<PAGE>
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, 2000 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 July 31, 2000:
Common Stock (No Par Value) 3,711,339
--------------------------- --------------------
(Title of Class) (Outstanding Shares)
<PAGE>
OLD GUARD GROUP, INC.
Form 10-Q
For the Quarter Ended June 30, 2000
Contents
<TABLE>
<CAPTION>
Part I - FINANCIAL INFORMATION Page No.
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Income and Comprehensive
Income for the Three Months Ended June 30,
2000 and 1999 4
Consolidated Statements of Income and Comprehensive
Income for the Six Months Ended June 30, 2000
and 1999 5
Consolidated Statement of Shareholders' Equity for
the Six Months Ended June 30, 2000 6
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999 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 18
Item 2. Change in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8 - K 19
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
OLD GUARD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
As of As of
June 30, 2000 December 31, 1999
------------------ --------------------
<S> <C> <C>
ASSETS
Investments:
Fixed income securities
Held to maturity, at amortized cost $ 33,092,186 $ 35,128,390
Available for sale, at fair value 59,799,955 62,142,865
Preferred stocks, available for sale, at fair value 6,478,410 6,441,999
Common stocks, available for sale, at fair value 17,545,535 16,437,575
Other invested assets 3,489,310 4,541,644
------------------ --------------------
Total investments 120,405,396 124,692,473
Cash and cash equivalents 15,607,927 14,092,314
Receivables:
Premiums 20,297,393 14,556,771
Reinsurance 4,970,768 8,992,729
Investment income 1,330,515 1,343,594
Affiliates 1,569,208 444,521
Prepaid reinsurance premiums 10,893,543 419,842
Deferred policy acquisition costs 10,468,639 11,306,258
Deferred income taxes 834,741 1,009,666
Property and equipment 18,885,278 19,220,861
Goodwill 634,163 661,735
Other assets 3,609,719 2,734,526
------------------ --------------------
Total assets $ 209,507,290 $ 199,475,290
================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss adjustment expenses $ 57,876,903 $ 55,697,390
Unearned premiums 54,924,812 46,371,346
Accrued expenses 3,787,070 5,949,491
Long-term debt 12,258,318 12,822,562
ESOP liability 3,067,166 3,234,293
Other liabilities 4,600,360 3,833,748
------------------ --------------------
Total liabilities 136,514,629 127,908,830
------------------ --------------------
Minority interest 925,307 935,675
------------------ --------------------
Shareholders' Equity:
Preferred stock (5,000,000 shares authorized; none issued and
outstanding) - -
Common Stock (15,000,000 shares authorized; 4,257,327 shares issued;
3,601,402 and 3,596,353 shares outstanding; no par) 38,865,703 38,865,703
Additional paid-in capital 4,185,317 4,212,021
Deferred compensation (4,344,452) (4,778,432)
Retained earnings 39,227,921 38,540,660
Net unrealized investment gains, net of deferred income taxes 3,472,685 3,215,957
Treasury stock, at cost (655,925 and 660,974 shares) (9,339,820) (9,425,124)
------------------ --------------------
Total shareholders' equity 72,067,354 70,630,785
------------------ --------------------
Total liabilities and shareholders' equity $ 209,507,290 $ 199,475,290
================== ====================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<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
June 30, 2000 June 30, 1999
<S> <C> <C>
------------------------- -------------------------
Revenue:
Net premiums written $ 31,748,888 $ 29,758,931
Change in net unearned premiums (4,751,823) (3,018,405)
------------------------- -------------------------
Net premiums earned 26,997,065 26,740,526
Investment income, net of expenses 1,740,434 1,490,224
Net realized investment gains 657,558 806,741
Other revenue 995,991 1,120,263
------------------------- -------------------------
Total revenue 30,391,048 30,157,754
------------------------- -------------------------
Expenses:
Losses and loss adjustment expenses incurred 17,939,864 15,435,294
Operating expenses 11,571,051 12,539,835
Interest expense 311,234 275,454
------------------------- -------------------------
Total expenses 29,822,149 28,250,583
------------------------- -------------------------
Income before income tax and minority interest 568,899 1,907,171
Income tax expense 148,949 583,442
------------------------- -------------------------
Income before minority interest 419,950 1,323,729
Minority interest in income of consolidated subsidiaries 97,753 104,904
