SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 0-15341
DONEGAL GROUP INC.
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(Exact name of registrant as specified in its charter)
Delaware 23-2424711
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1195 River Road, Marietta, Pennsylvania 17547
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (717) 426-1931
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in
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definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ X ]
On March 15, 2000, the aggregate market value (based on the closing sales price
on that date) of the voting stock held by non-affiliates of the Registrant was
$24,719,873.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 8,618,558 shares of Common
Stock outstanding on March 15, 2000.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Registrant's annual report to stockholders for the fiscal
year ended December 31, 1999 are incorporated by reference into Parts I, II
and IV of this report.
2. Portions of the Registrant's proxy statement relating to the annual meeting
of stockholders to be held April 20, 2000 are incorporated by reference
into Part III of this report.
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DONEGAL GROUP INC.
INDEX TO FORM 10-K REPORT
Page
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I. PART I.
Item 1. Business................................................. 1
Item 2. Properties................................................23
Item 3. Legal Proceedings.........................................23
Item 4. Submission of Matters to a Vote of Security Holders.......23
Executive Officers of the Company.........................23
II. PART II.
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.............................25
Item 6. Selected Financial Data...................................25
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............25
Item 8. Financial Statements and Supplementary Data...............25
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................25
III. PART III.
Item 10. Directors and Executive Officers of the Registrant........26
Item 11. Executive Compensation....................................26
Item 12. Security Ownership of Certain Beneficial
Owners and Management...................................26
Item 13. Certain Relationships and Related Transactions............26
IV. PART IV.
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.................................27
(i)
PART I
Item 1. Business.
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(a) General Development of Business.
--------------------------------
Donegal Group Inc. is an insurance holding company formed in August 1986,
which is headquartered in Pennsylvania and engages, through its subsidiaries, in
the property and casualty insurance business in 19 mid-Atlantic and southeastern
states. As used herein, "DGI" or the "Company" refers to Donegal Group Inc. and
its insurance subsidiaries, Atlantic States Insurance Company ("Atlantic
States"), Southern Insurance Company of Virginia ("Southern"), Delaware Atlantic
Insurance Company ("Delaware Atlantic"), Pioneer Insurance Company ("Pioneer")
and Southern Heritage Insurance Company ("Southern Heritage"). DGI is currently
61.8% owned by Donegal Mutual Insurance Company (the "Mutual Company"). DGI and
its subsidiaries and the Mutual Company underwrite a broad line of personal and
commercial coverages, consisting of private passenger and commercial automobile,
homeowners, commercial multi-peril, workers' compensation and other lines of
insurance.
The Company's strategy is to seek growth both internally and through
acquisitions. Since the formation of the Company and Atlantic States in 1986,
the Company has completed the following acquisitions:
Net Net Premiums
Premiums Written Year
Written Year Ended
Year Prior to December 31,
Company Acquired Acquired Acquisition 1999
- ---------------- -------- ------------ ------------
Southern Insurance Company of Virginia 1988 $1,128,843 14,193,477
Delaware Atlantic Insurance Company 1995 2,824,398 3,813,812
Pioneer Insurance Company 1997 4,499,273 3,749,701
Southern Heritage Insurance Company 1998 32,002,540 17,422,801
The Company evaluates other acquisition candidates on a continuing basis.
However, there can be no assurance as to whether or when the Company will effect
any additional acquisitions.
Atlantic States, which DGI organized in September 1986, participates in an
underwriting pool whereby it cedes to the Mutual Company the premiums, losses
and loss expenses from all of its insurance business and assumes from the Mutual
Company a specified portion of the pooled business, which also includes
substantially all of the Mutual Company's property and casualty insurance
business. Effective as of October 1, 1986, DGI entered into a pooling agreement
with the Mutual Company whereby Atlantic States assumed 35% of the pooled
business written or in force on or after October 1, 1986. Pursuant to amendments
to the pooling agreement subsequent to October 1, 1986, the Mutual Company,
which is solely responsible for any losses in the pooled business with dates of
loss on or before the close of business on September 30, 1986, has increased the
percentage of retrocessions of the pooled business to Atlantic States. Since
January 1, 1996, 65% of the pooled business has been retroceded to Atlantic
States. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in Item 7 hereof and Note 3 to the Consolidated
Financial Statements incorporated by reference herein.
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On December 29, 1988, DGI acquired all of the outstanding capital stock of
Southern in exchange for a $3,000,000 equity contribution to Southern. Since
January 1, 1991, Southern has ceded to the Mutual Company 50% of its direct
premiums written and 50% has been retained by Southern. Because the Mutual
Company places substantially all of the business assumed from Southern in the
pool, in which DGI has a 65% allocation, DGI's results of operations include
approximately 80% of the business written by Southern. See Note 3 to the
Consolidated Financial Statements incorporated by reference herein.
As of December 31, 1995, the Company acquired all of the outstanding
capital stock of Delaware Atlantic pursuant to a Stock Purchase Agreement dated
as of December 21, 1995 between the Company and the Mutual Company.
As of March 31, 1997, the Company acquired all of the outstanding capital
stock of Pioneer pursuant to a Stock Purchase Agreement dated as of April 7,
1997 between the Company and the Mutual Company.
On November 17, 1998, DGI purchased all of the outstanding capital stock of
Southern Heritage, a Georgia-domiciled property and casualty insurance company,
from Southern Heritage Limited Partnership for a purchase price, as finally
settled, of $18,824,950 in cash.
The Mutual Company is currently a party to retrocessional reinsurance
contracts with each of the Company's subsidiaries, Southern, Delaware Atlantic,
Pioneer and Southern Heritage, whereby the Mutual Company reinsures each such
subsidiary in respect of 100% of the net liability that may accrue to such
subsidiary from its insurance operations and retrocedes 100% of the net
liability back to such subsidiary, which such subsidiary assumes.
On March 19, 1999, the Mutual Company, the Company and Donegal Financial
Services Corporation, a Delaware corporation formed by the Mutual Company and
the Company in 1999 ("Donegal Financial" and together with the Mutual Company
and the Company, the "Applicants"), filed an Application for Permission to
Organize a Federal Stock Savings Bank and related holding company application
with the Office of Thrift Supervision (the "OTS") pursuant to Section 10(e) of
the Home Owners' Loan Act to organize a proposed de novo federal savings bank,
to be known as Donegal Federal Savings Bank (the "Savings Bank"), the deposits
of which will be insured by the Savings Association Insurance Fund of the
Federal Deposit Insurance Corporation (the "FDIC"). An Application for Federal
Deposit Insurance was filed on behalf of the Savings Bank with the FDIC on April
9, 1999. These applications currently remain under review by the OTS and the
FDIC.
Unless otherwise stated, all information in this report gives retroactive
effect to: (i) the four-for-three split of the Company's Common Stock effected
through a stock dividend of one share of Common Stock for each three shares
outstanding, which was paid on July 15, 1997 to stockholders of record on June
25, 1997, and (ii) the four-for-three split of the Company's
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Common Stock effected through a stock dividend of one share of Common Stock for
each three shares outstanding, which was paid on June 25, 1998 to stockholders
of record on June 10, 1998.
(b) Financial Information about Industry Segments.
----------------------------------------------
The Company has three segments, which consist of the investment function,
the personal lines of insurance and the commercial lines of insurance. Financial
information about these segments is set forth in Note 17 to the Consolidated
Financial Statements incorporated by reference herein.
(c) Narrative Description of Business.
----------------------------------
Relationship with the Mutual Company
DGI's operations are interrelated with the operations of the Mutual Company
and, because of the percentage of the pooled business assumed by DGI, DGI's
results of operations are dependent to a material extent upon the success of the
Mutual Company. In addition, various reinsurance agreements exist between the
Company and the Mutual Company. The Mutual Company is responsible for
underwriting and marketing the pooled business and provides facilities,
employees and services required to conduct the business of DGI on a
cost-allocated basis. The Mutual Company owned 61.8% of DGI as of March 15,
2000.
Through the pool, DGI writes personal and commercial property and casualty
insurance lines, including automobile, homeowners, commercial multi-peril,
workers' compensation and other lines of business. The insurance agencies under
contract with the Mutual Company serve as representatives for the pool
participants.
The Mutual Company provides all personnel for the Company and certain of
its insurance subsidiaries, including Atlantic States, Delaware Atlantic,
Southern and Pioneer. Expenses are allocated to the Company, Delaware Atlantic,
Southern and Pioneer according to a time allocation and estimated usage
agreement, and to Atlantic States in relation to the relative participation of
the Mutual Company and Atlantic States in the pooling agreement described
herein. Expenses allocated to the Company under such agreement were $27,466,898
in 1999.
The Mutual Company leases office equipment and automobiles from the
Company, under a lease dated January 1, 1990. The Mutual Company made lease
payments to the Company of $819,474 in 1999.
