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June 24, 2005
Mr. Donald H. Nikolaus
President
Donegal Group, Inc.
1195 River Road
Marietta, Pennsylvania 17547
Re: Donegal Group, Inc.
Form 10-K for Fiscal Year Ended December 31, 2004
File No. 0-15341
Dear Mr. Nikolaus:
We have limited our review of your filing to those issues
addressed in our comments. In our comments, we ask you to provide
us
with information so we may better understand your disclosure.
After
reviewing this information, we may raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
Business
Liabilities for Losses and Loss Expenses, page 15
1. In your disclosure supporting the Industry Guide 6 table, you
state that loss data in the table includes business allocated from
the Mutual Company. Please provide us information about the
changes
in your pool participation percentages and any other terms of your
pooling and reinsurance arrangements and the related impact on
your
loss reserves over the ten year period. If the impact of these
changes is material, tell us why you did not discuss reinsurance
transactions or changes in such terms as required by Section 2A of
Industry Guide 6.
Exhibit 13 - Annual Report to Shareholders
Management`s Discussion and Analysis
Critical Accounting Policies and Estimates, page 10
2. This disclosure should provide investors with a fuller
understanding of the uncertainties in applying critical accounting
policies and the likelihood that materially different amounts
would
be reported under different conditions or using different
assumptions. It should include quantification of the related
variability in operating results that you expect to be reasonably
likely to occur. Please provide us information about the
uncertainties in applying these accounting policies, the
historical
accuracy of these critical accounting estimates, a quantification
of
their sensitivity to changes in key assumptions and the expected
likelihood of material changes in the future. Tell us why you
have
not provided these disclosures in your filing. Please refer to the
next comment for your critical accounting estimates related to
losses
and loss expenses.
3. Disclosures explaining the likelihood that materially different
amounts would be reported under different conditions or using
different assumptions are consistent with the objective of
Management`s Discussion and Analysis. Your disclosure regarding
losses and loss expenses does not appear to include an adequate
explanation of the judgments and uncertainties surrounding these
estimates and the potential impact on your financial statements.
Accordingly, please provide us the following information for each
of
your lines of business and tell us why you have not provided these
disclosures in your filing.
* Tell us the reserves accrued as of the latest balance sheet date
presented. The total of these amounts should agree to the amount
presented on the balance sheet.
* Tell us the range of loss reserve estimates as determined by
your
actuaries. Discuss the key assumptions used to arrive at
management`s best estimate of loss reserves within that range and
what specific factors led management to believe this amount rather
than any other amount within the range represented the best
estimate
of incurred losses.
* Provide more precise insight into the existence and effects on
future operations and financial condition of known trends in claim
frequency and severity. Link this discussion to liquidity and
capital
resources.
* For each of your longer-tail businesses, such as workers`
compensation, provide us with more insight into the existence and
effects on future operations and financial condition of known
trends,
events and uncertainties. Information you should consider, but
not
be limited to, includes the following:
a. the number of claims pending at each balance sheet date;
b. the number of claims reported for each period presented;
c. the number of claims dismissed, settled, or otherwise resolved
for
each period;
d. the nature of the claims including relevant characteristics of
the
claimant population (e.g., involves a large number of relatively
small individual claims of a similar type);
e. the total settlement amount for each period;
f. the cost of administering the claims;
g. emerging trends that may result in future reserve adjustments;
and
if management is unable to estimate the possible loss or range of
loss, a statement to that effect.
4. It appears that in 2004 and 2002 you significantly revised your
estimates of loss reserves recorded in prior years. For each of
these changes in estimate, please provide us the following
information by line of business and tell us why you have not
provided
these disclosures in your filing. Include a discussion of the
impact
of the acquired business of Le Mars and Peninsula on your 2004
loss
experience.
* Identify the years to which the change in estimate relates and
the
amount of the related loss reserve as of the beginning of the year
that was re-estimated. Explain to us and quantify offsetting
changes
in estimates that increase and decrease the loss reserve.
* Identify the changes in the key assumptions you made to estimate
the reserve since the last reporting date.
* Identify the nature and timing of the change in estimate,
explicitly identifying and describing in reasonable specificity
the
new events that occurred or additional information acquired since
the
last reporting date that led to the change in estimate.
* Explain why recognition occurred in the periods that it did and
why
recognition was not required in earlier periods.
* Tell us about any trends such as, the number of claims incurred,
average settlement amounts, number of claims outstanding at period
ends along with average per claim outstanding, and any other
trends,
necessary to understand the change in estimate. Explain the
rationale
for a change in estimate that does not correlate with these
trends.