------------------------- -------------------------
Net income $ 322,197 $ 1,218,825
------------------------- -------------------------
Other comprehensive income, before tax:
Unrealized holding gains 1,223,903 1,084,106
Less: Reclassification adjustment for gains
included in net income 657,558 806,741
------------------------- -------------------------
Other comprehensive income, before tax 566,345 277,365
Income tax expense related to items of other
comprehensive income 192,558 94,510
------------------------- -------------------------
Other comprehensive income, net of tax 373,787 182,855
------------------------- -------------------------
Comprehensive income $ 695,984 $ 1,401,680
========================= =========================
Earnings per share
Basic 0.10 0.34
Diluted 0.09 0.32
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
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, 2000 June 30, 1999
-------------------------- -------------------
<S> <C> <C>
Revenue:
Net premiums written $ 50,003,157 $ 56,241,394
Change in net unearned premiums 1,920,236 (4,118,790)
-------------------------- --------------------
Net premiums earned 51,923,393 52,122,604
Investment income, net of expenses 3,487,752 2,934,634
Net realized investment gains 1,271,230 1,714,444
Other revenue 1,775,111 2,285,718
-------------------------- -------------------
Total revenue 58,457,486 59,057,400
-------------------------- -------------------
Expenses:
Losses and loss adjustment expenses incurred 35,071,395 31,265,744
Operating expenses 21,420,078 25,102,164
Interest expense 617,134 422,061
-------------------------- -------------------
Total expenses 57,108,607 56,789,969
-------------------------- -------------------
Income before income tax and minority interest 1,348,879 2,267,431
Income tax expense 411,122 680,152
-------------------------- -------------------
Income before minority interest 937,757 1,587,279
Minority interest in income of consolidated subsidiaries 81,284 196,612
-------------------------- -------------------
Net income $ 856,473 $ 1,390,667
-------------------------- -------------------
Other comprehensive income, before tax:
Unrealized holding gains 1,660,213 833,273
Less: Reclassification adjustment for gains
included in net income 1,271,230 1,714,444
-------------------------- -------------------
Other comprehensive income (loss), before tax 388,983 (881,171)
Income tax expense (benefit) related to items of other
comprehensive income 132,255 (273,105)
-------------------------- -------------------
Other comprehensive income (loss), net of tax 256,728 (608,066)
-------------------------- -------------------
Comprehensive income $ 1,113,201 $ 782,601
========================== ===================
Earnings per share
Basic 0.26 0.39
Diluted 0.25 0.37
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Net Unrealized
Additional Investment Gains,
Common Stock Paid-In Deferred Retained Net of Deferred
Shares Amount Capital Compensation Earnings Income Taxes
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 2000 3,596,353 $ 38,865,703 $ 4,212,021 $ (4,778,432) $ 38,540,660 $ 3,215,957
Comprehensive income:
Net income 856,473
Unrealized gains on investments,
net of reclassification adjustment 256,728
Comprehensive income
Dividends ($.05 per share) (169,212)
Reissuance of treasury stock 2,849 (13,353)
Stock-based compensation 2,200 (13,351) 433,980
------------------------------------------------------------------------------------------------
Balance, June 30, 2000 3,601,402 $ 38,865,703 $ 4,185,317 $ (4,344,452) $ 39,227,921 $ 3,472,685
------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Treasury
Stock Total
-----------------------------------
<S> <C> <C>
Balance, January 1, 2000 $ (9,425,124) $ 70,630,785
Comprehensive income:
Net income 856,473
Unrealized gains on investments,
net of reclassification adjustment 256,728
--------------
Comprehensive income 1,113,201
--------------
Dividends ($.05 per share) (169,212)
Reissuance of treasury stock 43,091 29,738
Stock-based compensation 42,213 462,842
----------------------------------
Balance, June 30, 2000 $ (9,339,820) $ 72,067,354
----------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
OLD GUARD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, 2000
-----------------------------
<S> <C>
Cash flows from operating activities:
Net income $ 856,473
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,214,624
Net realized investment gains (1,271,230)
Deferred income tax expense 42,671
Non-cash compensation expense 462,843
Other 79,156
