DONEGAL GROUP INC.
AGENCY STOCK PURCHASE PLAN
PROSPECTUS SUPPLEMENT
TO PROSPECTUS DATED AUGUST 22, 1996
--------------------------
On August 16, 1999, Donegal Group Inc. (the "Company") filed with the
Securities and Exchange Commission a Form 10-Q Quarterly Report for the quarter
ended June 30, 1999, 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 1998 Annual Report to
Stockholders.
The date of this Prospectus Supplement is September 1, 1999.
<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, 1999
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _________________ to ___________________.
Commission File No. 0-15341
Donegal Group Inc.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2424711
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1195 River Road, P.O. Box 302, Marietta, PA 17547-0302
----------------------------------------------------------
(Address of principal executive offices, including zip code)
(717) 426-1931
--------------------------------------------------
(Registrant's telephone number, including area code)
---------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]. No [_].
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years:
Indicate by check mark whether the registrant has filed all documents and
reports required by Sections 12, 13, or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes [_]. No [_].
Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 8,317,057 shares of Common
Stock, $1.00 par value, outstanding on July 31, 1999.
<PAGE>
Part I. Financial Information
Item 1. Financial Statements.
Donegal Group Inc. and Subsidiaries
Consolidated Balance Sheet
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(Unaudited)
<S> <C> <C>
Assets
Investments
Fixed maturities
Held to maturity, at amortized cost $ 124,943,975 $ 127,183,788
Available for sale, at market value 92,060,000 90,525,855
Equity securities, available for sale at market 13,503,312 6,763,943
Short-term investments, at cost, which
approximates market 7,824,375 30,521,887
------------- -------------
Total Investments 238,331,662 254,995,473
Cash 2,694,685 8,227,042
Accrued investment income 3,565,331 3,164,599
Premiums receivable 22,971,658 19,824,894
Reinsurance receivable 50,314,541 48,339,223
Deferred policy acquisition costs 11,761,237 11,334,301
Federal income tax receivable 224,641 227,841
Deferred federal income taxes 4,851,226 3,536,692
Prepaid reinsurance premiums 31,752,105 27,203,111
Property and equipment, net 6,273,040 5,920,420
Accounts receivable - securities -- 329,299
Other 1,041,233 2,128,611
------------- -------------
Total Assets $ 373,781,359 $ 385,231,506
============= =============
Liabilities and Stockholders' Equity
Liabilities
Losses and loss expenses $ 143,735,738 $ 141,409,008
Unearned premiums 102,152,913 94,722,785
Accrued expenses 3,635,722 4,821,594
Drafts payable 1,049,158 1,394,373
Reinsurance balances payable 1,448,001 1,785,914
Cash dividend declared to stockholders -- 708,513
Line of credit 15,000,000 37,500,000
Accounts payable - securities 1,350,000 503,840
Other 963,682 884,392
Due to affiliate - Other 2,052,865 870,083
------------- -------------
Total Liabilities 271,388,079 284,600,502
------------- -------------
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
8,427,469 and 8,325,221 shares and outstanding 8,305,181
and 8,202,933 shares 8,427,469 8,325,221
Additional paid-in capital 42,432,747 41,271,322
Accumulated other comprehensive income (loss) (904,262) 1,315,425
Retained earnings 53,329,082 50,610,792
Treasury stock (891,756) (891,756)
------------- -------------
Total Stockholders' Equity 102,393,280 100,631,004
------------- -------------
Total Liabilities and
Stockholders' Equity $ 373,781,359 $ 385,231,506
============= =============
</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, 1999 and 1998
<TABLE>
<CAPTION>
Three Months Ended June 30,
1999 1998
---- ----
<S> <C> <C>
Revenues:
Premiums earned $ 52,653,705 $ 41,260,309
Premiums ceded 16,823,890 13,682,052
------------ ------------
Net premiums earned 35,829,815 27,578,257
Investment income, net of investment
expenses 3,155,817 2,768,139
Realized gain 32,345 35,442
