Exhibit 13
Financial Highlights
Year Ended December 31,
Income statement data 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Net premiums earned $116,168,992 $107,302,168 $104,527,038 $ 89,522,203 $ 79,026,809
Investment income 11,997,661 11,507,277 10,799,369 9,713,744 8,188,852
Total revenues 130,586,365 121,327,606 117,581,664 101,615,698 88,607,550
Net income 9,017,840 10,641,186 8,557,774 9,559,610 4,589,397
Net income per common share
Basic 1.11 1.33* 1.10* 1.29* .63*
Diluted 1.09 1.32* 1.09* 1.26* .62*
- ---------------------------------------------------------------------------------------------------------------------------
Balance sheet data
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $385,231,506 $304,104,505 $287,990,994 $244,943,598 $215,013,165
Stockholders' equity 100,631,004 91,596,663 81,599,274 73,020,689 61,338,761
Book value per share 12.27 11.39* 10.26* 9.64* 8.42*
- ---------------------------------------------------------------------------------------------------------------------------
* Restated
Management's Discussion and Analysis of Results of
Operation and Financial Condition 12
Consolidated Balance Sheets 16
Consolidated Statements of Income and Comprehensive Income 17
Consolidated Statements of Stockholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20
Independent Auditors' Report 31
Board of Directors and Officers 32
Corporate Information 33
Management's Discussion and Analysis of Results of Operation and Financial
Condition
Donegal Group Inc. ("DGI" or the "Company") is a regional insurance holding
company doing business in the Mid-Atlantic and Southern states through its five
wholly-owned property-casualty insurance subsidiaries, Atlantic States Insurance
Company ("Atlantic States"), Southern Insurance Company of Virginia
("Southern"), Southern Heritage Insurance Company ("Southern Heritage"),
Delaware Atlantic Insurance Company ("Delaware") and Pioneer Insurance Company
("Pioneer") (collectively "Insurance Subsidiaries"). The Company has three
operating segments: the investment function, the personal lines of insurance and
the commercial lines of insurance. Products offered in the personal lines of
insurance consist primarily of homeowners and private passenger automobile
policies. Products offered in the commercial lines of insurance consist
primarily of commercial automobile, commercial multiple peril and workers'
compensation policies. The Insurance Subsidiaries are subject to regulation by
Insurance Departments in those states in which they operate and undergo periodic
examination by those departments. The Insurance Subsidiaries 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 60% of the outstanding common shares of the Company as of
December 31, 1998.
On June 25, 1998, the Company issued a 4-for-3 stock split in the form of a
33 1/3% stock dividend to stockholders of record as of June 10, 1998. Per share
information prior to June 25, 1998, has been restated for this change.
Atlantic States participates in an intercompany pooling arrangement with the
Mutual Company and assumes 65% of the pooled business. Southern cedes 50% of its
business to the Mutual Company and Delaware cedes 70% of its Workers'
Compensation business to the Mutual Company. Because the Mutual Company places
substantially all of the business assumed from Southern and Delaware into the
pool, from which the Company has a 65% allocation, the Company's results of
operations include approximately 83% of the business written by Southern and
approximately 76% of the Workers' Compensation business written by Delaware.
In November 1998, the Company acquired all of the outstanding stock of
Southern Heritage. This transaction was accounted for as a "purchase." The
Company's financial statements include Southern Heritage as a consolidated
subsidiary from November 1, 1998.
In addition to the Company's Insurance Subsidiaries, it also owns all of the
outstanding stock of Atlantic Insurance Services, Inc. ("AIS"), an insurance
services organization currently providing inspection and policy auditing
information on a fee-for-service basis to its affiliates and the insurance
industry.
Results of Operation 1998 Compared to 1997
Total revenues for 1998 were $130,586,365, which were $9,258,759, or 7.6%,
greater than 1997. Net premiums earned increased to $116,168,992, an increase of
$8,866,824, or 8.3%, over 1997. The acquisition of Southern Heritage contributed
$4,835,036, or 4.5%, to the earned premiums in 1998. Direct premiums written by
the combined pool of Atlantic States and the Mutual Company increased $6,426,444
or 4.7%. A 17.5% increase in the direct premiums written of Southern, a 6.5%
decrease in the direct premiums written of Delaware and an 11.7% decrease in the
direct premiums written of Pioneer accounted for the majority of the remaining
change. The Company reported realized investment losses of $13,562, compared to
realized investment gains of $314,136 in 1997. Realized gains and losses in both
years resulted from normal turnover of the Company's investment portfolio. As of
December 31, 1998, 99.9% of the Company's bond portfolio was classified as Class
1 (highest quality) by the National Association of Insurance Commissioners'
Securities Valuation Office. Investment income increased $490,384. An increase
in the average invested assets from $198,727,027 to $208,303,664, offset by a
decrease in the average yield to 5.6% from 5.8% in 1997, accounted for the
change.
The GAAP combined ratio of insurance operations was 99.8% in 1998, compared
to 97.6% in 1997. The GAAP combined ratio is the sum of the ratios of incurred
losses and loss adjustment expenses to premiums earned (loss ratio),
underwriting expenses to premiums earned (expense ratio) and policyholder
dividends to premiums earned (dividend ratio). The loss ratio in 1998 was 63.0%,
compared to 63.1% in 1997. The expense ratio for 1998 was 35.4%, compared to
33.3% in 1997, with the dividend ratio increasing from 1.2% in 1997 to 1.4% in
1998. The increase in the Company's expense ratio accounted for the change in
its combined ratio. The expense ratio was adversely affected by a charge to
earnings in the third quarter resulting from an unprecedented large mandatory
Pennsylvania Insurance Guaranty Association assessment arising from the
insolvency of two medical malpractice companies. The Company's share of the
Guaranty Association liability arising from these two companies was
12 / Donegal Group Annual Report 1998
$1.3 million. Guaranty Association assessments represent mandatory regulatory
charges that must be absorbed by substantially all property and casualty
insurance companies doing business in a state where an insolvent company had
been writing business, including companies, like Donegal, who do not write lines
of business that the insolvent companies were writing.
Results of Operation 1997 Compared to 1996
Total revenues for 1997 were $121,327,606 which were $3,745,942, or 3.2%,
greater than 1996. Net premiums earned increased to $107,302,168, an increase of
$2,775,130, or 2.7%, over 1996. Direct premiums written by the combined pool of
Atlantic States and the Mutual Company decreased $107,786, with Workers'
Compensation decreasing $4,052,981, or 19.5%, due to a mandatory rate rollback
for that line in Pennsylvania. A 12.4% increase in the direct premiums written
of Southern, a 6.6% increase in the direct premiums written of Delaware and an
18.5% decrease in the direct premiums written of Pioneer accounted for the
majority of the remaining increase. The Company reported realized investment
gains of $314,136, compared to realized investment gains of $172,734 in 1996.
Gains in both years resulted from normal turnover of the Company's investment
portfolio. As of December 31, 1997, 99.9% of the Company's bond portfolio was
classified as Class 1 (highest quality) by the National Association of Insurance
Commissioners' Securities Valuation Office. Investment income increased
$707,908. An increase in the average invested assets from $180,352,394 to
$198,727,027, offset by a decrease in the average yield to 5.8% from 6.0% in
1996, accounted for the change.
The GAAP combined ratio of insurance operations was 97.6% in 1997, compared
to 100.4% in 1996. The GAAP combined ratio is the sum of the ratios of incurred
losses and loss adjustment expenses to premiums earned (loss ratio),
underwriting expenses to premiums earned (expense ratio) and policyholder
dividends to premiums earned (dividend ratio). The loss ratio in 1997 was 63.1%,
compared to 67.4% in 1996, accounting for the majority of the change in the
combined ratio. This decrease in the loss ratio resulted from a return to more
normal weather patterns in 1997, compared to severe winter weather experienced
in the primary operating areas of the Company in the first quarter of 1996. The
expense ratio for 1997 was 33.3%, compared to 31.5% in 1996, with the dividend
ratio decreasing from 1.5% in 1996 to 1.2% in 1997 due primarily to the rate
rollback in Workers' Compensation in 1997.
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 December 31,
1998, 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.
As of December 31, 1998, pursuant to a credit agreement dated December 29,
1995, with Fleet National Bank of Connecticut, the Company had unsecured
borrowings of $37.5 million. Such borrowings were made in connection with the
acquisitions of Delaware, Pioneer and Southern Heritage and various capital
contributions to the subsidiaries. Per the terms of the credit agreement, the
Company may borrow up to $40 million at interest rates equal to the bank's then
current prime rate or the then current London interbank Eurodollar bank rate
plus 1.70%. At December 31, 1998, the interest rates on the outstanding balances
were 7.75% on an outstanding prime rate balance of $22.5 million and 6.93375% on
an outstanding Eurodollar rate balance of $15 million. In addition, the Company
pays a rate of 3/10 of 1% per annum on the average daily unused portion of the
bank's commitment. On each July 27, commencing July 27, 2001, the credit line
will be reduced by $8 million. Any outstanding loan in excess of the remaining
credit line after such reduction will then be payable.
