SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________________ to _________________
Commission file number 0-15341
DONEGAL GROUP INC.
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(Exact name of registrant as specified in its charter)
Delaware 23-2424711
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1195 River Road, Marietta, Pennsylvania 17547
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (717) 426-1931
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
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(Title of class)
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 ____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
On March 15, 1996, the aggregate market value (based on the closing sales price
on that date) of the voting stock held by non-affiliates of the Registrant was
$32,732,254.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 4,276,944 shares of Common
Stock outstanding on March 15, 1996.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Registrant's annual report to stockholders for the fiscal
year ended December 31, 1995 are incorporated by reference into Parts I, II and
IV of this report.
2. Portions of the Registrant's proxy statement relating to the annual meeting
of stockholders to be held April 18, 1996 are incorporated by reference into
Part III of this report.
<PAGE>
DONEGAL GROUP INC.
INDEX TO FORM 10-K REPORT
Page
----
I. PART I.
Item 1. Business.............................................. 3
Item 2. Properties............................................ 23
Item 3. Legal Proceedings..................................... 23
Item 4. Submission of Matters to a Vote of
Security Holders..................................... 24
II. PART II.
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.......................... 25
Item 6. Selected Financial Data............................... 25
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................................... 25
Item 8. Financial Statements and Supplementary
Data................................................. 25
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure................................. 25
III. PART III.
Item 10. Directors and Executive Officers of the
Registrant........................................... 26
Item 11. Executive Compensation................................ 26
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................ 26
Item 13. Certain Relationships and Related
Transactions......................................... 26
IV. PART IV.
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K............................. 27
<PAGE>
PART I
Item 1. Business.
(a) General Development of Business.
Donegal Group Inc. is a regional insurance holding company formed in
August 1986 which is headquartered in Pennsylvania and engages, through its
subsidiaries, in the property and casualty insurance business. As used herein,
"DGI" or the "Company" refers to Donegal Group Inc. and its subsidiaries,
Atlantic States Insurance Company ("Atlantic States"), Southern Insurance
Company of Virginia ("Southern"), Delaware American Insurance Company ("Delaware
American") and Atlantic Insurance Services, Inc. ("AIS"). DGI is currently 58.6%
owned by Donegal Mutual Insurance Company (the "Mutual Company"). The Mutual
Company's principal subsidiary is Pioneer Insurance Company ("Pioneer"). DGI and
the Mutual Company and their subsidiaries underwrite a broad line of personal
and commercial coverages, consisting of private passenger and commercial
automobile, homeowners, commercial multi-peril, workers' compensation and other
lines of insurance.
Atlantic States, which DGI organized in September 1986, participates
in an underwriting pool whereby it cedes to the Mutual Company the premiums,
losses and loss expenses from all of its insurance business and assumes from the
Mutual Company a specified portion of the pooled business, which also includes
substantially all of the Mutual Company's property and casualty insurance
business. Effective as of October 1, 1986, DGI entered into a pooling agreement
with the Mutual Company whereby Atlantic States assumed 35% of the pooled
business written or in force on or after October 1, 1986. Effective October 1,
1988, the pooling agreement was amended to provide for the assumption by
Atlantic States of 50% of the pooled business written or in force on or after
October 1, 1988. Effective January 1, 1993, the pooling agreement was further
amended to provide for the assumption by Atlantic States of 60% of the pooled
business written or in force on or after January 1, 1993. As of December 21,
1995, the pooling agreement was further amended to provide for the assumption by
Atlantic States, effective January 1, 1996, of 65% of the pooled business
written or in force on or after January 1, 1996. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in Item
7 hereof and Note 2 to the Consolidated Financial Statements incorporated by
reference herein.
On December 29, 1988, DGI acquired all of the outstanding capital
stock of Southern in exchange for a $3,000,000 equity contribution to Southern.
As of March 31, 1993, the Mutual Company converted Pioneer Mutual Insurance
Company into Pioneer, which writes property and casualty insurance in Ohio, and
acquired all of Pioneer's capital stock. Pioneer does not currently participate
in the pooling agreement. In connection with the Pioneer transaction, the Mutual
Company was admitted in Ohio and began active marketing of its insurance
products in Ohio in the fourth quarter of 1993. On October 1, 1986, the Mutual
Company and Southern's predecessor, Southern Mutual Insurance Company, entered
into a reinsurance agreement whereby such predecessor ceded to the Mutual
Company 80% of its
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direct premiums written and retained 20%. Effective January 1, 1991, this
percentage was changed to 50% ceded to the Mutual Company and 50% retained by
Southern. Because the Mutual Company places substantially all of the business
assumed from Southern in the pool, from which the Company has a 65% allocation,
the Company's results of operations include approximately 80% of the business
written by Southern. See Note 2 to the Consolidated Financial Statements
incorporated by reference herein.
In January 1994, the Company organized a new subsidiary, AIS, which
began business in that same month. AIS is an insurance services organization
currently providing inspection and policy auditing information on a fee for
service basis to its affiliates and the insurance industry.
In December 1994, the Superintendent of Insurance of the State of
Ohio issued an order permitting the sale by the Mutual Company to the Company of
all of the outstanding capital stock of Pioneer at the independently determined
fair market value thereof at the date of sale. It is anticipated that this sale
will occur on or before December 31, 1996. Pioneer and the Mutual Company are
parties to an excess of loss reinsurance agreement whereby the Mutual Company
reinsures Pioneer for losses in excess of $100,000 up to a limit of $150,000,
and a property catastrophe excess of loss reinsurance agreement whereby the
Mutual Company reinsures Pioneer for catastrophe losses in excess of $200,000 up
to a limit of $1,800,000.
As of the close of business on December 31, 1995, DGI acquired all
of the outstanding capital stock of Delaware American pursuant to a Stock
Purchase Agreement between DGI and the Mutual Company dated as of December 21,
1995. This transaction was accounted for a an "as if pooling-of-interests,"
and as such DGI's financial statements have been restated to include Delaware
American as a Consolidated Subsidiary from January 1, 1994 to the present.
Under current accounting principles, for amounts that are treated as
"retroactive" reinsurance, Delaware American is required to defer income
statement recognition of a recovery related to adverse development, if any,
of any such business into future accounting periods while recognizing the
entire adverse developments, if any, in the current period. However, Delaware
American would take the recovery into income over the estimated settlement
period. Although this accounting treatment could affect Delaware American's
financial statements in any given period, Delaware American would not sustain
economic loss and there would be no impact on Delaware American's cumulative
results of operations or surplus after the recovery is fully recognized.
In connection with the transaction, Delaware American entered into an
aggregate excess of loss reinsurance agreement whereby the Mutual Company
reinsures Delaware American against any loss from: (a) any adverse development
in Delaware American's loss reserve and loss adjustment expense reserve at
December 31, 1996 compared to the amount of such reserves at December 31, 1995
in respect of all policy years ended on or before December 31, 1995 and (b) all
losses and loss adjustment expenses incurred by Delaware American during the
month of December 1995 by reason of the fact that Delaware American's loss and
loss adjustment expense ratio as finally determined for the month of December
1995 exceeds the lesser of Delaware American's loss and loss adjustment expense
ratio as finally determined for the period January 1, 1995 through November 30,
1995 or 60% and (c) all losses and loss adjustment expenses incurred by Delaware
American during the year ending December 31, 1996 by reason of the fact that
Delaware American's loss and loss adjustment expense ratio as finally determined
for the year ending December 31, 1996 exceeds the lesser of Delaware American's
loss and loss adjustment expense ratio as finally determined for the year ended
December 31, 1995 or 60%, it being understood that any calculations made for the
year ending December 31, 1996 will be adjusted to reflect any recoveries by
Delaware American under the loss development section of the aggregate excess of
loss reinsurance agreement.
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(b) Financial Information about Industry Segments.
The Company is of the opinion that all of its operations are within
one industry segment and that no information as to industry segments is required
pursuant to Statement of Financial Accounting Standards No. 14 or Regulation
S-K.
(c) Narrative Description of Business.
Relationship with the Mutual Company
DGI's operations are interrelated with the operations of the Mutual
Company and, because of the percentage of the pooled business assumed by DGI,
DGI's results of operations are largely dependent upon the success of the Mutual
Company. In addition, various reinsurance agreements exist between the Company
and the Mutual Company. The Mutual Company is responsible for underwriting and
marketing the pooled business and provides facilities, employees and services
required to conduct the business of DGI on a cost allocated basis. The Mutual
Company owned 58.6% of DGI as of March 15, 1996.
Through the pool, DGI writes personal and commercial property and
casualty insurance lines, including automobile, homeowners, commercial
multi-peril, workers' compensation and other lines of business. The insurance
agencies under contract with the Mutual Company serve as representatives for the
pool participants.
Under the terms of the intercompany pooling agreement, which took
effect on October 1, 1986, Atlantic States cedes to the Mutual Company the
premiums, losses and loss expenses on all of its insurance business.
Substantially all of the Mutual Company's property and casualty insurance
business, including the business reinsured from Southern, written or in force on
or after October 1, 1986 is also included in the pooled business. The Mutual
Company retroceded 35% of the pooled business to Atlantic States and retained
65% until October 1, 1988 when Atlantic States assumed 50% of the pooled
business written or in force on or after October 1, 1988. Effective January 1,
1993, Atlantic States assumed 60% of the pooled business written or in force on
or after January 1, 1993, and effective January 1, 1996, Atlantic States assumed
65% of the pooled business written or in force on or after January 1, 1996. All
premiums, losses, loss expenses, other underwriting expenses and policy
dividends are prorated among the parties on the basis of their participation in
the pool. The pooling agreement may be amended or terminated at the end of any
calendar year by agreement of the parties. The Company does not intend to
terminate its participation in the pooling agreement. The allocations of pool
participation percentages between the Mutual Company and the Company are based
on the pool participants' relative amounts of capital and surplus and
expectations of future relative amounts of capital and surplus. The pooling
agreement does not legally discharge Atlantic States from its primary liability
for the full amount of the policies ceded. However, it makes the Mutual Company
liable to Atlantic States to the extent of the business ceded.
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All of DGI's officers are officers of the Mutual Company, and five
of DGI's seven directors are directors of the Mutual Company. A Coordinating
Committee, which consists of two outside directors from each of DGI and the
Mutual Company, none of whom hold seats on both Boards, reviews and approves
changes in the pooling agreement and is responsible for matters involving actual
or potential conflicts of interest. The decisions of the Coordinating Committee
are binding on the two companies. DGI's members must conclude that intercompany
transactions are fair and reasonable in order for such transactions to be
approved.
The underwriting pool is intended to produce a more uniform and
stable underwriting result from year to year for the companies in the pool than
they would experience individually and to spread the risk of loss among all the
participants. Each company participating in the pool has at its disposal the
capacity of the entire pool, rather than being limited to policy exposures of a
size commensurate with its own capital and surplus. The additional capacity
exists because such policy exposures are spread among the pool participants
which each have their own capital and surplus.
DGI's Business Strategy
DGI, in conjunction with the Mutual Company, has multiple strategies
which the management of DGI believes have resulted in underwriting results that
are favorable when compared to those of the property and casualty insurance
industry in general over the past five years. The principal strategies comprise
the following:
o A regional company concept designed to provide the advantages
of local marketing, underwriting and claims servicing with the
economies of scale from centralized accounting,
administrative, investment, data processing and other
services.
o An underwriting program and product mix designed to produce a
Company-wide underwriting profit, i.e., a combined ratio of
less than 100%, from careful risk selection and adequate
pricing.
o A goal of a closely balanced ratio between commercial
business and personal business.
o An agent selection process that focuses on appointing agencies
with proven market strategies for the development of
profitable business and an agent compensation plan providing
for additional commissions based upon premium volume and
profitability.
o Gradual expansion into adjacent states, including Indiana,
Ohio, New York and North Carolina.
o A continuing effort to attract and retain qualified employees
who receive incentive compensation based upon historical
results.
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Property and Casualty Insurance Products and Services
The following table indicates the percentage of DGI's net premiums
written represented by commercial lines and by personal lines for the years
ended December 31, 1995, 1994 and 1993:
Year Ended December 31,
----------------------------------------
1995 1994 1993
---- ---- ----
Net Premiums Written:
Commercial...................... 46.8% 43.6% 43.2%
Personal........................ 53.2 56.4 56.8
The commercial lines consist primarily of automobile, multi-peril
and workers' compensation insurance. The personal lines consist primarily of
automobile and homeowners insurance. These types of insurance are described in
greater detail below:
Commercial
o Commercial automobile -- policies that provide protection
against liability for bodily injury and property damage
arising from automobile accidents, and provide protection
against loss from damage to automobiles owned by the insured.
o Workers' compensation -- policies purchased by employers to
provide benefits to employees for injuries sustained during
employment. The extent of coverage is established by the
workers' compensation laws of each state.
o Commercial multi-peril -- policies that provide protection to
businesses against many perils, usually combining liability
and physical damage coverages.
Personal
o Private passenger automobile -- policies that provide
protection against liability for bodily injury and property
damage arising from automobile accidents, and provide
protection against loss from damage to automobiles owned by
the insured.
o Homeowners -- policies that provide coverage for damage to
residences and their contents from a broad range of perils,
including, fire, lightning, windstorm and theft. These
policies also cover liability of the insured arising from
injury to other persons or their property while on the
insured's property and under other specified conditions.
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The following table sets forth the combined ratios of DGI, prepared
in accordance with generally accepted accounting principles and statutory
accounting principles prescribed or permitted by state insurance authorities.
The combined ratio is a traditional measure of underwriting profitability. When
the combined ratio is under 100%, underwriting results are generally considered
profitable. Conversely, when the combined ratio is over 100%, underwriting
results are generally considered unprofitable. The combined ratio does not
reflect investment income, federal income taxes or other non-operating income or
expense. DGI's operating income depends on income from both underwriting
operations and investments.
Year Ended December 31,
-------------------------------------
1995 1994 1993
---- ---- ----
GAAP Combined Ratio................. 97.3% 101.7% 99.1%
Statutory operating ratios:
Loss ratio........................ 65.6 68.9 67.4
Expense ratio..................... 31.6 31.3 29.3
Dividend ratio.................... 1.2 1.7 1.5
----- ----- -----
Statutory combined ratio.......... 98.4 101.9 98.2
Industry statutory combined
ratio(1).......................... 105.0 109.6 106.9
- ----------
(1) Source: Best's Aggregates & Averages Property-Casualty, 1993;
Insurance Information Institute, 1995 and 1994.
DGI is required to participate in involuntary insurance programs for
automobile insurance, as well as other property and casualty insurance lines, in
states in which DGI operates. These programs include joint underwriting
associations, assigned risk plans, fair access to insurance requirements
("FAIR") plans, reinsurance facilities and windstorm plans. Legislation
establishing these programs requires all companies that write lines covered by
these programs to provide coverage (either directly or through reinsurance) for
insureds who cannot obtain insurance in the voluntary market. The legislation
creating these programs usually allocates a pro rata portion of risks
attributable to such insureds to each company on the basis of direct premiums
written or the number of automobiles insured. Generally, state law requires
participation in such programs as a condition to doing business. The loss ratio
on insurance written under involuntary programs has traditionally been greater
than the loss ratio on insurance in the voluntary market. The impact of these
involuntary programs on DGI has been immaterial.
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The following table sets forth the net premiums written and combined
ratios by line of insurance for the business of DGI, prepared in accordance with
statutory accounting practices prescribed or permitted by state insurance
authorities, for the periods indicated.
Year Ended December 31,
------------------------------------------
1995 1994 1993
------- ------- -------
(in thousands)
Net Premiums Written:
Commercial:
Automobile...................... $ 8,306 $ 6,133 $ 5,279
Workers' compensation........... 17,607 15,110 15,098
Commercial multi-peril.......... 14,598 11,028 10,326
Other........................... 2,422 2,251 1,958
------- ------- -------
Total commercial .............. 42,933 34,522 32,661
------- ------- -------
Personal:
Automobile...................... 31,060 29,263 29,243
Homeowners...................... 14,932 12,850 11,214
Other........................... 2,746 2,598 2,476
------- ------- -------
Total personal................ 48,738 44,711 42,933
------- ------- -------
Total business.................... $91,671 $79,233 $75,594
======= ======= =======
Statutory Combined Ratios:
Commercial:
Automobile...................... 92.9% 116.1% 104.0%
Workers' compensation........... 76.9 80.0 96.8
Commercial multi-peril.......... 110.0 95.0 90.7
Other........................... 88.2 92.4 98.7
Total commercial.............. 91.6% 92.0% 95.8%
Personal:
Automobile...................... 98.7% 92.3% 92.4%
Homeowners...................... 118.7 147.5 120.1
Other........................... 90.8 111.4 102.0
Total personal................ 104.1% 109.3% 99.9%
Total business.................... 98.4% 101.9% 98.2%
Property and Casualty Underwriting
The underwriting department is responsible for the establishment of
underwriting and risk selection guidelines and criteria for the various
insurance products written by DGI. The underwriting department, in conjunction
with the marketing representatives, works closely with DGI's independent agents
to insure a comprehensive knowledge on the part of the agents of DGI's
underwriting requirements and risk selection process.
DGI's underwriting and pricing strategy is designed to produce an
underwriting profit resulting in a Company-wide combined ratio below 100%. DGI
and the Mutual Company have a conservative underwriting philosophy, which, in
the opinion of management, is one of the prime reasons for DGI's favorable loss
ratios relative to the property and casualty insurance industry over the last
five years.
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The underwriting department has over time initiated risk inspection
procedures and underwriting analysis on a per risk and class of business basis.
It has also automated underwriting processing utilizing technology such as bar
coding. Management has established monitoring and auditing processes to verify
compliance with underwriting requirements and procedures.
The underwriting department and the research and development section
are responsible for the development of new insurance products and enhancements.
Underwriting profitability is enhanced by the creation of niche products focused
on classes of business which traditionally have provided underwriting profits.
Marketing
DGI's insurance products, together with the products of the Mutual
Company and their respective subsidiaries, are marketed through approximately
2,300 independent insurance agents associated with approximately 700 insurance
agencies. Business is written by either DGI or the Mutual Company depending upon
geographic location, agency license and product. Management has developed an
agency appointment procedure that focuses on appointing agencies with proven
marketing strategies for the development of profitable business. DGI regularly
evaluates its agency force and continues to strive to obtain and retain a
significant position within each agency relative to the amount of business
similar to that of DGI placed by the agency with other insurers. DGI and the
Mutual Company have developed a successful contingent commission plan for agents
under which additional commissions are payable based upon the volume of premiums
produced and the profitability of the business of the agency written by DGI and
the Mutual Company. Management believes the contingent commission program has
enhanced the ability of DGI and the Mutual Company to write profitable business.
DGI has granted certain agents the authority to bind insurance
within underwriting and pricing limits specified by DGI without the prior
approval of DGI. However, DGI generally reviews all coverages placed by its
agents and, subject to applicable insurance regulations, may cancel the coverage
if it is inconsistent with DGI's guidelines.
DGI believes that its regional structure enables it to compete
effectively with large national companies. This regional structure permits DGI
to take advantage of its knowledge of local operating territories and the
opportunity to form strong, long-term relationships with the agents that
represent DGI and the Mutual Company.
DGI and the Mutual Company have developed comprehensive growth
strategies for each of the commercial and personal lines of insurance business.
DGI has focused on the small- to medium-sized commercial insurance markets,
which have traditionally been a stable and profitable segment of the property
and casualty insurance business. Commercial lines marketing is characterized by
account selling, in which multiple lines of insurance are offered to a single
policyholder.
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DGI believes that competitive and comprehensive products targeted to
selected classes of personal lines business, along with excellent service to
agents and policyholders, will provide growth with profitability. As is
customary in the industry, insureds are encouraged to place both their
homeowners and personal automobile insurance with DGI or the Mutual Company and
are offered a discount for doing so.
Claims
The claims department develops and implements policies and
procedures for the establishment of claim reserves and the timely resolution and
payment of claims. The management and staff of the department resolve policy
coverage issues, manage and process reinsurance recoveries and handle salvage
and subrogation matters.
Insurance claims are normally investigated and adjusted by internal
claims adjusters and supervisory personnel. Independent adjusters are employed
as needed to handle claims in territories in which the volume of claims is not
sufficient to justify hiring internal claims adjusters. The litigation and
personal injury sections manage all claims litigation, and all claims above
$25,000 require home office review and settlement authorization.
Field office staffs are supported by home office technical,
litigation, material damage, subrogation and medical audit personnel who provide
specialized claims support. An investigative unit attempts to prevent fraud and
abuse and to control losses.
Liabilities for Losses and Loss Expenses
Liabilities for losses and loss expenses are estimates at a given
point in time of what the insurer expects to pay to claimants, based on facts
and circumstances then known, and it can be expected that the ultimate liability
will exceed or be less than such estimates. Liabilities are based on estimates
of future trends and claims severity, judicial theories of liability and other
factors. However, during the loss adjustment period, additional facts regarding
individual claims may become known, and consequently it often becomes necessary
to refine and adjust the estimates of liability. Any adjustments are reflected
in operating results in the year in which the changes are made.
DGI maintains liabilities for the eventual payment of losses and
loss expenses with respect to both reported and unreported claims. Liabilities
for loss expenses are intended to cover the ultimate costs of settling all
losses, including investigation and litigation costs from such losses. The
amount of liability for reported losses is primarily based upon a case-by-case
evaluation of the type of risk involved and knowledge of the circumstances
surrounding each claim and the insurance policy provisions relating to the type
of loss. The amount of liability for unreported claims and loss expenses is
determined on the basis of historical information by line of insurance.
Inflation is implicitly provided for in the reserving function through analysis
of costs, trends and reviews of historical reserving results. Liabilities are
closely monitored and
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are recomputed periodically by the Company and the Mutual Company using new
information on reported claims and a variety of statistical techniques.
Liabilities for losses are not discounted.
The establishment of appropriate liabilities is an inherently
uncertain process, and there can be no assurance that the ultimate liability
will not exceed DGI's loss and loss expenses and have an adverse effect on DGI's
results of operations and financial condition. As is the case for virtually all
property and casualty insurance companies, DGI has found it necessary in the
past to revise in non-material amounts estimated future liabilities for losses
and loss expenses, and further adjustments could be required in the future.
However, on the basis of DGI's internal procedures, which analyze, among other
things, DGI's experience with similar cases and historical trends such as
reserving patterns, loss payments, pending levels of unpaid claims and product
mix, as well as court decisions, economic conditions and public attitudes,
management of DGI believes that adequate provision has been made for DGI's
liability for loss and loss expenses.
Differences between liabilities reported in DGI's financial
statements prepared on the basis of generally accepted accounting principles and
financial statements prepared on a statutory accounting basis result from
reducing statutory liabilities for anticipated salvage and subrogation
recoveries. These differences amounted to $3,880,621, $2,730,112 and $2,159,614
at December 31, 1995, 1994 and 1993, respectively.
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The following tables set forth a reconciliation of the beginning and
ending net liability for unpaid losses and loss expenses for the periods
indicated on a GAAP basis for the Company.
Year Ended December 31,
-----------------------------------------
1995 1994 1993
------- ------- -------
(in thousands)
Net liability for unpaid losses
and loss expenses at
beginning of year.................... $62,577 $52,298 $43,449
------- ------- -------
Acquisition of Delaware American...... 5,670
------- ------- -------
New balance beginning of year......... 62,577 57,968 43,449
------- ------- -------
Provision for net losses and
loss expenses for claims
incurred in the current year......... 58,354 55,941 45,451
Increase (decrease) in provision
for estimated net losses and
loss expenses for claims
incurred in prior years.............. (2,947) (3,084) 1,264
------- ------- -------
Total incurred........................ 55,407 52,857 46,715
Net losses and loss payments
for claims incurred during:
The current year..................... 28,834 30,544 21,779
Prior years.......................... 19,009 17,704 16,087
------- ------- -------
Total paid............................ 47,943 48,248 37,866
Net liability for unpaid losses
and loss expenses at
end of year.......................... $70,040 $62,577 $52,298
======= ======= =======
The following table sets forth the development of the liability for
net unpaid losses and loss expenses for DGI on a GAAP basis from 1987 (the first
full year of DGI's operations) to 1995, with supplemental loss data for 1995 and
1994.
"Net liability at end of year for unpaid losses and loss expenses"
sets forth the estimated liability for net unpaid losses and loss expenses
recorded at the balance sheet date for each of the indicated years. This
liability represents the estimated amount of net losses and loss expenses for
claims arising in the current and all prior years that are unpaid at the balance
sheet date including losses incurred but not reported.
The "Liability reestimated as of" portion of the table shows the
reestimated amount of the previously recorded liability based on experience for
each succeeding year. The estimate is increased or decreased as payments are
made and more information becomes known about the severity of the remaining
unpaid claims. For example, the 1990 liability has developed a deficiency after
five years, in that reestimated net losses and loss expenses are expected
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to be less than the estimated liability initially established in 1990 of
$31,898,000 by $1,857,000.
The "Cumulative deficiency (excess)" shows the cumulative deficiency
or excess at December 31, 1995 of the liability estimate shown on the top line
of the corresponding column. An excess in liability means that the liability
established in prior years exceeded actual net losses and loss expenses or were
reevaluated at less than the original amount. A deficiency in liability means
that the liability established in prior years was less than actual net losses
and loss expenses or were reevaluated at more than the original amount.
The "Cumulative amount of liability paid through" portion of the
table shows the cumulative net losses and loss expense payments made in
succeeding years for net losses incurred prior to the balance sheet date. For
example, the 1990 column indicates that as of December 31, 1995, payments equal
to $27,439,000 of the currently reestimated ultimate liability for net losses
and loss expenses of $30,041,000 had been made.
