SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, for the fiscal year ended
December 31, 1997, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, for the transition period
from N/A to __________.
Commission File Number 0-16533
OLD GUARD GROUP, INC.
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2852984
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2929 Lititz Pike, Lancaster, Pennsylvania 17601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (717) 569-5361
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (no par value)
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the shares of Common Stock of the
Registrant held by nonaffiliates of the Registrant was
$71,982,054 at March 25, 1998. As of March 25, 1998, the
Registrant had 4,231,635 shares of Common Stock outstanding.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement with respect to the 1998 annual meeting of
shareholders is incorporated into Part III hereof.
<PAGE>
PART I
Item 1. BUSINESS.
THE COMPANY
General
Old Guard Group, Inc. (the "Company") was incorporated under
the laws of the Commonwealth of Pennsylvania in May 1996 for the
purpose of serving as a holding company for Old Guard Insurance
Company ("Old Guard"), Old Guard Fire Insurance Company ("Old
Guard Fire"), and First Patriot Insurance Company ("First
Patriot" and collectively with Old Guard and Old Guard Fire, the
"Insurance Companies").
On February 11, 1997, the Company became a holding company
for the Insurance Companies upon the completion of their
conversion from Pennsylvania mutual insurance companies to
Pennsylvania stock insurance companies and the simultaneous
acquisition of the capital stock of each of the Insurance
Companies by the Company pursuant to a Joint Plan of Conversion
adopted by the Boards of Directors of the Company and the
Insurance Companies on May 31, 1996, as amended and restated on
July 19, 1996 and January 10, 1997 (the "Plan").
On February 11, 1997, pursuant to the Plan, the Company
completed the sale of 4,204,910 shares of its common stock, no
par value per share (the "Common Stock") at the price of $10.00
per share in contemporaneous subscription and community offerings
(the "Offering") for gross proceeds of approximately $42,049,100,
including the Conversion of a $1.5 million surplus note into
Common Stock. The conversion of the Insurance Companies to stock
form, the issuance of capital stock of the Insurance Companies to
the Company and the Offering are collectively referred to herein
as the "Conversion."
The Company's executive offices are located at 2929 Lititz
Pike, Lancaster, Pennsylvania 17601, and its main telephone
number is (717) 569-5361. The Company and its subsidiaries are
collectively referred to herein as the "Group."
The Insurance Companies
Old Guard, Old Guard Fire and First Patriot are each
Pennsylvania-chartered insurance companies that converted from
mutual to stock form on February 11, 1997. The Insurance
Companies are wholly-owned subsidiaries of the Company and
operate as members of Old Guard Insurance ("OGI"), a group of
insurance companies under common management. OGI also includes
First Delaware Insurance Company (see "Acquisition of First
Delaware Insurance Company"), New Castle Mutual Insurance Company
(see "New Castle Insurance Company Investment") and Neffsville
Mutual Fire Insurance Company ("Neffsville"). The Insurance
Companies are property and casualty insurers of farms, small and
medium-sized businesses and residences primarily in rural and
suburban communities in Pennsylvania, Maryland and Delaware. The
Insurance Companies market farmowners, homeowners and
businessowners policies, as well as personal and commercial
automobile, workers' compensation and commercial multi-peril
coverages through approximately 1,600 independent agents.
The Insurance Companies operate under a reinsurance pooling
agreement pursuant to which all premium revenue, loss and loss
adjustment expense are ceded to Old Guard and a fixed percentage
of those items is retroceded by Old Guard to Old Guard Fire and
First Patriot. The allocation of pooled revenue and expense is
determined by the parties and is currently as follows: Old
Guard - 60%, Old Guard Fire - 29% and First Patriot - 11%.
Investment income and investment gains and losses are not pooled.
In addition, Neffsville reinsures 90% of its book of business
with Old Guard Fire.
Old Guard. Old Guard was originally chartered in 1896. At
December 31, 1997, Old Guard had total assets of $122.3 million
(prior to the elimination of intercompany accounts in
consolidation) and equity of $37.8 million.
Old Guard Fire. Old Guard Fire was originally chartered in
1872. At December 31, 1997, Old Guard Fire had total assets of
$41.5 million (prior to the elimination of intercompany accounts
in consolidation) and equity of $17.2 million.
First Patriot. Formally known as Goschenhoppen-Home
Insurance Company, was originally chartered in 1843. At
December 31, 1997, First Patriot had total assets of
$23.5 million (prior to the elimination of intercompany accounts
in consolidation) and equity of $6.7 million.
The Insurance Companies are subject to examination and
comprehensive regulation by the Department. See "Business --
Regulation."
Strategy
The Group's principal strategies for the future are to:
-- Achieve geographic diversification of risk by
acquisition of other insurance companies or licensing
of the Insurance Companies in other jurisdictions with
reduced or different loss exposure;
-- Improve the mix of business by increasing commercial
writings and emphasizing casualty coverages in order to
enhance profitability and lessen the impact of property
losses on overall results; and
-- Improve efficiency and maintain the high level of
personal service delivered to agents and insureds
through continued enhancement of the Group's management
information systems (MIS).
Geographic Diversification. The Group's goal is to achieve
geographic diversification of risk outside Pennsylvania to areas
with reduced or different catastrophic loss exposure and in which
management believes insurers generally have been permitted to
manage risk selection and pricing without undue regulatory
interference. Concentration of property insurance in
Pennsylvania has caused the Insurance Companies to be susceptible
to localized catastrophic events primarily related to severe
weather. The Group expects to accomplish geographic
diversification principally through acquisition but expects also
to seek authority for the Insurance Companies to do business in
additional jurisdictions. The acquisition of an 80% interest in
First Delaware Insurance Company and the investment in New Castle
Mutual Insurance Company ("New Castle") represent initial steps
to diversify geographically. See "Acquisition of First Delaware
Insurance Company" and "New Castle Insurance Company Investment"
herein.
The Company plans to seek additional acquisitions outside
Pennsylvania. The Company is currently targeting companies
located in jurisdictions adjacent to its current markets and in
the upper Midwest. The Conversion provided funds for cash
acquisitions and the holding company structure will facilitate
the use of capital stock for acquisitions as well. Insurance
companies acquired may be added to the existing reinsurance pool
among the Insurance Companies.
The determination whether to add acquired companies to the
Insurance Companies' intercompany reinsurance pooling arrangement
will be made on a case by case basis as acquisitions are
completed. Some of the factors considered in evaluating an
acquired company for possible inclusion in the reinsurance pool
will include the acquired company's capital position, the quality
of the book of business, liabilities for losses and loss
adjustment expenses, claims settlement practices, the lines of
business written, existing reinsurance relationships, the level
of control which management of the Insurance Companies will have
over the operations of the acquired company, and rating agency
considerations.
Diversification of Lines of Business. The Insurance
Companies have taken, and will continue to take, steps to
increase commercial and casualty premium volume, both to reduce
property loss exposure and to provide greater product
diversification from personal into commercial lines that may
provide a countercyclical balance to personal lines.
During 1997, emphasis was placed on improving the staff.
Underwriters received regular counseling and training on working
with agents to attract new business and retain existing accounts.
There was some turnover as certain underwriters were unable to
adapt to the new environment. In each case, the Group has
attempted to hire a replacement with the skills needed to be more
sales and customer oriented.
Management believes that it has the opportunity to increase
the volume of casualty business by focused marketing to existing
agents. For instance, New Castle began writing personal
automobile business in 1997 and First Patriot will begin to do so
in 1998. Management believes an increasing share of this market
is desirable and attainable given the existing relationships
among the Insurance Companies, its agents and its insureds.
Service Capabilities. Management believes the Insurance
Companies have a strong reputation for personal attention to
agents and insureds. The Insurance Companies have undertaken a
program to enhance their MIS capabilities, with the goal of
improving efficiency, internal reporting and service to agents
and insureds, as well as facilitating acquisitions. The
Insurance Companies have been actively involved in the search,
review, selection, customization and testing of a new policy
processing software system since the second quarter of 1994. The
licensing rights for the new software system were acquired from
Strategic Data Systems, Inc., an insurance industry software
specialty company. The software system is a personal computer
database system designed to eliminate most paperwork required in
traditional systems. Claims, billing and accounting functions
are also fully integrated in the new software system. The
ability to operate multiple companies, maintain on-line remote
offices and enhancements in the quality and timeliness of
management information are additional benefits of the new
software system. Effective January 1, 1997, personal automobile
was the first line of business phased into the new software
system. During 1998, management of the Insurance Companies
expects to integrate homeowners into the new software system and
by the end of 1999 expects to have the farmowners and commercial
lines of business processed on a new software system. This new
MIS environment should permit a greater volume of business to be
processed by the same or fewer number of staff and is fully Year
2000 compliant. It will also allow direct agent interface to
enhance service to agents and insureds and build upon the
Insurance Companies' strong reputation in this area.
First Delaware Insurance Company Acquisition
On February 14, 1997, Old Guard Investment Holding Company,
Inc. ("Old Guard Investment"), a subsidiary of the Group,
pursuant to an agreement with First Delaware Insurance Company
("First Delaware"), a Delaware insurance company, and
International Corporation ("IC"), First Delaware's sole
shareholder, acquired 80% of the capital stock of First Delaware.
The acquisition was made through a combination of (i) a
$1.5 million cash investment in First Delaware in exchange for a
number of shares of First Delaware common stock equal to
$1.5 million divided by 1.5 times the GAAP book value per share
of First Delaware as of December 31, 1996 and (ii) the purchase
from IC for cash of a number of additional shares of First
Delaware at a price per share equal to 1.5 times the GAAP book
value per share of First Delaware. Old Guard Investment now
holds 80% of the stock of First Delaware. The total acquisition
price equaled approximately $3.3 million.
At closing of the acquisition, Old Guard Investment and IC
executed a shareholder agreement that, among other things,
prohibits IC from transferring its remaining 20% interest in
First Delaware prior to December 31, 2003 to anyone other than
Old Guard Investment or an affiliate of Old Guard Investment.
The shareholder agreement also gives the parties certain "put"
and "call" rights prior to December 31, 2003 during specified
periods with respect to the remaining 20% of the common stock of
First Delaware held by IC at a purchase price of between 1 and
1.5 times then current GAAP book value per share. The exercise
price of the put or call varies depending upon the time period
when the put or call is exercised and is payable in cash or
Common Stock at the election of the party exercising the put or
call right. In addition, after December 30, 1999, IC can
relinquish its put right and extinguish Old Guard Investment's
call right in exchange for a payment from Old Guard Investment to
IC of 10% of the put price.
Following closing, the First Delaware Board of Directors was
expanded to consist of five members, three of whom were elected
by Old Guard Investment. David E. Hosler, the Chairman of the
Company, became Chairman of First Delaware. In order to retain
the services of the two principals of First Delaware, First
Delaware entered into employment agreements acceptable to Old
Guard Investment with such principals.
The acquisition of First Delaware furthers the Group's
strategic goals of geographic and product line diversification
because First Delaware's business is principally commercial
lines, including surety business in the Delaware and Maryland
markets. The Insurance Companies intend to renew their current
commercial writings in Delaware and the Eastern Shore of Maryland
with First Delaware and support a planned expansion of First
Delaware into Virginia.
The Insurance Companies and First Delaware are referred to
collectively herein as "Old Guard Insurance Companies".
New Castle Mutual Insurance Company Investment
On December 23, 1996, Old Guard Investment executed an
Investment Agreement with New Castle Mutual Insurance Company
(New Castle), a Delaware insurance company that is licensed in
Delaware and Pennsylvania and sells primarily homeowners and
other personal property and casualty lines through independent
agents. Pursuant to the Investment Agreement, Old Guard
Investment has purchased a total of $2.5 million in convertible
surplus notes from New Castle. Old Guard Investment, or an
affiliate designated by Old Guard Investment may be obligated to
purchase, from time to time, up to an additional $1.5 million of
convertible surplus notes based on cancellation of reinsurance or
an increase in the ratio of net premiums written to statutory
surplus to an amount in excess of 2.9x. The surplus notes will
bear interest payable monthly at a floating rate equal to Dauphin
Deposit Bank's base rate with a maximum interest rate of 10%.
All principal amounts under the surplus notes will be due at
maturity on January 1, 2007. The Investment Agreement contains
customary representations, warranties, covenants and conditions
to subsequent closing. New Castle and Old Guard Insurance
Management Co. ("OGIM"), a subsidiary of Old Guard Investment
formally known as Commonwealth Insurance Managers, Inc., also
executed a management agreement pursuant to which OGIM will
provide management advice on actuarial services, reinsurance
purchasing, investment management, management information
systems, security custody services, human resource services and
employee benefits.
The surplus notes will be convertible into common stock of
New Castle if, but only if, New Castle converts from mutual to
stock form. The surplus notes will be convertible into that
number of shares of common stock of New Castle equal to the
greater of (i) the principal balance of the surplus notes divided
by (A) the price at which a share of common stock of New Castle
is offered and sold in a mutual to stock conversion of New
Castle, if such an offering is made, or (B) the value assigned to
a share of New Castle common stock distributed to New Castle
policyholders in a mutual to stock conversion of New Castle, if
such a distribution is made, or (ii) the number of authorized
shares of common stock of New Castle multiplied by a fraction the
numerator of which is the principal amount of the surplus notes
and the denominator of which is the statutory surplus of New
Castle on the last day of the month immediately preceding a
mutual to stock conversion of New Castle. New Castle has
covenanted to use its best efforts to convert from mutual to
stock form within three years from the date of the initial
surplus note investment.
The surplus note investment in New Castle furthers the
Group's strategic goal of geographic diversification because New
Castle's business is principally located in the Delaware market.
Products
The Old Guard Insurance Companies offer a variety of
property and casualty insurance products primarily designed to
meet the insurance needs of the rural and suburban communities in
which the Old Guard Insurance Companies do business, including
their agricultural clients. The following tables set forth the
direct premiums written, net premiums earned, net loss ratios,
expense ratios and combined ratios by product line for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31
% of % of % of % of % of
Direct Premiums Written: 1997 Total 1996 Total 1995 Total 1994 Total 1993 Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Farmowners $17,819 21.0 % $16,365 20.6 % $15,494 20.2 % $16,080 20.7 % $15,319 20.5 %
Homeowners 21,142 25.0 21,577 27.2 21,157 27.6 20,509 26.3 19,067 25.5
Businessowners and commercial
multi-peril 12,605 14.9 10,577 13.3 11,083 14.4 10,587 13.6 10,367 13.9
Personal automobile 19,949 23.6 18,617 23.5 16,810 21.9 15,928 20.5 13,376 17.9
Commercial automobile 2,201 2.6 886 1.1 776 1.0 815 1.0 807 1.0
Workers' compensation 6,245 7.4 5,912 7.4 5,432 7.1 5,562 7.1 6,312 8.4
Fire, allied, inland marine 2,850 3.4 4,078 5.2 3,668 6.1 7,073 9.1 8,192 11.0
Surety 113 0.1 - - - - - - - -
Other liability 1,740 2.0 1,372 1.7 1,317 1.7 1,331 1.7 1,316 1.8
Total $84,664 100.0 % $79,384 100.0 % $75,737 100.0 % $77,885 100.0 % $74,756 100.0 %
<CAPTION>
Year Ended December 31
% of % of % of % of % of
Net Premiums Earned(1) 1997 Total 1996 Total 1995 Total 1994 Total 1993 Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Farmowners $12,309 19.7 % $9,907 18.5 % $13,413 20.1 % $13,315 21.0 % $13,368 21.9 %
Homeowners 16,114 25.8 14,898 27.8 18,391 27.6 16,755 26.4 14,622 24.0
Businessowners and commercial
multi-peril 8,576 13.8 7,078 13.2 8,828 13.2 8,387 13.2 8,548 14.0
Personal automobile 14,800 23.7 12,766 23.8 14,459 21.7 12,521 19.8 11,402 18.7
Commercial automobile 1,239 2.0 565 1.1 769 1.2 717 1.1 675 1.1
Workers' compensation 4,388 7.0 3,564 6.6 4,233 6.4 4,266 6.7 4,394 7.2
Fire, allied, inland marine 4,378 7.0 4,538 8.5 6,294 9.4 6,930 10.9 7,465 12.3
Surety 172 0.3 - - - - - - - -
Other liability 453 0.7 276 0.5 276 0.4 574 0.9 512 0.8
Total $62,429 100.0 % $53,592 100.0 % $66,663 100.0 % $63,465 100.0 % $60,986 100.0 %
</TABLE>
<TABLE>
<CAPTION>
Net Loss Ratio 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Farmowners 68.5 % 94.2 % 78.7 % 8.8 % 71.2 %
Homeowners 62.1 95.5 80.8 98.0 83.3
Business owners and commercial
multi-peril 66.5 76.5 62.2 47.8 51.6
Personal automobile 75.3 82.5 90.4 70.9 73.2
Commercial automobile 82.5 63.6 70.9 53.8 35.1
Workers' Compensation (7.8) 45.7 43.0 58.3 74.3
Fire, allied, inland marine 52.4 58.5 53.4 49.7 50.1
Surety (9.3) - - - -
Other liability 58.2 87.8 326.3 49.9 83.9
Total 61.7 % 82.8 % 75.8 % 73.2 % 69.1 %
<CAPTION>
Year Ended December 31
1997 1996 1995 1994 1993
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Expense Ratios
Farmowners 47.8 % 46.4 % 36.6 % 34.1 % 34.3 %
Homeowners 37.8 31.8 39.0 39.7 39.3
Businessowners and commercial
multiple peril 58.3 57.1 41.2 36.4 36.1
Personal automobile 23.8 20.4 22.6 24.0 24.5
Commercial automobile 33.0 27.9 24.9 27.3 32.5
Workers' Compensation 39.1 21.4 23.6 25.7 29.1
Fire, allied, inland marine 33.8 34.8 47.2 49.6 42.0
Surety 59.7 - - - -
Other liability 52.1 50.7 46.9 25.2 33.3
Total 39.1 % 34.7 % 34.9 % 34.8 % 34.4 %
Combined Ratios (2)
Farmowners 116.2 % 138.7 % 115.2 % 112.8 % 105.5 %
Homeowners 99.9 127.3 119.7 137.7 122.6
Businessowners and commercial
multiple peril 124.8 133.6 103.4 84.1 87.7
Personal automobile 99.1 102.9 113.1 94.8 97.7
Commercial automobile 115.5 91.5 95.8 81.2 67.6
Workers' Compensation 31.3 67.1 66.7 84.1 103.4
Fire, allied, inland marine 86.1 93.3 100.6 99.2 92.1
Surety 50.4 - - - -
Other liability 110.3 138.5 373.2 75.1 117.2
Total 100.8 % 120.3 % 107.9 % 106.3 % 99.5 %
Industry combined ratio (3) 101.8 % 105.8 % 106.4 % 108.4 % 106.9 %
</TABLE>
(1) Effective January 1, 1996, the Insurance Companies and
American Re entered into a quota share reinsurance agreement
pursuant to which the Insurance Companies ceded 20% (reduced
to 15% effective January 1, 1997) of their liability
remaining after cessions of excess and catastrophic risks
through other reinsurance contracts. Pro rata cessions of
unearned premiums as of January 1, 1996 and the transfer of
premiums written during the year ended December 31, 1996
accounts, in part, for the decline in net premiums earned
when the year ended December 31, 1996 as compared to the
year ended December 31, 1995.
