SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[X] Quarterly report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the quarterly period ended
June 30, 1997 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the transition period from
______________ to ____________.
0-16533
(Commission File Number)
Old Guard Group, Inc.
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-2852984
(State of Incorporation) (IRS Employer ID Number)
2929 Lititz Pike, Lancaster, PA 17604
(Address of Principal Executive Offices) (Zip Code)
717-569-5361
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Number of Shares Outstanding as of April 30, 1997:
Common Stock (No Par Value) 4,204,910
(Title of Class) (Outstanding Shares)
<PAGE>
OLD GUARD GROUP, INC.
Form 10-Q
For the Quarter Ended June 30, 1997
Contents
Part I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Income for the
Three Months Ended June 30, 1997 and 1996 4
Consolidated Statements of Income for the
Six Months Ended June 30, 1997 and 1996 5
Consolidated Statements of Shareholders'
Equity for the Six Months Ended
June 30, 1997 6
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1997
and 1996 7
Notes to Consolidated Financial Statements 8
Item 2. Management Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Change in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of
Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8 - K 12
<PAGE>
<TABLE>
<CAPTION>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
As of As of
June 30, 1997 December 31, 1996
<S> <C> <C>
ASSETS
Investments:
Fixed income securities, available for sale, at fair value $ 90,766,149 $ 69,905,076
Preferred stocks, available for sale, at fair value 4,686,128 5,281,426
Common stocks, available for sale, at fair value 11,403,319 7,094,752
Other invested assets 3,952,173 1,849,811
Total investments 110,807,769 84,131,065
Cash and cash equivalents 16,276,426 5,668,369
Premiums receivable 8,932,023 6,373,236
Reinsurance recoverables and unearned premiums 22,099,745 22,601,333
Deferred policy acquisition costs, net 6,743,506 5,603,343
Accrued investment income 1,309,079 1,014,601
Deferred income taxes, net 1,154,968 2,132,600
Property and equipment, net 8,750,333 6,535,789
Receivable from affiliates 1,456,569 258,430
Issuance costs - 958,484
Goodwill 799,595 -
Other assets 2,052,712 2,184,747
Total assets 180,382,725 137,461,997
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss adjustment expenses 55,348,130 55,371,077
Unearned premiums 37,839,703 34,377,756
Accrued expenses 1,993,728 2,744,165
Capital lease obligations 1,170,010 1,521,443
ESOP liability 3,870,529 -
Long-term debt 1,080,444 -
Subordinated debt - 1,500,000
Other liabilities 1,869,957 2,936,637
Total liabilities 103,172,501 98,451,078
Minority Interest 671,187 -
Shareholders' Equity:
Preferred stock (5,000,000 shares authorized;
0 issued and outstanding) - -
Common Stock (15,000,000 shares authorized; 4,204,910
shares issued and outstanding, no par) 38,368,524 -
Additional paid-in capital 35,793 -
Deferred ESOP expense (3,970,669) -
Retained earnings 39,038,329 36,985,415
Net unrealized investment gains, net of deferred income taxes 3,067,060 2,025,504
Total shareholders' equity 76,539,037 39,010,919
Total liabilities and shareholders' equity $ 180,382,725 $137,461,997
============= ============
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
For the Three For the Three
Months Ended Months Ended
June 30, 1997 June 30, 1996
<S> <C> <C>
Revenue:
Net premiums written $ 18,061,209 $ 14,260,834
Change in unearned premiums (2,260,382) (1,273,189)
Net premiums earned 5,800,827 12,987,645
Investment income, net of expenses 1,560,761 1,238,220
Net realized investment gains 415,829 336,033
Other revenue 142,800 200,149
Total revenue 17,920,217 14,762,047
Expenses:
Losses and loss adjustment expenses incurred 10,046,229 10,477,026
Operating expenses 6,150,051 3,966,081
Interest 159,352 105,974
Total expenses 16,355,632 14,549,081
Income before minority interest
and provision for income tax 1,564,585 212,966
