<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 13, 1997
REGISTRATION NO. 333-12779
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------
Amendment No. 1
Post-Effective
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)
<TABLE>
<S> <C> <C>
Pennsylvania 6331 23-2852984
- --------------------------------- ---------------------------- ------------------
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------
<TABLE>
<S> <C>
2929 Lititz Pike David E. Hosler
Lancaster, Pennsylvania 17601 Chairman, President and Chief Executive Officer
(717) 569-5361 Old Guard Group, Inc.
- ---------------------------------------------------- 2929 Lititz Pike
(Address, including zip code, and telephone number, Lancaster, Pennsylvania 17601
including area code, of registrant's (717) 581-6700
principal executive offices) ---------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
</TABLE>
------
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
------
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. [ ]
------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Proposed maximum Proposed maximum
Title of each class of securities Amount to be offering price aggregate offering Amount of
to be registered registered per share price(1) registration fees
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 4,396,660
no par value per share ........ shares(2) $10.00 $43,966,000 $15,160.90
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(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>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSE OF ISSUANCE AND DISTRIBUTION.
The Company anticipates the following expenses:
<TABLE>
<CAPTION>
<S> <C>
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
===========
</TABLE>
- ------
*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:
<TABLE>
<CAPTION>
<S> <C>
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*
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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.*
10.12 Form of Escrow Agreement between Old Guard Group, Inc., Hopper Soliday & Co., Inc.and Dauphin Deposit and
Trust 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)*
23.5 Consent of Stevens & Lee*
24 Power of Attorney (contained on signature page)*
27 Amended Financial Data Schedule*
99.1 Final 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*
99.8 Opinion of Berwind Financial Group, L.P.*
</TABLE>
- ------
* Previously filed.
II-2
<PAGE>
(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.
II-3
<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
II-4
<PAGE>
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
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
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>
II-5
<PAGE>
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
<TABLE>
<CAPTION>
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>
II-6
<PAGE>
OLD GUARD MUTUAL INSURANCECOMPANY,
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
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------------ ---------- ---------- ---------- ----------
RESERVE
DEFERRED FOR DISCOUNT
POLICY LOSSES IF ANY
AFFILIATION ACQUISI- AND DEDUCTED
WITH TION LOSS ADJ IN UNEARNED
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS
------------------ ---------- ---------- ---------- ----------
(In thousands)
CONSOLIDATED
PROPERTY AND
CASUALTY
ENTITIES
<S> <C> <C> <C> <C>
DECEMBER 31, 1995 $7,181 $52,091 $0 $33,329
DECEMBER 31, 1994 7,103 51,309 0 32,647
DECEMBER 31, 1993 6,459 59,057 0 32,065
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
------------------ ---------- ---------- ---------------------- ---------- ---------- ----------
PAID
LOSSES
NET LOSSES AND LAE AND LOSS
AFFILIATION NET INVEST- INCURRED ADJUST- NET
WITH EARNED MENT CURRENT PRIOR AMORT MENT WRITTEN
REGISTRANT PREMIUMS INCOME YEAR YEAR OF DPAC EXPENSES PREMIUMS
------------------ ---------- ---------- --------- --------- ---------- ---------- ----------
CONSOLIDATED
PROPERTY AND
CASUALTY
ENTITIES
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1995 $66,663 $4,458 $48,067 $ 2,442 $17,611 $47,228 $67,115
DECEMBER 31, 1994 63,465 3,932 51,959 (5,519) 17,036 50,511 65,649
DECEMBER 31, 1993 60,986 3,928 44,950 (2,796) 15,358 39,938 63,355
</TABLE>
II-7
<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) Rule 430A: The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus 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.
(c) 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.
II-8
<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 February 12, 1997.
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.
<TABLE>
<CAPTION>
Signature Capacity Date
------------------------------- ---------------------------------- --------------------
<S> <C> <C>
/s/ David E. Hosler President, Chief Executive February 12, 1997
------------------------------ Officer and Director
David E. Hosler (Principal Executive Officer)
/s/ James W. Appel* Director February 12, 1997
- --------------------------------
James W. Appel
/s/ John E. Barry* Director February 12, 1997
- --------------------------------
John E. Barry
/s/ Luther R. Campbell, Jr.* Director February 12, 1997
- --------------------------------
Luther R. Campbell, Jr.
/s/ M. Scott Clemens* Director February 12, 1997
- --------------------------------
M. Scott Clemens
Director February 12, 1997
- --------------------------------
Richard B. Neiley, Jr.
Director February 12, 1997
- --------------------------------
G. Arthur Weaver
/s/ Robert L. Wechter* Director February 12, 1997
- --------------------------------
Robert L. Wechter
/s/ Mark J. Keyser Chief Financial Officer and Treasurer February 12, 1997
- -------------------------------- (Principal Financial and Accounting
Mark J. Keyser Officer)
</TABLE>
*By /s/ David E. Hosler
----------------------------
David E. Hosler
Attorney-in-fact
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Title
---------- ------------------------------------------------------------------------------------------------
<S> <C>
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.*
10.12 Form of Escrow Agreement between Old Guard Group, Inc., Hopper Soliday & Co., Inc. and Dauphin Deposit
Trust 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)*
23.5 Consent of Stevens & Lee*
24 Power of Attorney (contained on signature page)*
27 Amended Financial Data Schedule*
99.1 Final 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*
99.8 Opinion of Berwind Financial Group, L.P.*
</TABLE>
- ------
* Previously filed.
<PAGE>
Coopers Coopers & Lybrand L.L.P.
&Lybrand
a professional services firm
CONSENT OF INDENPENDENT ACCOUNTANTS
We consent to the inclusion in the post effective amendment #1 to 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 Goshenhoppen -
Home Mutual Insurance Company and subsidiary as of December 31, 1995 and 1994m
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."
COOPERS AND LYBRAND L.L.P.
One South Market Square
Harrisburg, Pennsylvania
February 12, 1997
<PAGE>
EXHIBIT 23.3
BERWIND
FINANCIAL GROUP, L.P.
INVESTMENT BANKING
MERCHANT BANKING
February 7, 1997
Board of Directors
Old Guard Group, Inc.
2929 Lititz Pike
Lancaster, PA 17601
Directors:
We hereby consent to the inclusion of our updated appraisal dated February
7, 1997 of the estimated pro forma market value of Old Guard Mutual Insurance
Company, Old Guard Mutual Fire Insurance Company and Goschenhoppen-Home
Mutual Insurance Company as subsidiaries of Old Guard Group, Inc. as an
exhibit to the Old Guard Group, Inc. Form S-1 Registration Statement.
Sincerely,
/s/ Berwind Financial Group, L.P.
-----------------------------
BERWIND FINANCIAL GROUP, L.P.
3000 CENTRE SQUARE WEST, 1800 MARKET STREET, PHILADELPHIA, PENNSYLVANIA
19102. PHONE (215) 575-2395. FAX: (215) 564-5402
<PAGE>
OLD GUARD GROUP, INC.
Pro Forma Appraisal Update Report
Joint Plan of Conversion from
Mutual to Stock Organization
Prepared by:
- --------------------------------------------------------------------------
Berwind Financial Group, L.P. Logo
- --------------------------------------------------------------------------
3000 Centre Square West, 1500 Market Street, Philadelphia, Pa. 19102 -
(215) 575-2395 - Fax (215) 564-5402
<PAGE>
STATEMENT OF LIMITING CONDITIONS
================================================================================
All facts and data set forth in this report are true and accurate
to the best of the appraiser's knowledge and belief.
Neither the fee nor payment thereof for this appraisal update is
contingent upon the values reported.
The information, estimates, and data contained in this update were
obtained from sources believed to be reliable, but Berwind Financial Group, L.P.
("Berwind") assumes no responsibility for their accuracy.
We have made a personal inspection of the business appraised. Berwind
has made no investigations of, and assumes no responsibility for the titles to,
or any liabilities against, the business. Berwind further assumes that there are
no hidden or unexpected conditions of either the real or personal property which
would affect value.
Berwind does not have any present, prospective, direct or indirect
interest in the business herein appraised. All opinions as to the appraised
value of the business in total are presented as the appraiser's considered
opinion based on the facts and data set forth in this report and may not be used
out of the context presented herein.
Neither all nor any part of the contents of this valuation report
shall be conveyed to the public through advertising, public relations, news,
sales or other media without the prior written consent and approval of Berwind.
================================================================================
Berwind Financial Group, L.P.
<PAGE>
TABLE OF CONTENTS
================================================================================
Section Page
- ------- ----
1. UPDATED APPRAISAL LETTER
2. INTRODUCTION...........................................................1-3
3. COMPANY BACKGROUND AND DESCRIPTION.....................................4-7
4. MARKET AREA AND INDUSTRY DISCUSSION...................................8-15
5. FINANCIAL REVIEW.....................................................16-27
6. APPRAISAL DISCUSSION.................................................28-39
================================================================================
Berwind Financial Group, L.P.
