SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[X] Quarterly report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the quarterly period
ended March 31, 1999 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the transition period
from ______________ to ____________.
0-16533
(Commission File Number)
Old Guard Group, Inc.
(Exact Name of Registrant as Specified in its
Charter)
Pennsylvania 23-2852984
State of Incorporation) (IRS Employer ID
Number)
2929 Lititz Pike, Lancaster, PA 17604
(Address of Principal Executive Offices) ( Zip Code)
717-569-5361
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Number of Shares Outstanding as of April 30, 1999:
Common Stock (No Par Value) 4,062,465
(Title of Class) (Outstanding
Shares)
PAGE 1
<PAGE>
OLD GUARD GROUP, INC.
Form 10-Q
For the Quarter Ended March 31, 1999
Contents
Page
No.
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998
3
Consolidated Statements of Income and
Comprehensive Income for the Three
Months Ended March 31, 1999 and 1998
4
Consolidated Statement of Shareholders'
Equity for the Three Months Ended March 31,
1999
5
Consolidated Statements of Cash Flows
for the Three Months Ended March 31,
1999 and 1998
6
Notes to Consolidated Financial Statements
7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations
11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
17
Item 2. Change in Securities
17
Item 3. Defaults upon Senior Securities
17
Item 4. Submission of Matters to a Vote
of Security Holders
17
Item 5. Other Information
17
Item 6. Exhibits and Reports on Form 8 - K
17
PAGE 2
<PAGE>
<TABLE>
<CAPTION>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(UNAUDITED)
As of As of
March 31, 1999 December 31, 1998
<S> <C>
<C>
ASSETS
Investments:
Fixed income securities
Held to maturity, at amortized cost $
37,165,200 $ 36,615,905
Available for sale, at fair value
55,253,861 59,249,118
Preferred stocks, available for sale, at fair value
6,260,541 5,979,443
Common stocks, available for sale, at fair value
15,803,347 15,620,659
Other invested assets
4,449,527 4,412,378
Total investments
118,932,476 121,877,503
Cash and cash equivalents
11,411,870 6,121,983
Receivables:
Premiums
10,354,833 9,354,449
Reinsurance
17,414,039 15,138,801
Investment income
1,301,587 1,194,031
Affiliates
1,125,015 479,989
Prepaid reinsurance premiums
670,288 983,630
Deferred policy acquisition costs
9,686,350 9,423,124
Property and equipment
17,939,851 16,941,129
Intangible assets
2,928,826 716,879
Other assets
4,182,087 3,752,624
Total assets
$195,947,222 $185,984,142
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss adjustment expenses
56,840,691 52,707,951
Unearned premiums
40,599,627 39,812,585
Accrued expenses
3,980,792 4,250,938
Deferred income taxes
303,679 420,654
Long-term debt
9,738,889 3,402,778
ESOP liability
3,470,644 3,547,448
Other liabilities
3,084,994 3,362,831
Total liabilities
118,019,316 107,505,185
Minority Interest
914,921 703,220
Shareholders' Equity:
Preferred stock (5,000,000 shares authorized; 0 issued and
outstanding)
- -
Common Stock (15,000,000 shares authorized; 4,256,327
and 4,248,417 shares issued; 3,921,689 and
3,933,401 shares outstanding; no par)
38,855,703 38,776,603
Additional paid-in capital
4,465,875 4,370,606
Deferred compensation
(5,211,509) (5,330,718)
Retained earnings
40,161,824 40,175,219
Net unrealized investment gains, net of deferred income
taxes
4,206,378 4,997,299
Treasury stock, at cost (334,638 and
315,016 shares)
(5,465,286) (5,213,272)
Total shareholders' equity
77,012,985 77,775,737
Total liabilities and shareholders' equity
$195,947,222 $185,984,142
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements. <PAGE 3>
PAGE 4
<PAGE>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive
Income
(UNAUDITED)
<TABLE>
<CAPTION>
For the
Three For the Three
Months
Ended Months Ended
March
31, 1999 March 31, 1998
<S> <C>
<C>
Revenue:
Net premiums written
$26,482,463 $21,274,210
Change in unearned premiums
(1,100,385) (3,544,783)
Net premiums earned
25,382,078 17,729,427
Investment income, net of expenses
1,444,410 1,503,754
Net realized investment gains
907,703 807,381
Other revenue
1,165,455 598,651
Total revenue
28,899,646 20,639,213
Expenses:
Losses and loss adjustment expenses incurred
15,830,450 9,540,015
Operating expenses
12,562,329 8,501,608
Interest expense
146,607 111,709
Total expenses
