SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 of the Securities Exchange Act
of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
------------------ --------------------
Commission File No. 0-15341
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DONEGAL GROUP INC.
------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-2424711
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1195 RIVER ROAD, P.O. BOX 302, MARIETTA, PA 17547-0302
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(Address of principal executive offices, including zip code)
(717) 426-1931
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x . No. .
-- --
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required by Sections 12, 13, or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes . No .
-- --
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 5,945,714 shares of Class A
Common Stock and 2,972,857 shares of Class B Common Stock, $0.01 par value,
outstanding on April 30, 2001.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS MARCH 31, 2001 DECEMBER 31, 2000 *
-------------- -------------------
Investments
Fixed maturities
Held to maturity, at amortized cost $ 91,485,727 $143,181,718
Available for sale, at fair value 172,960,300 114,611,183
Equity securities, available for sale at fair value 13,743,998 12,112,236
Short-term investments, at cost, which
approximates fair value 9,024,271 19,439,505
------------ ------------
Total Investments 287,214,296 289,344,642
Cash 7,798,157 5,182,988
Accrued investment income 4,042,166 4,002,464
Premiums receivable 23,820,154 21,758,502
Reinsurance receivable 78,575,257 67,443,687
Deferred policy acquisition costs 12,185,690 12,284,214
Federal income tax receivable -- 259,962
Deferred income taxes 6,712,830 7,690,886
Prepaid reinsurance premiums 45,983,364 38,385,540
Property and equipment, net 5,054,099 5,236,483
Accounts receivable - securities -- 234,817
Other 725,944 757,554
------------ ------------
Total Assets $472,111,957 $452,581,739
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
LIABILITIES
Losses and loss expenses $179,724,569 $169,375,927
Unearned premiums 121,426,891 113,613,537
Accrued expenses 5,659,777 5,877,475
Reinsurance balances payable 1,140,605 1,634,975
Federal income taxes payable 1,060,890 --
Cash dividend declared to stockholders -- 797,282
Borrowings under line of credit 37,000,000 40,000,000
Accounts payable - securities 300,000 959,652
Due to affiliate 5,279,803 4,528,996
Other 1,231,397 1,664,304
------------ ------------
Total Liabilities 352,823,932 338,452,148
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value, authorized
2,000,000 shares; none issued
Common stock, $1.00 par value, authorized
20,000,000 shares, issued 9,026,250 and
8,980,977 shares and outstanding 8,903,962
and 8,858,689 shares 9,026,250 8,980,977
Additional paid-in capital 47,294,639 46,969,840
Accumulated other comprehensive income (loss) 1,636,359 (199,063)
Retained earnings 62,222,533 59,269,593
Treasury stock (891,756) (891,756)
------------ ------------
Total Stockholders' Equity 119,288,025 114,129,591
------------ ------------
Total Liabilities and Stockholders' Equity $472,111,957 $452,581,739
============ ============
* RESTATED - SEE NOTE 9.
See accompanying notes to consolidated financial statements.
-1-
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
THREE MONTHS ENDED MARCH 31,
2001 2000 *
---- ----
REVENUES:
Premiums earned $65,073,239 $54,358,508
Premiums ceded 25,032,337 18,269,810
----------- -----------
Net premiums earned 40,040,902 36,088,698
Investment income, net of investment expenses 4,041,186 3,980,069
Realized investment gain (loss) 120,807 (281,910)
Lease income 200,691 206,772
Service charge income 388,440 363,704
----------- -----------
Total Revenues 44,792,026 40,357,333
----------- -----------
EXPENSES:
Losses and loss expenses 42,550,115 38,854,538
Reinsurance recoveries 16,391,431 12,905,626
----------- -----------
Net losses and loss expenses 26,158,684 25,948,912
Amortization of deferred policy acquisition costs 6,503,000 6,168,000
Other underwriting expenses 6,505,029 5,258,041
Policy dividends 399,380 352,962
Interest 812,614 823,210
Other expenses 395,337 273,887
----------- -----------
Total Expenses 40,774,044 38,825,012
----------- -----------
Income before income taxes 4,017,982 1,532,321
Income taxes 1,063,387 369,639
----------- -----------
Net income $ 2,954,595 $ 1,162,682
=========== ===========
Earnings per common share
Basic $ .33 $ .14
=========== ===========
Diluted $ .33 $ .14
=========== ===========
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS ENDED MARCH 31,
2001 2000
---- ----
Net Income $2,954,595 $1,162,682
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on securities:
Unrealized holding gain (loss) arising
during the period, net of income tax 1,915,155 (488,132)
Less: Reclassification adjustment,
net of income tax (79,733) 186,061
----------- ----------
Other comprehensive income (loss) 1,835,422 302,071)
---------- ----------
Comprehensive income $4,790,017 $ 860,611
========== ==========
* RESTATED - SEE NOTE 9.
