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, 2000
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: 8,820,824 shares
of Common Stock, $1.00 par value, outstanding on October 31, 2000.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
Investments
Fixed maturities
Held to maturity, at amortized cost $ 137,241,256 $ 136,173,547
Available for sale, at fair value 111,989,488 100,043,548
Equity securities, available for sale at fair value 16,755,091 9,229,498
Short-term investments, at cost, which approximates
fair value 11,693,164 15,995,257
--------------- ---------------
Total Investments 277,678,999 261,441,850
Cash 3,657,898 3,922,403
Accrued investment income 3,967,282 3,474,430
Premiums receivable 22,588,317 18,218,525
Reinsurance receivable 57,658,048 53,070,283
Deferred policy acquisition costs 12,989,737 11,203,302
Federal income tax receivable 28,955 698,969
Deferred federal income taxes 8,608,943 9,121,232
Prepaid reinsurance premiums 38,584,536 32,154,837
Property and equipment, net 5,130,068 5,516,688
Accounts receivable 1,797,277 -
Due from affiliate 124,876 262,954
Other 608,252 647,184
--------------- ---------------
Total Assets $ 433,423,188 $ 399,732,657
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
Losses and loss expenses $ 159,056,494 $ 149,979,141
Unearned premiums 114,809,252 97,657,020
Accrued expenses 5,410,899 5,888,392
Drafts payable 95,534 597,775
Reinsurance balances payable 1,060,620 1,216,034
Cash dividend declared to stockholders - 760,673
Line of credit 40,000,000 37,000,000
Accounts payable - securities 803,543 2,500,000
Other 1,130,796 719,010
--------------- ---------------
Total Liabilities 322,367,138 296,318,045
--------------- ---------------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value, authorized
1,000,000 shares; non issued
Common stock, $1.00 par value authorized
20,000,000 shares, issued 8,925,425 and
8,574,210 shares and outstanding 8,803,137
and 8,451,922 shares 8,925,425 8,574,210
Additional paid-in capital 45,493,760 43,536,748
Accumulated other comprehensive loss (1,491,049) (2,073,989)
Retained earnings 59,019,670 54,269,399
Treasury stock (891,756) (891,756)
--------------- ---------------
Total Stockholders' Equity 111,056,050 103,414,612
--------------- ---------------
Total Liabilities and Stockholders' Equity $ 433,423,188 $ 399,732,657
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements
-1-
<PAGE>
<TABLE>
<CAPTION>
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Nine Months Ended September 30,
2000 1999
---- ----
<S> <C> <C>
REVENUES:
Premiums earned $ 166,049,694 $ 157,663,660
Premiums ceded 55,791,406 49,784,318
------------- -------------
Net premiums earned 110,258,288 107,879,342
Investment income, net of investment expenses 11,710,056 9,763,940
Realized gains (losses) 442,927 (67,437)
Lease income 625,070 612,138
Service charge income 1,141,296 1,512,228
------------- -------------
Total Revenues 124,177,637 119,700,211
------------- -------------
EXPENSES:
Losses and loss expenses 114,779,873 112,959,768
Reinsurance recoveries 38,149,452 37,895,855
------------- -------------
76,630,421 75,063,913
Amortization of deferred policy acquisition costs 18,766,000 18,376,000
Other underwriting expenses 16,117,258 23,105,011
Policy dividends 957,319 955,854
Interest 2,394,889 974,089
Other expenses 852,754 1,213,493
------------- -------------
Total Expenses 115,718,641 119,688,360
------------- -------------
Income before taxes 8,458,996 11,851
Income tax expense (benefit) 2,136,317 (997,372)
------------- -------------
Net income $ 6,322,679 $ 1,009,223
============= =============
Earnings per common share
Basic $ 0.73 $ 0.12
============= =============
Diluted $ 0.73 $ 0.12
============= =============
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Nine Months Ended September 30,
2000 1999
---- ----
<S> <C> <C>
Net Income $ 6,322,679 1,009,223
------------- -------------
Other comprehensive income (loss), net of tax
Unrealized gains on securities:
Unrealized holding gain (loss) during the period
net of income tax 875,272 (2,985,556)
Reclassification adjustment (292,332) 44,508
------------- -------------
Other comprehensive income (loss) 582,940 (2,985,556)
------------- -------------
Comprehensive income (loss) $ 6,905,619 $ (1,931,825)
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
-2-
<PAGE>
<TABLE>
<CAPTION>
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended September 30,
2000 1999
---- ----
<S> <C> <C>
REVENUES:
Premiums earned $ 58,173,509 $ 53,173,772
Premiums ceded 19,522,963 17,218,216
------------- -------------
Net premiums earned 38,650,546 35,955,556
Investment income, net of investment expenses 4,034,217 3,238,862
Realized gain (loss) 333,720 (82,852)
Lease income 210,076 209,777
Service charge income 401,944 480,891
------------- -------------
Total Revenues 43,630,503 39,802,234
