SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[X] Quarterly report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the quarterly period
ended June 30, 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) 4,063,465
(Title of Class) (Outstanding Shares)
<PAGE 1>
<PAGE>
OLD GUARD GROUP, INC.
Form 10-Q
For the Quarter Ended June 30, 1999
Contents
Page No.
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Income and
Comprehensive Income for the Three
Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Income and
Comprehensive Income for the Six
Months Ended June 30, 1999 and 1998 5
Consolidated Statement of Shareholders'
Equity for the Six Months Ended June 30,
1999 6
Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 1999 and
1998 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Change in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security
Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8 -K 20
<PAGE 2>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of As of
June 30,1999 December 31, 1998
<S> <C> <C>
ASSETS
Investments:
Fixed income securities
Held to maturity, at amortized cost $36,205,984 $36,615,905
Available for sale, at fair value 56,706,851 59,249,118
Preferred stocks, available for sale, at fair value 5,927,833 5,979,443
Common stocks, available for sale, at fair value 16,620,206 15,620,659
Other invested assets 4,444,069 4,412,378
Total investments 119,904,943 121,877,503
Cash and cash equivalents 13,906,615 6,121,983
Receivables:
Premiums 12,135,234 9,354,449
Reinsurance 15,479,901 15,138,801
Investment income 1,213,453 1,194,031
Affiliates 1,571,185 479,989
Prepaid reinsurance premiums 681,085 983,630
Deferred policy acquisition costs 10,354,203 9,423,124
Property and equipment 18,180,974 16,941,129
Intangible assets 2,917,074 716,879
Other assets 3,196,504 3,752,624
Total assets $199,541,171 $185,984,142
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss adjustment expenses 56,663,622 52,707,951
Unearned premiums 43,628,829 39,812,585
Accrued expenses 3,966,484 4,250,938
Deferred income taxes 696,202 420,654
Long-term debt 9,498,611 3,402,778
ESOP liability 3,392,955 3,547,448
Other liabilities 2,050,056 3,362,831
Total liabilities 119,896,759 107,505,185
Minority Interest 991,912 703,220
Shareholders' Equity:
Preferred stock (5,000,000 shares authorized; 0 issued and
outstanding) - -
Common Stock (15,000,000 shares authorized; 4,257,327
and 4,248,417 shares issued; 3,923,689 and
3,933,401 shares outstanding; no par) 38,865,703 38,776,603
Additional paid-in capital 4,471,643 4,370,606
Deferred compensation (5,008,067) (5,330,718)
Retained earnings 41,380,649 40,175,219
Net unrealized investment gains, net of deferred income
taxes 4,389,233 4,997,299
Treasury stock, at cost (333,638 and
315,016 shares) (5,446,661) (5,213,272)
Total shareholders' equity 78,652,500 77,775,737
Total liabilities and shareholders' equity $199,541,171 $185,984,142
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE 3>
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
June 30, 1999 June 30, 1998
<S> <C> <C>
Revenue:
Net premiums written $29,758,931 $21,864,934
Change in unearned premiums (3,018,405) (3,417,596)
Net premiums earned 26,740,526 18,447,338
Investment income, net of expenses 1,490,224 1,548,070
Net realized investment gains 806,741 936,818
Other revenue 1,120,263 609,562
Total revenue 30,157,754 21,541,788
Expenses:
Losses and loss adjustment expenses incurred 15,435,294 14,274,556
