================================================================================
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 September 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
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(Address of principal executive offices, including zip code)
(717) 426-1931
--------------
(Registrant's telephone number, including area code)
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(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: 8,173,491 shares of Common
Stock, $1.00 par value, outstanding on October 31, 1998.
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<PAGE>
Part I. Financial Information
Item 1. Financial Statements.
Donegal Group Inc. and Subsidiaries
Consolidated Balance Sheet
<TABLE>
<CAPTION>
Assets September 30, 1998 December 31, 1997
------------------ -----------------
(Unaudited)
<S> <C> <C>
Investments
Fixed maturities
Held to maturity, at amortized cost $ 115,403,514 $ 117,246,205
Available for sale, at market value 69,984,731 57,731,251
Equity securities, available for sale at market 11,383,150 7,274,562
Short-term investments, at cost, which
approximates market 13,395,559 22,712,787
Other investments, at market 960,000 --
------------- -------------
Total Investments 211,126,954 204,964,805
Cash 2,465,595 3,413,315
Accrued investment income 2,746,358 2,741,207
Premiums receivable 12,703,016 11,244,628
Reinsurance receivable 47,010,656 40,953,032
Deferred policy acquisition costs 9,315,731 8,448,060
Federal income tax receivable 882,816 56,454
Deferred federal income taxes 3,248,648 3,302,043
Prepaid reinsurance premiums 26,983,034 22,882,283
Property and equipment, net 5,070,118 4,938,524
Accounts receivable - securities -- 456,493
Due from affiliate -- 141,313
Other 1,228,997 562,348
------------- -------------
Total Assets $ 322,781,923 $ 304,104,505
============= =============
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities
Losses and loss expenses $ 128,343,472 $ 118,112,390
Unearned premiums 79,987,414 71,367,691
Accrued expenses 2,857,218 3,214,767
Reinsurance balances payable 685,300 735,009
Cash dividend declared to stockholders -- 604,054
Line of credit 5,000,000 10,500,000
Accounts payable - securities 1,649,865 2,499,059
Other 893,612 283,098
Due to affiliate - Pioneer acquisition 5,191,774 5,191,774
- Other 600,257 --
------------- -------------
Total Liabilities 225,208,912 212,507,842
------------- -------------
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
8,279,857 and 6,122,431 shares and outstanding 8,157,569
and 6,030,715 shares 8,279,857 6,122,431
Additional paid-in capital 40,686,408 38,932,117
Accumulated other comprehensive income 1,248,331 1,011,417
Retained earnings 48,250,171 46,422,454
Treasury stock (891,756) (891,756)
------------- -------------
Total Stockholders' Equity 97,573,011 91,596,663
------------- -------------
Total Liabilities and
Stockholders' Equity $ 322,781,923 $ 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 September 30, 1998 and 1997
<TABLE>
<CAPTION>
Three Months Ended September 30,
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Premiums earned $ 42,214,525 $ 40,572,081
Premiums ceded 14,149,761 13,311,388
------------ ------------
Net premiums earned 28,064,764 27,260,693
Investment income, net of investment
expenses 2,825,718 2,937,109
Realized gain 147,659 120,098
Lease income 188,888 165,997
Service charge income 427,707 426,019
------------ ------------
Total Revenues 31,654,736 30,909,916
------------ ------------
Expenses:
Losses and loss expenses 32,826,321 27,136,180
Reinsurance recoveries 12,391,787 10,025,051
------------ ------------
Net losses and loss expenses 20,434,534 17,111,129
Amortization of deferred policy
acquisition costs 4,835,000 4,638,000
Other underwriting expenses 5,693,443 4,301,001
Policy dividends 478,736 279,070
Interest 210,749 256,852
Other expenses 417,875 380,619
------------ ------------
Total Expenses 32,070,337 26,966,671
------------ ------------
Income (loss) before income taxes (415,601) 3,943,245