(Increase) decrease in assets:
Receivables (2,830,269)
Prepaid reinsurance premiums (10,473,701)
Deferred policy acquisition costs 837,619
Other assets (965,193)
Increase (decrease) in liabilities:
Losses and loss adjustment expenses 2,179,513
Unearned premiums 8,553,466
Accrued expenses (2,162,421)
Other liabilities 1,339,837
--------------------
Net cash provided (used) by operating activites (2,136,612)
--------------------
Cash flows from investing activities:
Cost of purchases of fixed income securities
Held to maturity (384,892)
Available for sale (19,517,067)
Proceeds from sales of fixed income securities
Available for sale 19,444,510
Proceeds from maturities of fixed income securities
Held to maturity 2,485,980
Available for sale 3,819,003
Cost of equity securities acquired (3,831,925)
Proceeds from sales of equity securities 2,979,875
Change in receivable/payable for securities (483,225)
Cost of purchases of other invested assets -
Proceeds from sales of other invested assets 964,438
Acquisition of subsidiary, net of cash acquired -
Cost of purchases of property and equipment (861,974)
--------------------
Net cash provided (used) by investing activities 4,614,723
--------------------
Cash flows from financing activities:
Exercise of common stock options -
Purchase of treasury stock -
Proceeds from reissuance of treasury stock 29,738
Payment of dividends (169,212)
Distributions to minority interest (91,652)
Proceeds from issuance of long-term debt -
Repayment of long-term debt (731,372)
--------------------
Net cash provided (used) by financing activities (962,498)
--------------------
Net increase in cash and cash equivalents 1,515,613
--------------------
Cash and cash equivalents at beginning of period 14,092,314
--------------------
Cash and cash equivalents at end of period $ 15,607,927
====================
Cash paid (received) during the year for:
Interest $ 558,166
Income taxes $ (219,865)
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, 1999
----------------------------
<S> <C>
Cash flows from operating activities:
Net income $ 1,390,667
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,226,052
Net realized investment gains (1,714,444)
Deferred income tax expense 427,418
Non-cash compensation expense 451,313
Other 183,424
(Increase) decrease in assets:
Receivables (2,727,990)
Prepaid reinsurance premiums 302,545
Deferred policy acquisition costs (931,079)
Other assets 684,342
Increase (decrease) in liabilities:
Losses and loss adjustment expenses 2,464,847
Unearned premiums 3,816,244
Accrued expenses (662,925)
Other liabilities (1,399,309)
---------------------
Net cash provided (used) by operating activites 3,511,105
---------------------
Cash flows from investing activities:
Cost of purchases of fixed income securities
Held to maturity (3,239,990)
Available for sale (11,901,832)
Proceeds from sales of fixed income securities
Available for sale 10,754,400
Proceeds from maturities of fixed income securities
Held to maturity 5,100,566
Available for sale 2,920,267
Cost of equity securities acquired (2,839,931)
Proceeds from sales of equity securities 3,736,070
Change in receivable/payable for securities 23,385
Cost of purchases of other invested assets (30,000)
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)
---------------------
Net cash provided (used) by investing activities (820,058)
---------------------
Cash flows from financing activities:
Exercise of common stock options 89,100
Purchase of treasury stock (297,903)
Proceeds from reissuance of treasury stock 36,888
Payment of dividends (185,237)
Distributions to minority interest (83,164)
Proceeds from issuance of long-term debt 6,000,000
Repayment of long-term debt (466,099)
---------------------
Net cash provided (used) by financing activities 5,093,585
---------------------
Net increase in cash and cash equivalents 7,784,632
---------------------
Cash and cash equivalents at beginning of period 6,121,983
---------------------
Cash and cash equivalents at end of period $ 13,906,615
=====================
Cash paid (received) during the year for:
Interest $ 399,327
Income taxes $ (768,628)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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), Investors Southern Corporation
(Southern), Old Guard Insurance Management Company (OGIMC), 2929 Service
Corporation and OGGI's 80% owned subsidiary, First Delaware Insurance Company
(First Delaware). Effective January 1, 2000, New Castle Insurance Company of
Delaware, previously a wholly owned subsidiary of Old Guard Group, Inc., merged
into Old Guard.