The Company's principal sources of cash with which to meet obligations and
pay stockholder dividends are dividends from the Insurance Subsidiaries 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. The Insurance Subsidiaries are also subject to
Risk Based Capital (RBC) requirements which may further impact their ability to
pay dividends. At December 31, 1998, all five companies' statutory capital and
surplus were substantially above the RBC requirements. At December 31, 1998,
amounts available for distribution as dividends to DGI without prior approval of
the insurance regulatory authorities were $6,480,524 from Atlantic States,
$638,832 from Southern, $1,085,807 from Delaware, $530,035 from Pioneer and
$1,580,564 from Southern Heritage.
Donegal Group Annual Report 1998 / 13
Net unrealized gains resulting from fluctuations in the fair value of
investments reported in the balance sheet at fair value were $1,315,425 (net of
applicable federal income tax) at December 31, 1998, and $1,011,417 (net of
applicable federal income tax) at December 31, 1997.
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 the
Company's commercial business is billed through its agents, who are extended
credit in the normal course of business.
The Company's Insurance Subsidiaries have reinsurance agreements in place
with the Mutual Company, as described in Note 3 of the financial statements, and
with a number of other major authorized reinsurers, as described in Note 9 of
the financial statements.
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.
Year 2000 Issues
The Year 2000 issue (i.e. the ability of computer systems to properly process
information which contains dates beginning with January 1, 2000 and thereafter)
affects virtually all companies. All computer systems used for processing of
business for the Company are owned and operated by the Mutual Company.
The ability to process information in a timely and accurate manner is vital
to the Company's property and casualty insurance business. The Company
recognizes that the systems used to process its business must be able to
accurately identify and process information containing year 2000 dates. The
Mutual Company has had a vigorous and comprehensive project underway since 1995
to ensure substantial compliance by the end of 1998. This project was initiated
as part of a review of the main application systems utilized by the Mutual
Company and was geared towards the implementation of new or current versions of
its applications software to bring greater efficiencies and operational
improvements to its users. The project was expanded to include a review of all
hardware, peripheral software and inquiries of agents and vendors to determine
the readiness of each related to the Year 2000 problem. During 1998 the Mutual
Company put into production its updated, Year-2000-compliant versions of its
main application softwares and late in the year began issuing policies with
expiration dates in the year 2000. The implementations of these updated systems
were without major problems and the Mutual Company's mission-critical systems
were substantially Year-2000-compliant by the end of 1998. Testing of less
critical systems, documentation of vendors' readiness and final testing of
certain other potential problem dates will continue during the first half of
1999. Costs directly related to Year 2000 changes were not material.
With respect to insurance policies issued by the Company providing coverages
to insureds who may incur losses as a result of Year 2000 problems, the Company
is evaluating its possible exposure under such coverages. Endorsements excluding
losses related to or resulting from Year 2000 issues are being attached to
commercial policies.
Given the nature of its business, the Company believes that its exposure to
embedded chip Year 2000 issues is minimal. The Company believes that its most
significant Year 2000 exposure is the potential business disruption that would
be caused by widespread failure of public utility systems. Prolonged failure of
power and telecommunications systems could have a material adverse effect on the
Company's results of operations, cash flows and consolidated financial position.
This Year 2000 disclosure contains statements which are forward-looking
statements that involve risks and uncertainties and qualify for the statutory
safe harbor under the Private Securities Litigation Reform Act of 1995. Future
Year 2000 readiness activities may not adhere to the anticipated schedule
because more problems may be encountered than anticipated in the various stages
of testing and trained personnel may not be available to work on internal
systems in the time required; or there may be unexpected problems with the
readiness of third party business partners and vendors who cannot produce
services, or utility companies may not be able to provide the vital services
required to maintain operations.
Impact of New Accounting Standards
Accounting for Derivative Instruments and for Hedging Activities
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and for Hedging Activities," requires enterprises to
record derivatives on the balance sheet at fair
14 / Donegal Group Annual Report 1998
value and establishes special accounting for the following three different types
of hedges: hedges of changes in the fair value of assets, liabilities or firm
commitments; hedges of the variable cash flows of forecasted transactions; and
hedges of foreign currency exposures of net investments in foreign operations.
SFAS No. 133 is effective for years beginning after June 15, 1999, with earlier
adoption permitted. The Company believes that the effect of adoption of SFAS No.
133 will not be material.
Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments
In 1997, the AICPA issued Statement of Position (SOP) 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments," which
provides guidance for determining when to recognize, and how to determine, a
liability for guaranty-fund and other insurance-related assessments. SOP 97-3 is
effective for financial statements issued for fiscal years beginning after
December 15, 1998. The Company expects to adopt this SOP on January 1, 1999 and
currently believes that the cumulative effect of this change in accounting
principle will not be material.
Accounting for Costs of Computer Software Developed or
Obtained for Internal Use
In March 1998, the AICPA issued SOP 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use." This SOP requires that certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. This
SOP also requires that costs related to the preliminary project stage and the
post-implementation/operations stage in an internal-use computer software
development project be expensed as incurred. SOP 98-1 is effective for financial
statements issued for fiscal years beginning after December 15, 1998. The
Company expects to adopt this SOP on January 1, 1999 and is currently assessing
its impact on the Company's financial reporting.
Quantitative and Qualitative Disclosure
About Market Risk
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates is
concentrated in its investment portfolio and, to a lesser extent, its debt
obligations. The Company monitors this exposure through periodic reviews of
asset and liability positions. Estimates of cash flows and the impact of
interest rate fluctuations relating to the investment portfolio are modeled
regularly.
Principal cash flows and related weighted-average interest rates by expected
maturity dates for financial instruments sensitive to interest rates at December
31, 1998 are as follows:
Principal Weighted-Average
Cash Interest
Flows Rate
- -------------------------------------------------------------------------------
Fixed maturities and
short-term investments:
1999 $ 47,671,887 5.78%
2000 18,010,000 5.79%
2001 14,625,261 6.87%
2002 9,911,162 6.07%
2003 13,100,000 5.71%
Thereafter 141,981,802 5.82%
- -------------------------------------------------------------------------------
Total $245,300,112
===============================================================================
Market value $252,681,041
===============================================================================
Debt
1999 $ 0 7.42%
2000 0 7.42%
2001 5,500,000 7.42%
2002 8,000,000 7.42%
2003 8,000,000 7.42%
Thereafter 16,000,000 7.42%
- -------------------------------------------------------------------------------
Total $ 37,500,000
===============================================================================
Fair value $ 37,500,000
===============================================================================
Actual cash flows may differ from those stated as a result of calls and
prepayments.
Equity Price Risk
The Company's portfolio of equity securities, which is carried on the balance
sheet at market value, has exposure to price risk. Price risk is defined as the
potential loss in market value resulting from an adverse change in prices.
Portfolio characteristics are analyzed regularly and market risk is actively
managed through a variety of techniques. The portfolio is diversified across
industries, and concentrations in any one company or industry are limited by
parameters established by management.
The combined total of realized and unrealized equity investment gains and
(losses) were ($307,147), $586,178, and $199,733 in 1998, 1997 and 1996,
respectively. During these three years the largest total equity investment gain
and (loss) in a quarter was $897,971 and ($1,435,101), respectively.
Donegal Group Annual Report 1998 / 15
Donegal Group Inc.
Consolidated Balance Sheets
Year Ended December 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Assets
Investments
Fixed maturities
Held to maturity, at amortized cost (fair value $131,633,299 and $120,882,886) $127,183,788 $117,246,205
Available for sale, at fair value (amortized cost $89,089,995 and $56,922,342) 90,525,855 57,731,251
Equity securities, available for sale, at fair value (cost $6,206,735 and $6,551,020) 6,763,943 7,274,562
Short-term investments, at cost, which approximates fair value 30,521,887 22,712,787
- --------------------------------------------------------------------------------------------------------------------------------
Total investments 254,995,473 204,964,805
Cash 8,227,042 3,413,315
Accrued investment income 3,164,599 2,741,207
Premiums receivable 19,824,894 11,244,628
Reinsurance receivable 48,339,223 40,953,032
Deferred policy acquisition costs 11,334,301 8,448,060
Federal income taxes receivable 227,841 56,454
Deferred tax asset, net 3,536,692 3,302,043
Prepaid reinsurance premiums 27,203,111 22,882,283
Property and equipment, net 5,920,420 4,938,524
Accounts receivable--securities 329,299 456,493
Due from affiliate -- 141,313
Other 2,128,611 562,348
================================================================================================================================
Total assets $385,231,506 $304,104,505
================================================================================================================================
Liabilities and Stockholders' Equity
Liabilities
Losses and loss expenses $141,409,008 $118,112,390
Unearned premiums 94,722,785 71,367,691
Accrued expenses 4,821,594 3,214,767
Drafts payable 1,394,373 --
Reinsurance balances payable 1,785,914 735,009
Cash dividend declared to stockholders 708,513 604,054
Borrowings under line of credit 37,500,000 10,500,000
Accounts payable--securities 503,840 2,499,059
Due to affiliate - Pioneer acquisition -- 5,191,774
Due to affiliate - other 870,083 --
Other 884,392 283,098
================================================================================================================================
Total liabilities 284,600,502 212,507,842
================================================================================================================================
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 8,325,221 6,122,431
Additional paid-in capital 41,271,322 38,932,117
Accumulated other comprehensive income 1,315,425 1,011,417
Retained earnings 50,610,792 46,422,454
Treasury stock, at cost (891,756) (891,756)
- --------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 100,631,004 91,596,663
================================================================================================================================
Total liabilities and stockholders' equity $385,231,506 $304,104,505
================================================================================================================================
See accompanying notes to consolidated financial statements.