(2) A combined ratio over 100% means that an insurer's
underwriting operations are not profitable.
(3) Per A.M. Best
Farmowners Policy
The farmowners policy is a flexible, multi-line package of
insurance coverages. As a result of its flexible features, this
product can be adapted to meet the needs of a variety of
agricultural and related businesses, including a package designed
for farmers with large dairy operations. The farmowners policy
combines property and liability insurance for the farm owner, as
well as owners of other agricultural related businesses, such as
nurseries and greenhouses. The largest numbers of farmowners
policies written by the Insurance Companies are for dairy, beef,
horse and crop farming risks. In general, standing crops are not
insured except under limited circumstances but harvested and
stored crops generally are insured. Policyholders may select
property damage coverages for specific peril groups, such as
basic perils that include fire and allied lines, extended
coverage and vandalism or broad form and special perils.
Personal liability coverage insures policyholders against third
party liability from accidents occurring on their premises or
arising out of their operations or from their products. The
farmowners policy contains a limited liability extension of
pollution-type coverage for damages caused to third persons or
their crops resulting from above-ground, off-premises
contamination, such as overspray of fertilizers and pesticides.
Homeowners Policy
Homeowners insurance is a multi-peril policy providing
property and liability coverages and optional inland marine
coverage. The homeowners policy is sold to provide coverage for
the insured's principal residence.
Businessowners and Commercial Multi-Peril
Businessowners. Businessowners insurance provides property
and liability coverages to small businesses within rural and
suburban markets. This product is marketed to six distinct
groups: (i) apartment owners with relatively small property-
based risks; (ii) condominium owners; (iii) landlords with
dwelling properties of up to four family units; (iv) mercantile
businessowners, such as florists, gift shops and antique dealers,
with property-based risks; (v) offices with owner and/or tenant
occupancies; and (vi) religious institutions consisting of
smaller, rural properties.
Commercial Multi-Peril. Commercial multi-peril policies
provide property and liability coverage to accounts that, because
of their larger size, do not meet the eligibility requirements
for the businessowners product. The Old Guard Insurance
Companies are working to increase market penetration for this
product because it includes commercial liability risks that help
to diversify exposures and lessen the impact of property losses
on overall results. One such marketing initiative is the
promotion of commercial multi-peril packages targeted to the
following businesses: (i) food processing, (ii) retailing,
(iii) manufacturing, (iv) metal working, (v) offices, and
(vi) service operations. These packages are being written using
existing policy forms and were chosen based on the experience of
the underwriting staff and market opportunities available to
existing agents. The packages are of a type generally written by
larger companies and should permit the Old Guard Insurance
Companies to sell commercial packages as well as accompanying
workers' compensation and commercial automobile coverages to
larger accounts.
Personal Automobile
Personal automobile policies insure individuals against
claims resulting from injury and property damage and can be
marketed in conjunction with the Old Guard Insurance Companies'
other products, such as the farmowners policy, the businessowners
policy or the homeowners policy.
Commercial Automobile
Commercial automobile policies are generally marketed in
conjunction with farmowners, businessowners or commercial multi-
peril policies. Commercial automobile is one of the Old Guard
Insurance Companies' lower volume products.
Workers' Compensation
Workers' compensation policies are generally issued in
conjunction with farmowners policies, businessowners policies or
other commercial packages. However, stand-alone workers'
compensation policies may be written. A recent initiative is
tiered pricing for workers' compensation coverage with the
introduction of a policy with more attractive pricing and the
opportunity for dividends.
Fire, Allied, Inland Marine
Fire and allied lines insurance generally covers fire,
lightning and extended coverage. Inland marine coverage insures
merchandise or cargo in transit and business and personal
property. Fire, allied and inland marine insurance coverages are
offered only as endorsements available under the other insurance
products.
Other Liability
Umbrella Liability. Commercial and personal line excess
liability policies are offered to cover business, farm and
personal liabilities in excess of amounts covered under
farmowners, homeowners, businessowners, commercial multi-peril
and automobile policies. Such policies are available generally
with limits of $1 million to $5 million. Excess liability
policies are generally not marketed to individuals and farmowners
unless they also write an underlying liability policy. However,
excess liability coverage may be written for commercial accounts
without all underlying liability coverages.
Commercial General Liability. Stand-alone commercial
general liability policies are written for certain business
situations that do not meet the criteria for liability coverage
under a farmowners, businessowners or commercial multi-peril
policy. The policy insures businesses against third party
liability from accidents occurring on their premises or arising
out of their operations or products. Most of the Old Guard
Insurance Companies' products liability line is written as part
of the commercial general liability product.
Marketing
The Old Guard Insurance Companies market their property and
casualty insurance products in Pennsylvania, Maryland and
Delaware through independent agencies. These agencies
collectively employ a force of approximately 3,500 agents. Most
of the Old Guard Insurance Companies' independent agents
represent multiple carriers and are established residents of the
rural and suburban communities in which they operate. The Old
Guard Insurance Companies' independent agents generally market
and write the full range of the Old Guard Insurance Companies'
products. The Old Guard Insurance Companies consider their
relationships with agents to be good. As of December 31, 1997,
no agency accounted for more than 5% of direct premiums written.
The Old Guard Insurance Companies emphasize personal contact
between their agents and policyholders. The Old Guard Insurance
Companies believe that their name recognition, policyholder
loyalty and policyholder satisfaction with agent and claims
relationships are the principal sources of new customer
referrals, cross-selling of additional insurance products and
policyholder retention.
The Old Guard Insurance Companies' policies are marketed
exclusively through their network of independent agents. The Old
Guard Insurance Companies depend upon their agency force to
produce new business and to provide customer service. The
network of independent agents also serves as an important source
of information about the needs of the communities served by the
Old Guard Insurance Companies. This information is utilized by
the Old Guard Insurance Companies to develop new products and new
product features.
Agency compensation is based on one of three compensation
plans. Each agency may elect: fixed base commission only, fixed
base commission with some opportunity for bonus commission based
on the agency's loss experience, or floating base commission
based on the agency's three year loss ratio with some opportunity
to earn bonus commission depending on the agency's one-year loss
experience.
Independent agencies are supervised and supported by agent
representatives, who are employees of the Old Guard Insurance
Companies and who have principal responsibility for recruiting
agencies and training new agents. To support its marketing
efforts, the Old Guard Insurance Companies develop and produce
print and radio advertising and hold seminars for agents.
Agencies are then able to purchase advertising (using prepared
materials) in local markets. The Old Guard Insurance Companies
and agent representatives conduct training programs that provide
both technical training about products and sales training on how
to market insurance products.
Computer software is provided to agencies that allows them
to quote rates on homeowners, farmowners, businessowners and
personal auto. In addition, a home page has been established on
the Internet for the public that is periodically updated with
pertinent information about the Old Guard Insurance Companies and
their products.
Underwriting
The Old Guard Insurance Companies seek to write their
commercial and personal lines by evaluating each risk with
consistently applied standards. The Old Guard Insurance
Companies maintain information on all aspects of their business
that is regularly reviewed to determine product line
profitability. The Old Guard Insurance Companies' underwriters
generally specialize in personal or commercial/farm lines.
Specific information is monitored with regard to individual
insureds that is used to assist the Old Guard Insurance Companies
in making decisions about policy renewals or modifications. The
Old Guard Insurance Companies' underwriters have an average of
over 15 years of experience as underwriters. The Old Guard
Insurance Companies believe their extensive knowledge of local
markets is a key underwriting advantage.
The Old Guard Insurance Companies rely on information
provided by their independent agents, who, subject to certain
guidelines, also act as field underwriters and pre-screen policy
applicants. The independent agents have the authority to sell
and bind insurance coverages in accordance with pre-established
guidelines. Agents' underwriting results are monitored and on
occasion agents with historically poor loss ratios have had their
binding authority removed until more profitable underwriting
results were achieved.
Claims
Claims on insurance policies written by the Old Guard
Insurance Companies are usually investigated and settled by one
of the Old Guard Insurance Companies' staff claims
representatives who work in teams led by a supervisor.
Supervisors report to the claims manager. The Old Guard
Insurance Companies' claims philosophy emphasizes timely
investigation, evaluation and fair settlement of claims, while
maintaining adequate case reserves and controlling claim
adjustment expenses. The claims philosophy is designed to
support the Old Guard Insurance Companies marketing efforts by
providing prompt service and making the claims process a positive
experience for agents and policyholders.
Claims settlement authority levels are established for each
representative and claims manager based upon their level of
experience. Claims are typically reported by the agents. Multi-
line teams exist to handle all claims. Subrogation is
centralized in the Lancaster, Pennsylvania office. The claims
department is responsible for reviewing all claims, obtaining
necessary documentation, estimating the loss reserves and
resolving the claims. The Old Guard Insurance Companies engage
independent appraisers and adjusters to evaluate and settle
claims as claims volume or specialized needs require. The Old
Guard Insurance Companies attempt to minimize claims costs by
encouraging the use of alternative dispute resolution procedures.
Litigated claims are assigned to outside counsel, who then work
closely as a team with a staff claims representative. Outside
counsel must comply with a formal litigation management plan and
all bills are audited.
Reinsurance
Reinsurance Ceded
In accordance with insurance industry practice, the Old
Guard Insurance Companies reinsure a portion of their exposure
and pay to the reinsurers a portion of the premiums received on
all policies reinsured. Insurance is ceded principally to reduce
net liability on individual risks, to mitigate the effect of
individual loss occurrences (including catastrophic losses), to
stabilize underwriting results and to increase the Old Guard
Insurance Companies' underwriting capacity.
Reinsurance can be facultative reinsurance or treaty
reinsurance. Under facultative reinsurance, each risk or portion
of a risk is reinsured individually. Under agreement
reinsurance, an agreed-upon portion of business written is
automatically reinsured. Agreement reinsurance can be further
defined as quota share or excess of loss reinsurance. Under
quota share reinsurance, the ceding company cedes a percentage of
its insurance liability to the reinsurer in exchange for a like
percentage of premiums less a ceding commission, and in turn will
recover from the reinsurer the reinsurer's share of all losses
and loss adjustment expenses incurred on those risks. Under
excess reinsurance, an insurer limits its liability to all or a
particular portion of the amount in excess of a predetermined
deductible or retention. Regardless of type, reinsurance does
not legally discharge the ceding insurer from primary liability
for the full amount due under the reinsured policies. However,
the assuming reinsurer is obligated to reimburse the ceding
company to the extent of the coverage ceded. The Old Guard
Insurance Companies generally place all of their reinsurance
directly without the use of brokers.
The Old Guard Insurance Companies determine the amount and
scope of reinsurance coverage to purchase each year based upon
their evaluation of the risks accepted, consultations with
reinsurance representatives and a review of market conditions,
including the availability and pricing of reinsurance. In 1997,
1996 and 1995, the Old Guard Insurance Companies ceded earned
premiums of $24.8 million, $27.5 million and $11.6 million,
respectively. The significant increase in ceded premiums for 1996
reflects the quota share reinsurance agreement that was effective
as of January 1, 1996 and which is described herein.
The Old Guard Insurance Companies' reinsurance arrangements
are placed with non-affiliated reinsurers, principally American
Re-Insurance Company ("American Re"), and are generally
renegotiated annually. Coverages described herein are generally
for 1997.
Except for certain excluded classes of property and losses
due to flood, the largest exposure retained by the Old Guard
Insurance Companies on any one individual property risk is
$250,000. Individual property risks in excess of $250,000 are
covered on an excess of loss basis up to $2.0 million per risk
pursuant to reinsurance agreements with American Re.
For 1997, individual casualty risks for most lines of
business, excluding umbrella liability, that were in excess of
$100,000 were covered on an excess of loss basis up to
$2.0 million per occurrence pursuant to reinsurance agreements
with American Re. In addition, casualty losses arising from
workers' compensation claims were reinsured on a per occurrence
and per person basis by various reinsurers up to $10.0 million.
Umbrella liability losses were reinsured by American Re on a 95%
quota share basis up to $1.0 million and a 100% quota share basis
in excess of $2.0 million up to $5.0 million.
Catastrophic reinsurance protects the ceding insurer from
significant aggregate loss exposure arising from a single event
such as windstorm, hail, tornado, hurricane, earthquake, riot,
blizzard, freezing temperatures or other extraordinary events.
For 1997, the Old Guard Insurance Companies purchased layers of
catastrophic property reinsurance, under which the Old Guard
Insurance Companies reinsured 95.0% of losses per occurrence over
$3.5 million up to a maximum of $10.0 million and 100% of losses
between $13.5 million and $30.0 million per occurrence. The Old
Guard Insurance Companies also had an underlying catastrophe and
aggregate excess of loss reinsurance agreement with American Re
designed to protect against multiple events each of which was
below the $3.5 million retention under the primary catastrophe
reinsurance. Under this agreement, losses were reinsured to the
extent of (A) aggregate net losses exceeding a 75% loss ratio in
any accident year up to the lesser of a 78.33% loss ratio or
$5.0 million, and (B) 100% of losses in excess of $3.0 million
for winter storm losses during specified periods, up to a maximum
of $5.0 million. The Insurance Companies recovered under this
latter coverage provision for losses attributable to the
January 1996 blizzard.
The Insurance Companies also maintain a quota share
reinsurance agreement with American Re. Under the terms of this
agreement, the Insurance Companies ceded 15% (20% in 1996) of
their liability remaining after cessions of excess and
catastrophic risks through other reinsurance contracts. The
result of the quota share agreement is a pro rata sharing of risk
with both the Insurance Companies and American Re. This agreement
protects the Insurance Companies' surplus from high frequency and
low severity type losses. Under the terms of the quota share
agreement the Insurance Companies paid American Re a reinsurance
premium equal to 15% (20% in 1996) of premiums collected net of
other reinsurance costs. Reinsurance premiums due American Re on
the quota share agreement were reduced by a ceding allowance
equal to 30% (35% in 1996) of the reinsurance premium.
Quota share reinsurance may be used to moderate the adverse
impact of underwriting losses to the ceding company but also
decreases underwriting profits which would otherwise be retained
by the ceding company. The quota share reinsurance agreement
entered into by the Insurance Companies with American Re has had,
and will have, a material effect on the financial condition and
results of operations of the Insurance Companies during the term
of the reinsurance agreement.
Effective January 1, 1998, the Insurance Companies' quota
share reinsurance agreement with American Re is in a "run-off"
basis whereby new or renewal policies in 1998 will no longer be
covered by the agreement.
The insolvency or inability of any reinsurer to meet its
obligations to the Old Guard Insurance Companies could have a
material adverse effect on the results of operations or financial
condition of the Old Guard Insurance Companies. American Re is
the Insurance Companies' major reinsurer. American Re is rated
A+ (superior) by A.M. Best. The A+ rating is the second highest
of A.M. Best's fifteen ratings. In 1997 and 1996, the Old Guard
Insurance Companies paid reinsurance premiums in an aggregate
amount of approximately $18.2 million and $31.2 million to
American Re, respectively. The Old Guard Insurance Companies
monitor the solvency of reinsurers through regular review of
their financial statements and A.M. Best ratings. The Old Guard
Insurance Companies have experienced no significant difficulties
collecting amounts due from reinsurers.
Losses and LAE Liabilities
Property and Casualty Reserves. The Old Guard Insurance
Companies are required by applicable insurance laws and
regulations to maintain liabilities for payment of losses and
loss adjustment expenses ("LAE") for both reported claims and for
claims incurred but not reported ("IBNR"), arising from the
policies they have issued. These laws and regulations require
that provision be made for the ultimate cost of those claims
without regard to how long it takes to settle them or the time
value of money. The determination of the liabilities involves
actuarial and statistical projections of what the Old Guard
Insurance Companies expect to be the cost of the ultimate
settlement and administration of such claims based on facts and
circumstances then known, estimates of future trends in claims
severity, and other variable factors such as inflation and
changing judicial theories of liability.
The estimation of ultimate liability for losses and LAE is
an inherently uncertain process and does not represent an exact
calculation of that liability. The Old Guard Insurance
Companies' estimation policy recognizes this uncertainty by
maintaining liabilities at a level providing for the possibility
of adverse development relative to the estimation process. The
Old Guard Insurance Companies do not discount their liabilities
to recognize the time value of money.
When a claim is reported to the Old Guard Insurance
Companies, claims personnel establish a "case reserve" for the
estimated amount of the ultimate payment. This estimate reflects
an informed judgment based upon general insurance reserving
practices and on the experience and knowledge of the estimator
regarding the nature and value of the specific claim, the
severity of injury or damage, and the policy provisions relating
to the type of loss. Case reserves are adjusted by the Old Guard
Insurance Companies' claims staff as more information becomes
available. It is the Old Guard Insurance Companies' policy to
settle each claim as expeditiously as possible.
The Old Guard Insurance Companies maintain IBNR reserves to
provide for future reporting of already incurred claims and
developments on reported claims. The IBNR reserve is determined
by estimating the Old Guard Insurance Companies' ultimate net
liability for both reported and IBNR claims and then subtracting
the case reserves for reported claims.