Income taxes (459,475) 1,031,517
------------ ------------
Net income $ 44,414 $ 2,911,728
============ ============
Earnings per common share
Basic $ .01 $ .37*
============ ============
Diluted $ .01 $ .36*
============ ============
</TABLE>
Statement of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1998 1997
---------- ----------
<S> <C> <C>
Net Income $ 44,414 $2,911,728
---------- ----------
Other comprehensive income (loss), net of tax
Unrealized gains on securities:
Unrealized holding gain arising
during the period (192,684) 406,349
Less: Reclassification adjustment for
gains and (losses) included in
Net income 14,545 1,750
---------- ----------
Other comprehensive income (loss) (207,229) 404,599
---------- ----------
Comprehensive income $ 162,815 $3,316,327
========== ==========
</TABLE>
- -------------
* Restated
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
Donegal Group Inc. and Subsidiaries
Consolidated Statement of Income
(Unaudited)
For the nine months ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
---------- -----------
<S> <C> <C>
Revenues:
Premiums earned $123,953,613 $119,335,186
Premiums ceded 41,106,048 38,846,655
------------ ------------
Net premiums earned 82,847,565 80,488,531
Investment income, net of investment
expenses 8,439,124 8,663,863
Realized gain 494,894 193,452
Lease income 560,072 462,845
Service charge income 1,232,251 1,178,456
------------ ------------
Total Revenues 93,573,906 90,987,147
------------ ------------
Expenses:
Losses and loss expenses 86,186,915 76,842,909
Reinsurance recoveries 30,725,338 25,489,834
------------ ------------
Net losses and loss expenses 55,461,577 51,353,075
Amortization of deferred policy
acquisition costs 14,560,000 13,368,000
Other underwriting expenses 13,840,760 13,018,871
Policy dividends 1,298,860 1,020,839
Interest 594,364 699,777
Other expenses 1,240,927 1,154,432
------------ ------------
Total Expenses 86,996,488 80,614,994
------------ ------------
Income before income taxes 6,577,418 10,372,153
Income taxes 1,323,459 2,497,395
--------- ------------
Net income $ 5,253,959 $ 7,874,758
============ ============
Earnings per common share
Basic $.64 $.99*
==== ====
Diluted $.63 $.98*
==== ====
</TABLE>
Statement of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
----------- -----------
<S> <C> <C>
Net Income $ 5,253,959 $ 7,874,758
----------- -----------
Other comprehensive income, net of tax
Unrealized gains (losses) on securities:
Unrealized holding gain arising
during the period 264,013 405,043
Less: Reclassification adjustment for
gains and (losses) included in
Net income (27,099) 1,033
----------- -----------
Other comprehensive income (loss) 236,914 404,010
----------- -----------
Comprehensive income $ 5,490,873 $ 8,278,768
=========== ===========
</TABLE>
- ----------
* Restated
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
Donegal Group Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
(Unaudited)
for the Nine Months Ended September 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 96,178 96,178 1,754,291 1,850,469
Net Income 5,253,959 5,253,959
Other Comprehensive
Income 236,914 236,914
Stock Dividend 2,061,248 2,061,248 2,061,248 --
Cash Dividend (1,364,994) (1,364,994)
--------- ---------- ------------ ------------ ------------ ------------ ------------
Balance,
September 8, 1998 8,279,857 $8,279,857 $ 40,686,408 $ 1,248,331 $ 48,250,171 $ (891,756) $ 97,573,011
========= ========== ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
Donegal Group Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(Unaudited)
For the nine months ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 5,253,959 $ 7,874,758
------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 345,591 280,359
Realized investment gain (loss) (494,894) (193,452)
Changes in Assets and Liabilities:
Losses and loss expenses 10,231,082 2,107,898
Unearned premiums 8,619,723 1,684,349
Premiums receivable (1,458,388) (242,952)
Deferred policy acquisition costs (867,671) (335,156)
