Securities
and Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 of the Securities Exchange Act of
1934
For the Quarterly Period Ended June 30, 1995.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
of 1934
For the transition period from _________________ to ___________________.
Commission File No. 0-15341
Donegal Group Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2424711
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1195 River Road, P.O. Box 302, Marietta, PA 17547-0302
(Address of principal executive offices, including zip code)
(717) 426-1931
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No .
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years:
Indicate by check mark whether the registrant has filed all documents and
reports required by Sections 12, 13, or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes No .
Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 4,184,614 shares of Common
Stock, $1.00 par value, outstanding on July 31, 1995.
Part I. Financial Information
Item 1. Financial Statements.
Donegal Group Inc. And Subsidiaries
Consolidated Balance Sheet
Assets June 30, 1995 December 31, 1994
------------- -----------------
(Unaudited)
Investments
Fixed maturities
Held to maturity, at amortized cost $ 77,555,218 $ 65,451,109
Available for sale, at market value and at
the lower of amortized cost or market value 45,363,797 41,370,321
Equity securities, available for sale at market 5,243,584 4,190,316
Short-term investments, at cost, which
approximate market 14,106,979 24,640,509
-------------- --------------
Total Investments 142,269,578 135,652,255
Cash 725,844 1,263,764
Accrued investment income 2,114,004 1,912,835
Premiums receivable 10,284,404 8,882,053
Reinsurance receivable 23,871,627 21,295,593
Deferred policy acquisition costs 6,095,209 5,551,869
Deferred federal income taxes 3,457,568 3,734,826
Current income taxes 115,300 --
Prepaid reinsurance premiums 12,249,164 10,802,519
Property and equipment, net 1,624,051 1,591,766
Accounts receivable - securities -- 212,655
Due from affiliate 1,264,022 591,707
Other 391,532 554,468
-------------- --------------
Total Assets $ 204,462,303 $ 192,046,310
============== ==============
Liabilities and Stockholders' Equity
Liabilities
Losses and loss expenses $ 86,301,706 $ 79,962,961
Unearned premiums 49,143,337 44,512,189
Accrued expenses 1,005,586 1,134,064
Current income taxes -- 123,687
Reinsurance balances payable 579,881 562,626
Cash dividend declared to stockholders -- 369,335
Accounts payable - securities 339,879 4,213,830
Other 277,805 165,827
-------------- --------------
Total Liabilities 137,648,194 131,044,519
-------------- --------------
Stockholders' Equity
Preferred stock, $1.00 par value, authorized
1,000,000 shares; none issued
Common stock, $1.00 par value, authorized
10,000,000 shares, issued 4,242,724 and
4,162,770 shares and outstanding 4,177,676
and 4,097,722 shares 4,242,724 4,162,770
Additional paid-in capital 33,176,721 32,411,677
Net unrealized gain (losses) on investments 115,662 (821,535)
Retained earnings 30,098,782 26,068,659
Treasury stock (819,780) (819,780)
-------------- --------------
Total Stockholders' Equity 66,814,109 61,001,791
-------------- --------------
Total Liabilities and
Stockholders' Equity $ 204,462,303 $ 192,046,310
============== ==============
See accompanying notes to consolidated financial statements.
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Donegal Group Inc. and Subsidiaries
Consolidated Statement of Income
(Unaudited)
For the three months ended June 30, 1995 and 1994
Three Months Ended June 30,
1995 1994
---- ----
Revenues:
Premiums earned $ 27,233,374 $ 23,936,073
Premiums ceded (6,787,195) (5,871,976)
------------ ------------
Net premiums earned 20,446,179 18,064,097
Investment income, net of investment
expenses 2,121,382 1,730,994
Realized gain (loss) 190,191 (308,134)
Lease income 122,553 116,093
Service charge income 371,604 204,494
------------ -----------
Total Revenues 23,251,909 19,807,544
------------ -----------
Expenses:
Losses and loss expenses 18,289,014 15,034,547
Reinsurance recoveries (4,597,411) (3,520,254)
------------ -----------
Net losses and loss expenses 13,691,603 11,514,293
Amortization of deferred policy
acquisition costs 3,440,000 3,010,000
Other underwriting expenses 2,513,161 2,208,111
Policy dividends 324,625 221,268
Other expenses 324,855 188,326
------------ -----------
Total Expenses 20,294,244 17,141,998
------------ -----------
Income before income taxes 2,957,665 2,665,546
Income taxes 694,201 718,508
------------ -----------
Net income $ 2,263,464 $ 1,947,038
============ ============
Earnings per common share $ .53 $ .47
============ ============
See accompanying notes to consolidated financial statements.