Each month, the Old Guard Insurance Companies compute their
estimated ultimate liability using principles and procedures
applicable to the lines of business written. Such liabilities
are also considered annually by the Company's independent
auditors in connection with their audit of the Company's
consolidated financial statements. However, because the
establishment of these liabilities are an inherently uncertain
process, there can be no assurance that ultimate losses will not
exceed the estimated losses. Adjustments in aggregate
liabilities, if any, are reflected in the operating results of
the period during which such adjustments are made. As required
by insurance regulatory authorities, the Old Guard Insurance
Companies submit to the various jurisdictions in which they are
licensed a statement of opinion by its appointed actuary
concerning the adequacy of statutory liabilities. The results of
these actuarial studies have consistently indicated that the
liabilities are adequate. Management of the Old Guard Insurance
Companies does not believe the Old Guard Insurance Companies are
subject to any material potential asbestos or environmental
liability claims.
Based on actuarial studies, the IBNR reserve provision was
increased at December 31, 1995 by $1.8 million and at
December 31, 1994 it was decreased by $2.3 million. Prior to
1995, the Insurance Companies had consistently shown loss reserve
redundancies. This led to the decrease in the IBNR reserve at
December 31, 1994. At December 31, 1995, it was determined that
the December 31, 1994 reserves were deficient. This deficiency
was primarily due to a change in the methodology for case
reserving for liability claims. The change was to reserve cases
at expected settlement value rather than at ultimate exposure
amounts. The 1995 actuarial study indicated that the reduction
in IBNR reserves coupled with the changes in case reserving
methodology may have been overstated. The majority of the
December 31, 1995 IBNR reserve strengthening was to correct
potential deficiencies in the reserves for the 1994 accident
year. Current evaluations indicate that the 1995 reserve
strengthening was premature because the 1994 reserves now appear
to have been materially correct as originally determined.
A table providing a reconciliation of beginning and ending
liability for losses and LAE of the Old Guard Insurance Companies
for 1997, 1996 and 1995 is included in footnote 4 to the
consolidated financial statements included herein.
The following table shows the development of the
liabilities for loss and LAE from 1987 through 1997 for the Old
Guard Insurance Companies on a GAAP basis. The top line of the
table shows the liabilities at the balance sheet date, including
losses incurred but not yet reported. The upper portion of the
table shows the cumulative amounts subsequently paid as of
successive years with respect to the liability. The lower
portion of the table shows the reestimated amount of the
previously recorded liability based on experience as of the end
of each succeeding year. The estimates change as more
information becomes known about the frequency and severity of
claims for individual years. The redundancy (deficiency) exists
when the reestimated liability at each December 31 is less
(greater) than the prior liability estimate. The "cumulative
redundancy (deficiency)" depicted in the table, for any
particular calendar year, represents the aggregate change in the
initial estimates over all subsequent calendar years.
<TABLE>
<CAPTION>
Year Ended December 31,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid Losses and LAE
net of reinsurance recoverable. $10,820 $14,097 $22,404 $25,477 $29,291 $34,895 $36,882 $32,810 $36,091 $34,515 $31,717
Acquisition of First Delaware - - - - - - - - - 668 -
Adjusted liability 10,820 14,097 22,404 25,477 29,291 34,895 36,882 32,810 36,091 35,183 31,717
Cumulative amount of liability
paid through:
One year later 5,478 6,554 10,425 10,713 10,867 14,126 15,386 17,468 16,289 14,704 -
Two years later 7,677 9,589 13,770 14,904 16,318 20,871 22,331 22,959 22,314
Three years later 9,432 11,380 16,098 18,438 20,368 24,346 25,109 26,788
Four years later 10,183 12,256 17,793 20,987 22,588 24,422 27,562
Five years later 10,435 13,264 19,293 21,947 23,274 25,675
Six years later 11,060 14,281 19,786 22,270 24,035
Seven years later 11,654 14,646 20,112 22,753
Eight years later 11,851 14,887 20,353
Nine years later 12,059 15,057
Ten years later 12,232
Liability reestimated as of:
One year later 10,875 15,787 22,120 25,094 28,404 32,099 31,363 35,252 36,648 30,840 -
Two years later 12,623 15,747 22,060 25,117 28,052 28,821 32,503 34,000 31,705
Three years later 12,632 15,570 21,416 25,008 26,143 28,165 31,375 32,134
Four years later 12,371 15,237 21,696 23,809 25,467 27,740 30,637
Five years later 11,968 15,367 20,969 23,781 25,153 27,036
Six years later 11,993 15,338 20,911 23,488 24,757
Seven years later 12,307 15,357 20,895 23,255
Eight years later 12,312 15,298 20,639
Nine years later 12,370 15,157
Ten years later 12,307
Cumulative total redundancy
(Deficiency) (1,487) (1,060) 1,765 2,222 4,534 7,859 6,245 676 4,386 4,343 -
Gross Liability end of year 59,057 51,309 52,091 57,565 48,725
Reinsurance recoverables 22,175 18,499 16,000 22,382 17,008
Net Liability, end of year 36,882 32,810 36,091 35,183 31,717
Gross reestimated Liability
47,026 49,550 46,024 51,096 -
Reestimated reinsurance
recoverables 16,389 17,416 14,319 20,240 -
Net reestimated Liability
30,637 32,134 31,705 30,856 -
</TABLE>
The following table is derived from the preceding table and
summarizes the effect of reserve reestimates, net of reinsurance,
on calendar year operations for the same ten-year period ended
December 31, 1997. The total of each column details the amount
of reserve reestimates made in the indicated calendar year and
shows the accident years to which the reestimates are applicable.
The amounts in the total accident year column on the far right
represent the cumulative reserve reestimates for the indicated
accident year(s).
<TABLE>
<CAPTION>
Cumulative
Deficiency
Effect of Reserve Reestimates on Calendar Year Operations (Redundancy)
Increase (Decrease) in Reserves for Calendar Year from
Reestimates
Accident for each
Year 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Accident Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 $ 55 $1,748 $ 9 $(261) $(403) $ 25 $ 314 $ 5 $ 58 $ (63) $ 1,487
1988 (58) (49) 84 70 105 (343) 14 (117) (78) (372)
1989 (244) 117 (311) 150 (698) (77) 43 (115) (1,135)
1990 (323) 667 (389) (472) 30 (277) 23 (741)
1991 (910) (243) (710) (648) (21) (163) (2,695)
1992 (2,444) (1,369) 20 (111) (308) (4,212)
1993 (2,241) 1,796 (703) (34) (1,182)
1994 1,302 (124) (1,128) 50
1995 1,809 (3,077) (1,268)
1996 1,268 1,268
Total 55 1,690 (284) (383) (887) (2,796) (5,519) 2,442 557 (3,675) (8,800)
</TABLE>
Investments
The Group's investment securities are classified as either
available for sale or held to maturity. An important component
of the operating results of the Group has been the return on
invested assets. The Group's investment objective is to maximize
current yield while maintaining safety of capital together with
adequate liquidity for its insurance operations. The Group's
investments are managed by outside investment advisors.
Certain consolidated information concerning the Group's
investments and their maturities is set forth in footnote 3 to
the consolidated financial statements contained elsewhere herein.
The average duration of the Group's fixed maturity
investments, excluding collateralized and asset backed securities
which are subject to paydown, as of December 31, 1997 was
approximately 4.0 years. As a result, the market value of the
Group's investments may fluctuate significantly in response to
changes in interest rates. In addition, the Group may experience
investment losses to the extent its liquidity needs require the
disposition of fixed maturity securities in unfavorable interest
rate environments.
A.M. Best Rating
A.M. Best, which rates insurance companies based on factors
of concern to policyholders, currently assigns an "A-"
(Excellent) rating (its fourth highest rating category out of
15 categories) to the Insurance Companies as a group. In
addition, First Delaware has received a "A-" rating from A.M.
Best. A.M. Best assigns "A" or "A-" ratings to companies which,
in its opinion, have demonstrated excellent overall performance
when compared to the standards established by A.M. Best.
Companies rated "A" and "A-" have a strong ability to meet their
obligations to policyholders over a long period of time. In
evaluating a company's financial and operating performance, A.M.
Best reviews the company's profitability, leverage and liquidity,
as well as the company's book of business, the adequacy and
soundness of its reinsurance, the quality and estimated market
value of its assets, the adequacy of its loss reserves, the
adequacy of its surplus, its capital structure, the experience
and competency of its management and its market presence. No
assurance can be given that A.M. Best will not reduce the current
rating in the future.
Competition
The property and casualty insurance market is highly
competitive. The Old Guard Insurance Companies compete with
other stock insurance companies, mutual companies, local
cooperatives and other underwriting organizations. Certain of
these competitors have substantially greater financial, technical
and operating resources than the Old Guard Insurance Companies.
The Old Guard Insurance Companies' ability to compete
successfully in their principal markets is dependent upon a
number of factors, many of which (including market and
competitive conditions) are outside the Old Guard Insurance
Companies' control. Many of the lines of insurance written by
the Old Guard Insurance Companies are subject to significant
price competition. Some companies may offer insurance at lower
premium rates through the use of salaried personnel or other
methods, rather than through independent agents paid on a
commission basis, as the Old Guard Insurance Companies do. In
addition to price, competition in the lines of business written
by the Old Guard Insurance Companies is based on quality of the
products, quality and speed of service (including claims
service), financial strength, ratings, distribution systems and
technical expertise.
Regulation
Insurance companies are subject to supervision and
regulation in the states in which they transact business. Such
supervision and regulation relates to numerous aspects of an
insurance company's business and financial condition. The
primary purpose of such supervision and regulation is the
protection of policyholders. The extent of such regulation
varies, but generally derives from state statutes which delegate
regulatory, supervisory and administrative authority to state
insurance departments. Accordingly, the authority of the state
insurance departments includes the establishment of standards of
solvency which must be met and maintained by insurers, the
licensing to do business of insurers and agents, the nature of
and limitations on investments, premium rates for property and
casualty insurance, the provisions which insurers must make for
current losses and future liabilities, the deposit of securities
for the benefit of policyholders, the approval of policy forms,
notice requirements for the cancellation of policies and the
approval of certain changes in control. State insurance
departments also conduct periodic examinations of the affairs of
insurance companies and require the filing of annual and other
reports relating to the financial condition of insurance
companies.
Examinations are conducted by the Pennsylvania Insurance
Department (the "Department") every three to five years. The
last examinations of Old Guard and Old Guard Fire were as of
December 31, 1991. The Department's last examination of First
Patriot was as of December 31, 1994 and the last examination of
First Delaware by the Delaware Insurance Department was as of
December 31, 1992. These examinations did not result in any
adjustments to the financial position of any of the companies.
In addition, there were no substantive qualitative matters
indicated in the examination reports that had a material adverse
impact on the operations of the companies. The Department is
currently conducting an examination of Old Guard, Old Guard Fire
and First Patriot as of December 31, 1996. To date, no material
findings have been brought to the attention of management.
In addition to state-imposed insurance laws and regulations,
the NAIC has adopted risk-based capital ("RBC") requirements that
require insurance companies to calculate and report information
under a risk-based formula that attempts to measure statutory
capital and surplus needs based on the risks in a company's mix
of products and investment portfolio. Under the formula, a
company first determines its Authorized Control Level risk-based
capital ("ACL") by taking into account (i) the risk with respect
to the insurer's assets; (ii) the risk of adverse insurance
experience with respect to the insurer's liabilities and
obligations, (iii) the interest rate risk with respect to the
insurer's business; and (iv) all other business risks and such
other relevant risks as are set forth in the RBC instructions. A
company's "Total Adjusted Capital" is the sum of statutory
capital and surplus and such other items as the RBC instructions
may provide. The formula is designed to allow state insurance
regulators to identify potential weakly capitalized companies.
The requirements provide for four different levels of
regulatory attention. The "Company Action Level" is triggered if
a company's Total Adjusted Capital is less than 2.0 times its ACL
but greater than or equal to 1.5 times its ACL. At the Company
Action Level, the company must submit a comprehensive plan to the
regulatory authority which discusses proposed corrective actions
to improve the capital position. The "Regulatory Action Level"
is triggered if a company's Total Adjusted Capital is less than
1.5 times but greater than or equal to 1.0 times its ACL. At the
Regulatory Action Level, the regulatory authority will perform a
special examination of the company and issue an order specifying
corrective actions that must be followed. The "Authorized
Control Level" is triggered if a company's Total Adjusted Capital
is than 1.0 times but greater than or equal to 0.7 times its ACL,
and the regulatory authority may take action it deems necessary,
including placing the company under regulatory control. The
"Mandatory Control Level" is triggered if a company's Total
Adjusted Capital is less than 0.7 times its ACL, and the
regulatory authority is mandated to place the company under its
control. The Old Guard Insurance Companies have never failed to
exceed the required levels of capital. There can be no assurance
that the capital requirements applicable to the business of the
Old Guard Insurance Companies will not increase in the future.
The NAIC has also developed a set of eleven financial
ratios, referred to as the Insurance Regulatory Information
System (IRIS), for use by state insurance regulators in
monitoring the financial condition of insurance companies. The
NAIC has established an acceptable range of values for each of
the eleven IRIS financial ratios. Generally, an insurance
company will become the subject of increased scrutiny when four
or more of its IRIS ratio results fall outside the range deemed
acceptable by the NAIC. The nature of increased regulatory
scrutiny resulting from IRIS ratio results outside the acceptable
range is subject to the judgment of the applicable state
insurance department, but generally will result in accelerated
review of annual and quarterly filings. Depending on the nature
and severity of the underlying cause of the IRIS ratio results
being outside the acceptable range, increased regulatory scrutiny
could range from increased but informal regulatory oversight to
placing a company under regulatory control. During the last
three years, each of the Old Guard Insurance Companies reported
results outside the acceptable range for certain IRIS tests but
none reported four or more IRIS ratios outside the acceptable
range.
The states in which the Old Guard Insurance Companies do
business (Pennsylvania, Maryland and Delaware), have guaranty
fund laws under which insurers doing business in such states can
be assessed on the basis of premiums written by the insurer in
that state in order to fund policyholder liabilities of insolvent
insurance companies. Under these laws in general, an insurer is
subject to assessment, depending upon its market share of a given
line of business, to assist in the payment of policyholder claims
against insolvent insurers. The Old Guard Insurance Companies
make accruals for their portion of assessments related to such
insolvencies when notified of assessments by the guaranty
associations.
Most states have enacted legislation that regulates
insurance holding company systems. Each insurance company in a
holding company system is required to register with the insurance
supervisory agency of its state of domicile and furnish
information concerning the operations of companies within the
holding company system that may materially affect the operations,
management or financial condition of the insurers within the
system. Pursuant to these laws, the respective insurance
departments may examine the Old Guard Insurance Companies, the
Group and their respective insurance subsidiaries at any time,
require disclosure of material transactions by the Group and/or
its subsidiaries and require prior approval of certain
transactions, such as "extraordinary dividends" from the Old
Guard Insurance Companies to the Group.
All transactions within the holding company system affecting
the Old Guard Insurance Companies, the Group and their respective
subsidiaries must be fair and equitable. Approval of the
applicable insurance commissioner is required prior to
consummation of transactions affecting the control of an insurer.
In some states, including Pennsylvania, the acquisition of 10% or
more of the outstanding capital stock of an insurer or its
holding company is presumed to be a change in control. In
addition, the Department approval of the acquisition by the Group
of all of the common stock of the Insurance Companies prohibits
the Group from paying any dividends or making other distributions
to shareholders (i) other than from earnings of the Insurance
Companies or (ii) in excess of $500,000 per year for a period of
three years following the Conversion without the approval of the
Department. These laws also require notice to the applicable
insurance commissioner of certain material transactions between
an insurer and any person in its holding company system and, in
some states, certain of such transactions cannot be consummated
without the prior approval of the applicable insurance
commissioner.
Other Subsidiaries
As of December 31, 1997, the Group owns all the capital
stock of Old Guard Investment, a Delaware corporation. Old Guard
Investment owns all of the capital stock of OGIM, a Pennsylvania
corporation. OGIM is a management company that employs and pays
senior management of the Insurance Companies. OGIM derives all
its revenues from management agreements with the Insurance
Companies and New Castle. Old Guard Investment also owns
2929 Service Corp., a licensed insurance agency that distributes
products of the Insurance Companies to customers whose agents are
no longer in business or no longer an agent for the Insurance
Companies.
Employees
As of December 31, 1997, the total number of full-time
equivalent employees of the Group and its subsidiaries was 214.
None of these employees are covered by a collective bargaining
agreement and the Company believes that employee relations are
good.
Item 2. PROPERTIES
The Group's main offices are located at 2929 Lititz Pike,
Lancaster, Pennsylvania in a 33,000 square foot facility owned by
Old Guard. Old Guard Fire owns a 25,000 square foot office
facility near the main office at 147 West Airport Road in
Lancaster. First Patriot leases 7,500 square feet of office
space in Quakertown, Pennsylvania and First Delaware leases 6,750
square feet of office space in Smyrna, Delaware.
On February 21, 1997, Old Guard Investment purchased a
21,500 square foot facility situated on 8 acres of land adjacent
to the Group's headquarters. The purchase price was
$1.1 million. The parcel of land permits construction of an
additional 50,000 square foot facility. This expansion was begun
in late 1997 and is expected to be completed in 1998. In
addition, Old Guard Fire has listed the Airport Road facility for
sale.
Item 3. LEGAL PROCEEDINGS
On February 10, 1997, the Group, the Insurance Companies and
each of their respective directors were served with an eleven
count combination class action and derivative lawsuit, filed in
the United States District Court for the Eastern District of
Pennsylvania by four policyholders. By filing the class action
portion of the lawsuit, these four policyholders purport to
represent all 141,000 policyholders of the Insurance Companies.
Seven of the eleven counts challenge the constitutionality of the
Act. The plaintiffs are contending that the conversion plan
violated the rights of the plaintiffs and members of the class
under the United States and Pennsylvania constitution and that
the Act is unconstitutional as applied by the conversion plan.