Deferred federal income taxes (68,652) (91,710)
Reinsurance receivable (6,057,624) 1,521,971
Prepaid reinsurance premiums (4,100,751) (658,089)
Accrued investment income (197) 2,389
Due from affiliate 741,570 (514,557)
Reinsurance balances payable (49,709) (22,563)
Current income taxes payable (826,362) (617,504)
Other, net (413,684) (1,007,277)
------------ ------------
Net adjustments 5,600,034 1,913,706
------------ ------------
Net cash provided by operating activities 10,853,993 9,788,464
------------ ------------
Cash flows from investing activities:
Purchase of fixed maturities
Held to maturity (13,800,482) (15,583,302)
Available for sale (26,025,429) (15,332,409)
Purchase of equity securities, available for sale (13,612,002) (4,539,449)
Maturity of fixed maturities
Held to maturity 17,476,597 9,074,739
Available for sale 11,898,065 7,444,999
Sale of fixed maturities - available for sale 535,765 4,010,313
Sale of equity securities, available for sale 9,545,064 2,804,257
Purchase of other investments (1,000,000) --
Purchase of property and equipment (517,939) (2,594,311)
Net sales of short-term investments 9,317,228 9,139,037
------------ ------------
Net cash used in investing activities (6,183,133) (5,576,126)
------------ ------------
Cash flows from financing activities:
Cash dividends paid (1,969,049) (1,650,444)
Issuance of common stock 1,850,469 543,283
Line of credit, net (5,500,000) (3,500,000)
------------ ------------
Net cash provided by (used in)
financing activities (5,618,580) (4,607,161)
------------ ------------
Net decrease in cash (947,720) (394,823)
Cash at beginning of year 3,413,315 3,700,163
------------ ------------
Cash at end of quarter $ 2,465,595 $ 3,305,340
============ ============
Cash paid during period - Interest $ 102,306 $ 375,780
- Income taxes $ 2,218,473 $ 3,450,055
</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 September 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 nine months ended September
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>
3 - Earnings Per Share
The computation of basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
Weighted
Average Earnings
Net Shares Per
Income Outstanding Share
-------- ----------- --------
Three Months Ended September 30:
<S> <C> <C> <C>
1998
Basic $44,414 8,144,510 $ .01
Effect of stock options --- 108,982 --
-------- --------- -----
Diluted $44,414 8,253,492 $ .01
------- --------- -----
1997*
Basic $2,911,728 8,000,267 $ .37
Effect of stock options -- 45,881 (.01)
---------- --------- -----
Diluted $2,911,728 8,046,148 $ .36
---------- --------- -----
Nine Months Ended September 30:
1998
Basic $5,253,959 8,105,566 $ .64
Effect of stock options -- 148,613 ( .01)
---------- --------- -----
Diluted $5,253,959 8,254,179 $ .63
---------- --------- -----
1997*
Basic $7,874,758 7,983,703 $ .99
Effect of stock options -- 19,762 (.01)
---------- --------- -----
Diluted $7,874,758 8,003,465 $ .98
---------- --------- -----
</TABLE>
- -------------
* Restated
-7-
<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 September 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.
-8-
<PAGE>
Results of Operations - Three Months Ended September 30, 1998
to Three Months Ended September 30, 1997
- ----------------------------------------
Revenues for the three months ended September 30, 1998 were $31,654,736, an
increase of $744,820 or 2.4%, over the same period of 1997. An increase in net
premiums earned of $804,071 or 2.9%, represented most of this change. Investment
income for the third quarter fell $111,391 or 3.8% due to a decrease in the
annualized average return on investments from 6.0% in the third quarter 1997 to
5.4% in the third quarter 1998, offset by an increase in average invested assets
from $194.9 million in the third quarter 1997 to $208.1 million in the third
quarter 1998. Realized investment gains, which resulted from normal turnover of
the Company's investment portfolio, were $147,659 in the third quarter 1998
compared to $120,098 for the same period of 1997.