Under the terms of the intercompany pooling agreement, Atlantic States
cedes to the Mutual Company the premiums, losses and loss expenses on all of its
insurance business. Substantially all of the Mutual Company's property and
casualty insurance business written or in force on or after October 1, 1986 is
included in the pooled business. Pursuant to amendments to the pooling agreement
subsequent to October 1, 1986, the Mutual Company, which is solely responsible
for any losses in the pooled business with dates of loss on or before the close
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of business on September 30, 1986, has increased the percentage of retrocessions
of the pooled business to Atlantic States. As most recently amended, effective
as of January 1, 1996, 65% of the pooled business has been retroceded to
Atlantic States. All premiums, losses, loss expenses and other underwriting
expenses are prorated among the parties on the basis of their participation in
the pool. The pooling agreement may be amended or terminated at the end of any
calendar year by agreement of the parties. 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 the ability of the Company to raise
capital for Atlantic States. The Company does not currently anticipate a further
increase in Atlantic States' percentage of participation in the pool, nor does
the Company intend to terminate the participation of Atlantic States in the
pooling agreement.
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. The additional capacity
exists because such policy exposures are spread among the pool participants,
each of which has its own capital and surplus.
In addition to the underwriting pool, through the retrocessional
reinsurance agreements with each of the Company's subsidiaries, Southern,
Delaware Atlantic, Pioneer and Southern Heritage, the Mutual Company reinsures
each such subsidiary in respect of 100% of the net liability that may accrue to
such subsidiary from its insurance operations and retrocedes 100% of the net
liability back to such subsidiary, which such subsidiary assumes.
On March 19, 1999, the Mutual Company, the Company and Donegal Financial
filed an Application for Permission to Organize a Federal Stock Savings Bank and
related holding company application with the OTS pursuant to Section 10(e) of
the Home Owners' Loan Act to organize a proposed de novo federal savings bank,
to be known as Donegal Federal Savings Bank, the deposits of which will be
insured by the Savings Association Insurance Fund of the FDIC. An Application
for Federal Deposit Insurance was filed on behalf of the Savings Bank with the
FDIC on April 9, 1999. These applications currently remain under review by the
OTS and the FDIC.
All of the Company's officers are officers of the Mutual Company, five of
the Company's seven directors are directors of the Mutual Company and three of
the Company's executive officers are directors of the Mutual Company. The
Company and the Mutual Company maintain a Coordinating Committee, which consists
of two outside directors from each of the Company and the Mutual Company, none
of whom holds seats on both Boards, to review and evaluate the pooling agreement
between the Company and the Mutual Company and to be responsible for matters
involving actual or potential conflicts of interest between the Company and the
Mutual Company. The decisions of the Coordinating Committee are binding on the
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Company and the Mutual Company. The Company's Coordinating Committee members
must conclude that intercompany transactions are fair and equitable to the
Company. The purpose of this provision is to protect the interests of the
stockholders of the Company other than the Mutual Company. The Coordinating
Committee meets on an as-needed basis.
DGI's Business Strategy
DGI, in conjunction with the Mutual Company, has multiple strategies which
the management of DGI believes have resulted in underwriting results that are
favorable when compared to those of the property and casualty insurance industry
in general over the past five years. The principal strategies comprise the
following:
o A regional company concept designed to provide the advantages of local
marketing, underwriting and claims servicing with the economies of
scale from centralized accounting, administrative, investment, data
processing and other services.
o An underwriting program and product mix designed to produce a
Company-wide underwriting profit, i.e., a combined ratio of less than
100%, from careful risk selection and adequate pricing.
o A goal of a closely balanced ratio between commercial business and
personal business.
o An agent selection process that focuses on appointing agencies with
proven market strategies for the development of profitable business
and an agent compensation plan providing for additional commissions
based upon premium volume and profitability and the right to
participate in the Company's Agency Stock Purchase Plan.
o A continuing effort to attract and retain qualified employees who
receive incentive compensation based upon historical results.
o A goal of expanding operations in current and adjacent states.
Property and Casualty Insurance Products and Services
The following table indicates the percentage of DGI's net premiums written
represented by commercial lines and by personal lines for the years ended
December 31, 1999, 1998 and 1997:
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Year Ended December 31,
--------------------------
1999 1998 1997
---- ---- ----
Net Premiums Written:
Commercial................................ 35.6% 38.2% 41.0%
Personal.................................. 64.4% 61.8% 59.0%
The commercial lines consist primarily of automobile, multi-peril and
workers' compensation insurance. The personal lines consist primarily of
automobile and homeowners insurance. These types of insurance are described in
greater detail below:
Commercial
o Commercial automobile -- policies that provide protection against
liability for bodily injury and property damage arising from
automobile accidents, and provide protection against loss from damage
to automobiles owned by the insured.
o Workers' compensation -- policies purchased by employers to provide
benefits to employees for injuries sustained during employment. The
extent of coverage is established by the workers' compensation laws of
each state.
o Commercial multi-peril -- policies that provide protection to
businesses against many perils, usually combining liability and
physical damage coverages.
Personal
o Private passenger automobile -- policies that provide protection
against liability for bodily injury and property damage arising from
automobile accidents, and provide protection against loss from damage
to automobiles owned by the insured.
o Homeowners -- policies that provide coverage for damage to residences
and their contents from a broad range of perils, including, fire,
lightning, windstorm and theft. These policies also cover liability
of the insured arising from injury to other persons or their property
while on the insured's property and under other specified conditions.
The following table sets forth the combined ratios of DGI, prepared in
accordance with generally accepted accounting principles and statutory
accounting principles prescribed or permitted by state insurance authorities.
The combined ratio is a traditional measure of underwriting profitability. When
the combined ratio is under 100%, underwriting results are generally considered
profitable. Conversely, when the combined ratio is over 100%, underwriting
results are generally considered unprofitable. The combined ratio does not
reflect investment income, federal income taxes or other non-operating income or
expense. DGI's operating income depends on income from both underwriting
operations and investments. DGI's combined ratio
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for 1999 was adversely impacted by restructuring charges of approximately
$681,000 incurred in the third quarter of 1999.
Year Ended December 31,
------------------------------
1999 1998 1997
----- ----- -----
GAAP combined ratio........................... 106.5% 99.8% 97.6%
Statutory operating ratios:
Loss ratio................................. 68.8 64.0 64.0
Expense ratio.............................. 37.1 35.4 34.0
Dividend ratio............................. 0.9 1.4 1.2
-- --
Statutory combined ratio...................... 106.8% 100.8% 99.2%
===== ===== =====
Industry statutory combined ratio(1).......... 107.5% 105.6% 101.6%
===== ===== =====
- ----------
(1) Source: A.M. Best Co.
DGI is required to participate in involuntary insurance programs for
automobile insurance, as well as other property and casualty insurance lines, in
states in which DGI operates. These programs include joint underwriting
associations, assigned risk plans, fair access to insurance requirements
("FAIR") plans, reinsurance facilities and windstorm plans. Legislation
establishing these programs requires all companies that write lines covered by
these programs to provide coverage (either directly or through reinsurance) for
insureds who cannot obtain insurance in the voluntary market. The legislation
creating these programs usually allocates a pro rata portion of risks
attributable to such insureds to each company on the basis of direct premiums
written or the number of automobiles insured. Generally, state law requires
participation in such programs as a condition to doing business. The loss ratio
on insurance written under involuntary programs has traditionally been greater
than the loss ratio on insurance in the voluntary market. During 1998 and 1999,
the Company received assessments totaling $1.3 million and $726,000,
respectively, from the Pennsylvania Insurance Guaranty Association relating to
the insolvency of two medical malpractice insurers. The impact of these
involuntary programs on DGI were not material during 1997.
The following table sets forth the net premiums written and combined ratios
by line of insurance for the business of DGI, prepared in accordance with
statutory accounting practices prescribed or permitted by state insurance
authorities, for the periods indicated.
Year Ended December 31,
---------------------------------------
1999 1998 1997
------- ------- -------
(dollars in thousands)
Net Premiums Written:
Commercial:
Automobile ................... $12,608 $11,120 $10,522
Workers' compensation ........ 17,519 15,446 15,590
Commercial multi-peril ....... 18,872 17,046 16,357
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Year Ended December 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
(dollars in thousands)
Other ........................ 1,433 1,473 1,612
-------- -------- --------
Total commercial ........... 50,432 45,085 44,081
-------- -------- --------
Personal:
Automobile ................... 60,716 46,609 38,989
Homeowners ................... 25,573 21,737 19,939
Other ........................ 5,135 4,724 4,597
-------- -------- --------
Total personal ............. 91,424 73,070 63,525
-------- -------- --------
Total business ................. $141,856 $118,155 $107,606
======== ======== ========
Statutory Combined Ratios:
Commercial:
Automobile ................... 113.8% 118.2% 89.9%
Workers' compensation ........ 96.7 80.4 89.5
Commercial multi-peril ....... 95.7 85.6 103.0
Other ........................ 80.6 71.1 57.7
-------- -------- --------
Total commercial ........... 100.0 91.3 93.5
-------- -------- --------
Personal:
Automobile ................... 106.8 104.2 98.7
Homeowners ................... 123.9 115.7 116.4
Other ........................ 87.1 91.2 87.6
-------- -------- --------
Total personal ............. 110.6 106.7 103.4
-------- -------- --------
Total business ................. 106.8% 100.8% 99.2%
======== ======== ========
Property and Casualty Underwriting
The underwriting department is responsible for the establishment of
underwriting and risk selection guidelines and criteria for the various
insurance products written by DGI. The underwriting department, in conjunction
with the marketing representatives, works closely with DGI's independent agents
to insure a comprehensive knowledge on the part of the agents of DGI's
underwriting requirements and risk selection process.