Operating expenses 12,539,835 8,178,437
Interest expense 275,454 103,504
Total expenses 28,250,583 22,556,497
Income (loss) before income tax and minority interest 1,907,171 (1,014,709)
Income tax expense (benefit) 583,442 (374,757)
Income (loss) before minority interest 1,323,729 (639,952)
Minority interest in income (loss) of consolidated subsidiaries 104,904 9,818
Net income (loss) 1,218,825 (649,770)
Other comprehensive income (loss), before tax:
Unrealized holding gains 1,084,106 393,929
Less: Reclassification adjustment for gains
included in net income 806,741 936,818
Other comprehensive income (loss), before tax 277,365 (542,889)
Income tax expense (benefit) related to items of other
comprehensive income 94,510 (190,355)
Other comprehensive income (loss), net of tax 182,855 (352,534)
Comprehensive income (loss) $1,401,680 $(1,002,304)
=========== ===========
Earnings per share
Basic 0.34 -0.17
Diluted 0.32 -0.17
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE 4>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six For the Six
Months Ended Months Ended
June 30, 1999 June 30, 1998
<S> <C> <C>
Revenue:
Net premiums written $56,241,394 $43,139,144
Change in unearned premiums (4,118,790) (6,962,379)
Net premiums earned 52,122,604 36,176,765
Investment income, net of expenses 2,934,634 3,051,824
Net realized investment gains 1,714,444 1,744,199
Other revenue 2,285,718 1,208,213
Total revenue 59,057,400 42,181,001
Expenses:
Losses and loss adjustment expenses incurred 31,265,744 23,814,571
Operating expenses 25,102,164 16,680,045
Interest expense 422,061 215,213
Total expenses 56,789,969 40,709,829
Income before income tax and minority interest 2,267,431 1,471,172
Income tax expense 680,152 500,113
Income before minority interest 1,587,279 971,059
Minority interest in income of consolidated subsidiaries 196,612 42,905
Net income 1,390,667 928,154
Other comprehensive income (loss), before tax:
Unrealized holding gains 833,273 3,287,742
Less: Reclassification adjustment for gains
included in net income 1,714,444 1,744,199
Other comprehensive income (loss), before tax (881,171) 1,543,543
Income tax expense (benefit) related to items of other
comprehensive income (273,105) 524,329
Other comprehensive income (loss), net of tax (608,066) 1,019,214
Comprehensive income $ 782,601 $1,947,368
=========== ==========
Earnings per share
Basic 0.39 0.25
Diluted 0.37 0.24
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE 5>
<PAGE>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
For the Six Months Ended June 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Net
Unrealized
Investment
Additional Gains, Net
Common Stock Paid-In Deferred Retained of Deferred Treasury
Shares Amount Capital Compensation Earnings Income Taxes Stock Total
<S> <C> <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)
$77,775.737
Comprehensive income:
Net income 1,390,667
1,390,667
Unrealized losses on
investments, net of
reclassification
adjustment (608,066)
(608,066)
Comprehensive income 782,601
=========
Dividends ($.05 per share) (185,237)
(185,237)
Reissuance of
treasury stock 3,034 (9,001) 45,889 36,888
Exercise of common stock
options 8,910 89,100 89,100
Stock-based compensation (21,656) - 110,038 322,651 (279,278) 153,411
Balance, June 30, 1999 3,923,689 $38,865,703 $4,471,643 $(5,008,067) $41,380,649 $4,389,233 $(5,446,661) $78,652,500
========== =========== ========== =========== =========== ========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statement.
