================================================================================
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, 1998
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.
------------------------------------------------------
(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, Marietta, Pennsylvania 17547
- ---------------------------------------- ----------
(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
-----------------------------
(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 definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On March 15, 1999, 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
$43,493,338.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 8,248,731 shares of Common
Stock outstanding on March 15, 1999.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Registrant's annual report to stockholders for the fiscal
year ended December 31, 1998 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 15, 1999 are incorporated by reference
into Part III of this report.
DONEGAL GROUP INC.
INDEX TO FORM 10-K REPORT
Page
----
I. PART I.
Item 1. Business 1
Item 2. Properties 22
Item 3. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of
Security Holders 22
Executive Officers of the Company 22
II. PART II.
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 24
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 24
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 24
III. PART III.
Item 10. Directors and Executive Officers of the
Registrant 25
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial
Owners and Management 25
Item 13. Certain Relationships and Related
Transactions 25
IV. PART IV.
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 26
(i)
PART I
Item 1. Business.
(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 60% 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 1998
- ---------------- -------- ----------- ----
Southern Insurance Company of Virginia 1988 $1,128,843 12,836,852
Delaware Atlantic Insurance Company 1995 2,824,398 3,795,928
Pioneer Insurance Company 1997 4,499,273 3,188,476
Southern Heritage Insurance Company 1998 32,002,540 27,856,117
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 adjustment 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
-1-
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.
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 part of
this transaction, the Mutual Company entered into an aggregate excess of loss
reinsurance agreement with Delaware Atlantic for a specified period. This
reinsurance agreement did not result in any additional payment from the Mutual
Company to Delaware Atlantic.
Effective July 1, 1996, the Mutual Company entered into retrocessional
reinsurance agreements with each of Southern, Delaware Atlantic and Pioneer
(individually, an "Affiliate"), whereby the Mutual Company agreed to reinsure
each Affiliate in respect of 100% of the net liability that may accrue to such
Affiliate from its insurance operations and retrocede 100% of the net liability
back to each Affiliate, which the Affiliate assumes.
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. As part of this
transaction, the Mutual Company entered into an aggregate excess of loss
reinsurance agreement with Pioneer whereby the Mutual Company assumed the risk
of any loss from an adverse development in Pioneer's loss and loss adjustment
expense reserve at the end of 1996 compared to the end of 1998 by reason of the
fact that Pioneer's loss and loss adjustment expense ratio for those periods
exceeded the lesser of the loss and loss expense ratios of immediately preceding
periods or 60%. This reinsurance agreement resulted in additional payments of
$306,400 from the Mutual Company to Pioneer in 1998.
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 of
$18,361,279 in cash. The purchase price is subject to adjustment based upon the
final determination of certain account balances of
-2-
Southern Heritage as of October 31, 1998 and the resolution of certain breach of
representation and warranty claims that DGI has asserted against Southern
Heritage Limited Partnership.
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
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 60% of DGI as of March 15, 1999.
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.
Under the terms of the intercompany pooling agreement, which took
effect on October 1, 1986, 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, including the business reinsured from Southern, written or in force on
or after October 1, 1986, is also 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 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. All premiums, losses, loss expenses, other underwriting
expenses and policy
-3-
dividends 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 Company does not intend to
terminate its participation in the pooling agreement. 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 and
expectations of future relative amounts of capital and surplus. The pooling
agreement does not legally discharge Atlantic States from its primary liability
for the full amount of the policies ceded. However, it makes the Mutual Company
liable to Atlantic States to the extent of the business ceded.
All of DGI's officers are officers of the Mutual Company, and five of
DGI's seven directors are directors of the Mutual Company. A Coordinating
Committee, which consists of two outside directors from each of DGI and the
Mutual Company, none of whom holds seats on the Boards of Directors of both DGI
and the Mutual Company, reviews and approves changes in the pooling agreement
and is responsible for matters involving actual or potential conflicts of
interest. The decisions of the Coordinating Committee are binding on the two
companies. DGI's members must conclude that intercompany transactions are fair
and reasonable in order for such transactions to be approved.
The underwriting pool is intended to produce a more uniform and stable
underwriting result from year to year for the companies 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 have their own capital and surplus.
In addition to the underwriting pool, through the retrocessional
reinsurance agreements with each of Southern, Delaware Atlantic and Pioneer, the
Mutual Company reinsures each Affiliate in respect of 100% of the net liability
that may accrue to such Affiliate from its insurance operations and the Mutual
Company retrocedes 100% of the net liability back to each Affiliate, which the
Affiliate assumes as part of the retrocession.
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.
-4-
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, 1998, 1997 and 1996:
Year Ended December 31,
---------------------------
1998 1997 1996
---- ---- ----
Net Premiums Written:
Commercial.................... 38.2% 41.0% 44.3%
Personal...................... 61.8% 59.0% 55.7%
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.
-5-
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.