See accompanying notes to consolidated financial statements.
-2-
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2001
-----------------------------------------
COMMON STOCK
------------ ACCUMULATED TOTAL
ADDITIONAL OTHER COM- STOCK-
PAID-IN PREHENSIVE RETAINED TREASURY HOLDERS'
SHARES AMOUNT CAPITAL INCOME (LOSS) EARNINGS STOCK EQUITY
------ ------ ------- ------------- -------- ----- ------
BALANCE,
DECEMBER 31, 2000 * 8,980,977 $8,980,977 $46,969,840 $ (199,063) $59,269,593 $(891,756) $114,129,591
ISSUANCE OF
COMMON STOCK 45,273 45,273 324,799 370,072
NET INCOME 2,954,595 2,954,595
CASH DIVIDEND (1,655) (1,655)
OTHER COMPREHENSIVE
INCOME -- -- -- 1,835,422 -- -- 1,835,422
---------- ------------ ----------- ---------- ----------- --------- -----------
BALANCE,
MARCH 31, 2001 $9,026,250 $9,026,250 $47,294,639 $1,636,359 $62,222,533 $(891,756) $119,288,025
========== ========== =========== ========== =========== ========= ============
* RESTATED - SEE NOTE 9.
See accompanying notes to consolidated financial statements.
-3-
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
THREE MONTHS ENDED MARCH 31,
2001 2000 *
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,954,595 $ 1,162,682
------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 301,873 262,926
Realized investment (gain) loss (120,807) 281,910
Changes in assets and liabilities:
Losses and loss expenses 10,348,642 1,741,220
Unearned premiums 7,813,354 (33,205)
Premiums receivable (2,061,652) (734,892)
Deferred policy acquisition costs 98,524 143,900
Deferred income taxes 32,535 74,994
Reinsurance receivable (11,131,570) (1,194,805)
Prepaid reinsurance premiums (7,597,824) (472,975)
Accrued investment income (39,702) (128,433)
Due to affiliate 750,807 449,832
Reinsurance balances payable (494,370) 99,577
Federal income taxes 1,320,852 985,386
Other, net (634,248) (1,303,885)
----------- ----------
Net adjustments (1,413,586) 171,550
----------- ----------
Net cash provided by operating activities 1,541,009 1,334,232
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed maturities
Held to maturity (8,450,000) (3,249,537)
Available for sale (14,808,595) (7,083,345)
Purchase of equity securities, available for sale (4,496,258) (6,554,263)
Maturity of fixed maturities
Held to maturity 8,478,904 4,839,737
Available for sale 10,411,789 3,500,000
Sale of equity securities, available for sale 2,989,473 638,629
Net purchase of property and equipment (37,522) (89,104)
Net sales of short-term investments 10,415,234 6,539,450
----------- ----------
Net cash provided by (used in) investing activities 4,503,025 (1,458,433)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (798,937) (768,842)
Issuance of common stock 370,072 1,030,431
Line of credit, net (3,000,000) --
----------- ----------
Net cash provided by (used in)
financing activities (3,428,865) 261,589
----------- ----------
Net increase in cash 2,615,169 137,388
Cash at beginning of period 5,182,988 4,500,570
----------- ----------
Cash at end of period $ 7,798,157 $4,637,958
=========== ==========
Cash paid during period - Interest $ 1,442,784 $ 620,391
Net cash received during period - Income taxes $ 290,000 $ 689,544
* RESTATED - SEE NOTE 9.
See accompanying notes to consolidated financial statements.