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Donegal Group Inc. and Subsidiaries
Consolidated Statement of Income
(Unaudited)
For the six months ended June 30, 1995 and 1994
Six Months Ended June 30,
1995 1994
---- ----
Revenues:
Premiums earned $ 53,392,825 $ 46,533,113
Premiums ceded (13,453,727) (11,404,256)
------------ ------------
Net premiums earned 39,939,098 35,128,857
Investment income, net of investment
expenses 4,208,374 3,521,245
Realized gain (loss) 214,297 (34,487)
Lease income 241,274 230,145
Service charge income 678,634 358,480
------------ ------------
Total Revenues 45,281,677 39,204,240
------------ ------------
Expenses:
Losses and loss expenses 33,670,457 33,219,316
Reinsurance recoveries (7,904,116) (8,223,528)
------------ ------------
Net losses and loss expenses 25,766,341 24,995,788
------------ ------------
Amortization of deferred policy
acquisition costs 6,598,000 5,835,000
Other underwriting expenses 5,683,747 4,712,362
Policy dividends 633,816 483,190
Other expenses 628,390 367,793
------------ ------------
Total Expenses 39,310,294 36,394,133
------------ ------------
Income before income taxes 5,971,383 2,810,107
Income taxes 1,529,737 565,600
------------ ------------
Net income $ 4,441,646 $ 2,244,507
============ ============
Earnings per common share $ 1.05 $ .54
============ ============
See accompanying notes to consolidated financial statements.
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DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
FOR THE THREE MONTHS ENDED JUNE 30, 1995
Common Stock Net Unreal- Total
------------ Additonal ized Gains Stock-
Paid-In (Losses) on Retained Treasury holders'
Shares Amount Capital Investments Earnings Stock Equity
------ ------ ------- ----------- -------- ----- ------
Balance,
January 1, 1995 4,162,770 $4,162,770 $32,411,677 $ (821,535) $26,068,659 $(819,780) $61,001,791
Net Income 4,441,646 4,441,646
Unrealized gain
on investments 937,197 937,197
Dividends Paid (411,523) (411,523)
Issuance of
Common Stock 79,954 79,954 765,044 844,998
--------- ---------- ----------- ----------- ----------- --------- ----------
Balance,
June 30, 1995 4,242,724 $4,242,724 $33,176,721 $ 115,662 $30,098,782 $(819,780) $66,814,109
========= ========== =========== ========== =========== ========= ===========
See accompanying notes to financial statements.
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DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the six months ended June 30, 1995 and 1994
Six months ended June 30,
1995 1994
---- ----
Cash Flows from Operating Activities:
Net income $ 4,441,646 $ 2,244,507
Adjustments to reconcile net income to net
cash provided by operating activities:
Liabilities for losses and loss expenses 6,338,745 7,941,338
Depreciation and amortization 110,746 149,294
Realized investment (gain) loss (214,297) 34,487
Changes in Assets and Liabilities:
Unearned premiums 4,631,148 3,551,013
Premiums receivable (1,402,351) (1,396,401)
Deferred acquisition costs (543,340) (319,155)
Deferred income taxes (205,539) (229,592)
Reinsurance receivable (2,576,034) (6,178,808)
Prepaid reinsurance premiums (1,446,645) (1,488,535)
Accrued investment income (201,169) 192,985
Due from affiliate (672,315) 227,836
Accounts payable reinsurance 17,255 1,083,179
Current income taxes payable (238,987) 649,433
Other, net 146,436 (371,961)
------------ ----------
Net adjustments 3,743,653 3,845,113
------------ ----------
Net cash provided by operating activities 8,185,299 6,089,620
------------ ----------
Cash flows from investing activities:
Purchase of fixed maturities
Held to maturity (11,811,318) (4,388,465)
Available for sale (8,602,670) (10,969,994)
Purchase of equity securities,
available for sale (3,998,350) (5,380,857)
Sale of fixed maturities
Held to maturity --- 1,346,375
Available for sale 2,621,843 13,904,427
Maturity of fixed maturities -
held to maturity 2,266,416 8,690,154
Maturity of fixed maturities -
available for sale 533,334 199,291
Sale of equity securities, available for sale 3,813,240 5,489,155
Purchase of property and equipment (179,554) (87,192)
Purchase of intangible asset --- (115,000)
Net sales of short-term investments 6,569,700 (14,093,484)
------------ ----------
Net cash used in investing activities (8,787,359) (5,405,590)
------------ ----------
Cash flows from
financing activities:
Expenses of subsidiary formation --- (16,625)
Cash dividends paid (780,858) (695,680)
Issuance of common stock 844,998 55,401
Net cash provided by (used in)
financing activities 64,140 (656,904)
------------ ----------
Net decrease in cash (537,920) 27,126
Cash at beginning of year 1,263,764 1,192,124
------------ ----------
Cash at end of quarter $ 725,844 $ 1,219,250
============ ============
Cash paid during period
- Interest 0 0
- Income Taxes $ 1,973,000 $ 146,000
See accompanying notes to consolidated financial statements.