28,539,386 18,153,332
Income before income tax and minority interest
360,260 2,485,881
Income tax expense
96,710 874,870
Income before minority interest
263,550 1,611,011
Minority interest in income of consolidated subsidiary
91,708 33,087
Net income
171,842 1,577,924
Other comprehensive income (loss), before tax:
Unrealized holding gains (losses)
(250,833) 2,893,813
Less: Reclassification adjustment for gains
included in net income
907,703 807,381
Other comprehensive income (loss), before tax
(1,158,536) 2,086,432
Income tax expense (benefit) related to items of other
comprehensive income
(367,615) 714,684
Other comprehensive income (loss), net of tax
(790,921) 1,371,748
Comprehensive income (loss)
$(619,079) $2,949,672
=========== ===========
Earnings per share
Basic
0.05 0.43
Diluted
0.05 0.41
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
PAGE 5
<PAGE>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
For the Three Months Ended March 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Net Unrealized
Investment
Additional Gains, 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>
Balance, January 1, 1999 3,933,401 $38,776,603
$4,370,606 $(5,330,718) $40,175,219 $4,997,299 $(5,213,272)
$77,775,737
Comprehensive income:
Net income
171,842 171,842
Unrealized losses on
investments, net of
reclassification adjustment
(790,921) (790,921)
Comprehensive income
(619,079)
Dividends ($.05 per share)
(185,237) (185,237)
Reissuance of treasury stock 3,034
(9,001) 45,889
36,888
Exercise of common stock options 7,910 79,100
79,100
Stock-based compensation (22,656) -
104,270 119,209 (297,903)
(74,424)
Balance, March 31, 1999 3,921,689 $38,855,703
$4,465,875 $(5,211,509) $40,161,824 $4,206,378 $(5,465,286)
$77,012,985
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statement.
PAGE 6
<PAGE>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
For
the Three For the Three
Months Ended Months Ended
March 31, 1999 March 31, 1998
<S> <C>
<C>
Cash flows from operating activities:
Net income
$171,842 $1,577,924
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
587,429 346,326
Net realized investment gains
(907,426) (807,381)
Deferred income tax expense
129,403 59,698
Non-cash compensation expense
223,479 288,167
Other
22,641 33,087
(Increase) decrease in assets:
Receivables
(2,643,290) (3,057,486)
Prepaid reinsurance premiums
313,342 1,533,451
Deferred policy acquisition costs
(263,226) (927,226)
Other assets
(301,637) (1,559,358)
Increase (decrease) in liabilities:
Losses and loss adjustment expenses
2,641,916 (1,132,488)
Unearned premiums
787,042 2,011,332
Accrued expenses
(648,617) (717,134)
Other liabilities
(449,826) 1,626,732
Net cash provided by operating activities
(336,928) (724,356)
Cash flows from investing activities:
Cost of purchases of fixed income securities
Held to maturity
(1,380,472) (1,973,291)
Available for sale
(3,879,155) (2,718,721)
Proceeds from sales of fixed income securities
Available for sale
6,201,427 3,877,689
Proceeds from maturities of fixed income securities
Held to maturity
2,295,200 2,829,399
Available for sale
1,217,473 1,076,753
Cost of equity securities acquired
(1,880,173) (1,966,514)
Proceeds from sales of equity securities
1,824,506 1,318,861
Change in receivable/payable for securities
223,781 -
Cost of purchases of other invested assets
- (60,000)
Proceeds from sales of other invested assets
18,000 -
Acquisition of subsidiary, net of cash acquired
(3,659,431) -
Cost of purchases of property and equipment
(844,461) (2,410,016)
Proceeds from sales of property and equipment
350 -
Net cash used by investing activities
137,045 (25,840)
Cash flows from financing activities:
Exercise of common stock options
79,100 276,950
Purchase of treasury stock
(297,903) (1,473,345)
Proceeds from reissuance of treasury stock
36,888 -
Payment of dividends
(185,237) (210,246)
Proceeds from issuance of long-term debt
6,000,000 -
Repayment of long-term debt
(143,078) (266,927)
Net cash provided (used) by financing activities
5,489,770 (1,673,568)
Net increase (decrease) in cash and cash equivalents
5,289,887 (2,423,764)
Cash and cash equivalents at beginning of period
6,121,983 10,214,908
Cash and cash equivalents at end of period
$11,411,870 $7,791,144
=========== ==========
</TABLE> <PAGE 7>
The accompanying notes are an integral part of the consolidated
financial statements.