-4-
DONEGAL GROUP INC. AND SUBSIDIARIES
(Unaudited)
SUMMARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - ORGANIZATION
Donegal Group Inc. (the "Company") was organized as a regional insurance
holding company by Donegal Mutual Insurance Company (the "Mutual Company") on
August 26, 1986 and operates in the Mid-Atlantic and Southern states through its
wholly-owned stock insurance companies, Atlantic States Insurance Company
("Atlantic States"), Southern Heritage Insurance Company ("Southern Heritage"),
Southern Insurance Company of Virginia ("Southern"), Delaware Atlantic Insurance
Company ("Delaware"), Pioneer Insurance Company - New York ("Pioneer - New York)
and Pioneer Insurance Company - Ohio ("Pioneer - Ohio") (collectively "Insurance
Subsidiaries"). The Company has three operating segments: the investment
function, the personal lines of insurance and the commercial lines of insurance.
Products offered in the personal lines of insurance consist primarily of
homeowners and private passenger automobile policies. Products offered in the
commercial lines of insurance consist primarily of commercial automobile,
commercial multiple peril and workers' compensation policies. The Insurance
Subsidiaries are subject to regulation by Insurance Departments in those states
in which they operate and undergo periodic examinations by those departments.
The Insurance Subsidiaries are also subject to competition from other insurance
companies in their operating areas. Atlantic States participates in an
inter-company pooling arrangement with the Mutual Company and assumes 70% of the
pooled business (65% prior to July 1, 2000). Southern cedes 50% of its business
to the Mutual Company. At March 31, 2001, the Mutual Company held 62% of the
outstanding common stock of the Company.
During 2000, the Company acquired 45% of the outstanding stock of Donegal
Financial Services Corporation ("DFSC"), a bank holding company, for $3,042,000
in cash. The remaining 55% of the outstanding stock of DFSC is owned by the
Mutual Company.
Effective January 1, 2001, the Mutual Company has entered into a
retrocessional reinsurance agreement with Southern Heritage Insurance Company
whereby Southern Heritage cedes all of its business, net of outside reinsurance,
to the Mutual Company who then retrocedes all of it back to Southern Heritage.
For the three months ending March 31, 2001, this agreement resulted in a
$3,822,518 increase in both premiums earned and premiums ceded and a $1,701,978
increase in both losses and loss expenses and reinsurance recoveries. However,
this agreement has no impact on net premiums earned or net income.
The Company has announced plans to streamline its corporate structure by
merging a number of its subsidiaries together. Pending regulatory approval both
Pioneer-New York and Delaware Atlantic Insurance Company will be merged into
Atlantic States Insurance Company and Southern Heritage Insurance Company will
be merged into Southern Insurance Company of Virginia.
2 - BASIS OF PRESENTATION
The financial information for the interim period included herein is
unaudited; however, such information reflects all adjustments, consisting only
of normal recurring adjustments, which, in the opinion of management, are
necessary to a fair presentation of the financial position, results of
operations and cash flow for the interim period included herein. The results of
operations for the three months ended March 31, 2001, are not necessarily
indicative of results of operations to be expected for the twelve months ended
December 31, 2001.
These financial statements should be read in conjunction with the financial
statements and notes thereto contained in the Registrant's Annual Report on Form
10-K for the year ended December 31, 2000.
-5-
3 - EARNINGS PER SHARE
The computation of basic and diluted earnings per share is as follows:
WEIGHTED
AVERAGE EARNINGS
NET SHARES PER
INCOME OUTSTANDING SHARE
------ ----------- -----
THREE MONTHS ENDED MARCH 31:
2001
- ----
Basic $2,954,595 8,890,314 $.33
Effect of stock options -- 98,433 --
---------- ---------- ----
Diluted $2,954,595 8,988,747 $.33
---------- ---------- ----
2000
- ----
Basic $1,162,682 8,572,383 $.14
Effect of stock options -- -- --
---------- ---------- ----
Diluted $1,162,682 8,572,383 $.14
---------- ---------- ----
The following options to purchase shares of common stock were not included
in the computation of diluted earnings per share because they were antidilutive,
that is, the exercise price of the options was greater than the average market
prices.
