<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 of the Securities Exchange Act
of 1934
For the Quarterly Period Ended March 31, 1995.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________________ to ___________________.
Commission File No. 0-15341
-------
Donegal Group Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2424711
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1195 River Road, P.O. Box 302, Marietta, PA 17547-0302
(Address of principal executive offices, including zip code)
(717) 426-1931
(Registrant's telephone number, including area code)
_____________________________________________________________________
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether 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 ___ .
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years:
Indicate by check mark whether the registrant has filed all documents and
reports required by Sections 12, 13, or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes ___ . No ___ .
Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 4,115,226 shares of Common
Stock, $1.00 par value, outstanding on April 30, 1995.
<PAGE>
Part I. Financial Information
Item 1. Financial Statements.
Donegal Group Inc. And Subsidiaries
Consolidated Balance Sheet
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994
(Unaudited)
<S> <C> <C>
Assets
- ------
Investments
Fixed maturities
Held to maturity, at amortized cost $ 70,197,532 $ 65,451,109
Available for sale, at market value and at
the lower of amortized cost or market value 42,307,176 41,370,321
Equity securities, available for sale at market 4,142,028 4,190,316
Short-term investments, at cost, which
approximate market 20,531,806 24,640,509
----------- -----------
Total Investments 137,178,542 135,652,255
Cash 659,581 1,263,764
Accrued investment income 1,753,874 1,912,835
Premiums receivable 9,113,104 8,882,053
Reinsurance receivable 22,913,595 21,295,593
Deferred policy acquisition costs 5,496,171 5,551,869
Deferred federal income taxes 3,596,783 3,734,826
Prepaid reinsurance premiums 11,255,489 10,802,519
Property and equipment, net 1,630,312 1,591,766
Accounts receivable - securities --- 212,655
Due from affiliate 84,775 591,707
Other 879,655 554,468
------------ ------------
Total Assets $194,561,881 $192,046,310
============ ============
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities
Losses and loss expenses $ 83,066,495 $ 79,962,961
Unearned premiums 45,183,304 44,512,189
Accrued expenses 906,209 1,134,064
Current income taxes 924,525 123,687
Reinsurance balances payable 467,018 562,626
Cash dividend declared to stockholders --- 369,335
Accounts payable - securities --- 4,213,830
Other 112,445 165,827
----------- -----------
Total Liabilities 130,659,996 131,044,519
=========== ===========
Stockholders' Equity
- --------------------
Preferred stock, $1.00 par value, authorized
1,000,000 shares; none issued
Common stock, $1.00 par value, authorized
10,000,000 shares, issued 4,180,274 and
4,162,770 shares and outstanding 4,115,226
and 4,097,722 shares 4,180,274 4,162,770
Additional paid-in capital 32,576,621 32,411,677
Net unrealized losses on investments (282,071) (821,535)
Retained earnings 28,246,841 26,068,659
Treasury stock (819,780) (819,780)
----------- ----------
Total Stockholders' Equity 63,901,885 61,001,791
---------- ----------
Total Liabilities and
Stockholders' Equity $194,561,881 $192,046,310
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
Donegal Group Inc. and Subsidiaries
Consolidated Statement of Income
(Unaudited)
For the three months ended March 31, 1995 and 1994
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1995 1994
---- ----
<S> <C> <C>
Revenues:
- --------
Premiums earned $26,159,451 $22,597,040
Premiums ceded (6,666,532) (5,532,280)
---------- ----------
Net premiums earned 19,492,919 17,064,760
Investment income, net of investment
expenses 2,086,992 1,790,251
Realized gain 24,106 273,647
Lease income 118,721 114,052
Service charge income 307,030 153,986
---------- ----------
Total Revenues 22,029,768 19,396,696
---------- ----------
Expenses:
- --------
Losses and loss expenses 15,381,443 18,184,769
Reinsurance recoveries (3,306,705) (4,703,274)
---------- ----------
Net losses and loss expenses 12,074,738 13,481,495
Amortization of deferred policy
acquisition costs 3,158,000 2,825,000
Other underwriting expenses 3,170,586 2,504,251
Policy dividends 309,191 261,922
Other expenses 303,535 179,467
---------- ----------
Total Expenses 19,016,050 19,252,135
---------- ----------
Income before income taxes 3,013,718 144,561
Income taxes (835,536) 152,908
----------- ----------
Net income $ 2,178,182 $ 297,469
=========== ===========
Earnings per common share $.52 $.07
==== ====
