsylvania-chartered mutual
insurance company to a Pennsylvania-chartered stock insurance
company and 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 Conversion will
be accounted for as a simultaneous reorganization,
recapitalization and share offering which will not change the
historical accounting basis of the Insurance Companies' financial
statements. Completion of the Conversion is contingent on the
sale of a minimum of 2,853,500 shares of Common Stock. If less
than 2,853,500 shares of Common Stock are sold in the Offering,
the remaining shares, up to a maximum of 3,860,600 shares, will
be sold in the Public Offering.
The unaudited pro forma information does not purport to
represent what the Insurance Companies' financial position or
results of operations actually would have been had the Conversion
and implementation of the ESOP and MRP occurred on the dates
indicated, or to project the Insurance Companies' financial
position or results of operations for any future date or period.
The pro forma adjustments are based on available information and
certain assumptions that the Insurance Companies believe are
reasonable in the circumstances. The unaudited pro forma
combined financial information should be used in conjunction with
the accompanying notes thereto, and the other financial
information pertaining to the Insurance Companies included
elsewhere in this Prospectus.
The pro forma adjustments and pro forma combined amounts
are provided for information purposes only. The Insurance
Companies' financial statements will reflect the effects of the
Conversion and implementation of the ESOP and MRP only from the
dates such events occur.
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of September 30, 1996
(in thousands)
Historical Pro Forma Pro Forma
Combined Adjustments Combined
ASSETS
Investments:
Fixed income securities,
available for sale, at
fair value $ 69,786 $25,428 (1) $ 95,214
Preferred stocks, at fair
value 5,100 5,100
Common stocks, at fair
value 6,425 6,425
Other invested assets 318 318
Total investments 81,629 25,428 107,057
Cash and cash equivalents 3,737 3,737
Premiums receivable 7,911 7,911
Reinsurance recoverables
and unearned premiums 25,659 25,659
Deferred policy acquisition
costs, net 5,934 5,834
Accrued investment income 1,103 1,103
Deferred income taxes, net 2,371 2,371
Property and equipment, net 6,164 6,164
Receivable from affiliate 413 413
Other assets 2,717 2,717
Total assets $137,538 $25,428 $162,966
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities:
Reserve for losses and
loss adjustment expenses $ 56,799 $ 56,799
Unearned premiums 35,774 35,774
Accrued expenses 2,203 2,203
Subordinated debt 1,500 $(1,500)(2) 0
Other liabilities 3,593 2,854 (3) 6,447
Total liabilities 99,869 1,354 100,223
Stockholders' equity:
Common stock 26,928 (4) 26,928
Unearned Employee Stock
Ownership Plan
compensation (2,854)(3) (2,854)
Retained earnings 36,357 36,357
Unrealized capital gains
(losses) on securities,
net of deferred income
taxes 1,312 1,312
Total stockholders'
equity 37,669 24,074 61,743
Total liabilities and
stockholders' equity $137,538 $23,428 $162,966
See accompanying Notes to Unaudited Pro Forma Combined
Balance Sheet
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(in thousands, except per share data)
(1) The pro forma adjustment to reflect the Conversion is
as follows (in thousands):
Issuance of 2,853,500 shares at $10/share $28,535
Estimated conversion expenses (3,107)
Net proceeds from conversion $25,428
(2) Pro forma adjustment to effect the conversion of a
$1,500 surplus note by American Re into 150,000 shares
of Common Stock at $10.0 per share.
(3) Upon completion of the Conversion, the Company will
implement an ESOP for the benefit of participating
employees. The ESOP will borrow funds from an
unaffiliated lender in an amount sufficient to purchase
10% of the Common Stock issued upon Conversion or
$2,854. The ESOP loan is assumed to bear interest at
8% per year and require monthly payments of
approximately $35 for a term of ten years. The ESOP
will be accounted for in accordance with Statement of
Position 93-6, "Employers' Accounting for Employee
Stock Ownership Plans" issued by the Accounting
Standards Executive Committee of the American Institute
of Certified Public Accounts. Accordingly, the Company
will report the loan to the ESOP as a liability on the
Company's combined balance sheet with a corresponding
charge to unearned ESOP compensation, a contra-equity
account.
(4) The effect of adjustments (1) and (2).
(5) The unaudited pro forma condensed combined balance
sheet, as prepared, gives effect to the sale of Common
Stock at the minimum of the Estimated Valuation Range
based upon the assumptions set forth under "Use of
Proceeds." The following table provides a comparison
between the sale of Common Stock at the minimum and
maximum of the Estimated Valuation Range.
Minimum Maximum
Net proceeds from Conversion $25,428 $35,055
Conversion of American-Re
Subordinated debt $ 1,500 $ 1,500
ESOP loan $ 2,854 $3,861
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
Year Ended December 31, 1995
(in thousands, except per share data)
Historical Pro Forma Pro Forma
Combined Adjustments Combined
Revenue:
Net premiums earned $66,663 $66,663
Investment income, 4,458 4,458
net of expenses
Net realized investment
gains 1,011 1,011
Other revenue 274 274
Total revenue 72,406 0 72,406
Expenses:
Losses and loss adjustment
expenses 50,509 50,509
Amortization of deferred
policy acquisition costs 17,611 17,611
Operating expenses 5,655 194 (1) 5,849
Interest expense 222 (2) 222
Total expenses 73,775 416 74,191
Loss before income tax
benefit (1,369) (416) (1,785)
Income tax benefit (685) (141)(3) (826)
Net loss $ (684) $(275) $ (959)
Earnings per share data:
Net income (loss) per share of
common stock $(0.35)
Weighted average number
of shares of common
stock outstanding 2,727,850(4)
See accompanying Notes to Unaudited Pro Forma Condensed
Combined Statement of Income.
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
Nine Months Ended September 30, 1996
(in thousands, except per share data)
Historical Pro Forma Pro Forma
Combined Adjustments Combined
Revenue:
Net premiums earned $39,705 $39,705
Investment income, net 3,434 3,434
of expenses
Net realized investment
gains 1,328 1,328
Other revenue 484 484
Total revenue 44,951 0 44,951
Expenses:
Losses and loss adjustment
expenses 34,548 34,548
Amortization of deferred
policy acquisition costs 9,079 9,079
Operating expenses 5,330 156 (1) 5,486
Interest expense 157 (2) 157
Total expenses 48,957 313 49,270
Loss before income tax
benefit (4,006) (313) (4,319)
Income tax benefit (1,458) (106)(3) (1,564)
Net loss $(2,548) $(207) $ (2,755)
Earnings per share data:
Net income (loss) per share of
common stock $ (1.00)
Weighted average number
of shares of common
stock outstanding 2,745,350(4)
See accompanying Notes to Unaudited Pro Forma Condensed
Combined Statement of Income
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENT OF INCOME
(in thousands, except per share data)
(1) Pro forma adjustment to recognize compensation expense
under ESOP for shares committed to be released to
participants as the ESOP loan is repaid.
(2) Pro forma adjustment to recognize interest expense
under the $2,854 ESOP Loan at the assumed rate of 8%
for 10 years (approximately $35 monthly).
(3) Adjustment to reflect the federal income tax effects of
(1) and (2) above.
(4) Calculation of weighted average number of shares
outstanding:
<TABLE>
<CAPTION>
Total Shares Less: Encumbered Shares
Issued ESOP Shares Outstanding
<S> <C> <C> <C>
January 1, 1995 3,003,500 (285,350) 2,718,150
ESOP shares released _________ 19,400 19,400
December 31, 1995 3,003,500 (265,950) 2,737,550
ESOP shares released ________ 15,600 15,600
September 30, 1996 3,003,500 (250,350) 2,753,150
========= ========= =========
</TABLE>
ESOP shares are released evenly throughout each of the
periods and therefore the weighted average number of shares
outstanding is determined by adding beginning of period and end
of period shares outstanding and dividing by two.
(5) The unaudited pro forma condensed combined statements
of income, as prepared, give effect to the sale of
Common Stock at the minimum of the Estimated Valuation
Range based upon the assumptions set forth under "Use
of Proceeds." The following table provides a
comparison between the sale of Common Stock at the
minimum and maximum of the Estimated Valuation Range.
<TABLE>
<CAPTION>
December 31, 1995 September 30, 1996
Minimum Maximum Minimum Maximum
<S> <C> <C> <C> <C>
Compensation expense $ 194 $ 263 $ 156 $ 211
Interest expense $ 222 $ 299 $ 157 $ 211
Net income (loss) ($ 959) ($1,055) ($2,755) ($2,827)
Net income (loss) per share of ($0.35) ($ 0.29) ($ 1.00) ($ 0.77)
Common Stock
Weighted average number of shares 2,727,850 3,637,690 2,745,350 3,661,390
of Common Stock outstanding
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
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 three months and nine months ended
September 30, 1996 and September 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 ended on
December 31 of that year.
Nine Months and Three Months Ended September 30,
1996 Compared to Nine Months and Three Months Ended
September 30, 1995
Premiums. Direct premiums written increased 4.9% for the
nine months ended September 30, 1996, compared to the same period
in 1995. Personal automobile, commercial auto and workers'
compensation all increased in excess of 11.0% for the nine months
ended September 30, 1996 compared to the corresponding period in
1995, while all other lines were either relatively stable or
declined slightly from period to period. The continuing focus on
liability business is intended to balance the overall book of
business between property and liability exposures. The
relatively stable premium volume in other lines is attributable
to premium rate increases that were offset by policyholders
replacing coverage with lower cost providers. The farmowners
line also increased, by 5.0%, during the nine months ended
September 30, 1996 due to premium rate increases and reacquiring
business lost due to pricing competition in 1994 and 1995.
Personal automobile now represents 22.1% of the total book of
business, up from 20.8% at September 30, 1995, while homeowners
is down slightly to 26.2%.
Direct premiums written increased 7.5% for the three
months ended September 30, 1996 compared to the same period in
1995. Farmowners, commercial multi-peril, personal automobile,
commercial auto and workers' compensation all increased in excess
of 7.0% during the three months ended September 30, 1996 compared
to the corresponding period in 1995. All other lines were either
relatively stable or declined slightly from period to period.
Written Premiums ceded to reinsurers increased
$18.2 million to $27.9 million for the nine months ended
September 30, 1996 compared to the nine months ended September
30, 1995. The increase in premiums ceded was directly
attributable to the effects of instituting a quota share
reinsurance treaty between the Insurance Companies and 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% ceding commission under the treaty. Ceded premiums
written and ceded premiums earned under the treaty amounted to
$16.9 million and $10.1 million, respectively, for the nine
months ended September 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.
Written premiums ceded to reinsurers increased $4.2
million, or 131.9% for the three months ended September 30, 1996
compared to the three months ended September 30, 1995. The
increase in premiums ceded was directly attributable to the quota
share reinsurance treaty. Ceded premiums written and ceded
premiums earned under the treaty amounted to $3.7 million and
$3.9 million, respectively, for the three months ended
September 30, 1996.
Net premiums written decreased $15.3 million, or 30.5%,
for the nine months ended September 30, 1996 to $34.8 million
from $50.1 million for the nine months ended September 30, 1995.
For the same comparative periods, net premiums earned decreased
$8.8 million, or 18.1%, to $39.7 million from $48.5 million. The
decreases in net premiums written and net premiums earned were
directly attributable to the effects of instituting the quota
share reinsurance treaty between the Insurance Companies and
American-Re.
Net premiums written decreased $2.3 million, or 14.0% for
the three months ended September 30, 1996, to $14.5 million from
$16.8 million for the three months ended September 30, 1995. For
the same comparative periods, net premiums earned decreased $2.8
million, or 17.4% to 13.4 million from $16.2 million. The
decreases in net premiums written and net premiums earned were
directly attributable to the effects of instituting the quota
share reinsurance treaty between the Insurance Companies and
American-Re.
Net Investment Income. Cash and invested assets
decreased $13.0 million, or 13.2%, to $85.4 million as of
September 30, 1996 compared to $98.4 million as of September 30,
1995. The yield on cash and invested assets remained stable at
4.9% for the nine months ended September 30, 1996 and 1995.
Although the September 30, 1996 cash and invested asset balance
declined substantially in comparison to September 30, 1995, the
average invested balance for each of the nine month periods
remained relatively level. The level average invested asset
balance and stable yields resulted in less than a 1.0% increase
in net investment income to $3.4 million for the nine month
period ended September 30, 1996. Additionally, interest income
of $53,000 in 1996 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 investment income of $1.05 million for the three
months ended September 30, 1996 was $48,000 less than the
comparable period in 1995. The decrease was attributable to the
significant cash outflows experienced during the third quarter of
1996. These outflows included settlement of the quota share
cessions from the first quarter, repayment of $750,000 of
principal on the American Re Surplus Note and continuing
settlement of winter storm claims. Cash and invested assets were
down by $13.0 million compared to September 30, 1995. This was
offset by a $12.0 million increase in reinsurance recoverables at
September 30, 1996 compared to September 30, 1995.
Net Realized Investment Gains. Net realized investment
gains were $1.3 million for the nine months ended September 30,
1996 compared to $650,000 for the same period in 1995. 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
nine months of 1996. Interest rate and general economic
conditions in 1996 also created capital gains opportunities. For
the three months ended September 30, 1996 and 1995 net realized
investment gains were at comparable levels.
Losses and Loss Adjustment Expenses. Losses and loss
adjustment expenses increased by $657,000, or 1.9%, to
$34.5 million for the nine months ended September 30, 1996 from
$33.9 million for the nine months ended September 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 $7.1 million for the nine months
ended September 30, 1996 compared to the nine months ended
September 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
nine months ended September 30, 1996 and the nine months ended
September 30, 1995 was accentuated by exceptionally favorable
experience during the first nine months of 1995. These net
losses and loss adjustment expenses for the nine months ended
September 30, 1996, totalling $10.8 million, were reduced by
implementation of the 20% quota share reinsurance treaty
effective January 1, 1996 pursuant to which the Insurance
Companies ceded $9.0 million of losses and loss adjustment
expenses during the nine months ended September 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 87.0% of net premiums earned for the
nine months ended September 30, 1996, compared to 69.8% of net
premiums earned in the same period in 1995.
For the three months ended September 30, 1996 net losses
and loss adjustment expenses were $8.9 million. This represents
a decrease of $2.1 million or 19.5% compared to net losses and
loss adjustment expenses for the three months ended September 30,
1995. This decrease is attributable to the quota share
reinsurance treaty which reduced losses by $2.3 million for the
three months ended September 30, 1996. Losses and loss
adjustment expenses were 66.4% of net premiums earned for the
three months ended September 30, 1996 compared to 68.2% of net
earned premiums earned for the same period in 1995.
Underwriting Expenses. Underwriting expenses were
$14.2 million for the nine months ended September 30, 1996, a
decrease of $3.5 million, or 20.0%, compared to the same period
in 1995. The reduction is primarily due to a $3.7 million
reduction in amortization of policy acquisition costs arising out
of the implementation of the quota share reinsurance treaty
offset by a $185,000 increase in operating expenses. Expenses
for the three months ended September 30, 1996 were $500,000 lower
than the comparable period in 1995 for the reasons stated
above.
Other Expenses. A nonrecurring expense incurred in the
first nine 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
Statements.
Federal Income Tax Expense (Benefit). The federal income
tax benefit for the nine months ended September 30, 1996, was
$1.5 million compared to an expense of $252,000 for the nine
months ended September 30, 1995. The decrease in the Insurance
Companies' effective federal income tax rate was attributable to
the loss for the nine months ended September 30, 1996. For the
comparable three month periods federal income tax expense was
consistent with operating results.
Net Income. The Insurance Companies had a net loss of
$2.5 million for the nine months ended September 30, 1996
compared to net income of $916,000 for the nine months ended
September 30, 1995, primarily as a result of the foregoing
factors. Net income for the third quarter was $400,000 for both
1996 and 1995.
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.
Effect of Pending Transactions on the Company's Future Financial
Condition and Results of Operations
The future financial condition and results of operations
of the Company will be affected by the Conversion and related
transactions, the acquisition of First Delaware and the
investment in New Castle.
The Conversion. Upon completion of the Conversion, the
Company's capital will increase by between $24.1 million and
$32.7 million, an increase of approximately 63.9% to 86.8% over
the combined capital of the Insurance Companies at September 30,
1996. See "Use of Proceeds," "Capitalization" and "Pro Form
Data." This increased capitalization should permit the Company
to (i) further its business strategy of geographic
diversification through acquisitions, including the use of
capital stock to effect such acquisitions, (ii) increase direct
premium volume to the extent competitive conditions permit,
(iii) increase net premium volume by decreasing the use of
reinsurance, and (iv) enhance investment income.
The Conversion will be accounted for as a simultaneous
reorganization, recapitalization and share offering which will
not change the historical accounting basis of the Insurance
Companies' financial statements.
In connection with the Conversion, the ESOP intends to
finance the purchase of 10% of the Common Stock with a loan and
the Company will make annual contributions to the ESOP sufficient
to repay the loan which the Company estimates will total between
$2.9 and $3.9 on a pre-tax basis.
Acquisition of First Delaware. Old Guard Investment
expects to acquire 80% of the common stock of First Delaware
through the purchase of shares directly from First Delaware for
$3.0 million and the purchase of additional shares from the sole
shareholder of First Delaware for approximately $1.8 million for
an aggregate investment of $4.8 million.
Old Guard Investment will finance this acquisition by
drawing on the Line of Credit which will be repaid from the
proceeds of the Offering and the Public Offering. Accordingly,
the Company does not expect the acquisition will have any future
material impact on liquidity.
Although the acquisition of First Delaware is not a
material transaction to the Company on a consolidated basis, the
Company believes that it represents an important step in its
strategic plan to grow and diversify geographically through
acquisitions. In addition, substantially all of First Delaware's
book of business is in commercial lines, including businessowners
and commercial multi-peril products and surety products, which
are distributed through independent agents. This furthers the
Company's goal of achieving a greater balance between personal
and commercial lines. The $3.0 million infusion of additional
capital also should permit First Delaware to increase writings.
Finally, underwriting results for First Delaware have been good.
For the nine months ended September 30, 1996, First Delaware had
a combined ratio of 95.8% on net premiums earned of $1.2 million.
For the year ended December 31, 1995, First Delaware had a
combined ratio of 90.0% on net premium earned of $1.4
million.
Investment in New Castle. Old Guard Investment will
initially purchase a $1.0 million convertible surplus note from
New Castle and will have a commitment to purchase an additional
$3.0 million of convertible surplus notes, subject to certain
conditions. The initial $1.0 million investment will be financed
by drawing on the Line of Credit which will be repaid with the
proceeds of the Offering and the Public Offering. Initially,
because New Castle will not be consolidated with the Company and
no present plan exists to include New Castle in the Insurance
Companies' intercompany pooling arrangement, the Company does not
expect the investment to have any effect on its financial
condition, results of operation or liquidity. If New Castle
elects to convert from mutual to stock form, Old Guard Investment
elects to convert the surplus notes, and such conversion results
in the indirect control of New Castle by the Company, the result
would be a material increase in assets and direct premiums
written.
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 $9.2 million.
At September 30, 1996, no amounts were outstanding on these lines
of credit, which has an annual interest rate equal to the lending
institutions' 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 September 30, 1996, Old
Guard Mutual had a $1.5 million surplus note outstanding. The
holder has elected to exchange the $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
$(14.5) million during the nine months ended September 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
nine months ended September 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
$9.5 million during the nine months ended September 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 nine months
ended September 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.
In February 1996, Old Guard Investment and American
Technologies, Inc., a California based software lessor, entered
into a lease financing agreement in connection with the
acquisition by the Insurance Companies of a new policy processing
software system for approximately $2.5 million. See "Business --
Strategy." The terms of the lease financing agreement provide
for an aggregate lease facility up to $1.5 million. The implied
interest rate under the lease is 9.5%. As of September 30, 1996,
the lease facility was fully utilized. Under the terms of the
lease financing agreement, Old Guard Investment is required to
make payments of approximately $57,000 per month for 24 months.
The principal source of liquidity for the Company will be
dividend payments and other fees received from the Insurance
Companies. The Company's insurance subsidiaries, including the
Insurance Companies, will be restricted by the insurance laws of
the state of domicile as to the amount of dividends or other
distributions they may pay to the Company without the prior
approval of the state regulatory authority. Under Pennsylvania
law, the maximum amount that may be paid by each of the Insurance
Companies during any twelve-month period after notice to, but
without prior approval of, the Department cannot exceed the
greater of 10% of the Insurance Company's statutory surplus as
reported on the most recent annual statement filed with the
Department, or the net income of the Insurance Company for the
period covered by such annual statement. As of December 31,
1995, amounts available for payment of dividends in 1996 without
the prior approval of the Department would have been
approximately $2.0 million, $879,000 and $494,000 from Old Guard
Mutual, from Old Guard Fire and from Goschenhoppen, respectively.
Such restrictions or any subsequently imposed restrictions may in
the future affect the Company's liquidity.
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. Although the ESOP has not yet
received a commitment from a lender with respect to such a loan,
based on preliminary discussions with potential lenders the
Company expects that the loan will bear an 8% interest rate, and
will require the ESOP to make monthly payments of approximately
$35,000 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.
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 nine-month period ended September 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 September 30, 1996, the Insurance Companies had over 139,000
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 September 30, 1996, the consolidated
assets of the Insurance Companies were $137.5 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.
Insurance companies acquired may be added to the existing
reinsurance pool among the Insurance Companies.
The determination whether to add acquired companies to
the Insurance Companies' intercompany reinsurance pooling
arrangement will be made on a case by case basis as acquisitions
are completed. Some of the factors considered in evaluating an
acquired company for possible inclusion in the reinsurance pool
will include the acquired company's capital position, the quality
of the book of business, reserves for losses and loss adjustment
expenses, settlement practices, the lines of business written,
existing reinsurance relationships, the level of control which
management of the Insurance Companies will have over the
operations of the acquired company, and rating
considerations.
Neither the Company nor Old Guard Investment will control
New Castle after purchase of the surplus notes and there are no
present plans to add New Castle to the intercompany pooling
arrangement. Management of the Insurance Companies has not yet
determined whether First Delaware will be added to the
reinsurance pool in the event Old Guard Investment successfully
completes the acquisition of First Delaware. If First Delaware
and/or New Castle are added to the reinsurance pool, there will
be no retroactive coverage.
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. The
Insurance Companies have been actively involved in the search,
review, selection, customization and testing of a new policy
processing software system since the second quarter of 1994.
The licensing rights for the new software system were acquired
from Strategic Data Systems, Inc., an insurance industry software
specialty company. The software system is a personal computer
database system designed to eliminate most paperwork required in
traditional systems. Claims, billing and accounting functions
are also fully integrated in the new software system. The
ability to operate multiple companies, maintain on-line remote
offices and enhancements in the quality and timeliness of
management information are additional benefits of the new
software system. Personal automobile is the first line of
business being phased into the new software system, and it is
expected to begin processing policies in early 1997. By 1999,
management of the Insurance Companies expects to integrate
homeowners, farmowners and commercial lines of business into the
new software system. 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, net loss ratios, expense ratios and
combined ratios by product line of the Insurance Companies for
the periods indicated:
<TABLE>
<CAPTION>
Nine Months
Ended September 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. . . . . . . . . . . . . $ 12,663 20.2% $12,046 20.2% $15,494 19.7% $16,080 20.4% $15,319 20.5%
Homeowners. . . . . . . . . . . . . 16,411 26.2 15,995 26.8 21,157 26.8 20,509 26.1 19,067 25.5
Businessowners and commercial
multi-peril . . . . . . . . . . . 8,409 13.4 8,307 13.9 11,083 14.1 10,587 13.4 10,367 13.9
Personal automobile . . . . . . . . 13,864 22.2 12,401 20.7 16,810 21.3 15,928 20.2 13,376 17.9
Commercial automobile . . . . . . . 714 1.1 638 1.1 776 0.9 815 1.0 807 1.0
Workers' compensation . . . . . . . 4,901 7.8 4,398 7.4 5,432 6.9 5,563 7.1 6,312 8.4
Fire, allied, inland marine . . . . 4,604 7.4 4,921 8.2 6,763 8.6 7,917 10.1 8,192 11.0
Other liability . . . . . . . . . . 1,057 1.7 1,023 1.7 1,317 1.7 1,331 1.7 1,316 1.8
-------- ----- ------- ----- ------- ----- -------- ----- -------- -----
Total. . . . . . . . . . . . . $62,623 100.0% $58,729 100.0% $78,832 100.0% $78,730 100.0% $74,756 100.0%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
<CAPTION>
Nine Months
Ended September 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. . . . . . . . . . . . . $ 7,375 18.6% $ 9,888 20.4% $13,413 20.1% $13,315 21.0% $13,368 21.9%
Homeowners. . . . . . . . . . . . . 11,080 27.9 13,714 28.3 18,391 27.6 16,755 26.4 14,622 24.0
Businessowners and commercial
multi-peril . . . . . . . . . . . 5,230 13.2 6,362 13.1 8,828 13.2 8,387 13.2 8,548 14.0
Personal automobile . . . . . . . . 9,405 23.7 10,336 21.3 14,459 21.7 12,521 19.8 11,402 18.7
Commercial automobile . . . . . . . 407 1.0 501 1.0 769 1.2 717 1.1 675 1.1
Workers' compensation . . . . . . . 2,660 6.7 3,075 6.3 4,233 6.4 4,266 6.7 4,394 7.2
Fire, allied, inland marine . . . . 3,347 8.4 4,401 9.1 6,294 9.4 6,930 10.9 7,465 12.3
Other liability . . . . . . . . . . 201 0.5 259 0.5 276 0.4 574 0.9 512 0.8
-------- ----- ------- ----- ------- ----- -------- ----- -------- -----
Total. . . . . . . . . . . . . $39,705 100.0% $48,536 100.0% $66,663 100.0% $63,465 100.0% $60,986 100.0%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Net Loss Ratio
Farmowners. . . . . . . . . . . . . 93.0% 77.8% 78.7% 78.8% 71.2%
Homeowners. . . . . . . . . . . . . 103.0 81.1 80.8 98.0 83.3
Businessowners and commercial
multi-peril . . . . . . . . . . . 92.0 54.3 62.2 47.8 51.6
Personal automobile . . . . . . . . 73.5 68.9 90.4 70.9 73.2
Commercial automobile . . . . . . . 75.7 63.7 70.9 53.8 35.1
Workers' compensation . . . . . . . 57.2 38.3 43.0 58.3 74.3
Fire, allied, inland marine . . . . 75.6 48.5 53.4 49.7 50.1
Other liability . . . . . . . . . . 55.2 327.2 326.3 49.9 83.9
Total. . . . . . . . . . . . . 87.0% 69.8% 75.8% 73.2% 69.1%
Expense Ratios
Farmowners . . . . . . . . . . . . 40.0% 39.4% 36.6% 34.1% 34.3%
Homeowners . . . . . . . . . . . . 32.1 34.3 39.0 39.7 39.3
Businessowners and commercial
multiple peril . . . . . . . . . 44.1 43.7 41.2 36.4 36.1
Personal automobile. . . . . . . . 20.5 24.1 22.6 24.0 24.5
Commercial automobile. . . . . . . 33.2 32.6 24.9 27.3 32.5
Workers' compensation. . . . . . . 20.6 26.2 23.6 25.7 29.1
Fire, allied, inland marine . . . 76.4 65.3 47.2 49.6 42.0
Other liability . . . . . . . . . 41.4 39.5 46.9 25.2 33.3
Total . . . . . . . . . . . . 35.7% 36.5% 34.9% 34.8% 34.4%
Combined Ratios(2)
Farmowners . . . . . . . . . . . . 133.0% 117.2% 115.2% 112.8% 105.5%
Homeowners . . . . . . . . . . . . 135.1 115.4 119.7 137.7 122.6
Businessowners and commercial
multiple peril . . . . . . . . . 136.1 97.9 103.4 84.1 87.7
Personal automobile . . . . . . . 94.1 92.9 113.1 94.8 97.7
Commercial automobile. . . . . . . 108.9 96.4 95.8 81.2 67.6
Workers' compensation. . . . . . . 77.8 64.6 66.7 84.1 103.4
Fire, allied, inland marine . . . 152.0 113.9 100.6 99.2 92.1
Other liability . . . . . . . . . 96.6 366.8 373.2 75.1 117.2
Total . . . . . . . . . . . . 122.7% 106.2% 110.7% 108.0% 103.5%
Industry Combined Ratio. . . . . . - - 106.4% 108.4% 106.9%
</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 nine months ended September 30, 1996
accounts, in part, for the decline in net premiums
earned when the nine months ended September 30, 1996 is
compared to the nine months ended September 30,
1995.
(2) A combined ratio over 100% means that an insurer's
underwriting operations are not profitable.