DGI's underwriting and pricing strategy is designed to produce an
underwriting profit resulting in a Company-wide combined ratio below 100%. DGI
and the Mutual Company have a conservative underwriting philosophy, which, in
the opinion of management, is one of the prime reasons for DGI's favorable loss
ratios relative to the property and casualty insurance industry over the last
five years, with the exception of 1999, when DGI's loss ratio was adversely
impacted by restructuring charges.
The underwriting department has over time initiated risk inspection
procedures and underwriting analyses on a per risk and class of business basis.
It has also automated
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underwriting processing utilizing technology such as bar coding. Management has
established monitoring and auditing processes to verify compliance with
underwriting requirements and procedures.
The underwriting department and the research and development department are
responsible for the development of new insurance products and enhancements of
existing products. Underwriting profitability is enhanced by the creation of
niche products focused on classes of business which traditionally have provided
underwriting profits.
Marketing
DGI's insurance products, together with the products of the Mutual Company
and their respective subsidiaries, are marketed through approximately 3,300
independent insurance agents associated with approximately 1,200 insurance
agencies. Business is written by either DGI or the Mutual Company depending upon
geographic location, agency license and product. Management has developed an
agency appointment procedure that focuses on appointing agencies with proven
marketing strategies for the development of profitable business. DGI regularly
evaluates its agency force and continues to strive to obtain and retain a
significant position within each agency relative to the amount of business
similar to that of DGI placed by the agency with other insurers. DGI and the
Mutual Company have developed a successful contingent commission plan for agents
under which additional commissions are payable based upon the volume of premiums
produced and the profitability of the business of the agency written by DGI and
the Mutual Company. Management believes the contingent commission program and
the Company's Agency Stock Purchase Plan have enhanced the ability of DGI and
the Mutual Company to write profitable business.
DGI has granted certain agents the authority to bind insurance within
underwriting and pricing limits specified by DGI without the prior approval of
DGI. However, DGI generally reviews all coverages placed by its agents and,
subject to applicable insurance regulations, may cancel the coverage if it is
inconsistent with DGI's guidelines.
DGI believes that its regional structure enables it to compete effectively
with large national companies. This regional structure permits DGI to take
advantage of its knowledge of local operating territories and the opportunity to
form strong, long-term relationships with the agents that represent DGI and the
Mutual Company.
DGI and the Mutual Company have developed comprehensive growth strategies
for each of the commercial and personal lines of insurance business. DGI has
focused on the small-to medium-sized commercial insurance markets, which have
traditionally been a more stable and profitable segment of the property and
casualty insurance business than the large commercial insurance markets, which
have become increasingly competitive in the past several years. Commercial lines
marketing is characterized by account selling, in which multiple lines of
insurance are offered to a single policyholder.
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DGI believes that competitive and comprehensive products targeted to
selected classes of personal lines business, along with excellent service to
agents and policyholders, provides a foundation for growth and profitability. As
is customary in the industry, insureds are encouraged to place both their
homeowners and personal automobile insurance with DGI or the Mutual Company and
are offered a discount for doing so.
Claims
The claims department develops and implements policies and procedures for
the establishment of claim reserves and the timely resolution and payment of
claims. The management and staff of the claims department resolve policy
coverage issues, manage and process reinsurance recoveries and handle salvage
and subrogation matters.
Insurance claims are normally investigated and adjusted by internal claims
adjusters and supervisory personnel. Independent adjusters are employed as
needed to handle claims in territories in which the volume of claims is not
sufficient to justify hiring internal claims adjusters. The litigation and
personal injury sections manage all claims litigation, and all claims above
$25,000 require home office review and settlement authorization.
Field office staffs are supported by home office technical, litigation,
material damage, subrogation and medical audit personnel who provide specialized
claims support. An investigative unit attempts to prevent fraud and abuse and to
control losses.
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.
DGI 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
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are recomputed periodically by the Company and the Mutual Company using new
information on reported claims and a variety of statistical techniques.
Liabilities for losses are not discounted.
The establishment of appropriate liabilities is an inherently uncertain
process, and there can be no assurance that the ultimate liability will not
exceed DGI's loss and loss expense reserves and have an adverse effect on DGI's
results of operations and financial condition. As is the case for virtually all
property and casualty insurance companies, DGI has found it necessary in the
past to revise estimated future liabilities for losses and loss expenses in
non-material amounts, and further adjustments could be required in the future.
However, on the basis of DGI's internal procedures, which analyze, among other
things, DGI'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 DGI believes that adequate provision has been made for DGI's
liability for losses and loss expenses.
Differences between liabilities reported in DGI's financial statements
prepared on the basis of generally accepted accounting principles ("GAAP") and
financial statements prepared on a statutory accounting basis result from
reducing statutory liabilities for anticipated salvage and subrogation
recoveries. These differences amounted to $7,736,942, $7,963,559 and $6,155,467
at December 31, 1999, 1998 and 1997, respectively.
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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 the Company.
Year Ended December 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
Net liability for unpaid losses
and loss expenses at
beginning of year ................. $ 93,863 $ 77,474 $ 75,428
Net liabilities of acquired company.. -- 14,967 --
-------- -------- --------
Net beginning balance as adjusted ... $ 93,863 $ 92,441 $ 75,428
Provision for net losses and
loss expenses for claims
incurred in the current year ...... 99,659 75,463 69,040
Decrease in provision for estimated
net losses and loss expenses for
claims incurred in prior years .... (454) (2,296) (1,384)
-------- -------- --------
Total incurred ...................... 99,205 73,167 67,656
Net losses and loss payments
for claims incurred during:
The current year .................... 58,906 44,389 39,133
Prior years ......................... 36,668 27,356 26,477
-------- -------- --------
Total paid .......................... 95,574 71,745 65,610
Net liability for unpaid losses
and loss expenses at
end of year ....................... $ 97,494 $ 93,863 $ 77,474
======== ======== ========
The following table sets forth the development of the liability for net
unpaid losses and loss expenses for DGI on a GAAP basis from 1989 to 1999, with
supplemental loss data for 1999 and 1998.
"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 "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
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the severity of the remaining unpaid claims. For example, the 1990 liability has
developed an excess after nine years, in that reestimated net losses and loss
expenses are expected to be $2.8 million less than the estimated liability
initially established in 1990 of $31.9 million.
The "Cumulative excess" shows the cumulative excess at December 31, 1999 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 would mean 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
1990 column indicates that as of December 31, 1999 payments equal to $28.9
million of the currently reestimated ultimate liability for net losses and loss
expenses of $29.1 million had been made.
-13-
Year Ended December 31
----------------------------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
------- ------- ------- ------- ------- ------- -------- ------- ------- ------- ------
(in thousands)
Net liability at end of
year for unpaid losses
and loss expenses...... $27,767 $31,898 $36,194 $44,339 $52,790 $63,317 $ 71,155 $75,428 $77,474 $93,863 $97,494
Net liability
reestimated as of:...
One year later...... 29,175 32,923 37,514 45,408 50,583 60,227 68,348 74,044 75,178 93,409
Two years later..... 28,861 33,550 37,765 42,752 48,132 56,656 66,520 70,545 74,269
Three years later... 28,545 32,803 35,446 40,693 44,956 54,571 63,187 68,788
Four years later.... 27,717 31,004 33,931 38,375 42,157 51,825 60,457
Five years later.... 26,759 30,041 32,907 37,096 41,050 50,493
Six years later..... 26,180 29,595 32,234 36,682 40,572
Seven years later... 25,971 29,417 31,976 36,730
Eight years later... 25,828 29,175 31,685
Nine years later.... 25,904 29,058
Ten years later..... 25,856
Cumulative excess....... $(1,911) $(2,840) $(4,509) $(7,609) $(12,218) $(12,824) $(10,698)* $(6,640) $(3,205) $ (454)
======= ======= ======= ======= ======== ======== ======== ======= ======= ======
Cumulative amount of
liability paid through:
One year later....... $11,401 $13,003 $13,519 $16,579 $16,126 $19,401 $23,479 $26,477 $27,356 $36,668
Two years later...... 17,421 19,795 20,942 24,546 25,393 30,354 37,078 40,384 46,143
Three years later.... 20,986 24,178 25,308 29,385 32,079 38,684 45,796 52,071
Four years later..... 23,268 26,413 27,826 32,925 36,726 43,655 51,771
Five years later..... 24,331 27,439 29,605 34,757 39,122 46,331
Six years later...... 24,909 28,157 30,719 35,739 40,440
Seven years later.... 25,280 28,627 31,173 36,518
Eight years later.... 25,599 28,841 31,412
Nine years later..... 25,695 28,948
Ten years later...... 25,753
Year Ended December 31
-------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998 1999
------- ------- ------- ------- -------- -------- -------- --------
(in thousands)
Gross liability at end of year......... $57,777 $70,093 $88,484 $98,894 $114,622 $118,112 $141,409 $149,979
Reinsurance recoverable................ 13,438 17,303 25,167 27,739 39,194 40,638 47,546 52,485
Net liability at end of year........... 44,339 52,790 63,317 71,155 75,428 77,474 93,863 97,494
Gross reestimated liability -- latest.. 58,615 56,519 74,406 85,727 107,600 115,187 135,464
Reestimated recoverable -- latest...... 21,885 15,947 23,913 25,270 38,812 40,918 42,055
Net reestimated liability -- latest.... 36,730 40,572 50,493 60,457 68,788 74,269 93,409
Gross cumulative deficiency (excess)... 838 (13,574) (14,078) (13,167) (7,022) (2,925) (5,945)
-14-
Reinsurance
DGI and the Mutual Company use several different reinsurers, all of which
have a Best rating of A- or better or, with respect to foreign reinsurers, have
a financial condition which, in the opinion of management, is equivalent to a
company with at least an A-rating.