<PAGE>
February 7, 1997
PERSONAL & CONFIDENTIAL
- -----------------------
Board of Directors
Old Guard Mutual Insurance Company,
Old Guard Mutual Fire Insurance Company, and
Goschenhoppen-Home Mutual Fire Insurance Company
c/o Mr. David E. Hosler, CPCU
President & Chief Executive Officer
Old Guard Insurance Group
2929 Lititz Pike
Lancaster, PA 17604
Directors:
Berwind Financial Group, L.P. ("Berwind") has been retained by the
Board of Directors to render an update (the "Update") to its independent
appraisal ("Appraisal") of the estimated pro forma fair market value of Old
Guard Mutual Insurance Company ("OGMIC"), Old Guard Mutual Fire Insurance
Company ("OGMFIC") and Goschenhoppen-Home Mutual Insurance Company ("GHMIC")
(collectively, "Insurance Companies") as subsidiaries of Old Guard Group, Inc.
("OGGI" or the "Company"). We understand that the Company will offer common
stock (the "Common Stock") in an amount equal to this pro forma fair market
value in an offering (the "Offering") conducted in conjunction with a Joint Plan
of Conversion (the "Plan"). Pursuant to the Plan, OGGI, an insurance holding
company, will purchase all the authorized stock of each of the Insurance
Companies, which will convert from mutual to stock form (the "Reorganization").
References to OGGI, Company, OGMIC, OGMFIC, GHMIC, and Insurance Companies
herein shall include such entities in their current (mutual) forms, or their
post-Reorganization form, as indicated by the context.
<PAGE>
Board of Directors
February 7, 1997
Page 2
Upon completion of the Reorganization, the Company will have shares of
Common Stock issued and outstanding to the Company's employee stock ownership
and management stock bonus plans, policyholders of the Insurance Companies,
directors, officers and employees of OGGI and the Insurance Companies, and
potentially members of the general public including members of the local
community. Pursuant to the Reorganization, the Company has received the approval
of the Pennsylvania Department of Insurance ("PDI") on its joint application for
approval of the conversion. The Reorganization shall be accomplished in
accordance with the procedures set forth in the Plan adopted by the Company's
Board of Directors, the requirements of applicable laws and regulations, and the
policies of the PDI.
Berwind, as part of its investment banking business, is regularly
engaged in the valuation of assets, securities, and companies, in various types
of asset and security transactions including the valuation of assets, securities
and companies in mergers, acquisitions, capital raisings and leveraged buyouts.
In accordance with the terms of our engagement letter dated June 3,
1996, we submit this Update which includes our opinion and summarizes the
procedures used in arriving at our conclusion. Our original Appraisal, dated
August 19, 1996, is incorporated herein by reference.
A. Documentation and Information Examined
As background for analysis of the proposed transaction, we reviewed
the history, current operations and future prospects of OGGI with
certain members of the Company's management. Our financial analysis
is based upon, but not limited to, a review of the following
documents and information we examined during the course of our
analysis:
1. Agreement and Joint Plan of Conversion dated May 31, 1996.
2. OGGI Prospectus dated January 15, 1997.
3. Audited financial statements for the two year period ended
December 31, 1995.
4. Internally-prepared financial statements for the nine month
period ended September 30, 1996.
5. Internally prepared unaudited projected consolidated income
statements for the years 1997-2001. Projections indicate earnings
results under particular assumptions indicated in the
projections.
<PAGE>
Board of Directors
February 7, 1997
Page 3
6. Organizational charts for Old Guard Insurance Group.
7. Other such items as provided by management in fulfillment of the
Information Request List attached as Exhibit A.
B. Persons Interviewed
During the course of our analysis, we conducted meetings and
interviews with persons who, in our judgment, were capable of
providing us with information necessary to complete the assignment.
These interviews and meetings included, but were not limited to:
David E. Hosler, President, Chief Executive Officer and Chairman;
Mark J. Keyser, Chief Financial Officer; Steven D. Dyer, Esquire,
Secretary and General Counsel.
C. Factors Considered
We also reviewed, among other factors, demographics of the Company's
primary market area and compared the Company's financial condition
and operating performance with that of selected publicly-traded
property/casualty insurers. We reviewed conditions in the securities
markets in general and in the market for property/casualty insurance
company common stock in particular.
In arriving at our appraisal, we considered the following factors,
among others, which we deemed relevant:
1. The operating history and management of the Company.
2. The nature of the businesses operated by OGGI and their future
prospects.
3. The historical and current operating results of OGGI and the
factors affecting these results.
4. The historical and current financial condition of the Company.
5. Projected operating results of the Company entities for the years
ending 1997 through 2001 prepared by management.
6. Price to earnings ratios, price to book value and future growth
prospects of publicly-traded comparable companies.
7. Conditions in the general economy and the industry in which the
Company operates.
<PAGE>
Board of Directors
February 7, 1997
Page 4
8. The financial terms and conditions of the proposed transaction.
In addition, we conducted other such financial analyses, studies and
investigations as deemed appropriate.
D. Access to Information and Personnel
During our analysis, we received access to all materials and
personnel which we deemed necessary and adequate for the purpose of
formulating the appraisal expressed in this letter, and no
limitations were placed upon our investigations.
E. Assumptions and Limitations
As in the preparation of our original Appraisal, we did not
independently verify the financial statements and other information
provided by the Company and its independent accountants, nor did we
independently value the assets or liabilities of OGGI. The Update
considers the Company only as a going concern.
Our Update is subject to the following assumptions and limitations,
among others.
1. We express no opinion as to the tax consequences, if any, to OGGI
and its shareholders.
2. We have made no independent verification of the financial and
operating data supplied by management including, but not limited
to, internal and audited financial statements and projected data
for the years 1997 through 2001 for the Company and have accepted
the information as presented. In addition, since Berwind is not
qualified as an expert in detecting the presence of potentially
hazardous material, we have relied upon management representation
that there are no known environmental problems that would have a
material affect on our Update.
3. Our Update is based upon market, economic, financial and other
conditions as they exist and can be evaluated as of the date of
this letter and speaks to no other time period.
4. We assume that the proposed transaction is, in all respects,
lawful under applicable law.
<PAGE>
Board of Directors
February 7, 1997
Page 5
5. In rendering our opinion, we have assumed with your permission,
that the Act is constitutional and that no material monetary
damages or other relief will be awarded against the Company in
connection with its litigation with Donald Nikolaus. Were the act
to be declared unconstitutional and/or material monetary damages
or other relief awarded against the Company, sucn an event would
have a material effect on our Update.
6. We have assumed and relied upon the accuracy and completeness of
the information reviewed by us and the information provided to us
by OGGI's management without independent investigation. With
respect to financial projections, we have assumed, for purposes
of our appraisal, that they have been reasonably prepared by the
Company's management on bases reflecting the best currently
available estimates and judgments of the future financial
performance of the Company.
F. Conclusions
As of February 7, 1997, our estimated pro forma market value of OGGI
as an insurance holding company was $33.4 million. This midpoint
represents approximately the same value as the midpoint of the
original Appraisal.
Our Update is not intended, and must not be construed, to be a
recommendation of any kind as to the advisability of purchasing
shares of Common Stock in the Offering. Moreover, because this
Update is necessarily based upon estimates and projections of a
number of matters, all of which are subject to change from time to
time, no assurance can be given that persons who purchase shares of
stock in the Offering will thereafter be able to sell such shares at
prices related to the foregoing estimate of pro forma market value.
Berwind is not a seller of securities within the meaning of any
federal or state securities laws and any report prepared by Berwind
shall not be used as an offer or solicitation with respect to the
purchase or sale of any securities.
Sincerely,
BERWIND FINANCIAL GROUP, L.P.
<PAGE>
Exhibit A
INFORMATION UPDATE REQUIRED FOR APPRAISAL ANALYSIS
--------------------------------------------------
(Please update any information previously provided)
Old Guard Insurance Group
I. Financial - for Old Guard Mutual Insurance Company, Old Guard Mutual Fire
Insurance Company and Goschenhoppen-Home Mutual Home Insurance Company.
A. Most recent internal year to date results (with consolidating
adjustments); Fiscal Year 1996 estimated results; FY 1997 budget.
Accountants' management letter.
B. Long-term financial projections and/or strategic plans (update and
extension to projections previously supplied).
C. Most recent statutory filings (insurance companies).
D. Most recent Best report (insurance companies).
E. Most recent actuarial report (insurance companies).
II. Other (on site as necessary; all 3 companies and OGGI)
A. Minutes for Director's meetings for past year.
B. Most recent Insurance Department Examination.
C. Any meaningful changes to information previously supplied (list
enclosed).
D. Update to factual content of Berwind's August 1996 Appraisal Report.
E. Discussion of terms and financial impact of acquisitions recently
contemplated and/or currently under consideration.
<PAGE>
INFORMATION REQUIRED FOR APPRAISAL ANALYSIS
-------------------------------------------
Old Guard Insurance Group
The following list is intended to indicate the general areas of information
required by Berwind in the completion of its appraisal analysis. Berwind
understands that certain items may only be available for "on site" review.