On May 10, 2000, OGGI and Ohio Farmers Insurance Company (Ohio Farmers)
signed an Agreement and Plan of Reorganization whereby Ohio Farmers has agreed
to purchase all of the outstanding capital stock of OGGI for $12 per share in
cash. The transaction, which is subject to shareholder approval and regulatory
approvals, is expected to close by November 30, 2000.
2. BASIS OF PRESENTATION
The consolidated 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, 1999 included in OGGI's 1999 Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
Certain amounts in the 1999 consolidated financial statements have been
reclassified to conform with the current year presentation.
8
<PAGE>
3. EARNINGS PER SHARE
The following table reconciles the numerator and denominator used in
basic earnings per share to diluted earnings per share.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
------------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Net income for basic and diluted
earnings per share $ 322,197 $ 1,218,825 $ 856,473 $ 1,390,667
=================== ================= =================== ===================
Average common shares outstanding 3,289,039 3,572,130 3,284,270 3,567,609
Treasury shares in MRP trust 108,696 140,534 108,838 137,154
Outstanding stock options 28,999 42,458 28,999 42,458
------------------- ----------------- ------------------- -------------------
Average dilutive shares outstanding 3,426,734 3,755,122 3,422,107 3,747,221
=================== ================= =================== ===================
</TABLE>
9
<PAGE>
4. BUSINESS SEGMENTS
OGGI has two primary business segments, property and casualty (P&C) and
title. Old Guard, Old Guard Fire, First Patriot and First Delaware make up the
P&C segment while Southern makes up the title segment. The following table
reflects OGGI's total revenues and pre-tax income by principle business segment.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
-------------------- ------------------- ------------------- -------------------
Revenue:
<S> <C> <C> <C> <C>
P & C operations $ 26,224,403 $ 25,239,580 $ 50,513,926 $49,247,355
Title operations 3,321,688 4,002,109 6,278,631 7,757,376
Net realized investment gains 657,558 806,741 1,271,230 1,714,444
Other 187,399 109,324 393,699 338,225
-------------------- ------------------- ------------------- -------------------
Total revenue $ 30,391,048 $ 30,157,754 $ 58,457,486 $59,057,400
==================== =================== =================== ===================
Pretax income:
P & C operations $ 21,628 $ 803,977 $ 592,581 $ 126,608
Title operations 136,692 364,677 (25,575) 623,824
Net realized investment gains 657,558 806,741 1,271,230 1,714,444
Other (246,979) (68,224) (489,357) (197,445)
-------------------- ------------------- ------------------- -------------------
Income before income taxes
and minority interest 568,899 1,907,171 1,348,879 2,267,431
Income tax expense 148,949 583,442 411,122 680,152
-------------------- ------------------- ------------------- -------------------
Income before minority interest 419,950 1,323,729 937,757 1,587,279
Minority interest in earnings of
consolidated subsidiaries 97,753 104,904 81,284 196,612
-------------------- ------------------- ------------------- -------------------
Net income $ 322,197 $ 1,218,825 $ 856,473 $ 1,390,667
==================== =================== =================== ===================
</TABLE>
10
<PAGE>
5. 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, the adoption of SFAS No. 133
is not expected to have a material impact on OGGI's financial condition, results
of operations or liquidity.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
PROPERTY AND CASUALTY (P&C) OPERATIONS
PREMIUMS. Gross P&C premiums written increased $8.9 million, or 31.2%,
to $37.4 million for the three months ended June 30, 2000 compared to the three
months ended June 30, 1999. The cause of this increase was significant growth in
direct written premium in personal automobile and workers' compensation lines,
as well as moderate growth in commercial package and commercial automobile lines
of business.