The remainder of the class action claims assert theories
regarding purported violations of the Act, principally relating
to the description of the Plan in the proxy statement approved by
the Insurance Department of the Commonwealth of Pennsylvania
Department and mailed to policyholders. The derivative claim was
brought against the directors of Insurance Companies, purportedly
on behalf of the Insurance Companies, alleging breach of the
fiduciary duty of care in approving and implementing the Plan and
the fiduciary duty of loyalty, presumably in approving the stock-
based compensation plans which were contemplated by the Plan.
The stock-based compensation plans are expressly permitted by the
Act, were approved by the Department and have subsequently been
approved by shareholders. The suit seeks such compensatory
damages as may be allowed by law, a declaration that the Plan
violates the Act and the United States and Pennsylvania
Constitutions and the rights of the plaintiffs thereunder, and
such other relief as the court deems appropriate.
The Group, the Insurance Companies and the individual
defendants filed a motion to dismiss the complaint in May 1997.
In December 1997, the Court granted the motion with respect to
two of the constitutional counts and denied the motion with
respect to the remaining nine counts, including five of the
constitutional claims. Discovery has begun and is scheduled to
be completed by September 30, 1998.
However, at the direction of the trial judge, the Group, the
Insurance Companies and the individual defendants expect to file
a motion for summary judgment with respect to the constitutional
claims on or before June 1, 1998. The Group cannot predict the
outcome of any such summary judgment motion. If the motion for
summary judgment is not granted, then, absent settlement, the
case would proceed to trial.
If the plaintiffs prevail in the above litigation, the
remedy a court would grant or the amount of damages it might
award is uncertain. A court has broad discretion to fashion a
fair and equitable remedy in light of the nature of the
constitutional or other violation, the relative harm to the
parties, and the public interest. In some cases, relief is
applied on a prospective basis only; in other cases, relief is
applied on a retroactive basis. No prediction can be made
concerning the remedy a court would fashion or the amount of
damages it might award. However, two of the more far-reaching
possibilities include:
- A requirement that the Group pay all purchasers of
common stock, either on a mandatory basis or at the
election of the purchaser, as damages or otherwise,
(i) the purchase price paid per share of common stock
acquired in the Conversion, plus interest, (ii) the
market value per share of common stock acquired, or
(iii) the greater of (i) or (ii), less, in each case,
any proceeds received by such purchaser from the sale
of the common stock. No assurance can be given that
the group would have sufficient funds at that time to
honor any such obligation; or
- The Group could be required to pay or distribute to all
or some policyholders of the Insurance Companies,
either on a mandatory basis or at the election of the
policyholders, an amount equal to the statutory surplus
of the Insurance Companies as of the date of the
Conversion, as damages or otherwise. Such distribution
could be required to be made in cash common stock or
other debt or equity securities. No assurance can be
given that the Group would have sufficient funds, or
the capacity to borrow sufficient funds, at that time
to honor any such obligation. Any required
distribution of common stock or other equity
securities would materially dilute the interests of
existing holder of the common stock.
In the event that the Group could no honor its obligations
under any remedy imposed by the Court, the Group could be forced
to seek the protection of the bankruptcy laws and the Insurance
Companies could be deemed insolvent and seized by the Department.
The Company and its subsidiaries are also parties to other
litigation in the normal course of business. Based upon
information presently available to them, the Company does not
consider any threatened or pending litigation to be material,
except as described above. However, given the uncertainties
attendant to litigation, there can be no assurance that the
Company's results of operations and financial condition will not
be materially adversely affected by any threatened or pending
litigation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Group's Common Stock commenced trading on the Nasdaq
Stock Market under the symbol OGGI on February 18, 1997, after
completion of the Offering. Prior to the Offering, no shares of
Common Stock were issued or outstanding. As of March 2, 1998,
the Group had approximately 2,048 shareholders of record. The
table below sets forth for the periods indicated the amount of
dividends declared per share and the quarterly ranges of high and
low bid prices for the Common Stock as reported by the Nasdaq
Stock Market National Market and does not necessarily reflect
mark-ups, mark-downs or commissions.
Cash
Dividends
1997 High Low Declared
First Quarter $15.00 $13.00 $ -
Second Quarter 14.75 13.38 -
Third Quarter 19.44 14.75 .05
Fourth Quarter 19.13 16.88 -
Subsequent to year-end, the Board declared a $.05 per share
dividend payable on March 18, 1998.
Payment of dividends on the Common Stock is subject to
determination and declaration by the Group's Board of Directors.
Any dividend policy of the Group will depend upon the financial
condition, results of operations and future prospects of the
Group. In addition, the approval of the Department of the
acquisition by the Group of all the common stock of the Insurance
Companies prohibits the Group from paying any dividends or making
other distributions to shareholders (i) other than from earnings
of the Insurance Companies, or (ii) in excess of $500,000 per
year for a period of three years following the Conversion without
the prior approval of the Department. At present, the Group
intends to pay an annual dividend of $.10 per share. However,
there can be no assurance that dividends will be permitted to be
paid under the terms of the Department's approval order or, if
paid initially, that they will continue to be paid in the future.
In addition, because the Group initially will have no significant
source of income other than dividends from the Insurance
Companies and earnings from investment of the net proceeds of the
Conversion retained by the Company, the payment of dividends by
the Group will depend significantly upon receipt of dividends
from the Insurance Companies.
Except as described above, the Group is not subject to
regulatory restrictions on the payment of dividends to
shareholders. The Group is subject to the requirements of the
Pennsylvania Business Corporation Law of 1988, as amended, which
generally permits dividends or distributions to be paid as long
as, after making the dividend or distribution, the Group will be
able to pay its debts in the ordinary course of business and the
Group's total assets will exceed its total liabilities plus the
amount that would be needed to satisfy the preferential rights
upon dissolution of holders of stock with senior liquidation
rights if the Group were to be dissolved at the time the dividend
or distribution is paid.
Item 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues:
Direct and assumed premiums written $87,936 $82,109 $78,946 $78,110 $75,168
Net premiums written 66,064 47,692 67,115 65,649 63,355
Net premiums earned 62,429 53,592 66,663 63,465 60,986
Net investment income 5,877 4,495 4,686 4,241 4,305
Net realized investment gains (losses) 2,326 1,385 1,011 476 1,758
Other income 413 322 274 266 244
Total revenue: $71,045 $59,794 $72,634 $68,448 $67,293
Losses and Expenses:
Losses and LAE incurred 38,514 44,359 50,509 46,440 42,154
Other underwriting expenses 24,436 18,397 23,227 22,087 20,991
Stock option compensation 2,017 - - - -
Interest 591 385 266 309 377
Total losses and expenses 65,558 63,141 74,002 68,836 63,522
Income before federal income tax (benefit)
and minority interest 5,487 (3,347) (1,368) (388) 3,771
Income tax expense (benefit) 2,009 (1,427) (684) (532) 383
Minority interest in loss of consolidated
subsidiary (7) - - - -
Net income (loss) $3,485 ($1,920) ($684) $144 $3,388
Selected Balance Sheet Data (at period end):
Total investments $118,123 $84,131 $92,335 $82,879 $90,895
Total assets 175,299 137,462 134,853 127,831 140,213
Line of credit outstanding - 1,550 - - -
Subordinated debt - 1,500 2,250 3,000 3,750
Total liabilities 96,645 98,451 93,956 91,300 100,359
Total equity $78,654 $39,011 $40,897 $36,531 $39,854
GAAP Ratios:
Loss and LAE ratio 61.7% 82.8% 75.8% 73.2% 69.1%
Underwriting expense ratio 39.1% 34.3% 34.9% 34.8% 34.4%
Combined ratio 100.8% 117.1% 110.7% 108.0% 103.5%
Statutory Data:
Statutory combined ratio 101.7% 120.3% 107.9% 106.3% 99.5%
Industry combined ratio 101.6% 105.8% 106.4% 108.4% 106.9%
Statutory surplus $51,691 $30,759 $32,249 $31,097 $31,487
Ratio of annual statutory net premiums
written to statutory surplus 1.3:1 1.6:1 2.2:1 2.2:1 2.1:1
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Year Ended December 31, 1997 Compared to Year Ended December 31,
1996
Premiums. Direct premiums written increased $5.3 million,
or 6.7%, in 1997 compared to 1996. This increase in direct
premiums written can be attributed, in part, to the acquisition
of First Delaware which contributed $3.6 million to the increase.
The remaining increase can be attributed to increases in personal
and commercial automobile and farmowners business offset by a
decrease in homeowners business. The increases in automobile
writings reflects the Group's continuing focus on increasing
liability business in an effort to balance the overall book of
business between property and liability exposures. The
farmowners line increased due to premium rate increases as
competition eased somewhat in the Group's primary market,
Pennsylvania. Homeowners premiums decreased $435,000, or 2.0%, in
1997 as a result of a reunderwriting initiative which commenced
in 1997 and is designed to improve the portfolio mix to include
higher value dwellings and to ensure that the appropriate premium
is received for the risk underwritten. To date, this initiative
has been successful as the number of homeowners policies in force
has declined at a faster rate than written premiums indicating
that we are receiving more premium dollars for less risk.
Workers' compensation premium rates decreased in 1997 because of
a 25% rate reduction mandated by the Pennsylvania Workers'
Compensation Rating Bureau. The decrease was driven by lower
claim costs arising out of reforms adopted in 1994-1995. This
rate reduction was offset by increases in policy count as the
Group implemented several safety group programs to attract new
and maintain existing business. The safety group programs offer
dividends based upon the group's loss experience and to
policyholders who are otherwise unable to obtain a dividend
participating policy. By creating safety groups, the Group is
able to offer this benefit and attract new business. Farmowners,
homeowners, and personal automobile direct writings as a
percentage of the total book of business were 21.0%, 25.0%, and
23.6%, respectively, in 1997 as compared to 20.6%, 27.2%, and
23.5%, respectively, for 1996.
Ceded premiums written decreased $12.5 million to
$21.9 million in 1997 compared to 1996. The decrease in premiums
ceded was directly attributable to the effects of reducing from
20% to 15% the quota share reinsurance agreement with our primary
reinsurer, American Re-Insurance Company (American Re). Ceded
premiums written under this agreement amounted to $9.4 million
and $20.1 million for 1997 and 1996, respectively. The remaining
decrease in ceded premiums written related to a restructuring of
our property reinsurance program effective January 1, 1997, from
a combination of pro-rata and excess of loss to 100% excess of
loss. This change in the property reinsurance program resulted
in a $2.9 million decrease in ceded premiums written. Decreases
in ceded premiums as a result of the aforementioned changes in
our property reinsurance were offset by a $1.6 million increase
associated with the acquisition of First Delaware.
Net premiums written increased $18.4 million, or 38.5%, in
1997 to $66.1 million from $47.7 million in 1996. For the same
comparative periods, net premiums earned increased $8.8 million,
or 16.5%, to $62.4 million from $53.6 million. The increases in
net premiums written and net premiums earned were directly
attributable to the effects of reducing the quota share
reinsurance agreement with American Re as well as the other
factors discussed above.
Net Investment Income. Net investment income increased
$1.4 million, or 30.7%, to $5.9 million in 1997 from $4.5 million
in 1996. Cash and invested assets increased $38.5 million, or
42.9%, to $128.3 million on December 31, 1997 from $89.8 million
on December 31, 1996. For 1997 the yield on average cash and
invested assets was 5.3% compared to 5.1% for 1996. The increase
in cash and invested assets can be attributed primarily to the
$33.7 million in net proceeds from the Group's subscription
offering in February 1997 and the increase in gross unrealized
gains on investments of $2.8 million.
During the third quarter of 1997, the Group transferred
$38.1 million of fixed income securities from available to sale
to held to maturity reflecting management's intention and ability
to hold these securities until maturity. This will enable the
Group to extend the duration of this portion of the portfolio
which will allow for the purchase of higher yielding securities.
The change in classification from available to sale to held to
maturity did not have a material effect on the Group's financial
position or results of operations.
Net Realized Investment Gains. Net realized investment
gains were $2.3 million for 1997 compared to $1.4 million in 1996
an increase of $900,000 or 68.0%. The additional gains were
realized as interest rate and general economic conditions in 1997
created capital gains opportunities particularly in the equity
portfolio.
Losses and Loss Adjustment Expenses. Net losses and loss
adjustment expenses incurred decreased by $5.8 million, or 13.2%,
to $38.5 million in 1997 from $44.4 million in 1996. Losses and
loss adjustment expenses decreased in 1997 as compared to 1996
because of the absence of catastrophic claims in 1997 which
amounted to $3.7 million in 1996 and favorable loss development
in 1997 on prior losses of $4.3 million as compared to adverse
development in 1996 of $557,000. These decreases were offset by
losses incurred associated with First Delaware that amounted to
$1.1 million and the decrease in the quota share reinsurance
agreement which increased incurred losses and loss adjustment
expenses by $836,000.
Underwriting Expenses. Underwriting expenses, which include
amortization of deferred policy acquisition costs and operating
expenses, increased $6.0 million, or 32.8%, in 1997 to
$24.4 million from $18.4 million in 1996. The increase is
primarily due to a $4.5 million reduction in ceded commissions
arising out of the decrease in the quota share reinsurance
agreement and a $1.4 million increase in other underwriting
expenses. The other underwriting expense increase can be
attributed to the acquisition of First Delaware that contributed
$650,000 to the increase and initiatives undertaken by the
Group's subsidiaries to upgrade their computer systems and to
reunderwrite the homeowners book of business.
Stock Option Compensation. The $2.0 million charge for
stock compensation expense is a non-recurring, non-cash expense
resulting from the grant of 237,286 stock options on February 11,
1997, at an exercise price equal to the $10 per share offering
price in the Group's subscription offering, and approved by
shareholders at the Group's first Annual Meeting on August 19,
1997. At the time of shareholder approval the Group's stock
price was $18.50 per share. In accordance with the Group's
accounting policy for stock-based compensation (the optional
accounting treatment afforded under Statement of Financial
Accounting Standards (SFAS) No. 123 which allows companies to
follow the expense recognition criteria of Accounting Principles
Board Opinion No. 25), the difference between the stock price at
the approval date and the exercise price is charged to earnings.
Further changes in the Group's stock price or future grants of
options, shareholder approval of which will not be required and
which are expected to be made at the then current price of the
Group's stock, will not result in additional charges to earnings.
Federal Income Tax Expense (Benefit). Federal income tax
expense (benefit) as a percentage of pre-tax income or loss was
36.6% in 1997 compared to (42.6%) in 1996. The increase in the
rate can be attributed to the return to profitable operations in
1997, which generated taxable income versus operating losses in
1996, and the realization of $128,000 in research and
experimentation tax credits in 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31,
1995
Premiums. Direct premiums written increased $2.6 million or
3.4% in 1996 compared to 1995. This increase in direct premiums
written was concentrated in personal automobile which grew 10.8%,
workers compensation which grew 8.8%, and farmowners which grew
5.6%. The increases in automobile and workers compensation
reflect the continuing focus on increasing liability business in
an effort to balance the overall book of business between
property and liability exposures. The farmowners line increased
due to premium rate increases and reacquiring business lost in
1995 and 1994 due to pricing competition. Commercial multiple
peril direct premiums declined by 4.6% in 1996 as compared to
1995. Farmowners, homeowners, and personal automobile direct
writings as a percentage of the total book of business were
20.0%, 26.3%, and 22.7%, respectively, in 1996 as compared to
19.7%, 26.8%, and 21.3%, respectively, for 1995.
Ceded premiums written increased $22.6 million to
$34.4 million in 1996 compared to 1995. The increase in premiums
ceded was directly attributable to the effects of instituting a
quota share reinsurance agreement effective January 1, 1996
between the Insurance Companies and American Re. Under the
agreement, the Insurance Companies ceded 20% of all premiums,
losses, and loss adjustment expenses and received a 35% ceding
commission on the ceded premium. Ceded premiums written and
ceded premiums earned under the agreement amounted to
$20.1 million and $13.6 million, respectively, in 1996. This
reinsurance agreement was designed to lessen the financial impact
of adverse loss experience and had a material effect on the
financial condition and results of operations of the Insurance
Companies. The balance of the increase in ceded premiums written
was related to catastrophe reinsurance (reinstatement premiums of
$800,000) and a change in methodology in determining risk
cessions under the surplus reinsurance agreement. This resulted
in an increase in surplus reinsurance cessions of approximately
$1.1 million.
Net premiums written decreased $19.4 million, or 28.9%, in
1996 to $47.7 million from $67.1 million in 1995. For the same
comparative periods, net premiums earned decreased by
$13.1 million, or 19.6%, to $53.6 million from $66.7 million.
The decreases in net premiums written and net premiums earned
were directly attributable to the effects of instituting the
quota share reinsurance agreement between the Insurance Companies
and American Re as well as the other factors discussed above.
Net Investment Income. Cash and invested assets decreased
$10.7 million, or 10.6%, to $89.8 million on December 31, 1996
from $100.5 million on December 31, 1995. In 1996 and 1995, the
yield on average cash and invested assets was 5.1%. The result of
these changes was that net investment income decreased $191,000,
or 4.1%, to $4.5 million in 1996 from $4.7 million in 1995.
Although the December 31, 1996 cash and invested asset balance
declined substantially in comparison to December 31, 1995, the
average annual cash and invested balance for each of the years
decreased only slightly thus moderating the effect on net
investment income.
The Group restructured its portfolio from preferred stock
and toward common stock in 1996. At December 31, 1996, the
Group's preferred stock holdings as a percentage of invested
asset balances was 6.3% compared to 10% at December 31, 1995,
while common stock holdings as a percentage of invested asset
balances increased to 8.4% at December 31, 1996 compared to 4.7%
at December 31, 1995. This restructuring resulted in a 29.8%
decrease in dividend income from preferred stock and a 38.3%
increase in dividend income from common stock in 1996 compared to
1995.
Net Realized Investment Gains. Net realized investment
gains were $1.4 million in 1996 compared to $1.0 million in 1995.
The adverse claims experience of the first half of 1996 placed a
severe burden on the Group's cash flow and, accordingly, certain
investments in bonds and preferred stocks were liquidated to meet
cash needs. In addition, the investment portfolio was
restructured during 1996 as described above. Interest rate and
general economic conditions in 1996 also created capital gains
opportunities.