</TABLE>
<PAGE 6>
<PAGE>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six For the Six
Months Ended Months Ended
June 30, 1999 June 30, 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $1,390,667 $928,154
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,226,052 606,880
Net realized investment gains (1,714,444) (1,741,199)
Deferred income tax expenses 427,418 180,458
Non-cash compensation expense 451,313 511,716
Other 183,424 39,905
(Increase) decrease in assets:
Receivables (2,727,990) (4,698,522)
Prepaid reinsurance premiums 302,545 3,022,619
Deferred policy acquisition costs (931,079) (1,805,608)
Other assets 684,342 (2,000,006)
Increase (decrease) in liabilities:
Losses and loss adjustment expenses 2,464,847 1,203,085
Unearned premiums 3,816,244 3,939,760
Accrued expenses (662,925) (1,012,055)
Other liabilities (1,399,309) (678,757)
Net cash provided (used) by operating activities 3,511,105 (1,503,570)
Cash flows from investing activities:
Cost of purchases of fixed income securities
Held to maturity (3,239,990) (4,991,611)
Available for sale (11,901,832) (7,700,659)
Proceeds from sales of fixed income securities
Available for sale 10,754,400 10,820,521
Proceeds from maturities of fixed income securities
Held to maturity 5,100,566 7,072,238
Available for sale 2,920,267 1,022,511
Cost of equity securities acquired (2,839,931) (4,139,288)
Proceeds from sales of equity securities 3,736,070 3,190,235
Change in receivable/payable for securities 23,385 (50,000)
Cost of purchases of other invested assets (30,000) (1,250,000)
Proceeds from sales of other invested assets 18,000 -
Acquisition of subsidiary, net of cash acquired (3,661,465) -
Cost of purchases of property and equipment (1,699,528) (3,843,692)
Proceeds from sales of property and equipment - 3,000
Net cash provided (used) by investing activities (820,058) 133,255
Cash flows from financing activities:
Exercise of common stock options 89,100 -
Purchase of treasury stock (297,903) 323,490
Proceeds from reissuance of treasury stock 36,888 (1,473,345)
Distributions to minority interest (83,164) -
Payment of dividends (185,237) (210,247)
Proceeds from issuance of long-term debt 6,000,000 -
Repayment of long-term debt (466,099) (487,438)
Net cash provided (used) by financing activities 5,093,585 (1,847,540)
Net increase (decrease) in cash and cash equivalents 7,784,632 (3,217,855)
Cash and cash equivalents at beginning of period 6,121,983 10,214,908
Cash and cash equivalents at end of period $13,906,615 $6,997,053
=========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE> <PAGE 7>
<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 provides
property and casualty insurance throughout Pennsylvania, Maryland
and Delaware and title insurance and related services in
Virginia, North Carolina, Washington D.C., Ohio, Pennsylvania and
Maryland.
Effective January 1, 1999, OGGI acquired Southern and its
principal operating subsidiary, Southern Title Insurance
Corporation. 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 and six months ended June 30, 1998, including Southern
and New Castle as if they had been fully owned for that period
are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
<S> <C> <C>
Total revenue $25,068,479 $48,551,559
Income (loss) before income tax (1,154,452) 1,628,141
Net income (loss) (778,063) 974,986
Earnings (loss) per share - diluted (0.20) 0.25
</TABLE>
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
<PAGE 8> 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 six months ended:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
<S> <C> <C>
Net income for basic and diluted
earnings per share $1,390,667 $ 928,154
Common shares outstanding 3,567,609 3,720,243
Dilutive shares
Treasury stock in MRP trust 137,154 126,682
Outstanding stock options 42,458 98,900
Total common and dilutive shares $3,747,221 $3,945,825
</TABLE>
4. Supplemental Cash Flow Disclosure
Interest paid for the six months ended June 30, 1999 and
1998 was $399,327 and $215,213, respectively. Net income taxes
paid (recovered) for the six months ended June 30, 1999 and 1998
was ($768,628) and $1,322,200, respectively.
5. Business Segments
The following table indicates OGGI's total revenues and
pre-tax income by principle business segment.
<PAGE 9>
<TABLE>
<CAPTION>
Six Months Ended June 30 Three Months Ended June 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenue
P & C operations $49,247,355 $ 7,953,612 $25,239,580 $18,898,554
Title operations 7,757,376 - 4,002,109 -
Net realized investment gains 1,714,444 1,744,199 806,741 936,818
Other 338,225 2,483,190 109,324 1,706,416
Total revenue $59,057,400 $42,181,001 $30,157,754 $21,541,788
Pretax income (loss)
P & C operations $ 126,608 $ 50,649 $ 803,977 $(1,706,725)
Title operations 623,824 - 364,677 -
Net realized investment gains 1,714,444 1,744,199 806,741 936,818
Other (197,445) (323,676) (68,224) (244,802)
Income (loss) before income
taxes and minority interest 2,267,431 1,471,172 1,907,171 (1,014,709)
Income tax expense (benefit) 680,152 500,113 583,442 (374,757)
Income (loss) before minority
interest 1,587,279 971,059 1,323,729 (639,952)
Minority interest in earnings of
consolidated subsidiaries 196,612 42,905 104,904 9,818
Net income (loss) $ 1,390,667 $ 928,154 $ 1,218,825 $ (649,770)
</TABLE>
6. New Accounting Pronouncements
In June 1998, SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," 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
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. In June
1999, SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133," was issued which defers the effective date of
SFAS No. 133 to fiscal years beginning after June 15, 2000.
