Year Ended December 31, 1998 Compared to Year Ended December 31,
Premiums. Gross (direct plus assumed) premiums written increased $9.5 million, or 10.8%, in 1998 compared to 1997. The increase in gross premiums written can be attributed primarily to the affiliation with New Castle Insurance which contributed $8.0 million of homeowners and personal auto premiums. Specifically, $1.4 million of the increase from New Castle is attributable to direct premiums written in the fourth quarter (subsequent to OGGI's acquisition of New Castle) with the remaining increase of $6.6 million attributable to the assumption, through reinsurance, of 100% of New Castle's business during the first nine months of 1998. The remaining increase can be attributed to increases in direct premiums written for personal and commercial automobile, farmowners business and workers' compensation offset by a decrease in fire, allied line, and inland marine business. Farmowners, homeowners, and personal automobile direct writings as a percentage of the total book of business were 21.0%, 25.2%, and 24.1%, respectively, in 1998 and 21.0%, 25.0% and 23.6%, respectively, for 1997.
Ceded premiums written decreased $8.3 million to $13.5 million in 1998 compared to 1997. The decrease in premiums ceded was directly attributable to the elimination of the 15% quota share reinsurance agreement with our primary reinsurer, American Re-Insurance Company (American Re). This agreement was cancelled on a run-off basis whereby new or renewal policies in 1998 are no longer covered. Ceded premiums written under this agreement amounted to nil and $9.4 million for 1998 and 1997, respectively.
Losses and Loss Adjustment Expenses. Net losses and loss adjustment expenses incurred increased by $9.9 million, or 25.7%, to $48.4 million in 1998 from $38.5 million in 1997. Losses and loss adjustment expenses increased in 1998 as compared to 1997 because of the $3.4 million of claims from tornadoes and severe thunderstorms during the first week of June 1998 compared to the absence of severe storms in 1997, more losses being retained by OGGI as a result of the termination of the quota share reinsurance agreement, and the $2.3 million favorable loss development in 1998 compared to 1997's favorable development of $4.3 million.
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. Assessment from these insolvencies are expected to continue for the next two to three years. Based upon OGGI's current premium volume this amounts to approximately $1.0 million each year. 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.
Federal Income Tax Expense (Benefit). Federal income tax expense (benefit) as a percentage of pre-tax income or loss was (37.3%) in 1998 compared to 36.6% in 1997. The unusual relationship of income tax benefit versus pretax income in 1998 is attributable to the low level of pretax income versus the magnitude of tax preference items (primarily tax exempt income and dividends received deduction) which do not vary with pretax income. In 1998, tax preference items were large enough to offset pretax income. Assessment from these insolvencies are expected to continue for the next two to three years. Based upon OGGI's current premium volume this amounts to approximately $1.0 million each year.
Year Ended December 31, 1997 Compared to Year Ended December 31,
Premiums. Gross premiums written increased $5.8 million, or 7.1%, in 1997 compared to 1996. The increase can be attributed, in part, to the acquisition of First Delaware which contributed $3.6 million to the increase. The remaining increase can be attributed to increases in direct premiums written for personal and commercial automobile and farmowners business offset by a decrease in homeowners business. The increases in automobile writings reflect OGGI's focus on increasing liability business in an effort to balance the overall book of business between property and liability exposures. The farmowners line increased due to premium rate increases as competition eased somewhat in OGGI's primary market, Pennsylvania. Homeowners premiums decreased $435,000, or 2.0%, in 1997 as a result of a reunderwriting initiative which commenced in 1997 and is designed to improve the portfolio mix to include higher value dwellings and to ensure that the appropriate premium is received for the risk underwritten. This initiative was successful as the number of homeowners policies in force has declined at a faster and faster rate than written premiums indicating that OGGI received more premium dollars for less risk. Workers' compensation premium rates decreased in 1997 because of a 25% rate reduction mandated by the Pennsylvania Workers' Compensation Rating Bureau. The decrease was driven by lower claim costs arising out of reforms adopted in 1994-1995. This rate reduction was offset by increases in policy count as OGGI implemented several safety group programs to attract new and maintain existing business. The safety group programs offer dividends based upon the group's loss experience and to policyholders who are otherwise unable to obtain a dividend participating policy. By creating safety groups, OGGI is able to offer this benefit and attract new business. Farmowners, homeowners, and personal automobile direct writings as a percentage of the total book of business were 21.0%, 25.0%, and 23.6%, respectively, in 1997 as compared to 20.6%, 27.2%, and 23.5%, respectively, for 1996.