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<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994* 1995
-------- -------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability at end of
year for unpaid losses
and loss expenses............. $11,878 $20,734 $27,767 $31,898 $36,194 $43,449 $52,298 $62,577 $70,041
Net liability
reestimated as of:
One year later.............. 12,678 21,598 29,175 32,923 37,514 44,713 50,223 59,630
Two years later............. 12,949 20,475 28,861 33,550 37,765 42,053 47,820
Three years later........... 12,692 19,823 28,545 32,803 35,446 40,077
Four years later............ 12,160 19,296 27,717 31,004 33,931
Five years later............ 11,799 18,796 26,759 30,041
Six years later............. 11,857 18,457 26,180
Seven years later........... 11,782 18,189
Eight years later........... 11,722
Cumulative deficiency
(excess).................... $ (156) $(2,545) $(1,587) $(1,857) $(2,263) $(3,372) $(4,478) $(2,947)
======== ======== ======== ======== ======== ======== ======== ========
Cumulative amount of
liability paid through:
One year later............... $ 5,891 $ 8,855 $11,401 $13,003 $13,519 $16,087 $15,947 $19,009
Two years later.............. 8,472 12,280 17,421 19,795 20,942 24,010 25,128
Three years later............ 9,988 14,912 20,986 24,178 25,308 28,802
Four years later............. 10,774 16,292 23,268 26,413 27,826
Five years later............. 11,209 17,201 24,331 27,439
Six years later.............. 11,388 17,706 24,909
Seven years later............ 11,484 17,782
Eight years later............ 11,544
</TABLE>
* Restated for acquisition of Delaware American
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1994 1995
---- ----
(in thousands)
<S> <C> <C>
Gross liability at end of year........................ $87,744 $97,734
Reinsurance recoverable............................... 25,167 27,693
Net liability at end of year.......................... 62,577 70,041
Gross reestimated liability -- latest................. 85,313
Reestimated recoverable -- latest..................... 25,683
Net reestimated liability -- latest................... 59,630
Gross cumulative excess............................... 2,431
</TABLE>
-15-
<PAGE>
Reinsurance
DGI and the Mutual Company use several different reinsurers, all of
which have a Best rating of A or better or, with respect to foreign reinsurers,
have a financial condition which, in the opinion of management, is equivalent to
a company with at least an A- rating.
The external reinsurance purchased by DGI and the Mutual Company
includes "excess treaty reinsurance" under which losses are automatically
reinsured over a set retention ($250,000 for 1995) and "catastrophic
reinsurance" under which the reinsured recovers 90% of an accumulation of many
losses resulting from a single event, including natural disasters (for 1995,
$3,000,000 retention) DGI's principal reinsurance agreement, other than that
with the Mutual Company, is an excess of loss treaty in which the reinsurers are
Continental Casualty Company, Employers Reinsurance Corporation and Dorinco
Reinsurance Company. Reinsurance is also purchased on an individual policy basis
to reinsure losses that may occur from large risks, specific risk types or
specific locations. The amount of coverage provided under each of these types of
reinsurance depends upon the amount, nature, size and location of the risk being
reinsured. For property insurance, excess of loss treaties provide for coverage
up to $1,000,000. For liability insurance, excess of loss treaties provide for
coverage up to $30,000,000. Property catastrophe contracts provide coverage up
to $50,000,000 resulting from one event. On both property and casualty
insurance, DGI and the Mutual Company purchase facultative reinsurance to cover
exposures from losses that exceed the limits provided by their respective treaty
reinsurance. In addition, the Company and the Mutual Company maintain various
reinsurance agreements between themselves in addition to the pooling agreement.
Atlantic States and the Mutual Company have a catastrophe reinsurance agreement
which limits the maximum liability for losses from any one catastrophe
occurrence to $400,000 for Atlantic States. Southern and the Mutual Company have
an excess of loss reinsurance agreement in which the Mutual Company assumes up
to $150,000 for losses in excess of $100,000. Southern and the Mutual Company
also have a catastrophe reinsurance agreement which limits Southern's liability
to $300,000 from any one catastrophe occurrence. Delaware American and the
Mutual Company have an aggregate of loss reinsurance agreement whereby the
Mutual Company reinsures Delaware American against adverse developments in
Delaware American's loss reserve and loss adjustment reserves in 1996 compared
to December 31, 1995 and all loss and loss adjustment expenses in December 1995
and all of 1996 to the extent that the loss and loss adjustment expense ratios
for those periods exceed the lesser of the loss and loss adjustment expense
ratios for January-November 1995 and January-December 1995, respectively, or
60%. Delaware American and the Mutual Company also have an excess of loss
reinsurance agreement in which the Mutual Company assumes up to $200,000 for
losses in excess of $50,000. Delaware American and the Mutual Company also have
a Catastrophe Reinsurance Agreement which limits Delaware American's liability
to $300,000 from any one catastrophe occurrence. Delaware American and the
Mutual Company also have a reinsurance contract
-16-
<PAGE>
whereby Delaware American cedes 70% of its workers' compensation business to the
Mutual Company.
Competition
The property and casualty insurance industry is highly competitive
on the basis of both price and service. There are numerous companies competing
for this business in the geographic areas where the Company operates, many of
which are substantially larger and have greater financial resources than DGI,
and no single company dominates. In addition, because the insurance products of
DGI and the Mutual Company are marketed exclusively through independent
insurance agencies, most of which represent more than one company, DGI faces
competition to retain qualified independent agencies, as well as competition
within agencies.
Investments
DGI's return on invested assets is an important element of its
financial results. Currently, the investment objective is to maintain a widely
diversified fixed maturities portfolio structured to maximize after-tax
investment income while minimizing credit risk through investments in high
quality instruments. At December 31, 1995, all debt securities were rated
investment grade with the exception of one unrated obligation of $250,000, and
the investment portfolio did not contain any real estate, any mortgage loans or
any non-performing assets.
The following table shows the composition of the debt securities
investment portfolio (at carrying value), excluding short-term investments, by
rating as of December 31, 1995:
December 31, 1995
------------------------------------
Rating(1) Amount Percent
- -------------------- ----------- ------------
(dollars in thousands)
U.S. Treasury and U.S.
agency securities(2)................. $ 76,663 53.4%
Aaa or AAA............................. 35,008 24.3
Aa or AA............................... 24,250 16.9
A...................................... 7,455 5.2
Not rated(3)........................... 250 0.2
-------- -----
Total.............................. $143,626 100.0%
======== ======
- ----------
(1) Ratings assigned by Moody's Investors Services, Inc. or Standard & Poor's
Corporation.
(2) Includes mortgage-backed securities of approximately $18,164,066.
(3) Represents one unrated obligation of The Lancaster County Hospital
Authority Mennonite Home Project, which management of DGI believes to be
equivalent to investment grade securities with respect to repayment risk.
-17-
<PAGE>
DGI invests in both taxable and tax-exempt securities as part of its
strategy to maximize after-tax income. Such strategy considers, among other
factors, the alternative minimum tax. Tax-exempt securities made up
approximately 38.5%, 26.4% and 35.6% of the total investment portfolio at
December 31, 1995, 1994 and 1993, respectively.
The following table shows the classification of the investments (at
carrying value) of DGI and its subsidiaries at December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
December 31
------------------------------------------------------
1995(1) 1994(1) 1993(2)
------------------ ------------------ -----------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
-------- ----- -------- ------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities:
Held to maturity:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies.............. $ 19,676 12.2% $ 14,271 9.8% $ 13,052 10.8%
Obligations of states and
political subdivisions.... 52,081 32.3 32,110 22.1 28,297 23.4
Corporate securities....... 3,816 2.4 2,994 2.1 4,592 3.8
Mortgage-backed
securities................ 16,406 10.1 20,783 14.2 17,476 14.4
-------- ----- -------- ----- -------- -----
Total held to
maturity................ 91,979 57.0 70,158 48.2 63,417 52.4
-------- ----- -------- ----- -------- -----
Available for sale:
U.S. treasury securities
and obligations of U.S.
government corporations
and agencies.............. 35,421 21.9 33,429 22.9 16,032 13.2
Obligations of states and
political subdivisions.... 10,120 6.3 6,357 4.4 14,828 12.3
Corporate securities....... 4,348 2.7 3,734 2.6 6,225 5.1
Mortgage-backed
securities................ 1,758 1.1 202 0.1 --- --
-------- ----- -------- ----- -------- ----
Total available
for sale................ 51,647 32.0 43,722 30.0 37,085 30.6
-------- ----- -------- ----- -------- -----
Total fixed
maturities.............. 143,626 89.0 113,880 78.2 100,502 83.0
Equity securities(3)......... 3,264 2.0 4,202 2.9 3,823 3.2
Short-term
investments(4).............. 14,498 9.0 27,485 18.9 16,704 13.8
-------- ----- -------- ----- -------- -----
Total investments............ $161,388 100.0% $145,567 100.0% $121,029 100.0%
======== ====== ======== ====== ======== =====
</TABLE>
- -----------------
(1) The Company accounts for investments in accordance with State-
ment of Financial Accounting Standards (SFAS) No. 115, "Account-
ing For Certain Investments in Debt and Equity Securities". See
Notes 1 and 3 to the Consolidated Financial Statements incorpo-
-18-
<PAGE>
rated by reference herein. Fixed maturities held to maturity are valued at
amortized cost; those fixed maturities available for sale are valued at
fair value. Total fair value of fixed maturities held to maturity was
$95,357,840 at December 31, 1995. The amortized cost of fixed maturities
available for sale was $50,714,887 at December 31, 1995.
(2) Effective December 31, 1993, in anticipation of adopting SFAS No. 115, the
Company specifically identified those fixed maturi- ties as to which it
has both the ability and intent to hold to maturity and classified them as
"Held to maturity." See Notes 1 and 3 to the Consolidated Financial
Statements incorporated by reference herein. Fixed maturities held to
maturity were valued at amortized cost; those fixed maturities available
for sale were valued at the lower of aggregate amortized cost or fair
value. Total fair value of fixed maturities was $111,006,515 at December
31, 1994 and $106,486,367 at December 31, 1993.
(3) Equity securities are valued at market. Total cost of equity securities
was $2,954,487 at December 31, 1995, $4,897,115 at December 31, 1994 and
$3,439,488 at December 31, 1993.
(4) Short-term investments are valued at cost, which approximates market.
The following table sets forth the maturities (at carrying value) in
the fixed maturity and short-term investment portfolio at December 31, 1995,
December 31, 1994 and December 31, 1993.
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------
1995 1994 1993
------------------- ------------------ -----------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
-------- ------- -------- ------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Due in:(1)
One year or less........ $ 34,493 21.8% $ 35,803 25.3 $ 19,208 16.4%
Over one year
through three years.... 19,546 12.4 34,204 24.2 9,062 7.7
Over three years
through five years..... 9,559 6.0 5,346 3.8 10,121 8.6
Over five years
through ten years...... 35,005 22.1 9,846 7.0 18,712 16.0
Over ten years
through fifteen
years.................. 39,172 24.8 29,665 21.0 31,606 27.0
Over fifteen years...... 2,185 1.4 5,968 4.2 11,021 9.4
Mortgage-backed
securities............. 18,164 11.5 20,534 14.5 17,476 14.9
-------- ----- -------- ----- -------- -----
$158,124 100.0% $141,366 100.0% $117,206 100.0%
======== ====== ======== ====== ======== =====
</TABLE>
- ----------
(1) Based on stated maturity dates with no prepayment assumptions.
Actual maturities will differ because borrowers may have the
-19-
<PAGE>
right to call or prepay obligations with or without call or
prepayment penalties.
As shown above, the Company held investments in mortgage-backed
securities having a carrying value of $18,164,066 at December 31, 1995. Included
in these investments are collateralized mortgage obligations ("CMOs") with a
carrying value of $17,682,497 at December 31, 1995. The Company has attempted to
reduce the prepayment risks associated with mortgage-backed securities by
investing approximately 99.5%, as of December 31, 1995, of the Company's
holdings of CMOs in planned amortization and very accurately defined tranches.
Such investments are designed to alleviate the risk of prepayment by providing
predictable principal prepayment schedules within a designated range of
prepayments. If principal is repaid earlier than originally anticipated,
investment yields may decrease due to reinvestment of these funds at lower
current interest rates and capital gains or losses may be realized since the
book value of securities purchased at premiums or discounts may be different
from the prepayment amount.
Investment results of DGI and its subsidiaries for the years ended
December 31, 1995, 1994 and 1993 are shown in the following table:
Year Ended December 31,
--------------------------------------------
1995 1994 1993
---- ---- ----
(dollars in thousands)
Invested assets(1)........... $155,093 $134,636 $108,472
Investment income(2)......... $ 9,270 $ 7,778 $ 6,478
Average yield................ 6.0% 5.8% 6.0%
- ----------------
(1) Average of the aggregate invested amounts at the beginning and end of the
period, including cash.
(2) Investment income is net of investment expenses and does not include
realized investment gains or losses or provision for income taxes.
A.M. Best Rating
In 1995, the Best rating of the Mutual Company, Atlantic States,
Southern and Delaware American was "A", based upon their respective current
financial conditions and historical statutory results of operations. Management
believes that this Best rating is an important factor in marketing DGI's
products to its agents and customers. Best's ratings are industry ratings based
on a comparative analysis of the financial condition and operating performance
of insurance companies as determined by their publicly available reports. Best's
classifications are A++ and A+ (Superior), A and A-(Excellent), B++ and B+ (Very
Good), B and B- (Good), C++ and C+ (Fair), C and C- (Marginal), D (below minimum
standards) and E and F (Liquidation). Best's ratings are based upon factors
relevant to policyholders and are not directed toward the protection of inves-
-20-
<PAGE>
tors. According to Best, an "excellent" rating is assigned to those companies
which, in Best's opinion, have achieved excellent overall performance when
compared to the norms of the property and casualty insurance industry and have
generally demonstrated a strong ability to meet policyholder and other
contractual obligations.
Regulation
Insurance companies are subject to supervision and regulation in the
states in which they transact business. Such supervision and regulation relates
to numerous aspects of an insurance company's business and financial condition.
The primary purpose of such supervision and regulation is the protection of
policyholders. The extent of such regulation varies, but generally derives from
state statutes which delegate regulatory, supervisory and administrative
authority to state insurance departments. Accordingly, the authority of the
state insurance departments includes the establishment of standards of solvency
which must be met and maintained by insurers, the licensing to do business of
insurers and agents, the nature of and limitations on investments, premium rates
for property and casualty insurance, the provisions which insurers must make for
current losses and future liabilities, the deposit of securities for the benefit
of policyholders, the approval of policy forms, notice requirements for the
cancellation of policies and the approval of certain changes in control. State
insurance departments also conduct periodic examinations of the affairs of
insurance companies and require the filing of annual and other reports relating
to the financial condition of insurance companies.
In addition to state-imposed insurance laws and regulations, in
December 1993 the National Association of Insurance Commissioners (the "NAIC")
adopted a new risk-based capital system for assessing the adequacy of statutory
capital and surplus effective in 1994 which augments the states' current fixed
dollar minimum capital requirements for insurance companies. At December 31,
1995, DGI exceeded the required levels of capital. There can be no assurance
that the capital requirements applicable to DGI's business will not increase in
the future.
The states in which Atlantic States (Pennsylvania, Maryland and
Delaware), the Mutual Company (Pennsylvania, Ohio, Maryland, New York, Virginia
and Delaware), Southern (Virginia) and Delaware American (Delaware, Maryland and
Pennsylvania) do business have guaranty fund laws under which insurers doing
business in such states can be assessed on the basis of premiums written by the
insurer in that state in order to fund policyholder liabilities of insolvent
insurance companies. Under these laws in general, an insurer is subject to
assessment, depending upon its market share of a given line of business, to
assist in the payment of policyholder claims against insolvent insurers. The
Mutual Company, Atlantic States, Southern and Delaware American have made
accruals for their portion of assessments related to such insolvencies based
upon the most current information furnished by the guaranty associations. During
the five years ended December 31, 1995, the amount of such insolvency assess-
-21-
<PAGE>
ments paid by Atlantic States, Southern, the Mutual Company and Delaware
American was not material.
The property and casualty insurance industry has recently received a
considerable amount of publicity because of rising insurance costs and the
unavailability of insurance. New regulations and legislation are being proposed
to limit damage awards, to control plaintiffs' counsel fees, to bring the
industry under regulation by the federal government and to control premiums,
policy terminations and other policy terms. It is not possible to predict
whether, in what form or in what jurisdictions any of these proposals might be
adopted or the effect, if any, on the Company.
Most states have enacted legislation that regulates insurance
holding company systems. Each insurance company in the holding company system is
required to register with the insurance supervisory agency of its state of
domicile and furnish information concerning the operations of companies within
the holding company system that may materially affect the operations, management
or financial condition of the insurers within the system. Pursuant to these
laws, the respective insurance departments may examine the Mutual Company, the
Company and their respective insurance subsidiaries at any time, require
disclosure of material transactions by the holding company and require prior
approval of certain transactions, such as "extraordinary dividends" from the
insurance subsidiaries to the holding company.
All transactions within the holding company system affecting the
Mutual Company and the Company's insurance subsidiaries must be fair and
equitable. Approval of the applicable insurance commissioner is required prior
to consummation of transactions affecting the control of an insurer. In some
states, including Pennsylvania, the acquisition of 10% or more of the
outstanding capital stock of an insurer or its holding company is presumed to be
a change in control. These laws also require notice to the applicable insurance
commissioner of certain material transactions between an insurer and any person
in its holding company system and, in some states, certain of such transactions
cannot be consummated without the prior approval of the applicable insurance
commissioner.
The Company's insurance subsidiaries are restricted by the insurance
laws of their respective states of domicile as to the amount of dividends or
other distributions they may pay to the Company without the prior approval of
the respective state regulatory authorities. Generally, the maximum amount that
may be paid by an insurance subsidiary during any year after notice to, but
without prior approval of the insurance commissioners of these states is limited
to a stated percentage of that subsidiary's statutory capital and surplus as of
a certain date, or the net income or net investment income not including
realized capital gains of the subsidiary for the preceding year. As of December
31, 1995, amounts available for payment of dividends in 1996 without the prior
approval of the various insurance commissioners were $5,224,905 from Atlantic
States, $638,042 from Southern and $569,563 from Delaware American. See Note
-22-
<PAGE>
11 to the Consolidated Financial Statements incorporated by reference herein.
The Mutual Company
The Mutual Company, which was organized in 1889, has a Best rating
of A (Excellent). At December 31, 1995, the Mutual Company had admitted assets
of $159 million and policyholders' surplus of $72.5 million. At December 31,
1995, the Mutual Company had no debt and, of its total liabilities of $86.9
million, reserves for net losses and loss expenses accounted for $49.5 million
and unearned premiums accounted for $23.4 million. Of the Mutual Company's
investment portfolio of $136 million at December 31, 1995, investment-grade
bonds accounted for $55 million, cash and short-term investments accounted for
$8 million and mortgages accounted for $7 million. At December 31, 1995, the
Mutual Company owned 2,507,633 shares of the Company's Common Stock, which were
carried on the Mutual Company's books at $47 million. The foregoing financial
information is presented on the statutory basis of accounting.
Employees
As of December 31, 1995, the Mutual Company had 339 employees. The
Mutual Company's employees provide a variety of services to DGI, Atlantic
States, Delaware American and Southern as well as to the Mutual Company and its
subsidiaries.
Item 2. Properties.
DGI shares headquarters with the Mutual Company in a building owned
by the Mutual Company. The Mutual Company charges DGI for an appropriate portion
of the building expenses under an inter-company allocation agreement which is
consistent with the terms of the pooling agreement. The headquarters of the
Mutual Company have approximately 82,000 square feet of office space, with an
additional 40,000 square feet of office space currently under construction. The
Mutual Company has a branch office of approximately 1,600 square feet in
Pittsburgh, Pennsylvania, which it leases. Southern has a facility of
approximately 10,000 square feet in Glen Allen, Virginia which it leases.
Delaware American has a facility of approximately 4,000 square feet in New
Castle, Delaware which it leases.
Item 3. Legal Proceedings.
DGI is a party to numerous lawsuits arising in the ordinary course
of its insurance business. DGI believes that the resolution of these lawsuits
will not have a material adverse effect on its financial condition or results of
operations.
-23-
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of holders of the Company's Common
Stock during the fourth quarter of 1995.
Executive Officers of the Company
Name Age Position
---- --- --------
Donald H. Nikolaus 53 President and Chief Executive
Officer since 1981
William H. Shupert 69 Senior Vice President -
Underwriting since 1991; Vice
President - Underwriting for
18 years prior thereto
Ralph G. Spontak 43 Senior Vice President since
1991; Chief Financial Officer
since 1983; Vice President
since 1983; Secretary since
1988; KMG Main Hurdman for nine
years to 1983
Frank J. Wood 62 Vice President - Marketing
since 1988; Manager - Marketing
for one year prior thereto
Daniel J. Wagner 35 Treasurer since 1993; Controller for
five years prior thereto
-24-
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.
The answer to this Item is incorporated in part by reference to page
25 of the Company's Annual Report to Stockholders for the year ended December
31, 1995, which is included as Exhibit (13) to this Form 10-K Report. As of
March 15, 1996, the Company had approximately 372 holders of record of its
Common Stock. The Company declared dividends of $.36 per share in 1994 and $.40
per share in 1995.
Item 6. Selected Financial Data.
The answer to this Item is incorporated by reference to page 1 of
the Company's Annual Report to Stockholders for the year ended December 31,
1995, which is included as Exhibit (13) to this Form 10-K Report.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The answer to this Item is incorporated by reference to pages 7
through 9 of the Company's Annual Report to Stockholders for the year ended
December 31, 1995, which is included as Exhibit (13) to this Form 10-K Report.
Item 8. Financial Statements and Supplementary Data.
The answer to this Item is incorporated by reference to pages 10
through 23 of the Company's Annual Report to Stockholders for the year ended
December 31, 1995, which is included as Exhibit (13) to this Form 10-K Report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
-25-
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Company.
The answer to this Item with respect to the Company's directors is
incorporated by reference to pages 5 through 7 of the Company's proxy statement
relating to the Company's annual meeting of stockholders to be held April 18,
1996. The response to this Item with respect to the Company's executive officers
is incorporated by reference to Part I of this Form 10-K Report.
Item 11. Executive Compensation.
The answer to this Item is incorporated by reference to pages 7
through 12 of the Company's proxy statement relating to the Company's annual
meeting of stockholders to be held April 18, 1996, except for the Compensation
Committee Report and the Performance Graph, which are not incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners
and Management.
The answer to this Item is incorporated by reference to pages 2
through 3 of the Company's proxy statement relating to the Company's annual
meeting of stockholders to be held April 18, 1996.
Item 13. Certain Relationships and Related Transactions.
The answer to this Item is incorporated by reference to pages 3
through 5 and page 13 of the Company's proxy statement relating to the Company's
annual meeting of stockholders to be held April 18, 1996.
-26-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.
(a) Financial statements, financial statement schedules and
exhibits filed:
(1) Consolidated Financial Statements
Page*
----
Report of Independent Auditors................................. 23
Donegal Group Inc. and Subsidiaries:
Consolidated Balance Sheets as of
December 31, 1995 and 1994................................ 10
Consolidated Statements of Income
for the three years ended
December 31, 1995, 1994 and 1993.......................... 11
Consolidated Statements of Stockholders'
Equity for the three years ended
December 31, 1995, 1994 and 1993.......................... 12
Consolidated Statements of Cash Flows
for the three years ended
December 31, 1995, 1994 and 1993.......................... 13
Notes to Consolidated Financial Statements..................... 14-23
(2) Financial Statement Schedules
Page
----
Donegal Group Inc. and Subsidiaries:
Report of Independent Auditors on Schedules.................... 33
Schedule I. Summary of Investments - Other
than Investments in Related
Parties....................................... 34
Schedule II. Condensed Financial Information
of Parent Company............................. 35-37
Schedule III. Supplementary Insurance
Information................................... 38-39
Schedule IV. Reinsurance................................... 40
Schedule VI. Supplemental Insurance Information
Concerning Property and Casualty
Subsidiary.................................... 41-42
All other schedules have been omitted since they are not required,
not applicable or the information is included in the financial statements or
notes thereto.
- ------------------
* Refers to the respective page of Donegal Group Inc.'s 1995 Annual Report to
Stockholders. The Consolidated Financial Statements and Notes to Consolidated
Financial Statements and Auditor's Report thereon on pages 10 through 23 are
incorporated herein by reference.
-27-
<PAGE>
With the exception of the portions of such Annual Report specifically
incorporated by reference in this Item and Items 5, 6, 7 and 8, such Annual
Report shall not be deemed filed as part of this Form 10-K Report or otherwise
subject to the liabilities of Section 18 of the Securities Exchange Act of 1934.
(3) Exhibits
Exhibit No. Description of Exhibits Reference
- ----------- --------------------------------------- ---------
(3)(i) Certificate of Incorporation of (a)
Registrant
(3)(ii) Amended and Restated By-laws of (e)
Registrant
(4) Form of Registrant's Common Stock (a)
Certificate
Management Contracts and Compensatory Plans or Arrangements
(10)(A) Donegal Mutual Insurance Company (a)
Money Purchase Pension Plan and
Trust dated March 12, 1985
(10)(B) Donegal Mutual Insurance Company (a)
Profit Sharing Plan and Trust
dated March 12, 1985
(10)(C) Donegal Group Inc. Key Executive (b)
Incentive Bonus Plan dated
September 29, 1986
(10)(D) Donegal Group Inc. Employee Stock (b)
Purchase Plan, as amended
(10)(E) Donegal Group Inc. Equity Incentive (b)
Plan, as amended
(10)(F) Donegal Group Inc. 1996 Equity filed herewith
Incentive Plan.