While OGGI is presently evaluating the impact of SFAS No. 133,
<PAGE 10> the adoption of SFAS No. 133 is not expected to have a
material impact on OGGI's financial condition, results of
operations or liquidity.
<PAGE 11>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Premiums. Gross premiums written increased $6.0 million, or
23.8%, to $31.4 million, and $8.0 million, or 15.7%, to $58.6
million for the three and six months ended June 30, 1999 compared
to the three and six months ended June 30, 1998. The primary
cause of these increases was growth in property and casualty
(P&C) direct premiums of $2.9 million and $5.0 million for the
three and six months ended June 30, 1999, respectively, versus
the comparable periods in 1998. Workers' compensation, personal
and commercial automobile and commercial multiperil were the
lines contributing to the growth. In addition, $3.0 million and
$5.7 million of title insurance premiums were generated by
Southern in the three and six months ended June 30, 1999,
respectively. Offsetting the growth for the six months ended
June 30, 1999 was a one-time transfer of $3.0 million of unearned
premiums from New Castle as of January 1, 1998. The unearned
premium transfer resulted from a 100% quota share reinsurance
agreement between Old Guard and New Castle.
Premiums ceded to reinsurers decreased $1.9 million, or
52.5%, to $1.7 million and $5.1 million, or 68.7%, to $2.3
million for the three and six months ended June 30, 1999 compared
to the three and six months ended June 30, 1998. The decrease in
ceded premiums was attributable to changes in the reinsurance
program as of January 1, 1999 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 load 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, OGGI's effective retention was already at
$500,000. In addition, OGGI eliminated its 95% quota share
reinsurance agreement on the first $1 million of umbrella
liability coverage and included this risk in its casualty excess
of loss reinsurance agreement.
Net premiums written increased $7.9 million, or 36.1%, to
$29,759,000, and $13.1 million, or 30.4%, to $56.2 million for
the three and six months ended June 30, 1999 compared to the
three and six months ended June 30, 1998. Net premiums earned
increased $8.3 million, or 45.0%, to $26.7 million, and $15.9
million, or 44.1%, to $52.1 million during the three and six
months ended June 30, 1999 compared to the three and six months
ended June 30, 1998. The increases in net premiums written and
earned were directly attributable to the effects of the changes
instituted in OGGI's reinsurance program and increases in gross
premiums written as previously discussed.
<PAGE 12>
Net Investment Income. Net investment income decreased 3.7%
or $58,000 for the three months ended June 30, 1999 and 3.8% or
$117,000 for the six months ended June 30, 1999. Average cash
and invested assets increased $5.8 million or 4.8% for the six
months ended June 30, 1999 compared to the average cash and
invested assets for the twelve months ending December 31, 1998.
The increase in average invested assets is primarily related to
the acquisition of Southern effective January 1, 1999. For the
six months ended June 30, 1999, the yield on average cash and
invested assets was 4.7% compared to 5.1% for the six months
ended June 30, 1998.
Net Realized Investment Gains. Net realized investment
gains were $807,000 and $1.7 million for the three and six months
ended June 30, 1999, respectively, compared to $937,000 and $1.7
million for the comparable periods in 1998.