Year Ended December 31,
---------------------------
1998 1997 1996
---- ---- ----
GAAP combined ratio ..................... 99.8% 97.6% 100.4%
Statutory operating ratios:
Loss ratio ......................... 64.0 64.0 68.4
Expense ratio ...................... 35.4 34.0 31.1
Dividend ratio ..................... 1.4 1.2 1.5
Statutory combined ratio ................ 100.8% 99.2% 101.0%
===== ===== =====
Industry statutory combined ratio(1) .... 105.6% 101.6% 107.0%
===== ===== =====
- ----------
(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
-6-
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, the Company received an
assessment from the Pennsylvania Insurance Guaranty Association totaling $1.3
million relating to the insolvency of two medical malpractice insurers. The
impact of these involuntary programs on DGI were not material during 1996 and
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,
--------------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
Net Premiums Written:
Commercial:
Automobile ........................... $ 11,120 $ 10,522 $ 10,149
Workers' compensation ............... 15,446 15,590 17,998
Commercial multi-peril ............... 17,046 16,357 17,153
Other ................................ 1,473 1,612 3,127
-------- -------- --------
Total commercial ................... 45,085 44,081 48,427
-------- -------- --------
Personal:
Automobile ........................... 46,609 38,989 37,739
Homeowners ........................... 21,737 19,939 18,979
Other ................................ 4,724 4,597 4,070
-------- -------- --------
Total personal ..................... 73,070 63,525 60,788
-------- -------- --------
Total business ......................... $118,155 $107,606 $109,215
======== ======== ========
Statutory Combined Ratios:
Commercial:
Automobile ........................... 118.2% 89.9% 97.6%
Workers compensation ................. 80.4 89.5 67.2
Commercial multi-peril ............... 85.6 103.0 106.4
Other ................................ 71.1 57.7 42.8
----- ---- ----
Total commercial ................... 91.3 93.5 86.5
----- ---- ----
Personal:
Automobile ........................... 104.2 98.7 100.7
Homeowners ........................... 115.7 116.4 139.1
Other ................................ 91.2 87.6 109.6
----- ----- -----
Total personal ..................... 106.7 103.4 112.7
----- ----- -----
Total business .................. 100.8% 99.2% 101.0%
===== ===== =====
-7-
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.
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 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.
-8-
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.
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.
-9-
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
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 expenses 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 and financial
statements prepared on a statutory accounting basis result from reducing
statutory liabilities for anticipated salvage and subrogation recoveries. These
differences amounted to $7,963,559, $6,155,467 and $5,170,486 at December 31,
1998, 1997 and 1996, respectively.
-10-
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,
-----------------------------
1998 1997 1996
---- ---- ----
(in thousands)
Net liability for unpaid losses
and loss expenses at
beginning of year ........................ $77,474 $75,428 $71,155
Net liabilities of acquired company ........ 14,967 -- --
------- ------- -------
Net beginning balance as adjusted .......... $92,441 $75,428 $71,155
Provision for net losses and
loss expenses for claims
incurred in the current year ............. 75,463 69,040 73,212
Decrease in provision for estimated
net losses and loss expenses for
claims incurred in prior years ........... (2,296) (1,384) (2,791)
------- ------- -------
Total incurred ............................. 73,167 67,656 70,421
Net losses and loss payments
for claims incurred during:
The current year ........................... 44,389 39,133 42,669
Prior years ................................ 27,356 26,477 23,479
------- ------- -------
Total paid ................................. 71,745 65,610 66,148
Net liability for unpaid losses
and loss expenses at
end of year .............................. $93,863 $77,474 $75,428
======= ======= =======
The following table sets forth the development of the liability for
net unpaid losses and loss expenses for DGI on a GAAP basis from 1988 to 1998,
with supplemental loss data for 1998 and 1997.
"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
-11-
the severity of the remaining unpaid claims. For example, the 1990 liability has
developed an excess after eight years, in that reestimated net losses and loss
expenses are expected to be less than the estimated liability initially
established in 1990 of $31,898 by $2,723.
The "Cumulative deficiency (excess)" shows the cumulative deficiency
or excess at December 31, 1998 of the liability estimate shown on the top line
of the corresponding column. An excess in liability means that the liability
established in prior years exceeded actual net losses and loss expenses or were
reevaluated at less than the original amount. A deficiency in liability means
that the liability established in prior years was less than actual net losses
and loss expenses or were reevaluated at more than the original amount.
The "Cumulative amount of liability paid through" portion of the table
shows the cumulative net losses and loss expense payments made in succeeding
years for net losses incurred prior to the balance sheet date. For example, the
1990 column indicates that as of December 31, 1998 payments equal to $28,841 of
the currently reestimated ultimate liability for net losses and loss expenses of
$29,175 had been made.