The GAAP combined ratio of insurance operations in the third quarter of
1998 was 112.0% compared to 96.6% 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 expense ratio in the third quarter was effected by a charge to
earnings from an unprecedented large mandatory Pennsylvania Guaranty Association
assessment arising from the insolvency of two medical malpractice companies. The
Company's share of the Guaranty Association liability arising from these two
companies is $1.34 million. This charge is equal to the 1998 cash assessment
plus the anticipated maximum potential assessment to be made in 1999. The
expense ratio for the third quarter 1998 was 37.5% compared to 32.8% for the
third quarter 1997. The Guaranty Fund assessment accounted for 4.8% of the 1998
ratio which would have been 32.7% without this charge. Guaranty Association
assessments represent mandatory regulatory charges that must be absorbed by
substantially all property and casualty insurance companies doing business in a
state where an insolvent company had been writing business, including companies,
like Donegal, who do not write lines of business that the insolvent companies
were writing. The Company's loss ratio was impacted by a continuation into the
summer of the unusual severe weather pattern that began in June. As a result of
claims from these storms, the Company's loss ratio in the third quarter of 1998
was 72.8% compared to 62.8% in the third quarter of 1997. The dividend ratio
increased to 1.7% for the third quarter of 1998 compared to 1.0% for the same
period of 1997 do to higher levels of profitability in the workers' compensation
line of business.
Federal income taxes for the third quarter represented 110.6% of the loss
before income taxes compared to 26.2% for the same period of 1997. Decreased
underwriting profits, due to the storm activity and the guaranty assessment,
resulted in tax free investment income increasing the taxable loss and
distorting the normal effective rate.
-9-
<PAGE>
Results of Operations - Nine Months Ended September 30, 1998
to Nine Months Ended September 30, 1997
- ---------------------------------------
Revenues for the nine months ended September 30, 1998 were $93,573,906, an
increase of $2,586,759 or 2.8%, over the same period of 1997. An increase in net
premiums earned of $2,359,034 or 2.9%, represented most of this change.
Investment income for the first nine months of 1998 fell $224,739 or 2.6% due to
a decrease in the annualized average return on investments from 6.0% for the
first three quarters of 1997 to 5.4% for the first three quarters of 1998,
offset by an increase in average invested assets from $193.1 million in the
first nine months of 1997 to $208.0 million in the first nine months of 1998.
Realized investment gains, which resulted from normal turnover of the Company's
investment portfolio, were $494,894 for the first nine months of 1998 compared
to $193,452 for the same period of 1997.
The GAAP combined ratio of insurance operations for the nine months ended
September 30, 1998 was 102.8% compared to 97.9% 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 expense ratio was effected by a third quarter
charge to earnings from an unprecedented large mandatory Pennsylvania Guaranty
Association assessment arising from the insolvency of two medical malpractice
companies. The Company's share of the Guaranty Association liability arising
from these two companies is $1.34 million. This charge is equal to the 1998 cash
assessment plus the anticipated maximum potential assessment to be made in 1999.
The expense ratio for the nine months ended September 30, 1998 was 34.3%
compared to 32.8% for the same period in 1997. The Guaranty Fund assessment
accounted for 1.6% of the 1998 ratio which would have been 32.7% without this
charge. Guaranty Association assessments represent mandatory regulatory charges
that must be absorbed by substantially all property and casualty insurance
companies doing business in a state where an insolvent company had been writing
business, including companies, like Donegal, who do not write lines of business
that the insolvent companies were writing. The Company's loss ratio was impacted
by unusual severe weather patterns that began in June and continued into the
summer. As a result of claims from these storms, the Company's year to date loss
ratio through September 30, 1998 was 66.9% compared to 63.8% for the same period
of 1997. The dividend ratio increased to 1.6% for the first nine months of 1998
compared to 1.3% for the same period of 1997 do to higher levels of
profitability in the workers' compensation line of business.
Federal income taxes for the nine months ended September 30, 1998
represented 20.1% of the income before income taxes compared to 24.1% for the
same period of 1997. Decreased underwriting profits, due to the storm activity
and the guaranty assessment, resulted in tax free investment income representing
a higher level of the income before income taxes and reducing the effective tax
rate in 1998.
-10-
<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
September 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 amendmended 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 September 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 $40 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 September 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 July 27, commencing July 27, 2001, the credit line will be reduced by $8
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.
-11-
<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.
-12-
<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.
-13-
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings.