Premiums ceded to reinsurers increased $6.4 million to $8.0 million for
the three months ended June 30, 2000 compared to the three months ended June 30,
1999. The increase in ceded premiums was directly attributable to a 20% quota
share reinsurance agreement entered into effective January 1, 2000 on all
business written by Old Guard, Old Guard Fire, and First Patriot (the Insurance
Companies). Under the agreement, the Insurance Companies cede 20% of subject
premiums and losses and loss adjustment expenses, subject to a loss corridor,
and receive a 36% ceding commission on the premium ceded. The result is a
pro-rata sharing of risk with the reinsurer and protection of the Insurance
Companies' surplus from high frequency, low severity losses. Ceded premiums
written and ceded premiums earned under the agreement amounted to $6.8 million
and $5.7 million, respectively, for the quarter ending June 30, 2000.
Net premiums written increased $2.5 million, or 9.3%, to $29.4 million
for the three months ended June 30, 2000 compared to the three months ended June
30, 1999. Net premiums earned increased $769,000, or 3.2%, to $24.6 million for
the three months ended June 30, 2000 compared to the three months ended June 30,
1999. The increase in net premiums written and net premiums earned were directly
attributable to increases in gross premiums written offset by the effects of the
implementation of the Insurance Companies' 20% quota share treaty, as previously
discussed.
OTHER REVENUE. Other revenue of P&C operations increased $73,000, or
84.8% to $159,000 for the three months ended June 30, 2000 compared to the three
months ended June 30, 1999. The increase in other revenue is primarily
attributable to the increase in lease income from tenants in the recently
expanded home office facility in Lancaster, Pennsylvania.
LOSSES AND LOSS ADJUSTMENT EXPENSES. Net losses and loss adjustment
expenses incurred in P&C operations increased by $2.5 million, or 16.5% to $17.8
million for the three months ended June 30, 2000 compared to the three months
ended June 30, 1999. The loss and loss adjustment expense ratio was 72.4% for
the three months ended June 30, 2000 versus 64.1% for the comparable period in
1999. The increase in loss and loss adjustment expenses can be attributed to
higher than expected losses in personal lines products, most notably personal
automobile and homeowners.
12
<PAGE>
OPERATING EXPENSES. Operating expenses of P&C operations decreased by
$542,000, or 6.0%, to $8.5 million for the three months ended June 30, 2000
compared to the three months ended June 30, 1999. The expense ratio was 33.9%
for the three months ended June 30, 2000 compared to 37.6% for the three months
ended June 30, 1999. These decreases are primarily the result of the
implementation of the 20% quota share agreement that generated $2.1 million in
commission income in the second quarter of 2000 offset by other acquisition
expenses such as premium taxes and agents commissions which vary directly with
direct premiums written.
TITLE OPERATIONS
PREMIUMS. Title insurance premiums decreased approximately $513,000, or
17.7%, to $2.4 million for the three months ended June 30, 2000, compared to the
three months ended June 30, 1999. Higher interest rates during the current
quarter, which tend to reduce the number of real estate transactions,
contributed to both a decline in direct premiums of 27.2% and affiliated and
non-affiliated agency premiums of 16.9% as compared to the same period of the
prior year.
