DONEGAL GROUP INC.
AGENCY STOCK PURCHASE PLAN
PROSPECTUS SUPPLEMENT
TO PROSPECTUS DATED AUGUST 22, 1996
---------------------
On August 14, 1998, Donegal Group Inc. (the "Company") filed with the
Securities and Exchange Commission a Form 10-Q Quarterly Report for the quarter
ended June 30, 1998, a copy of which, without exhibits, is attached to this
Prospectus Supplement.
This Prospectus Supplement should be read in conjunction with the
Company's Prospectus dated August 22, 1996 and the Company's 1997 Annual Report
to Stockholders.
The date of this Prospectus Supplement is September 9, 1998.
<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 of the Securities Exchange Act
of 1934
For the Quarterly Period Ended June 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________________ to ___________________.
Commission File No. 0-15341
Donegal Group Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2424711
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1195 River Road, P.O. Box 302, Marietta, PA 17547-0302
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(717) 426-1931
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x . No. .
--- ---
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years:
Indicate by check mark whether the registrant has filed all documents
and reports required by Sections 12, 13, or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes . No .
--- ---
Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 8,132,759 shares of
Common Stock, $1.00 par value, outstanding on July 31, 1998.
<PAGE>
Part I. Financial Information
Item 1. Financial Statements.
Donegal Group Inc. And Subsidiaries
Consolidated Balance Sheet
<TABLE>
<CAPTION>
Assets June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Investments (Unaudited)
Fixed maturities
Held to maturity, at amortized cost $113,012,794 $117,246,205
Available for sale, at market value 63,681,171 57,731,251
Equity securities, available for sale at market 13,696,428 7,274,562
Short-term investments, at cost, which
approximates market 13,663,713 22,712,787
Other investments, at cost, which
approximates market 1,000,000 --
------------ ------------
Total Investments 205,054,106 204,964,805
Cash 1,826,116 3,413,315
Accrued investment income 2,837,984 2,741,207
Premiums receivable 12,952,084 11,244,628
Reinsurance receivable 43,428,769 40,953,032
Deferred policy acquisition costs 9,109,754 8,448,060
Federal income tax receivable 459,059 56,454
Deferred federal income taxes 3,090,040 3,302,043
Prepaid reinsurance premiums 23,410,314 22,882,283
Property and equipment, net 5,058,747 4,938,524
Accounts receivable - securities --- 456,493
Due from affiliate 471,627 141,313
Other 1,270,007 562,348
------------ ------------
Total Assets $308,968,607 $304,104,505
============ ============
Liabilities and Stockholders' Equity
Liabilities
Losses and loss expenses $122,566,123 $118,112,390
Unearned premiums 74,728,962 71,367,691
Accrued expenses 2,310,911 3,214,767
Reinsurance balances payable 664,316 735,009
Cash dividend declared to stockholders -- 604,054
Line of credit 5,000,000 10,500,000
Accounts payable - securities -- 2,499,059
Other 611,826 283,098
Due to affiliate - Pioneer acquisition 5,191,774 5,191,774
------------ ------------
Total Liabilities 211,073,912 212,507,842
------------ ------------
Stockholders' Equity
Preferred stock, $1.00 par value, authorized
1,000,000 shares; none issued
Common stock, $1.00 par value, authorized 15,000,000 shares,
issued 8,245,868 and 6,122,431 shares and outstanding
8,123,580 and 6,030,715 shares 8,245,868 6,122,431
Additional paid-in capital 40,187,679 38,932,117
Accumulated other comprehensive income 1,455,560 1,011,417
Retained earnings 48,897,344 46,422,454
Treasury stock (891,756) (891,756)
------------ ------------
Total Stockholders' Equity 97,894,695 91,596,663
------------ ------------
Total Liabilities and
Stockholders' Equity $308,968,607 $304,104,505
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-1-
<PAGE>
Donegal Group Inc. and Subsidiaries
Consolidated Statement of Income
(Unaudited)
For the three months ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
Three Months Ended June 30,
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Premiums earned $41,260,309 $39,721,921