-12-
Year Ended December 31
--------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
Net liability at end of
year for unpaid losses
and loss expenses ........... $20,734 $27,767 $31,898 $36,194 $44,339 $ 52,790 $ 63,317 $71,155 $75,428 $77,474 $93,863
Net liability
reestimated as of:
One year later ............. 21,598 29,175 32,923 37,514 45,408 50,583 60,227 68,348 74,044 75,178
Two years later ............ 20,475 28,861 33,550 37,765 42,752 48,132 56,656 66,520 70,545
Three years later .......... 19,823 28,545 32,803 35,446 40,693 44,956 54,571 63,187
Four years later ........... 19,296 27,717 31,004 33,931 38,375 42,157 51,825
Five years later ........... 18,796 26,759 30,041 32,907 37,096 41,050
Six years later ............ 18,457 26,180 29,595 32,234 36,682
Seven years later .......... 18,189 25,971 29,417 31,976
Eight years later .......... 18,117 25,828 29,175
Nine years later ........... 18,050 25,904
Ten years later ............ 18,015
Cumulative deficiency
(excess) ................... $(2,719) $(1,863) $(2,723) $(4,218) $(7,657) $(11,740) $(11,492) $(7,968) $(4,883) $(2,296)
======= ======= ======= ======= ======= ======== ======== ======= ======= =======
Cumulative amount of
liability paid through:
One year later ............. $ 8,855 $11,401 $13,003 $13,519 $16,579 $ 16,126 $ 19,401 $23,479 $26,477 $27,356
Two years later ............ 12,280 17,421 19,795 20,942 24,546 25,393 30,354 37,078 40,384
Three years later .......... 14,912 20,986 24,178 25,308 29,385 32,079 38,684 45,796
Four years later ........... 16,292 23,268 26,413 27,826 32,925 36,726 43,655
Five years later ........... 17,201 24,331 27,439 29,605 34,757 39,122
Six years later ............ 17,706 24,909 28,157 30,719 35,739
Seven years later .......... 17,782 25,280 28,627 31,173
Eight years later .......... 17,884 25,599 28,841
Nine years later ........... 17,986 25,695
Ten years later ............ 17,980
Year Ended December 31
-----------------------------------------------------------
1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
(in thousands)
Gross liability at end of year ................................... $57,777 $70,093 $88,484 $98,894 $114,622 $118,112 $141,409
Reinsurance recoverable .......................................... 13,438 17,303 25,167 27,739 39,194 40,638 47,546
Net liability at end of year ..................................... 44,339 52,790 63,317 71,155 75,428 77,474 93,863
Gross reestimated liability -- latest ............................ 58,733 56,969 76,260 89,706 109,735 118,309
Reestimated recoverable -- latest ................................ 22,051 15,919 24,435 26,519 39,190 43,131
Net reestimated liability -- latest .............................. 36,682 41,050 51,825 63,187 70,545 75,178
Gross cumulative deficiency (excess) ............................. 956 (13,124) (12,224) (9,188) (4,887) 197
-13-
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 1998), and "catastrophic
reinsurance," under which the reinsured recovers 95% of an accumulation of many
losses resulting from a single event, including natural disasters (for 1998,
$3,000,000 retention). DGI's principal reinsurance agreement in 1998, other than
that with the Mutual Company, was an excess of loss treaty in which the
reinsurers were Continental Casualty Company, Employers Reinsurance Corporation
and Dorinco Reinsurance Company. 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 and Pioneer 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 and $200,000, 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 Pioneer also have an
aggregate excess of loss reinsurance agreement, entered into as part of the sale
of Pioneer from the Mutual Company to the Company, in which the Mutual Company
agrees to assume the adverse loss development of claims with dates of loss prior
to December 31, 1996, as developed through December 31, 1998, and to assume
losses in excess of a 60% loss ratio through December 31, 1998. The Mutual
Company and Southern have an excess of loss reinsurance agreement in which the
Mutual Company assumes up to $25,000 of losses in excess of $100,000 and a quota
share agreement whereby Southern cedes 50% of its direct business less certain
reinsurance to the Mutual Company. Southern, Delaware Atlantic and Pioneer each
have retrocessional reinsurance agreements effective July 1, 1996 with the
Mutual Company, under which they cede, and then assume back, 100% of their
business net of other reinsurance.
-14-
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, 1998, all debt securities were rated
investment grade with the exception of one unrated obligation of $10,000, 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, 1998:
December 31, 1998
-----------------------
Rating(1) Amount Percent
- --------- ------ -------
(dollars in thousands)
U.S. Treasury and U.S. agency
agency securities(2) ...................... $104,188 47.8%
Aaa or AAA .................................. 61,786 28.4
Aa or AA .................................... 36,486 16.8
A ........................................... 15,138 7.0
BBB.......................................... 102 --
Not rated(3) ................................ 10 --
-------- ---
Total ..................................... $217,710 100%
======== ===
- ----------
(1) Ratings assigned by Moody's Investors Services, Inc. or Standard & Poor's
Corporation.
(2) Includes mortgage-backed securities of $22,563.
(3) Represents one unrated obligation of The Lancaster County Hospital
Authority Mennonite Home Project, which management of DGI believes to be
equivalent to investment grade securities with respect to repayment risk.
-15-
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 34.1%, 34.3% and 36.4% of the total investment portfolio at
December 31, 1998, 1997 and 1996, respectively.
16
The following table shows the classification of the investments (at
carrying value) of DGI and its subsidiaries at December 31, 1998, 1997 and 1996.
December 31,
--------------------------------------------------------
1998 1997 1996
---------------- ----------------- ------------------
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 .......... $ 32,891 12.9% $ 41,450 20.2% $38,64 20.1%
Obligations of
states and
political
subdivisions .......... 66,941 26.2 57,621 28.1 57,095 29.6
Corporate
securities.............. 9,131 3.6 7,250 3.5 5,917 3.1
Mortgage-backed
securities.............. 18,221 7.1 10,925 5.4 12,680 6.6
-------- ----- -------- ----- -------- -----
Total held to
maturity ............... 127,184 49.8 117,246 57.2 114,339 59.4
-------- ----- -------- ----- -------- -----
Available for sale:
U.S. treasury
securities and
obligations of U.S.
government
corporations
and agencies ........... 55,439 21.8 40,197 19.6 35,507 18.4
Obligations of states
and political
subdivisions ........... 19,957 7.8 12,762 6.2 12,987 6.8
Corporate securities .... 10,787 4.2 3,252 1.6 3,436 1.8
Mortgage-backed
securities ............. 4,342 1.7 1,520 0.8 1,606 0.8
-------- ----- -------- ----- -------- -----
Total available
for sale ............... 90,525 35.5 57,731 28.2 53,536 27.8
-------- ----- -------- ----- -------- -----
Total fixed
maturities ............. 217,709 85.3 174,977 85.4 167,875 87.2
Equity securities(2) .... 6,764 2.7 7,275 3.5 3,143 1.6
Short-term investments(3) 30,522 12.0 22,713 11.1 21,471 11.2
-------- ----- -------- ----- -------- -----
Total investments ....... $254,995 100.0% $204,965 100.0% $192,489 100.0%
======== ===== ======== ===== ======== =====
17
(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 $131,633,299 at December 31, 1998,
$120,882,886 at December 31, 1997 and $116,264,317 at December 31, 1996.