Lease income 205,224 188,120
Service charge income 564,786 453,068
------------ ------------
Total Revenues 39,787,987 31,023,026
------------ ------------
Expenses:
Losses and loss expenses 36,505,254 28,433,598
Reinsurance recoveries 12,342,954 9,208,460
------------ ------------
Net losses and loss expenses 24,162,300 19,225,138
Amortization of deferred
policy acquisition costs 7,325,000 5,025,000
Other underwriting expenses 5,763,127 3,450,366
Policy dividends 298,636 342,266
Interest 263,487 200,556
Other expenses 478,571 401,243
------------ ------------
Total Expenses 38,291,121 28,644,569
------------ ------------
Income before income taxes 1,496,866 2,378,457
Income taxes 196,130 485,025
------------ ------------
Net income $ 1,300,736 $ 1,893,432
============ ============
Earnings per common share
Basic $ .16 $ .22
============ ============
Diluted $ .16 $ .22
============ ============
Statement of Comprehensive Income
(Unaudited)
1999 1998
---- ----
Net Income $ 1,300,736 $ 1,893,432
------------ ------------
Other comprehensive income, net of tax
Unrealized gains (losses) on securities:
Unrealized holding gain (loss) arising
during the period (1,419,048) 165,369
Reclassification adjustment,
net of income tax (21,348) (23,392)
------------ ------------
Other comprehensive income (loss) (1,440,396) 141,977
------------ ------------
Comprehensive income (loss) $ (139,660) $ 2,035,409
============ ============
</TABLE>
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, 1999 and 1998
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
---- ----
<S> <C> <C>
Revenues:
Premiums earned $ 104,489,888 $ 81,739,088
Premiums ceded 32,566,102 26,956,287
------------- -------------
Net premiums earned 71,923,786 54,782,801
Investment income, net of investment
expenses 6,525,078 5,613,406
Realized gain 15,415 347,235
Lease income 402,361 371,184
Service charge income 1,031,337 804,544
------------- -------------
Total Revenues 79,897,977 61,919,170
------------- -------------
Expenses:
Losses and loss expenses 73,106,709 53,360,594
Reinsurance recoveries 24,492,758 18,333,551
------------- -------------
Net losses and loss expenses 48,613,951 35,027,043
Amortization of deferred policy
acquisition costs 13,356,000 9,725,000
Other underwriting expenses 11,520,884 8,147,317
Policy dividends 630,012 820,124
Interest 694,431 383,615
Other expenses 860,958 823,052
------------- -------------
Total Expenses 75,676,236 54,926,151
------------- -------------
Income before income taxes 4,221,741 6,993,019
Income taxes 769,638 1,782,934
------------- -------------
Net income $ 3,452,103 $ 5,210,085
============= =============
Earnings per common share
Basic $ .42 $ .63
============= =============
Diluted $ .42 $ .62
============= =============
Statement of Comprehensive Income
(Unaudited)
1999 1998
---- ----
Net Income $ 3,452,103 $ 5,210,085
------------- -------------
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gain (loss) arising
during the period (2,209,513) 673,318
Reclassification adjustment,
net of income tax (10,174) (229,175)
------------- -------------
Other comprehensive income (loss) (2,219,687) 444,143
------------- -------------
Comprehensive income $ 1,232,416 $ 5,654,228
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
Common Stock Accumulated Total
------------ Additional Other Com- Stock-
Paid-In prehensive Retained Treasury holders'
Shares Amount Capital Income(Loss) Earnings Stock Equity
------ ------ ------- ------------ -------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1998 8,325,221 $8,325,221 $41,271,322 $1,315,425 $50,610,792 $(891,756) $100,631,004
Issuance of
Common Stock 102,248 102,248 1,161,425 1,263,673
Net Income 3,452,103 3,452,103
Cash Dividend (733,813) (733,813)
Other Comprehensive
Loss (2,219,687) (2,219,687)
--------- ---------- ----------- ---------- ----------- --------- ------------
Balance,
June 30, 1999 8,427,469 $8,427,469 $42,432,747 $ (904,262) $53,329,082 $(891,756) $102,393,280
========= ========== =========== =========== =========== ========== ============
See accompanying notes to consolidated financial statements.