Other Material Contracts
(10)(G) Tax Sharing Agreement dated (a)
September 29, 1986 between Donegal
Group Inc. and Atlantic States
Insurance Company
(10)(H) Services Allocation Agreement dated (a)
September 29, 1986 between Donegal
Mutual Insurance Company, Donegal
Group Inc. and Atlantic States
Insurance Company
-28-
<PAGE>
(10)(I) Proportional Reinsurance Agreement (a)
dated September 29, 1986 between
Donegal Mutual Insurance Company
and Atlantic States Insurance Company
(10)(J) Amendment dated October 1, 1988 to (c)
Proportional Reinsurance Agreement
between Donegal Mutual Insurance Company
and Atlantic States Insurance Company
(10)(K) Multi-Line Excess of Loss Reinsurance (e)
Agreement effective January 1, 1993
between Donegal Mutual Insurance Company,
Southern Insurance Company of Virginia,
Atlantic States Insurance Company and
Pioneer Mutual Insurance Company, and
Christiana General Insurance Corporation
of New York, Cologne Reinsurance Company
of America, Continental Casualty Company,
Employers Reinsurance Corporation and
Munich American Reinsurance Company
(10)(L) Amendment dated July 16, 1992 to Propor- (d)
tional Reinsurance Agreement between
Donegal Mutual Insurance Company and
Atlantic States Insurance Company
(10)(M) Amendment dated as of December 21, 1995 (f)
to Proportional Reinsurance Agreement
between Donegal Mutual Insurance Company
and Atlantic States Insurance Company
(10)(N) Credit Agreement dated as of December 29, (f)
1995 between Donegal Group Inc. and Fleet
National Bank of Connecticut
(10)(O) Stock Purchase Agreement dated as of (f)
December 21, 1995 between Donegal Mutual
Insurance Company and Donegal Group Inc.
(10)(P) Donegal Group Inc. 1996 Employee Stock (g)
Purchase Plan.
(13) 1995 Annual Report to Stockholders filed herewith
(electronic filing contains only
those portions incorporated by
reference into this Form 10-K
report).
(20) Proxy Statement relating to the filed herewith
Annual Meeting of Stockholders
to be held on April 18, 1996
(21) Subsidiaries of Registrant filed herewith
-29-
<PAGE>
(23) Consent of Independent Auditors Certified filed herewith
(27) Financial Data Schedule filed herewith
(28)(A) Analysis of Losses and Loss Expenses -- P
Schedule P of the 1995 Annual Statement
of Donegal Mutual Insurance Company
(28)(B) Analysis of Losses and Loss Expenses -- P
Schedule P of the 1995 Annual Statement
of Atlantic States Insurance Company
(28)(C) Analysis of Losses and Loss Expenses -- P
Schedule P of the 1995 Annual Statement
of Southern Insurance Company of Virginia
(28)(D) Analysis Losses and Loss Expenses -- P
Schedule P of the 1995 Annual Statement
of Delaware American Insurance Company
- ------------------
(a) Such exhibit is hereby incorporated by reference to the
like-described exhibits in Registrant's Form S-1
Registration Statement No. 33-8533 declared effective
October 29, 1986.
(b) Such exhibit is hereby incorporated by reference to the
like-described exhibits in Registrant's Form 10-K Report for
the year ended December 31, 1986.
(c) Such exhibit is hereby incorporated by reference to the
like-described exhibit in Registrant's Form 10-K Report for
the year ended December 31, 1988.
(d) Such exhibit is hereby incorporated by reference to the
like-described exhibit in Registrant's Form 10-K Report for
the year ended December 31, 1992.
(e) Such exhibit is hereby incorporated by reference to the
like-described exhibit in Registrant's Form S-2 Registration
Statement No. 33-67346 declared effective September 29,
1993.
(f) Such exhibit is hereby incorporated by reference to the
like-described exhibit in Registrant's Form 8-K Report dated
December 21, 1995.
(g) Such exhibit is hereby incorporated by reference to the
like-described exhibit in Registrant's Form S-8 Registration
Statement No. 333-1287 filed February 29, 1996.
(b) Reports on Form 8-K:
-30-
<PAGE>
During the quarter ended December 31, 1995, Registrant filed a
report on Form 8-K dated December 21, 1995 in which information was reported
under Item 5 (Other Events).
-31-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 29, 1996 By: /s/Donald H. Nikolaus
--------------------------------
Donald H. Nikolaus, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signature Title Date
- ---------------------------- ----------------------- ---------------
/s/Donald H. Nikolaus President and a March 29, 1996
- ---------------------------- Director (principal
Donald H. Nikolaus executive officer)
/s/Ralph G. Spontak Senior Vice President March 29, 1996
- ---------------------------- and Secretary (principal
Ralph G. Spontak financial and accounting
officer)
/s/Robert S. Bolinger Director March 29, 1996
- ----------------------------
Robert S. Bolinger
- ---------------------------- Director March , 1996
Thomas J. Finley, Jr.
/s/Patricia A. Gilmartin Director March 29, 1996
- ----------------------------
Patricia A. Gilmartin
/s/Philip H. Glatfelter, II Director March 29, 1996
- ----------------------------
Philip H. Glatfelter, II
/s/C. Edwin Ireland Director March 29, 1996
- ----------------------------
C. Edwin Ireland
/s/R. Richard Sherbahn Director March 29, 1996
- ----------------------------
R. Richard Sherbahn
-32-
<PAGE>
Independent Auditors' Report
The Stockholders and Board of Directors
Donegal Group Inc.
Under the date of February 23, 1996, we reported on the consolidated balance
sheets of Donegal Group Inc. and subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1995, as
contained in the 1995 annual report to stockholders. These consolidated
financial statements and our report thereon are incorporated by reference in the
annual report on Form 10-K for the year 1995. In connection with our audits of
the aformentioned consolidated financial statements, we also audited the
related financial statement schedules as listed in the accompanying index. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
As discussed in Note 1 to the financial statements, the Company adopted
the provisions of Statement of Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" as of January 1, 1994.
KPMG Peat Marwick LLP
Harrisburg, Pennsylvania
February 23, 1996
-33-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1995
Amount at Which
Fair Shown in the
Cost Value Balance Sheet
------------ ------------ ---------------
Fixed Maturities:
Held to maturity:
United States government
and governmental agencies
and authorities including
obligations of states and
political subdivisions....... $ 71,756,284 $ 74,525,605 $ 71,756,284
All other corporate bonds..... 3,816,309 4,195,000 3,816,309
Mortgage-backed securities.... 16,406,529 16,637,235 16,406,529
------------ ------------ ------------
Total fixed maturities
held to maturity............ 91,979,122 95,357,840 91,979,122
------------ ------------ ------------
Available for sale:
United States government
and governmental agencies
and authorities including
obligations of states and
political subdivisions....... 44,690,339 45,541,193 45,541,193
All other corporate bonds..... 4,299,597 4,348,000 4,348,000
Mortgage-backed securities.... 1,724,951 1,757,537 1,757,537
------------ ------------ ------------
Total fixed maturities
available for sale.......... 50,714,887 51,646,730 51,646,730
------------ ------------ ------------
Total fixed
maturities................ 142,694,009 147,004,570 143,625,852
------------ ------------ ------------
Equity Securities:
Preferred stocks
Public utilities............... 562,500 598,750 598,750
Banks.......................... 625,000 646,875 646,875
Industrial and
miscellaneous ................ 1,126,500 1,093,125 1,093,125
------------ ------------ ------------
Total preferred stocks...... 2,314,000 2,338,750 2,338,750
------------ ------------ ------------
Common stocks
Public utilities............... 131,516 121,250 121,250
Banks.......................... 53,525 358,628 358,628
Industrial and
miscellaneous................. 455,446 445,250 445,250
------------ ------------ ------------
Total common stocks.......... 640,487 925,128 925,128
------------ ------------ ------------
Total equity securities..... 2,954,487 3,263,878 3,263,878
------------ ------------ ------------
Short-term investments........... 14,498,579 14,498,579 14,498,579
------------ ------------ ------------
Total investments.............. $160,147,075 $164,767,027 $161,388,309
============ ============ ============
-34-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Condensed Balance Sheets
($ in thousands)
December 31, 1995 and 1994
ASSETS
1995 1994*
-------- -------
Investment in subsidiaries (equity method) $75,236 $59,346
Short-term investments, at cost,
which approximates market 1,117 373
Cash 147 194
Property and equipment 1,355 1,339
Current income taxes 341 9
Loan costs 280
Other receivables 4
------- -------
Total assets $78,480 $61,261
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
1995 1994
-------- --------
Cash dividends declared to stockholders $ 428 $ 369
Accounts payable and accrued expenses 317 92
Deferred income taxes 250 235
Payable to affiliates 202
Line of credit 5,000
------- -------
Total liabilities 6,197 696
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 4,326,362 and 4,162,770
shares and outstanding 4,261,314
and 4,097,722 shares 4,327 4,163
Additional paid-in capital 35,018 33,459
Net unrealized gains (losses)
on investments 819 (998)
Retained earnings, including equity
in undistributed net income of
subsidiaries ($37,202 and $28,631) 32,939 24,761
Treasury stock at cost (820) (820)
------- -------
Total stockholders' equity 72,283 60,565
------- -------
Total liabilities and
stockholders' equity $78,480 $61,261
======= =======
* Restated
-35-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Condensed Statements of Income
($ in thousands)
Years ended December 31, 1995, 1994 and 1993
1995 1994* 1993
-------- -------- --------
Revenues
Dividends-subsidiary $ 900 $ 900 $ 500
Lease income 491 463 403
Investment income 13 12 23
------- ------ ------
Total revenues 1,404 1,375 926
------- ------ ------
Expenses
Operating expenses 411 418 369
Interest 4 10 307
------- ------ ------
Total expenses 415 428 676
------- ------ ------
Income before income
tax benefit and equity in
undistributed net income
of subsidiaries 989 947 250
Income tax (benefit) (298) 16 (79)
-------- ------ -------
Income before equity in
undistributed net
income of subsidiaries 1,287 931 329
Equity in undistributed net
income of subsidiaries 8,571 4,109 6,053
------- ------ ------
Net income $ 9,858 $5,040 $6,382
======= ====== ======
* Restated
-36-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED INFORMATION OF PARENT COMPANY
Condensed Statements of Cash Flows
($ in thousands)
Years ended December 31, 1995, 1994 and 1993
1995 1994* 1993
-------- -------- --------
Cash flows from operating activities:
Net income $ 9,858 $ 5,040 $ 6,382
Adjustments to reconcile net
income to net cash provided by
operating activities:
Equity in undistributed net
income of subsidiaries (8,571) (4,109) (6,053)
Increase (decrease) in accounts
payable and accrued expenses 225 22 3
Depreciation and amortization 264 257 222
Increase in deferred income tax 15 21 46
Increase in current
income tax receivable (332) (2) ---
------- ------- -------
Increase in other receivables (284) --- ---
Net adjustments (8,683) (3,811) (5,782)
------- ------- -------
Net cash provided by
operating activities 1,175 1,229 600
------- ------- -------
Cash flows from investing activities:
Net sales (purchases) of short-term
investments (744) 447 (820)
Net purchase of property and equipment (279) (110) (449)
Capital contribution to subsidiaries --- --- (9,500)
Net purchases of long-term investments --- (200) ---
Acquisition of Delaware American (5,300) --- ---
------- ------- -------
Net cash provided by (used in)
investing activities (6,323) 137 (10,769)
------- ------- -------
Cash flows from financing activities:
Short-term bank borrowings --- --- ---
Repayment of short-term bank
borrowings --- --- (4,500)
Cash dividends paid (1,622) (1,433) (1,011)
Issuance of common stock 125 16,369
Purchase of treasury stock 1,723 --- (820)
Line of credit 5,000 --- ---
------- ------- -------
Net cash provided by (used in)
financing activities 5,101 (1,308) 10,038
------- ------- -------
Net change in cash (47) 58 (131)
Cash beginning 194 136 267
------- ------- -------
Cash ending $ 147 $ 194 $ 136
======= ======= =======
* Restated
-37-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Amortization
Net of Deferred
Net Net Losses Policy Other Net
Earned Investment and Loss Acquisition Underwriting Premiums
Segment Premiums Income Expenses Costs Expenses Written
------- -------- ---------- -------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Year Ended
December 31, 1995
- -----------------
Property and casualty $86,277,852 $ 9,256,960 $55,407,254 $14,412,000 $13,049,188 $91,671,128
Parent --- 12,924 --- --- --- ---
----------- ----------- ----------- ----------- ----------- -----------
$86,277,852 $ 9,269,884 $55,407,254 $14,412,000 $13,049,188 $91,671,128
=========== =========== =========== =========== =========== ===========
Year Ended
December 31, 1994*
- ------------------
Property and casualty $77,232,889 $ 7,765,950 $52,857,302 $12,055,000 $12,278,473 $79,233,963
Parent --- 12,214 --- --- --- ---
----------- ----------- ----------- ----------- ----------- -----------
$77,232,889 $ 7,778,164 $52,857,302 $12,055,000 $12,278,473 $79,233,963
=========== =========== =========== =========== =========== ===========
Year Ended
December 31, 1993
- -----------------
Property and casualty $69,415,874 $ 6,455,071 $46,714,826 $11,475,000 $ 9,545,102 $75,594,469
Parent --- 23,283 --- --- --- ---
----------- ----------- ----------- ----------- ----------- -----------
$69,415,874 $ 6,478,354 $46,714,826 $11,475,000 $ 9,545,102 $75,594,469
=========== =========== =========== =========== =========== ===========
</TABLE>
* Restated
-38-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
At December 31,
--------------------------------------------------------
Deferred Liability Other Policy
Policy for Losses Claims and
Acquisition and Loss Unearned Benefits
Segment Costs Expenses Premiums Payable
------- ----------- ---------- -------- -----------
1995
----
Property and casualty $ 6,902,218 $97,733,851 $54,377,239 $ ---
1994*
-----
Property and casualty $ 5,551,869 $87,743,937 $46,755,095 $ ---
* Restated
-39-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
Ceded Assumed Percentage
Gross To Other From Other Net Assumed
Amount Companies Companies Amount to Net
------ --------- --------- ------ ------
Year Ended
December 31, 1995
- -----------------
Property and
casualty premiums $40,552,497 $29,099,448 $74,824,803 $86,277,852 87%
=========== =========== =========== =========== ====
Year Ended
December 31, 1994*
- ------------------
Property and
casualty premiums $35,275,866 $24,365,441 $66,322,464 $77,232,889 86%
=========== =========== =========== =========== ====
Year Ended
December 31, 1993
- -----------------
Property and
casualty premiums $27,954,300 $21,447,088 $62,908,662 $69,415,874 91%
=========== =========== =========== =========== ====
* Restated
-40-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE VI - SUPPLEMENTARY INSURANCE INFORMATION
CONCERNING PROPERTY AND CASUALTY SUBSIDIARIES
Discount,
Deferred Liability if any,
Policy for Losses Deducted
Acquisition and Loss From Unearned
Costs Expenses Reserves Premiums
----------- ----------- ----------- -----------
At December 31,
1995 $ 6,902,218 $97,733,851 $ --- $54,377,239
=========== =========== =========== ===========
1994* $ 5,551,869 $87,743,937 $ --- $46,755,095
=========== =========== =========== ===========
* Restated
-41-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE VI - SUPPLEMENTARY INSURANCE INFORMATION
CONCERNING PROPERTY AND CASUALTY SUBSIDIARIES
<TABLE>
<CAPTION>
Losses and Loss
Expenses Related to Amortization
---------------------- of Deferred Net
Net (1) (2) Policy Paid Losses Net
Earned Investment Current Prior Acquisition and Loss Premiums
Premiums Income Year Years Costs Expenses Written
-------- ---------- ------- --------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended
December 31, 1995 $86,277,852 $ 9,256,960 $58,354,254 $(2,947,000) $14,412,000 $47,943,360 $91,671,128
=========== =========== =========== ============ =========== =========== ===========
Year Ended
December 31, 1994* $77,232,889 $ 7,765,950 $55,941,502 $(3,084,000) $12,055,000 $48,248,316 $79,233,963
=========== =========== =========== ============ =========== =========== ===========
Year Ended
December 31, 1993 $69,415,874 $ 6,455,071 $45,451,826 $ 1,263,000 $11,475,000 $37,865,913 $75,594,469
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
* Restated
-42-
<PAGE>
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit No. Description of Exhibits Reference
- ----------- ----------------------- ---------
(3)(i) Certificate of Incorporation of (a)
Registrant
(3)(ii) Amended and Restated By-laws of (e)
Registrant
(4) Form of Registrant's Common Stock (a)
Certificate
Management Contracts and Compensatory Plans or Arrangements
(10)(A) Donegal Mutual Insurance Company (a)
Money Purchase Pension Plan and
Trust dated March 12, 1985
(10)(B) Donegal Mutual Insurance Company (a)
Profit Sharing Plan and Trust
dated March 12, 1985
(10)(C) Donegal Group Inc. Key Executive (b)
Incentive Bonus Plan dated
September 29, 1986
(10)(D) Donegal Group Inc. Employee Stock (b)
Purchase Plan, as amended
(10)(E) Donegal Group Inc. Equity Incentive (b)
Plan, as amended
(10)(F) Donegal Group Inc. 1996 Equity filed herewith
Incentive Plan
Other Material Contracts
(10)(G) Tax Sharing Agreement dated (a)
September 29, 1986 between Donegal
Group Inc. and Atlantic States
Insurance Company
(10)(H) Services Allocation Agreement dated (a)
September 29, 1986 between Donegal
Mutual Insurance Company, Donegal
Group Inc. and Atlantic States
Insurance Company
-43-
<PAGE>
(10)(I) Proportional Reinsurance Agreement (a)
dated September 29, 1986 between
Donegal Mutual Insurance Company
and Atlantic States Insurance Company
(10)(J) Amendment dated October 1, 1988 to (c)
Proportional Reinsurance Agreement
between Donegal Mutual Insurance Company
and Atlantic States Insurance Company
(10)(K) Multi-Line Excess of Loss Reinsurance (e)
Agreement effective January 1, 1993
between Donegal Mutual Insurance Company,
Southern Insurance Company of Virginia,
Atlantic States Insurance Company and
Pioneer Mutual Insurance Company, and
Christiana General Insurance Corporation
of New York, Cologne Reinsurance Company
of America, Continental Casualty Company,
Employers Reinsurance Corporation and
Munich American Reinsurance Company
(10)(L) Amendment dated July 16, 1992 to Propor- (d)
tional Reinsurance Agreement between
Donegal Mutual Insurance Company and
Atlantic States Insurance Company
(10)(M) Amendment dated as of December 21, 1995 (f)
to Proportional Reinsurance Agreement
between Donegal Mutual Insurance Company
and Atlantic States Insurance Company
(10)(N) Credit Agreement dated as of December 29, (f)
1995 between Donegal Group Inc. and Fleet
National Bank of Connecticut
(10)(O) Stock Purchase Agreement dated as of (f)
December 21, 1995 between Donegal Mutual
Insurance Company and Donegal Group Inc.
(10)(P) Donegal Group Inc. 1996 Employee Stock (g)
Purchase Plan.
(13) 1995 Annual Report to Stockholders filed herewith
(electronic filing contains only
those portions incorporated by
reference into this Form 10-K
report.)
(20) Proxy Statement relating to the Annual filed herewith
Meeting of Stockholders to be held on
April 18, 1996
(21) Subsidiaries of Registrant filed herewith
-44-
<PAGE>
(23) Consent of Independent Auditors filed herewith
(27) Financial Data Schedule filed herewith
(28)(A) Analysis of Losses and Loss P
Expenses -- Schedule P of the 1995
Annual Statement of Donegal Mutual
Insurance Company
(28)(B) Analysis of Losses and Loss P
Expenses -- Schedule P of the 1995
Annual Statement of Atlantic
States Insurance Company
(28)(C) Analysis of Losses and Loss Expenses -- P
Schedule P of the 1995 Annual Statement
of Southern Insurance Company of Virginia
(28)(D) Analysis Losses and Loss Expenses -- P
Schedule P of the 1995 Annual
Statement of Delaware American
Insurance Company
- ------------------
(a) Such exhibit is hereby incorporated by reference to the like-
described exhibits in Registrant's Form S-1 Registration
Statement No. 33-8533 declared effective October 29, 1986.
(b) Such exhibit is hereby incorporated by reference to the
like-described exhibits in Registrant's Form 10-K Report for the
year ended December 31, 1986.
(c) Such exhibit is hereby incorporated by reference to the
like-described exhibit in Registrant's Form 10-K Report for the
year ended December 31, 1988.
(d) Such exhibit is hereby incorporated by reference to the
like-described exhibit in Registrant's Form 10-K Report for the
year ended December 31, 1992.
(e) Such exhibit is hereby incorporated by reference to the like-
described exhibit in Registrant's Form S-2 Registration
Statement No. 33-67346 declared effective September 29, 1993.
(f) Such exhibit is hereby incorporated by reference to the
like-described exhibit in Registrant's Form 8-K Report dated
December 21, 1995.
(g) Such exhibit is hereby incorporated by reference to the like-
described exhibit in Registrant's Form S-8 Registration
Statement No. 333-1287 filed on February 29, 1996.
-45-
DONEGAL GROUP INC.
1996 EQUITY INCENTIVE PLAN
1. Purpose. The purpose of the Donegal Group Inc. 1996 Equity Incentive
Plan (the "Plan") is to further the growth, development and financial success of
Donegal Group Inc. (the "Company"), its parent and the subsidiaries of the
Company and its parent by providing additional incentives to those officers and
key employees who are responsible for the management of the business affairs of
the Company, its parent and/or subsidiaries of the Company or its parent, which
will enable them to participate directly in the growth of the capital stock of
the Company. The Company intends that the Plan will facilitate securing,
retaining and motivating management employees of high caliber and potential. To
accomplish these purposes, the Plan provides a means whereby management
employees may receive stock options ("Options") to purchase the Company's Common
Stock, $1.00 par value (the "Common Stock").
2. Administration.
(a) Composition of the Committee. The Plan shall be
administered by a committee of at least three persons (the "Committee")
appointed by the Company's Board of Directors. No member of the Committee shall
have been, or shall be, granted Options under the Plan, or options or other
awards under any other plan of the Company or any of its affiliates, in the year
preceding his appointment or while serving on the Committee, except for
participation in any plan in which participation would be permitted in
accordance with the applicable rules of the Securities and Exchange Commission
relating to disinterested administration under the Securities Exchange Act of
1934 (the "Exchange Act"). Subject to the foregoing, from time to time the Board
of Directors may increase the size of the Committee and appoint additional
members thereof, remove members (with or without cause) and appoint new members
in substitution therefor, fill vacancies, however caused, or remove all members
of the Committee and thereafter directly administer the Plan.
(b) Authority of the Committee. The Committee shall have full
and final authority, in its sole discretion, to interpret the provisions of the
Plan and to decide all questions of fact arising in its application; to
determine the employees to whom Options shall be granted and the type, amount,
size and terms of each such grant; to determine the time when Options shall be
granted; and to make all other determinations necessary or advisable for the
administration of the Plan. All decisions, determinations and interpretations of
the Committee shall be final and binding on all optionees and all other holders
of Options granted under the Plan.
3. Stock Subject to the Plan. Subject to Section 16 hereof, the shares
that may be issued under the Plan shall not exceed in the aggregate 345,850
shares of Common Stock. Such shares may be authorized and unissued shares or
shares issued and subsequently reacquired by the Company. Except as otherwise
provided herein, any shares subject to an Option that for any reason expires or
is terminated unexercised as to such shares shall again be available under the
Plan.
<PAGE>
4. Eligibility To Receive Options. Persons eligible to receive Options
under the Plan shall be limited to those officers and other key employees of the
Company, its parent and any subsidiary of the Company or its parent (as defined
in Section 425 of the Internal Revenue Code of 1986 (the "Code") or any
amendment or substitute thereto) who are in positions in which their decisions,
actions and counsel significantly impact upon the profitability and success of
the Company, its parent or any subsidiary of the Company or its parent.
Directors of the Company who are not also officers or employees of the Company,
its parent or any subsidiary of the Company or its parent shall not be eligible
to participate in the Plan.
5. Types of Options. Grants may be made at any time and from time to
time by the Committee in the form of stock options to purchase shares of Common
Stock. Options granted hereunder may be Options that are intended to qualify as
incentive stock options within the meaning of Section 422 of the Code or any
amendment or substitute thereto ("Incentive Stock Options") or Options that are
not intended to so qualify ("Nonqualified Stock Options").
6. Option Agreements. Options for the purchase of Common Stock shall be
evidenced by written agreements in such form not inconsistent with the Plan as
the Committee shall approve from time to time. The Options granted hereunder may
be evidenced by a single agreement or by multiple agreements, as determined by
the Committee in its sole discretion. Each option agreement shall contain in
substance the following terms and conditions:
(a) Type of Option. Each option agreement shall identify the
Options represented thereby either as Incentive Stock Options or Nonqualified
Stock Options, as the case may be.
(b) Option Price. Each option agreement shall set forth the
purchase price of the Common Stock purchasable upon the exercise of the Option
evidenced thereby. Subject to the limitation set forth in Section 6(d)(ii) of
the Plan, the purchase price of the Common Stock subject to an Incentive Stock
Option shall be not less than 100% of the fair market value of such stock on the
date the Option is granted, as determined by the Committee, but in no event less
than the par value of such stock. The purchase price of the Common Stock subject
to a Nonqualified Stock Option shall be not less than 100% of the fair market
value of such stock on the date the Option is granted, as determined by the
Committee. For this purpose, fair market value on any date shall mean the
closing price of the Common Stock, as reported in The Wall Street Journal (or if
not so reported, as otherwise reported by the National Association of Securities
Dealers Automated Quotation ("Nasdaq") System), or if the Common Stock is not
reported by Nasdaq, the fair market value shall be as determined by the
Committee pursuant to Section 422 of the Code.