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 September 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 September 30, 1996, the Insurance Companies had
approximately 71,000 homeowners policies in force.
Businessowners and Commercial Multi-peril.
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 September 30, 1996,
approximately 6,700 businessowners policies were 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 September 30, 1996,
approximately 1600 such policies were in force. The Insurance
Companies are working to increase market penetration for this
product because it includes commercial liability risks that help
to diversify exposures 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 policy 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.
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 September 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 September 30, 1996, the Insurance Companies had
approximately 1,000 commercial automobile insurance policies in
force.
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 September 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.
Fire, Allied, Inland Marine.
Fire and allied lines insurance generally covers fire,
lightning, and removal and extended coverage. Inland marine
coverage insures merchandise or cargo in transit and business and
personal property. The Insurance Companies offer fire, allied
and inland marine insurance coverage only as endorsements
available under the Insurance Companies' other insurance
products.
Other Liability.
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 September 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 specializes 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 September 30, 1996, the Insurance Companies'
claim staff included 29 claims representatives and 5 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.
Reinsurance can be facultative reinsurance or treaty
reinsurance. Under facultative reinsurance, each risk or portion
of a risk is reinsured individually. Under treaty reinsurance,
an agreed-upon portion of business written is automatically
reinsured. Reinsurance can also be classified as quota share
reinsurance or excess of loss reinsurance. Under quota share
reinsurance, the ceding company cedes a percentage of its
insurance liability to the reinsurer in exchange for a like
percentage of premiums less a ceding commission, and in turn will
recover from the reinsurer the reinsurer's share of all losses
and loss adjustment expenses incurred on those risks. Under
excess reinsurance, an insurer limits its liability to all or a
particular portion of the amount in excess of a predetermined
deductible or retention. Regardless of type, reinsurance does
not legally discharge the ceding insurer from primary liability
for the full amount due under the reinsured policies. However,
the assuming reinsurer is obligated to reimburse the ceding
company to the extent of the coverage ceded. The Company
generally places all of its reinsurance directly without the use
of brokers.
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
$9.4 million of earned premiums. For the nine months ended
September 30, 1996, the Insurance Companies ceded earned premiums
of $20.6 million. The significant increase in ceded premiums in
the nine-month period ended September 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. Excess reinsurance is provided on a treaty basis in
layers as follows: Individual property risks in excess of
$150,000 are covered on an excess of loss basis up to $500,000
per risk pursuant to a reinsurance treaty with 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 $2.0 million are reinsured on a
proportional treaty basis by American Re and Munich Re.
Facultative coverage also is available for certain property risks
in excess of $2.0 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 $2.0 million per
occurrence pursuant to a reinsurance treaty with American Re. In
addition, casualty losses arising from workers' compensation
claims are reinsured on a per occurrence and per person treaty
basis by various reinsurers up to $10.0 million. Umbrella
liability losses are reinsured by American Re on a 95% quota
share basis up to $1.0 million and a 100% quota share basis in
excess of $2.0 million up to $5.0 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 layers of excess treaty
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 treaty 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
$3.0 million, and (ii) 100% of losses in excess of $2.0 million
for winter storm losses during specified periods, up to a maximum
of $3.0 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. American Re and Munich Re
are the Insurance Companies' major reinsurers, providing
approximately 64.2% of ceded reinsurance written. American Re
and Munich Re are both rated A+ (superior) by A.M. Best. The A+
rating is the second highest of A.M. Best's fifteen ratings. For
the year ended December 31, 1995 and for the nine months ended
September 30, 1996, the Insurance Companies paid reinsurance
premiums in an aggregate amount of approximately $6.9 million and
$17.2 million to American Re, respectively, and $847,000 and
$657,000 to Munich Re, respectively. The Insurance Companies
monitor the solvency of reinsurers through regular review of
their financial statements and A.M. Best ratings. The Insurance
Companies have experienced no significant difficulties collecting
amounts due from reinsurers.
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 both reported claims and for claims 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. Management of the Insurance Companies does not
believe the Insurance Companies are subject to any material
potential asbestos or environmental liability claims.
Based on actuarial studies, the IBNR reserve provision
was increased at December 31, 1995 by $1.8 million and at
December 31, 1994 it was decreased by $2.3 million. Prior to
1995, the Insurance Companies had consistently shown loss reserve
redundancies. This led to the decrease in the IBNR reserve at
December 31, 1994. At December 31, 1995, it was determined that
the December 31, 1994 reserves were deficient. This deficiency
was primarily due to a change in the methodology for case
reserving for liability claims. The change was to reserve cases
at expected settlement value rather than at ultimate exposure
amounts. The 1995 actuarial study indicated that the reduction
in IBNR reserves coupled with the changes in case reserving
methodology may have been overstated. The majority of the
December 31, 1995 IBNR reserve strengthening was to correct
potential deficiencies in the reserves for the 1994 accident
year.
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 nine months ended September 30, 1996 and
1995 as prepared in accordance with GAAP.
<TABLE>
<CAPTION>
Reconciliation of Reserve for Losses
and Loss Adjustment Expenses
Nine Months
Ended September 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 . . . . . . . . . . . . . . . . 35,719 33,861 48,067 51,959 44,950
Prior years . . . . . . . . . . . . . . . . . . (1,171) 31 2,442 (5,519) (2,796)
Total incurred losses and loss adjustment
expenses . . . . . . . . . . . . . . . . . . . 34,548 33,892 50,509 46,440 42,154
Less: Loss and loss adjustment expenses
payments for claims occurring in:
The current year . . . . . . . . . . . . . . . . 23,978 20,307 29,970 35,196 25,952
Prior years . . . . . . . . . . . . . . . . . . 14,302 14,069 17,258 15,316 13,986
Total losses and loss adjustment expenses. . . . 38,280 34,376 47,228 50,512 39,938
Net reserves for losses and loss adjustment
expenses at end of period . . . . . . . . . . . . . 32,359 32,326 36,091 32,810 36,882
Add: Reinsurance recoverables and receivables . . . . 24,440 18,967 16,000 18,499 22,175
Reserves for losses and loss adjustment
expenses at end of period . . . . . . . . . . . . . $56,799 $51,293 $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 $18,998 $16,763 $18,097
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 16,633 18,209
Two years later. . . . . . . . . . . 13,587 13,666 18,469 --
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) --
Gross liability - end of year 24,910 22,676 23,585
Reinsurance recoverables 5,912 5,913 5,488
------- ------- -------
Net liability - end of year $18,998 $16,763 $18,097
======= ======= =======
Gross reestimated liability - latest 24,638 24,812
Reestimated reinsurance recover-
ables - latest 6,209 6,603
------- -------
Net reestimated liability - latest 18,429 18,209
======= =======
Gross cumulative (deficiency) redundancy 272 (2,136)
======= =======
</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).
<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 September 30, 1996 At December 31, 1995 At December 31, 1994
------------------------ ------------------------ ------------------------
Market Market Market
Cost(2) Value Cost(2) Value Cost(2) Value
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Fixed income securities(1)
United States government and
government agencies and
authorities . . . . . . . . . . . $28,803 $28,304 $33,419 $33,380 $33,270 $30,382
Obligations of states,
municipalities and
political subdivisions. . . . . . 60 60 1,553 1,566 3,687 3,666
Corporate obligations . . . . . . . 30,865 31,211 25,868 27,015 16,155 15,414
Collateralized mortgage
obligations . . . . . . . . . . . 5,862 5,932 9,564 9,840 17,916 17,364
Other obligations . . . . . . . . 4,317 4,279 6,626 6,727 3,356 3,334
Total fixed income securities . . 69,907 69,786 77,030 78,528 74,384 70,160
Equity securities . . . . . . . . . . 9,307 11,526 12,031 13,579 12,930 12,528
Other invested assets . . . . . . . . 325 318 242 228 191 191
Total . . . . . . . . . . . . . . $79,539 $81,630 $89,303 $ 92,335 $87,505 $82,879
======= ======= ======= ======== ======= =======
<FN>
____________
(1) In the combined financial statements of the Insurance
Companies, fixed income securities (bonds, redeemable
preferred stocks and mortgage-backed securities),
equity securities and other invested assets are carried
at fair value as established by quoted market prices on
secondary markets.
(2)Original cost of equity securities; original cost of fixed
income securities adjusted for amortization of premium and
accretion of discount.
/TABLE
<PAGE>
The table below contains information concerning the
investment ratings of the Insurance Companies' fixed maturity
investments at September 30, 1996.
Type/Ratings of Amortized Market
Investment(1) Cost Value Percentages(2)
- --------------- --------- ------ --------------
(Dollars in thousands)
U.S. Government and
agencies. . . . . . . . $28,802 $28,304 40.6%
AAA . . . . . . . . . . . 21,531 21,521 30.8
AA. . . . . . . . . . . . 5,674 5,668 8.1
A . . . . . . . . . . . . 9,117 9,298 13.3
BBB . . . . . . . . . . . 4,548 4,674 6.7
------- ------- -----
Total BBB or Better . . $69,672 $69,465 99.5%
BB. . . . . . . . . . . . 235 321 0.5
------- ------- -----
Total . . . . . . . . . $69,907 $69,786 100.0%
======= ======= ======
____________
(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
September 30, 1996 (substituting average life for mortgage-backed
securities):
Amortized Market
Maturity Cost(1) Value Percentages(2)
- -------- --------- ------ --------------
(Dollars in thousands)
1 year or less . . . . . .. $ 5,896 $ 5,853 8.4%
More than 1 year
through 5 years . . . . . 17,114 17,075 24.5
More than 5 years through
10 years . . . . . . . . 4,342 4,547 6.5
More than 10 years . . . . 9,567 9,558 13.7
Collateralized and asset
backed securities(3) . . 32,988 32,753 46.9
------- ------- -----
Total. . . . . . . . . $69,907 $69,786 100.0%
======= ======= ======
____________
(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.
(3) Collateralized and asset backed securities consist of
mortgage pass-through holdings and securities backed by
credit card receivables, auto loans and home equity
loans. These securities follow a structured principal
repayment schedule and are of high credit quality rated
"AA" or better by Standard & Poor's. These securities
are presented separately in the maturity schedule due
to the inherent risk associated with prepayment or
early authorization. The average duration of this
portfolio is 3.9 years.
The average duration of the Insurance Companies' fixed
maturity investments, excluding collateralized and asset backed
securities which are subject to paydown, as of September 30, 1996
was approximately 2.7 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 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 nine months ended September 30, 1995 and 1996 were as
follows:
<TABLE>
<CAPTION>
Nine Months
Ended September 30, Year Ended December 31,
------------------- -----------------------------
(Dollars In thousands)
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average invested assets. . . . . . . . $92,928 $94,302 $95,323 $94,891 $95,530
Net investment income . . . . . . . . 3,434 3,409 4,458 3,932 3,928
Return on average
invested assets. . . . . . . . . . . 4.9% 4.8% 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.
Examinations are regularly conducted by the Department
every three to five years. The Department's last examinations of
Old Guard Mutual and Old Guard Fire Company were as of
December 31, 1991. The Department's last examination of
Goschenhoppen was as of December 31, 1994. These examinations
did not result in any adjustments to the financial position of
any of the Insurance Companies. In addition, there were no
substantive qualitative matters indicated in the examination
reports that had a material adverse impact on the operations of
the Insurance Companies.
In addition to state-imposed insurance laws and
regulations, the NAIC has adopted risk-based capital ("RBC")
requirements that require insurance companies to calculate and
report information under a risk-based formula that attempts to
measure statutory capital and surplus needs based on the risks in
a company's mix of products and investment portfolio. Under the
formula, a company first determines its Authorized Control Level
risk-based capital ("ACL") by taking into account (i) the risk
with respect to the insurer's assets; (ii) the risk of adverse
insurance experience with respect to the insurer's liabilities
and obligations, (iii) the interest rate risk with respect to the
insurer's business; and (iv) all other business risks and such
other relevant risks as are set forth in the RBC instructions. A
company's "Total Adjusted Capital" is the sum of statutory
capital and surplus and such other items as the RBC instructions
may provide. The formula is designed to allow state insurance
regulators to identify potential weakly capitalized
companies.
The requirements provide for four different levels of
regulatory attention. The "Company Action Level" is triggered if
a company's Total Adjusted Capital is less than 2.0 times its ACL
but greater than or equal to 1.5 times its ACL. At the Company
Action Level, the company must submit a comprehensive plan to the
regulatory authority which discusses proposed corrective actions
to improve the capital position. The "Regulatory Action Level"
is triggered if a company's Total Adjust Capital is less than
1.5 times but greater than or equal to 1.0 times its ACL. At the
Regulatory Action Level, the regulatory authority will perform a
special examination of the company and issue an order specifying
corrective actions that must be followed. The "Authorized
Control Level" is triggered if a company's Total Adjusted Capital
is than 1.0 times but greater than or equal to 0.7 times its ACL,
and the regulatory authority may take action it deems necessary,
including placing the company under regulatory control. The
"Mandatory Control Level" is triggered if a company's Total
Adjusted Capital is less than 0.7 times its ACL, and the
regulatory authority is mandated to place the company under its
control. 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 NAIC has also developed a set of financial ratios,
referred to as the Insurance Regulatory Information System
(IRIS), for use by state insurance regulators in monitoring the
financial condition of insurance companies. The NAIC has
established an acceptable range of values for each of the IRIS
financial ratios. Generally, an insurance company will become
the subject of increased scrutiny where four or more of its IRIS
ratio results fall outside the range deemed acceptable by the
NAIC.
During the last three years, each of the Insurance Companies
reported results outside the acceptable range for certain IRIS
tests. The table below sets forth IRIS ratios outside the
acceptable range for the Insurance Companies during 1993, 1994
and 1995:
<TABLE>
<CAPTION>
Insurance
Values
Equal to or Old Guard Mutual Old Guard Fire Goschenhoppen
-------------- ---------------------- ---------------------- --------------------
Ratio Name/Description Over Under 1995 1994 1993 1995 1994 1993 1995 1994 1993
- ---------------------- ---- ----- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Two-Year Overall
Operating Ratio 100 101 104 106 N/A
Investment Yield 100 4.5 4.3 4.5 4.2 N/A
Estimated Current Reserve
Deficiency to Surplus 25 74 82 N/A
</TABLE>
For Old Guard Mutual, the 1994 and 1993 investment yields
were outside the acceptable range. This was attributable to
substantial investments in tax-exempt fixed income securities
with reduced before tax investment yields.
For Old Guard Fire, the 1995 two-year overall operating
ratio was outside the acceptable range. For 1995 and 1994,
operating results were adversely impacted by winter storms and
wind storms which resulted in significant losses.
For Goschenhoppen, the 1995 and 1994 two-year overall
operating ratio, the 1994 investment yield and the 1995 and 1994
estimated current reserve deficiency to surplus were outside the
acceptable range. The 1995 and 1994 two-year overall operating
ratios were negatively impacted by poor underwriting performance
stemming from winter storm and wind storm activity and adverse
development on prior year losses. The 1994 investment yield was
adversely affected by substantial investments in tax-exempt fixed
income securities with lower before tax yields. For 1995 and
1994 the estimated current reserve deficiency to surplus ratio
was adversely affected by the merger of Home Mutual Insurance
Company into Goschenhoppen Mutual Insurance Company to form
Goschenhoppen-Home Mutual Insurance Company on December 31, 1993.
The amounts upon which the projected deficiency were computed did
not reflect the combined entity. After considering such data,
the ratio was within NAIC limits. All 1993 ratios are not
available for Goschenhoppen-Home because the combined entity was
not formed until December 31, 1993.
In 1996, the Pennsylvania Workers' Compensation Act was
amended to create a more favorable business environment for
employers and insurers. The amendments to the Workers'
Compensation Act provides employers and insurers greater ability
to control costs by (i) reducing wage loss benefits by amounts of
income received through other sources; (ii) requiring claimants
to submit to the employer's medical provider for 90 days
following the first visit after an injury; and (iii) requiring
claimants to submit to a medical examination after 104 weeks of
disability.
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 Insurance Companies.
Most states have enacted legislation that regulates
insurance holding company systems. Each insurance company in a
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, including the
Insurance Companies, will be restricted by the insurance laws of
the state of domicile as to the amount of dividends or other
distributions they may pay to the Company without the prior
approval of the state regulatory authority. Under Pennsylvania
law, the maximum amount that may be paid by each of the Insurance
Companies during any twelve-month period after notice to, but
without prior approval of, the Department cannot exceed the
greater of 10% of the Insurance Company's statutory surplus as
reported on the most recent annual statement filed with the
Department, or the net income of the Insurance Company for the
period covered by such annual statement. As of December 31,
1995, amounts available for payment of dividends in 1996 without
the prior approval of the Department would have been
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. ("Old Guard
Investment"), a Delaware corporation (Old Guard, Old Guard Fire
and Goschenhoppen own 79.0%, 15.4% and 5.6% of Old Guard
Investment, respectively). Old Guard Investment owns all of 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. 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.
After completion of the Conversion, the Insurance
Companies intend to transfer all of the capital stock of Old
Guard Investment to the Company and, as a result, Old Guard
Investment will become a direct wholly-owned subsidiary of the
Company and CIMI and 2929 Service Corp. will become a second tier
subsidiary of the Company. The Company will also indirectly own
a 30% interest in CIC through the Company's ownership of Old
Guard Investment.
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
7,500 square feet of office space in Quakertown, Pennsylvania.
Old Guard Investment has entered into an agreement to
purchase a 21,507 square foot facility situated on 8.07 acres 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.
The Company has received an $880,000 mortgage loan commitment
from Dauphin for the purchase of such property. The mortgage
loan will be for a term of 15 years, carry a 20-year amortization
schedule and bear interest at an annual rate equal to the federal
funds rate, plus 1.90% per annum. The Mortgage loan will be
repaid in 180 consecutive monthly payments of principal and
interest. The mortgage loan will be secured by the purchased
property. Old Guard Fire has listed the Airport Road facility
for sale.
Employees
As of September 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 Chiefand 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
TreasurerCompany 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
Presidentof 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. Although the ESOP has not yet
received a commitment from a lender with respect to such a loan,
based on preliminary discussions with potential lenders, the
Company expects that the loan will bear an 8% interest rate, and
will require the ESOP to make monthly payments of approximately
$35,000 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 or 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. 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,
Messrs. Keyser, Dyer, Orndorff and Manley are entitled to receive
annual base salaries of not less than $106,080, $87,200, $94,000
and $86,400, respectively.
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.
Background and Reasons for the Conversions
The Insurance Companies annually review and adopt a
strategic plan whose goals, by their terms, have been expressly
predicated upon company independence and capital strength. The
Insurance Companies have considered various capital formation
alternatives in the past, such as the issuance of surplus notes
or a stock offering by a subsidiary company. Surplus notes were
used in the past to enhance statutory capital and a subsidiary
company offering was actively considered in prior years.
However, each was limited; surplus notes do not provide either
GAAP capital or permanent statutory capital and a subsidiary
offering may not yield the amount of capital the Insurance
Companies would like to obtain to fully implement their strategic
plan, which the Insurance Companies estimated to be
$20 million.
As a result of the inadequate avenues for capital
formation by mutual insurance companies, the Insurance Companies
were active supporters of the Pennsylvania Insurance Company
Mutual to Stock Conversion Act (the "Act"), which is designed to
encourage capital formation by changing the manner in which
Pennsylvania mutual insurance companies convert from mutual to
stock form. Under the Act, distribution of surplus to
policyholders upon conversion is not required. Instead,
policyholders are given a first priority right to purchase the
stock of a converting company.
The Act was passed by the Pennsylvania General Assembly
in early December 1995. On December 12, 1995, management was
directed by the Boards of Directors of each Insurance Company to
explore the process and feasibility of conversion under the Act.
On January 12, 1996, the Boards of Directors authorized further
study and requested a presentation with respect to the process at
its meeting on March 31, 1996. At the March 31, 1996 meeting,
counsel for the Insurance Companies made a presentation regarding
conversion under the Act, including the process, advantages and
disadvantages of conversion and public company status, tax
considerations, the financial impact of conversion and the costs
of conversion. No decision regarding conversion was made at this
meeting. At a meeting of the Board of Directors of each
Insurance Company held on April 22, 1996, management was directed
to prepare the Plan for consideration at a special meeting to be
held in May. Effective 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. The Insurance
Companies did not engage a financial adviser in connection with
their decision to adopt the Plan. Each Board of Directors
unanimously adopted amendments to the Plan on July 19, 1996. An
application with respect to the Conversion was filed by the
Insurance Companies on August 21, 1996 and notice of the filing
and the opportunity to comment was simultaneously mailed to all
Eligible Policyholders as required by law. The Insurance
Companies know of no significant opposition to the Conversion
from the Insurance Companies' policyholders. The Department
informed the Insurance Companies on November 27, 1996 that it did
not intend to hold any hearings regarding the Conversion.
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 ___________, 1997.
On November 19, 1996, the Company received an unsolicited
request from an unrelated insurance holding company to amend the
Plan to provide for the merger of the Company into such unrelated
party in exchange for an aggregate payment of $27.5 million to
all policyholders of the Insurance Companies, or less than $200
per policyholder assuming equal distribution to all
policyholders. Such amount was proposed to be payable one-half
in cash and one-half in a new class of preferred stock of the
unrelated company, the terms of which were not specified. The
Boards of Directors of the Company and the Insurance Companies
met on November 22, 1996. Because such a transaction would not
provide additional capital to the Insurance Companies, would be
inconsistent with their strategic plan of continued independence
and would be tantamount to a sale and liquidation of the
Insurance Companies, the Boards of Directors of the Company and
the Insurance Companies declined to further consider the request
and affirmed their course of independence and commitment to the
Plan.
An application to acquire the Company was
contemporaneously filed with the Department by the unrelated
party. In response to the application, the Department informed
the applicant that its application was both deficient and
premature because no stock of the Company is outstanding.
Pending cure of these deficiencies and approval of the
application by the Department, the Department informed the
applicant that the applicant is prohibited from (i) making any
public announcement of its request to the Company to amend the
Plan, and (ii) soliciting policyholders of the Insurance
Companies in any way, including in connection with the
policyholder votes to be held on the Plan at the Special
Meetings. The Company believes the applicant will be unable to
cure the deficiencies in its application and secure Department
approval, on a timely basis, if at all. If Eligible
Policyholders do not approve the Plan, the Boards of Directors of
the Insurance Companies intend to maintain their current course
of independence.
General
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 exchange $16.0 million of the net proceeds of the
Offering for all of the capital stock of Old Guard Mutual, Old
Guard Fire and Goschenhoppen to be issued in the Conversion. See
"Use of Proceeds." Upon issuance of the shares of capital stock
of the Insurance Companies to the Company, the Insurance
Companies will become wholly-owned subsidiaries of the Company.
The Conversion will be effected only upon completion of the sale
of at least the minimum number of shares of Common Stock required
to be sold by the Company pursuant to the Plan. The Conversion
will be accounted for as a simultaneous reorganization,
recapitalization and share offering which will not change the
historical accounting basis of the Insurance Companies' financial
statements.
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"), a Pennsylvania limited partnership. All shares of
Common Stock to be issued and sold in the Conversion will be sold
at the same price of $10.00 per share. 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 the proxy statements prepared by the Insurance
Companies in connection with 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, except that the ESOP may
purchase up to 10% of the shares of Common Stock issued in the
Conversion. 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 are 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, including Eligible Policyholders who
purchase shares of Common Stock in the Subscription Offering.
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.
See "Description of Capital Stock -- Common Stock."
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. Shareholders of the Company, including eligible
policyholders who purchase shares of Common Stock in the
Subscription Offering, will have the exclusive right to receive
dividends paid by the Company, if any. See "Description of
Capital Stock -- Common Stock."
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. In
the event of a liquidation, dissolution or winding up of the
Company, shareholders of the Company, including Eligible
Policyholders who purchase shares of Common Stock in the
Subscription Offering, 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. See "Description of
Capital Stock -- Common Stock."
The Offering
Subscription Offering.
Nontransferable subscription rights to purchase shares of
Common Stock are being 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 has 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. The Community
Offering will terminate on the Community Offering Termination
Date, which is expected to coincide with the Subscription
Offering Termination Date, unless extended by the Company, in its
sole discretion, for up to an additional 45 days. The sale of
shares of Common Stock in the Subscription Offering and the
Community Offering will be conducted by Hopper Soliday on a best
efforts basis. 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, as part of its
investment banking business, is engaged regularly in the
valuation of assets, securities and companies in connection with
various types of asset and security transactions, including
mergers, acquisitions, private placements, and valuations for
various other purposes and in the determination of adequate
consideration in such transactions. 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 Valuation Range,
initially plans to issue between 2,853,500 and 3,860,600 shares
(exclusive of purchases by the ESOP) 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. Subscribers will
be notified of any such action by mail and, if a new Estimated
Valuation Range is established, subscribers will be given an
opportunity to affirm, amend or cancel their subscriptions.
Subscription orders may not be withdrawn for any reason, if the
updated appraisal is within the Estimated Valuation Range.
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 in one or more
other registered transactions; 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 in one or more other registered transactions. If the
aggregate number of shares of Common Stock subscribed for in the
Subscription Offering, the Community Offering and in any Public
Offering or other registered transaction 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 other registered transaction
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 other
registered transaction 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 in one or more other
registered transactions 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 other registered
transaction 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 one
or more registered transactions.
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."
Under the Act, the Company is permitted to require a
minimum subscription of 25 shares of Common Stock provided that
any required minimum subscription amount established cannot
exceed $500. Based on the minimum subscription parameters set
forth in the Act and the Company's desire to create a broad and
diverse shareholder base, the Company determined to offer the
Common Stock in the Conversion at the price of $10.00 per
share.
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 obtained from the
Internal Revenue Service (the "IRS") a private letter ruling (the
"PLR") 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. The PLR confirms, 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 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 stock is purchased.
Subscription Rights.
Generally, 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. Nevertheless, the IRS has
ruled in the PLR that any gain realized by an Eligible
Policyholder as a result of the receipt of subscription rights
with a fair market value must be recognized, whether or not such
rights are exercised. The amount of gain recognized by each
Eligible Policyholder will equal the fair market value of
subscription rights received 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 or lapse of
such Eligible Policyholder's unexercised subscription rights.
The amount of such loss should equal the gain previously
recognized upon receipt of such unexercised subscription rights,
although such loss may not have the same character as the
corresponding gain. 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 should be valued or how to determine
the number of subscription rights that may be allocated to each
Eligible Policyholder during the Subscription Offering.
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 WHICH
MAY BE RELEVANT TO EACH ELIGIBLE POLICYHOLDER THAT MAY BE SUBJECT
TO SPECIAL TREATMENT UNDER THE CODE, SUCH AS TRUSTS, INDIVIDUAL
RETIREMENT ACCOUNTS, OTHER EMPLOYEE BENEFIT PLANS, INSURANCE
COMPANIES, AND ELIGIBLE POLICYHOLDERS WHO ARE EMPLOYEES OF AN
INSURANCE COMPANY OR 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, 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. 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 will not be available to subscribers for
such 45-day period, and may not be available for 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
Stock Information 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 Stock Information Center, which is
expected to operate during normal business hours throughout the
Offering. Employees of Hopper Soliday will manage the Stock
Information 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 Stock Information
Center to assist employees of Hopper Soliday with administrative
matters and proxy and stock order solicitation.
In addition to the activity in the Stock Information
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 Stock Information 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
upon completion of the Conversion 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. The outstanding principal balance
of the Surplus Note was $1.5 million at September 30, 1996.
American Re has elected to convert the Surplus Note into 150,000
shares of Common Stock. These shares are in addition to the
shares of Common Stock offered and sold in the Offering. Any
accrued interest outstanding at the time of conversion of the
Surplus Note will be paid in cash (accrued interest on the
Surplus Note at September 30, 1996 was approximately $140,000).
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. 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 number of shares equal to the maximum of the Estimated
Valuation Range divided by the Purchase Price). In addition, no
purchaser (including any Eligible Policyholders who elect to
purchase stock in the Conversion), together with such person's
affiliates and associates (as defined in the Plan) or a group
acting in concert (as defined in the Plan), may purchase more
than 193,030 shares of Common Stock in the Conversion (5% of the
number of shares 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 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 Eligible Policyholders are required to
approve an amendment to the Plan, the Company will send an a
Proxy Statement to each Eligible Policyholder as soon as
practical after the amendment is approved by the directors of the
Company and each Insurance Company and, if required, the
Department.