Other Revenue. Other revenue increased $511,000, or 83.8%,
to $1.1 million and $1.1 million, or 89.2%, to $2.3 million for
the three and six months ended June 30, 1999 compared to the
three and six months ended June 30, 1998. Southern accounted for
an increase of $1.0 million and $2.0 million in the three and six
months periods, respectively. Offsetting the other revenue from
Southern was a decrease in OGIM's management fee income from New
Castle of $420,000 and $840,000 in the three and six months ended
June 30, 1999, respectively. In 1998, management fee income from
New Castle was included in consolidation until their conversion
on October 1, 1998.
Losses and Loss Adjustment Expenses. Net losses and loss
adjustment expenses incurred increased by $1.2 million, or 8.1%,
to $15.4 million, and $7.5 million, or 31.3%, to $31.3 million
for the three and six months ended June 30, 1999 compared to the
three and six months ended June 30, 1998. The increase in losses
and loss adjustment expenses can be attributed to the changes in
OGGI's reinsurance program enumerated previously. The loss and
loss adjustment expense ratio for P&C operations was 64.1% and
66.7% for the three and six months ended June 30, 1999,
respectively, versus 77.4% and 65.8% for the comparable periods
in 1998. The decrease in the loss and loss adjustment expense
ratio for the three months ended June 30, 1999 versus the
comparable period in 1998 can be attributed to nearly
$3.4 million of losses from tornadoes and severe thunderstorms
during the first week of June 1998. The loss and loss adjustment
expense ratio for title operations was 4.9% and 4.6% for the
three and six months ended June 30, 1999, respectively.
Operating Expenses. Operating expenses increased by $4.4
million, or 53.3%, to $12.5 million and $8.4 million, or 50.5%,
to $25.1 million for the three and six months ended June 30, 1999
compared to the three and six months ended June 30, 1998.
Excluding title operations, operating expenses increased
$875,000, or 10.7%. and $1.6 million, or 9.4% for the three and
six months ended June 30, 1999 compared to the comparable periods
<PAGE 13> in 1998. These increases can be attributed to increases
in gross premiums earned. The expense ratio for P&C operations
was 37.6% and 38.6% for the three and six months ended June 30,
1999, respectively, versus 41.0% and 42.8% for the comparable
periods in 1998. The reductions 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 30.6% and 30.0% for the three
and six months ended June 30, 1999, respectively, versus 37.0%
and 34.0% for the comparable periods in 1998. The decrease in
effective tax rate is primarily attributable to income from
minority interests earned by Southern which is not taxed.
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
relate primarily to the payment of losses and loss adjustment
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 June 30, 1999,
no amounts were borrowed against these lines of credit.
Net cash provided (used) by operating activities was $3.5
million and ($1.5) million during the first six months of 1999
and 1998, respectively. The increase in cash flow from operating
activities in 1999 versus 1998 can be attributed to increased
profitability and an increase in gross premiums written.
In 1999, cash used by investing activities was $820,000 as
OGGI funded the acquisition of Southern. In 1998, cash provided
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 $5.1
million primarily as a result of OGGI obtaining a $6.0 million
loan to help it finance its acquisition of Southern. The
$6.0 million loan has a term of five years and an interest rate
of LIBOR plus 1.5%. OGGI has 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 $1.8 million as OGGI
purchased treasury stock and paid dividends.
<PAGE 14>
As a holding company, the principal source of liquidity for
Old Guard Group, Inc. 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 until February of 2000.
In 1998, OGGI entered into a $3.5 million mortgage related
to the expansion of its home office. The mortgage require
principal payments over fifteen years and interest floating
monthly at LIBOR plus 1.5%. $2.0 million of the mortgage has
been converted to a fixed rate of 7.7% through the use of an
interest rate swap.
In 1997, 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 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 loans are repaid. OGGI
expects to contribute sufficient funds as necessary to the ESOP
to repay such loans, 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 LAE,
including losses that have been incurred but not yet reported,
make adequate provision for the effects of inflation.
<PAGE 15>
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,
applications software, computer hardware, 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 have been evaluated to determine whether
they need to be replaced, repaired or are compliant.
