OGGI's main offices are located at 2929 Lititz Pike, Lancaster, Pennsylvania in a 33,000 square foot facility owned by Old Guard. First Delaware and New Castle jointly occupy 6,750 square feet of leased office space in Smyrna, Delaware.
UNDERWRITING EXPENSES. Underwriting expenses, which include amortization of deferred policy acquisition costs and operating expenses, increased $11.4 million, or 46.6%, in 1998 to $35.8 million from $24.4 million in 1997. The increase is primarily the result of the loss of commission income from the termination of the quota share reinsurance agreement in 1998 and additional commission expense on assumed business from New Castle, as well as pretax charges of $2.0 million for guaranty fund assessments related to the insolvencies of PIC Insurance Group, Inc. and P.I.E. Mutual Insurance Company. Other increases in underwriting expenses relate to Old Guard Insurance Management Co.'s management agreement with New Castle. Expenses related to this agreement are offset by increases in other revenue.
In 1999, investing activities used cash of $7.2 million as OGGI funded the acquisition of Southern and invested surplus cash from operations. In 1998, investing activities used cash of $6.8 million primarily because of OGGI's home office expansion, which was completed in the fall of 1998, and the continued investments in technology. In 1997, investing activities used cash of $33.5 million primarily because of the investment of the net proceeds from the subscription offering and the costs of improvements to computer systems.
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.
With the assistance of outside consulting groups, OGGI began evaluating and reprogramming its IT systems to address the Year 2000 Issue in late 1995. OGGI's Year 2000 systems' program consisted of four phases: (i) identifying systems requiring remediation; (ii) assessing the requirements to remediate those systems; (iii) remediating those systems to make them Year 2000 ready by either modifying or replacing them; and (iv) testing the systems for Year 2000 readiness, including, where applicable, that they properly interface with third parties. Prior to the end of 1999, OGGI remediated and tested its IT systems that were determined to be critical to maintaining operations or the failure of which would result in significant costs or disruption of operation ("mission critical systems") and its non-IT systems. As of March 22, 2000, OGGI has not experienced any material disruptions to its business due to Year 2000 Issues with its mission critical systems or non-IT systems. The cost of OGGI's Year 2000 readiness work through December 31, 1999 was approximately $200,000.
Property and equipment are carried at cost less accumulated depreciation. Property is depreciated on a straight-line basis over the useful lives ranging from five to fifty years. Equipment is depreciated on a straight-line basis with useful lives of five to ten years. Computer software is amortized on a straight-line basis over a useful life of five to ten years. Title plant is not subject to depreciation.
Changes in estimates for prior years are attributable to favorable loss development for private passenger automobile, workers' compensation and commercial multiple peril lines in 1999, across all lines in 1998 and primarily in workers' compensation reserves in 1997.
Management believes that its liability for losses and loss adjustment expenses are fairly stated, in accordance with generally accepted actuarial principles and practices. However, estimating the ultimate claims liability is a complex and judgmental process inasmuch as the amounts are based on management's
On December 20, 1996 the Board of Directors of OGGI also adopted a Management Recognition Plan (MRP) which is designed to reward and retain key employees of OGGI. A total of 168,196 shares were authorized for possible award.
Under the Act, converting insurance companies are not required to make a pro rata distribution of surplus to policyholders upon conversion. The amended complaint alleges that the Insurance Companies' conversion was accomplished in violation of the plaintiffs' state and federal constitutional rights, and that the defendant directors unanimously approved the Joint Plan of Conversion (the "Plan") knowing that it was unfair and prejudicial to policyholders, in violation of the Act. The amended complaint also alleges claims under the common law of Pennsylvania for inadequate and misleading proxy statement and other related claims. The amended complaint includes derivative claims against the directors of the Insurance Companies, purportedly on behalf of the Insurance Companies, alleging breach of the fiduciary duty of care in approving and implementing the Plan and the fiduciary duty of loyalty, presumably in approving the stock-based compensation plans which were contemplated by the Plan. The stock-based compensation plans are expressly permitted by the Act, were approved by the Department, and have subsequently been