-4-
</TABLE>
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the six months ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Six months ended June 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,452,103 $ 5,210,085
------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 545,699 217,046
Realized investment gain (15,415) (347,235)
Changes in Assets and Liabilities:
Losses and loss expenses 2,326,730 4,453,733
Unearned premiums 7,430,128 3,361,271
Premiums receivable (3,146,764) (1,707,456)
Deferred policy acquisition costs (426,936) (661,694)
Deferred federal income taxes (171,058) (16,798)
Reinsurance receivable (1,975,318) (2,475,737)
Prepaid reinsurance premiums (4,548,994) (528,031)
Accrued investment income (400,732) (96,777)
Due from affiliate 1,182,782 (330,314)
Reinsurance balances payable (337,913) (70,693)
Federal income taxes receivable 3,200 (402,605)
Other, net (422,928) (1,282,787)
------------ ------------
Net adjustments 42,481 111,923
------------ ------------
Net cash provided by operating activities 3,494,584 5,322,008
------------ ------------
Cash flows from investing activities:
Purchase of fixed maturities
Held to maturity (8,727,038) (9,004,828)
Available for sale (13,639,230) (14,234,581)
Purchase of equity securities, available for sale (7,162,651) (11,878,128)
Maturity of fixed maturities
Held to maturity 10,150,310 13,307,736
Available for sale 10,154,868 5,248,065
Sale of fixed maturities - available for sale -- 535,765
Sale of equity securities, available for sale 967,504 5,893,013
Purchase of property and equipment (789,563) (365,073)
Net sales of short-term investments 22,697,512 9,049,074
------------ ------------
Net cash provided by (used in)
investing activities 13,651,712 (1,448,957)
------------ ------------
Cash flows from financing activities:
Cash dividends paid (1,442,326) (1,277,782)
Issuance of common stock 1,263,673 1,317,532
Line of credit, net (22,500,000) (5,500,000)
------------ ------------
Net cash used in financing activities (22,678,653) (5,460,250)
------------ ------------
Net decrease in cash (5,532,357) (1,587,199)
Cash at beginning of year 8,227,042 3,413,315
------------ ------------
Cash at end of quarter $ 2,694,685 $ 1,826,116
============ ============
Cash paid during period - Interest $ 700,279 $ 58,143
- Income taxes $ 595,380 $ 2,202,337
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
DONEGAL GROUP INC. AND SUBSIDIARIES
(Unaudited)
Summary Notes to Consolidated Financial Statements
1 - Organization
Donegal Group Inc. (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 the Mid-Atlantic and Southern states through its
wholly-owned stock insurance companies, Atlantic States Insurance Company
("Atlantic States"), Southern Heritage Insurance Company ("Southern Heritage"),
Southern Insurance Company of Virginia ("Southern"), Delaware Atlantic Insurance
Company ("Delaware") and Pioneer Insurance Company ("Pioneer") (collectively
"Insurance Subsidiaries"). The Company has three operating segments: the
investment function, the personal lines of insurance and the commercial lines of
insurance. Products offered in the personal lines of insurance consist primarily
of homeowners and private passenger automobile policies. Products offered in the
commercial lines of insurance consist primarily of commercial automobile,
commercial multiple peril and workers' compensation policies. The Insurance
Subsidiaries are subject to regulation by Insurance Departments in those states
in which they operate and undergo periodic examinations by those departments.
The Insurance Subsidiaries are also subject to competition from other insurance
companies in their operating areas. Atlantic States participates in an
inter-company pooling arrangement with the Mutual Company and assumes 65% of the
pooled business. Southern cedes 50% of its business to the Mutual Company and
Delaware cedes 70% of its Workers' Compensation business to the Mutual Company.
At June 30, 1999, the Mutual Company held 60% of the outstanding common stock of
the Company.
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.
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 six months ended June 30, 1999, are not necessarily
indicative of results of operations to be expected for the twelve months ended
December 31, 1999.
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, 1998.
-6-
<PAGE>
3 - Earnings Per Share
The computation of basic and diluted earnings per share is as follows:
Weighted
Average Earnings
Net Shares Per
Income Outstanding Share
------ ----------- -----
Three Months Ended June 30:
1999
- ----
Basic $1,300,736 8,292,407 $ .16
Effect of stock options -- -- --
---------- ---------- --------
Diluted $1,300,736 8,292,407 $ .16
---------- ---------- --------
1998
- ----
Basic $1,893,432 8,243,201 $ .22
Effect of stock options -- 193,445 --
---------- ---------- --------
Diluted $1,893,432 8,436,646 $ .22
---------- ---------- --------
Weighted
Average Earnings
Net Shares Per
Income Outstanding Share
------ ----------- -----
Six months Ended June 30:
1999
- ----
Basic $3,452,103 8,264,995 $ .42
Effect of stock options -- -- --
---------- ---------- --------
Diluted $3,452,103 8,264,995 $ .42
---------- ---------- --------
1998
- ----
Basic $5,210,085 8,207,956 $ .63
Effect of stock options -- 169,692 (.01)
---------- ---------- --------
Diluted $5,210,085 8,377,648 $ .62
---------- ---------- --------
-7-
<PAGE>
4 - Segment Information
The performance of the personal lines and commercial lines based upon
underwriting results as determined under statutory accounting practices
(SAP) which is used by management to measure performance for the total
business of the Company.
