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 March 31, 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 17601
(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 March 31, 1997
Contents
PART I - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheets as of 1
March 31, 1997 and December 31, 1996
Consolidated Statements of Income for the 3
Quarters Ended March 31, 1997 and 1996
Consolidated Statements of Shareholders' 4
Equity for the Quarter Ended
March 31, 1997
Consolidated Statements of Cash Flows 6
for the Quarters Ended
March 31, 1997 and 1996
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of
Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings II
Item 2. Changes in Securities II
Item 3. Defaults upon Senior Securities II
Item 4. Submission of Matters to a Note of II
Security Holders
Item 5. Other Information II
Item 6. Exhibits and Reports on Form 8-K II
<PAGE>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
1997 1996
<S> <C> <C>
Assets:
Investments:
Fixed income securities, available for sale,
at fair value $ 86,574,495 $ 69,905,076
Preferred stocks, available for sale, at
fair value 4,484,763 5,281,426
Common stocks, available for sale, at fair
value 9,623,225 7,094,752
Other invested assets 1,389,811 1,849,811
Total investments 102,072,294 84,131,065
Cash and cash equivalents 21,104,764 5,668,369
Premiums receivable 7,455,987 6,373,236
Reinsurance recoverables and unearned premiums 18,620,930 22,601,333
Deferred policy acquisition costs, net 6,302,602 5,603,343
Accrued investment income 1,430,333 1,014,601
Deferred income taxes, net 2,392,244 2,132,600
Property and equipment, net 8,329,371 6,535,789
Receivable from affiliate 882,506 258,430
Issuance costs 958,484
Goodwill 813,381
Other assets 1,801,993 2,184,747
Total assets $171,206,405 $137,461,997
Liabilities:
Reserve for losses and loss adjustment expenses $ 51,203,873 $ 55,371,077
Unearned premiums 35,037,944 34,377,756
Accrued expenses 1,944,030 2,744,165
Capital lease obligations 1,349,114 1,521,443
ESOP liability 4,034,508
Long-term debt 1,100,000
Subordinated debt 1,500,000
Other liabilities 2,316,447 2,936,637
Total liabilities 96,985,916 98,451,078
Minority Interest 666,686
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) 38,377,855
Additional paid-in capital 8,568
Deferred ESOP expense (4,034,510)
Retained Earnings 38,114,069 36,985,415
Net unrealized investment gains,
net of deferred income taxes 1,087,821 2,025,504
Total shareholders' equity 73,553,803 39,010,919
Total liabilities and shareholders' equity $171,206,405 $137,461,997
</TABLE>
The accompanying notes are an integral part of the interim consolidated
financial statements.
<PAGE>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the For the
Quarter Ended Quarter Ended
March 31, March 31,
1997 1996
<S> <C> <C>
Revenue:
Net premiums written $16,752,561 $ 6,093,075
Change in unearned premiums (2,045,615) 7,225,529
Net premiums earned 14,706,946 13,318,604
Investment income, net of
expenses 1,353,633 1,194,317
Net realized investment gains 467,258 359,362
Other revenue 88,890 60,238
Total revenue 16,616,727 14,932,521
Expenses:
Losses and loss adjustment
expenses incurred 8,885,227 15,171,466
Operating expenses 5,973,682 4,577,740
Total expenses 14,858,909 19,749,206
Income (loss) before minority
interest and provision for
income tax 1,757,818 (4,816,685)
Minority interest in earnings of
consolidated subsidiary (10,274)
Income (loss) before provision for
income tax 1,747,544 (4,816,685)
Income tax expense (benefit) 618,890 (1,669,060)
Net income (loss) $ 1,128,654 ($3,147,625)
Earnings per share .29 (.79)
</TABLE>
The accompanying notes are an integral part of the interim
consolidated financial statements.
<PAGE>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE QUARTER ENDED MARCH 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
Investment
Additional Deferred Gains, Net
Common Stock Paid-In ESOP Retained 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 1,128,654 1,128,654
Issuance of common stock,
net of issuance costs 4,204,910 38,377,855 38,377,855
Deferral of ESOP expense (4,054,910) (4,054,910)
Accrued stock-based
compensation 8,568 20,400 28,968
Decrease in net
unrealized investment
gains, net (937,683) (937,683)
Balance, March 31, 1997 4,204,910 $38,377,855 $8,568 ($4,034,510) $38,114,069 $1,087,821 $73,553,803
</TABLE>
The accompanying notes are an integral part of the interim
consolidated financial statements.