FOR THE THREE MONTHS
ENDED MARCH 31,
2001 2000
---- ----
Number of Options 1,042,338 1,499,560
========= =========
-6-
4 - SEGMENT INFORMATION
The Company evaluates the performance of the personal lines and commercial
lines based upon underwriting results as determined under statutory accounting
practices (SAP) which is used by management to measure performance for the total
business of the Company.
Financial data by segment is as follows:
THREE MONTHS ENDED MARCH 31
2001 2000
- --------------------------------------------------------------------------------
($ in thousands)
- --------------------------------------------------------------------------------
Revenues:
Premiums earned:
Commercial lines $15,009 $12,414
Personal lines 25,032 23,675
- -------------------------------------------------------------------------------
Total net premiums earned 40,041 36,089
- -------------------------------------------------------------------------------
Net investment income 4,041 3,980
Realized investment gain (loss) 121 (282)
Other 589 570
- -------------------------------------------------------------------------------
Total revenues $44,792 $40,357
===============================================================================
Income before income taxes:
Underwriting income (loss)
Commercial lines $ 330 $ (890)
Personal lines 160 (716)
- -------------------------------------------------------------------------------
SAP underwriting income (loss) 490 (1,606)
- -------------------------------------------------------------------------------
GAAP adjustments (15) (33)
- -------------------------------------------------------------------------------
GAAP underwriting income (loss) 475 (1,639)
Net investment income 4,041 3,980
Realized investment gain (loss) 121 (282)
Other (619) (527)
- -------------------------------------------------------------------------------
Income before income taxes $ 4,018 $ 1,532
===============================================================================
-7-
5 - RESTRUCTURING CHARGE
On September 29, 1999, the Company announced a plan to consolidate certain
subsidiary support functions into its Marietta, Pennsylvania office. As a result
of this consolidation, the Company recorded a restructuring charge in 1999 of
$2,044,000 for employee termination benefits, occupancy charges, lease
cancellation costs, and asset impairments. The charge was included in other
underwriting expenses. The consolidation has been completed.
Employee termination benefits include severance payments, which were paid
either in a lump sum or over a defined period, and related benefits for
approximately 60 employees. Of the terminated employees, approximately 50% were
from subsidiary support functions and approximately 50% were from the Marietta,
Pennsylvania office. By December 31, 1999, all of the terminated employees had
left the employment of the Company.
Included in occupancy charges are future lease obligations, less
anticipated sublease benefits, for leased space which is no longer being used by
the Delaware and Southern Heritage subsidiary support functions.
Also included in the restructuring charges were contract cancellation costs
that represented the estimated cost to buy out of the remaining term on printer,
copier, and computer processing contracts that provided no future benefits to
the Company as a result of the restructuring. By December 31, 1999, all such
assets had been taken out of service.
Asset impairments, which were a direct result of the consolidation of
subsidiary functions, amounted to $407,000. They consisted of capitalized
programming and data center costs, voice systems, and leasehold and office
improvements. These assets were written-down to zero in 1999. By December 31,
1999, all such assets were taken out of service.
Activity in the restructuring accrual is as follows:
EMPLOYEE
TERMINATION CONTRACT
BENEFITS OCCUPANCY CANCELLATIONS TOTALS
- --------------------------------------------------------------------------------------------
RESTRUCTURING CHARGE $ 782,000 $ 488,000 $ 529,000 $1,799,000
CASH PAYMENT (343,000) (47,000) (365,000) (755,000)
REVERSAL OF PRIOR ACCRUAL (71,000) -- (91,000) (162,000)
- --------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $ 368,000 $ 441,000 $ 73,000 $ 882,000
- --------------------------------------------------------------------------------------------
CASH PAYMENTS (339,000) (155,000) (73,000) (567,000)
ACCRUAL ADJUSTMENT -- 12,000 -- 12,000
- --------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 $ 29,000 $ 298,000 $ -- $ 327,000
CASH PAYMENTS (3,000) (31,000) -- (34,000)
- --------------------------------------------------------------------------------------------
BALANCE AT 3/31/01 $ 26,000 $ 267,000 $ -- $ 293,000
============================================================================================
6- SUBSEQUENT EVENTS
On April 19, 2001 the Company's stockholders approved an amendment to the
Company's certificate of incorporation. Among other things, the amendment
reclassified the Company's common stock as Class B common stock and effected a
one-for-three reverse split of the Company's Class B common stock effective
April 19, 2001. The amendment also authorized a new class of common stock with
one-tenth of a vote per share designated as Class A common stock. The Company's
Board also approved a dividend of two shares of Class A common stock for each
share of Class B common stock, after the one-for-three reverse split, held of
record at the close of business April 19, 2001. The effect of the reverse split
and the stock dividend taken together is that the Company will have the same
total number of shares outstanding after the reverse split and the stock
dividend as it did before the reverse split and the stock dividend. Therefore,
there will be no change in the historical earnings per share of the Class A
common stock and the Class B common stock after the reverse split and the stock
dividend compared to before the reverse split and the stock dividend.