Losses and Loss Adjustment Expense. Net losses and loss
adjustment expenses incurred decreased by $6.2 million, or 12.2%,
to $44.4 million in 1996 from $50.5 million in 1995. Losses and
loss adjustment expenses before reinsurance on the quota share
and aggregate excess of loss agreements increased during 1996 due
to substantial numbers of insurance claims arising out of
abnormally severe winter storms during January, 1996. Net
catastrophic losses arising directly out of these storms amounted
to $3.3 million In addition, non-storm related losses and loss
adjustment expenses increased $2.8 million in 1996 compared to
1995 primarily because of increases in winter, fire, and wind
related claims. The difference in non-storm related losses and
loss adjustment expenses between 1996 and 1995 was accentuated by
exceptionally favorable experience during the first nine months
of 1995 as compared to 1996. This difference was moderated by
favorable weather experienced in December, 1996 as compared to
December, 1995. These net losses and loss adjustment expense
increases for 1996 totaling $6.3 million, were reduced by
implementation of the 20% quota share reinsurance agreement
effective January 1, 1996 pursuant to which Group ceded
$7.8 million of losses and loss adjustment expenses during 1996.
Also, the Group recovered reinsurance of $1.8 million from their
aggregate excess of loss reinsurer.
Loss and loss adjustment expenses were 82.8% of net premiums
earned in 1996 compared to 75.8% in 1995. The impact of the
catastrophic losses in 1996 on the loss ratio was 6.5 percentage
points.
Underwriting Expenses. Underwriting expenses decreased by
$4.5 million, or 19.8%, in 1996 to $18.6 million from
$23.9 million for 1995. The reduction is primarily due to a
$5.5 million reduction in amortization of policy acquisition
costs arising out of the implementation of the quota share
reinsurance agreement offset by a $700,000 increase in operating
expenses. In 1996 the Group had an underwriting expense ratio of
34.3% compared to 34.4% in 1995.
Federal Income Tax Expense. Federal income tax decreased
$743,000, resulting in a tax benefit of $1.4 million in 1996
compared to a $684,000 tax benefit in 1995. The decrease in
federal income tax expense is attributable to the decrease in
taxable income in 1996 compared to 1995 in addition to the
recognition of $128,000 in research and experimentation credit in
1996.
Net Income. Net income decreased $1.2 million to a
$1.9 million loss in 1996 from a net loss of $684,000 in 1995
primarily as a result of the foregoing factors.
Liquidity and Capital Resources
The principal sources of the Group's cash flow are premiums,
investment income, maturing investments and proceeds from sales
of invested assets. In addition to the need for cash flow to
meet operating expenses, the liquidity requirements of the Group
relate primarily to the payment of losses and loss adjustment
expenses. The short and long-term liquidity requirements of the
Group vary because of the uncertainties regarding the settlement
dates for liabilities for unpaid claims and because of the
potential for large losses, either individually or in the
aggregate.
The Group and its subsidiaries have in place unsecured lines
of credit with local financial institutions under which they may
borrow up to an aggregate of $1.5 million. During 1997, no
amounts were borrowed against these lines of credit.
Net cash provided (used) by operating activities was
$4.1 million, ($10.7) million and $4.9 million during 1997, 1996,
and 1995, respectively. The negative cash flow from operating
activities during 1996 was primarily attributable to the net loss
for the period and an increase in reinsurance receivables and
prepaid reinsurance premiums as a result of implementing the
quota share agreement with American Re. Net cash provided by
operating activities in 1995 was primarily attributable to the
decrease in receivables.
In 1997, investing activities used cash of $33.5 million
primarily because of the investment of the net proceeds from the
subscription offering and the continuing costs of improvements to
our computer systems. In 1996, investing activities provided
cash of $7.6 million primarily as a result of decreases in the
fixed income portfolio needed to fund unprofitable operations in
that year. In 1995, investing activities used cash of
$2.2 million as the Group invested the positive cash generated
from operations.
In February 1996, Old Guard Investment and American
Technologies, Inc., a California based software lessor, entered
into a lease financing agreement in connection with the
acquisition by the Group of a new policy processing software
system for approximately $2.5 million. See "Business --
Strategy." The terms of the lease financing agreement provide
for an aggregate lease facility up to $1.5 million. The implied
interest rate under the lease is 9.5%. As of December 31, 1996,
the lease facility was fully utilized. Under the terms of the
lease financing agreement, Old Guard Investment is required to
make payments of approximately $57,000 per month for 24 months.
The principal source of liquidity for Old Guard Group, Inc.
(OGGI) will be dividend payments and other fees received its
subsidiaries. OGGI's insurance subsidiaries are restricted by
the insurance laws of the state of domicile as to the amount of
dividends or other distributions they may pay to the OGGI without
the prior approval of the state regulatory authority. Under
Pennsylvania law, the maximum amount that may generally be paid
by an insurance company during any twelve-month period after
notice to, but without prior approval of, the Department cannot
exceed the greater of 10% of the insurance company's statutory
surplus as reported on the most recent annual statement filed
with the Department, or the net income of the insurance company
for the period covered by such annual statement. However, the
Old Guard Insurance Companies are further restricted as to the
amount of dividends that may be paid to OGGI. These restrictions
do not allow the Insurance Companies to pay a dividend to OGGI
without prior approval of the Department for a 36-month period
following the Conversion.
The ESOP borrowed $4.1 million from an unaffiliated lender
and $100,000 from OGGI to purchase 10% of the common stock issued
in the Conversion. The loans bear an 8.45% interest rate, and
will require the ESOP to make monthly payments of approximately
$49,000 for a term of 10 years. The loan is secured by the
shares of common stock purchased and the earnings thereon.
Shares purchased with such loan proceeds will be held in a
suspense account for allocation among participants as the loan is
repaid. OGGI expects to contribute sufficient funds to the ESOP
to repay such loan, plus such other amounts as the OGGI's Board
of Directors may determine at its discretion.
Effects of Inflation
The effects of inflation on the Group are implicitly
considered in estimating reserves for unpaid losses and loss
adjustment expenses, and in the premium rate-making process. The
actual effects of inflation on the Group's results of operations
cannot be accurately known until the ultimate settlement of
claims. However, based upon the actual results reported to date,
it is management's opinion that the liability for losses and LAE,
including losses that have been incurred but not yet reported,
make adequate provision for the effects of inflation.
New Accounting Pronouncements
In June 1997, SFAS No. 130, "Comprehensive Income", was
issued. SFAS No. 130 establishes standards for the reporting and
disclosure of comprehensive income and its components (revenues,
expenses, gains and losses). SFAS No. 130 requires that all
items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as
other financial statements. SFAS No. 130 requires that an
enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity
section of a statement of financial position. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997.
The adoption of SFAS No. 130 will not impact the Group's
financial position and results of operations, but may change the
presentation of certain of the Group's financial statements and
related notes.
In June 1997, SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," was issued. SFAS No. 131
establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim
financial reports issued to shareholders. SFAS No. 131 also
establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997.
The Group will adopt SFAS No. 131 in 1998 and is currently in the
process of determining the effect of SFAS No. 131 upon its
financial reporting requirements.
In February 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings per Share." SFAS No. 128 is
effective for all financial statements ending after December 15,
1997. SFAS No. 128 replaces the presentation of primary earnings
per share (EPS) with basic EPS and required the presentation of
both basic and diluted EPS on the face of the statement of
income. In addition, SFAS No. 128 requires the restatement of
all prior EPS data to conform to the provisions of the statement.
Year 2000 Issue
The unprecedented advances in computer technology over the
past several decades have resulted in dramatic changes in the way
companies do business. Most of these developments have been
beneficial, but some have proven costly, as businesses have
struggled to adapt to various features of the new technological
landscape. One such well-publicized problem has arisen out of
the worldwide use of the so called "Year 2000" programming
convention, in which two digit numbers were generally used
instead of four digit numbers to identify the years used in
dates. As a consequence, most computers require relatively
costly reprogramming to enable them to correctly perform data
operations involving years 2000 or later, a problem anticipated
to have substantial repercussions on the business world because
computer operations involving date calculations are pervasive.
Beginning in 1991, the Group began evaluating and
reprogramming its own computer systems to address the Year 2000
problem. By the end of 1992, all necessary programming work was
completed and implemented. With the completion of these changes,
Year 2000 issues are not likely to result in any material adverse
disruption in the Group's computer systems or its internal
business operations. The cost of this work through 1992 was
approximately $140,000.
To ensure that all software applications are Year 2000
compliant, the Group is currently testing all applications in a
true Year 2000 environment. This testing is being conducted on
hardware and system operating software that has the operating
system date beyond 1999. This project is scheduled to be
completed by June 30, 1998. It is estimated that the total
remaining cost to complete this phase and become Year 2000
compliant will be approximately $10,000.
Many experts now believe that the Year 2000 problem may have
a material adverse impact on the national and global economy
generally, In addition, it seems likely that if businesses are
materially damaged as a result of Year 2000 problems, at least
some such businesses may attempt to recoup their losses by
claiming coverage under various types of insurance policies.
And, although management has concluded that under a fair reading
of the various policies of insurance issued by it no coverage for
Year 2000 problems should be considered to exist, it is not
possible to predict whether or to what extent any such coverage
could ultimately be found to exist by courts in the various
jurisdictions. Accordingly, important factors which could cause
actual results to differ materially from those expressed in the
forward looking statements include, but are not limited to, the
inability of the Group to accurately estimate the impact of the
Year 2000 problem on the insurance issued by, or other business
operations of the Group.
Forward-Looking Statements
Certain statements contained in the Management's Discussion
and Analysis and other statements made throughout this report
constitute "forward-looking statements" (as such term is defined
in the Private Securities Litigation Reform Act of 1995). Such
forward-forwarding statements involve certain assumptions, risks
and uncertainties that could cause actual results to differ
materially from those included in or contemplated by the
statements. These assumptions, risks and uncertainties include,
but are not limited to those associated with factors affecting
the property-casualty insurance industry generally, including
price competition, size and frequency of claims, escalating
damage awards, natural disasters, fluctuations in interest rates
and general business conditions; the Group's dependence on
investment income; the geographic concentration of the Group's
business in the Northeast United States, the adequacy of the
Group's liability for losses and loss adjustment expenses;
government regulation of the insurance industry and the other
risks and uncertainties discussed or indicated in all documents
filed by the Group with the Securities and Exchange Commission.
The Group expressly disclaims any obligation to update any
forward-looking statements as a result of developments occurring
after the release of this report.
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Accountants
To the Board of Directors
Old Guard Group, Inc.:
We have audited the accompanying consolidated balance sheets of
Old Guard Group, Inc. and subsidiaries, as of December 31, 1997
and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for the years ended
December 31, 1997, 1996 and 1995. These consolidated financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Old Guard Group, Inc. and subsidiaries as
of December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for the years ended
December 31, 1997, 1996 and 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 15 to the consolidated financial statements,
Old Guard Group, Inc. has completed a plan of conversion which
has been challenged by certain policyholders.
/s/ Coopers & Lybrand L.L.P.
One South Market Square
Harrisburg, Pennsylvania
February 20, 1998
<PAGE>
<TABLE>
<CAPTION>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 1997 and 1996
1997 1996
<S> <C> <C>
ASSETS
Investments:
Fixed income securities
Held to maturity, at amortized cost $38,382,722 $ -
Available for sale, at fair value 57,237,836 69,905,076
Preferred stocks, available for sale, at fair value 4,626,565 5,281,426
Common stocks, available for sale, at fair value 12,208,318 7,094,752
Other invested assets 5,668,025 1,849,811
Total investments 118,123,466 84,131,065
Cash and cash equivalents 10,214,908 5,668,369
Receivables:
Premiums 7,945,218 6,373,236
Reinsurance 10,767,770 14,183,833
Investment income 1,236,186 1,014,601
Affiliates 992,922 258,430
Prepaid reinsurance premiums 6,285,844 8,417,500
Deferred policy acquisition costs 7,318,767 5,603,343
Deferred income taxes 262,750 2,132,600
Property and equipment 10,112,212 6,535,789
Issuance costs - 958,484
Goodwill 772,023 -
Other assets 1,266,509 2,184,747
Total assets $175,298,575 $137,461,997
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss adjustment expenses 48,718,666 55,371,077
Unearned premiums 36,535,108 34,377,756
Accrued expenses 2,541,896 2,744,165
Capital lease obligations 796,558 1,521,443
ESOP liability 3,740,426 -
Subordinated debt - 1,500,000
Other liabilities 3,662,423 2,936,637
Total liabilities 95,995,077 98,451,078
Minority Interest 649,125 -
Shareholders' Equity:
Preferred stock (5,000,000 shares authorized:
none issued and outstanding) - -
Common stock (15,000,000 shares authorized; 4,204,910
shares issued; 4,084,370 shares outstanding, no par) 38,317,908 -
Additional paid-in capital 4,787,703 -
Deferred compensation (6,277,553) -
Retained earnings 40,259,736 36,985,415
Net unrealized investment gains,net deferred income taxes 3,856,612 2,025,504
Treasury stock, at cost (120,540 shares) (2,290,033) -
Total shareholders' equity 78,654,373 39,010,919
Total liabilities and shareholders' equity $175,298,575 $137,461,997
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
<S> <C> <C> <C>
Revenue:
Net premiums written $66,063,881 $47,692,036 $67,114,947
Change in net unearned premiums (3,635,287) 5,899,678 (451,523)
Net premiums earned 62,428,594 53,591,714 66,663,424
Investment income, net of expenses 5,876,708 4,494,818 4,685,787
Net realized investment gains 2,326,221 1,384,957 1,010,993
Other revenue 413,636 321,770 273,575
Total revenue 71,045,159 59,793,259 72,633,779
Expenses:
Losses and loss adjustment
expenses incurred 38,514,060 44,358,790 50,509,295
Amortization of deferred policy
acquisition costs 16,398,006 12,076,183 17,610,525
Operating expenses 8,038,028 6,320,550 5,616,200
Stock option compensation 2,016,931 - -
Interest expense 591,452 384,529 265,861
Total expenses 65,558,477 63,140,052 74,001,881
Income(loss) before income tax(benefit)
and minority interest 5,486,682 (3,346,793) (1,368,102)
Income tax expense (benefit) 2,009,403 (1,427,080) (684,531)
Income (loss) before minority interest 3,477,279 (1,919,713) (683,571)
Minority interest in loss of
consolidated subsidiary (7,287) - -
Net income (loss) $3,484,566 $(1,919,713) $(683,571)
Earnings (loss) per share:
Basic .92 (.49) (.17)
Diluted .91 (.49) (.17)
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995
Net
Unrealized
Investment
Gains(Losses)
Additional Net of
Common Stock Paid-In Deferred Retained Deferred Treasury
Shares Amount Capital Compensation Earnings Income Taxes Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 0 $0 $0 $0 $39,588,699 ($3,057,253) $0 $36,531,446
Net loss (683,571) (683,571)
Increase in unrealized investment
gains, net 5,049,439 5,049,439
Balance, December 31, 1995 0 0 0 0 38,905,128 1,992,186 0 40,897,314
Net loss (1,919,713) (1,919,713)
Increase in unrealized investment
gains, net 33,318 33,318
Balance, December 31, 1996 0 0 0 0 36,985,415 2,025,504 0 39,010,919
Net income 3,484,566 3,484,566
Dividends ($.05 per share) (210,245) (210,245)
Issuance of common stock, net of
issuance costs 4,204,910 38,317,908 38,317,908
Purchase of treasury stock (120,540) (2,290,033) (2,290,033)
Deferral of ESOP expense (4,054,910) (4,054,910)
ESOP compensation earned 136,908 214,344 351,252
Stock option compensation 2,016,931 2,016,931
Deferral of MRP expense 2,633,864 (2,633,864) 0
MRP Stock-based compensation 196,877 196,877
Increase in unrealized investment 1,831,108 1,831,108
gains, net
Balance, December 31, 1997 4,084,370 $38,317,908 $4,787,703 ($6,277,553) $40,259,736 $3,856,612 ($2,290,033) $78,654,373
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $3,484,566 $(1,919,713) $(683,571)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 1,388,677 960,515 1,026,082
Net realized investment gains (2,326,221) (1,384,957) (1,010,993)
Deferred income tax expense (benefit) 958,542 (910,615) (661,728)
Non-cash compensation expense 2,565,061 - -
Other (16,694) (5,195) 21,285
(Increase) decrease in assets:
Receivables 3,063,473 (5,463,532) 4,372,804
Prepaid reinsurance premiums 2,945,331 (6,948,184) (230,758)
Deferred policy acquisition costs (1,519,308) 1,577,436 (77,368)
Other assets 1,116,626 (757,012) 9,260
Increase (decrease) in liabilities:
Losses and loss adjustment expenses (8,847,039) 3,279,580 782,070
Unearned premiums 689,956 1,048,506 682,281
Accrued expenses (298,154) (408,945) 336,131
Other liabilities 849,542 214,401 310,174
Net cash provided (used) by operating activities 4,054,358 (10,717,715) 4,875,669
Cash flows from investing activities:
Cost of purchases of fixed income securities
Held to maturity (2,777,906) - -
Available for sale (51,038,191) (23,847,070) (35,935,523)
Proceeds from sales of fixed income securities
Available for sale 18,322,894 24,135,158 26,334,729
Proceeds from maturities of fixed income securities
Held to maturity 2,463,699 - -
Available for sale 10,100,750 7,827,777 7,124,765
Cost of equity securities acquired (8,981,660) (4,015,036) (4,772,358)
Proceeds from sales of equity securities 7,662,191 7,122,598 5,800,281
Change in receivable/payable for securities (87,932) (423,768) 268,009
Cost of purchases of other invested assets (4,420,001) (1,885,000) (50,000)
Proceeds from sales of other invested assets 588,582 - 190,000
First Delaware acquisition, net of cash acquired (626,175) - -
Cost of purchases of property and equipment (4,740,860) (1,535,465) (2,405,430)
Proceeds from sales of property and equipment 20,700 - 193,807
Net cash provided (used) by investing activities: (33,513,909) 7,379,194 (3,251,720)
Cash flows from financing activities:
Proceeds from sale of stock, net of issuance costs 33,721,482 (958,484) -
Purchase treasury stock (970,688) - -
Payment of dividends (210,245) - -
Repayment of subordinated debt - (750,000) (750,000)
Proceeds from bank loans 5,054,770 1,550,000 -
Proceeds from capital lease funding - 1,499,028 -
Payment on principal of capital lease or bank loan (3,589,229) (486,779) -
Net cash provided (used) by financing activities 34,006,090 853,765 (750,000)
Net increase (decrease) in cash and cash equivalents 4,546,539 (2,484,756) 873,949
Cash and cash equivalents at beginning of period 5,668,369 8,153,125 7,279,176
Cash and cash equivalents at end of period $10,214,908 $5,668,369 $8,153,125
Cash paid (received) during the year for:
Interest 591,452 381,896 265,861
Income taxes 85,241 (160,453) 203,674
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
Old Guard Group, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies:
Basis of Consolidation
The consolidated financial statements include the accounts
of Old Guard Group, Inc. and its wholly-owned subsidiaries (the
Group), Old Guard Insurance Company (Old Guard), Old Guard Fire
Insurance Company (Old Guard Fire), First Patriot Insurance
Company (First Patriot) and Old Guard Investment Holding Company,
Inc. (OGIHC) and its wholly-owned subsidiaries, Old Guard
Insurance Management Company (OGIM) and 2929 Service Corporation
and OGIHC's 80% owned subsidiary, First Delaware Insurance
Company (First Delaware). During 1997, First Patriot changed its
name from Goschenhoppen-Home Insurance Company and OGIM changed
its name from Commonwealth Insurance Managers, Inc.