-5-
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
Donegal Group Inc. ("DGI" or the "Company") is a regional insurance holding
company doing business in Pennsylvania, Maryland, Delaware, Virginia and Ohio
through its wholly owned subsidiaries, Atlantic States Insurance Company
("Atlantic"), Southern Insurance Company of Virginia ("Southern") and Atlantic
Insurance Services, Inc. ("AIS"). The Company's major lines of business in 1994
and their percentages of total net earned premiums were Automobile Liability
(30.7%), Automobile Physical Damage (16.2%) Homeowners (13.8%), Commercial
Multiple Peril (13.8%) and Workers' Compensation (19.9%). Atlantic and Southern
are subject to regulation by Insurance Departments in those states in which they
operate and undergo periodic examination by those departments. They are also
subject to competition from other insurance carriers in their operating areas.
DGI was formed in September 1986 by Donegal Mutual Insurance Company (the
"Mutual Company") which owns 59% of the outstanding common shares of the Company
as of June 30, 1995.
In connection with the formation of the Company and Atlantic States, as of
October 1, 1986, Atlantic States and the Mutual Company entered into a pooling
agreement which provides for the allocation of premiums, losses, loss settlement
expenses and underwriting expenses. The Company is not liable for any losses
occurring prior to the date of the pooling agreement. The Company's
participation in the pool was 35% from October 1, 1986 to September 30, 1988,
50% from October 1, 1988 to December 31, 1992 and since January 1, 1993 has been
60%.
On December 29, 1988, the Company converted Southern Mutual Insurance Company
into Southern Insurance Company of Virginia, which writes property and casualty
insurance in Virginia, and acquired all of Southern's outstanding capital stock.
Pursuant to a reinsurance agreement, Southern cedes 50% of its direct premiums
written less certain reinsurance to the Mutual Company and retains the remaining
50%. Because the Mutual Company places substantially all of the business assumed
from Southern into the pool, from which the Company has a 60% allocation, the
company's results of operations include approximately 80% of the business
written by Southern.
In January 1994, the Company formed Atlantic Insurance Services, Inc. which
primarily provides risk inspection services for the property-casualty insurance
industry.
The Company's results of operations are affected by the conditions that
affect all property and casualty insurance companies, such as competition,
catastrophic events, regulation, general economic conditions and the investment
environment. Underwriting results vary by line of business and from period to
period principally due to changes in claims experience. Because the Company's
premium volume in various lines of business is small, small changes in the
number of incurred claims can significantly affect the results of operations
from that line of business in a given fiscal period.
-6-
DONEGAL GROUP INC. AND SUBSIDIA
(Unaudited)
Summary Notes to Consolidated Financial Statements
1 - Organization
The Company was organized as a regional insurance holding company by Donegal
Mutual Insurance Company (the "Mutual Company") on August 26, 1986 and operates
in Pennsylvania, Maryland, Delaware, Virginia and Ohio through its wholly owned
stock insurance companies, Atlantic States Insurance Company ("Atlantic
States"), Southern Insurance Company of Virginia ("Southern") and Atlantic
Insurance Services, Inc. ("AIS"). The Company's major lines of business are
Automobile Liability, Automobile Physical Damage, Homeowners, Commercial
Multiple Peril and Workers' Compensation. Atlantic and Southern are subject to
regulation by Insurance Departments in those states in which they operate and
undergo periodic examination by those departments. They are also subject to
competition from other insurance carriers in their operating areas. Atlantic
States engages in the insurance business primarily through an intercompany
pooling arrangement with the Mutual Company. Southern was acquired by the
Company on December 31, 1988 pursuant to a plan of conversion from a mutual to a
stock company and cedes 50% of its business to the Mutual Company, 80% prior to
1991. At June 30, 1995 the Mutual Company held 59% of the outstanding common
stock of the Company.