OTHER REVENUE. Other revenues of title operations, which consist
primarily of search, title exam, copy charges and escrow fees, decreased
approximately $197,000, or 19.1%, to $837,000 for the current period as compared
to the comparable prior year period. Higher interest rates and their impact on
real estate transactions also negatively impacted other revenues.
LOSSES AND LOSS ADJUSTMENT EXPENSES. Losses and loss adjustment
expenses incurred in title operations decreased $26,000, or 18.7%, to $115,000
for the three months ended June 30, 2000 compared to $141,000 for the three
months ended June 30, 1999 primarily as a result of the decrease in earned
premiums for the same period.
OPERATING EXPENSES. Operating expenses of title operations decreased
approximately $427,000, or 12.2%, to $3.1 million for the current year quarter
compared to the comparable quarter of the prior year. The decrease is comprised
of a decrease in agent commissions of approximately $244,000 and a decrease in
other operating expenses of approximately $183,000. The decrease in commissions
paid to agents was due primarily to the 18.8% decrease in premiums written by
non-affiliated agencies during the period offset by an increase in commission
rates for selected business. The decrease in other operating expenses is
primarily the result of a decrease in salary and employee benefits related to
the reduction in premiums and other title insurance related activity for the
period.
COMBINED P&C AND TITLE OPERATIONS
NET INVESTMENT INCOME. Net investment income increased 16.8%, to $1.7
million for the three months ended June 30, 2000 from $1.4 million for the three
months ended June 30, 1999 while average cash and invested assets increased $5.4
million, or 4.3%. For the three months ended June 30, 2000, the yield on average
cash and invested assets was 5.3% compared to 4.8% for the three months ended
June 30, 1999. The increase in yield is primarily a result of the increasing
interest rate environment.
NET REALIZED INVESTMENT GAINS. Net realized investment gains were
$658,000 for the three months ended June 30, 2000, compared to $807,000 for the
comparable period in 1999. The reduction in realized investment gains is a
result of losses on the sales of tax exempt fixed
13
<PAGE>
income securities which were initiated to take advantage of higher after-tax
yields on corporate securities and to protect against alternative minimum taxes.
FEDERAL INCOME TAX EXPENSE. Federal income tax as a percentage of
pre-tax income was 26.2% and 30.6% for the three months ended June 30, 2000 and
1999, respectively. The decrease in the effective tax rate is primarily
attributable to higher levels of tax exempt income versus pre-tax income.
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
PROPERTY AND CASUALTY (P&C) OPERATIONS
PREMIUMS. Gross P&C premiums written increased $16.5 million, or 31.2%,
to $69.4 million for the six months ended June 30, 2000 compared to the six
months ended June 30, 1999. The cause of this increase was significant growth in
direct written premium in personal automobile and workers' compensation lines,
as well as moderate growth in commercial package and commercial automobile lines
of business.
Premiums ceded to reinsurers increased $21.7 million to $24.0 million
for the six months ended June 30, 2000 compared to the six months ended June 30,
1999. The increase in ceded premiums was directly attributable to the
institution of a 20% quota share reinsurance agreement effective January 1, 2000
on all business written by the Insurance Companies. Under the agreement, the
Insurance Companies cede 20% of subject premiums and losses and loss adjustment
expenses, subject to a loss corridor, and receive a 36% ceding commission on the
premium ceded. The result is a pro-rata sharing of risk with the reinsurer and
protection of the Insurance Companies' surplus from high frequency, low severity
losses. Cessions under the agreement for the quarter ending June 30, 2000
amounted to $21.4 million of written premiums, which includes $8.8 million
related to the transfer of unearned premium at the inception of the agreement,
and $11.1 million of earned premiums.