The Group is a regional insurance holding company that, on
February 11, 1997, completed a subscription offering in which it
raised $38.3 million, net of issuance costs of $3.7 million, in
exchange for 4.2 million shares of no par common stock.
Concurrent with the offering and in accordance with a plan of
conversion, Old Guard, Old Guard Fire and First Patriot
(collectively, the Insurance Companies) were converted from
mutual to stock insurance companies and issued shares of common
stock to the Group in exchange for $16.0 million. As a result of
the conversion, the Insurance Companies are wholly-owned
subsidiaries of the Group. Effective January 1, 1997, OGIHC
acquired 80% of the outstanding common stock of First Delaware
for $3.3 million which included a capital infusion of
$1.5 million. Pro forma results for 1996, including First
Delaware as if it had been 80% owned during that period and as if
the Group had converted to the stock form, are as follows:
Total revenue $61,476,000
Loss before provision for income tax (3,200,000)
Net loss (1,814,000)
Loss per share (.46)
The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting
principles. All significant intercompany transactions have been
eliminated in consolidation. Certain amounts in the 1996 and
1995 financial statements have been reclassified to conform to
the current year presentation.
Description of Business
The Group is a property and casualty insurer of farms ,
small and medium size businesses and residences in rural and
suburban communities in Pennsylvania, Delaware and Maryland, with
Pennsylvania comprising in excess of 85% of total direct premiums
written. The principal lines of business are homeowners,
farmowners, personal automobile and commercial multi- peril which
represent approximately 25%, 21%, 24% and 14%, respectively, of
direct premiums written.
Cash and Cash Equivalents
Cash and cash equivalents are carried at cost which
approximates fair value. The Group considers all highly liquid
investments with a maturity of three months or less when
purchased to be cash equivalents.
Investments
The Group classifies fixed income and marketable equity
securities as trading or available for sale. In addition, fixed
income securities may be classified as held to maturity. Each
security is evaluated at the time of purchase and periodically
reevaluated. Held to maturity securities are carried at amortized
cost. Available for sale securities are carried at fair value,
with the unrealized gains and losses, net of deferred income tax,
reported as a separate component of shareholders' equity.
Currently, no securities are classified as trading.
The fair value of all investments is subject to various
market fluctuations which include changes in equity markets,
interest rate environment and general economic conditions.
Interest on fixed maturities and short-term investments is
credited to income as it accrues on the principal amounts
outstanding, adjusted for amortization of premiums and accretion
of discounts computed utilizing the effective interest rate
method. Realized gains and losses on investments sold are
calculated on the specific identification basis.
During the third quarter of 1997, the Group transferred
$38.1 million of fixed income securities from available for sale
to held to maturity reflecting management's intention and ability
to hold these securities until maturity. The change in
classification from available to sale to held to maturity did not
have a material effect on the Group's financial position or
results of operations.
Deferred Policy Acquisition Costs
Acquisition costs such as commissions, premium taxes and
certain other expenses which vary with and are directly related
to the production of business, are deferred and amortized over
the effective period of the related insurance policies. The
method followed in computing deferred policy acquisition costs
limits the amount of such deferred costs to their estimated
realizable value, which gives effect to premiums to be earned,
related investment income, loss and loss adjustment expenses and
certain other maintenance costs expected to be incurred as the
premiums are earned. To the extent that deferred policy
acquisition costs are not realizable, the deficiency is charged
to income currently.
Property and Equipment
Property and equipment are carried at cost less accumulated
depreciation. Property is depreciated on a straight-line basis
over the useful lives ranging from five to fifty years.
Equipment is depreciated on a straight-line basis with useful
lives of five to ten years. Computer software is amortized on a
straight-line basis over a useful life of five years.
Premiums
Premiums written are earned on a pro rata basis over the terms
of the respective policies. Unearned premiums represent the
unexpired portion of the policies in-force.
Losses and Loss Adjustment Expenses
The liability for losses and loss adjustment expenses
includes amounts determined on the basis of claims adjusters'
evaluations, estimates of losses incurred but not reported
calculated using historical experience and other estimates. Any
adjustments resulting from changes in estimates are reflected in
current operating results. Estimated amounts of salvage and
subrogation recoverable on paid and unpaid losses are reflected
as a reduction of the liability for losses and loss adjustment
expenses.
Stock-Based Compensation
Stock-based compensation plans are accounted for under the
provisions of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded
on the date of a stock option grant only if the current market
price of the underlying stock exceeded the exercise price.
Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," permits entities to
recognize as expense, over the vesting period, the fair value of
all stock-based awards on the date of grant. Alternately, SFAS
No. 123 allows entities to apply the provision of APB Opinion
No. 25 and provide pro forma net income and earnings per share
disclosures for employee stock option grants as if the fair value
method defined in SFAS No. 123 had been applied. The Group has
elected to apply the provisions of APB Opinion No. 25 and provide
pro forma disclosures under SFAS No. 123.
Income Taxes
Deferred income taxes are accounted for using the liability
method wherein deferred tax assets or liabilities are calculated
on the differences between the bases of assets and liabilities
for financial statement purposes versus tax purposes (temporary
differences) using enacted tax rates in effect for the year in
which the differences are expected to reverse. Tax expense in
the consolidated statements of income is equal to the sum of
taxes currently payable, including the effect of the alternative
minimum tax, if any, plus an amount necessary to adjust deferred
tax assets and liabilities to an amount equal to period-end
temporary differences at prevailing tax rates.
Effective for the 1997 tax year, the Group will file a
consolidated federal income tax return.
Reinsurance
In the normal course of business, the Group's insurance
subsidiaries reinsure a portion of their exposure and pay to
reinsurers a portion of premiums received on all policies
reinsured. Insurance is ceded primarily to reduce net liability
on individual risks, to mitigate the effect of individual loss
occurrences (including catastrophe losses), to stabilize
underwriting results and to increase underwriting capacity.
Assets and liabilities related to insurance contracts are
reported before the effects of reinsurance. Reinsurance
receivables and prepaid reinsurance premiums are reported as
separate assets.
Certain reinsurance contracts provide for retrospective rate
adjustments based on experience. Management estimates the
ultimate ceded premium based upon historical experience. Any
adjustments resulting from changes in estimates are reflected in
current operating results.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board
issued SFAS No. 128 "Earnings Per Share". SFAS No. 128 is
effective for all financial statements ending after December 15,
1997. SFAS No. 128 replaces the presentation of primary earnings
per share (EPS) with basic EPS and requires the presentation of
both basic and diluted EPS on the face of the statement of
income. In addition, SFAS No. 128 requires the restatement of
all prior EPS data to conform to the provisions of the statement.
Assessments
The Group's insurance subsidiaries are subject to
assessments in the states in which each insurance company is
licensed. Assessments consist primarily of charges from the
residual markets and guaranty fund associations. The expense is
recognized upon notification.
Concentration of Credit Risk
Financial instruments which potentially expose the Group to
concentrations of credit risk consist primarily of cash and
short-term investments, premiums in course of collection,
investments and balances recoverable from reinsurers. Insureds
primarily consist of individuals and commercial and agricultural
businesses.
No one insured accounted for a significant amount of
premiums earned or premiums in course of collection in 1997, 1996
or 1995.
Excess of Cost Over Net Assets of Business Acquired
(Goodwill):
The excess of the 80% investment in First Delaware over the
net asset value at acquisition is being amortized on a straight-
line basis over 15 years. The Group's policy is to evaluate the
excess of cost over the net assets of businesses acquired based
on an evaluation of such factors as the occurrence of a
significant adverse event or change in the environment in which
the business operates or if the expected future net cash flows
(undiscounted and without interest) would become less than the
carrying amount of the asset. An impairment loss would be
recorded in the period such determination is made based on the
fair value of the related businesses.
Use of Estimates
The preparation of the accompanying consolidated financial
statements requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the results of their
operations during the period. The consolidated financial
statements include estimates the most significant of which are
the net deferred tax asset, liability for losses and loss
adjustment expenses, deferred policy acquisition costs and
reinsurance recoverables. Actual results may differ from those
estimates.
2. Statutory Information:
The Group's insurance subsidiaries prepare their statutory
financial statements in accordance with accounting principles and
practices prescribed or permitted by the Insurance Department of
the respective company's state of domicile. Prescribed statutory
accounting practices include state laws, regulations, and general
administrative rules, as well as a variety of publications of the
National Association of Insurance Commissioners (NAIC).
Permitted statutory accounting practices encompass all accounting
practices that are not prescribed; such practices differ from
state to state, may differ from company to company within a
state, and may change in the future. Furthermore, the NAIC has a
project to codify statutory accounting practices, the result of
which is expected to constitute the only source of "prescribed"
statutory accounting practices. Accordingly, that project will
likely change the definitions of what comprise prescribed versus
permitted statutory accounting practices, and may result in
changes to the accounting policies that insurance enterprises use
to prepare their statutory financial statements. The effects of
any such changes are not presently determinable and will not
likely affect financial statements prepared under generally
accepted accounting principles.
Risk based capital is designed to measure the acceptable
amount of capital an insurer should have based on the inherent
risks of the insurer's business. Insurers failing to meet
adequate capital levels may be subject to insurance department
scrutiny and ultimately rehabilitation or liquidation. Based on
established standards, the Group's insurance subsidiaries
maintain surplus in excess of prescribed risk based capital
requirements.
Policyholders' surplus and net income (loss), determined in
accordance with accounting practices prescribed or permitted by
insurance regulatory authorities are as follows:
<TABLE>
<CAPTION>
Policyholders' Surplus Statutory Net Income (Loss)
1997 1996 1997 1996 1995
<S> <C> <C>
Old Guard $29,176,267 $19,155,368 $2,789,155 $(658,740) $(128,349)
Old Guard Fire 14,274,141 8,340,757 675,225 (534,143) (265,828)
First Patriot 5,254,516 3,262,887 504,258 (207,441) 494,455
First Delaware 2,986,233 - 26,457 - -
$51,691,157 $30,759,012 $3,995,095 $(1,400,324) $100,278
</TABLE>
A reconciliation of the Group's statutory net income and
policyholders' surplus to the Group's net income and
shareholders' equity, under generally accepted accounting
principles (GAAP), is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
<S>
Net Income: <C> <C> <C>
Statutory net income (loss) $3,995,095 $(1,400,324) $100,278
GAAP adjustments:
Increase (decrease) in deferred policy
acquisition costs 1,519,308 (1,577,436) 77,368
Deferred income tax expense (benefit) (1,716,425) 910,615 661,728
Other (313,412) 147,432 (1,522,945)
GAAP net income (loss) $3,484,566 $(1,919,713) $(683,571)
<CAPTION>
As of December 31,
1997 1996
<S> <C> <C>
Shareholders' Equity:
Policyholders' surplus $51,691,157 $30,759,012
GAAP adjustments:
Deferred policy acquisition costs 7,318,767 5,603,343
Deferred income taxes (436,396) 2,132,600
Restoration of non-admitted assets 686,604 798,500
Unrealized gains on investments,
available for sale 1,401,835 614,996
Elimination of excess of statutory
over statement reserves 3,395,713 830,520
Reclassification of subordinated debt - (1,500,000)
Equity of holding companies, net of
eliminations 12,775,263 -
Goodwill 772,023 -
Other 1,049,407 (228,052)
Shareholders' equity $78,654,373 $39,010,919
</TABLE>
3. Investments:
Net investment income, net realized investment gains and
change in unrealized capital gains (losses) on investment
securities are as follows for each of the three years ended
December 31:
Net investment income and net realized investment gains:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Investment Income:
Fixed income securities $5,391,156 $4,337,217 $4,457,884
Preferred stocks 285,712 437,633 623,396
Common stocks 252,638 99,763 72,156
Cash and cash equivalents 1,039,826 418,695 474,136
Other 395,576 244,514 116,899
Gross investment income 7,364,908 5,537,822 5,744,471
Less investment expenses 1,488,200 1,043,004 1,058,684
Net investment income $5,876,708 $4,494,818 $4,685,787
Realized gains (losses):
Fixed income securities 1,054,387 1,079,958 543,696
Preferred stocks 391,640 413,326 73,156
Common stocks 868,704 141,673 268,080
Other 11,490 (250,000) 126,061
Net realized investment gains $2,326,221 $1,384,957 $1,010,993
</TABLE>
Change in net unrealized gains on investment securities:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Fixed income securities $1,189,419 $(1,309,607) $5,722,298
Preferred stocks 19,257 (62,807) 853,101
Common stocks 1,578,982 1,434,746 1,096,943
Other invested assets (24,695) (16,314) (14,703)
2,762,963 46,018 7,657,639
Tax effect (931,855) (12,700) (2,608,200)
1,831,108 33,318 5,049,439
</TABLE>
The cost and estimated fair value of investments at
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Gross Gross
1997 Unrealized Unrealized Estimated
Held to Maturity Cost (1) Gains Losses Fair Value
<S> <C> <C> <C> <C>
Fixed income securities
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $13,115,291 $54,615 $96,731 $13,073,175
Obligations of states and political subdivisions 8,344,543 65,375 11,027 8,398,891
Corporate obligations 11,496,048 272,148 30,574 11,737,622
Collateralized mortgage obligations 5,426,840 86,840 4,021 5,509,659
Total held to maturity $38,382,722 $478,978 $142,353 $38,719,347
1997
Available for Sale
Fixed income securities:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $6,823,182 $76,889 $15,895 $6,884,176
Obligations of states and obligations subdivisions 8,188,884 167,823 - 8,356,707
Corporate obligations 32,948,364 1,360,832 280,495 34,028,701
Collateralized mortgage obligations 7,899,325 69,340 413 7,968,252
Total fixed income securities
available for sale 55,859,755 1,674,884 296,803 57,237,836
Equity securities:
Preferred stock 4,431,698 371,736 176,869 4,626,565
Common stock 7,885,087 4,587,650 264,419 12,208,318
Total available for sale $68,176,540 $6,634,270 $738,091 $74,072,719
1996
Available for Sale
Fixed income securities:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $30,860,634 $15,716 $402,681 $30,473,669
Obligations of states and obligations subdivisions 5,944,350 37,419 59,012 5,922,757
Corporate obligations 27,837,232 779,978 261,107 28,356,103
Collateralized mortgage obligations 5,074,198 82,096 3,747 5,152,547
Total fixed income securities 69,716,414 915,209 726,547 69,905,076
Equity securities:
Preferred stock 5,105,816 250,326 74,716 5,281,426
Common stock 4,350,503 2,786,163 23,914 7,094,752
Total available for sale $79,172,733 $3,951,698 $825,177 $82,281,254
</TABLE>
(1) Original cost of equity securities; original cost of fixed
income securities adjusted for amortization of premium and
accretion of discount.
The amortized cost and estimated fair value of fixed income
securities at December 31, 1997 by contractual maturity are shown
below:
<TABLE>
<CAPTION>
Amortized Estimated
Held to Maturity Cost Fair Value
<S> <S> <S>
Due in one year or less $6,783,008 $6,765,348
Due after one year through five years 4,873,724 4,915,456
Due after five years through ten years 2,777,855 2,870,800
Due after ten years 4,957,623 4,956,902
Collateralized mortgage obligations 18,990,512 19,210,841
$38,382,722 $38,719,347
Available for Sale
Due in one year or less $49,814 $50,000
Due after one year through five years 6,768,814 7,050,789
Due after five years through ten years 11,237,424 11,492,913
Due after ten years 14,146,326 14,833,742
Collateralized mortgage obligations 23,657,377 23,810,392
$55,859,755 $57,237,836
</TABLE>
Actual maturities may differ from contractual and anticipated
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Collateralized mortgage obligations consist of mortgage
pass-through holdings and securities backed by credit card
receivables, auto loans and home equity loans. These securities
follow a structured principal repayment schedule and are of high
credit quality rated "AA" or better by Standard & Poor's. These
securities are presented separately in the maturity schedule due
to the inherent risk associated with prepayment on early
authorization. The average duration of this portfolio is
2.0 years.
The gross realized gains and losses on investment securities
in 1997, 1996 and 1995, are as follows:
1997 1996 1995
Gross realized gains $2,720,560 $ 1,804,668 $2,995,584
Gross realized losses (394,339) (419,711) (1,984,591)
Net realized gains $2,326,221 $ 1,384,957 $1,010,993
Insurance laws require that certain amounts be deposited
with various state insurance departments for the benefit and
protection of policyholders. The amortized cost of fixed income
securities on deposit with governmental authorities was $820,402
and $616,067 at December 31, 1997 and 1996, respectively.