Financial data by segment is as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
- ---------------------------------------------------------------------------------------------------------------
($ in thousands)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Premiums earned:
Commercial lines $23,182 $22,050
Personal lines 48,742 32,733
- ---------------------------------------------------------------------------------------------------------------
Total net premiums earned 71,924 54,783
- ---------------------------------------------------------------------------------------------------------------
Net investment income 6,525 5,613
Realized investment
gains (losses) 15 347
Other 1,434 1,176
- ---------------------------------------------------------------------------------------------------------------
Total revenues $79,898 $61,919
===============================================================================================================
Income before income taxes:
Underwriting income (loss)
Commercial lines $ (205) $ 3,062
Personal lines (2,169) (3,175)
- ---------------------------------------------------------------------------------------------------------------
SAP underwriting gain
(loss) (2,374) (113)
GAAP adjustments 177 950
- ---------------------------------------------------------------------------------------------------------------
GAAP underwriting gain
(loss) (2,197) 1,063
Net investment income 6,525 5,613
Realized investment gains (losses) 15 347
Other (121) (30)
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes $ 4,222 $ 6,993
===============================================================================================================
</TABLE>
-8-
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- ---------------------------------------------
Overview
Donegal Group Inc. (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 the Mid-Atlantic and Southern states through its
wholly-owned stock insurance companies, Atlantic States Insurance Company
("Atlantic States"), Southern Heritage Insurance Company ("Southern Heritage"),
Southern Insurance Company of Virginia ("Southern"), Delaware Atlantic Insurance
Company ("Delaware") and Pioneer Insurance Company ("Pioneer") (collectively
"Insurance Subsidiaries"). The Company has three operating segments: the
investment function, the personal lines of insurance and the commercial lines of
insurance. Products offered in the personal lines of insurance consist primarily
of homeowners and private passenger automobile policies. Products offered in the
commercial lines of insurance consist primarily of commercial automobile,
commercial multiple peril and workers' compensation policies. The Insurance
Subsidiaries are subject to regulation by Insurance Departments in those states
in which they operate and undergo periodic examinations by those departments.
The Insurance Subsidiaries are also subject to competition from other insurance
companies in their operating areas. Atlantic States participates in an
inter-company pooling arrangement with the Mutual Company and assumes 65% of the
pooled business. Southern cedes 50% of its business to the Mutual Company and
Delaware cedes 70% of its Workers' Compensation business to the Mutual Company.
At June 30, 1999, the Mutual Company held 60% of the outstanding common stock of
the Company.
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.
-9-
<PAGE>
Results of Operations - Three Months Ended June 30, 1999
to Three Months Ended June 30, 1998
- -----------------------------------
Revenues for the three months ended June 30, 1999 were $39,787,987 an
increase of $8,764,961 or 28.3%, over the same period of 1998. An increase in
net premiums earned of $8,251,558 or 29.9%, represented most of this change.
Premium growth escalated as a result of the Company's acquisition of Southern
Heritage in November, 1998. Southern Heritage accounted for $6,188,870, or
75.0%, of the increase in net premiums earned. Investment income for the second
quarter increased $387,678 or 14.0% with Southern Heritage accounting for an
increase of $609,853. A decrease in the annualized average return on investments
from 5.5% in the second quarter 1998 to 5.3% in the second quarter 1999, offset
by an increase in average invested assets from $203.0 million in the second
quarter 1998 to $238.6 million in the second quarter 1999, accounted for the
remaining change. Realized investment gains, which resulted from normal turnover
of the Company's investment portfolio, were $32,345 in the second quarter 1999
compared to $35,442 for the same period of 1998.