The amortized cost of fixed maturities available for sale was $89,089,995
at December 31, 1998, $56,922,342 at December 31, 1997 and $53,264,748 at
December 31, 1996.
(2) Equity securities are valued at fair value. Total cost of equity securities
was $6,206,735 at December 31, 1998, $6,551,020 at December 31, 1997 and
$2,774,946 at December 31, 1996.
(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, 1998,
December 31, 1997 and December 31, 1996.
December 31,
---------------------------------------------------------------
1998 1997 1996
---------------- ---------------- ------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------- ----- ------ -----
(dollars in thousands)
Due in:(1)
One year or less .................. $ 47,760 19.2% $ 36,013 18.2% $ 34,836 18.4%
Over one year
through three years ............. 31,964 12.9 30,910 15.6 26,392 13.9
Over three years
through five years .............. 23,139 9.3 20,303 10.3 21,163 11.2
Over five years
through ten years ............... 78,061 31.4 65,122 32.9 45,370 24.0
Over ten years
through ffiteen years ........... 37,940 15.3 32,384 16.4 46,248 24.4
Over fifteen years ................ 6,805 2.8 513 0.3 1,051 0.6
Mortgage-backed
securities ...................... 22,563 9.1 12,445 6.3 14,286 7.5
-------- ----- -------- ---- -------- -----
$248,232 100.0% $197,690 100.0% $189,346 100.0%
======== ===== ======== ===== ======== =====
- ----------
(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 $22,563 at December 31, 1998. Included in
these investments are
18
collateralized mortgage obligations ("CMOs") with a carrying value of $22,287 at
December 31, 1998. The Company has attempted to reduce the prepayment risks
associated with mortgage-backed securities by investing approximately 99%, as of
December 31, 1998, 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 lower current interest rates 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, 1998, 1997 and 1996 are shown in the following table:
Year Ended December 31,
-----------------------------
1998 1997 1996
---- ---- ----
(dollars in thousands)
Invested assets(1)............. $208,304 $202,283 $183,401
Investment income(2)........... 11,998 11,507 10,799
Average yield.................. 5.6% 5.7% 5.9%
- ----------------
(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 1998, 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 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.
19
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, 1998, DGI's
insurance subsidiaries 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, the Company received an assessment from the Pennsylvania Insurance
Guaranty Association totaling $1.3 million relating to the insolvency of two
medical malpractice insurers. For 1996 and 1997, assessments paid by the Company
were not material.
The property and casualty insurance industry has recently received a
considerable amount of publicity because of rising insurance costs and the
unavailability of insurance. New regulations and legislation are being proposed
to limit damage awards, to control plaintiffs' counsel fees, to bring the
industry under regulation by the federal government and to control premiums,
policy terminations and other policy terms. It is not possible to predict
whether, in what form or in what jurisdictions any of these proposals might be
adopted or the effect thereof, if any, on the Company.
20
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 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, 1998, amounts available for payment of dividends in 1999 without
the prior approval of the various insurance commissioners were $6,480,524 from
Atlantic States, $638,832 from Southern, $1,085,807 from Delaware Atlantic,
$530,035 from Pioneer and $1,580,564 from Southern Heritage. See Note 12 to the
Consolidated Financial Statements incorporated by reference herein.
The Mutual Company
The Mutual Company, which was organized in 1889, has a Best rating of
A (Excellent). At December 31, 1998, the Mutual Company had admitted assets of
$182,704,688 and policyholders' surplus of $98,549,558. At December 31, 1998,
the Mutual Company had no debt and, of its total liabilities of $84,155,130,
reserves for net losses and loss expenses accounted for $46,442,067 and unearned
premiums accounted for $23 million. Of the Mutual Company's investment portfolio
of $137,594,316 at December 31, 1998, investment-grade bonds accounted for
$40,356,021, cash and short-term investments accounted for $2 million and
mortgages accounted for $7,940,878. At December 31, 1998, the Mutual Company
owned 4,918,364 shares of the Company's Common Stock, which were carried on the
Mutual Company's books at $76,849,434. The foregoing financial information is
presented on the statutory basis of accounting.
21
Employees
As of December 31, 1998, the Mutual Company had 372 employees. The
Mutual Company's employees provide a variety of services to DGI, Atlantic
States, Delaware Atlantic, Southern, Pioneer and Southern Heritage as well as to
the Mutual Company and its subsidiaries. As of December 31, 1998, Southern
Heritage had 69 employees.
Item 2. Properties.
DGI shares headquarters with the Mutual Company 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. Delaware Atlantic has a facility of approximately 3,000 square
feet in Wilmington, Delaware, which it leases. 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 1998.