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 3,860,000 shares (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), 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 September 30, 1996 and 1995)
COMBINED STATEMENTS OF INCOME (Unaudited) F-28
(For the nine months ended September 30, 1996 and 1995)
COMBINED STATEMENTS OF CHANGES IN SURPLUS (Unaudited) F-29
(For the nine months ended September 30, 1996 and 1995)
COMBINED STATEMENTS OF CASH FLOWS (Unaudited) F-30
(For the nine months ended September 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, except for
Notes 15 E and F which are
dated as of December 5, 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:
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
------------ ------------
Total investments 92,335,264 82,879,084
Cash and cash equivalents 8,153,125 7,279,176
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). Management believes that presentation of combined
financial statements is the most meaningful given the
pending transaction described in footnote 15 B,
"Demutualization," and since the companies operate under
common management and, through a pooling agreement, share in
the premiums written and the loss experience of each
company.
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 B).
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. Computer software
is amortized on a straight-line basis over a useful life of
five 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.
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 (loss) $ (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 $9,825,000 on a statutory basis of
accounting to satisfy regulatory requirements.
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
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
Collateralized and asset backed
securities 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.
Collateralized and asset-backed securities consist of
mortgage pass-through holdings and securities backed by
credit card receivables, auto loans and home equity loans.
These securities follow a structured principal repayment
schedule and are of high credit quality rated "AA" or better
by Standard & Poor's. These securities are presented
separately in the maturity schedule due to the inherent risk
associated with prepayment on early authorization. The
average duration of this portfolio is 3.9 years.
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
The Group performs credit reviews of its reinsurers,
focusing on financial stability and commitment to the
reinsurance business. At December 31, 1995, the Group had a
reinsurance recoverable of $8,630,000 due from its principal
reinsurer, American Re-Insurance Company with an A.M. Best
rating of A+.
The ultimate ceded premium estimated by management for
retrospective contracts were $2,000,000, $1,400,000 and
$1,300,000 for 1995, 1994 and 1993, respectively. No
material adjustments from amounts originally estimated have
been recorded.
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
$7,000,000 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:
A. 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.
B. 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.
C. 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 charged the advance against earnings in 1996.
D. 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 insurance
company to secure insurance management services from CIMI
and pursue mutual to stock conversion and for the Group to
purchase a $1.0 million convertible surplus note and at its
discretion to purchase up to an additional $3.0 million of
convertible surplus notes. The agreement is subject to
satisfactory completion of due diligence investigations by
management and regulatory approval and is expected to be
completed by December 31, 1995.
E. Letter of Understanding:
In October 1996, OGIHC executed a letter of understanding
with a Delaware domiciled property and casualty insurance
company and its sole shareholder to acquire 80% of the stock
of the insurance company for approximately $4.8 million.
The letter also provides for the insurance company to secure
insurance management services from CIMI. The agreement is
subject to satisfactory completion of due diligence
investigations by management and regulatory approval.
F. 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 September 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 $2.5 million
through September 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 SEPTEMBER 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
ASSETS
<S> <C> <C>
Investments:
Fixed income securities, available for sale, at fair value $69,785,634 $78,527,888
Preferred stocks at fair value 5,100,434 9,230,609
Common stocks at fair value 6,425,351 4,348,463
Other invested assets 318,434 228,304
Total investments 81,629,853 92,335,264
Cash and cash equivalents 3,737,536 8,153,125
Premiums receivable 7,910,672 6,313,635
Reinsurance recoverables and unearned premiums 25,659,185 10,274,527
Deferred policy acquisition costs, net 5,833,960 7,180,779
Accrued investment income 1,102,600 1,033,140
Deferred income taxes, net 2,370,641 1,234,685
Property and equipment, net 6,164,008 5,656,074
Receivable from affiliate 412,836 214,582
Other assets 2,716,623 2,457,554
Total assets $137,537,914 $134,853,365
============ ============
LIABILITIES & SURPLUS
Liabilities:
Reserve for losses and loss adjustment expenses $ 56,798,586 52,091,497
Unearned premiums 35,773,725 33,329,250
Accrued expenses 2,203,007 3,153,110
Capital lease obligations 1,848,492 509,194
Subordinated debt 1,500,000 2,250,000
Other liabilities 1,744,703 2,623,000
Total liabilities 99,868,513 93,956,051
Surplus:
Unassigned surplus 36,356,971 38,905,128
Unrealized capital gains of securities,
net of deferred income taxes 1,312,430 1,992,186
Total surplus 37,669,401 40,897,314
Total liabilities and surplus $137,537,914 $134,853,365
============ =============
</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 Nine Months and Three Months Ended
September 30, 1996 and 1995
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenue:
Net premiums written $34,825,650 $50,089,488 $14,471,741 $16,828,120
Change in unearned premiums 4,878,988 (1,553,794) (1,073,352) (613,766)
Net premiums earned 39,704,638 48,535,694 13,398,389 16,214,354
Investment income, net of expenses 3,434,066 3,408,538 1,052,583 1,100,442
Net realized investment gains 1,328,217 649,546 382,822 309,526
Other revenue 483,986 172,055 223,599 60,359
Total revenue 44,950,907 52,655,843 15,057,393 17,684,681
Expenses:
Losses and loss adjustment expenses incurred 34,548,664 33,891,881 8,900,172 11,055,047
Amortization of deferred policy acquisition costs 9,078,515 12,811,109 3,396,480 4,099,778
Operating expenses 5,330,300 4,894,626 2,163,594 1,971,222
Total expenses 48,957,479 51,597,616 14,460,246 17,126,047
Income (loss) before provision for income tax (4,006,572) 1,168,227 597,147 558,634
Income tax expense (benefit) (1,458,415) 252,112 184,189 137,880
Net income (loss) ($2,548,157) $ 916,115 $ 412,958 $ 420,754
============ =========== =========== ===========
</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 Nine Months and Three Months Ended
September 30, 1996 and 1995
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Unassigned surplus:
Balance, beginning of year $38,905,128 $39,588,699 $35,944,013 $40,084,060
Net income (2,548,157) 916,115 412,958 420,754
Balance, end of period $36,356,971 $40,504,814 $36,356,971 $40,504,814
=========== =========== =========== ===========
Unrealized capital gains (losses) of securities,
net of deferred income taxes:
Balance, beginning of period $ 1,992,186 $(3,057,253) $ 1,097,228 $ 1,666,267
Net increase (decrease) in unrealized capital (679,756) 5,307,648 215,202 584,128
gains of securities available for sale
Balance, end of period $1,312,430 $2,250,395 $ 1,312,430 $ 2,250,395
========== ========== =========== ===========
</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 Nine Months and Three Months Ended
September 30, 1996 and 1995
<TABLE> Nine Months Ended September 30, Three Months Ended September 30,
<CAPTION> 1996 1995 1996 1995
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($2,548,157) $ 916,115 $ 412,958 $ 420,754
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation of property and equipment 462,432 381,240 264,618 187,674
Amortization of discount/accretion of premium 240,855 305,430 72,734 106,293
Net realized investment gain (1,328,215) (649,546) (382,819) (309,526)
Net realized gain on sale of property and equipment (11,400) (8,977) 0 (8,977)
Deferred income tax provision (benefit) (887,851) 226,586 124,138 157,243
(Increase) decrease in assets:
Premiums receivable (1,597,037) (1,300,133) (669,064) 315,137
Reinsurance recoverable (15,384,658) 568,514 (4,626,468) (2,437,853)
Deferred policy acquisition costs 1,346,819 (373,095) 74,551 (85,142)
Accrued investment income (69,460) (241) (104,198) (24,832)
Other assets, excluding receivable from
sale of security (1,286,065) (209,554) (611,651) (79,617)
Receivable from affiliate (198,254) 641,269 1,095,930 1,327,390
Increase (decrease) in liabilities:
Reserve for losses and loss adjustment expenses 4,707,089 (16,879) (2,142,686) 1,655,105
Unearned premium 2,444,475 1,743,805 1,366,584 720,661
Accrued expenses (950,103) (371,039) 587,782 529,641
Other liabilities, excluding payable for
purchase of security 572,467 270,146 (96,283) 54,859
Net cash used by operating activities (14,487,063) 2,123,641 (4,633,874) 2,528,810
Cash flows from investing activities:
Cost of purchases of fixed income securities, (19,283,725) (29,008,791) (6,846,570) (15,734,768)
available for sale
Proceeds from sales of fixed income securities, 25,377,279 26,582,882 8,749,146 11,015,596
available for sale
Proceeds from maturities of fixed income securities, 1,700,000 865,000 200,000 250,000
available for sale
Cost of equity securities acquired (3,200,300) (1,966,538) (850,427) (445,314)
Proceeds from sales of equity securities 6,358,616 2,567,857 1,260,344 689,529
Change in receivable/payable for securities (423,768) 0 0 155,759
Cost of purchases of other invested assets (86,959) (30,000) (27,883) 0
Proceeds from sale of other invested assets 0 190,000 0 190,000
Cost of purchase of property and equipment (970,367) (1,433,875) (513,462) (710,939)
Proceeds from sale of property and equipment 11,400 169,813 0 169,813
Net cash provided by investing activities 9,482,176 (2,063,652) 1,971,148 (4,420,324)
Cash flows from financing activities:
Payments on principal of capital lease (159,730) (93,498) (159,730) (93,498)
Proceeds from capital lease funding 1,499,028 0 344,277 0
Repayment of subordinated debt (750,000) (750,000) (750,000) 0
Net cash provided by (used in) financing
activities 589,298 (843,498) (565,453) (93,498)
Net increase (decrease) in cash and cash equivalents (4,415,589) (783,509) (3,228,179) (1,985,012)
Cash and cash equivalents at beginning of year 8,153,125 7,279,176 6,965,715 8,480,679
Cash and cash equivalents at end of nine months $ 3,737,536 6,495,667 3,737,536 6,495,667
Additional Disclosures:
Cash paid (received) during the nine months for:
Interest $ 29,638 $ 28,761 $ 29,638 $ 28,761
Income taxes $ (45,843) $ 252,949 $ 0 $ 80,949
</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 January 1997, 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 by drawing down on an existing $7.0 million
line of credit.
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
$7.0 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 & 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. (Incorporated herein by reference to
Exhibit 1 to the Registration Statement on Form 8-A
(File No. 000-21611) 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.*
10.10Surplus Note, as amended, issued by Old Guard Mutual
Insurance Company to American Re-Insurance Company.*
10.11Property and Casualty Quota Share Reinsurance
Agreement, between Old Guard Mutual Insurance Company,
Old Guard Fire Insurance Company, Goschenhoppen-Home
Mutual Insurance Company, Neffsville Mutual Fire
Insurance Company and 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 Brochures
99.4 Letters to prospective purchasers
99.5 Old Guard Mutual Insurance Company Policyholder
Information Statement
99.6 Old Guard Fire Mutual Insurance Company Policyholder
Information Statement
99.7 Goschenhoppen-Home Mutual Insurance Company
Policyholder Information Statement
- ---------------
* 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 December 6, 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 December 6, 1996
David E. Hosler Executive Officer
and Director
(Principal Executive
Officer)
/s/ James W. Appel* Director December 6, 1996
James W. Appel
/s/John E. Barry* Director December 6, 1996
John E. Barry
/s/Luther R. Campbell, Jr.* Director December 6, 1996
Luther R. Campbell, Jr.
/s/M. Scott Clemens* Director December 6, 1996
M. Scott Clemens
____________________________ Director December __, 1996
Richard B. Neiley, Jr.
____________________________ Director December __, 1996
G. Arthur Weaver
/s/Robert L. Wechter* Director December 6, 1996
Robert L. Wechter
/s/Mark J. Keyser Chief Financial December 6, 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. (Incorporated herein by reference to
Exhibit 1 to the Registration Statement on Form 8-A
(File No. 000-21611) 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.*
10.11 Property and Casualty Quota Share Reinsurance
Agreement, between Old Guard Mutual Insurance Company,
Old Guard Fire Insurance Company, Goschenhoppen-Home
Mutual Insurance Company, Neffsville Mutual Fire
Insurance Company and 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 Brochures
99.4 Letters to prospective purchasers
99.5 Old Guard Mutual Insurance Company Policyholder
Information Statement
99.6 Old Guard Fire Mutual Insurance Company Policyholder
Information Statement
99.7 Goschenhoppen-Home Mutual Insurance Company
Policyholder Information Statement
- ----------------
* Previously filed.
** To be filed by amendment.
EXHIBIT 10.11
PROPERTY AND CASUALTY QUOTA SHARE
REINSURANCE AGREEMENT
between
OLD GUARD MUTUAL INSURANCE COMPANY
OLD GUARD MUTUAL FIRE INSURANCE COMPANY
GOSCHENHOPPEN-HOME MUTUAL INSURANCE COMPANY
NEFFSVILLE MUTUAL FIRE INSURANCE COMPANY
and
AMERICAN RE-INSURANCE COMPANY
<PAGE>
TABLE OF CONTENTS
ARTICLE PAGE
ARTICLE I - BUSINESS COVERED . . . . . . . . . . . . . . . . . 1
ARTICLE II - REINSURANCE COVERAGE. . . . . . . . . . . . . . . 1
ARTICLE III - REINSURANCE PREMIUM. . . . . . . . . . . . . . . 2
ARTICLE IV - CEDING COMMISSION . . . . . . . . . . . . . . . . 2
ARTICLE V - EXCLUSIONS . . . . . . . . . . . . . . . . . . . . 2
ARTICLE VI - DEFINITIONS . . . . . . . . . . . . . . . . . . . 3
ARTICLE VII - EXTRA CONTRACTUAL OBLIGATIONS AND/OR EXCESS
JUDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE VIII - WARRANTY OF INURING REINSURANCES. . . . . . . . 5
ARTICLE IX - REPORTS AND REMITTANCES . . . . . . . . . . . . . 5
ARTICLE X - SALVAGE AND RECOVERIES . . . . . . . . . . . . . . 6
ARTICLE XI - ERRORS AND OMISSIONS. . . . . . . . . . . . . . . 7
ARTICLE XII - OFFSET AND SECURITY. . . . . . . . . . . . . . . 7
ARTICLE XIII - ACCESS TO RECORDS . . . . . . . . . . . . . . . 8
ARTICLE XIV - RESERVES AND TAXES . . . . . . . . . . . . . . . 8
ARTICLE XV - INSOLVENCY. . . . . . . . . . . . . . . . . . . . 8
ARTICLE XVI - COMMENCEMENT AND TERMINATION . . . . . . . . . . 9
<PAGE>
PROPERTY AND CASUALTY QUOTA SHARE
REINSURANCE AGREEMENT
THIS AGREEMENT made and entered into by and between OLD
GUARD MUTUAL INSURANCE COMPANY, OLD GUARD MUTUAL FIRE INSURANCE
COMPANY, GOSCHENHOPPEN-HOME MUTUAL INSURANCE COMPANY and
NEFFSVILLE MUTUAL FIRE INSURANCE COMPANY, all of Lancaster,
Pennsylvania, (hereinafter and thereinafter collectively referred
to as the "Company") and the AMERICAN RE-INSURANCE COMPANY of
Princeton, New Jersey (hereinafter and thereinafter referred to
as the "Reinsurer").
WITNESSETH:
The Reinsurer hereby reinsures the Company to the extent and
on the terms and conditions and subject to the exceptions,
exclusions and limitations hereinafter set forth, and nothing
hereinafter shall in any manner create any obligations or
establish any rights against the Reinsurer in favor of any third
parties or any persons not parties to this Agreement.
ARTICLE I
BUSINESS COVERED
By this Agreement the Reinsurer agrees to indemnify the
Company for loss amounts incurred by the Company during the term
of this Agreement that arise from policies in-force at the
effective date or issued or renewed during the term of this
Agreement under all lines of business underwritten by the
Company; subject however, to the reinsurance coverage limitation
in ARTICLE II, REINSURANCE COVERAGE, as excluded in ARTICLE V,
EXCLUSIONS, and all other conditions as set forth in this
Agreement.
ARTICLE II
REINSURANCE COVERAGE
The Company shall cede to the Reinsurer and the Reinsurer
shall accept from the Company a 20% quota share participation of
the business covered, net of all other reinsurance except for
Sections 1 and 3 of the Underlying Catastrophe and Aggregate
Excess of Loss Reinsurance Agreement No. 3063-0034. It is
understood and agreed that the Reinsurer's maximum limit of
liability hereunder shall not exceed an Accident Year Loss Ratio
greater than 95% in the aggregate on the business reinsured
hereunder.
ARTICLE III
REINSURANCE PREMIUM
As consideration for the reinsurance provided hereunder, the
Company shall cede to the Reinsurer 20% of the Company's Net
Written Premium of the Company's policies.
ARTICLE IV
CEDING COMMISSION
(a) The Reinsurer shall allow the Company a 35% commission
on all premium ceded to the Reinsurer hereunder. The Company
shall allow the Reinsurer return commission on return premium at
the same rate.
(b) It is expressly agreed that the ceding commission
allowed the Company includes provision for all dividends,
commissions, taxes, assessments, and all other expenses of
whatever nature, except Allocated Loss Adjustment Expenses.
ARTICLE V
EXCLUSIONS
This Agreement does not apply to and specifically excludes:
1. Liability of the Company arising from its participation
or membership, whether voluntary or involuntary, in any
insolvency fund, including any guarantee fund,
association, pool, plan or other facility which
provides for the assessment of, payment by, or
assumption by the Company of a part or the whole of any
claim, debt, charge, fee or other obligations of an
insurer, or its successors or assigns, which has been
declared insolvent by any authority having
jurisdiction.
2. Liability excluded by the provisions of the following
clauses attached hereto, except that the word
"Reassured" used in these clauses shall mean "Company."
Nuclear Incident Exclusion Clause Liability -
Reinsurance - No. 1B
Nuclear Incident Exclusion Clause - Physical
Damage - Reinsurance - No. 2
Nuclear Incident Exclusion Clauses - Physical
Damage & Liability - Boiler & Machinery
Policies - Reinsurance - No. 3
3. Liability of the Company arising from war risk,
bombardment, invasion, insurrection, rebellion,
revolution, military or usurped power, or confiscation
by order of any government or public authority.
ARTICLE VI
DEFINITIONS
(a) The term "Accident Year" shall refer to insured losses
occurring during the twelve month period beginning January 1,
1996 and ending December 31, 1996.
(b) The term "Accident Year Loss Ratio" shall be the amount
resulting by dividing the amount of Losses Incurred by the
Company for the Accident Year for which the computation is being
made, by the Net Earned Premium for the corresponding Accident
Year.
(c) The term "Losses Incurred" shall mean the aggregate sum
or sums paid or to be paid by the Company in settlement of
losses, including Allocated Loss Adjustment Expenses, plus
reserves for outstanding losses and Allocated Loss Adjustment
Expenses (including IBNR), as respects covered losses for which
the Company is liable to pay under the policies, including Extra
Contractual Obligations and Excess Judgments awards, after making
proper deductions for all other reinsurances or insurances except
for Sections 1 and 3 of the Underlying Catastrophe and Aggregate
Excess of Loss Reinsurance Agreement No. 3063-0034, whether
collectible or not, and all salvages and recoveries. The
Reinsurer's liability hereunder shall not be increased by reason
of the inability of the Company to collect from any other
reinsurer or insurer, whether specific or general, any amount
that may be due from them, whether such inability arises from the
insolvency of such other reinsurers or insurers or otherwise.
(d) The term "Allocated Loss Adjustment Expenses" shall
mean all expenses, including taxed court costs, prejudgment and
postjudgment interests, that are allocable to specific claims
recoverable under this Agreement incurred by the Company in the
investigation, appraisal, adjustment, settlement or defense of
such claims made against the Company under its policies.
However, such amounts shall not include office expenses of the
Company and the salaries and expenses of its employees.
(e) The term "IBNR" shall mean that amount of reserves for
outstanding losses and Allocated Loss Adjustment Expenses arising
from insured losses that have already occurred during the term of
this Agreement but have not yet been reported to the Company as
claims recoverable under the Company's policies. Such amounts
shall contemplate the ultimate valuation of such losses and
Allocated Loss Adjustment Expenses.
(f) The term "Net Written Premium" shall mean the Company's
gross written premium, plus additional premium, less return
premium on policies for the period for which the computation is
being made, less premium for inuring reinsurances, except for
premiums for Sections 1 and 3 of the Underlying Catastrophe and
Aggregate Excess of Loss Reinsurance Agreement No. 3063-0034.
(g) The term "Net Earned Premium" shall mean the Company's
Net Written Premium for the period for which computation is being
made, plus unearned premium at the beginning of the period, less
unearned premium at the end of the period.
(h) The term "Policies" as used herein means the Company's
binders, contracts and policies in-force at the effective date or
issued or renewed during the term of this Agreement under all
lines of business underwritten by the Company and reinsured under
this Agreement.
ARTICLE VII
EXTRA CONTRACTUAL OBLIGATIONS AND/OR EXCESS JUDGMENTS
(a) This Agreement shall indemnify the Company, within the
reinsurance coverage as provided in ARTICLE II, REINSURANCE
COVERAGE of this Agreement, for Extra Contractual Obligations
and/or Excess Judgments awards incurred by the Company that arise
from the business reinsured hereunder.
(b) "Extra Contractual Obligations" are defined as those
damages for which the Company is legally liable to pay that are
not covered under any other provision of this Agreement,
including related expenses, that arise as a result of the
Company's handling of any claim on the business reinsured
hereunder, such liabilities arising because of, but not limited
to, the following: failure by the Company to settle within the
policy limit, or by reason of alleged or actual negligence, fraud
or bad faith in rejecting an offer of settlement or in the
preparation of the defense or in the trial of any action against
its insured or in the preparation or prosecution of an appeal
consequent upon such action.
(c) "Excess Judgments" are defined as those damages for
which the Company is legally liable to pay that are in excess of
its policy limits, but otherwise within the coverage terms of the
business reinsured hereunder, including related expenses, that
arise as a result of the Company's alleged or actual tortious
conduct in the handling of the investigation, defense or
settlement of the claim made against the Company's insured and an
action is taken by the insured or assignee and a judgment
rendered against the Company for an amount in excess of the
Company's policy limit.
(d) The date on which an Extra Contractual Obligation
and/or an Excess Judgment award is incurred by the Company shall
be deemed, in all circumstances, to be the date of the original
loss occurrence.
(e) However, this Article shall not apply where the loss
has been incurred due to the fraud of a member of the Board of
Directors or a corporate officer of the Company or any other
employee of the Company with claims settlement authority acting
individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the
presentation, defense or settlement of any claim covered
hereunder.
(f) Recoveries, collectibles or retentions from any form of
insurance and/or reinsurance, including but not limited to,
deductibles or self-insured retentions, that protect the Company
against claims the subject matter of this clause, will inure to
the benefit of the Reinsurer and shall be deducted from the total
amount of Extra Contractual Obligations and/or Excess Judgments
awards for purposes of determining the amount recoverable
hereunder.
(g) If any provision of this Article shall be rendered
illegal or unenforceable by the laws, regulations or public
policy of any state, such provision shall be considered void in
such state, but this shall not affect the validity or
enforceability of any other provision of this Agreement or the
enforceability of such provision in any other jurisdiction.
ARTICLE VIII
WARRANTY OF INURING REINSURANCES
It is understood and agreed that all underlying reinsurance
coverages in effect as of the effective date of this Agreement
are deemed in-force and in effect, whether actually purchased or
not, for purposes of determining reinsurance recoveries under
this Agreement. In the event the Company changes any of the
underlying reinsurances, the Company must give written notice of
such change to the Reinsurer.
ARTICLE IX
REPORTS AND REMITTANCES
(a) Reinsurance Premium amounts due the Reinsurer shall be
paid by the Company in accordance with the terms set forth in
ARTICLE III, REINSURANCE PREMIUM, of this Agreement.
(b) It is understood and agreed that the net unearned
premium on business in-force at the inception of this Agreement
shall be due and paid to the Reinsurer on or before January 31,
1996.
(c) The Company will provide and forward to the Reinsurer
within 45 days after the close of each calendar quarter, on forms
mutually acceptable to the Company and to the Reinsurer, the
following information relating to reinsurance covered under this
Agreement:
1. Gross and Net Written Premium;
2. Gross and Net reserves for unearned premium;
3. Gross and Net Earned Premium;
4. Gross and Net ceding commissions;
5. Gross and Net paid losses and Allocated Loss
Adjustment Expenses, net of salvage,
recoveries, and inuring reinsurances;
6. Gross and Net reserves for outstanding losses
and Allocated Loss Adjustment Expenses
(including IBNR), net of inuring
reinsurances;
7. Account Current summarizing net premiums,
commissions, losses and loss expenses paid
and salvages recovered.
(d) As of the date of calculation, any amount shown due the
Reinsurer in the Account Current shall be paid by Company with
its report. Any amount due the Company as shown in the Account
Current shall be paid by the Reinsurer within 30 days following
the Reinsurer's receipt of the Company's report.
ARTICLE X
SALVAGE AND RECOVERIES
(a) The Reinsurer shall be subrogated, as respects any loss
for which the Reinsurer shall actually pay or become liable, but
only to the extent of the amount of payment by or the amount of
liability to the Reinsurer, to all the rights of the Company
against any person or other entity who may be legally responsible
in damages for said loss. The Company hereby agrees to enforce
such rights, but in case the Company shall refuse or neglect to
do so the Reinsurer is hereby authorized and empowered to bring
any appropriate action in the name of the Company or its
policyholders, or otherwise to enforce such rights.
(b) All salvages, recoveries or reimbursements, after
deduction of expenses applicable thereto, recovered or received
subsequent to a loss settlement recoverable under this Agreement
shall be applied as if recovered or received prior to the
settlement and all necessary adjustments shall be made by the
parties hereto, provided always, that nothing in this clause
shall be construed to mean that losses under this Agreement are
not recoverable until the Company's Aggregate Ultimate Net Loss
has been ascertained. Expenses hereunder shall exclude all
office expenses of the Company and all salaries and expenses of
its officials and employees.
ARTICLE XI
ERRORS AND OMISSIONS
Errors or omissions on the part of the Company shall not
invalidate the reinsurance under this Agreement, provided such
errors or omissions are corrected promptly after discovery
thereof, but the liability of the Reinsurer under this Agreement
or any endorsements attached thereto shall in no event exceed the
limits specified therein, nor be extended to cover any risks,
perils or classes of insurance generally or specifically excluded
therein.
ARTICLE XII
OFFSET AND SECURITY
(a) Each party hereto has the right, which may be exercised
at any time, to offset any amounts, whether on account of premium
or losses or otherwise, due from such party to another party
under this Agreement or any other reinsurance agreement
heretofore or hereafter entered into between them, against any
amounts, whether on account of premium or losses or otherwise due
from the latter party to the former party. The party asserting
the right of offset may exercise this right, whether as assuming
or ceding insurer or in both roles in the relevant agreement or
agreements.
(b) Each party hereby assigns and pledges to the other
party (or to each other party, if more than one) all of its
rights under this Agreement to receive premium or loss payments
at any time from such other party ("Collateral"), to secure its
premium or loss obligations to such other party at any time under
this Agreement and any other reinsurance agreement heretofore or
hereafter entered into by and between them ("Secured
Obligations"). If at any time a party is in default under any
Secured Obligation or shall be subject to any liquidation,
rehabilitation, reorganization or conservation proceeding, each
other party shall be entitled in its discretion, to apply, or to
withhold for the purpose of applying in due course, any
Collateral assigned and pledged to it by the former party and
otherwise to realize upon such Collateral as security for such
Secured Obligations.
(c) The security interest described herein, and the term
"Collateral," shall apply to all payments and other proceeds in
respect of the rights assigned and pledged. A party's security
interest in Collateral shall be deemed evidenced only by the
counterpart of this Agreement delivered to such party.
(d) Each right under this Article is a separate and
independent right, exercisable, without notice or demand, alone
or together with other rights, in the sole election of the party
entitled thereto, and no waiver, delay, or failure to exercise,
in respect of any right, shall constitute a waiver of any other
right. The provisions of this Article shall survive any
cancellation or other termination of this Agreement.
(e) In the event of the insolvency of a party hereto,
offsets shall only be allowed in accordance with the laws of the
insolvent party's state of domicile.
ARTICLE XIII
ACCESS TO RECORDS
The Company shall place at the disposal of the Reinsurer and
the Reinsurer shall have the right to inspect, through its
authorized representatives, at all reasonable times during the
currency of this Agreement and thereafter, the books, records and
papers of the Company pertaining to the reinsurance provided
hereunder and all claims made in connection therewith.
ARTICLE XIV
RESERVES AND TAXES
(a) The Reinsurer shall maintain legal reserves with
respect to unearned premium and claims hereunder.
(b) The Company will be liable for all taxes on premium
reported to the Reinsurer hereunder and will reimburse the
Reinsurer for such taxes where the Reinsurer is required to pay
the same.