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
Common Stock
------------ Net Unreal- Total
Additional ized Gains Stock-
Paid-In (Losses)on Retained Treasury holders'
Shares Amount Capital Investments Earnings Stock Equity
------ ------ ------- ----------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, 4,162,770 $4,162,770 $32,411,677 $ (821,535) $26,068,659 $(819,780) $61,001,791
January 1, 1995
Net Income 2,178,182 2,178,182
Unrealized gain
on investments 539,464 539,464
Issuance of
Common Stock 17,504 17,504 164,944 182,448
--------- --------- ---------- --------- ---------- --------- ---------
Balance,
March 31, 1995 4,180,274 $4,180,274 $32,576,621 $ (282,071) $28,246,841 $(819,780) $63,901,885
--------- --------- ---------- --------- ---------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the three months ended March 31, 1995 and 1994
<TABLE>
<CAPTION>
Three months ended March 31,
1995 1994
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 2,178,182 $ 297,469
Adjustments to reconcile net income to net
cash provided by operating activities:
Liabilities for losses and loss expenses 3,103,534 10,231,284
Depreciation and amortization 60,225 71,878
Realized investment gain (24,106) (273,647)
Changes in Assets and Liabilities:
Unearned premiums 671,115 (497,105)
Premiums receivable (231,051) 1,622,510
Deferred acquisition costs 55,698 139,054
Deferred income taxes (139,861) (29,468)
Reinsurance receivable (1,618,002) (10,482,389)
Prepaid reinsurance premiums (452,970) (97,235)
Accrued investment income 158,961 229,682
Due from affiliate 506,932 1,014,320
Accounts payable reinsurance (95,608) 635,715
Current income taxes payable 800,838 176,560
Other, net (609,173) (303,142)
--------- ----------
Net adjustments 2,186,532 2,438,017
--------- ----------
Net cash provided by operating activities 4,364,714 2,735,486
--------- ----------
Cash flows from investing activities:
Purchase of fixed maturities
Held to maturity (4,332,754) (4,288,758)
Available for sale (3,523,367) (2,032,260)
Purchase of equity securities, available for sale (394,600) (4,749,103)
Sale of fixed maturities
Held to maturity --- 1,346,375
Available for sale 2,509,766 ---
Maturity of fixed maturities - held to maturity 81,218 8,099,688
Sale of equity securities, available for sale 842,399 4,328,926
Purchase of property and equipment (109,545) (47,447)
Purchase of intangible asset --- (115,000)
Net sales of short-term investments 144,873 (5,686,569)
---------- ----------
Net cash used in investing activities (4,782,010) (3,144,148)
---------- ----------
Cash flows from financing activities:
Expenses of subsidiary formation --- (16,625)
Cash dividends paid (369,335) (327,379)
Issuance of common stock 182,448 55,401
Net cash provided by (used in) ----------- -----------
financing activities (186,887) (288,603)
----------- -----------
Net decrease in cash (604,183) (697,265)
Cash at beginning of year 1,263,764 1,192,124
----------- -----------
Cash at end of quarter $ 659,581 $ 494,859
=========== ===========
Cash paid during period --- Interest $ 0 $ 0
--- Income taxes $ 175,000 $ (300,000)
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
----------------------------------------------
Overview
Donegal Group Inc. ("DGI" or the "Company") is a regional insurance holding
company doing business in Pennsylvania, Maryland, Delaware, Virginia and Ohio
through its wholly owned subsidiaries, Atlantic States Insurance Company
("Atlantic"), Southern Insurance Company of Virginia ("Southern") and Atlantic
Insurance Services, Inc. ("AIS"). The Company's major lines of business in 1994
and their percentages of total net earned premiums were Automobile Liability
(30.7%), Automobile Physical Damage (16.2%) Homeowners (13.8%), Commercial
Multiple Peril (13.8%) and Workers' Compensation (19.9%). Atlantic and Southern
are subject to regulation by Insurance Departments in those states in which they
operate and undergo periodic examination by those departments. They are also
subject to competition from other insurance carriers in their operating areas.
DGI was formed in September 1986 by Donegal Mutual Insurance Company (the
"Mutual Company") which owns 58% of the outstanding common shares of the Company
as of March 31, 1995.
In connection with the formation of the Company and Atlantic States, as of
October 1, 1986, Atlantic States and the Mutual Company entered into a pooling
agreement which provides for the allocation of premiums, losses, loss settlement
expenses and underwriting expenses. The Company is not liable for any losses
occurring prior to the date of the pooling agreement. The Company's
participation in the pool was 35% from October 1, 1986 to September 30, 1988,
50% from October 1, 1988 to December 31, 1992 and since January 1, 1993 has been
60%.