Net premiums written decreased $5.2 million, or 10.4%, to $45.4 million
for the six months ended June 30, 2000 compared to the six months ended June 30,
1999. Net premiums earned increased $789,000, or 1.7%, to $47.3 million for the
six months ended June 30, 2000 compared to the six months ended June 30, 1999.
The decrease in net premiums written and the moderate increase in net premiums
earned were directly attributable to increases in gross premiums written offset
by the effects of the implementation of the Insurance Companies' 20% quota share
treaty, as previously discussed.
OTHER REVENUE. Other revenue of P&C operations increased $44,000, or
14.5% to $349,000 for the six months ended June 30, 2000 compared to the six
months ended June 30, 1999. The increase in other revenue is primarily
attributable to the increase in lease income from tenants in the recently
expanded home office facility in Lancaster, Pennsylvania.
LOSSES AND LOSS ADJUSTMENT EXPENSES. Net losses and loss adjustment
expenses incurred in P&C operations increased by $3.8 million, or 12.4% to $34.8
million for the six months ended June 30, 2000 compared to the six months ended
June 30, 1999. The loss and loss adjustment expense ratio was 73.7% for the six
months ended June 30, 2000 versus 66.7% for the comparable period in 1999. The
increase in loss and loss adjustment expenses can be
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attributed to higher than expected losses in personal lines products, most
notably personal automobile and homeowners.
OPERATING EXPENSES. Operating expenses of P&C operations decreased by
$2.9 million, or 15.8%, to $15.4 million for the six months ended June 30, 2000
compared to the three months ended June 30, 1999. The expense ratio was 31.8%
for the six months ended June 30, 2000 compared to 38.6% for the six months
ended June 30, 1999. These decreases are primarily the result of the
implementation of the 20% quota share agreement that generated $4.9 million in
commission income in the first half of 2000 offset by other acquisition expenses
such as premium taxes and agents commissions which vary directly with direct
premiums written.
TITLE OPERATIONS
PREMIUMS. Title insurance premiums decreased approximately $989,000, or
17.6%, to $4.6 million for the six months ended June 30, 2000, compared to the
six months ended June 30, 1999. Higher interest rates during the current
quarter, which tend to reduce the number of real estate transactions,
contributed to both a decline in direct premiums of 32.3% and affiliated and
non-affiliated agency premiums of 15.0% as compared to the same period of the
prior year.
OTHER REVENUE. Other revenues of title operations, which consist
primarily of search, title exam, copy charges and escrow fees, decreased
approximately $555,000, or 28.0%, to $1.4 million for the current period as
compared to the comparable prior year period. Higher interest rates and their
impact on real estate transactions also negatively impacted other revenues.
LOSSES AND LOSS ADJUSTMENT EXPENSES. Losses and loss adjustment
expenses incurred in title operations decreased $35,000, or 13.4%, to $224,000
for the six months ended June 30, 2000 compared to $259,000 for the six months
ended June 30, 1999 primarily as a result of the decrease in earned premiums for
the same period.
OPERATING EXPENSES. Operating expenses of title operations decreased
approximately $793,000, or 11.6%, to $6.1 million for the current year quarter
compared to the comparable quarter of the prior year. The decrease is comprised
of a decrease in agent commissions of approximately $369,000 and a decrease in
other operating expenses of approximately $427,000. The decrease in commissions
paid to agents was due primarily to the 14.1% decrease in premiums written by
non-affiliated agencies during the period offset by an increase in commission
rates for selected business. The decrease in other operating expenses is
primarily the result of a decrease in salary and employee benefits related to
the reduction in premiums and other title insurance related activity for the
period.
COMBINED P&C AND TITLE OPERATIONS
NET INVESTMENT INCOME. Net investment income increased 18.8%, to $3.5
million for the six months ended June 30, 2000 from $2.9 million for the six
months ended June 30, 1999 while average cash and invested assets increased $6.8
million, or 5.4%. For the six months ended June 30, 2000, the yield on average
cash and invested assets was 5.3% compared to 4.7% for the six months ended June
30, 1999. The increase in yield is primarily a result of the increasing interest
rate environment.