------------- -------------
EXPENSES:
Losses and loss expenses 40,061,623 39,853,059
Reinsurance recoveries 13,574,944 13,403,097
26,489,679 26,449,962
Amortization of deferred policy acquisition costs 6,578,000 5,020,000
Other underwriting expenses 5,577,170 11,584,127
Policy dividends 370,084 325,842
Interest 813,901 279,658
Other expenses 284,747 352,535
------------- -------------
Total Expenses 40,110,581 44,012,124
------------- -------------
Income (loss) before income taxes 3,519,922 (4,209,890)
Income tax expense (benefit) 917,877 (1,767,010)
------------- -------------
Net income (loss) $ 2,602,045 $ (2,442,880)
============= =============
Earnings (loss) per common share
Basic $ 0.30 $ (0.29)
------------- -------------
Diluted $ 0.30 $ (0.29)
============= =============
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended September 30,
2000 1999
---- ----
<S> <C> <C>
Net income (loss) $ 2,602,045 $ (2,442,880)
------------- -------------
Other comprehensive loss, net of tax
Unrealized gains on securities:
Unrealized holding gain (loss) during the period 868,012 (776,043)
Reclassification adjustment (220,255) 54,682
------------- -------------
Other comprehensive income (loss) 647,757 (721,361)
------------- -------------
Comprehensive income (loss) $ 3,249,802 $ (3,164,241)
============= =============
</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 NINE MONTHS ENDED SEPTEMBER 30, 2000
--------------------------------------------
Common Stock
------------ Accumulated
Additional Other Com- Stock-
Paid-In prehensive Retained Treasury holders'
Shares Amount Capital Loss Earnings Stock Equity
------ ------ ---------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1999 8,574,210 $ 8,574,210 $ 43,536,748 $ (2,073,089) $ 54,269,399 $ (891,756) $103,414,612
Issuance of
Common Stock 351,215 351,215 1,957,012 2,308,227
Net Income 6,322,679 6,322,679
Cash Dividends (1,572,408) (1,572,408)
Other Comprehensive
Income 582,940 582,940
--------- ------------ ------------- ------------- ------------- ----------- ------------
Balance,
September 30, 2000 8,925,425 $ 8,925,425 $ 45,493,760 $ (1,491,049) $ 59,019,670 $ (891,756) $111,056,050
========= ============ ============= ============= ============= =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,322,679 $ 1,009,223
------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 691,245 788,044
Realized investment (gains) losses (442,927) 67,437
Changes in assets and liabilities:
Losses and loss expenses 9,077,353 6,339,268
Unearned premiums 13,308,022 6,675,118
Premiums receivable (4,369,792) 313,413
Deferred policy acquisitions costs (1,264,256) (252,390)
Deferred federal income taxes 156,700 (172,251)
Reinsurance receivable (4,587,765) (4,196,826)
Prepaid reinsurance premiums (6,429,699) (6,173,645)
Accrued investment income (492,852) 110,838
Due from affiliate 138,078 2,287,196
Reinsurance balances payable (155,414) (464,588)
Current income taxes 670,014 (2,063,129)
Change in pooling participation 3,322,031 -
Other, net (567,828) 2,142,862
------------ ------------
Net adjustments 9,052,910 5,401,347
------------ ------------
Net cash provided by operating activities 15,375,589 6,410,570
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed maturities
Held to maturity (11,323,932) (10,825,788)
Available for sale (20,731,731) (19,558,519)
Purchase of equity securities, available for sale (23,163,599) (9,602,686)
Maturity of fixed maturities
Held to maturity 10,410,429 12,834,588
Available for sale 6,276,600 11,950,518
Sale of fixed maturities, available for sale 1,490,469 -
Sale of equity securities, available for sale 14,318,432 7,744,072
Purchase of property and equipment (194,001) (968,852)
Net sales of short-term investments 4,302,093 18,962,473
------------ ------------
Net cash provided by (used in) investing activities (18,615,240) 10,535,806
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (2,333,081) (2,190,857)
Issuance of common stock 2,308,227 1,842,145
Line of credit, net 3,000,000 (22,500,000)
------------ ------------
Net cash provided by (used in) financing activities 2,975,146 (22,848,712)
------------ ------------
Net decrease in cash (264,505) (5,902,336)
Cash at beginning of period 3,922,403 8,227,042
------------ ------------
Cash at end of period $ 3,657,898 $ 2,324,706
============ ============
Cash paid during period - Interest $ 2,214,867 $ 975,500
Net cash paid during period - Taxes $ 1,310,456 $ 933,415
</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 assumed 65% of
the pooled business through June 30, 2000. Effective July 1, 2000 the
pooling arrangement was amended changing Atlantic States' portion of the
pooled business to 70%. Southern cedes 50% of its business to the Mutual
Company. At September 30, 2000, the Mutual Company held 62% of the
outstanding common stock of the Company.