On December 29, 1988, the Company converted Southern Mutual Insurance
Company into Southern Insurance Company of Virginia, which writes property and
casualty insurance in Virginia, and acquired all of Southern's outstanding
capital stock. Pursuant to a reinsurance agreement, Southern cedes 50% of its
direct premiums written less certain reinsurance to the Mutual Company and
retains the remaining 50%. Because the Mutual Company places substantially all
of the business assumed from Southern into the pool, from which the Company has
a 60% allocation, the company's results of operations include approximately 80%
of the business written by Southern.
In January 1994, the Company formed Atlantic Insurance Services, Inc. which
primarily provides risk inspection services for the property-casualty insurance
industry.
The Company's results of operations are affected by the conditions that
affect all property and casualty insurance companies, such as competition,
catastrophic events, regulation, general economic conditions and the investment
environment. Underwriting results vary by line of business and from period to
period principally due to changes in claims experience. Because the Company's
premium volume in various lines of business is small, small changes in the
number of incurred claims can significantly affect the results of operations
from that line of business in a given fiscal period.
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<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
(Unaudited)
Summary Notes to Consolidated Financial Statements
--------------------------------------------------
1 - Organization
The Company was organized as a regional insurance holding company by
Donegal Mutual Insurance Company (the "Mutual Company") on August 26, 1986 and
operates in Pennsylvania, Maryland, Delaware, Virginia and Ohio through its
wholly owned stock insurance companies, Atlantic States Insurance Company
("Atlantic States"), Southern Insurance Company of Virginia ("Southern") and
Atlantic Insurance Services, Inc. ("AIS"). The Company's major lines of business
are Automobile Liability, Automobile Physical Damage, Homeowners, Commercial
Multiple Peril and Workers' Compensation. Atlantic and Southern are subject to
regulation by Insurance Departments in those states in which they operate and
undergo periodic examination by those departments. They are also subject to
competition from other insurance carriers in their operating areas. Atlantic
States engages in the insurance business primarily through an intercompany
pooling arrangement with the Mutual Company. Southern was acquired by the
Company on December 31, 1988 pursuant to a plan of conversion from a mutual to a
stock company and cedes 50% of its business to the Mutual Company, 80% prior to
1991. At March 31, 1995 the Mutual Company held 58% of the outstanding common
stock of the Company.
2 - Basis of Presentation
The financial information for the interim period included herein is
unaudited; however, such information reflects all adjustments, consisting only
of normal recurring adjustments, which, in the opinion of management of
Registrant, are necessary to a fair presentation of Registrant's financial
position, results of operations and changes in financial position for the
interim period included herein. The results of operations for the three months
ended March 31, 1995, are not necessarily indicative of results of operations to
be expected for the twelve months ended December 31, 1995.
These financial statements should be read in conjunction with the financial
statements and notes thereto contained in Registrant's Annual Report on Form
10-K for the year ended December 31, 1994.
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<PAGE>
Results of Operations - Three Months Ended March 31, 1995
to Three Months Ended March 31, 1994
- ------------------------------------
Revenues for the three months ended March 31, 1995 were $22,029,768, an
increase of $2,633,072, or 13.6%, over the same period of 1994. An increase in
net premiums earned of $2,428,159, or 14.2% represented most of this change.
Direct premiums written by the combined pool of Atlantic States and the Mutual
Company increased 15.4%. In the first quarter 1994, the Company incurred
additional ceded reinsurance premiums of approximately $637,000. These
additional ceded premiums were reinstatement premiums related to catastrophe
reinsurance recoveries resulting from claims incurred due to severe weather
which hit the northeastern part of the United States in the first three months
of 1994. Investment income for the first quarter 1995 was $2,086,992, an
increase of $296,741, or 16.6%, over the first quarter 1994. An increase in the
average invested assets of $13,622,336, or 11.1%, to $136,415,398 and an
increase in the average return on investments to an annualized rate of 6.1% for
the first three months of 1995 compared to 5.8% for the first three months of
1994, accounted for the change. Realized investment gains, which resulted from
the normal turnover of the Company's investment portfolio, decreased to $24,106
in the first quarter of this year, compared to $273,647 for the first quarter of
1994.