ARTICLE XV
INSOLVENCY
In the event of the insolvency of the Company and the
appointment of a conservator, liquidator or statutory successor,
the reinsurance provided by this Agreement shall be payable by
the Reinsurer directly to the Company or to its liquidator,
receiver or statutory successor on the basis of the liability of
the Company under the contract or contracts reinsured. Subject
to the right of offset and the verification of coverage, the
Reinsurer shall pay its share of the loss without diminution
because of the insolvency of the Company. The liquidator,
receiver or statutory successor of the Company shall give written
notice of the pendency of each claim against the Company on a
policy or bond reinsured within a reasonable time after such
claim is filed in the insolvency proceeding. During the pendency
of such claim, the Reinsurer may, at its own expense, investigate
such claim and interpose in the proceeding where such claim is to
be adjudicated any defense or defenses which it may deem
available to the Company, its liquidator or receiver or statutory
successor. Subject to court approval, any expense thus incurred
by the Reinsurer shall be chargeable against the Company as part
of the expense of liquidation to the extent of such proportionate
share of the benefit as shall accrue to the Company solely as a
result of the defense undertaken by the Reinsurer. The
reinsurance shall be payable as set forth above except where this
Agreement specifically provides for the payment of reinsurance
proceeds to another party in the event of the insolvency of the
Company.
ARTICLE XVI
COMMENCEMENT AND TERMINATION
(a) This Agreement is effective 12:01 A.M., Eastern
Standard Time, January 1, 1996 and shall terminate at Midnight,
Eastern Standard Time, December 31, 1996.
(b) Upon termination of this Agreement, the Reinsurer shall
not be bound on any policies on or after the date of termination,
however all policies bound under the terms of this Agreement that
are in effect as of said termination date shall remain in force
until cancellation or natural termination thereof.
(c) Notwithstanding the termination of this Agreement, the
provisions of this Agreement shall continue to apply to all
unfinished business hereunder until all obligations and
liabilities incurred by each party under this Agreement prior to
said date are fully performed and discharged.
IN WITNESS WHEREOF the parties hereto have caused this
Agreement to be executed in duplicate this 11th day of September,
1996.
ACCEPTED:
OLD GUARD MUTUAL INSURANCE COMPANY
OLD GUARD MUTUAL FIRE INSURANCE COMPANY
GOSCHENHOPPEN-HOME MUTUAL INSURANCE COMPANY
NEFFSVILLE MUTUAL FIRE INSURANCE COMPANY
/s/ David E. Hosler
AMERICAN RE-INSURANCE COMPANY
/s/ American Re-Insurance Company<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE-LIABILITY-REINSURANCE
No. 1B
(1) This reinsurance does not cover any loss or liability
accruing to the Reassured as a member of, or subscriber to, any
association of insurers or reinsurers formed for the purpose of
covering nuclear energy risks or as a direct or indirect
reinsurer of any such member, subscriber or association.
(2) Without in any way restricting the operation of
paragraph (1) of this Clause it is understood and agreed that for
all purposes of this reinsurance all the original policies of the
Reassured (new, renewal and replacement) of the classes specified
in Clause II of this paragraph (2) from the time specified in
Clause III in this paragraph (2) shall be deemed to include the
following provision (specified as-the Limited Exclusion
Provision):
Limited Exclusion Provision*
I. It is agreed that the policy does not apply under any
liability coverage,
to {injury, sickness, disease, death or destruction
{bodily injury or property damage
with respect to which an insured under the policy is
also an insured under a nuclear energy liability policy
issued by Nuclear Energy Liability Insurance
Association, Mutual Atomic Energy Liability
Underwriters or Nuclear Insurance Association of
Canada, or would be an insured under any such policy
but for its termination upon exhaustion of its limit of
liability.
II. Family Automobile Policies (liability only), Special
Automobile Policies (private passenger automobiles,
liability only), Farmers Comprehensive Personal
Liability Policies (liability only), Comprehensive
Personal Liability Policies (liability only) or
policies of a similar nature; and the liability portion
of combination forms related to the four classes of
policies stated above, such as the Comprehensive
Dwelling Policy and the applicable types of Homeowners
Policies.
III. The inception dates and thereafter of all original
policies as described in 11 above, whether new, renewal
or replacement, being policies which either
(a) become effective on or after 1st May, 1960, or
(b) become effective before that date and contain the
Limited Exclusion Provision set out above;
provided this paragraph (2) shall not be applicable to
Family Automobile Policies, Special Automobile
Policies, or policies or combination policies of a
similar nature, issued by the Reassured on New York
risks, until 90 days following approval of the Limited
Exclusion Provision by the Governmental Authority
having jurisdiction thereof.
(3) Except for those classes of policies specified in
Clause 11 of paragraph (2) and without in any way restricting the
operation of paragraph (1) of this Clause, it is understood and
agreed that for all purposes of this reinsurance the original
liability policies of the Reassured (new, renewal and
replacement) affording the following coverages:
Owners, Landlords and Tenants Liability, Contractual
Liability, Elevator Liability, Owners or Contractors
(including railroad) Protective Liability,
Manufacturers and Contractors Liability, Product
Liability, Professional and Malpractice Liability,
Storekeepers Liability, Garage Liability, Automobile
Liability (including Massachusetts Motor Vehicle or
Garage Liability)
shall be deemed to include, with respect to such coverages, from
the time specified in Clause V of this paragraph (3), the
following provision (specified as the Broad Exclusion Provision):
Broad Exclusion Provision*
It is agreed that the policy does not apply:
I. Under any Liability Coverage,
to {injury, sickness, disease, death or destruction
{bodily injury or property damage
(a) with respect to which an insured under the
policy is also an insured under a nuclear
energy liability policy issued by Nuclear
Energy Liability Insurance Association,
Mutual Atomic Energy Liability Underwriters
or Nuclear Insurance Association of Canada,
or would be an insured under any such policy
but for its termination upon exhaustion of
its limit or liability; or
(b) resulting from the hazardous properties of
nuclear material and with respect to which
(1) any person or organization is required to
maintain financial protection pursuant to the
Atomic Energy Act of 1954, or any law
amendatory thereof, or (2) the insured is, or
had this policy not been issued would be,
entitled to indemnity from the United States
of America, or any agency thereof, under any
agreement entered in to by the United States
of America, or any agency thereof, with any
person or organization.
II. Under any Medical Payments Coverage, or under any
Supplementary Payments Provision relating
to {immediate medical or surgical relief,
{first aid, to expenses incurred with respect
to {bodily injury, sickness, disease or death
{bodily injury resulting from the hazardous
properties of nuclear material and arising out of
operation of nuclear facility by any person or
organization.<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSE-
PHYSICAL DAMAGE-REINSURANCE-NO. 2
(1) This Reinsurance does not cover any loss or liability
accruing to the Reassured, directly or indirectly and whether as
Insurer or Reinsurer, from any Pool of Insurers or Reinsurers
formed for the purpose of covering Atomic or Nuclear Energy
risks.
(2) Without in any way restricting the operation of
paragraph (1) of this Clause, this Reinsurance does not cover any
loss or liability accruing to the Reassured, directly or
indirectly and whether as Insurer or Reinsurer, from any
insurance against Physical Damage (including business
interruption or consequential loss arising out of such Physical
Damage) to:
I. Nuclear reactor power plants including all
auxiliary property on the site, or
II. Any other nuclear reactor installation, including
laboratories handling radioactive materials in
connection with reactor installations, and
"critical facilities" as such, or
III. Installations for fabricating complete fuel
elements or for processing substantial quantities
of "special nuclear material," and for
reprocessing, salvaging, chemically separating,
storing or disposing of "spent" nuclear fuel or
waste materials, or
IV. Installations other than those listed in paragraph
(2) III above using substantial quantities of
radioactive isotopes or other products of nuclear
fission.
(3) Without in any way restricting the operations of
paragraphs (1) and (2) hereof, this Reinsurance does not cover
any loss or liability by radioactive contamination accruing to
the Reassured, directly or indirectly, and whether as Insurer or
Reinsurer, from any insurance on property which is on the same
site as a nuclear reactor power plant or other nuclear
installation and which normally would be insured therewith except
that this paragraph (3) shall not operate:
(a) where Reassured does not have knowledge of such
nuclear reactor power plant or nuclear
installation, or
(b) where said insurance contains a provision
excluding coverage for damage to property caused
by or resulting from radioactive contamination,
however caused. However on and after 1st January
1960 this sub-paragraph (b) shall only apply
provided the said radioactive contamination
exclusion provision has been approved by the
Governmental Authority having jurisdiction
thereof.
(4) Without in any way restricting the operations of
paragraphs (1), (2) and (3) hereof, this Reinsurance does not
cover any loss or liability by radioactive contamination accruing
to the Reassured, directly or indirectly, and whether as Insurer
or Reinsurer, when such radioactive contamination is a named
hazard specifically insured against.
(5) It is understood and agreed that this Clause shall not
extend to risks using radioactive isotopes in any form where the
nuclear exposure is not considered by the Reassured to be the
primary hazard.
(6) The term "special nuclear material" shall have the
meaning given it in the Atomic Energy Act of 1954 or by any law
amendatory thereof.
(7) Reassured to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
Note.--Without in any way restricting the operation of
paragraph (1) hereof, it is understood and agreed that:
(a) all policies issued by the Reassured on or before
31st December 1957 shall be free from the
application of the other provisions of this Clause
until expiry date or 31st December 1960 whichever
first occurs whereupon all the provisions of this
Clause shall apply,
(b) With respect to any risk located in Canada
policies issued by the Reassured on or before 31st
December 1958 shall be free from the application
of the other provisions of this Clause until
expiry date or 31st December 1960 whichever first
occurs whereupon all the provisions of this Clause
shall apply.
<PAGE>
NUCLEAR INCIDENT EXCLUSION CLAUSES-PHYSICAL DAMAGE
AND LIABILITY
(BOILER AND MACHINERY POLICIES)-REINSURANCE-No. 3
(1) This reinsurance does not cover any loss or liability
accruing to the Reassured as a member of, or subscriber to, any
association of insurers or reinsurers formed for the purpose of
covering nuclear energy risks or as a direct or indirect
reinsurer of any such member, subscriber or association.
(2) Without in any way restricting the operation of
paragraph (1) of this Clause it is understood and agreed that for
all purposes of this reinsurance all original Boiler and
Machinery Insurance contracts of the Reassured (new, renewal and
replacement) shall be deemed to include the following provisions
of this paragraph.
This Policy does not apply to "loss," whether it be direct
or indirect, proximate or remote
(a) from an Accident caused directly or indirectly by
nuclear reaction, nuclear radiation or radioactive
contamination, all whether controlled or
uncontrolled; or
(b) from nuclear reaction, nuclear radiation or
radioactive contamination, all whether controlled
or uncontrolled, caused directly or indirectly by,
contributed to or aggravated by an Accident.
(3) However, it is agreed that loss arising out of the use
of Radioactive Isotopes in any form is not hereby excluded from
reinsurance protection.
(4) Without in any way restricting the operation of
paragraph (1) hereof, it is understood and agreed that
(a) all policies issued by the Reassured to become
effective on or before 30th April, 1958, shall be
free from the application of the other provisions
of this Clause until expiry date or 30th April,
1961, whichever first occurs, whereupon all the
provisions of this Clause shall apply,
(b) with respect to any risk located in Canada
policies issued by the Reassured to become
effective on or before 31st December, 1958, shall
be free from the application of the other
provisions of this Clause until expiry date or
31st December, 1960, whichever first occurs,
whereupon all the provisions of this Clause shall
apply.
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 (Registration No. 333-12779),
as amended, of our reports dated July 19, 1996 (except for
Notes 15 E and F which are dated as of December 5, 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 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
December 6, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> SEP-30-1996 DEC-31-1996
<DEBT-HELD-FOR-SALE> 69,786 78,528
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 11,526 13,579
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 81,630 92,335
<CASH> 3,737 8,153
<RECOVER-REINSURE> 1,664 565
<DEFERRED-ACQUISITION> 5,834 7,181
<TOTAL-ASSETS> 137,538 134,853
<POLICY-LOSSES> 56,799 52,091
<UNEARNED-PREMIUMS> 35,774 33,329
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 1,500 2,250
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 37,669 40,897
<TOTAL-LIABILITY-AND-EQUITY> 137,538 134,853
39,705 66,663
<INVESTMENT-INCOME> 3,434 4,458
<INVESTMENT-GAINS> 1,328 1,011
<OTHER-INCOME> 484 274
<BENEFITS> 34,548 50,509
<UNDERWRITING-AMORTIZATION> 9,079 17,611
<UNDERWRITING-OTHER> 5,330 5,655
<INCOME-PRETAX> (4,006) (1,368)
<INCOME-TAX> (1,458) (684)
<INCOME-CONTINUING> (2,548) (684)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,548) (684)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<RESERVE-OPEN> 52,091 51,309
<PROVISION-CURRENT> 35,719 48,067
<PROVISION-PRIOR> (1,171) 2,442
<PAYMENTS-CURRENT> 23,978 29,970
<PAYMENTS-PRIOR> 14,302 17,258
<RESERVE-CLOSE> 56,799 52,091
<CUMULATIVE-DEFICIENCY> (8,854) (7,683)
</TABLE>
EXHIBIT 99.2
[FRONT]
SUBSCRIPTION OFFERING
STOCK ORDER FORM
Old Guard Group, Inc.
Note: Please read this Stock Order Form and instructions on the
back of this form before completion.
Deadline 1:00 P.M., Local Time, 1997
- - WE ARE NOT REQUIRED TO ACCEPT COPIES OF THIS FORM
The Subscription and Community Offering ends at 1:00 P.M., Local
time, on , 1997. Your Stock
Order Form, properly executed and with the correct payment, must
be received at the address on the bottom of this form by this
deadline, or it will be considered void.
________________________________________________________________
Number of Shares Office Use Only:
(1) Number of Shares Price Per Share (2) Total Amount Due
____________ x $10.00 = $____________
(minimum 25)
______________ ______________ __________________
Date Rec'd Batch # Order #
The minimum number of shares that may be _____________
subscribed for is 25. See Prospectus Priority
for further details regarding the maximum
purchase limitations.
________________________________________________________________
Method of Payment Purchaser Information
(3) [ ] Enclosed is a check, bank draft or money order payable
to Old Guard Group, Inc. for $____________(or cash if
presented in person.)
(4) [ ] Check here if you are an Eligible Policyholder with a
policy in effect May 31, 1996.
[ ] Check here if you are a director, officer or employee
of Old Guard Group, Inc. or one of its subsidiaries.
Policy Title (Names on Policy) Policy Number
1.______________________________________________________________
____________________________
2.______________________________________________________________
____________________________
________________________________________________________________
If additional space is needed, please use the back of this form.
________________________________________________________________
Stock Registration
(5) Form of stock ownership
[ ] Individual [ ] Tenants in Common
[ ] Uniform Transfer to Minors [ ] Corporation
[ ] Fiduciary/Trust (Under [ ] Joints Tenants
Agreement
[ ] Individual Retirement Account [ ] Uniform Gift to
Minors
[ ] Partnership [ ] Other____________
(Please Specify)
Dated:__________________
________________________________________________________________
(6) Name (1) Social Security or
Tax I.D. No.
________________________________________________________________
Name (2) Daytime Telephone
________________________________________________________________
Street Address Evening Telephone
________________________________________________________________
City State Zip Code County of Residence
________________________________________________________________
NASD Affiliation (This section only applies to those individuals
who meet the delineated criteria).
[ ] Check here if you are a member of the National Association of
Securities Dealers, Inc. ("NASD"), a person associated with an
NASD member, a member of the immediate family of any such person
to whose support such person contributes, directly or indirectly,
or the holder of an account in which an NASD member or person
associated with an NASD member has a beneficial interest. To
comply with conditions under which an exemption from the NASD's
interpretation With Respect to Free-Riding and Withholding is
available, you agree, if you have checked the NASD affiliation
box, (i) not to sell, transfer or hypothecate the stock for a
period of 3 months following the issuance, and (ii) to report
this subscription in writing to the applicable NASD member within
one day of the payment therefor.
Acknowledgment
By signing below, I acknowledge receipt of the Prospectus dated
___________________ at least 48 hours prior to the delivery of
the Stock Order Form to Old Guard Group, Inc. and the provisions
therein and understand that I may not change or revoke my order
once it is received by Old Guard Group, Inc. I also certify that
this stock order is for my account only and there is no agreement
or understanding regarding any further sale or transfer of these
shares. Under penalties of perjury, I certify that the Social
Security or Tax ID number given above is correct and I am not
subject to backup withholding tax. Pennsylvania law prohibits
any person from transferring conversion subscription rights. Old
Guard Group, Inc. will pursue any and all legal and equitable
remedies in the event it becomes aware of the transfer of
subscription rights and will not honor orders involving such
transfer.
Signature (Please sign in box(es) below right)
Sign and date the form. When purchasing as a custodian,
corporate officer, etc.,
include your full title.
Date
Authorized Signature Title (if
applicable)
Authorized Signature Title (if
applicable) Date
YOUR ORDER WILL BE FILLED IN ACCORDANCE WITH THE PROVISIONS OF
THE SUBSCRIPTION AND COMMUNITY OFFERING PROSPECTUS.
Date
[ ] I/We are customers (per Section 4) of Old Guard Group, Inc.
or one of its subsidiaries
[ ] I/We are not customers of Old Guard Group, Inc. or one of
its subsidiaries
THIS ORDER IS NOT VALID IF NOT SIGNED YOU MUST MARK A BOX
Old Guard Group, Inc.
P.O. Box 3243
Lancaster, PA 17604
1-888-262-7731
<PAGE>
[REVERSE]
Old Guard Group, Inc.
STOCK ORDER FORM
INSTRUCTIONS
Stock Ownership Guide
The stock transfer industry has developed a uniform system of
shareholder registrations that we will use in the issuance of Old
Guard Group, Inc. Common Stock. Print the name(s) in which you
want the stock registered and the mailing address of the
registration. Include the first name, middle initial, and last
name of the shareholder. Avoid the use of two initials. Please
omit words that do not affect ownership rights, such as "Mrs.",
"Mr.", "Dr.", "Special account", etc.
Individual
The stock is to be registered in an individual's name only. You
may not list beneficiaries for this ownership.
Joint Tenants
Joint tenants with right of survivorship identifies two or more
owners. When stock is held by joint tenants with rights of
survivorship, ownership automatically passes to the surviving
joint tenant(s) upon the death of any joint tenant. You may not
list beneficiaries for this ownership.
Tenants in Common
Tenants in common also identifies two or more owners. When stock
is held by tenants in common, upon the death of one co-tenant,
the deceased contenant's ownership interest in the stock will be
held by his or her estate in accordance with the laws of descent
and distribution. You may not list beneficiaries for this
transaction.
Uniform Gift to Minors/Uniform Transfer to Minors
Stock may be held either in the name of a custodian for the
benefit of a minor under the Uniform Transfer to Minors Act or
Uniform Gift to Minors Act of the individual states. For either
ownership, the minor is the actual owner of the stock with the
adult custodian being responsible for the investment until the
minor reaches legal age.
Instructions: See your legal advisor if you are unsure about the
correct registration of your stock.
On the first "NAME" line, print the first name, middle initial,
and last name of the custodian, with the abbreviation "CUST"
after the name. Print the first name, middle initial, and last
name of the minor on the second "NAME" line. Only one custodian
and one minor may be designated.
Corporation/Partnership
Corporation/Partnerships may purchase stock. Please provide the
Corporation/Partnership's legal name and Tax I.D. To have
subscription rights, the Corporation/Partnership must have an
account in the legal name. Please contact the Stock Conversion
Center to verify depositor rights and purchase limitations.
Fiduciary/Trust
Generally, fiduciary relationships (such as Trusts, Estates,
Guardianshps, etc.) are established under a form of trust
agreement or pursuant to a court order. Without a legal document
establishing a fiduciary relationship, your stock may not be
registered in a fiduciary capacity.
Instructions: On the first "NAME" line, print the first name,
middle initial, and last name of the fiduciary if the fiduciary
is an individual. If the fiduciary is a corporation, list the
corporate title on the first "NAME" line. Following the name,
print the fiduciary "title" such as trustee, executor, personal
representative, etc.
On the second "NAME" line, print either the name of the maker,
donor, or testator or the name of the beneficiary. Following the
name, indicate the type of legal document establishing the
fiduciary relationship (agreement, court order, etc.). In the
blank after "Under Agreement Dated," fill in the date of the
document governing the relationship. The date of the document
need not be provided for a trust created by a will.
An example of fiduciary ownership of stock in the case of a trust
is: John D. Smith Trustee for Thomas A. Smith Under Agreement
Dated 06/09/87.
You may mail your completed Stock Order Form in the envelope that
has been provided or you may deliver your Stock Order Form to Old
Guard Group, Inc. Your Stock Order Form, properly competed, and
payment in full at the subscription price must be received by Old
Guard no later than 1:00 p.m. Local time on ____________, 1997 or
it will become void. If you have any remaining questions or if
you would like assistance in completing your Stock Order Form you
may call the Stock Information Center at 1-888-262-7731.
________________________________________________________________
Item Instruction
Items 1 and 2-
Fill in the number of shares that you wish to purchase and the
total payment due. The amount due is determined by multiplying
the number of shares by the subscription price of $10.00 per
share. The minimum number of shares which may be purchased is 25
shares. An Eligible Policyholder may subscribe for and purchase
in the Subscription Offering up to 1.0% (38,600 shares based on
the issuance of 3,860,600 shares) of the Common Stock to be
issued. No person in the Community Offering, including
associates and groups of persons acting in concert with such
person, may purchase more than 5.0% (193,030 shares based on the
issuance of 3,860,600 shares) of the Common Stock to be issued.
No person, including associates and groups or persons acting in
concert with such person, may purchase more than 5.0% of the
shares of Common Stock issued. See the Prospectus for further
details.
Old Guard Group, Inc. has reserved the right to reject any or all
subscriptions received in the Community Offering, in whole or in
part.
Item 3-
Payment for shares may be made in cash (only if delivered by you
in person) or by check, bank draft, or money order made payable
to Old Guard Group, Inc. DO NOT MAIL CASH. If you choose to
make a cash payment, take your Stock Order Form and payment in
person to Old Guard Group, Inc.
Item 4-
Please check the appropriate box to indicate whether you were a
policyholder with a policy in effect May 31, 1996 ("Eligible
Policyholder")
If you are an eligible Policyholder, you must list all names on
each policy in effect on May 31, 1996 and all policy numbers.
Note: This section is important. Because qualifying policies
are utilized in allocating shares, you must list all policies you
had at the Companies on the Stock Order Form. Failure to do so
could result in your not receiving all of the shares you may
otherwise be entitled to in the event of an oversubscription.
Item 4-Continued
Continue listing from front, if necessary, all accounts you had
as an Eligible Policyholder.
POLICY TITLE (Names on Policy) POLICY NUMBER
3.______________________________________________________________
_________________________________
4.______________________________________________________________
_________________________________
5.______________________________________________________________
_________________________________
Items 5 and 6.
Print the name(s) in which you want the stock registered and the
mailing address for the registration. You cannot add names of
persons whose names do not appear on the eligible policies at the
Companies. The stock must be registered in the name(s) of the
owner(s) of the policies. A policy with more than one name
allows all owners of the policy to order stock in their
individual names or jointly with other owners of the policy.
However, all of their purchases (using each policy for
eligibility) will be aggregated to ensure maximum purchase
compliance.
Enter the Social Security Number or Tax ID Number of one
registered owner. Only one number is required.
Check the box that shows how you want the legal ownership of the
stock to appear. If necessary, mark "Other" and enter the
correct ownership, such as corporation, trust or estate. To
purchase stock for a trust, include the date of the trust
agreement and the title of the trust.
<PAGE>
[FRONT]
COMMUNITY OFFERING
STOCK ORDER FORM
Old Guard Group, Inc.
Note: Please read this Stock Order Form and instructions on the
back of this form before completion.
________________________________________________________________
Deadline 1:00 P.M., Local Time, 1997
- - WE ARE NOT REQUIRED TO ACCEPT COPIES OF THIS FORM
The Subscription and Community Offering ends at 1:00 P.M., Local
time, on , 1997. Your Stock
Order Form, properly executed and with the correct payment, must
be received at the address on the bottom of this form by this
deadline, or it will be considered void.
________________________________________________________________
Number of Shares Office Use Only:
(1) Number of Shares Price Per Share (2) Total Amount Due
____________ x $10.00 = $____________
(minimum 25)
______________ ______________ __________________
Date Rec'd Batch # Order #
The minimum number of shares that may be _____________
subscribed for is 25. See Prospectus Priority
for further details regarding the maximum
purchase limitations.
________________________________________________________________
Method of Payment Purchaser Information
(3)[ ] Enclosed is a check, bank draft or money order payable
to Old Guard Group, Inc. for $_______ (or cash if
presented in person.)
(4) Check all categories that apply to you:
[ ] Permanent resident Berks, Bucks, Chester, Cumberland,
Dauphin, Lancaster, Lebanon, Lehigh, Montgomery,
Northampton or York Counties, PA.
[ ] Principal of Eligible Policyholder in the case of an
Eligible Policyholder that is not a natural person.
Please list the policy or policies on the back of this
form.
[ ] Licensed insurance agent that has been appointed by one
of the Companies to market and distribute policies of
insurance.
[ ] Named insurance agent under policies of insurance
issued by the Companies after May 31, 1996. Please
list the policy or policies on the back of this form.
[ ] Provider of goods and services to any or all of the
Companies.
________________________________________________________________
Stock Registration
(5) Form of stock ownership
[ ] Individual [ ] Tenants in Common
[ ] Uniform Transfer to Minors [ ] Corporation
[ ] Fiduciary/Trust (Under [ ] Joints Tenants
Agreement
[ ] Individual Retirement Account [ ] Uniform Gift to
Minors
[ ] Partnership [ ] Other____________
(Please Specify)
Dated:__________________
________________________________________________________________
(6) Name (1) Social Security or
Tax I.D. No.
________________________________________________________________
Name (2) Daytime Telephone
________________________________________________________________
Street Address Evening Telephone
________________________________________________________________
City State Zip Code County of Residence
________________________________________________________________
NASD Affiliation (This section only applies to those individuals
who meet the delineated criteria).
[ ] Check here if you are a member of the National Association of
Securities Dealers, Inc. ("NASD"), a person associated with an
NASD member, a member of the immediate family of any such person
to whose support such person contributes, directly or indirectly,
or the holder of an account in which an NASD member or person
associated with an NASD member has a beneficial interest. To
comply with conditions under which an exemption from the NASD's
interpretation With Respect to Free-Riding and Withholding is
available, you agree, if you have checked the NASD affiliation
box, (i) not to sell, transfer or hypothecate the stock for a
period of 3 months following the issuance, and (ii) to report
this subscription in writing to the applicable NASD member within
one day of the payment therefor.
Acknowledgment
By signing below, I acknowledge receipt of the Prospectus dated
___________________ at least 48 hours prior to the delivery of
the Stock Order Form to Old Guard Group, Inc. and the provisions
therein and understand that I may not change or revoke my order
once it is received by Old Guard Group, Inc. I also certify that
this stock order is for my account only and there is no agreement
or understanding regarding any further sale or transfer of these
shares. Under penalties of perjury, I certify that the Social
Security or Tax ID number given above is correct and I am not
subject to backup withholding tax. Pennsylvania law prohibits
any person from transferring conversion subscription rights. Old
Guard Group, Inc. will pursue any and all legal and equitable
remedies in the event it becomes aware of the transfer of
subscription rights and will not honor orders involving such
transfer.
Signature (Please sign in box(es) below right)
Sign and date the form. When purchasing as a custodian,
corporate officer, etc.,
include your full title.
Date
Authorized Signature Title (if
applicable)
Authorized Signature Title (if
applicable) Date
YOUR ORDER WILL BE FILLED IN ACCORDANCE WITH THE PROVISIONS OF
THE SUBSCRIPTION AND COMMUNITY OFFERING PROSPECTUS.
Date
THIS ORDER IS NOT VALID IF NOT SIGNED
Old Guard Group, Inc.
P.O. Box 3243
Lancaster, PA 17604
1-888-262-7731
<PAGE>
[REVERSE]
Old Guard Group, Inc.
STOCK ORDER FORM
INSTRUCTIONS
Stock Ownership Guide
The stock transfer industry has developed a uniform system of
shareholder registrations that we will use in the issuance of Old
Guard Group, Inc. Common Stock. Print the name(s) in which you
want the stock registered and the mailing address of the
registration. Include the first name, middle initial, and last
name of the shareholder. Avoid the use of two initials. Please
omit words that do not affect ownership rights, such as "Mrs.",
"Mr.", "Dr.", "Special account", etc.
Individual
The stock is to be registered in an individual's name only. You
may not list beneficiaries for this ownership.