-8-
7 - IMPLEMENTATION OF NEW ACCOUNTING STANDARD -
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company has no derivative instruments or hedging activities as defined
in accordance with the Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," and SFAS No. 138 "Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an amendment of SFAS No 133", which statements
became effective January 1, 2001. On January 1, 2001, the Company transferred
investments with an amortized cost of $51,640,154 and fair value of $52,444,675
from the held to maturity classification to the available for sale
classification under the provisions of SFAS No. 133 and 138. The unrealized
holding gain of $804,521 at January 1, 2001 was reported in other comprehensive
income. The transfer had no impact on net income.
8 - IMPLEMENTATION OF CODIFICATION
The National Association of Insurance Commissioners (NAIC) has adopted the
Codification of Statutory Accounting Principles with an effective date of
January 1, 2001. The codified principles are intended to provide a basis of
accounting recognized and adhered to in the absence of conflict with, or silence
of, state statutes and regulations. The impact of the codified principles on the
statutory capital and surplus of the Company's Insurance Subsidiaries as of
January 1, 2001 is as follows: Atlantic States - $5,922,449 increase; Southern
Heritage - $1,083,354 increase; Pioneer - Ohio - $313,638 increase; Delaware
Atlantic - $246,293 increase; Southern of Virginia - $1,171,204 increase; and
Pioneer - New York - 0.
9 - BUSINESS COMBINATION
In January 2001, the Company acquired all of the outstanding shares of
Pioneer Insurance Company of New York ("Pioneer - New York") from the Mutual
Company, which previously owned 100% of Pioneer - New York. The acquisition has
been accounted for as a pooling of interests, as both Pioneer - New York and the
Company are under the common management and control of the Mutual Company. As
such, all financial data prior to January 1, 2001 has been restated to include
the results of operations, financial position and cash flows of Pioneer - New
York.
The following information presents certain income statement data of the
separate companies for the period preceding the merger:
THREE MONTHS ENDED MARCH 31, 2000 (unaudited):
Revenues
Donegal Group, Inc. $39,745,534
Pioneer - New York 611,799
-----------
Total $40,357,333
Net income (loss)
Donegal Group, Inc. $ 1,250,234
Pioneer - New York (87,552)
-----------
Total $ 1,162,682
In connection with the transaction, the Mutual Company issued the Company a
$4,441,311 note which bears a 6% rate and is due in one year. There were no
material transactions between Donegal Group Inc. and Pioneer - New York prior to
the merger. Pioneer - New York's accounting policies, which were previously
based on statutory accounting principles, were conformed to the Company's
accounting policies. Such changes did not materially impact Pioneer - New York's
net income.
-9-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS -THREE MONTHS ENDED MARCH 31, 2001
TO THREE MONTHS ENDED MARCH 31, 2000
------------------------------------
In January 2001, the Company acquired all of the outstanding shares of
Pioneer Insurance Company of New York ("Pioneer - New York") from the Mutual
Company, which previously owned 100% of Pioneer - New York. The acquisition has
been accounted for as a pooling of interests, as both Pioneer - New York and the
Company are under the common management and control of the Mutual Company. As
such, all financial data prior to January 1, 2001 has been restated to include
the results of operations, financial position and cash flows of Pioneer - New
York.