During the third quarter of 1997, OGGI transferred $38.1 million of fixed income securities from available to sale to held to maturity reflecting management's intention and ability to hold these securities until maturity. This will enable OGGI to extend the duration of this portion of the portfolio which will allow for the purchase of higher yielding securities. The change in classification from available to sale to held to maturity did not have a material effect on OGGI's financial position or results of operations.
Net Realized Investment Gains. Net realized investment gains were $2.3 million for 1997 compared to $1.4 million in 1996, an increase of $900,000 or 68.0%. The additional gains were realized as interest rate and general economic conditions in 1997 created capital gains opportunities particularly in the equity portfolio.
Stock Option Compensation. The $2.0 million charge for stock compensation expense is a non-recurring, non-cash expense resulting from the grant of 237,286 stock options on February 11, 1997, at an exercise price equal to the $10 per share offering price in OGGI's subscription offering, and approved by shareholders at OGGI's first Annual Meeting on August 19, 1997. At the time of shareholder approval OGGI's stock price was $18.50 per share. In accordance with OGGI's accounting policy for stock-based compensation (the optional accounting treatment afforded under Statement of Financial Accounting Standards (SFAS) No. 123 which allows companies to follow the expense recognition criteria of Accounting Principles Board Opinion No. 25), the difference between the stock price at the approval date and the exercise price is charged to earnings. Further changes in OGGI's stock price or future grants of options, shareholder approval of which will not be required and which are expected to be made at the then current price of OGGI's stock, will not result in additional charges to earnings.
Federal Income Tax Expense (Benefit). Federal income tax expense (benefit) as a percentage of pre-tax income or loss was 36.6% in 1997 compared to 42.6% in 1996. The increase in the rate can be attributed to the return to profitable operations in 1997, which generated taxable income versus operating losses in 1996, and the realization of $128,000 in research and experimentation tax credits in 1996.
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 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 December 31, 1998 and 1997, no amounts were borrowed against these lines of credit.
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. The Company's insurance subsidiaries are restricted by the insurance laws of the state of domicile as to the amount of dividends or other distributions they may pay to the Company 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 Insurance Department cannot exceed the greater of 10% of the insurance company's statutory surplus as reported on the most recent annual statement filed, 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 insurance companies to pay any dividend without prior approval of the Pennsylvania Insurance Department for a 36 month period following the conversion.
In January 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments" (SOP 97-3). SOP 97-3, which is effective for fiscal years beginning after December 31, 1998, provides guidance for determining when an insurance company should recognize a liability for guaranty fund and other insurance related assessments and how to measure that liability. The adoption of SOP 97-3 is not expected to have a material impact on the financial statements of OGGI.
In June 1997, Statement of Financial Accounting Standards (SFAS) No. 130, "Comprehensive Income", was issued. SFAS No. 130 establishes standards for the reporting and disclosure of comprehensive income and its components (revenues, expenses, gains and losses). SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. The effects of adopting SFAS No. 130 are included in the consolidated financial statements included herein.
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 to insure that all affected areas within OGGI have been reviewed.
OGGI 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, third-party suppliers and customers (external agents).
The representatives prioritized assets by assigning a criticality factor. These factors consisted of "fatal," "critical," "marginal" and "desirable." "Fatal" is defined as an asset that is necessary for uninterrupted operations of OGGI and will fail or terminate if there were year 2000 date processing errors. "Critical" is defined as an asset that is necessary for the operation of the business, and year 2000-related failures will produce an inaccurate or incorrect result. "Marginal" is defined as an asset that is necessary for the operation of the business, but year 2000-related failures will cause minor inconveniences, annoyances, or irritations. "Desirable" is defined as an asset that is not mandatory for operating the business. All assets will continue to be evaluated to determine whether they need to be replaced, repaired or are compliant. As of December 1998, OGGI has evaluated the majority of assets and confirms all assessment work is substantially completed.
OGGI's most "fatal" asset is older personal computers. OGGI has developed a plan to ensure these systems will be compliant by the first quarter of 1999. Information regarding BIOS upgrades and recommendations have been received from the manufacturers of each of the different computer systems that are not year 2000 compliant. The software programs identified as not yet compliant continue to be reviewed and remediation will be implemented according to manufacturer recommendations. Some of the computer software programs currently being utilized will be replaced by compliant systems.