Joint Tenants
Joint tenants with right of survivorship identifies two or more
owners. When stock is held by joint tenants with rights of
survivorship, ownership automatically passes to the surviving
joint tenant(s) upon the death of any joint tenant. You may not
list beneficiaries for this ownership.
Tenants in Common
Tenants in common also identifies two or more owners. When stock
is held by tenants in common, upon the death of one co-tenant,
the deceased co-tenant's ownership interest in the stock will be
held by his or her estate in accordance with the laws of descent
and distribution. You may not list beneficiaries for this
transaction.
Uniform Gift to Minors/Uniform Transfer to Minors
Stock may be held either in the name of a custodian for the
benefit of a minor under the Uniform Transfer to Minors Act or
Uniform Gift to Minors Act of the individual states. For either
ownership, the minor is the actual owner of the stock with the
adult custodian being responsible for the investment until the
minor reaches legal age.
Instructions: See your legal advisor if you are unsure about the
correct registration of your stock.
On the first "NAME" line, print the first name, middle initial,
and last name of the custodian, with the abbreviation "CUST"
after the name. Print the first name, middle initial, and last
name of the minor on the second "NAME" line. Only one custodian
and one minor may be designated.
Corporation/Partnership
Corporation/Partnerships may purchase stock. Please provide the
Corporation/Partnership's legal name and Tax I.D. To have
subscription rights, the Corporation/Partnership must have an
account in the legal name. Please contact the Stock Conversion
Center to verify depositor rights and purchase limitations.
Fiduciary/Trust
Generally, fiduciary relationships (such as Trusts, Estates,
Guardianships, etc.) are established under a form of trust
agreement or pursuant to a court order. Without a legal document
establishing a fiduciary relationship, your stock may not be
registered in a fiduciary capacity.
Instructions: On the first "NAME" line, print the first name,
middle initial, and last name of the fiduciary if the fiduciary
is an individual. If the fiduciary is a corporation, list the
corporate title on the first "NAME" line. Following the name,
print the fiduciary "title" such as trustee, executor, personal
representative, etc.
On the second "NAME" line, print either the name of the maker,
donor, or testator or the name of the beneficiary. Following the
name, indicate the type of legal document establishing the
fiduciary relationship (agreement, court order, etc.). In the
blank after "Under Agreement Dated," fill in the
date of the document governing the relationship. The date of the
document need not be provided for a trust created by a will.
An example of fiduciary ownership of stock in the case of a trust
is: John D. Smith Trustee for Thomas A. Smith Under Agreement
Dated 06/09/87.
You may mail your completed Stock Order Form in the envelope that
has been provided or you may deliver your Stock Order Form to Old
Guard Group, Inc. Your Stock Order Form, properly competed, and
payment in full at the subscription price must be received by Old
Guard no later than 1:00 p.m. Local time on ____________, 1997 or
it will become void. If you have any remaining questions or if
you would like assistance in completing your Stock Order Form you
may call the Stock Information Center at 1-888-262-7731.
Item Instruction
Items 1 and 2-
Fill in the number of shares that you wish to purchase and the
total payment due. The amount due is determined by multiplying
the number of shares by the subscription price of $10.00 per
share. The minimum number of shares which may be purchased is 25
shares. An Eligible Policyholder may subscribe for and purchase
in the Subscription Offering up to 1.0% (38,600 shares based on
the issuance of 3,860,600 shares) of the Common Stock to be
issued. No person in the Community Offering, including
associates and groups of persons acting in concert with such
person, may purchase more than 5.0% (193,030 shares based on the
issuance of 3,860,600 shares) of the Common Stock to be issued.
No person, including associates and groups or persons acting in
concert with such person, may purchase more than 5.0% of the
shares of Common Stock issued. See the Prospectus for further
details.
Old Guard Group, Inc. has reserved the right to reject any or all
subscriptions received in the Community Offering, in whole or in
part.
Item 3-
Payment for shares may be made in cash (only if delivered by you
in person) or by check, bank draft, or money order made payable
to Old Guard Group, Inc. DO NOT MAIL CASH. If you choose to
make a cash payment, take your Stock Order Form and payment in
person to Old Guard Group, Inc.
Item 4-
Listing from front, if necessary, of all policies you have as a
policyholder.
POLICY TITLE (Names on Policy) POLICY NUMBER
1.______________________________________________________________
_________________________________
2.______________________________________________________________
_________________________________
3.______________________________________________________________
_________________________________
Items 5 and 6.
Print the name(s) in which you want the stock registered and the
mailing address for the registration.
Enter the Social Security Number or Tax ID Number of one
registered owner. Only one number is required.
Check the box that shows how you want the legal ownership of the
stock to appear. If necessary, mark "Other" and enter the
correct ownership, such as corporation, trust or estate. To
purchase stock for a trust, include the date of the trust
agreement and the title of the trust.
EXHIBIT 99.3
Questions
And
Answers
About
Voting
For
Conversion
[LOGO]
Your Vote Counts!
Share in
Old Guard's
Future
<PAGE>
Vote Yes For Conversion
Your Vote Counts
Customers of Old Guard Mutual Insurance Company, Old Guard Mutual
Fire Insurance Company, and Goschenhoppen-Home Mutual Insurance
Company (the "Companies") who were policyholders on the voting
record date have the right to vote on the Companies' plan to
convert from mutual to stock form (the "Conversion"). Complete
details on the Conversion, including reasons for Conversion, are
contained in the Proxy Statement. Please read the Proxy
Statement carefully.
This brochure is provided to answer basic questions you might
have about the Conversion. Remember, the Conversion will not
affect your insurance policy or policies with the Companies.
The Directors of the Companies recommend that you VOTE "FOR"
Conversion. Your vote counts and is very important.<PAGE>
Questions and Answers About the Conversion.
Q What is "Conversion"?
A Conversion is a change in the legal form of organization.
The Companies are currently organized as mutual insurance
companies with no stockholders. Through the Conversion,
the Companies will become stock insurance companies, and all
of their stock will be owned by Old Guard Group, Inc.
Old Guard Group, Inc., will in turn offer its shares of
Common Stock for sale, first to certain policyholders and
employees of the Companies, then to natural persons who
maintain a residence in certain counties of Pennsylvania,
and finally to the general public. The general powers,
duties and procedures of the Companies after the Conversion
will be the same as prior to the Conversion.
Q Why should policyholders VOTE "FOR" Conversion?
A The funds to be raised by selling shares of Old Guard Group,
Inc. common stock will increase the Companies' capital,
enabling the Companies to:
- enhance policyholder protection by increasing statutory
surplus;
- support future premium growth;
- provide greater resources for the development of
customer services;
- afford the Companies' policyholders an opportunity to
share in the growth and earnings of Old Guard Group,
Inc. through the purchase of shares of the common stock
in the Conversion.
Q Will the Conversion have any effect on my insurance policy
with the Companies?
A No! The Conversion will not change the terms or conditions
of your policy or policies. After the Conversion, however,
you will not have voting rights unless you become a
shareholder of Old Guard Group, Inc.
Q Will my policy be converted into stock?
A No! Your policy will not be affected by the Conversion.
Q Did the Boards of Directors of the Companies approve the
Conversion?
A Yes! The Conversion was unanimously approved by the Boards
of Directors of the Companies.
Q Will there by any changes in management or personnel?
A No! Directors and officers of the Companies will continue
in their same positions, as will the employees in the branch
offices and other departments of the Companies. Our day-to-
day activities will not change. In addition, the executive
officers and certain directors of the Companies will serve
as directors and/or executive officers of Old Guard Group,
Inc.
Q Am I required to vote?
A No! You are not required to vote. However, your vote is
important, and we urge you to VOTE "FOR" the Conversion!
Q If I VOTE "FOR" the Conversion, am I required to buy stock?
A No! A vote "FOR" Conversion will not obligate you to buy
any stock.
Q Why did I get several proxy cards?
A If you have more than one policy with the Companies, you
could receive more than one proxy, depending on the titles
of your policies. Please VOTE AND SIGN ALL PROXY CARDS!
Q If a policy is in joint names, must the signatures of both
parties be on the proxy card?
A No! The signature of only one policyholder is required.
Q How many votes do I have?
A There is one vote for each policy.
Q May I vote in person at the Special Meeting?
A Yes! But we would still like you to sign your proxy and
mail it today. If you then attend in person, you will have
the opportunity to revoke your proxy by voting another
ballot, if you wish.
Q How can I get further information about the Conversion?
A The Proxy Statement describes the Conversion process in
detail.
If you would like further information, call our special
toll-free Stock Information Center number at 1-888-262-7731
between 8:30 a.m. and 5:00 p.m., Monday through Friday.
<PAGE>
VOTE "FOR" CONVERSION!
Policyholders of the Companies should sign and mail their proxy
cards as soon as possible. Please don't delay. Mail your proxy
today!
OLD GUARD GROUP, INC.
P.O. Box 3243
Lancaster, PA 17601-9842
This letter is not an offer to sell nor a solicitation of an
offer to buy common stock of Old Guard Group, Inc. The offer is
made only by the Prospectus which should be read with care.
<PAGE>
QUESTIONS
AND
ANSWERS
ABOUT
BUYING
OLD GUARD
GROUP, INC.
STOCK
Share In
Old Guard's
Future
<PAGE>
Share in Old Guard's Future
We are pleased to inform you that the Boards of Directors of
Old Guard Mutual Insurance Company, Old Guard Mutual Fire
Insurance Company and Goschenhoppen-Home Mutual Insurance Company
(the "Companies") have approved a plan to convert the Companies
from mutual insurance companies to stock insurance companies (the
"Conversion"). As part of the Conversion, a newly-formed holding
company, Old Guard Group, Inc. will offer shares of common stock,
first in a concurrent subscription and community offering and
then, if stock is available, in a public offering. The
conversions will not affect the general terms and coverages of
policies currently in force with the Companies.
This brochure is intended to answer basic questions about
the Conversion. Investment in the common stock of Old Guard
Group, Inc. involves certain risks. For a discussion of these
risks, investors are encouraged to read the Prospectus before
making an investment decision.
As Old Guard celebrates its 100th anniversary, we invite you
to consider sharing in Old Guard's future.
<PAGE>
Questions and Answers
Q Why are the Companies converting?
A Simply because it makes the best business sense. In 1896,
when Old Guard Mutual Insurance Company was chartered as a
mutual insurance company, most insurance institutions were
organized in the mutual form. Today, facing the present
economy and the current climate in the insurance industry,
it makes better business sense for us to be chartered in the
stock form. By converting, capital will be raised that will
enable the Companies to enhance policyholder protection and
further expand their business, both geographically and in
terms of the range of products offered.
Q Who may subscribe to purchase shares of stock?
A Eligible policyholders of the Companies as of the May 31,
1996, an Employee Stock Ownership Plan of Old Guard Group,
Inc. and officers, directors and employees of the Companies
have preferential rights to subscribe to purchase shares in
the new holding company, Old Guard Group, Inc., during the
"Subscription Offering." Concurrently, there will be a
"Community Offering" for the general public, with preference
given to natural persons who maintain a residence in certain
counties of Pennsylvania and certain other groups (as
specified in the Prospectus). The remaining shares, if any,
will be offered by Legg Mason, Wood Walker, Inc. and
McDonald & Company Securities, Inc. to the general public in
a "Public Offering."
Q What is the deadline for purchasing stock?
A To participate in the Subscription Offering, your Stock
Order Form and payment must be received by us no later than
the time and date stated on the cover letter, Stock Order
Form and Subscription and Community Offering Prospectus.
Q What is the price per share?
A The price per share is $10.00.
Q How much stock may I purchase?
A The minimum order is 25 shares. With the exception of the
Employee Stock Ownership Plan, no Eligible Policyholder may
purchase more than 38,606 shares in the Subscription
Offering and no person (including Eligible Policyholders who
also buy stock in the Community Offering or the Public
Offering) may purchase more than 193,030 shares in the
Conversion. A detailed description of maximum purchase
limitations may be found in the Subscription and Community
Offering Prospectus.
Q Will dividends be paid?
A Subject to regulatory and other restrictions, Old Guard
Group, Inc. currently intends to pay cash dividends at the
annual rate of $0.10 per share, payable in quarterly
increments after the first full quarter following the
Conversion. Dividends will be subject to determination and
declaration by the Board of Directors, and will take into
consideration factors such as the financial condition of Old
Guard Group, Inc., tax considerations, industry standards,
economic conditions and regulatory restrictions.
Q Am I being offered a discount on the price of the stock?
A No. The offering price of the stock will be the same for
everyone including Eligible Policyholders, our directors,
officers and employees and the general public.
Q Will I be charged a commission?
A No. You will not be charged a brokerage commission on the
purchase of shares in the Subscription and Community
Offering.
Q How do I order stock?
A To order stock, complete a Stock Order Form by following
instructions printed on the form. If you have questions,
telephone the Stock Information Center between 8:30 a.m. and
5:00 p.m., Monday through Friday. The toll-free telephone
number is 1-888-262-7731.
Q How do I pay for my stock?
A You may pay for your stock by check, cash or money order, as
long as your payment is received by us no later than the
closing date of the Subscription and Community Offering
periods which is noted on the Stock Order Form and in the
Subscription and Community Offering Prospectus. Cash orders
can be accepted only at Old Guard Group, Inc.'s headquarters
office which is located at 2929 Lititz Pike in Lancaster,
PA. Funds received from stock orders paid by cash, check or
money order will be placed in an escrow account until the
Conversion is completed.
Q Will I receive confirmation that my stock order has been
received?
A Yes. An acknowledgment letter will be mailed a few days
after your order is received at our Stock Information
Center.
Q In the future, how can I purchase more shares or sell my
shares?
A The common stock of Old Guard Group, Inc. has been approved
for listing on the NASDAQ National Market System under the
symbol "OGGI." Our underwriters have advised us that they
intend to make a market (identify buyers and sellers) in the
stock, subject to market conditions and other factors.
Q Are there any restrictions on the resale of stock after the
purchase?
A There are none for our policyholders, employees or the
public. Only our directors and executive officers are
subject to sale restrictions.
Q When will I receive my stock certificate?
A Stock Certificates will be mailed promptly after the
consummation of the Conversion.
Q May I order stock from my IRA or Keogh account?
A Yes, if you have a self-directed IRA account, you may order
stock using funds from such an account.
Q May I change my mind?
A The Stock Order Form cannot be canceled or withdrawn after
it has been received by Old Guard Group, Inc. However, you
may order additional shares by completing another Stock
Order Form.
Q Can you tell me how to register the stock?
A The back of your Stock Order Form has guidelines for stock
registration. You may also wish to consult your legal or
tax advisor.
Q How can I obtain more information?
A Call our Stock Information Center toll free at 1-888-262-
7731 between 8:30 a.m. and 5:00 p.m., Monday through Friday.
This letter is not an offer to sell nor a solicitation of an
offer to buy common stock of Old Guard Group, Inc. The offer is
made only by the Prospectus which should be read with care.
EXHIBIT 99.4
[OLD GUARD MUTUAL LETTER]
Dear Policyholder:
We are pleased to announce that the Board of Directors of
Old Guard Mutual Insurance Company ("Old Guard Mutual") has
unanimously adopted a Plan of Conversion (the "Plan") under which
Old Guard Mutual will convert from a mutual insurance company to
a stock insurance company (the "Conversion"). As part of the
conversion process, we have formed a new company, Old Guard
Group, Inc., which will become the holding company of Old Guard
Mutual. The enclosed material provides more information about
the Conversion. Please note that the Conversion will not change
the status of your existing insurance policy or policies with Old
Guard Mutual.
Your participation in the Conversion is very important. A
proxy statement is enclosed for your review, together with a
Question and Answer brochure and a proxy card. Because your vote
is important to the success of the Plan, on behalf of the Board
of Directors, I urge you to vote FOR the Plan by completing,
signing, dating and returning the enclosed proxy card immediately
in the postage-paid envelope provided, whether or not you plan to
attend the special meeting or subscribe for stock. If you and/or
members of your family have multiple policies with Old Guard
Mutual or one of its affiliates, you may receive more than one
mailing. If you do receive more than one proxy card, please sign
and return each one.
Your vote for approval of the Plan in no way obligates you
to buy stock. However, as an Eligible Policyholder, you have
been granted nontransferable rights to subscribe for shares of
Old Guard Group, Inc. common stock on a priority basis without
commission or fee. If you are interested in obtaining more
information about subscribing for shares, please complete and
return the enclosed request card in the postage-paid envelope
provided by ____________, 1997, and we will mail you a Prospectus
and Stock Order Form.
If you wish to subscribe for common stock using funds
currently in an IRA please be aware that federal law requires
that such funds first be in a self-directed IRA. Because the
transfer of retirement funds to a new trustee takes time, it is
important that you make arrangements for such a transfer as soon
as possible.
If you have any questions or would like additional
information, please call our Stock Information Center toll free
at 1-888-262-7731. The Stock Information Center is open Monday
through Friday from 8:30 a.m. to 5:00 p.m.
Sincerely,
David E. Hosler
Chairman, President and Chief
Executive Officer
This letter is not an offer to sell nor a solicitation of an
offer to buy common stock of Old Guard Group, Inc. The offer is
made only by the Prospectus which should be read with care.
<PAGE>
[OLD GUARD FIRE LETTER]
Dear Policyholder:
We are pleased to announce that the Board of Directors of
Old Guard Mutual Fire Insurance Company ("Old Guard Fire") has
unanimously adopted a Plan of Conversion (the "Plan") under which
Old Guard Fire will convert from a mutual insurance company to a
stock insurance company (the "Conversion"). As part of the
conversion process, we have formed a new company, Old Guard
Group, Inc., which will become the holding company of Old Guard
Fire. The enclosed material provides more information about the
Conversion. Please note that the Conversion will not change the
status of your existing insurance policy or policies with Old
Guard Fire.
Your participation in the Conversion is very important. A
proxy statement is enclosed for your review, together with a
Question and Answer brochure and a proxy card. Because your vote
is important to the success of the Plan, on behalf of the Board
of Directors, I urge you to vote FOR the Plan by completing,
signing, dating and returning the enclosed proxy card immediately
in the postage-paid envelope provided, whether or not you plan to
attend the special meeting or subscribe for stock. If you and/or
members of your family have multiple policies with Old Guard Fire
or one of its affiliates, you may receive more than one mailing.
If you do receive more than one proxy card, please sign and
return each one.
Your vote for approval of the Plan in no way obligates you
to buy stock. However, as an Eligible Policyholder, you have
been granted nontransferable rights to subscribe for shares of
Old Guard Group, Inc. common stock on a priority basis without
commission or fee. If you are interested in obtaining more
information about subscribing for shares, please complete and
return the enclosed request card in the postage-paid envelope
provided by ____________, 1997, and we will mail you a Prospectus
and Stock Order Form.
If you wish to subscribe for common stock using funds
currently in an IRA please be aware that federal law requires
that such funds first be in a self-directed IRA. Because the
transfer of retirement funds to a new trustee takes time, it is
important that you make arrangements for such a transfer as soon
as possible.
If you have any questions or would like additional
information, please call our Stock Information Center toll free
at 1-888-262-7731. The Stock Information Center is open Monday
through Friday from 8:30 a.m. to 5:00 p.m.
Sincerely,
David E. Hosler
Chairman, President and Chief
Executive Officer
This letter is not an offer to sell nor a solicitation of an
offer to buy common stock of Old Guard Group, Inc. The offer is
made only by the Prospectus which should be read with care.
<PAGE>
[GOSCHENHOPPEN-HOME MUTUAL LETTER]
Dear Policyholder:
We are pleased to announce that the Board of Directors of
Goschenhoppen-Home Mutual Insurance Company ("Goschenhoppen-
Home") has unanimously adopted a Plan of Conversion (the "Plan")
under which Goschenhoppen-Home will convert from a mutual
insurance company to a stock insurance company (the
"Conversion"). As part of the conversion process, we have formed
a new company, Old Guard Group, Inc., which will become the
holding company of Goschenhoppen-Home. The enclosed material
provides more information about the Conversion. Please note that
the Conversion will not change the status of your existing
insurance policy or policies with Goschenhoppen-Home.
Your participation in the Conversion is very important. A
proxy statement is enclosed for your review, together with a
Question and Answer brochure and a proxy card. Because your vote
is important to the success of the Plan, on behalf of the Board
of Directors, I urge you to vote FOR the Plan by completing,
signing, dating and returning the enclosed proxy card immediately
in the postage-paid envelope provided, whether or not you plan to
attend the special meeting or subscribe for stock. If you and/or
members of your family have multiple policies with Goschenhoppen-
Home or one of its affiliates, you may receive more than one
mailing. If you do receive more than one proxy card, please sign
and return each one.
Your vote for approval of the Plan in no way obligates you
to buy stock. However, as an Eligible Policyholder, you have
been granted nontransferable rights to subscribe for shares of
Old Guard Group, Inc. common stock on a priority basis without
commission or fee. If you are interested in obtaining more
information about subscribing for shares, please complete and
return the enclosed request card in the postage-paid envelope
provided by ____________, 1997, and we will mail you a Prospectus
and Stock Order Form.
If you wish to subscribe for common stock using funds
currently in an IRA please be aware that federal law requires
that such funds first be in a self-directed IRA. Because the
transfer of retirement funds to a new trustee takes time, it is
important that you make arrangements for such a transfer as soon
as possible.
If you have any questions or would like additional
information, please call our Stock Information Center toll free
at 1-888-262-7731. The Stock Information Center is open Monday
through Friday from 8:30 a.m. to 5:00 p.m.
Sincerely,
David E. Hosler
Chairman, President and
Chief Executive Officer
This letter is not an offer to sell nor a solicitation of an
offer to buy common stock of Old Guard Group, Inc. The offer is
made only by the Prospectus which should be read with care.
<PAGE>
[TARGET POLICYHOLDER LETTER]
Dear Policyholder:
We are pleased to announce that the Boards of Directors of
Old Guard Mutual Insurance Company, Old Guard Mutual Fire
Insurance Company and Goschenhoppen-Home Mutual Insurance Company
(the "Companies") have unanimously adopted a Plan of Conversion
(the "Plan") under which the Companies will convert from mutual
insurance companies to stock insurance companies (the
"Conversion"). As part of the conversion process, we have formed
a new company, Old Guard Group, Inc., which will become the
holding company of the Companies. The enclosed material provides
more information about the Conversion. Please note that the
Conversion will not change the status of your existing insurance
policy or policies with the Companies.
Your participation in the Conversion is very important. A
proxy statement is enclosed for your review, together with a
Question and Answer brochure and a proxy card. Because your vote
is important to the success of the Plan, on behalf of the Boards
of Directors, I urge you to vote FOR the Plan of Conversion by
completing, signing, dating and returning the enclosed proxy card
immediately in the postage-paid envelope provided, whether or not
you plan to attend the special meeting or subscribe for stock.
If you and/or members of your family have multiple policies at
the Companies, you may receive more than one mailing. If you do
receive more than one proxy card, please sign and return each
one.
Your vote for approval of the Plan in no way obligates you
to buy stock. However, as an Eligible Policyholder, you have
been granted nontransferable rights to subscribe for shares of
Old Guard Group, Inc. common stock on a priority basis without
commission or fee. A Prospectus is enclosed for your review
along with a Question and Answer brochure about buying stock. If
you are interested in subscribing for shares, please complete the
Stock Order Form and return it with payment in the postage-paid
envelope by ____________, 1997.
If you wish to subscribe for common stock using funds
currently in an IRA please be aware that federal law requires
that such funds first be in a self-directed IRA. Because the
transfer of retirement funds to a new trustee takes time, it is
important that you make arrangements for such a transfer as soon
as possible.
If you have any questions or would like additional
information, please call our Stock Information Center toll free
at 1-888-262-7731. The Stock Information Center is open Monday
through Friday from 8:30 a.m. to 5:00 p.m.
Sincerely,
David E. Hosler
Chairman, President and
Chief Executive Officer
This letter is not an offer to sell nor a solicitation of an
offer to buy common stock of Old Guard Group, Inc. The offer is
made only by the Prospectus which should be read with care.
<PAGE>
[COMMUNITY VIP LETTER]
Dear Friend:
We are pleased to announce that the Boards of Directors of
Old Guard Mutual Insurance Company, Old Guard Mutual Fire
Insurance Company and Goschenhoppen-Home Mutual Insurance Company
(the "Companies") have unanimously adopted a Plan of Conversion
(the "Plan") under which the Companies will convert from mutual
insurance companies to stock insurance companies (the
"Conversion"). As part of the conversion process, we have formed
a new company, Old Guard Group, Inc., which will become the
holding company of the Companies.
Enclosed you will find a Prospectus and a Question and
Answer brochure about buying Old Guard Group, Inc. common stock.
If you decide to order stock, you may place your order directly
with Old Guard Group, Inc. Instructions on how to order shares
are printed on the Stock Order Form. Your order form, with
payment, must be received by Old Guard by 1:00 p.m. on
______________________ 1997.
If you wish to subscribe for common stock using funds
currently in an IRA please be aware that federal law requires
that such funds first be in a self-directed IRA. Because the
transfer of retirement funds to a new trustee takes time, it is
important that you make arrangements for such a transfer as soon
as possible.
If you have any questions or would like additional
information, please call our Stock Information Center toll free
at 1-888-262-7731. The Stock Information Center is open Monday
through Friday from 8:30 a.m. to 5:00 p.m.
Sincerely,
David E. Hosler
Chairman, President and Chief
Executive Officer
This letter is not an offer to sell nor a solicitation of an
offer to buy common stock of Old Guard Group, Inc. The offer is
made only by the Prospectus which should be read with care.
<PAGE>
Dear Friend:
Thank you for your interest in the Conversion of Old Guard
Group, Inc. ("Old Guard").
Enclosed is the Prospectus you requested and a brochure to
answer questions you may have. Please review them carefully
prior to making your investment decision. For any additional
information you may require, please call the Stock Information
Center toll free at 1-888-262-7731, 8:30 a.m. to 5:00 p.m.,
Monday through Friday.
If you decide to order stock, you may purchase your shares
directly from Old Guard. Instructions on how to purchase shares
are printed on your Stock Order Form. To order shares, your
payment and completed Stock Order Form must be received by us no
later than 1:00 p.m., on _______________, 1997.
In 1896, Old Guard Mutual Insurance Company began its
tradition of providing personalized service and high-quality
insurance products. As we celebrate one hundred years of
service, we are pleased to offer you this opportunity to
participate in our future.
Sincerely,
David E. Hosler
Chairman, President and Chief
Executive Officer
This letter is not an offer to sell nor a solicitation of an
offer to buy common stock of Old Guard Group, Inc. The offer is
made only by the Prospectus which should be read with care.
<PAGE>
[BLUE SKY LETTER- HOPPER SOLIDAY LETTERHEAD]
To Policyholders and Friends of Old Guard Group, Inc.:
Hopper Soliday & Co., Inc. is a NASD-member broker/dealer
firm assisting Old Guard Mutual Insurance Company, Old Guard
Mutual Fire Insurance Company and Goschenhoppen-Home Mutual
Insurance Company (the "Companies") in their conversion from
mutual insurance companies to stock form and the concurrent
offering of common stock by Old Guard Group, Inc., which will
become the holding company for the Companies.
At the request of Old Guard Group, Inc., we are enclosing
materials relating to the offer and sale of common stock in
connection with the Conversion. The materials include a
Prospectus which offers an opportunity to subscribe to purchase
shares of Common Stock of Old Guard Group, Inc.
These documents are being forwarded to you pursuant to the
requirements of the securities laws of your state. This letter
should not be understood as recommending or soliciting in any
way, any action by you with regard to the enclosed materials.
Very truly yours,
Hopper Soliday & Co., Inc.
This letter is not an offer to sell nor a solicitation of an
offer to buy common stock of Old Guard Group, Inc. The offer is
made only by the Prospectus which should be read with care.
Exhibit 99.5
OLD GUARD MUTUAL INSURANCE COMPANY
2929 Lititz Pike
Lancaster, Pennsylvania 17601
(717) 569-5361
NOTICE OF SPECIAL MEETING OF POLICYHOLDERS
Notice is hereby given that a Special Meeting of
Policyholders (the "Special Meeting") of Old Guard Mutual
Insurance Company ("Old Guard Mutual" or the "Company") will be
held at __________________________, Pennsylvania, on
______________, __________________, 1996 at __:__ _.m. Business
to be considered at the Special Meeting shall be:
(1) To consider and vote upon a Joint Plan of Conversion
(the "Plan") providing for the conversion of Old Guard
Mutual from a Pennsylvania mutual insurance company to
a Pennsylvania stock insurance company as a wholly-
owned subsidiary of Old Guard Group, Inc., a newly
organized Pennsylvania corporation formed for the
purpose of becoming a holding company for the Company,
Old Guard Mutual Fire Insurance Company and
Goschenhoppen-Home Mutual Insurance Company upon each
of their conversions from mutual to stock form pursuant
to the Plan, and the related transactions provided for
in the Plan, including the adoption of amended Articles
of Incorporation for Old Guard Mutual.