(c) Exercise Term. Each option agreement shall state the
period or periods of time within which the Option may be exercised, in whole or
in part, as determined by the Committee, provided that no Option shall be
exercisable after ten years from the date of grant thereof. The Committee shall
have the power to permit an acceleration of previously established exercise
terms, subject to the requirements set forth herein, upon such circumstances and
subject to such terms and conditions as the Committee deems appropriate.
-2-
<PAGE>
(d) Incentive Stock Options. In the case of an Incentive Stock
Option, each option agreement shall contain such other terms, conditions and
provisions as the Committee determines to be necessary or desirable in order to
qualify such Option as a tax-favored Option (within the meaning of Section 422
of the Code or any amendment or substitute thereto or regulation thereunder)
including without limitation, each of the following, except that any of these
provisions may be omitted or modified if it is no longer required in order to
have an Option qualify as a tax-favored Option within the meaning of Section 422
of the Code or any substitute therefor:
(i) The aggregate fair market value (determined as of the date
the Option is granted) of the Common Stock with respect to which Incentive Stock
Options are first exercisable by any employee during any calendar year (under
all plans of the Company) shall not exceed $100,000.
(ii) No Incentive Stock Options shall be granted to any
employee if at the time the Option is granted to the individual who owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or its subsidiaries unless at the time such Option is
granted the Option price is at least 110% of the fair market value of the stock
subject to the Option and, by its terms, the Option is not exercisable after the
expiration of five years from the date of grant.
(iii) No Incentive Stock Options shall be exercisable more
than three months (or one year, in the case of an employee who dies or becomes
disabled within the meaning of Section 22(e)(3) of the Code or any substitute
therefor) after termination of employment.
(e) Substitution of Options. Options may be granted under the
Plan from time to time in substitution for stock options held by employees of
other corporations who are about to become, and who do concurrently with the
grant of such options become, employees of the Company, its parent or a
subsidiary of the Company or its parent as a result of a merger or consolidation
of the employing corporation with the Company, its parent or a subsidiary of the
Company or its parent, or the acquisition by the Company, its parent or a
subsidiary of the Company or its parent of the assets of the employing
corporation, or the acquisition by the Company, its parent or a subsidiary of
the Company or its parent of stock of the employing corporation. The terms and
conditions of the substitute options so granted may vary from the terms and
conditions set forth in this Section 6 to such extent as the Committee at the
time of grant may deem appropriate to conform, in whole or in part, to the
provisions of the stock options in substitution for which they are granted.
7. Date of Grant. The date on which an Option shall be deemed to have
been granted under the Plan shall be the date of the Committee's authorization
of the Option or such later date as may be determined by the Committee at the
time the Option is authorized. Notice of the determination shall be given to
each individual to whom an Option is so granted within a reasonable time after
the date of such grant.
-3-
<PAGE>
8. Exercise and Payment for Shares. Options may be exercised in whole
or in part, from time to time, by giving written notice of exercise to the
Secretary of the Company, specifying the number of shares to be purchased,
except that no Option may be exercised in whole or in part during the first six
months after such Option is granted unless expressly permitted by the Committee.
The purchase price of the shares with respect to which an Option is exercised
shall be payable in full with the notice of exercise in cash, Common Stock at
fair market value, or a combination thereof, as the Committee may determine from
time to time and subject to such terms and conditions as may be prescribed by
the Committee for such purpose. The Committee may also, in its discretion and
subject to prior notification to the Company by an optionee, permit an optionee
to enter into an agreement with the Company's transfer agent or a brokerage firm
of national standing whereby the optionee will simultaneously exercise the
option and sell the shares acquired thereby through the Company's transfer agent
or such a brokerage firm and either the Company's transfer agent or the
brokerage firm executing the sale will remit to the Company from the proceeds of
sale the exercise price of the shares as to which the option has been exercised.
9. Rights upon Termination of Employment. In the event that an optionee
ceases to be an employee of the Company, its parent or any subsidiary of the
Company or its parent for any reason other than death, retirement, as
hereinafter defined, or disability (within the meaning of Section 22(e)(3) of
the Code or any substitute therefor), the optionee shall have the right to
exercise the Option during its term within a period of three months after such
termination to the extent that the Option was exercisable at the time of
termination, or within such other period, and subject to such terms and
conditions as may be specified by the Committee. In the event that an optionee
dies, retires or becomes disabled prior to the expiration of his Option and
without having fully exercised his Option, the optionee or his successor shall
have the right to exercise the Option during its term within a period of one
year after termination of employment due to death, retirement or disability to
the extent that the Option was exercisable at the time of termination, or within
such other period, and subject to such terms and conditions as may be specified
by the Committee. As used in this Section 9, "retirement" means a termination of
employment by reason of an optionee's retirement at or after his earliest
permissible retirement date pursuant to and in accordance with his employer's
regular retirement plan or personnel practices. Notwithstanding the provisions
of Section 6(d)(iii) hereof, if the term of an Incentive Stock Option continues
for more than three months after termination of employment due to retirement or
more than one year after termination of employment due to death or disability,
such Option shall thereupon lose its status as an Incentive Stock Option and
shall be treated as a Nonqualified Stock Option.
10. General Restrictions. Each Option granted under the Plan shall be
subject to the requirement that if at any time the Committee shall determine
that (i) the listing, registration or qualification of the shares of Common
Stock subject or related thereto upon any securities exchange or under any state
or federal law, or (ii) the consent or approval of any government regulatory
body, or (iii) an agreement by the recipient of an Option with respect to the
disposition of shares of Common Stock is necessary or desirable as a condition
of or in connection with the granting of such Option or the issuance or purchase
of shares of Common Stock thereunder, such Option shall not be consummated in
whole or in part unless such listing, registration, qualification,
-4-
<PAGE>
consent, approval or agreement shall have been effected or obtained free of any
conditions not acceptable to the Committee.
11. Rights of a Stockholder. The recipient of any Option under the
Plan, unless otherwise provided by the Plan, shall have no rights as a
stockholder unless and until certificates for shares of Common Stock are issued
and delivered to him.
12. Right to Terminate Employment. Nothing contained in the Plan or in
any option agreement entered into pursuant to the Plan shall confer upon any
optionee the right to continue in the employment of the Company, its parent or
any subsidiary of the Company or its parent or affect any right that the
Company, its parent or any subsidiary of the Company or its parent may have to
terminate the employment of such optionee.
13. Withholding. Whenever the Company proposes or is required to issue
or transfer shares of Common Stock under the Plan, the Company shall have the
right to require the recipient to remit to the Company an amount sufficient to
satisfy any federal, state or local withholding tax requirements prior to the
delivery of any certificate or certificates for such shares. If and to the
extent authorized by the Committee, in its sole discretion, an optionee may make
an election, by means of a form of election to be prescribed by the Committee,
to have shares of Common Stock that are acquired upon exercise of an Option
withheld by the Company or to tender other shares of Common Stock or other
securities of the Company owned by the optionee to the Company at the time of
exercise of an Option to pay the amount of tax that would otherwise be required
by law to be withheld by the Company as a result of any exercise of an Option.
Any such election shall be irrevocable and shall be subject to termination by
the Committee, in its sole discretion, at any time. Any securities so withheld
or tendered will be valued by the Committee as of the date of exercise.
14. Non-Assignability. No Option under the Plan shall be assignable or
transferable by the recipient thereof except by will or by the laws of descent
and distribution or by such other means as the Committee may approve. During the
life of the recipient, such Option shall be exercisable only by such person or
by such person's guardian or legal representative.
15. Non-Uniform Determinations. The Committee's determinations under
the Plan (including without limitation determinations of the persons to receive
Options, the form, amount and timing of such grants, the terms and provisions of
Options, and the agreements evidencing same) need not be uniform and may be made
selectively among persons who receive, or are eligible to receive, grants of
Options under the Plan whether or not such persons are similarly situated.
16. Adjustments.
(a) Changes in Capitalization. Subject to any required action
by the stockholders of the Company, the number of shares of Common Stock covered
by each outstanding Option and the number of shares of Common Stock that have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon
-5-
<PAGE>
cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the
Committee, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, all outstanding Options will
terminate immediately prior to the consummation of such proposed action, unless
otherwise provided by the Committee. The Committee may, in the exercise of its
sole discretion in such instances, declare that any Option shall terminate as of
a date fixed by the Committee and give each Option holder the right to exercise
his Option as to all or any part of the shares of Common Stock covered by the
Option, including shares as to which the Option would not otherwise be
exercisable.
(c) Sale or Merger. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, the Committee, in the exercise of its sole
discretion, may take such action as it deems desirable, including, but not
limited to: (i) causing an Option to be assumed or an equivalent option to be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation, (ii) providing that each Option holder shall have the
right to exercise his Option as to all of the shares of Common Stock covered by
the Option, including shares as to which the Option would not otherwise be
exercisable, or (iii) declare that an Option shall terminate at a date fixed by
the Committee provided that the Option holder is given notice and opportunity to
exercise his Option prior to such date.
17. Amendment. The Committee may terminate or amend the Plan at any
time, except that without stockholder approval the Committee may not (i)
materially increase the maximum number of shares that may be issued under the
Plan (other than increases pursuant to Section 16 hereof), (ii) materially
increase the benefits accruing to participants under the Plan or (iii)
materially modify the requirements as to eligibility for participation in the
Plan. The termination or any modification or amendment of the Plan shall not,
without the consent of a participant, affect his rights under an Option
previously granted.
18. Reservation of Shares. The Company, during the term of the Plan,
will at all times reserve and keep available such number of shares as shall be
sufficient to satisfy the require- ments of the Plan. Inability of the Company
to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
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<PAGE>
issuance and sale of any shares hereunder, shall relieve the Company of any
liability for the failure to issue or sell such shares as to which such
requisite authority shall not have been obtained.
19. Effect on Other Plans. Participation in the Plan shall not affect
an employee's eligibility to participate in any other benefit or incentive plan
of the Company, its parent or any subsidiary of the Company or its parent. Any
Options granted pursuant to the Plan shall not be used in determining the
benefits provided under any other plan of the Company, its parent or any
subsidiary of the Company or its parent unless specifically provided.
20. Duration of the Plan. The Plan shall remain in effect until all
Options granted under the Plan have been satisfied by the issuance of shares,
but no Option shall be granted more than ten years after the earlier of the date
the Plan is adopted by the Company or is approved by the Company's stockholders.
21. Forfeiture for Dishonesty. Notwithstanding anything to the contrary
in the Plan, if the Committee finds, by a majority vote, after full
consideration of the facts presented on behalf of both the Company and any
optionee, that the optionee has been engaged in fraud, embezzlement, theft,
commission of a felony or dishonest conduct in the course of his employment or
retention by the Company, its parent or any subsidiary of the Company or its
parent that damaged the Company, its parent or any subsidiary of the Company or
its parent or that the optionee has disclosed confidential information of the
Company, its parent or any subsidiary of the Company or its parent, the optionee
shall forfeit all unexercised Options and all exercised Options under which the
Company has not yet delivered the certificates. The decision of the Committee in
interpreting and applying the provisions of this Section 21 shall be final. No
decision of the Committee, however, shall affect the finality of the discharge
or termination of such optionee by the Company, its parent or any subsidiary of
the Company or its parent in any manner.
22. No Prohibition on Corporate Action. No provision of the Plan shall
be construed to prevent the Company or any officer or director thereof from
taking any action deemed by the Company or such officer or director to be
appropriate or in the Company's best interest, whether or not such action could
have an adverse effect on the Plan or any Options granted hereunder, and no
optionee or optionee's estate, personal representative or beneficiary shall have
any claim against the Company or any officer or director thereof as a result of
the taking of such action.
23. Indemnification. With respect to the administration of the Plan,
the Company shall indemnify each present and future member of the Committee and
the Board of Directors against, and each member of the Committee and the Board
of Directors shall be entitled without further action on his part to indemnity
from the Company for, all expenses (including the amount of judgments and the
amount of approved settlements made with a view to the curtailment of costs of
litigation, other than amounts paid to the Company itself) reasonably incurred
by him in connection with or arising out of, any action, suit or proceeding in
which he may be involved by reason of his being or having been a member of the
Committee or the Board of Directors, whether or not he continues to be such
member at the time of incurring such expenses; provided, however, that such
indemnity shall not include any expenses incurred by any such member of the
Committee or the Board of Directors (i) in respect of matters as to which he
shall be finally
-7-
<PAGE>
adjudged in any such action, suit or proceeding to have been guilty of gross
negligence or willful misconduct in the performance of his duty as such member
of the Committee or the Board of Directors; or (ii) in respect of any matter in
which any settlement is effected for an amount in excess of the amount approved
by the Company on the advice of its legal counsel; and provided further that no
right of indemnification under the provisions set forth herein shall be
available to or enforceable by any such member of the Committee or the Board of
Directors unless, within 60 days after institution of any such action, suit or
proceeding, he shall have offered the Company in writing the opportunity to
handle and defend same at its own expense. The foregoing right of
indemnification shall inure to the benefit of the heirs, executors or
administrators of each such member of the Committee or the Board of Directors
and shall be in addition to all other rights to which such member may be
entitled as a matter of law, contract or otherwise.
24. Miscellaneous Provisions.
(a) Compliance with Plan Provisions. No optionee or other
person shall have any right with respect to the Plan, the Common Stock reserved
for issuance under the Plan or in any Option until a written option agreement
shall have been executed by the Company and the optionee and all the terms,
conditions and provisions of the Plan and the Option applicable to such optionee
(and each person claiming under or through him) have been met.
(b) Approval of Counsel. In the discretion of the Committee,
no shares of Common Stock, other securities or property of the Company or other
forms of payment shall be issued hereunder with respect to any Option unless
counsel for the Company shall be satisfied that such issuance will be in
compliance with applicable federal, state, local and foreign legal, securities
exchange and other applicable requirements.
(c) Compliance with Rule 16b-3. To the extent that Rule 16b-3
under the Exchange Act applies to Options granted under the Plan, it is the
intent of the Company that the Plan comply in all respects with the requirements
of Rule 16b-3, that any ambiguities or inconsistencies in construction of the
Plan be interpreted to give effect to such intention and that if the Plan shall
not so comply, whether on the date of adoption or by reason of any later
amendment to or interpretation of Rule 16b-3, the provisions of the Plan shall
be deemed to be automatically amended so as to bring them into full compliance
with such rule.
(d) Effects of Acceptance of Option. By accepting any Option
or other benefit under the Plan, each optionee and each person claiming under or
through him shall be conclusively deemed to have indicated his acceptance and
ratification of, and consent to, any action taken under the Plan by the Company,
the Board of Directors and/or the Committee or its delegates.
(e) Construction. The masculine pronoun shall include the
feminine and neuter, and the singular shall include the plural, where the
context so indicates.
25. Stockholder Approval. The exercise of any Option granted under the
Plan shall be subject to the approval of the Plan by the affirmative vote of the
holders of a majority of the
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<PAGE>
outstanding shares of the Common Stock present, or represented, and entitled to
vote at a meeting duly held.
-9-
<PAGE>
EXHIBIT (13)
THE ELECTRONIC VERSION OF THIS EXHIBIT CONTAINS ONLY THOSE PAGES
SPECIFICALLY INCORPORATED BY REFERENCE INTO THE FORM 10-K REPORT.
<PAGE>
Financial Highlights
[Graphic]
The printed document has two bar graphs, side by side and contain plot points as
indicated below:
TOTAL ASSETS BOOK VALUE PER SHARE
in millions in dollars
------------ --------------------
1991 $111,013,993 1991 10.74
1992 $131,135,002 1992 12.18
1993 $169,460,466 1993 14.03
1994 $207,721,362 1994 14.78
1995 $235,704,366 1995 16.96
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994* 1993 1992 1991
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data
Net premiums earned $ 86,277,852 $ 77,232,889 $ 69,415,874 $ 54,630,786 $ 51,718,039
Investment income 9,269,884 7,778,164 6,478,354 6,042,163 5,759,462
Total revenues 97,885,060 86,354,530 77,698,608 62,107,673 58,469,044
Net income 9,857,950 5,039,948 6,382,449 4,948,744 4,529,684
Net income
per common share 2.31 1.20 1.92 1.65 1.52
Balance Sheet Data*
Total assets $235,704,366 $207,721,362 $169,460,466 $131,135,002 $111,013,993
Stockholders' equity 72,282,892 60,565,067 57,345,586 36,417,485 31,960,604
Book value per share 16.96 14.78 14.03 12.18 10.74
</TABLE>
* Restated for acquisition of Delaware American
Donegal Group Inc. is a regional insurance holding company offering property and
casualty insurance in Pennsylvania, Delaware, Maryland, Ohio and Virginia
through its wholly-owned subsidiaries Atlantic States Insurance Company,
Delaware American Insurance Company, and Southern Insurance Company of Virginia;
and through a pooling agreement
1
<PAGE>
Management's Discussion and Analysis of Results of Operation and Financial
Condition
Donegal Group Inc. ("DGI" or the "Company") is a regional insurance holding
company doing business in Pennsylvania, Maryland, Delaware, Virginia and Ohio
through its three wholly owned property-casualty insurance subsidiaries,
Atlantic States Insurance Company ("Atlantic"), Southern Insurance Company of
Virginia ("Southern") and Delaware American Insurance Company ("Delaware"). The
Company's major lines of business in 1995 and their percentage of total net
earned premiums were Automobile Liability (28.2%), Workers' Compensation
(19.1%), Automobile Physical Damage (15.5%), Homeowners (16.4%), and Commercial
Multiple Peril (14.8%). The subsidiaries are subject to regulation by Insurance
Departments in those states in which they operate and undergo periodic
examination by those departments. The subsidiaries 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 59% of the outstanding common shares of the Company as of
December 31, 1995.
Atlantic States participates in an intercompany pooling arrange ment with
the Mutual Company and assumes 60% of the pooled business, 50% prior to January
1, 1993. Southern cedes 50% of its business to the Mutual Company and Delaware
American cedes 70% of its Workers' Compensation business to the Mutual Company.
Because the Mutual Company places substantially all of the business assumed from
Southern and Delaware American 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 and approximately 70% of the Workers' Compensation
business written by Delaware American.
On December 29, 1995, the Company acquired all of the outstanding stock of
Delaware American Insurance Company. This transaction was accounted for as if it
were a "Pooling of Interest," and as such, the Company's financial statements
have been restated to include Delaware as a consolidated subsidiary from January
1, 1994 to the present.
In January 1994, the Company organized a new subsidiary, Atlantic Insurance
Services, Inc. ("AIS"), which began business in that same month. AIS is an
insurance services organization currently providing inspection and policy
auditing information on a fee for service basis to its affiliates and the
insurance industry.
Results of Operation 1995 Compared to 1994
Total revenues for 1995 were $97,885,060 which were $11,530,530, or 13.4%
greater than 1994. Net premiums earned increased to $86,277,852, an increase of
$9,044,963, or 11.7% over 1994. A 12.0% increase in the direct premiums written
by the combined pool of Atlantic States and Donegal Mutual, a 15.1% increase in
the direct premiums written of Southern and a 67.4% increase in the direct
premiums written of Delaware accounted for most of the increase. Premiums earned
in 1994 were offset by additional reinsurance premiums of approximately $1
million which resulted from the reinstatement of catastrophic reinsurance
contracts which were impacted by severe weather which hit the northeast part of
the United States during the first quarter of that year. The increase in the
direct premiums written by the combined pool was distributed among a number of
the major lines,with Commercial Multiple Peril representing the largest increase
for any individual line, with a 28% increase over 1994. The Company posted a
realized gain of $398,587, compared to a realized gain of $34,333 in 1994. Both
gains resulted from normal turnover of the Company's investment portfolio. As of
December 31, 1995, all of the Company's bond portfolio was classified as Class I
(highest quality) by the National Association of Insurance Commis sioners'
Security Valuation Office. Invest ment income increased $1,491,720. An increase
in the average invested assets from $137,514,214 to $153,477,866, and an
increase in the average yield to 6.0% from 5.7% in 1994, accounted for the
increase.
The GAAP combined ratio of insurance operations was 97.3% in 1995, compared
to 101.7% in 1994. The GAAP combined ratio is the sum of the ratios of incurred
losses and loss adjustment expense to premiums earned (loss ratio), underwriting
expenses to premiums earned (expense ratio) and policyholder dividends to
premiums earned (dividend ratio). The loss ratio in 1995 was 64.2% compared to
68.4% in 1994. The total effect of the first quarter storms in 1994 was an
increase in the loss for that year of 2.6%, which would have resulted in a loss
ratio of 65.8% for 1994 net of this effect. The expense ratio for 1995 was
31.8%, compared to 31.5% in 1994 with the dividend ratio going from 1.7% in 1994
to 1.3% in 1995, due to more stringent qualification requirements to earn a
dividend in 1995.
7
7
<PAGE>
Results of Operation 1994 Compared to 1993
Total revenues for 1994 were $86,354,530 which were $8,655,922 or 11.4% greater
than 1993. Net premiums earned increased to $77,232,889, an increase of
$7,817,015, or 11.3% over 1993. The acquisition of Delaware in December 1995,
which was accounted for as a pooling of interest, resulted in Delaware being
included in the Company's financial statements on a consolidated basis after
January 1, 1994. The inclusion of Delaware resulted in additional premiums
earned in 1994 of $4,035,021 and additional revenues of $4,612,951 over 1993. An
8.1% increase in the direct premiums written by the combined pool of Atlantic
States and Donegal Mutual and a 7.6% increase in the direct premiums written of
Southern accounted for the rest of the increase offset by additional reinsurance
premiums of approximately $1 million which resulted from the reinstatement of
catastrophic reinsurance contracts which were impacted by severe weather which
hit the northeast part of the United States during the first quarter of 1994.
The additional reinstatement premiums would have resulted in an additional 1.4%
increase to net premiums earned if they had not been incurred. The increase in
the direct premiums written by the combined pool was distributed among a number
of the major lines, with Commercial Multiple Peril representing the largest
increase for any individual line, with a 17% increase over 1993. Workers'
Compensation, which had shown the largest increases in the past few years,
slowed to a 4.3% growth rate in 1994. The Company posted a realized gain of
$34,333 with Delaware providing $108,447 of the total. The remaining realized
loss of $74,114 in 1994, compared to a realized gain of $845,156 in 1993,
resulted from normal turnover of the Company's investment portfolio. As of
December 31, 1994, all of the Company's bond portfolio was classified as Class I
(highest quality) by the National Association of Insurance Commissioners'
Security Valuation Office. Investment income increased $1,299,810, of which
$428,711 resulted from inclusion of Delaware. An increase in the average
invested assets, excluding Delaware, from $107,715,128 to $128,340,631,
partially offset by a decrease in the average yield to 5.7% from 6.0% in 1993,
accounted for the remaining increase.
The GAAP combined ratio of insurance operations was 101.7% in 1994,
compared to 99.1% in 1993. The inclusion of Delaware increased this ratio by
2.1%. The GAAP combined ratio is the sum of the ratios of incurred losses and
loss adjustment expense to premiums earned (loss ratio), underwriting expenses
to premiums earned (expense ratio) and policyholder dividends to premiums earned
(dividend ratio). The loss ratio in 1994, excluding Delaware, was 67.8%,
compared to 67.3% in 1993. Excluding the effect of acquiring Delaware, the total
effect of the first quarter storms was an increase in the loss ratio of 2.6%,
which would have resulted in a loss ratio of 65.8% for 1994 net of this effect.
The expense ratio for 1994 before including Delaware was 30.0% compared to 30.3%
in 1993, with the dividend ratio going from 1.5% in 1993 to 1.8% in 1994.
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 December 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.
As of December 31, 1995, pursuant to a credit agreement dated December 29,
1995, with Fleet National Bank of Con necticut, the Company had unsecured
borrowings of $5 million. Such borrowings were made in connection with the
acquisition of Delaware American Insurance Company. Per the terms of the credit
agreement, the Company may borrow up to $20 million at interest rates equal to
the bank's then current prime rate or the then current London interbank
Eurodollar bank rate plus 1.70%. At December 31, 1995, the interest rate on the
outstanding balance was 7.2%. In addition, the Company will pay a non-use fee at
a rate of 3/10 of 1% per annum on the average daily unused portion of the Bank's
commitment. On each December 29, commencing December 29, 1998, the credit line
will be reduced by $4 million. Any outstanding loan in excess of the remaining
credit line, after such reduction, will then be payable.
8
<PAGE>
The Company's principal source of cash with which to pay stockholder
dividends is dividends from Atlantic States, Southern and Delaware, 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. Atlantic States, Southern and Delaware are subject to
Risk Based Capital (RBC) require ments effective for 1994. At December 31, 1995,
all three Com panies' capital was substantially above the RBC requirements. At
December 31, 1995, amounts avail able for distribution as dividends to Donegal
Group without prior approval of the insurance regulatory authorities are
$5,224,905 from Atlantic States, $638,042 from Southern and $569,563 from
Delaware.
Net unrealized gains (losses) resulting from fluctuations in the fair value
of investments reported in the balance sheet at fair value were $819,213 (net of
applicable federal income tax) at December 31, 1995, and ($997,638) (net of
applicable federal income tax) at December 31, 1994.
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 the
Company'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, as described in Note 2 of the financial state ments, and with a
number of other major authorized reinsurers, as described in Note 8 of the
financial statements.
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
Stock-Based Compensation
The Company has not elected early adoption of Statement of Financial Accounting
Standards No. 123 (SFASNo. 123), "Accounting for Stock-Based Compensation."