Executive Officers of the Company
Name Age Position
---- --- --------
Donald H. Nikolaus 56 President and Chief Executive Officer since 1981
Ralph G. Spontak 46 Senior Vice President since 1991; Chief Financial Officer
and Vice President since 1983; Secretary since 1988
Cyril J. Greenya 54 Senior Vice President - Commercial Underwriting since 1997;
Vice President - Commercial Underwriting for five years
prior thereto; Manager - Commercial Underwriting for nine
years prior thereto
Frank J. Wood 65 Senior Vice President - Marketing since 1997; Vice-President -
Marketing for nine years prior thereto; Manager - Marketing
for one year prior thereto
22
James B. Price 63 Senior Vice President - Claims since 1997; Vice President -
Claims for 25 years prior thereto
Robert G. Shenk 46 Senior Vice President - Claims since 1997; Vice President -
Claims for five years prior thereto
William H. Shupert 72 Senior Vice President - Underwriting since 1991; Vice
President - Underwriting for 18 years prior thereto
Daniel J. Wagner 38 Treasurer since 1993; Controller for five years prior thereto
23
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
33 of the Company's Annual Report to Stockholders for the year ended December
31, 1998, which is included as Exhibit (13) to this Form 10-K Report. As of
March 15, 1999, the Company had approximately 566 holders of record of its
Common Stock. The Company declared dividends of $.2925 per share in 1997 and
$.3375 per share in 1998.
Item 6. Selected Financial Data.
The response to this Item is incorporated by reference to page 1 of
the Company's Annual Report to Stockholders for the year ended December 31,
1998, 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 12
through 15 of the Company's Annual Report to Stockholders for the year ended
December 31, 1998, 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 16
through 30 of the Company's Annual Report to Stockholders for the year ended
December 31, 1998, 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.
24
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 7 through 10 of the Company's proxy statement
relating to the Company's annual meeting of stockholders to be held April 15,
1999. 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 10
through 15 of the Company's proxy statement relating to the Company's annual
meeting of stockholders to be held April 15, 1999, 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 2
through 4 of the Company's proxy statement relating to the Company's annual
meeting of stockholders to be held April 15, 1999.
Item 13. Certain Relationships and Related Transactions.
The response to this Item is incorporated by reference to pages 4
through 6 and page 14 of the Company's proxy statement relating to the Company's
annual meeting of stockholders to be held April 15, 1999.
25
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......................... 31
Donegal Group Inc. and Subsidiaries:
Consolidated Balance Sheets as of December 31, 1998
and 1997 .......................................... 16
Consolidated Statements of Income for the three years
ended December 31, 1998, 1997 and 1996 ............ 17
Consolidated Statements of Stockholders' Equity for
the three years ended December 31, 1998, 1997 and
1996............................................... 18
Consolidated Statements of Cash Flows for the three
years ended December 31, 1998, 1997 and 1996....... 19
Notes to Consolidated Financial Statements............ 20-30
(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............ 31
Schedule II. Condensed Financial Information of
Parent Company............................ 32
Schedule III Supplementary Insurance Information....... 35
Schedule IV. Reinsurance............................... 37
Schedule VI. Supplemental Insurance Information
Concerning Property and Casualty
Subsidiary................................ 38
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.
- ------------------
* Refers to the respective page of Donegal Group Inc.'s 1998 Annual Report to
Stockholders. The Consolidated Financial Statements and Notes to Consolidated
Financial Statements and Auditor's Report thereon on pages 16 through 31 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, 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.
26
(3) Exhibits
Exhibit No. Description of Exhibits Reference
- ----------- ----------------------- ---------
(3)(i) Certificate of Incorporation of (a)
Registrant
(3)(ii) Amended and Restated By-laws of (b)
Registrant
(4) Form of Registrant's Common Stock (a)
Certificate
Management Contracts and Compensatory Plans or Arrangements
(10)(A) Donegal Mutual Insurance Company (a)
Money Purchase Pension Plan and
Trust dated March 12, 1985
(10)(B) Donegal Mutual Insurance Company (a)
Profit Sharing Plan and Trust
dated March 12, 1985
(10)(C) Donegal Group Inc. Key Executive (c)
Incentive Bonus Plan dated
September 29, 1986
(10)(D) Donegal Group Inc. Employee Stock (c)
Purchase Plan, as amended
(10)(E) Donegal Group Inc. Equity Incentive (c)
Plan, as amended
(10)(F) Donegal Group Inc. Agency (j)
Stock Purchase Plan
(10)(G) Donegal Group Inc. Amended and filed herewith
Restated 1996 Equity Incentive
Plan
(10)(H) Donegal Group Inc. Amended (i)
and Restated 1996 Equity Incentive
Plan for Directors
27
(10)(I) Donegal Group Inc. Executive (b)
Restoration Plan
Other Material Contracts
(10)(J) Tax Sharing Agreement dated (a)
September 29, 1986 between Donegal
Group Inc. and Atlantic States
Insurance Company
(10)(K) Services Allocation Agreement dated (a)
September 29, 1986 between Donegal
Mutual Insurance Company, Donegal
Group Inc. and Atlantic States
Insurance Company
(10)(L) Proportional Reinsurance Agreement (a)
dated September 29, 1986 between
Donegal Mutual Insurance Company
and Atlantic States Insurance Company
(10)(M) Amendment dated October 1, 1988 to (d)
Proportional Reinsurance Agreement
between Donegal Mutual Insurance Company
and Atlantic States Insurance Company
(10)(N) Multi-Line Excess of Loss Reinsurance (f)
Agreement effective 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)(O) Amendment dated July 16, 1992 to Propor- (e)
tional Reinsurance Agreement between
Donegal Mutual Insurance Company and
Atlantic States Insurance Company
(10)(P) Amendment dated as of December 21, 1995 (g)
to Proportional Reinsurance Agreement
between Donegal Mutual Insurance Company
and Atlantic States Insurance Company
28
(10)(Q) Credit Agreement dated as of December 29, (g)
1995 between Donegal Group Inc. and Fleet
National Bank of Connecticut
(10)(R) Stock Purchase Agreement dated as of (g)
December 21, 1995 between Donegal Mutual
Insurance Company and Donegal Group Inc.