Premiums ceded 13,682,052 12,898,416
----------- -----------
Net premiums earned 27,578,257 26,823,505
Investment income, net of investment
expenses 2,768,139 2,881,771
Realized gain 35,442 35,527
Lease income 188,120 154,396
Service charge income 453,068 358,661
----------- -----------
Total Revenues 31,023,026 30,253,860
----------- -----------
Expenses:
Losses and loss expenses 28,433,598 25,799,082
Reinsurance recoveries 9,208,460 8,469,679
----------- -----------
Net losses and loss expenses 19,225,138 17,329,403
Amortization of deferred policy
acquisition costs 5,025,000 4,251,000
Other underwriting expenses 3,450,366 4,605,054
Policy dividends 342,266 308,070
Interest 200,556 277,938
Other expenses 401,243 376,348
----------- -----------
Total Expenses 28,644,569 27,147,813
----------- -----------
Income before income taxes 2,378,457 3,106,047
Income taxes 485,025 705,450
----------- -----------
Net income $ 1,893,432 $ 2,400,597
=========== ===========
Earnings per common share
Basic $.22 $.30*
=== ===
Diluted $.22 $.30*
=== ===
</TABLE>
Statement of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
1998 1997
----------- -----------
<S> <C> <C>
Net Income $ 1,893,432 $ 2,400,597
----------- -----------
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gain arising
during the period 142,285 641,902
Less: Reclassification adustment for
losses included in
Net income (308) (4,307)
----------- -----------
Other comprehensive income 141,977 637,595
----------- -----------
Comprehensive income $ 2,035,409 $ 3,038,192
=========== ===========
</TABLE>
- ---------------
* Restated
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
Donegal Group Inc. and Subsidiaries
Consolidated Statement of Income
(Unaudited)
For the six months ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Premiums earned $81,739,088 $78,763,105
Premiums ceded 26,956,287 25,535,267
----------- -----------
Net premiums earned 54,782,801 53,227,838
Investment income, net of investment
expenses 5,613,406 5,726,754
Realized gain 347,235 73,354
Lease income 371,184 296,848
Service charge income 804,544 752,437
----------- -----------
Total Revenues 61,919,170 60,077,231
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Expenses:
Losses and loss expenses 53,360,594 49,706,729
Reinsurance recoveries 18,333,551 15,464,783
----------- -----------
Net losses and loss expenses 35,027,043 34,241,946
Amortization of deferred policy
acquisition costs 9,725,000 8,730,000
Other underwriting expenses 8,147,317 8,717,870
Policy dividends 820,124 741,769
Interest 383,615 442,925
Other expenses 823,052 773,813
----------- -----------
Total Expenses 54,926,151 53,648,323
----------- -----------
Income before income taxes 6,993,019 6,428,908
Income taxes 1,782,934 1,465,878
----------- -----------
Net income $5,210,085 $ 4,963,030
========== ===========
Earnings per common share
Basic $.63 $.62*
=== ===
Diluted $.62 $.62*
=== ===
</TABLE>
Statement of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
----------- -----------
<S> <C> <C>
Net Income $ 5,210,085 $ 4,963,030
----------- -----------
Other comprehensive income, net of tax
Unrealized gains (losses) on securities:
Unrealized holding gain arising
during the period 486,787 128
Less: Reclassification adustment for
losses included in
Net income (41,644) (717)
----------- -----------
Other comprehensive income (loss) 444,143 (589)
----------- -----------
Comprehensive income $ 5,654,228 $ 4,962,441
=========== ===========
</TABLE>
- -------------
* Restated
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Accumulated Total
Common Stock Additional Other Com- Stock-
-------------------------- Paid-In prehensive Retained Treasury holders'
Shares Amount Capital Income Earnings Stock Equity
--------- ---------- ---------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1997 6,122,431 $6,122,431 $38,932,117 $1,011,417 $46,422,454 $(891,756) $91,596,663
Issuance of
Common Stock 61,970 61,970 1,255,562 1,317,532
Net Income 5,210,085 5,210,085
Other Comprehensive
Income 444,143 444,143
Stock Dividend 2,061,467 2,061,467 (2,061,467) --
Cash Dividend (673,728) (673,728)
----------- ---------- ----------- ---------- ----------- ---------- -----------
Balance,
June 30, 1998 8,245,868 $8,245,868 $40,187,679 $1,455,560 $48,897,344 $(891,756) $97,894,695