The external reinsurance purchased by DGI and the Mutual Company includes
"excess treaty reinsurance," under which losses are automatically reinsured over
a set retention ($250,000 for 1999), and "catastrophic reinsurance," under which
the reinsured recovers 95% of an accumulation of many losses resulting from a
single event, including natural disasters (for 1999, $3,000,000 retention).
DGI's principal reinsurance agreement in 1999, other than that with the Mutual
Company, was an excess of loss treaty in which the reinsurers were Continental
Casualty Company, Dorinco Reinsurance Company and Swiss Re America. Reinsurance
is also purchased on an individual policy basis to reinsure losses that may
occur from large risks, specific risk types or specific locations. The amount of
coverage provided under each of these types of reinsurance depends upon the
amount, nature, size and location of the risk being reinsured. For property
insurance, excess of loss treaties provide for coverage up to $1,000,000. For
liability insurance, excess of loss treaties provide for coverage up to
$30,000,000. Property catastrophe contracts provide coverage up to $70,000,000
resulting from one event. On both property and casualty insurance, DGI and the
Mutual Company purchase facultative reinsurance to cover exposures from losses
that exceed the limits provided by their respective treaty reinsurance. Atlantic
States cedes to the Mutual Company all of its insurance business and assumes
from the Mutual Company 65% of the Mutual Company's total pooled insurance
business, including that assumed from Atlantic States and substantially all of
the business assumed and retained by the Mutual Company from Southern and
Delaware Atlantic. Atlantic States, Southern, Delaware Atlantic, Pioneer 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 and $400,000, respectively, and
$700,000 for a catastrophe involving more than one of the companies. The Mutual
Company and Delaware Atlantic 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 a workers' compensation quota share agreement whereby Delaware Atlantic
cedes 70% of that business. The Mutual Company and Pioneer 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 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 and a quota share agreement whereby Southern cedes
50% of its direct business less certain reinsurance to the Mutual Company.
Southern, Delaware Atlantic, Pioneer and Southern Heritage each have
retrocessional reinsurance agreements with the Mutual Company, under which they
cede, and then assume back, 100% of their business net of other reinsurance.
-15-
Competition
The property and casualty insurance industry is highly competitive on the
basis of both price and service. There are numerous companies competing for this
business in the geographic areas where the Company operates, many of which are
substantially larger and have greater financial resources than DGI, and no
single company dominates. In addition, because the insurance products of DGI and
the Mutual Company are marketed exclusively through independent insurance
agencies, most of which represent more than one company, DGI faces competition
to retain qualified independent agencies, as well as competition within
agencies.
Investments
DGI's return on invested assets is an important element of its financial
results. Currently, the investment objective is to maintain a widely diversified
fixed maturities portfolio structured to maximize after-tax investment income
while minimizing credit risk through investments in high quality instruments. At
December 31, 1999, all debt securities were rated investment grade with the
exception of three unrated obligations of $878,000, and the investment portfolio
did not contain any mortgage loans or any non-performing assets.
The following table shows the composition of the debt securities investment
portfolio (at carrying value), excluding short-term investments, by rating as of
December 31, 1999:
December 31, 1999
--------------------------
Rating(1) Amount Percent
- --------- -------- -------
(dollars in thousands)
U.S. Treasury and U.S. agency securities(2)..... $111,574 47.3%
Aaa or AAA...................................... 66,696 28.2
Aa or AA........................................ 34,550 14.6
A............................................... 22,275 9.4
BBB............................................. 245 0.1
Not rated(3).................................... 878 0.4
-------- ----
Total...................................... $236,218 100%
======== ====
-16-
- ----------
(1) Ratings assigned by Moody's Investors Services, Inc. or Standard & Poor's
Corporation.
(2) Includes mortgage-backed securities of $18.7 million.
(3) Represents one unrated obligation of The Lancaster County Hospital
Authority Mennonite Home Project, one unrated obligation of Lakewood,
Colorado and one unrated obligation of the Indianapolis, Indiana Economic
Development Authority, all of which management of DGI believes to be
equivalent to investment grade securities with respect to repayment risk.
DGI invests in both taxable and tax-exempt securities as part of its
strategy to maximize after-tax income. Such strategy considers, among other
factors, the alternative minimum tax. Tax-exempt securities made up
approximately 37.3%, 34.1% and 34.3% of the total investment portfolio at
December 31, 1999, 1998 and 1997, respectively.
-17-
The following table shows the classification of the investments (at
carrying value) of DGI and its subsidiaries at December 31, 1999, 1998 and 1997.
December 31,
--------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- -----------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
-------- ------- -------- ------- -------- -----
(dollars in thousands)
Fixed maturities(1):
Held to maturity:
U.S. Treasury securities
and obligations of U.S.
government corporations and agencies $ 36,861 14.1% $ 32,891 12.9% $ 41,450 20.2%
Canadian government obligation ....... 498 0.2 -- -- -- --
Obligations of states and
political subdivisions ............... 67,824 25.9 66,941 26.2 57,621 28.1
Corporate securities ................. 15,819 6.1 9,131 3.6 7,250 3.5
Mortgage-backed securities ........... 15,172 5.8 18,221 7.1 10,925 5.4
-------- ----- -------- ----- -------- -----
Total held to maturity ............... 136,174 52.1 127,184 49.8 117,246 57.2
-------- ----- -------- ----- -------- -----
Available for sale:
U.S. treasury securities and
obligations of U.S. government
corporations and agencies ............ 61,205 23.4 55,439 21.8 40,197 19.6
Obligations of states and political
subdivisions ......................... 20,223 7.7 19,957 7.8 12,762 6.2
Corporate securities ................. 15,053 5.8 10,787 4.2 3,252 1.6
Mortgage-backed securities ........... 3,563 1.4 4,342 1.7 1,520 0.8
-------- ----- -------- ----- -------- -----
Total available for sale ............. 100,044 38.3 90,525 35.5 57,731 28.2
-------- ----- -------- ----- -------- -----
Total fixed maturities ............... 236,218 90.4 217,709 85.3 174,977 85.4
Equity securities(2) ................. 9,229 3.5 6,764 2.7 7,275 3.5
Short-term investments(3) ............ 15,995 6.1 30,522 12.0 22,713 11.1
-------- ----- -------- ----- -------- -----
Total investments .................... $261,442 100.0% $254,995 100.0% $204,965 100.0%
======== ===== ======== ===== ======== =====
-18-
- ----------
(1) The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting For Certain
Investments in Debt and Equity Securities." See Notes 1 and 4 to the
Consolidated Financial Statements incorporated by reference herein. Fixed
maturities held to maturity are valued at amortized cost; those fixed
maturities available for sale are valued at fair value. Total fair value of
fixed maturities held to maturity was $133,995,994 at December 31, 1999,
$131,633,299 at December 31, 1998 and $120,882,886 at December 31, 1997.
The amortized cost of fixed maturities available for sale was $103,419,994
at December 31, 1999, $89,089,995 at December 31, 1998 and $56,922,342 at
December 31, 1997.
(2) Equity securities are valued at fair value. Total cost of equity securities
was $9,043,818 at December 31, 1999, $6,206,735 at December 31, 1998 and
$6,551,020 at December 31, 1997.
(3) Short-term investments are valued at cost, which approximates market.
The following table sets forth the maturities (at carrying value) in the
fixed maturity and short-term investment portfolio at December 31, 1999,
December 31, 1998 and December 31, 1997.
December 31,
-----------------------------------------------------------------------
1999 1998 1997
--------------------- -------------------- ---------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
-------- ------- -------- ------- -------- -------
(dollars in thousands)
Due in:(1)
One year or less ................... $ 34,007 13.5% $ 47,760 19.2% $ 36,013 18.2%
Over one year through three years .. 27,107 10.8 31,964 12.9 30,910 15.6
Over three years through five years 30,878 12.2 23,139 9.3 20,303 10.3
Over five years through ten years .. 104,883 41.6 78,061 31.4 65,122 32.9
Over ten years through fifteen years 30,478 12.1 37,940 15.3 32,384 16.4
Over fifteen years ................. 6,125 2.4 6,805 2.8 513 0.3
Mortgage-backed securities ......... 18,735 7.4 22,563 9.1 12,445 6.3
-------- ----- -------- ----- -------- -----
$252,213 100.0% $248,232 100.0% $197,690 100.0%
======== ===== ======== ===== ======== =====
-19-
- ----------
(1) Based on stated maturity dates with no prepayment assumptions. Actual
maturities will differ because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
As shown above, the Company held investments in mortgage-backed securities
having a carrying value of $18.7 million at December 31, 1999. Included in these
investments are collateralized mortgage obligations ("CMOs") with a carrying
value of $18.6 million at December 31, 1999. The Company has attempted to reduce
the prepayment risks associated with mortgage-backed securities by investing
approximately 99%, as of December 31, 1999, of the Company's holdings of CMOs in
planned amortization and very accurately defined tranches. Such investments are
designed to alleviate the risk of prepayment by providing predictable principal
prepayment schedules within a designated range of prepayments. If principal is
repaid earlier than originally anticipated, investment yields may decrease due
to reinvestment of the proceeds at current interest rates (which may be lower)
and capital gains or losses may be realized since the book value of securities
purchased at premiums or discounts may be different from the prepayment amount.