I. Financial - for Old Guard Mutual Insurance Company, Old Guard Mutual Fire
Insurance Company and Goschenhoppen-Home Mutual Fire Insurance Company
A. Annual audited financial statements for the past five fiscal years; most
recent internal year to date results; Fiscal Year 1996 estimated results;
FY 1997 budget. Accountants' management letter.
B. Any long-term financial projections or strategic plans.
C. Most recent statutory filings.
D. Loss Experience and Analysis - three years.
E. Best reports for the latest three years.
F. Schedule indicating adjusted, consolidated financial statements for 3
entities, if combined (GAAP basis, latest year and projection only).
II. Business Description - for Old Guard Mutual Insurance Company, Old Guard
Mutual Fire Insurance Company and Goschenhoppen-Home Mutual Fire Insurance
Company
A. Principal Markets (by geography and insurance lines) and Competition.
1. Number of customers in market area served.
2. Customer concentration, if any.
<PAGE>
3. Competition - include names, market shares, and principal means of
competing.
4. Demographic information utilized to substantiate revenue projections.
5. The names of public companies that provide similar services.
B. Significant policies with regard to:
1 Marketing.
2. Compensation and incentive and benefits programs for executives and
employees.
3. Claims/Loss assessment and reserves.
4. Investments.
5. Pricing and Regulation.
6. Capital Expenditures.
7. Commissions/Agent Relationships.
8. Reinsurance.
9. Underwriting and delegation of authority.
III. Description of Facilities and Operations including:
A. Location.
B. Capacities, rates of utilization and required Capital Investment.
C. Schedule of fair market value of real estate owned (include appraisals
or cost-basis), if available.
D. Equipment description (include for significant equipment only and give
useful life remaining, estimated replacement costs, etc.).
<PAGE>
IV. Management and Personnel - for Old Guard Mutual Insurance Company, Old
Guard Mutual Fire Insurance Company and Goschenhoppen-Home Mutual Fire
Insurance Company
A. List of directors and their affiliations.
B. Organization chart
C. List of officers including title, age, length of service, former
affiliation, and salary.
D. Number of employees, union affiliations, strike record, employee benefit
plans (including post retirement).
E. Discussion of impact of FASB # 106 (post-retirement benefits).
F. Discussion of known and potential environmental liabilities.
V. Other
A. Discussion of federal or state tax returns unsettled and any tax
treatments in contention.
B. Discussion of significant regulatory issues, in particular, any issues
in contention.
C. Discussion of significant or unusual leases.
D. Schedule of pending litigation.
E. Minutes for Director's meetings for past two years.
F. Most recent Insurance Department Examination.
G. Name of Actuary.
<PAGE>
INTRODUCTION
===============================================================================
Background, Purpose and Limiting Conditions
This document is an update of an independent Appraisal dated August
19, 1996 prepared by Berwind Financial Group, L.P. for Old Guard Mutual
Insurance Company, Old Guard Mutual Fire Insurance Company, and
Goschenhoppen-Home Mutual Insurance Company as subsidiaries of Old Guard
Insurance Group ("Company" or "OGGI"). OGGI will offer common stock in an amount
equal to this pro forma fair market value in an offering conducted in
conjunction with a Joint Plan of Conversion. Detailed information on the nature
of the conversion can be found in the Form S-1 filed on January 15, 1997 with
the SEC.
In the course of preparing this Update, we reviewed and discussed with
the Company and its management developments since our original Appraisal. This
included, but was not limited to, recent financial performance as of September
30, 1996, projections, acquisition opportunities, competition, and other
financial and legal matters.
Where appropriate, we updated our original Appraisal with most recent
available public information which we believe to be reliable. This information
included, but was not limited to, property and casualty industry studies,
quarterly regulatory filings for comparable companies, research reports, and
census bureau data.
===============================================================================
1 Berwind Financial Group, L.P.
<PAGE>
INTRODUCTION
===============================================================================
As part of this Update, we examined and compared OGGI's performance
with selected segments of the Property/Casualty industry ("P/C") and selected
publicly-traded P/C companies. We reviewed conditions in the securities markets
in general and the market for P/C company common stock in particular since the
August 19th Appraisal.
As in preparing our Appraisal, we have relied upon and assumed the
accuracy and completeness of financial and statistical information provided by
OGGI, the Insurance Companies, their independent accountants and other industry
sources we deemed to be reliable. We did not independently verify the financial
statements and other information provided by the Company and its independent
accountants, nor did we independently value the assets or liabilities of the
Company.
This Update is not intended, and must not be construed, to be a
recommendation of any kind as to the advisability of purchasing shares of Common
Stock in the Offering. Moreover, because such an Update is necessarily based on
estimates and projections of a number of significant matters, all of which are
subject to change from time to time, no assurance can be given that persons who
purchase shares of Common Stock in the Offering will thereafter be able to sell
such shares at prices related to the foregoing valuation of the pro forma market
value thereof. Berwind is not a seller of securities within the meaning of any
federal and state securities laws, and any report prepared by Berwind shall not
be used as an offer or solicitation with respect to the purchase or sale of any
securities.
===============================================================================
2 Berwind Financial Group, L.P.
<PAGE>
INTRODUCTION
===============================================================================
Neither all nor any part of the contents of this Update shall be
conveyed to the public through advertising, public relations, news, or other
media without the prior written consent of Berwind.
===============================================================================
3 Berwind Financial Group, L.P.
<PAGE>
COMPANY BACKGROUND AND DESCRIPTION
===============================================================================
General Overview
There is no material change since the original Appraisal in the
Company's organizational structure, personnel, product mix, facilities,
customers, marketing and sales, and competition. The effect these factors would
have on our pro forma valuation remain as they were in our original Appraisal.
However, there have been several developments affecting the Company which are
discussed in the following pages including:
(i) acquiring controlling interest in First Delaware Insurance
Company;
(ii) making an investment in New Castle Mutual Insurance Company;
(iii) evaluating its rate structure;
(iv) obtaining preliminary fourth quarter 1996 financial results;
and,
(v) becoming a party to litigation.
First Delaware Insurance Company
OGGI expects to acquire 80% of the common stock of First Delaware
Insurance Company ("FDIC") through the purchase of shares directly from FDIC for
an amount which may ultimately reach $3.0 million (although the mutual
investment will be smaller based on FDIC capital requirements) and the purchase
of additional shares from the sole shareholder of FDIC for approximately $1.8
million for an aggregate investment of $4.8 million. OGGI will finance this
===============================================================================
4 Berwind Financial Group, L.P.
<PAGE>
COMPANY BACKGROUND AND DESCRIPTION
===============================================================================
acquisition by drawing on its line of credit which will be repaid from the
proceeds of the Offering. Although the acquisition of FDIC is not a material
transaction to the Company on a consolidated basis, the Company believes that it
illustrates the Company's goals to grow and diversify geographically through
acquisitions.
Substantially all of FDIC's book of business is in commercial lines,
including businessowners and commercial multi-peril products and surety
products, which are distributed through independent agents. For the nine months
ended September 30, 1996, FDIC had a combined ratio of 95.8% on net premiums
earned of $1.2 million. For the year ended December 31, 1995, FDIC had a
combined ratio of 90.0% on net premium earned of $1.4 million. Net income in
1995 was $.15 million. Existing surplus was $1.5 million. The $3.0 million
infusion of additional capital from OGGI should permit FDIC to increase its
writings. Although FDIC's reinsurance programs have had a negative impact on
earnings in recent years, FDIC, under OGGI's leadership, is forecast to improve
profitability. Although this transaction expands the Company's scope of
business, the size of the contribution is not expected to be material.
New Castle Mutual Insurance Company
OGGI initially purchased a $1.0 million convertible surplus note from
New Castle Mutual Insurance Company ("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 was financed by drawing
on its line of credit which will be repaid with the proceeds of the Offering.
Initially, because New Castle will not be consolidated with the
===============================================================================
5 Berwind Financial Group, L.P.
<PAGE>
COMPANY BACKGROUND AND DESCRIPTION
===============================================================================
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. Net income in 1995 was $0.7 million. Existing surplus was $2.0
million.
The Company will receive an $85,000 management fee for its investment
and advisory services. OGGI plans to eliminate the inefficiencies in New Castle
before New Castle converts to a stock company (expected to be two or more years
from now) and OGGI acquires the rest of the entity. If in the future New Castle
elects to convert from mutual to stock form, the Company elects to convert its
surplus notes, and such conversion results in the indirect control of New Castle
by the Company, the Company would consolidate its financial results with New
Castle. Although this transaction may be the beginning of a process which will
result in the Company's acquisition of New Castle, such an acquisition is not
certain and the impact on the current financial condition and prospects of the
Company is not material.
Pricing
The Company is currently performing a comprehensive rate evaluation.
This evaluation will both increase and decrease rates in the Company's different
lines. Personal lines are considering surcharging for claim frequency and have
increased homeowner rates for certain policies. Farm lines will structure their
program so that they will also be able to surcharge for claim frequency. This
comprehensive study of underwriting rates and program structure lends
===============================================================================
6 Berwind Financial Group, L.P.
<PAGE>
COMPANY BACKGROUND AND DESCRIPTION
===============================================================================
credibility to the Company's financial projections by showing management's
detailed management of their underwriting programs.