(2) To consider and vote upon any other matters that may
lawfully come before the Special Meeting.
As of the date of mailing of this Notice of Special Meeting,
the Board of Directors is not aware of any other matters that may
come before the Special Meeting.
Under the bylaws, each named insured under a policy of
insurance issued by Old Guard Mutual that was in force at the
close of business on May 31, 1996 is a member entitled to vote,
except that each such policy is entitled to only one vote at the
Special Meeting.
BY THE ORDER OF THE BOARD OF
DIRECTORS
Steven D. Dyer
Secretary
_________________, 1996
Lancaster, Pennsylvania
____________________
YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THIS
PROXY MATERIAL AND, WHETHER OR NOT YOU PLAN TO BE PRESENT IN
PERSON AT THE SPECIAL MEETING, TO FILL IN, DATE, SIGN AND RETURN
THE ENCLOSED PROXY CARD(S) AS SOON AS POSSIBLE TO ASSURE THAT
YOUR VOTES WILL BE COUNTED. IN ACCORDANCE WITH THE BYLAWS OF THE
COMPANY, ALL PROXIES MUST BE RECEIVED TWENTY (20) DAYS BEFORE THE
SPECIAL MEETING, OR ___________, 1996, IN ORDER TO BE COUNTED AT
THE SPECIAL MEETING. THIS WILL NOT PREVENT YOU FROM VOTING IN
PERSON IF YOU ATTEND THE SPECIAL MEETING.<PAGE>
OLD GUARD MUTUAL INSURANCE COMPANY
2929 Lititz Pike
Lancaster, Pennsylvania 17601
(717) 569-5361
PROXY STATEMENT
YOUR PROXY, IN THE FORM ENCLOSED, IS SOLICITED BY THE BOARD
OF DIRECTORS OF OLD GUARD MUTUAL INSURANCE COMPANY FOR USE AT A
SPECIAL MEETING OF ITS MEMBERS TO BE HELD ON ______________, 1996
AND ANY ADJOURNMENT OF THAT MEETING, FOR THE PURPOSES SET FORTH
IN THE FOREGOING NOTICE OF SPECIAL MEETING. YOUR BOARD OF
DIRECTORS URGES YOU TO VOTE FOR THE JOINT PLAN OF CONVERSION. IN
ACCORDANCE WITH THE BYLAWS OF THE COMPANY, ALL PROXIES MUST BE
RECEIVED TWENTY (20) DAYS BEFORE THE SPECIAL MEETING, OR
___________, 1996, IN ORDER TO BE COUNTED AT THE SPECIAL MEETING.
INTRODUCTION
Purpose of Meeting. A Special Meeting of Policyholders (the
"Special Meeting") of Old Guard Mutual Insurance Company ("Old
Guard Mutual" or the "Company") will be held at
______________________, ______________________________,
Pennsylvania on ______________, ___________, 1996, at __:__ _.m.,
local time. The purpose of the Special Meeting is to consider
and vote upon a Joint Plan of Conversion (the "Plan"), which was
unanimously adopted by the Company's Board of Directors and
which, if approved by two-thirds of the votes cast at the Special
Meeting by named insureds under policies of insurance issued by
the Company that were in force at the close of business on
May 31, 1996 ("Eligible Policyholders"), will permit the Company
to convert from a Pennsylvania mutual insurance company to a
Pennsylvania stock insurance company and to become a wholly-owned
subsidiary of Old Guard Group, Inc. (the "Holding Company")
pursuant to the provisions of the Insurance Company
Mutual-to-Stock Conversion Act (the "Act"). The Holding Company
is a newly organized Pennsylvania corporation formed for the
purpose of becoming a holding company for the Company, Old Guard
Mutual Fire Insurance ("Old Guard Fire") and Goschenhoppen-Home
Mutual Insurance Company ("Goschenhoppen"), upon each of their
conversions from mutual to stock form pursuant to the Plan. Old
Guard Mutual, Old Guard Fire and Goschenhoppen are mutual
insurance companies under common management that are presently
members of Old Guard Insurance Group. Old Guard Mutual, Old
Guard Fire and Goschenhoppen are hereinafter referred to
individually as an "Insurance Company" and collectively as the
"Insurance Companies" and the conversion of each of the Insurance
Companies from mutual to stock form is hereinafter referred to as
the "Conversion." Eligible Policyholders hereinafter shall mean
named insureds under policies of insurance issued by either Old
Guard Mutual, Old Guard Fire or Goschenhoppen that were in force
as of May 31, 1996, as the context may require.
INFORMATION RELATING TO VOTING AT THE SPECIAL MEETING
The Board of Directors of the Company has determined that,
in accordance with the bylaws of the Company, the terms of the
Plan and the provisions of the Act, each named insured under an
insurance policy issued by the Company that was in force at the
close of business on May 31, 1996 (the "Voting Record Date") is a
member who is entitled to notice of and to vote at the Special
Meeting. Each such Eligible Policyholder will be entitled at the
Special Meeting to cast one vote for each insurance policy under
which such Eligible Policyholder is the named insured as of the
Voting Record Date; provided, however, that only one vote may be
cast for each insurance policy in force as of the Voting Record
Date. Thus, an Eligible Policyholder under more than one
insurance policy in force as of the Voting Record Date shall have
more than one vote, but if there is more than one Eligible
Policyholder under an insurance policy in force as of the Voting
Record Date, such Eligible Policyholders shall collectively have
only one vote with respect to such insurance policy.
Seven Eligible Policyholders must be present, in person, to
constitute a quorum at the Special Meeting. Approval of the Plan
will require the affirmative vote, either in person or by proxy,
of at least two-thirds of the votes cast at the Special Meeting.
As of the Voting Record Date, the Company had approximately ____
policies outstanding with respect to which Eligible Policyholders
would be entitled to cast a total of _____ votes at the Special
Meeting. For the Conversion to be completed, the Plan also must
be approved by the Eligible Policyholders of each of the
Insurance Companies.
Eligible Policyholders may vote at the Special Meeting or
any adjournment thereof in person or by proxy. All properly
executed proxies received by the Company twenty (20) days before
the Special Meeting, or ___________, 1996, will be voted in
accordance with the instructions indicated thereon. If no
contrary instructions are given, such proxies will be voted in
favor of the Plan. If any other matters are properly presented
before the Special Meeting, the proxies solicited hereby will be
voted on such matters by the proxyholders according to their
discretion. Any member giving a proxy will have the right to
revoke his proxy at any time before it is voted by delivering
written notice or a duly executed proxy bearing a later date to
the Secretary of the Company, provided that such written notice
is received by the Secretary prior to ___________, 1996, or by
attending the Special Meeting and voting in person.
In the event that conflicting proxies are received from more
than one Eligible Policyholder with respect to the same policy,
the proxyholders will vote in accordance with the instructions of
a majority of such Eligible Policyholders and, in the case of a
tie, the proxyholders will vote in accordance with the
instructions set forth in the latest proxy to be filed.
The Company has retained Georgeson & Company ("Georgeson")
to solicit proxies in favor of the Plan. The Insurance Companies
will pay Georgeson a fee of $___________ and reimburse Georgeson
for its out-of-pocket expenses. Independent agents of the
Company, as the primary contact between the Company and
policyholders, can be expected frequently to be the initial
contact with policyholders and, as a result, may obtain proxies
in favor of the Plan. The Company expects to reimburse such
agents for their reasonable expenses. Proxies also may be
solicited by officers, directors or other employees of the
Company, in person, by telephone or through other forms of
communication. Such persons will be reimbursed by the Company
only for their expenses incurred in connection with such
solicitation.
The proxies solicited hereby will be used only at the
Special Meeting and at any adjournment thereof; they will not be
used at any other meeting.
OLD GUARD GROUP, INC.
Old Guard Group, Inc. was incorporated under the laws of the
Commonwealth of Pennsylvania on May 24, 1996 at the direction of
the Board of Directors of the Insurance Companies for the purpose
of serving as a holding company of the Insurance Companies upon
the acquisition of all of the capital stock issued by the
Insurance Companies in the Conversion. Prior to the Conversion,
the Holding Company has not engaged, and will not engage, in any
material operations. Upon completion of the Conversion, the
Holding Company will have no significant assets other than the
outstanding capital stock of the Insurance Companies and between
approximately $8.6 million and $15.2 million of the net proceeds
from the Offerings (as hereinafter defined). The Holding
Company's principal business will be to hold the stock of, and
provide management services to, the Insurance Companies.
The holding company structure will permit the Holding
Company to expand the services currently offered through the
Company, although there are no definitive plans or arrangements
for such expansion at present. The Holding Company will have
greater flexibility than the Company to diversify its business
activities through existing or newly formed subsidiaries or
through acquisition or merger with other insurance companies or
financial service institutions. After the Conversion, the
Holding Company will be subject to regulation by the Pennsylvania
Department of Insurance (the "Department").
The Company's executive offices are located at 2929 Lititz
Pike, Lancaster, Pennsylvania 17604, and its telephone number is
(717) 569-5361.
OLD GUARD MUTUAL INSURANCE COMPANY
The Company was organized and commenced operations in 1896.
The Company currently operates as a Pennsylvania mutual insurance
company through its main office located in Lancaster,
Pennsylvania. The Company is primarily engaged in the business
of writing property and casualty insurance policies and is
licensed to write insurance in Pennsylvania, Maryland and
Delaware. For the year ended December 31, 1995, the Company had
revenues of $43.6 million and net income of $1.1. For the nine
months ended September 30, 1996, the Company had revenues of
$____ million and a net loss of $___ million. At September 30,
1996, the Company had assets of $116.1 million, equity of $22.5
million and statutory surplus of $____ million.
The Company is, and after the Conversion will continue to
be, subject to examination and comprehensive regulation by the
Department.
The Company's executive offices are located at 2929 Lititz
Pike, Lancaster, Pennsylvania 17601, and its telephone number is
(717) 569-5361.
DESCRIPTION OF JOINT PLAN OF CONVERSION
General
Effective as of May 31, 1996, each Insurance Company
(i) adopted a Joint Plan of Conversion under the Act, and
(ii) directed formation of the Holding Company to be a holding
company for the Insurance Companies upon completion of the
Conversion. Pursuant to the Plan, each Insurance Company will
(i) convert from a Pennsylvania-chartered mutual insurance
company to a Pennsylvania-chartered stock insurance company,
which will be accomplished by the amendment of each Insurance
Company's Articles of Incorporation to authorize the issuance of
capital stock, and (ii) issue all of its authorized capital stock
to the Holding Company in exchange for a portion of the net
proceeds to be received by the Holding Company from the sale of
Holding Company common stock. The Holding Company will offer for
sale between $28,535,000 and $38,606,000 of common stock, which
amount was determined based upon an independent appraisal
performed by Berwind Financial Group, L.P. ("Berwind"). See "--
Appraisal of the Insurance Companies" and "-- The Offering of
Holding Company Common Stock."
The Conversion is contingent upon approval of the Plan by:
(i) the Department; and (ii) the Eligible Policyholders of each
Insurance Company. The Department approved the Plan on
___________, 1996, subject to the Plan's approval by the Eligible
Policyholders of the Insurance Companies and subject to the
satisfaction of certain other conditions imposed by the
Department in its approval. Department approval, however, does
not constitute a recommendation or endorsement of the Joint Plan
of Conversion. All statements made in this Proxy Statement
regarding the Plan are hereby qualified in their entirety by
reference to the Plan, a copy of which is attached hereto as
Exhibit A.
The Offering of Holding Company Common Stock
In connection with the Plan, the Holding Company is
concurrently offering for sale shares of its no par value common
stock (the "Common Stock") through the issuance of
nontransferable subscription rights (the "Subscription
Offering"), first to the Eligible Policyholders, second, to a
tax-qualified employee stock benefit plan to be established by
the Holding Company, 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 of those in a prior category, except
that the tax qualified employee stock benefit plan shall have the
right to purchase in the aggregate up to ten percent (10%) of the
number of shares of Common Stock purchased by other purchasers in
the conversion. This Proxy Statement does not constitute an
offer to sell shares of Common Stock. Such offer shall be made
only by means of a prospectus. If no prospectus accompanies this
Proxy Statement a copy of the prospectus may be obtained by
completing and returning the enclosed pre-addressed, postage-paid
postcard.
Concurrently with the Subscription Offering, shares of the
Common Stock not sold in the Subscription Offering are being
offered to the general public in a community offering (the
"Community Offering"). In the Community Offering preference 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 which 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, and
(iv) named insureds under policies of insurance issued by any
Insurance Company after May 31, 1996. 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, on-going, 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 Subscription and
Community Offerings. In all cases, the determination as to
whether a potential purchaser is a "resident" of the Local
Community shall be in the sole discretion of the Holding Company.
The Subscription and Community Offerings will be managed by
Hopper Soliday & Co.
Any shares of Common Stock not purchased in the Subscription
and Community Offerings may be sold to a syndicate of
underwriters to be managed by Legg Mason Wood Walker,
Incorporated and McDonald & Company Securities, Inc. (the
"Underwriters") for resale in a public offering (the "Public
Offering"). Alternatively, such remaining shares of Common Stock
may be sold in a private placement (the "Private Placement").
The Subscription and Community Offerings, and Public Offering or
Private Placement, if any, are hereinafter collectively referred
to as the "Offerings."
The Common Stock issued in the Offerings will be freely
transferable under the Securities Act of 1933, as amended (the
"1933 Act"); provided, however that shares issued to directors
and officers of any of the Insurance Companies or of the Holding
Company will be restricted as to transfer for a period of one
year from the effective date of the Conversion pursuant to the
provisions of the Act and will be subject to additional transfer
restrictions under Rule 144 of the 1933 Act.
Appraisal of the Insurance Companies
The Act requires that the aggregate purchase price of the
Common Stock to be issued in the Conversion be equal to the fair
market value of such shares based upon an independent appraisal
of the estimated pro forma market value of the Insurance
Companies as subsidiaries of the Holding Company. 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 Holding Company and
has determined that, as of August 21, 1996, such estimated
consolidated pro forma market value was $33,570,000. The
resulting valuation range, which extends 15% below and above the
estimated value, is from $28,535,000 to $38,606,000 (the
"Estimated Valuation Range"). The Holding Company, in
consultation with its advisors, has determined to offer the
shares in the Conversion at a price of $10.00 per share (the
"Purchase Price"). Accordingly, the Holding Company will offer
between 2,853,500 and 4,246,660 shares of Common Stock in the
Offerings. Such appraisal is not intended and must not be
construed as a recommendation of any kind as to the advisability
of purchasing such shares or as any form of assurance that, after
the Conversion, such shares can be resold at or above the
Purchase Price. The appraisal considered a number of factors and
was based upon estimates derived from those factors, all of which
are subject to change from time to time. In preparing the
valuation, Berwind relied upon and assumed the accuracy and
completeness of financial and statistical information provided by
the Insurance Companies. Berwind did not verify the December 31,
1995 audited and June 30, 1996 unaudited financial statements
provided or independently value the assets of the Insurance
Companies. The appraisal will be further updated immediately
prior to the completion of the Conversion.
The total number of shares to be issued in the Conversion
may be increased or decreased without a resolicitation of
subscribers so long as the aggregate purchase price is not less
than the minimum or more than the maximum of the Estimated
Valuation Range. 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 4,246,660.
Amendment of Articles of Incorporation.
The Conversion will be accomplished by amending the existing
Articles of Incorporation of the Insurance Companies to authorize
the issuance of capital stock by the Insurance Companies to the
Holding Company. Upon completion of the Conversion, the Company
will issue all of its newly issued shares of capital stock
(10,000 shares) to the Holding Company in exchange for a portion
of the net proceeds. None of the Company's assets will be
distributed in order to effect the Conversion, other than to pay
expenses incident thereto.
The amendment of the Company's existing Articles of
Incorporation is an integral part of the Plan. A copy of the
proposed amended Articles of Incorporation of the Company are
attached to this Proxy Statement as Exhibit B.
Background and Reasons for the Conversion
The Insurance Companies annually review and adopt a
strategic plan whose goals, by their terms, have been expressly
predicated upon company independence and capital strength. The
Insurance Companies have considered various capital formation
alternatives in the past, such as the issuance of surplus notes
or a stock offering by a subsidiary company. Surplus notes were
used in the past to enhance statutory capital and a subsidiary
company offering was actively considered in prior years.
However, each was limited; surplus notes do not provide either
GAAP capital or permanent statutory capital and a subsidiary
offering may not yield the amount of capital the Insurance
Companies would like to obtain to fully implement their strategic
plan, which the Insurance Companies estimated to be $20 million.
As a result of the inadequate avenues for capital formation
by mutual insurance companies, the Insurance Companies were
active supporters of the Pennsylvania Insurance Company Mutual to
Stock Conversion Act (the "Act") which is designed to foster
capital formation by changing the manner in which Pennsylvania
mutual insurance companies convert from mutual to stock form.
Under the Act, distribution of surplus to policyholders upon
conversion is no longer required. Instead, policyholders are
given a first priority right to purchase the stock of a
converting company.
The Act was passed by the Pennsylvania General Assembly in
early December 1995. On December 12, 1995, management was
directed by the Boards of Directors of each Insurance Company to
explore the process and feasibility of conversion under the Act.
On January 12, 1996, the Boards of Directors authorized further
study and requested a presentation with respect to the process at
its meeting on March 31, 1996. At the March 31, 1996 meeting,
counsel for the Insurance Companies made a presentation regarding
conversion under the Act, including the process, advantages and
disadvantages of conversion and public company status, tax
considerations, the financial impact of conversion and the costs
of conversion. No decision regarding conversion was made at this
meeting. At a meeting of the Board of Directors of each
Insurance Company held on April 22, 1996, management was directed
to prepare the Plan for consideration at a special meeting to be
held in May. Effective 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 Holding Company. The
Insurance Companies did not engage a financial adviser in
connection with their decision to adopt the Plan. Each Board of
Directors unanimously adopted amendments to the Plan on July 19,
1996. An application with respect to the Conversion was filed by
the Insurance Companies on August 21, 1996 and notice of the
filing and the opportunity to comment was simultaneously mailed
to all Eligible Policyholders as required by law. There has been
no significant opposition to the Conversion from the Insurance
Companies' policyholders. The Department informed the Insurance
Companies on November 27, 1996 that it did not intend to hold any
hearings regarding the Conversion.
On November 19, 1996, the Holding Company received an
unsolicited request from an unrelated insurance holding company
to amend the Plan to provide for the merger of the Holding
Company into such unrelated party in exchange for a payment to
all policyholders of the Insurance Companies of $27.5 million, or
less than $200 per policyholder assuming equal distribution to
all policyholders. Such amount was proposed to be payable
one-half in cash and one-half in a new class of preferred stock
of the unrelated company, the terms of which were not specified.
The Boards of Directors of the Holding Company and the Insurance
Companies met on November 22, 1996. Because such a transaction
would not provide additional capital to the Insurance Companies,
would be inconsistent with their strategic plan of continued
independence and would be tantamount to a sale and liquidation of
the Insurance Companies, the Boards of Directors of the Holding
Company and the Insurance Companies declined to consider the
request and affirmed their course of independence and adoption of
the Plan.
An application to acquire the Holding Company was
contemporaneously filed with the Department by the unrelated
party. In response to the application, the Department informed
the applicant that its application was both deficient and
premature because no stock of the Holding Company is outstanding.
Pending cure of these deficiencies and approval of the
application by the Department, the Department informed the
applicant that it is prohibited from (i) making any public
announcement of its request to the Holding Company to amend its
Plan or (ii) soliciting policyholders of the Insurance Companies
in any way, including in connection with the policyholder votes
on the Plan. The Holding Company believes the applicant will be
unable to cure the deficiencies in its application and secure
Department approval, on a timely basis, if not at all. If
Eligible Policyholders do not approve the Plan, the Boards of
Directors of the Insurance Companies intend to maintain their
current course of independence.
The net proceeds from the sale of Common Stock in the
Conversion will substantially increase the equity of the Holding
Company and the GAAP equity and statutory surplus of the
Insurance Companies, thereby strengthening policyholder
protection. The Holding Company presently estimates that it will
receive between $24.6 million and $31.2 million in net proceeds
from the Offerings. Of this amount, the Holding Company expects
to contribute $9 million, $5 million and $2 million to Old Guard
Mutual, Old Guard Fire and Goschenhoppen, respectively. In
addition, the holding company structure will provide greater
flexibility than the Company alone would have for future product
line expansion and geographic diversification through acquisition
and de novo licensing. Management believes that this increased
capital and operating flexibility will enable the Company to
compete more effectively with other insurance companies and other
types of financial service organizations. Management also
believes that the Conversion will enhance the future access of
the Holding Company and Old Guard Mutual to the capital markets
and permit the Holding Company to attract, motivate and retain
highly qualified employees though the use of stock-based
compensation programs.
Effect of the Conversion on Policyholders
General. Each policyholder in a mutual insurance company,
such as the Company, has certain interests in the 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 (Old Guard
Mutual has never declared a policyholder dividend and has 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.
If the Plan is not approved by the Eligible Policyholders or
if the Conversion fails to be completed for any other reason, the
Company will continue its existence as a mutual insurance
company.
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 Company. During and after the
Conversion, the normal business of the Company of issuing
insurance policies in exchange for premium payments and
processing and paying claims will continue without change or
interruption. After the Conversion, the Company will continue to
provide services for policyholders under current policies and by
its present management and staff.
The Board of Directors serving the Company at the time of
the Conversion will serve as the Board of Directors of the
Company after the Conversion. The Board of Directors of the
Holding Company will consist of the following persons, each of
whom is an existing director of the Insurance Companies:
James W. Appel, John E. Barry, Luther R. Campbell, Jr.,
Michael S. Clemens, David E. Hosler, Richard B. Neiley, Jr.,
G. Arthur Weaver and Robert Wechter. All officers of the Company
at the time of the Conversion will retain their positions with
the Company after the Conversion.
Voting Rights. Upon completion of the Conversion, the
voting rights of all policyholders in the Company will terminate
and policyholders will no longer have the right to elect the
directors of the Company. Instead, voting rights in the Company
will be vested exclusively in the Holding Company, which will own
all the capital stock of the Company. Voting rights in the
Holding Company will be vested exclusively in the shareholders of
the Holding Company. Each holder of Common Stock shall be
entitled to vote on any matter to be considered by the
shareholders of the Holding Company, subject to the terms of the
Holding 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 Company 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 Board of Directors of the Company.
However, Old Guard Mutual has never declared a policyholder
dividend and has no present intention of doing so in the
future -- whether or not the Company converts 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 Company. Instead, this right
will vest in the sole shareholder of Old Guard Mutual -- the
Holding Company.
Tax Effects.
In General.
The Insurance Companies have obtained from the Internal
Revenue Service (the "IRS") a private letter ruling (the "PLR")
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. The PLR confirms, 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 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 stock is purchased.
Subscription Rights.
Generally, 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. Nevertheless, the IRS has ruled in the
PLR that any gain realized by an Eligible Policyholder as a
result of the receipt of subscription rights with a fair market
value must be recognized, whether or not such rights are
exercised. The amount of gain recognized by each Eligible
Policyholder will equal the fair market value of subscription
rights received 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 or lapse of such
Eligible Policyholder's unexercised subscription rights. The
amount of such loss should equal the gain previously recognized
upon receipt of such unexercised subscription rights, although
such loss may not have the same character as the corresponding
gain. 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 should be valued or how to determine
the number of subscription rights that may be allocated to each
Eligible Policyholder during the Subscription Offering.
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 WHICH
MAY BE RELEVANT TO EACH ELIGIBLE POLICYHOLDER THAT MAY BE SUBJECT
TO SPECIAL TREATMENT UNDER THE CODE, SUCH AS TRUSTS, INDIVIDUAL
RETIREMENT ACCOUNTS, OTHER EMPLOYEE BENEFIT PLANS, INSURANCE
COMPANIES, AND ELIGIBLE POLICYHOLDERS WHO ARE EMPLOYEES OF AN
INSURANCE COMPANY OR 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.
Interpretation and Amendment of the Plan of Conversion
All interpretations of the Plan by the Board of Directors of
each Insurance Company and the Board of Directors of the Holding
Company will be final, conclusive and binding upon all persons.
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 Holding Company and each Insurance Company. The Plan may
be similarly 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 Eligible Policyholders of each Insurance Company and
prior to the effective date of the Conversion by the affirmative
vote of two-thirds of the directors of the Holding 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 the Department adopts mandatory regulations
applicable to the Conversion prior to its 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 Holding Company and of each
Insurance Company, and no resolicitation of proxies or further
approval by the Eligible Policyholders shall be required. In the
event that the Department adopts regulations applicable to the
Conversion prior to its 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 Holding Company and of each Insurance Company, and no
resolicitation of proxies or further approval by the Eligible
Proxyholders shall be required.
Termination
The Plan may be terminated at any time before it is approved
by Eligible Policyholders by the affirmative vote of two-thirds
of the directors of the Holding 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 of the Conversion by the affirmative vote of two-thirds of
the directors of the Holding Company and of each Insurance
Company; provided, however, that any such termination shall be
subject to approval by the Department.
THE COMPANY'S ARTICLES OF INCORPORATION
AND BYLAWS
The following is a summary of certain provisions of the
amended Articles of Incorporation and bylaws of the Company,
which will become effective upon the Conversion of the Company
from a Pennsylvania mutual insurance company to a Pennsylvania
stock insurance company.
The Company's amended Articles of Incorporation will change
the name of the Company to Old Guard Insurance Company and
authorize the Company to issue 10,000 shares of common stock with
a par value of $1.00 per share. All of the Company's outstanding
common stock will be owned by the Holding Company. Accordingly,
exclusive voting rights with respect to the affairs of the
Company after the Conversion will be vested in the Board of
Directors of the Holding Company. A vote in favor of the Plan
will also constitute a vote to approve the Amended Articles of
Incorporation of the Company.
The Company's bylaws will provide that the number of
directors of the Company shall not be fewer than seven, with the
exact number to be determined by the Board of Directors. The
proposed Bylaws will provide that the number of directors will
not be staggered, so that all of the members of the Board will be
elected each year.
The Company's Amended Articles of Incorporation will provide
that such Articles may be amended only if such amendment is
approved by the Board of Directors of the Company, and, if and to
the extent required by law, approved by the Department and the
shareholders of the Company (i.e., the Holding Company). The
Bylaws may be amended by a majority vote of the Board of
Directors of the Company or by a majority vote of the outstanding
shares of voting stock of the Company at a meeting called for
such purpose.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS
THAT YOU VOTE "FOR" APPROVAL OF THE JOINT PLAN OF CONVERSION.
VOTING IN FAVOR OF THE JOINT PLAN OF CONVERSION WILL NOT OBLIGATE
ANY PERSON TO PURCHASE COMMON STOCK IN THE OFFERING.
ADDITIONAL INFORMATION
YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THIS
PROXY MATERIAL AND, WHETHER OR NOT YOU PLAN TO BE PRESENT IN
PERSON AT THE SPECIAL MEETING, TO FILL IN, DATE, SIGN AND RETURN
THE ENCLOSED PROXY AS SOON AS POSSIBLE TO ASSURE THAT YOUR VOTES
WILL BE COUNTED. THIS WILL NOT PREVENT YOU FROM VOTING IN PERSON
IF YOU ATTEND THE SPECIAL MEETING. YOU MAY REVOKE YOUR PROXY BY
WRITTEN INSTRUMENT DELIVERED TO THE SECRETARY OF THE COMPANY AT
ANY TIME PRIOR TO OR AT THE SPECIAL MEETING OR BY ATTENDING THE
SPECIAL MEETING AND VOTING IN PERSON.
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY THE COMMON STOCK. SUCH OFFERS
MAY BE MADE ONLY BY THE PROSPECTUS.
BY ORDER OF THE BOARD OF DIRECTORS
Steven D. Dyer
Secretary
_____________, 1996
Lancaster, Pennsylvania
Exhibit 99.6
OLD GUARD MUTUAL FIRE INSURANCE COMPANY
2929 Lititz Pike
Lancaster, Pennsylvania 17601
(717) 569-5361
NOTICE OF SPECIAL MEETING OF POLICYHOLDERS
Notice is hereby given that a Special Meeting of
Policyholders (the "Special Meeting") of Old Guard Mutual Fire
Insurance Company ("Old Guard Fire" or the "Company") will be
held at __________________________, Pennsylvania, on
______________, __________________, 1996 at __:__ _.m. Business
to be considered at the Special Meeting shall be:
(1) To consider and vote upon a Joint Plan of Conversion
(the "Plan") providing for the conversion of Old Guard
Fire from a Pennsylvania mutual insurance company to a
Pennsylvania stock insurance company as a wholly-owned
subsidiary of Old Guard Group, Inc., a newly organized
Pennsylvania corporation formed for the purpose of
becoming a holding company for the Company, Old Guard
Mutual Insurance Company and Goschenhoppen-Home Mutual
Insurance Company upon each of their conversions from
mutual to stock form pursuant to the Plan, and the
related transactions provided for in the Plan,
including the adoption of amended Articles of
Incorporation for Old Guard Fire.