Management`s Evaluation of Operating Results, page 11
5. An objective of MD&A is to provide information about the
quality
and potential variability of earnings and cash flow to facilitate
investors` determination of the likelihood that past performance
is
indicative of future performance. This disclosure should include a
discussion and quantification of the specific factors underlying
changes in your operating results and known trends and
uncertainties.
In particular, we noted that trends in accident frequency and
severity and the pooling agreement between Atlantic States and the
Mutual Company, which appeared to significantly increase your
profit
in each of the past three years, were not discussed in your MD&A.
Please provide us this information and tell us why you have not
provided these disclosures in your filing. Include an analysis of
the
impact on operating results of all pooling and reinsurance
agreements
with the Mutual Company, an analysis of known trends and
uncertainties affecting these insurance pools and any expected
changes in the pool and your pool participation levels.
6. Please explain specifically to us how the risk profile of the
Mutual Company`s business (e.g. types of products, pricing
practices
and underwriting standards) differs from that of Atlantic States
and
how these differences have changed over time and are expected to
change in the future. Explain to us the likelihood of adverse risk
development on business of the Mutual Company included in the pool
and the actions you would take to mitigate the related impact on
the
Company. Tell us why you did not provide this disclosure in your
filing.
Liquidity and Capital Resources, page 14
7. Disclosure of the more-likely-than-not impact of known trends,
demands, commitments and uncertainties on your liquidity and
capital
resources is consistent with the objectives of Management`s
Discussion and Analysis. We note that you do not discuss the
impact
of the pooling agreement with the Mutual Company and unexpected
variations in the timing of claim payments associated with your
loss
reserves and the maturity of your investments on future liquidity
and
results of operations. Please provide this information to us and
tell
us why you have not provided this disclosure in your filing.
8. We note that you have not provided a table of contractual
obligations as required by Item 303 (a) (5) of Regulation S-K. Due
to
the significance of estimated payments associated with your loss
reserves, we believe that exclusion of claim payments associated
with
your loss reserves from a contractual obligation table unduly
limits
investors` evaluation of your liquidity and capital resources.
The
purpose of Financial Reporting Release 67 is to obtain enhanced
disclosure concerning a registrant`s contractual payment
obligations
and the exclusion of ordinary course items is inconsistent with
the
objective of Item 303 (a)(5) of Regulation S-K. Please provide us
this information and tell us why you have not provided this
disclosure in your filing.
Consolidated Financial Statements
General
9. Rule 4-08 (k) of Regulation S-X requires all amounts arising
from
related party transactions, such as your pooling and reinsurance
agreements with the Mutual Company, be presented in separate
captions
on the face of your financial statements. Please provide us this
information and tell us why you have not provided these
disclosures
in your filing.
Note 1. Summary of Significant Accounting Policies
Reinsurance Accounting and Reporting, page 21
10. Disclosure of the methods and assumptions used to recognize
costs
and expenses associated with reinsurance transactions, including
your
pooling arrangement with the Mutual Company, is consistent with
the
objectives of SFAS 113. Please provide us this information and
tell
us why you have not provided these disclosures in your filing.
Note 10. Reinsurers, page 27
11. It appears that you do not provide an adequate description of
the
nature of your reinsurance arrangements as required by Rule 7-
03(a)
(13)(c) of Regulation S-X. Please provide us this information and
tell us why you have not provided these disclosures in your
filing.
Also, we note that reinsurance receivable at December 31, 2004
represented approximately 60% of premium assumed from the Mutual
Company during the year. In your response to us, include an
explanation of regulatory or other restrictions on the ability of
the
Mutual Company to fund its obligations under the pooling and
reinsurance agreements with you.
* * * *
Please respond to these comments within 10 business days or
tell us when you will provide us with a response. Your letter
should
key your responses to our comments. Detailed letters greatly
facilitate our review. Please file your letter on EDGAR under the
form type label CORRESP.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing to be certain that the
filing includes all information required under the Securities
Exchange Act of 1934 and that they have provided all information
investors require for an informed investment decision. Since the
company and its management are in possession of all facts relating
to
a company`s disclosure, they are responsible for the accuracy and
adequacy of the disclosures they have made.
In connection with responding to our comments, please
provide,
in your letter, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filings;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
You may contact Frank Wyman, Staff Accountant, at 202-551-
3660
or Don Abbott, Senior Staff Accountant, at 202-551-3608, if you
have
questions regarding the comments. In this regard, do not hesitate
to
contact me, at (202) 551-3679.
Sincerely,
Jim B. Rosenberg
Senior Assistant Chief Accountant
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Mr. Donald H. Nikolaus
Donegal Group, Inc.
June 24, 2005
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