The GAAP combined ratio of insurance operations in the second quarter of
1999 was 104.8% compared to 101.7% for the same period in 1998. 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 in the second quarter of 1999 was 67.4%
compared to 69.7% in the second quarter of 1998. Results for the second quarter
of 1999 reflect the integration of Southern Heritage and a return to more
expected weather patterns as compared to the stormy weather experienced in June
1998. The expense ratio for the second quarter 1999 was 36.5% compared to 30.7%
for the second quarter 1998. The increase in the expense ratio results from
higher levels of agents' contingent commission as well as higher levels of
employee incentives due to the lower loss ratios in the second quarter 1999 and
to additional expenditures for advertising and agents' incentives for the
rollover of books of business. The dividend ratio decreased to 0.8% for the
second quarter of 1999 compared to 1.2% for the same period of 1998 due to
higher loss ratios in the workers' compensation line of business and the
addition of Southern Heritage which decrease the percentage that Workers'
Compensation represents of the total premiums earned.
Federal income taxes for the second quarter represented 13.1% of the income
before income taxes compared to 20.4% for the same period of 1998. Decreased
underwriting profits resulted in tax free investment income representing a
higher percentage of the income before income taxes in 1999 compared to 1998.
-10-
<PAGE>
Results of Operations - Six Months Ended June 30, 1999
to Six Months Ended June 30, 1998
- ---------------------------------
Revenues for the six months ended June 30, 1999 were $79,897,977 an
increase of $17,978,807 or 29.0%, over the same period of 1998. An increase in
net premiums earned of $17,140,985 or 31.3%, represented most of this change.
Premium growth escalated as a result of the Company's acquisition of Southern
Heritage in November, 1998. Southern Heritage accounted for $13,398,082, or
78.2%, of the increase in net premiums earned. Investment income for the first
six months of 1999 increased $911,672 or 16.2% with Southern Heritage accounting
for an additional $1,177,901. A decrease in the annualized average return on
investments from 5.5% in the first six month of 1998 to 5.3% in the first six
months of 1999, offset by an increase in average invested assets from $205.0
million in the six months of 1998 to $246.7 million in the first six months of
1999, accounted for the remaining change. Realized investment gains, which
resulted from normal turnover of the Company's investment portfolio, were
$15,415 in the first six months of 1999 compared to $347,235 for the same period
of 1998.
The GAAP combined ratio of insurance operations in the first six months of
1999 was 103.1% compared to 98.1% for the same period in 1998. 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 in the first half of 1999 was 67.6% compared to 63.9%
in the first half of 1998. Results for the six months ended June 30, 1999
reflect the integration of Southern Heritage. The expense ratio for the first
half of 1999 was 34.6% compared to 32.6% for the first half of 1998. The
increase in the expense ratio results from higher levels of agents' contingent
commission as well as higher levels of employee incentives due to the lower loss
ratios in the second quarter 1999 and to additional expenditures for advertising
and agents incentives for the rollover of books of business. The dividend ratio
decreased to 0.9% for the first six months of 1999 compared to 1.5% for the same
period of 1998 due to higher loss ratios in the workers' compensation line of
business and the addition of Southern Heritage which decrease the percentage
that Workers' Compensation represents of the total premiums earned.
Federal income taxes for the six months ended June 30, 1999 represented
18.2% of the income before income taxes compared to 25.5% for the same period of
1998. Decreased underwriting profits resulted in tax free investment income
representing a higher percentage of the income before income taxes in 1999
compared to 1998.
-11-
<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, 1999 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 June 30, 1999, pursuant to a credit agreement dated December 29,
1995, with Fleet National Bank of Connecticut, (the "Bank") the Company had
unsecured borrowings of $15.0 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 June 30, 1999, the interest rate on the outstanding balance
was 6.76%. 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, Southern
Heritage 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, Southern Heritage and Delaware are subject to Risk Based
Capital (RBC) requirements effective for 1994. At December 31, 1998, all five
Companies' capital was substantially above the RBC requirements. At December 31,
1998, amounts available for distribution as dividends to Donegal Group without
prior approval of the insurance regulatory authorities are $6,480,524 from
Atlantic States, $638,832 from Southern, $530,035 from Pioneer, $1,085,807 from
Delaware and $1,580,564 from Southern Heritage.
-12-
<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 Donegal Mutual
Insurance Company (the "Mutual Company").