<PAGE>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
[CAPTION]
<TABLE>
For the For the
Quarter Quarter
Ended Ended
March 31, March 31,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,128,654 ($3,147,625)
Adjustments to reconcile net income (loss) to net cash used by
operating activities:
Depreciation and amortization 359,384 245,852
Net realized investment gains (467,258) (359,362)
Deferred income tax provision (benefit) 257,556 (691,360)
Other 39,242 (3,300)
(Increase) decrease in assets:
Premiums receivable (265,881) 139,810
Reinsurance recoverables and unearned premiums 6,123,098 (16,305,800)
Deferred policy acquisition costs (503,143) 2,419,217
Accrued investment income (397,653) (82,626)
Other assets 403,186 (968,607)
Receivable from affiliates (612,576) (840,898)
Increase (decrease) in liabilities:
Reserve for losses and loss adjustment expenses (6,361,832) 14,380,659
Unearned premiums (807,208) (786,298)
Accrued expenses (896,020) (2,061,808)
Other liabilities 912,935 285,306
Net cash used by operating activities (1,087,516) (7,776,840)
Cash flows from investing activities:
Cost of purchases of fixed income securities (20,872,384) (6,520,725)
Proceeds from sales of fixed income securities 3,864,606 9,759,834
Proceeds from maturities of fixed income securities 1,200,000
Cost of equity securities acquired (3,917,605) (1,314,772)
Proceeds from sales of equity securities 2,447,578 1,370,413
Change in receivable/payable for securities (423,768)
Cost of purchases of other invested assets (140,000) (261,095)
Proceeds from sales of other invested assets 624,442
FDIC acquisition, net of cash acquired (626,175)
Cost of purchases of property and equipment (2,050,159) (194,770)
Proceeds from sales of property and equipment 3,300
Net cash provided (used) by investing activities (20,669,697) 3,618,417
Cash flows from financing activities:
Proceeds from sale of stock 37,836,339
Repayment of bank loan (1,550,000)
Proceeds from mortgage loan 1,100,000
Payments on principal of capital lease or bank loan (192,731) (52,054)
Net cash provided (used) by financing activities 37,193,608 (52,054)
Net increase (decrease) in cash and cash equivalents 15,436,395 (4,210,477)
Cash and cash equivalents at beginning of period 5,668,369 8,153,125
Cash and cash equivalents at end of period $21,104,764 $ 3,942,648
</TABLE>
The accompanying notes are an integral part of the interim
consolidated financial statements.
<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 which on
February 11, 1997 completed an initial public offering whereby 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. Proforma
results for the first quarter of 1996, including FDIC as if it
had been owned during that period are as follows:
Total revenue $15,344,000
Loss before provision for income tax $(4,809,000)
Net loss $(3,145,000)
Earnings per share $ (0.79)
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.
3. Earnings Per Share
Earnings per share were calculated by dividing net income
per share by the weighted average number of common shares
outstanding. The number of shares outstanding used to calculate
earnings per share was 3,957,995 for the quarter ended March 31,
1997 which includes the 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 the quarter
ended March 31, 1996, the number of shares used to calculate
earnings per share was 3,957,610 and is based upon the assumption
that the initial public offering took place on January 1, 1996.
4. Supplemental Cash Flow Disclosure
Interest paid for the quarters ended March 31, 1997 and 1996
was $112,941 and $11,068, respectively. Net income taxes
received for the quarters ended March 31, 1997 and 1996 was
$16,523 and $45,843, respectively. Non-cash transactions for the
quarter ended March 31, 1997 included the satisfaction of
$1,500,000 of subordinated debt through the issuance of 150,000
common shares.
5. 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 is currently evaluating the impact, if
any, of the adoption of F.A.S. 128 on its earnings per share
calculations.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Period Ended March 31, 1997 Compared to the Period Ended
March 31, 1996
Premiums. The Company increased direct premium writings
$1,363,000 or 7.4% in the first quarter of 1997 as compared to
the first quarter of 1996. This increase in direct premiums
written was attributable to the acquisition of FDIC as of
January 1, 1997 which contributed $891,000 to the increase,
homeowners and personal automobile direct premiums which
increased $258,000, and farmowners direct premiums which
increased by $319,000, offset by small decreases in property and
workers' compensation lines of business.