(2) To consider and vote upon any other matters that may
lawfully come before the Special Meeting.
As of the date of mailing of this Notice of Special Meeting,
the Board of Directors is not aware of any other matters that may
come before the Special Meeting.
Under the bylaws, each named insured under a policy of
insurance issued by Old Guard Fire that was in force at the close
of business on May 31, 1996 is a member entitled to vote, except
that each such policy is entitled to only one vote at the Special
Meeting.
BY THE ORDER OF THE BOARD OF
DIRECTORS
Steven D. Dyer
Secretary
_________________, 1996
Lancaster, Pennsylvania
____________________
YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THIS
PROXY MATERIAL AND, WHETHER OR NOT YOU PLAN TO BE PRESENT IN
PERSON AT THE SPECIAL MEETING, TO FILL IN, DATE, SIGN AND RETURN
THE ENCLOSED PROXY CARD(S) AS SOON AS POSSIBLE TO ASSURE THAT
YOUR VOTES WILL BE COUNTED. IN ACCORDANCE WITH THE BYLAWS OF THE
COMPANY, ALL PROXIES MUST BE RECEIVED TWENTY (20) DAYS BEFORE THE
SPECIAL MEETING, OR ___________, 1996, IN ORDER TO BE COUNTED AT
THE SPECIAL MEETING. THIS WILL NOT PREVENT YOU FROM VOTING IN
PERSON IF YOU ATTEND THE SPECIAL MEETING.
<PAGE>
OLD GUARD MUTUAL FIRE INSURANCE COMPANY
2929 Lititz Pike
Lancaster, Pennsylvania 17601
(717) 569-5361
PROXY STATEMENT
YOUR PROXY, IN THE FORM ENCLOSED, IS SOLICITED BY THE BOARD
OF DIRECTORS OF OLD GUARD MUTUAL FIRE INSURANCE COMPANY FOR USE
AT A SPECIAL MEETING OF ITS MEMBERS TO BE HELD ON ______________,
1996 AND ANY ADJOURNMENT OF THAT MEETING, FOR THE PURPOSES SET
FORTH IN THE FOREGOING NOTICE OF SPECIAL MEETING. YOUR BOARD OF
DIRECTORS URGES YOU TO VOTE FOR THE JOINT PLAN OF CONVERSION. IN
ACCORDANCE WITH THE BYLAWS OF THE COMPANY, ALL PROXIES MUST BE
RECEIVED TWENTY (20) DAYS BEFORE THE SPECIAL MEETING, OR
___________, 1996, IN ORDER TO BE COUNTED AT THE SPECIAL MEETING.
INTRODUCTION
Purpose of Meeting. A Special Meeting of Policyholders (the
"Special Meeting") of Old Guard Mutual Fire Insurance Company
("Old Guard Fire" or the "Company") will be held at
______________________, ______________________________,
Pennsylvania on ______________, ___________, 1996, at __:__ _.m.,
local time. The purpose of the Special Meeting is to consider
and vote upon a Joint Plan of Conversion (the "Plan"), which was
unanimously adopted by the Company's Board of Directors and
which, if approved by two-thirds of the votes cast at the Special
Meeting by named insureds under policies of insurance issued by
the Company that were in force at the close of business on
May 31, 1996 ("Eligible Policyholders"), will permit the Company
to convert from a Pennsylvania mutual insurance company to a
Pennsylvania stock insurance company and to become a wholly-owned
subsidiary of Old Guard Group, Inc. (the "Holding Company")
pursuant to the provisions of the Insurance Company
Mutual-to-Stock Conversion Act (the "Act"). The Holding Company
is a newly organized Pennsylvania corporation formed for the
purpose of becoming a holding company for the Company, Old Guard
Mutual Insurance ("Old Guard Mutual") and Goschenhoppen-Home
Mutual Insurance Company ("Goschenhoppen"), upon each of their
conversions from mutual to stock form pursuant to the Plan. Old
Guard Fire, Old Guard Mutual and Goschenhoppen are mutual
insurance companies under common management that are presently
members of Old Guard Insurance Group. Old Guard Fire, Old Guard
Mutual and Goschenhoppen are hereinafter referred to individually
as an "Insurance Company" and collectively as the "Insurance
Companies" and the conversion of each of the Insurance Companies
from mutual to stock form is hereinafter referred to as the
"Conversion." Eligible Policyholders hereinafter shall mean
named insureds under policies of insurance issued by either Old
Guard Fire, Old Guard Mutual or Goschenhoppen that were in force
as of May 31, 1996, as the context may require.
INFORMATION RELATING TO VOTING AT THE SPECIAL MEETING
The Board of Directors of the Company has determined that,
in accordance with the bylaws of the Company, the terms of the
Plan and the provisions of the Act, each named insured under an
insurance policy issued by the Company that was in force at the
close of business on May 31, 1996 (the "Voting Record Date") is a
member who is entitled to notice of and to vote at the Special
Meeting. Each such Eligible Policyholder will be entitled at the
Special Meeting to cast one vote for each insurance policy under
which such Eligible Policyholder is the named insured as of the
Voting Record Date; provided, however, that only one vote may be
cast for each insurance policy in force as of the Voting Record
Date. Thus, an Eligible Policyholder under more than one
insurance policy in force as of the Voting Record Date shall have
more than one vote, but if there is more than one Eligible
Policyholder under an insurance policy in force as of the Voting
Record Date, such Eligible Policyholders shall collectively have
only one vote with respect to such insurance policy.
Seven Eligible Policyholders must be present, in person, to
constitute a quorum at the Special Meeting. Approval of the Plan
will require the affirmative vote, either in person or by proxy,
of at least two-thirds of the votes cast at the Special Meeting.
As of the Voting Record Date, the Company had approximately ____
policies outstanding with respect to which Eligible Policyholders
would be entitled to cast a total of _____ votes at the Special
Meeting. For the Conversion to be completed, the Plan also must
be approved by the Eligible Policyholders of each of the
Insurance Companies.
Eligible Policyholders may vote at the Special Meeting or
any adjournment thereof in person or by proxy. All properly
executed proxies received by the Company twenty (20) days before
the Special Meeting, or ___________, 1996, will be voted in
accordance with the instructions indicated thereon. If no
contrary instructions are given, such proxies will be voted in
favor of the Plan. If any other matters are properly presented
before the Special Meeting, the proxies solicited hereby will be
voted on such matters by the proxyholders according to their
discretion. Any member giving a proxy will have the right to
revoke his proxy at any time before it is voted by delivering
written notice or a duly executed proxy bearing a later date to
the Secretary of the Company, provided that such written notice
is received by the Secretary prior to ___________, 1996, or by
attending the Special Meeting and voting in person.
In the event that conflicting proxies are received from more
than one Eligible Policyholder with respect to the same policy,
the proxyholders will vote in accordance with the instructions of
a majority of such Eligible Policyholders and, in the case of a
tie, the proxyholders will vote in accordance with the
instructions set forth in the latest proxy to be filed.
The Company has retained Georgeson & Company ("Georgeson")
to solicit proxies in favor of the Plan. The Insurance Companies
will pay Georgeson a fee of $___________ and reimburse Georgeson
for its out-of-pocket expenses. Independent agents of the
Company, as the primary contact between the Company and
policyholders, can be expected frequently to be the initial
contact with policyholders and, as a result, may obtain proxies
in favor of the Plan. The Company expects to reimburse such
agents for their reasonable expenses. Proxies may be solicited
by officers, directors or other employees of the Company, in
person, by telephone or through other forms of communication.
Such persons will be reimbursed by the Company only for their
expenses incurred in connection with such solicitation.
The proxies solicited hereby will be used only at the
Special Meeting and at any adjournment thereof; they will not be
used at any other meeting.
OLD GUARD GROUP, INC.
Old Guard Group, Inc. was incorporated under the laws of the
Commonwealth of Pennsylvania on May 24, 1996 at the direction of
the Board of Directors of the Insurance Companies for the purpose
of serving as a holding company of the Insurance Companies upon
the acquisition of all of the capital stock issued by the
Insurance Companies in the Conversion. Prior to the Conversion,
the Holding Company has not engaged, and will not engage, in any
material operations. Upon completion of the Conversion, the
Holding Company will have no significant assets other than the
outstanding capital stock of the Insurance Companies and between
approximately $8.6 million and $15.2 million of the net proceeds
from the Offerings (as hereinafter defined). The Holding
Company's principal business will be to hold the stock of, and
provide management services to, the Insurance Companies.
The holding company structure will permit the Holding
Company to expand the services currently offered through the
Company, although there are no definitive plans or arrangements
for such expansion at present. The Holding Company will have
greater flexibility than the Company to diversify its business
activities through existing or newly formed subsidiaries or
through acquisition or merger with other insurance companies or
financial service institutions. After the Conversion, the
Holding Company will be subject to regulation by the Pennsylvania
Department of Insurance (the "Department").
The Company's executive offices are located at 2929 Lititz
Pike, Lancaster, Pennsylvania 17604, and its telephone number is
(717) 569-5361.
OLD GUARD MUTUAL FIRE INSURANCE COMPANY
The Company was organized and commenced operations in 1896.
The Company currently operates as a Pennsylvania mutual insurance
company through its main office located in Lancaster,
Pennsylvania. The Company is primarily engaged in the business
of writing property and casualty insurance policies and is
licensed to write insurance in Pennsylvania, Maryland and
Delaware. For the year ended December 31, 1995, the Company had
revenues of $20.7 million and net income of $4,000. For the six
months ended September 30, 1996, the Company had revenues of $___
million and a net loss of $___ million. At September 30, 1996,
the Company had assets of $36.1 million, equity of $11.0 million
and statutory surplus of $___ million.
The Company is, and after the Conversion will continue to
be, subject to examination and comprehensive regulation by the
Department.
The Company's executive offices are located at 2929 Lititz
Pike, Lancaster, Pennsylvania 17601, and its telephone number is
(717) 569-5361.
DESCRIPTION OF JOINT PLAN OF CONVERSION
General
Effective as of May 31, 1996, each Insurance Company
(i) adopted a Joint Plan of Conversion under the Act, and
(ii) directed formation of the Holding Company to be a holding
company for the Insurance Companies upon completion of the
Conversion. Pursuant to the Plan, each Insurance Company will
(i) convert from a Pennsylvania-chartered mutual insurance
company to a Pennsylvania-chartered stock insurance company,
which will be accomplished by the amendment of each Insurance
Company's Articles of Incorporation to authorize the issuance of
capital stock, and (ii) issue all of its authorized capital stock
to the Holding Company in exchange for a portion of the net
proceeds to be received by the Holding Company from the sale of
Holding Company common stock. The Holding Company will offer for
sale between $28,535,000 and $38,606,000 of common stock, which
amount was determined based upon an independent appraisal
performed by Berwind Financial Group, L.P. ("Berwind"). See "--
Appraisal of the Insurance Companies" and "-- The Offering of
Holding Company Common Stock."
The Conversion is contingent upon approval of the Plan by:
(i) the Department; and (ii) the Eligible Policyholders of each
Insurance Company. The Department approved the Plan on
___________, 1996, subject to the Plan's approval by the Eligible
Policyholders of the Insurance Companies and subject to the
satisfaction of certain other conditions imposed by the
Department in its approval. Department approval, however, does
not constitute a recommendation or endorsement of the Joint Plan
of Conversion. All statements made in this Proxy Statement
regarding the Plan are hereby qualified in their entirety by
reference to the Plan, a copy of which is attached hereto as
Exhibit A.
The Offering of Holding Company Common Stock
In connection with the Plan, the Holding Company is
concurrently offering for sale shares of its no par value common
stock (the "Common Stock") through the issuance of
nontransferable subscription rights (the "Subscription
Offering"), first to the Eligible Policyholders, second, to a
tax-qualified employee stock benefit plan to be established by
the Holding Company, 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 of those in a prior category, except
that the tax qualified employee stock benefit plan shall have the
right to purchase in the aggregate up to ten percent (10%) of the
number of shares of Common Stock purchased by other purchasers in
the conversion. This Proxy Statement does not constitute an
offer to sell shares of Common Stock. Such offer shall be made
only by means of a prospectus. If no prospectus accompanies this
Proxy Statement a copy of the prospectus may be obtained by
completing and returning the enclosed pre-addressed, postage-paid
postcard.
Concurrently with the Subscription Offering, shares of the
Common Stock not sold in the Subscription Offering are being
offered to the general public in a community offering (the
"Community Offering"). In the Community Offering preference 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 which 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, and
(iv) named insureds under policies of insurance issued by any
Insurance Company after May 31, 1996. 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, on-going, 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 Subscription and
Community Offerings. In all cases, the determination as to
whether a potential purchaser is a "resident" of the Local
Community shall be in the sole discretion of the Holding Company.
The Subscription and Community Offerings will be managed by
Hopper Soliday & Co.
Any shares of Common Stock not purchased in the Subscription
and Community Offerings may be sold to a syndicate of
underwriters to be managed by Legg Mason Wood Walker,
Incorporated and McDonald & Company Securities, Inc. (the
"Underwriters") for resale in a public offering (the "Public
Offering"). Alternatively, such remaining shares of Common Stock
may be sold in a private placement (the "Private Placement").
The Subscription and Community Offerings, and Public Offering or
Private Placement, if any, are hereinafter collectively referred
to as the "Offerings."
The Common Stock issued in the Offerings will be freely
transferable under the Securities Act of 1933, as amended (the
"1933 Act"); provided, however that shares issued to directors
and officers of any of the Insurance Companies or of the Holding
Company will be restricted as to transfer for a period of one
year from the effective date of the Conversion pursuant to the
provisions of the Act and will be subject to additional transfer
restrictions under Rule 144 of the 1933 Act.
Appraisal of the Insurance Companies
The Act requires that the aggregate purchase price of the
Common Stock to be issued in the Conversion be equal to the fair
market value of such shares based upon an independent appraisal
of the estimated pro forma market value of the Insurance
Companies as subsidiaries of the Holding Company. 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 Holding Company and
has determined that, as of August 21, 1996, such estimated pro
forma market value was $33,570,000. The resulting valuation
range, which extends 15% below and above the estimated value, is
from $28,535,000 to $38,606,000 (the "Estimated Valuation
Range"). The Holding Company, in consultation with its advisors,
has determined to offer the shares in the Conversion at a price
of $10.00 per share (the "Purchase Price"). Accordingly, the
Holding Company will offer between 2,853,500 and 4,246,600 shares
of Common Stock in the Offerings. Such appraisal is not intended
and must not be construed as a recommendation of any kind as to
the advisability of purchasing such shares or as any form of
assurance that, after the Conversion, such shares can be resold
at or above the Purchase Price. The appraisal considered a
number of factors and was based upon estimates derived from those
factors, all of which are subject to change from time to time.
In preparing the valuation, Berwind relied upon and assumed the
accuracy and completeness of financial and statistical
information provided by the Insurance Companies. Berwind did not
verify the December 31, 1995 audited and June 30, 1996 unaudited
financial statements provided or independently value the assets
of the Insurance Companies. The appraisal will be further
updated immediately prior to the completion of the Conversion.
The total number of shares to be issued in the Conversion
may be increased or decreased without a resolicitation of
subscribers so long as the aggregate purchase price is not less
than the minimum or more than the maximum of the Estimated
Valuation Range. 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 4,246,660.
Amendment of Articles of Incorporation.
The Conversion will be accomplished by amending the existing
Articles of Incorporation of the Insurance Companies to authorize
the issuance of capital stock by the Insurance Companies to the
Holding Company. Upon completion of the Conversion, the Company
will issue all of its newly issued shares of capital stock
(10,000 shares) to the Holding Company in exchange for a portion
of the net proceeds. None of the Company's assets will be
distributed in order to effect the Conversion, other than to pay
expenses incident thereto.
The amendment of the Company's existing Articles of
Incorporation is an integral part of the Plan. A copy of the
proposed amended Articles of Incorporation of the Company are
attached to this Proxy Statement as Exhibit B.
Background and Reasons for the Conversion
The Insurance Companies annually review and adopt a
strategic plan whose goals, by their terms, have been expressly
predicated upon company independence and capital strength. The
Insurance Companies have considered various capital formation
alternatives in the past, such as the issuance of surplus notes
or a stock offering by a subsidiary company. Surplus notes were
used in the past to enhance statutory capital and a subsidiary
company offering was actively considered in prior years.
However, each was limited; surplus notes do not provide either
GAAP capital or permanent statutory capital and a subsidiary
offering may not yield the amount of capital the Insurance
Companies would like to obtain to fully implement their strategic
plan, which the Insurance Companies estimated to be $20 million.
As a result of the inadequate avenues for capital formation
by mutual insurance companies, the Insurance Companies were
active supporters of the Pennsylvania Insurance Company Mutual to
Stock Conversion Act (the "Act") which is designed to foster
capital formation by changing the manner in which Pennsylvania
mutual insurance companies convert from mutual to stock form.
Under the Act, distribution of surplus to policyholders upon
conversion is no longer required. Instead, policyholders are
given a first priority right to purchase the stock of a
converting company.
The Act was passed by the Pennsylvania General Assembly in
early December 1995. On December 12, 1995, management was
directed by the Boards of Directors of each Insurance Company to
explore the process and feasibility of conversion under the Act.
On January 12, 1996, the Boards of Directors authorized further
study and requested a presentation with respect to the process at
its meeting on March 31, 1996. At the March 31, 1996 meeting,
counsel for the Insurance Companies made a presentation regarding
conversion under the Act, including the process, advantages and
disadvantages of conversion and public company status, tax
considerations, the financial impact of conversion and the costs
of conversion. No decision regarding conversion was made at this
meeting. At a meeting of the Board of Directors of each
Insurance Company held on April 22, 1996, management was directed
to prepare the Plan for consideration at a special meeting to be
held in May. Effective 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 Holding Company. The
Insurance Companies did not engage a financial adviser in
connection with their decision to adopt the Plan. Each Board of
Directors unanimously adopted amendments to the Plan on July 19,
1996. An application with respect to the Conversion was filed by
the Insurance Companies on August 21, 1996 and notice of the
filing and the opportunity to comment was simultaneously mailed
to all Eligible Policyholders as required by law. There has been
no significant opposition to the Conversion from the Insurance
Companies' policyholders. The Department informed the Insurance
Companies on November 27, 1996 that it did not intend to hold any
hearings regarding the Conversion.
On November 19, 1996, the Holding Company received an
unsolicited request from an unrelated insurance holding company
to amend the Plan to provide for the merger of the Holding
Company into such unrelated party in exchange for a payment to
all policyholders of the Insurance Companies of $27.5 million, or
less than $200 per policyholder assuming equal distribution to
all policyholders. Such amount was proposed to be payable
one-half in cash and one-half in a new class of preferred stock
of the unrelated company, the terms of which were not specified.
The Boards of Directors of the Holding Company and the Insurance
Companies met on November 22, 1996. Because such a transaction
would not provide additional capital to the Insurance Companies,
would be inconsistent with their strategic plan of continued
independence and would be tantamount to a sale and liquidation of
the Insurance Companies, the Boards of Directors of the Holding
Company and the Insurance Companies declined to consider the
request and affirmed their course of independence and adoption of
the Plan.
An application to acquire the Holding Company was
contemporaneously filed with the Department by the unrelated
party. In response to the application, the Department informed
the applicant that its application was both deficient and
premature because no stock of the Holding Company is outstanding.
Pending cure of these deficiencies and approval of the
application by the Department, the Department informed the
applicant that it is prohibited from (i) making any public
announcement of its request to the Holding Company to amend its
Plan or (ii) soliciting policyholders of the Insurance Companies
in any way, including in connection with the policyholder votes
on the Plan. The Holding Company believes the applicant will be
unable to cure the deficiencies in its application and secure
Department approval, on a timely basis, if not at all. If
Eligible Policyholders do not approve the Plan, the Boards of
Directors of the Insurance Companies intend to maintain their
current course of independence.
The net proceeds from the sale of Common Stock in the
Conversion will substantially increase the equity of the Holding
Company and the GAAP equity and statutory surplus of the
Insurance Companies, thereby strengthening policyholder
protection. The Holding Company presently estimates that it will
receive between $24.6 million and $31.2 million in net proceeds
from the Offerings. Of this amount, the Holding Company expects
to contribute $5 million, $9 million and $2 million to Old Guard
Fire, Old Guard Mutual and Goschenhoppen, respectively. In
addition, the holding company structure will provide greater
flexibility than the Company alone would have for future product
line expansion and geographic diversification through acquisition
and de novo licensing. Management believes that this increased
capital and operating flexibility will enable the Company to
compete more effectively with other insurance companies and other
types of financial service organizations. Management also
believes that the Conversion will enhance the future access of
the Holding Company and Old Guard Fire to the capital markets and
permit the Holding Company to attract, motivate and retain highly
qualified employees though the use of stock-based compensation
programs.
Effect of the Conversion on Policyholders
General. Each policyholder in a mutual insurance company,
such as the Company, has certain interests in the 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 (Old Guard Fire
has never declared a policyholder dividend and has 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.
If the Plan is not approved by the Eligible Policyholders or
if the Conversion fails to be completed for any other reason, the
Company will continue its existence as a mutual insurance
company.
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 Company. During and after the
Conversion, the normal business of the Company of issuing
insurance policies in exchange for premium payments and
processing and paying claims will continue without change or
interruption. After the Conversion, the Company will continue to
provide services for policyholders under current policies and by
its present management and staff.
The Board of Directors serving the Company at the time of
the Conversion will serve as the Board of Directors of the
Company after the Conversion. The Board of Directors of the
Holding Company will consist of the following persons, each of
whom is an existing director of the Insurance Companies:
James W. Appel, John E. Barry, Luther R. Campbell, Jr.,
Michael S. Clemens, David E. Hosler, Richard B. Neiley, Jr.,
G. Arthur Weaver and Robert Wechter. All officers of the Company
at the time of the Conversion will retain their positions with
the Company after the Conversion.
Voting Rights. Upon completion of the Conversion, the
voting rights of all policyholders in the Company will terminate
and policyholders will no longer have the right to elect the
directors of the Company. Instead, voting rights in the Company
will be vested exclusively in the Holding Company, which will own
all the capital stock of the Company. Voting rights in the
Holding Company will be vested exclusively in the shareholders of
the Holding Company. Each holder of Common Stock shall be
entitled to vote on any matter to be considered by the
shareholders of the Holding Company, subject to the terms of the
Holding 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 Company 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 Board of Directors of the Company.
However, Old Guard Fire has never declared a policyholder
dividend and has no present intention of doing so in the
future -- whether or not the Company converts 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 Company. Instead, this right
will vest in the sole shareholder of Old Guard Fire -- the
Holding Company.
Tax Effects.
In General.
The Insurance Companies have obtained from the Internal
Revenue Service (the "IRS") a private letter ruling (the "PLR")
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. The PLR confirms, 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 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 stock is purchased.
Subscription Rights.
Generally, 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. Nevertheless, the IRS has ruled in the
PLR that any gain realized by an Eligible Policyholder as a
result of the receipt of subscription rights with a fair market
value must be recognized, whether or not such rights are
exercised. The amount of gain recognized by each Eligible
Policyholder will equal the fair market value of subscription
rights received 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 or lapse of such
Eligible Policyholder's unexercised subscription rights. The
amount of such loss should equal the gain previously recognized
upon receipt of such unexercised subscription rights, although
such loss may not have the same character as the corresponding
gain. 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 should be valued or how to determine
the number of subscription rights that may be allocated to each
Eligible Policyholder during the Subscription Offering.
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 WHICH
MAY BE RELEVANT TO EACH ELIGIBLE POLICYHOLDER THAT MAY BE SUBJECT
TO SPECIAL TREATMENT UNDER THE CODE, SUCH AS TRUSTS, INDIVIDUAL
RETIREMENT ACCOUNTS, OTHER EMPLOYEE BENEFIT PLANS, INSURANCE
COMPANIES, AND ELIGIBLE POLICYHOLDERS WHO ARE EMPLOYEES OF AN
INSURANCE COMPANY OR 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.
Interpretation and Amendment of the Plan of Conversion
All interpretations of the Plan by the Board of Directors of
each Insurance Company and the Board of Directors of the Holding
Company will be final, conclusive and binding upon all persons.
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 Holding Company and each Insurance Company. The Plan may
be similarly 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 Eligible Policyholders of each Insurance Company and
prior to the effective date of the Conversion by the affirmative
vote of two-thirds of the directors of the Holding 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 the Department adopts mandatory regulations
applicable to the Conversion prior to its 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 Holding Company and of each
Insurance Company, and no resolicitation of proxies or further
approval by the Eligible Policyholders shall be required. In the
event that the Department adopts regulations applicable to the
Conversion prior to its 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 Holding Company and of each Insurance Company, and no
resolicitation of proxies or further approval by the Eligible
Proxyholders shall be required.
Termination
The Plan may be terminated at any time before it is approved
by Eligible Policyholders by the affirmative vote of two-thirds
of the directors of the Holding 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 of the Conversion by the affirmative vote of two-thirds of
the directors of the Holding Company and of each Insurance
Company; provided, however, that any such termination shall be
subject to approval by the Department.
THE COMPANY'S ARTICLES OF INCORPORATION
AND BYLAWS
The following is a summary of certain provisions of the
amended Articles of Incorporation and bylaws of the Company,
which will become effective upon the Conversion of the Company
from a Pennsylvania mutual insurance company to a Pennsylvania
stock insurance company.
The Company's amended Articles of Incorporation will change
the name of the Company to Old Guard Insurance Company and
authorize the Company to issue 10,000 shares of common stock with
a par value of $1.00 per share. All of the Company's outstanding
common stock will be owned by the Holding Company. Accordingly,
exclusive voting rights with respect to the affairs of the
Company after the Conversion will be vested in the Board of
Directors of the Holding Company. A vote in favor of the Plan
will also constitute a vote to approve the Amended Articles of
Incorporation of the Company.
The Company's bylaws will provide that the number of
directors of the Company shall not be fewer than seven, with the
exact number to be determined by the Board of Directors. The
proposed Bylaws will provide that the number of directors will
not be staggered, so that all of the members of the Board will be
elected each year.
The Company's Amended Articles of Incorporation will provide
that such Articles may be amended only if such amendment is
approved by the Board of Directors of the Company, and, if and to
the extent required by law, approved by the Department and the
shareholders of the Company (i.e., the Holding Company). The
Bylaws may be amended by a majority vote of the Board of
Directors of the Company or by a majority vote of the outstanding
shares of voting stock of the Company at a meeting called for
such purpose.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS
THAT YOU VOTE "FOR" APPROVAL OF THE JOINT PLAN OF CONVERSION.
VOTING IN FAVOR OF THE JOINT PLAN OF CONVERSION WILL NOT OBLIGATE
ANY PERSON TO PURCHASE COMMON STOCK IN THE OFFERING.
ADDITIONAL INFORMATION
YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THIS
PROXY MATERIAL AND, WHETHER OR NOT YOU PLAN TO BE PRESENT IN
PERSON AT THE SPECIAL MEETING, TO FILL IN, DATE, SIGN AND RETURN
THE ENCLOSED PROXY AS SOON AS POSSIBLE TO ASSURE THAT YOUR VOTES
WILL BE COUNTED. THIS WILL NOT PREVENT YOU FROM VOTING IN PERSON
IF YOU ATTEND THE SPECIAL MEETING. YOU MAY REVOKE YOUR PROXY BY
WRITTEN INSTRUMENT DELIVERED TO THE SECRETARY OF THE COMPANY AT
ANY TIME PRIOR TO OR AT THE SPECIAL MEETING OR BY ATTENDING THE
SPECIAL MEETING AND VOTING IN PERSON.
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY THE COMMON STOCK. SUCH OFFERS
MAY BE MADE ONLY BY THE PROSPECTUS.