Revenues for the three months ended March 31, 2001 were $44,792,026 an
increase of $4,434,693 or 11.0%, over the same period of 2000. An increase in
net premiums earned of $3,952,204 or 11.0%, represented most of this change. Net
premiums written of the insurance subsidiaries increased 13.1% in the first
quarter of 2001 compared to the first quarter of 2000. An increase in Atlantic
State's share of the pooled business of itself and Donegal Mutual from 65 % to
70%, effective July 1, 2000, accounted for 6 percentage points of the 13.1
percentage point increase in the premiums written. Investment income for the
first three months of 2001 increased $61,117 or 1.5%. A decrease in the
annualized average return on investments from 6.0% in the first three month of
2000 to 5.6% in the first three months of 2001 offset by an increase in average
invested assets from $267.3 million in the first three months of 2000 to $288.3
million in the first three months of 2001 accounted for the change. Realized
investment gains were $120,807 in the first three months of 2001 compared to a
loss of $281,910 for the same period of 2000. The realized losses in 2000
included $285,228 in losses which resulted from changes in the market value of
two securities that were determined to be other then temporary. The realized
gains in 2001 resulted from the normal turnover of the Company's portfolio.
The GAAP combined ratio of insurance operations in the first three months
of 2001 was 98.8% compared to 104.6% for the same period in 2000. The GAAP
combined ratio is the sum of the ratios of incurred losses and loss adjusting
expenses to premiums earned (loss ratio), policyholders dividends to premiums
earned (dividend ratio), and underwriting expenses to premiums earned (expense
ratio). The Company's loss ratio in the first three months of 2001 was 65.3%
compared to 71.9% in the first three months of 2000. The Company's expense ratio
for the first three months of 2001 was 32.5% compared to 31.7% for the first
three months of 2000. The change in the expense ratio resulted primarily from
increases in incentive costs related to the improved combined ratio. The
dividend ratio remained unchanged at 1.0%.
Federal income taxes for the three months ended March 31, 2001 represented
26.5% of the income before income taxes compared to 24.1% for the same period of
2000. These rates vary from the expected rate of 34% primarily due to the effect
of tax exempt investment income.
-10-
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. The Company
had no significant commitments for capital expenditures as of March 31, 2001.
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 March 31, 2001, pursuant to a credit agreement dated December 29,
1995, with Fleet National Bank of Connecticut, (the "Bank") the Company had
unsecured borrowings of $37.0 million. 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 March 31, 2001, the interest rates on the outstanding
balances were 6.8875% on an outstanding prime rate balance of $22.0 million and
6.7625% on an outstanding eurodollar rate balance of $15.0 million. In addition,
the Company will pay a non-use fee at a rate of 3/10 of 1% per annum on the
average daily unused portion of the Bank's commitment. On each July 27,
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 source of cash with which to pay stockholder
dividends is dividends from Atlantic States, Southern, Pioneer - Ohio, Pioneer -
New York, Southern Heritage and Delaware, which are required by law to maintain
certain minimum surplus on a statutory basis and are subject to regulations
under which payment of dividends from statutory surplus is restricted and may
require prior approval of their domiciliary insurance regulatory authorities.
Atlantic States, Southern, Pioneer - Ohio, Pioneer - New York, Southern Heritage
and Delaware are subject to Risk Based Capital (RBC) requirements effective for
1994. At December 31, 2000, each of the six Companies' capital was substantially
above the RBC requirements. At December 31, 2000, amounts available for
distribution as dividends to Donegal Group without prior approval of the
insurance regulatory authorities are $5,414,419 from Atlantic States, $908,259
from Southern, $581,132 from Pioneer - Ohio, $323,992 from Delaware, $973,796
from Southern Heritage and none from Pioneer - New York.
-11-
CREDIT RISK
- -----------
The Company provides property and liability coverages through its
subsidiaries' independent agency systems located throughout its operating area.
The majority of this business is billed directly to the insured although a
portion of Donegal Group's commercial business is billed through its agents who
are extended credit in the normal course of business.
The Company's subsidiaries have reinsurance agreements in place with the
Mutual Company and with a number of other major authorized reinsurers.