16 / Donegal Group Annual Report 1998
Donegal Group Inc.
Consolidated Statements of Income and Comprehensive Income
Year Ended December 31, 1998 1997 1996
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Statements of Income
Revenues
Premiums earned $172,507,090 $159,055,645 $145,712,891
Premiums ceded 56,338,098 51,753,477 41,185,853
- ---------------------------------------------------------------------------------------------------------------------------------
Net premiums earned 116,168,992 107,302,168 104,527,038
Investment income, net of investment expenses 11,997,661 11,507,277 10,799,369
Installment payment fees 895,283 818,981 786,779
Lease income 753,408 643,183 541,010
Service fees 784,583 741,861 754,734
Net realized investment gains (losses) (13,562) 314,136 172,734
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenues 30,586,365 121,327,606 117,581,664
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses
Losses and loss expenses 110,448,552 99,408,492 98,615,417
Reinsurance recoveries 37,281,467 31,751,974 28,194,493
- ---------------------------------------------------------------------------------------------------------------------------------
Net losses and loss expenses 73,167,085 67,656,518 70,420,924
Amortization of deferred policy acquisition costs 19,490,000 18,696,000 17,032,000
Other underwriting expenses 21,712,346 17,058,668 15,876,797
Policy dividends 1,635,300 1,319,384 1,609,369
Interest 1,292,992 910,237 375,311
Other 1,611,627 1,513,256 1,530,635
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Total expenses 118,909,350 107,154,063 106,845,036
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 11,677,015 14,173,543 10,736,628
Income taxes 2,659,175 3,532,357 2,178,854
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 9,017,840 $ 10,641,186 $ 8,557,774
=================================================================================================================================
Net income per common share
Basic $ 1.11 $ 1.33* $ 1.10*
=================================================================================================================================
Diluted $ 1.09 $ 1.32* $ 1.09*
=================================================================================================================================
Statements of Comprehensive Income
Net income $ 9,017,840 $ 10,641,186 $ 8,557,774
- ---------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Unrealized gains on securities:
Unrealized holding gain (loss) arising during the period,
net of income tax expense (benefit) of
$151,999, $409,974 and ($186,364) 295,057 795,831 (361,766)
Reclassification adjustment for (gains) losses included
in net income, net of income tax expense (benefit) of
($4,611), $106,806 and $58,730 8,951 (207,330) (114,004)
- ---------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 304,008 588,501 (475,770)
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 9,321,848 $ 11,229,687 $ 8,082,004
=================================================================================================================================
* Restated for 4-for-3 stock split
See accompanying notes to consolidated financial statements.
Donegal Group Annual Report 1998 / 17
Donegal Group Inc.
Consolidated Statements of Stockholders' Equity
Accumulated
Preferred Stock Common Stock Additional Other Total
------------------------------------- Paid-in Comprehensive Retained Treasury Stockholders'
Shares Amount Shares Amount Capital Income Earnings Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
January 1, 1996 0 $ 0 4,326,362 $4,326,362 $35,564,792 $ 898,696 $33,050,629 $(819,780) $ 73,020,689
- -----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 214,207 214,207 2,297,923 2,512,130
Net income 8,557,774 8,557,774
Other comprehensive loss (475,770) (475,770)
Purchase of 43,739 shares
of treasury stock (71,976) (71,976)
Cash dividends
$.2475 per share* (1,943,573) (1,943,573)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1996 0 $ 0 4,540,569 $4,540,569 $37,862,715 $ 422,916 $39,664,830 $(891,756) $ 81,599,274
- -----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 61,523 61,523 1,069,402 1,130,925
Net income 10,641,186 10,641,186
Other comprehensive income 588,501 588,501
Cash dividends
$.2925 per share* (2,363,223) (2,363,223)
Stock dividend 1,520,339 1,520,329 (1,520,329)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1997 0 $ 0 6,122,431 $6,122,431 $38,932,117 $1,011,417 $46,422,454 $(891,756) $ 91,596,663
- -----------------------------------------------------------------------------------------------------------------------------------
Issuance of common stock 141,542 141,542 2,339,205 2,480,747
Net income 9,017,840 9,017,840
Other comprehensive income 304,008 304,008
Cash dividends
$.3375 per share* (2,768,254) (2,768,254)
Stock dividend 2,061,248 2,061,248 (2,061,248)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1998 0 $ 0 8,325,221 $8,325,221 $41,271,322 $1,315,425 $50,610,792 $(891,756) $100,631,004
===================================================================================================================================
* Restated for 4-for-3 stock split
See accompanying notes to consolidated financial statements.
18 / Donegal Group Annual Report 1998
Donegal Group Inc.
Consolidated Statements of Cash Flow
Year Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 9,017,840 $10,641,186 $ 8,557,774
- ------------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 520,675 390,857 256,694
Realized investment (gains) losses 13,562 (314,136) (172,734)
Changes in Assets and Liabilities, net of acquisition:
Losses and loss expenses 7,125,806 3,490,429 15,727,682
Unearned premiums 6,478,435 811,785 13,923,360
Accrued expenses (542,693) 827,727 (300,425)
Premiums receivable (1,253,529) (169,213) 1,509,474
Deferred policy acquisition costs (399,428) (610,161) (935,681)
Deferred income taxes 158,593 7,108 3,380
Reinsurance receivable (6,182,621) (78,023) (12,649,518)
Accrued investment income (186,170) (112,644) (124,330)
Amounts due from affiliate (4,180,378) (438,442) 1,514,009
Reinsurance balances payable (127,931) (11,926) 64,586
Prepaid reinsurance premiums (3,819,226) (508,964) (9,281,222)
Current income taxes (171,387) (700,983) 1,353,718
Other, net 100,292 192,808 44,969
- ------------------------------------------------------------------------------------------------------------------------------------
Net adjustments (2,466,000) 2,776,222 10,933,962
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,551,840 13,417,408 19,491,736
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchase of fixed maturities
Held to maturity (24,774,417) (15,834,418) (30,795,475)
Available for sale (43,662,157) (21,614,427) (21,900,833)
Purchase of equity securities (15,824,465) (10,598,546) (9,077,146)
Sale of fixed maturities
Available for sale 2,207,500 -- 7,247,675
Maturity of fixed maturities
Held to maturity 24,815,155 11,909,421 11,996,190
Available for sale 16,106,644 18,860,222 17,634,933
Sale of equity securities 16,155,130 6,695,236 9,493,480
Acquisition of Delaware Atlantic -- -- (202,243)
Acquisition of Southern Heritage (18,028,072) -- --
Purchase of property and equipment (650,014) (2,758,851) (255,754)
Net sales (purchases) of short-term investments 15,099,631 (1,242,030) (6,391,292)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (28,555,065) (14,583,393) (22,250,465)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Issuance of common stock 2,480,747 1,130,925 2,512,130
Borrowings under line of credit, net 27,000,000 2,000,000 3,500,000
Cash dividends paid (2,663,795) (2,251,788) (1,878,648)
Purchase of treasury stock -- -- (71,976)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 26,816,952 879,137 4,061,506
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 4,813,727 (286,848) 1,302,777
Cash at beginning of year 3,413,315 3,700,163 2,397,386
===================================================================================================================================
Cash at end of year $ 8,227,042 $ 3,413,315 $ 3,700,163
===================================================================================================================================
See accompanying notes to consolidated financial statements.
Donegal Group Annual Report 1998 / 19
Notes to Consolidated Financial Statements
1--Summary of Significant Accounting Policies
Organization and Business
Donegal Group Inc. (the "Company") was organized as a regional insurance holding
company by Donegal Mutual Insurance Company (the "Mutual Company") and operates
in the Mid-Atlantic and Southern states through its wholly-owned stock insurance
companies, Atlantic States Insurance Company ("Atlantic States"), Southern
Insurance Company of Virginia ("Southern"), Southern Heritage Insurance Company
("Southern Heritage"), Delaware Atlantic Insurance Company ("Delaware"), and
Pioneer Insurance Company ("Pioneer") (collectively "Insurance Subsidiaries").