BY ORDER OF THE BOARD OF DIRECTORS
Steven D. Dyer
Secretary
_____________, 1996
Lancaster, Pennsylvania
Exhibit 99.7
GOSCHENHOPPEN-HOME MUTUAL INSURANCE COMPANY
2929 Lititz Pike
Lancaster, Pennsylvania 17601
(717) 569-5361
NOTICE OF SPECIAL MEETING OF POLICYHOLDERS
Notice is hereby given that a Special Meeting of
Policyholders (the "Special Meeting") of Goschenhoppen-Home
Mutual Insurance Company ("Goschenhoppen" or the "Company") will
be held at __________________________, Pennsylvania, on
______________, __________________, 1996 at __:__ _.m. Business
to be considered at the Special Meeting shall be:
(1) To consider and vote upon a Joint Plan of Conversion
(the "Plan") providing for the conversion of
Goschenhoppen from a Pennsylvania mutual insurance
company to a Pennsylvania stock insurance company as a
wholly-owned subsidiary of Old Guard Group, Inc., a
newly organized Pennsylvania corporation formed for the
purpose of becoming a holding company for the Company,
Old Guard Mutual Fire Insurance Company and Old Guard
Mutual Insurance Company upon each of their conversions
from mutual to stock form pursuant to the Plan, and the
related transactions provided for in the Plan,
including the adoption of amended Articles of
Incorporation for Goschenhoppen.
(2) To consider and vote upon any other matters that may
lawfully come before the Special Meeting.
As of the date of mailing of this Notice of Special Meeting,
the Board of Directors is not aware of any other matters that may
come before the Special Meeting.
Under the bylaws, each named insured under a policy of
insurance issued by Goschenhoppen that was in force at the close
of business on May 31, 1996 is a member entitled to vote, except
that each such policy is entitled to only one vote at the Special
Meeting.
BY THE ORDER OF THE BOARD OF
DIRECTORS
Steven D. Dyer
Secretary
_________________, 1996
Lancaster, Pennsylvania
____________________
YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THIS
PROXY MATERIAL AND, WHETHER OR NOT YOU PLAN TO BE PRESENT IN
PERSON AT THE SPECIAL MEETING, TO FILL IN, DATE, SIGN AND RETURN
THE ENCLOSED PROXY CARD(S) AS SOON AS POSSIBLE TO ASSURE THAT
YOUR VOTES WILL BE COUNTED. IN ACCORDANCE WITH THE BYLAWS OF THE
COMPANY, ALL PROXIES MUST BE RECEIVED TWENTY (20) DAYS BEFORE THE
SPECIAL MEETING, OR ___________, 1996, IN ORDER TO BE COUNTED AT
THE SPECIAL MEETING. THIS WILL NOT PREVENT YOU FROM VOTING IN
PERSON IF YOU ATTEND THE SPECIAL MEETING.
<PAGE>
GOSCHENHOPPEN-HOME MUTUAL INSURANCE COMPANY
2929 Lititz Pike
Lancaster, Pennsylvania 17601
(717) 569-5361
PROXY STATEMENT
YOUR PROXY, IN THE FORM ENCLOSED, IS SOLICITED BY THE BOARD
OF DIRECTORS OF GOSCHENHOPPEN-HOME MUTUAL INSURANCE COMPANY FOR
USE AT A SPECIAL MEETING OF ITS MEMBERS TO BE HELD ON
______________, 1996 AND ANY ADJOURNMENT OF THAT MEETING, FOR THE
PURPOSES SET FORTH IN THE FOREGOING NOTICE OF SPECIAL MEETING.
YOUR BOARD OF DIRECTORS URGES YOU TO VOTE FOR THE JOINT PLAN OF
CONVERSION. IN ACCORDANCE WITH THE BYLAWS OF THE COMPANY, ALL
PROXIES MUST BE RECEIVED TWENTY (20) DAYS BEFORE THE SPECIAL
MEETING, OR ___________, 1996, IN ORDER TO BE COUNTED AT THE
SPECIAL MEETING.
INTRODUCTION
Purpose of Meeting. A Special Meeting of Policyholders (the
"Special Meeting") of Goschenhoppen-Home Mutual Insurance Company
("Goschenhoppen" or the "Company") will be held at
______________________, ______________________________,
Pennsylvania on ______________, ___________, 1996, at __:__ _.m.,
local time. The purpose of the Special Meeting is to consider
and vote upon a Joint Plan of Conversion (the "Plan"), which was
unanimously adopted by the Company's Board of Directors and
which, if approved by two-thirds of the votes cast at the Special
Meeting by named insureds under policies of insurance issued by
the Company that were in force at the close of business on
May 31, 1996 ("Eligible Policyholders"), will permit the Company
to convert from a Pennsylvania mutual insurance company to a
Pennsylvania stock insurance company and to become a wholly-owned
subsidiary of Old Guard Group, Inc. (the "Holding Company")
pursuant to the provisions of the Insurance Company
Mutual-to-Stock Conversion Act (the "Act"). The Holding Company
is a newly organized Pennsylvania corporation formed for the
purpose of becoming a holding company for the Company, Old Guard
Mutual Fire Insurance ("Old Guard Fire") and Old Guard Mutual
Insurance Company ("Old Guard Mutual"), upon each of their
conversions from mutual to stock form pursuant to the Plan.
Goschenhoppen, Old Guard Fire and Old Guard Mutual are mutual
insurance companies under common management that are presently
members of Old Guard Insurance Group. Goschenhoppen, Old Guard
Fire and Old Guard Mutual are hereinafter referred to
individually as an "Insurance Company" and collectively as the
"Insurance Companies" and the conversion of each of the Insurance
Companies from mutual to stock form is hereinafter referred to as
the "Conversion." Eligible Policyholders hereinafter shall mean
named insureds under policies of insurance issued by either
Goschenhoppen, Old Guard Fire or Old Guard Mutual that were in
force as of May 31, 1996, as the context may require.
INFORMATION RELATING TO VOTING AT THE SPECIAL MEETING
The Board of Directors of the Company has determined that,
in accordance with the bylaws of the Company, the terms of the
Plan and the provisions of the Act, each named insured under an
insurance policy issued by the Company that was in force at the
close of business on May 31, 1996 (the "Voting Record Date") is a
member who is entitled to notice of and to vote at the Special
Meeting. Each such Eligible Policyholder will be entitled at the
Special Meeting to cast one vote for each insurance policy under
which such Eligible Policyholder is the named insured as of the
Voting Record Date; provided, however, that only one vote may be
cast for each insurance policy in force as of the Voting Record
Date. Thus, an Eligible Policyholder under more than one
insurance policy in force as of the Voting Record Date shall have
more than one vote, but if there is more than one Eligible
Policyholder under an insurance policy in force as of the Voting
Record Date, such Eligible Policyholders shall collectively have
only one vote with respect to such insurance policy.
Seven Eligible Policyholders must be present, in person, to
constitute a quorum at the Special Meeting. Approval of the Plan
will require the affirmative vote, either in person or by proxy,
of at least two-thirds of the votes cast at the Special Meeting.
As of the Voting Record Date, the Company had approximately ____
policies outstanding with respect to which Eligible Policyholders
would be entitled to cast a total of _____ votes at the Special
Meeting. For the Conversion to be completed, the Plan also must
be approved by the Eligible Policyholders of each of the
Insurance Companies.
Eligible Policyholders may vote at the Special Meeting or
any adjournment thereof in person or by proxy. All properly
executed proxies received by the Company twenty (20) days before
the Special Meeting, or ___________, 1996, will be voted in
accordance with the instructions indicated thereon. If no
contrary instructions are given, such proxies will be voted in
favor of the Plan. If any other matters are properly presented
before the Special Meeting, the proxies solicited hereby will be
voted on such matters by the proxyholders according to their
discretion. Any member giving a proxy will have the right to
revoke his proxy at any time before it is voted by delivering
written notice or a duly executed proxy bearing a later date to
the Secretary of the Company, provided that such written notice
is received by the Secretary prior to ___________, 1996, or by
attending the Special Meeting and voting in person.
In the event that conflicting proxies are received from more
than one Eligible Policyholder with respect to the same policy,
the proxyholders will vote in accordance with the instructions of
a majority of such Eligible Policyholders and, in the case of a
tie, the proxyholders will vote in accordance with the
instructions set forth in the latest proxy to be filed.
The Company has retained Georgeson & Company ("Georgeson")
to solicit proxies in favor of the Plan. The Insurance Companies
will pay Georgeson a fee of $___________ and reimburse Georgeson
for its out-of-pocket expenses. Independent agents of the
Company, as the primary contact between the Company and
policyholders, can be expected frequently to be the initial
contact with policyholders and, as a result, may obtain proxies
in favor of the Plan. The Company expects to reimburse such
agents for their reasonable expenses. Proxies may be solicited
by officers, directors or other employees of the Company, in
person, by telephone or through other forms of communication.
Such persons will be reimbursed by the Company only for their
expenses incurred in connection with such solicitation.
The proxies solicited hereby will be used only at the
Special Meeting and at any adjournment thereof; they will not be
used at any other meeting.
OLD GUARD GROUP, INC.
Old Guard Group, Inc. was incorporated under the laws of the
Commonwealth of Pennsylvania on May 24, 1996 at the direction of
the Board of Directors of the Insurance Companies for the purpose
of serving as a holding company of the Insurance Companies upon
the acquisition of all of the capital stock issued by the
Insurance Companies in the Conversion. Prior to the Conversion,
the Holding Company has not engaged, and will not engage, in any
material operations. Upon completion of the Conversion, the
Holding Company will have no significant assets other than the
outstanding capital stock of the Insurance Companies and between
approximately $8.6 million and $15.2 million of the net proceeds
from the Offerings (as hereinafter defined). The Holding
Company's principal business will be to hold the stock of, and
provide management services to, the Insurance Companies.
The holding company structure will permit the Holding
Company to expand the services currently offered through the
Company, although there are no definitive plans or arrangements
for such expansion at present. The Holding Company will have
greater flexibility than the Company to diversify its business
activities through existing or newly formed subsidiaries or
through acquisition or merger with other insurance companies or
financial service institutions. After the Conversion, the
Holding Company will be subject to regulation by the Pennsylvania
Department of Insurance (the "Department").
The Company's executive offices are located at 2929 Lititz
Pike, Lancaster, Pennsylvania 17604, and its telephone number is
(717) 569-5361.
GOSCHENHOPPEN-HOME MUTUAL INSURANCE COMPANY
The Company was organized and commenced operations in 1896.
The Company currently operates as a Pennsylvania mutual insurance
company through its main office located in Lancaster,
Pennsylvania. The Company is primarily engaged in the business
of writing property and casualty insurance policies and is
licensed to write insurance in Pennsylvania, Maryland and
Delaware. For the year ended December 31, 1995, the Company had
revenues of $8.0 million and net income of $444,000. For the
nine months ended September 30, 1996, the Company had revenues of
$___ million and a net loss of $_______. At September 30, 1996,
the Company had assets of $23.4 million, equity of $4.1 million
and statutory surplus of $___ million.
The Company is, and after the Conversion will continue to
be, subject to examination and comprehensive regulation by the
Department.
The Company's executive offices are located at 2929 Lititz
Pike, Lancaster, Pennsylvania 17601, and its telephone number is
(717) 569-5361.
DESCRIPTION OF JOINT PLAN OF CONVERSION
General
Effective as of May 31, 1996, each Insurance Company
(i) adopted a Joint Plan of Conversion under the Act, and
(ii) directed formation of the Holding Company to be a holding
company for the Insurance Companies upon completion of the
Conversion. Pursuant to the Plan, each Insurance Company will
(i) convert from a Pennsylvania-chartered mutual insurance
company to a Pennsylvania-chartered stock insurance company,
which will be accomplished by the amendment of each Insurance
Company's Articles of Incorporation to authorize the issuance of
capital stock, and (ii) issue all of its authorized capital stock
to the Holding Company in exchange for a portion of the net
proceeds to be received by the Holding Company from the sale of
Holding Company common stock. The Holding Company will offer for
sale between $28,535,000 and $38,606,000 of common stock, which
amount was determined based upon an independent appraisal
performed by Berwind Financial Group, L.P. ("Berwind"). See "--
Appraisal of the Insurance Companies" and "-- The Offering of
Holding Company Common Stock."
The Conversion is contingent upon approval of the Plan by:
(i) the Department; and (ii) the Eligible Policyholders of each
Insurance Company. The Department approved the Plan on
___________, 1996, subject to the Plan's approval by the Eligible
Policyholders of the Insurance Companies and subject to the
satisfaction of certain other conditions imposed by the
Department in its approval. Department approval, however, does
not constitute a recommendation or endorsement of the Joint Plan
of Conversion. All statements made in this Proxy Statement
regarding the Plan are hereby qualified in their entirety by
reference to the Plan, a copy of which is attached hereto as
Exhibit A.
The Offering of Holding Company Common Stock
In connection with the Plan, the Holding Company is
concurrently offering for sale shares of its no par value common
stock (the "Common Stock") through the issuance of
nontransferable subscription rights (the "Subscription
Offering"), first to the Eligible Policyholders, second, to a
tax-qualified employee stock benefit plan to be established by
the Holding Company, 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 of those in a prior category, except
that the tax qualified employee stock benefit plan shall have the
right to purchase in the aggregate up to ten percent (10%) of the
number of shares of Common Stock purchased by other purchasers in
the conversion. This Proxy Statement does not constitute an
offer to sell shares of Common Stock. Such offer shall be made
only by means of a prospectus. If no prospectus accompanies this
Proxy Statement a copy of the prospectus may be obtained by
completing and returning the enclosed pre-addressed, postage-paid
postcard.
Concurrently with the Subscription Offering, shares of the
Common Stock not sold in the Subscription Offering are being
offered to the general public in a community offering (the
"Community Offering"). In the Community Offering preference 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 which 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, and
(iv) named insureds under policies of insurance issued by any
Insurance Company after May 31, 1996. 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, on-going, 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 Subscription and
Community Offerings. In all cases, the determination as to
whether a potential purchaser is a "resident" of the Local
Community shall be in the sole discretion of the Holding Company.
The Subscription and Community Offerings will be managed by
Hopper Soliday & Co.
Any shares of Common Stock not purchased in the Subscription
and Community Offerings may be sold to a syndicate of
underwriters to be managed by Legg Mason Wood Walker,
Incorporated and McDonald & Company Securities, Inc. (the
"Underwriters") for resale in a public offering (the "Public
Offering"). Alternatively, such remaining shares of Common Stock
may be sold in a private placement (the "Private Placement").
The Subscription and Community Offerings, and Public Offering or
Private Placement, if any, are hereinafter collectively referred
to as the "Offerings."
The Common Stock issued in the Offerings will be freely
transferable under the Securities Act of 1933, as amended (the
"1933 Act"); provided, however that shares issued to directors
and officers of any of the Insurance Companies or of the Holding
Company will be restricted as to transfer for a period of one
year from the effective date of the Conversion pursuant to the
provisions of the Act and will be subject to additional transfer
restrictions under Rule 144 of the 1933 Act.
Appraisal of the Insurance Companies
The Act requires that the aggregate purchase price of the
Common Stock to be issued in the Conversion be equal to the fair
market value of such shares based upon an independent appraisal
of the estimated pro forma market value of the Insurance
Companies as subsidiaries of the Holding Company. 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 Holding Company and
has determined that, as of August 21, 1996, such estimated
consolidated pro forma market value was $33,570,000. The
resulting valuation range, which extends 15% below and above the
estimated value, is from $28,535,000 to $38,606,000 (the
"Estimated Valuation Range"). The Holding Company, in
consultation with its advisors, has determined to offer the
shares in the Conversion at a price of $10.00 per share (the
"Purchase Price"). Accordingly, the Holding Company will offer
between 2,853,500 and 4,246,660 shares of Common Stock in the
Offerings. Such appraisal is not intended and must not be
construed as a recommendation of any kind as to the advisability
of purchasing such shares or as any form of assurance that, after
the Conversion, such shares can be resold at or above the
Purchase Price. The appraisal considered a number of factors and
was based upon estimates derived from those factors, all of which
are subject to change from time to time. In preparing the
valuation, Berwind relied upon and assumed the accuracy and
completeness of financial and statistical information provided by
the Insurance Companies. Berwind did not verify the December 31,
1995 audited and June 30, 1996 unaudited financial statements
provided or independently value the assets of the Insurance
Companies. The appraisal will be further updated immediately
prior to the completion of the Conversion.
The total number of shares to be issued in the Conversion
may be increased or decreased without a resolicitation of
subscribers so long as the aggregate purchase price is not less
than the minimum or more than the maximum of the Estimated
Valuation Range. 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 4,246,400.
Amendment of Articles of Incorporation.
The Conversion will be accomplished by amending the existing
Articles of Incorporation of the Insurance Companies to authorize
the issuance of capital stock by the Insurance Companies to the
Holding Company. Upon completion of the Conversion, the Company
will issue all of its newly issued shares of capital stock
(10,000 shares) to the Holding Company in exchange for a portion
of the net proceeds. None of the Company's assets will be
distributed in order to effect the Conversion, other than to pay
expenses incident thereto.
The amendment of the Company's existing Articles of
Incorporation is an integral part of the Plan. A copy of the
proposed amended Articles of Incorporation of the Company are
attached to this Proxy Statement as Exhibit B.
Background and Reasons for the Conversion
The Insurance Companies annually review and adopt a
strategic plan whose goals, by their terms, have been expressly
predicated upon company independence and capital strength. The
Insurance Companies have considered various capital formation
alternatives in the past, such as the issuance of surplus notes
or a stock offering by a subsidiary company. Surplus notes were
used in the past to enhance statutory capital and a subsidiary
company offering was actively considered in prior years.
However, each was limited; surplus notes do not provide either
GAAP capital or permanent statutory capital and a subsidiary
offering may not yield the amount of capital the Insurance
Companies would like to obtain to fully implement their strategic
plan, which the Insurance Companies estimated to be $20 million.
As a result of the inadequate avenues for capital formation
by mutual insurance companies, the Insurance Companies were
active supporters of the Pennsylvania Insurance Company Mutual to
Stock Conversion Act (the "Act") which is designed to foster
capital formation by changing the manner in which Pennsylvania
mutual insurance companies convert from mutual to stock form.
Under the Act, distribution of surplus to policyholders upon
conversion is no longer required. Instead, policyholders are
given a first priority right to purchase the stock of a
converting company.
The Act was passed by the Pennsylvania General Assembly in
early December 1995. On December 12, 1995, management was
directed by the Boards of Directors of each Insurance Company to
explore the process and feasibility of conversion under the Act.
On January 12, 1996, the Boards of Directors authorized further
study and requested a presentation with respect to the process at
its meeting on March 31, 1996. At the March 31, 1996 meeting,
counsel for the Insurance Companies made a presentation regarding
conversion under the Act, including the process, advantages and
disadvantages of conversion and public company status, tax
considerations, the financial impact of conversion and the costs
of conversion. No decision regarding conversion was made at this
meeting. At a meeting of the Board of Directors of each
Insurance Company held on April 22, 1996, management was directed
to prepare the Plan for consideration at a special meeting to be
held in May. Effective 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 Holding Company. The
Insurance Companies did not engage a financial adviser in
connection with their decision to adopt the Plan. Each Board of
Directors unanimously adopted amendments to the Plan on July 19,
1996. An application with respect to the Conversion was filed by
the Insurance Companies on August 21, 1996 and notice of the
filing and the opportunity to comment was simultaneously mailed
to all Eligible Policyholders as required by law. There has been
no significant opposition to the Conversion from the Insurance
Companies' policyholders. The Department informed the Insurance
Companies on November 27, 1996 that it did not intend to hold any
hearings regarding the Conversion.
On November 19, 1996, the Holding Company received an
unsolicited request from an unrelated insurance holding company
to amend the Plan to provide for the merger of the Holding
Company into such unrelated party in exchange for a payment to
all policyholders of the Insurance Companies of $27.5 million, or
less than $200 per policyholder assuming equal distribution to
all policyholders. Such amount was proposed to be payable
one-half in cash and one-half in a new class of preferred stock
of the unrelated company, the terms of which were not specified.
The Boards of Directors of the Holding Company and the Insurance
Companies met on November 22, 1996. Because such a transaction
would not provide additional capital to the Insurance Companies,
would be inconsistent with their strategic plan of continued
independence and would be tantamount to a sale and liquidation of
the Insurance Companies, the Boards of Directors of the Holding
Company and the Insurance Companies declined to consider the
request and affirmed their course of independence and adoption of
the Plan.
An application to acquire the Holding Company was
contemporaneously filed with the Department by the unrelated
party. In response to the application, the Department informed
the applicant that its application was both deficient and
premature because no stock of the Holding Company is outstanding.
Pending cure of these deficiencies and approval of the
application by the Department, the Department informed the
applicant that it is prohibited from (i) making any public
announcement of its request to the Holding Company to amend its
Plan or (ii) soliciting policyholders of the Insurance Companies
in any way, including in connection with the policyholder votes
on the Plan. The Holding Company believes the applicant will be
unable to cure the deficiencies in its application and secure
Department approval, on a timely basis, if not at all. If
Eligible Policyholders do not approve the Plan, the Boards of
Directors of the Insurance Companies intend to maintain their
current course of independence.
The net proceeds from the sale of Common Stock in the
Conversion will substantially increase the equity of the Holding
Company and the GAAP equity and statutory surplus of the
Insurance Companies, thereby strengthening policyholder
protection. The Holding Company presently estimates that it will
receive between $24.6 million and $31.2 million in net proceeds
from the Offerings. Of this amount, the Holding Company expects
to contribute $2 million, $5 million and $9 million to
Goschenhoppen, Old Guard Fire and Old Guard Mutual, respectively.
In addition, the holding company structure will provide greater
flexibility than the Company alone would have for future product
line expansion and geographic diversification through acquisition
and de novo licensing. Management believes that this increased
capital and operating flexibility will enable the Company to
compete more effectively with other insurance companies and other
types of financial service organizations. Management also
believes that the Conversion will enhance the future access of
the Holding Company and Goschenhoppen to the capital markets and
permit the Holding Company to attract, motivate and retain highly
qualified employees though the use of stock-based compensation
programs.
Effect of the Conversion on Policyholders
General. Each policyholder in a mutual insurance company,
such as the Company, has certain interests in the 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 (Goschenhoppen
has never declared a policyholder dividend and has 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.
If the Plan is not approved by the Eligible Policyholders or
if the Conversion fails to be completed for any other reason, the
Company will continue its existence as a mutual insurance
company.
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 Company. During and after the
Conversion, the normal business of the Company of issuing
insurance policies in exchange for premium payments and
processing and paying claims will continue without change or
interruption. After the Conversion, the Company will continue to
provide services for policyholders under current policies and by
its present management and staff.
The Board of Directors serving the Company at the time of
the Conversion will serve as the Board of Directors of the
Company after the Conversion. The Board of Directors of the
Holding Company will consist of the following persons, each of
whom is an existing director of the Insurance Companies:
James W. Appel, John E. Barry, Luther R. Campbell, Jr.,
Michael S. Clemens, David E. Hosler, Richard B. Neiley, Jr.,
G. Arthur Weaver and Robert Wechter. All officers of the Company
at the time of the Conversion will retain their positions with
the Company after the Conversion.
Voting Rights. Upon completion of the Conversion, the
voting rights of all policyholders in the Company will terminate
and policyholders will no longer have the right to elect the
directors of the Company. Instead, voting rights in the Company
will be vested exclusively in the Holding Company, which will own
all the capital stock of the Company. Voting rights in the
Holding Company will be vested exclusively in the shareholders of
the Holding Company. Each holder of Common Stock shall be
entitled to vote on any matter to be considered by the
shareholders of the Holding Company, subject to the terms of the
Holding 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 Company 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 Board of Directors of the Company.
However, Goschenhoppen has never declared a policyholder dividend
and has no present intention of doing so in the future -- whether
or not the Company converts 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 Company. Instead, this right
will vest in the sole shareholder of Goschenhoppen -- the Holding
Company.
Tax Effects.
In General.
The Insurance Companies have obtained from the Internal
Revenue Service (the "IRS") a private letter ruling (the "PLR")
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. The PLR confirms, 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 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 stock is purchased.
Subscription Rights.
Generally, 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. Nevertheless, the IRS has ruled in the
PLR that any gain realized by an Eligible Policyholder as a
result of the receipt of subscription rights with a fair market
value must be recognized, whether or not such rights are
exercised. The amount of gain recognized by each Eligible
Policyholder will equal the fair market value of subscription
rights received 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 or lapse of such
Eligible Policyholder's unexercised subscription rights. The
amount of such loss should equal the gain previously recognized
upon receipt of such unexercised subscription rights, although
such loss may not have the same character as the corresponding
gain. 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 should be valued or how to determine
the number of subscription rights that may be allocated to each
Eligible Policyholder during the Subscription Offering.
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 WHICH
MAY BE RELEVANT TO EACH ELIGIBLE POLICYHOLDER THAT MAY BE SUBJECT
TO SPECIAL TREATMENT UNDER THE CODE, SUCH AS TRUSTS, INDIVIDUAL
RETIREMENT ACCOUNTS, OTHER EMPLOYEE BENEFIT PLANS, INSURANCE
COMPANIES, AND ELIGIBLE POLICYHOLDERS WHO ARE EMPLOYEES OF AN
INSURANCE COMPANY OR 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.
Interpretation and Amendment of the Plan of Conversion
All interpretations of the Plan by the Board of Directors of
each Insurance Company and the Board of Directors of the Holding
Company will be final, conclusive and binding upon all persons.
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 Holding Company and each Insurance Company. The Plan may
be similarly 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 Eligible Policyholders of each Insurance Company and
prior to the effective date of the Conversion by the affirmative
vote of two-thirds of the directors of the Holding 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 the Department adopts mandatory regulations
applicable to the Conversion prior to its 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 Holding Company and of each
Insurance Company, and no resolicitation of proxies or further
approval by the Eligible Policyholders shall be required. In the
event that the Department adopts regulations applicable to the
Conversion prior to its 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 Holding Company and of each Insurance Company, and no
resolicitation of proxies or further approval by the Eligible
Proxyholders shall be required.
Termination
The Plan may be terminated at any time before it is approved
by Eligible Policyholders by the affirmative vote of two-thirds
of the directors of the Holding 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 of the Conversion by the affirmative vote of two-thirds of
the directors of the Holding Company and of each Insurance
Company; provided, however, that any such termination shall be
subject to approval by the Department.
THE COMPANY'S ARTICLES OF INCORPORATION
AND BYLAWS
The following is a summary of certain provisions of the
amended Articles of Incorporation and bylaws of the Company,
which will become effective upon the Conversion of the Company
from a Pennsylvania mutual insurance company to a Pennsylvania
stock insurance company.
The Company's amended Articles of Incorporation will change
the name of the Company to Old Guard Insurance Company and
authorize the Company to issue 10,000 shares of common stock with
a par value of $1.00 per share. All of the Company's outstanding
common stock will be owned by the Holding Company. Accordingly,
exclusive voting rights with respect to the affairs of the
Company after the Conversion will be vested in the Board of
Directors of the Holding Company. A vote in favor of the Plan
will also constitute a vote to approve the Amended Articles of
Incorporation of the Company.
The Company's bylaws will provide that the number of
directors of the Company shall not be fewer than seven, with the
exact number to be determined by the Board of Directors. The
proposed Bylaws will provide that the number of directors will
not be staggered, so that all of the members of the Board will be
elected each year.
The Company's Amended Articles of Incorporation will provide
that such Articles may be amended only if such amendment is
approved by the Board of Directors of the Company, and, if and to
the extent required by law, approved by the Department and the
shareholders of the Company (i.e., the Holding Company). The
Bylaws may be amended by a majority vote of the Board of
Directors of the Company or by a majority vote of the outstanding
shares of voting stock of the Company at a meeting called for
such purpose.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS
THAT YOU VOTE "FOR" APPROVAL OF THE JOINT PLAN OF CONVERSION.
VOTING IN FAVOR OF THE JOINT PLAN OF CONVERSION WILL NOT OBLIGATE
ANY PERSON TO PURCHASE COMMON STOCK IN THE OFFERING.
ADDITIONAL INFORMATION
YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THIS
PROXY MATERIAL AND, WHETHER OR NOT YOU PLAN TO BE PRESENT IN
PERSON AT THE SPECIAL MEETING, TO FILL IN, DATE, SIGN AND RETURN
THE ENCLOSED PROXY AS SOON AS POSSIBLE TO ASSURE THAT YOUR VOTES
WILL BE COUNTED. THIS WILL NOT PREVENT YOU FROM VOTING IN PERSON
IF YOU ATTEND THE SPECIAL MEETING. YOU MAY REVOKE YOUR PROXY BY
WRITTEN INSTRUMENT DELIVERED TO THE SECRETARY OF THE COMPANY AT
ANY TIME PRIOR TO OR AT THE SPECIAL MEETING OR BY ATTENDING THE
SPECIAL MEETING AND VOTING IN PERSON.
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY THE COMMON STOCK. SUCH OFFERS
MAY BE MADE ONLY BY THE PROSPECTUS.
BY ORDER OF THE BOARD OF DIRECTORS
Steven D. Dyer
Secretary
_____________, 1996
Lancaster, Pennsylvania