IMPACT OF INFLATION
- -------------------
Property and casualty insurance premiums are established before the amount
of losses and loss settlement expenses, or the extent to which inflation may
impact such expenses, are known. Consequently, the Company attempts, in
establishing rates, to anticipate the potential impact of inflation.
-12-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ------ -----------------
On March 30, 2001, an action was filed in the Court of Chancery of the
State of Delaware against the Mutual Company, the Company and the directors of
the Company. The action was filed derivatively on behalf of the Company and as a
class action on behalf of the holders of the Company's common stock other than
the Company, the Company's directors, the Mutual Company and their associates
and affiliates.
The action challenged the compliance of the Amendment to the Company's
Charter, the Reverse Split and the Stock Dividend with certain provisions of the
Delaware General Corporation Law and asserted a violation of fiduciary duties by
the Mutual Company and the directors of the Company. The action also made
certain allegations regarding the grant of stock options to certain persons and
the manner in which the Coordinating Committee of the Boards of Directors of the
Company and the Mutual Company operates.
The Company, the Mutual Company and the Company's Board of Directors deny
the allegations in the action, and believe the actions taken in connection with
the Amendment to the Company's Charter, the reverse Split and the Stock Dividend
were appropriate and in the best interest of all of the Company's stockholders.
However, rather then engage in protracted and extensive litigation, the
Company, the Mutual Company and the directors of the Company entered into an
agreement, which is subject to court approval, settling the litigation. As part
of the agreement, the Company agreed to various administrative changes related
to the reverse Split and Stock Dividend, which were approved by the Company's
Stockholders on April 19, 2001. Upon court approval of the settlement, it is
anticipated that the Company and the Mutual Company will be obligated to pay
certain legal fees to the plaintiff's counsel as determined by the court.
ITEM 2. CHANGES IN SECURITIES.
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None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- ------ -------------------------------
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
The Company's market risk generally represents the risk of gain or loss
that may result from the potential change in the fair value of the Company's
investment portfolio as a result of fluctuations in prices and interest rates
and, to a lesser extent, its debt obligations. The Company attempts to manage
its interest rate risk by maintaining an appropriate relationship between the
average duration of the investment portfolio and the approximate duration of its
liabilities, i.e., policy claims and debt obligations.
The Company has maintained approximately the same duration of its
investment portfolio to its liabilities from December 31, 2000 to March 31,
2001. In addition, the Company has maintained approximately the same investment
mix during this period.
There has been no material changes to the Company's quantitative or
qualitative market risk exposure from December 31, 2000 through March 31, 2001.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------ ---------------------------------------------------
Annual Stockholders meeting held April 19, 2001.
Directors elected at meeting:
Thomas J. Finley, Jr.
Votes for 7,855,712
Votes withheld 484,020
John J. Lyons
Votes for 7,857,014
Votes withheld 482,718
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R. Richard Sherbahn
Votes for 7,856,997
Votes withheld 482,735
Directors Continuing:
Robert S. Bolinger
Patricia A. Gilmartin
Philip H. Glatfelter
C. Edwin Ireland
Donald H. Nikolaus
Amendment to Article 4 of the Company's Certificate of Incorporation:
Votes for 7,073,603
Against 629,849
Abstain 13,089
Adoption of the 2001 Equity Incentive Plan:
Votes for 7,130,427
Against 574,591
Abstain 11,523
Adoption of the 2001 Equity Incentive Plan for Directors:
Votes for 7,127,526
Against 575,371
Abstain 13,644
Adoption of 2001 Employee Stock Purchase Plan:
Votes for 7,645,791
Against 59,457
Abstain 11,293
Election of KPMG LLP as Auditors for 2001:
Votes for 8,287,938
Against 41,858
Abstain 9,936
ITEM 5. OTHER INFORMATION.
- ------ -----------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------ --------------------------------
(a) EX -27 Financial Data Schedule
(b) Reports on 8-K:
No reports on Form 8-K were filed by the Company during the
quarter ended March 31, 2001.
-14-
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DONEGAL GROUP INC.
MAY 14, 2001 BY:
---------------------------------------
Donald H. Nikolaus, President
and Chief Executive Officer
MAY 14, 2001 BY:
---------------------------------------
Ralph G. Spontak, Senior Vice President,
Chief Financial Officer and Secretary
-15-