AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 21, 2001
REGISTRATION NO. 333-63102
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 4
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DONEGAL GROUP INC.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-2424711
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1195 River Road
Marietta, Pennsylvania 17547
(888) 877-0600
--------------------------
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Donald H. Nikolaus, President
Donegal Group Inc.
1195 River Road
Marietta, Pennsylvania 17547
(888) 877-0600
--------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Kathleen M. Shay, Esquire
Duane Morris
4200 One Liberty Place
Philadelphia, PA 19103-7396
(215) 979-1000
--------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Section 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Section 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
PROSPECTUS
----------
DONEGAL GROUP INC.
2001 AGENCY STOCK PURCHASE PLAN
300,000 SHARES OF CLASS A COMMON STOCK
Donegal Group is offering 300,000 shares of Class A common stock to
eligible insurance agencies under its 2001 Agency Stock Purchase Plan. Our Class
A common stock is listed for trading on the Nasdaq Stock Market under the symbol
"DGICA." On , 2001, the last reported sale price of our
-----------------------
Class A common stock on the Nasdaq National Market System was $
------------
per share.
We will offer the shares of Class A common stock under the plan directly to
eligible agencies through our officers and will not use a broker or a dealer. In
addition, we will not pay commissions, discounts or any other payments to any
person for services in connection with the offer or sale of shares of Class A
common stock under the plan. We will pay all costs of administering the plan.
Participants will not incur brokerage commissions or service charges for the
purchase of shares under the plan. Donegal Group will retain all proceeds from
the sale of shares of Class A common stock under the plan.
Donegal Group's principal executive offices are located at 1195 River Road,
Marietta, PA 17547; telephone (888) 877-0600. A copy of our 2000 Annual Report
to Stockholders accompanies this prospectus. You should retain this prospectus
for future reference.
SEE "RISK FACTORS" BEGINNING ON PAGE FOR A DISCUSSION OF CERTAIN FACTORS
--
THAT YOU SHOULD CONSIDER BEFORE YOU INVEST IN OUR CLASS A COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is , 2001.
------------------------
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY..............................................................
RISK FACTORS....................................................................
DESCRIPTION OF THE 2001 AGENCY STOCK PURCHASE PLAN..............................
Purpose and Advantages of the Plan...........................................
Administration...............................................................
Participation................................................................
Costs and Expenses...........................................................
Purchases....................................................................
Shares; Certificates for Shares..............................................
Withdrawal from the Plan.....................................................
Other Information............................................................
DESCRIPTION OF CAPITAL STOCK....................................................
General......................................................................
Certain Charter and By-law Provisions; Delaware Anti-Takeover Provisions.....
Limitation of Liability; Indemnification.....................................
PLAN OF DISTRIBUTION............................................................
USE OF PROCEEDS.................................................................
EXPERTS.........................................................................
LEGAL OPINION...................................................................
AVAILABLE INFORMATION...........................................................
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................................
SELECTED CONSOLIDATED FINANCIAL DATA............................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION..........................................................
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO.............................
1
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. It may not
contain all of the information that is important to you. To understand this
offering fully, you should read the entire prospectus carefully, including the
risk factors.
We are an insurance holding company that offers property and casualty
insurance through our wholly owned subsidiaries and participates in a pooling
agreement with our affiliate, Donegal Mutual Insurance Company, known as the
Mutual Company. Our operations are interrelated with the operations of the
Mutual Company, and various reinsurance arrangements exist between our insurance
subsidiaries and the Mutual Company. In addition, the Mutual Company provides us
and some of our insurance subsidiaries with all of our personnel.
Donegal Group is authorized to issue 30,000,000 shares of Class A common
stock, 10,000,000 shares of Class B common stock and 2,000,000 shares of
preferred stock. The Class A common stock and the Class B common stock are
identical, except with respect to voting rights and the payment of dividends.
The Mutual Company currently owns approximately 62.2% of our Class A common
stock and 62.2% of our Class B common stock.
We are offering to eligible independent insurance agencies of our
subsidiaries and affiliated insurance companies, including the Mutual Company,
an opportunity to acquire a proprietary interest in us through the plan. We
adopted the plan to foster the common interests of us and our agencies in
achieving long-term profitable growth for the Donegal Group of companies.
We have reserved 300,000 shares of Class A common stock for sale to
eligible agencies under the plan for the five-year period ending March 31, 2007.
The purchase price for shares of Class A common stock purchased from us under
the plan will be 90% of the average closing prices of the Class A common stock
on the Nasdaq National Market System on the last ten trading days of each
applicable subscription period.
We will offer shares under the plan directly to eligible agencies through
our officers and will not use a broker or a dealer. In addition, we will not pay
commissions, discounts or any other payments to any person for services in
connection with the sale of shares of Class A common stock under the plan. We
will pay all costs of administering the plan. Participants will not incur
brokerage commissions or service charges for the purchase of shares under the
plan.
2
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FACTORS SET FORTH BELOW, AS WELL AS ALL
OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS,
BEFORE YOU DECIDE TO PURCHASE SHARES OF CLASS A COMMON STOCK.
THE CYCLICAL NATURE OF THE PROPERTY AND CASUALTY INSURANCE INDUSTRY MAY REDUCE
OUR REVENUES AND PROFIT MARGINS.
The property and casualty insurance industry is highly cyclical, and
individual lines of business experience their own cycles within the overall
industry cycle. Premium rate levels are related to the availability of insurance
coverage, which varies according to the level of surplus in the industry. The
level of surplus in the industry varies with returns on invested capital and
regulatory barriers to withdrawal of surplus. Increases in surplus have
generally been accompanied by increased price competition among property and
casualty insurers. If we find it necessary to reduce premiums or limit premium
increases due to these competitive pressures on pricing, it may cause a
reduction in our profit margins and revenues, increase our ratios of claims and
expenses to premiums and result in lower profitability for us.
Volatile and unpredictable developments also offset significantly the
cyclical trends in the industry and the industry's profitability. These
developments include natural disasters (such as storms, earthquakes, hurricanes,
floods and fires), fluctuations in interest rates and other changes in the
investment environment that affect the market prices of our investments and the
income from those investments, inflationary pressures that affect the size of
losses and judicial decisions that affect our liabilities. The occurrence of
these developments may adversely affect our business and financial condition.
THE NATURE OF THE INSURANCE INDUSTRY LIMITS OUR ABILITY TO CHANGE PRICES TO
REFLECT RISKS AND TO ESTIMATE OUR RESERVES ACCURATELY.
One of the distinguishing features of the property and casualty industry is
that its products generally are priced before its costs are known. Our products
are priced in this manner because premium rates usually are determined at the
time the policy is issued and before losses are reported. Changes in statutory
and case law can also dramatically affect the liabilities associated with known
risks after the insurance policy is issued. The number of competitors and the
similarity of products offered, as well as regulatory constraints, limit our
ability to increase prices in response to declines in profitability. Our
reported profits and losses are also determined, in part, by the establishment
and adjustment of reserves reflecting estimates made by management as to the
amount of losses and loss adjustment expenses that will ultimately be incurred
in the settlement of claims. Our ultimate liability for all losses and loss
adjustment expenses reserved at any given time will likely be greater or less
than these estimates, and material shortfalls in the estimates may have a
material adverse effect on us in future periods.
3
WE COMPETE WITH MANY INSURERS THAT ARE FINANCIALLY STRONGER THAN WE ARE.
The property and casualty insurance industry is intensely competitive.
Competition is based on many factors, including the perceived financial strength
of the insurer, premiums charged, policy terms and conditions, policyholder
service, reputation and experience. We compete with many regional and national
property and casualty insurance companies, including direct sellers of insurance
products, insurers having their own agency organizations and other insurers
represented by independent agents. Many of these insurers are better capitalized
than we are, have substantially greater financial, technical and operating
resources and have equal or higher ratings from A.M. Best Company, Inc.
The superior capitalization of many of our competitors enables them to
withstand lower profit margins and, therefore, to market their products more
aggressively, to take advantage more quickly of new marketing opportunities and
offer lower premium rates. Moreover, if our competitors price their premiums
more aggressively and we meet their pricing, our profit margins and revenues may
be reduced and our ratios of claims and expenses to premiums may increase.
Our competition may become increasingly better capitalized in the future as
the traditional barriers between insurance companies and banks and other
financial institutions erode and as the property and casualty industry continues
to consolidate. Our ability to compete against our larger, better capitalized
competitors depends largely on our ability to provide superior policyholder
service and to maintain our historically strong relationships with independent
insurance agents, on whom we are entirely dependent to generate premium volume.
We cannot assure you that we will maintain our current competitive position
in the markets in which we operate, or that we will be able to expand our
operations into new markets. If we fail to do so, our business could be
materially adversely affected.
WE ARE A REGIONAL INSURANCE COMPANY THAT OFFERS INSURANCE PRODUCTS IN A LIMITED
NUMBER OF STATES.
We are headquartered in Pennsylvania and engage in the insurance business
in approximately 15 Middle Atlantic and Southern states. In 2000, the majority
of our direct premiums written, including those of the Mutual Company and our
insurance subsidiaries, were geographically dispersed as follows: 63% in
Pennsylvania, 15% in Virginia and 6% in Maryland. Any single catastrophic
occurrence, destructive weather pattern, general economic trend or other
condition disproportionately affecting losses or business conditions in these
states could adversely affect our results of operations, although we and the
Mutual Company maintain reinsurance against catastrophic losses in excess of
$3,000,000 per occurrence and our insurance subsidiaries maintain various
catastrophe reinsurance agreements with the Mutual Company that limit the
maximum liability under any one catastrophe.
4
THE REINSURANCE AGREEMENTS ON WHICH WE RELY ON DO NOT RELIEVE US FROM LIABILITY
TO OUR POLICYHOLDERS.
We rely on reinsurance agreements to limit our maximum net loss from large
single risks or risks in concentrated areas, and to increase our capacity to
write insurance. Each reinsurance agreement satisfies all applicable regulatory
requirements. Reinsurance, however, does not relieve us from liability to our
policyholders. To the extent that a reinsurer may be unable to pay losses for
which it is liable under the terms of its reinsurance agreement with us, we
remain liable for such losses. However, in an effort to reduce the risk of
non-payment, we require all of our reinsurers to have an A.M. Best rating of A
or better or, with respect to foreign reinsurers, to have a financial condition
that, in the opinion of our management, is equivalent to a company with at least
an A rating. If our reinsurers incur losses from their reinsurance arrangements
with us, it is probable that the reinsurance premiums payable by us in the
future could increase.
WE ARE SUBJECT TO EXTENSIVE STATE INSURANCE REGULATION.
We are subject to the laws and regulations of the states in which we
conduct business. These laws and regulations address many aspects of our
business and financial condition, including licensure, the payment of dividends,
the establishment of premium rates, the settlement of claims, the transfer of
control and the requirement that we participate in assigned risk pools. Certain
of the following laws and regulations could have a material adverse effect on
our results of operations:
o state insurance regulations that require us to file proposed premium
rates in advance of premium rate increases;
o state insurance regulations that mandate required levels of statutory
surplus;
o private rating organization review of our levels of statutory surplus
and claims-paying ability; and
o National Association of Insurance Commissioners, known as the NAIC,
and state insurance department review of our risk-based capital
levels.
Changes in the level of regulation of the insurance industry and laws or
regulations themselves or interpretations by regulatory authorities could also
have a material adverse effect on our operations. Specific regulatory
developments that could have a material adverse effect on our operations include
the potential repeal of the McCarran-Ferguson Act, which exempts insurance
companies from a variety of federal regulatory requirements, possible rate
rollback regulation and legislation to control premiums, policy terminations and
other policy terms.
5
THE MUTUAL COMPANY IS OUR LARGEST SHAREHOLDER AND PROVIDES US WITH OUR
FACILITIES AND SERVICES.
The Mutual Company currently owns approximately 62.2% of our outstanding
Class A common stock and 62.2% of our outstanding Class B common stock and will
continue to own approximately the same percentages of these classes of stock
after completion of this offering. Accordingly, the Mutual Company will continue
to control the election of members of our board of directors. Although the
Mutual Company could exercise its control in ways that are contrary to the
interests of our stockholders other than the Mutual Company, we and the Mutual
Company have established a coordinating committee consisting of two outside
directors from each company who do not also serve as directors of the other
company. Subsequent to approval of a matter by the separate boards of directors
of Donegal Group and the Mutual Company, this committee is responsible for
reviewing and approving all matters involving actual or potential conflicts of
interest, including any changes to the pooling and other agreements between us
and the Mutual Company, and this committee's decisions are binding on both us
and the Mutual Company. In order for an intercompany transaction to be approved,
our representatives on the committee must conclude that the transaction is fair
and equitable to us.
We are dependent upon the Mutual Company for the retention of agents and
the underwriting of insurance, the servicing of policyholder claims and all
other aspects of our operations. All of our officers are officers and employees
of the Mutual Company. The Mutual Company also provides all of the facilities
and data processing and administrative services required to conduct our
business, for which we pay a pro rata portion of the cost.
BECAUSE WE PARTICIPATE IN AN INSURANCE POOLING ARRANGEMENT WITH THE MUTUAL
COMPANY, OUR RESULTS OF OPERATIONS ARE DEPENDENT UPON THE FINANCIAL SUCCESS OF
THE MUTUAL COMPANY.
Our insurance operations are interrelated with the insurance operations of
the Mutual Company and our results of operations are dependent upon the
financial success of the Mutual Company.
Our insurance subsidiary, Atlantic States Insurance Company, participates
in an intercompany pooling arrangement with the Mutual Company under which the
parties share the underwriting results on substantially all of the property and
casualty insurance business written by both companies. Under the terms of the
intercompany pooling agreement, Atlantic States cedes all of its insurance
business to the Mutual Company and assumes from the Mutual Company 70% of the
total pooled insurance business of the Mutual Company and Atlantic States.
The allocations of pool participation percentages between the Mutual
Company and Atlantic States are based on the pool participants' relative amounts
of capital and surplus, expectations of future relative amounts of capital and
surplus and our ability to raise capital for Atlantic States. The underwriting
pool is intended to produce a more uniform and stable underwriting result from
year to year for the participants in the pool than they would experience
individually and to spread the risk of loss among all the participants. Each
company participating in the pool has at its disposal the capacity of the entire
pool, rather than being limited to policy exposures of a size commensurate with
its own capital and surplus.
6
OUR BUSINESS DEPENDS IN PART ON THE MARKETING EFFORTS OF INDEPENDENT INSURANCE
AGENTS, AND IT IS POSSIBLE THAT THESE AGENTS MAY NOT MARKET OUR PRODUCTS
SUCCESSFULLY OR SELL OUR PRODUCTS WITHIN THE GUIDELINES WE SPECIFY.
We market and sell almost all of our insurance products through
independent, non-exclusive insurance agents. These agents are not obligated to
promote our insurance products exclusively and they also sell our competitors'
insurance products. Our business depends in part on the marketing efforts of
these agents and we must offer insurance products and services that meet the
requirements of these independent agencies. If these agencies do not market our
products successfully or give priority to other insurers, our business may be
adversely impacted.
We also grant certain agents the authority to bind insurance without our
prior approval within underwriting and pricing limits that we specify. However,
we generally review all coverages placed by our agents and may cancel the
coverage if it is inconsistent with our guidelines and permissible to cancel
under applicable insurance regulations. If we are unable to cancel the coverage
placed by an agent prior to a claim being placed by the insured, our risk may be
increased and our profitability may suffer.
OUR ESTABLISHED RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES ARE BASED ON
ESTIMATES, AND IT IS POSSIBLE THAT OUR ULTIMATE LIABILITY WILL EXCEED THESE
ESTIMATES.
We establish reserves for losses and loss adjustment expenses based on
estimates of amounts needed to pay reported and unreported claims and related
loss adjustment expenses. These estimates are based on facts and circumstances
then known to us. Reserves are based on estimates of future trends and claims
severity, judicial theories of liability and other factors.
The establishment of appropriate reserves is an inherently uncertain
process, and there can be no assurance that the ultimate liability will not
exceed our loss and loss adjustment expense reserves and have an adverse effect
on our results of operations and financial condition. As is the case for most
property and casualty insurance companies, we have found it necessary in the
past to revise estimated liabilities as reflected in our loss and loss
adjustment expense reserves, and further adjustments could be required in the
future. However, our management believes that adequate provision has been made
for our loss and loss adjustment expense reserves. This belief is based on our
internal procedures, which analyze our experience with similar cases and
historical trends such as reserving patterns, loss payments, pending levels of
unpaid claims and product mix, as well as court decisions, economic conditions
and public attitudes.
OUR SUBSIDIARIES ARE RESTRICTED IN PAYING US DIVIDENDS, ON WHICH WE DEPEND FOR
THE PAYMENT OF CORPORATE EXPENSES.
As a holding company, we rely primarily on our subsidiaries for dividends
and other permitted payments to meet our obligations for corporate expenses.
Payment of dividends to us by our subsidiaries is subject to regulatory
restrictions and depends on the surplus of our subsidiaries. From time to time,
the NAIC and various state insurance regulators consider
7
modifying the method of determining the amount of dividends that may be paid by
an insurance company without prior regulatory approval.
OUR CHARTER DOCUMENTS, DELAWARE CORPORATE LAW AND PENNSYLVANIA INSURANCE LAW MAY
INHIBIT A TAKEOVER.
Certain provisions of our certificate of incorporation and by-laws and
Delaware and Pennsylvania law may discourage a future unsolicited takeover of
Donegal Group. These provisions could have the effect of discouraging certain
attempts to acquire us or remove current management, including current members
of our board of directors, even if some of our stockholders deemed these
attempts to be in their best interests.
Our certificate of incorporation authorizes us to issue two classes of
common stock, Class A common stock and Class B common stock. The holders of the
Class A common stock are entitled to one-tenth of one vote per share, while the
holders of the Class B common stock are entitled to one vote per share, on all
matters submitted to a vote of our stockholders. In addition, our certificate of
incorporation does not grant any holder of our stock the right to cumulate votes
in the election of directors. The Mutual Company currently owns approximately
62.2% of our Class A common stock and 62.2% of our Class B common stock and has
effective voting control over us. This ownership by the Mutual Company could
avert or prevent a change in control of us unless the Mutual Company, after
consideration of all relevant factors including the interests of our
stockholders other than the Mutual Company, is in favor of such a change.
Our board of directors, without stockholder approval, has the authority to
issue preferred stock with voting and conversion rights that could adversely
affect the voting power of the Class A common stock. The issuance of preferred
stock could have the effect of delaying, averting or preventing a change in
control of us. No preferred stock has been issued, and our board of directors
does not intend to issue any preferred stock at the present time.
Our by-laws provide for a classified board of directors, consisting of
three classes as nearly equal in size as possible. The classification of our
board of directors could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from acquiring, control of
us.
As a Delaware corporation we are subject to certain anti-takeover
provisions of Delaware law, including certain business combination transaction
prohibitions. In addition, we are subject to Pennsylvania insurance laws and
regulations that prohibit any person from acquiring a greater than 10% interest
in us without the prior approval of the Insurance Commissioner of the
Commonwealth of Pennsylvania. These provisions could make it more difficult for
a third party to gain control of us, deny stockholders the receipt of a premium
on their Class A common stock and have a depressive effect on the market price
of the Class A common stock.
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in, or incorporated by reference in, this
prospectus are forward-looking in nature. These statements can be identified by
the use of forward-looking words such as "believes," "expects," "may," "will,"
"should," "intends," "plans" or "anticipates,"
8
or the negative thereof or comparable terminology, or by discussions of
strategy. You are cautioned that our business and operations are subject to a
variety of risks and uncertainties and, consequently, our actual results may
materially differ from those projected by any forward-looking statements.
Certain of these risks and uncertainties are discussed under the heading "Risk
Factors."
9
DESCRIPTION OF THE 2001 AGENCY STOCK PURCHASE PLAN
We describe the provisions of the plan below, in question and answer form.
As used in the plan, the term "subsidiary and affiliated insurance companies"
means insurance companies that are our subsidiaries and the Mutual Company. The
plan was approved by our board of directors on March 8, 2001 and was amended and
restated on September 17, 2001 and December 20, 2001.
PURPOSE AND ADVANTAGES OF THE PLAN
1. What is the purpose of the plan?
The plan provides an eligible agency, as described in Question and Answer
6, an opportunity to acquire a long-term proprietary interest in us through the
purchase of our Class A common stock at a discount from current market prices.
In offering the plan, we seek to foster the common interests of Donegal Group
and the eligible agencies in achieving long-term profitable growth for us.
Accordingly, we have created the plan for the purpose of facilitating the
purchase of and long-term investment in shares of our Class A common stock by an
eligible agency. We expect that an eligible agency that purchases shares under
the plan will hold these shares on a long-term basis, as the plan is not
intended to benefit an agency that demonstrates a pattern of immediate resale of
shares acquired. As discussed in Question and Answer 6 below regarding
eligibility, immediate resale of shares will be a factor in our determination
whether an otherwise eligible agency should remain eligible for continued
participation in the plan.
2. What are the advantages of the plan?
Under the plan, an eligible agency can utilize three convenient payment
methods for the purchase of our Class A common stock at a 10% discount from the
current market price. You will not pay any brokerage commissions or service
charges in connection with your purchase.
ADMINISTRATION
3. Who administers the plan for participants?
A committee consisting of three persons appointed from time to time by our
board of directors administers the plan. The committee may adopt rules and
regulations for carrying out the plan. The committee's interpretations or
constructions of the provisions of the plan are final and conclusive unless our
board of directors takes contrary action.
Our board of directors appointed Donald H. Nikolaus, Ralph G. Spontak and
Daniel J. Wagner to serve on the committee. We do not compensate members of the
committee for administering the plan. Donald H. Nikolaus is President, Chief
Executive Officer and a director of Donegal Group and the Mutual Company. Ralph
G. Spontak is Senior Vice President, Chief Financial Officer and Secretary of
Donegal Group and the Mutual Company. Mr. Spontak is also a director of the
Mutual Company. Daniel J. Wagner is Treasurer of Donegal Group and the Mutual
Company. The address and telephone number of each member of the committee is c/o
Donegal Group Inc., 1195 River Road, Marietta, PA 17547; telephone (888)
877-0600.
10
4. Where can I obtain additional information about the plan and its
administrators?
You can obtain additional information about the plan and its administrators
by contacting Ralph G. Spontak, our Senior Vice President, Chief Financial
Officer and Secretary, at (888) 877-0600.
5. What is the term of the plan?
The plan will be in effect from March 15, 2002 through March 31, 2007
unless our board of directors terminates the plan earlier. The board of
directors has the right to terminate the plan at any time without notice
provided that no participant's existing rights are adversely affected by the
termination. During the term of the plan there will be ten consecutive
semi-annual subscription periods. Each subscription period extends from April 1
through September 30 and from October 1 through March 31, respectively,
beginning with April 1, 2002 and ending on March 31, 2007.
PARTICIPATION
6. What agencies are eligible to participate?
An eligible agency is an independent insurance agency that brings value to
Donegal Group, the Mutual Company and our subsidiary and affiliated insurance
companies, directly or indirectly, as determined by us in our discretion, and
with which we seek a long-term relationship. Only eligible agencies may
participate in the plan. The eligibility criteria we will consider includes the
agency's volume of direct premiums written, the ability of the agency to
increase sales and grow the volume of direct premiums written, the historic loss
ratio of the agency's direct premiums written and whether the agency has been
placed on rehabilitation by us, meaning that we notify the agency of operational
deficiencies, or had its binding authority revoked. We may base eligibility on
agency segmentation class or any other factors that indicate value to the
companies, directly or indirectly, in our discretion.
We will periodically review an eligible agency's continued eligibility. A
pattern of immediate resale of shares acquired under the plan by an eligible
agency will be a factor in our determination whether an agency should remain
eligible for continued participation in the plan. Immediate resales would tend
to indicate that an agency is not seeking to share in the long-term profitable
growth of the companies. If Donegal Group determines to discontinue an agency's
participation in the plan, the agency will receive written notice from us that
its eligibility to participate in the plan has been discontinued. This notice
will be sent to the agency as promptly as possible, but in no event later than
two weeks after the end of the subscription period during which the decision was
made. A decision by us, in our discretion, to discontinue the eligibility of an
agency under the plan will be treated as an automatic withdrawal from the plan.
See Questions and Answers 24 and 25 below.
11
7. How may an eligible agency participate in the plan?
An eligible agency may enroll in the plan by completing and filing a
subscription agreement, as described in Question and Answer 8, with us. We will
send to each eligible agency a subscription agreement, a copy of this prospectus
and any prospectus supplements and a copy of our most recent Annual Report to
Stockholders prior to the beginning of the first enrollment period following the
agency's designation as an eligible agency.
8. What does a subscription agreement provide?
A subscription agreement allows each eligible agency to decide and identify
the date on which the agency desires to become enrolled in the plan, the amounts
of contribution and the payment method(s) selected for purchases under the plan.
Eligible agencies that participated in our former Agency Stock Purchase Plan may
participate in the plan by checking the appropriate box on the subscription
agreement. Prior contribution amounts and payment method(s) will be carried over
from the former Agency Stock Purchase Plan unless new instructions are given in
the subscription agreement.
9. When may an eligible agency enroll in the plan?
If an eligible agency chooses the direct bill commission payment method, as
explained in Question and Answer 15, enrollment in the plan may occur only
during the enrollment period preceding each subscription period, which is from
the 15th through the 31st day of March and from the 15th through the 30th day of
September of each year commencing with March 15, 2002. An eligible agency that
desires to subscribe for the purchase of Class A common stock through
withholding from direct bill commissions must return a duly executed and
completed subscription agreement during the applicable enrollment period. Once
enrolled in the direct bill commission payment method, an eligible agency's
participation in the plan continues for each succeeding subscription period
until the agency ceases to be an eligible agency or withdraws from enrollment in
the plan.
If an eligible agency chooses the lump-sum payment method, as explained in
Question and Answer 17, an eligible agency may enroll by submitting a
supplemental subscription agreement to us and making a lump-sum payment by the
last day of the applicable subscription period, September 30 or March 31.
If an eligible agency chooses the contingent commission payment method, as
explained in Question and Answer 18, an eligible agency may enroll by submitting
a subscription agreement during the enrollment period immediately preceding each
October 1 through March 31 subscription period.
12
10. May an eligible agency transfer its subscription rights to another person
or agency?
No. An eligible agency may not assign its subscription payments or rights
to subscribe to any other person, and any such attempted assignment is void,
except for permitted designations as described in Question and Answer 23.
COSTS AND EXPENSES
11. Are there any expenses to participants in connection with purchases under
the plan?
No. Eligible agencies are not obligated to pay any brokerage commissions or
other charges with respect to the purchase of Class A common stock under the
plan.
PURCHASES
12. How many shares are available to be purchased under the plan?
Our board of directors reserved 300,000 shares of our Class A common stock
for sale under the plan.
13. What is the price of shares of Class A common stock purchased under the
plan?
The subscription price for each share of Class A common stock purchased
under the plan is 90% of the average of the closing prices of the Class A common
stock on the Nasdaq National Market System on the last ten trading days of the
applicable subscription period.
14. How may an eligible agency pay for shares purchased under the plan?
An eligible agency can pay for shares purchased under the plan by means of
three payment methods: Direct bill commission deduction, lump-sum payment or
contingent commission deduction.
15. What is the direct bill commission payment method?
Under the direct bill commission payment method, an eligible agency may
elect to purchase Class A common stock under the plan through deductions from
its monthly direct bill commission payment by designating that a minimum of 1%
and up to a maximum of 10% of the eligible agency's monthly direct bill
commission payments be withheld from the eligible agency's direct bill
commission payments. Direct bill commission payments are subject to the total
subscription limit under all payment methods of $12,000 per subscription period.
"Direct bill commission payments" means those commissions that are earned and
actually available for payment in a monthly period to an eligible agency for
personal and commercial direct bill policies after all offsetting debits and
credits are applied, as determined solely from our records.
13
16. May an eligible agency that chooses the direct bill commission payment
method change the method or amount of contribution made or withheld under
the plan?
Yes. An eligible agency choosing the direct bill commission payment method
may change the rate of contribution by filing a new subscription agreement with
us during the enrollment period for the next subscription period. This change
will become effective during the next subscription period.
17. What is the lump-sum payment method?
Under the lump-sum payment method, an eligible agency may, by September 30
and March 31 of each subscription period, elect to make lump-sum cash payments
for the purchase of Class A common stock under the plan. Lump-sum cash payments
may not be less than $1,000 per subscription period and are subject to the total
subscription limit under all methods of $12,000 per subscription period.
18. What is the contingent commission payment method?
An eligible agency may designate a percentage of the contingent commission
payable to it under the terms of the applicable agency contingency plan (or its
equivalent) to be withheld for the purchase of Class A common stock under the
plan during the enrollment period immediately preceding the October 1 through
March 31 subscription period. Contingent commission payments are subject to the
total subscription limit under all payment methods of $12,000 per subscription
period.
19. Are there limitations on the amount of contributions or purchases that can
be made?
Yes. Each eligible agency's total contributions for purchases from all
payment methods (described in Questions and Answers 15, 17 and 18 above) may not
exceed $12,000 during each subscription period. At the close of each
subscription period, we will total each agency's contributions from all payment
methods. If at any time throughout a subscription period, an eligible agency's
total payments exceed the $12,000 maximum amount and the agency so requests, we
will return the excess amount without interest to the agency within a reasonable
period. Any amount not returned will be applied to the purchase of Class A
common stock during the next subscription period without reducing the $12,000
limitation applicable to that subscription period.