Investment results of DGI and its subsidiaries for the years ended December
31, 1999, 1998 and 1997 are shown in the following table:
Year Ended December 31,
------------------------------------------
1999 1998 1997
-------- -------- --------
(dollars in thousands)
Invested assets(1) .......... $264,293 $208,304 $202,283
Investment income(2) ........ 13,224 11,998 11,507
Average yield ............... 5.0% 5.6% 5.7%
- ----------
(1) Average of the aggregate invested amounts at the beginning and end of the
period, including cash.
(2) Investment income is net of investment expenses and does not include
realized investment gains or losses or provision for income taxes.
A.M. Best Rating
In 1999, the A.M. Best rating of the Mutual Company, Atlantic States,
Southern, Delaware Atlantic and Pioneer was "A", based upon their respective
current financial conditions and historical statutory results of operations.
Southern Heritage, which DGI acquired in November 1998, currently has a Best
rating of B++. Management believes that this Best rating is an important factor
in marketing DGI's products to its agents and customers. Best's ratings are
industry ratings based on a comparative analysis of the financial condition and
operating performance of insurance companies as determined by their publicly
available reports. Best's classifications are A++ and A+ (Superior), A and A-
(Excellent), B++ and B+ (Very Good), B and B- (Good), C++ and C+ (Fair), C and
C- (Marginal), D (below minimum standards) and E and F (Liquidation). Best's
ratings are based upon factors relevant to policyholders and are not directed
toward the protection of investors. According to Best, an "excellent" rating is
assigned
-20-
to those companies which, in Best's opinion, have achieved excellent overall
performance when compared to the norms of the property and casualty insurance
industry and have generally demonstrated a strong ability to meet policyholder
and other contractual obligations.
Regulation
Insurance companies are subject to supervision and regulation in the states
in which they transact business. Such supervision and regulation relates to
numerous aspects of an insurance company's business and financial condition. The
primary purpose of such supervision and regulation is the protection of
policyholders. The extent of such regulation varies, but generally derives from
state statutes which delegate regulatory, supervisory and administrative
authority to state insurance departments. Accordingly, the authority of the
state insurance departments includes the establishment of standards of solvency
that must be met and maintained by insurers, the licensing to do business of
insurers and agents, the nature of and limitations on investments, premium rates
for property and casualty insurance, the provisions which insurers must make for
current losses and future liabilities, the deposit of securities for the benefit
of policyholders, the approval of policy forms, notice requirements for the
cancellation of policies and the approval of certain changes in control. State
insurance departments also conduct periodic examinations of the affairs of
insurance companies and require the filing of annual and other reports relating
to the financial condition of insurance companies.
In addition to state-imposed insurance laws and regulations, in December
1993 the National Association of Insurance Commissioners (the "NAIC") adopted a
risk-based capital system for assessing the adequacy of statutory capital and
surplus which augments the states' current fixed dollar minimum capital
requirements for insurance companies. At December 31, 1999, DGI's insurance
subsidiaries and the Mutual Company each exceeded the required levels of
capital. There can be no assurance that the capital requirements applicable to
DGI's insurance subsidiaries will not increase in the future.
The states in which Atlantic States (Pennsylvania, Maryland and Delaware),
the Mutual Company (Pennsylvania, Ohio, Maryland, New York, Virginia, Delaware
and North Carolina), Southern (Virginia and Pennsylvania), Delaware Atlantic
(Delaware, Maryland and Pennsylvania), Pioneer (Ohio and Pennsylvania) and
Southern Heritage (Alabama, Arkansas, Florida, Georgia, Illinois, Kentucky,
Louisiana, Mississippi, North Carolina, South Carolina, Tennessee and Virginia)
do business have guaranty fund laws under which insurers doing business in such
states can be assessed on the basis of premiums written by the insurer in that
state in order to fund policyholder liabilities of insolvent insurance
companies. Under these laws in general, an insurer is subject to assessment,
depending upon its market share of a given line of business, to assist in the
payment of policyholder claims against insolvent insurers. The Mutual Company,
Atlantic States, Southern, Delaware Atlantic, Pioneer and Southern Heritage have
made accruals for their portion of assessments related to such insolvencies
based upon the most current information furnished by the guaranty associations.
During 1998 and 1999, the Company received assessments totalling $1.3 million
and $726,000, respectively, from the Pennsylvania Insurance Guaranty Association
relating to the insolvency of two medical malpractice insurers. The impact of
these involuntary programs on DGI was not material during 1997.
Most states have enacted legislation that regulates insurance holding
company systems. Each insurance company in the holding company system is
required to register with the insurance supervisory agency of its state of
domicile and furnish information concerning the
-21-
operations of companies within the holding company system that may materially
affect the operations, management or financial condition of the insurers within
the system. Pursuant to these laws, the respective insurance departments may
examine the Mutual Company, the Company and their respective insurance
subsidiaries at any time, require disclosure of material transactions by the
holding company and require prior notice or prior approval of certain
transactions, such as "extraordinary dividends" from the insurance subsidiaries
to the holding company.
All transactions within the holding company system affecting the Mutual
Company and the Company's insurance subsidiaries must be fair and equitable.
Approval of the applicable insurance commissioner is required prior to
consummation of transactions affecting the control of an insurer. In some
states, including Pennsylvania, the acquisition of 10% or more of the
outstanding capital stock of an insurer or its holding company is presumed to be
a change in control. Pursuant to an order issued in October 1998, the
Pennsylvania Insurance Department has approved the Mutual Company's ownership of
up to 65% of the outstanding Common Stock of DGI. These laws also require notice
to the applicable insurance commissioner of certain material transactions
between an insurer and any person in its holding company system and, in some
states, certain of such transactions cannot be consummated without the prior
approval of the applicable insurance commissioner.
The Company's insurance subsidiaries are restricted by the insurance laws
of their respective states of domicile as to the amount of dividends or other
distributions they may pay to the Company without the prior approval of the
respective state regulatory authorities. Generally, the maximum amount that may
be paid by an insurance subsidiary during any year after notice to, but without
prior approval of, the insurance commissioners of these states is limited to a
stated percentage of that subsidiary's statutory capital and surplus as of a
certain date, or the net income or net investment income not including realized
capital gains of the subsidiary for the preceding year. As of December 31, 1999,
amounts available for payment of dividends in 2000 without the prior approval of
the various insurance commissioners were $6,851,802 from Atlantic States,
$184,285 from Southern, $956,381 from Delaware Atlantic, $567,793 from Pioneer
and $1,650,842 from Southern Heritage. See Note 12 to the Consolidated Financial
Statements incorporated by reference herein.
The 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. Various state laws
and regulations of the Company's insurance subsidiaries' respective states of
domicile may need to be amended for the codified principles to become effective.
The effect of the codified principles on the statutory financial statements of
the Company's insurance subsidiaries has not yet been determined.
The Mutual Company
The Mutual Company, which was organized in 1889, has a Best rating of A
(Excellent). At December 31, 1999, the Mutual Company had admitted assets of
$148,080,589 and policyholders' surplus of $61,409,896. At December 31, 1999,
the Mutual Company had no debt and, of its total liabilities of $86,670,693,
reserves for net losses and loss expenses accounted for $47,087,250 and unearned
premiums accounted for $24,921,293. Of the Mutual Company's investment portfolio
of $101,491,262 at December 31, 1999, investment-grade bonds accounted
-22-
for $38,581,727, cash and short-term investments accounted for $(546,117) and
mortgages accounted for $9,276,319. At December 31, 1999, the Mutual Company
owned 5,252,326 shares of the Company's Common Stock, which were carried on the
Mutual Company's books at $43,909,448. The foregoing financial information is
presented on the statutory basis of accounting.
Employees
As of December 31, 1999, the Mutual Company had 376 employees. The Mutual
Company's employees provide a variety of services to DGI, Atlantic States,
Delaware Atlantic, Southern and Pioneer, as well as to the Mutual Company and
its subsidiaries. As of December 31, 1999, Southern Heritage had 27 employees.
Item 2. Properties.
- ------ -----------
DGI and Delaware Atlantic share headquarters with the Mutual Company's
headquarters in a building owned by the Mutual Company. The Mutual Company
charges DGI for an appropriate portion of the building expenses under an
intercompany allocation agreement which is consistent with the terms of the
pooling agreement. The headquarters of the Mutual Company has approximately
163,500 square feet of office space. Southern has a facility of approximately
10,000 square feet in Glen Allen, Virginia, which it owns. Pioneer has a
facility of approximately 10,000 square feet in Greenville, Ohio, which it owns.
Southern Heritage has a facility of approximately 14,000 square feet in Duluth,
Georgia, which it leases.