Fourth Quarter 1996 Results
The Company believes its quarter ended December 31, 1996 will be
better than its previous quarter. This reflects a decrease in catastrophic
losses stemming from the winter of 1996 and confirms management's contention
that without the catastrophic losses in early 1996 the Company would have had
significantly better results. For the quarter ended December 31, 1996 net
premiums earned were $13.9 million and net income was approximately $650,000.
Litigation
OGGI is the subject of litigation in connection with the
President of Donegal Group's ("Donegal") charges that the statute governing
demutualization is unconstitutional. The impact of such litigation is discussed
in detail in the "Appraisal Discussion" section. Company management, however,
continues to believe that a negative outcome is unlikely.
===============================================================================
7 Berwind Financial Group, L.P.
<PAGE>
MARKET AREA AND INDUSTRY DISCUSSION
===============================================================================
Market Area
The most recent available census information for the Company's
geographic focus is for the year ended December 31, 1994. Therefore no update to
information contained in our Appraisal is available. The FDIC acquisition as
well as the New Castle investment give OGGI a stronger presence in Delaware with
possibly slightly more exposure on the coastal area. To our knowledge, nothing
materially has changed in the market area of the Company. In addition, the
Company's focus in their market area has not changed significantly since our
previous appraisal.
Industry and Capital Markets Discussion
Overview
As support for our Update, we examined the most recent industry
research and statistics for the property and casualty industry. While our
earlier Appraisal included industry data from December 31, 1995, our Update
includes industry data as of December 31, 1996, as well as market data as of
December 31, 1996 (and as of the date of this Update, where available).
Many fundamental market forces have not changed based on the latest
data available, however, there are certain areas of difference that should be
noted.
===============================================================================
8 Berwind Financial Group, L.P.
<PAGE>
MARKET AREA AND INDUSTRY DISCUSSION
===============================================================================
First, the combined ratios of the industry was estimated by A.M. Best
to be 107.0% as of December 31, 1996. This compares unfavorably to the
106.5% ratio a year earlier. A.M. Best attributes this loss to
weakening business fundamentals and increased competition that has
forced insurers to cut prices.
Secondly, the Dow Jones Propery/Casualty industry segment gained
18.73% for 1996. As of our previous Appraisal, it had been at a slight
loss. However, the Dow Jones Industrial Average was up 26.01% for the
same period. As before, the Property and Casualty industry continues
to significantly lag the Dow.
Lastly, catastrophic losses in 1996 were $7.4 billion compared to $8.3
billion in 1995.
Supporting Data
The following compares in detail the industry outlook as of the date
of this Update versus the outlook at our previous Appraisal. As can be seen, the
latest available data indicates a continuation of certain negative trends for
property/casualty insurers.
Incurred losses and loss adjustment expenses (LAE) for 1996 increased
2.5% over 1995. Because individual underwriting profits have been small or
negative, insurers' profitability has been largely dependent on net realized
investment gains and income from investment portfolios. Therefore, changes in
interest rates and performance of the capital markets greatly affect an
insurer's performance. As interest rates rise, the value of an insurer's bond
portfolio will drop as
===============================================================================
9 Berwind Financial Group, L.P.
<PAGE>
MARKET AREA AND INDUSTRY DISCUSSION
===============================================================================
bond prices decrease. The same is true for a company's equity portfolio when
equity markets decline. In 1996, the property/casualty industry's investment
results continued to be positively impacted by lower interest rates and the
strong securities markets that resulted. According to A.M. Best, both realized
and unrealized capital gains for the industry was $27.0 billion in 1996, a 3.7%
decrease over 1995. In effect, the capital markets, not underwriting, provided
the industry's earnings. According to Standard & Poors, investment income
actually masks a decline in operating income. During the first six months of
1996, pretax operating earnings declined 8.6% from the comparable year earlier
period.
In addition to market fluctuations, the property/casualty insurance
industry is negatively impacted by catastrophes, such as hurricanes,
earthquakes, fires and blizzards. Catastrophe losses for 1995 totaled $8.3
billion, which was $8.7 billion lower than the losses experienced in 1994, the
second-worst year for catastrophes on record. The mid-Atlantic region, in which
the Company writes its business, experienced some of its most severe winter
storm and tornado activity on record during the first half of 1996. Catastrophe
losses cost the industry $7.4 billion in 1996. Although catastrophic losses
declined in 1996, the impact on the Mid-Atlantic region, OGGI's geographic
focus, was actually worse. In fact, as noted in the financial section, the
Company continued to pay for winter storm damage in the third quarter.
The statutory loss ratio, or losses and related expenses divided by
net premiums earned, helps property/casualty insurers determine the effect of
underwriting losses on their performance. For 1995, the loss ratio for the
industry was 78.6%, which showed signs of improvement over
===============================================================================
10 Berwind Financial Group, L.P.
<PAGE>
MARKET AREA AND INDUSTRY DISCUSSION
===============================================================================
1994's ratio of 81.3% and the 10-year industry average of 81.1% due to fewer
losses from catastrophes. The loss ratio remained relatively unchanged in 1996
from 1995. OGGI, however, had a loss ratio of 87.0% for the first nine months of
1996.
According to Standard & Poor's, property/casualty insurers have been
setting aside inadequate reserves in recent years in order to make themselves
appear more profitable after suffering from weak premium pricing, high
catastrophe losses and moderate growth from investment income. Loss reserves for
the industry totaled $360.9 billion in 1995, only 3.6% higher than the $348.5
billion reserves in 1994. This trend continued in 1996 with loss reserves
totaling $370.0 only 2.5% higher than 1995. If a major catastrophe occurs in the
near future, the insurance industry may not have sufficient funds to cover the
severity of losses incurred, according to Standard & Poors. Therefore, the
insurance industry potentially could be forced to reassess its level of loss
reserves which could have a negative effect on earnings.
Financial
When premium prices drop, underwriting losses tend to increase as
revenues from premiums written are insufficient to cover underwriting losses and
expenses. Evidence can be seen by examining the industry's expense ratio
(underwriting expenses to net premiums written). As net premiums written fail to
keep pace with expenses, this ratio rises. The expense ratio in 1995 was 26.3%,
compared to 26.0% in 1994 and a 10-year average of 25.95%. According to the
Standard & Poor's Industry Survey, premium growth most likely will remain
sluggish for the
===============================================================================
11 Berwind Financial Group, L.P.
<PAGE>
MARKET AREA AND INDUSTRY DISCUSSION
===============================================================================
foreseeable future, and will not be sufficient to cover underwriting losses and
related costs. Continuing this trend, the estimated expense ratio for 1996 was
26.0%.
According to Standard & Poors, the best measure insurers use to judge
core profitability is the combined ratio, which is calculated as the sum of the
loss ratio and the expense ratio. A company having a combined ratio under 100%
is profitable in its underwriting activities, while one that has a ratio above
100% is experiencing underwriting losses. The industry's combined ratio in 1995
was 106.3% compared to 108.4% in 1994. The main reason for this improvement is
the lower loss ratio resulting from the less severe level of catastrophe losses
incurred in 1995 as compared to 1994. The 10-year average combined ratio for the
industry is 108.3%, implying that the industry has relied on investment
performance for earnings. Although 1995's results appear to indicate that there
are signs of improvement for insurers, combined ratios for balanced underwriters
worsened in 1996 to 107.5%, as a result of the soft premium pricing environment,
high level of winter storm activity, and weak level of premium renewals observed
during the first quarter.
Another measure used to compare and monitor insurance companies'
prospects for growth and financial solvency and to determine current capacity
utilization is statutory capital and surplus (policyholders' surplus) and the
ratio of net premiums written to statutory capital and surplus. A ratio greater
than one-to-one indicates that a company is writing more premiums than it has in
capital. The higher the ratio, the greater amount of leverage the company is
employing. The "typical" benchmark ratio for the industry is two-to-one. As
displayed in the chart on the
===============================================================================
12 Berwind Financial Group, L.P.
<PAGE>
MARKET AREA AND INDUSTRY DISCUSSION
===============================================================================
following page, 1995 net premiums written totaled 1.12 times the industry's
policyholders' surplus, which was lower than the 1.30 times experienced in 1994,
while as of December 31, 1996 it was an estimated 1.00 times the lowest in over
30 years. This ratio is far below the benchmark ratio of 2:1 because of the
low/no growth in premiums written and growth in policyholders' surplus. The
low/no growth in premiums written results from lower pricing ("soft" market)
conditions created by increased competition. According to ISO data, surplus for
the property/casualty industry was $231.7 billion in 1995, a 19.9% increase over
1994's surplus of $193.3 billion. This increase is attributable to modest
profitability, as well as the growth in unrealized and realized capital gains in
1995. Surplus did increase to $260.0 billion as of December 31, 1996 with (ratio
of 1:1). This ratio continues to be historically low and is an ominous sign for
the property/casualty insurance industry.