20. How are purchases made under the plan?
We will maintain on our books a plan account for each enrolled eligible
agency. All contributions made by an eligible agency through deductions from an
eligible agency's direct bill commission payments and contingent commission
withholding and lump-sum payments during a subscription period, up to $12,000,
are held in a separate bank account maintained by us until the shares purchased
under the plan are issued to the eligible agency. At the end of each
subscription period, the amount credited to each eligible agency's plan account
will be divided by the subscription price for the subscription period, and the
eligible agency's plan account will
14
be credited with the number of whole shares that results. Any amount remaining
in the plan account will be carried forward to the next subscription period
without reducing the $12,000 limitation applicable to that subscription period
or, if requested by the eligible agency, returned to the eligible agency. If the
number of shares subscribed for during any subscription period exceeds the
number of shares available for sale under the plan, the remaining available
shares will be allocated among the participating eligible agencies in proportion
to their total plan account balances, without regard to any amount carried
forward from a previous subscription period.
SHARES; CERTIFICATES FOR SHARES
21. May an eligible agency transfer, pledge, hypothecate or assign shares
credited to the agency's plan account?
An eligible agency may not transfer, pledge, hypothecate or assign its
subscription rights under the plan or shares credited to its plan account,
except for permitted designations as described in Question and Answer 23.
22. Are stock certificates issued for shares of Class A common stock purchased?
We will issue and deliver to each eligible agency stock certificates for
the shares it has purchased under the plan within a reasonable time after
purchase, but in no event later than two weeks after the end of the subscription
period during which the shares were purchased.
23. In whose name are accounts maintained and certificates registered when
issued?
Accounts in the plan will be maintained in the name of the eligible agency.
Consequently, certificates when issued for full shares will be registered in the
same name. An eligible agency may, upon written request to us, (a) designate
that shares be issued to a shareholder, partner, other principal or other
licensed employee of an eligible agency or (b) designate that any retirement
plan maintained by or for the benefit of an eligible agency or a shareholder,
partner, other principal or other licensed employee of the eligible agency may
purchase shares instead of the eligible agency through lump-sum payments made by
the designee. These permitted designations are subject to the maximum amount
limitation of $12,000, compliance with all laws that apply, including the
Employee Retirement Income Security Act of 1974, payment by the eligible agency
or its designee of any required transfer taxes and satisfaction of our usual
requirements for recognition of a transfer of our Class A common stock.
WITHDRAWAL FROM THE PLAN
24. How and when may an eligible agency withdraw from the plan?
An enrolled eligible agency may withdraw from the plan at any time by
notifying us in writing, signed on behalf of the eligible agency by an
authorized representative. We will treat a termination of agency status for any
reason as an automatic withdrawal. If an agency withdraws from the plan, that
agency may not resubscribe until after the next full subscription period has
elapsed, and then only if we have redesignated the agency an eligible agency.
15
25. What happens to any shares held in and amounts credited to an eligible
agency's plan account at the time of withdrawal?
Promptly after the time of withdrawal or termination of an agency's
eligibility, but in no event later than two weeks after the end of the
subscription period during which the withdrawal or termination occurred, we will
issue certificates representing the whole shares held under the plan in the name
of the agency, and will refund any amount credited to an eligible agency's plan
account at the time of withdrawal to the participant in cash without interest.
OTHER INFORMATION
26. What happens if Donegal Group declares a stock split or stock dividend or
changes or exchanges its Class A common stock for shares of stock or other
securities of its own or another corporation?
Our committee will make appropriate adjustments in the total number and
kind of shares that are reserved for sale under the plan if our outstanding
shares of Class A common stock are increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities of
Donegal Group, or of another corporation, by reason of reorganization, merger,
consolidation, recapitalization, reclassification, stock split-up, stock
dividend (either in shares of our Class A common stock or of another class of
our stock), spin-off or combination of shares.
27. What are the federal income tax consequences of an eligible agency's
participation in the plan?
At the time of purchase, and where an eligible agency purchases shares of
Class A common stock in its own name, the eligible agency will be treated as
having received ordinary income in an amount equal to the difference between the
subscription price paid and the then fair market value of the Class A common
stock acquired. At the end of each calendar year, we will mail to each
participating agency a Form 1099 reflecting the amount of ordinary income earned
under the plan. We will be entitled to a tax deduction at the same time in a
corresponding amount. The participating agency's basis in the Class A common
stock purchased under the plan will be equal to the purchase price plus the
amount of ordinary income recognized.
When an agency disposes of shares of Class A common stock purchased under
the plan, any amount received in excess of the value of the shares of Class A
common stock on which the agency was previously taxed will be treated as a
long-term or short-term capital gain, depending upon the holding period of the
shares. If the amount received is less than that value, the loss will be treated
as a long-term or short-term capital loss, depending upon the holding period of
the shares (which begins on the day after each share is acquired).
You are strongly advised to consult with a tax advisor to determine the tax
consequences of a given transaction, particularly if a taxpayer other than you
has been designated by you to become a participant in the plan.
16
28. May the plan be changed or discontinued?
Yes. Our board of directors has the right to amend, modify or terminate the
plan at any time without notice if your existing rights are not adversely
affected as a result of the amendment, modification or termination.
29. How may eligible agencies sell shares of Class A common stock purchased
under the plan?
As discussed in Question and Answer 22, we will issue and deliver to
eligible agencies the stock certificates for the shares purchased under the plan
after the end of the subscription period during which the shares were purchased.
Participants will have the sole discretion as to whether or when to sell their
shares and may transfer or dispose of them at any time without restriction after
receipt of their stock certificates. An agency may choose to sell shares through
the broker of his or her choice.
17
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized Class A Common stock consists of 30,000,000 shares. As of
October 31, 2001, 5,992,602 shares of our Class A common stock were issued and
outstanding. We also have authorized 10,000,000 shares of Class B common stock,
of which 2,980,537 shares were issued and outstanding on October 31, 2001, and
2,000,000 shares of preferred stock issuable from time to time in separate
series upon resolution of our board of directors, none of which are outstanding.
Except as otherwise required by the Delaware General Corporation Law, known as
the DGCL, or as otherwise provided in our certificate of incorporation with
respect to dividends and voting rights, each share of Class A common stock and
each share of Class B common stock have identical powers, preferences and
limitations.
Our certificate of incorporation provides that the holders of shares of
Class A common stock are entitled to one-tenth of one vote per share held on any
matter to be voted on by our stockholders, while the holders of shares of Class
B common stock are entitled to one vote per share. Except as otherwise required
under the DGCL or our certificate of incorporation, the holders of Class A
common stock and the holders of Class B common stock vote together as a single
class on all matters presented to our stockholders for a vote.
At any election of directors, the nominees receiving the highest number of
votes cast by the holders of the Class A common stock and the Class B common
stock for the number of directors to be elected will be elected as directors.
Under the DGCL and our certificate of incorporation, the affirmative vote
of the holders of a majority of the Class A common stock and the Class B common
stock, voting as a single class, is sufficient to amend our certificate of
incorporation, to authorize additional shares of capital stock of any class, to
approve any merger or consolidation of us with or into any other entity or the
sale of all or substantially all of our assets or to approve our dissolution.
Under the DGCL, the holders of shares of Class A common stock are entitled
to vote as a separate class on any proposal to change the par value of the Class
A common stock or to alter or change the rights, preferences and limitations of
the Class A common stock in a way that would affect the holders of shares of
Class A common stock adversely. Similarly, the holders of shares of Class B
common stock are entitled to vote as a separate class on any proposal to change
the par value of the Class B common stock or to alter or change the rights,
preferences and limitations of the Class B common stock in a way that would
affect the holders of shares of Class B common stock adversely. In addition,
under the DGCL, the number of authorized shares of Class A common stock or Class
B common stock may be increased or decreased, but not below the number of shares
then outstanding, by the affirmative vote of the holders of a majority of the
respective class of common stock voting as a separate class.
Our certificate of incorporation provides that each share of Class A common
stock outstanding at the time of the declaration of any cash dividend or other
distribution payable upon the shares of Class B common stock is entitled to a
cash dividend or distribution payable at the
18
same time and to stockholders of record on the same date in an amount at least
10% greater than any cash dividend declared upon each share of Class B common
stock. Each share of Class A common stock and Class B common stock is equal in
respect to dividends or other distributions payable in shares of capital stock
except that the dividends or distributions may be made (1) in shares of Class A
common stock to the holders of Class A common stock and in shares of Class B
common stock to the holders of Class B common stock, (2) in shares of Class A
common stock to the holders of Class A common stock and to the holders of Class
B common stock or (3) in any other authorized class or series of capital stock
to the holders of Class A common stock and to the holders of Class B common
stock.
There are no redemption or sinking fund provisions applicable to the Class
A common stock or to the Class B common stock. All the shares of Class A common
stock offered by us pursuant to this prospectus, when issued and paid for, will
be fully paid and non-assessable.
Each holder of Class A common stock and each holder of Class B common stock
is entitled to receive the same per share consideration in a merger or
consolidation of us into another entity except that, if the consideration paid
to our stockholders consists in whole or in part of shares of another entity,
the shares of the other entity issued to the holders of our Class B common stock
may have greater voting rights than the shares of the other entity issued to the
holders of our Class A common stock.
Neither the Class A common stock nor the Class B common stock is
convertible into another class of common stock or any other security of Donegal
Group.
The transfer agent and registrar for our Class A common stock is EquiServe.
CERTAIN CHARTER AND BY-LAW PROVISIONS; DELAWARE ANTI-TAKEOVER PROVISIONS
Our certificate of incorporation, by-laws and the DGCL contain certain
provisions that may enhance the likelihood of continuity and stability in the
composition of our board of directors and may discourage a future unsolicited
takeover of Donegal Group. These provisions could have the effect of
discouraging certain attempts to acquire us or remove current management,
including current members of our board of directors, even if some of our
stockholders deemed these attempts to be in their best interests.
Our certificate of incorporation authorizes us to issue two classes of
common stock, Class A common stock and Class B common stock. The holders of the
Class A common stock are entitled to one-tenth of one vote per share, while the
holders of the Class B common stock are entitled to one vote per share, on all
matters submitted to a vote of our stockholders. In addition, our certificate of
incorporation does not grant any holder of our stock the right to cumulate votes
in the election of directors. The Mutual Company currently owns approximately
62.2% of our Class A common stock and 62.2% of our Class B common stock and has
effective voting control over us. This ownership by the Mutual Company could
avert or prevent a change in control of us unless the Mutual Company, after
consideration of all relevant factors including the interests of our
stockholders other than the Mutual Company, is in favor of such a change.
19
Our board of directors, without stockholder approval, has the authority to
issue preferred stock with voting and conversion rights that could adversely
affect the voting power of the Class A common stock. The issuance of preferred
stock could have the effect of delaying, averting or preventing a change in
control of us. No preferred stock has been issued, and our board of directors
does not intend to issue any preferred stock at the present time.
Our by-laws provide for a classified board of directors consisting of three
classes as nearly equal in size as possible. The classification of our board of
directors could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring, control of us.
We are a Delaware corporation that is subject to certain anti-takeover
provisions of the DGCL. The business combination provisions contained in Section
203 of the DGCL defines an interested stockholder of a corporation as any person
that (1) owns, directly or indirectly, or has the right to acquire, 15% or more
of the outstanding voting stock of the corporation or (2) is an affiliate or
associate of the corporation and was the owner of 15% or more of the outstanding
voting stock of the corporation at any time within the three-year period
immediately prior to the date on which it is sought to be determined whether the
person is an interested stockholder; and the affiliates and the associates of
the person. Under Section 203, a Delaware corporation may not engage in any
business combination with any interested stockholder for a period of three years
following the date the stockholder became an interested stockholder, unless (1)
prior to that date the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, (2) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding, for determining
the number of shares outstanding, (a) shares owned by persons who are directors
and officers and (b) employee stock plans, in certain instances) or (3) on or
after that date the business combination is approved by the board of directors
and authorized at an annual or special meeting of stockholders by at least
66-2/3% of the outstanding voting stock that is not owned by the interested
stockholder.
The restrictions imposed by Section 203 will not apply to a corporation if
the corporation, by the action of its stockholders holding a majority of the
outstanding stock, adopts an amendment to its certificate of incorporation or
by-laws expressly electing not to be governed by Section 203. The amendment will
not be effective until 12 months after adoption and will not apply to any
business combination between the corporation and any person who became an
interested stockholder of the corporation on or prior to the adoption of the
amendment.
We have not elected to opt out of Section 203, and the restrictions imposed
by Section 203 apply to us. Section 203 could, under certain circumstances, make
it more difficult for a third party to gain control of us, deny stockholders the
receipt of a premium on their Class A common stock and have a depressive effect
on the market price of the Class A common stock.
20
In addition, we are subject to Pennsylvania insurance laws and regulations
that prohibit any person from acquiring a greater than 10% interest in us
without the prior approval of the Insurance Commissioner of the Commonwealth of
Pennsylvania. These provisions could make it more difficult for a third party to
gain control of us, deny stockholders the receipt of a premium on their Class A
common stock and have a depressive effect on the market price of the Class A
common stock.
LIMITATION OF LIABILITY; INDEMNIFICATION
As permitted by the DGCL, Article 6 of our certificate of incorporation
provides that our directors will not be personally liable to us or our
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (1) for any breach of the director's duty of loyalty to us
or our stockholders, (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) under Section 174 of
the DGCL, relating to prohibited dividends, distributions and repurchases or
redemptions of stock or (4) for any transaction from which the director derives
an improper personal benefit.
Article 5 of our by-laws includes provisions for indemnification of our
directors and officers to the fullest extent permitted by the DGCL as now in
effect or as in effect at a later date. Insofar as indemnification for
liabilities arising under the federal securities laws may be permitted to
directors, officers and persons controlling us under these provisions, we have
been informed that in the opinion of the SEC this indemnification is against
public policy as expressed in federal securities laws and is unenforceable.
PLAN OF DISTRIBUTION
We have reserved 300,000 shares of Class A common stock for sale to
eligible agencies under the plan for the five-year period ending March 31, 2007.
We will offer the shares of Class A common stock under the plan directly to
eligible agencies through our officers and will not use a broker or a dealer. In
addition, we will not pay commissions, discounts or any other payments to any
person for services in connection with the offer or sale of shares of Class A
common stock under the plan. We will pay all costs of administering the plan.
Participants will not incur brokerage commissions or service charges for the
purchase of shares under the plan.
USE OF PROCEEDS
No minimum amount of proceeds is required to be received by Donegal Group
in this offering. Donegal Group will retain all proceeds from the sale of the
shares of Class A common stock under the plan. We intend to use the proceeds
from sales of these shares for general corporate purposes, including making
investments in and advances to our subsidiaries.
21
EXPERTS
The consolidated financial statements and schedules of Donegal Group as of
December 31, 2000 and 1999, and for each of the years in the three-year period
ended December 31, 2000, have been included in this prospectus and in the
registration statement in reliance upon the report of KPMG LLP, independent
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
LEGAL OPINION
The validity of the issuance of the shares of Class A common stock offered
with this prospectus will be passed upon for us by Duane, Morris & Heckscher
LLP, Philadelphia, Pennsylvania. As of November 14, 2001, attorneys of Duane,
Morris & Heckscher LLP who have recently provided substantive legal services
beneficially owned 10,052 shares of our outstanding Class A common stock, and
4,921 shares of our outstanding Class B common stock, of which 5,926 shares
represent shares of Class A common stock purchasable under currently exercisable
stock options and 2,963 shares represent shares of Class B common stock
purchasable under currently exercisable stock options. In addition, Frederick W.
Dreher, a partner of Duane, Morris & Heckscher LLP, is a director of the Mutual
Company and is one of its members on the coordinating committee. The Mutual
Company is a holder of approximately 62.2% of our Class A common stock and 62.2%
of our Class B common stock.
AVAILABLE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information we file at the SEC's public reference room at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference room. Our filings with the
SEC are also available to the public from commercial document retrieval services
and at the worldwide web site maintained by the SEC at "http://www.sec.gov."
We filed with the SEC in Washington, D.C. a registration statement on Form
S-2 under the Securities Act with respect to the securities covered by this
prospectus. As permitted by the rules and regulations of the SEC, this
prospectus does not contain all of the information set forth in the registration
statement. For further information with respect to Donegal Group and the
securities covered by this prospectus, reference is made to the registration
statement, including the exhibits filed or incorporated in the registration
statement. Statements contained in this prospectus concerning the provisions of
documents filed with, or incorporated by reference in, the registration
statement as exhibits are necessarily summaries of those documents and each
statement is qualified in its entirety by reference to the copy of the
applicable documents filed with the SEC. Copies of the registration statement
and its exhibits are on file at the offices of the SEC and may be obtained upon
payment of the prescribed fee or may be examined without charge at the public
reference room of the SEC described above or at the worldwide web site
maintained by the SEC described above.
22
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We incorporate the following documents in this prospectus by reference:
(a) Our Annual Report on Form 10-K for the year ended December 31, 2000,
as filed with the SEC on March 29, 2001;
(b) Our Quarterly Reports on Form 10-Q for the quarters ended March 31,
2001, June 30, 2001 and September 30, 2001, as filed with the SEC on
May 14, 2001, August 14, 2001 and November 15, 2001, respectively;
(c) Our 2000 Annual Report to Stockholders (only those portions consisting
of the following are incorporated by reference in this Registration
Statement: (i) the description of the business of Donegal Group
included as part of the Management's Discussion and Analysis of
Results of Operation and Financial Condition on page 10 thereof; (ii)
the consolidated financial statements, notes thereto and independent
auditors' report thereon on pages 13 through 28 thereof; (iii) the
information set forth under "Market Information" on the inside back
cover thereof; (iv) the selected financial data set forth under
"Financial Highlights" on the inside front cover thereof; and (iv) the
"Management's Discussion and Analysis of Results of Operations and
Financial Condition" on pages 10 through 12 thereof) included as an
exhibit to our Annual Report on Form 10-K for the year ended December
31, 2000, as filed with the SEC on March 29, 2001. The remaining
portions of the 2000 Annual Report to Stockholders are not
incorporated by reference, consisting of pages 1, 2, 3, 4, 5, 6, 7, 8,
29 and 30, inclusive, the information on the inside back cover other
than the information under "Market Information" and the front and back
outside cover pages of the 2000 Annual Report to Stockholders, and are
not part of this registration statement.
Any statement incorporated in this prospectus shall be deemed to be
modified or superseded for purposes of this prospectus to the extent that a
statement contained in this prospectus or in any other subsequently filed
document which also is or is deemed to be incorporated by reference in this
prospectus modifies or supersedes such statement and any statement contained in
this prospectus shall be deemed to be modified or superseded for all purposes to
the extent that a statement contained in any subsequently filed document that is
deemed to be incorporated by reference modifies or supersedes such statement.
All documents filed by us pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act after the date of this prospectus and prior to the filing of a
post-effective amendment that indicates that all securities offered have been
sold or that deregisters all securities then remaining unsold, shall be deemed
to be incorporated by reference in this prospectus and to be a part hereof from
the date of filing of such documents.
23
We will provide without charge to each person, including any beneficial
owner, to whom this prospectus is delivered, on request, a copy of any or all
documents incorporated by reference in this prospectus, other than exhibits to
those documents unless the exhibits are specifically incorporated by reference.
Requests should be directed to:
Ralph G. Spontak
Senior Vice President and Chief Financial Officer
Donegal Group Inc.
1195 River Road
Marietta, PA 17547
(888) 877-0600
24
SELECTED CONSOLIDATED FINANCIAL DATA
--------------------------------------------------------------------------------------------------------------------
Nine Months Ended Year Ended December 31,
(Unaudited)
--------------------------------------------------------------------------------------------------------------------
9/30/01 9/30/00 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------
Income Statement Data:
Premiums earned $124,291,595 $111,684,838 $151,646,199 $145,517,457 $117,454,194
Investment income, net 11,988,347 12,009,023 16,394,747 13,590,695 12,343,793
Realized investment gains (losses) (448,462) 442,927 170,852 (38,702) (13,562)
Total revenues 137,654,981 125,919,756 170,581,587 161,739,336 132,232,316
Income before income taxes 8,768,865 8,318,883 11,743,028 3,844,641 11,697,666
Income taxes (benefit) 2,093,579 2,086,727 2,906,248 (2,950,556) 2,674,929
Net income 6,675,286 6,232,156 8,836,780 6,795,197 9,022,737
Basic earnings per share 0.75 0.72 1.01 0.82 1.11
Diluted earnings per share 0.74 0.72 1.01 0.82 1.09
Cash dividends per share
of common stock -- 0.18 0.36 0.36 0.34
Cash dividends per share
of Class A common stock 0.20 -- -- -- --
Cash dividends per share
of Class B common stock 0.18 -- -- -- --
Balance Sheet Data:
Total investments $304,531,291 $284,214,690 $289,344,642 $268,010,854 $261,506,778
Total assets 461,645,296 420,825,850 426,008,780 389,688,804 376,742,094
Debt obligations 28,200,000 40,000,000 40,000,000 37,000,000 37,500,000
Stockholders' equity 124,072,961 111,369,391 114,129,591 103,792,334 100,915,178
Stockholders' equity per share 13.83 12.65 12.88 12.28 12.30
----------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------
Income Statement Data:
Premiums earned $108,817,880 $107,223,496
Investment income, net 11,849,538 11,154,109
Realized investment gains (losses) 311,155 170,127
Total revenues 123,199,214 120,665,132
Income before income taxes 13,924,355 10,123,045
Income taxes (benefit) 3,681,070 2,178,854
Net income 10,243,285 7,944,191
Basic earnings per share 1.28 1.02
Diluted earnings per share 1.27 1.01
Cash dividends per share
of common stock 0.29 0.25
Cash dividends per share
of Class A common stock -- --
Cash dividends per share
of Class B common stock -- --
Balance Sheet Data:
Total investments $209,968,608 $ 197,400,467
Total assets 296,695,369 281,435,890
Debt obligations 10,500,000 8,500,000
Stockholders' equity 89,768,653 78,827,107
Stockholders' equity per share 11.16 9.92
--------------------------------------------------------------------------------
In November 1998, the Company acquired all of the outstanding stock of Southern
Heritage. This transaction was accounted for as a "purchase." The Company's
financial statements include Southern Heritage as a consolidated subsidiary from
November 1, 1998.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Donegal Group is a regional insurance holding company doing business in the
Mid-Atlantic and Southern states through its five wholly owned property-casualty
insurance subsidiaries, Atlantic States Insurance Company, known as Atlantic
States, Southern Insurance Company of Virginia, known as Southern, Southern
Heritage Insurance Company, known as Southern Heritage, Delaware Atlantic
Insurance Company, known as Delaware, Pioneer Insurance Company of New York,
known as Pioneer-New York, and Pioneer Insurance Company of Ohio, known as
Pioneer-Ohio, collectively known as the Insurance Subsidiaries. Donegal Group
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 examination by those departments. The Insurance Subsidiaries
are also subject to competition from other insurance carriers in their operating
areas. Donegal Group was formed in September 1986 by the Mutual Company, which
owns 62% of the outstanding common shares of Donegal Group as of December 31,
2000.
Atlantic States participates in an intercompany pooling arrangement with
the Mutual Company and assumes 70% of the pooled business (65% prior to July 1,
2000). Southern cedes 50% of its business to the Mutual Company, and prior to
January 1, 2000, Delaware ceded 70% of its workers' compensation business to the
Mutual Company. Because the Mutual Company places substantially all of the
business assumed from Southern into the pool, from which Donegal Group has a 70%
allocation, Donegal Group's results of operations include approximately 85% of
the business written by Southern.
In November 1998, Donegal Group acquired all of the outstanding stock of
Southern Heritage. This transaction was accounted for as a purchase. Donegal
Group's financial statements include Southern Heritage as a consolidated
subsidiary from November 1, 1998.
In addition to the Insurance Subsidiaries, Donegal Group also owned all of
the outstanding stock of Atlantic Insurance Services, Inc., known as AIS, an
insurance services organization, which provided inspection and policy auditing
information on a fee-for-service basis to its affiliates and the insurance
industry. Donegal Group sold all of the outstanding shares of AIS on October 1,
1999.
During 2000, Donegal Group acquired 45% of the outstanding stock of Donegal
Financial Services Corporation, known as DFSC, a bank holding company. The
remaining 55% of the outstanding stock of DFSC is owned by the Mutual Company.
Effective January 1, 2001, Donegal Group purchased all of the outstanding
shares of Pioneer-New York from the Mutual Company, which previously owned 100%
of Pioneer-New York. The acquisition had been accounted for as a reorganization
of entities under common control, similar to a pooling of interests, as both
Pioneer-New York and Donegal Group are under common management and control of
the Mutual Company. As such, all financial data prior to January 1, 2001 has
been restated to include the results of operation, financial position and cash
flows of Pioneer-New York.
26
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2001
TO NINE MONTHS ENDED SEPTEMBER 30, 2000
---------------------------------------
Revenues for the nine months ended September 30, 2001 were $137,654,981, an
increase of $11,735,225, or 9.3%, over the same period of 2000. An increase in
premiums earned of $12,606,757, or 11.3%, offset by a realized loss of $448,462
compared to a realized gain of $442,927 for the first nine months of 2000
accounted for most of the change. Premiums earned were affected by an increase
from 65% to 70% in Atlantic States' share of the pooled business of itself and
the Mutual Company, which was effective July 1, 2000. This change accounted for
$4,273,297, or 3.8 percentage points of the earned premium increase, with the
remaining increase coming from normal growth and rate increases. A decrease in
the annualized average return on investments from 5.8% for the first nine months
of 2000 to 5.3% for the first nine months of 2001 was offset by an increase in
average invested assets of approximately $21,000,000. The realized loss in the
first nine months of 2001 and 2000 included $1,067,970 and $285,228 in losses,
which resulted from declines in the market value of securities that were
determined to be other than temporary.
The GAAP combined ratio of insurance operations in the nine months ended
September 30, 2001 was 101.1% compared to 102.4% for the same period in 2000.
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). Donegal Group's loss ratio in the first nine months of 2001 was
67.7% compared to 69.5% for the same period of 2000. Donegal Group's expense
ratio for the first nine months of 2001 was 32.4% compared to 32.1% for the
first nine months of 2000. The dividend ratio remained virtually unchanged at
1.0% for the first nine months of 2001 compared to 0.9% for the first nine
months of 2000.
Federal income taxes for the nine months ended September 30, 2001
represented 23.9% of the income before income taxes compared to a 25.1% for the
same period of 2000. These rates vary from the expected rate of 34% primarily
due to the effect of tax-exempt investment income.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2001
TO THREE MONTHS ENDED SEPTEMBER 30, 2000
----------------------------------------
Revenues for the three months ended September 30, 2001 were $46,365,986, an
increase of $2,136,926, or 4.8%, over the same period of 2000. An increase in
premiums earned of $3,449,697, or 8.8%, offset by a decrease in investment
income of $417,444, or 10.1%, along with realized losses of $562,301 compared to
realized gains of $333,720 in the third quarter of 2000 accounted for most of
this change. A decrease in the annualized average return on investments from
5.9% in the third quarter of 2000 to 5.1% in the third quarter of 2001 offset by
an increase in average invested assets from $278,200,000 in the third quarter of
2000 to $290,500,000 in the third quarter of 2001, accounted for most of the
investment income change. The realized loss in the third quarter of 2001
included $604,235 in losses, which resulted from declines in the market value of
securities that were determined to be other than temporary. The realized gain in
the third quarter of 2000 resulted from the normal turnover of Donegal Group's
portfolio.
27
The GAAP combined ratio of insurance operations in the third quarter of
2001 was 104.3% compared to 101.3% for the same period in 2000. Donegal Group's
loss ratio in the third quarter of 2001 was 70.5% compared to 68.4% for the same
period of 2000. Weather related claims of approximately $250,000 from one storm
in August, 2001, an increase in the severity of claims and a worsening loss
ratio in Donegal Group's commercial automobile line of business accounted for
most of the increase in the loss ratio. The expense ratio for the third quarter
of 2001 was 32.7% compared to 31.9% for the third quarter of 2000. The change in
the expense ratio resulted primarily from expenses related to a travel
production incentive for agents in 2001, which added 0.7% to the expense ratio
compared to the third quarter of 2000. The dividend ratio increased slightly to
1.1% for the third quarter of 2001 compared to 0.9% for the same period of 2000.
Federal income taxes for the three months ended September 30, 2001
represented 9.2% of the income before income taxes compared to a 25.9% for the
same period of 2000 due to tax exempt interest representing a much larger
percentage of pretax income in the third quarter of 2001. These rates vary from
the expected rate of 34% primarily due to the effect of tax-exempt investment
income.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2001
TO SIX MONTHS ENDED JUNE 30, 2000
---------------------------------
Revenues for the six months ended June 30, 2001 were $91,288,995, an
increase of $9,598,299, or 11.7%, over the same period of 2000. An increase in
net premiums earned of $9,157,060, or 12.6%, represented most of this change.
Net premiums written of the Insurance Subsidiaries increased 15.6% in the first
half of 2001 compared to the first half of 2000. An increase in Atlantic States'
share of the pooled business of itself and the Mutual Company from 65% to 70%,
effective July 1, 2000, accounted for 6.1 percentage points of the 15.6
percentage point increase in the premiums written. Investment income for the
first six months of 2001 increased $396,768, or 5.0%. An increase in the
annualized average return on investments from 5.8% in the first six months of
2000 to 5.9% in the first six months of 2001 and an increase in average invested
assets from $270,400,000 in the first six months of 2000 to $282,900,000 in the
first six months of 2001 accounted for the change. Realized investment gains
were $113,839 in the first six months of 2001 compared to a gain of $109,207 for
the same period of 2000. The realized gains in 2000 and 2001 were net of losses
of $285,228 and $463,735, respectively, in losses, which resulted from changes
in the market value of securities that were determined to be other than
temporary.