2 - Basis of Presentation
The financial information for the interim period included herein is
unaudited; however, such information reflects all adjustments, consisting only
of normal recurring adjustments, which, in the opinion of management of
Registrant, are necessary to a fair presentation of Registrant's financial
position, results of operations and changes in financial position for the
interim period included herein. The results of operations for the six months
ended June 30, 1995, are not necessarily indicative of results of operations to
be expected for the twelve months ended December 31, 1995.
These financial statements should be read in conjunction with the financial
statements and notes thereto contained in Registrant's Annual Report on Form
10-K for the year ended December 31, 1994.
-7-
Results of Operations - Three Months Ended June 30, 1995
to Three Months Ended June 30, 1994
Revenues for the three months ended June 30, 1995 were $23,251,909, an
increase of $3,444,365, or 17.4%, over the same period of 1994. An increase in
net premiums earned of $2,382,082, or 13.2% represented most of this change. The
company s retained share of direct premiums written increased 10.1% in the
second quarter of 1995 compared to the second quarter of 1994. In the second
quarter 1994, the Company incurred additional ceded reinsurance premiums of
approximately $400,000. These additional ceded premiums were reinstatement
premiums related to catastrophe reinsurance recoveries resulting from claims
incurred due to severe weather which hit the northeastern part of the United
States in the first three months of 1994. Investment income for the second
quarter 1995 was $2,121,382 an increase of $390,388, or 22.6%, over the second
quarter 1994. An increase in the average invested assets of $14,306,118, or
11.4%, to $139,724,060 and an increase in the average return on investments to
an annualized rate of 6.1% for the second quarter of 1995 compared to 5.5% for
the second quarter of 1994, accounted for the change. Realized investment gains,
which resulted from the normal turnover of the Company s investment portfolio,
increased to $190,191 in the second quarter of this year, compared to a loss of
($308,134) for the second quarter of 1994.
The GAAP combined ratio of insurance operations in the second quarter of 1995
was 97.7% compared to 93.9% for the same period in 1994. The GAAP combined ratio
is the sum of the ratios of incurred losses and loss adjusting expenses to
premiums earned (loss ratio), policyholders dividends to premiums earned
(dividend ratio), and underwriting expenses to premiums earned (expense ratio).
An increase in the loss ratio from 63.7% in the second quarter of 1994 to 67.0%
in the second quarter of 1995, accounted for most of the change. The expense
ratio increased from 28.9% to 29.1% in the second quarter of 1995 due primarily
to additional incentive expenses for employees and agents related to the higher
levels of profitability for the year to date. The dividend ratio increased
slightly from 1.2% for the second quarter of 1994 to 1.6% for the second quarter
of 1995 due primarily to higher levels of profitability in 1995.
Federal income taxes for the second quarter of 1995 represented 23.5% of
pre-tax income compared to 26.9% for the second quarter of 1994. A tax benefit
resulting from the exercise of options by employees accounted for the majority
of this difference. The effective tax rates incurred are less than the statutory
federal rate of 34% due primarily to tax exempt investment income from municipal
bonds.
-8-
Results of Operations - Six Months Ended June 30, 1995
to Six Months Ended June 30, 1994
Revenues for the six months ended June 30, 1995 were $45,281,677, an increase
of $6,077,437, or 15.5%, over the same period of 1994. An increase in net
premiums earned of $4,810,241, or 13.7% represented most of this change. The
company s retained share of direct premiums written increased 12.4% in the first
six months of 1995 compared to the same period of 1994. In the six months ended
June 30, 1994, the Company incurred additional ceded reinsurance premiums of
approximately $1,000,000. These additional ceded premiums were reinstatement
premiums related to catastrophe reinsurance recoveries resulting from claims
incurred due to severe weather which hit the northeastern part of the United
States in the first three months of 1994. Investment income for the first six
months of 1995 was $4,208,374 an increase of $687,129, or 19.5%, over the first
six months of 1994. An increase in the average invested assets of $15,307,229,
or 12.4%, to $138,960,916 and an increase in the average return on investments
to an annualized rate of 6.1% for the first six months of 1995 compared to 5.7%
for the first six months of 1994, accounted for the change. Realized investment
gains, which resulted from the normal turnover of the Company s investment
portfolio, increased to $214,297 through June 30 of this year, compared to a
loss of ($34,487) for the first six months of 1994.