Minority interest in earnings of
consolidated subsidiary (4,501) -
Income before provision for income tax 1,560,084 212,966
Income tax expense 635,824 26,456
Net income $ 924,260 $ 186,510
============== ==============
Earnings per share 0.23 0.05
Weighted Average
number of shares outstanding $ 3,962,856 $ 3,957,610
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
For the Six For the Six
Months Ended Months Ended
June 30, 1997 June 30, 1996
<S> <C> <C>
Revenue:
Net premiums written $ 34,813,770 $ 20,353,909
Change in unearned premiums (4,305,997) 5,952,340
Net premiums earned 30,507,773 26,306,249
Investment income, net of expenses 2,933,997 2,482,481
Net realized investment gains 883,087 695,395
Other revenue 231,690 260,387
Total revenue 34,556,547 29,744,512
Expenses:
Losses and loss adjustment expenses incurred 18,931,456 25,648,492
Operating expenses 12,006,807 8,532,753
Interest 295,881 166,986
Total expenses 31,234,144 34,348,231
Income (loss) before minority interest
and provision for income tax 3,322,403 (4,603,719)
Minority interest in earnings of
consolidated subsidiary (14,775) -
Income (loss) before provision for income tax 3,307,628 (4,603,719)
Income tax expense (benefit) 1,254,714 (1,642,604)
Net income (loss) $ 2,052,914 $ (2,961,115)
============== ==============
Earnings per share 0.52 (0.75)
Weighted Average
number of shares outstanding $ 3,960,426 $ 3,957,610
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Unaudited)
Net Unrealized
Additional Deferred Investment Gains,
Common Stock Paid-In ESOP Retained Net of Deferred
Shares Amount Capital Expense Earnings Income Taxes Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 0 $0 $0 $0 $36,985,415 $2,025,504 $39,010,919
Net income - - - - 2,052,914 - 2,052,914
Issuance of common stock,
net of insurance costs 4,204,910 38,368,524 - - - 38,368,524
Deferral of ESOP expense - - - (4,054,910) - - (4,054,910)
Accrued stock-based
compensation - - 35,793 84,241 - - 120,034
Increase in net
unrealized investment
gains, net - - - - - 1,041,556 1,041,556
Balance, June 30, 1997 4,204,910 $38,368,524 $35,793 $(3,970,669) $39,038,329 $3,067,060 $76,539,037
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Six For the Six
Months Ended Months Ended
June 30, 1997 June 30, 1996
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,052,914 $(2,961,115)
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation and amortization 711,485 471,223
Net realized investment gains (883,087) (695,395)
Deferred income tax provision (benefit) 475,164 (1,011,989)
Other 134,809 (11,400)
(Increase) decrease assets:
Premiums receivable (1,741,917) (927,973)
Reinsurance recoverables and unearned premiums 2,644,283 (10,758,190)
Deferred policy acquisition costs (944,047) 1,272,268
Accrued investment income (276,399) 34,738
Other assets 152,467 (674,414)
Receivable from affiliates (1,186,639) (1,294,184)
Increase (decrease) in liabilities:
Losses and loss adjustment expenses (2,217,575) 6,849,775
Unearned premiums 1,994,551 1,077,891
Accrued expenses (846,322) (1,537,885)
Other liabilities 466,445 668,750
Net cash provided (used) by operating activities 536,132 (9,497,900)
Cash flows from investing activities:
Cost of purchases of fixed income securities (28,987,512) (12,437,155)
Proceeds from sales of fixed income securities 6,668,626 16,628,133
Proceeds from maturities of fixed income securities 2,470,000 1,500,000
Cost of equity securities acquired (4,795,895) (2,349,873)
Proceeds from sales of equity securities 3,320,106 5,098,272
Change in receivable/payable for securities - (423,768)
Cost of purchases of other invested assets (2,640,000) (309,076)
Proceeds from sales of other invested assets 588,582 -
FDIC acquisition, net of cash acquired (626,175) -
Cost of purchases of property and equipment (2,747,445) (456,905)
Proceeds from sales of property and equipment - 11,400
Net cash provided (used) by investing activities (26,749,713) 7,261,028
Cash flows from financing activities:
Proceeds from sale of stock 33,772,098 -