The GAAP combined ratio of insurance operations in the first six months of
2001 was 99.4% compared to 103.0% for the same period in 2000. Donegal Group's
loss ratio in the first six months of 2001 was 66.2% compared to 70.0% in the
first six months of 2000. Donegal Group's expense ratio for the first six months
of 2001 was 32.3% compared to 32.2% for the first six months of 2000. The
dividend ratio increased slightly from 0.8% for the first six months of 2000 to
0.9% for the first six months of 2001.
28
Federal income taxes for the six months ended June 30, 2001 represented
26.0% of the income before income taxes compared to 24.5% for the same period of
2000. These rates vary from the expected rate of 34% primarily due to the effect
of tax-exempt investment income.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2001
TO THREE MONTHS ENDED JUNE 30, 2000
-----------------------------------
Revenues for the three months ended June 30, 2001 were $46,496,969, an
increase of $5,163,606, or 12.5%, over the same period of 2000. An increase in
net premiums earned of $5,204,856, or 14.3%, represented most of this change.
Net premiums written of the Insurance Subsidiaries increased 17.7% in the second
quarter of 2001 compared to the second quarter of 2000. An increase in Atlantic
States' share of the pooled business of itself and the Mutual Company from 65%
to 70%, effective July 1, 2000, accounted for 6.2 percentage points of the 17.7
percentage point increase in the premiums written. The remaining portion of the
increase was primarily due to rate increases. Investment income for the second
quarter of 2001 increased $335,651, or 8.6%. An increase in the annualized
average return on investments from 5.8% in the second quarter of 2000 to 6.0% in
the second quarter of 2001 and an increase in average invested assets from
$269,700,000 in the second quarter of 2000 to $281,900,000 in the second quarter
of 2001 accounted for the change. Realized investment losses were $6,968 in the
second quarter of 2001 compared to a gain of $391,117 for the same period of
2000. The realized loss in 2001 included $463,735 in losses, which resulted from
changes in the market value of securities that were determined to be other then
temporary. The realized gains in 2000 resulted from the normal turnover of
Donegal Group's portfolio.
The GAAP combined ratio of insurance operations in the second quarter of
2001 was 99.9% compared to 101.4% for the same period in 2000. Donegal Group's
loss ratio in the second quarter of 2001 was 67.1% compared to 68.1% in the
second quarter of 2000. Donegal Group's expense ratio for the second quarter of
2001 was 32.1% compared to 32.7% for the second quarter of 2000. The dividend
ratio increased from 0.6% in the second quarter of 2000 to 0.8% in the second
quarter of 2001.
Federal income taxes for the second quarter of 2001 represented 25.6% of
the income before income taxes compared to 24.6% for the same period of 2000.
These rates vary from the expected rate of 34% primarily due to the effect of
tax-exempt investment income.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2001
TO THREE MONTHS ENDED MARCH 31, 2000
------------------------------------
Revenues for the three months ended March 31, 2001 were $44,792,026, an
increase of $4,434,693, or 11.0%, over the same period of 2000. An increase in
net premiums earned of $3,952,204, or 11.0%, represented most of this change.
Net premiums written of the Insurance Subsidiaries increased 13.1% in the first
quarter of 2001 compared to the first quarter of 2000. An increase in Atlantic
States' share of the pooled business of itself and the Mutual Company from 65%
to 70%, effective July 1, 2000, accounted for 6 percentage points of the 13.1
percentage point increase in the premiums written. Investment income for the
first three months of 2001 increased $61,117, or 1.5%. A decrease in the
annualized average return on investments from 6.0% in the first three months of
2000 to 5.6% in the first three months of 2001 offset by an increase in average
invested assets from $267,300,000 in the first three months of 2000 to
$288,300,000 in the first three months of 2001 accounted for the change.
Realized investment gains were $120,807 in the first three months of 2001
compared to a loss of $281,910 for the same period of 2000. The realized losses
in 2000 included $285,228 in losses, which resulted from changes in the market
value of two securities that were determined to be other than temporary. The
realized gains in 2001 resulted from the normal turnover of Donegal Group's
portfolio.
The GAAP combined ratio of insurance operations in the first three months
of 2001 was 98.8% compared to 104.6% for the same period in 2000.
29
Donegal Group's loss ratio in the first three months of 2001 was 65.3% compared
to 71.9% in the first three months of 2000. Donegal Group's expense ratio for
the first three months of 2001 was 32.5% compared to 31.7% for the first three
months of 2000. The change in the expense ratio resulted primarily from
increases in incentive costs related to the improved combined ratio. The
dividend ratio remained unchanged at 1.0%.
Federal income taxes for the three months ended March 31, 2001 represented
26.5% of the income before income taxes compared to 24.1% for the same period of
2000. These rates vary from the expected rate of 34% primarily due to the effect
of tax-exempt investment income.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2000
TO YEAR ENDED DECEMBER 31, 1999
-------------------------------
Total revenues for 2000 were $170,581,587, which were $8,842,251, or 5.5%,
greater than 1999. Net premiums earned increased to $151,646,199, an increase of
$6,128,742, or 4.2%, over 1999. The change in Atlantic States' share of the
pooling arrangement with the Mutual Company from 65% to 70%, effective July 1,
2000, accounted for $4,113,078 of the increase in net premiums earned. Direct
premiums written of the combined pool of Atlantic States and the Mutual Company
increased $13,851,692 or 9.0%. A 5.1% increase in the direct premiums written of
Southern, a 2.1% decrease in the direct premiums written of Delaware, a 13.2%
increase in the direct premiums written of Pioneer-New York, a 25.4% increase in
the direct premiums written of Pioneer-Ohio and a 15.6% decrease in the direct
premiums written of Southern Heritage accounted for the majority of the
remaining change. Donegal Group reported net realized investment gains of
$170,852, compared to net realized investment losses of $38,702 in 1999. During
2000 certain investments trading below cost had declined on an
other-than-temporary basis. Losses of $436,943 were included in net realized
investment gains for these investments in 2000. Net realized gains and losses in
1999 resulted from normal turnover of Donegal Group's investment portfolio. As
of December 31, 2000, 100.0% of Donegal Group's bond portfolio was classified as
Class 1 (highest quality) by the National Association of Insurance
Commissioners' Securities Valuation Office. Investment income increased
$2,804,052 in 2000. An increase in the average invested assets from $264,758,816
to $278,677,748 and an increase in the average yield to 5.9% from 5.1% in 1999
accounted for the change.
The GAAP combined ratio of insurance operations was 101.8% in 2000 compared
to 106.5% in 1999. The loss ratio in 2000 and 1999 was 68.8%. The commercial
lines loss ratio decreased from 68.8% in 1999 to 66.9% in 2000. The personal
lines loss ratio increased from 69.7% in 1999 to 70.3% in 2000. The expense
ratio for 2000 was 32.1% compared to 36.8% in 1999, with the dividend ratio
remaining unchanged at 0.9%. The expense ratio in 1999 was adversely affected by
a charge to earnings resulting from a restructuring charge of $2,000,000, which
increased the expense ratio by 1.4%.
30
Income tax expense (benefit) was $2,906,248 compared to $(2,950,556) in
1999. As discussed below, Donegal Group benefited from a federal income tax law
change in 1999.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1999
TO YEAR ENDED DECEMBER 31, 1998
-------------------------------
Total revenues for 1999 were $161,739,336, which were $29,507,020, or
22.3%, greater than 1998. Net premiums earned increased to $145,517,457, an
increase of $28,063,263, or 23.9%, over 1998. The acquisition of Southern
Heritage accounted for $19,674,071, or 71% of the increase in earned premiums in
1999. Direct premiums written of the combined pool of Atlantic States and the
Mutual Company increased $9,516,654 or 6.6%. A 9.4% increase in the direct
premiums written of Southern, a 4.9% increase in the direct premiums written of
Delaware, a 28.8% increase in the direct premiums written of Pioneer-New York
and a 13.9% increase in the direct premiums written of Pioneer-Ohio accounted
for the majority of the remaining change. Donegal Group reported net realized
investment losses of $38,702 compared to net realized investment losses of
$13,562 in 1998. Net realized losses in both years resulted from normal turnover
of Donegal Group's investment portfolio. As of December 31, 1999, 99.9% of
Donegal Group's bond portfolio was classified as Class 1 (highest quality) by
the National Association of Insurance Commissioners' Securities Valuation
Office. Investment income increased $1,246,902. An increase in the average
invested assets from $235,737,693 to $264,758,816, offset by a decrease in the
average yield to 5.1% from 5.2% in 1998, accounted for the change.
The GAAP combined ratio of insurance operations was 106.5% in 1999,
compared to 100.1% in 1998. The loss ratio in 1999 was 68.8% compared to 62.8%
in 1998. The increase in the loss ratio in 1999 resulted from a deterioration in
operating results in both the commercial and personal lines segments of Donegal
Group. The commercial lines loss ratio increased from 54.9% in 1998 to 68.8% in
1999, with results in workers' compensation suffering the largest increase, from
46.9% in 1998 to 68.8%, in 1999. Homeowners results suffered the largest
increase in personal lines as the loss ratio increased from 71.3% in 1998 to
76.0% in 1999. This increase was somewhat offset by a decrease in the private
passenger automobile loss ratio from 70.9% in 1998 to 69.3% in 1999. The expense
ratio for 1999 was 36.8% compared to 35.9% in 1998, with the dividend ratio
decreasing from 1.4% in 1998 to 0.9% in 1999. The expense ratio was adversely
affected by a charge to earnings resulting from a restructuring charge of
$2,000,000, which increased the expense ratio by 1.4%. The dividend ratio
decreased due to a higher loss ratio in workers' compensation in 1999 compared
to 1998.
Donegal Group benefited from a federal income tax law change that was
enacted during 1999, which allows net operating loss carryforwards of an
acquired company to be used to offset future taxable income of other affiliated
companies filing as part of a consolidated tax return. Prior law allowed such
net operating loss carryforward to be used to offset taxable income of the
acquired company only. Due to this law change, the net operating loss
carryforward, obtained as part of the acquisition of Southern Heritage, may be
used to offset taxable income generated by the other consolidated affiliates.
Because of this change, management determined that a valuation allowance for
Southern Heritage's net operating loss carryforward is no longer needed, and
Donegal Group recognized a tax benefit of $3,004,524 in 1999.
31
IMPACT OF NEW ACCOUNTING STANDARDS
----------------------------------
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Donegal Group has no derivative instruments or hedging activities as
defined in accordance with SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of SFAS No. 133," which
statements became effective January 1, 2001. On January 1, 2001, Donegal Group
transferred investments with an amortized cost of $51,640,154 and fair value of
$52,444,675 from the held to maturity classification to the available for sale
classification under the provisions of SFAS No. 133 and 138. The unrealized
holding gain of $804,521 at January 1, 2001 will be reported in other
comprehensive income. The transfer will not impact net income.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
------------------
Donegal Group's exposure to market risk for changes in interest rates is
concentrated in its investment portfolio and, to a lesser extent, its debt
obligations. Donegal Group monitors this exposure through periodic reviews of
asset and liability positions. Estimates of cash flows and the impact of
increase rate fluctuations relating to the investment portfolio are modeled
regularly.
Principal cash flows and related weighted-average interest rates by
expected maturity dates for financial instruments sensitive to interest rates at
December 31, 2001 are as follows:
-------------------------------------------------------------------------
Principal Weighted-Average
Cash Interest
Flows Rate
-------------------------------------------------------------------------
Fixed maturities and
short-term investments:
-------------------------------------------------------------------------
2001 $ 37,924,552 6.51%
-------------------------------------------------------------------------
2002 14,886,717 6.09%
-------------------------------------------------------------------------
2003 22,175,000 5.91%
-------------------------------------------------------------------------
2004 18,625,000 6.10%
-------------------------------------------------------------------------
2005 24,061,639 6.38%
-------------------------------------------------------------------------
Thereafter 158,397,081 6.18%
-------------------------------------------------------------------------
Total $276,069,989
--------------------------------============-----------------------------
Market value $278,713,124
--------------------------------============-----------------------------
Debt
-------------------------------------------------------------------------
2001 $ 8,000,000 8.57%
-------------------------------------------------------------------------
2002 8,000,000 8.57%
-------------------------------------------------------------------------
2003 8,000,000 8.57%
-------------------------------------------------------------------------
2004 8,000,000 8.57%
-------------------------------------------------------------------------
2005 8,000,000 8.57%
-------------------------------------------------------------------------
Total $ 40,000,000
--------------------------------============-----------------------------
Fair Value $ 40,000,000
--------------------------------============-----------------------------
32
Actual cash flows may differ from those stated as a result of calls and
prepayments.
EQUITY PRICE RISK
Donegal Group's portfolio of equity securities, which is carried on the
balance sheet at market value, has exposure to price risk. Price risk is defined
as the potential loss in market value resulting from an adverse change in
prices. Portfolio characteristics are analyzed regularly and market risk is
actively managed through a variety of techniques. The portfolio is diversified
across industries, and concentrations in any one company or industry are limited
by parameters established by management.
The combined total of realized and unrealized equity investment gains and
(losses) were $(650,229), $(394,931) and $(299,908) in 2000, 1999 and 1998,
respectively. During these three years the largest total equity investment gain
and (loss) in a quarter was $897,972 and $(1,395,103), respectively.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Donegal Group 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. Donegal Group
had no significant commitments for capital expenditures as of September 30,
2001.
In investing funds made available from operations, Donegal Group maintains
securities maturities consistent with its projected cash needs for the payment
of claims and expenses. Donegal Group 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, 2001, pursuant to a credit agreement dated December 29,
1995 with Fleet National Bank of Connecticut, known as the Bank, Donegal Group
had unsecured borrowings of $28,200,000. Per the terms of the credit agreement,
Donegal Group may borrow up to $32,000,000 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, 2001, the interest rates on the outstanding
balances were 5.28% on an outstanding eurodollar balance of $13,200,000 and
5.01% on an outstanding eurodollar rate balance of $15,000,000. In addition,
Donegal Group pays 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, the
credit line is reduced by $8,000,000. Any outstanding loan in excess of the
remaining credit line, after such reduction, will then be payable.
33
Donegal Group's principal source of cash with which to pay stockholder
dividends is dividends from Atlantic States, Southern, Pioneer-Ohio, Pioneer-New
York, 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-Ohio, Pioneer-New York, Southern Heritage and
Delaware are subject to Risk Based Capital or RBC requirements. At December 31,
2000, each of the six Insurance Subsidiaries' capital was substantially above
the RBC requirements. At December 31, 2000, amounts available for distribution
as dividends to Donegal Group without prior approval of the insurance regulatory
authorities were $5,414,419 from Atlantic States, $908,259 from Southern,
$581,132 from Pioneer-Ohio, $323,992 from Delaware, $973,796 from Southern
Heritage and none from Pioneer-New York.
In June 2000, Delaware made a $3,800,000 dividend distribution to Donegal
Group, which was approved by the Delaware Insurance Department.
CREDIT RISK
-----------
Donegal Group 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 Insurance 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, Donegal Group attempts, in
establishing rates, to anticipate the potential impact of inflation.
LIABILITIES FOR LOSSES AND LOSS EXPENSES
----------------------------------------
Liabilities for losses and loss expenses are estimates at a given point in
time of what the insurer expects to pay to claimants, based on facts and
circumstances then known, and it can be expected that the ultimate liability
will exceed or be less than such estimates. Liabilities are based on estimates
of future trends and claims severity, judicial theories of liability and other
factors. However, during the loss adjustment period, additional facts regarding
individual claims may become known, and consequently it often becomes necessary
to refine and adjust the estimates of liability. Any adjustments are reflected
in operating results in the year in which the changes are made.
Donegal Group maintains liabilities for the eventual payment of losses and
loss expenses with respect to both reported and unreported claims. Liabilities
for loss expenses are intended to cover the ultimate costs of settling all
losses, including investigation and litigation costs from such losses. The
amount of liability for reported losses is primarily based upon a case-by-case
evaluation of the type of risk involved and knowledge of the circumstances
surrounding each claim and the insurance policy provisions relating to the type
of loss. The amount of liability for unreported claims and loss expenses is
determined on the basis of historical information by line of insurance.
Inflation is implicitly provided for in the reserving function through analysis
of costs, trends and reviews of historical reserving results. Liabilities are
closely monitored and are recomputed periodically by Donegal Group and the
Mutual Company using new information on reported claims and a variety of
statistical techniques. Liabilities for losses are not discounted.
34
The establishment of appropriate liabilities is an inherently uncertain
process, and there can be no assurance that the ultimate liability will not
exceed Donegal Group's loss and loss expense reserves and have an adverse effect
on Donegal Group's results of operations and financial condition. As is the case
for virtually all property and casualty insurance companies, Donegal Group has
found it necessary in the past to revise estimated future liabilities for losses
and loss expenses, and further adjustments could be required in the future.
However, on the basis of Donegal Group's internal procedures, which analyze,
among other things, Donegal Group's experience with similar cases and historical
trends, such as reserving patterns, loss payments, pending levels of unpaid
claims and product mix, as well as court decisions, economic conditions and
public attitudes, management of Donegal Group believes that adequate provision
has been made for Donegal Group's liability for losses and loss expenses.
Differences between liabilities reported in Donegal Group's financial
statements prepared on a GAAP basis and financial statements prepared on a
statutory accounting basis result from reducing statutory liabilities for
anticipated salvage and subrogation recoveries. These differences amounted to
$8,042,860, $7,736,942 and $7,963,559 at December 31, 2000, 1999 and 1998,
respectively.
The following tables set forth a reconciliation of the beginning and ending
net liability for unpaid losses and loss expenses for the periods indicated on a
GAAP basis for Donegal Group.
Year Ended December 31,
---------------------------------------------
2000 1999 1998
---- ---- ----
(in thousands)
Net liability for unpaid losses and loss expenses
at beginning of year.......................................... $ 99,234 $96,014 $80,256
Net liabilities of acquired company.............................. - - 14,967
-------- ------- -------
Net beginning balance as adjusted................................ 99,234 96,014 95,223
Provision for net losses and loss expenses for
claims incurred in the current year........................... 103,671 100,573 76,629
Increase (Decrease) in provision for estimated net
losses and loss expenses for claims incurred in
prior years................................................... 712 (492) (2,822)
-------- ------- -------
Total incurred................................................... 104,383 100,081 73,807
Net losses and loss payments for claims
incurred during:
The current year................................................. 61,848 59,434 45,032
Prior years...................................................... 39,060 37,427 27,983
-------- ------- -------
Total paid....................................................... 100,908 96,861 73,015
Net liability for unpaid losses and loss expenses
at end of year................................................ $102,709 $99,234 $96,015
======== ======= =======
35
The following table sets forth the development of the liability for net
unpaid losses and loss expenses for Donegal Group on a GAAP basis from 1990 to
2000, with supplemental loss data for 2000 and 1999.
"Net liability at end of year for unpaid losses and loss expenses" sets
forth the estimated liability for net unpaid losses and loss expenses recorded
at the balance sheet date for each of the indicated years. This liability
represents the estimated amount of net losses and loss expenses for claims
arising in the current and all prior years that are unpaid at the balance sheet
date including losses incurred but not reported.
The "Net Liability reestimated as of" portion of the table shows the
reestimated amount of the previously recorded liability based on experience for
each succeeding year. The estimate is increased or decreased as payments are
made and more information becomes known about the severity of the remaining
unpaid claims. For example, the 1991 liability has developed an excess after
nine years, in that reestimated net losses and loss expenses are expected to be
$4,700,000 less than the estimated liability initially established in 1991 of
$36,200,000.
The "Cumulative (excess) deficiency" shows the cumulative (excess)
deficiency at December 31, 2000 of the liability estimate shown on the top line
of the corresponding column. An excess in liability means that the liability
established in prior years exceeded actual net losses and loss expenses or were
reevaluated at less than the original amount. A deficiency in liability means
that the liability established in prior years was less than actual net losses
and loss expenses or were reevaluated at more than the original amount.
The "Cumulative amount of liability paid through" portion of the table
shows the cumulative net losses and loss expense payments made in succeeding
years for net losses incurred prior to the balance sheet date. For example, the
1991 column indicates that as of December 31, 2000 payments equal to $31,600,000
of the currently reestimated ultimate liability for net losses and loss expenses
of $31,500,000 had been made.
36
Year Ended December 31
-------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ----
(in thousands)
Net liability at end of
year for unpaid losses
and loss expenses............. $31,898 $36,194 $44,339 $52,790 $63,317 $75,411 $78,889
Net liability
reestimated as of:............
One year later............... 32,923 37,514 45,408 50,583 60,227 72,380 77,400
Two years later.............. 33,550 37,765 42,752 48,132 56,656 70,451 73,438
Three years later............ 32,803 35,446 40,693 44,956 54,571 66,936 71,816
Four years later............. 31,004 33,931 38,375 42,157 51,825 64,356 69,378
Five years later............. 30,041 32,907 37,096 41,050 50,493 63,095
Six years later.............. 29,595 32,234 36,682 40,572 49,593
Seven years later............ 29,417 31,976 36,730 39,991
Eight years later............ 29,175 31,685 36,437
Nine years later............. 29,058 31,543
Ten years later.............. 29,000
Cumulative (excess) deficiency. $(2,898) $(4,651) $(7,902) $(12,799) $(13,724) $(12,316) $(9,511)
======== ======== ======== ========= ========= ========= ========
Cumulative amount of
liability paid through:
One year later............... $13,003 $13,519 $16,579 $16,126 $19,401 $24,485 $27,229
Two years later.............. 19,795 20,942 24,546 25,393 30,354 37,981 41,532
Three years later............ 24,178 25,308 29,385 32,079 38,684 47,027 53,555
Four years later............. 26,413 27,826 32,925 36,726 43,655 53,276 59,995
Five years later............. 27,439 29,605 34,757 39,122 46,331 56,869
Six years later.............. 28,157 30,719 35,739 40,440 47,802
Seven years later............ 28,627 31,173 36,518 40,903
Eight years later............ 28,841 31,412 36,809
Nine years later............. 28,948 31,585
Ten years later.............. 29,046
1997 1998 1999 2000
---- ---- ---- ----
Net liability at end of
year for unpaid losses
and loss expenses............. $80,256 $96,015 $99,234 $102,709
Net liability
reestimated as of:............
One year later............... 77,459 95,556 100,076
Two years later.............. 76,613 95,315
Three years later............ 74,851
Four years later.............
Five years later.............
Six years later..............
Seven years later............
Eight years later............
Nine years later.............
Ten years later..............
Cumulative (excess) deficiency. $(5,405) $(700) $842
======== ====== ====
Cumulative amount of
liability paid through:
One year later............... $27,803 $37,236 $38,973
Two years later.............. 46,954 57,347
Three years later............ 58,883
Four years later.............
Five years later.............
Six years later..............
Seven years later............
Eight years later............
Nine years later.............
Ten years later..............
Year Ended December 31
-------------------------------------------------
1993 1994 1995 1996
---- ---- ---- ----
(in thousands)
Gross liability at end of year................................ $70,093 $88,484 $108,157 $113,346 $
Reinsurance recoverable....................................... 17,303 25,167 32,746 34,457
Net liability at end of year.................................. 52,790 63,317 75,411 78,889
Gross reestimated liability - latest.......................... 55,642 72,804 91,723 105,654
Reestimated recoverable - latest.............................. 15,651 23,211 28,628 36,276
Net reestimated liability - latest............................ 39,991 49,593 63,095 69,378
Gross cumulative deficiency (excess).......................... (14,451) (15,680) (16,434) (7,692)
1997 1998 1999 2000
---- ---- ---- ----
Gross liability at end of year................................ $115,801 $136,727 $144,180 $156,476
Reinsurance recoverable....................................... 35,545 40,712 44,946 53,767
Net liability at end of year.................................. 80,256 96,015 99,234 102,709
Gross reestimated liability - latest.......................... 112,624 133,456 150,177
Reestimated recoverable - latest.............................. 37,773 38,141 50,101
Net reestimated liability - latest............................ 74,851 95,315 100,076
Gross cumulative deficiency (excess).......................... (3,177) (3,271) 5,997
37
DONEGAL GROUP INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.................................................F-
Consolidated Balance Sheets as of December 31, 1999 and 2000.................F-
Consolidated Statements of Income and Comprehensive Income for the years
ended December 31, 1998, 1999 and 2000......................................F-
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1999 and 2000......................................F-
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000............................................F-
Notes to Consolidated Financial Statements...................................F-
Unaudited Consolidated Balance Sheets as of September 30, 2001...............F-
Unaudited Consolidated Statements of Income and Comprehensive Income for
the nine months ended September 30, 2001 and 2000...........................F-
Unaudited Consolidated Statements of Income and Comprehensive Income for
the three months ended September 30, 2001 and 2000..........................F-
Unaudited Consolidated Statement of Stockholders' Equity for
the nine months ended September 30, 2001....................................F-
Unaudited Consolidated Statements of Cash Flows for the nine
months ended September 30, 2001 and 2000....................................F-
Summary Notes to Consolidated Financial Statements...........................F-
Unaudited Consolidated Balance Sheets as of June 30, 2001....................F-
Unaudited Consolidated Statements of Income and Comprehensive Income for
the six months ended June 30, 2001 and 2000.................................F-
Unaudited Consolidated Statements of Income and Comprehensive Income for
the three months ended June 30, 2001 and 2000...............................F-
Unaudited Consolidated Statement of Stockholders' Equity for
the six months ended June 30, 2001..........................................F-
Unaudited Consolidated Statements of Cash Flows for the six
months ended June 30, 2001 and 2000.........................................F-
Summary Notes to Consolidated Financial Statements...........................F-
Unaudited Consolidated Balance Sheets as of March 31, 2001...................F-
Unaudited Consolidated Statements of Income and Comprehensive Income for
the three months ended March 31, 2001 and 2000..............................F-
Unaudited Consolidated Statement of Stockholders' Equity for
the three months ended March 31, 2001.......................................F-
Unaudited Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 and 2000........................................F-
Summary Notes to Consolidated Financial Statements...........................F-
F-1
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Donegal Group Inc.
We have audited the accompanying consolidated balance sheets of Donegal Group
Inc. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of income and comprehensive income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2000. In connection with our audits of the consolidated financial
statements, we also have audited the accompanying financial statement schedules.
These consolidated financial statements and financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Donegal Group Inc.
and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
KPMG LLP
Philadelphia, Pennsylvania
February 23, 2001
F-2
Donegal Group Inc.
CONSOLIDATED BALANCE SHEETS
December 31, 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments
Fixed maturities
Held to maturity, at amortized cost (fair value $144,662,436 and $137,361,494) $143,181,718 $139,638,608
Available for sale, at fair value (amortized cost $114,524,472 and $105,955,784) 114,611,183 102,500,048
Equity securities, available for sale, at fair value (cost $12,500,558 and $9,067,428) 12,112,236 9,283,036
Short-term investments, at cost, which approximates fair value 19,439,505 16,589,162
-----------------------------------------------------------------------------------------------------------------------------
Total investments 289,344,642 268,010,854
Cash 5,182,988 4,500,570
Accrued investment income 4,002,464 3,547,405
Premiums receivable 21,758,502 18,461,687
Reinsurance receivable 54,543,884 45,573,554
Deferred policy acquisition costs 12,284,214 11,445,572
Federal income taxes receivable 259,962 634,582
Deferred tax asset, net 7,690,886 9,221,874
Prepaid reinsurance premiums 24,712,384 21,556,152
Property and equipment, net 5,236,483 5,860,252
Accounts receivable--securities 234,817 --
Other 757,554 876,302
-----------------------------------------------------------------------------------------------------------------------------
Total assets $426,008,780 $389,688,804
=============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Losses and loss expenses $156,476,124 $144,180,006
Unearned premiums 99,940,381 88,307,928
Accrued expenses 5,877,475 6,096,157
Drafts payable 48,640 597,775
Reinsurance balances payable 1,634,975 1,372,289
Cash dividend declared to stockholders 797,282 760,673
Borrowings under line of credit 40,000,000 37,000,000
Accounts payable--securities 959,652 2,600,000
Due to affiliate 4,528,996 4,178,357
Other 1,615,664 803,285
-----------------------------------------------------------------------------------------------------------------------------
Total liabilities 311,879,189 285,896,470
-----------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock, $1.00 par value, authorized 2,000,000 shares; none issued
Common stock, Class A, authorized 15,000,000 shares; none issued
Common stock, $1.00 par value, authorized 20,000,000 shares,
issued 8,980,977 and 8,574,210 shares and outstanding
8,858,689 and 8,451,922 shares 8,980,977 8,574,210
Additional paid-in capital 46,969,840 44,595,437
Accumulated other comprehensive loss (199,063) (2,106,568)
Retained earnings 59,269,593 53,621,011
Treasury stock, at cost (891,756) (891,756)
-----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 114,129,591 103,792,334
-----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $426,008,780 $389,688,804
=============================================================================================================================
See accompanying notes to consolidated financial statements.
