Underwriting Results. For the year ended December 31, 1996 the Insurance Companies had an underwriting loss of $9.4 million and a combined ratio of 117.5% compared to an underwriting loss of $7.1 million and a combined ratio of 110.7% for the year ended December 31, 1995. In both years the underwriting loss was primarily attributable to severe weather in the Insurance Companies' territory.
Net Realized Investment Gains. Net realized investment gains were $1.0 million for the year ended December 31, 1995 compared to $476,000 in 1994. The increase in investment gains occurred as part of the previously discussed portfolio restructuring; a similar shift in the composition of the portfolio did not occur in 1994 and far fewer securities were sold.
Net cash provided by (used in) operating activities was $(14.5) million was ($10.7) million, $4.9 million and ($2.9) million during the years ended December 31, 1996, 1995, and 1994, respectively. The decrease in net cash provided by operating activities during the year ended December 31, 1996 was primarily attributable to the net loss for the period and an increase in reinsurance recoverable. The increase in net cash provided by operating activities in 1995 was primarily attributable to the increase in net income and a decrease in reinsurance recoverable. The increase in net cash used in operating activities in 1994 was primarily attributable to a net operating loss and an increase in reserves for losses and loss adjustment expenses during 1994 compared to 1993, offset by an increase in deferred policy acquisition costs.
As discussed in Note 1 to the combined financial statements, the Group changed its method of accounting for investments in 1994.
In accordance with Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes," deferred income taxes are accounted for using the liability method, wherein deferred tax assets or liabilities are calculated on the differences between the bases of assets and liabilities for financial statement purposes versus tax purposes (temporary differences) using enacted tax rates in effect for the year in which the differences are expected to reverse. Tax expense in the combined statements of income is equal to the sum of taxes currently payable, including the effect of the alternative minimum tax, if any, plus an amount necessary to adjust deferred tax assets and liabilities to an amount equal to period-end temporary differences at prevailing tax rates.
The Group maintains reinsurance agreements, which include coverage for excess of loss and catastrophe loss and a quota share treaty in 1996. These reinsurance programs mitigate loss exposure from individually large losses and an aggregation of losses arising from a single loss event. The Group is contingently liable for reinsured claims if the assuming reinsurers cannot meet their obligations under the reinsurance agreements.
The insurance companies of the Group jointly maintain cash management programs with a local financial institution. The programs provide for draws by any member of the Group against a line of credit in the event of overdrafts. The line of credit is subject to a maximum of $2,250,000 and bears interest at the prime rate. The Group must maintain zero balances on the lines for one thirty-day period each year and must meet certain demand deposit requirements. No borrowings were outstanding under these arrangements during the years or at December 31, 1996 and 1995.
Deferred policy acquisition costs 1,905,137 2,441,465 Unrealized gain on investment securities 1,051,968 1,039,300 Depreciation and other 441,763 338,910
Neffsville Mutual Fire Insurance Company (NMF) is affiliated with the Group through common management and reinsurance programs.
On January 7, 1997, a policyholder of the Company filed in Commonwealth Court of Pennsylvania a Petition for Review of the approval of the demutualization plan by the Insurance Department of the Commonwealth of Pennsylvania and to have an injunction on preventing the special meeting of policyholders from taking place on February 11, 1997. The Commonwealth Court of Pennsylvania ruled on February 7, 1997 that the special meeting of policyholders could take place. The suit was filed against the Insurance Department of the Commonwealth of Pennsylvania, the Pennsylvania Insurance Commissioner, OGGI and the Insurance Companies. The plaintiff is contending that the Pennsylvania Insurance Company Mutual to Stock Conversion Act (Act) which permits the demutualization plan is constitutionally defective for procedural reasons and because the demutualization plan does not provide for compensation to the policyholders. Final adjudication of the case by the Commonwealth Court of Pennsylvania could take a year or more.
OGIHC had an agreement prior to year end to purchase a facility for approximately $1.1 million. This transaction was completed on February 21, 1997.
OLD GUARD INSURANCE GROUP SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY & CASUALTY INSURANCE OPERATIONS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994