OGGI's most "fatal" asset is older personal computers. OGGI
implemented a plan to ensure that these systems were 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 were not year 2000
<PAGE 16> compliant. Software programs identified as not
compliant were reviewed and remediation plans were implemented
according to manufacturer recommendations. Other computer
software programs identified as non compliant were replaced by
compliant programs.
Vendors and external agents also have been contacted to
request information regarding their year 2000 status. OGGI has
received responses confirming year 2000 compliance from all
agents and vendors considered fatal or critical. For other agents
or vendors from whom responses have not been received,
contingency plans have been developed.
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 $10,000. Costs incurred to date have
been approximately $190,000.
Contingency Plans:
Although OGGI has confirmed that all of its fatal and
critical systems are year 2000 compliant, it has considered
contingencies in case any of these assets experience unforeseen
problems related to the year 2000 issue. For such 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.
<PAGE 17>
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 OGGI, Old Guard, Old Guard Fire, First Patriot
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 June 1999, the plaintiffs
filed an amended complaint alleging additional theories of
liability arising from the same facts.
ITEM 2. Change in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders -
The 1999 Annual Meeting of Shareholders (the "Meeting") of
OGGI was held on May 13, 1999. Notice of the Meeting was mailed
to shareholders on or about April 13, 1999.
The meeting was held for the following purposes:
1. To elect three Class III directors to hold office for
three years from the date of election, each to hold
office until their successors have been elected and
qualified.
To ratify the appointment by OGGI's Board of Directors of
PricewaterhouseCoopers L.L.P., as OGGI's independent
auditors for the fiscal year ending December 31, 1999
(Matter No. 2).
To act upon the Old Guard Group, Inc. Employee Stock
Purchase Plan (Matter No. 3).
Consideration of a shareholder proposal regarding sale of
the Company (Matter No. 4).
There was no solicitation in opposition to the nominees of
the Board of Directors. All nominees of the Board of Directors
were elected. The number of votes cast for or against, as well
<PAGE 19> as the number of abstentions for each of the nominees
for election to the Board of Directors were as follows:
ELECTION OF CLASS III DIRECTORS
Nominee For Withheld
E. Matthew Brown 3,155,026 145,211
David E. Hosler 3,150,922 149,316
Jay S. Sidhu 3,149,818 150,389
Matter No. 2 was approved by Shareholders at the Meeting.
The votes cast for this Matter were as follows:
Abstentions and
For Against Broker Non-Votes
3,275,459 18,639 6,140
Matter No. 3 was approved by Shareholders at the Meeting.
The votes cast for this Matter were as follows:
Abstentions and
For Against Broker Non-Votes
2,024,292 248,207 40,741
Matter No. 4 was not approved by Shareholders at the
Meeting. The votes cast for this Matter were as follows:
Abstentions and
For Against Broker Non-Votes
377,563 1,886,598 48,881
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K
3.1 Articles of Incorporation
(Incorporated by reference to
Exhibit 3.1 to the Company's
Registration Statement No. 333-
12779 on Form S-1).
3.2 Bylaws (Incorporated by reference
to Exhibit 3.2 to the Company's
Registration Statement No. 333-
12779 on Form S-1).
27 Financial Data Schedule.
(B) Reports on Form 8-K - None
<PAGE 20>
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
OLD GUARD GROUP, INC.
Date: August 13, 1999 /s/ Henry J. Straub
Henry J. Straub,
Chief Financial Officer and
Treasurer (principal financial
officer and principal accounting
officer)
<PAGE 21>
EXHIBIT INDEX
Exhibit No.
3.1 Articles of Incorporation
(Incorporated by reference to
Exhibit 3.1 to the Company's
Registration Statement No. 333-
12779 on Form S-1).
3.2 Bylaws (Incorporated by reference
to Exhibit 3.2 to the Company's
Registration Statement No. 333-
12779 on Form S-1).
27 Financial Data Schedule. <PAGE 22>
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<FISCAL-YEAR-END> DEC-31-1999
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0
0
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