(10)(S) Donegal Group Inc. 1996 Employee Stock (h)
Purchase Plan
(10)(T) Reinsurance and Retrocession Agreement (b)
dated May 21, 1996 between Donegal Mutual
Insurance Company and Pioneer Insurance
Company
(10)(U) Reinsurance and Retrocession Agreement (b)
dated May 21, 1996 between Donegal
Mutual Insurance Company and
Delaware American Insurance Company
(10)(V) Reinsurance and Retrocession Agreement (b)
dated May 21, 1996 between Donegal
Mutual Insurance Company and Southern
Insurance Company of Virginia
(10)(W) Stock Purchase Agreement dated as of
May 14, 1998 between Donegal Group Inc.
and Southern Heritage Limited Partnership (k)
(10)(X) Amendment dated November 17, 1998 to (k)
Stock Purchase Agreement dated as of
May 14, 1998 between Donegal Group Inc.
and Southern Heritage Limited Partnership
(10)(Y) Amended and Restated Credit Agreement (k)
dated as of July 27, 1998 among
Donegal Group Inc., the banks and other
financial institutions from time to time
party thereto and Fleet National Bank, as
Agent
(13) 1998 Annual Report to Stockholders filed herewith
(electronic filing contains only those
portions incorporated by reference into
this Form 10-K report)
(20) Proxy Statement relating to the Annual (l)
Meeting of Stockholders to be held on
29
April 15, 1999, 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 exhibits in Registrant's Form S-1 Registration
Statement No. 33-8533 declared effective October 29, 1986.
(b) 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.
(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, 1986.
(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, 1988.
(e) Such exhibit is hereby incorporated by reference to the
like-described exhibit in Registrant's Form 10-K Report for the year
ended December 31, 1992.
(f) Such exhibit is hereby incorporated by reference to the
like-described exhibit in Registrant's Form S-2 Registration
Statement No. 33-67346 declared effective September 29, 1993.
(g) Such exhibit is hereby incorporated by reference to the
like-described exhibit in Registrant's Form 8-K Report dated
December 21, 1995.
(h) 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.
(i) Such exhibit is hereby incorporated by reference to the
like-described exhibit in Registrant's Form 10-K Report for the year
ended December 31, 1997.
(j) 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.
(k) Such exhibit is hereby incorporated by reference to the
like-described exhibit in Registrant's Form 8-K Report dated
November 17, 1998.
(l) Such exhibit is hereby incorporated by reference to the Registrant's
definitive proxy statement filed March 22, 1999.
30
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1998
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..... $ 99,832 $103,766 $ 99,832
All other corporate
bonds..................... 9,131 9,550 9,131
Mortgage-backed
securities................ 18,221 18,317 18,221
-------- --------- ---------
Total fixed maturities
held to maturity........... 127,184 131,633 127,184
-------- --------- ---------
Available for sale:
United States government
and governmental agencies
and authorities including
obligations of states
and political
subdivisions............... 74,116 75,397 75,396
All other corporate
bonds..................... 10,643 10,787 10,787
Mortgage-backed
securities................ 4,331 4,342 4,342
-------- --------- ---------
Total fixed maturities
available for sale........ 89,090 90,526 90,525
-------- --------- ---------
Total fixed maturities..... 216,274 222,159 217,709
-------- --------- ---------
Equity Securities:
Preferred stocks
Public utilities........... 250 250 250
Banks...................... 2,713 2,801 2,801
Industrial and
miscellaneous............. 987 1,022 1,022
-------- --------- ---------
Total preferred stocks..... 3,950 4,073 4,073
-------- --------- ---------
Common stocks
Public utilities........... 57 56 56
Banks and insurance
companies................. 308 852 852
Industrial and
miscellaneous............. 1,892 1,783 1,783
-------- --------- ---------
Total common stocks........ 2,257 2,691 2,691
-------- --------- ---------
Total equity securities.... 6,207 6,764 6,764
-------- --------- ---------
Short-term investments....... 30,522 30,522 30,522
-------- --------- ---------
Total investments........... $253,003 $259,445 $254,995
======== ========= =========
31
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Condensed Balance Sheets
($ in thousands)
December 31, 1998 and 1997
ASSETS
1998 1997
---- ----
Investment in subsidiaries
(equity method) $134,441 $ 99,857
Short-term investments, at cost,
which approximates market 3 3
Cash 599 730
Property and equipment 2,276 2,139
Goodwill 121 --
Current income taxes 568 243
Loan costs 254 205
Other receivables 1,178 --
--------- --------
Total assets $139,440 $103,177
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
---- ----
Cash dividends declared to
stockholders $ 708 $ 604
Accounts payable and accrued
expenses 277 208
Deferred income taxes 324 268
Line of credit 37,500 10,500
-------- -------
Total liabilities 38,809 11,580
Stockholders' equity
Preferred stock, $1.00 par value,
authorized 1,000,000 shares, none
issued
Common stock, $1.00 par value,
authorized 15,000,000 shares, issued
8,325,221 and 6,122,431 shares and
outstanding 8,202,933 and 6,030,715
shares 8,325 6,123
Additional paid-in capital 41,271 38,932
Accumulated other comprehensive income
Retained earnings, including equity in
undistributed net income of subsidiaries 1,316 1,012
($64,922 and $56,082) 50,611 46,422
Treasury stock, at cost (892) (892)