=========== ========== =========== ========== =========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the six months ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
Six months ended June 30,
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 5,210,085 $ 4,963,030
----------- -----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 217,046 178,538
Realized investment gain (347,235) (73,354)
Changes in Assets and Liabilities:
Losses and loss expenses 4,453,733 267,228
Unearned premiums 3,361,271 563,176
Premiums receivable (1,707,456) (15,611)
Deferred policy acquisition costs (661,694) (72,796)
Deferred federal income taxes (16,798) (110,876)
Reinsurance receivable (2,475,737) 2,467,980
Prepaid reinsurance premiums (528,031) (515,112)
Accrued investment income (96,777) (151,078)
Due from affiliate (330,314) 967,333
Reinsurance balances payable (70,693) (50,622)
Federal income taxes receivable (402,605) (795,418)
Other, net (1,282,787) (1,697,586)
----------- -----------
Net adjustments 111,923 961,802
----------- -----------
Net cash provided by operating activities 5,322,008 5,924,832
----------- -----------
Cash flows from investing activities:
Purchase of fixed maturities
Held to maturity (9,004,828) (13,087,963)
Available for sale (14,234,581) (10,183,672)
Purchase of equity securities, available for sale (10,878,128) (3,015,732)
Maturity of fixed maturities
Held to maturity 13,307,736 4,484,420
Available for sale 5,248,065 3,594,999
Sale of fixed maturities - available for sale 535,765 4,010,313
Sale of equity securities, available for sale 5,893,013 1,538,232
Purchase of other investments (1,000,000) --
Purchase of property and equipment (365,073) (988,680)
Net sales of short-term investments 9,049,074 6,507,482
----------- -----------
Net cash used in investing activities (1,448,957) (7,140,601)
----------- -----------
Cash flows from financing activities:
Cash dividends paid (1,277,782) (1,047,079)
Issuance of common stock 1,317,532 398,077
Line of credit, net (5,500,000) --
----------- -----------
Net cash provided by (used in)
financing activities (5,460,250) (649,002)
----------- -----------
Net decrease in cash (1,587,199) (1,864,771)
Cash at beginning of year 3,413,315 3,700,163
----------- -----------
Cash at end of quarter $ 1,826,116 $ 1,835,392
=========== ===========
Cash paid during period - Interest $ 58,143 $ 334,014
- Income taxes $ 2,202,337 $ 559,584
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
(Unaudited)
Summary Notes to Consolidated Financial Statements
1 - Organization
The Company was organized as a regional insurance holding company by
Donegal Mutual Insurance Company (the "Mutual Company") on August 26, 1986 and
operates in Pennsylvania, Maryland, Delaware, Virginia and Ohio through its
wholly owned stock insurance companies, Atlantic States Insurance Company
("Atlantic States"), Southern Insurance Company of Virginia ("Southern"),
Delaware Atlantic Insurance Company ("Delaware"), Pioneer Insurance Company
("Pioneer") and Atlantic Insurance Services, Inc. ("AIS"). The Company's major
lines of business are Automobile Liability, Automobile Physical Damage,
Homeowners, Commercial Multiple Peril and Workers' Compensation. Atlantic,
Southern, Delaware and Pioneer are subject to regulation by Insurance
Departments in those states in which they operate and undergo periodic
examination by those departments. They are also subject to competition from
other insurance carriers in their operating areas. Atlantic States engages in
the insurance business primarily through an intercompany pooling arrangement
with the Mutual Company. Southern was acquired by the Company on December 31,
1988 pursuant to a plan of conversion from a mutual to a stock company and cedes
50% of its business to the Mutual Company, 80% prior to 1991. On December 29,
1995, the Company acquired all of the outstanding stock of Delaware. 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. On March 31,
1997, the Company acquired all of the outstanding stock of Pioneer. 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 Pioneer as a
consolidated subsidiary from January 1, 1994 to the present. At June 30, 1998,
the Mutual Company held 58% of the outstanding common stock of the Company.