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. The
Mutual Company has had a vigorous and comprehensive project underway since 1995
to ensure substantial compliance by the end of 1998. This project was initiated
as part of a review of the main application systems utilized by the Mutual
Company and was geared towards the implementation of new or current versions of
its application software to bring greater efficiencies and operational
improvements to its users. The project was expanded to include a review of all
hardware, peripheral software and inquiries of agents and vendors to determine
the readiness of each related to the Year 2000 problem. During 1998 the Mutual
Company put into production its updated, Year 2000 compliant versions of its
main application softwares and late in the year began issuing policies with
expiration dates in the year 2000. The implementation of these updated systems
were without major problems and the Mutual Company's mission critical systems
were substantially Year 2000 compliant by the end of 1998. Testing of less
critical systems, documentation of vendors' readiness, replacement of some
hardware and final testing of certain other potential problem dates continues in
1999 and is anticipated to be complete near the end of the third quarter. Costs
directly related to the Year 2000 changes were not material.
With respect to insurance policies issued by the Company providing coverage
to insureds who may incur losses as a result of Year 2000 problems, the Company
is evaluating its possible exposure under such coverages. Endorsements excluding
losses related to or resulting from Year 2000 issues are being attached to
commercial policies.
Given the nature of its business, the Company believes that its exposure to
embedded chip Year 2000 issues is minimal. The Company believes that its most
significant Year 2000 exposure is the potential business disruption that would
be caused by widespread failure of public utility systems. Prolonged failure of
power and telecommunications systems could have a material adverse effect on the
Company's results of operation, cash flow and consolidated financial position.
This Year 2000 disclosure contains statements which are forward looking
statements that involve risks and uncertainties and qualify for the statutory
safe harbor under the Private Securities Litigation Reform Act of 1995. Future
Year 2000 readiness activities may not adhere to the anticipated schedule
because more problems may be encountered than anticipated in the various stages
of testing and trained personnel may not be available to work on internal
systems in the time required; or there may be unexpected problems with the
readiness of third party business partners and vendors who cannot produce
services, or utility companies may not be able to provide the vital services
required to maintain operations.
-13-
<PAGE>
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.
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.
-14-
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings.
- ------- ------------------
None.
Item 2. Changes in Securities.
- ------- ----------------------
None.
Item 3. Defaults upon Senior Securities.
- ------- --------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
None.
Item 5. Other Information.
- ------- ------------------
None.
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) EX-27 Financial Data Schedule
(b) Reports on 8-K:
No reports on Form 8-K were filed by the Company during the
quarter ended June 30, 1999
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.
August 12, 1999 By: /s/
-------------------------------
Donald H. Nikolaus, President
and Chief Executive Officer
August 12, 1999 By: /s/
-------------------------------
Ralph G. Spontak, Senior Vice President,
Chief Financial Officer and Secretary
-15-
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 92,060,000
<DEBT-CARRYING-VALUE> 124,943,975
<DEBT-MARKET-VALUE> 125,332,432
<EQUITIES> 13,503,312
<MORTGAGE> 0
<REAL-ESTATE> 2,464,282
<TOTAL-INVEST> 238,331,662
<CASH> 2,694,685
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 11,761,237
<TOTAL-ASSETS> 373,781,359
<POLICY-LOSSES> 143,735,738
<UNEARNED-PREMIUMS> 102,152,913
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 15,000,000
0
0
<COMMON> 8,427,469
<OTHER-SE> 102,393,280
<TOTAL-LIABILITY-AND-EQUITY> 373,781,359
71,923,786
<INVESTMENT-INCOME> 6,525,078
<INVESTMENT-GAINS> 15,415
<OTHER-INCOME> 1,433,698
<BENEFITS> 48,613,951
<UNDERWRITING-AMORTIZATION> 13,356,000
<UNDERWRITING-OTHER> 11,520,884
<INCOME-PRETAX> 4,221,741
<INCOME-TAX> 769,638
<INCOME-CONTINUING> 3,452,103
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,452,103
<EPS-BASIC> .42
<EPS-DILUTED> .42
<RESERVE-OPEN> 93,863
<PROVISION-CURRENT> 51,989
<PROVISION-PRIOR> (3,375)
<PAYMENTS-CURRENT> 18,139
<PAYMENTS-PRIOR> 30,008
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