-------- --------
Total stockholders' equity 100,631 91,597
-------- --------
Total liabilities and stockholders'
equity $139,440 $103,177
======== ========
32
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Condensed Statements of Income
($ in thousands)
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Revenues
Dividends-subsidiary $1,000 $950 $ 0
Lease income 754 643 541
Investment income 22 15 31
------ ------- ------
Total revenues 1,776 1,608 572
Expenses
Operating Expenses 718 643 548
Interest 1,293 1,022 416
------ ------- ------
Total expenses 2,011 1,665 964
------ ------- ------
Loss before income tax
benefit and equity in
undistributed net
income of subsidiaries (235) (57) (392)
Income tax benefit (413) (346) (533)
------ ------- ------
Income before equity in
undistributed net income
of subsidiaries 178 289 141
Equity in undistributed
net income of subsidiaries 8,840 10,352 8,417
------ ------- ------
Net income $9,018 $10,641 $8,558
====== ======= ======
33
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED INFORMATION OF PARENT COMPANY
Condensed Statements of Cash Flows
($ in thousands)
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
-------- -------- -------
Cash flows from operating activities:
Net income $ 9,018 $ 10,641 $ 8,558
-------- -------- -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of
subsidiaries (8,840) (10,352) (8,417)
Change in accounts payable and accrued
expenses 35 34 (143)
Depreciation and amortization 491 401 309
Change in deferred income tax 56 2 16
Change in current income tax receivable (325) (85) 183
Change in other receivables (1,178) 30 8
-------- -------- -------
Net adjustments (9,761) (9,970) (8,044)
-------- -------- -------
Net cash provided by (used in) operating activities (743) 671 514
-------- -------- -------
Cash flows from investing activities:
Net sales (purchases) of short-term investments (5,280) 4 1,110
Net purchase of property and equipment (564) (1,251) (203)
Capital contribution to subsidiaries (2,000) --- (5,000)
Acquisition of Southern Heritage (18,361) --- ---
Acquisition of Delaware Atlantic --- --- (202)
-------- -------- -------
Net cash provided by (used in) investing activities (26,205) (1,247) (4,295)
-------- -------- -------
Cash flows from financing activities:
Cash dividends paid (2,664) (2,252) (1,879)
Issuance of common stock 2,481 1,131 2,512
Purchase of treasury stock --- --- (72)
Line of credit, net 27,000 2,000 3,500
-------- -------- -------
Net cash provided by (used in) financing activities 26,817 879 4,061
-------- -------- -------
Net change in cash (131) 303 280
Cash beginning 730 427 147
-------- -------- -------
Cash ending $ 599 $ 730 $ 427
======== ======== =======
-34-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
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, 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
======== ======= ======= ======= ======= ========
Year Ended
December 31, 1996
- -----------------
Personal Lines $ 58,356 $ --- $45,822 $10,286 $ 9,588 $ 60,788
Commercial Lines 46,171 --- 24,599 6,746 6,289 48,427
Investments --- 10,799 --- --- --- ---
-------- ------- ------- ------- ------- --------
$104,527 $10,799 $70,421 $17,032 $15,877 $109,215
======== ======= ======= ======= ======= ========
(continued)
-35-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
At December 31,
Deferred Liability Other Policy
Policy for Losses Claims and
Acquisition and Loss Unearned Benefits
Segment Costs Expenses Premiums Payable
------- ----------- ---------- -------- ---------------
1998
----
Personal Lines $ 7,648 $ 77,482 $63,916 $ --
Commercial Lines 3,686 63,927 30,807 --
Investments -- -- -- --
------- -------- ------- -------
$11,334 $141,409 $94,723 $ --
======= ======== ======= =======
1997
----
Personal Lines $ 4,732 $ 54,309 $39,972 $ --
Commercial Lines 3,716 63,803 31,396 --
Investments -- -- -- --
------- -------- ------- -------
$ 8,448 $118,112 $71,368 $ --
======= ======== ======= =======
-36-
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, 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%
=========== =========== ============ ============ ====
Year Ended
December 31, 1996
- -----------------
Property and
casualty premiums $49,802,516 $41,185,853 $ 95,910,375 $104,527,038 92%
=========== =========== ============ ============ ====
-37-
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,
1998 $11,334,301 $141,409,008 $ --- $94,722,785
=========== ============ ========= ===========
1997 $ 8,448,060 $118,112,390 $ --- $71,367,691
=========== ============ ========= ===========
(continued)
-38-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE VI - SUPPLEMENTARY INSURANCE INFORMATION
CONCERNING PROPERTY AND CASUALTY SUBSIDIARIES
Losses and Loss
Expenses Related to Amortization
--------------------- of Deferred Net
Net (1) (2) Policy Paid Losses Net
Earned Investment Current Prior Acquisition and Loss Premiums
Premiums Income Year Years Costs Expenses Written
-------- ---------- ------- ----- ------------ ----------- --------
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
============ =========== =========== =========== =========== =========== ============
Year Ended
December 31, 1996 $104,527,038 $10,768,518 $73,211,924 $(2,791,000) $17,032,000 $66,148,749 $109,169,176
============ =========== =========== =========== =========== =========== ============
-39-
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 30, 1999 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 30, 1999