In addition, a process also was established for reviewing new and existing contracts and maintenance agreements for appropriate year 2000 compliance language.
OGGI presently expects that substantially all future costs associated with the year 2000 compliance will be internal and are estimated to be less than $50,000. Costs incurred to date have been approximately $150,000.
To the Board of Directors and Shareholders of Old Guard Group, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and comprehensive income, shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Old Guard Group, Inc. and Subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
The accompanying notes are an integral part of the consolidated financial statement.
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, Old Guard Insurance Management Co. (OGIM), 2929 Service Corporation and OGGI's 80% owned subsidiary, First Delaware Insurance Company (First Delaware).
OGGI is a regional insurance holding company that, on February 11, 1997, completed a subscription offering in which it raised $38.3 million, net of issuance costs of $3.7 million, in exchange for 4.2 million shares of no par common stock. Concurrent with the subscription offering and in accordance with a plan of demutualization, Old Guard, Old Guard Fire and First Patriot were converted from mutual to stock insurance companies and issued shares of common stock to OGGI in exchange for $16.0 million.
Effective 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). 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. Accordingly, New Castle's results of operations for the three months ended December 31, 1998 are consolidated with those of OGGI in the financial statements presented herein. Pro forma results for 1998 and 1997, including New Castle as if it had been fully owned for each of those years are as follows:
Total revenue $61,476,000 Loss before provision for income tax (3,200,000) Net loss (1,814,000) Loss per share $(0.46)
OGGI is a property and casualty insurer of farms, small and medium size businesses and residences in rural and suburban communities in Pennsylvania, Delaware and Maryland, with Pennsylvania comprising in excess of 83% of total direct premiums written. The principal lines of business are homeowners, farmowners, personal automobile and commercial multi-peril which represent approximately 25%, 21%, 24% and 15%, respectively, of direct premiums written.
During the third quarter of 1997, OGGI transferred $38.1 million of fixed income securities from available for sale to held to maturity reflecting management's intention and ability to hold these securities until maturity. The change in classification from available to sale to held to maturity did not have a material effect on OGGI's financial position or results of operations.
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 consolidated 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.
Effective for the 1997 tax year, OGGI and its subsidiaries file a consolidated federal income tax return.
The preparation of the accompanying consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the results of their operations during the period. The consolidated financial statements include estimates the most significant of which are the net deferred tax asset, liability for losses and loss adjustment expenses, deferred policy acquisition costs and reinsurance recoverables. Actual results may differ from those estimates.
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles guidance, which will replace the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The NAIC is now considering amendments to the Codification guidance that would also be effective upon implementation. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas, e.g. deferred income taxes are recorded. The Pennsylvania Insurance Department has adopted the Codification guidance, effective January 1, 2001. OGGI has not yet estimated the potential effect of the Codification guidance, however, it will not likely affect financial statements prepared in accordance with generally accepted accounting principles.
The cost and estimated fair value of investments at December 31, 1998 and 1997 were as follows:
The amortized cost and estimated fair value of fixed income securities at December 31, 1998 by contractual maturity are shown below:
Changes in estimates for prior years are attributable to favorable loss development across all lines in 1998 and primarily in workers' compensation reserves in 1997. The changes in estimates for 1996 are primarily attributable to incurred loss development experience across all lines of business.
16,165,028 7,900,202 Software in development 776,101 1,771,969 Construction in progress - 440,041
The following amounts represent OGGI's reinsurance activity with unrelated insurers in 1998, 1997 and 1996:
OGGI performs credit reviews of its reinsurers, focusing on financial stability and commitment to the reinsurance business. At December 31, 1998, OGGI's insurance subsidiaries had reinsurance balances of approximately $11,723,000, net of applicable ceded reinsurance payable, due from American Re. American Re's A.M. Best rating is A++.
Mortgage, due 2013 7.70% fixed $1,944,444 LIBOR plus 1.50% 1,458,334 $3,402,778
The mortgage is secured by property located in Lancaster, PA. and requires annual principal payments of $233,328. The fixed rate portion of the mortgage was converted from a variable rate through an interest rate swap. The fair value of the swap at December 31, 1998 was $101,682.