PAGE 8
<PAGE>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
The consolidated financial statements include the accounts
of
Old Guard Group, Inc. and its wholly-owned subsidiaries (OGGI),
Old
Guard Insurance Company (Old Guard), Old Guard Fire Insurance
Company (Old Guard Fire), First Patriot Insurance Company (First
Patriot), New Castle Insurance Company of Delaware (New Castle),
Investors Southern Corporation (Southern), Old Guard Insurance
Management Company (OGIM), 2929 Service Corporation and OGGI's
80%
owned subsidiary, First Delaware Insurance Company (First
Delaware).
OGGI 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 were converted from mutual to
stock insurance companies and issued shares of common stock to
OGGI
in exchange for $16.0 million.
Effective January 1, 1999, OGGI acquired Southern and its
principal operating subsidiary, Southern Title Insurance
Corporation. Southern provides title insurance and related
services
through a network of agencies in Virginia, North Carolina, the
District of Columbia, Ohio and Pennsylvania. Pursuant to the
stock
purchase agreement, OGGI paid $6,750,000 in cash for 100% of
Southern's capital stock. In addition, OGGI will make additional
payments equal to 25% of Southern's pretax profits in 1999, 2000,
and 2001. Effective October 1, 1998, New Castle Mutual Insurance
Company converted from mutual to stock form and changed its name
to
New Castle Insurance Company of Delaware. New Castle's
conversion
was pursuant to a plan of conversion approved by the Delaware
Insurance Department and New Castle's policyholders. Along with
the conversion, OGGI's $2.5 million surplus note investment in
New
Castle was converted to 1,500 shares of common stock and OGGI
became the sole shareholder of New Castle. Pro forma results for
the three months ended March 31, 1998, including Southern and New
Castle as if they had been fully owned for that period are as
follows:
1998
Total revenue $23,483,080
Income before income tax 2,907,718
Net income 1,878,174 <PAGE 9>
Earnings per share
- diluted 0.48
2. Basis of Presentation
The financial information for the interim periods included
herein is unaudited; however, such information reflects all
adjustments, consisting of normal recurring adjustments, which
are,
in the opinion of management, necessary to a fair presentation of
the financial position, results of operations, and cash flows for
the interim periods. The results of operations for interim
periods
are not necessarily indicative of results to be expected for the
full year.
These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
for the year ended December 31, 1998 included in OGGI's 1998
Annual
Report on Form 10-K filed with the Securities and Exchange
Commission.
Certain amounts in the 1998 financial statements have been
reclassified to conform with the current year presentation.
3. Earnings Per Share
The following table reconciles the numerator and
denominator
used in basic earnings per share to diluted earnings per share
for the three months ended:
March 31, 1999 March 31,
1998
Net income for
basic and diluted
earnings per share $ 171,842 $
1,577,924
Common Shares
outstanding 3,563,037
3,704,466
Dilutive shares
Treasury stock in
MRP trust 133,736
127,029
Outstanding stock
options 40,250
94,941
Total common and dilutive
shares 3,737,023
3,926,436
4. Supplemental Cash Flow Disclosure
Interest paid for the three months ended March 31, 1999 and
1998 was $125,652 and $84,808, respectively. Net income taxes
<PAGE 10> paid for the three months ended March 31, 1999 and 1998
was $17,093 and $490,000, respectively.
5. Business Segments
The following table indicates OGGI's total revenues and
pre-
tax income by principle business segment:
March 31,
1999 1998
Revenue:
P & C operations $24,007,775 $19,055,058
Title operations 3,755,267 -
Net realized investment gains 907,703 807,381
Other 228,901 776,774
Total revenue $28,899,646 $20,639,213
Pretax income
P & C operations $ (677,369) $ 1,757,374
Title operations 259,147 -
Net realized investment gains 907,703 807,381
Other (129,221) (78,874)
Income before income taxes and
minority interest 360,260 2,485,881
Income tax expense 96,710 874,870
Income before minority interest 263,550 1,611,011
Minority interest in earnings of
consolidated subsidiary 91,708 33,087
Net income $ 171,842 $ 1,577,924
6. New Accounting Pronouncements
In June 1998, SFAS No. 133 was issued. SFAS No. 133
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as "derivatives") and
for hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at
fair value. If certain conditions are met, a derivative may be
specifically designated as (i) a hedge of the exposure to changes
in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (ii) a hedge of the exposure of
variable cash flows of a forecasted transaction, or (iii) a hedge
of the foreign currency exposure of a net investment in a foreign
<PAGE 11> operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated
forecasted transaction. The accounting for changes in the fair
value of a derivative (that is, gains and losses) depends on the
intended use of the derivative and the resulting designation.
SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. While OGGI is presently
evaluating the impact of SFAS No. 133, the adoption of SFAS No.
133 is not expected to have a material impact on OGGI's financial
condition or results of operations.
PAGE 12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Premiums. Gross premiums written increased $1.9 million,
or
7.7%, to $27.1 million for the three months ended March 31, 1999
compared to the three months ended March 31, 1998. The primary
cause of this increase was growth in property and casualty (P&C)
direct written premium of $2.0 million primarily in the personal
and commercial automobile, workers compensation, and commercial
lines of business as well as $2.7 million in title insurance
premiums. Offsetting the growth in 1999 was a one-time transfer
of
New Castle's unearned premium reserve of $3.0 million as of
January
1, 1998. This unearned premium transfer resulted from a 100%
quota
share reinsurance agreement between Old Guard and New Castle.
Premiums ceded to reinsurers decreased $3.3 million, or
83.8%, to $638,000 for the three months ended March 31, 1999
compared to the three months ended March 31, 1998. The decrease
in ceded premiums was attributable to changes in the reinsurance
program as of January 1, 1998 including reductions in rates.
Changes in the reinsurance program included elimination of the
first layers of the property and casualty excess of loss
reinsurance agreements which covered losses in excess of $150,000
up to $500,000. This layer of reinsurance required premium
payments equal to losses incurred plus a fee subject to a maximum
and minimum premium. OGGI's experience had generally been such
that the actual premium paid was within the minimum and maximum.
As a result, the Company's effective retention was already at
$500,000. In addition, OGGI eliminated its 95% quota share
reinsurance agreement on the first $1 million of coverage and
included this risk in its casualty excess of loss reinsurance
agreement.
Net premiums written increased $5.2 million, or 24.5%, to
$26.4 million for the three months ended March 31, 1999 compared
to the three months ended March 31, 1998. Net premiums earned
increased $7.7 million, or 43.2%, to $25.4 million during the
three months ended March 31, 1999 compared to the three months
ended March 31, 1998. The increases in net premiums written and
earned were directly attributable to the effects of the changes
instituted in the Group's reinsurance program and increases in
gross premiums written as previously discussed.
Net Investment Income. Net investment income decreased
3.9%, to $1,444,000 for the three months ended March 31, 1999
from $1,504,000 for the three months ended March 31, 1998 while
average cash and invested assets increased $4.9 million, or 4.1%.
For the three months ended March 31, 1999, the yield on average
cash and invested assets was 4.6% compared to 4.9% for the three
months ended March 31, 1998.
<PAGE 13>
Net Realized Investment Gains. Net realized investment
gains were $908,000 for the three months ended March 31, 1999,
compared to $807,000 for the comparable period in 1998.
Other Revenue. Other revenue increased $567,000, or 94.7%
to $1,165,000 for the three months ended March 31, 1999 compared
to the three months ended March 31, 1998. Southern accounted for
an increase of $947,000 which was offset by a decrease in OGIM's
management fee income from New Castle of $420,000. In the first
quarter of 1998, management fee income from New Castle was not
eliminated in the consolidation since they were not a wholly
owned subsidiary at that time.
Losses and Loss Adjustment Expenses. Net losses and loss
adjustment expenses incurred increased by $6.3 million, or 65.9%,
to $15.8 million for the three months ended March 31, 1999
compared to the three months ended March 31, 1998. The loss and
loss adjustment expense ratio from P&C operations was 69.4% for
the three months ended March 31, 1999 versus 53.8% for the
comparable periods in 1998. The increase in loss and loss
adjustment expenses can be attributed to the unusually mild
winter weather experienced in the first quarter of 1998 as
compared to the less favorable, but more typical weather
experienced in 1999. The loss ratio for the title operations was
4.3% for the three months ended March 31, 1999.
Operating Expenses. Operating expenses increased by $4.1
million, or 47.8%, to $12.6 million for the three months ended
March 31, 1999 compared to the three months ended March 31, 1998.
The increases are primarily the result of the acquisition of
Southern which accounted for $3.4 million of the increase.