SFASNo. 123 becomes effective January 1, 1996, and will not have a material
effect on the Company's financial position or results of operations. Upon
adoption of SFASNo. 123, the Company will continue to measure compensation
expense for its stock-based employee compensation plans using the intrinsic
value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and will provide pro forma disclosures of net income and earn ings
per share as if the fair value-based method prescribed by SFAS No. 123 had been
applied in measuring compensation expense.
Impairment of Long-Lived Assets
The Company will adopt Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of" (SFAS No. 121) effective January 1, 1996. SFAS No. 121 provides
guidance for recognition and measurement of impairment of long-lived assets,
certain identifiable intangibles and goodwill related both to assets to be held
and used and assets to be disposed of.
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, an entity
should estimate the future cash flows expected to result from the use of the
asset and its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Other wise, an impairment loss is
not recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use should be based
on the fair value of the asset.
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell.
Management does not expect the adoption of SFAS No. 121 to have a material
effect on its financial condition or results of operation.
9
<PAGE>
Donegal Group Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1995 1994*
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Investments
Fixed maturities
Held to maturity, at amortized cost (fair value $95,357,840 and $67,284,194) $ 91,979,122 $ 70,157,631
Available for sale, at fair value (amortized cost
$50,714,887 and $44,447,923) 51,646,730 43,722,321
Equity securities, available for sale, at fair value (cost $2,954,487 and $4,897,115) 3,263,878 4,201,865
Short-term investments, at cost, which approximates fair value 14,498,579 27,485,607
- -----------------------------------------------------------------------------------------------------------------------------------
Total investments 161,388,309 145,567,424
Cash 1,747,572 1,482,951
Accrued investment income 2,414,095 2,031,879
Premiums receivable 11,790,396 9,155,306
Reinsurance receivable 27,693,106 25,167,086
Deferred policy acquisition costs 6,902,218 5,551,869
Federal income taxes receivable 551,990 --
Deferred tax asset, net 3,411,544 3,734,826
Prepaid reinsurance premiums 13,055,893 10,827,025
Property and equipment, net 2,282,570 2,293,084
Accounts receivable--securities 2,702,895 240,155
Due from affiliate 546,746 591,707
Other 1,217,032 1,078,050
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 235,704,366 $ 207,721,362
===================================================================================================================================
Liabilities and Stockholders' Equity
Liabilities
Losses and loss expenses $ 97,733,851 $ 87,743,937
Unearned premiums 54,377,239 46,755,095
Accrued expenses 2,373,142 1,544,017
Current income taxes -- 123,687
Reinsurance balances payable 634,731 716,191
Cash dividend declared to stockholders 427,694 369,335
Line of credit 5,000,000 --
Accounts payable--securities 2,491,148 4,213,830
Other 181,426 187,960
Due to affiliate--Delaware American acquisition 202,243 5,502,243
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 163,421,474 147,156,295
- -----------------------------------------------------------------------------------------------------------------------------------
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 4,326,362 and 4,162,770 shares and outstanding
4,261,314 and 4,097,722 shares 4,326,362 4,162,770
Additional paid-in capital 35,017,965 33,458,543
Net unrealized gains (losses) on investments available for sale, net of taxes 819,213 (997,638)
Retained earnings 32,939,132 24,761,172
Treasury stock, at cost (819,780) (819,780)
- -----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 72,282,892 60,565,067
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 235,704,366 $ 207,721,362
===================================================================================================================================
</TABLE>
*Restated
See accompanying notes to consolidated financial statements.
10
<PAGE>
Donegal Group Inc.
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994* 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Premiums earned $115,377,300 $101,598,330 $ 90,862,962
Premiums ceded 29,099,448 24,365,441 21,447,088
- ------------------------------------------------------------------------------------------------------------------------------------
Net premiums earned 86,277,852 77,232,889 69,415,874
Investment income, net of investment expenses 9,269,884 7,778,164 6,478,354
Installment payment fees 670,971 611,296 556,280
Lease income 491,115 462,587 402,944
Service fees 776,651 235,261 --
Net realized investment gains 398,587 34,333 845,156
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 97,885,060 86,354,530 77,698,608
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses
Losses and loss expenses 72,545,223 70,026,135 65,078,008
Reinsurance recoveries 17,137,969 17,168,633 18,363,182
- ------------------------------------------------------------------------------------------------------------------------------------
Net losses and loss expenses 55,407,254 52,857,502 46,714,826
Amortization of deferred policy acquisition costs 14,412,000 12,055,000 11,475,000
Other underwriting expenses 13,049,188 12,278,473 9,545,102
Policy dividends 1,106,357 1,349,079 1,037,878
Other 1,256,839 702,038 368,684
Interest 7,604 9,459 36,967
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 85,239,242 79,251,551 69,178,457
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 12,645,818 7,102,979 8,520,151
Income taxes 2,787,868 2,063,031 2,137,702
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 9,857,950 $ 5,039,948 $ 6,382,449
====================================================================================================================================
Net income per common share $ 2.31 $ 1.20 $ 1.92
====================================================================================================================================
</TABLE>
*Restated
See accompanying notes to consolidated financial statements.
11
<PAGE>
Donegal Group Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Net Unrealized
Gains (Losses)
Preferred Stock Common Stock Additional on Investments Total
--------------- --------------------- Paid-in Available Retained Treasury Stockholders'
Shares Amount Shares Amount Capital for Sale Earnings Stock Equity
------ ------- --------- ----------- ----------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1, 1993 0 $ 0 2,988,921 $2,988,921 $17,091,252 $ 134,856 $16,202,456 $ 0 $36,417,485
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 1,164,160 1,164,160 15,204,793 16,368,953
Net income 6,382,449 6,382,449
Change in unrealized gains (losses)
on investments (Net of applicable
federal income taxes) 125,450 125,450
Purchase of 65,048 shares of
treasury stock (819,780) (819,780)
Cash dividends
$.32 per share (1,128,971) (1,128,971)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1993 0 $ 0 4,153,081 $4,153,081 $32,296,045 $ 260,306 $21,455,934 $(819,780) $57,345,586
Restatement for Delaware American 1,046,866 (259,484) 787,382
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
January 1, 1994 as restated 0 $ 0 4,153,081 $4,153,081 $33,342,911 $ 260,306 $21,196,450 $(819,780) $58,132,968
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of adopting
SFAS No. 115* 1,349,670 1,349,670
Issuance of common stock 9,689 9,689 115,632 125,321
Net income* 5,039,948 5,039,948
Change in unrealized gains (losses)
on investments* (Net of applicable
federal income taxes) (2,607,614) (2,607,614)
Cash dividends
$.36 per share (1,475,226) (1,475,226)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1994* 0 $ 0 4,162,770 $4,162,770 $33,458,543 $ (997,638) $24,761,172 $(819,780) $60,565,067
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 163,592 163,592 1,559,422 1,723,014
Net income 9,857,950 9,857,950
Change in unrealized gains (losses)
on investments (Net of applicable
federal income taxes) 1,816,851 1,816,851
Cash dividends
$.40 per share (1,679,990) (1,679,990)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1995 0 $ 0 4,326,362 $4,326,362 $35,017,965 $ 819,213 $32,939,132 $(819,780) $72,282,892
====================================================================================================================================
</TABLE>
*Restated
See accompanying notes to consolidated financial statements.
12
<PAGE>
Donegal Group Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994* 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 9,857,950 $ 5,039,948 $ 6,382,449
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 380,491 385,944 222,599
Realized investment gains (398,587) (34,333) (845,156)
Changes in Assets and Liabilities:
Losses and loss expenses 9,989,914 7,788,953 13,571,521
Unearned premiums 7,622,144 2,480,511 7,651,881
Accrued expenses 829,125 (341,338) 227,304
Premiums receivable (2,635,090) (245,408) (1,650,347)
Deferred policy acquisition costs (1,350,349) (462,202) (1,117,426)
Deferred income taxes (521,952) (344,725) (654,237)
Reinsurance receivable (2,526,020) (3,179,767) (4,722,608)
Accrued investment income (382,216) (202,057) (175,185)
Amounts due from affiliate 44,961 (243,002) 642,354
Accounts payable reinsurance (81,460) (62,793) 207,371
Prepaid reinsurance premiums (2,228,868) (479,438) (1,473,286)
Current income taxes (675,677) 358,824 (436,600)
Other, net (145,516) (391,859) 56,080
- -----------------------------------------------------------------------------------------------------------------------------------
Net adjustments 7,920,900 5,027,310 11,504,265
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 17,778,850 10,067,258 17,886,714
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchase of fixed maturities -- -- (35,278,186)
Held to maturity (26,057,540) (5,139,055) --
Available for sale (27,895,537) (27,983,885) --
Purchase of equity securities (6,072,439) (7,486,343) (13,154,616)
Sale of fixed maturities -- -- 6,565,065
Available for sale 5,276,380 22,975,319 --
Maturity of fixed maturities -- -- 11,148,600
Held to maturity 10,996,250 2,637,135 --
Available for sale 6,631,844 2,627,416 --
Sale of equity securities 8,121,345 8,671,596 10,427,709
Acquisition and assumption of Delaware American (5,300,000) 5,513,259 --
Purchase of property and equipment (334,894) (338,804) (447,785)
Purchase of other assets -- (131,625) --
Net sales (purchases) of short-term investments 12,018,979 (9,813,495) (6,315,305)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (22,615,612) (8,468,482) (27,054,518)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Issuance of common stock 1,723,014 125,321 16,368,953
Line of credit 5,000,000 -- --
Repayment of short-term bank borrowings -- -- (4,500,000)
Cash dividends paid (1,621,631) (1,433,270) (1,011,294)
Purchase of treasury stock -- -- (819,780)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 5,101,383 (1,307,949) 10,037,879
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash 264,621 290,827 870,075
Cash at beginning of year 1,482,951 1,192,124 322,049
- -----------------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 1,747,572 $ 1,482,951 $ 1,192,124
===================================================================================================================================
</TABLE>
*Restated
See accompanying notes to consolidated financial statements.
13
<PAGE>
Donegal Group Inc.
Notes to Consolidated Financial Statements
1 -- Summary of Significant Accounting Policies
Organization and Business
The Company was organized as a regional insurance holding company by Donegal
Mutual Insurance Company (the "Mutual Company") and operates in Pennsylvania,
Maryland, Delaware, Virginia and Ohio through its wholly owned stock insurance
companies, Atlantic States Insurance Company ("Atlantic States"), Southern
Insurance Com pany of Virginia ("Southern"), and Delaware American Insurance
Company ("Delaware"). The Company's major lines of business in 1995 and their
percentages of total net earned premiums were Automobile Liability (28.2%),
Workers' Compensation(19.1%), Automobile Physical Damage (15.5%), Homeowners
(16.4%) and Commercial Multiple Peril (14.8%). The subsidiaries are subject to
regulation by Insurance Departments in those states in which they operate and
undergo periodic examination by those departments. The subsidiaries are also
subject to competition from other insurance carriers in their operating areas.
Atlantic States participates in an intercompany pooling arrangement with the
Mutual Company and assumes 60% of the pooled business. Southern cedes 50% of its
business to the Mutual Company and Delaware American cedes 70% of its Workers'
Compensation business to the Mutual Company. At December 31, 1995, the Mutual
Company held 59% of the outstanding common stock of the Company.
On December 29, 1995, the Company acquired all of the outstanding stock of
Delaware American Insurance Company. This transaction was accounted for as if it
were a "Pooling of Interest," and as such the Company's financial statements
have been restated to include Delaware as a consolidated subsidiary from January
1, 1994, to the present.
In January 1994, the Company organized a new subsidiary, Atlantic
Insurance Services, Inc. ("AIS"), which began business in that same month. AIS
is an insurance services organization currently providing inspec tion and policy
auditing information on a fee for service basis to its affiliates and the
insurance industry.
Basis of Consolidation
The consolidated financial statements, which have been prepared in accordance
with generally accepted accounting principles, include the accounts of Donegal
Group Inc. and its wholly owned sub sidiaries, Atlantic States, Southern,
Delaware and AIS. All significant inter -company accounts and transactions have
been eliminated in consolidation. The term "Company" as used herein refers to
the consolidated entity. The principal business activity of the Company is that
of its subsidiaries.
Use of Estimates
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the liabilities for losses and
loss expenses. While management uses available information to provide for such
liabilities, future additions to these liabilities may be necessary based on
changes in trends in claim frequency and severity.
Investments
The Company accounts for investments in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS)No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," which was adopted January 1,
1994.
SFAS No. 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
cost.
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).
Short-term investments are carried at amortized cost, which approximates
fair value.
If there is a decline in fair value which is other than temporary, the
carrying value for investments in the held to maturity and available for sale
categories is reduced to fair value. Such decline in carrying value is
recognized as a realized loss and charged to income. Premiums and discounts on
debt securities are amortized over the life of the security as an adjustment to
yield using the effective interest method. Realized investment gains and losses
are computed using the specific identification method and are reported as a
component of other income.
Cash -- Cash balances represent funds held by depository institutions. It
is the Company's policy to treat cash equivalents as short-term
investments.
14
<PAGE>
Fair Values of Financial Instruments
The Company has used the following methods and assumptions in estimating its
fair value disclosures:
Investment Securities -- Fair values for fixed maturity securities are
based on quoted market prices, when available. If quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments or values obtained from independent pricing services through a
bank trustee. The fair values for equity securities are based on quoted
market prices.
Cash and Short-Term Investments -- The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Premium and Reinsurance Receivables and Payables -- The carrying amounts
reported in the balance sheet for these instruments approximate their fair
values.
Line of Credit -- The carrying amounts reported in the balance sheet for
the line of credit approximates the fair value due to the variable rate
nature of the line of credit.
Revenue Recognition
Insurance premiums are recognized as income over the terms of the policies and
include estimates of audit premiums on retrospectively rated workers'
compensation policies. Unearned premiums are calculated on a daily prorata
basis.
Policy Acquisition Costs
Policy acquisition costs, consisting primarily of commissions, premium taxes and
certain other variable underwriting costs, are deferred and amortized over the
period in which the premiums are earned. Anticipated losses and loss expenses,
expenses for main tenance of policies in force and anticipated investment income
are considered in the determination of the recoverability of deferred
acquisition costs.
Property and Equipment
Property and equipment are reported at depreciated cost that is computed using
the straight-line method based upon estimated useful lives of the assets,
ranging from 3 to 15 years.
Losses and Loss Expenses
The liability for losses and loss expenses includes amounts determined on the
basis of estimates for losses reported prior to the close of the accounting
period and other estimates, including those for incurred but not reported
losses, and salvage and subrogation recoveries.
These liabilities are continuously reviewed and updated by man agement and
management believes that such liabilities are adequate to cover the ultimate net
cost of claims and expenses. When manage ment determines that changes in
estimates are required, such changes are included in current earnings.
In addition, various Insurance Departments, as an integral part of their
examination process, periodically review the Company's liabilities for losses
and loss expenses. Such departments may require the Company to recognize
additions to the liabilities based on their judgements about information
available to them at the time of their examination.
The Company has no material exposures to environmental liabilities.
Income Taxes
The Company and its subsidiaries currently file a consolidated federal income
tax return.
The Company accounts for income taxes using the asset and liability
method. The objective of the asset and liability method is to establish deferred
tax assets and liabilities for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities at
enacted tax rates expected to be in effect when such amounts are realized or
settled.
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 the
Company's commercial business is billed through its agents who are extended
credit in the normal course of business.
As described in Note 2, the Company's subsidiaries have rein surance
agreements in place with the Mutual Company and with a number of other
authorized reinsurers with at least an A.M. Best rating of A- or an equivalent
financial condition, as described in Note 8.
Reinsurance Accounting and Reporting
The Company relies upon reinsurance agreements to limit its maximum net loss
from large single risks or risks in concentrated areas, and to increase its
capacity to write insurance. Each reinsurance agreement satisfies all applicable
regulatory requirements. Reinsurance does not relieve the primary insurer from
liability to its policyholders. To the extent that a reinsurer may be unable to
pay losses for which it is liable under the terms of a reinsurance agreement,
the Company is exposed to the risk of continued liability for such losses.
However, in an effort to reduce the risk of non-payment, the Company requires
all of its reinsurers to have an A.M. Best rating of A- or better or, with
respect to foreign
15
<PAGE>
reinsurers, to have a financial condition which, in the opinion of management,
is equivalent to a company with at least an A- rating. If the Company's
reinsurers incur losses from their reinsurance arrangements with the Company, it
is probable that the reinsurance premiums payable by the Company in the future
could increase.
The Company accounts for reinsurance contracts in accordance with the
provisions of SFAS No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts." SFAS No. 113 establishes the
conditions required for a contract with a reinsurer to be accounted for as
reinsurance and prescribes accounting and reporting standards for those
contracts. It requires reinsurance receivables (including amounts related to
claims incurred but not reported) and prepaid reinsurance premiums to be
reported as assets.
Statutory Accounting Practices
As described in Note 12, the Company's insurance subsidiaries file financial
statements with regulatory agencies prepared on a statutory basis of accounting
which differs from generally accepted accounting principles.
Stock-Based Compensation
The Company has not elected early adoption of Statement of Financial Accounting
Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation."
SFASNo. 123 becomes effective January 1, 1996, and will not have a material
effect on the Company's financial position or results of operations. Upon
adoption of SFAS No. 123, the Company will continue to measure compensation
expense for its stock-based employee compensation plans using the intrinsic
value method prescribed by APBOpinion No. 25, "Accounting for Stock Issued to
Employees" and will provide pro forma disclosures of net income and earnings per
share as if the fair value-based method prescribed by SFAS No. 123 had been
applied in measuring compensation expense.
Impairment of Long-Lived Assets
The Company will adopt Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of" (SFAS No. 121) effective January 1, 1996. SFAS No. 121 provides
guidance for recognition and measurement of impairment of long-lived assets,
certain identifiable intangibles and goodwill related both to assets to be held
and used and assets to be disposed of.
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, an entity
should estimate the future cash flows expected to result from the use of the
asset and its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Otherwise, an impairment loss is
not recognized. Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use should be based
on the fair value of the asset.
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell.
Management does not expect the adoption of SFAS No. 121 to have a material
effect on its financial condition or results of operation.
Net Income per Common Share
Net income per share is based upon the weighted average number of common shares
outstanding plus dilutive common equivalent shares from stock options using the
treasury stock method.
The average common and common equivalent shares outstanding for the years
ended December 31, 1995, 1994 and 1993, were 4,272,447, 4,181,159 and 3,330,302,
respectively.
2 -- Transactions with Affiliates
The Company conducts business and has various agreements with the Mutual Company
which are described below.
a. Reinsurance Pooling and Other Reinsurance Arrangements
Delaware cedes 70% of its Workers' Compensation business to the Mutual Company.
Southern cedes 50% of its direct premiums written less certain reinsurance to
the Mutual Company. Atlantic States cedes to the Mutual Company all of its
insurance business and assumes from the Mutual Company 60% of the Mutual
Company's total pooled insurance business, including that assumed from Atlantic
States, and substantially all that is assumed from Southern and Delaware. In
addition to the reinsurance pooling, Atlantic States and the Mutual Company have
a catastrophe reinsurance agreement which limits the maximum liability for
losses on any one catastrophe occurrence to $400,000 for Atlantic States.
Southern and the Mutual Company have an excess of loss reinsurance agreement in
which the Mutual Company generally assumes up to $25,000 for losses in excess of
$100,000. The Mutual Company and Delaware have an excess of loss reinsurance
agreement in which the Mutual Company assumes up to $200,000 for losses in
excess of $50,000. The Mutual Company receives a premium from Atlantic States,
Southern and Delaware as part of these agreements. Insurance ceded by Delaware,
Southern and Atlantic States does not relieve their primary liability as the
16
<PAGE>
originating insurer. Balances arising from the agreements are settled monthly.
The following amounts represent statutory reinsurance transactions with
the Mutual Company during 1995, 1994 and 1993. These amounts exclude the ceded
and assumed components of salvage and subrogation recoverable because such
amounts are determined on a net basis only consistent with the Mutual Company's
statutory records:
Ceded reinsurance: 1995 1994 1993
- ------------------------------------------------------------------------
Premiums written $27,731,104 $22,792,131 $20,127,555
========================================================================
Premiums earned $25,555,026 $21,274,804 $18,802,849
========================================================================
Losses and loss expenses $14,336,897 $14,643,183 $13,369,604
========================================================================
Unearned premiums $12,406,072 $10,229,994 $ 8,712,667
========================================================================
Liability for losses and
loss expenses $20,855,048 $18,476,791 $15,039,660
========================================================================
Assumed reinsurance:
Premiums written $79,550,369 $69,196,807 $68,933,663
========================================================================
Premiums earned $74,824,803 $66,322,464 $62,908,662
========================================================================
Losses and loss expenses $49,332,144 $45,544,081 $42,699,794
========================================================================
Unearned premiums $35,110,068 $30,384,502 $27,510,159
========================================================================
Liability for losses
and loss expenses $66,020,750 $57,267,708 $50,284,110
========================================================================
Losses and loss expenses assumed from the Mutual Company for 1994 are
reported net of intercompany catastrophe recoveries. Catastrophe losses and
loss expenses recovered from the Mutual Company in 1994 amounted to
approximately $2.8 million.
b. Expense Sharing
The Mutual Company provides facilities, management and other services to the
Company, and the Company reimburses the Mutual Company for such services on a
periodic basis under usage agreements and pooling arrangements. The charges are
based upon the relative participation of the Company and the Mutual Company in
the pooling arrangement, and management of both the Company and the Mutual
Company consider this allocation to be reasonable. Charges for these services
totalled $16,351,186, $13,024,856 and $12,780,682 for 1995, 1994 and 1993,
respectively.
The net amounts due from the Mutual Company arising from all intercompany
transactions, excluding amounts due to Delaware acquisition, at December 31,
1995 and 1994, were $546,746 and $591,707, respectively.
c. Lease Agreement
The Company leases office equipment and automobiles to the Mutual Company under
a 10-year lease dated January 1, 1990.
d. Inspection and Policy Auditing Services
AIS provides inspection and policy auditing services to The Mutual Company on a
fee for service basis.
3 -- Investments
The amortized cost and estimated fair values of investment securities at
December 31, 1995 and 1994, are as follows (excluding short-term investments
which are comprised primarily of corporate debt securities reported at cost,
which approximates fair value):
1995
- ------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
HELD TO MATURITY Cost Gains Losses Value
- ------------------------------------------------------------------------
U.S. Treasury securities
and obligations of
U.S. government
corporations
and agencies $19,675,694 $ 467,842 $ 48,036 $20,095,500
Obligations of states
and political
subdivisions 52,080,590 2,378,670 29,155 54,430,105
Corporate securities 3,816,309 380,980 2,289 4,195,000
Mortgage-backed
securities 16,406,529 288,082 57,376 16,637,235
- ------------------------------------------------------------------------
Totals $91,979,122 $3,515,574 $136,856 $95,357,840
========================================================================
1995
- ------------------------------------------------------------------------
Gross Gross Estimated
AVAILABLE Amortized Unrealized Unrealized Market
FOR SALE Cost Gains Losses Value
- ------------------------------------------------------------------------
U.S. Treasury securities
and obligations of
U.S. government
corporations
and agencies $35,057,293 $ 374,436 $ 10,286 $35,421,443
Obligations of states
and political
subdivisions 9,633,046 486,704 -- 10,119,750
Corporate securities 4,299,597 55,273 6,870 4,348,000
Mortgage-backed
securities 1,724,951 32,586 -- 1,757,537
Equity securities 2,954,487 413,878 104,487 3,263,878
- ------------------------------------------------------------------------
Totals $53,669,374 $1,362,877 $121,643 $54,910,608
========================================================================
1994
- ------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
HELD TO MATURITY Cost Gains Losses Value
- ------------------------------------------------------------------------
U.S. Treasury securities
and obligations of
U.S. government
corporations
and agencies $14,271,210 $ 83,172 $ 352,382 $14,002,000
Obligations of states
and political
subdivisions 32,109,340 120,471 1,180,708 31,049,103
Corporate securities 2,994,258 4,856 40,614 2,958,500
Mortgage-backed
securities 20,782,823 33,184 1,541,416 19,274,591
- ------------------------------------------------------------------------
Totals $70,157,631 $241,683 $3,115,120 $67,284,194
========================================================================
17
<PAGE>
1994
- ------------------------------------------------------------------------
Gross Gross Estimated
AVAILABLE Amortized Unrealized Unrealized Fair
FOR SALE Cost Gains Losses Value
- ------------------------------------------------------------------------
U.S. Treasury securities
and obligations of
U.S. government
corporations
and agencies $34,002,272 $ 33,489 $ 606,440 $33,429,321
Obligations of states
and political
subdivisions 6,445,915 70,511 159,426 6,357,000
Corporate securities 3,799,912 5,917 71,829 3,734,000
Mortgage-backed
securities 199,824 2,176 -- 202,000
Equity securities 4,897,115 49,075 744,325 4,201,865
- ------------------------------------------------------------------------
Totals $49,345,038 $161,168 $1,582,020 $47,924,186
========================================================================
The amortized cost and estimated fair value of fixed maturities at
December 31, 1995, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
- ------------------------------------------------------------------------
Estimated
Amortized Fair
Cost Value
- ------------------------------------------------------------------------
Held to maturity
Due in one year or less $ 3,199,746 $ 3,195,000
Due after one year through five years 12,127,178 12,466,500
Due after five years through ten years 27,001,635 28,106,650
Due after ten years 33,244,034 34,952,455
Mortgage-backed securities 16,406,529 16,637,235
- ------------------------------------------------------------------------
Total held to maturity $91,979,122 $95,357,840
========================================================================
Available for sale
Due in one year or less $16,662,079 $16,795,042
Due after one year through five years 16,776,499 16,977,900
Due after five years through ten years 7,862,625 8,003,250
Due after ten years 7,688,733 8,113,001
Mortgage-backed securities 1,724,951 1,757,537
- ------------------------------------------------------------------------
Total available for sale $50,714,887 $51,646,730
========================================================================
Net change in unrealized investment gains (losses) less applicable federal
income taxes is as follows:
1995 1994 1993
- --------------------------------------------------------------------------------
Fixed maturities $ 1,657,442 $(2,664,358) $ --
Equity securities 1,004,643 (1,185,026) 186,394
Deferred federal income
(taxes) benefit (845,234) 1,241,770 (60,944)
- --------------------------------------------------------------------------------
Net change $ 1,816,851 $(2,607,614) $ 125,450
================================================================================
Unrealized investment gains (losses) less applicable federal income taxes
are as follows:
1995 1994 1993
- --------------------------------------------------------------------------------
Fixed maturities
Gains $ 948,999 $ 112,093 $ --
Losses (17,156) (837,695) --
Equity securities
Gains 413,877 49,075 396,714
Losses (104,487) (744,325) (13,136)
- --------------------------------------------------------------------------------
1,241,233 (1,420,852) 383,578
Deferred federal
income (taxes) benefit (422,020) 423,214 (123,272)
- --------------------------------------------------------------------------------
Net unrealized investment
gains (losses) $ 819,213 $ (997,638) $ 260,306
================================================================================
Net investment income of the Company, consisting primarily of interest and
dividends, is attributable to the following sources:
1995 1994 1993
- --------------------------------------------------------------------------------
Fixed maturities $ 8,264,968 $ 6,681,435 $ 6,240,923
Equity securities 233,822 230,530 308,285
Short-term investments 1,194,082 1,286,290 307,027
Real Estate 29,250 29,310 --
- --------------------------------------------------------------------------------
Investment income 9,722,122 8,227,565 6,856,235
Investment expenses 452,238 449,401 377,881
- --------------------------------------------------------------------------------
Net investment income $ 9,269,884 $ 7,778,164 $ 6,478,354
================================================================================
Proceeds and gross realized gains (losses) from sale of investment
securities during 1995, 1994 and 1993 are as follows:
1995 1994 1993
- --------------------------------------------------------------------------------
Proceeds $13,409,224 $30,615,578 $18,264,424
- --------------------------------------------------------------------------------
Gross realized gains:
Fixed maturities 347,020 410,687 554,720
Equity securities 658,595 675,008 502,573
- --------------------------------------------------------------------------------
1,005,615 1,085,695 1,057,293
- --------------------------------------------------------------------------------
Gross realized losses:
Fixed maturities 1,152 831,412 3,413
Equity securities 605,876 219,950 208,724
- --------------------------------------------------------------------------------
607,028 1,051,362 212,137
- --------------------------------------------------------------------------------
Net realized gains $ 398,587 $ 34,333 $ 845,156
================================================================================
During 1995, as permitted by the Financial Accounting Standards Board
"one-time window," the Company transferred $4,101,469 of investments from the
held to maturity to the available for sale portfolio. The fair value of such
investments was $4,381,217. This transfer was made to provide the Company with
increased flexibility in managing its liquidity position.