- ------- ------------------
None.
Item 2. Changes in Securities.
- ------- ----------------------
On October 15, 1998, the Company's Board of Directors further amended
the Company's Amended and Restated By-laws (the "By-laws"). A copy of the
By-Laws, as so amended, is filed as Exhibit 3(ii) to this Form 10-Q Quarterly
Report. Reference is made to the summary of the amendments to the Company's
Bylaws set forth in Item 5 of this Form 10-Q Quarterly Report.
Item 3. Defaults upon Senior Securities.
- ------- --------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
None.
Item 5. Other Information.
- ------- ------------------
A. Deadline for Submitting Stockholder Proposals to the Company for
Inclusion in the Company's Proxy Statement Relating to the Company's
1999 Annual Meeting of Stockholders Pursuant to and in Compliance with
SEC Rule 14a-8.
Any stockholder who, in accordance with and subject to the provisions of
Rule 14a-8 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.
B. Requirements Under the Company's By-laws for Advance Notice to the
Company of Stockholder Proposals to be Presented at the Company's 1999
Annual Meeting of Stockholders Otherwise than Pursuant to and in
Compliance with SEC Rule 14a-8.
The Company amended Section 2.3 of its By-laws relating to stockholder
proposals. The following description of Section 2.3 as so amended is a
materially complete summary of Section 2.3 as so amended. Reference is made,
however, to the complete text of Section 2.3 as included in Exhibit 3(ii) to
this Form 10-Q Quarterly Report and such summary is qualified in its entirety by
such reference.
Pursuant to amended Section 2.3 of the Company's By-Laws, if a
stockholder desires to present at the 1999 Annual Meeting of Stockholders (i) a
proposal relating to nominations for and election of directors or (ii) a
proposal relating to other than nominations for and election of directors,
otherwise than pursuant to Rule 14a-8 of the proxy rules of the Securities and
Exchange Commission, such stockholder must comply with the provisions for
stockholder proposals set forth in the By-Laws which are summarized below.
Written notice of any such proposal containing the information required under
such By-Law provisions must be delivered during the period commencing on
November 23, 1998 and ending on December 23, 1998 to the following address:
(i) Written notice of a proposal relating to nominations for and
election of directors must be delivered in person, by first class United States
mail postage prepaid or by reputable overnight delivery service to the
Nominating Committee of the Board of Directors of the Company to the attention
of the Company's Secretary at the Company's principal executive offices at 1195
River Road, Marietta, Pennsylvania 17547; and
-14-
<PAGE>
(ii) Written notice of a proposal relating to other than nominations for
and election of directors must be delivered in person, by first class United
States mail postage prepaid or by reputable overnight delivery service to the
Board of Directors of the Company to the attention of the Company's Secretary at
the Company's principal executive offices at 1195 River Road, Marietta,
Pennsylvania 17547.
(a) Stockholder Proposals Relating to Nominations for and Election of
-----------------------------------------------------------------
Directors.
----------
The Company's By-Laws provide that nominations of candidates for
election by stockholders to the Board of Directors shall be made exclusively by
the Nominating Committee of the Company's Board of Directors. A proposal by a
stockholder for the nomination by the Nominating Committee of the Company's
Board of Directors of a candidate for election by stockholders as a director at
any meeting of stockholders at which directors are to be elected may only be
made by notice in writing, delivered in person or by first class United States
mail postage prepaid or by reputable overnight delivery service, to the
Nominating Committee of the Board of Directors of the Company to the attention
of the Secretary of the Company at the principal office of the Company, within
the time limits specified herein.
In the case of an annual meeting of stockholders, any such written
proposal of nomination must be received by the Nominating Committee not less
than 90 calendar days nor more than 120 calendar days before the first
anniversary of the date on which the Company first mailed its proxy statement to
stockholders for the annual meeting of stockholders in the immediately preceding
year; provided, however, that in the case of an annual meeting of stockholders
that is called for a date which is not within 30 calendar days before or after
the first anniversary date of the annual meeting of stockholders in the
immediately preceding year, any such written proposal of nomination must be
received by the Company's Board of Directors not less than five business days
after the date the Company shall have mailed notice to its stockholders that an
annual meeting of stockholders will be held or issued a press release, filed a
periodic report with the Securities and Exchange Commission or otherwise
publicly disseminated notice that an annual meeting of stockholders will be
held.