Excluding title operations, operating expenses increased $696,000
or 8.2% which can be attributed to increases in gross premiums
written. The expense ratio for P&C operations was 39.7% for the
three months ended March 31, 1999 compared to 44.6% for the three
months ended March 31, 1998. The reduction in the expense ratio
can be attributed to increases in net premiums earned without
commensurate increases in expenses.
Federal Income Tax Expense. Federal income tax as a
percentage of pre-tax income was 26.8% and 35.2% for the three
months ended March 31, 1999 and 1998, respectively. The decrease
in the effective tax rate is primarily attributable to the low
level of pretax income versus the magnitude of tax preference
items (primarily tax exempt income and the dividends received
deduction).
Liquidity and Capital Resources
The principal sources of OGGI'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 OGGI
relates primarily to the payment of losses and loss adjustment
<PAGE 14> expenses. The short and long-term liquidity
requirements of OGGI 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.
OGGI and its subsidiaries have in place unsecured lines of
credit with a local financial institution under which they may
borrow up to an aggregate of $1.5 million. As of March 31, 1999,
no amounts were borrowed against these lines of credit.
Net cash used by operating activities was $337,000 and
$724,000 during the first three months of 1999 and 1998,
respectively.
In 1999, cash provided by investing activities was $137,000
as OGGI sold fixed income securities and invested the proceeds in
Southern. In 1998, cash used by operating activities was minimal
as OGGI used the net proceeds from its investment portfolio to
finance its investment in new computer systems and its home
office expansion.
In 1999, cash provided by financing activities was $5.5
million as OGGI obtained a $6.0 million loan to help it finance
its acquisition of Southern. The $6,000,000 loan has a term of
five years and an interest rate of LIBOR plus 1.5%. Subsequent
to the end of the quarter, OGGI entered into an interest rate
swap agreement to fix the interest rate on the loan at 7.05%. In
1998, cash used by financing activities was $1.7 million as OGGI
purchased treasury stock and paid dividends.
As a holding company, the principal source of liquidity for
OGGI will be dividend payments and other fees received from its
subsidiaries. Insurance companies are restricted by the
insurance laws of the state of domicile as to the amount of
dividends or other distributions they may pay 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 Pennsylvania Insurance
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, Old Guard, Old Guard Fire and First Patriot
are further restricted as to the amount of dividends that they
may pay. These restrictions do not allow the payment of any
dividend without prior approval of the Pennsylvania Insurance
Department for a 36 month period following the conversion. This
restrictive period expires in February 2000.
OGGI's Employee Stock Ownership Plan (ESOP) borrowed
$4.1 million from an unaffiliated lender and $100,000 from OGGI
to purchase 10% of the common stock issued in OGGI's subscription
<PAGE 15> offering. The loans bear an 8.45% interest rate, and
will require the ESOP to make monthly payments of $50,417 for a
term of 10 years. The loans are secured by the shares of common
stock 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 as necessary 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 OGGI 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 OGGI'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 loss
adjustment expenses, including losses that have been incurred but
not yet reported, make adequate provision for the effects of
inflation.
Year 2000 Issue
General:
As the year 2000 approaches, concerns arise involving
business interruptions or failures of specific operations
performed by computer chips as a result of date sensitive
information. The problem results because some current
information technology ("IT") systems and non-IT systems with
embedded computer chips are not prepared to recognize the year
change from 1999, to 2000. Absent remediation of non-compliant
systems, there is a substantial risk to OGGI of business
interruption or failure. Therefore, it is important to prepare a
contingency plan whereby all affected areas within OGGI have been
reviewed.
Project:
OGGI has developed an enterprise-wide year 2000 Readiness
Initiative Program to identify the enterprise-wide business
impact(s) of the arrival of the year 2000. A plan was developed
to ensure all applicable systems, equipment, vendors and external
agents are compliant. OGGI has utilized the recommendations from
an outside consultant as a tool for project management.
In the process of identifying assets affected by the year
2000 problem, a year 2000 representative was selected from each
department within OGGI. Each representative completed an
inventory of year 2000 affected assets utilized by their
department. The inventory included: infrastructure, including
non-IT assets such as elevators and security systems, <PAGE 16>
applications software, third-party suppliers and customers
(external agents).