18
<PAGE>
4 -- Deferred Policy Acquisition Costs
Changes in deferred policy acquisition costs are as follows:
1995 1994 1993
- ------------------------------------------------------------------------
Balance, January 1 $ 5,551,869 $ 5,089,667 $ 3,972,241
Acquisition costs
deferred 15,762,349 12,517,202 12,592,426
Amortization charged
to earnings 14,412,000 12,055,000 11,475,000
- ------------------------------------------------------------------------
Balance, December 31 $ 6,902,218 $ 5,551,869 $ 5,089,667
========================================================================
5 -- Property and Equipment
Property and equipment at December 31, 1995 and 1994, consisted of the
following:
1995 1994
- --------------------------------------------------------------------------------
Cost-- office equipment $ 2,204,608 $ 2,585,962
automobiles 721,565 573,403
leasehold improvements 81,719 81,719
land 610,010 610,010
software 2,067 224,437
- --------------------------------------------------------------------------------
3,619,969 4,075,531
Accumulated depreciation (1,337,399) (1,782,447)
- --------------------------------------------------------------------------------
$ 2,282,570 $ 2,293,084
================================================================================
Depreciation expense for the years ended December 31, 1995, 1994 and 1993
amounted to $345,408, $351,951 and $231,244, respectively.
6 -- Liability for Losses and Loss Expenses
Activity in the liability for losses and loss expenses is summarized as follows:
1995 1994 1993
- --------------------------------------------------------------------------------
Balance at January 1 $87,743,937 $69,441,728 $55,870,207
Less reinsurance
recoverable 25,167,086 17,143,860 12,421,252
- --------------------------------------------------------------------------------
Net Balance at January 1 62,576,851 52,297,868 43,448,955
- --------------------------------------------------------------------------------
Acquisition of Delaware
American -- 5,669,797 --
- --------------------------------------------------------------------------------
New Balance at January 1
as restated 62,576,851 57,967,665 43,448,955
- --------------------------------------------------------------------------------
Incurred related to:
Current year 58,354,254 55,941,502 45,451,826
Prior years (2,947,000) (3,084,000) 1,263,000
- --------------------------------------------------------------------------------
Total incurred 55,407,254 52,857,502 46,714,826
- --------------------------------------------------------------------------------
Paid related to:
Current year 28,934,360 30,544,316 21,779,913
Prior years 19,009,000 17,704,000 16,086,000
- --------------------------------------------------------------------------------
Total paid 47,943,360 48,248,316 37,865,913
- --------------------------------------------------------------------------------
Net Balance at
December 31 70,040,745 62,576,851 52,297,868
Plus reinsurance
recoverable 27,693,106 25,167,086 17,143,860
- --------------------------------------------------------------------------------
Balance at December 31 $97,733,851 $87,743,937 $69,441,728
================================================================================
The Company recognized a decrease in the liability for loss and loss
adjustment expenses (favorable development) of $3.0 million (net of reinsurance
recoveries of $0.5 million and $41 thousand respectively) in 1995 and 1994.
These favorable developments are primarily attributable to the Company's
strengthening of case reserves in prior years, the effects of which are being
recognized currently.
The unfavorable development of $1.3 million in 1993 (net of reinsurance
recoveries of $6.7 million) is primarily related to strengthening of case
reserves.
7 -- Line of Credit
As of December 31, 1995, pursuant to a credit agreement dated December 29, 1995,
with Fleet National Bank of Connecticut, the Company had unsecured borrowings
of $5 million. Such borrowings were made in connection with the acquisition of
Delaware American Insurance Company. Per the terms of the credit agreement, the
Company may borrow up to $20 million at interest rates equal to the bank's then
current prime rate or the then current London interbank Eurodollar bank rate
plus 1.70%. At December 31, 1995, the interest rate on the outstanding balance
was 7.2%. In addition, the Company will pay a non-use fee at a rate of 3/10 of
1% per annum on the average daily unused portion of the Bank's commitment. On
each December 29, commencing December 29, 1998, the credit line will be reduced
by $4 million. Any outstanding loan in excess of the remaining credit line,
after such reduction, will then be payable.
8 -- Unaffiliated Reinsurers
In addition to the primary reinsurance in place with the Mutual Company,
Atlantic States, Southern and Delaware have other reinsurance in place
principally with three unaffiliated reinsurers. The following amounts represent
statutory reinsurance transactions with unaffiliated reinsurers during 1995,
1994 and 1993:
Ceded reinsurance: 1995 1994 1993
- ------------------------------------------------------------------------
Premiums written $3,597,212 $3,062,180 $2,792,819
========================================================================
Premiums earned $3,544,424 $4,090,637 $2,644,239
========================================================================
Losses and loss expenses $2,801,073 $2,531,806 $4,993,578
========================================================================
Unearned premiums $ 649,821 $ 597,031 $ 393,705
========================================================================
Liability for losses and
loss expenses $6,838,058 $6,690,295 $2,104,200
========================================================================
9 -- Federal Income Taxes
The provision for federal income tax consists of the following:
1995 1994 1993
- --------------------------------------------------------------------------------
Current $ 3,309,820 $ 2,407,756 $ 2,791,939
Deferred (521,952) (344,725) (654,237)
- --------------------------------------------------------------------------------
Federal tax provision $ 2,787,868 $ 2,063,031 $ 2,137,702
================================================================================
19
<PAGE>
The effective tax rate is different than the amount computed at the
statutory federal rate of 34% for 1995, 1994 and 1993. The reason for such
difference and the related tax effect are as follows:
1995 1994 1993
- --------------------------------------------------------------------------------
Income before
income taxes $12,645,818 $ 7,102,979 $ 8,520,151
================================================================================
Computed "expected"
taxes at 34% $ 4,299,578 $ 2,415,013 $ 2,896,851
Delaware loss not
providing current
tax benefit -- 356,321 --
Change in valuation
allowance (383,669) -- --
Tax-exempt interest (751,003) (671,969) (641,298)
Dividends received deduction (46,789) (52,993) (48,170)
Adjustment to prior
year's provision (19,604) 28,495 6,103
Deduction for exercise
of options (324,254) -- --
Other, net 13,606 (11,836) (75,784)
- --------------------------------------------------------------------------------
Federal income
tax provision $ 2,787,868 $ 2,063,031 $ 2,137,702
================================================================================
In accordance with SFAS No. 109, the tax effects of temporary differences
that give rise to significant portions of the deferred tax assets and deferred
tax liabilities at December 31, 1995 and 1994, are as follows:
1995 1994
- --------------------------------------------------------------------------------
Deferred tax assets:
Unearned premium $ 2,809,850 $ 2,443,108
Loss reserves 3,810,076 3,492,459
Unrealized loss -- 435,109
- --------------------------------------------------------------------------------
6,619,926 6,370,676
(Less valuation allowance) -- (383,669)
- --------------------------------------------------------------------------------
Total $ 6,619,926 $ 5,987,009
================================================================================
Deferred tax liabilities:
Depreciation expense $ 273,919 $ 251,843
Deferred policy acquisition costs 2,346,754 1,887,635
Salvage receivable 165,689 112,703
Unrealized gain 422,020 --
- --------------------------------------------------------------------------------
Total $ 3,208,382 $ 2,252,181
================================================================================
Net deferred tax assets $ 3,411,544 $ 3,734,826
================================================================================
A valuation allowance is provided when it is more likely than not that
some portion of the tax asset will not be realized. Management has determined
that it is not required to establish a valuation allowance for the deferred tax
asset of $6,619,926 at December 31, 1995 since it is more likely than not that
the deferred tax asset will be realized through reversals of existing temporary
differences, future taxable income, carryback to taxable income in prior years,
previously realized investment gains and the implementation of tax planning
strategies. A valuation allowance of $383,669 was established at December 31,
1994 in connection with the acquisition of Delaware. The net change in the
valuation allowance for the year ended December 31, 1995 was a decrease of
$383,669.
10 -- Stock Option and Stock Purchase Plans
The Company has an Equity Incentive Plan for key employees. The plan provides
for the granting of awards by the Board of Directors. Awards may be made in the
form of stock options, stock appreciation rights, restricted stock or any
combination of the above. During 1994 the aggregate number of shares availa ble
as awards was increased from 450,000 to 700,000 shares of the Company's common
stock. The plan provides that stock options may become exercisable up to 10
years from date of grant, with an option price not less than fair market value
on date of grant. The stock appreciation rights permit surrender of the option
and receipt of the excess of current market price over option price in cash.
During 1995, 1994, and 1993, the following options for shares of the
Company's common stock were issued, expired, or exercised:
1995 1994 1993
- ------------------------------------------------------------------------
Issued 0 0 0
Expired 7,500 0 0
Exercised 150,650 0 1,000
As of December 31, 1995, the Company has unexercised options as follows:
- ------------------------------------------------------------------------
Number of Options Date
Options Price Exercisable
- ------------------------------------------------------------------------
39,000 $ 9 Currently
163,500 12 Currently
Shares available for future grants at December 31, 1995, are 345,850.
20
<PAGE>
Effective January 1, 1988, the Company adopted an Employee Stock Purchase
Plan. The Plan extends over a 10-year period and provides for shares to be
offered to all eligible employees at a purchase price equal to the lesser of 85
percent of the fair market value of the Company's common stock on the last day
before the first day of the enrollment period (June 1 and December 1) of the
plan or 85 percent of the fair market value of such share on the last day of the
subscription period (June 30 and December 31). A summary of plan activity
follows:
Shares Issued
- --------------------------------------------------------------------------------
Price Shares
- --------------------------------------------------------------------------------
January 1, 1993 $ 7.65 6,822
July 1, 1993 8.50 6,338
January 1, 1994 13.175 4,205
July 1, 1994 12.75 5,484
January 1, 1995 11.90 6,004
July 1, 1995 10.625 6,938
On January 1, 1996, the Company issued an additional 5,630 shares at a
price of $14.2375 per share under this plan.
11 -- Statutory Net Income Capital and Surplus and Dividend Restrictions
The following is selected information for Atlantic States, Southern and Delaware
as determined in accordance with accounting practices prescribed or permitted by
insurance regulatory authorities for the years ended December 31, 1995, 1994 and
1993.
1995 1994 1993
- ------------------------------------------------------------------------
ATLANTIC STATES
Statutory capital
and surplus $40,726,246 $38,481,691 $37,250,053
========================================================================
Statutory unassigned
surplus $14,765,382 $12,520,827 $11,289,189
========================================================================
Statutory net income $ 5,224,905 $ 4,072,387 $ 3,468,400
========================================================================
1995 1994 1993
- ------------------------------------------------------------------------
SOUTHERN
Statutory capital
and surplus $6,380,420 $5,833,556 $5,395,140
========================================================================
Statutory unassigned
surplus $2,378,150 $1,831,285 $1,392,869
========================================================================
Statutory net income $ 679,335 $ 764,696 $ 783,995
========================================================================
1995 1994 1993
- ------------------------------------------------------------------------
DELAWARE
Statutory capital
and surplus $5,695,634 $5,016,599 $ 735,262
========================================================================
Statutory unassigned
surplus $ 495,634 $ (183,401) $ 735,262
========================================================================
Statutory net income $ 494,576 $ (963,982) $(3,219,938)
========================================================================
The Company's principal source of cash for payment of dividends is
dividends from Atlantic States, Southern and Delaware, 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 regu-
latory authorities. Atlantic States, Southern and Delaware are subject to risk
based capital (RBC) requirements effective for 1994. At December 31, 1995, all
three Companies' capital was substantially above the RBC requirements. At
December 31, 1995, amounts available for distribution as dividends to Donegal
Group Inc. without prior approval of insurance regulatory authorities are
$5,224,905 from Atlantic States, $638,042 from Southern and $569,563 from
Delaware.
12 -- Reconciliation of Statutory Filings to Amounts Reported Herein
The Company's insurance subsidiaries are required to file statutory financial
statements with state insurance regulatory authorities. Accounting principles
used to prepare these statutory financial statements differ from financial
statements prepared on the basis of generally accepted accounting principles.
Reconciliations of statutory net income and capital and surplus, as
determined using statutory accounting principles, to the amounts included in the
accompanying financial statements are as follows:
Year ended December 31,
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Statutory net income of
insurance subsidiaries $ 6,398,816 $ 3,873,101 $ 4,252,395
Increases (decreases):
Deferred policy
acquisition costs 1,350,349 462,202 1,117,426
Deferred federal
income taxes 521,952 344,725 654,237
Salvage and subrogation
recoverable 1,150,509 337,188 68,934
Consolidating eliminations
and adjustments (900,000) (900,000) (85,585)
Parent only net income 1,301,558 952,697 375,042
Non-insurance subsidiary
net income (loss) 34,766 (29,965) --
- --------------------------------------------------------------------------------
Net income as
reported herein $ 9,857,950 $ 5,039,948 $ 6,382,449
================================================================================
21
<PAGE>
Year ended December 31,
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Statutory capital and surplus
of insurance subsidiaries $52,802,300 $49,331,846 $42,645,193
Increases (decreases):
Deferred policy
acquisition costs 6,902,218 5,551,869 5,089,667
Deferred federal
income taxes 3,411,544 3,734,826 2,843,615
Salvage and subrogation
recoverable 3,880,621 2,730,112 2,159,614
Statutory reserves 6,413,472 3,446,574 2,321,696
Non-admitted assets and
other adjustments, net 440,116 374,009 234,954
Fixed maturities
available for sale 931,843 (725,600) --
Consolidating eliminations
and adjustments (5,929,937) (5,871,578) (327,379)
Parent only equity 3,225,914 1,822,974 2,378,226
Non-insurance
subsidiary equity 204,801 170,035 --
- --------------------------------------------------------------------------------
Stockholders' equity as
reported herein $72,282,892 $60,565,067 $57,345,586
================================================================================
13 -- Supplementary Information on Statement of Cash Flows
The following schedule reflects income taxes and interest paid during 1995, 1994
and 1993:
1995 1994 1993
- --------------------------------------------------------------------------------
Income taxes $ 3,985,497 $ 2,072,512 $ 3,228,539
Interest $ 7,229 $ 9,459 $ 37,707
================================================================================
14 -- Interim Financial Data (unaudited)
1995
- --------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Net premiums
earned $20,333,148 $21,353,648 $22,026,028 $22,565,028
Total
revenues 23,008,266 24,312,402 25,034,119 25,530,273
Loss and loss
adjusting
expenses 12,455,415 14,215,193 14,240,198 14,496,448
Net income 2,430,125 2,500,700 2,349,118 2,578,007
Net income per
common share $ .58 $ .59 $ .55 $ .59
1994
- --------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Net premiums
earned $18,464,325 $18,883,443 $19,617,191 $20,267,930
Total
revenues 21,065,271 20,777,778 21,952,586 22,558,895
Loss and loss
adjusting
expenses 15,926,220 11,601,375 12,863,618 12,466,289
Net income (loss) (866,003) 1,841,238 1,888,944 2,175,719
Net income per
common share $ (.22) $ .45 $ .45 $ .52
The interim financial data for 1995 and 1994 vary from amounts previously
reported by the Company on form 10-Q's due to the acquisition of Delaware in
December 1995 which was accounted for as a "as if Pooling of Interest."
Results for the first quarter of 1994 were adversely affected due to the
unprecedented severe weather which hit the northeast part of the United States
in those three months and the inclusion of Delaware which experienced a net loss
of approximately $1.2 million in the first quarter. In addition to increased
loss and loss expenses of approximately $3.8 million compared to the average of
the last three quarters the Company incurred approximately $1 million in
additional ceded premiums related to the reinstatement of its catastrophe
reinsurance contracts. These factors resulted in a loss ratio of 81.4% in the
first quarter compared to 62.9% for the rest of the year.
15 -- Pending Acquisition
On December 22, 1994, the Company announced its intent to purchase all of the
outstanding shares of Pioneer Insurance Company from the Mutual Company. The
purchase price is expected to approximate statutory book value, which at
December 31, 1995, was $5,108,442. The acquisition will be accounted for as if
it were a pooling of interests. Currently, it is not known whether the
acquisition will be consummated during 1996.
22
<PAGE>
Donegal Group Inc.
Independent Auditors' Report
The Stockholders and Board of Directors
Donegal Group Inc.
We have audited the accompanying consolidated balance sheets of Donegal Group
Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Donegal
Group Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, the Company adopted the
provisions of Statement of Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" as of January 1, 1994.
KPMG Peat Marwick LLP
Harrisburg, Pennsylvania
February 23, 1996
23
<PAGE>
Donegal Group Inc.
Corporate Information
Annual Meeting
April 18, 1996 at the Company's headquarters at 10:00 a.m.
Form 10-K
A copy of Donegal Group's Annual Report on Form 10-K, will be furnished free
upon written request to Ralph G. Spontak, Senior Vice President and Chief
Financial Officer, at the address listed below.
Market Information
Donegal Group's common stock is traded on NASDAQ under the symbol "DGIC."
During 1994 and 1995, the stock price ranged as follows:
Cash Dividend
Declared
Quarter High Low Per Share
- --------------------------------------------------------------------------------
1994
1st $19 1/2 $13 $ --
2nd 15 1/2 13 1/2 .09
3rd 15 1/4 13 3/4 .09
4th 14 3/4 10 3/4 .18
1995
1st 15 13 15/16 --
2nd 17 1/2 14 .10
3rd 17 3/4 16 .10
4th 19 1/4 17 .20
Corporate Offices
1195 River Road
Box 302
Marietta, Pennsylvania 17547
(717) 426-1931
Transfer Agent
First Chicago Trust Company of New York
Mail Suite 4693
P.O. Box 2535
Jersey City, NJ 07303-2535
(201) 324-0313
Stockholders
The number of common stockholders of
record as of December 31, 1995 was 359.
DONEGAL GROUP INC.
---------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 18, 1996
---------------------------
To the Stockholders of
DONEGAL GROUP INC.:
The Annual Meeting of Stockholders of Donegal Group Inc. (the 'Company')
will be held at 10:00 a.m., prevailing time, on April 18, 1996, at the Company's
offices, 1195 River Road, Marietta, Pennsylvania 17547, for the following
purposes:
1. To elect three Class A directors, to serve until the expiration of their
three-year terms and until their successors are elected;
2. To act upon the election of KPMG Peat Marwick LLP as auditors for the
Company for 1996;
3. To act upon the adoption of the Company's 1996 Employee Stock Purchase
Plan;
4. To act upon the adoption of the Company's 1996 Equity Incentive Plan;
and
5. To transact such other business as may properly come before the Annual
Meeting and any adjournment, postponement or continuation thereof.
The Board of Directors has fixed the close of business on February 23, 1996
as the record date for the determination of the stockholders entitled to notice
of and to vote at the Annual Meeting.
A copy of the Company's Annual Report for the year ended December 31, 1995
is being mailed to stockholders together with this Notice.
Holders of Common Stock are requested to complete, sign and return the
enclosed form of proxy in the envelope provided whether or not they expect to
attend the Annual Meeting in person.
By Order of the Board of Directors,
/s/ Donald H. Nikolaus
Donald H. Nikolaus,
President and Chief Executive Officer
March 26, 1996
Marietta, Pennsylvania
<PAGE>
DONEGAL GROUP INC.
---------------------------
This Proxy Statement and the form of proxy enclosed herewith, which are
first being mailed to stockholders on or about March 26, 1996, are furnished in
connection with the solicitation by the Board of Directors of Donegal Group Inc.
(the 'Company') of proxies to be voted at the Annual Meeting of Stockholders
(the 'Annual Meeting') to be held at 10:00 a.m., prevailing time, on April 18,
1996, and at any adjournment, postponement or continuation thereof, at the
Company's principal executive offices, which are located at 1195 River Road,
Marietta, Pennsylvania 17547.
Shares represented by proxies in the accompanying form, if properly signed
and returned, will be voted in accordance with the specifications made thereon
by the stockholders. Any proxy not specifying to the contrary will be voted in
favor of the adoption of the proposals referred to in the Notice of Annual
Meeting and for the election of the nominees for director named below. A
stockholder who signs and returns a proxy in the accompanying form may revoke it
at any time before it is voted by giving written notice of revocation or a duly
executed proxy bearing a later date to the Secretary of the Company or by
attending the Annual Meeting and voting in person.
The cost of solicitation of proxies in the accompanying form will be borne
by the Company, including expenses in connection with preparing and mailing this
Proxy Statement. Such solicitation will be made by mail and may also be made on
behalf of the Company in person or by telephone or telegram by the Company's
regular officers and employees, none of whom will receive special compensation
for such services. The Company, upon request therefor, will also reimburse
brokers, nominees, fiduciaries and custodians and persons holding shares in
their names or in the names of nominees for their reasonable expenses in sending
proxies and proxy material to beneficial owners.
Only holders of Common Stock of record at the close of business on February
23, 1996 will be entitled to notice of and to vote at the Annual Meeting. Each
share of Common Stock is entitled to one vote on all matters to come before the
Annual Meeting. Cumulative voting rights do not exist with respect to the
election of directors.
As of the close of business on February 23, 1996, the Company had
outstanding 4,276,944 shares of Common Stock, $1.00 par value. A majority of the
outstanding shares will constitute a quorum at the Annual Meeting. As of
February 23, 1996, Donegal Mutual Insurance Company (the 'Mutual Company') owned
2,507,633 shares of the Company's outstanding Common Stock, or approximately
58.6% of the Company's outstanding Common Stock. The Mutual Company has advised
the Company that the Mutual Company will vote its shares for the election of
Robert S. Bolinger, Patricia A. Gilmartin and Philip H. Glatfelter, II as
directors, for the election of KPMG Peat Marwick LLP as auditors for 1996, for
the adoption of the Company's 1996 Employee Stock Purchase Plan and for the
adoption of the Company's 1996 Equity Incentive Plan. Accordingly, Messrs.
Bolinger and Glatfelter and Mrs. Gilmartin will be elected as directors, KPMG
Peat Marwick LLP will be elected as auditors for the Company for 1996 and the
Company's 1996 Employee Stock Purchase Plan and the Company's 1996 Equity
Incentive Plan will be approved regardless of the votes of the Company's
stockholders other than the Mutual Company.