Due to intense competition and the resulting prolonged soft pricing
conditions which make profitable growth extremely challenging, insurers are
seeking to control their expenses in order to compete effectively. Consolidation
has become an industry trend over the last few years, as companies merge in
order to cut overhead and distribution costs while increasing premiums written
through the addition of territories and regions. As more and more companies
merge, the industry should become more efficient, and therefore, increased
profitability should result.
===============================================================================
13 Berwind Financial Group, L.P.
<PAGE>
MARKET AREA AND INDUSTRY DISCUSSION
===============================================================================
Net Premiums Written to Policyholders' Surplus
1994 1995 1996
---- ---- ----
Property/Casualty Industry (a) 1.30x 1.12x 1.00x
(a) Source: May 2, 1996 Standard & Poor's Industry Survey and A.M. Best
Property/Casualty Supplement, January 6, 1997.
Summary of Investor Perceptions
Property/casualty insurers continue to lag the overall market.
Evidence of the industry's lack of appeal can be observed by the Dow Jones
Property/Casualty index gain of 18.73% versus 26.01% gain in the Dow Jones
Industrial. OGGI appears to fit the market's negative stereotype for a
property/casualty insurer based on its recent results as well as its operations
and financial position.
===============================================================================
14 Berwind Financial Group, L.P.
<PAGE>
MARKET AREA AND INDUSTRY DISCUSSION
===============================================================================
Comparable Returns on Equity for Select Industries
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Property/Casualty Insurance (1) Other Industries (2)
- -------------------------------------------------------------------------------------------------------------------
Statutory GAAP Diversified Commercial
Year Accounting (3) Accounting (4) Financial (5) Banks Utilities Fortune 500 (6)
---- -------------- -------------- ------------- ---------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
1986 13.9 15.0 15.9 12.8 13.3 11.6
1987 13.2 17.3 16.3 11.1 12.8 14.4
1988 13.2 14.1 12.8 14.6 12.7 16.2
1989 9.1 10.5 13.0 13.6 12.4 15.0
1990 8.5 8.8 12.7 9.9 11.5 13.0
1991 8.9 9.6 13.9 11.9 11.5 10.2
1992 4.4 4.5 12.8 12.2 9.4 9.0
1993 10.6 11.0 17.1 14.9 11.1 11.9
1994 5.6 5.6 18.4 15.6 11.3 13.7
1995 9.0 8.7 18.2 15.6 11.9 14.0
10-Year Average 9.6 10.5 15.1 13.2 11.8 12.7
</TABLE>
Source: Best's Review - Property/Casualty, January 1997.
(1) Statutory Accounting, A.M. Best data; GAAP accounting, Insurance Services
Office.
(2) Data are medians. Data for 1985 to 1990 include return on preferred stock.
Thereafter, return on preferred stock is excluded.
(3) Net income after taxes, divided by year-end policyholders' surplus.
(4) Revised by Insurance Services Office to reflect revisions to the GAAP
procedure and the Tax Reform Act of 1986.
(5) Composed largely of companies engaged in property/casualty insurance, with
or without life insurance, and other financial services.
(6) Fortune 500 U.S. Industrial Corporations.
===============================================================================
15 Berwind Financial Group, L.P.
<PAGE>
FINANCIAL REVIEW
===============================================================================
1996 YTD Results
Old Guard Group, Inc.
September 30, 1996 Financial Summary
($000s)
September 30, 1996 December 31, 1995
------------------ -----------------
Balance Sheet
Cash & Investments 88,729 100,488
Premiums Receivable 7,911 6,314
Reinsurance Recoverables 25,659 10,275
Other Assets 15,239 18,062
-------- --------
137,538 115,170
Reserve for Losses and LAE 56,799 52,091
Unearned Premiums 35,784 33,329
Other Liabilities 7,296 8,536
-------- --------
Surplus 37,669 41,183
Nine Months Ended Nine Months Ended
September 1996 September 1995
-------------- -----------------
Income Statement
Net Premiums Earned $39,705 $48,536
Net Investment Income 3,434 3,408
Other Revenue 1,812 822
------- -------
Total Revenue 44,951 52,766
Losses Incurred & LAE 34,548 33,892
Other Expense 14,409 17,706
------- -------
Income Before Taxes (4,006) 1,168
Income Tax Expense (1,458) 252
------- --------
Net Income $(2,548) $ 916
======== ========
===============================================================================
16 Berwind Financial Group, L.P.
<PAGE>
FINANCIAL REVIEW
===============================================================================
Revenues
Revenues ($000s)
<TABLE>
<CAPTION>
For the Year Ended 12/31,
9/30/96 -------------------------------------------------------------
LTM 1995 1994 1993 1992 1991
------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Premiums Earned $57,832 $66,663 $63,465 $60,986 $54,013 $53,050
% Change (Year to Year) 5.0% 4.1% 12.9% 1.8% N/A
Total Revenue $64,591 $72,406 $68,139 $66,916 $60,172 $58,596
% Change (Year to Year) 6.3% 1.8% 11.2% 2.7% N/A
</TABLE>
The Company continues to have declining revenues in 1996. For the
third quarter ended September 30, net premiums earned declined $2.8 million from
a comparative period in 1995. On a latest twelve months basis, revenues have
declined almost $8 million since year-end December 1995. However, much of this
decline is directly attributable to the effects of instituting the quota share
reinsurance treaty with American Re discussed in the original Appraisal.
Effective January 1, 1996, the Company executed a 20% quota share
reinsurance treaty with American Re-insurance. The treaty provides for a 35%
ceding commission on net business written. This treaty is designed to protect
the Company from high frequency and low severity type losses as occurred in the
winter of 1996. Because of this quota share treaty, the Company's net premiums
earned fell in the first nine months of 1996.
===============================================================================
17 Berwind Financial Group, L.P.
<PAGE>
FINANCIAL REVIEW
===============================================================================
Although the Company has not prepared formal year end 1996 financial
statements, discussions with management indicate expected results as follows:
1996
Net Premiums Earned $53,600
% Change (Year to Year) (19.6%)
Net Income (1,900)
The fourth quarter showed improvement with a net income of $650,000. This
improvement over the third quarter substantiates managements' current positive
projections.
Investment Portfolio and Performance
September 30, 1996
Investment Portfolio Composition ($000s)
Category Book Value %
-------- ---------- ---
ST Investment 3,738 4.2
Fixed Income 69,786 78.7
Preferred Stock 5,100 5.8
Equity - unaff. 6,425 7.2
Real Estate 3,361 3.8
Other Investments 318 0.4
------- -------
88,728 100.0%(1)
(1) Total may not sum to 100% due to rounding.
===============================================================================
18 Berwind Financial Group, L.P.
<PAGE>
FINANCIAL REVIEW
===============================================================================
At September 30, 1996, the Company's investment portfolio market value
approximated book value. In the third quarter, the Company had transitioned out
of tax exempt securities in an attempt to get higher yields on its securities.
Combined with significant net investment gains, these higher yielding
investments produced improved investment results over 1995.
<TABLE>
<CAPTION>
1996 YTD 1995 1994 1993 1992
-------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Investment Results (net of expenses)(1) (%) 6.6% 5.6% 5.0% 6.0% 6.8%
</TABLE>
(1) (Net investment gains plus net investment income)/Average Investments
The Company continues to maintain its conservative investment policy
and portfolio. Net investment income for the third quarter of 1996 was $48,000
less than the comparable period in 1995. As with revenues, much of this can be
attributable to significant cash outflow from the settlement of the quota share
cessions. In addition, the Company's decrease in cash in the third quarter was
attributable to continued payment of winter storm claims as well as a scheduled
$750,000 payment of the principal of the American Re Surplus Note as well as the
use of cash to pay out winter storm claims.
===============================================================================
19 Berwind Financial Group, L.P.
<PAGE>
FINANCIAL REVIEW
===============================================================================
Underwriting Performance
<TABLE>
<CAPTION>
YTD 1995 1994 1993 1992 1991
--- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
GAAP Loss and LAE Ratio 87.0% 75.8% 73.2% 69.1% 70.5% 68.9%
Five Year GAAP Average 71.5% (Loss and LAE)
</TABLE>
Although the Company continues to target a 68.7% Loss and LAE ratio as
its goal, it has been unable to reach that goal. For 9 months ending September
30, 1996, the loss and LAE ratio was 87.0%. However, for the quarter ending
September 30, 1996 the Loss and LAE ratio was a respectable 66.4% reflecting the
fewer winter storm claims that carried over to the third quarter. Although the
third quarter showed improvement, sustained improvement would be necessary to
prove a fundamental improvement in the Company's Loss and LAE ratio.