Proceeds from ESOP loan 3,954,770 -
Repayment of bank loan (1,569,556) -
Proceeds from mortgage loan 1,100,000 -
Proceeds from capital lease funding - 1,154,751
Payments on principal of capital lease or bank loan (435,674) (105,289)
Net cash provided by financing activities 36,821,638 1,049,462
Net increase (decrease) in cash and cash equivalents 10,608,057 (1,187,410)
Cash and cash equivalents at beginning of period 5,668,369 8,153,125
Cash and cash equivalents at end of period $ 16,276,426 $ 6,965,715
=============== ==============
<FN>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
The consolidated financial statements include the accounts
of Old Guard Group, Inc. (the "Company") and its wholly-owned
subsidiaries Old Guard Insurance Company, Old Guard Fire
Insurance Company, Goschenhoppen-Home Insurance Company and Old
Guard Investment Holding Company ("OGIHC") and its wholly-owned
subsidiaries Commonwealth Insurance Managers, Inc. and 2929
Service Corporation and OGIHC's 80% owned subsidiary First
Delaware Insurance Company ("FDIC").
The Company is a regional insurance holding company that, on
February 11, 1997, completed an initial public offering in which
it raised $38.4 million, net of issuance costs of $3.7 million,
in exchange for 4.2 million shares of no par common stock.
Concurrent with the public offering and in accordance with a plan
of demutualization, Old Guard Insurance Company, Old Guard Fire
Insurance Company and Goschenhoppen-Home Insurance Company
(collectively "Insurance Companies") were converted from mutual
to stock insurance companies and issued shares of common stock to
the Company in exchange for $16.0 million. As a result of the
demutualization, the Insurance Companies are wholly-owned
subsidiaries of the Company.
Effective January 1, 1997, OGIHC acquired 80% of the
outstanding common stock of FDIC for $3.3 million which included
a capital infusion of $1.5 million. Pro forma results for the
six months ended June 30, 1996, including FDIC as if it had been
owned during that period and as if the Companies had converted to
the stock form, are as follows:
Total revenue $30,555,000
Loss before provision for income tax (4,483,000)
Net loss (2,880,000)
Earnings per share (.73)
2. Acquisition
The Company is working with the Board of Directors and
management of New Castle Mutual Insurance Company ("New Castle")
to convert New Castle to stock form and concurrently acquire 100%
of the stock of that company. Subject to regulatory approvals,
it is expected that this transaction will be completed in early
1998. Currently, the Company assumes certain insurance business
from New Castle as a participant on its reinsurance program.
3. Basis of Presentation
The financial information for the interim periods included
herein is unaudited; however, such information reflects all
adjustments, consisting of normal recurring adjustments, which
are, in the opinion of management, necessary to a fair
presentation of the financial position, results of operations,
and cash flows for the interim periods. The results of
operations for interim periods are not necessarily indicative of
results to be expected for the full year.
These consolidated financial statements should be read in
conjunction with the combined financial statements and notes for
the year ended December 31, 1996 included in the Company's 1996
Annual Report filed with the Securities and Exchange Commission
on Form 10-K.
4. Earnings Per Share
Earnings per share were calculated by dividing net income by
the weighted average number of common shares outstanding during
each respective period. During 1997, shares outstanding include
shares issued in the initial public offering as if it took place
on January 1, 1997, less encumbered ESOP shares, plus shares
expected to be issued, subject to shareholder approval, as stock
compensation. For all periods of 1996 the number of shares used
to calculate earnings per share was 3,957,610 based upon the
assumption that the initial public offering took place on January
1, 1996.