1
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth as of February 23, 1996 the amount and
percentage of the Company's outstanding Common Stock beneficially owned by (i)
each person who is known by the Company to own beneficially more than 5% of its
outstanding Common Stock, (ii) each director and nominee for director, (iii)
each executive officer named in the Summary Compensation Table, other than Harry
E. Newman, who died in January 1996, and (iv) all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
SHARES PERCENT OF
NAME OF INDIVIDUAL BENEFICIALLY OUTSTANDING COMMON
OR IDENTITY OF GROUP OWNED (1) STOCK (2)
- ------------------------------------------------------------------------------ ----------- -------------------
<S> <C> <C>
5% HOLDERS:
Donegal Mutual Insurance Company............................................ 2,507,633 58.6%
1195 River Road
Marietta, Pennsylvania 17547
Putnam Investments, Inc..................................................... 252,000 5.9%(3)
One Post Office Square
Boston, Massachusetts 02109
DIRECTORS:
C. Edwin Ireland............................................................ 5,000 --
Donald H. Nikolaus.......................................................... 89,340(4) 2.1%
Patricia A. Gilmartin....................................................... 1,200 --
Philip H. Glatfelter, II.................................................... 1,400 --
R. Richard Sherbahn......................................................... 100 --
Robert S. Bolinger.......................................................... 600 --
Thomas J. Finley, Jr........................................................ 450 --
EXECUTIVE OFFICERS:
Ralph G. Spontak............................................................ 58,530(5) 1.4%
William H. Shupert.......................................................... 2,785 --
Frank J. Wood............................................................... 13,025(6) --
All directors and executive officers as a group (11 persons)................ 172,430(7) 3.9%
</TABLE>
- ------------------
(1) Information furnished by each individual named. This table includes shares
that are owned jointly, in whole or in part, with the person's spouse, or
individually by such person's spouse.
(2) Less than 1% unless otherwise indicated.
(3) Based upon information contained in a Schedule 13G of Putnam Investments,
Inc. ('Putnam') received by the Company on or about February 9, 1996.
According to this Schedule 13G, certain Putnam investment managers (together
with their parent corporations, Putnam Investments, Inc. and Marsh &
McLennan Companies, Inc.) are considered beneficial owners of these shares,
which were acquired for investment purposes by such investment managers for
certain of their advisory clients.
(4) Includes 65,000 shares of Common Stock which Mr. Nikolaus has the option to
purchase under the Company's 1986 Equity Incentive Plan at prices ranging
from $9.00 to $12.00 per share, all of which options are currently
exercisable. See 'Certain Transactions.'
2
<PAGE>
(5) Includes 53,000 shares of Common Stock which Mr. Spontak has the option to
purchase under the Company's 1986 Equity Incentive Plan at prices ranging
from $9.00 to $12.00 per share, all of which options are currently
exercisable.
(6) Includes 10,000 shares of Common Stock which Mr. Wood has the option to
purchase under the Company's 1986 Equity Incentive Plan at prices ranging
from $9.00 to $12.00 per share, all of which options are currently
exercisable.
(7) Includes 128,000 shares of Common Stock subject to options to purchase under
the Company's 1986 Equity Incentive Plan, all of which options are currently
exercisable.
Section 16 of the Securities Exchange Act of 1934 (the 'Exchange Act')
requires that the officers and directors of a corporation, such as the Company,
which has a class of equity securities registered under Section 12 of the
Exchange Act, as well as persons who own more than 10% of a class of equity
securities of such a corporation, file reports of their ownership of such
securities, as well as monthly statements of changes in such ownership, with the
corporation, the Securities and Exchange Commission (the 'SEC') and Nasdaq.
Based upon written representations received by the Company from its officers and
directors, and the Company's review of the monthly statements of ownership
changes filed with the Company by its officers and directors during 1995, the
Company believes that all such filings required during 1995 were made on a
timely basis.
RELATIONSHIP WITH THE MUTUAL COMPANY
The Company was formed by the Mutual Company in August 1986 and was a
wholly owned subsidiary of the Mutual Company until November 1986, when the
Company sold 600,000 shares of Common Stock in a public offering, thereby
reducing the Mutual Company's ownership of the Company's outstanding Common
Stock from 100% to approximately 79.5%, which subsequently increased to
approximately 84%. In September 1993, the Company sold 1,150,000 shares of
Common Stock in a public offering. At the same time, the Mutual Company sold
200,000 shares of the Company's Common Stock, reducing the Mutual Company's
ownership of the Company's outstanding Common Stock to approximately 57%.
Between December 22, 1994 and December 31, 1995, the Mutual Company purchased an
aggregate of 172,000 shares of the Company's Common Stock in the open market
pursuant to SEC Rule 10b-18 and in private transactions. See 'Executive
Compensation -- Certain Transactions' below. These purchases increased the
Mutual Company's ownership of the Company's Common Stock to 2,507,633 shares or
approximately 58.6% of the Company's outstanding Common Stock as of February 23,
1996.
The Company's operations are interrelated with the operations of the Mutual
Company, and various reinsurance arrangements exist between the Company and the
Mutual Company. The Company believes that its various transactions with the
Mutual Company have been on terms no less favorable to the Company than the
terms that could have been negotiated with an independent third party.
The Mutual Company provides all personnel for the Company and its
subsidiaries, Atlantic States Insurance Company ('Atlantic States'), Delaware
American Insurance Company ('Delaware American') and Southern Insurance Company
of Virginia ('Southern'). Expenses are allocated to the Company, Delaware
American and Southern according to a time allocation and estimated usage
agreement, and to Atlantic States in relation to the relative participation of
the Mutual Company and Atlantic States in the pooling agreement described
herein. Such charges to the Company were $16,251,186 in 1995.
3
<PAGE>
On December 29, 1988, the Company acquired all of the outstanding common
stock of Southern, which converted from a mutual insurance company known as
Southern Mutual Insurance Company to a stock insurance company on the same date.
Since January 1, 1991, the Mutual Company has reinsured 50% of Southern's
business. Because the Mutual Company places substantially all of the business
assumed from Southern in the pool, from which the Company has an allocation
which is 65% from and after January 1, 1996, the Company's operations include
approximately 80% of the business written by Southern. Southern and the Mutual
Company settle the balances resulting from this reinsurance arrangement on a
monthly basis.
Atlantic States participates in an underwriting pool with the Mutual
Company whereby Atlantic States cedes premiums, losses and loss adjustment
expenses on all of its business to the Mutual Company and assumes from the
Mutual Company a specified portion of the premiums, losses and loss adjustment
expenses of the Mutual Company and Atlantic States. Under the pooling agreement,
which became effective on October 1, 1986, Atlantic States cedes to the Mutual
Company all of its insurance business written on or after October 1, 1986.
Substantially all of the Mutual Company's property and casualty insurance
business written or in force on or after October 1, 1986 is also included in the
pooled business, including the business reinsured from Southern. Pursuant to an
amendment to the pooling agreement effective October 1, 1988, the Mutual
Company, which is solely responsible for any losses in the pooled business with
dates of loss on or before the close of business on September 30, 1986,
retroceded 50% of the pooled business to Atlantic States. From January 1, 1993
to December 31, 1995, 60% of the pooled business had been retroceded to Atlantic
States. Since January 1, 1996, 65% of the pooled business has been retroceded to
Atlantic States. All premiums, losses, loss adjustment expenses and other
underwriting expenses are prorated among the parties on the basis of their
participation in the pool. The pooling agreement may be amended or terminated at
the end of any calendar year by agreement of the parties. The allocations of
pool participation percentages between the Mutual Company and the Company are
based on the pool participants' relative amounts of capital and surplus,
expectations of future relative amounts of capital and surplus and the ability
of the Company to raise capital for Atlantic States. The Company does not
currently anticipate a further increase in its percentage of participation in
the pool, nor does the Company intend to terminate its participation in the
pooling agreement. Additional information describing the pooling agreement is
contained in the Company's 1995 Annual Report to Stockholders, a copy of which
is enclosed with this Proxy Statement and to which reference is hereby made.
As of December 31, 1995, the Company acquired all of the outstanding
capital stock of Delaware American pursuant to a Stock Purchase Agreement dated
as of December 21, 1995 between the Company and the Mutual Company. As part of
this transaction, the Mutual Company entered into an aggregate excess of loss
reinsurance agreement with Delaware American whereby the Mutual Company has
insured the risk of any loss from an adverse development in Delaware American's
loss reserve and loss adjustment expense reserve at the end of 1995 compared to
the end of 1996 and losses and loss expense adjustments incurred by Delaware
American during the month of December 1995 and for 1996 by reason of the fact
that Delaware American's loss and loss adjustment expense ratio for those
periods exceeds the lesser of the loss and loss expense ratios of immediately
preceding periods or 60%.
All of the Company's officers are officers of the Mutual Company, and five
of the Company's seven directors are directors of the Mutual Company. The
Company and the Mutual Company maintain a Coordinating Committee, which consists
of two outside directors from each of the Company and the Mutual Company, none
of whom holds seats on both Boards, to review and evaluate
4
<PAGE>
the pooling agreement between the Company and the Mutual Company and to be
responsible for matters involving actual or potential conflicts of interest
between the Company and the Mutual Company. The decisions of the Coordinating
Committee are binding on the Company and the Mutual Company. The Company's
Coordinating Committee members must conclude that intercompany transactions are
fair and equitable to the Company. The purpose of this provision is to protect
the interests of the stockholders of the Company other than the Mutual Company.
The Coordinating Committee met two times in 1995. The Company's members on the
Coordinating Committee are Messrs. Bolinger and Finley. See 'Election of
Directors.' The Mutual Company's members on the Coordinating Committee are John
E. Hiestand and Dr. Charles A. Heisterkamp, III.
Mr. Hiestand, age 58, has been a director of the Mutual Company since 1983
and has been President of Hiestand Memorials, Inc., a manufacturer of cemetery
monuments, since 1977.
Dr. Heisterkamp, age 63, has been a director of the Mutual Company since
1979 and has practiced as a surgeon in Lancaster, Pennsylvania for more than the
past five years.
ELECTION OF DIRECTORS
The Company's Board of Directors consists of seven members. Each director
is elected for a three-year term and until his successor has been duly elected.
The current three-year terms of the Company's directors expire in the years
1996, 1997 and 1998, respectively.
Three Class A directors are to be elected at the Annual Meeting. Unless
otherwise instructed, the proxy holders will vote the proxies received by them
for the election of the nominees named below, all of whom are currently
directors of the Company. If a nominee becomes unavailable for any reason, it is
intended that the proxies will be voted for a substitute nominee designated by
the Board of Directors. The Board of Directors has no reason to believe the
nominees named will be unable to serve if elected. Any vacancy occurring on the
Board of Directors for any reason may be filled by a majority of the directors
then in office until the expiration of the term of the class of directors in
which the vacancy exists. The three nominees for Class A director receiving a
plurality of the votes cast at the Annual Meeting will be elected as directors.
Shares held by brokers or nominees as to which voting instructions have not been
received from the beneficial owner or person otherwise entitled to vote and as
to which the broker or nominee does not have discretionary voting power, i.e.,
broker nonvotes, will be treated as not present and not entitled to vote for
nominees for election as Class A directors. Abstentions from voting and broker
nonvotes will have no effect on the election of directors since they will not
represent votes cast at the Annual Meeting for the purpose of electing
directors.
The names of the nominees for Class A directors and the Class B and Class C
directors who will continue in office after the Annual Meeting until the
expiration of their respective terms, together with certain information
regarding them, are as follows:
NOMINEES FOR CLASS A DIRECTORS
<TABLE>
<CAPTION>
DIRECTOR YEAR TERM
NAME AGE SINCE WILL EXPIRE*
- ------------------------------------------------------------------------------ --- --------- ------------
<S> <C> <C> <C>
Robert S. Bolinger............................................................ 59 1986 1999
Patricia A. Gilmartin......................................................... 56 1986 1999
Philip H. Glatfelter, II...................................................... 66 1986 1999
</TABLE>
- ------------------
* If elected at the Annual Meeting.
5
<PAGE>
DIRECTORS CONTINUING IN OFFICE
CLASS B DIRECTORS
<TABLE>
<CAPTION>
DIRECTOR YEAR TERM
NAME AGE SINCE WILL EXPIRE
- ------------------------------------------------------------------------------ --- --------- ------------
<S> <C> <C> <C>
C. Edwin Ireland.............................................................. 86 1986 1997
Donald H. Nikolaus............................................................ 53 1986 1997
</TABLE>
CLASS C DIRECTORS
<TABLE>
<CAPTION>
DIRECTOR YEAR TERM
NAME AGE SINCE WILL EXPIRE
- ------------------------------------------------------------------------------ --- --------- ------------
<S> <C> <C> <C>
Thomas J. Finley, Jr. ........................................................ 75 1986 1998
R. Richard Sherbahn........................................................... 67 1986 1998
</TABLE>
Mr. Bolinger has been President and Chief Executive Officer of Susquehanna
Bancshares, Inc. since 1982 and of Farmers First Bank since 1976. Mr. Bolinger
is also a director of Susquehanna Bancshares, Inc.
Mr. Finley retired in 1985 as President and Chief Executive Officer of the
Insurance Federation of Pennsylvania, a position he held for 18 years.
Mrs. Gilmartin has been an employee since 1969 of Donegal Insurance Agency,
which has no affiliation with the Company except that Donegal Insurance Agency
receives insurance commissions in the ordinary course of business from the
Company's subsidiaries and affiliates in accordance with such subsidiaries' and
affiliates' standard commission schedules and agency contracts. Mrs. Gilmartin
has been a director of the Mutual Company since 1979.
Mr. Glatfelter retired in 1989 as a Vice President of Meridian Bank, a
position he held for more than five years prior to his retirement. Mr.
Glatfelter has been a director of the Mutual Company since 1981 and has been
Vice Chairman of the Mutual Company since 1991.
Mr. Ireland is former Chairman of the Lancaster Industrial Development
Authority. He retired from Hamilton Watch Company in 1970. Prior thereto, he was
Vice President, Secretary and Treasurer of Hamilton Watch Company. Mr. Ireland
has been a director of the Mutual Company since 1972 and Chairman of its Board
of Directors since 1985. He has been Chairman of the Company's Board of
Directors since 1986.
Mr. Nikolaus has been President of the Mutual Company since 1981 and a
director of the Mutual Company since 1972. He has been President of the Company
since 1986. Mr. Nikolaus has been a partner in the law firm of Nikolaus,
Hohenadel & Umbenhauer since 1972.
Mr. Sherbahn has owned and operated Sherbahn Associates, Inc., a life
insurance and financial planning firm, since 1974. Mr. Sherbahn has been a
director of the Mutual Company since 1967.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors met four times in 1995. The Board of Directors has
an Executive Committee, an Audit Committee, a Nominating Committee, a
Compensation Committee and, together with the Mutual Company, a Coordinating
Committee.
The Company's Executive Committee met 16 times in 1995. Messrs. Nikolaus,
Ireland and Glatfelter are the members of the Executive Committee. The Executive
Committee has the authority to
6
<PAGE>
take all action that can be taken by the full Board of Directors, consistent
with Delaware law, between Board of Directors' meetings.
The Audit Committee of the Company consists of Messrs. Bolinger, Glatfelter
and Ireland. The Audit Committee, which met once in 1995, reviews audit reports
and management recommendations made by the Company's outside auditing firm.
The Nominating Committee of the Company consists of Messrs. Ireland and
Glatfelter. The Nominating Committee, which did not meet in 1995, is responsible
for the nomination of candidates to stand for election to the Board of Directors
at the Annual Meeting and the nomination of candidates to fill vacancies on the
Board of Directors between meetings of stockholders. The Nominating Committee
will consider written nominations for directors from stockholders to the extent
such nominations are made in accordance with the Company's By-laws. The
Company's By-laws require that any such nominations must be sent to the Company
at its principal executive offices, attention: Secretary, not less than 30 days
prior to the date of the stockholders meeting at which directors are to be
elected. Such written nomination should set forth the name, age, address and
principal occupation for the past five years of such nominee, the number of
shares of the Company's Common Stock beneficially owned by such nominee and such
other information about such nominee as would be required under the proxy
solicitation rules of the SEC if proxies were solicited for the election of such
nominee.
The Compensation Committee of the Company consists of Messrs. Ireland,
Sherbahn and Glatfelter. The Compensation Committee met two times in 1995 to
review and recommend compensation plans, approve certain compensation changes
and grant options under and determine participants in the 1986 Equity Incentive
Plan. No member of the Compensation Committee is a former or current officer or
employee of the Company, the Mutual Company or any of their respective
subsidiaries. Furthermore, no executive officer of the Company serves as a
member of a compensation committee of another entity one of whose executive
officers serves on the Compensation Committee of the Company or as a director of
the Company, nor does any executive officer of the Company serve as a director
of another entity, one of whose executive officers serves on the Compensation
Committee of the Company.
None of the directors of the Company attended fewer than 75% of the
aggregate of the total number of meetings of the Board of Directors plus the
total number of meetings of all committees of the Board of Directors on which
the director served that were held during 1995, except Mr. Ireland, who attended
62.5% of such meetings as a result of meetings missed due to illness.
COMPENSATION OF DIRECTORS
Directors of the Company were paid an annual retainer of $13,000 in 1995
and were paid $500 for each meeting attended in excess of five per year.
Directors who are members of committees of the Board of Directors receive $250
for each committee meeting attended. If a director serves on the Board of
Directors of both the Mutual Company and the Company, the director receives only
one annual retainer. If the Boards of Directors of both companies meet on the
same day, directors receive only one meeting fee. In such event, the retainer
and meeting fees are allocated 35% to the Mutual Company and 65% to the Company.
7
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Company and the
Mutual Company during each of the three fiscal years ended December 31, 1995 for
services rendered in all capacities to the chief executive officer of the
Company and the four other most highly compensated executive officers of the
Company whose compensation exceeded $100,000 in the fiscal year ended December
31, 1995.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------
AWARDS
----------------------
SECURITIES
ANNUAL COMPENSATION (1) RESTRICTED UNDERLYING
NAME AND --------------------------------- STOCK OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) AWARDS ($) (#) COMPENSATION ($)(3)
- ------------------------------ --------- ----------- --------- ---------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Donald H. Nikolaus, 1995 $ 311,000 $ 100,369 -- -- $ 85,430
President and Chief 1994 281,000 0 -- -- 64,776
Executive Officer 1993 255,000 80,144 -- -- 53,774
Ralph G. Spontak, 1995 $ 204,000 $ 57,133 -- -- $ 46,205
Senior Vice President, 1994 184,000 0 -- -- 34,496
Chief Financial Officer 1993 167,000 45,620 -- -- 25,422
and Secretary
Harry E. Newman, 1995 $ 137,000 $ 47,868 -- -- $ 27,186
Senior Vice President, 1994 122,000 0 -- -- 23,042
Claims(2) 1993 110,000 38,223 -- -- 12,167
William H. Shupert, 1995 $ 137,000 $ 47,868 -- -- $ 22,791
Senior Vice President, 1994 122,000 0 -- -- 19,244
Underwriting 1993 110,000 38,223 -- -- 12,167
Frank J. Wood 1995 $ 95,000 $ 18,530 -- -- $ 13,576
Vice President, 1994 86,500 0 -- -- 16,424
Marketing 1993 79,000 14,796 -- -- 14,456
</TABLE>
- ------------------
(1) All compensation of officers of the Company is paid by the Mutual Company.
Pursuant to the terms of an intercompany allocation agreement between the
Company and the Mutual Company, the Company is charged for its proportionate
share of all such compensation.
(2) Mr. Newman died in January 1996.
(3) Represents contributions made by the Company under its defined contribution
pension plan and its profit-sharing plan. In the case of Mr. Nikolaus, the
total shown also includes premiums paid under a split-dollar life insurance
policy of $21,267 and directors and committee meeting fees of $20,650. In
the case of Mr. Spontak for 1995, the total shown includes premiums paid
under a split-dollar life insurance policy of $4,043 and directors and
committee meeting fees of $15,200. In the case of Messrs. Newman, Shupert
and Wood for 1995, the totals shown also include term life insurance
premiums of $10,670, $6,275 and $2,316, respectively.
No options were granted by the Company during the fiscal year ended
December 31, 1995 to any of the persons named in the Summary Compensation Table.
8
<PAGE>
The following table sets forth information with respect to options
exercised during the year ended December 31, 1995 and held on December 31, 1995
by the persons named in the Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING OPTIONS OPTIONS AT FISCAL YEAR
SHARES AT FISCAL YEAR END END
ACQUIRED ON VALUE -------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- ------------- --------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Donald H. Nikolaus......... 35,000 $ 275,000 65,000 -- $ 453,750 $ --
Ralph G. Spontak........... 0 -- 53,000 -- 426,750 --
Harry E. Newman............ 33,200 205,600 -- -- -- --
William H. Shupert......... 33,200 238,800 -- -- -- --
Frank J. Wood.............. 0 -- 10,000 -- 67,500 --
</TABLE>
REPORT OF THE COMPENSATION COMMITTEE OF DONEGAL GROUP INC.
THE FOLLOWING REPORT OF THE COMPANY'S COMPENSATION COMMITTEE AND THE
PERFORMANCE GRAPH THAT IMMEDIATELY FOLLOWS SUCH REPORT SHALL NOT BE DEEMED PROXY
SOLICITATION MATERIAL, SHALL NOT BE DEEMED FILED WITH THE SEC UNDER THE EXCHANGE
ACT OR INCORPORATED BY REFERENCE IN ANY DOCUMENT SO FILED AND SHALL NOT
OTHERWISE BE SUBJECT TO THE LIABILITIES OF SECTION 18 OF THE EXCHANGE ACT.
Under rules established by the SEC, the Company is required to provide
certain information about the compensation and benefits provided to the
Company's President and Chief Executive Officer and the other executive officers
listed in the Summary Compensation Table. The disclosure requirements as to
these officers include the use of specified tables and a report of the Company's
Compensation Committee reviewing the factors that resulted in compensation
decisions affecting these officers and the Company's other executive officers.
The Compensation Committee of the Board of Directors has furnished the following
report in fulfillment of the SEC's requirements.
The Compensation Committee reviews the general compensation policies of the
Company, including the compensation plans and compensation levels for executive
officers, and administers the Company's 1986 Equity Incentive Plan and the cash
incentive compensation program in which the Company's executive officers
participate. No members of the Compensation Committee are former or current
officers of the Company, or have other interlocking relationships as defined by
the SEC.
Compensation of the Company's executive officers has two principal
elements: (i) an annual portion, consisting of a base salary that is reviewed
annually and cash bonuses based on the Company's underwriting results, and (ii)
a long-term portion, consisting of stock options. In general, the executive
compensation program of the Company has been designed to:
(i) Attract and retain executive officers who contribute to the long-term
success of the Company;
9
<PAGE>
(ii) Motivate key senior executive officers to achieve strategic business
objectives and reward them for their achievement; and
(iii) Support a compensation policy that differentiates in compensation
amounts based on corporate and individual performance and
responsibilities.
A major component of the Company's compensation policy, which has been
approved by the Compensation Committee, is that a significant portion of the
aggregate annual compensation of the Company's executive officers should be
based upon the Company's underwriting results as well as the contribution of the
individual officer. For a number of years, the Company has maintained a cash
incentive compensation program for the Company's executive officers. This
program provides a formula pursuant to which a fixed percentage of the Company's
underwriting results for the year is computed, as specified in the program, and
then allocated among the executive officers selected to participate in the
program for the particular year. The identity of the executive officers selected
to participate in the program for the particular year as well as their
participation in the amount determined by application of the fixed formula is
based upon recommendations submitted by the Company's senior executive officers
to the Compensation Committee. The Compensation Committee reviews those
recommendations and fixes the percentage participation of the Company's
executive officers in the program. The portion of the total compensation of the
executive officers named in the Summary Compensation Table arising from the cash
incentive compensation program formula increased in 1995 compared to 1994
because the Company's net income in 1995 was substantially greater than its net
income in 1994. The Compensation Committee therefore believes that the amount of
the incentive payments are tied directly to the Company's performance.
The principal factors considered by the Company when it established the
cash incentive compensation program were:
(i) achievement of the Company's long-term underwriting objectives; and
(ii) the Company's long-term underwriting results compared to the long-term
underwriting results of other property and casualty insurance
companies.
Such factors as cost control, continued development of the skills of the
Company's workforce to achieve greater efficiency and an ability to maintain and
expand the Company's current business on a profitable basis while seeking new
business opportunities through acquisitions, one of which was completed in 1995,
the Company's expansion into New York in late 1995 through the establishment of
a relationship between the Company and Pioneer Insurance Company (New York) and
the Company's successful completion of a $20,000,000 debt financing in December
1995, were considered in approving Mr. Nikolaus' participation percentage in
1995, as well as the above factors and a subjective analysis of the performance
of Mr. Nikolaus.
The Company's executive officers participate in the Company's 1986 Equity
Incentive Plan, under which stock options are granted from time to time at the
fair market value of the Company's Common Stock on the date of grant. The
options typically vest over three years. The primary purpose of the 1986 Equity
Incentive Plan is to provide an incentive for the Company's long-term
performance. Such stock options provide an incentive for the creation of
stockholder value over the long-term because the full benefit of the options can
be realized only if the price of the Company's Common Stock appreciates over
time.
10
<PAGE>
The Compensation Committee believes the compensation of Mr. Nikolaus and
the other executive officers of the Company is reasonable in view of the
Company's performance and the contribution of those officers to that performance
in 1995, as well as the performance of the Company in 1995 compared to the
performance of other property and casualty insurance companies in 1995.