Premiums ceded to reinsurers decreased $9.0 million to
$3.9 million for the quarter ended March 31, 1997 compared to the
quarter ended March 31, 1996. The decrease in premiums ceded was
primarily attributable to the effects of instituting a 20% quota
share reinsurance treaty effective January 1, 1996 and effective
January 1, 1997 reducing the quota share reinsurance treaty to
15% and canceling the company's surplus reinsurance treaty. The
aggregate change in ceded premiums written under these two
reinsurance treaties was a decrease of $10.7 million. This
decrease of $10.7 million is offset by increases in ceded
premiums attributable to the increase in direct writings, the
acquisition of FDIC and additional ceded premiums under the
Company's property excess of loss reinsurance treaties as a
result of the cancellation of the surplus reinsurance.
Net premiums written increased $10.7 million, or 175.0%, for
the quarter ended March 31, 1997 to $16.8 million from
$6.1 million in 1996. For the same comparative periods, net
premiums earned increased by $1.4 million, or 10.4%, to
$14.7 million from $13.3 million. The increases in net premiums
written and net premiums earned were directly attributable to the
effects of the changes instituted in the Company's reinsurance
program and increases in direct premiums written as previously
discussed.
Net Investment Income. Cash and invested assets increased
$33.4 million, or 37.2%, to $123.2 million on March 31, 1997 from
$89.8 million on December 31, 1996 primarily as a result of the
$34.4 million net proceeds from the Company's initial public
offering on February 11, 1997 and mitigated by the $1.4 million
gross unrealized capital loss in the first quarter of 1997 on
investments carried at fair value. For the quarter ended
March 31, 1997 the yield on average cash and invested assets was
5.5% compared to 5.0% for the comparable period in 1996. The
result of these changes was that net investment income increased
$160,000, or 13.4%, to $1.4 million for the quarter ended
March 31, 1997 from $1.2 million in the first quarter of 1996.
Net Realized Investment Gains. Net realized investment
gains were $467,000 for the first quarter of 1997 compared to
$360,000 in 1996.
Losses and Loss Adjustment Expenses. Net losses and loss
adjustment expenses incurred decreased by $6.3 million, or 41.4%,
to $8.9 million for the quarter ended March 31, 1997 from
$15.2 million in 1996. 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 $3.5 million. In addition, non-storm related
losses and loss adjustment expenses were $2.8 million higher in
1996 compared to 1995 primarily because of increases in winter,
fire, and wind related claims.
Loss and loss adjustment expenses were 60.4% of net premiums
earned for the quarter ended March 31, 1997 compared to 113.9% in
1996. The impact of the catastrophic losses and non-storm
related losses and loss adjustment expenses on the loss ratio was
26.2 and 21.0 percentage points, respectively, in 1996.
Operating and Underwriting Expenses. Operating and
underwriting expenses increased by $1.4 million, or 30.7%, for
the quarter ended March 31, 1997 to $6.0 million from
$4.6 million for 1996. The increase is entirely the result of
less commission income from reinsurance in 1997 and more ceded
commission income in 1996 as a result of the reinsurance changes
discussed previously.
Federal Income Tax Expense. Federal income tax (benefit) as
a percentage of pre-tax income or loss was 35.4% and (34.6%) for
the quarters ended March 31, 1997 and 1996, respectively. The
higher effective tax rate in 1997 is the result of additional
state income taxes.
Underwriting Results. For the quarter ended March 31, 1997
the Company had a combined ratio of 101.0% compared to a combined
ratio of 148.2% for the first quarter of 1996. The 47.2
percentage point decrease in the combined ratio can be attributed
to the unusually mild winter in the first quarter of 1997 and
severe winter storms in the Company's territory in 1996.
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 is currently
evaluating the impact, if any, of the adoption of F.A.S. 128 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. Exhibits and Reports on Form 8-K
Report on Form 8-K was filed on February 13, 1997 under
"Item 5. Other Events" of such form.
Exhibit 27 - Financial Data Schedule
<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: May 14, 1997 /s/ Mark J. Keyser
Chief Financial Officer and
Treasurer (principal financial
officer and principal accounting
officer)
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 86,574
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 14,108
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 102,072
<CASH> 21,105
<RECOVER-REINSURE> 4,459
<DEFERRED-ACQUISITION> 6,303
<TOTAL-ASSETS> 171,206
<POLICY-LOSSES> 51,204
<UNEARNED-PREMIUMS> 35,038
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,100
0
0
<COMMON> 38,378
<OTHER-SE> 35,176
<TOTAL-LIABILITY-AND-EQUITY> 171,206
14,707
<INVESTMENT-INCOME> 1,354
<INVESTMENT-GAINS> 467
<OTHER-INCOME> 89
<BENEFITS> 8,885
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<UNDERWRITING-OTHER> 5,984
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<INCOME-TAX> 619
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