2 - Basis of Presentation
The financial information for the interim period included herein is
unaudited; however, such information reflects all adjustments, consisting only
of normal recurring adjustments, which, in the opinion of management are
necessary to a fair presentation of the financial position, results of
operations and cash flow for the interim period included herein. The results of
operations for the three months ended and for the six months ended June 30,
1998, are not necessarily indicative of results of operations to be expected for
the twelve months ended December 31, 1998.
On June 25, 1998, the Company issued a 4 for 3 stock split in the form
of a 33-1/3% stock dividend to stockholders of record as of June 10, 1998. Per
share information prior to June 25, 1998, has been restated for this change.
These financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
-6-
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
Donegal Group Inc. ("DGI" or the "Company") is a regional insurance
holding company doing business in Pennsylvania, Maryland, Delaware, Virginia and
Ohio through its four wholly owned property-casualty insurance subsidiaries,
Atlantic States Insurance Company ("Atlantic"), Southern Insurance Company of
Virginia ("Southern"), Pioneer Insurance Company ("Pioneer") and Delaware
Atlantic Insurance Company ("Delaware"). The Company's major lines of business
in 1997 and their percentage of total net earned premiums were Automobile
Liability (27.8%), Workers' Compensation (15.9%), Automobile Physical Damage
(17.1%), Homeowners (17.6%), and Commercial Multiple Peril (15.6%). 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 58% of the outstanding
common shares of the Company as of June 30, 1998.
Atlantic States participates in an intercompany pooling arrangement
with the Mutual Company and assumes 65% of the pooled business, 60% prior to
January 1, 1996. Southern cedes 50% of its business to the Mutual Company and
Delaware 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 into 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 and approximately 75% of the Workers' Compensation
business written by Delaware.
In addition to the Company's insurance subsidiaries, it also owns all
of the outstanding stock of Atlantic Insurance Services, Inc. ("AIS"), an
insurance services organization currently providing inspection and policy
auditing information on a fee for service basis to its affiliates and the
insurance industry.
-7-
<PAGE>
Results of Operations - Three Months Ended June 30, 1998 to Three Months Ended
June 30, 1997
Revenues for the three months ended June 30, 1998 were $31,023,026 an
increase of $769,166 or 2.5%, over the same period of 1997. An increase in net
premiums earned of $754,752 or 2.8%, represented most of this change. Investment
income for the second quarter fell $113,632 or 3.9% due to a decrease in the
annualized average return on investments from 5.8% in the second quarter 1997 to
5.4% in the second quarter 1998, offset by an increase in average invested
assets from $197.2 million in the second quarter 1997 to $205.0 million in the
second quarter 1998. Realized investment gains, which resulted from normal
turnover of the Company's investment portfolio, were $35,442 in the second
quarter 1998 compared to $35,527 for the same period of 1997.
The GAAP combined ratio of insurance operations in the second quarter
of 1998 was 101.7% compared to 98.8% for the same period in 1997. The GAAP
combined ratio is the sum of the ratios of incurred losses and loss adjusting
expenses to premiums earned (loss ratio), policyholders dividends to premiums
earned (dividend ratio), and underwriting expenses to premiums earned (expense
ratio). The Company's loss ratio was impacted by an unusual series of
thunderstorms and tornadoes that hit the northeast part of the United States
throughout the month of June, 1998. As a result of claims from these storms, the
Company's loss ratio in the second quarter of 1998 was 69.7% compared to 64.6%
in the second quarter of 1997. The increase in the loss ratio was somewhat
offset by a decrease in the expense ratio to 30.7% in the second quarter of 1998
compared to 33.0% in the second quarter of 1997. This improvement was primarily
due to decreases in incentive plans for employees and contingent commissions for
agents due to the higher loss ratios. The dividend ratio changed little ending
up at 1.3% for the second quarter of 1998 compared to 1.2% for the same period
of 1997.