The GAAP combined ratio of insurance operations in the first three months
of 1995 was 96.0% compared to 111.8% for the same period in 1994. The GAAP
combined ratio is the sum of the ratios of incurred losses and loss adjusting
expenses to premiums earned (loss ratio), policyholders dividends to premiums
earned (dividend ratio), and underwriting expenses to premiums earned (expense
ratio). An improvement in the loss ratio from 79.0% in the first quarter of 1994
to 61.9% in the first quarter of 1995, resulting from more normal weather
conditions in the northeastern part of the United States, accounted for the
improvement. The expense ratio increased from 31.2% to 32.4% in the first three
months of 1995 due primarily to additional incentive expenses for employees and
agents due to higher levels of profitability and to increased inspection costs
related to higher levels of new business. The dividend ratio remained fairly
steady at 1.6% for the first quarter of 1995 compared to 1.5% for the first
quarter of 1994.
Federal income taxes for the first quarter of 1995 represented 27.7% of
pre-tax income compared to a tax benefit of $152,908 for the first three months
of 1994 due to the poor underwriting results of a year ago. The effective tax
rates incurred are less than the statutory federal rate of 34% due primarily to
tax exempt investment income from municipal bonds.
-7-
<PAGE>
Liquidity and Capital Resources
The Company generates sufficient funds from its operations and maintains a
high degree of liquidity in its investment portfolio. The primary source of
funds to meet the demands of claim settlements and operating expenses are
premium collections, investment earnings and maturing investments. As of March
31, 1995, the Company had no material commitment for capital expenditures.
In investing funds made available from operations, the Company maintains
securities maturities consistent with its projected cash needs for the payment
of claims and expenses. The Company maintains a portion of its investment
portfolio in relatively short-term and highly liquid assets to ensure the
availability of funds.
The Company's principal source of cash with which to pay stockholder
dividends is dividends from Atlantic States and Southern, which are required by
law to maintain certain minimum surplus on a statutory basis and are subject to
regulations under which payment of dividends from statutory surplus is
restricted and may require prior approval of their domiciliary insurance
regulatory authorities. At December 31, 1994, amounts available for distribution
as dividends to DGI without prior approval of the insurance regulatory
authorities are $764,696 from Southern and $4,072,387 from Atlantic States.
Unrealized losses resulting from fluctuations in the market value of
investments available for sale reported in the balance sheet at market value
were $282,071 at March 31, 1995, net of taxes.
-8-
<PAGE>
Credit Risk
The company provides property and liability coverages through its
subsidiaries' independent agency systems located throughout its operating area.
The majority of this business is billed directly to the insured although a
portion of Donegal Group's commercial business is billed through its agents who
are extended credit in the normal course of business.
The Company's subsidiaries have reinsurance agreements in place with the
Mutual Company and with a number of other major authorized reinsurers.
Impact of Inflation
Property and casualty insurance premiums are established before the amount
of losses and loss settlement expenses, or the extent to which inflation may
impact such expenses, are known. Consequently, the Company attempts, in
establishing rates, to anticipate the potential impact of inflation.
Impact of New Accounting Standards
- ----------------------------------
Accounting for Certain Investments in Debt and Equity Securities
The Company adopted the SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities , effective January 1, 1994 on a prospective basis.
The cumulative effect of adopting SFAS 115 resulted in a before tax unrealized
gain of $1,908,207. The net increase to equity amounted to $1,259,417 after
providing for taxes of $648,790. Adoption of this statement had no effect on the
net income of the Company.
SFAS 115 requires that investments in all debt securities and those equity
securities with readily determinable market values be classified into three
categories as follows:
Held to Maturity Securities -- Debt securities that the enterprise has
the positive intent and ability to hold
to maturity; reported at amortized costs.
Trading Securities -- Debt and equity securities that are bought
and held principally for the purpose of
selling them in the near term; reported
at fair value, with unrealized gains and
losses included in earnings.
Available for Sale Securities -- Debt and equity securities not classified
as either held to maturity securities or
trading securities; reported at fair
value, with unrealized gains and losses
excluded from earnings and reported as
a separate component of shareholders'
equity (net of tax effects).
No trading securities were identified at December 31, 1994 or March 31,
1995.
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<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
-------------------------------
(a) Exhibits
None.
(b) Reports on Form 8-K
During the quarter ended March 31, 1995, Registrant
did not file any reports on Form 8-K.
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<PAGE>
Signatures
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.
Donegal Group Inc.
Date: May 10, 1995 By: ----------------------------
Donald H. Nikolaus,
President and
Chief Executive Officer
Date: May 10, 1995 By: ----------------------------
Ralph G. Spontak,
Corporate Secretary,
Senior Vice President and
Chief Financial Officer
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