F-3
Donegal Group Inc.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year Ended December 31, 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME
Revenues
Net premiums earned (includes affiliated reinsurance of
$61,986,528, $58,280,333 and $59,716,528) $151,646,199 $145,517,457 $117,454,194
Investment income, net of investment expenses 16,394,747 13,590,695 12,343,793
Installment payment fees 1,532,792 1,456,918 909,900
Lease income 836,997 819,474 753,408
Service fees -- 393,494 784,583
Net realized investment gains (losses) 170,852 (38,702) (13,562)
-------------------------------------------------------------------------------------------------------------------
Total revenues 170,581,587 161,739,336 132,232,316
-------------------------------------------------------------------------------------------------------------------
Expenses
Net losses and loss expenses (includes affiliated reinsurance of
$36,767,436, $38,549,795 and $37,078,260) 104,383,176 100,080,616 73,806,408
Amortization of deferred policy acquisition costs 25,319,000 24,931,000 19,743,000
Other underwriting expenses 23,355,781 28,648,951 22,445,323
Policy dividends 1,330,330 1,341,294 1,635,300
Interest 3,285,036 1,535,249 1,292,992
Other 1,165,236 1,357,585 1,611,627
-------------------------------------------------------------------------------------------------------------------
Total expenses 158,838,559 157,894,695 120,534,650
-------------------------------------------------------------------------------------------------------------------
Income before income tax expense (benefit) 11,743,028 3,844,641 11,697,666
Income tax expense (benefit) 2,906,248 (2,950,556) 2,674,929
-------------------------------------------------------------------------------------------------------------------
Net income $ 8,836,780 $ 6,795,197 $ 9,022,737
===================================================================================================================
Net income per common share
Basic $ 1.01 $ .82 $ 1.11
===================================================================================================================
Diluted $ 1.01 $ .82 $ 1.09
===================================================================================================================
STATEMENTS OF COMPREHENSIVE INCOME
Net income $ 8,836,780 $ 6,795,197 $ 9,022,737
-------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities:
Unrealized holding gain (loss) arising during the period,
net of income tax expense (benefit) of
$1,057,179, $(1,804,294) and $154,815 2,020,267 (3,459,669) 300,523
Reclassification adjustment for (gains) losses included
in net income, net of income tax expense (benefit) of
$58,090, $(13,159) and $(4,611) (112,762) 25,543 8,951
-------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 1,907,505 (3,434,126) 309,474
-------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 10,744,285 $ 3,361,071 $ 9,332,211
===================================================================================================================
See accompanying notes to consolidated financial statements.
F-4
Donegal Group Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Additional Other
----------------------- Paid-in Comprehensive Retained
Shares Amount Capital Income (Loss) Earnings
------------------------------------------------------------------------------------------------------------------------------
Balance,
January 1, 1998 6,122,431 $6,122,431 $39,990,806 $ 1,018,084 $43,529,088
------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 141,542 141,542 2,339,205
Capital contribution to Pioneer-New York 2,101,821
Net income 9,022,737
Other comprehensive income 309,474
Cash dividends
$.3375 per share (2,768,254)
Stock dividend 2,061,248 2,061,248 (2,061,248)
------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1998 8,325,221 $8,325,221 $42,330,011 $ 1,327,558 $49,824,144
------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 248,989 248,989 2,265,426
Net income 6,795,197
Other comprehensive loss (3,434,126)
Cash dividends
$.36 per share (2,998,330)
------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1999 8,574,210 $8,574,210 $44,595,437 $(2,106,568) $53,621,011
------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 406,767 406,767 2,349,773
Net income 8,836,780
Other comprehensive income 1,907,505
Grant of stock options 24,630 (24,630)
Cash dividends
$.36 per share (3,163,568)
------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 2000 8,980,977 $8,980,977 $46,969,840 $ (199,063) $ 59,269,593
==============================================================================================================================
Total
Treasury Stockholders'
Stock Equity
--------------------------------------------------------------------------
Balance,
January 1, 1998 $(891,756) $ 89,768,653
--------------------------------------------------------------------------
Issuance of common stock 2,480,747
Capital contribution to Pioneer-New York 2,101,821
Net income 9,022,737
Other comprehensive income 309,474
Cash dividends
$.3375 per share (2,768,254)
Stock dividend --
--------------------------------------------------------------------------
Balance,
December 31, 1998 $(891,756) $100,915,178
--------------------------------------------------------------------------
Issuance of common stock 2,514,415
Net income 6,795,197
Other comprehensive loss (3,434,126)
Cash dividends
$.36 per share (2,998,330)
--------------------------------------------------------------------------
Balance,
December 31, 1999 $(891,756) $103,792,334
--------------------------------------------------------------------------
Issuance of common stock 2,756,540
Net income 8,836,780
Other comprehensive income 1,907,505
Grant of stock options --
Cash dividends
$.36 per share (3,163,568)
--------------------------------------------------------------------------
Balance,
December 31, 2000 $(891,756) $114,129,591
==========================================================================
See accompanying notes to consolidated financial statements.
F-5
Donegal Group Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2000 1999 1998
-------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 8,836,780 $ 6,795,197 $ 9,022,737
-------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 982,926 1,078,594 596,726
Realized investment (gains) losses (170,852) 38,702 13,562
Changes in Assets and Liabilities, net of acquisition:
Losses and loss expenses 12,296,118 7,452,899 4,754,595
Unearned premiums 7,788,243 2,395,965 5,686,640
Accrued expenses (165,997) 1,166,287 (575,857)
Premiums receivable (3,296,815) 1,477,671 (1,235,219)
Deferred policy acquisition costs (316,463) 64,545 (411,491)
Deferred income taxes 499,976 (3,783,354) 192,511
Reinsurance receivable (8,970,330) (3,809,600) (4,577,874)
Accrued investment income (455,059) (311,975) (187,955)
Amounts due to/from affiliate 350,639 (1,133,037) (4,180,378)
Reinsurance balances payable 262,686 (499,423) (207,847)
Prepaid reinsurance premiums (3,156,232) (4,041,033) (3,000,904)
Current income taxes 374,620 (388,577) (189,551)
Change in pooling participation 3,322,031 -- --
Other, net 268,316 508,807 169,245
-------------------------------------------------------------------------------------------------------------
Net adjustments 9,613,807 216,471 (3,153,797)
-------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 18,450,587 7,011,668 5,868,940
-------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchase of fixed maturities
Held to maturity (17,340,175) (23,782,305) (26,699,301)
Available for sale (30,355,507) (32,890,963) (45,448,018)
Purchase of equity securities (28,286,533) (14,258,861) (15,824,465)
Sale of fixed maturities
Available for sale 8,719,165 503,895 2,207,500
Maturity of fixed maturities
Held to maturity 13,490,715 15,563,638 26,935,155
Available for sale 11,928,622 19,049,880 16,606,644
Sale of equity securities 24,572,288 11,767,268 16,155,130
Capital contribution to Pioneer-New York -- -- 2,101,821
Sale of Atlantic Insurance Services, net -- (48,810) --
Acquisition of Southern Heritage -- -- (18,028,072)
Purchase of property and equipment (275,982) (461,669) (729,959)
Net sales (purchases) of short-term investments (2,850,343) 14,619,107 14,690,277
-------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (20,397,750) (9,938,820) (28,033,288)
-------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Issuance of common stock 2,756,540 2,514,415 2,480,747
Borrowings (payments) under line of credit, net 3,000,000 (500,000) 27,000,000
Cash dividends paid (3,126,959) (2,946,170) (2,663,795)
-------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 2,629,581 (931,755) 26,816,952
-------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 682,418 (3,858,907) 4,652,604
Cash at beginning of year 4,500,570 8,359,477 3,706,873
-------------------------------------------------------------------------------------------------------------
Cash at end of year $ 5,182,988 $ 4,500,570 $ 8,359,477
=============================================================================================================
See accompanying notes to consolidated financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Donegal Group Inc. (the "Company") was organized as a regional insurance holding
company by Donegal Mutual Insurance Company (the "Mutual Company") and operates
in the Mid-Atlantic and Southern states through its wholly owned stock insurance
companies, Atlantic States Insurance Company ("Atlantic States"), Southern
Insurance Company of Virginia ("Southern"), Southern Heritage Insurance Company
("Southern Heritage"), Delaware Atlantic Insurance Company ("Delaware"), Pioneer
Insurance Company of New York ("Pioneer-New York") and Pioneer Insurance Company
of Ohio ("Pioneer-Ohio") (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 examination by those departments. The Insurance Subsidiaries
are also subject to competition from other insurance carriers in their operating
areas. Atlantic States participates in an intercompany pooling arrangement with
the Mutual Company and assumes 70% of the pooled business (65% prior to July 1,
2000). Southern cedes 50% of its business to the Mutual Company and prior to
January 1, 2000, Delaware ceded 70% of its workers' compensation business to the
Mutual Company. At December 31, 2000, the Mutual Company held 62% of the
outstanding common stock of the Company.
In addition to the Company's Insurance Subsidiaries, it also owned all of
the outstanding stock of Atlantic Insurance Services, Inc. ("AIS"), an insurance
services organization. The Company sold all of the stock of AIS on October 1,
1999.
During 2000, the Company acquired 45% of the outstanding stock of
Donegal Financial Services Corporation ("DFSC"), a bank holding company, for
$3,042,000 in cash. The remaining 55% of the outstanding stock of DFSC is owned
by the Mutual Company.
On January 3, 2001, the Company announced that it had purchased all of the
outstanding shares of Pioneer Insurance Company of New York ("Pioneer-New York")
from the Mutual Company effective January 1, 2001. The purchase price was
$4,441,311, representing Pioneer-New York's adjusted statutory equity at
December 31, 2000. The acquisition has been accounted for as a reorganization of
entities under common control, similar to a pooling of interests, as both
Pioneer-New York and the Company are under the common management and control of
the Mutual Company. As such, the Company's financial statements have been
restated to include Pioneer-New York as a consolidated subsidiary.
BASIS OF CONSOLIDATION
The consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America,
include the accounts of Donegal Group Inc. and its wholly owned subsidiaries.
All significant inter-company accounts and transactions have been eliminated in
consolidation. The term "Company" as used herein refers to the consolidated
entity.
USE OF ESTIMATES
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the liabilities for losses and
loss expenses. While management uses available information to provide for such
liabilities, future changes to these liabilities may be necessary based on
changes in trends in claim frequency and severity.
INVESTMENTS
The Company classifies its debt and equity securities into the following
categories:
Held to Maturity--Debt securities that the Company has the positive intent
and ability to hold to maturity; reported at amortized cost.
Available for Sale--Debt and equity securities not classified as held to
maturity; reported at fair value, with unrealized gains and losses excluded
from income and reported as a separate component of stockholders' equity
(net of tax effects).
Short-term investments are carried at amortized cost, which approximates
fair value.
If there is a decline in fair value below amortized cost which is other
than temporary, the cost basis for such investments in the held to maturity and
available for sale categories is reduced to fair value. Such decline in cost
basis is recognized as a realized loss and charged to income.
Premiums and discounts on debt securities are amortized over the life of
the security as an adjustment to yield using the effective interest method.
Realized investment gains and losses are computed using the specific
identification method.
Premiums and discounts for mortgage-backed debt securities are amortized
using anticipated prepayments.
F-7
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company has used the following methods and assumptions in estimating its
fair value disclosures:
Investments--Fair values for fixed maturity securities are based on quoted
market prices, when available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable instruments or
values obtained from independent pricing services through a bank trustee.
The fair values for equity securities are based on quoted market prices.
Cash and Short-Term Investments--The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Premium and Reinsurance Receivables and Payables--The carrying amounts
reported in the balance sheet for these instruments approximate their fair
values.
Borrowings Under Line of Credit--The carrying amounts reported in the
balance sheet for the line of credit approximate fair value due to the
variable rate nature of the line of credit.
REVENUE RECOGNITION
Insurance premiums are recognized as income over the terms of the policies.
Unearned premiums are calculated on a daily pro-rata basis.
POLICY ACQUISITION COSTS
Policy acquisition costs, consisting primarily of commissions, premium taxes and
certain other variable underwriting costs, are deferred and amortized over the
period in which the premiums are earned. Anticipated losses and loss expenses,
expenses for maintenance of policies in force and anticipated investment income
are considered in the determination of the recoverability of deferred
acquisition costs.
PROPERTY AND EQUIPMENT
Property and equipment are reported at depreciated cost that is computed using
the straight-line method based upon estimated useful lives of the assets.
LOSSES AND LOSS EXPENSES
The liability for losses and loss expenses includes amounts determined on the
basis of estimates for losses reported prior to the close of the accounting
period and other estimates, including those for incurred but not reported losses
and salvage and subrogation recoveries.
These liabilities are continuously reviewed and updated by management, and
management believes that such liabilities are adequate to cover the ultimate net
cost of claims and expenses. When management determines that changes in
estimates are required, such changes are included in current earnings.
The Company has no material exposures to environmental liabilities.
INCOME TAXES
The Company and its subsidiaries currently file a consolidated federal income
tax return.
The Company accounts for income taxes using the asset and liability method.
The objective of the asset and liability method is to establish deferred tax
assets and liabilities for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities at
enacted tax rates expected to be in effect when such amounts are realized or
settled.
CREDIT RISK
The Company provides property and liability coverages through its Insurance
Subsidiaries' independent agency systems located throughout its operating area.
The majority of this business is billed directly to the insured, although a
portion of the Company's commercial business is billed through its agents, who
are extended credit in the normal course of business.
The Company's Insurance Subsidiaries have reinsurance agreements in place
with the Mutual Company and with a number of other authorized reinsurers with at
least an A.M. Best rating of A- or an equivalent financial condition
REINSURANCE ACCOUNTING AND REPORTING
The Company relies upon reinsurance agreements to limit its maximum net loss
from large single risks or risks in concentrated areas, and to increase its
capacity to write insurance. Reinsurance does not relieve the primary insurer
from liability to its policyholders. To the extent that a reinsurer may be
unable to pay losses for which it is liable under the terms of a reinsurance
agreement, the Company is exposed to the risk of continued liability for such
losses. However, in an effort to reduce the risk of non-payment, the Company
requires all of its reinsurers to have an A.M. Best rating of A- or better or,
with respect to foreign reinsurers, to have a financial condition which, in the
opinion of management, is equivalent to a company with at least an A- rating.
STOCK-BASED COMPENSATION
Effective July 1, 2000, the Company adopted Financial Accounting Standards Board
Interpretation No. 44 (FIN No. 44), "Accounting for Certain Transactions
involving Stock Compensation," and Emerging Issues Task Force Issue No. 00-23
(EITF 00-23), "Issues Related to the Accounting for Stock Compensation under
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and FIN No. 44, Accounting for Certain Transactions involving Stock
Compensation." FIN No. 44 states that APB Opinion No. 25 does not apply in the
separate financial statements of a subsidiary to the accounting for stock
compensation granted by the subsidiary to employees of the parent or another
subsidiary. EITF 00-23 states that when employees of a controlling entity are
granted stock compensation, the entity granting the stock compensation should
measure the fair value of the award at the grant date and recognize that fair
value as a dividend to the controlling entity. These provisions apply to the
Company, as the Mutual Company is the employer of record for all employees that
provide services to the Company.
F-8
Prior to July 1, 2000, the Company's stock-based compensation plans were
accounted for under the provisions of APB Opinion No. 25 and related
interpretations. As such, compensation expense was recorded on the date of stock
option grant only if the current market price of the underlying stock exceeded
the exercise price. Additionally, the Company provides the pro-forma net income
and earnings per share disclosures required by Statement of Financial Accounting
Standards (SFAS No. 123), "Accounting for Stock-Based Compensation," for grants
prior to the adoption of FIN No. 44.
EARNINGS PER SHARE
Basic earnings per share are calculated by dividing net income by the
weighted-average number of common shares outstanding for the period, while
diluted earnings per share reflects the dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock.
RECLASSIFICATIONS
Certain amounts in these financial statements have been reclassified from those
previously presented. Gross and ceded premiums earned and losses and loss
adjustment expenses are no longer presented in the statements of income.
Reinsurance receivable, prepaid reinsurance premiums, unearned premiums, and the
liabilities for losses and loss expenses have been reduced in the consolidated
balance sheet as they no longer include the amounts under the agreements
discussed in the last paragraph of note 3a. The amounts in note 7 as well as the
consolidated statements of cash flows have been revised to conform to the
changes in the consolidated balance sheets. Note 3a has been expanded to include
the purpose of the various agreements and to separately disclose amounts under
the various arrangements versus the aggregate disclosure previously provided.
These reclassifications had no effect on total revenues, total expenses, net
income, net income per share, cash flows provided by operating activities, or
stockholders' equity.
2--ACQUISITIONS OF BUSINESSES
In November 1998, the Company acquired all of the outstanding stock of Southern
Heritage for a cash price of $18,824,950. Southern Heritage primarily writes
personal automobile and homeowners policies in the Southeastern region of the
country. This transaction was accounted for as a "purchase." The Company's
financial statements include Southern Heritage as a consolidated subsidiary from
November 1, 1998.
Assets in the amount of $56,568,710 were acquired, and liabilities in the
amount of $38,330,912 were assumed in the purchase transaction. The purchase
price exceeded the fair value of net assets acquired by $587,152, which was
recognized as goodwill and is being amortized over five years.
On January 3, 2001, the Company announced that it had purchased all of the
outstanding shares of Pioneer-New York from the Mutual Company effective January
1, 2001. The purchase price was $4,441,311, representing Pioneer-New York's
adjusted statutory equity at December 31, 2000. The acquisition has been
accounted for as a reorganization of entities under common control, similar to a
pooling of interests, as both Pioneer-New York and the Company are under the
common management and control of the Mutual Company. As such, the Company's
financial statements have been restated to include Pioneer-New York as a
consolidated subsidiary.
3--TRANSACTIONS WITH AFFILIATES
The Company conducts business and has various agreements with the Mutual Company
which are described below:
a. REINSURANCE POOLING AND OTHER REINSURANCE ARRANGEMENTS
Atlantic States cedes to the Mutual Company all of its insurance business and
assumes from the Mutual Company 70% (65% prior to July 1, 2000) of the Mutual
Company's total pooled insurance business, including that assumed from Atlantic
States and substantially all of the business assumed by the Mutual Company from
Southern and Delaware (prior to January 1, 2000). The Mutual Company and
Atlantic States write business with different risk profiles. Through the pooling
arrangement, each is able to share proportionately in the results of all
policies written by the other. Atlantic States ceded premiums earned of
$30,414,395, $23,745,989 and $17, 990, 629 and ceded losses and loss expenses
incurred of $22,966,106, $15,625,894 and $11,146,777 under this arrangement
during 2000, 1999 and 1998, respectively. It also assumed premiums earned of
$108,338,157, $98,521,860 and $92,092,071 and assumed losses and loss expenses
incurred of $74,872,049, $67,715,642 and $58,931,407 under this arrangement
during 2000, 1999 and 1998, respectively. Atlantic States had ceded unearned
premiums of $16,251,612, $12,978,863 and $9,570,642 and ceded liability for
losses and loss expenses of $31,068,101, $24,025,502 and $22,009,642 under this
arrangement as of December 31, 2000, 1999 and 1998, respectively. It also had
assumed unearned premiums of $54,578,621, $46,283,485 and $42,128,657 and
assumed liability for losses and loss expenses of $84,805,937, $80,258,589 and
$76,497,857 under this arrangement at December 31, 2000, 1999 and 1998,
respectively.
The Mutual Company and Southern have a quota share agreement whereby
Southern cedes 50% of its direct business, less reinsurance, to the Mutual
Company. The business assumed by the Mutual Company from Southern becomes part
of the pooling arrangement between the Mutual Company and Atlantic States.
Southern ceded premiums earned of $14,413,261, $13,517,603 and $11,840,751 and
ceded losses and loss expenses incurred of $9,885,436, $9,986,718 and $8,667,526
under this agreement during 2000, 1999 and 1998, respectively. Southern had
ceded unearned premiums of $7,084,729, $6,683,001 and $6,007,127 and a liability
for ceded losses and loss expenses of $7,924,750, $7,054,012 and $5,757,994
under this agreement at December 31, 2000, 1999 and 1998, respectively.
Atlantic States, Southern, Delaware, Pioneer-Ohio, Pioneer-New York and
Southern Heritage each have a catastrophe reinsurance agreement with the Mutual
Company which limits the maximum liability under any one catastrophic occurrence
to $400,000, $300,000, $300,000, $200,000, $400,000 and $400,000 (effective
January 1, 2000), respectively, and $1,000,000 ($700,000 in 1999 and 1998) for a
catastrophe involving more than one of the companies. The Mutual Company and
Delaware have an excess of loss reinsurance agreement in which the Mutual
Company assumes up to $200,000 of losses in excess of $50,000 and prior to
January 1, 2000, a workers' compensation quota share agreement whereby Delaware
ceded 70% of that business. The Mutual Company and Pioneer-Ohio have an excess
of loss reinsurance agreement in which the Mutual Company assumes up to $200,000
of losses in excess of $50,000. The Mutual Company and Pioneer-Ohio also had an
aggregate excess of loss reinsurance agreement, entered into as
F-9
part of the sale of Pioneer-Ohio from the Mutual Company to Donegal Group Inc.,
in which the Mutual Company agreed to assume the adverse loss development of
claims with dates of loss prior to December 31, 1996, as developed through
December 31, 1998, and to assume losses in excess of a 60% loss ratio through
December 31, 1998. The Mutual Company and Southern have an excess of loss
reinsurance agreement in which the Mutual Company assumes up to $25,000 of
losses in excess of $100,000. Effective January 1, 1999, the Mutual Company and
Pioneer-New York have an excess of loss reinsurance agreement in which the
Mutual Company assumes up to $200,000 of losses in excess of $50,000. Effective
October 1, 2000, the Mutual Company and Southern Heritage have an excess of loss
reinsurance agreement in which the Mutual Company assumes up to $125,000 of
losses in excess of $125,000. The Mutual Company has agreements in place with
Delaware, Southern and Pioneer-Ohio to reallocate the loss results of workers'
compensation business written by those companies as part of commercial accounts
primarily written by the Mutual Company or Atlantic States. These agreements
provide for the workers' compensation loss ratios of each company to be no worse
than the average workers' compensation loss ratio for all of the companies
combined. The subsidiaries ceded premiums earned of $1,523,973, $2,977,935 and
$2,544,163 and ceded losses and loss expenses incurred of $5,253,071, $3,553,235
and $2,038,844 under these various agreements during 2000, 1999 and 1998,
respectively. The subsidiaries had ceded unearned premiums of $0, $733,183 and
$618,541 and a liability for ceded losses and loss expenses of $4,941,116,
$2,689,825 and $2,003,355 under these various agreements at December 31, 2000,
1999, and 1998, respectively.
Southern, Delaware, Pioneer-Ohio and Pioneer-New York each have agreements
with the Mutual Company under which they cede, and then reassume back, 100% of
their business net of reinsurance. The primary purpose of the agreements is to
provide these subsidiaries with the same A.M. Best rating (currently "A") as the
Mutual Company, which these subsidiaries could not achieve without these
contracts in place. These agreements do not transfer insurance risk. While these
subsidiaries ceded and reassumed amounts received from policyholders of
$25,790,126, $22,486,490 and $19,916,557 and claims of $15,325,638, $13,177,186
and $11,217,861 under these agreements in 2000, 1999 and 1998, respectively, the
amounts are not reflected in the consolidated financial statements. The
aggregate liabilities ceded and reassumed under these agreements were
$26,572,959 and $23,551,575 at December 31, 2000, and 1999, respectively.
B. EXPENSE SHARING
The Mutual Company provides facilities, management and other services to the
Company, and the Company reimburses the Mutual Company for such services on a
periodic basis under usage agreements and pooling arrangements. The charges are
based upon the relative participation of the Company and the Mutual Company in
the pooling arrangement, and management of both the Company and the Mutual
Company consider this allocation to be reasonable. Charges for these services
totalled $26,985,080, $27,466,898 and $25,250,873 for 2000, 1999 and 1998,
respectively.
C. LEASE AGREEMENT
The Company leases office equipment and automobiles to the Mutual Company under
a 10-year lease dated January 1, 2000.
D. LEGAL SERVICES
Donald H. Nikolaus, President and a director of the Company, is also a partner
in the law firm of Nikolaus & Hohenadel. Such firm has served as general counsel
to the Company since 1986, principally in connection with the defense of claims
litigation arising in Lancaster, Dauphin and York counties. Such firm is paid
its customary fees for such services.
4--INVESTMENTS
The amortized cost and estimated fair values of fixed maturities and equity
securities at December 31, 2000 and 1999, are as follows:
2000
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
HELD TO MATURITY Cost Gains Losses Value
--------------------------------------------------------------------------------
U.S. Treasury securities
and obligations of
U.S. government
corporations
and agencies $ 38,779,230 $ 343,819 $ 255,049 $ 38,868,000
Canadian government
obligation 498,559 11,441 -- 510,000
Obligations of states
and political
subdivisions 66,831,090 1,499,955 45,904 68,285,141
Corporate securities 21,621,472 228,851 195,287 21,655,036
Mortgage-backed
securities 15,451,367 47,120 154,228 15,344,259
--------------------------------------------------------------------------------
Totals $143,181,718 $2,131,186 $ 650,468 $144,662,436
================================================================================
2000
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
AVAILABLE FOR SALE Cost Gains Losses Value
--------------------------------------------------------------------------------
U.S. Treasury securities
and obligations of
U.S. government
corporations
and agencies $ 68,007,634 $ 544,135 $ 650,339 $ 67,901,430
Obligations of states
and political
subdivisions 17,965,179 327,256 36,885 18,255,550
Corporate securities 22,902,588 312,426 306,664 22,908,350
Mortgage-backed
securities 5,649,071 14,790 118,008 5,545,853
Equity securities 12,500,558 880,419 1,268,741 12,112,236
--------------------------------------------------------------------------------
Totals $127,025,030 $2,079,026 $2,380,637 $126,723,419
================================================================================
F-10
1999
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
HELD TO MATURITY Cost Gains Losses Value
--------------------------------------------------------------------------------
U.S. Treasury securities
and obligations of
U.S. government
corporations
and agencies $ 38,975,828 $ 34,292 $1,265,513 $ 37,744,607
Canadian government
obligation 498,245 -- 8,245 490,000
Obligations of states
and political
subdivisions 67,823,291 819,155 1,005,936 67,636,510
Corporate securities 16,019,031 77,340 639,010 15,457,361
Mortgage-backed
securities 16,322,213 30,077 319,274 16,033,016
--------------------------------------------------------------------------------
Totals $139,638,608 $ 960,864 $3,237,978 $137,361,494
================================================================================
1999
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
AVAILABLE FOR SALE Cost Gains Losses Value
--------------------------------------------------------------------------------
U.S. Treasury securities
and obligations of
U.S. government
corporations
and agencies $ 64,915,388 $ 1,982 $2,473,473 $ 62,443,897
Obligations of states
and political
subdivisions 20,728,496 204,284 524,934 20,407,846
Corporate securities 15,672,535 578 425,950 15,247,163
Mortgage-backed
securities 4,639,365 321 238,544 4,401,142
Equity securities 9,067,428 1,414,810 1,199,202 9,283,036
--------------------------------------------------------------------------------
Totals $115,023,212 $1,621,975 $4,862,103 $111,783,084
================================================================================
The amortized cost and estimated fair value of fixed maturities at December
31, 2000, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
----------------------------------------------------------------------
Estimated
Amortized Fair
Cost Value
----------------------------------------------------------------------
HELD TO MATURITY
Due in one year or less $ 7,156,141 $ 7,215,000
Due after one year through five years 37,158,344 37,495,500
Due after five years through ten years 71,119,162 72,377,485
Due after ten years 12,296,704 12,230,192
Mortgage-backed securities 15,451,367 15,344,259
----------------------------------------------------------------------
Total held to maturity $143,181,718 $144,662,436
======================================================================
AVAILABLE FOR SALE
Due in one year or less $ 11,137,876 $ 11,135,000
Due after one year through five years 40,050,015 40,262,450
Due after five years through ten years 40,868,456 41,276,880
Due after ten years 16,819,054 16,391,000
Mortgage-backed securities 5,649,071 5,545,853
----------------------------------------------------------------------
Total available for sale $114,524,472 $114,611,183
======================================================================
The amortized cost of fixed maturities on deposit with various regulatory
authorities at December 31, 2000 and 1999, amounted to $6,056,374 and
$5,983,066, respectively.
Net investment income of the Company, consisting primarily of interest and
dividends, is attributable to the following sources:
2000 1999 1998
-------------------------------------------------------------------
Fixed maturities $15,180,008 $13,046,603 $11,260,110
Equity securities 635,049 440,268 295,235
Short-term investments 1,221,724 809,949 1,431,632
Real estate 255,250 316,139 255,250
-------------------------------------------------------------------
Investment income 17,292,031 14,612,959 13,242,227
Investment expenses 897,284 1,022,264 898,434
-------------------------------------------------------------------
Net investment income $16,394,747 $13,590,695 $12,343,793
===================================================================
Gross realized gains and losses from investments and the change in the
difference between fair value and cost of investments, before applicable income
taxes, are as follows:
2000 1999 1998
-------------------------------------------------------------------------------
Gross realized gains:
Fixed maturities $ 237,748 $ -- $ 132,431
Equity securities 1,813,242 586,745 1,119,679
-------------------------------------------------------------------------------
2,050,990 586,745 1,252,110
-------------------------------------------------------------------------------
Gross realized losses:
Fixed maturities 20,597 6,083 5,180
Equity securities 1,859,541 619,364 1,260,492
-------------------------------------------------------------------------------
1,880,138 625,447 1,265,672
-------------------------------------------------------------------------------
Net realized gains (losses) $ 170,852 $ (38,702) $ (13,562)
===============================================================================
Change in difference between
fair value and cost of
investments:
Fixed maturities $ 7,300,279 $(11,668,991) $ 1,487,716
Equity securities (603,930) (362,312) (159,095)
-------------------------------------------------------------------------------
$ 6,696,349 $(12,031,303) $ 1,328,621
===============================================================================
Income taxes (benefit) on realized investment gains were $58,090,
$(13,159), and $(4,611) for 2000, 1999 and 1998, respectively. Deferred income
tax benefits applicable to net unrealized investment losses included in
shareholders' equity were $102,548 and $1,133,560 at December 31, 2000 and 1999,
respectively.