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NET REALIZED INVESTMENT GAINS. Net realized investment gains were $1.3
million for the six months ended June 30, 2000, compared to $1.7 million for the
comparable period in 1999. The reduction in realized investment gains is a
result of increasing interest rates which caused a decline in the prices of
fixed income securities and losses on the sales of tax exempt fixed income
securities which were initiated to take advantage of higher after-tax yields on
corporate securities and to protect against alternative minimum taxes.
FEDERAL INCOME TAX EXPENSE. Federal income tax as a percentage of
pre-tax income was 30.5% and 30.0% for the six months ended June 30, 2000 and
1999, respectively.
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 losses and because of the potential for large losses, either individually
or in the aggregate.
OGGI's property and casualty subsidiaries have in place an unsecured
line of credit with a financial institution under which they may borrow up to an
aggregate of $1.5 million to fund claims in the event of catastrophic losses not
covered under reinsurance. As of June 30, 2000, no amounts were borrowed against
these lines of credit. Under a separate $400,000 unsecured operating line of
credit, Southern has borrowed $352,000 to meet its operating cash requirements.
OGGI 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 and bears interest at LIBOR plus 1.50%. At June 30, 2000, OGGI maintained
a balance of $8,827,000 on this line of credit of which $5,250,000 was used to
fund the acquisition of Southern and $3,577,000 used to purchase treasury stock.
Net cash used by operating activities was $2.1 million during the first
six months of 2000 compared to net cash provided by operating activities of $3.5
million during the first six months of 1999. In 2000, the negative cash flow
from operations is directly a result of the timing of a $3.9 million payment
related to the implementation of the Insurance Companies' quota share treaty.
In the first six months of 2000, cash provided by investing activities
was $4.6 million as OGGI sold fixed income securities and was unable to redeploy
the funds until after June 30, 2000. In the first six months of 1999, cash used
by investing activities was $820,000 as OGGI acquired Southern and continued to
invest in computer systems offset to a large degree by the sale of fixed income
securities.
In the first six months of 2000, cash used by financing activities was
$962,000, a direct result of the repayment of bank loans and the payment of
dividends. In the first six months of 1999, cash provided by financing
activities was $5.1 million as OGGI obtained a $6.0 million
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loan to help it finance its acquisition of Southern. The $6.0 million loan has a
term of five years with a fixed interest rate of 7.05%.
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.
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.
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 OGGI or third parties to achieve Year 2000 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.
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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. OGGI has filed a motion for
summary judgment on all remaining claims. The issues relating to that motion
have been fully briefed, but no hearing has yet been scheduled. Discovery is
concluded, but no trial date has been set.
ITEM 2. CHANGE IN SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held an Annual Meeting of Shareholders on May 11, 2000.
(b) Not Applicable.
(c) The votes cast for the election of the nominees for director were as
follows:
<TABLE>
<CAPTION>
DIRECTOR FOR WITHHELD
-------- --- --------
<S> <C> <C>
Karen M. Balaban 3,136,417 68,399
Robert L. Goldstein 3,126,072 78,746
Noah W. Kreider, Jr. 3,136,569 68,248
</TABLE>
The votes cast for the ratification of PricewaterhouseCoopers
L.L.P. as the auditors for the fiscal year ended December 31, 2000
were as follows:
(i) For -- 3,076,401
(ii) Against -- 103,628
(iii) Abstentions -- 24,938
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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
(i) On May 16, 2000, the Company filed an 8-K containing an
Item 5, Other Events disclosure regarding the execution of an
Agreement and Plan of Reorganization among the Company and
Ohio Farmers Insurance Company.
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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 9, 2000 /s/ Henry J. Straub
---------------------------- ---------------------------------
Henry J. Straub,
Chief Financial Officer and
Treasurer (principal financial officer and
principal accounting officer)
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