The Company has three operating segments: the investment function, the personal
lines of insurance and the commercial lines of insurance. Products offered in
the personal lines of insurance consist primarily of homeowners and private
passenger automobile policies. Products offered in the commercial lines of
insurance consist primarily of commercial automobile, commercial multiple peril
and workers' compensation policies. The Insurance Subsidiaries are subject to
regulation by Insurance Departments in those states in which they operate and
undergo periodic examination by those departments. The Insurance Subsidiaries
are also subject to competition from other insurance carriers in their operating
areas. Atlantic States participates in an intercompany pooling arrangement with
the Mutual Company and assumes 65% of the pooled business. Southern cedes 50% of
its business to the Mutual Company and Delaware cedes 70% of its Workers'
Compensation business to the Mutual Company. At December 31, 1998, the Mutual
Company held 60% of the outstanding common stock of the Company.
On June 25, 1998, the Company issued a 4-for-3 stock split in the form of a
33 1/3% stock dividend to stockholders of record as of June 10, 1998. Per share
information prior to June 25, 1998, has been restated for this change.
In addition to the Company's Insurance Subsidiaries, it also owns all of the
outstanding stock of Atlantic Insurance Services, Inc. ("AIS"), an insurance
services organization currently providing inspection and policy auditing
information on a fee-for-service basis to its affiliates and the insurance
industry.
Basis of Consolidation
The consolidated financial statements, which have been prepared in accordance
with generally accepted accounting principles, include the accounts of Donegal
Group Inc. and its wholly-owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated in consolidation. The term
"Company" as used herein refers to the consolidated entity.
Use of Estimates
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the liabilities for losses and loss
expenses. While management uses available information to provide for such
liabilities, future changes to these liabilities may be necessary based on
changes in trends in claim frequency and severity.
Investments
The Company classifies its debt and equity securities into the following
categories:
Held to Maturity--Debt securities that the Company has the positive intent
and ability to hold to maturity; reported at amortized cost.
Available for Sale--Debt and equity securities not classified as held to
maturity; reported at fair value, with unrealized gains and losses excluded
from income and reported as a separate component of stockholders' equity (net
of tax effects).
Short-term investments are carried at amortized cost, which approximates fair
value.
If there is a decline in fair value below amortized cost which is other than
temporary, the cost basis for such investments in the held to maturity and
available for sale categories is reduced to fair value. Such decline in cost
basis is recognized as a realized loss and charged to income.
Premiums and discounts on debt securities are amortized over the life of the
security as an adjustment to yield using the effective interest method. Realized
investment gains and losses are computed using the specific identification
method.
Premiums and discounts for mortgage-backed debt securities are amortized
using anticipated prepayments with significant changes in estimated prepayments
accounted for under the prospective method.
20 / Donegal Group Annual Report 1998
Fair Values of Financial Instruments
The Company has used the following methods and assumptions in estimating its
fair value disclosures:
Investments--Fair values for fixed maturity securities are based on quoted
market prices, when available. If quoted market prices are not available,
fair values are based on quoted market prices of comparable instruments or
values obtained from independent pricing services through a bank trustee. The
fair values for equity securities are based on quoted market prices.
Cash and Short-Term Investments--The carrying amounts reported in the balance
sheet for these instruments approximate their fair values.
Premium and Reinsurance Receivables and Payables--The carrying amounts
reported in the balance sheet for these instruments approximate their fair
values.
Borrowings Under Line of Credit--The carrying amounts reported in the balance
sheet for the line of credit approximate fair value due to the variable rate
nature of the line of credit.
Revenue Recognition
Insurance premiums are recognized as income over the terms of the policies.
Unearned premiums are calculated on a daily pro-rata basis.
Policy Acquisition Costs
Policy acquisition costs, consisting primarily of commissions, premium taxes and
certain other variable underwriting costs, are deferred and amortized over the
period in which the premiums are earned. Anticipated losses and loss expenses,
expenses for maintenance of policies in force and anticipated investment income
are considered in the determination of the recoverability of deferred
acquisition costs.
Property and Equipment
Property and equipment are reported at depreciated cost that is computed using
the straight-line method based upon estimated useful lives of the assets.
Losses and Loss Expenses
The liability for losses and loss expenses includes amounts determined on the
basis of estimates for losses reported prior to the close of the accounting
period and other estimates, including those for incurred but not reported losses
and salvage and subrogation recoveries.
These liabilities are continuously reviewed and updated by management, and
management believes that such liabilities are adequate to cover the ultimate net
cost of claims and expenses. When management determines that changes in
estimates are required, such changes are included in current earnings.
The Company has no material exposures to environmental liabilities.
Income Taxes
The Company and its subsidiaries currently file a consolidated federal income
tax return.
The Company accounts for income taxes using the asset and liability method.
The objective of the asset and liability method is to establish deferred tax
assets and liabilities for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities at
enacted tax rates expected to be in effect when such amounts are realized or
settled.
Credit Risk
The Company provides property and liability coverages through its Insurance
Subsidiaries' independent agency systems located throughout its operating area.
The majority of this business is billed directly to the insured, although a
portion of the Company's commercial business is billed through its agents, who
are extended credit in the normal course of business.
The Company's Insurance Subsidiaries have reinsurance agreements in place
with the Mutual Company and with a number of other authorized reinsurers with at
least an A.M. Best rating of A- or an equivalent financial condition.
Reinsurance Accounting and Reporting
The Company relies upon reinsurance agreements to limit its maximum net loss
from large single risks or risks in concentrated areas, and to increase its
capacity to write insurance. Reinsurance does not relieve the primary insurer
from liability to its policyholders. To the extent that a reinsurer may be
unable to pay losses for which it is liable under the terms of a reinsurance
agreement, the Company is exposed to the risk of continued liability for such
losses. However, in an effort to reduce the risk of non-payment, the Company
requires all of its reinsurers to have an A.M. Best rating of A- or better or,
with respect to foreign reinsurers, to have a financial condition which, in the
opinion of management, is equivalent to a company with at least an A- rating.
Donegal Group Annual Report 1998 / 21
Stock-Based Compensation
Stock-based compensation plans are accounted for under the provisions of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. As such, compensation expense would
be recorded on the date of a stock option grant only if the current market price
of the underlying stock exceeded the exercise price. Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
permits entities to recognize as expense, over the vesting period, the fair
value of all stock-based awards on the date of the grant. Alternatively, SFAS
No. 123 allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro-forma net income and earnings per share disclosures for
employee stock option grants made as if the fair-value-based method defined in
SFAS No. 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro-forma disclosures under
SFAS No. 123.
Earnings per Share
Basic earnings per share are calculated by dividing net income by the
weighted-average number of common shares outstanding for the period, while
diluted earnings per share reflects the dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock.
Comprehensive Income
In 1998, the Company adopted SFAS No. 130, "Comprehensive Income," which
established standards for the reporting and disclosure of comprehensive income
and its components. Comprehensive income consists of net income and net
unrealized investment gains or losses and is presented in the Consolidated
Statements of Income and Comprehensive Income. The adoption of SFAS No. 130 had
no impact on total shareholders' equity. Prior year financial statements have
been reclassified to conform to these requirements.
2--Acquisitions of Businesses
In November 1998, the Company acquired all of the outstanding stock of Southern
Heritage for a cash price of $18,361,279. Southern Heritage primarily writes
personal automobile and homeowners policies in the Southeastern region of the
country. This transaction was accounted for as a "purchase." The Company's
financial statements include Southern Heritage as a consolidated subsidiary from
November 1, 1998.
Assets in the amount of $56,568,710 were acquired, and liabilities in the
amount of $38,330,912 were assumed in the purchase transaction. The purchase
price exceeded the fair value of net assets acquired by $123,481, which is
recognized as goodwill and is being amortized over ten years.
The following table reflects unaudited pro-forma combined results of
operations of the Company and Southern Heritage on the basis that the
acquisition had taken place at the beginning of each year. The pro-forma
information is presented for information purposes only and is not indicative of
the actual results that would have resulted if the acquisition had been made as
of those dates. The pro-forma is not intended to be a projection of future
results.
1998 1997
- -------------------------------------------------------------------------------
Revenues $161,307,562 $157,037,483
Net income 2,978,411 9,558,889
Earnings per common share
Basic .37 1.20
Diluted .36 1.19
The above table includes interest expense and amortization of goodwill as if
the acquisition occurred January 1, 1997.
In March 1997, the Company acquired all of the outstanding stock of Pioneer.
This transaction was accounted for as if it were a "pooling of interest," and as
such the Company's financial statements have been restated to include Pioneer as
a consolidated subsidiary from January 1, 1993 to the present.