Item 3. Legal Proceedings.
- ------- ------------------
DGI is a party to numerous lawsuits arising in the ordinary course of its
insurance business. DGI believes that the resolution of these lawsuits will not
have a material adverse effect on its financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ---------------------------------------------------
No matter was submitted to a vote of holders of the Company's Common Stock
during the fourth quarter of 1999.
Executive Officers of the Company
- ---------------------------------
Name Age Position
---- --- --------
Donald H. Nikolaus 57 President and Chief Executive Officer since 1981
Ralph G. Spontak 47 Senior Vice President since 1991; Chief
Financial Officer and Vice President since
1983; Secretary since 1988
Cyril J. Greenya 55 Senior Vice President - Commercial
Underwriting since 1997; Vice President -
Commercial Underwriting for five years prior
thereto; Manager - Commercial Underwriting
for nine years prior thereto
-23-
Frank J. Wood 66 Senior Vice President - Marketing since 1997;
Vice President - Marketing for nine years
prior thereto; Manager - Marketing for one
year prior thereto
James B. Price 64 Senior Vice President - Claims since 1997;
Vice President - Claims for 25 years prior
thereto
Robert G. Shenk 47 Senior Vice President - Claims since 1997;
Vice President - Claims for five years prior
thereto
William H. Shupert 73 Senior Vice President - Underwriting since
1991; Vice President - Underwriting for 18
years prior thereto
Daniel J. Wagner 39 Treasurer since 1993; Controller for five
years prior thereto
-24-
PART II
Item 5. Market for the Registrant's Common Equity and Related
- ------- -----------------------------------------------------
Stockholder Matters.
--------------------
The response to this Item is incorporated in part by reference to page 31
of the Company's Annual Report to Stockholders for the year ended December 31,
1999, which is included as Exhibit (13) to this Form 10-K Report. As of March
15, 2000, the Company had approximately 622 holders of record of its Common
Stock. The Company declared dividends of $.36 per share in 1999 and $.3375 per
share in 1998.
Item 6. Selected Financial Data.
- ------- -----------------------
The response to this Item is incorporated by reference to page 29 of the
Company's Annual Report to Stockholders for the year ended December 31, 1999,
which is included as Exhibit (13) to this Form 10-K Report.
Item 7. Management's Discussion and Analysis of Financial
- ------- -------------------------------------------------
Condition and Results of Operations.
------------------------------------
The response to this Item is incorporated by reference to pages 10 through
12 of the Company's Annual Report to Stockholders for the year ended December
31, 1999, which is included as Exhibit (13) to this Form 10-K Report.
Item 8. Financial Statements and Supplementary Data.
- ------- --------------------------------------------
The response to this Item is incorporated by reference to
pages 13 through 28 of the Company's Annual Report to Stockholders for the year
ended December 31, 1999, which is included as Exhibit (13) to this Form 10-K
Report.
Item 9. Changes in and Disagreements with Accountants on
- ------- ------------------------------------------------
Accounting and Financial Disclosure.
------------------------------------
None.
-25-
PART III
Item 10. Directors and Executive Officers of the Registrant.
- -------- ---------------------------------------------------
The response to this Item with respect to the Company's directors is
incorporated by reference to pages 8 through 10 of the Company's proxy statement
relating to the Company's annual meeting of stockholders to be held April 20,
2000. The response to this Item with respect to the Company's executive officers
is incorporated by reference to Part I of this Form 10-K Report.
Item 11. Executive Compensation.
- -------- -----------------------
The response to this Item is incorporated by reference to
pages 11 through 14 of the Company's proxy statement relating to the Company's
annual meeting of stockholders to be held April 20, 2000, except for the
Compensation Committee Report and the Performance Graph, which are not
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------- ---------------------------------------------------------------
The response to this Item is incorporated by reference to pages 3 through 5
of the Company's proxy statement relating to the Company's annual meeting of
stockholders to be held April 20, 2000.
Item 13. Certain Relationships and Related Transactions.
- -------- -----------------------------------------------
The response to this Item is incorporated by reference to pages 3 through 7
and page 16 of the Company's proxy statement relating to the Company's annual
meeting of stockholders to be held April 20, 2000.
-26-
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- -------- ----------------------------------------------------------------
(a) Financial statements, financial statement schedules and exhibits
filed:
(1) Consolidated Financial Statements
Page*
----
Report of Independent Auditors.................................................................... 28
Donegal Group Inc. and Subsidiaries:
Consolidated Balance Sheets as of December 31, 1999 and 1998.................................... 13
Consolidated Statements of Income for the three years ended
December 31, 1999, 1998 and 1997 ............................................................. 14
Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 1999, 1998 and 1997.............................................................. 15
Consolidated Statements of Cash Flows for the three years ended
December 31, 1999, 1998 and 1997.............................................................. 16
Notes to Consolidated Financial Statements....................................................... 17-28
(2) Financial Statement Schedules
Page
----
Donegal Group Inc. and Subsidiaries:
Independent Auditors' Consent and Report on Schedules............................................. Exhibit 23
Schedule I. Summary of Investments - Other than Investments in Related Parties................. 33
Schedule II. Condensed Financial Information of Parent Company.................................. 34
Schedule III. Supplementary Insurance Information................................................ 37
Schedule IV. Reinsurance........................................................................ 39
Schedule VI. Supplemental Insurance Information Concerning Property and Casualty Subsidiaries... 40
All other schedules have been omitted since they are not required, not
applicable or the information is included in the financial statements or notes
thereto.
-27-
- ----------
* Refers to the respective page of Donegal Group Inc.'s 1999 Annual Report to
Stockholders. The Consolidated Financial Statements and Notes to Consolidated
Financial Statements and Auditor's Report thereon on pages 13 through 28 are
incorporated herein by reference. With the exception of the portions of such
Annual Report specifically incorporated by reference in this Item and Items 5,
6, 7 and 8 hereof, such Annual Report shall not be deemed filed as part of this
Form 10-K Report or otherwise subject to the liabilities of Section 18 of the
Securities Exchange Act of 1934.
(3) Exhibits
Exhibit No. Description of Exhibits Reference
- ----------- ----------------------- ---------
(3)(i) Certificate of Incorporation of Registrant, as amended filed herewith
(3)(ii) Amended and Restated By-laws of Registrant (a)
(4) Form of Registrant's Common Stock Certificate (b)
Management Contracts and Compensatory Plans or Arrangements
- -----------------------------------------------------------
(10)(A) Donegal Mutual Insurance Company Money Purchase Pension Plan and (b)
Trust dated March 12, 1985
(10)(B) Donegal Mutual Insurance Company Profit Sharing Plan and Trust (b)
dated March 12, 1985
(10)(C) Donegal Group Inc. Key Executive Incentive Bonus Plan dated (e)
September 29, 1986
(10)(D) Donegal Group Inc. Employee Stock Purchase Plan, as amended (e)
(10)(E) Donegal Group Inc. Equity Incentive Plan, as amended (e)
(10)(F) Donegal Group Inc. Agency Stock Purchase Plan (l)
(10)(G) Donegal Group Inc. Amended and Restated 1996 Equity Incentive (d)
Plan
-28-
(10)(H) Donegal Group Inc. Amended and Restated 1996 Equity Incentive (k)
Plan for Directors
(10)(I) Donegal Group Inc. Executive Restoration Plan (c)
(10)(J) Donegal Mutual Insurance Company 401(k) Plan filed herewith
(10)(K) Amendment No. 1 effective January 1, 2000 to Donegal Mutual filed herewith
Insurance Company 401(k) Plan
Other Material Contracts
(10)(L) Tax Sharing Agreement dated September 29, 1986 between Donegal (b)
Group Inc. and Atlantic States Insurance Company
(10)(M) Services Allocation Agreement dated September 29, 1986 between (b)
Donegal Mutual Insurance Company, Donegal Group Inc. and Atlantic
States Insurance Company
(10)(N) Proportional Reinsurance Agreement dated September 29, 1986 (b)
between Donegal Mutual Insurance Company and Atlantic States
Insurance Company
(10)(O) Amendment dated October 1, 1988 to Proportional Reinsurance (f)
Agreement between Donegal Mutual Insurance Company and Atlantic
States Insurance Company
(10)(P) Multi-Line Excess of Loss Reinsurance Agreement effective January (h)
1, 1993 between 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
-29-
(10)(Q) Amendment dated July 16, 1992 to Proportional Reinsurance (g)
Agreement between Donegal Mutual Insurance Company and Atlantic
States Insurance Company
(10)(R) Amendment dated as of December 21, 1995 to Proportional (i)
Reinsurance Agreement between Donegal Mutual Insurance Company
and Atlantic States Insurance Company
(10)(S) Stock Purchase Agreement dated as of December 21, 1995 between (i)
Donegal Mutual Insurance Company and Donegal Group Inc.