4. Losses and Loss Adjustment Expenses:
Activity in the liability for losses and loss adjustment expenses
is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance as of January 1 $55,371,077 $52,091,497 $51,309,427
Less reinsurance recoverables 20,855,702 16,000,653 18,499,642
Net balance at January 1 34,515,375 36,090,844 32,809,785
Acquisition of First Delaware 667,929 - -
Incurred related to:
Current year 42,857,000 43,801,765 48,067,295
Prior years (4,342,940) 557,025 2,442,000
Total incurred 38,514,060 44,358,790 50,509,295
Paid related to:
Current year 27,276,000 29,648,916 29,970,071
Prior years 14,703,977 16,285,343 17,258,165
Total paid 41,979,977 45,934,259 47,228,236
Net balance as of December 31 31,717,387 34,515,375 36,090,844
Plus reinsurance recoverables 17,001,279 20,855,702 16,000,653
Balance at December 31 $48,718,666 $55,371,077 $52,091,497
</TABLE>
Changes in estimates for prior years in 1997 are
attributable to favorable loss development primarily in workers'
compensation reserves. The changes in estimates for prior years
in 1996 and 1995 are primarily attributable to incurred loss
development experience across all lines of business.
The liability for losses and loss adjustment expenses
reflects management's best estimate of future amounts needed to
pay claims and related settlement costs with respect to insured
events which have occurred, including events that have not been
reported. In many cases, significant periods of time, ranging up
to several years, may elapse between the occurrence of an insured
loss, the reporting of the loss, and the payment of that loss.
As part of the process in determining these amounts, historical
data is reviewed and consideration is given to the impact of
various factors, such as legal developments, changes in social
attitudes, and economic conditions.
The Group's insurance subsidiaries have geographic exposure
to catastrophic losses in certain Mid Atlantic states.
Catastrophes can be caused by various events including
hurricanes, windstorms, earthquakes, hail, explosions, severe
weather and fires, and the incidence and severity of catastrophes
are inherently unpredictable. The extent of losses from a
catastrophe is a function of both the total amount of insured
exposure in the area affected by the event and the severity of
the event. Most catastrophes are restricted to small geographic
areas; however, hurricanes and earthquakes may produce
significant damage in large, heavily populated areas. The
Group's insurance subsidiaries generally seek to reduce their
exposure to catastrophe through individual risk selection and the
purchase of catastrophe reinsurance.
Management believes that its liability for losses and loss
adjustment expenses is fairly stated, in accordance with
generally accepted actuarial principles and practices. However,
estimating the ultimate claims liability is a complex and
judgmental process inasmuch as the amounts are based on
management's informed estimates and judgments using data
currently available. As additional experience and data become
available regarding claim payments and reporting patterns,
legislative developments, and economic conditions, the estimates
are revised accordingly and the impact is reflected currently in
the consolidated financial statements.
5. Property and Equipment
Property and equipment consisted of the following at
December 31, 1997 and 1996:
1997 1996
Land $ 767,407 $ 287,407
Buildings and improvements 4,992,202 4,237,217
Furniture, fixtures and
equipment 7,599,114 4,143,142
Property and equipment, cost 13,358,723 8,667,766
Less accumulated depreciation (5,458,521) (4,292,782)
7,900,202 4,374,984
Software in development 1,771,969 2,160,805
Construction in Progress 440,041 -
Property and equipment $ 10,112,212 $6,535,789
6. Reinsurance:
The Group's insurance subsidiaries maintain reinsurance
agreements which provide coverage for individual property and
liability claims, as well as, catastrophic events. These
reinsurance programs mitigate loss exposure from individually
large losses and an aggregation of losses arising from a single
loss event. The Group is contingently liable for reinsured
claims if the assuming reinsurers cannot meet their obligations
under the reinsurance agreements.
The following amounts represent the Group's reinsurance
activity with unrelated insurers in 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Ceded:
Premiums earned $24,817,610 $27,468,375 $11,600,070
Unearned premiums $6,285,844 $8,417,500 $1,469,316
Losses and loss adjustment
expenses incurred $8,816,887 $30,508,137 $6,897,673
Assumed:
Premiums earned $300,536 $142,423 $114,395
Unearned premiums $76,602 $27,545 $22,431
Losses and loss adjustment
expenses incurred $314,913 $180,604 $384,762
</TABLE>
The Insurance Companies maintain a 15% (20% in 1996) quota
share reinsurance agreement with their primary reinsurer,
American Re-Insurance Company (American Re). The agreement
provides for a 30% (35% in 1996) ceding commission on net
business written. This agreement is intended to provide
protection from high frequency and low severity type losses. The
following summarizes activity under this treaty in 1997 and 1996:
1997 1996
Earned premiums $10,732,903 $13,647,111
Unearned premiums $5,198,631 $4,867,616
Losses and loss adjustment
expenses incurred $6,943,898 $7,779,576
Reinsurance recoverable under this agreement on paid and
unpaid losses were $5,565,726 and $10,690,231 at December 31,
1997 and 1996, respectively.
The Group performs credit reviews of its reinsurers,
focusing on financial stability and commitment to the reinsurance
business. At December 31, 1997, the Group had a reinsurance
recoverable of approximately $13,792,000, net of applicable ceded
reinsurance payable, due from American Re. American Re's A.M.
Best rating is A+.
Ceded premiums subject to retrospective rate adjustments
were approximately $1,450,000, $2,000,000 and $1,600,000 for
1997, 1996 and 1995, respectively. No material adjustments from
amounts originally estimated have been recorded.
7. Subordinated Debt:
During 1989, Old Guard received $6,000,000 in subordinated
debt from a third party, the remaining balance of which was
repaid as part of the Group's subscription offering in 1997.
Repayment was in the form of 150,000 shares of the Group's stock.
Old Guard paid interest of $19,603, $174,021 and $224,877 under
the obligation in 1997, 1996 and 1995, respectively.
8. Lines of Credit:
Subsidiaries of the Group jointly maintain cash management
programs with a local financial institution. The programs
provide for draws by any member of the Group against a line of
credit in the event of overdrafts. The line of credit is subject
to a maximum of $1,500,000 and bears interest at prime. The
Group must maintain zero balances on the lines for one thirty-day
period each year and must meet certain demand deposit
requirements. No borrowings were made under these arrangements
during 1997 or 1996. The Group also maintains a $15,000,000
acquisition line of credit which is subject to certain approvals
by the granting institution before funds can be drawn.
9. Income Taxes:
The tax effect of significant temporary differences that
give rise to the Group's net deferred tax asset as of
December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Unearned premiums $2,056,951 $1,765,297
Losses and loss adjustment expenses 1,435,173 1,676,812
Stock compensation costs 752,695 -
Alternative minimum tax credit 241,550 565,204
Net operating loss carryforward 504,533 1,106,780
Other 249,316 417,375
Deferred tax asset $5,240,218 $5,531,468
Deferred policy acquisition costs $2,488,352 $1,905,137
Unrealized gain on investments 1,987,461 1,051,968
Depreciation and other 501,655 441,763
Deferred tax liability $4,977,468 $3,398,868
Net deferred tax asset $262,750 $2,132,600
</TABLE>
The net deferred tax asset has not been reduced by a valuation
allowance because management believes that, while it is not
assured, it is more likely than not that it will generate
sufficient future taxable income to utilize these net excess tax
deductions. The amount of the deferred tax asset considered
realizable, however, could be materially reduced in the near term
if estimates of future taxable income in the years in which the
differences are expected to reverse are decreased.
Actual income tax expense (benefit) differed from expected
income tax expense (benefit), computed by applying the federal
corporate tax rate of 34% to income (loss) before income tax and
minority interest, for each of the three years ended December 31
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Expected tax expense (benefit) $1,865,472 $(1,137,910) $(465,155)
Tax-exempt interest (8,041) (9,380) (61,558)
Dividends received reduction (95,595) (144,871) (161,764)
ESOP compensation 46,549
Goodwill 18,749
Research and experimentation
credit - (127,823) -
Other 182,269 (7,096) 3,946
Income tax expense (benefit) $2,009,403 $(1,427,080) $(684,531)
</TABLE>
The components of income tax expense (benefit) for each of
the three years ended December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current federal income
tax expense (benefit) 1,050,862 (516,465) (22,803)
Deferred federal income
tax expense (benefit) 958,541 (910,615) (661,728)
Income tax expense (benefit) 2,009,403 (1,427,080) (684,531)
</TABLE>
First Patriot has a net operating loss carryforward at
December 31, 1997 of approximately $1,476,000. First Patriot's
net operating loss carryforward expires $58,000 in 2007, $261,000
in 2009, $780,000 in 2010 and $377,000 in 2011.
As of December 31, 1997, Old Guard and Old Guard Fire had
alternative minimum tax credit carryforwards of approximately
$88,000 and $152,000, respectively, available to offset future
regular income tax.
10. Employee Benefit Plans
The Group and it subsidiaries maintain certain stock
compensation and retirement plans. The stock compensation plans
were adopted by the Board of the Directors of the Group in
connection with the initial public offering. The retirement
plans are essentially the same as maintained by Old Guard prior
to the Conversion.
Stock Compensation Plan
The Stock Compensation Plan was adopted by the Board of
Directors of the Group on December 20, 1996 and approved by
shareholders at the first Annual Meeting on August 19, 1997. The
purpose of the plan is to provide additional incentive to
directors and employees by facilitating their purchase of stock
of the Group. Awards under the plan may be made in the form of
options, stock appreciation rights or grants of restricted stock.
Awards up to 420,491 shares may be made under the Stock
Compensation Plan. The Compensation Committee of the Board of
Directors of the Group may, at their discretion, select employees
to whom awards will be granted, the number of shares to be
subject to such awards, the terms and conditions of such awards
and other restrictions they deem appropriate. No awards of stock
appreciation rights or restricted stock have been made as of
December 31, 1997.
The Group applies the APB Opinion No. 25 expense recognition
criteria of SFAS No. 123 and related interpretations in
accounting for its stock compensation plan. Accordingly, no
compensation cost has been recognized, except for the one-time
charge of $2,016,931 described later herein, in the accompanying
financial statements for the difference between the fair value of
stock-based compensation plans and the intrinsic value. Had
compensation cost for stock-based compensation plans been
determined using fair value, the Group's net income and earnings
per share for 1997 would have been as follows:
Net income:
As reported $ 3,484,566
Pro forma $ 3,074,985
Basic earnings per share:
As reported $ .92
Pro forma $ .79
The per share weighted-average fair value of options granted
during 1997 was $10.75. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted-average assumption used
for grants in 1997: dividend yield of .50%, expected volatility
of 20.00%; risk-free interest rate of 6.33% and an expected life
of 5.40 years.
On February 11, 1997, in connection with the Group's
subscription offering, 237,286 stock options were granted to
directors and officers. These options have an exercise price of
$10 per share and are exercisable by the grantee for a period of
ten years. The granting of these options was approved by
shareholders at the Group's first Annual Meeting on August 19,
1997. At that time the price of the Group's stock was $18.50 per
share. The difference between the price of the stock at the
measurement date and the exercise price of the options has been
charged to earnings in 1997. Since these options were granted as
non-qualified incentive stock options, the Group has recognized a
deferred tax asset on the difference between the exercise price
and the value of the options at the measurement date.
Information regarding activity in the Group's stock options
plan is presented below:
Weighted- Average Exercise Prices
Number of Shares Per Share
Outstanding at
January 1, 1997 - N/A
Granted in 1997 247,286 $10.42
Exercised in 1997 - N/A
Forfeited in 1997 - N/A
Outstanding at
December 31, 1997 247,286 $10.42
The following table summarizes information about the Group's
stock option plan at December 31, 1997:
Exercise Prices $10 $19 $22
Outstanding at December 31, 1997 237,286 5,000 5,000
Weighted-average remaining
contractual life (in years) 9.1 9.6 9.6
Options exercisable at
December 31, 1997 237,286 5,000 5,000
Management Recognition Plan
On December 20, 1996, the Board of Directors of the Group
also adopted a Management Recognition Plan (MRP) which is
designed to reward and retain key employees of the Group at the
time of the conversion. A total of 168,196 shares were
authorized for possible award. On August 19, 1997, shareholders
approved the granting of 142,371 shares under the MRP. Further
grants are not expected to take place. Awards under the MRP vest
over a period of five years following the award date. The Group
is recognizing compensation cost over the vesting period equal to
the value of the shares granted at the award date. In 1997,
$196,877 of compensation cost was recognized under the MRP.
Employee Stock Ownership Plan
The Board of Directors has also adopted an Employee Stock
Ownership Plan (ESOP) for the exclusive benefit of participating
and eligible employees. Employees are eligible after having
attained the age of 21 and completing one year of service with
the Group or its subsidiaries. In connection with the
subscription offering, the ESOP borrowed $4,054,910 in order to
purchase 10% of the total shares issued by the Group. The loan
bears interest at 8.45% and requires monthly payments of
principal and interest of $49,178 for a term of 10 years.
Because the Group has guaranteed repayment of the ESOP debt, the
debt and related unearned compensation are recorded in the
accompanying consolidated balance sheet as of December 31, 1997.
Dividends on shares held by the ESOP are paid to the ESOP
trust and together with Group contributions, are used by the ESOP
to repay principal and interest on the outstanding debt. Shares
are released for allocation to participants as the debt is
retired. Interest incurred on the ESOP notes amounted to $
282,079 in 1997. The Group paid dividends on the stock held by
the ESOP of $20,275.
Retirement Plans
The Group has a discretionary noncontributory profit sharing
plan covering eligible employees. The Group's contribution to
the plan amounted to $58,224, $268,043 and $262,945 in 1997,
1996, and 1995, respectively.
The Group also maintains a voluntary defined contribution
savings plan covering substantially all full-time employees. The
Group matches employee contributions up to 3% of compensation.
The Group's contribution to this plan amounted to $168,064,
$158,784 and $144,367 in 1997, 1996, and 1995, respectively.
11. Earnings Per Share
The following table reconciles the numerator and denominator
used in basic earnings per share to diluted earnings per share.
<TABLE>
<CAPTION> 1997 1996 1995
<S> <C> <C> <C>
Net income (loss) - for
basic and diluted
earnings per share $3,484,566 ($1,919,713) ($683,571)
Common shares
outstanding 3,803,141 3,957,610 3,957,610
Dilutive shares
Outstanding stock
options 40,483 - -
Total common and
dilutive shares 3,843,624 3,957,610 3,957,610
</TABLE>
Options to purchase 10,000 shares of common stock at $19 to
$22 per share were granted during the second half of 1997 but
were not included in the computation of diluted earnings per
share because the options' exercise price was greater than the
average market price of the common shares. Earnings per share
for 1996 and 1995 are computed on a pro forma basis assuming the
initial public offering took place on January 1, 1995.
12. Commitments and Contingencies:
In the event a property and casualty insurer becomes or is
declared insolvent, state insurance regulations provide for the
assessment of other insurers operating in that jurisdiction to
fund any capital deficiency of the insolvent insurer. Generally,
this assessment is based upon the ratio of an insurer's voluntary
written premiums to total written premiums for all insurers in
that particular state. The Group charges these assessments to
income in the period in which it is notified. The Group is not
aware of any material assessments which have not been recorded at
December 31, 1997.
13. Fair Values of Financial Instruments:
The carrying amounts of cash and cash equivalents, short-
term investments and subordinated debt approximate their fair
value.
Fixed income securities, preferred stocks and common stocks
are reported at fair value as established by quoted market prices
on secondary markets as of the balance sheet dates.
14. Related Party Transactions:
Neffsville Mutual Fire Insurance Company (Neffsville) and
New Castle Mutual Insurance Company (New Castle) are affiliated
with the Group through common management and reinsurance
programs.
Neffsville and New Castle are provided management services
by OGIM for a fee as determined under a management agreement.
Management fees recognized by OGIM under the aforementioned
management agreements are as follows:
1997 1996 1995
Neffsville $110,200 $55,600 $45,000
New Castle $ 86,900 -- --
Neffsville maintains a quota share reinsurance agreement
with OGF whereby 90% of Neffsville's business was assumed by Old
Guard Fire during 1997, 1996 and 1995. The following summarizes
the business ceded under the reinsurance agreement as of and for
each of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Premiums written $2,371,963 $2,577,252 $2,094,759
Premiums earned 2,371,561 2,577,252 2,094,759
Losses and loss adjustment expenses (1,192,792) (1,424,207) (860,823)
Commissions (728,032) (902,038) (837,904)
$ 450,737 $ 251,007 $ 396,032
Liability for losses and loss
adjustment expenses $ 351,750 $ 305,440 $ 328,590
Receivable from Neffsville $ 755,497 $ 258,430 $ 214,582
</TABLE>
During 1997, Old Guard began to participate in New
Castle's reinsurance program. The following summarizes the
business assumed from New Castle as of and for the year ended
December 31:
1997
Premiums written $582,580
Premiums earned $582,580
Losses and loss adjustment
expenses 373,214
Commissions 170,631
$ 38,735
Reserve for losses and
loss adjustment expenses $191,450
Receivable from New Castle $108,895
15. Litigation
On February 11, 1997, the Group completed a plan of
conversion under the Pennsylvania Insurance Company Mutual to
Stock conversion Act (the "Act").
On February 10, 1997, the Group, the Insurance Companies and
each of their respective directors were served with an eleven
count combination class action and derivative lawsuit, filed in
the United States District Court for the Eastern District of
Pennsylvania by four policyholders. By filing the class action
portion of the lawsuit, these four policyholders purport to
represent all 141,000 policyholders of the Insurance Companies.
Seven of the eleven counts challenge the constitutionality of the
Act. The plaintiffs are contending that the conversion plan
violated the rights of the plaintiffs and members of the class
under the United States and Pennsylvania, and that the Act is
unconstitutional as applied by the conversion plan. The
remainder of the class action claims assert theories regarding
purported violations of the Act, principally relating to the
description of the Plan in the proxy statement approved by the
Insurance Department of the Commonwealth of Pennsylvania
(Department) and mailed to policyholders. The derivative claim
was brought against the directors of Insurance Companies,
purportedly on behalf of the Insurance Companies, alleging breach
of the fiduciary duty of care in approving and implementing the
Plan and the fiduciary duty of loyalty, presumably in approving
the stock-based compensation plans which were contemplated by the
Plan. The stock-based compensation plans are expressly permitted
by the Act, were approved by the Department and have subsequently
been approved by shareholders. The suit seeks such compensatory
damages as may be allowed by law, a declaration that the Plan
violates the Act and the United States and Pennsylvania
Constitutions and the rights of the plaintiffs thereunder, and
such other relief as the court deems appropriate.