During 2000, certain investments trading below cost had declined on an
other-than-temporary basis. Losses of $436,943 were included in net realized
investment gains for these investments in 2000.
Donegal Group has not held or issued derivative financial instruments.
5--DEFERRED POLICY ACQUISITION COSTS
Changes in deferred policy acquisition costs are as follows:
2000 1999 1998
-------------------------------------------------------------------------------
Balance, January 1 $ 11,445,572 $ 11,510,117 $ 8,611,813
Acquisition of
Southern Heritage -- -- 2,486,813
Acquisition costs deferred 26,157,642 24,866,455 20,154,491
Amortization charged
to earnings 25,319,000 24,931,000 19,743,000
-------------------------------------------------------------------------------
Balance, December 31 $ 12,284,214 $ 11,445,572 $11,510,117
===============================================================================
F-11
6--PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2000 and 1999, consisted of the
following:
-------------------------------------------------------------------------
Estimated
Useful
2000 1999 Life
-------------------------------------------------------------------------
Cost--office equipment $ 4,981,970 $ 4,866,241 5-15 years
automobiles 947,865 967,220 3 years
real estate 3,063,646 3,063,646 15-50 years
software 561,146 551,796 5 years
-------------------------------------------------------------------------
9,554,627 9,448,903
Accumulated depreciation (4,318,144) (3,588,651)
-------------------------------------------------------------------------
$ 5,236,483 $ 5,860,252
=========================================================================
Depreciation expense for 2000, 1999, and 1998 amounted to $899,750,
$970,331 and $634,882, respectively.
7--LIABILITY FOR LOSSES AND LOSS EXPENSES
Activity in the liability for losses and loss expenses is summarized as follows:
2000 1999 1998
-------------------------------------------------------------------------------
Balance at January 1 $ 144,180,006 $ 136,727,107 $ 115,801,700
Less reinsurance
recoverable 44,945,908 40,712,330 35,545,458
-------------------------------------------------------------------------------
Net balance at January 1 99,234,098 96,014,777 80,256,242
Acquisition of
Southern Heritage -- -- 14,967,242
-------------------------------------------------------------------------------
New balance at beginning
as adjusted 99,234,098 96,014,777 95,223,484
-------------------------------------------------------------------------------
Incurred related to:
Current year 103,671,401 100,573,192 76,629,130
Prior years 711,775 (492,576) (2,822,722)
-------------------------------------------------------------------------------
Total incurred 104,383,176 100,080,616 73,806,408
-------------------------------------------------------------------------------
Paid related to:
Current year 61,848,261 59,434,306 45,032,194
Prior years 39,059,599 37,426,989 27,982,921
-------------------------------------------------------------------------------
Total paid 100,907,860 96,861,295 73,015,115
-------------------------------------------------------------------------------
Net balance at
December 31 102,709,414 99,234,098 96,014,777
Plus reinsurance
recoverable 53,766,710 44,945,908 40,712,330
-------------------------------------------------------------------------------
Balance at December 31 $ 156,476,124 $ 144,180,006 $ 136,727,107
===============================================================================
The Company recognized an increase (decrease) in the liability for losses
and loss expenses of prior years of $0.7 million, $(0.5 million) and $(2.8
million) in 2000, 1999 and 1998, respectively. These developments are primarily
attributable to variations from expected claim severity in the private passenger
automobile liability, workers' compensation and commercial multiple peril lines
of business.
8--LINE OF CREDIT
At December 31, 2000 and 1999, pursuant to a credit agreement dated December 29,
1995, and amended as of July 27, 1998, with Fleet National Bank, the Company had
unsecured borrowings of $40 million and $37 million, respectively. Such
borrowings were made in connection with the acquisitions of Delaware,
Pioneer-Ohio, and Southern Heritage and various capital contributions to the
subsidiaries. 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 December
31, 2000, the interest rates were 9.5% on an outstanding prime rate balance of
$3 million, 8.48% on an outstanding Eurodollar rate balance of $15 million and
8.50188% on another Eurodollar rate balance of $22 million. In addition, the
Company pays 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.
9--REINSURERS
UNAFFILIATED REINSURERS
In addition to the primary reinsurance in place with the Mutual Company, the
Insurance Subsidiaries have other reinsurance in place, principally with four
unaffiliated reinsurers. The following amounts represent ceded reinsurance
transactions with unaffiliated reinsurers during 2000, 1999 and 1998:
2000 1999 1998
------------------------------------------------------------------------
Premiums written $ 6,238,520 $ 6,437,877 $ 5,194,487
========================================================================
Premiums earned $ 6,023,582 $ 6,595,581 $ 5,369,340
========================================================================
Losses and loss expenses $ 3,027,810 $ 5,537,410 $ 4,896,104
========================================================================
Unearned premiums $ 1,376,043 $ 1,161,105 $ 1,318,809
========================================================================
Liability for losses and
loss expenses $ 9,832,743 $11,176,569 $10,941,337
========================================================================
TOTAL REINSURANCE
The following amounts represent the total of all ceded reinsurance transactions
with both affiliated and unaffiliated reinsurers during 2000, 1999, and 1998:
2000 1999 1998
------------------------------------------------------------------------
Premiums earned $52,375,211 $46,837,108 $37,744,883
========================================================================
Losses and loss expenses $41,132,423 $34,703,257 $26,749,251
========================================================================
Unearned premiums $24,712,384 $21,556,152 $17,515,119
========================================================================
Liability for losses and
loss expenses $53,766,710 $44,945,908 $40,712,330
========================================================================
The following amounts represent the effect of reinsurance on premiums written
for 2000, 1999, and 1998:
2000 1999 1998
------------------------------------------------------------------------
Direct $ 99,042,235 $ 91,854,011 $ 65,768,976
Assumed 116,611,628 102,896,519 94,846,293
Ceded 55,531,443 50,878,141 41,149,723
------------------------------------------------------------------------
Net premiums written $160,122,420 $143,872,389 $119,465,546
========================================================================
The following amounts represent the effect of reinsurance on premiums earned for
2000, 1999, and 1998:
2000 1999 1998
------------------------------------------------------------------------
Direct $ 95,671,588 $ 93,399,834 $ 63,107,006
Assumed 108,349,822 98,954,731 92,092,071
Ceded 52,375,211 46,837,108 37,744,883
------------------------------------------------------------------------
Net premiums earned $151,646,199 $145,517,457 $117,454,194
========================================================================
F-12
10--INCOME TAXES
The provision for income tax consists of the following:
2000 1999 1998
------------------------------------------------------------------------
Current $ 2,406,272 $ 832,798 $ 2,482,418
Deferred 499,976 (3,783,354) 192,511
------------------------------------------------------------------------
Federal tax provision $ 2,906,248 $(2,950,556) $ 2,674,929
========================================================================
The effective tax rate is different than the amount computed at the
statutory federal rate of 34% for 2000, 1999 and 1998. The reason for such
difference and the related tax effect are as follows:
2000 1999 1998
------------------------------------------------------------------------
Income before
income taxes $11,743,028 $ 3,844,641 $11,697,666
========================================================================
Computed "expected"
taxes at 34% 3,992,630 1,307,178 $ 3,977,206
Recognition of net operating
loss carryover of
Southern Heritage -- (3,004,524) --
Tax-exempt interest (1,347,959) (1,355,816) (1,181,188)
Dividends received deduction (25,423) (83,948) (177,374)
Other, net 287,000 186,554 56,285
------------------------------------------------------------------------
Federal income
tax provision $ 2,906,248 $(2,950,556) $ 2,674,929
========================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2000 and 1999, are as follows:
2000 1999
---------------------------------------------------------------------
Deferred tax assets:
Unearned premium $ 5,139,217 $ 4,539,119
Loss reserves 4,878,850 4,746,853
AMT credit carryforward -- 577,611
Net operating loss carryforward -
Southern Heritage 2,339,133 2,646,172
Unrealized loss 102,548 1,133,560
Other 174,886 306,412
---------------------------------------------------------------------
Total $12,634,634 $13,949,727
=====================================================================
Deferred tax liabilities:
Depreciation expense $ 464,235 $ 477,552
Deferred policy acquisition costs 4,176,632 3,891,495
Salvage recoverable 302,881 358,806
---------------------------------------------------------------------
Total $ 4,943,748 $ 4,727,853
=====================================================================
Net deferred tax assets $ 7,690,886 $ 9,221,874
=====================================================================
A valuation allowance is provided when it is more likely than not that some
portion of the tax asset will not be realized. Management has determined that it
is not required to establish a valuation allowance for any deferred tax asset at
December 31, 2000, since it is more likely than not that the deferred tax assets
will be realized through reversals of existing temporary differences, future
taxable income, carryback to taxable income in prior years and the
implementation of tax planning strategies.
A change in the federal income laws was enacted during 1999 which allows
net operating loss carryforwards of an acquired company to be used to offset
future taxable income of other affiliated companies filing as part of a
consolidated tax return. Prior law allowed such net operating loss carryforward
to be used to offset taxable income of the acquired company only. Due to this
law change, the net operating loss carryforward, obtained as part of the
acquisition of Southern Heritage, can now be used to offset taxable income
generated by the other consolidated affiliates. This was the primary factor in
management's determination that no valuation allowance was required at the end
of 1999. Accordingly, the tax benefit of this carryforward, as adjusted for the
1998 tax return as filed, of $3,004,524 was recognized in 1999.
At December 31, 2000, the Company has a net operating loss carryforward of
$6,879,803, which is available to offset taxable income of the Company. Such net
operating loss carryforward will expire beginning in 2009. Federal income tax
laws limit the amount of net operating loss carryforward that the Company can
use in any one year to approximately $1 million.
11--STOCK COMPENSATION PLANS
EQUITY INCENTIVE PLANS
The Company has had an Equity Incentive Plan for key employees since 1986 and
adopted a nearly identical new plan in 1996. Both plans provide for the granting
of awards by the Board of Directors in the form of stock options, stock
appreciation rights, restricted stock or any combination of the above. The new
plan was adopted in 1996 and amended in 1997 and 1999 making a total of
1,800,000 shares available. The plans provide that stock options may become
exercisable up to 10 years from date of grant, with an option price not less
than fair market value on date of grant. The stock appreciation rights permit
surrender of the option and receipt of the excess of current market price over
option price in cash. No stock appreciation rights have been issued.
During 1996 the Company adopted an Equity Incentive Plan For Directors. The
plan was amended in 1998, making 265,735 shares available for award. Awards may
be made in the form of stock options, and the plan additionally provides for the
issuance of 177 shares of restricted stock to each director on the first
business day of January in each year, commencing January 2, 1997. As of December
31, 2000, the Company has 71,112 unexercised options under this plan.
Additionally 1,947, 2,124 and 2,124 shares of restricted stock were issued on
January 2, 2000, 1999 and 1998, respectively.
Information regarding activity in the Company's stock option plans is
presented below:
Weighted-Average
Number of Exercise Price
Options Per Share
---------------------------------------------------------------------------
Outstanding at December 31, 1997 595,860 $13.50
Granted - 1998 505,333 18.00
Exercised - 1998 10,073 13.50
Forfeited - 1998 -- --
---------------------------------------------------------------------------
Outstanding at December 31, 1998 1,091,120 15.73
Granted - 1999 433,500 8.00
Exercised - 1999 -- --
Forfeited - 1999 28,227 15.52
---------------------------------------------------------------------------
Outstanding at December 31, 1999 1,496,393 13.50
Granted - 2000 59,500 8.05
Exercised - 2000 -- --
Forfeited - 2000 39,555 12.84
---------------------------------------------------------------------------
Outstanding at December 31, 2000 1,516,338 $13.19
===========================================================================
Exercisable at:
===========================================================================
December 31, 1998 556,301 $14.86
===========================================================================
December 31, 1999 897,338 $15.99
===========================================================================
December 31, 2000 1,190,004 $16.68
===========================================================================
Options available for future grants at December 31, 2000 are 549,397.
F-13
The following table summarizes information about fixed stock options at
December 31, 2000:
Exercise Prices
---------------------------------------------------
$8.00 $9.00 $13.50 $18.00
--------------------------------------------------------------------------------
Options outstanding at
December 31, 2000:
Number of options 471,000 3,000 552,004 490,334
Weighted-average remaining
contractual life 4.0 years 5.0 years 1.0 years 2.25 years
Options exercisable at
December 31, 2000:
Number of options 151,000 -- 552,004 487,000
--------------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLANS
During 1996 the Company adopted an Employee Stock Purchase Plan which made
162,873 shares available for issuance.
The plan extends over a 10-year period and provides for shares to be
offered to all eligible employees at a purchase price equal to the lesser of 85%
of the fair market value of the Company's common stock on the last day before
the first day of the enrollment period (June 1 and December 1) of the plan or
85% of the fair market value of the Company's common stock on the last day of
the subscription period (June 30 and December 31). A summary of plan activity
follows:
Shares Issued
------------------------
Price Shares
--------------------------------------------------------------------------------
January 1, 1998 $11.65430 8,901
July 1, 1998 $13.06875 9,179
January 1, 1999 $13.28125 10,227
July 1, 1999 $ 9.66875 11,876
January 1, 2000 $ 5.41875 23,906
July 1, 2000 $ 4.88750 21,714
On January 1, 2001, the Company issued an additional 16,438 shares at a
price of $5.95 per share under this plan.
AGENCY STOCK PURCHASE PLAN
On December 31, 1996, the Company adopted the Agency Stock Purchase Plan which
made 514,102 shares available for issuance. The plan provides for agents of
affiliated companies of Donegal Group Inc. to invest up to $12,000 per
subscription period (April 1 to September 30 and October 1 to March 31) under
various methods. Stock is issued at the end of the subscription period at a
price equal to 90% of the average market price during the last ten trading days
of the subscription period. During 2000, 1999 and 1998, 46,603, 47,841, and
35,003 shares, respectively, were issued under this plan. Expense recognized
under the plan was not material.
PRO-FORMA DISCLOSURES
The weighted-average grant date fair value of options granted for the various
plans during 2000, 1999 and 1998 was $2.23, $1.98 and $4.48, respectively.
The fair values above were calculated based upon risk-free interest rates
of 5.75% for the Stock Purchase Plans and the Equity Incentive Plans, expected
lives of 6 months for the Stock Purchase Plans and 5 years for the Equity
Incentive Plans, expected volatility of 54% for 2000, 47% for 1999 and 34% for
1998, and an expected dividend yield of 4.5% for 2000, 5.0% for 1999 and 2.4%
for 1998.
Through June 30, 2000, the Company applied APB Opinion No. 25 in accounting
for its stock-based compensation plans. Accordingly, no compensation cost has
been recognized for its fixed stock option plans and certain of its stock
purchase plans. Had the Company recognized stock compensation expense in
accordance with SFAS No. 123, net income and earnings per share would have been
reduced to the pro-forma amounts shown below:
2000 1999 1998
--------------------------------------------------------------------------------
Net income:
As reported $8,836,780 $6,795,197 $9,022,737
Pro-forma 8,071,825 5,595,851 8,367,661
Basic earnings per share:
As reported 1.01 .82 1.11
Pro-forma .92 .68 1.03
Diluted earnings per share:
As reported 1.01 .82 1.09
Pro-forma .92 .68 1.01
12--STATUTORY NET INCOME, CAPITAL AND SURPLUS
AND DIVIDEND RESTRICTIONS
The following is selected information, as filed with insurance regulatory
authorities, for the Insurance Subsidiaries as determined in accordance with
accounting practices prescribed or permitted by such insurance regulatory
authorities:
2000 1999 1998
------------------------------------------------------------------------
ATLANTIC STATES
Statutory capital
and surplus $ 74,144,186 $ 68,518,020 $ 62,672,151
===========================================
Statutory unassigned
surplus $ 43,183,322 $ 37,557,156 $ 31,711,287
===========================================
Statutory net income $ 6,974,230 $ 3,855,803 $ 6,480,524
-----------------------------===========================================
SOUTHERN
Statutory capital
and surplus $ 9,082,587 $ 7,293,856 $ 6,388,316
===========================================
Statutory unassigned
surplus $ 3,980,317 $ 2,191,586 $ 1,636,046
===========================================
Statutory net income $ 1,543,128 $ 184,285 $ 66,297
-----------------------------===========================================
DELAWARE
Statutory capital
and surplus $ 10,051,711 $ 9,563,808 $ 8,548,354
===========================================
Statutory unassigned
surplus $ 4,851,711 $ 4,363,808 $ 3,348,354
===========================================
Statutory net income $ 1,223,992 $ 898,360 $ 1,085,807
-----------------------------===========================================
PIONEER-NEW YORK
Statutory capital
and surplus $ 4,424,483 $ 4,319,399 $ 4,214,784
===========================================
Statutory unassigned
deficit $ (1,075,517) $ (1,180,601) $ (1,285,216)
===========================================
Statutory net income (loss) $ (64,087) $ 78,574 $ 26,752
-----------------------------===========================================
PIONEER-OHIO
Statutory capital
and surplus $ 5,811,315 $ 5,677,926 $ 5,300,349
===========================================
Statutory unassigned
deficit $ (1,188,685) $ (1,322,074) $ (1,699,651)
===========================================
Statutory net income (loss) $ (176,011) $ 108,322 $ 188,579
-----------------------------===========================================
SOUTHERN HERITAGE
Statutory capital
and surplus $ 16,975,171 $ 16,508,422 $ 15,805,641
===========================================
Statutory unassigned
deficit $(15,540,144) $(16,006,893) $(16,709,674)
===========================================
Statutory net income (loss) $ 1,486,698 $ 487,098 $ (3,937,548)
===========================================
F-14
The Company's principal source of cash for payment of dividends are
dividends from its Insurance Subsidiaries which are required by law to maintain
certain minimum capital and 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, Delaware, Pioneer-New York,
Pioneer-Ohio and Southern Heritage are also subject to Risk Based Capital (RBC)
requirements which may further impact their ability to pay dividends. At
December 31, 2000, all six companies' statutory capital and surplus were
substantially above the RBC requirements. At December 31, 2000, amounts
available for distribution as dividends to Donegal Group Inc. without prior
approval of insurance regulatory authorities are $5,414,419 from Atlantic
States, $908,259 from Southern, $323,992 from Delaware, $0 from Pioneer-New
York, $581,132 from Pioneer-Ohio and $973,796 from Southern Heritage.
The National Association of Insurance Commissioners (NAIC) has adopted the
Codification of Statutory Accounting Principles with an effective date of
January 1, 2001. The codified principles are intended to provide a basis of
accounting recognized and adhered to in the absence of conflict with, or silence
of, state statutes and regulations. The impact of the codified principles on the
statutory capital and surplus of the Company's Insurance Subsidiaries is not
expected to decrease statutory capital and surplus as of January 1, 2001.
13--RECONCILIATION OF STATUTORY FILINGS TO
AMOUNTS REPORTED HEREIN
The Company's Insurance Subsidiaries are required to file statutory financial
statements with state insurance regulatory authorities. Accounting principles
used to prepare these statutory financial statements differ from financial
statements prepared on the basis of generally accepted accounting principles.
Reconciliations of statutory net income and capital and surplus, as
determined using statutory accounting principles, to the amounts included in the
accompanying financial statements are as follows:
Year Ended December 31,
-------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
Statutory net income of
Insurance Subsidiaries $10,987,950 $5,612,442 $8,327,833
Increases (decreases):
Deferred policy
acquisition costs 838,642 (64,545) 411,491
Deferred federal
income taxes (499,976) 3,783,354 (192,511)
Salvage and subrogation
recoverable 305,918 (226,617) 1,217,092
Consolidating eliminations
and adjustments (4,318,624) (1,387,864) (967,940)
Parent-only net income (loss) 1,522,870 (908,987) 178,249
Non-insurance subsidiary
net income (loss) -- (12,586) 48,523
--------------------------------------------------------------------------------
Net income as
reported herein $ 8,836,780 $6,795,197 $9,022,737
================================================================================
December 31,
-------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
Statutory capital and surplus
of Insurance Subsidiaries $120,489,453 $111,881,431 $102,929,595
Increases (decreases):
Deferred policy
acquisition costs 12,284,214 11,445,572 11,510,117
Deferred federal
income taxes 7,690,886 9,221,874 3,676,982
Salvage and subrogation
recoverable 8,042,860 7,736,942 7,963,559
Statutory reserves 2,623,921 5,154,062 9,113,132
Non-admitted assets and
other adjustments, net 911,370 942,170 1,384,805
Fixed maturities 493,055 (2,968,655) 2,036,275
Consolidating eliminations
and adjustments (40,973,097) (41,072,150) (40,824,673)
Parent-only equity 2,566,929 1,451,088 2,843,990
Non-insurance
subsidiary equity -- -- 281,396
--------------------------------------------------------------------------------
Stockholders' equity as
reported herein $114,129,591 $103,792,334 $100,915,178
================================================================================
14--SUPPLEMENTARY INFORMATION ON STATEMENT OF CASH FLOWS
The following reflects income taxes and interest paid during 2000, 1999 and
1998:
2000 1999 1998
------------------------------------------------------------------
Income taxes $2,031,652 $1,221,375 $2,671,969
==================================================================
Interest $2,731,048 $1,370,155 $1,270,646
==================================================================
During 1999, the Company wrote off fixed assets with a net carrying value of
$407,000 which was a non-cash charge to earnings.
15--EARNINGS PER SHARE
The following information illustrates the computation of net income, outstanding
shares and earnings per share on both a basic and diluted basis for the years
ending December 31, 2000, 1999 and 1998:
Weighted-
Average Earnings
Net Shares Per
Income Outstanding Share
-----------------------------------------------------------------------
2000:
Basic $8,836,780 8,715,899 $ 1.01
Effect of stock options -- 21,011 --
-----------------------------------------------------------------------
Diluted $8,836,780 8,736,910 $ 1.01
=======================================================================
1999:
Basic $6,795,197 8,327,356 $ .82
Effect of stock options -- -- --
-----------------------------------------------------------------------
Diluted $6,795,197 8,327,356 $ .82
=======================================================================
1998:
Basic $9,022,737 8,126,286 $ 1.11
Effect of stock options -- 123,404 (0.02)
-----------------------------------------------------------------------
Diluted $9,022,737 8,249,690 $ 1.09
=======================================================================
F-15
The following options to purchase shares of common stock were not included in
the computation of diluted earnings per share because the exercise price of the
options was greater than the average market price:
2000 1999 1998
------------------------------------------------------------------------
Options excluded from
diluted earnings per share 1,045,338 1,496,393 585,337
========================================================================
16--CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED BALANCE SHEETS
($ in thousands)
December 31, 2000 1999
-----------------------------------------------------------------------
ASSETS
Investment in subsidiaries (equity method) $151,159 $139,079
Cash 2,381 371
Property and equipment 1,997 2,232
Other 715 750
-----------------------------------------------------------------------
Total assets $156,252 $142,432
=======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Cash dividends declared to stockholders $ 797 $ 761
Line of credit 40,000 37,000
Other 1,325 879
-----------------------------------------------------------------------
Total liabilities 42,122 38,640
=======================================================================
Stockholders' equity 114,130 103,792
-----------------------------------------------------------------------
Total liabilities and stockholders' equity $156,252 $142,432
=======================================================================
CONDENSED STATEMENTS OF INCOME
($ in thousands)
Year Ended December 31, 2000 1999 1998
--------------------------------------------------------------------------
Revenues
Dividends-subsidiaries $ 3,900 $ 820 $ 1,000
Other 866 865 776
--------------------------------------------------------------------------
Total revenues 4,766 1,685 1,776
--------------------------------------------------------------------------
Expenses
Operating expenses 1,165 938 718
Interest 3,304 2,463 1,293
--------------------------------------------------------------------------
Total expenses 4,469 3,401 2,011
--------------------------------------------------------------------------
Income (loss) before income tax benefit
and equity in undistributed net
income of subsidiaries 297 (1,716) (235)
Income tax benefit (1,226) (807) (413)
------------------------------------------------------------------- -------
Income (loss) before equity in undistributed
net income of subsidiaries 1,523 (909) 178
Equity in undistributed net income
of subsidiaries 7,314 7,704 8,845
--------------------------------------------------------------------------
Net income $ 8,837 $ 6,795 $ 9,023
==========================================================================
CONDENSED STATEMENTS OF CASH FLOWS
($ in thousands)
Year Ended December 31, 2000 1999 1998
--------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 8,837 $ 6,795 $ 9,023
Adjustments:
Equity in undistributed net
income of subsidiaries (7,314) (7,704) (8,845)
Other 1,123 2,365 (921)
--------------------------------------------------------------------------
Net adjustments (6,191) (5,339) (9,766)
--------------------------------------------------------------------------
Net cash provided (used) 2,646 1,456 (743)
--------------------------------------------------------------------------
Cash flows from investing activities:
Net purchase of property and
equipment (262) (426) (564)
Capital contribution to subsidiaries -- -- (2,000)
Sale of AIS -- 100 --
Investment in Donegal Financial
Services Corp. (3,042) -- --
Acquisition of Southern Heritage -- -- (18,028)
Other 38 (426) (5,613)
--------------------------------------------------------------------------
Net cash used (3,266) (752) (26,205)
--------------------------------------------------------------------------
Cash flows from financing activities:
Cash dividends paid (3,127) (2,946) (2,664)
Issuance of common stock 2,757 2,514 2,481
Line of credit, net 3,000 (500) 27,000
--------------------------------------------------------------------------
Net cash provided (used) 2,630 (932) 26,817
--------------------------------------------------------------------------
Net change in cash 2,010 (228) (131)
Cash at beginning of year 371 599 730
--------------------------------------------------------------------------
Cash at ending of year $ 2,381 $ 371 $ 599
==========================================================================
F-16
17--SEGMENT INFORMATION
As an underwriter of property and casualty insurance, the Company has three
reportable segments which consist of the investment function, the personal lines
of insurance and the commercial lines of insurance. Using independent agents,
the Company markets personal lines of insurance to individuals and commercial
lines of insurance to small and medium-sized businesses.
The Company evaluates the performance of the personal lines and commercial
lines primarily based upon underwriting results as determined under statutory
accounting practices (SAP) for the total business of the Company.
Assets are not allocated to the personal and commercial lines and are
reviewed in total by management for purposes of decision making. Donegal Group
Inc. operates only in the United States and no single customer or agent provides
10 percent or more of revenues.
Financial data by segment is as follows:
2000 1999 1998
($ in thousands)
--------------------------------------------------------------------------------
Revenues:
Premiums earned:
Commercial lines $ 54,581 $ 47,804 $ 44,594
Personal lines 97,065 97,713 72,860
--------------------------------------------------------------------------------
Total premiums earned 151,646 145,517 117,454
--------------------------------------------------------------------------------
Net investment income 16,395 13,591 12,344
Realized investment
gains (losses) 171 (39) (14)
Other 2,370 2,670 2,448
--------------------------------------------------------------------------------
Total revenues $170,582 $161,739 $132,232
================================================================================
Income before income taxes:
Underwriting income (loss):
Commercial lines $ 763 $ (839) $ 3,726
Personal lines (4,649) (8,461) (5,717)
--------------------------------------------------------------------------------
SAP underwriting loss (3,886) (9,300) (1,991)
GAAP adjustments 1,144 (184) 1,815
--------------------------------------------------------------------------------
GAAP underwriting loss (2,742) (9,484) (176)
Net investment income 16,395 13,591 12,344
Realized investment gains (losses) 171 (39) (14)
Other (2,081) (223) (456)
--------------------------------------------------------------------------------
Income before income taxes $ 11,743 $ 3,845 $ 11,698
================================================================================
18--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 of $2,206,000
in 1999 for employee termination benefits, occupancy charges, lease cancellation
costs, and asset impairments. The charge was included in other underwriting
expenses. The consolidation was completed by the end of the first quarter of
2000.
Employee termination benefits of $782,000 included severance payments,
which were paid 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 of $488,000 were future lease obligations,
less anticipated sublease benefits, for leased space which is no longer used by
the Delaware and Southern Heritage subsidiary support functions.
Also included in the restructuring charge was $529,000 related to 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 benefit to the Company as a result of the restructuring. All
such assets have 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. All such assets have been
taken out of service.
Activity in the restructuring accrual is as follows:
Employee
Termination Contract
Benefits Occupancy Cancellations Total
--------------------------------------------------------------------------------
Restructuring
charge $ 782,000 $ 488,000 $ 529,000 $1,799,000
Cash payments (343,000) (47,000) (365,000) (755,000)
Reversal of
prior accrual (71,000) -- (91,000) (162,000)
--------------------------------------------------------------------------------
Balance at
December 31,
1999 $ 368,000 $ 441,000 $ 73,000 $ 882,000
--------------------------------------------------------------------------------
Cash payments (339,000) (155,000) (73,000) (567,000)
Accrual adjustment -- 12,000 -- 12,000
--------------------------------------------------------------------------------
Balance at
December 31,
2000 $ 29,000 $ 298,000 -- $ 327,000
================================================================================
Based on revised estimates, $162,000 of the restructuring accrual was reversed
by a reduction to the restructuring charge in other underwriting expenses in the
fourth quarter of 1999. Employee termination benefits and contract cancellation
costs were lower than original estimates.