(10)(T) Donegal Group Inc. 1996 Employee Stock Purchase Plan (j)
(10)(U) Reinsurance and Retrocession Agreement dated May 21, 1996 (c)
between Donegal Mutual Insurance Company and Pioneer Insurance
Company
(10)(V) Reinsurance and Retrocession Agreement dated May 21, 1996 (c)
between Donegal Mutual Insurance Company and Delaware American
Insurance Company
(10)(W) Reinsurance and Retrocession Agreement dated May 21, 1996 (c)
between Donegal Mutual Insurance Company and Southern Insurance
Company of Virginia
(10)(X) Reinsurance and Retrocession Agreement effective January 1, 2000 filed herewith
between Donegal Mutual Insurance Company and Southern Heritage
Insurance Company
(10)(Y) Property Catastrophe Excess of Loss Reinsurance Agreement filed herewith
effective January 1, 2000 between Donegal Mutual Insurance
Company and Southern Heritage Insurance Company
(10)(Z) Stock Purchase Agreement dated as of May 14, 1998 between Donegal (m)
Group Inc. and Southern Heritage Limited Partnership
-30-
(10)(AA) Amendment dated November 17, 1998 to Stock Purchase Agreement (m)
dated as of May 14, 1998 between Donegal Group Inc. and Southern
Heritage Limited Partnership
(10)(BB) Amended and Restated Credit Agreement dated as of July 27, 1998 (m)
among Donegal Group Inc., the banks and other financial
institutions from time to time party thereto and Fleet National
Bank, as Agent
(10)(CC) First Amendment and Waiver to the Amended and Restated Credit filed herewith
Agreement dated as of December 31, 1999
(13) 1999 Annual Report to Stockholders (electronic filing contains filed herewith
only those portions incorporated by reference into this
Form 10-K report)
(20) Proxy Statement relating to the Annual Meeting of Stockholders to (n)
be held on April 20, 2000, provided, however, that the
Compensation Committee Report and the Performance Graph shall not
be deemed filed as part of this Form 10-K Report
(21) Subsidiaries of Registrant filed herewith
(23) Consent of Independent Auditors filed herewith
(27) Financial Data Schedule filed herewith
- ----------
(a) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-Q Report for the quarter ended September
30, 1998.
(b) Such exhibit is hereby incorporated by reference to the like-described
exhibits 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,
1996.
(d) 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.
-31-
(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,
1986.
(f) 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.
(g) 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.
(h) 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.
(i) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated December 21, 1995.
(j) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-8 Registration Statement No. 333-1287
filed February 29, 1996.
(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,
1997.
(l) 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.
(m) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated November 17, 1998.
(n) Such exhibit is hereby incorporated by reference to the Registrant's
definitive proxy statement filed March 24, 2000.
(b) Reports on Form 8-K:
None.
-32-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
-----------------------------------------
($ in thousands)
December 31, 1999
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 subdivisions ............................ $104,684 $103,312 $104,684
Canadian government obligation ...................... 498 490 498
All other corporate bonds ........................... 15,819 15,253 15,819
Mortgage-backed securities .......................... 15,173 14,941 15,173
-------- -------- --------
Total fixed maturities held to maturity ............. 136,174 133,996 136,174
-------- -------- --------
Available for sale:
United States government and governmental agencies
and authorities including obligations of states and
political subdivisions ............................ 84,171 81,428 81,428
All other corporate bonds ........................... 15,472 15,053 15,053
Mortgage-backed securities .......................... 3,777 3,563 3,563
-------- --------
Total fixed maturities available for sale ........... 103,420 100,044 100,044
-------- -------- --------
Total fixed maturities .............................. 239,594 234,040 236,218
-------- -------- --------
Equity Securities:
Preferred stocks
Public utilities ................................... 125 115 115
Banks .............................................. 3,959 3,413 3,413
Industrial and miscellaneous ....................... 1,488 1,302 1,302
-------- -------- --------
Total preferred stocks .............................. 5,572 4,830 4,830
-------- -------- --------
Common stocks
Public utilities ................................... 131 63 63
Banks and insurance companies ...................... 733 1,271 1,271
Industrial and miscellaneous ....................... 2,608 3,065 3,065
-------- -------- --------
Total common stocks ................................. 3,472 4,399 4,399
-------- -------- --------
Total equity securities ............................. 9,044 9,229 9,229
-------- -------- --------
Short-term investments .............................. 15,995 15,995 15,995
-------- -------- --------
Total investments ................................... $264,633 $259,264 $261,442
======== ======== ========
-33-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
---------------------------------------------------------------
Condensed Balance Sheets
($ in thousands)
December 31, 1999 and 1998
ASSETS
1999 1998
--------- ---------
Investment in subsidiaries (equity method) $ 138,702 $ 134,441
Cash 371 599
Property and equipment 2,232 2,276
Other 750 2,124
--------- ---------
Total assets $ 142,055 $ 139,440
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
--------- ---------
Cash dividends declared to stockholders $ 761 $ 708
Line of credit 37,000 37,500
Other 879 601
--------- ---------
Total liabilities 38,640 38,809
========= =========
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
8,574,210 and 8,325,221 shares and
outstanding 8,451,922 and 8,202,933 shares 8,574 8,325
Class A Common Stock, $1.00 par value,
authorized 15,000,000 shares, none issued -- --
Additional paid-in capital 43,537 41,271
Accumulated other comprehensive income (loss) (2,074) 1,316
Retained earnings, including equity in
undistributed net income of subsidiaries
(72,539 and 64,922) 54,270 50,611
Treasury stock, at cost (892) (892)
--------- ---------
Total stockholders' equity 103,415 100,631
--------- ---------
Total liabilities and stockholders' equity $ 142,055 $ 139,440
========= =========
-34-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
---------------------------------------------------------------
(Continued)
Condensed Statements of Income
($ in thousands)
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
------- ------- --------
Revenues
Dividends-subsidiary $ 820 $ 1,000 $ 950
Lease income 819 754 643
Investment income 46 22 15
------- ------- --------
Total revenues 1,685 1,776 1,608
Expenses
Operating expenses 938 718 643
Interest 2,463 1,293 1,022
------- ------- --------
Total expenses 3,401 2,011 1,665
------- ------- --------
Loss before income tax
benefit and equity in
undistributed net income of
subsidiaries (1,716) (235) (57)
Income tax benefit (807) (413) (346)
------- ------- --------
Income (loss) before equity in
undistributed net income of
subsidiaries (909) 178 289
Equity in undistributed net
income of subsidiaries 7,566 8,840 10,352
------- ------- --------
Net income $ 6,657 $ 9,018 $ 10,641
======= ======= ========
-35-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED INFORMATION OF PARENT COMPANY
-----------------------------------------------------
Condensed Statements of Cash Flows
($ in thousands)
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net income $ 6,657 $ 9,018 $ 10,641
-------- -------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of
subsidiaries (7,566) (8,840) (10,352)
Other 2,365 (921) 382
-------- -------- --------
Net adjustments (5,201) (9,761) (9,970)
-------- -------- --------
Net cash provided by (used in) operating activities 1,456 (743) 671
-------- -------- --------
Cash flows from investing activities:
Net purchase of property and equipment (426) (564) (1,251)
Capital contribution to subsidiaries -- (2,000) --
Sale of subsidiary 100 -- --
Acquisition of Southern Heritage -- (18,028) --
Other (426) (5,613) 4
-------- -------- --------
Net cash used in investing activities (752) (26,205) (1,247)
-------- -------- --------
Cash flows from financing activities:
Cash dividends paid (2,946) (2,664) (2,252)
Issuance of common stock 2,514 2,481 1,131
Line of credit, net (500) 27,000 2,000
-------- -------- --------
Net cash provided by (used in) financing activities (932) 26,817 879
-------- -------- --------
Net change in cash (228) (131) 303
Cash beginning 599 730 427
-------- -------- --------
Cash ending $ 371 $ 599 $ 730
======== ======== ========
-36-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
--------------------------------------------------
($ in thousands)
Years Ended December 31, 1999, 1998 and 1997
Amortization
Net of Deferred
Net Net Losses Policy Other Net
Earned Investment and Loss Acquisition Underwriting Premiums
Segment Premiums Income Expenses Costs Expenses Written
-------- ---------- -------- ------------ ------------ --------
Year Ended December 31, 1999
- ----------------------------
Personal Lines $ 96,167 $ -- $67,582 $16,448 $ 19,801 $ 91,424
Commercial Lines 47,707 -- 31,623 8,160 8,234 50,432
Investments -- 13,224 -- -- -- --
-------- ------- ------- ------- -------- --------
$143,874 $13,224 $99,205 $24,608 $ 28,035 $141,856
======== ======= ======= ======= ======== ========
Year Ended December 31, 1998
- ----------------------------
Personal Lines $ 71,676 $ -- $49,141 $12,614 $ 14,052 $ 73,070
Commercial Lines 44,493 -- 24,026 6,876 7,660 45,084
Investments -- 11,998 -- -- -- --
-------- ------- ------- ------- -------- --------
$116,169 $11,998 $73,167 $19,490 $ 21,712 $118,154
======== ======= ======= ======= ======== ========
Year Ended December 31, 1997
- ----------------------------
Personal Lines $ 61,600 $ -- $41,074 $11,578 $ 10,564 $ 63,525
Commercial Lines 45,702 -- 26,583 7,118 6,495 44,081
Investments -- 11,507 -- -- -- --
-------- ------- ------- ------- -------- --------
$107,302 $11,507 $67,657 $18,696 $ 17,059 $107,606
======== ======= ======= ======= ======== ========
(continued)
-37-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION, CONTINUED
-------------------------------------------------------------
($ in thousands)
At December 31,
---------------------------------------------------------------
Deferred Liability Other Policy
Policy for Losses Claims and
Acquisition and Loss Unearned Benefits
Segment Costs Expenses Premiums Payable
------- ----------- ---------- -------- ------------
1999
----
Personal Lines $ 6,936 $ 79,085 $60,886 $ --
Commercial Lines 4,267 70,894 36,771 --
Investments -- -- -- --
-------- -------- ------- -------
$ 11,203 $149,979 $97,657 $ --
======== ======== ======= =======
1998
----
Personal Lines $ 7,648 $ 77,482 $63,916 $ --
Commercial Lines 3,686 63,927 30,807 --
Investments -- -- -- --
-------- -------- ------- -------
$ 11,334 $141,409 $94,723 $ --
======== ======== ======= =======
-38-
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, 1999
- ----------------------------
Property and casualty premiums $91,996,926 $67,487,819 $119,364,863 $143,873,970 83%
=========== =========== ============ ============ ===
Year Ended December 31, 1998
- ----------------------------
Property and casualty premiums $61,173,134 $56,338,098 $111,333,956 $116,168,992 96%
=========== =========== ============ ============ ===
Year Ended December 31, 1997
- ----------------------------
Property and casualty premiums $51,753,477 $51,753,477 $107,302,168 $107,302,168 100%
=========== =========== ============ ============ ====
-39-
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,
1999 $11,203,302 $149,979,141 $ --- $97,657,020
=========== ============ ============= ===========
1998 $11,334,301 $141,409,008 $ --- $94,722,785
=========== ============ ============= ===========
(continued)
-40-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE VI - SUPPLEMENTARY INSURANCE INFORMATION
CONCERNING PROPERTY AND CASUALTY SUBSIDIARIES, CONTINUED
--------------------------------------------------------
Years ended December 31, 1999, 1998 and 1997
Losses and Loss Amortization
Expenses Related to 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, 1999 $143,873,970 $13,223,537 $99,659,002 $ (454,000) $24,608,000 $95,574,426 $141,856,479
============ =========== =========== =========== =========== =========== ============
Year Ended December 31, 1998 $116,168,992 $11,997,661 $75,463,085 $(2,296,000) $19,490,000 $71,744,736 $118,153,817
============ =========== =========== =========== =========== =========== ============
Year Ended December 31, 1997 $107,302,168 $11,492,012 $69,040,518 $(1,384,000) $18,696,000 $65,610,249 $107,604,989
============ =========== =========== =========== =========== =========== ============
-41-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DONEGAL GROUP INC.