A summary of these events and their effect on the loss and loss
adjustment expense ratio by year is presented on the following page:
===============================================================================
20 Berwind Financial Group, L.P.
<PAGE>
FINANCIAL REVIEW
===============================================================================
Effect of Severe Weather
(000's Omitted)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Event(s) Winter Wind Winter Wind, Wind Wind
Storms Storms Blizzard
Direct Losses $12,099 $3,676 $19,169 $4,093 $2,715 $1,870
Net Losses After All $2,769 $3,159 $3,084 $3,221 $1,673 $1,854
Recoveries
Effect on Loss and LAE Ratio 8.6% 4.7% 4.9% 5.3% 3.5% 3.5%
</TABLE>
These events impacted homeowners and farmowners policies most
significantly. A schedule showing the direct claims arising out of these events
for these lines of business follows:
(000's Omitted)
<TABLE>
<CAPTION>
1996 YTD 1995 1994 1993 1992 1991
-------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Farmowners $4,710 $2,005 $ 5,384 $1,636 $1,031 $1,025
Homeowners 4,881 1,100 10,804 1,110 885 407
</TABLE>
For 1994, 1995 and 1996 net underwriting losses reported may be
attributed almost entirely to these events. Direct underwriting results for 1996
show a loss resulting entirely from the storm losses. Other factors impacting
1996 net results were high catastrophe reinsurance costs, adverse loss
development and a conscious decision to liquidate certain stock holdings which
were in substantial loss positions.
===============================================================================
21 Berwind Financial Group, L.P.
<PAGE>
FINANCIAL REVIEW
===============================================================================
Operating Performance
GAAP Expense Ratio (%)
YTD 1995 1994 1993 1992 1991
--- ---- ---- ---- ---- ----
35.7 34.9 34.8 34.4 36.2 35.5
The expense ratio for the quarter ended September 30, 1996 was
slightly higher (41.5%) due to the institution of the quota share reinsurance
treaty which decreased net premiums earned greater than expenses incurred. In
addition, the Company had not booked any agent contingent commissions until the
third quarter further increasing expenses. This increase is considered unusual
and is not expected to continue in the fourth quarter.
GAAP Combined Ratio (%)
YTD 1995 1994 1993 1992 1991
--- ---- ---- ---- ---- ----
122.7 110.7 108.0 103.5 106.7 104.3
5 Year Average - 106.6
The combined ratio continues to significantly lag the industry average. The
122.7% ratio year to date is at a five year high.
===============================================================================
22 Berwind Financial Group, L.P.
<PAGE>
FINANCIAL REVIEW
===============================================================================
Reserve Adequacy
The Company's basic Property/Casualty product lines result in quickly
quantified losses with an average length of less than 2 years' development
(workers' compensation is longer, approximately 5-6 years). The Company has not
experienced unfavorable development in loss reserves in the past quarter.
Equity
At September 30, 1996 Policyholders' Surplus totaled $37.7 million,
down $3.5 million from December 31, 1995's balance of $41.2 million due to
year-to-date losses. However, this is an improvement over the June 30, 1996
surplus of $37.0 million due to third quarter unrealized gains and modest
profitability. Although there has been improvement, the Company's ability to
leverage its capital has worsened as reflected in its 1.67x ratio of net
premiums earned to statutory surplus.
Currently a surplus note in the amount of $1,500,000 is outstanding to
American Re-Insurance Company (the "American Re Surplus Note") which contains
rights to purchase equity of the Company in a de-mutualization transaction.
According to Company management and subject to negotiation, the American Re
Surplus Note will be converted into 150,000 shares
===============================================================================
23 Berwind Financial Group, L.P.
<PAGE>
FINANCIAL REVIEW
===============================================================================
of equity. Please refer to "Appraisal Discussion" for a discussion of the impact
of this conversion on the pro forma valuation.
<TABLE>
<CAPTION>
Summary of Selected GAAP Ratios YTD 1996 1995 5 Year Average
------------------------------- -------- ---- --------------
<S> <C> <C> <C>
Expense Ratio 35.7% 35.9% 35.2%
Loss Ratio 87.0 75.8 71.5
Combined Ratio 122.7 110.7 106.6
Return on Average Surplus N/A 4.2 5.7
Premium Earned Growth Rate N/A 5.0 5.9(1)
Net Prem. Earned / Surplus 1.67x 1.62x 1.60x
</TABLE>
(1) Represents Compound Annual Growth Rate
Rationale for Demutualization Transaction
Company management identifies several factors which led the Company to
pursue the Demutualization Plan, including:
o Obtaining capital to:
o support expansion of business (premiums written)
o enable the Company to expand and diversify its target market
area
o improve the Company's prospects to make acquisitions of other
insurance companies.
o strengthen policyholder protection
o Providing stock issuance as an alternative to a cash structure for
acquisitions.
o Providing capital to enhance rating agency review and rating of the
Company.
o Permit use of stock based compensation to motivate and retain
employees.
o Providing consistent dividend payment to shareholders.
===============================================================================
24 Berwind Financial Group, L.P.
<PAGE>
FINANCIAL REVIEW
===============================================================================
Litigation
OGGI management has indicated that there is no material litigation
except for that which is disclosed in the Prospectus and discussed below.
On November 19, 1996, the Company received an unsolicited offer for
the merger of the Company into Donegal. The Board of Directors rejected
Donegal's proposal based on the fact that the proposed transaction would not fit
with the ongoing business strategy at the Company.
On January 7, 1997, the President of Donegal, Donald Nikolaus,
purportedly in his individual capacity as a policyholder of Old Guard Mutual
filed in the Commonwealth Court of Pennsylvania a Petition for Review of the
approval of the Plan by the Department. Mr. Nikolaus contends that the Act,
which was passed overwhelmingly by the Pennsylvania General Assembly and which
permits the Conversion, is constitutionally defective for procedural reasons and
because the Plan does not provide for compensation to policyholders.
Mr. Nikolaus asks the Commonwealth Court to (1) declare the Act
unconstitutional, (2) enjoin the holding of the Special Meetings, and (3) direct
the Department to rescind its approval of the Plan. No court proceedings have
been scheduled with respect to the Petition for Review, although a hearing on
the request to enjoin holding the Special Meetings has occurred, and the Court
declined Mr. Nikolaus' request for an injunction. Final adjudication of the case
by the Commonwealth Court could take a year or more and the parties then could
appeal any decision to
===============================================================================
25 Berwind Financial Group, L.P.
<PAGE>
FINANCIAL REVIEW
===============================================================================
the Pennsylvania Supreme Court and then to the United States Supreme Court,
although either or both higher Courts can elect not to hear the appeal. Such
appeals, if made, could take an additional two to four years.
The Department has advised the Company that it believes the Act is
constitutional, and it intends to defend this action vigorously, as do the
Company and the Insurance companies. Moreover, the Court has refused Mr.
Nicolaus' request for an injunction. The Company and the Insurance Companies
believe that it is unlikely that an injunction [update] will be issued to enjoin
the holding of the Special Meetings and the Company and the Insurance companies
further believe, based on the advice of such counsel, that they will ultimately
prevail on the merits of the case principally because of (i) the existence of
court decisions that have consistently upheld the constitutionality of a very
similar federal statutory provision providing for the conversion to stock form
of mutual savings and loan associations pursuant to which over 1,000 mutual to
stock conversions have been completed, and (ii) a court decision upholding the
constitutionality of a similar Pennsylvania statutory provision providing for
the conversion to stock form of a Pennsylvania mutual savings bank.
The Company's prospectus details the uncertainty as to the outcome of
the case, as well as to the remedy the Court would grant. Various outcomes no
matter how remote, are also detailed.
In the event that the Company loses this case and the remedy
prescribed by the court contains onerous financial obligations, the Company
could be forced to seek the protection of the bankruptcy laws and the Insurance
Companies could be deemed insolvent and seized by the
===============================================================================
26 Berwind Financial Group, L.P.
<PAGE>
FINANCIAL REVIEW
===============================================================================
Department as discussed in the prospectus. The probability is good that
additional legal fees will be incurred ($400,00 to $1,000,000). However, the
Company's directors and officers' insurance caps any such legal fees at
$100,000.
While Company management and legal counsel have indicated the strength
of OGGI's position in this litigation and, importantly, have characterized the
risk of bankruptcy as remote, as indicated above, severe adverse financial
consequences are still a possible outcome of this litigation. Berwind has relied
upon Company management's and its legal counsel's opinions that (i) the
Company's position in the case is well-supported, (ii) the remedy, if the
Company did lose the case, cannot be predicted and (iii) the potential for
material adverse consequences is not probable.
As discussed in the "Appraisal Discussion" section, the range of
financial impact from this litigation could be from no cost to bankruptcy, with
the risk impossible to quantify.
===============================================================================
27 Berwind Financial Group, L.P.
<PAGE>
APPRAISAL DISCUSSION
===============================================================================
Comparable Public Company Analysis
Berwind used the same methodology as the original Appraisal in
analyzing the Comparable publicly-traded companies. Berwind used the same
comparable companies in its analysis. There have been no major acquisitions or
new issuance of securities by any of the comparable companies since our original
Appraisal which would have significantly effected share prices.
For informational purposes, a brief description of each of the
publicly-traded companies follows.
o Allied Group, Inc., based in Iowa, is a leading regional
property/casualty insurer specializing in personal lines, which it
sells predominantly in the central and western United States. The
company's subsidiaries utilize independent agencies, exclusive
agencies, and direct response marketing to sell its products.