The Company and Donegal Mutual were granted approval from the Federal
Office of Thrift Supervision to form a savings bank. The bank, Province
Bank, which opened for business September 12, 2000, is 45% owned by the
Company and 55% by Donegal Mutual. The Company contributed $2.8 million for
its 45% interest.
2 - BASIS OF PRESENTATION
The financial information for the interim periods 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 periods included herein. The
results of operations for the three and nine months ended September 30,
2000, are not necessarily indicative of results of operations to be expected
for the twelve months ended December 31, 2000.
As interim period financial statements, these financial statements do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. As such,
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, 1999.
-6-
<PAGE>
3 - EARNINGS PER SHARE
THE COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE IS AS FOLLOWS:
NET WEIGHT AVERAGE EARNINGS
INCOME SHARES OUTSTANDING PER SHARE
------ ------------------ ---------
Three Months Ended September 30:
2000
----
Basic $ 2,602,045 $ 8,768,751 $ .30
Effect of stock options - - -
---------------------------------------
Diluted $ 2,602,045 $ 8,768,751 $ .30
---------------------------------------
1999
----
Basic $ 2,442,880 $ 8,347,396 $ (.29)
Effect of stock options - - -
---------------------------------------
Diluted $ 2,442,880 $ 8,347,396 $ (.29)
---------------------------------------
Nine Months Ended September 30:
2000
----
Basic $ 6,322,679 $ 8,674,174 $ .73
Effect of stock options - - -
---------------------------------------
Diluted $ 6,322,679 $ 8,674,174 $ .73
---------------------------------------
1999
----
Basic $ 1,009,223 $ 8,292,462 $ .12
Effect of stock options - - -
---------------------------------------
Diluted $ 1,009,223 $ 8,292,462 $ .12
---------------------------------------
The following options to purchase shares of common stock were not
included in the computation of diluted earnings per share because they were
antidilutive and the exercise price of the options was greater than the
average market prices:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
Number of Options 1,425,281 1,011,116 1,425,281 1,011,116
========= ========= ========= =========
-7-
<PAGE>
4 - Segment Information
The Company evaluates 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:
THREE MONTHS ENDED SEPTEMBER 30,
2000 1999
------------------------------------------------------------------------------
($ in thousands)
------------------------------------------------------------------------------
Revenues:
Premiums earned:
Commercial lines $ 14,170 $ 12,069
Personal lines 24,481 23,886
------------------------------------------------------------------------------
Total net premiums earned 38,651 35,955
------------------------------------------------------------------------------
Net investment income 4,034 3,239
Realized investment
gains (losses) 334 (82)
Other 612 690
------------------------------------------------------------------------------
Total revenues $ 43,631 $ 39,802
==============================================================================
Income (loss) before income taxes:
Underwriting income gain (loss)
Commercial lines $ 1,801 $ (9)
Personal lines (3,401) (7,326)
------------------------------------------------------------------------------
SAP underwriting loss (1,600) (7,335)
GAAP adjustments 1,238 (90)
------------------------------------------------------------------------------
GAAP underwriting loss (362) (7,425)
Net investment income 4,034 3,239
Realized investment gains (losses) 334 (82)
Other (486) 58
------------------------------------------------------------------------------
Income (loss) before income taxes $ 3,520 $ (4,210)
==============================================================================
-8-
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
------------------------------------------------------------------------------
($ in thousands)
------------------------------------------------------------------------------
Revenues:
Premiums earned:
Commercial lines $ 39,472 $ 35,251
Personal lines 70,786 72,628
------------------------------------------------------------------------------
Total net premiums earned 110,258 107,879
------------------------------------------------------------------------------
Net investment income 11,710 9,764
Realized investment
gains (losses) 443 (67)
Other 1,767 2,124
------------------------------------------------------------------------------
Total revenues $ 124,178 $ 119,700
==============================================================================
Income before income taxes:
Underwriting income gain (loss)
Commercial lines $ 1,901 $ (214)
Personal lines (6,029) (9,495)
------------------------------------------------------------------------------
SAP underwriting loss (4,128) (9,709)
GAAP adjustments 1,915 87
------------------------------------------------------------------------------
GAAP underwriting loss (2,213) (9,622)
Net investment income 11,710 9,764
Realized investment gain (losses) 443 (67)
Other (1,481) (63)
------------------------------------------------------------------------------
Income before income taxes $ 8,459 $ 12
==============================================================================
-9-
<PAGE>
5 - RESTRUCTURING CHARGE
On September 29, 1999, the Company announced a plan to consolidate
certain subsidiary support functions into its Marietta, Pennsylvania office.