The GAAP combined ratio of insurance operations in the first six months of
1995 was 96.9% compared to 102.6% for the same period in 1994. The GAAP combined
ratio is the sum of the ratios of incurred losses and loss adjusting expenses to
premiums earned (loss ratio), policyholders dividends to premiums earned
(dividend ratio), and underwriting expenses to premiums earned (expense ratio).
An improvement in the loss ratio from 71.2% in the first six months of 1994 to
64.5% in the first six months of 1995, accounted for most of the change. The
expense ratio increased from 30.0% to 30.7% for the first six months ended June
30, 1995 due primarily to additional incentive expenses for employees and agents
related to the higher levels of profitability for the year to date. The dividend
ratio increased slightly from 1.4% for the first two quarters of 1994 to 1.6%
for the first two quarters of 1995, due primarily to higher levels of
profitability in 1995.
Federal income taxes for the six months ended June 30, 1995 represented 25.6%
of pre-tax income compared to 20.1% for the same period of 1994 due primarily to
the net loss incurred for taxes in the first quarter of 1994, used in the second
quarter of 1994. The effective tax rates incurred are less than the statutory
federal rate of 34% due primarily to tax exempt investment income from municipal
bonds.
-9-
Liquidity and Capital Resources
The Company generates sufficient funds from its operations and maintains a
high degree of liquidity in its investment portfolio. The primary source of
funds to meet the demands of claim settlements and operating expenses are
premium collections, investment earnings and maturing investments. As of June
30, 1995, the Company had no material commitment for capital expenditures.
In investing funds made available from operations, the Company maintains
securities maturities consistent with its projected cash needs for the payment
of claims and expenses. The Company maintains a portion of its investment
portfolio in relatively short-term and highly liquid assets to ensure the
availability of funds.
The Company's principal source of cash with which to pay stockholder
dividends is dividends from Atlantic States and Southern, which are required by
law to maintain certain minimum surplus on a statutory basis and are subject to
regulations under which payment of dividends from statutory surplus is
restricted and may require prior approval of their domiciliary insurance
regulatory authorities. At December 31, 1994, amounts available for distribution
as dividends to DGI without prior approval of the insurance regulatory
authorities are $764,696 from Southern and $4,072,387 from Atlantic States.
Unrealized gains resulting from fluctuations in the market value of
investments available for sale reported in the balance sheet at market value
were $115,662 at June 30, 1995, net of taxes.
-10-
Credit Risk
The company provides property and liability coverages through its
subsidiaries' independent agency systems located throughout its operating area.
The majority of this business is billed directly to the insured although a
portion of Donegal Group's commercial business is billed through its agents who
are extended credit in the normal course of business.
The Company's subsidiaries have reinsurance agreements in place with the
Mutual Company and with a number of other major authorized reinsurers.
Impact of Inflation
Property and casualty insurance premiums are established before the amount
of losses and loss settlement expenses, or the extent to which inflation may
impact such expenses, are known. Consequently, the Company attempts, in
establishing rates, to anticipate the potential impact of inflation.
Impact of New Accounting Standards
Accounting for Certain Investments in Debt and Equity Securities
The Company adopted the SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities , effective January 1, 1994 on a prospective basis.
The cumulative effect of adopting SFAS 115 resulted in a before tax unrealized
gain of $1,908,207. The net increase to equity amounted to $1,259,417 after
providing for taxes of $648,790. Adoption of this statement had no effect on the
net income of the Company.
SFAS 115 requires that investments in all debt securities and those equity
securities with readily determinable market values be classified into three
categories as follows:
Held to Maturity Securities - Debt securities that the enterprise has the positive intent and ability to hold to
maturity; reported at amortized costs.
Trading Securities - Debt and equity securities that are bought and held principally for the purpose
of selling them in the near term; reported at fair value, with unrealized gains and
losses included in earnings.
Available for Sale Securities - Debt and equity securities not classified as either held to maturity securities or
trading securities; reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate
component of shareholders' equity (net of tax effects).
No trading securities were identified at December 31, 1994 or June 30, 1995.
-11-
Part II. Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EX-27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended June 30, 1995, Registrant did not file any
reports on Form 8-K.
-12-
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Donegal Group Inc.
Date: August 10, 1995 By: ______________________
Donald H. Nikolaus,
President and
Chief Executive Officer
Date: August 10, 1995 By: ____________________
Ralph G. Spontak,
Corporate Secretary,
Senior Vice President and
Chief Financial Officer
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