3--Transactions with Affiliates
The Company conducts business and has various agreements with the Mutual Company
which are described below.
a. Reinsurance Pooling and Other Reinsurance Arrangements
Atlantic States cedes to the Mutual Company all of its insurance business and
assumes from the Mutual Company 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 States, Southern, Delaware 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 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 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 Donegal
Group Inc., in which the Mutual Company agrees to assume the adverse loss
development of claims with dates of loss prior to
22 / Donegal Group Annual Report 1998
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 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.
The following amounts represent reinsurance transactions with the Mutual
Company during 1998, 1997 and 1996:
Ceded reinsurance: 1998 1997 1996
================================================================================
Premiums written $ 55,372,556 $ 47,946,847 $ 46,443,220
================================================================================
Premiums earned $ 51,617,429 $ 47,488,716 $ 37,175,897
================================================================================
Losses and loss expenses $ 32,791,739 $ 28,582,315 $ 25,838,753
================================================================================
Unearned premiums $ 25,886,653 $ 22,131,526 $ 21,673,395
================================================================================
Liability for losses and
loss expenses $ 39,039,648 $ 35,295,994 $ 33,850,684
================================================================================
Assumed reinsurance:
================================================================================
Premiums written $114,667,549 $107,604,989 $108,982,894
================================================================================
Premiums earned $111,333,956 $107,302,168 $ 95,910,375
================================================================================
Losses and loss expenses $ 69,869,999 $ 68,104,859 $ 65,579,955
================================================================================
Unearned premiums $ 51,819,000 $ 48,485,408 $ 48,182,587
================================================================================
Liability for losses
and loss expenses $ 85,766,514 $ 83,271,292 $ 80,203,642
================================================================================
Losses and loss expenses assumed from the Mutual Company for 1998, 1997 and
1996 are reported net of inter-company catastrophe recoveries which amounted to
approximately $2.3 million, $0, and $9.5 million, respectively.
b. Expense Sharing
The Mutual Company provides facilities, management and other services to the
Company, and the Company reimburses the Mutual Company for such services on a
periodic basis under usage agreements and pooling arrangements. The charges are
based upon the relative participation of the Company and the Mutual Company in
the pooling arrangement, and management of both the Company and the Mutual
Company consider this allocation to be reasonable. Charges for these services
totalled $24,065,066, $21,739,911 and $19,365,166 for 1998, 1997 and 1996,
respectively.
c. Lease Agreement
The Company leases office equipment and automobiles to the Mutual Company under
a 10-year lease dated January 1, 1990. Future annual commitments under these
leases are $723,000 for 1999 and 2000.
d. Inspection and Policy Auditing Services
AIS provides inspection and policy auditing services to the Mutual Company on a
fee-for-service basis. Charges for these services totalled $559,845, $544,651,
and $600,453 for 1998, 1997 and 1996, respectively.
4--Investments
The amortized cost and estimated fair values of fixed maturities and equity
securities at December 31, 1998 and 1997, are as follows:
1998
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Held to Maturity Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Treasury securities
and obligations of
U.S. government
corporations
and agencies $ 32,890,694 $ 484,622 $ 29,816 $ 33,345,500
Obligations of states
and political
subdivisions 66,941,133 3,489,849 10,044 70,420,938
Corporate securities 9,131,114 422,916 4,030 9,550,000
Mortgage-backed
securities 18,220,847 96,014 -- 18,316,861
- --------------------------------------------------------------------------------
Totals $127,183,788 $4,493,401 $ 43,890 $131,633,299
================================================================================
1998
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Available for Sale Cost Gains Losses Value
- --------------------------------------------------------------------------------
U.S. Treasury securities
and obligations of
U.S. government
corporations
and agencies $ 54,975,813 $ 570,376 $106,689 $ 55,439,500
Obligations of states
and political
subdivisions 19,140,686 822,884 6,497 19,957,073
Corporate securities 10,642,598 150,045 5,324 10,787,319
Mortgage-backed
securities 4,330,898 11,065 -- 4,341,963
Equity securities 6,206,735 743,210 186,002 6,763,943
================================================================================
Totals $ 95,296,730 $2,297,580 $304,512 $ 97,289,798
================================================================================
Donegal Group Annual Report 1998 / 23
1997
- ------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Held to Maturity Cost Gains Losses Value
- ------------------------------------------------------------------------------
U.S. Treasury securities
and obligations of
U.S. government
corporations
and agencies $ 41,450,057 $ 341,162 $ 99,819 $ 41,691,400
Obligations of states
and political
subdivisions 57,620,998 2,955,526 -- 60,576,524
Corporate securities 7,249,829 327,364 6,693 7,570,500
Mortgage-backed
securities 10,925,321 154,057 34,916 11,044,462
- ------------------------------------------------------------------------------
Totals $117,246,205 $3,778,109 $141,428 $120,882,886
==============================================================================
1997
- ------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Available for Sale Cost Gains Losses Value
- ------------------------------------------------------------------------------
U.S. Treasury securities
and obligations of
U.S. government
corporations
and agencies $ 40,066,278 $159,106 $28,883 $ 40,196,501
Obligations of states
and political
subdivisions 12,109,254 652,996 -- 12,762,250
Corporate securities 3,247,602 8,412 3,514 3,252,500
Mortgage-backed
securities 1,499,208 20,792 -- 1,520,000
Equity securities 6,551,020 821,409 97,867 7,274,562
- ------------------------------------------------------------------------------
Totals $ 63,473,362 $1,662,715 $130,264 $ 65,005,813
==============================================================================
The amortized cost and estimated fair value of fixed maturities at December
31, 1998, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
- ------------------------------------------------------------------------------
Estimated
Amortized Fair
Cost Value
- ------------------------------------------------------------------------------
Held to maturity
Due in one year or less $ 1,797,072 $ 1,813,000
Due after one year through five years 23,716,416 24,449,650
Due after five years through ten years 57,304,006 59,895,700
Due after ten years 26,145,447 27,158,088
Mortgage-backed securities 18,220,847 18,316,861
- ------------------------------------------------------------------------------
Total held to maturity $127,183,788 $131,633,299
==============================================================================
Available for sale
Due in one year or less $ 15,348,958 $ 15,441,000
Due after one year through five years 31,110,027 31,386,819
Due after five years through ten years 19,930,607 20,756,500
Due after ten years 18,369,505 18,599,573
Mortgage-backed securities 4,330,898 4,341,963
- ------------------------------------------------------------------------------
Total available for sale $ 89,089,995 $ 90,525,855
==============================================================================
The amortized cost of fixed maturities on deposit with various regulatory
authorities at December 31, 1998 and 1997, amounted to $5,285,367 and
$2,785,752, respectively.
Net investment income of the Company, consisting primarily of interest and
dividends, is attributable to the following sources:
1998 1997 1996
- ------------------------------------------------------------------------------
Fixed maturities $10,981,353 $10,703,397 $ 9,924,660
Equity securities 294,646 238,777 233,072
Short-term investments 1,385,500 1,141,834 1,091,855
Real estate 175,250 127,250 81,650
- ------------------------------------------------------------------------------
Investment income 12,836,749 12,211,258 11,331,237
Investment expenses 839,088 703,981 531,868
- ------------------------------------------------------------------------------
Net investment income $11,997,661 $11,507,277 $10,799,369
==============================================================================
Gross realized gains and losses from sales of investments and the change in
the difference between fair value and cost of investments, before applicable
income taxes, are as follows:
1998 1997 1996
- ------------------------------------------------------------------------------
Gross realized gains:
Fixed maturities $ 132,431 $ 84,196 $ 29,206
Equity securities 1,119,679 408,429 404,381
- ------------------------------------------------------------------------------
1,252,110 492,625 433,587
- ------------------------------------------------------------------------------
Gross realized losses:
Fixed maturities 5,180 694 689
Equity securities 1,260,492 177,795 260,164
- ------------------------------------------------------------------------------
1,265,672 178,489 260,853
- ------------------------------------------------------------------------------
Net realized gains (losses) $ (13,562) $ 314,136 $ 172,734
==============================================================================
Change in difference between
fair value and cost of
investments:
Fixed maturities $ 1,439,782 $ 2,248,484 $ (870,761)
Equity securities (166,335) 355,544 54,461
- ------------------------------------------------------------------------------
$ 1,273,447 $ 2,604,028 $ (816,300)
==============================================================================
Income taxes on realized investment gains were ($4,611), $106,806 and $58,730
for 1998, 1997 and 1996, respectively. Deferred income taxes applicable to net
unrealized investment gains included in shareholders' equity were $677,643 and
$521,033 at December 31, 1998 and 1997, respectively. Donegal Group has not held
or issued derivative financial instruments.