Allied Group focuses its underwriting on private passenger auto and
homeowners business, with 66% of its business in personal lines and
34% in commercial lines.
o American Indemnity Financial Corporation is a Galveston, Texas
based holding company comprised of a group of regional property and
casualty insurance companies that offer personal and commercial
lines of insurance through independent agents. It offers auto,
homeowners multiple peril, workers' compensation, fire and allied
lines, commercial multiple peril and general casualty lines of
insurance. The majority of the company's business is written in
Texas (over 70%); other states where the company writes business
include Florida, Louisiana, Mississippi, Alabama, Tennessee,
Kentucky and six other states.
o The Commerce Group, Inc. is engaged primarily in providing personal
and commercial property and casualty insurance in Massachusetts.
Its principal insurance line is motor vehicle insurance, primarily
covering personal automobiles. The company also offers commercial
automobile, homeowners, inland marine, fire, general liability and
commercial multi-peril insurance. Through its 1995 acquisition of
Western Pioneer Insurance Company, a personal
===============================================================================
28 Berwind Financial Group, L.P.
<PAGE>
APPRAISAL DISCUSSION
===============================================================================
automobile insurer located in Pleasanton, California, the company
has the ability to write insurance outside the state of
Massachusetts.
o Donegal Group Inc., headquartered in Marietta, Pennsylvania, is a
regional insurance holding company offering property and casualty
insurance in the states of Pennsylvania, Delaware, Maryland, Ohio
and Virginia through its wholly-owned subsidiaries and through a
pooling agreement with its affiliate, Donegal Mutual Insurance
Company. The company is also licensed to conduct business in
Indiana, North Carolina and New York. It offers full lines of
personal and commercial products, including businessowners,
commercial multi-peril, automobile, homeowners, boat owners,
workers' compensation and other coverages. Donegal Group Inc. was
formed in September 1986 by Donegal Mutual Insurance Company, which
owns 59% of the outstanding common shares.
o Erie Indemnity Company is a Pennsylvania business corporation that
was formed in 1925 to be the attorney-in-fact for Erie Insurance
Exchange, a Pennsylvania-domiciled reciprocal insurance exchange.
The Erie Insurance Exchange underwrites a broad line of personal
and commercial property and casualty insurance coverages, including
automobile, homeowners, commercial multi-peril and workers'
compensation. Erie Indemnity Company's principal business consists
of managing the Erie Insurance Exchange, but it is also engaged in
the property/casualty business through its wholly-owned
subsidiaries. The company, together with the Exchange and its
subsidiaries and affiliates, operates collectively under the name
Erie Insurance Group. The company operates in eight states and the
District of Columbia, although most of its business is written in
Pennsylvania, Ohio, West Virginia, Maryland, and Virginia.
o Harleysville Group Inc. is a regional insurance holding company
headquartered in Harleysville, Pennsylvania which, through its
subsidiaries, underwrites a broad line of commercial and personal
property and casualty insurance coverages, including automobile,
homeowners, commercial multi-peril, and workers' compensation.
These coverages are marketed primarily in the eastern half of the
United States. Regional offices are maintained in Georgia,
Illinois, Indiana, Maryland, Massachusetts, Michigan, New Jersey,
New York, North Carolina, Ohio, Pennsylvania, Tennessee and
Virginia. Harleysville Group is approximately 56% owned by
Harleysville Mutual Insurance Company.
o Merchants Group, Inc., through its wholly-owned subsidiary,
Merchants Insurance Company of New Hampshire, Inc., markets
tailored property and casualty insurance products to individuals
and businesses in market segments with identifiable individual risk
factors in the northeastern, mid-Atlantic, and midwestern United
States. The company is licensed to underwrite most major lines of
property and casualty insurance, including personal and commercial
automobile, multi-peril, homeowners, and general liability, with
the majority of its business written in New York, New Hampshire,
and New Jersey.
===============================================================================
29 Berwind Financial Group, L.P.
<PAGE>
APPRAISAL DISCUSSION
===============================================================================
o Meridian Insurance Group, Inc. is a regional holding company that
underwrites property and casualty insurance through its
wholly-owned subsidiary, Meridian Security Insurance Company.
Approximately 89% of the company's 1995 business was written by
Meridian Mutual Insurance Company, an Indiana-domiciled mutual
insurance company that currently owns 46.5% of the company's
outstanding common stock. Meridian Mutual writes a broad line of
property and casualty insurance, including personal and commercial
automobile, homeowner, farmowners and commercial multi-peril, and
worker's compensation. Business is written in the states of
Illinois, Indiana, Kentucky, Michigan, Ohio, Tennessee, and
Wisconsin. Meridian Security writes personal and farm lines
policies primarily in the rural areas of Indiana, Kentucky, Ohio,
Tennessee, and Wisconsin.
o Penn-America Group, Inc., headquartered in Hatboro, Pennsylvania,
is an insurance holding company which, through its wholly-owned
subsidiary, Penn-America Insurance Company, writes commercial
property, general liability and multi-peril insurance and personal
automobile insurance on a surplus lines or nonstandard basis. The
Company focuses on smaller, Main Street businesses in the surplus
lines market, such as restaurants, taverns, retail businesses,
contractors and similar classes, that may not have access to
standard insurance, but drive the economies of rural and suburban
areas. The company does not write unique or high risk policies. The
company markets its products nationally in small cities and towns,
but writes personal automobile coverage in only two states,
Washington and California.
o State Auto Financial Corporation is an insurance holding company
located in Columbus, Ohio. The company and its subsidiaries are
affiliated with State Automobile Mutual Insurance Company, which
owns 67% of the company's common stock. The company, including its
subsidiaries and affiliates, currently writes property and casualty
insurance in twenty two midwestern and southern states. Principal
lines of business include personal and commercial automobile,
homeowners, commercial multi-peril, workers' compensation, general
liability and fire insurance.
===============================================================================
30 Berwind Financial Group, L.P.
<PAGE>
APPRAISAL DISCUSSION
===============================================================================
Financial Comparisons
The statutory data used in the original Appraisal was as of December
31, 1995. There is no new statutory data reported for the consolidated entities
in their Form 10-Q filings, so there are no changes in the statutory analysis.
Comparison with Comparable Group
In updating the previous Appraisal, we continued to separate the
comparable companies into two groups based on differences in their
profitability. Profitability was determined by analyzing such measures as return
on average common equity (22.56% median for higher profitability group vs.
10.93% median for lower profitability group), return on average capital (23.68%
vs. 13.83%), return on average assets (6.64% vs. 3.16%), and pretax return on
revenue (13.46% vs. 4.62%). As evidenced by the following table, in most cases,
there continues to be significant and meaningful difference between the higher
and lower profitability group medians.
===============================================================================
31 Berwind Financial Group, L.P.
<PAGE>
APPRAISAL DISCUSSION
===============================================================================
<TABLE>
<CAPTION>
Group Medians
- -----------------------------------------------------------------------------------------
Return
on Return Return Pretax
Average on on Return Price/Book
Common Average Average on Value Per
Equity(1) Capital(1) Assets(1) Revenue(2) Share(2)
-------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Higher Profitability 22.56% 23.68% 6.64% 13.46% 1.86x
Lower Profitability 10.93% 13.83% 3.16% 4.62% .91x
Lower Profitability as
a Percent of Higher
Profitability 48.45% 58.40% 47.59% 34.32% 48.92%
Lower Profitability as a
Percent of Comparable
Group 68.43% 86.55% 66.35% 44.91% 69.47%
====== ====== ====== ====== ======
</TABLE>
(1) Based on fiscal year end financials.
(2) Based on latest twelve months ended September 30, 1996.
The lower profitability group, which includes Donegal Group,
Harleysville Group, Meridian Insurance, Merchants Group, and American Indemnity,
exhibited a median price to book value of .91x, or approximately 70% of the
comparable group's median price to book value per share of 1.31x for the twelve
months ended September 1996, based on closing stock prices on February 7, 1997.
Therefore, it would appear that those companies which produce lower
returns/profitability continue to exhibit lower price to book value per share
ratios. OGGI is still less profitable than the median of even the lower
profitability group, implying that it should be valued below the median of lower
profitability group. In addition, the original Appraisal had the lower
profitability group as a percent of the Comparables at 70.73%. As of February 7,
the percentage has dropped slightly to 69.47%.
===============================================================================
32 Berwind Financial Group, L.P.
<PAGE>
APPRAISAL DISCUSSION
===============================================================================
<TABLE>
<CAPTION>
Comparison of Profitability
-------------------------------------------------
Return on
Average Return on Return on
Common Average Average
Equity(1) Capital(1) Assets(1)
-------- --------- --------
<S> <C> <C> <C>
Old Guard Group, Inc. 4.23% 5.17% 1.23%
Comparable Group Median 15.98 18.54 4.76
Higher Profitability Median 22.56 23.68 6.64
Lower Profitability Median 10.93 13.83 3.16
</TABLE>
(1) Based on fiscal year end financials.
The market capitalization multiples continue to be insignificant due
to the numerous companies operating at a loss. One significant ratio that did
increase as a whole is the total market capitalization to operating income
ratio. That increased from 8.39x in our previous analysis to 10.23x in our
current analysis. As in the original Appraisal, the Company's operating income
is negative and is therefore not relied upon in the valuation.