Federal income taxes for the second quarter represented 20.4% of income
before income taxes compared to 22.7% for the same period of 1997. Decreased
underwriting profits, due to the storm activity, resulted in tax free investment
income representing a larger portion of income than in 1997 decreasing the
effective tax rate.
-8-
<PAGE>
Results of Operations - Six Months Ended June 30, 1998 to Six Months Ended June
30, 1997
Revenues for the six months ended June 30, 1998 were $61,919,170 an
increase of $1,841,939 or 3.1%, over the same period of 1997. An increase in net
premiums earned of $1,554,963 represented most of this change. Investment income
for the first six months fell $113,348 or 2.0% due to a decrease in the
annualized average return on investments from 5.8% for the first six months of
1997 to 5.4% for the first six months of 1998, offset by an increase in average
invested assets from $197.1 million in 1997 to $207.6 million in the first six
months of 1998. Realized investment gains, which resulted from normal turnover
of the Company's investment portfolio, were $347,235 in the six months ended
June 30, 1998 compared to $73,354 for the same period of 1997.
The GAAP combined ratio of insurance operations for the six months
ended June 30, 1998 was 98.1 % compared to 98.5% for the same period in 1997.
The GAAP combined ratio is the sum of the ratios of incurred losses and loss
adjusting expenses to premiums earned (loss ratio), policyholders dividends to
premiums earned (dividend ratio), and underwriting expenses to premiums earned
(expense ratio). The Company's loss ratio was impacted by an unusual series of
thunderstorms and tornadoes that hit the northeast part of the United States
throughout the month of June, 1998 but had been favorably effected by the mild
winter weather in the same part of the country in the first quarter. As a
result, the Company's loss ratio for the first six months of 1998 was 63.9%
compared to 64.3% for the first six months of 1997. The expense ratio for the
six months ended June 30, 1998 was 32.6%, almost identical to the 32.8% expense
ratio for the same period of 1997. The dividend ratio changed little ending up
at 1.5% for the period compared to 1.4% for the first six months of 1997.
Federal income taxes for the first six months of 1998 represented 25.5%
of income before income taxes compared to 22.8% for the same period of 1997. Tax
savings from the acquisition of Pioneer last year accounted for the difference.
-9-
<PAGE>
Liquidity and Capital Resources
The Company generates sufficient funds from its operations and
maintains a high degree of liquidity in its investment portfolio. The primary
source of funds to meet the demands of claim settlements and operating expenses
are premium collections, investment earnings and maturing investments. As of
June 30, 1998, the Company had announced it has entered into an agreement to
purchase all of the outstanding shares of Southern Heritage Insurance Company,
Tucker, Georgia, for $21 million in cash. The acquisition is pending regulatory
approval. The Company has requested an amendment to its credit agreement with
Fleet Bank to expand the credit available under that agreement from $20 million
to $40 million to fund the acquisition.
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 June 30, 1998, pursuant to a credit agreement dated December 29,
1995, with Fleet National Bank of Connecticut, the Company had unsecured
borrowings of $5.0 million. 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 June 30, 1998, the interest rate on the outstanding balance was 7.60625%. 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, 1999, 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.
The Company's principal source of cash with which to pay stockholder
dividends is dividends from Atlantic States, Southern, Pioneer 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, Pioneer
and Delaware are subject to Risk Based Capital (RBC) requirements effective for
1994. At December 31, 1997, all four Companies' capital was substantially above
the RBC requirements. At December 31, 1997, amounts available for distribution
as dividends to Donegal Group without prior approval of the insurance regulatory
authorities are $7,349,284 from Atlantic States, $703,688 from Southern,
$542,799 from Pioneer and $1,070,463 from Delaware.
-10-
<PAGE>
Credit Risk
The company provides property and liability coverages through its
subsidiaries' independent agency systems located throughout its operating area.