The Group, the Insurance Companies and the individual
defendants filed a motion to dismiss the complaint in May 1997.
In December 1997, the Court granted the motion with respect to
two of the constitutional counts and denied the motion with
respect to the remaining nine counts, including five of the
constitutional claims. Discovery has begun and is scheduled to
be completed by September 30, 1998.
However, at the direction of the trial judge, the Group, the
Insurance Companies and the individual defendants expect to file
a motion for summary judgment with respect to the constitutional
claims on or before June 1, 1998. The Group cannot predict the
outcome of any such summary judgment motion. If the motion for
summary judgment is not granted, then, absent settlement, the
case would proceed to trial.
If the plaintiffs prevail in the above litigation, the
remedy a court would grant or the amount of damages it might
award is uncertain. A court has broad discretion to fashion a
fair and equitable remedy in light of the nature of the
constitutional or other violation, the relative harm to the
parties, and the public interest. In some cases, relief is
applied on a prospective basis only; in other cases, relief is
applied on a retroactive basis. No prediction can be made
concerning the remedy a court would fashion or the amount of
damages it might award. However, two of the more far-reaching
possibilities include:
- A requirement that the Group pay all purchasers of
common stock, either on a mandatory basis or at the
election of the purchaser, as damages or otherwise, (I)
the purchase price paid per share of common stock
acquired in the Conversion, plus interest, (ii) the
market value per share of common stock acquired, or
(iii) the greater of (I) or (ii), less, in each case,
any proceeds received by such purchaser from the sale
of the common stock. No assurance can be given that
the group would have sufficient funds at that time to
honor any such obligation; or
- The Group could be required to pay or distribute to all
or some policyholders of the Insurance Companies,
either on a mandatory basis or at the election of the
policyholders, an amount equal to the statutory surplus
of the Insurance Companies as of the date of the
Conversion as damages or otherwise. Such distribution
could be required to be made in cash, common stock or
other debt or equity securities. No assurance can be
given that the Group would have sufficient funds, or
the capacity to borrow sufficient funds, at that time
to honor any such obligation. Any required
distribution of common stock or other equity securities
would materially dilute the interests of existing
holder of the common stock.
In the event that the Group could not honor its obligations
under any remedy imposed by the Court, the Group could be forced
to seek the protection of the bankruptcy laws and the Insurance
Companies could be deemed insolvent and seized by the Department.
16. Unaudited Quarterly Information (in thousands):
1997
Fourth Third Second First
Quarter Quarter Quarter Quarter
Net premiums earned $16,544 $15,377 $15,801 $14,707
Total revenues $18,392 $18,097 $17,920 $16,636
After-tax operating
income (loss), net of
realized investment
gains and losses $ 915 $ (436) $ 650 $ 820
Net income $ 1,174 $ 258 $ 924 $ 1,129
Earnings per share
Basic .31 .07 .24 .30
Diluted .30 .07 .24 .30
1996
Fourth Third Second First
Quarter Quarter Quarter Quarter
Net premiums earned $13,887 $13,398 $12,988 $13,319
Total revenues $14,668 $15,057 $14,961 $14,933
After-tax operating
income (loss), net of
realized investment
gains and losses $ 591 $ 160 $ (200) $(3,385)
Net income (loss) $ 628 $ 413 $ 187 $(3,148)
Earnings per share
Basic .16 .10 .05 -.80
Diluted .16 .10 .05 -.80
<PAGE>
Report of Independent Accountants
To the Board of Directors
Old Guard Group, Inc.
Our report on the consolidated financial statements of Old Guard
Group, Inc. (the Group) is included in Item 8 of this Form 10-K.
In connection with such audits of our financial statements, we
have also audited the related financial statement schedules
included in Item 8 of this Form 10-K. These financial statements
schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statement schedules based on our audits.
In our opinion, the financial statement schedules referred to
above, when considered in relation to the basic consolidated
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
February 20, 1998
<PAGE>
<TABLE>
<CAPTION>
OLD GUARD GROUP, INC.
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 1997
COLUMN A COLUMN B COLUMN C COLUMN D
Fair Balance
Type of Investment Cost Value Sheet
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
United States Government and Government
Agencies and Authorities $19,938,473 $19,957,350 $19,999,466
States, Municipalities and Political Subdivisions 16,533,427 16,755,597 16,701,249
Convertibles and Bonds with Warrants Attached 9,702,177 10,158,481 10,158,481
All Other Corporate Bonds 48,068,400 49,085,755 48,761,362
Redeemable Preferred Stock 4,431,698 4,626,565 4,626,565
Total Fixed Maturities $98,674,175 $100,583,748 $100,247,123
Equity Securities:
Common Stocks:
Public Utilities $46,660 $56,787 $56,787
Banks, Trust and Insurance Companies 1,291,524 2,292,595 2,292,595
Industrial, Miscellaneous and All Other 6,546,903 9,858,936 9,858,936
Non-redeemable Preferred Stock - - -
Total Equity Securities $7,885,087 $12,208,318 $12,208,318
Other Long-Term Investments $5,720,133 $5,668,025 $5,668,025
Total Investments $112,279,395 $118,460,091 $118,123,466
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Old Guard Group, Inc.
Schedule II. Condensed Financial Information of Registrant - Balance Sheet (Parent Company)
As of December 31, 1997
<S> <C>
ASSETS
Investments:
Fixed income securities, available for sale $8,513,120
Other invested assets 1,068,376
Investment in subsidiaries, at equity 70,560,377
Total investments 80,141,873
Cash and cash equivalents 2,729,671
Deferred income taxes 702,051
Other assets 196,524
TOTAL ASSETS $83,770,119
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities:
ESOP liability 3,740,426
Other liabilities 1,375,320
Total liabilities 5,115,746
Shareholders' Equity:
Preferred stock (5,000,000 shares authorized;
None issued and outstanding) -
Common stock (15,000,000 shares authorized; 4,204,910
shares issued; 4,084,370 shares outstanding, no par) 38,317,908
Additional paid-in capital 4,787,703
Deferred compensation (6,277,553)
Retained earnings 40,259,736
Net unrealized investment gains, net deferred income taxes 3,856,612
Treasury stock, at cost (120,540 shares) (2,290,033)
Total shareholders' equity 78,654,373
Total liabilities and shareholders' equity $83,770,119
</TABLE>
<TABLE>
<CAPTION>
Old Guard Group, Inc.
Schedule II. Condensed Financial Information of Registrant - Statement of Income (Parent Company)
For the Year Ended December 31, 1997
<S> <C>
Revenue:
Dividends from subsidiaries $1,675,000
Investment income 828,502
Total revenue 2,503,502
Expense:
Stock option compensation 2,016,931
Other expense 1,050,453
Interest expense 282,079
Total expense 3,349,463
Loss before income tax and equity in earnings of subsidiaries (845,961)
Income tax benefit (810,595)
Loss before equity in earnings of subsidiaries (35,366)
Equity in undistributed earnings of subsidiaries 3,519,932
Net income $3,484,566
</TABLE>
<TABLE>
Old Guard Group, Inc.
Schedule II. Condensed Financial Information of Registrant - Statement of Cash Flow (Parent Company)
For the year ended December 31, 1997
<S> <C>
Cash flows from operating activities:
Net income $3,484,566
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiaries (3,519,932)
Deferred income tax benefit (752,695)
Non-cash compensation expense 2,565,061
Other (143,646)
Net cash provided by operating activities 1,633,354
Cash flows from investing activities:
Cost of purchases of fixed income securities (8,895,373)
Proceeds from sales and maturities of fixed income securities 465,926
Cost of equity securities acquired (26,296,727)
Cost of purchases of other invested assets (1,000,000)
Proceeds from sales of other invested assets 1,500,000
Net cash used by investing activities (34,226,174)
Cash flows from financing activities
Proceeds from sale of stock, net of issuance costs 32,762,998
Cost of treasury stock (970,688)
Payment of dividends (210,245)
Proceeds from bank loans 3,954,770
Payments on principal of capital lease or bank loan (214,344)
Net cash provided by financing activities 35,322,491
Net increase in cash and cash equivalents 2,729,671
Cash and cash equivalents at beginning of period -
Cash and cash equivalents at end of period $2,729,671
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OLD GUARD GROUP, INC.
SCHEDULE IV - REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
Percentage
Ceded to Assumed from of Amount
Gross Other Other Net Assumed to
Amount Companies Companies Amount Net
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1997 $83,991,527 $24,817,610 $3,254,677 $62,428,594 5.2
FOR THE YEAR ENDED DECEMBER 31, 1996 $78,340,414 $27,468,375 $2,719,675 $53,591,714 5.1
FOR THE YEAR ENDED DECEMBER 31, 1995 $76,054,340 $11,600,070 $2,209,154 $66,663,424 3.3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OLD GUARD GROUP, INC.
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY & CASUALTY INSURANCE OPERATIONS AS OF AND FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
DEFERRED RESERVE FOR DISCOUNT IF
POLICY LOSSES AND ANY NET
ACQUISITION LOSS ADJ DEDUCTED IN UNEARNED EARNED
AFFILIATION WITH REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS
<S> <C> <C> <C> <C> <C>
CONSOLIDATED PROPERTY & CASUALTY ENTITIES
December 31, 1997 $7,318,767 $48,718,666 $ 0 $36,535,108 $62,428,594
December 31, 1996 $5,603,343 $55,371,077 $ 0 $34,377,756 $53,591,714
December 31, 1995 $7,180,779 $52,091,497 $ 0 $33,329,250 $66,663,424
<CAPTION>
COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
LOSSES AND LAE PAID LOSSES
NET INCURRED AND LOSS NET
INVESTMENT CURRENT PRIOR AMORT ADJUSTMENT WRITTEN
INCOME YEAR YEAR OF DPAC EXPENSES PREMIUMS
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997 $5,876,708 $42,857,000 ($4,342,940) $16,398,006 $41,979,977 $66,063,881
December 31, 1996 $4,494,818 $43,801,765 $ 557,025 $12,076,183 $45,934,259 $47,692,036
December 31, 1995 $4,685,787 $48,067,295 $2,442,000 $17,610,525 $47,228,236 $67,114,947
</TABLE>
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by
reference from the Company's proxy statement with respect to the
1998 annual meeting of shareholders.
Item 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by
reference from the Company's proxy statement with respect to the
1998 annual meeting of shareholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this item is incorporated by
reference from the Company's proxy statement with respect to the
1998 annual meeting of shareholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by
reference from the Company's proxy statement with respect to the
1998 annual meeting of shareholders.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) 1. Financial Statements.
The following consolidated financial statements are
included by reference in Part II, Item 8 hereof:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31,
1997 and 1996.
Consolidated Statements of Income for the years
ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1997, 1996 and
1995.
Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules.
The following financial statement schedules are
included in Part II, Item 8 hereof:
Schedule I - Summary of Investments - Other than
Investments in Related Parties
Schedule II - Condensed Financial Information of
Registrant
Schedule IV - Reinsurance
Schedule VI - Supplemental Information Concerning
Property and Casualty Insurance Operations
3. Exhibits.
Number Title
2.1 Joint Plan of Conversion, dated as of May 31, 1996, as
amended and restated July 19, 1996, of Old Guard Mutual
Insurance Group, Old Guard Mutual Fire Insurance
Company and Goschenhoppen-Home Mutual Insurance Company
(Incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement No. 333-12779 on
Form S-1)
3.1 Articles of Incorporation of Old Guard Group, Inc.
(Incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement No. 333-12779 on
Form S-1)
3.2 Bylaws of Old Guard Group, Inc. (Incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement No. 333-12779 on Form S-1)
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.)
10.1 Old Guard Group, Inc. - Management Recognition Plan*
(Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement No. 333-12779 on
Form S-1)
10.2 Old Guard Group, Inc. - 1996 Stock Compensation Plan*
(Incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement No. 333-12779 on
Form S-1)
10.3 Old Guard Group, Inc. - Employee Stock Ownership Plan*
(Incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement No. 333-12779 on
Form S-1)
10.4 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and David E. Hosler* (Incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement
No. 333-12779 on Form S-1)
10.5 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Mark J. Keyser* (Incorporated by reference to
Exhibit 10.5 to the Company's Registration Statement
No. 333-12779 on Form S-1)
10.6 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Steven D. Dyer* (Incorporated by reference to
Exhibit 10.6 to the Company's Registration Statement
No. 333-12779 on Form S-1)
10.7 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Scott A. Orndorff* (Incorporated by reference
to Exhibit 10.7 to the Company's Registration Statement
No. 333-12779 on Form S-1)
10.8 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Donald W. Manley* (Incorporated by reference
to Exhibit 10.8 to the Company's Registration Statement
No. 333-12779 on Form S-1)
21 List of Subsidiaries of Old Guard Group, Inc.
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
________
*Denotes a compensatory plan, contract or arrangement.
(b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
OLD GUARD GROUP, INC.
(Registrant)
March 30, 1998 By /s/ David E. Hosler
David E. Hosler, Chairman,
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title
__________________________ Director March __, 1998
James W. Appel
/s/ John E. Barry Director March 25, 1998
John E. Barry
/s/ Luther R. Campbell, Jr. Director March 25, 1998
Luther R. Campbell, Jr.
/s/ M. Scott Clemens Director March 25, 1998
M. Scott Clemens
/s/ David E. Hosler Chairman of Board March 30, 1998
David E. Hosler and Director
/s/ Richard B. Neiley, Jr. Director March 30, 1998
Richard B. Neiley, Jr.
/s/ G. Arthur Weaver Director March 25, 1998
G. Arthur Weaver
/s/ Robert L. Wechter Director March 25, 1998
Robert L. Wechter
/s/ Mark J. Keyser Chief Financial March 30, 1998
Mark J. Keyser Officer and
Treasurer
(Principal)
Financial Officer
<PAGE>
EXHIBIT INDEX
Number Title
2.1 Joint Plan of Conversion, dated as of May 31, 1996, as
amended and restated July 19, 1996, of Old Guard Mutual
Insurance Group, Old Guard Mutual Fire Insurance
Company and Goschenhoppen-Home Mutual Insurance Company
(Incorporated by reference to Exhibit 2.1 to the
Company's Registration Statement No. 333-12779 on
Form S-1)
3.1 Articles of Incorporation of Old Guard Group, Inc.
(Incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement No. 333-12779 on
Form S-1)
3.2 Bylaws of Old Guard Group, Inc. (Incorporated by
reference to Exhibit 3.2 to the Company's Registration
Statement No. 333-12779 on Form S-1)
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.)
10.1 Old Guard Group, Inc. - Management Recognition Plan*
(Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement No. 333-12779 on
Form S-1)
10.2 Old Guard Group, Inc. - 1996 Stock Compensation Plan*
(Incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement No. 333-12779 on
Form S-1)
10.3 Old Guard Group, Inc. - Employee Stock Ownership Plan*
(Incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement No. 333-12779 on
Form S-1)
10.4 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and David E. Hosler* (Incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement
No. 333-12779 on Form S-1)
10.5 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Mark J. Keyser* (Incorporated by reference to
Exhibit 10.5 to the Company's Registration Statement
No. 333-12779 on Form S-1)
10.6 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Steven D. Dyer* (Incorporated by reference to
Exhibit 10.6 to the Company's Registration Statement
No. 333-12779 on Form S-1)
10.7 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Scott A. Orndorff* (Incorporated by reference
to Exhibit 10.7 to the Company's Registration Statement
No. 333-12779 on Form S-1)
10.8 Employment Agreement, dated as of June 1, 1996, between
Commonwealth Insurance Managers, Inc., Old Guard Group,
Inc. and Donald W. Manley* (Incorporated by reference
to Exhibit 10.8 to the Company's Registration Statement
No. 333-12779 on Form S-1)
21 List of Subsidiaries of Old Guard Group, Inc.
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
________
*Denotes a compensatory plan, contract or arrangement.
EXHIBIT 23
Consent of Independent Accountants
We consent to the incorporation by reference in the registration
statement of Old Guard Group, Inc. and Subsidiaries on Form S-8
(File No. 333-46175) of our reports dated February 20, 1998, on our
audits of the consolidated financial statements and financial
statement schedule of Old Guard Group, Inc. and Subsidiaries as of
December 31, 1997 and 1996, and for the years ended December 31,
1997, 1996 and 1995, which reports are included in this Annual
Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
One South Market Square
Harrisburg, Pennsylvania
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 57,238
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 16,835
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 118,123
<CASH> 10,215
<RECOVER-REINSURE> 10,768
<DEFERRED-ACQUISITION> 7,319
<TOTAL-ASSETS> 175,299
<POLICY-LOSSES> 48,719
<UNEARNED-PREMIUMS> 36,535
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 4,537
0
0
<COMMON> 0
<OTHER-SE> 78,655
<TOTAL-LIABILITY-AND-EQUITY> 175,299
62,429
<INVESTMENT-INCOME> 5,877
<INVESTMENT-GAINS> 2,326
<OTHER-INCOME> 414
<BENEFITS> 38,514
<UNDERWRITING-AMORTIZATION> 16,398
<UNDERWRITING-OTHER> 8,038
<INCOME-PRETAX> 5,487
<INCOME-TAX> 2,009
<INCOME-CONTINUING> 3,477
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 7
<NET-INCOME> 3,485
<EPS-PRIMARY> .92
<EPS-DILUTED> .91
<RESERVE-OPEN> 55,371
<PROVISION-CURRENT> 42,857
<PROVISION-PRIOR> (4,343)
<PAYMENTS-CURRENT> 27,276
<PAYMENTS-PRIOR> 14,704
<RESERVE-CLOSE> 31,717
<CUMULATIVE-DEFICIENCY> (8,800)
</TABLE>