Date: March 29, 2000 By: /s/ Donald H. Nikolaus
-----------------------------
Donald H. Nikolaus, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Donald H. Nikolaus President and a Director March 29, 2000
- ----------------------------- (principal executive officer)
Donald H. Nikolaus
/s/ Ralph G. Spontak Senior Vice President and March 29, 2000
- ----------------------------- Secretary (principal financial
Ralph G. Spontak and accounting officer)
/s/ Robert S. Bolinger Director March 29, 2000
- -----------------------------
Robert S. Bolinger
Director March __, 2000
- -----------------------------
Thomas J. Finley
/s/ Patricia A. Gilmartin Director March 29, 2000
- -----------------------------
Patricia A. Gilmartin
/s/ Philip H. Glatfelter, II Director March 29, 2000
- -----------------------------
Philip H. Glatfelter, II
/s/ C. Edwin Ireland Director March 29, 2000
- -----------------------------
C. Edwin Ireland
/s/ R. Richard Sherbahn Director March 29, 2000
- -----------------------------
R. Richard Sherbahn
-42-
EXHIBIT INDEX
-------------
(Pursuant to Item 601 of Regulation S-K)
Exhibit No. Description of Exhibits Reference
- ----------- ----------------------- ---------
(3)(i) Certificate of Incorporation of Registrant, as amended filed herewith
(3)(ii) Amended and Restated By-laws of Registrant (a)
(4) Form of Registrant's Common Stock Certificate (b)
Management Contracts and Compensatory Plans or Arrangements
(10)(A) Donegal Mutual Insurance Company Money Purchase Pension Plan and (b)
Trust dated March 12, 1985
(10)(B) Donegal Mutual Insurance Company Profit Sharing Plan and Trust (b)
dated March 12, 1985
(10)(C) Donegal Group Inc. Key Executive Incentive Bonus Plan dated (e)
September 29, 1986
(10)(D) Donegal Group Inc. Employee Stock Purchase Plan, as amended (e)
(10)(E) Donegal Group Inc. Equity Incentive Plan, as amended (e)
(10)(F) Donegal Group Inc. Agency Stock Purchase Plan (l)
(10)(G) Donegal Group Inc. Amended and Restated 1996 Equity Incentive (d)
Plan
(10)(H) Donegal Group Inc. Amended and Restated 1996 Equity Incentive (k)
Plan for Directors
(10)(I) Donegal Group Inc. Executive Restoration Plan (c)
-43-
(10)(J) Donegal Mutual Insurance Company 401(k) Plan filed herewith
(10)(K) Amendment No. 1 effective January 1, 2000 to Donegal Mutual filed herewith
Insurance Company 401(k) Plan
Other Material Contracts
(10)(L) Tax Sharing Agreement dated September 29, 1986 between Donegal (b)
Group Inc. and Atlantic States Insurance Company
(10)(M) Services Allocation Agreement dated September 29, 1986 between (b)
Donegal Mutual Insurance Company, Donegal Group Inc. and
Atlantic States Insurance Company
(10)(N) Proportional Reinsurance Agreement dated September 29, 1986 (b)
between Donegal Mutual Insurance Company and Atlantic States
Insurance Company
(10)(O) Amendment dated October 1, 1988 to Proportional Reinsurance (f)
Agreement between Donegal Mutual Insurance Company and
Atlantic States Insurance Company
(10)(P) Multi-Line Excess of Loss Reinsurance Agreement effective (h)
January 1, 1993 between 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)(Q) Amendment dated July 16, 1992 to Proportional Reinsurance (g)
Agreement between Donegal Mutual Insurance Company and Atlantic
States Insurance Company
-44-
(10)(R) Amendment dated as of December 21, 1995 to Proportional (i)
Reinsurance Agreement between Donegal Mutual Insurance Company
and Atlantic States Insurance Company
(10)(S) Stock Purchase Agreement dated as of December 21, 1995 between (i)
Donegal Mutual Insurance Company and Donegal Group Inc.
(10)(T) Donegal Group Inc. 1996 Employee Stock Purchase Plan (j)
(10)(U) Reinsurance and Retrocession Agreement dated May 21, 1996 between (c)
Donegal Mutual Insurance Company and Pioneer Insurance Company
(10)(V) Reinsurance and Retrocession Agreement dated May 21, 1996 between (c)
Donegal Mutual Insurance Company and Delaware American Insurance
Company
(10)(W) Reinsurance and Retrocession Agreement dated May 21, 1996 between (c)
Donegal Mutual Insurance Company and Southern Insurance Company
of Virginia
(10)(X) Reinsurance and Retrocession Agreement effective January 1, 2000 filed herewith
between Donegal Mutual Insurance Company and Southern Heritage
Insurance Company
(10)(Y) Property Catastrophe Excess of Loss Reinsurance Agreement filed herewith
effective January 1, 2000 between Donegal Mutual Insurance
Company and Southern Heritage Insurance Company
(10)(Z) Stock Purchase Agreement dated as of May 14, 1998 between Donegal (m)
Group Inc. and Southern Heritage Limited Partnership
(10)(AA) Amendment dated November 17, 1998 to Stock Purchase Agreement (m)
dated as of May 14, 1998 between Donegal Group Inc. and Southern
Heritage Limited Partnership
-45-
(10)(BB) Amended and Restated Credit Agreement dated as of July 27, 1998 (m)
among Donegal Group Inc., the banks and other financial
institutions from time to time party thereto and Fleet National
Bank, as Agent
(10)(CC) First Amendment and Waiver to the Amended and Restated Credit filed herewith
Agreement dated as of December 31, 1999
(13) 1999 Annual Report to Stockholders (electronic filing contains filed herewith
only those portions incorporated by reference into this
Form 10-K report)
(20) Proxy Statement relating to the Annual Meeting of Stockholders to (n)
be held on April 20, 2000, provided, however, that the
Compensation Committee Report and the Performance Graph shall not
be deemed filed as part of this Form 10-K Report
(21) Subsidiaries of Registrant filed herewith
(23) Consent of Independent Auditors filed herewith
(27) Financial Data Schedule filed herewith
- ----------
(a) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-Q Report for the quarter ended
September 30, 1998.
(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, 1996.
(d) 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.
(e) Such exhibit is hereby incorporated by reference to the like-described
exhibits in Registrant's Form 10-K Report for the year ended December
31, 1986.
-46-
(f) 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.
(g) 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.
(h) 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.
(i) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated December 21, 1995.
(j) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-8 Registration Statement No. 333-1287
filed February 29, 1996.
(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, 1997.
(l) 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.
(m) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated November 17, 1998.
(n) Such exhibit is hereby incorporated by reference to the Registrant's
definitive proxy statement filed March 24, 2000.
47