24 / Donegal group Annual Report 1998
5--Deferred Policy Acquisition Costs
Changes in deferred policy acquisition costs are as follows:
1998 1997 1996
- ------------------------------------------------------------------------------
Balance, January 1 $ 8,448,060 $ 7,837,899 $ 6,902,218
Acquisition of
Southern Heritage 2,486,813 -- --
Acquisition costs deferred 19,889,428 19,306,161 17,967,681
Amortization charged
to earnings 19,490,000 18,696,000 17,032,000
- ------------------------------------------------------------------------------
Balance, December 31 $11,334,301 $ 8,448,060 $ 7,837,899
==============================================================================
6--Property and Equipment
Property and equipment at December 31, 1998 and 1997, consisted of the
following:
- ------------------------------------------------------------------------------
Estimated
Useful
1998 1997 Life
- -------------------------------------------------------------------------------
Cost--office equipment $ 5,648,108 $ 3,653,494 5-15 years
automobiles 890,264 768,643 3 years
leasehold improvements 59,233 59,233 15-40 years
real estate 2,627,597 2,621,896 15-50 years
software 434,344 31,526 5 years
- -------------------------------------------------------------------------------
9,659,546 7,134,792
Accumulated depreciation (3,739,126) (2,196,268)
- ------------------------------------------------------------------------------
$ 5,920,420 $ 4,938,524
===============================================================================
Depreciation expense for 1998, 1997, and 1996 amounted to $559,710, $442,726
and $384,154, respectively.
7--Liability for Losses and Loss Expenses
Activity in the liability for losses and loss expenses is summarized as follows:
1998 1997 1996
- ------------------------------------------------------------------------------
Balance at January 1 $118,112,390 $114,621,961 $ 98,894,279
Less reinsurance
recoverable 40,638,565 39,194,405 27,738,898
- ------------------------------------------------------------------------------
Net balance at January 1 77,473,825 75,427,556 71,155,381
Acquisition of
Southern Heritage 14,967,242 -- --
- ------------------------------------------------------------------------------
New balance at beginning
as adjusted 92,441,067 75,427,556 71,155,381
- ------------------------------------------------------------------------------
Incurred related to:
Current year 75,463,085 69,040,518 73,211,924
Prior years (2,296,000) (1,384,000) (2,791,000)
- ------------------------------------------------------------------------------
Total incurred 73,167,085 67,656,518 70,420,924
- ------------------------------------------------------------------------------
Paid related to:
Current year 44,388,736 39,133,249 42,669,749
Prior years 27,356,000 26,477,000 23,479,000
- ------------------------------------------------------------------------------
Total paid 71,744,736 65,610,249 66,148,749
- ------------------------------------------------------------------------------
Net balance at
December 31 93,863,416 77,473,825 75,427,556
Plus reinsurance
recoverable 47,545,592 40,638,565 39,194,405
- ------------------------------------------------------------------------------
Balance at December 31 $141,409,008 $118,112,390 $114,621,961
==============================================================================
The Company recognized a decrease in the liability for losses and loss
expenses of prior years (favorable development) of $2.3 million, $1.4 million
and $2.8 million in 1998, 1997 and 1996, respectively. These favorable
developments are primarily attributable to lower-than-expected claim severity in
the private passenger automobile liability, workers' compensation and commercial
multiple peril lines of business.
8--Line of Credit
At December 31, 1998, pursuant to a credit agreement dated December 29, 1995,
and amended as of July 27, 1998, with Fleet National Bank of Connecticut, the
Company had unsecured borrowings of $37.5 million. Such borrowings were made in
connection with the acquisitions of Delaware, Pioneer, and Southern Heritage and
various capital contributions to the subsidiaries. Per the terms of the credit
agreement, the Company may borrow up to $40 million at interest rates equal to
the bank's then current prime rate or the then current London interbank
Eurodollar bank rate plus 1.70%. At December 31, 1998, the interest rates were
7.75% on an outstanding prime rate balance of $22.5 million and 6.93375% on an
outstanding Eurodollar rate balance of $15 million. In addition, the Company
pays a rate of 3/10 of 1% per annum on the average daily unused portion of the
bank's commitment. On each July 27, commencing July 27, 2001, the credit line
will be reduced by $8 million. Any outstanding loan in excess of the remaining
credit line, after such reduction, will then be payable.
9--Unaffiliated Reinsurers
In addition to the primary reinsurance in place with the Mutual Company, the
Insurance Subsidiaries have other reinsurance in place, principally with four
unaffiliated reinsurers. The following amounts represent reinsurance
transactions with unaffiliated reinsurers during 1998, 1997 and 1996:
Ceded reinsurance: 1998 1997 1996
- ------------------------------------------------------------------------------
Premiums written $4,784,768 $4,315,594 $4,023,855
==============================================================================
Premiums earned $4,720,669 $4,264,761 $4,009,956
==============================================================================
Losses and loss expenses $4,489,728 $3,169,659 $2,355,740
==============================================================================
Unearned premiums $1,316,458 $ 750,757 $ 699,924
==============================================================================
Liability for losses and
loss expenses $8,505,944 $5,342,571 $5,343,721
==============================================================================
Donegal Group Annual Report 1998 / 25
10--Income Taxes
The provision for income tax consists of the following:
1998 1997 1996
- ------------------------------------------------------------------------------
Current $2,500,582 $3,525,249 $2,175,474
Deferred 158,593 7,108 3,380
- ------------------------------------------------------------------------------
Federal tax provision $2,659,175 $3,532,357 $2,178,854
==============================================================================
The effective tax rate is different than the amount computed at the statutory
federal rate of 34% for 1998, 1997 and 1996. The reason for such difference and
the related tax effect are as follows:
1998 1997 1996
- ------------------------------------------------------------------------------
Income before
income taxes $11,677,015 $14,173,543 $10,736,628
==============================================================================
Computed "expected"
taxes at 34% $ 3,970,185 $ 4,819,005 $ 3,650,454
Tax-exempt interest (1,180,773) (1,130,311) (1,076,764)
Dividends received deduction (177,374) (48,477) (48,108)
Deduction for exercise
of option -- (1,700) (399,904)
Other, net 47,137 (106,160) 53,176
- ------------------------------------------------------------------------------
Federal income
tax provision $ 2,659,175 $ 3,532,357 $ 2,178,854
==============================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31
1998 and 1997, are as follows:
1998 1997
- ------------------------------------------------------------------------------
Deferred tax assets:
Unearned premium $4,593,745 $3,297,008
Loss reserves 4,581,026 4,064,877
Net operating loss carryforward -
Southern Heritage 3,429,107 --
Valuation allowance (3,429,107) --
==============================================================================
Total $9,174,771 $7,361,885
==============================================================================
Deferred tax liabilities:
Depreciation expense $ 425,292 $ 341,945
Deferred policy acquisition costs 3,853,662 2,872,343
Salvage receivable 483,960 324,521
Unrealized gain 875,165 521,033
- ------------------------------------------------------------------------------
Total $5,638,079 $4,059,842
==============================================================================
Net deferred tax assets $3,536,692 $3,302,043
==============================================================================
A valuation allowance is provided when it is more likely than not that some
portion of the tax asset will not be realized. Management has determined that a
valuation allowance related to the net operating loss carryforward of Southern
Heritage should be established at December 31, 1998. Management has determined
that it is not required to establish a valuation allowance for the other
deferred tax assets of $9,174,771 and $7,361,885 at December 31, 1998 and 1997,
since it is more likely than not that the deferred tax assets will be realized
through reversals of existing temporary differences, future taxable income,
carryback to taxable income in prior years, previously realized investment gain
and the implementation of tax planning strategies.
As a result of the acquisition of Southern Heritage, net deferred tax
asset of $549,851 were acquired.
At December 31, 1998 the Company has a net operating loss carryforward
of $10,085,608 which is available to offset taxable income of Southern Heritage.
Such net operating loss carryforward will expire beginning in 2009. Federal
income tax laws limit the amount of net operating loss carryforward that the
Company can use in any one year to $903,056.
11--Stock Compensation Plans
All share data presented in the following sections has been adjusted for the
Company's 4-for-3 stock splits in July 1997 and June 1998.
Equity Incentive Plans
The Company has had an Equity Incentive Plan for key employees since 1986 and
adopted a nearly identical new plan in 1996. Both plans provide for the granting
of awards by the Board of Directors in the form of stock options, stock
appreciation rights, restricted stock or any combination of the above. The new
plan was adopted in 1996 and amended in 1997 making a total of 1,233,141 shares
available. The plans provide that stock options may become exercisable up to 10
years from date of grant, with an option price not less than fair market value
on date of grant. The stock appreciation rights permit surrender of the option
and receipt of the excess of current market price over option price in cash.