In the case of a special meeting of stockholders, any such written
proposal of nomination must be received by the Nominating Committee not less
than five business days after the earlier of the date that the Company shall
have mailed notice to its stockholders that a special meeting of stockholders
will be held or issued a press release, filed a periodic report with the
Securities and Exchange Commission or otherwise publicly disseminated notice
that a special meeting of stockholders will be held.
Such written proposal of nomination must set forth (A) the name and
address of the stockholder who intends to make the nomination (the "Nominating
Stockholder"), (B) the name, age, business address and, if known, residence
address of each person so proposed, (C) the principal occupation or employment
of each person so proposed for the past five years, (D) the number of shares of
capital stock of the Company beneficially owned within the meaning of Securities
and Exchange Commission Rule 13d-1 by each person so proposed and the earliest
date of acquisition of any such capital stock, (E) a description of any
arrangement or understanding between each person so proposed and the Nominating
Stockholder with respect to such person's proposal for nomination and election
as a director and actions to be proposed or taken by such person as a director,
(F) the written consent of each person so proposed to serve as a director if
nominated and elected as a director and (G) such other information regarding
each such person as would be required under the proxy solicitation rules of the
Securities and Exchange Commission if proxies were to be solicited for the
election as a director of each person so proposed.
If a written proposal of nomination submitted to the Nominating
Committee fails, in the reasonable judgment of the Nominating Committee, to
contain the information specified in the immediately preceding paragraph or is
otherwise deficient, the Chairperson of the Nominating Committee shall, as
promptly as is practicable under the circumstances, provide written notice to
the Nominating Stockholder of such failure or deficiency in the written proposal
of nomination and such Nominating Stockholder shall have five business days from
receipt of such notice to submit a revised written proposal of nomination that
corrects such failure or deficiency in all material respects.
-15-
<PAGE>
Only candidates nominated for election by stockholders as a member of the
Company's Board of Directors in accordance with the By-Law provisions summarized
herein shall be eligible for election as a member of the Company's Board of
Directors at such meeting of stockholders, and any candidate not nominated in
accordance with such provisions shall not be considered or acted upon for
election as a director at such meeting of stockholders.
(b) Stockholder Proposals Relating to Other Than Nominations for and
----------------------------------------------------------------
Elections of Directors.
-----------------------
A stockholder of the Company may bring a matter before a meeting of
stockholders only if (A) (x) such matter is a proper matter for stockholder
action and (y) such stockholder shall have provided notice in writing, delivered
in person or by first class United States mail postage prepaid or by reputable
overnight delivery service, to the Board of Directors of the Company to the
attention of the Secretary of the Company at the principal office of the
Company, within the time limits specified herein or (B) the stockholder complies
with the provisions of Rule 14a-8 under the Securities Exchange Act of 1934
relating to inclusion of stockholder proposals in the Company's proxy statement.
In the case of an annual meeting of stockholders, any such written
notice of presentation of a matter must be received by the Company's Board of
Directors not less than 90 calendar days nor more than 120 calendar days before
the first anniversary of the date on which the Company first mailed its proxy
statement to stockholders for the annual meeting of stockholders in the
immediately preceding year; provided, however, that in the case of an annual
meeting of stockholders that is called for a date which is not within 30
calendar days before or after the first anniversary date of the annual meeting
of stockholders in the immediately preceding year, any such written notice of
presentation of a matter must be received by the Company's Board of Directors
not less than five business days after the date the Company shall have mailed
notice to its stockholders that an annual meeting of stockholders will be held
or issued a press release, filed a periodic report with the Securities and
Exchange Commission or otherwise publicly disseminated notice that an annual
meeting of stockholders will be held.