5. Supplemental Cash Flow Disclosure
Interest paid for the six months ended June 30, 1997 and
1996 was $271,095 and $65,988, respectively. Net income taxes
paid (recovered) for the six months ended June 30, 1997 and 1996
was $584,127 and $(45,843), respectively. Non-cash transactions
for the six months ended June 30, 1997 included the satisfaction
of $1,500,000 of subordinated debt through the issuance of
150,000 common shares.
6. New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128
(F.A.S. 128), Earnings Per Share. F.A.S. 128 specifies the
computation, presentation and disclosure requirements for
earnings per share. F.A.S. 128 is effective for financial
statements ending after December 15, 1997; earlier adoption is
not permitted. Management does not expect the adoption of F.A.S.
128 to have a material impact on its earnings per share
calculations.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Premiums. Direct premiums written increased $2,290,000, or
10.8%, to $23,471,000 and $3,653,000, or 9.3%, to $43,166,000
during the three and six months ended June 30, 1997,
respectively. This increase in direct premiums written was
attributable to the acquisition of FDIC as of January 1, 1997
which added $1,083,000 and $1,974,000 during the three and six
months ended June 30, 1997, respectively, and increases in
personal automobile, commercial multi-peril, workers'
compensation and farmowners premiums.
Net premiums written increased $3,800,000, or 26.6%, for the
three months ended June 30, 1997 to $18,061,000 and $14,460,000,
or 71.0%, for the six months ended June 30, 1997 to $34,814,000.
The increase in net premiums written was attributable to
increases in direct premiums written and various changes to the
Company's reinsurance program in 1997 and 1996 which lowered
ceded premiums written in 1997 as compared to 1996. The changes
included instituting a 20% quota-share reinsurance treaty
effective January 1, 1996 and, effective January 1, 1997,
reducing the quota-share reinsurance treaty to 15%. In addition,
the Company canceled its surplus reinsurance treaty and increased
its net retention on property losses to $250,000 from $150,000
effective January 1, 1997.
Net premiums earned increased $2,813,000, or 21.7%, for the
three months ended June 30, 1997 to $15,801,000 and $4,202,000,
or 16.0%, for the six months ended June 30, 1997 to $30,508,000.
The increases in net premiums earned were directly attributable
to the effects of the changes instituted in the Company's
reinsurance program, the acquisition of FDIC, increases in direct
premiums written, as previously discussed, and limited
assumptions of business from New Castle Mutual Insurance Company.
Net Investment Income. Cash and invested assets increased
$37,285,000, or 41.5 %, to $127,084,000 on June 30, 1997 from
$89,799,000 on December 31, 1996 primarily as a result of the
$33,772,000 net proceeds from the Company's initial public
offering on February 11, 1997, as well as a $1,578,000 gross
unrealized capital gain in the six months ended June 30, 1997 on
investments carried at fair value. For the six months ended June
30, 1997 the yield on average cash and invested assets was 5.2%
compared to 5.4% for the comparable period of 1996. The result
of these changes was that net investment income increased
$323,000, or 26.1%, to $1,561,000 for the three months ended June
30, 1997 and $452,000, or 18.2%, to $2,934,000 for the six months
ended June 30, 1997.
Net Realized Investment Gains. Net realized investment
gains were $416,000 and $883,000 for the three and six months
ended June 30, 1997, respectively, compared to $336,000 and
$695,000 for the three and six months ended June 30, 1996.
Losses and Loss Adjustment Expenses. Losses and loss
adjustment expenses incurred decreased by $6,717,000, or 26.2%,
to $18,931,000 for the six months ended June 30, 1997. Losses
and loss adjustment expenses were higher in 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
approximately $3,500,000. In addition, non-storm related losses
and loss adjustment expenses were approximately $2,800,000 higher
in 1996 compared to 1995 primarily because of increases in
winter, fire, and wind related claims.
Loss and loss adjustment expenses were 63.6% and 80.7% of
net premiums earned for the three months ended June 30, 1997 and
1996, respectively, and 62.1% and 97.5% for the six months ended
June 30, 1997 and 1996, respectively. The impact of the
catastrophic storms and non-storm related claims on the loss
ratio was 23.9 percentage points for the six months ended June
30, 1996.