- ------------------------------- (principal executive officer)
Donald H. Nikolaus
/s/ Ralph G. Spontak Senior Vice President and March 30, 1999
- ------------------------------- Secretary (principal financial
Ralph G. Spontak and accounting officer)
/s/ Robert S. Bolinger Director March 30, 1999
- -------------------------------
Robert S. Bolinger
Director March , 1999
- -------------------------------
Thomas J. Finley
/s/ Patricia A. Gilmartin Director March 30, 1999
- -------------------------------
Patricia A. Gilmartin
/s/ Philip H. Glatfelter, II Director March 30, 1999
- -------------------------------
Philip H. Glatfelter, II
/s/ C. Edwin Ireland Director March 30, 1999
- -------------------------------
C. Edwin Ireland
Director March , 1999
- -------------------------------
R. Richard Sherbahn
-40-
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit No. Description of Exhibits Reference
----------- ----------------------- ---------
(3)(i) Certificate of Incorporation of (a)
Registrant
(3)(ii) Amended and Restated By-laws of (b)
Registrant
(4) Form of Registrant's Common Stock (a)
Certificate
Management Contracts and Compensatory Plans or Arrangements
- -----------------------------------------------------------
(10)(A) Donegal Mutual Insurance Company (a)
Money Purchase Pension Plan and
Trust dated March 12, 1985
(10)(B) Donegal Mutual Insurance Company (a)
Profit Sharing Plan and Trust
dated March 12, 1985
(10)(C) Donegal Group Inc. Key Executive (c)
Incentive Bonus Plan dated
September 29, 1986
(10)(D) Donegal Group Inc. Employee Stock (c)
Purchase Plan, as amended
(10)(E) Donegal Group Inc. Equity Incentive (c)
Plan, as amended
(10)(F) Donegal Group Inc. Agency (j)
Stock Purchase Plan
(10)(G) Donegal Group Inc. Amended and filed herewith
Restated 1996 Equity Incentive
Plan
(10)(H) Donegal Group Inc. Amended and (i)
Restated 1996 Equity Incentive
Plan for Directors
(10)(I) Donegal Group Inc. Executive (b)
Restoration Plan
-41-
Other Material Contracts
- ------------------------
(10)(J) Tax Sharing Agreement dated (a)
September 29, 1986 between Donegal
Group Inc. and Atlantic States
Insurance Company
(10)(K) Services Allocation Agreement dated (a)
September 29, 1986 between Donegal
Mutual Insurance Company, Donegal
Group Inc. and Atlantic States
Insurance Company
(10)(L) Proportional Reinsurance Agreement (a)
dated September 29, 1986 between
Donegal Mutual Insurance Company
and Atlantic States Insurance Company
(10)(M) Amendment dated October 1, 1988 to (d)
Proportional Reinsurance Agreement
between Donegal Mutual Insurance Company
and Atlantic States Insurance Company
(10)(N) Multi-Line Excess of Loss Reinsurance (f)
Agreement effective 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)(O) Amendment dated July 16, 1992 to Propor- (e)
tional Reinsurance Agreement between
Donegal Mutual Insurance Company and
Atlantic States Insurance Company
(10)(P) Amendment dated as of December 21, 1995 (g)
to Proportional Reinsurance Agreement
between Donegal Mutual Insurance Company
and Atlantic States Insurance Company
(10)(Q) Credit Agreement dated as of December 29, (g)
1995 between Donegal Group Inc. and Fleet
National Bank of Connecticut
-42-
(10)(R) Stock Purchase Agreement dated as of (g)
December 21, 1995 between Donegal Mutual
Insurance Company and Donegal Group Inc.
(10)(S) Donegal Group Inc. 1996 Employee Stock (h)
Purchase Plan
(10)(T) Reinsurance and Retrocession Agreement (b)
dated May 21, 1996 between Donegal
Mutual Insurance Company and Pioneer
Insurance Company
(10)(U) Reinsurance and Retrocession Agree- (b)
ment dated May 21, 1996 between
Donegal Mutual Insurance Company and
Delaware American Insurance Company
(10)(V) Reinsurance and Retrocession Agree- (b)
ment dated May 21, 1996 between
Donegal Mutual Insurance Company and
Southern Insurance Company of Virginia
(10)(W) Stock Purchase Agreement dated (k)
as of May 14, 1998 between Donegal
Group Inc. and Southern Heritage
Limited Partnership
(10)(X) Amendment dated November 17, 1998 (k)
to Stock Purchase Agreement dated
as of May 14, 1998 between Donegal
Group Inc. and Southern Heritage
Limited Partnership
(10)(Y) Amended and Restated Credit Agreement (k)
dated as of July 27, 1998 among
Donegal Group Inc., the banks and
other financial institutions from
time to time party thereto and Fleet
National Bank, as Agent
(13) 1998 Annual Report to Stockholders filed herewith
(electronic filing contains only
those portions incorporated by
reference into this Form 10-K
report)
-43-
(20) Proxy Statement relating to the Annual (l)
Meeting of Stockholders to be held on
April 15, 1999, 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 S-1 Registration Statement No. 33-8533
declared effective October 29, 1986.
(b) 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.
(c) 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.
(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,
1988.
(e) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1992.
(f) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-2 Registration Statement No. 33-67346
declared effective September 29, 1993.
(g) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated December 21, 1995.
(h) 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.
(i) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1997.
(j) 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.
(k) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated November 17, 1998.
(l) Such exhibit is hereby incorporated by reference to the Registrant's
definitive proxy statement filed March 22, 1999.
-44-