Subsidiaries of OGGI jointly maintain cash management programs with a local financial institution. The programs provide for draws by any member of OGGI against a line of credit in the event of overdrafts. The line of credit is subject to a maximum of $1,500,000 and bears interest at prime. OGGI 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 at December 31, 1998 and 1997. 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.
Actual income tax expense (benefit) differed from expected income tax expense (benefit), computed by applying the federal corporate tax rate of 34% to income (loss) before income tax and minority interest, for each of the three years ended December 31 as follows:
First Patriot has a net operating loss carryforward at December 31, 1998 of approximately $1,415,000. First Patriots' net operating loss carryforward expires $58,000 in 2007, $261,000 in 2009, $780,000 in 2010 and $316,000 in 2011. The NOL's can be utilized to offset future taxable income of First Patriot.
As of December 31, 1998, Old Guard and Old Guard Fire had alternative minimum tax credit carryforwards of approximately $71,000 and $139,000, respectively, available to offset future regular income tax.
OGGI and it subsidiaries maintain certain stock compensation and retirement plans as follows:
The Stock Compensation Plan was adopted by the Board of Directors of OGGI on December 20, 1996 and approved by shareholders at the first Annual Meeting on August 19, 1997. The purpose of the plan is to provide additional incentive to directors and employees by facilitating their purchase of stock of OGGI. Awards under the plan may be made in the form of options, stock appreciation rights or grants of restricted stock. Awards up to 420,491 shares may be made under the Stock Compensation Plan. The Compensation Committee of the Board of Directors of OGGI may, at their discretion, select employees to whom awards will be granted, the number of shares to be subject to such awards, the terms and conditions of such awards and other restrictions they deem appropriate. No awards of stock appreciation rights or restricted stock have been made as of December 31, 1998.
OGGI applies the APB Opinion No. 25 expense recognition criteria of SFAS No. 123 and related interpretations in accounting for its stock compensation plan. Accordingly, no compensation cost has been recognized, except for the one-time charge of $2,016,931 described later herein, in the accompanying financial statements for the difference between the fair value of stock-based compensation plans and the intrinsic value. Had compensation cost for stock-based compensation plans been determined using fair value, OGGI's net income and earnings per share would have been as follows:
1998 1997 Net income: As reported $279,278 $3,484,566 Pro forma $253,951 $3,074,985
Basic earnings per share: As reported $.08 $ .92 Pro forma $.07 $ .79
Dividend Yield .50% .50% Expected Volatility 21.90% 20.00% Risk Free Interest Rate 4.95% 6.33% Expected Life 5.4 years 5.4 years
The following table summarizes information about OGGI's stock option plan at December 31, 1998:
On February 11, 1997, in connection with OGGI's subscription offering, 237,286 stock options were granted to directors and officers. These options have an exercise price of $10 per share and are exercisable by the grantee for a period of ten years. The granting of these options was approved by shareholders at OGGI's first Annual Meeting on August 19, 1997. At that time, the price of OGGI's stock was $18.50 per share. The difference between the price of the stock at the measurement date and the exercise price of the options was charged to earnings in 1997. Since these options were granted as non-qualified incentive stock options, OGGI has recognized a deferred tax asset on the difference between the exercise price and the value of the options at the measurement date.
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.
Total granted at January 1, 1997 - Granted in 1997 142,373 Forfeited in 1997 - Total granted at December 31, 1997 142,373
Awards under the MRP vest over a period of five years following the award date. OGGI is recognizing compensation cost over the vesting period equal to the value of the shares granted at the award date. In 1998 and 1997, $491,083 and $196,878 of compensation cost was recognized under the MRP, respectively.
The Board of Directors has also adopted an Employee Stock Ownership Plan (ESOP) for the exclusive benefit of participating and eligible employees. Employees are eligible after having attained the age of 21 and completing one year of service with OGGI or its subsidiaries. In connection with the subscription offering, the ESOP borrowed $4,054,910 in order to purchase 10% of the total shares issued by OGGI. The loan bears interest at 8.45% and requires monthly payments of principal and interest of $50,417 for a term of 10 years. Because OGGI has guaranteed repayment of the ESOP debt, the debt and related unearned compensation are recorded in the accompanying consolidated balance sheets as of December 31, 1998 and 1997.