As a result of this consolidation, the Company recorded a restructuring
charge in 1999 of $2,044,000 for employee termination benefits, occupancy
charges, lease cancellation costs, and asset impairments. The charge was
included in other underwriting expenses. The consolidation has been
completed.
Employee termination benefits include severance payments, which were
paid either in a lump sum or over a defined period, and related benefits for
approximately 60 employees. Of the terminated employees, approximately 50%
were from subsidiary support functions and approximately 50% were from the
Marietta, Pennsylvania office. By December 31, 1999, all of the terminated
employees had left the employment of the Company.
Included in occupancy charges are future lease obligations, less
anticipated sublease benefits, for leased space which is no longer being
used by the Delaware and Southern Heritage subsidiary support functions.
Also included in the restructuring charges were contract cancellation
costs that represented the estimated cost to buy out of the remaining term
on printer, copier, and computer processing contracts that provided no
future benefits to the Company as a result of the restructuring. By
December 31, 1999 all such assets had been taken out of service.
Asset impairments, which were a direct result of the consolidation of
subsidiary functions, amounted to $407,000. They consisted of capitalized
programming and data center costs, voice systems, and leasehold and office
improvements. These assets were written-down to zero in 1999. By December
31, 1999 all such assets were taken out of service.
Activity in the restructuring accrual is as follows:
EMPLOYEE
TERMINATION CONTRACT
BENEFITS OCCUPANCY CANCELLATIONS TOTALS
-------------------------------------------------------------------------------
BALANCE AT 12/31/99 $ 368,000 $ 441,000 $ 73,000 $ 882,000
CASH PAYMENTS (337,000) $ (112,000) (73,000) (522,000)
-------------------------------------------------------------------------------
BALANCE AT 9/30/00 $ 31,000 $ 329,000 $ - $ 360,000
===============================================================================
-10-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations - Three Months Ended September 30, 2000
to Three Months Ended September 30, 1999
----------------------------------------
Revenues for the three months ended September 30, 2000 were $43,630,503
an increase of $3,828,269 or 9.6%, over the same period of 1999. An
increase in premiums earned of $2,694,990, or 7.5% and an increase in
investment income of $795,355, or 24.6% represented most of this change.
Premiums earned were affected by an increase from 65% to 70% in Atlantic
States Insurance Company's share of the pooled business of itself and
Donegal Mutual Insurance Company which was effective July 1, 2000. This
change accounted for $1,381,083, or 3.8 percentage points of the earned
premium increase with the remaining increase coming from normal growth. An
increase in the annualized average return on investments from 5.4% in the
third quarter of 1999 to 5.9% in the third quarter of 2000 and an increase
in average invested assets from $239.0 million in the third quarter of 1999
to $272.4 million in the third quarter of 2000, accounted for most of the
investment income change. A change in realized gains and losses from a loss
of $82,852 in the third quarter of 1999 to a gain of $333,720 in the third
quarter of 2000 accounted for most of the remaining change in revenues. The
realized gains (losses) in the third quarter of both 2000 and 1999 resulted
from the normal turnover of the Company's portfolio.
The GAAP combined ratio of insurance operations in the third quarter of
2000 was 100.9% compared to 120.6% for the same period in 1999. 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 third quarter of
2000 was 68.5% compared to 73.5% for the same period of 1999. The expense
ratio for the third quarter of 2000 improved to 31.4% compared to 46.2% for
the third quarter of 1999. The improvement in the expense ratio resulted
primarily from the Company's restructuring plan that was implemented at the
end of the third quarter in 1999. Expenses in the third quarter of 1999
included a charge of $2.2 million for the restructuring. The dividend ratio
remained virtually unchanged at 1.0% for the third quarter of 2000 compared
to 0.9% for the same period of 1999.
Federal income taxes for the three months ended September 30, 2000
represented 26.1% of the income before income taxes compared to a tax
benefit 42.0% for the same period of 1999 as a result of the Company's
restructuring. The effective tax rate for the third quarter of 2000 varies
from the expected rate of 34% primarily due to the effect of tax exempt
investment income.