Application of Comparable Multiples
We continue to believe that there are a number of meaningful
differences that differentiates the company and its comparable peers. These
differences meaningfully decrease the Company's value below that of the value
assumed when applying the comparable company's multiples.
===============================================================================
33 Berwind Financial Group, L.P.
<PAGE>
APPRAISAL DISCUSSION
===============================================================================
For information purposes, we have restated those differences below.
Profitability of OGGI - As discussed in the financial comparison
section, OGGI is less profitable and suffers from higher underwriting
expenses and losses than its comparable group. In addition, the
Company experienced extremely tight cash flows in the first nine
months of 1996, which resulted in the rescheduling of a principal
payment on a surplus note due on April 20, 1996. Such cash flow
deficiencies are not viewed favorably in a public market.
Because of OGGI's unprofitable underwriting activity, it is more
dependent on investment results to bolster earnings. For example, in
1995, OGGI generated $5.5 million of net investment income and net
investment gains while generating only $2.1 million in profit before
tax. Since approximately 79% of the book value of OGGI's investment
portfolio is made up of fixed income products, OGGI's interest income
and investment gains (and ultimately, net earnings) are heavily
influenced by interest rate movements. Uncertainty in today's capital
markets makes OGGI's valuation more variable than a company with
stronger underwriting earnings. Additionally, continued poor
performance could create concern with respect to the Company's A.M.
Best rating. A downgrade, if one occurred, would be detrimental to the
Company's business operations and its valuation.
Because the Company's financial results and position do not compare
favorably with its peers and because it matches investor's negative
perceptions of the industry (refer to page 15), OGGI should be valued
not as the comparable group taken as a whole but by focusing on
multiples applied to the lower profitability group discussed in the
"Market Comparison" section. Since the lower profitability group's
median price to book value ratio was .91x, approximately 69% of the
comparable group median (1.31x), a significant discount should be
applied to OGGI.
Geographic Concentration - Substantially all of the Company's premiums
(94%) are written in Pennsylvania, with the balance in Maryland and
Delaware. Therefore, profitability of OGGI is subject to the
prevailing economic, regulatory, demographic, climatic and other
conditions in primarily one state, including the harsh winters
suffered by the Mid-Atlantic states over the last few years. Although
the companies in the comparable group also focus their business on
certain states, most enjoy greater diversity in their target market
regions. Even with OGGI's new investment and acquisition, the
Company's geographic concentration has not been significantly diluted.
A discount to the comparable peer group should be applied to the
comparable company valuation due to OGGI's high geographic
concentration.
===============================================================================
34 Berwind Financial Group, L.P.
<PAGE>
APPRAISAL DISCUSSION
===============================================================================
Size Disadvantage - OGGI's policyholders' surplus as of September 30,
1996 was $37.7 million, substantially less than the comparable group
median of $147.0 million. Even a $34 million offering will leave the
Company at less than 50% of its peers. Net premiums earned of $57.8
also indicate a much smaller company than the peer group (median of
$127.7 million). Larger companies with greater resources frequently
are able to be more competitive given their access to marketing and
management talent, economies of scale, sophistication and greater
diversification in underwriting. Additionally, greater size may offer
increased investor protection in the event of extraordinary events and
catastrophic losses.
OGGI's Business Strategy Means Additional Risk - In order to increase
revenues while mitigating weather and catastrophe-related risks and to
diversify its product offerings, OGGI intends to modify its product
mix and make acquisitions of other insurance companies. Changing a
proven product mix and merging with other insurance companies present
added risk for OGGI and its potential shareholders because success (in
the completion of such moves or in the operations themselves) is not
guaranteed. For example, in 1996, the Company attempted to acquire
Lutheran Benevolent Insurance Exchange. After the Company's Directors
declined to pursue the opportunity, it had incurred expenses as well
as management time and effort; additionally, the recovery of a surplus
advance in the amount of $250,000 has been written off. In addition,
acquisitions can result in dilution of book value and earnings per
share. Since investors require higher returns with increased risk, the
Company's valuation must be discounted from the comparable group to
make up for this additional risk.
No Prior Market for Common Stock - Because the Company currently is a
mutual insurance company, there has been no public market for its
common stock. As with any new issue, there can be no assurance that an
active trading market will develop or be sustained or that there will
be sufficient demand for the Common Stock. Also, since uncertainty
exists regarding what the value of OGGI's stock will be once it starts
trading publicly, investors will require a higher return on their
initial investment. The more uncertainty that arises from an offering,
the lower the initial public offering price should be to induce
potential shareholders to purchase stock.
First Mutual Conversion of an Insurance Company in Pennsylvania under
Act 79 - OGGI will be the first insurance company to convert from a
mutual company to a stock company under the new Pennsylvania
legislation. Since no prior conversions of this type have occurred in
the Commonwealth of Pennsylvania under this legislation, no precedents
exist to be used as examples for valuation purposes or to determine
how this process will be received by the policyholders and the public.
Policyholders may show little interest because they may not fully
understand what they are purchasing due to the novel nature of the
offering or because policyholders may not have a strong affinity with
their property/casualty insurer. According to the Act, "the pro forma
market value may be the value that is estimated to be necessary to
attract full subscription for the shares as indicated by the
independent evaluation." Given the numerous uncertainties associated
with the first such conversion in Pennsylvania, a discount in excess
of a standard new
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35 Berwind Financial Group, L.P.
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APPRAISAL DISCUSSION
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issue discount must be applied to induce potential shareholders to
purchase shares and attract a full subscription.
In addition to the above discounts, Berwind considered the pending
litigation discussed on page 26 as well as the additional income from the New
Castle investment and improved loss condition. In terms of earnings prospects,
the effect of the litigation is the one-time cost of the legal fees and the
burden on the Company's management time. The additional legal fees, which are
capped at $100,000, would lend to a decrease in earnings over the next year. The
additional pre-tax income of $85,000 from the Company's investment, as well as
the potential for decreased expenses from a more mild winter (1997 year to date
has been less severe than 1996) add credibility to the Company's projections.
Importantly, Company management has elected not to change the forecast for the
Company's earnings.
In the aggregate the Company's earnings prospects have not changed
materially. Predicting the outcome of the Company's litigation is not possible
with any degree of certainty.
Upon consideration of the Comparable Group data as well as the
important differences between OGGI and Comparable Group (discussed above and
taken as a whole), Berwind applied an aggregate discount to the valuation
multiples derived in the Comparable Public Company Analysis of 45%. The charts
on the following pages summarize the valuation discounts and their effect on
OGGI pro forma valuation.
The appraisal range listed below includes the effect of the conversion
of the American Re Surplus. As discussed in the original Appraisal, we have
considered the effect of the note
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36 Berwind Financial Group, L.P.
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APPRAISAL DISCUSSION
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which requires a slight initial discount to maintain the targeted price to book
value estimate. The conversion of debt increases the equity account as well as
the number of shares issued.
Example of Multiple Applicable to Old Guard Group, Inc.
Price to Book Value(1)
---------------------
Comparable Group Multiple 1.31x
Profitability - Initial .91x
Discounts applied, including
new issue, profitability, geographic
concentration, business strategy risk,
size disadvantage, first conversion
under Act(2) 45%
----
Adjusted Multiple .50x
(1) Price to earnings multiples were not used due to OGGI's currently depressed
earnings as well as the historical variability of the Company's earnings.
(2) Discounts must be viewed in the aggregate and taken as a whole.
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37 Berwind Financial Group, L.P.
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APPRAISAL DISCUSSION
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Valuation Conclusion
The following is a summary of changes in the Company's position
since the original Appraisal.
o Company is in the process of reviewing its pricing policy and
has begun to examine its underwriting programs.
o The quarter ended December 31, 1996 is anticipated to show
improvement over the previous quarter. This is in line with
management's projections.
o OGGI is subject to litigation which could have a material effect
on the Company if it were to be decided against the Company.
Company management and its legal counsel have indicated that
there is no certainty as to the outcome. Therefore, we have not
considered the effect of this litigation on our valuation.
o The Company has made an investment in New Castle and an
acquisition of FDIC, which slightly increases revenues and gives
OGGI a stronger presence in Delaware.
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38 Berwind Financial Group, L.P.
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APPRAISAL DISCUSSION
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o There has been no change in projections of the Company despite
the above changes.
Having evaluated all of the above changes to the Company from
August 19, 1996 to February 7, 1997, it is Berwind's opinion that the financial
and operational state of the Company, on a net basis, has not materially
changed. We have utilized the current book value multiple of .91x (up slightly
from .87x at 8/19/96). We have continued to apply a discount of 45% to this
multiple to account for the differences between the Company and the Comparable
Peer Group.
In Berwind's opinion, at February 7, 1997 OGGI's estimated pro
forma book value was $71.1 million implying an offering size of $33.4 million,
representing approximately the same value as in our August 19, 1996 appraisal.
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39 Berwind Financial Group, L.P.