Information regarding activity in the Company's stock option plans is
presented below:
Weighted-Average
Number of Exercise Price
Shares Per Share
- -------------------------------------------------------------------------------
Outstanding at December 31, 1995 270,000 $ 8.57
Granted - 1996 -- --
Exercised - 1996 270,000 8.57
Forfeited - 1996 -- --
- -------------------------------------------------------------------------------
Outstanding at December 31, 1996 -- --
Granted - 1997 532,451 13.50
Exercised - 1997 2,963 13.50
Forfeited - 1997 13,632 13.50
- -------------------------------------------------------------------------------
Outstanding at December 31, 1997 515,856 13.50
- -------------------------------------------------------------------------------
Granted - 1998 497,333 18.00
Exercised - 1998 10,073 13.50
Forfeited - 1998 -- --
- -------------------------------------------------------------------------------
Outstanding at December 31, 1998 1,003,116 $15.73
===============================================================================
Exercisable at:
December 31, 1996 -- --
===============================================================================
December 31, 1997 173,333 $13.50
===============================================================================
December 31, 1998 502,965 $15.00
===============================================================================
Shares available for future grants at December 31, 1998 are 216,248.
26 / Donegal Group Annual Report 1998
The following table summarizes information about fixed stock options at
December 31, 1998:
Exercise Prices
- -------------------------------------------------------------------------------
$13.50 $18.00
- -------------------------------------------------------------------------------
Options outstanding at December 31, 1998:
Number of options 505,783 497,333
- -------------------------------------------------------------------------------
Weighted-average remaining
contractual life 3.0 years 4.25 years
- -------------------------------------------------------------------------------
Options exercisable at December 31, 1998:
Number of options 337,188 165,777
- -------------------------------------------------------------------------------
1996 Equity Incentive Plan For Directors
During 1996 the Company adopted an Equity Incentive Plan For Directors. The plan
was amended in 1998, making 265,735 shares available for award. Awards may be
made in the form of stock options, and the plan additionally provides for the
issuance of 177 shares of restricted stock to each director on the first
business day of January in each year, commencing January 2, 1997. As of December
31, 1998, the Company has 80,004 unexercised options under this plan.
Additionally, 2,124, 2,124 and 0 shares of restricted stock were issued on
January 2, 1998, 1997 and 1996, respectively.
Employee Stock Purchase Plans
During 1996 the Company adopted the 1996 Employee Stock Purchase Plan which
replaced a similar plan that had been adopted effective January 1, 1988. The
1996 plan made 162,873 shares available for issuance.
The 1996 Plan extends over a 10-year period and provides for shares to be
offered to all eligible employees at a purchase price equal to the lesser of 85%
of the fair market value of the Company's common stock on the last day before
the first day of the enrollment period (June 1 and December 31). A summary of
plan activity follows:
Shares Issued
- -------------------------------------------------------------------------------
Price Shares
- -------------------------------------------------------------------------------
January 1, 1996 $ 8.00859 10,009
July 1, 1996 $ 8.24766 10,804
January 1, 1997 $ 8.24766 11,689
July 1, 1997 $ 9.26367 11,357
January 1, 1998 $11.65430 8,901
July 1, 1998 $13.06875 9,179
On January 1, 1999, the Company issued an additional 10,227 shares at a price
of $13.28125 per share under this plan.
Agency Stock Purchase Plan
On December 31, 1996, the Company adopted the Agency Stock Purchase Plan which
made 514,102 shares available for issuance. The plan provides for agents of
affiliated companies of Donegal Group Inc. to invest up to $12,000 per
subscription period (April 1 to September 30 and October 1 to March 31) under
various methods. Stock is issued at the end of the subscription period at a
price equal to 90% of the average market price during the last ten trading days
of the subscription period. During 1998, 1997 and 1996, 35,003, 40,200 and 0
shares, respectively, were issued under this plan.
Pro-forma Disclosures
The weighted-average grant date fair value of options granted for the various
plans during 1998, 1997 and 1996 was $4.48, $4.74 and $3.27, respectively.
The fair values above were calculated based upon risk-free interest rates of
5% for the Stock Purchase Plans and 6% for the Equity Incentive Plans, expected
lives of 6 months for the Stock Purchase Plans and 5 years for the Equity
Incentive Plans, expected volatility of 34% and an expected dividend yield of
2.40%.
The Company applies APB Opinion No. 25 in accounting for its stock-based
compensation plans. Accordingly, no compensation cost has been recognized for
its fixed stock option plans and certain of its stock purchase plans. Had the
Company recognized stock compensation expense in accordance with SFAS No. 123,
net income and earnings per share would have been reduced to the pro-forma
amounts shown below:
1998 1997 1996
- -------------------------------------------------------------------------------
Net income:
As reported $9,017,840 $10,641,186 $8,557,774
Pro-forma 8,362,764 10,263,965 8,530,468
Basic earnings per share:
As reported 1.11 1.33 1.10
Pro-forma 1.03 1.28 1.09
Diluted earnings per share:
As reported 1.09 1.32 1.09
Pro-forma 1.01 1.28 1.08
The calculation of pro-forma net income reflects only options granted in
1998, 1997 and 1996.
Donegal Group Annual Report 1998 / 27
12--Statutory Net Income, Capital and Surplus and Dividend Restrictions
The following is selected information for the Insurance Subsidiaries as
determined in accordance with accounting practices prescribed or permitted by
insurance regulatory authorities.
1998 1997 1996
- --------------------------------------------------------------------------
Atlantic States
Statutory capital
and surplus $ 62,672,151 $ 56,606,354 $ 47,914,415
=============================================
Statutory unassigned
surplus $ 31,711,287 $ 25,645,490 $ 16,953,551
=============================================
Statutory net income $ 6,480,524 $ 7,349,284 $ 5,410,536
=============================================
- --------------------------------------------------------------------------
Southern
Statutory capital
and surplus $ 6,388,316 $ 7,069,112 $ 6,608,944
=============================================
Statutory unassigned
surplus $ 1,636,046 $ 2,316,842 $ 1,856,674
=============================================
Statutory net income $ 66,297 $ 703,727 $ 255,480
=============================================
- --------------------------------------------------------------------------
Delaware
Statutory capital
and surplus $ 8,548,354 $ 7,657,691 $ 6,798,477
=============================================
Statutory unassigned
surplus $ 3,348,354 $ 2,457,691 $ 1,598,477
=============================================
Statutory net income $ 1,085,807 $ 1,070,463 $ 1,120,952
=============================================
- --------------------------------------------------------------------------
Pioneer
Statutory capital
and surplus $ 5,300,349 $ 5,377,492 $ 5,048,582
=============================================
Statutory unassigned
surplus $ (1,699,651) $ (1,622,508) $ (1,951,418)
=============================================
Statutory net income (loss) $ 188,579 $ 542,799 $ (367,614)
=============================================
- --------------------------------------------------------------------------
Southern Heritage
Statutory capital
and surplus $ 15,805,641 $ 16,532,876 $ 16,504,236
=============================================
Statutory unassigned
surplus $(16,709,674) $(12,482,439) $(12,511,079)
=============================================
Statutory net income (loss) $ (3,937,548) $ 151,135 $ (149,007)
=============================================
- --------------------------------------------------------------------------
The Company's principal source of cash for payment of dividends are dividends
from its Insurance Subsidiaries which are required by law to maintain certain
minimum capital and surplus on a statutory basis and are subject to regulations
under which payment of dividends from statutory surplus is restricted and may
require prior approval of their domiciliary insurance regulatory authorities.
Atlantic States, Southern, Delaware, Pioneer and Southern Heritage are also
subject to Risk Based Capital (RBC) requirements which may further impact their
ability to pay dividends. At December 31, 1998, all five companies' statutory
capital and surplus were substantially above the RBC requirements. At December
31, 1998, amounts available for distribution as dividends to Donegal Group Inc.
without prior approval of insurance regulatory authorities are $6,480,524 from
Atlantic States, $638,832 from Southern, $1,085,807 from Delaware, $530,035 from
Pioneer and $1,580,564 from Southern Heritage.
13--Reconciliation of Statutory Filings to Amounts Reported Herein
The Company's Insurance Subsidiaries are required to file statutory financial
statements with state insurance regulatory authorities. Accounting principles
used to prepare these statutory financial statements differ from financial
statements prepared on the basis of generally accepted accounting principles.