-11-
<PAGE>
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000
TO NINE MONTHS ENDED SEPTEMBER 30, 1999
---------------------------------------
Revenues for the nine months ended September 30, 2000 were $124,177,637
an increase of $4,477,426 or 3.7%, over the same period of 1999. An
increase in premiums earned of $2,378,946, or 2.2% and an increase in
investment income of $1,946,116, or 19.9% represented most of this change.
Premiums earned were affected by an increase from 65% to 70% in Atlantic
States Insurance Company's share of the pooled business of itself and
Donegal Mutual Insurance Company which was effective July 1, 2000. This
change accounted for $1,381,083, or 1.3 percentage points of the earned
premium increase with the remaining increase coming from normal growth which
was somewhat offset by a $5,614,161 decrease in earned premiums of Southern
Heritage Insurance Company resulting from the reunderwriting of its book of
business. An increase in the annualized average return on investments from
5.2% for the first nine months of 1999 to 5.8% for the first nine months of
2000 and an increase in average invested assets from $247.4 million in the
first three quarters of 1999 to $269.6 million in the first three quarters
of 2000, accounted for most of the investment income change. A change in
realized gains and losses from a loss of $67,437 in the nine months ended
September 30, 1999 to a gain of $442,927 in the nine months ended September
30, 2000 accounted for most of the remaining change in revenues. The
realized gains (losses) in the nine-month periods ended September 30, 2000
and 1999 resulted from the normal turnover of the Company's portfolio.
The GAAP combined ratio of insurance operations in the nine months
ended September 30, 2000 was 102.0% compared to 108.9% for the same period
in 1999. 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 nine months of 2000 was 69.5% compared to 69.6% for
the same period of 1999. An improvement in the expense ratio for the first
nine months of 2000 to 31.6% compared to 38.4% for the same period of 1999
resulted primarily from the Company's restructuring plan that was
implemented at the end of the third quarter in 1999. Expenses for the
first nine months of 1999 included a charge of $2.2 million for the
restructuring. The dividend ratio remained unchanged at 0.9% for the first
nine months of both 1999 and 2000.
Federal income taxes for the nine months ended September 30, 2000
represented 25.3% of income before income taxes. This rate varies from the
expected rate of 34% primarily due to the effect of tax exempt investment
income. For the first nine months of 1999, the Company recorded a Federal
income tax benefit of $997,372, which resulted from a carryback of a taxable
loss resulting primarily from the deduction of tax-free interest from its
operating income.
-12-
<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.
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, 2000, pursuant to a credit agreement dated December
29, 1995, with Fleet National Bank of Connecticut, (the "Bank") the Company
had unsecured borrowings of $40.0 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 rate plus 1.70%. At September 30, 2000, the interest rates on
the outstanding balances were 8.43125% on an outstanding eurodollar rate
balance of $22.0 million and 8.48% on an outstanding eurodollar rate balance
of $15.0 million and 9.5% on a prime rate balance of $3.0 million. 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. At December 31, 1999, each
of the five Companies' capital was substantially above the RBC requirements.
At December 31, 1999, amounts available for distribution as dividends to
Donegal Group without prior approval of the insurance regulatory
authorities are $6,851,802 from Atlantic States, $184,285 from Southern,
$567,793 from Pioneer, $956,381 from Delaware and $1,650,842 from Southern
Heritage.
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<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.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
------ -----------------
None.
ITEM 2. CHANGES IN SECURITIES.
------ ---------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
------ -------------------------------
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's market risk generally represents the risk of
gain or loss that may result from the potential change in the fair
value of the Company's investment portfolio as a result of
fluctuations in prices and interest rates and, to a lesser extent, its
debt obligations. The Company attempts to manage its interest rate
risk by maintaining an appropriate relationship between the average
duration of the investment portfolio and the approximate duration of
its liabilities, i.e., policy claims and debt obligations.
The Company has maintained approximately the same duration of
its investment portfolio to its liabilities from December 31, 1999 to
September 30, 2000. In addition, the Company has maintained
approximately the same investment mix during this period.
There have been no material changes to the Company's
quantitative or qualitative market risk exposure from December 31,
1999 through September 30, 2000.
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:
none
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<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DONEGAL GROUP INC.
NOVEMBER 10, 2000 BY:____________________________________
DONALD H. NIKOLAUS, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
NOVEMBER 10, 2000 BY:____________________________________
RALPH G. SPONTAK, SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND SECRETARY
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