DONEGAL GROUP INC. COMPENSATION COMMITTEE
C. Edwin Ireland
R. Richard Sherbahn
Philip H. Glatfelter, II
11
<PAGE>
COMPARISON OF TOTAL RETURN ON THE COMPANY'S COMMON STOCK WITH CERTAIN AVERAGES
The following graph provides an indicator of cumulative total stockholder
returns on the Company's Common Stock compared to the Russell 2000 Index and a
peer group of property and casualty insurance companies selected by Value Line,
Inc. The members of the peer group are as follows: W.R. Berkley Corporation, The
Chubb Corporation, Cincinnati Financial Corporation, USF&G Corporation, Fremont
General Corporation, Frontier Insurance Group, Inc., General Reinsurance
Corporation, The Hartford Steam Boiler Inspection and Insurance Company, 20th
Century Insurance Company, Orion Capital Corporation, Gainsco Inc., Ohio
Casualty Corporation, The Progressive Corporation, SAFECO Corporation, Selective
Insurance Group, Inc. and The St. Paul Companies, Inc.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
Donegal Group, Russell 2000 Index And Value Line Insurance: Property/Casualty
Index
(Performance Results Through 12/31/95)
[GRAPHIC]
In the printed version there appears a line graph depicting the following
plot points:
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
Donegal Group $100.00 $116.09 $130.10 $209.15 $182.66 $242.14
Russell 2000 Index $100.00 $146.05 $172.94 $205.64 $201.56 $258.89
Insurance: Prop/Cas $100.00 $126.61 $158.44 $156.75 $157.75 $209.21
Assumes $100 invested at the close of trading 12/31/90 in Donegal Group common
stock, Russell 2000 Index, and Insurance Property/Casualty.
*Cumulative total return assumes reinvestment of dividends.
12
<PAGE>
CERTAIN TRANSACTIONS
Donald H. Nikolaus, President and a director of the Company and the Mutual
Company, is also a partner in the law firm of Nikolaus, Hohenadel & Umbenhauer.
Such firm has served as general counsel to the Mutual Company since 1970 and to
the Company since 1986, principally in connection with the defense of claims
litigation arising in Lancaster, Dauphin and York Counties of Pennsylvania. Such
firm is paid its customary fees for such services.
Patricia A. Gilmartin, a director of the Company and the Mutual Company, is
an employee of Donegal Insurance Agency, which has no affiliation with the
Company except that Donegal Insurance Agency receives insurance commissions in
the ordinary course of business from the Company's subsidiaries and affiliates
in accordance with such subsidiaries' and affiliates' standard commission
schedules and agency contracts.
During 1995, certain executive officers of the Company exercised options
held by them pursuant to the Company's 1986 Equity Incentive Plan and thereafter
sold the shares of the Company's Common Stock thereby acquired to the Mutual
Company. In each case, the price paid was the closing bid price of the Company's
Common Stock on the date of the sale. From the sale proceeds, the Mutual Company
paid the exercise price of the options exercised to the Company, made the
appropriate withholding deduction for income tax purposes and remitted the
remaining balance to the selling executive officer. Certain information
concerning these transactions is as follows:
NUMBER OF NET
NAME OF SELLER SHARES SOLD PROCEEDS RECEIVED
- ------------------------------------------------ ----------- -----------------
Donald H. Nikolaus.............................. 35,000 $ 275,000
Harry E. Newman................................. 32,000 196,000
William H. Shupert.............................. 32,000 228,000
ELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
Unless instructed to the contrary, it is intended that votes will be cast
pursuant to the proxies for the election of KPMG Peat Marwick LLP as the
Company's independent public accountants for 1996. The Company has been advised
by KPMG Peat Marwick LLP that none of its members has any financial interest in
the Company. Election of KPMG Peat Marwick LLP will require the affirmative vote
of a majority of the shares of Common Stock represented in person or by proxy at
the Annual Meeting.
A representative of KPMG Peat Marwick LLP will attend the Annual Meeting,
will have the opportunity to make a statement, if such representative desires to
do so, and will be available to respond to any appropriate questions presented
by stockholders at the Annual Meeting.
13
<PAGE>
APPROVAL OF THE 1996 EMPLOYEE STOCK PURCHASE PLAN
DESCRIPTION OF THE 1996 EMPLOYEE STOCK PURCHASE PLAN
The Board of Directors of the Company adopted the 1996 Employee Stock
Purchase Plan (the 'Stock Purchase Plan') as of January 1, 1996, subject to
stockholder approval. The purpose of the Stock Purchase Plan is to provide
eligible employees with an opportunity to acquire or increase their proprietary
interest in the Company through the purchase of the Company's Common Stock at a
discount from current market prices. The Stock Purchase Plan is intended to meet
the requirements of Section 423 of the Internal Revenue Code of 1986, as amended
(the 'Code').
The total number of shares of the Company's Common Stock that are available
for issuance under the Stock Purchase Plan is 100,000 shares. Appropriate
adjustments in the number or kind of shares reserved for sale under the Stock
Purchase Plan are provided for in the event of a stock split, stock dividend,
share combination or spin-off and certain other types of corporate transactions
involving the Company, including mergers, consolidations, reorganizations and
reclassifications.
On March 1, 1996, the closing price of the Company's Common Stock as
reported on the Nasdaq National Market was $19.00 per share.
The Stock Purchase Plan is administered by a committee of three employees
of the Company (the 'Purchase Plan Committee') appointed by the Company's Board
of Directors. The Purchase Plan Committee is authorized to adopt rules and
regulations from time to time for carrying out the provisions of the Stock
Purchase Plan. Any interpretation or construction of any provision of the Stock
Purchase Plan by the Purchase Plan Committee is final and conclusive as to all
persons absent contrary action by the Board of Directors. Any interpretation or
construction of any provision of the Stock Purchase Plan by the Board of
Directors is final and conclusive as to all persons.
Full-time employees of the Company, the Mutual Company or any subsidiary of
the Company or the Mutual Company who have completed one month of employment
prior to the beginning of an enrollment period are eligible to participate in
the Stock Purchase Plan. An otherwise eligible employee may not purchase shares
under the Stock Purchase Plan if exercising the right to purchase shares of the
Company's Common Stock: (i) would cause the employee to own shares of the
Company's Common Stock that possess 5% or more of the total combined voting
power or value of all classes of the Company's stock or any subsidiary of the
Company or the Mutual Company; or (ii) would cause the employee to have purchase
rights under all stock purchase plans of the Company or any subsidiary of the
Company or the Mutual Company that meet the requirements of Section 423 of the
Code that accrue at a rate that exceeds $25,000 of fair market value of the
Common Stock of the Company or any subsidiary of the Company or the Mutual
Company for each calendar year in which such right is outstanding. Separation
from employment for any reason constitutes an automatic withdrawal from the
Stock Purchase Plan.
The Company has heretofore maintained The Donegal Group Inc. Employee Stock
Purchase Plan (the 'Prior Plan'). The Company anticipates that all of the shares
of the Company's Common Stock reserved for issuance under the Prior Plan will be
subscribed for during the current subscription period under the Prior Plan. The
first subscription period under the Stock Purchase Plan will run concurrently
with the current subscription period under the Prior Plan so that, after the
shares reserved for issuance under the Prior Plan are fully subscribed, shares
of the Company's Common Stock reserved for issuance under the Stock Purchase
Plan will be issued to the extent necessary to fill any oversubscription under
the Prior Plan, and, in such event, shares issued under the Stock Purchase Plan
and
14
<PAGE>
under the Prior Plan will be allocated among participants on a pro rata basis or
on such other reasonable basis as management of the Company shall determine.
The Stock Purchase Plan provides for semi-annual subscription periods,
extending from January 1 through June 30 or from July 1 through December 31,
respectively, beginning on January 1, 1996 and ending on December 31, 2005.
Employees enrolled in the Prior Plan as of December 31, 1995 are deemed to be
automatically enrolled for participation in the Stock Purchase Plan. Thereafter,
enrollment for participation in the Stock Purchase Plan shall take place during
the month preceding each subscription period, which is either the period from
December 1 through December 31 or the period from June 1 through June 30 of each
year.
Payroll deduction is the only payment method available for the purchase of
Common Stock under the Stock Purchase Plan. Employees may invest a maximum of
10% of their base pay towards the purchase of Common Stock in any subscription
period. At a minimum, an employee must authorize a payroll deduction sufficient
to enable such employee to purchase at least ten shares of the Company's Common
Stock in any subscription period.
Subscriptions received under the Stock Purchase Plan during each
subscription period will be held by the Company in a plan account maintained for
each employee. At the end of each subscription period, the amount contained in
the employee's plan account will be divided by the subscription price for the
applicable subscription period, and the employee's plan account will be credited
with the resulting number of whole shares. The subscription price for any
subscription period will be equal to the lesser of 85% of the closing price of
the Common Stock as reported on the Nasdaq National Market on the last trading
day before the first day of the enrollment period with respect to such
subscription period or 85% of the closing price of the Common Stock as reported
on the Nasdaq National Market on the last trading day of such subscription
period; provided that the subscription price will never be less than $1.00 per
share.
No employee may assign his rights under the Stock Purchase Plan. An
employee may transfer rights under the Stock Purchase Plan only by will or by
the laws of descent and distribution, and such subscription rights shall be
exercisable, during an employee's lifetime, only by the employee.
Upon the discontinuance of an employee's employment with the Company, the
Mutual Company or a subsidiary of the Company or the Mutual Company or an
employee's withdrawal from the Stock Purchase Plan, the amount of any cash
credited to the employee's Stock Purchase Plan account for the current
subscription period will be refunded by the Company to the employee without
interest. Withdrawal by an officer subject to Section 16 of the Exchange Act,
except for withdrawal because of the discontinuance of an officer's employment
with the Company, the Mutual Company or a subsidiary of the Company or the
Mutual Company, will become effective only at the end of a subscription period.
No further payroll deductions will be made with respect to employees that have
withdrawn from the Stock Purchase Plan. An employee's withdrawal from the Stock
Purchase Plan does not affect such employee's eligibility to participate in the
Stock Purchase Plan during succeeding subscription periods. A retiring employee
or a beneficiary of a participating employee upon the death of such employee may
elect to purchase the appropriate number of whole shares of Common Stock using
the date of retirement or death as though it were the last day of a subscription
period.
15
<PAGE>
AMENDMENT AND TERMINATION
The Stock Purchase Plan will remain in effect until December 31, 2005 or
until all shares available for purchase are purchased under the Stock Purchase
Plan. The Board of Directors of the Company has the right to terminate the Stock
Purchase Plan at any time without notice, as long as no participant's existing
rights are adversely affected thereby. Without stockholder approval, no
amendments may be made to the Stock Purchase Plan to: (i) increase materially
the benefits accruing to participants under the Stock Purchase Plan; (ii)
increase the total number of shares of Common Stock subject to the Stock
Purchase Plan; (iii) change the formula by which the price at which the shares
of Common Stock shall be sold is determined; or (iv) change the class of
employees eligible to participate in the Stock Purchase Plan.
FEDERAL INCOME TAX CONSEQUENCES
The Stock Purchase Plan is intended to qualify under the provisions of
Section 423 of the Code. No income will be realized for federal income tax
purposes by a participant upon the purchase of shares under the Stock Purchase
Plan. For participants who do not dispose of their shares within two years after
the date on which the right to purchase was granted nor within one year after
their shares were purchased, the gain on sale of the shares following the end of
the required holding period (or their increase in value in the event of death
prior to sale) will, under the present provisions of the Code, be taxed as
ordinary income to the extent of the lesser of (i) an amount equal to the
difference between the fair market value of the shares on the date of grant and
85% of such value on such date or (ii) an amount equal to the difference between
the fair market value of the shares at the time of disposition and the amount
paid for such shares under the Stock Purchase Plan. Any additional gain will be
treated as long-term capital gain assuming the shares are capital assets in the
participant's hands. If a participant is entitled to long-term capital gain
treatment upon a sale of the stock, the Company will not be entitled to any
deduction for federal income tax purposes with respect thereto. For participants
who dispose of their shares within two years after the date of grant or within
one year after their shares were purchased, the gain on the sale of the shares
will, under the present provisions of the Code, be taxed as ordinary income to
the extent of the difference between the purchase price of the shares and the
fair market value of the shares on the purchase date and such difference will be
deductible by the Company for federal income tax purposes. Any additional gain
will be treated as long-term or short-term capital gain, depending on whether
the shares have been held for more or less than one year from the date they were
purchased.
VOTE REQUIRED
Approval of the Stock Purchase Plan will require the affirmative vote of
the holders of a majority of the outstanding shares of the Company's Common
Stock present in person or represented by proxy at the Annual Meeting and
entitled to vote. Abstentions are considered shares of stock present in person
or represented by proxy at the meeting and entitled to vote and are counted in
determining the number of votes necessary for a majority. An abstention from
voting will therefore have the practical effect of voting against approval of
the Stock Purchase Plan because it does not represent a vote for approval.
Broker non-votes are not considered shares present in person or represented by
proxy and entitled to vote on the amendment and will have no effect on the vote.
The Board of Directors recommends a vote FOR the approval of the Stock Purchase
Plan.
16
<PAGE>
APPROVAL OF THE 1996 EQUITY INCENTIVE PLAN
DESCRIPTION OF THE 1996 EQUITY INCENTIVE PLAN
The Board of Directors of the Company adopted the 1996 Equity Incentive
Plan (the '1996 Equity Incentive Plan') on February 15, 1996, subject to
stockholder approval. The purpose of the 1996 Equity Incentive Plan is to
further the growth, development and financial success of the Company, the Mutual
Company and the subsidiaries of the Company and the Mutual Company by providing
additional incentives to those officers and key employees who are responsible
for the management and affairs of the Company, the Mutual Company and the
subsidiaries of the Company and the Mutual Company which will enable them to
participate in the growth of the capital stock of the Company.
The 1996 Equity Incentive Plan permits the granting of options to purchase
Common Stock of the Company ('Options'), including Options intended to qualify
as incentive stock options ('Incentive Stock Options') under Section 422 of the
Code, and Options not intended to so qualify ('Non-Qualified Stock Options') to
those officers and key employees of the Company, the Mutual Company and the
subsidiaries of the Company and the Mutual Company (as defined in Section 425 of
the Code) who are in positions in which their decisions, actions and counsel
significantly impact upon the profitability and success of the Company, the
Mutual Company and the subsidiaries of the Company and the Mutual Company.
Directors of the Company who are not also officers or employees of the Company,
the Mutual Company or the subsidiaries of the Company and the Mutual Company are
not eligible to participate in the 1996 Equity Incentive Plan. Nothing contained
in the 1996 Equity Incentive Plan affects the right of the Company, the Mutual
Company or any subsidiary of the Company or the Mutual Company to terminate the
employment of an employee.
Approximately 25 persons are eligible to participate in the 1996 Equity
Incentive Plan, including executive officers of the Company, the Mutual Company
and the subsidiaries of the Company and the Mutual Company. No Options have yet
been granted to any person and no determination has been made as to the
allocation of grants of Options to specific employees under the 1996 Equity
Incentive Plan.
The total number of shares of the Company's Common Stock that may be the
subject of Options granted under the 1996 Equity Incentive Plan may not exceed
345,850 shares in the aggregate. If an Option expires or is terminated for any
reason without having been fully vested or exercised, the number of shares
subject to such Option which have not been purchased or become vested may again
be made subject to an Option under the 1996 Equity Incentive Plan. Appropriate
adjustments to outstanding Options and to the number or kind of shares subject
to the 1996 Equity Incentive Plan are provided for in the event of a stock
split, reverse stock split, stock dividend, share combination or
reclassification and certain other types of corporate transactions involving the
Company, including a merger or a sale of substantially all of the assets of the
Company. On March 1, 1996, the closing price of the Company's Common Stock as
reported on the Nasdaq National Market was $19.00 per share.
The 1996 Equity Incentive Plan will be administered by a committee of at
least three persons (the 'Equity Plan Committee') appointed by the Company's
Board of Directors, none of whom is eligible to receive Options under the 1996
Equity Incentive Plan. The Equity Plan Committee is authorized to (i) interpret
the provisions of the 1996 Equity Incentive Plan and decide all questions of
fact arising in its application; (ii) select the employees to whom Options are
granted, and determine the timing, type, amount, size and terms of each such
grant; and (iii) make all other determinations necessary or advisable for the
administration of the 1996 Equity Incentive Plan.
17
<PAGE>
INCENTIVE AND NON-QUALIFIED OPTIONS
The exercise price of the shares subject to Options will be set by the
Equity Plan Committee but may not be less than 100% of the fair market value of
such shares on the date the Option is granted as determined by the Equity Plan
Committee.
Options will be evidenced by written agreements in such form not
inconsistent with the 1996 Equity Incentive Plan as the Equity Plan Committee
shall approve from time to time. Each agreement will state the period or periods
of time within which the Option may be exercised, provided, however, that no
Option may be exercised in whole or in part during the first six months after
such Option is granted unless expressly permitted by the Committee. The Equity
Plan Committee may accelerate the exercisability of any installments upon such
circumstances and subject to such terms and conditions as the Equity Plan
Committee deems appropriate. Unless the Equity Plan Committee accelerates
exercisability, no Option that is unexercisable at the time of the optionee's
termination of employment may thereafter become exercisable. No Option may be
exercised after ten years from the date of its grant.
An outstanding Non-Qualified Option that has become exercisable generally
terminates one year after the termination of employment due to death, retirement
or total disability and three months after employment termination for any reason
other than retirement, total disability or death. Incentive Stock Options that
have become exercisable generally will terminate one year after termination of
employment due to total disability or death and three months after an employment
termination for any other reason. No Option may be assigned or transferred,
except by will or by the applicable laws of descent and distribution. During the
lifetime of the optionee, the Option may be exercised only by the optionee.
The Equity Plan Committee will determine whether Options granted are to be
Incentive Stock Options meeting the requirements of Section 422 of the Code.
Incentive Stock Options may be granted only to eligible employees. Any such
optionee must own less than 10% of the total combined voting power of the
Company or of any of its subsidiaries unless at the time such Incentive Stock
Option is granted the price of the Option is at least 110% of the fair market
value of the Common Stock subject to the Option and, by its terms, the Incentive
Stock Option is not exercisable after the expiration of five years from the date
of grant. An optionee may not receive Incentive Stock Options for shares that
first become exercisable in any calendar year with an aggregate fair market
value determined at the date of grant in excess of $100,000.
The option price must be paid in full at the time of exercise unless
otherwise determined by the Equity Plan Committee. Payment must be made in cash,
in shares of the Company's Common Stock valued at their then fair market value,
or a combination thereof, as determined in the discretion of the Equity Plan
Committee. It is the policy of the Equity Plan Committee that any taxes required
to be withheld must also be paid at the time of exercise. The Equity Plan
Committee may, in its discretion, allow an optionee to enter into an agreement
with the Company's transfer agent or a brokerage firm of national standing
whereby the optionee will simultaneously exercise the Option and sell the shares
acquired thereby and either the Company's transfer agent or the brokerage firm
executing the sale will remit to the Company from the proceeds of sale the
exercise price of the shares as to which the Option has been exercised.
18
<PAGE>
AMENDMENT AND TERMINATION
The 1996 Equity Incentive Plan will remain in effect until all Options
granted under the 1996 Equity Incentive Plan have been satisfied by the issuance
of shares, except that no Option may be granted under the 1996 Equity Incentive
Plan after February 15, 2006. Without stockholder approval, no amendments may be
made to the 1996 Equity Incentive Plan to: (i) materially increase the maximum
number of shares that may be issued under the 1996 Equity Incentive Plan, except
to reflect adjustments in capitalization as described in the 1996 Equity
Incentive Plan; (ii) materially increase the benefits accruing to participants
under the 1996 Equity Incentive Plan; or (iii) materially modify requirements
for eligibility for participation under the 1996 Equity Incentive Plan. In all
other respects, the Equity Incentive Plan can be amended, modified, suspended or
terminated by the Board of Directors of the Company or the Equity Plan
Committee, except that no modification, amendment or termination may be made to
the 1996 Equity Incentive Plan, without the consent of an optionee, if such
modification, amendment or termination will affect the rights of the optionee
under an Option previously granted.
FEDERAL INCOME TAX CONSEQUENCES
The 1996 Equity Incentive Plan is not qualified under Section 401(a) of the
Code. The following description, which is based on existing laws, sets forth
generally certain of the federal income tax consequences of the Options under
the 1996 Equity Incentive Plan. This description may differ from the actual tax
consequences of participation in the 1996 Equity Incentive Plan.
An employee receiving an Option will not recognize taxable income upon the
grant of the Option, nor will the Company be entitled to any deduction on
account of such grant. In the case of Non-Qualified Stock Options, the optionee
will recognize ordinary income upon the exercise of the Non-Qualified Stock
Option in an amount equal to the difference between the option price and the
fair market value of the shares on the date of exercise. When the optionee
disposes of the shares acquired upon exercise of the Option, the employee will
generally recognize capital gain or loss equal to the difference between (i) the
selling price of the shares and (ii) the sum of the option price and the amount
included in his income when the Option was exercised. Such gain will be
long-term or short-term depending upon whether the shares were held for more or
less than one year after the date of exercise.
Incentive Stock Options granted under the 1996 Equity Incentive Plan are
intended to qualify as incentive stock options under Section 422 of the Code. A
purchase of shares upon exercise of an Incentive Stock Option will not result in
recognition of income at that time. However, the excess of the fair market value
of the shares purchased over the exercise price will constitute an item of tax
preference. This tax preference will be included in the optionee's computation
of his alternative minimum tax.
If the optionee does not dispose of the shares issued to the optionee upon
the exercise of an Incentive Stock Option within one year of such issuance or
within two years from the date of the grant of such Option, whichever is later,
then any gain or loss realized by the optionee on a later sale or exchange of
such shares generally will be a long-term capital gain or a long-term capital
loss. If the optionee sells the shares during such period, the sale will be
referred to as a 'disqualifying disposition.' In that event, the optionee will
recognize ordinary income for the year in which the disqualifying disposition
occurs equal to the amount, if any, by which the lesser of the fair market value
of such shares on the date of exercise of such Option or the amount realized
from the sale exceeded the amount the optionee paid for such shares. Any
additional gain realized generally will be capital gain, which will be long-term
or short-term depending on the holding period for the shares. If
19
<PAGE>
the optionee disposes of the shares by gift during such period, the transfer
will be treated as a disqualifying disposition subject to the rules described
herein.
If the purchase price upon exercise of an Option is paid with shares
already owned by the optionee, generally no gain or loss will be recognized with
respect to the shares used for payment and the additional shares received will
be taxed as described herein. However, if payment of the purchase price upon
exercise of an Incentive Stock Option is made with shares acquired upon exercise
of an Incentive Stock Option before the shares used for payment have been held
for the two-year or one-year period described herein, use of such shares as
payment will be treated as a 'disqualifying disposition' of the shares used for
payment subject to the rules described herein.
The Company will be entitled to a tax deduction in connection with an
Option under the 1996 Equity Incentive Plan only in an amount equal to the
ordinary income realized by the optionee and at the time such optionee
recognizes such income, provided that applicable tax withholding requirements
are met. The federal, state and local income tax consequences to any particular
taxpayer will depend upon the taxpayer's individual circumstances. In addition,
various tax legislative proposals are introduced in the Congress from time to
time, and it is not possible to predict which of the various proposals
introduced will be enacted into law, the form in which they finally may be
enacted, the effective dates thereof or the effect on the tax consequences of
participation in the 1996 Equity Incentive Plan.
VOTE REQUIRED
Approval of the 1996 Equity Incentive Plan will require the affirmative
vote of the holders of a majority of the outstanding shares of the Company's
Common Stock present in person or represented by proxy at the Annual Meeting and
entitled to vote. Abstentions are considered shares of stock present in person
or represented by proxy at the meeting and entitled to vote and are counted in
determining the number of votes necessary for majority. An abstention from
voting will therefore have the practical effect of voting against approval of
the 1996 Equity Incentive Plan because it does not represent a vote for
approval. Broker non-votes are not considered shares present in person or
represented by proxy and entitled to vote on the amendment and will have no
effect on the vote. The Board of Directors recommends a vote FOR the approval of
the 1996 Equity Incentive Plan.
ANNUAL REPORT
A copy of the Company's Annual Report for 1995 is being mailed to the
Company's stockholders with this Proxy Statement.
STOCKHOLDER PROPOSALS
Any stockholder who, in accordance with and subject to the provisions of
the proxy rules of the SEC, wishes to submit a proposal for inclusion in the
Company's proxy statement for its 1997 Annual Meeting of Stockholders must
deliver such proposal in writing to the Company's Secretary at the Company's
principal executive offices at 1195 River Road, Marietta, Pennsylvania 17547,
not later than November 26, 1996.
20
<PAGE>
OTHER PROPOSALS
The Board of Directors does not know of any matters to be presented for
consideration other than the matters described in the Notice of Annual Meeting,
but if any matters are properly presented, it is the intention of the persons
named in the accompanying proxy to vote on such matters in accordance with their
judgment.
By Order of the Board of Directors,
/s/ Donald H. Nikolaus
Donald H. Nikolaus,
President and Chief Executive Officer
March 26, 1996
21
<PAGE>
EXHIBIT (21)
SUBSIDIARIES OF REGISTRANT
Registrant owns 100% of the outstanding stock of the following insurance
companies:
Name State of Formation
---- ------------------
Atlantic States Insurance Company Pennsylvania
Southern Insurance Company of Virginia Virginia
Delaware American Insurance Company Delaware
Registrant owns 100% of the outstanding stock of the following business
corporation:
Name State of Formation
---- ------------------
Atlantic Inspection Services, Inc. Maryland
EXHIBIT (23)
<PAGE>
Independent Auditors' Consent
The Board of Directors
Donegal Group Inc.
We consent to incorporation by reference in the registration statements (Nos.
33-85128 and 33-31287) on Form S-8 of Donegal Group Inc. of our report dated
February 23, 1996, relating to the consolidated balance sheets of Donegal Group
Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1995, which report is
incorporated by reference in the December 31, 1995 annual report on Form 10-K of
Donegal Group Inc.
Our report refers to a change in the Company's method of accounting for
investment securities effective January 1, 1994.
KPMG Peat Marwick LLP
Harrisburg, Pennsylvania
March 28, 1996
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<NET-INCOME> 9,857,950
<EPS-PRIMARY> 2.31
<EPS-DILUTED> 2.31
</TABLE>