19--GUARANTY FUND AND OTHER INSURANCE-RELATED ASSESSMENTS
The Company accrues for guaranty-fund and other insurance-related assessments in
accordance with Statement of Position (SOP) 97-3, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments." SOP 97-3 provides guidance
for determining when an entity should recognize a liability for guaranty-fund
and other insurance-related assessments, how to measure that liability, and when
an asset may be recognized for the recovery of such assessments through premium
tax offsets or policy surcharges. The Company's liabilities for guaranty-fund
and other insurance-related assessments were $880,154 and $582,480 at December
31, 2000 and 1999, respectively. These liabilities included $397,832 and $47,962
related to surcharges collected by the Company on behalf of regulatory
authorities for 2000 and 1999, respectively. The Company expects to pay most of
the December 31, 2000 liability in 2001.
F-17
20--INTERIM FINANCIAL DATA (UNAUDITED)
2000
---------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------------------------------------------------
Net premiums
earned $36,088,698 $36,447,134 $39,149,006 $39,961,361
Total revenues 40,357,333 41,333,363 44,229,060 44,661,831
Net losses and loss
expenses 25,948,912 24,823,941 26,795,640 26,814,683
Net income 1,162,682 2,502,499 2,566,975 2,604,624
Net income per
common share
Basic $.14 $.29 $.29 $.29
Diluted .14 .29 .29 .29
1999
---------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------------------------------------------------
Net premiums
earned $36,465,389 $36,201,820 $36,377,684 $36,472,564
Total revenues 40,570,259 40,256,667 40,309,264 40,603,146
Net losses and loss
expenses 24,812,699 24,230,319 26,592,587 24,445,011
Net income (loss) 2,091,437 1,481,303 (2,431,401) 5,653,858
Net income (loss) per
common share
Basic $.26 $.18 $(.29) $.67
Diluted .26 .18 (.29) .67
------------------------------------------------------------------------------------------------
F-18
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPT. 30, 2001 DEC. 31, 2000*
-------------- ---------------
ASSETS
------
Investments
Fixed maturities
Held to maturity, at amortized cost $ 90,949,775 $ 143,181,718
Available for sale, at market value 179,863,548 114,611,183
Equity securities, available for sale at market 16,908,532 12,112,236
Short-term investments, at cost, which
approximates market 16,809,436 19,439,505
------------- -------------
Total investments 304,531,291 289,344,642
Cash 3,428,640 5,182,988
Accrued investment income 3,691,298 4,002,464
Premiums receivable 28,861,845 21,758,502
Reinsurance receivable 64,200,319 54,543,884
Deferred policy acquisition costs 13,839,361 12,284,214
Federal income tax receivable -- 259,962
Deferred federal income taxes 6,282,061 7,690,886
Prepaid reinsurance premiums 31,424,599 24,712,384
Property and equipment, net 4,736,932 5,236,483
Accounts receivable - securities -- 234,817
Other 648,950 757,554
------------- -------------
Total assets $ 461,645,296 $ 426,008,780
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
Losses and loss expenses $ 171,615,749 $ 156,476,124
Unearned premiums 117,191,350 99,940,381
Accrued expenses 5,919,747 5,877,475
Reinsurance balances payable 1,274,636 1,634,975
Federal income taxes payable 93,483 --
Cash dividend declared to stockholders -- 797,282
Line of credit 28,200,000 40,000,000
Accounts payable - securities 7,566,092 959,652
Due to affiliate 4,268,643 4,528,996
Other 1,442,635 1,664,304
------------- -------------
Total liabilities 337,572,335 311,879,189
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value, authorized
2,000,000 shares; none issued
Common stock, $1.00 par value, authorized none and
20,000,000 shares, issued none and 8,980,977 shares
and outstanding none and 8,858,689 shares -- 8,980,977
Class A common stock, $.01 par value, authorized
30,000,000 shares, issued 6,074,126 and 0 shares and
outstanding 5,992,602 and 0 shares 60,741 --
Class B common stock, $.01 par value, authorized
10,000,000 shares, issued 3,021,299 and 0 shares and
outstanding 2,980,537 and 0 shares 30,213 --
Additional paid-in capital 57,017,352 46,969,840
Accumulated other comprehensive income (loss) 3,641,004 (199,063)
Retained earnings 64,215,399 59,269,593
Treasury stock (891,748) (891,756)
------------- -------------
Total stockholders' equity 124,072,961 114,129,591
------------- -------------
Total liabilities and stockholders' equity $ 461,645,296 $ 426,008,780
============= =============
* Restated - See note 9.
See accompanying notes to consolidated financial statements.
F-19
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
2001 2000*
---- -----
REVENUES:
Net premiums earned $ 124,291,595 $ 111,684,838
Investment income, net of investment expenses 11,988,347 12,009,023
Net realized investment gains (losses) (448,462) 442,927
Lease income 599,564 625,070
Service charge income 1,223,937 1,157,898
------------- -------------
Total revenues 137,654,981 125,919,756
------------- -------------
EXPENSES:
Net losses and loss expenses 84,116,321 77,568,493
Amortization of deferred policy acquisition costs 20,168,000 19,055,000
Other underwriting expenses 20,144,001 16,772,418
Policy dividends 1,182,481 957,319
Interest 1,857,727 2,394,889
Other expenses 1,417,586 852,754
------------- -------------
Total expenses 128,886,116 117,600,873
------------- -------------
Income before income taxes 8,768,865 8,318,883
Income taxes 2,093,579 2,086,727
------------- -------------
Net income $ 6,675,286 $ 6,232,156
============= =============
Earnings per common share
Basic $ 0.75 $ 0.72
============= =============
Diluted $ 0.74 $ 0.72
============= =============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
2001 2000*
----- -----
Net income $ 6,675,286 $ 6,232,156
Other comprehensive income, net of income tax
Unrealized gains on securities:
Unrealized holding gain during the period,
net of income tax 3,544,082 901,414
Reclassification adjustment, net of income tax 295,985 (292,332)
------------- -------------
Other comprehensive income 3,840,067 609,082
------------- -------------
Comprehensive income $ 10,515,353 $ 6,841,238
============= =============
* Restated - see note 9.
See accompanying notes to consolidated financial statements.
F-20
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30,
2001 2000*
---- ----
REVENUES:
Net premiums earned $ 42,598,703 $ 39,149,006
Investment income, net of investment expenses 3,710,452 4,127,896
Net realized investment gains (losses) (562,301) 333,720
Lease income 199,948 210,076
Service charge income 419,184 408,362
------------ ------------
Total revenues 46,365,986 44,229,060
------------ ------------
EXPENSES:
Net losses and loss expenses 30,026,448 26,795,640
Amortization of deferred policy acquisition costs 6,997,000 6,679,000
Other underwriting expenses 6,944,584 5,820,077
Policy dividends 465,779 370,084
Interest 465,726 813,901
Other expenses 339,871 284,747
------------ ------------
Total expenses 45,239,408 40,763,449
------------ ------------
Income before income taxes 1,126,578 3,465,611
Income taxes 103,156 898,636
------------ ------------
Net income $ 1,023,422 $ 2,566,975
============ ============
Earnings per common share
Basic $ 0.11 $ 0.29
============ ============
Diluted $ 0.11 $ 0.29
============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30,
2001 2000*
---- ----
Net income $ 1,023,422 $ 2,566,975
Other comprehensive income, net of income tax
Unrealized gains on securities:
Unrealized holding gain during the period,
net of income tax 2,172,740 889,579
Reclassification adjustment, net of income tax 371,119 (220,255)
------------ ------------
Other comprehensive income 2,543,859 669,324
------------ ------------
Comprehensive income $ 3,567,281 $ 3,236,299
============ ============
* Restated - see note 9.
See accompanying notes to consolidated financial statements.
F-21
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
Common Stock Additional
Prior Class A Class B Prior Class A Class B Paid-In
Shares Shares Shares Amount Amount Amount Capital
------ ------- ------- ------ ------ ------ -------
Balance,December 31, 2000* 8,980,977 $ 8,980,977 $ -- $ -- $ 46,969,840
Issuance of common stock 61,830 39,039 3,758 61,830 390 38 995,485
Recapitalization (9,042,807) 6,027,975 3,013,987 (9,042,807) 60,280 30,140 8,949,361
Net income
Cash dividends
Exercise of stock options 7,112 3,554 71 35 102,666
Other comprehensive income
-------------------------------------------------------------------------------------------------
Balance, September 30, 2001 -- 6,074,126 3,021,299 $ -- $ 60,741 $ 30,213 $ 57,017,352
=================================================================================================
Accumulated
Other Total
Comprehensive Retained Treasury Stockholders'
Income (Loss) Earnings Stock Equity
------ -------- ----- ------
Balance,December 31, 2000* $ (199,063) $ 59,269,593 $ (891,756) $ 114,129,591
Issuance of common stock 1,057,743
Recapitalization 8 (3,018)
Net income 6,675,286 6,675,286
Cash dividends (1,729,480) (1,729,480)
Exercise of stock options 102,772
Other comprehensive income 3,840,067 3,840,067
-----------------------------------------------------------
Balance, September 30, 2001 $ 3,641,004 $ 64,215,399 $ (891,748) $ 124,072,961
===========================================================
* Restated - see note 9.
See accompanying notes to consolidated financial statements.
F-22
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
2001 2000*
---- -----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,675,286 $ 6,232,156
------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 839,380 799,723
Realized investment gain 448,462 (442,927)
Changes in assets and liabilities:
Losses and loss expenses 15,139,625 8,415,628
Unearned premiums 17,250,969 15,019,978
Premiums receivable (7,103,343) (4,380,245)
Deferred policy acquisition costs (1,555,147) (1,788,273)
Deferred income taxes (569,391) 162,627
Reinsurance receivable (9,656,435) (4,278,936)
Prepaid reinsurance premiums (6,712,215) (4,393,859)
Accrued investment income 311,166 (520,900)
Due to affiliate (260,353) 138,078
Reinsurance balances payable (360,339) 67,621
Current income taxes 353,445 550,176
Other, net (116,544) (605,458)
------------ ------------
Net adjustments 8,009,280 8,743,233
------------ ------------
Net cash provided by operating activities 14,684,566 14,975,389
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed maturities
Held to maturity (36,895,097) (11,725,356)
Available for sale (53,380,298) (21,232,004)
Purchase of equity securities, available for sale (10,046,952) (23,163,599)
Maturity of fixed maturities
Held to maturity 40,209,398 10,860,429
Available for sale 36,307,020 6,576,600
Sale of fixed maturities, available for sale 12,275,464 1,490,469
Sale of equity securities, available for sale 5,770,980 14,318,432
Net purchase of property and equipment (140,233) (194,001)
Net sales of short-term investments 2,630,069 4,411,044
------------ ------------
Net cash used in investing activities (3,269,649) (18,657,986)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (2,526,762) (2,333,081)
Issuance of common stock 1,157,497 2,308,227
Line of credit, net (11,800,000) 3,000,000
------------ ------------
Net cash provided by (used in) financing activities (13,169,265) 2,975,146
------------ ------------
Net decrease in cash (1,754,348) (707,451)
Cash at beginning of period 5,182,988 4,500,570
------------ ------------
Cash at end of period $ 3,428,640 $ 3,793,119
============ ============
Cash paid during period - Interest $ 2,426,292 $ 2,214,867
Net cash paid during period - Taxes $ 2,325,000 $ 1,374,777
* Restated - see note 9.
See accompanying notes to consolidated financial statements.
F-23
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"), Pioneer Insurance Company -
New York ("Pioneer - New York") and Pioneer Insurance Company - Ohio ("Pioneer -
Ohio") (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 70% of the pooled business (65% prior to July 1, 2000).
Southern cedes 50% of its business to the Mutual Company. At September 30, 2001,
the Mutual Company held 62% of the outstanding common stock of the Company.
During 2000, the Company acquired 45% of the outstanding stock of Donegal
Financial Services Corporation ("DFSC"), a bank holding company, for $3,042,000
in cash. The remaining 55% of the outstanding stock of DFSC is owned by the
Mutual Company.
Effective January 1, 2001, Southern Heritage entered into an agreement with
Mutual Company, under which Southern Heritage cedes, and then reassumes back,
100% of their business net of reinsurance. The primary purpose of this agreement
is to provide Southern Heritage with the same A.M. Best rating (currently "A")
as the Mutual Company, which Southern Heritage could not achieve without this
contract in place. This agreement does not transfer insurance risk. While this
subsidiary ceded and reassumed amounts received from policyholders of $4,008,652
and $12,139,925 and claims of $1,610,080 and $5,654,699 under this agreement for
the three and nine months ended September 30, 2001, respectively, the amounts
are not reflected in the consolidated financial statements. The aggregate
liabilities ceded and reassumed under this agreement were $16,182,239 at
September 30, 2001.
The Company has announced plans to streamline its corporate structure by
merging a number of its subsidiaries together. Pending regulatory approval,
Southern Heritage Insurance Company will be merged into Southern Insurance
Company of Virginia. Regulatory approvals have been received for the mergers of
Delaware Atlantic Insurance Company and Pioneer - New York into Atlantic States
Insurance Company and these mergers are effective August 1, 2001 and October 1,
2001 respectively. These mergers are not anticipated to have a material impact
on the Company.
On April 19, 2001 the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation. Among other things, the amendment
reclassified the Company's common stock as Class B common stock and effected a
one-for-three reverse split of the Company's Class B common stock effective
April 19, 2001. The amendment also authorized a new class of common stock with
one-tenth of a vote per share designated as Class A common stock. The Company's
Board also approved a dividend of two shares of Class A common stock for each
share of Class B common stock, after the one-for-three reverse split, held of
record at the close of business April 19, 2001. The effect of the reverse split
and the stock dividend taken together is that the Company will have the same
total number of shares outstanding after the reverse split and the stock
dividend as it did before the reverse split and the stock dividend. Therefore,
there is no change in the historical earnings per share of the Class A common
stock and the Class B common stock after the reverse split and the stock
dividend compared to before the reverse split and the stock dividend.
Each share of Class A common stock outstanding at the time of the
declaration of any dividend or other distribution payable in cash upon the
shares of Class B common stock is entitled to a dividend or distribution payable
at the same time and to stockholders of record on the same date in an amount at
least 10% greater than any dividend declared upon each share of Class B common
stock. In the event of a merger or consolidation of the Company with or into
another entity, the holders of Class A common stock and the holders of Class B
common stock are entitled to receive the same per share consideration in such
merger or consolidation. In the event of any liquidation, dissolution or
winding-up of the Company, any assets available to common stockholders will be
distributed pro-rata to the holders of Class A and Class B common stock.
F-24
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 and nine months ended September 30, 2001, are not
necessarily indicative of results of operations to be expected for the twelve
months ended December 31, 2001.
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, 2000.
3 - RECLASSIFICATIONS
Certain amounts in these financial statements have been reclassified from
those previously presented. Gross and ceded premiums earned and losses and loss
adjustment expenses are no longer presented in the statements of income.
Reinsurance recoverable, prepaid reinsurance premiums, unearned premiums, and
the liabilities for losses and loss adjustment expenses have been reduced in the
consolidated balance sheet as they no longer include the amounts ceded and
reassumed under agreements between several subsidiaries and the Mutual Company.
The primary purpose of the agreements is to provide these subsidiaries with the
same A.M. Best rating (currently "A") as the Mutual Company, which these
subsidiaries could not achieve without these contracts in place. These
agreements do not transfer risk. The consolidated statements of cash flows have
been revised to conform to the changes in the consolidated balance sheet. These
reclassifications had no effect on total revenues, total expenses, net income,
net income per share, cash flows provided by operating activities, or
stockholders' equity.
4 - 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 SEPTEMBER 30:
2001
Basic $1,023,422 8,963,207 $ .11
Effect of stock options --- 172,497 ---
---------- --------- -----
Diluted $1,023,422 9,135,704 $ .11
--------- --------- -----
2000
Basic $2,566,975 8,768,751 $ .29
Effect of stock options --- --- ---
---------- --------- -----
Diluted $2,566,975 8,768,751 $ .29
---------- ---------- -----
F-25
NINE MONTHS ENDED SEPTEMBER 30:
2001
Basic $6,675,286 8,927,446 $ .75
Effect of stock options --- 146,295 .01
---------- ---------- -----
Diluted $6,675,286 9,073,741 $ .74
---------- ---------- -----
2000
Basic $6,232,156 8,674,174 $ .72
Effect of stock options --- --- ---
---------- --------- ------
Diluted $6,232,156 8,674,174 $ .72
---------- --------- -----
The following options to purchase shares of common stock were not included
in the computation of diluted earnings per share because the exercise price of
the options was greater than the average market price:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2001 2000 2001 2000
---- ---- ---- ----
Number of Options 1,042,338 1,425,281 1,042,338 1,425,281
========= ========= ========= =========
5 - 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
2001 2000
--------------------------------------------------------------------------------
($ in thousands)
--------------------------------------------------------------------------------
Revenues:
Premiums earned:
Commercial lines $16,078 $14,183
Personal lines 26,521 24,966
--------------------------------------------------------------------------------
Total net premiums earned 42,599 39,149
--------------------------------------------------------------------------------
Net investment income 3,710 4,128
Realized investment gains (losses) (562) 334
Other 619 618
--------------------------------------------------------------------------------
Total revenues $46,366 $44,229
================================================================================
Income before income taxes:
Underwriting income (loss)
Commercial lines $ (113) $ (141)
Personal lines (2,394) (1,638)
--------------------------------------------------------------------------------
SAP underwriting loss (2,507) (1,779)
GAAP adjustments 672 1,263
--------------------------------------------------------------------------------
GAAP underwriting loss (1,835) (516)
Net investment income 3,710 4,128
Realized investment gains (losses) (562) 334
Other (186) (480)
--------------------------------------------------------------------------------
Income before income taxes $ 1,127 $3,466
================================================================================
F-26
NINE MONTHS ENDED SEPTEMBER 30
2001 2000
--------------------------------------------------------------------------------
($ in thousands)
--------------------------------------------------------------------------------
Revenues:
Premiums earned:
Commercial lines $ 46,661 $ 39,530
Personal lines 77,631 72,155
--------------------------------------------------------------------------------
Total net premiums earned 124,292 111,685
--------------------------------------------------------------------------------
Net investment income 11,988 12,009
Realized investment gains (losses) (448) 443
Other 1,823 1,783
--------------------------------------------------------------------------------
Total revenues $137,655 $ 125,920
================================================================================
Income before income taxes:
Underwriting income (loss)
Commercial lines $ (543) $ 317
Personal lines (2,343) (4,903)
--------------------------------------------------------------------------------
SAP underwriting loss (2,886) (4,586)
GAAP adjustments 1,567 1,917
--------------------------------------------------------------------------------
GAAP underwriting income (loss) (1,319) (2,669)
Net investment income (1,988) 12,009
Realized investment gains (losses) (448) 443
Other (1,452) (1,464)
--------------------------------------------------------------------------------
Income before income taxes $ 8,769 $ 8,319
--------------------------------------------------------------------------------
6 - 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 that is no longer being used by
the Delaware Atlantic 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.
F-27
Activity in the restructuring accrual is as follows:
EMPLOYEE
TERMINATION CONTRACT
BENEFITS OCCUPANCY CANCELLATIONS TOTALS
-------------------------------------------------------------------------------------------------
RESTRUCTURING CHARGE $782,000 $488,000 $529,000 $1,799,000
CASH PAYMENT (343,000) (47,000) (365,000) (755,000)
REVERSAL OF PRIOR ACCRUAL (71,000) - (91,000) (162,000)
-------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $368,000 $441,000 $ 73,000 $882,000
-------------------------------------------------------------------------------------------------
CASH PAYMENTS (339,000) (155,000) (73,000) (567,000)
ACCRUAL ADJUSTMENT - 12,000 - 12,000
-------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 $ 29,000 $298,000 $ - $327,000
CASH PAYMENTS (8,000) (74,000) - (82,000)
-------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2001 $ 21,000 $224,000 $ - $ 245,000
-------------------------------------------------------------------------------------------------
7 - RECENT ACCOUNTING STANDARDS -
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company has no derivative instruments or hedging activities as defined
in accordance with the Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS
No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of SFAS No 133", which statements became effective
January 1, 2001. On January 1, 2001, the Company transferred investments with an
amortized cost of $51,640,154 and fair value of $52,444,675 from the held to
maturity classification to the available for sale classification under the
provisions of SFAS No. 133 and 138. The unrealized holding gain of $804,521 at
January 1, 2001 was reported in other comprehensive income. The transfer had no
impact on net income.
BUSINESS COMBINATIONS
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires
the purchase method of accounting to be used for all future business
combinations and contains provisions for the accounting for goodwill and
intangible assets. SFAS No. 142 is effective January 1, 2002, and will require
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead evaluated for impairment.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $117,000 which will be subject to the transition
provisions of Statements 141 and 142, no unamortized identifiable intangible
assets, and no unamortized negative goodwill. Amortization expense related to
goodwill was $61,534 and $45,758 for the year ended December 31, 2000 and the
nine months ended September 30, 2001, respectively. The impact of adopting these
Statements on the Company's financial statements is not expected to be material.
8 - IMPLEMENTATION OF CODIFICATION
The National Association of Insurance Commissioners (NAIC) has adopted the
Codification of Statutory Accounting Principles with an effective date of
January 1, 2001. The codified principles are intended to provide a basis of
accounting recognized and adhered to in the absence of conflict with, or silence
of, state statutes and regulations. The impact of the codified principles on the
statutory capital and surplus of the Company's Insurance Subsidiaries as of
January 1, 2001 is as follows: Atlantic States - $5,922,449 increase; Southern
Heritage - $1,083,354 increase; Pioneer-Ohio - $313,638 increase; Delaware
Atlantic - $246,293 increase; Southern of Virginia - $1,171,204 increase; and
Pioneer - New York - 0.
9 - BUSINESS COMBINATION
In January 2001, the Company acquired all of the outstanding shares of
Pioneer - New York from the Mutual Company, which previously owned 100% of
Pioneer - New York. The acquisition has been accounted for as a reorganization
of entities under common control, similar to a pooling of interests, as both
Pioneer - New York and the Company are under the common management and control
of the Mutual Company. As such, all financial data prior to January 1, 2001 has
been restated to include the results of operations, financial position and cash
flows of Pioneer - New York.
F-28
The following information presents certain income statement data of the
separate companies for the period preceding the merger:
Three and nine months ended September 30, 2000 (unaudited):
Revenues Three Months Ended Nine Months Ended
September 30, 2000 September 30, 2000
------------------ -------------------
Donegal Group Inc. $43,630,503 $124,177,637
Pioneer - New York 598,557 1,742,119
----------- ------------
Total $44,229,060 $125,919,756
Net income (loss)
Donegal Group Inc. $ 2,602,045 $ 6,322,679
Pioneer - New York (35,070) (90,523)
----------- ------------
Total $ 2,566,975 $ 6,232,156
In connection with the transaction, the Company issued the Mutual Company a
$4,441,311 note, which bears a 6% rate and is due in one year. The Company
classifies this note in Due to Affiliate. There were no material transactions
between Donegal Group Inc. and Pioneer - New York prior to the merger. Pioneer -
New York's accounting policies, which were previously based on statutory
accounting principles, were conformed to the Company's accounting policies. Such
changes did not materially impact Pioneer - New York's net income.
F-29
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, 2001 DEC. 31, 2000*
------------- --------------
ASSETS
------
Investments
Fixed maturities
Held to maturity, at amortized cost $ 88,835,677 $ 143,181,718
Available for sale, at market value 158,207,013 114,611,183
Equity securities, available for sale at market 14,012,536 12,112,236
Short-term investments, at cost, which
approximates market 15,486,003 19,439,505
------------- -------------
Total investments 276,541,229 289,344,642
Cash 4,429,540 5,182,988
Accrued investment income 4,000,067 4,002,464
Premiums receivable 27,352,707 21,758,502
Reinsurance receivable 58,704,571 54,543,884
Deferred policy acquisition costs 13,129,124 12,284,214
Federal income tax receivable -- 259,962
Deferred federal income taxes 7,320,544 7,690,886
Prepaid reinsurance premiums 28,886,480 24,712,384
Property and equipment, net 4,882,667 5,236,483
Accounts receivable - securities 9,673,641 234,817
Other 689,420 757,554
------------- -------------
Total assets $ 435,609,990 $ 426,008,780
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
Losses and loss expenses $ 162,723,837 $ 156,476,124
Unearned premiums 110,550,588 99,940,381
Accrued expenses 5,170,815 5,877,475
Reinsurance balances payable 1,039,705 1,634,975
Federal income taxes payable 197,959 --
Cash dividend declared to stockholders -- 797,282
Line of credit 28,200,000 40,000,000
Accounts payable - securities 1,808,232 959,652
Due to affiliate 3,607,566 4,528,996
Other 1,295,903 1,664,304
------------- -------------
Total liabilities 314,594,605 311,879,189
------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value, authorized
2,000,000 shares; none issued
Common stock, $1.00 par value, none and 20,000,000
authorized, issued 0 and 8,980,977 shares and
outstanding 0 and 8,858,689 shares -- 8,980,977
Class A common stock, $.01 par value, authorized
30,000,000 shares, issued 6,047,734 and 0 shares and
outstanding 5,966,210 and 0 shares 60,477 --
Class B common stock, $.01 par value, authorized
10,000,000 shares, issued 3,015,775 and 0 shares and
outstanding 2,975,013 and 0 shares 30,158 --
Additional paid-in capital 56,661,826 46,969,840
Accumulated other comprehensive income (loss) 1,097,145 (199,063)
Retained earnings 64,057,527 59,269,593
Treasury stock (891,748) (891,756)
------------- -------------
Total stockholders' equity 121,015,385 114,129,591
------------- -------------
Total liabilities and stockholders' equity $ 435,609,990 $ 426,008,780
============= =============
* Restated - See note 9
See accompanying notes to consolidated financial statements.
F-30
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
SIX MONTHS ENDED JUNE 30,
2001 2000*
---- -----
REVENUES:
Net premiums earned $81,692,892 $72,535,832
Investment income, net of investment expenses 8,277,895 7,881,127
Realized gain 113,839 109,207
Lease income 399,616 414,994
Service charge income 804,753 749,536
----------- -----------
Total revenues 91,288,995 81,690,696
----------- -----------
EXPENSES:
Net losses and loss expenses 54,089,873 50,772,853
Amortization of deferred policy acquisition costs 13,171,000 12,376,000
Other underwriting expenses 13,199,417 10,952,341
Policy dividends 716,702 587,235
Interest 1,392,001 1,580,988
Other expenses 1,077,715 568,007
----------- -----------
Total expenses 83,646,708 76,837,424
----------- -----------
Income before income taxes 7,642,287 4,853,272
Income taxes 1,990,423 1,188,091
----------- -----------
Net income $ 5,651,864 $ 3,665,181
=========== ===========
Earnings per common share
Basic $ 0.63 $ 0.42
=========== ===========
Diluted $ 0.63 $ 0.42
=========== ===========
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
SIX MONTHS ENDED JUNE 30,
2001 2000
---- ----
Net income $ 5,651,864 $ 3,665,181
Other comprehensive income (loss), net of income tax
Unrealized gains on securities:
Unrealized holding gain during the period,
net of income tax 1,371,342 11,835
Reclassification adjustment, net of income tax (75,134) (72,077)
----------- -----------
Other comprehensive income (loss) 1,296,208 (60,242)
----------- -----------
Comprehensive income $ 6,948,072 $ 3,604,939
=========== ===========
* Restated - see note 9.
See accompanying notes to consolidated financial statements.
F-31
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED JUNE 30,
2001 2000*
---- ----
REVENUES:
Net premiums earned $ 41,651,990 $ 36,447,134
Investment income, net of investment expenses 4,236,709 3,901,058
Realized gain (loss) (6,968) 391,117
Lease income 198,925 208,222
Service charge income 416,313 385,832
------------ ------------
Total revenues 46,496,969 41,333,363
------------ ------------
EXPENSES:
Net losses and loss expenses 27,931,189 24,823,941
Amortization of deferred policy acquisition costs 6,668,000 6,208,000
Other underwriting expenses 6,694,388 5,694,300
Policy dividends 317,322 234,273
Interest 579,387 757,778
Other expenses 682,378 294,120
------------ ------------
Total expenses 42,872,664 38,012,412
------------ ------------
Income before income taxes 3,624,305 3,320,951
Income taxes 927,036 818,452
------------ ------------
Net income $ 2,697,269 $ 2,502,499
============ ============
Earnings per common share
Basic $ 0.30 $ 0.29
============ ============
Diluted $ 0.30 $ 0.29
============ ============
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS ENDED JUNE 30,
2001 2000*
---- ----
Net income $ 2,697,269 $ 2,502,499
Other comprehensive income (loss), net of income tax
Unrealized gains on securities:
Unrealized holding gain (loss) during the period,
net of income tax (543,813) 499,967
Reclassification adjustment, net of income tax 4,599 (258,138)
------------ ------------
Other comprehensive income (loss) (539,214) 241,829
------------ -----------
Comprehensive income $ 2,158,055 $ 2,744,328
============ ============
* Restated - see note 9.
See accompanying notes to consolidated financial statements.
F-32
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2001
Common Stock Additional
Prior Class A Class B Prior Class A Class B Paid-In
Shares Shares Shares Amount Amount Amount Capital
------ ------- ------- ------ ------ ------ -------
Balance,December 31, 2000* 8,980,977 $ 8,980,977 $ -- $ -- $ 46,969,840
Issuance of common stock 61,830 16,181 61,830 162 691,603
Recapitalization (9,042,807) 6,027,997 3,013,998 (9,042,807) 60,280 30,140 8,949,479
Net income
Cash dividends
Exercise of stock options 3,556 1,777 35 18 50,904
Other comprehensive income
-------------------------------------------------------------------------------------------------
Balance, June 30, 2001 -- 6,047,734 3,015,775 $ -- $ 60,477 $ 30,158 $ 56,661,826
=================================================================================================
Accumulated
Other Total
Comprehensive Retained Treasury Stockholders'
Income (Loss) Earnings Stock Equity
------ -------- ----- ------
Balance,December 31, 2000* $ (199,063) $ 59,269,593 $ (891,756) $ 114,129,591
Issuance of common stock 753,595
Recapitalization 8 (2,900)
Net income 5,651,864 5,651,864
Cash dividends (863,930) (863,930)
Exercise of stock options 50,957
Other comprehensive income 1,296,208 1,296,208
-----------------------------------------------------------
Balance, June 30, 2001 $ 1,097,145 $ 64,057,527 $ (891,748) $ 121,015,385
===========================================================
* Restated - see note 9.