The majority of this business is billed directly to the insured although a
portion of Donegal Group's commercial business is billed through its agents who
are extended credit in the normal course of business.
The Company's subsidiaries have reinsurance agreements in place with
the Mutual Company and with a number of other major authorized reinsurers.
Impact of Inflation
Property and casualty insurance premiums are established before the
amount of losses and loss settlement expenses, or the extent to which inflation
may impact such expenses, are known. Consequently, the Company attempts, in
establishing rates, to anticipate the potential impact of inflation.
Year 2000 Issues
The year 2000 issue (i.e. the ability of computer systems to properly
process information which contains dates beginning with January 1, 2000 and
thereafter) affects virtually all companies. All computer systems used for
processing of business for the Company are owned and operated by the Mutual
Company. Certain of these computer systems utilized by the Mutual Company to
process information use only two digits to identify a year. Because of this, the
year 2000 would be represented in the system as "00" and would in most cases be
interpreted by the computer as "1900" rather than "2000", resulting in
processing errors.
The ability to process information in a timely and accurate manner is
vital to the Company's property and casualty insurance business. The Company
recognizes that the systems used to process its business must be able to
accurately identify and process information containing year 2000 dates by the
end of 1998. The Mutual Company has a vigorous and comprehensive project
underway to ensure compliance in time to meet this deadline. This project was
initiated as part of a review of the main application systems in 1995. The
Mutual Company is taking the steps it deems appropriate to meet this challenge,
including migrating to the most current version of vendors' software, which
improves functionality in addition to being year 2000 compliant, replacing
existing software with new software systems and rewriting existing computer
programs. The goal of this project is to be substantially year 2000 complaint by
the end of 1998.
Impact of New Accounting Standards
Accounting for Derivative Instruments and Hedging Activities
In June, 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 establishes accounting and reporting standards for derivative instruments
and for hedging activities. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999, with earlier adoption permitted.
Insurance Related Assessments
In December 1997, the AICPA Accounting Standards Executive Committee
issued Statement of Position (SOP) 97-3, Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments. The accounting guidance of this
SOP focuses on the timing of recognition and measurement of liabilities for
insurance-related assessments. The SOP is effective for fiscal years beginning
after December 15, 1998. The Company believes that they are in compliance with
the provisions of this SOP and no impact on the Company's financial reporting is
expected.
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<PAGE>
Computer Software Development Costs
On March 4, 1998, the AICPA Accounting Standards Executive Committee
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This SOP requires that certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. This
SOP also requires that costs related to the preliminary project stage and the
post-implementation/operations stage in an internal-use computer software
development project be expensed as incurred. SOP 98-1 is effective for financial
statements issued for fiscal years beginning after December 15, 1998. The
Company believes that they are in compliance with the provisions of this SOP and
no material impact of the Company's financial reporting is expected.
-12-
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
Amendment of Certificate of Incorporation
Exhibit 3(i)
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Any stockholder who, in accordance with and subject to the
provisions of the proxy rules of the Securities and Exchange
Commission, wishes to submit a proposal for inclusion in the
Company's proxy statement for its 1999 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 23,
1998.
Pursuant to new amendments to Rule 14a-4(c) of the Securities
Exchange Act of 1934, if a stockholder who intends to present a
proposal at the 1999 Annual Meeting of Stockholders does not notify
the Company of such proposal on or before February 7, 1999, then
management proxies will be allowed to use their discretionary voting
authority to vote on the proposal when the proposal is raised at the
Annual Meeting, even though there is no discussion of the proposal
in the 1999 proxy statement.
Item 6. Exhibits and Reports on Form 8-K
(a) EX-27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended June 30, 1998 - None
-13-
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Donegal Group Inc.
Date: August 14, 1998 By:
-------------------------------
Donald H. Nikolaus,
President and Chief Executive Officer
Date: August 14, 1998 By:
-------------------------------
Ralph G. Spontak,
Corporate Secretary,
Senior Vice President and
Chief Financial Officer
-14-
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