Reconciliations of statutory net income and capital and surplus, as
determined using statutory accounting principles, to the amounts included in the
accompanying financial statements are as follows:
Year Ended December 31,
-----------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------
Statutory net income of
insurance subsidiaries $8,301,081 $ 9,666,273 $6,419,354
Increases (decreases):
Deferred policy
acquisition costs 399,428 610,161 935,681
Deferred federal
income taxes (158,593) (7,108) (3,380)
Salvage and subrogation
recoverable 1,217,092 984,981 1,067,201
Consolidating eliminations
and adjustments (967,940) (950,000) --
Parent-only net income 178,249 291,831 155,894
Non-insurance subsidiary
net income (loss) 48,523 45,048 (16,976)
- --------------------------------------------------------------------------
Net income as
reported herein $9,017,840 $10,641,186 $8,557,774
==========================================================================
December 31,
--------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------
Statutory capital and surplus
of insurance subsidiaries $ 98,714,811 $ 76,710,649 $ 66,370,418
Increases (decreases):
Deferred policy
acquisition costs 11,334,301 8,448,060 7,837,899
Deferred federal
income taxes 3,592,605 3,302,043 3,613,307
Salvage and subrogation
recoverable 7,963,559 6,155,467 5,170,486
Statutory reserves 9,066,998 8,712,694 10,035,325
Non-admitted assets and
other adjustments, net 1,178,102 394,432 355,540
Fixed maturities
available for sale 2,038,604 808,908 271,795
Consolidating eliminations
and adjustments (36,383,362) (16,121,711) (16,121,711)
Parent-only equity 2,843,990 2,953,248 3,878,390
Non-insurance
subsidiary equity 281,396 232,873 187,825
- --------------------------------------------------------------------------
Stockholders' equity as
reported herein $100,631,004 $ 91,596,663 $ 81,599,274
==========================================================================
28 / Donegal Group Annual Report 1998
14--Supplementary Information on Statement of Cash Flows
The following schedule reflects income taxes and interest paid during 1998, 1997
and 1996:
1998 1997 1996
- --------------------------------------------------------------------------
Income taxes $2,671,969 $4,094,338 $825,136
==========================================================================
Interest $1,270,646 $ 904,385 $369,869
==========================================================================
15--Earnings Per Share
The following information illustrates the computation of net income, outstanding
shares and earnings per share on both a basic and diluted basis for the years
ending December 31, 1998, 1997 and 1996:
Weighted-
Average Earnings
Net Shares Per
Income Outstanding Share
- --------------------------------------------------------------------------
1998:
Basic $ 9,017,840 8,126,286 $1.11
Effect of stock options -- 123,404 (0.02)
- --------------------------------------------------------------------------
Diluted $ 9,017,840 8,249,690 $1.09
==========================================================================
1997:
Basic $10,641,186 7,994,937 $1.33
Effect of stock options -- 41,274 (0.01)
- --------------------------------------------------------------------------
Diluted $10,641,186 8,036,211 $1.32
==========================================================================
1996:
Basic $ 8,557,774 7,814,007 $1.10
Effect of stock options -- 53,818 (0.01)
- --------------------------------------------------------------------------
Diluted $ 8,557,774 7,867,825 $1.09
==========================================================================
16--Condensed Financial Information of Parent Company
Condensed Balance Sheets
($ in thousands)
December 31, 1998 1997
- --------------------------------------------------------------------------
Assets
Investment in subsidiaries (equity method) $134,441 $ 99,857
Cash 599 730
Property and equipment 2,276 2,139
Other 2,124 451
- --------------------------------------------------------------------------
Total assets $139,440 $103,177
==========================================================================
Liabilities and Stockholders' Equity
Liabilities
Cash dividends declared to stockholders $ 708 $ 604
Line of credit 37,500 10,500
Other 601 476
- --------------------------------------------------------------------------
Total liabilities 38,809 11,580
==========================================================================
Stockholders' equity
Preferred stock, $1.00 par value, authorized
1,000,000 shares, none issued
Commonstock, $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 1,316 1,012
Retained earnings, including equity in
undistributed net income of
subsidiaries($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 $103,177
==========================================================================
Condensed Statements of Income
($ in thousands)
Years Ended December 31, 1998 1997 1996*
- --------------------------------------------------------------------------
Revenues
Dividends-subsidiaries $1,000 $ 950 $ 0
Other 776 658 572
- --------------------------------------------------------------------------
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
==========================================================================
Income 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 $8,558
==========================================================================
* Restated
Condensed Statements of Cash Flows
($ in thousands)
Years Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 9,018 $ 10,641 $ 8,558
- --------------------------------------------------------------------------
Adjustments:
Equity in undistributed net
income of subsidiaries (8,840) (10,352) (8,417)
Other (921) 382 373
- --------------------------------------------------------------------------
Net adjustments (9,761) (9,970) (8,044)
- --------------------------------------------------------------------------
Net cash provided (743) 671 514
- --------------------------------------------------------------------------
Cash flows from investing activities:
Net purchase of property and
equipment (564) (1,251) (203)
Capital contribution to subsidiaries (2,000) -- (5,000)
Acquisition of Delaware Atlantic -- -- (202)
Acquisition of Southern Heritage (18,361) -- --
Other (5,280) 4 1,110
- --------------------------------------------------------------------------
Net cash used (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 26,817 879 4,061
Net change in cash (131) 303 280
Cash at beginning of year 730 427 147
- --------------------------------------------------------------------------
Cash at ending of year $ 599 $ 730 $ 427
==========================================================================
Donegal Group Annual Report 1998 / 29
17--Segment Information
In 1998, Donegal Group Inc. adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" which establishes standards for reporting
information about operating segments. As an underwriter of property and casualty
insurance, the Company has three reportable segments which consist of the
investment function, the personal lines of insurance and the commercial lines of
insurance. Using independent agents, the Company markets personal lines of
insurance to individuals and commercial lines of insurance to small and
medium-sized businesses.
The Company evaluates the performance of the personal lines and commercial
lines primarily based upon underwriting results as determined under statutory
accounting practices (SAP) for the total business of the Company.
Assets are not allocated to the personal and commercial lines and are
reviewed in total by management for purposes of decision making. Donegal Group
Inc. operates only in the United States and no single customer or agent provides
10 percent or more of revenues.
Financial data by segment is as follows:
1998 1997 1996
---------------------------------
($ in thousands)
- --------------------------------------------------------------------------
Revenues:
Premiums earned:
Commercial lines $ 44,493 $ 45,702 $ 46,171
Personal lines 71,676 61,600 58,356
- --------------------------------------------------------------------------
Total premiums earned 116,169 107,302 104,527
- --------------------------------------------------------------------------
Net investment income 11,998 11,507 10,799
Realized investment
gains (losses) (14) 314 173
Other 2,433 2,205 2,083
- --------------------------------------------------------------------------
Total revenues $130,586 $121,328 $117,582
==========================================================================
Income before income taxes:
Underwriting income (loss):
Commercial lines $ 3,688 $ 3,497 $ 6,121
Personal lines (5,327) (2,734) (8,699)
- --------------------------------------------------------------------------
SAP underwriting gain
(loss) (1,639) 763 (2,578)
GAAP adjustments 1,803 1,809 2,166
- --------------------------------------------------------------------------
GAAP underwriting gain
(loss) 164 2,572 (412)
Net investment income 11,998 11,507 10,799
Realized investment gains (losses) (14) 314 173
Other (471) (219) 177
- --------------------------------------------------------------------------
Income before income taxes $ 11,677 $ 14,174 $ 10,737
==========================================================================
18--Interim Financial Data (unaudited)
1998
------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------
Net premiums
earned $27,204,544 $27,578,257 $28,064,764 $33,321,427
Total revenues 30,896,144 31,023,026 31,654,736 37,012,459
Loss and loss
adjusting
expenses 15,801,905 19,225,138 20,434,534 17,705,508
Net income 3,316,653 1,892,892 44,414 3,763,881
Net income per
common share
Basic $.41 $.22 $.01 $.46
Diluted .40 .22 .01 .46
1997
------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------
Net premiums
earned $26,404,333 $26,823,505 $27,260,693 $26,813,637
Total revenues 29,823,371 30,253,860 30,909,916 30,340,459
Loss and loss
adjusting
expenses 16,912,543 17,329,403 17,111,129 16,303,443
Net income 2,562,433 2,400,597 2,911,728 2,766,428
Net income per
common share
Basic $.32 $.30 $.37 $.35
Diluted .32 .30 .36 .34
30 / Donegal Group Annual Report 1998
Donegal Group Inc.
Independent Auditors' Report
The Stockholders and Board of Directors
Donegal Group Inc.
We have audited the accompanying consolidated balance sheets of Donegal Group
Inc. as of December 31, 1998 and 1997, and the related consolidated statements
of income and comprehensive income, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Donegal
Group Inc. as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1998 in conformity with generally accepted accounting principles.
KPMG LLP
Philadelphia, Pennsylvania
March 2, 1999
Donegal Group Annual Report 1998 / 31
Market Information
Donegal Group's common stock is traded on NASDAQ under
the symbol "DGIC." During 1997 and 1998, the stock price
ranged as follows (information prior to June 25, 1998
restated for 4-for-3 stock split on that date):
Cash Dividend
Declared
Quarter High Low Per Share
1997
1st* 14.203 11.25 --
2nd* 14.25 12.75 .0675
3rd* 15.75 13.6875 .075
4th* 16.6875 15.1875 .15
1998
1st* 17.625 15.188 --
2nd* 22.781 16.875 .0825
3rd 19.875 14.250 .085
4th 15.750 12.625 .17
* Restated