See accompanying notes to consolidated financial statements.
F-33
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
2001 2000*
---- -----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,651,864 $ 3,665,181
------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 564,508 531,677
Realized investment gain (113,839) (109,207)
Changes in assets and liabilities:
Losses and loss expenses 5,004,810 1,536,925
Unearned premiums 9,375,528 6,879,373
Premiums receivable (5,594,205) (3,449,513)
Deferred policy acquisition costs (844,910) (544,358)
Deferred income taxes (297,401) 333,926
Reinsurance receivable (2,917,784) (114,804)
Prepaid reinsurance premiums (2,939,417) (3,150,833)
Accrued investment income 2,397 (168,086)
Due to affiliate (921,430) (101,842)
Reinsurance balances payable (595,270) (38,744)
Current income taxes 457,921 39,279
Other, net (1,037,422) (966,099)
------------ ------------
Net adjustments 143,486 677,694
------------ ------------
Net cash provided by operating activities 5,795,350 4,342,875
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed maturities
Held to maturity (13,659,750) (5,912,003)
Available for sale (25,623,643) (13,194,803)
Purchase of equity securities, available for sale (6,742,189) (13,470,191)
Maturity of fixed maturities
Held to maturity 16,304,164 6,625,468
Available for sale 22,506,453 4,700,000
Sale of fixed maturities, available for sale 4,271,591 496,250
Sale of equity securities, available for sale 5,180,419 9,440,407
Net purchase of property and equipment (79,785) (139,168)
Net sales of short-term investments 3,953,502 4,279,814
------------ ------------
Net cash provided by (used in) investing activities 6,110,762 (7,174,226)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (1,661,212) (1,547,121)
Issuance of common stock 801,652 1,715,694
Line of credit, net (11,800,000) --
------------ ------------
Net cash provided by (used in) financing activities (12,659,560) 168,573
------------ ------------
Net decrease in cash (753,448) (2,662,778)
Cash at beginning of period 5,182,988 4,500,570
------------ ------------
Cash at end of period $ 4,429,540 $ 1,837,792
============ ============
Cash paid during period - Interest $ 2,045,457 $ 1,102,693
Net cash paid during period - Taxes $ 1,825,000 $ 810,456
* Restated - see note 9
See accompanying notes to consolidated financial statements.
F-34
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"), Pioneer Insurance Company -
New York ("Pioneer - New York") and Pioneer Insurance Company - Ohio ("Pioneer -
Ohio") (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 70% of the pooled business (65% prior to July 1, 2000).
Southern cedes 50% of its business to the Mutual Company. At June 30, 2001, the
Mutual Company held 62% of the outstanding common stock of the Company.
During 2000, the Company acquired 45% of the outstanding stock of Donegal
Financial Services Corporation ("DFSC"), a bank holding company, for $3,042,000
in cash. The remaining 55% of the outstanding stock of DFSC is owned by the
Mutual Company.
Effective January 1, 2001, Southern Heritage entered into an agreement with
Mutual Company, under which Southern Heritage cedes, and then reassumes back,
100% of their business net of reinsurance. The primary purpose of this agreement
is to provide Southern Heritage with the same A.M. Best rating (currently "A")
as the Mutual Company, which Southern Heritage could not achieve without this
contract in place. This agreement does not transfer insurance risk. While this
subsidiary ceded and reassumed amounts from policyholders of $4,308,755 and
$8,131,273 and claims of $2,342,641 and $4,044,619 under this agreement for the
three and six months ended June 30, 2001, respectively, the amounts are not
reflected in the consolidated financial statements. The aggregate liabilities
ceded and reassumed under this agreement were $16,587,862 at June 30, 2001.
The Company has announced plans to streamline its corporate structure by
merging a number of its subsidiaries together. Pending regulatory approval
Pioneer-New York will be merged into Atlantic States Insurance Company and
Southern Heritage Insurance Company will be merged into Southern Insurance
Company of Virginia. Regulatory approvals have been received for the mergers of
Delaware Atlantic Insurance Company into Atlantic States Insurance Company and
this merger is effective August 1, 2001. These mergers are not anticipated to
have a material impact on the Company.
On April 19, 2001 the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation. Among other things, the amendment
reclassified the Company's common stock as Class B common stock and effected a
one-for-three reverse split of the Company's Class B common stock effective
April 19, 2001. The amendment also authorized a new class of common stock with
one-tenth of a vote per share designated as Class A common stock. The Company's
Board also approved a dividend of two shares of Class A common stock for each
share of Class B common stock, after the one-for-three reverse split, held of
record at the close of business April 19, 2001. The effect of the reverse split
and the stock dividend taken together is that the Company will have the same
total number of shares outstanding after the reverse split and the stock
dividend as it did before the reverse split and the stock dividend. Therefore,
there is no change in the historical earnings per share of the Class A common
stock and the Class B common stock after the reverse split and the stock
dividend compared to before the reverse split and the stock dividend.
Each share of Class A common stock outstanding at the time of the
declaration of any dividend or other distribution payable in cash upon the
shares of Class B common stock is entitled to a dividend or distribution payable
at the same time and to stockholders of record on the same date in an amount at
least 10% greater than any dividend declared upon each share of Class B common
stock. In the event of a merger or
F-35
consolidation of the Company with or into another entity, the holders of Class A
common stock and the holders of Class B common stock are entitled to receive the
same per share consideration in such merger or consolidation. In the event of
any liquidation, dissolution or winding-up of the Company, any assets available
to common stockholders will be distributed pro-rata to the holders of Class A
and Class B common stock.
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 and six months ended June 30, 2001, are not necessarily
indicative of results of operations to be expected for the twelve months ended
December 31, 2001.
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, 2000.
3 - RECLASSIFICATIONS
Certain amounts in these financial statements have been reclassified from
those previously presented. Gross and ceded premiums earned and losses and loss
adjustment expenses are no longer presented in the statements of income.
Reinsurance recoverable, prepaid reinsurance premiums, unearned premiums, and
the liabilities for losses and loss adjustment expenses have been reduced in the
consolidated balance sheet as they no longer include the amounts ceded and
reassumed under agreements between several subsidiaries and the Mutual Company.
The primary purpose of the agreements is to provide these subsidiaries with the
same A.M. Best rating (currently "A") as the Mutual Company, which these
subsidiaries could not achieve without these contracts in place. These
agreements do not transfer risk. The consolidated statements of cash flows have
been revised to conform to the changes in the consolidated balance sheet. These
reclassifications had no effect on total revenues, total expenses, net income,
net income per share, cash flows provided by operating activities, or
stockholders' equity.
4 - 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:
2001
Basic $2,697,269 8,928,017 $ .30
Effect of stock options --- 167,955 ---
---------- --------- -----
Diluted $2,697,269 9,095,972 $ .30
---------- --------- -----
2000
Basic $2,502,499 8,680,348 $ .29
Effect of stock options --- --- ---
---------- --------- -----
Diluted $2,502,499 8,680,348 $ .29
---------- --------- -----
F-36
SIX MONTHS ENDED JUNE 30:
2001
Basic $5,651,864 8,909,270 $ .63
Effect of stock options --- 133,194 ---
---------- --------- -----
Diluted $5,651,864 9,042,464 $ .63
---------- --------- -----
2000
Basic $3,665,181 8,626,365 $ .42
Effect of stock options --- --- ---
---------- --------- -----
Diluted $3,665,181 8,626,365 $ .42
---------- --------- -----
The following options to purchase shares of common stock were not included
in the computation of diluted earnings per share because the exercise price of
the options was greater than the average market price:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Number of Options 1,042,338 1,425,281 1,042,338 1,425,281
========= ========= ========= =========
5 - 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 JUNE 30
2001 2000
--------------------------------------------------------------------------------
( $ in thousands)
--------------------------------------------------------------------------------
Revenues:
Premiums earned:
Commercial lines $ 15,574 $ 12,933
Personal lines 26,078 23,514
-------------------------------------------------------------------------------
Total net premiums earned 41,652 36,447
-------------------------------------------------------------------------------
Net investment income 4,237 3,901
Realized investment
Gains (7) 391
Other 615 594
-------------------------------------------------------------------------------
Total revenues $ 46,497 $ 41,333
================================================================================
Income before income taxes:
Underwriting income (loss)
Commercial lines $ (760) $ 1,349
Personal lines (109) (2,549)
--------------------------------------------------------------------------------
SAP underwriting loss (869) (1,200)
GAAP adjustments 910 687
--------------------------------------------------------------------------------
GAAP underwriting
Loss 41 (513)
Net investment income 4,237 3,901
Realized investment losses (7) 391
Other (647) (458)
--------------------------------------------------------------------------------
Income before income taxes $ 3,624 $ 3,321
================================================================================
F-37
SIX MONTHS ENDED JUNE 30
2001 2000
--------------------------------------------------------------------------------
( $ in thousands)
--------------------------------------------------------------------------------
Revenues:
Premiums earned:
Commercial lines $ 30,583 $ 25,347
Personal lines 51,110 47,189
--------------------------------------------------------------------------------
Total net premiums earned 81,693 72,536
--------------------------------------------------------------------------------
Net investment income 8,278 7,881
Realized investment
Gains 114 109
Other 1,204 1,165
--------------------------------------------------------------------------------
Total revenues $ 91,289 $ 81,691
================================================================================
Income before income taxes:
Underwriting income (loss)
Commercial lines $ (430) $ 458
Personal lines 51 (3,265)
--------------------------------------------------------------------------------
SAP underwriting loss ( 379) (2,807)
GAAP adjustments 895 654
--------------------------------------------------------------------------------
GAAP underwriting loss 516 (2,153)
Net investment income 8,278 7,881
Realized investment losses 114 109
Other (1,265) (984)
--------------------------------------------------------------------------------
Income before income taxes $ 7,642 $ 4,853
================================================================================
6 - 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.
F-38
Activity in the restructuring accrual is as follows:
TERMINATION EMPLOYEE CONTRACT
BENEFITS OCCUPANCY CANCELLATIONS TOTALS
---------------------------------------------------------------------------------------------------------
RESTRUCTURING CHARGE $ 782,000 $ 488,000 $ 529,000 $ 1,799,000
CASH PAYMENT (343,000) (47,000) (365,000) (755,000)
REVERSAL OF PRIOR ACCRUAL (71,000) - (91,000) (162,000)
---------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $ 368,000 $ 441,000 $ 73,000 $ 882,000
---------------------------------------------------------------------------------------------------------
CASH PAYMENTS (339,000) (155,000) (73,000) (567,000)
ACCRUAL ADJUSTMENT - 12,000 - 12,000
---------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 $ 29,000 $ 298,000 $ - $ 327,000
CASH PAYMENTS (6,000) (57,000) - (63,000)
--------------------------------------------------------------------------------------------------------
BALANCE AT 6/30/01 $ 23,000 $ 241,000 $ - $ 264,000
=========================================================================================================
7 - IMPLEMENTATION OF NEW ACCOUNTING STANDARD -
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company has no derivative instruments or hedging activities as defined
in accordance with the Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS
No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of SFAS No 133", which statements became effective
January 1, 2001. On January 1, 2001, the Company transferred investments with an
amortized cost of $51,640,154 and fair value of $52,444,675 from the held to
maturity classification to the available for sale classification under the
provisions of SFAS No. 133 and 138. The unrealized holding gain of $804,521 at
January 1, 2001 was reported in other comprehensive income. The transfer had no
impact on net income.
BUSINESS COMBINATIONS
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires
the purchase method of accounting to be used for all future business
combinations and contains provisions for the accounting for goodwill and
intangible assets. SFAS No. 142 is effective January 1, 2002, and will require
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead evaluated for impairment.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $117,000 which will be subject to the transition
provisions of Statements 141 and 142, no unamortized identifiable intangible
assets, and no unamortized negative goodwill. Amortization expense related to
goodwill was $61,534 and $30,505 for the year ended December 31, 2000 and the
six months ended June 30, 2001, respectively. The impact of adopting these
Statements on the Company's financial statements is not expected to be material.
8 - IMPLEMENTATION OF CODIFICATION
The National Association of Insurance Commissioners (NAIC) has adopted the
Codification of Statutory Accounting Principles with an effective date of
January 1, 2001. The codified principles are intended to provide a basis of
accounting recognized and adhered to in the absence of conflict with, or silence
of, state statutes and regulations. The impact of the codified principles on the
statutory capital and surplus of the Company's Insurance Subsidiaries as of
January 1, 2001 is as follows: Atlantic States - $5,922,449 increase; Southern
Heritage - $1,083,354 increase; Pioneer-Ohio - $313,638 increase; Delaware
Atlantic - $246,293 increase; Southern of Virginia - $1,171,204 increase; and
Pioneer - New York - 0.
F-39
9 - BUSINESS COMBINATION
In January 2001, the Company acquired all of the outstanding shares of
Pioneer - New York from the Mutual Company, which previously owned 100% of
Pioneer - New York. The acquisition has been accounted for as a reorganization
of entities under common control, similar to a pooling of interests, as both
Pioneer - New York and the Company are under the common management and control
of the Mutual Company. As such, all financial data prior to January 1, 2001 has
been restated to include the results of operations, financial position and cash
flows of Pioneer - New York.
The following information presents certain income statement data of the
separate companies for the period preceding the merger:
Three and six months ended June 30, 2000 (unaudited):
Revenues Three Months Ended Six Months Ended
June 30, 2000 June 30, 2000
------------- -------------
Donegal Group Inc. $40,801,600 $ 80,547,134
Pioneer - New York 531,763 1,143,562
------------ ------------
Total $41,333,363 $ 81,690,696
Net income (loss)
Donegal Group Inc. $ 2,470,400 $ 3,720,634
Pioneer - New York 32,099 (55,453)
------------- ------------
Total $ 2,502,499 $ 3,665,181
In connection with the transaction, the Company issued the Mutual Company a
$4,441,311 note, which bears a 6% rate and is due in one year. The Company
classifies this note in Due to Affiliate. There were no material transactions
between Donegal Group Inc. and Pioneer - New York prior to the merger. Pioneer -
New York's accounting policies, which were previously based on statutory
accounting principles, were conformed to the Company's accounting policies. Such
changes did not materially impact Pioneer - New York's net income.
F-40
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, 2001 DECEMBER 31, 2000 *
-------------- -------------------
ASSETS
Investments
Fixed maturities
Held to maturity, at amortized cost $ 91,485,727 $143,181,718
Available for sale, at fair value 172,960,300 114,611,183
Equity securities, available for sale at fair value 13,743,998 12,112,236
Short-term investments, at cost, which
approximates fair value 9,024,271 19,439,505
------------ ------------
Total Investments 287,214,296 289,344,642
Cash 7,798,157 5,182,988
Accrued investment income 4,042,166 4,002,464
Premiums receivable 23,820,154 21,758,502
Reinsurance receivable 55,774,779 54,543,884
Deferred policy acquisition costs 12,185,690 12,284,214
Federal income tax receivable - 259,962
Deferred income taxes 6,712,830 7,690,886
Prepaid reinsurance premiums 25,451,266 24,712,384
Property and equipment, net 5,054,099 5,236,483
Accounts receivable - securities - 234,817
Other 725,944 757,554
------------ ------------
Total Assets $428,779,381 $426,008,780
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
Losses and loss expenses $156,924,091 $156,476,124
Unearned premiums 100,894,793 99,940,381
Accrued expenses 5,659,777 5,877,475
Reinsurance balances payable 1,140,605 1,634,975
Federal income taxes payable 1,060,890 -
Cash dividend declared to stockholders - 797,282
Borrowings under line of credit 37,000,000 40,000,000
Accounts payable - securities 300,000 959,652
Due to affiliate 5,279,803 4,528,996
Other 1,231,397 1,664,304
------------ ------------
Total Liabilities 309,491,356 311,879,189
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value, authorized
2,000,000 shares; none issued
Common stock, $1.00 par value, authorized 20,000,000 shares,
issued 9,026,250 and 8,980,977 shares and outstanding
8,903,962 and 8,858,689 shares 9,026,250 8,980,977
Additional paid-in capital 47,294,639 46,969,840
Accumulated other comprehensive income (loss) 1,636,359 (199,063)
Retained earnings 62,222,533 59,269,593
Treasury stock (891,756) (891,756)
------------ ------------
Total Stockholders' Equity 119,288,025 114,129,591
------------ ------------
Total Liabilities and Stockholders' Equity $428,779,381 $426,008,780
============ ============
* RESTATED - SEE NOTE 10.
See accompanying notes to consolidated financial statements.
F-41
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED MARCH 31,
2001 2000 *
---- ----
REVENUES:
Net premiums earned 40,040,902 36,088,698
Investment income, net of investment expenses 4,041,186 3,980,069
Realized investment gain (loss) 120,807 (281,910)
Lease income 200,691 206,772
Service charge income 388,440 363,704
------------ -----------
Total Revenues 44,792,026 40,357,333
------------ -----------
EXPENSES:
Net losses and loss expenses 26,158,684 25,948,912
Amortization of deferred policy acquisition costs 6,503,000 6,168,000
Other underwriting expenses 6,505,029 5,258,041
Policy dividends 399,380 352,962
Interest 812,614 823,210
Other expenses 395,337 273,887
------------ -----------
Total Expenses 40,774,044 38,825,012
------------ -----------
Income before income taxes 4,017,982 1,532,321
Income taxes 1,063,387 369,639
------------ -----------
Net income $ 2,954,595 $ 1,162,682
============ ===========
Earnings per common share
Basic $ .33 $ .14
============ ===========
Diluted $ .33 $ .14
============ ===========
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS ENDED MARCH 31,
2001 2000 *
---- ----
Net Income $ 2,954,595 $1,162,682
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) arising
during the period, net of income tax 1,915,155 (488,132)
Reclassification adjustment,
net of income tax (79,733) 186,061
----------- ----------
Other comprehensive income (loss) 1,835,422 (302,071)
----------- ----------
Comprehensive income $ 4,790,017 $ 860,611
=========== ==========
* RESTATED - SEE NOTE 10.
See accompanying notes to consolidated financial statements.
F-42
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2001
-----------------------------------------
COMMON STOCK
------------ ACCUMULATED TOTAL
ADDITIONAL OTHER COM- STOCK-
PAID-IN PREHENSIVE RETAINED TREASURY HOLDERS'
SHARES AMOUNT CAPITAL INCOME (LOSS) EARNINGS STOCK EQUITY
------ ------ ------- ------------- -------- ----- ------
BALANCE,
DECEMBER 31, 2000 * 8,980,977 $8,980,977 $46,969,840 $ (199,063) $59,269,593 $(891,756) $114,129,591
ISSUANCE OF
COMMON STOCK 45,273 45,273 324,799 370,072
NET INCOME 2,954,595 2,954,595
CASH DIVIDEND (1,655) (1,655)
OTHER COMPREHENSIVE
INCOME 1,835,422 1,835,422
--------- ---------- ----------- ----------- ----------- --------- ------------
BALANCE, 9,026,250 $9,026,250 $47,294,639 $ 1,636,359 $62,222,533 $(891,756) $119,288,025
MARCH 31, 2001 ========= ========== =========== =========== =========== ========= ============
* RESTATED - SEE NOTE 10.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-43
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
THREE MONTHS ENDED MARCH 31,
2001 2000*
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,954,595 $ 1,162,682
----------- -----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 301,873 262,926
Realized investment (gain) loss (120,807) 281,910
Changes in assets and liabilities:
Losses and loss expenses 4,479,967 1,784,307
Unearned premiums 954,412 (27,997)
Premiums receivable (2,061,652) (734,892)
Deferred policy acquisition costs 98,524 143,900
Deferred income taxes 32,535 74,994
Reinsurance receivable (1,230,895) (1,237,892)
Prepaid reinsurance premiums (738,882) (478,183)
Accrued investment income (39,702) (128,433)
Due to affiliate 750,807 449,832
Reinsurance balances payable (494,370) 99,577
Federal income taxes 1,320,852 985,386
Other, net (634,248) (1,303,885)
------------ -----------
Net adjustments (1,413,586) 171,550
----------- -----------
Net cash provided by operating activities 1,541,009 1,334,232
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed maturities
Held to maturity (8,450,000) (3,249,537)
Available for sale (14,808,595) (7,083,345)
Purchase of equity securities, available for sale (4,496,258) (6,554,263)
Maturity of fixed maturities
Held to maturity 8,478,904 4,839,737
Available for sale 10,411,789 3,500,000
Sale of equity securities, available for sale 2,989,473 638,629
Net purchase of property and equipment (37,522) (89,104)
Net sales of short-term investments 10,415,234 6,539,450
----------- -----------
Net cash provided by (used in) investing activities 4,503,025 (1,458,433)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (798,937) (768,842)
Issuance of common stock 370,072 1,030,431
Line of credit, net (3,000,000) -
----------- -----------
Net cash provided by (used in)
financing activities (3,428,865) 261,589
----------- -----------
Net increase in cash 2,615,169 137,388
Cash at beginning of period
5,182,988 4,500,570
----------- -----------
Cash at end of period $ 7,798,157 $ 4,637,958
----------- -----------
Cash paid during period - Interest $ 1,442,784 $ 620,391
Net cash received during period - Income taxes $ 290,000 $ 689,544
* Restated - See note 10.
See accompanying notes to consolidated financial statements.
F-44
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"), Pioneer Insurance Company -
New York ("Pioneer - New York") and Pioneer Insurance Company - Ohio ("Pioneer -
Ohio") (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 70% of the pooled business (65% prior to July 1, 2000).
Southern cedes 50% of its business to the Mutual Company. At March 31, 2001, the
Mutual Company held 62% of the outstanding common stock of the Company.
During 2000, the Company acquired 45% of the outstanding stock of Donegal
Financial Services Corporation ("DFSC"), a bank holding company, for $3,042,000
in cash. The remaining 55% of the outstanding stock of DFSC is owned by the
Mutual Company.
Effective January 1, 2001, Southern Heritage entered into an agreement with
Mutual Company, under which Southern Heritage cedes, and then reassumes back,
100% of their business net of reinsurance. The primary purpose of this agreement
is to provide Southern Heritage with the same A.M. Best rating (currently "A")
as the Mutual Company, which Southern Heritage could not achieve without this
contract in place. This agreement does not transfer insurance risk. While this
subsidiary ceded and reassumed amounts received from policyholders of $3,822,518
and claims of $1,701,978 under this agreement for the three months ended March
31, 2001 the amounts are not reflected in the consolidated financial statements.
The aggregate liabilities ceded and reassumed under this agreement were
$17,229,503 at March 31, 2001.
The Company has announced plans to streamline its corporate structure by
merging a number of its subsidiaries together. Pending regulatory approval both
Pioneer-New York and Delaware Atlantic Insurance Company will be merged into
Atlantic States Insurance Company and Southern Heritage Insurance Company will
be merged into Southern Insurance Company of Virginia. These mergers are not
anticipated to have a material impact on 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 March 31, 2001, are not necessarily
indicative of results of operations to be expected for the twelve months ended
December 31, 2001.
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, 2000.
3 - RECLASSIFICATIONS
Certain amounts in these financial statements have been reclassified from
those previously presented. Gross and ceded premiums earned and losses and loss
adjustment expenses are no longer presented in the statements of income.
Reinsurance recoverable, prepaid reinsurance premiums, unearned premiums, and
the liabilities for losses and loss adjustment expenses have been reduced in the
consolidated balance sheet as they no longer include the amounts ceded and
reassumed under agreements between several subsidiaries and the Mutual Company.
The primary purpose of the agreements is to provide these subsidiaries with the
same A.M. Best rating (currently "A") as the Mutual Company, which these
subsidiaries could not achieve without these contracts in place. These
agreements do not transfer risk. The consolidated statements of cash flows have
been revised to conform to the changes in the consolidated balance sheet. These
reclassifications had no effect on total revenues, total expenses, net income,
net income per share, cash flows provided by operating activities, or
stockholders' equity.
F-45
4 - 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 MARCH 31:
2001
Basic $2,954,595 8,890,314 $ .33
Effect of stock options --- 98,433 ---
---------- --------- -----
Diluted $2,954,595 8,988,747 $ .33
---------- --------- -----
2000
Basic $1,162,682 8,572,383 $ .14
Effect of stock options --- --- ---
---------- --------- -----
Diluted $1,162,682 8,572,383 $ .14
---------- --------- -----
The following options to purchase shares of common stock were not included
in the computation of diluted earnings per share because they were antidilutive,
that is, the exercise price of the options was greater than the average market
prices.
FOR THE THREE MONTHS
ENDED MARCH 31,
2001 2000
---- ----
Number of Options 1,042,338 1,499,560
========= =========
5 - 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.
F-46
Financial data by segment is as follows:
THREE MONTHS ENDED MARCH 31
2001 2000
--------------------------------------------------------------------------------
($ in thousands)
--------------------------------------------------------------------------------
Revenues:
Premiums earned:
Commercial lines $15,009 $12,414
Personal lines 25,032 23,675
--------------------------------------------------------------------------------
Total net premiums earned 40,041 36,089
--------------------------------------------------------------------------------
Net investment income 4,041 3,980
Realized investment gain (loss) 121 (282)
Other 589 570
--------------------------------------------------------------------------------
Total revenues $44,792 $40,357
================================================================================
Income before income taxes:
Underwriting income (loss)
Commercial lines $ 330 $ (890)
Personal lines 160 (716)
--------------------------------------------------------------------------------
SAP underwriting income (loss) 490 (1,606)
--------------------------------------------------------------------------------
GAAP adjustments (15) (33)
--------------------------------------------------------------------------------
GAAP underwriting income (loss) 475 (1,639)
Net investment income
4,041 3,980
Realized investment gain (loss) 121 (282)
Other (619) (527)
--------------------------------------------------------------------------------
Income before income taxes $ 4,018 $ 1,532
================================================================================
6 - 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.
F-47
Activity in the restructuring accrual is as follows:
EMPLOYEE
TERMINATION CONTRACT
BENEFITS OCCUPANCY CANCELLATIONS TOTALS
-------------------------------------------------------------------------------------------------------------
RESTRUCTURING CHARGE $ 782,000 $ 488,000 $ 529,000 $ 1,799,000
CASH PAYMENT (343,000) (47,000) (365,000) (755,000)
REVERSAL OF PRIOR ACCRUAL (71,000) - (91,000) (162,000)
-------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $ 368,000 $ 441,000 $ 73,000 $ 882,000
-------------------------------------------------------------------------------------------------------------
CASH PAYMENTS (339,000) (155,000) (73,000) (567,000)
ACCRUAL ADJUSTMENT - 12,000 - 12,000
-------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 $ 29,000 $ 298,000 $ - $ 327,000
CASH PAYMENTS (3,000) (31,000) - (34,000)
-------------------------------------------------------------------------------------------------------------
BALANCE AT 3/31/01 $ 26,000 $ 267,000 $ - $ 293,000
=============================================================================================================
7 - SUBSEQUENT EVENTS
On April 19, 2001 the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation. Among other things, the amendment
reclassified the Company's common stock as Class B common stock and effected a
one-for-three reverse split of the Company's Class B common stock effective
April 19, 2001. The amendment also authorized a new class of common stock with
one-tenth of a vote per share designated as Class A common stock. The Company's
Board also approved a dividend of two shares of Class A common stock for each
share of Class B common stock, after the one-for-three reverse split, held of
record at the close of business April 19, 2001. The effect of the reverse split
and the stock dividend taken together is that the Company will have the same
total number of shares outstanding after the reverse split and the stock
dividend as it did before the reverse split and the stock dividend. Therefore,
there is no change in the historical earnings per share of the Class A common
stock and the Class B common stock after the reverse split and the stock
dividend compared to before the reverse split and the stock dividend.
Each share of Class A common stock outstanding at the time of the
declaration of any dividend or other distribution payable in cash upon the
shares of Class B common stock is entitled to a dividend or distribution payable
at the same time and to stockholders of record on the same date in an amount at
least 10% greater than any dividend declared upon each share of Class B common
stock. In the event of a merger or consolidation of the Company with or into
another entity, the holders of Class A common stock and the holders of Class B
common stock are entitled to receive the same per share consideration in such
merger or consolidation. In the event of any liquidation, dissolution or
winding-up of the Company, any assets available to common stockholders will be
distributed pro-rata to the holders of Class A and Class B common stock.
8 - IMPLEMENTATION OF NEW ACCOUNTING STANDARD -
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company has no derivative instruments or hedging activities as defined
in accordance with the Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS
No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of SFAS No 133", which statements became effective
January 1, 2001. On January 1, 2001, the Company transferred investments with an
amortized cost of $51,640,154 and fair value of $52,444,675 from the held to
maturity classification to the available for sale classification under the
provisions of SFAS No. 133 and 138. The unrealized holding gain of $804,521 at
January 1, 2001 was reported in other comprehensive income. The transfer had no
impact on net income.