Operating and Underwriting Expenses. Operating and
underwriting expenses increased by $2,184,000, or 55.1%, and
$3,474,000, or 40.7%, for the three and six months ended June 30,
1997, respectively. The increase is entirely the result of more
ceded commission than normal in 1996 and less than normal ceded
commission income in 1997 as a result of the reinsurance changes
discussed previously.
Federal Income Tax Expense. Federal income tax expense
(benefit) as a percentage of pre-tax income or loss was 37.9% and
(35.7%) for the six months ended June 30, 1997 and 1996,
respectively, compared to the three and six months ended June 30,
1996. The higher effective tax rate in 1997 is the result of
ESOP compensation expense and goodwill amortization that is not
deductible for tax purposes.
Underwriting Results. For the three and six months ended
June 30, 1997 the Company had a combined ratio of 102.5% and
101.4%, respectively, compared to combined ratios of 111.2% and
129.9% for 1996. The decrease in the combined ratio for all
periods can be attributed to the unusually mild winter in the
early part of 1997 and severe winter storms in the Company's
territory in 1996 offset by higher expenses as a result of the
reduction in ceded commissions discussed above.
New Accounting Pronouncement. In February 1997, the
Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (F.A.S. 128), Earnings Per
Share. F.A.S. 128 specifies the computation, presentation and
disclosure requirement for earnings per share. F.A.S. 128 is
effective for financial statements ending after December 15,
1997; earlier adoption is not permitted. Management does not
expect the adoption of F.A.S. 128 to have a material impact on
its earnings per share calculations.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1.
Legal Proceedings - Two separate lawsuits were filed
during the quarter ended March 31, 1997 challenging, among other
things, the constitutionality of the Pennsylvania law pursuant to
which the Insurance Companies converted from mutual to stock form
and certain procedural aspects of the conversion transaction
completed by the Insurance Companies. A detailed description of
these lawsuits is contained in the Report on Form 8-K filed on
February 13, 1997.
ITEM 2.
Change in Securities - None
ITEM 3.
Defaults Upon Senior Securities - None
ITEM 4.
Submission of Matters to a Vote of Security Holders - None
ITEM 5.
Other Information - None
ITEM 6.
(A) Exhibits
3.1 Articles of Incorporation of Old Guard Group, Inc.
(Incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement No. 333-12779 on
Form S-1).
3.2 Bylaws of Old Guard Group, Inc. (Incorporated by
reference to Exhibit 3.2 to the Company's
Registration Statement No. 333-12779 on Form S-1).
27 Financial Data Schedule
(B) Reports on Form 8K - None
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
OLD GUARD GROUP, INC.
Date: August 14, 1997 /s/ Mark J. Keyser
Chief Financial Officer and
Treasurer (principal financial
officer and principal accounting
officer)
<PAGE>
EXHIBIT INDEX
Description
3.1 Articles of Incorporation of Old Guard Group, Inc.
(Incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement No. 333-12779 on Form S-1).
3.2 Bylaws of Old Guard Group, Inc. (Incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement
No. 333-12779 on Form S-1).
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 90,766
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 16,089
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 110,808
<CASH> 16,276
<RECOVER-REINSURE> 3,712
<DEFERRED-ACQUISITION> 6,744
<TOTAL-ASSETS> 180,383
<POLICY-LOSSES> 55,348
<UNEARNED-PREMIUMS> 37,840
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 4,951
0
0
<COMMON> 38,369
<OTHER-SE> 38,170
<TOTAL-LIABILITY-AND-EQUITY> 180,383
30,508
<INVESTMENT-INCOME> 2,934
<INVESTMENT-GAINS> 883
<OTHER-INCOME> 232
<BENEFITS> 18,931
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 12,007
<INCOME-PRETAX> 3,308
<INCOME-TAX> 1,255
<INCOME-CONTINUING> 2,053
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,053
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.52
<RESERVE-OPEN> 55,371
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 55,348
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