In the case of a special meeting of stockholders, any such written
notice of presentation of a matter must be received by the Company's Board of
Directors not less than five business days after the earlier of the date the
Company shall have mailed notice to its stockholders that a special meeting of
stockholders will be held or issued a press release, filed a periodic report
with the Securities and Exchange Commission or otherwise publicly disseminated
notice that a special meeting of stockholders will be held.
Such written notice of presentation of a matter shall set forth
information regarding such matter equivalent to the information regarding such
matter that would be required under the proxy solicitation rules of the
Securities and Exchange Commission if proxies were solicited for stockholder
consideration of such matter at a meeting of stockholders.
If a written notice of presentation of a matter submitted to the
Company's Board of Directors fails, in the reasonable judgment of the Company's
Board of Directors, to contain the information specified in the immediately
preceding paragraph or is otherwise deficient, the Chairperson of the Company's
Board of Directors shall, as promptly as is practicable under the circumstances,
provide written notice to the stockholder who submitted the written notice of
presentation of a matter of such failure or deficiency in the written notice of
presentation of a matter and such stockholder shall have five business days from
receipt of such notice to submit a revised written notice of presentation of a
matter that corrects such failure or deficiency in all material respects.
Only matters submitted in accordance with the By-Law provisions
summarized herein shall be eligible for presentation of such meeting of
stockholders, and any matter not submitted to the Company's Board of Directors
in accordance with such provisions shall not be considered or acted upon at such
meeting of stockholders.
-16-
<PAGE>
<TABLE>
<CAPTION>
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) Exhibits:
Exhibit No. Description of Exhibit Reference
----------- ------------------------------------ ---------------
<S> <C> <C> <C>
3(i) Certificate of Incorporation (*)
3(ii) Amended and Restated By-Laws Filed herewith
27 Financial Data Schedule Filed herewith
</TABLE>
- ---------
* Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-1 Registration Statement No. 33-8533
declared effective October 29, 1986.
(b) Reports on 8-K:
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1998.
-17-
<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.
November 10, 1998 By:
------------------------------------
Donald H. Nikolaus, President
and Chief Executive Officer
November 10, 1998 By:
------------------------------------
Ralph G. Spontak, Senior Vice President,
Chief Financial Officer and Secretary
-18-
<PAGE>
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Reference
----------- ------------------------------------ ---------------
<S> <C> <C> <C>
3(i) Certificate of Incorporation (*)
3(ii) Amended and Restated By-Laws Filed herewith
27 Financial Data Schedule Filed herewith
</TABLE>
- ---------
* Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-1 Registration Statement No. 33-8533
declared effective October 29, 1986.
-19-
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 69,984,731
<DEBT-CARRYING-VALUE> 115,403,514
<DEBT-MARKET-VALUE> 120,382,362
<EQUITIES> 13,395,559
<MORTGAGE> 0
<REAL-ESTATE> 2,488,452
<TOTAL-INVEST> 211,126,954
<CASH> 2,465,595
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 9,315,731
<TOTAL-ASSETS> 322,781,923
<POLICY-LOSSES> 128,343,472
<UNEARNED-PREMIUMS> 79,987,414
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 5,000,000
0
0
<COMMON> 8,279,857
<OTHER-SE> 97,573,011
<TOTAL-LIABILITY-AND-EQUITY> 322,781,923
82,847,565
<INVESTMENT-INCOME> 8,439,124
<INVESTMENT-GAINS> 494,894
<OTHER-INCOME> 1,792,323
<BENEFITS> 55,461,577
<UNDERWRITING-AMORTIZATION> 14,560,000
<UNDERWRITING-OTHER> 13,840,760
<INCOME-PRETAX> 6,577,418
<INCOME-TAX> 1,323,459
<INCOME-CONTINUING> 5,253,959
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,253,959
<EPS-PRIMARY> .64
<EPS-DILUTED> .63
<RESERVE-OPEN> 77,474
<PROVISION-CURRENT> 58,421
<PROVISION-PRIOR> (2,959)
<PAYMENTS-CURRENT> 36,413
<PAYMENTS-PRIOR> 15,190
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</TABLE>