9 - IMPLEMENTATION OF CODIFICATION
The National Association of Insurance Commissioners (NAIC) has adopted the
Codification of Statutory Accounting Principles with an effective date of
January 1, 2001. The codified principles are intended to provide a basis of
accounting recognized and adhered to in the absence of conflict with, or silence
of, state statutes and regulations. The impact of the codified principles on the
statutory capital and surplus of the Company's Insurance Subsidiaries as of
January 1, 2001 is as follows: Atlantic States - $5,922,449 increase; Southern
Heritage - $1,083,354 increase; Pioneer-Ohio - $313,638 increase; Delaware
Atlantic - $246,293 increase; Southern of Virginia - $1,171,204 increase; and
Pioneer - New York - 0.
F-48
10 - BUSINESS COMBINATION
In January 2001, the Company acquired all of the outstanding shares of
Pioneer Insurance Company of New York ("Pioneer - New York") from the Mutual
Company, which previously owned 100% of Pioneer - New York. The acquisition has
been accounted for as a reorganization of entities under common control, similar
to a pooling of interests, as both Pioneer - New York and the Company are under
common management and control of the Mutual Company. As such, all financial data
prior to January 1, 2001 has been restated to include the results of operation,
financial position and cash flows of Pioneer - New York.
The following information presents certain income statement data of the
separate companies for the period preceding the merger:
Three months ended March 31, 2000 (unaudited):
Revenues
Donegal Group Inc. $39,745,534
Pioneer - New York 611,799
-------
Total $40,357,333
Net income (loss)
Donegal Group Inc. $ 1,250,234
Pioneer - New York (87,552)
-------
Total $ 1,162,682
In connection with the transaction, the Company issued the Mutual Company a
$4,441,311 note which bears a 6% rate and is due in one year. The Company
classifies this note in Due to Affiliates. There were no material transactions
between Donegal Group Inc. and Pioneer - New York prior to the merger. Pioneer -
New York's accounting policies, which were previously based on statutory
accounting principles, were conformed to the Company's accounting policies. Such
changes did not materially impact Pioneer - New York's net income.
F-49
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
-----------------------------------------
($ in thousands)
December 31, 2000
Amount at Which
Fair Shown in the
Cost Value Balance Sheet
---------------------------------------
Fixed Maturities:
Held to maturity:
United States government and
Governmental agencies and
authorities including obligations
of states and political subdivision $105,610 $107,153 $105,610
Canadian government obligation 499 510 499
All other corporate bonds 21,622 21,655 21,622
Mortgage-backed securities 15,451 15,344 15,451
-------- -------- --------
Total fixed maturities
Held to maturity 143,182 144,662 143,182
-------- -------- --------
Available for sale:
United States government and
Governmental agencies and
Authorities including obligations
of states and political subdivision 85,973 86,157 86,157
All other corporate bonds 22,902 22,908 22,908
Mortgage-backed securities 5,649 5,546 5,546
-------- -------- --------
Total fixed maturities
Available for sale 114,524 114,611 114,611
-------- -------- --------
Total fixed maturities 257,706 259,273 257,793
-------- -------- --------
Equity Securities:
Preferred stocks
Public utilities 228 231 231
Banks 4,159 4,066 4,066
Industrial and miscellaneous 1,365 1,325 1,325
-------- -------- --------
Total preferred stocks 5,752 5,622 5,622
-------- -------- --------
Common stocks
Banks and insurance companies 2,890 3,613 3,613
Industrial and miscellaneous 3,859 2,877 2,877
-------- -------- --------
Total common stocks 6,749 6,490 6,490
-------- -------- --------
Total equity securities 12,501 12,112 12,112
-------- -------- --------
Short-term investments 19,440 19,440 19,440
-------- -------- --------
Total investments $289,647 $290,825 $289,345
======== ======== ========
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
---------------------------------------------------------------
Condensed Balance Sheets
($ in thousands)
December 31, 2000 and 1999
ASSETS
2000 1999
-------------------------
Investment in subsidiaries (equity method) $151,159 $139,079
Cash 2,381 371
Property and equipment 1,997 2,232
Other 715 750
-------- --------
Total assets $156,252 $142,432
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
2000 1999
-------------------------
Cash dividends declared to stockholders $ 797 $ 761
Line of credit 40,000 37,000
Other 1,325 879
-------- --------
Total liabilities 42,122 38,640
-------- ---------
Stockholders' equity 114,130 103,792
-------- --------
Total liabilities and stockholders' equity $156,252 $142,432
======== ========
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
---------------------------------------------------------------
(Continued)
Condensed Statements of Income
($ in thousands)
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
---------------------------------
Revenues
Dividends-subsidiary $3,900 $820 $1,000
Lease income 837 819 754
Investment income 29 46 22
------ ------ ------
Total revenues 4,766 1,685 1,776
Expenses
Operating expenses 1,165 938 718
Interest 3,304 2,463 1,293
------ ------ ------
Total expenses 4,469 3,401 2,011
------ ------ ------
Income (loss) before income
tax benefit and equity in
undistributed net income of
subsidiaries 297 (1,716) (235)
Income tax benefit (1,226) (807) (413)
------ ------ ------
Income (loss) before equity in
undistributed net income of
subsidiaries 1,523 (909) 178
Equity in undistributed net
income of subsidiaries 7,314 7,704 8,845
------ ------ ------
Net income $8,837 $6,795 $9,023
====== ====== ======
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED INFORMATION OF PARENT COMPANY
Condensed Statements of Cash Flows
($ in thousands)
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
---------------------------------
Cash flows from operating activities:
Net income $ 8,837 $ 6,795 $ 9,023
------- ------- --------
Adjustments to reconcile net income to net
cash provided by(used in) operating
activities:
Equity in undistributed net income of
subsidiaries (7,314) (7,704) (8,845)
Other 1,123 2,365 (921)
------- ------- --------
Net adjustments (6,191) (5,339) (9,766)
------- ------- --------
Net cash provided by (used in) operating
activities 2,646 1,456 (743)
------- ------- --------
Cash flows from investing activities:
Net purchase of property and equipment (262) (426) (564)
Capital contribution to subsidiaries --- --- (2,000)
Sale of subsidiary --- 100 ---
Investment in Donegal Financial 3,042 --- ---
Acquisition of Southern Heritage --- --- (18,028)
Other 38 (426) (5,613)
------- ------- --------
Net cash used in investing activities (3,266) (752) (26,205)
------- ------- --------
Cash flows from financing activities:
Cash dividends paid (3,127) (2,946) (2,664)
Issuance of common stock 2,757 2,514 2,481
Line of credit, net 3,000 (500) 27,000
------- ------- --------
Net cash provided by (used in) financing
activities 2,630 (932) 26,817
------- ------- --------
Net change in cash 2,010 (228) (131)
Cash beginning 371 599 730
------- ------- --------
Cash ending $ 2,381 $ 371 $ 599
======= ======= ========
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
--------------------------------------------------
($ in thousands)
Years Ended December 31, 2000, 1999 and 1998
Amortization
of Deferred
Net Net Net Losses Policy Other Net
Earned Investment And Loss Acquisition Underwriting Premiums
Segment Premiums Income Expenses Costs Expenses Written
-------
---------------------------------------------------------------------------
Year Ended
December 31, 2000
Personal Lines $ 97,065 $ -- $ 68,003 $ 16,206 $ 14,950 $100,516
Commercial Lines 54,581 -- 36,380 9,113 8,406 59,606
Investments -- 16,395 -- -- -- --
-------- -------- -------- -------- -------- --------
$151,646 $ 16,395 $104,383 $ 25,319 $ 23,356 $160,122
======== ======== ======== ======== ======== ========
Year Ended
December 31, 1999
Personal Lines $ 97,713 $ -- $ 68,400 $ 16,741 $ 19,237 $ 93,363
Commercial Lines 47,804 -- 31,681 8,190 9,412 50,509
Investments -- 13,591 -- -- -- --
-------- -------- -------- -------- -------- --------
$145,517 $ 13,591 $100,081 $ 24,931 $ 28,649 $143,872
======== ======== ======== ======== ======== ========
Year Ended
December 31, 1998
Personal Lines $ 72,860 $ -- $ 49,728 $ 12,247 $ 13,923 $ 73,159
Commercial Lines 44,594 -- 24,079 7,496 8,522 46,307
Investments -- 12,344 -- -- -- --
-------- -------- -------- -------- -------- --------
$117,454 $ 12,344 $ 73,807 $ 19,743 $ 22,445 $119,466
======== ======== ======== ======== ======== ========
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION, CONTINUED
-------------------------------------------------------------
($ in thousands)
At December 31,
---------------------------------------------------
Deferred Liability Other Policy
Policy For Losses Claims and
Acquisition And Loss Unearned Benefits
Segment Costs Expenses Premiums Payable
------- ----- -------- -------- -------
2000
----
Personal Lines $ 6,759 $ 77,546 $ 54,992 $ --
Commercial Lines 5,525 78,930 44,948 --
Investments -- -- -- --
-------- -------- -------- -----
$ 12,284 $156,476 $ 99,940 $ --
======== ======== ======== =====
1999
----
Personal Lines $ 7,208 $ 75,358 $ 55,613 $ --
Commercial Lines 4,238 68,822 32,695 --
Investments -- -- -- --
-------- -------- -------- -----
$ 11,446 $144,180 $ 88,308 $ --
======== ======== ======== =====
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE IV - REINSURANCE
-------------------------
Ceded Assumed Percentage
Gross To Other from Other Net Assumed
Amount Companies Companies Amount To Net
------ --------- --------- ------ ------
Year Ended
December 31, 2000
-----------------
Property and casualty premiums $95,671,588 $52,375,211 $108,349,822 $151,646,199 71%
=========== =========== ============ ============ ===
Year Ended
December 31, 1999
-----------------
Property and casualty premiums $93,399,834 $46,837,108 $98,954,731 $145,517,457 68%
=========== =========== =========== ============ ===
Year Ended
December 31, 1998
-----------------
Property and casualty premiums $63,107,006 $37,744,883 $92,092,071 $117,454,194 78%
=========== =========== =========== ============ ===
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE VI - SUPPLEMENTARY INSURANCE INFORMATION
CONCERNING PROPERTY AND CASUALTY SUBSIDIARIES
---------------------------------------------
Discount,
Deferred Liability if any,
Policy For Losses Deducted
Acquisition And Loss From Unearned
Costs Expenses Reserves Premiums
----- -------- -------- --------
At December 31,
2000 $12,284,214 $156,476,124 $- $99,940,381
=========== ============ == ===========
1999 $11,445,572 $144,180,006 $- $88,307,928
=========== ============ == ===========
1998 $11,510,117 $136,727,107 $- $85,911,963
=========== ============ == ===========
(continued)
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE VI - SUPPLEMENTARY INSURANCE INFORMATION
CONCERNING PROPERTY AND CASUALTY SUBSIDIARIES, CONTINUED
--------------------------------------------------------
Years ended December 31, 2000, 1999 and 1998
Losses and Loss
Expenses Related to
----------------------------
Amortization
of Deferred Net
Net Policy Paid Losses Net
Earned Investment Current Prior Acquisition And Loss Premiums
Premiums Income Year Years Costs Expenses Written
-------- ------ ---- ----- ----- -------- -------
Year Ended
December 31, 2000 $151,646,199 $16,394,747 $103,671,401 $ 711,775 $25,319,000 $100,907,860 $160,122,420
============ =========== ============ ============ =========== ============ ============
Year Ended
December 31, 1999 $145,517,457 $13,590,695 $100,573,192 $ (492,576) $24,931,000 $ 96,861,295 $143,872,389
============ =========== ============ ============ =========== ============ ============
Year Ended
December 31, 1998 $117,454,194 $12,343,793 $ 76,629,130 $(2,822,722) $19,743,000 $ 73,015,115 $119,465,546
============ =========== ============ ============ =========== ============ ============
DONEGAL GROUP INC.
2001 AGENCY STOCK PURCHASE PLAN
300,000
SHARES OF
CLASS A COMMON STOCK
----------
PROSPECTUS
----------
DATED , 2001
-----------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION.
WE DO NOT CLAIM THE ACCURACY OF THE INFORMATION IN THIS PROSPECTUS AS OF
ANY DATE OTHER THAN THE DATE STATED ON THE COVER PAGE OF THE PROSPECTUS.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Item Amount
---- ----------
Registration Fee .................................................... $1,017
Accounting Fees and Expenses......................................... 1,000*
Legal Fees and Expenses.............................................. 4,500*
Printing and Duplicating............................................. 650*
Miscellaneous Expenses............................................... 500*
-------
Total........................................................... $7,667*
=======
*Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware
empowers a Delaware corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
such person's conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon plea of nolo
contendere or its equivalent, does not, of itself, create a presumption that the
person did not act in good faith and in a manner which such person reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had reasonable cause to
believe that such person's conduct was unlawful.
In the case of an action or suit by or in the right of the corporation to
procure a judgment in its favor, Section 145 empowers a corporation to indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by reason of the fact that such
person is or was acting in any of the capacities set forth above against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if
such person acted in good faith
II-1
and in a manner such person reasonably believed to be in or not opposed to the
best interests of the corporation, except that indemnification is not permitted
in respect of any claim, issue or matter as to which such person is adjudged to
be liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought determines upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
deems proper.
Section 145 further provides that a Delaware corporation is required to
indemnify a director, officer, employee or agent against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with any action, suit or proceeding or in defense of any claim, issue or matter
therein as to which such person has been successful on the merits or otherwise;
that indemnification provided for by Section 145 shall not be deemed exclusive
of any other rights to which the indemnified party may be entitled; that
indemnification provided for by Section 145 shall, unless otherwise provided
when authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of such
person's heirs, executors and administrators; and empowers the corporation to
purchase and maintain insurance on behalf of a director or officer against any
liability asserted against such person and incurred by such person in any such
capacity or arising out of such person's status as such whether or not the
corporation would have the power to indemnify such person against such liability
under Section 145. A Delaware corporation may provide indemnification only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because such
person has met the applicable standard of conduct. Such determination is to be
made (i) by a majority vote of the directors who were not parties to such
action, suit or proceeding, or (ii) by a committee of such directors designated
by the majority vote of such directors, or (iii) if there are no such directors,
or if such directors so direct, by independent legal counsel in a written
opinion or (iv) by the stockholders.
Article 5 of Donegal Group's By-laws provides for indemnification of
directors and officers of Donegal Group to the fullest extent permitted by the
General Corporation Law of the State of Delaware, as presently or hereafter in
effect. The By-laws of the Mutual Company also provide that the Mutual Company
shall indemnify to the full extent authorized by law any director or officer of
the Mutual Company who is made, or threatened to be made, a party to any action
or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that such person is or was serving as a director, officer,
employee or agent of Donegal Group, or is or was serving as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise at the request of the Mutual Company.
Donegal Group provides liability insurance for directors and officers for
certain losses arising from claims or charges made against them while acting in
their capacities as directors or officers of Donegal Group up to an aggregate of
$5,000,000 inclusive of defense costs, expenses and charges.
Additionally, as permitted by the General Corporation Law of the State of
Delaware, Article 6 of Donegal Group's Certificate of Incorporation provides
that no director of Donegal
II-2
Group shall incur personal liability to Donegal Group or its stockholders for
monetary damages for breach of such person's fiduciary duty as a director;
provided, however, that the provision does not eliminate or limit the liability
of a director for (i) any breach of the director's duty of loyalty to Donegal
Group or its stockholders; (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) the unlawful
payment of dividends or unlawful purchase or redemption of stock under Section
174 of the General Corporation Law of the State of Delaware; or (iv) any
transaction from which the director derived an improper personal benefit.
ITEM 16. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS REFERENCE
------ ----------------------- ---------
4.1 Form of Subscription Agreement Under the Donegal Group Inc. 2001 Agency Stock Purchase Filed herewith
Plan
5.1 Opinion of Duane, Morris & Heckscher LLP (a)
10.1 Tax Sharing Agreement dated September 29, 1986 between Donegal Group Inc. and Atlantic (b)
States Insurance Company
10.2 Services Allocation Agreement dated September 29, 1986 between Donegal Mutual (b)
Insurance Company, Donegal Group Inc. and Atlantic States Insurance Company
10.3 Proportional Reinsurance Agreement dated September 29, 1986 between Donegal Mutual (b)
Insurance Company and Atlantic States Insurance Company
10.4 Amendment dated October 1, 1988 to Proportional Reinsurance Agreement between Donegal (c)
Mutual Insurance Company and Atlantic States Insurance Company
10.5 Multi-Line Excess of Loss Reinsurance Agreement effective January 1, 1993 between (d)
Donegal Mutual Insurance Company, Southern Insurance Company of Virginia, Atlantic
States Insurance Company and Pioneer Mutual Insurance Company, and Christiana General
Insurance Corporation of New York, Cologne Reinsurance Company of America, Continental
Casualty Company, Employers Reinsurance Corporation and Munich American Reinsurance
Company
10.6 Amendment dated July 16, 1992 to Proportional Reinsurance Agreement between Donegal (e)
Mutual Insurance Company and Atlantic States Insurance Company
II-3
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS REFERENCE
------ ----------------------- ---------
10.7 Donegal Group Inc. 1996 Employee Stock Purchase Plan (f)
10.8 Donegal Group Inc. Agency Stock Purchase Plan (g)
10.9 Amendment effective September 17, 2001 to Donegal Group Inc. Agency Stock Purchase Plan (h)
10.10 Donegal Group Inc. Amended and Restated 1996 Equity Incentive Plan (i)
10.11 Donegal Group Inc. Amended and Restated 1996 Equity Incentive Plan for Directors (j)
10.12 Donegal Mutual Insurance Company Executive Restoration Plan (k)
10.13 Donegal Mutual Insurance Company 401(k) Plan (l)
10.14 Amendment No. 1 effective January 1, 2000 to Donegal Mutual Insurance Company 401(k) (l)
Plan
10.15 Donegal Group Inc. 2001 Equity Incentive Plan for Employees (m)
10.16 Donegal Group Inc. 2001 Equity Incentive Plan for Directors (m)
10.17 Donegal Group Inc. 2001 Employee Stock Purchase Plan, as amended (n)
10.18 Donegal Group Inc. Amended and Restated 2001 Agency Stock Purchase Plan Filed herewith
10.19 Amendment dated as of December 21, 1995 to Proportional Reinsurance Agreement between (o)
Donegal Mutual Insurance Company and Atlantic States Insurance Company
10.20 Stock Purchase Agreement dated as of December 21, 1995 between Donegal Mutual (o)
Insurance Company and Donegal Group Inc.
10.21 Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal Mutual (k)
Insurance Company and Pioneer Insurance Company
10.22 Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal Mutual (k)
Insurance Company and Delaware American Insurance Company
10.23 Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal Mutual (k)
Insurance Company and Southern Insurance Company of Virginia
II-4
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS REFERENCE
------ ----------------------- ---------
10.24 Reinsurance and Retrocession Agreement effective January 1, 2000 between Donegal (l)
Mutual Insurance Company and Southern Heritage Insurance Company
10.25 Property Catastrophe Excess of Loss Reinsurance Agreement effective January 1, 2000 (l)
between Donegal Mutual Insurance Company and Southern Heritage Insurance Company
10.26 Stock Purchase Agreement dated as of May 14, 1998 between Donegal Group Inc. and (p)
Southern Heritage Limited Partnership
10.27 Amendment dated November 17, 1998 to Stock Purchase Agreement dated as of May 14, 1998 (p)
between Donegal Group Inc. and Southern Heritage Limited Partnership
10.28 Amended and Restated Credit Agreement dated as of July 27, 1998 among Donegal Group (p)
Inc., the banks and other financial institutions from time to time party thereto and
Fleet National Bank, as agent
10.29 First Amendment and Waiver to the Amended and Restated Credit Agreement dated as of (l)
December 31, 1999
10.30 Stock Purchase Agreement dated as of July 20, 2000 between Donegal Mutual Insurance (m)
Company and Donegal Group Inc.
10.31 Amendment dated as of April 20, 2000 to Proportional Reinsurance Agreement between (q)
Donegal Mutual Insurance Company and Atlantic States Insurance Company
10.32 Lease Agreement dated as of September 1, 2000 between Donegal Mutual Insurance Company (m)
and Province Bank FSB
10.33 Aggregate Excess of Loss Reinsurance Agreement dated as of January 1, 2001 between (m)
Donegal Mutual Insurance Company and Pioneer Insurance Company
13.1 2000 Annual Report to Stockholders (m)
23.1 Consent of KPMG LLP Filed herewith
II-5
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS REFERENCE
------ ----------------------- ---------
23.2 Consent of Duane, Morris & Heckscher LLP (included in its opinion)
24.1 Powers of Attorney (a)
----------
(a) Such exhibit is hereby incorporated by reference to the liked-described
exhibit in Registrant's Form S-2 Registration Statement No. 333-63102 filed
with the SEC on June 15, 2001.
(b) 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.
(c) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1988.
(d) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-2 Registration Statement No. 33-67346
declared effective September 29, 1993.
(e) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1992.
(f) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-8 Registration Statement No. 333-01287 filed
with the SEC on February 28, 1996.
(g) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-2 Registration Statement No. 333-06787
declared effective August 1, 1996.
(h) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Amendment No. 1 to Form S-2 Registration Statement
No. 333-68748 filed with the SEC on September 26, 2001.
(i) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1998.
II-6
(j) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1997.
(k) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1996.
(l) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1999.
(m) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
2000.
(n) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-8 Registration Statement No. 333-62974 filed
with the SEC on June 14, 2001.
(o) Such exhibit is hereby incorporated by reference to the liked-described
exhibit in Registrant's Form 8-K Report dated December 21, 1995.
(p) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated November 17, 1998.
(q) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated June 19, 2000.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering
II-7
range may be reflected in the form of prospectus filed with the SEC pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration Statement;
and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
provided, however, that paragraphs (a)(i) and (a)(ii) of this section do not
apply if the registration statement is on Form S-3 or Form S-8 and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the SEC
by the Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act
that are incorporated by reference in the Registration Statement.
(b) For the purpose of determining any liability under the Securities Act,
to treat each post-effective amendment as a new registration statement relating
to the securities offered therein, and the offering of such securities at that
time to be the initial bona fide offering thereof.
(c) To file a post-effective amendment to remove from registration any of
the securities being registered that remain unsold at the termination of the
offering.
(d) That, for the purpose of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Exchange Act (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the Exchange
Act) that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned Registrant hereby further undertakes to deliver or cause to
be delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Exchange Act; and, where
interim financial information required to be presented by Article 3 of
Regulation S-X is not set forth in the prospectus, to deliver, or cause to be
delivered, to each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant, the Registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling
II-8
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Marietta, Pennsylvania, on December 20, 2001.
DONEGAL GROUP INC.
By: /s/ Donald H. Nikolaus
-----------------------------
Donald H. Nikolaus, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Donald H. Nikolaus President, Chief Executive Officer December 20, 2001
------------------------------------------ and a Director
Donald H. Nikolaus (principal executive officer)
/s/ Ralph G. Spontak Senior Vice President, Chief December 20, 2001
------------------------------------------ Financial Officer and Secretary
Ralph G. Spontak (principal financial and
accounting officer)
* Director December 20, 2001
------------------------------------------
C. Edwin Ireland
* Director December 20, 2001
------------------------------------------
Patricia A. Gilmartin
* Director December 20, 2001
------------------------------------------
Philip H. Glatfelter, II
II-10
Signature Title Date
--------- ----- ----
* Director December 20, 2001
------------------------------------------
R. Richard Sherbahn
Director December __, 2001
------------------------------------------
Thomas J. Finley, Jr.
* Director December 20, 2001
------------------------------------------
Robert S. Bolinger
Director December __, 2001
------------------------------------------
John J. Lyons
By: /s/ Ralph G. Spontak
-------------------------------------
Ralph G. Spontak, as attorney-in-fact
*Signed pursuant to power of attorney
II-11
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS REFERENCE
------ ----------------------- ---------
4.1 Form of Subscription Agreement Under the Donegal Group Inc. 2001 Agency Stock Filed herewith
Purchase Plan
5.1 Opinion of Duane, Morris & Heckscher LLP (a)
10.1 Tax Sharing Agreement dated September 29, 1986 between Donegal Group Inc. and (b)
Atlantic States Insurance Company
10.2 Services Allocation Agreement dated September 29, 1986 between Donegal Mutual (b)
Insurance Company, Donegal Group Inc. and Atlantic States Insurance Company
10.3 Proportional Reinsurance Agreement dated September 29, 1986 between Donegal Mutual (b)
Insurance Company and Atlantic States Insurance Company
10.4 Amendment dated October 1, 1988 to Proportional Reinsurance Agreement between (c)
Donegal Mutual Insurance Company and Atlantic States Insurance Company
10.5 Multi-Line Excess of Loss Reinsurance Agreement effective January 1, 1993 between (d)
Donegal Mutual Insurance Company, Southern Insurance Company of Virginia, Atlantic
States Insurance Company and Pioneer Mutual Insurance Company, and Christiana
General Insurance Corporation of New York, Cologne Reinsurance Company of America,
Continental Casualty Company, Employers Reinsurance Corporation and Munich American
Reinsurance Company
10.6 Amendment dated July 16, 1992 to Proportional Reinsurance Agreement between Donegal (e)
Mutual Insurance Company and Atlantic States Insurance Company
10.7 Donegal Group Inc. 1996 Employee Stock Purchase Plan (f)
10.8 Donegal Group Inc. Agency Stock Purchase Plan (g)
10.9 Amendment effective September 17, 2001 to Donegal Group Inc. Agency Stock Purchase (h)
Plan
10.10 Donegal Group Inc. Amended and Restated 1996 Equity Incentive Plan (i)
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS REFERENCE
------ ----------------------- ---------
10.11 Donegal Group Inc. Amended and Restated 1996 Equity Incentive Plan for Directors (j)
10.12 Donegal Mutual Insurance Company Executive Restoration Plan (k)
10.13 Donegal Mutual Insurance Company 401(k) Plan (l)
10.14 Amendment No. 1 effective January 1, 2000 to Donegal Mutual Insurance Company 401(k) (l)
Plan
10.15 Donegal Group Inc. 2001 Equity Incentive Plan for Employees (m)
10.16 Donegal Group Inc. 2001 Equity Incentive Plan for Directors (m)
10.17 Donegal Group Inc. 2001 Employee Stock Purchase Plan, as amended (n)
10.18 Donegal Group Inc. Amended and Restated 2001 Agency Stock Purchase Plan Filed herewith
10.19 Amendment dated as of December 21, 1995 to Proportional Reinsurance Agreement (o)
between Donegal Mutual Insurance Company and Atlantic States Insurance Company
10.20 Stock Purchase Agreement dated as of December 21, 1995 between Donegal Mutual (o)
Insurance Company and Donegal Group Inc.
10.21 Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal Mutual (k)
Insurance Company and Pioneer Insurance Company
10.22 Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal Mutual (k)
Insurance Company and Delaware American Insurance Company
10.23 Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal Mutual (k)
Insurance Company and Southern Insurance Company of Virginia
10.24 Reinsurance and Retrocession Agreement effective January 1, 2000 between Donegal (l)
Mutual Insurance Company and Southern Heritage Insurance Company
10.25 Property Catastrophe Excess of Loss Reinsurance Agreement effective January 1, 2000 (l)
between Donegal Mutual Insurance Company and Southern Heritage Insurance Company
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS REFERENCE
------ ----------------------- ---------
10.26 Stock Purchase Agreement dated as of May 14, 1998 between Donegal Group Inc. and (p)
Southern Heritage Limited Partnership
10.27 Amendment dated November 17, 1998 to Stock Purchase Agreement dated as of May 14, (p)
1998 between Donegal Group Inc. and Southern Heritage Limited Partnership
10.28 Amended and Restated Credit Agreement dated as of July 27, 1998 among Donegal Group (p)
Inc., the banks and other financial institutions from time to time party thereto and
Fleet National Bank, as agent
10.29 First Amendment and Waiver to the Amended and Restated Credit Agreement dated as of (l)
December 31, 1999
10.30 Stock Purchase Agreement dated as of July 20, 2000 between Donegal Mutual Insurance (m)
Company and Donegal Group Inc.
10.31 Amendment dated as of April 20, 2000 to Proportional Reinsurance Agreement between (q)
Donegal Mutual Insurance Company and Atlantic States Insurance Company
10.32 Lease Agreement dated as of September 1, 2000 between Donegal Mutual Insurance (m)
Company and Province Bank FSB
10.33 Aggregate Excess of Loss Reinsurance Agreement dated as of January 1, 2001 between (m)
Donegal Mutual Insurance Company and Pioneer Insurance Company
13.1 2000 Annual Report to Stockholders (m)
23.1 Consent of KPMG LLP Filed herewith
23.2 Consent of Duane, Morris & Heckscher LLP (included in its opinion)
24.1 Powers of Attorney (a)
(a) Such exhibit is hereby incorporated by reference to the liked-described
exhibit in Registrant's Form S-2 Registration Statement No. 333-63102 filed
with the SEC on June 15, 2001.
(b) 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.
(c) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1988.
(d) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-2 Registration Statement No. 33-67346
declared effective September 29, 1993.
(e) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1992.
(f) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-8 Registration Statement No. 333-01287 filed
with the SEC on February 28, 1996.
(g) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-2 Registration Statement No. 333-06787
declared effective August 1, 1996.
(h) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Amendment No. 1 to Form S-2 Registration Statement
No. 333-68748 filed with the SEC on September 26, 2001.
(i) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1998.
(j) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1997.
(k) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1996.
(l) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1999.
(m) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
2000.
(n) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-8 Registration Statement No. 333-62974 filed
with the SEC on June 14, 2001.
(o) Such exhibit is hereby incorporated by reference to the liked-described
exhibit in Registrant's Form 8-K Report dated December 21, 1995.
(p) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated November 17, 1998.
(q) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated June 19, 2000.