The representatives prioritized assets by assigning a
criticality factor. These factors consisted of "fatal,"
"critical," "marginal" and "desirable." "Fatal" is defined as an
asset that is necessary for uninterrupted operations of OGGI and
will fail or terminate if there were year 2000 date processing
errors. "Critical" is defined as an asset that is necessary for
the operation of the business, and year 2000-related failures
will produce an inaccurate or incorrect result. "Marginal" is
defined as an asset that is necessary for the operation of the
business, but year 2000-related failures will cause minor
inconveniences, annoyances, or irritations. "Desirable" is
defined as an asset that is not mandatory for operating the
business. All assets will continue to be evaluated to determine
whether they need to be replaced, repaired or are compliant. As
of December 1998, OGGI has evaluated the majority of assets and
confirms all assessment work is substantially completed.
OGGI's most "fatal" asset is older personal computers.
OGGI
has developed a plan to ensure these systems will be compliant by
the first quarter of 1999. Information regarding BIOS upgrades
and recommendations have been received from the manufacturers of
each of the different computer systems that are not year 2000
compliant. The software programs identified as not yet compliant
continue to be reviewed and remediation will be implemented
according to manufacturer recommendations. Some of the computer
software programs currently being utilized will be replaced by
compliant systems.
Vendors and external agents also have been contacted by
phone and/or letter to request information regarding their year
2000 status. OGGI has received some responses to date but all
vendors have not yet responded. Alternative vendors have been
identified for those vendors that do not respond.
In addition, a process also was established for reviewing
new and existing contracts and maintenance agreements for
appropriate year 2000 compliance language.
Costs:
OGGI presently expects that substantially all future costs
associated with the year 2000 compliance will be internal and are
estimated to be less than $50,000. Costs incurred to date have
been approximately $150,000.
Contingency Plans:
Although OGGI expects to finish testing its year 2000
compliance by June 30, 1999, it has considered contingencies in
case any of its fatal or critical assets, not already confirmed
as compliant, fail year 2000 compliance testing. For such
<PAGE 17> assets, OGGI has identified alternatives that will not
cause significant interruptions to service or operation.
Policy Coverage:
Many experts now believe that the year 2000 problem may
have
a material adverse impact on the national and global economies.
In addition, it seems likely that if businesses are materially
damaged as a result of the 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 and has included
exclusionary language on certain policies beginning in 1998, 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 OGGI to accurately estimate the
impact of the year 2000 problem on the insurance issued by, or
other business operations of OGGI.
Forward-Looking Statements
Certain statements contained in the Management's Discussion
and Analysis of Financial Condition and Results of Operations 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-looking
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
and title insurance industries generally, including price
competition, size and frequency of claims, escalating damage
awards, natural disasters, fluctuations in interest rates and
general business conditions; OGGI's dependence on investment
income; the geographic concentration of OGGI's business in the
Northeast United States, the adequacy of OGGI's liability for
losses and loss adjustment expenses; government regulation of the
insurance industry; the inability of the Company or third parties
to achieve Y2K compliance and the other risks and uncertainties
discussed or indicated in all documents filed by OGGI with the
Securities and Exchange Commission. OGGI expressly disclaims any
obligation to update any forward-looking statements as a result
of developments occurring after the release of this report.
PAGE 18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - In February 1997, four
policyholders, purportedly on behalf of all policyholders, filed
an action against the Group, the Insurance Companies, and their
directors in the United States District Court for the eastern
District of Pennsylvania. Plaintiffs seek damages for the loss
of their alleged equity interest in the Insurance Companies as a
result of the conversion, based on numerous theories, including
breach of fiduciary duty and civil rights claims. In April 1997,
defendants filed a motion to dismiss for failure to state a cause
of action. The motion to dismiss was granted as to two counts
and denied as to the remaining nine counts. In January 1998,
plaintiffs filed a motion for class certification which was
granted in September 1998. In July 1998, defendants filed a
motion for summary judgment with respect to the remaining
constitutional claims. In March 1999, the Court granted the
motion with respect to the two remaining counts under the U.S.
Constitution and retained supplemental jurisdiction over the
remaining state law claims. In April 1999, the plaintiffs filed
a motion for permission to file an amended complaint alleging
additional theories of liability arising from the same facts.
The Insurance Companies have opposed this motion. A decision on
this motion is pending.
ITEM 2. Change in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security
Holders - None
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K
(A.) Exhibit 27 - Financial Data Schedule
(B.) Reports on Form 8-K - None
PAGE 19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
OLD GUARD GROUP, INC.
Dated: May 17, 1999 /s/ Henry J. Straub
Henry J. Straub,
Chief Financial Officer and
Treasurer (principal
financial
officer and principal
accounting
officer)
<PAGE 20>
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0
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