Dividends on shares held by the ESOP are paid to the ESOP trust. Dividends on the unallocated ESOP shares together with OGGI's contributions, are used by the ESOP to repay principal and interest on the outstanding debt. Shares are released for allocation to participants as the debt is retired. Interest incurred on the ESOP notes amounted to $309,671 and $282,079 in 1998 and 1997, respectively. OGGI paid dividends on the stock held by the ESOP of $40,518 and $20,275 in 1998 and 1997, respectively.
OGGI has a discretionary noncontributory profit sharing plan covering eligible employees. OGGI's contribution to the plan amounted to $73,050, $58,224 and $268,043 in 1998, 1997 and 1996, respectively.
OGGI also maintains a voluntary defined contribution savings plan covering substantially all full-time employees. OGGI matches employee contributions up to 3% of compensation. OGGI's contribution to this plan amounted to $216,237, $168,064 and $158,784 in 1998, 1997 and 1996, respectively.
(c) the event obligating the Group to pay has taken place (usually the writing of premiums).
Because of the insolvencies of two large medical malpractice insurance companies, OGGI expects to be assessed the maximum allowable under Pennsylvania law (2% of subject premium writings) for the next two to three years. Based upon OGGI's current premium volume this amounts to approximately $1,000,000 each year.
Losses and loss adjustment expenses (2,831,782) (373,214) Commissions (2,611,910) (170,631 $ (803,689) $ 38,735
On March 5, 1999, OGGI completed the acquisition of Investors Southern Corporation and its principal operating subsidiary, Southern Title Insurance Corporation (collectively referred to as Southern). Southern provides title insurance and related services through a network of agencies in Virginia, North Carolina, the District of Columbia, Ohio and Pennsylvania. Pursuant to the stock purchase agreement, OGGI paid $6,750,000 in cash for 100% of Southern's capital stock. In addition, OGGI will make additional payments equal to 25% of Southern's pretax profits in 1999, 2000 and 2001.
The acquisition will be accounted for under the purchase method of accounting. The purchase price will be allocated to the assets acquired and liabilities assumed based upon their estimated fair values. The purchase price allocation will be determined in 1999 when additional information becomes available.
On January 15, 1998, the plaintiffs filed a motion for class certification. On September 30, 1998, the Court granted the motion, appointing plaintiffs as class representatives and certifying the class as all policyholders of the Insurance Companies as of February 7, 1997.
OGGI, the Insurance Companies and the individual defendants filed a motion for summary judgment with respect to the remaining constitutional claims on July 13, 1998. On March 5, 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.
If the plaintiffs prevail in the above litigation, the remedy a court would grant or the amount of damages it might award is uncertain. A court has broad discretion to fashion a fair and equitable remedy in light of the nature of the constitutional or other violation, the relative harm to the parties, and the public interest. In some cases, relief is applied on a prospective basis only; in other cases, relief is applied on a retroactive basis. No prediction can be made concerning the remedy a court would fashion or the amount of damages it might award. However, two of the more far-reaching possibilities include:
- OGGI could be required to pay or distribute to all or some policyholders of the Insurance Companies, either on a mandatory basis or at the election of the policyholders, an amount equal to the surplus of the Insurance Companies as of the date of the subscription offering (approximately $38 million), as damages or otherwise. Such distribution could be required to be made in cash common stock or other debt or equity securities. No assurance can be given that OGGI would have sufficient funds, or the capacity to borrow sufficient funds, at that time to honor any such obligation. Any required distribution of common stock or other equity securities would materially dilute the interests of existing shareholders.
In the event that OGGI could not honor its obligations under any remedy imposed by the Court, OGGI could be forced to seek the protection of the bankruptcy laws and the Insurance Companies could be deemed insolvent and seized by the Department.
To the Board of Directors and Shareholders Of Old Guard Group, Inc.
In our opinion, the financial statement schedules referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information required to included therein.
2400 Eleven Penn Center Philadelphia, Pennsylvania February 24, 1999, except for Notes 15 and 16, for which the date is March 5, 1999
OLD GUARD INSURANCE GROUP SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES AS OF DECEMBER 31, 1998
Old Guard Group, Inc. Schedule II. Condensed Financial Information of Registrant - Statement of Cash Flow (Parent Company) For the Years Ended December 31, 1998 and 1997
OLD GUARD INSURANCE GROUP SCHEDULE IV - REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996