SEC Filing | Donegal Group Inc.

Securities and Exchange Commission Washington, D.C. 20549 Form 10-Q (Mark One) [x] Quarterly Report Pursuant to Section 13 of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 2000 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 ------- Donegal Group Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 23-2424711 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1195 River Road, P.O. Box 302, Marietta, PA 17547-0302 ------------------------------------------------------------ (Address of principal executive offices, including zip code) (717) 426-1931 ---------------------------------------------------- (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X. No . --- --- Applicable Only to Issuers Involved in Bankruptcy Proceedings During the Preceding Five Years: Indicate by check mark whether the registrant has filed all documents and reports required by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes . No . --- --- Applicable Only to Corporate Issuers: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 8,732,837 shares of Common Stock, $1.00 par value, outstanding on July 31, 2000.

Part I. Financial Information Item 1. Financial Statements. Donegal Group Inc. And Subsidiaries Consolidated Balance Sheet Assets June 30, 2000 December 31, 1999 ------------- ----------------- Investments (Unaudited) Fixed maturities Held to maturity, at amortized cost $136,587,402 $136,173,547 Available for sale, at fair value 105,264,515 100,043,548 Equity securities, available for sale at fair value 13,377,106 9,229,498 Short-term investments, at cost, which approximates fair value 11,891,757 15,995,257 ------------ ------------ Total Investments 267,120.780 261,441,850 Cash 1,661,701 3,922,403 Accrued investment income 3,638,159 3,474,430 Premiums receivable 21,716,434 18,218,525 Reinsurance receivable 53,777,534 53,070,283 Deferred policy acquisition costs 11,771,006 11,203,302 Federal income tax receivable 619,028 698,969 Deferred federal income taxes 8,775,722 9,121,232 Prepaid reinsurance premiums 36,850,275 32,154,837 Property and equipment, net 5,226,538 5,516,688 Due from affiliate 364,796 262,954 Other 691,369 647,184 ------------ ------------ Total Assets $412,253,342 $399,732,657 ============ ============ Liabilities and Stockholders' Equity Liabilities Losses and loss expenses $152,538,908 $149,979,141 Unearned premiums 106,298,817 97,657,020 Accrued expenses 4,906,800 5,888,392 Drafts payable 108,628 597,775 Reinsurance balances payable 947,842 1,216,034 Cash dividend declared to stockholders -- 760,673 Line of credit 37,000,000 37,000,000 Accounts payable - securities 1,100,000 2,500,000 Other 1,352,672 719,010 ------------- ------------ Total Liabilities 304,253,667 296,318,045 ----------- ----------- Stockholders' Equity Preferred stock, $1.00 par value, authorized 1,000,000 shares; none issued Common stock, $1.00 par value, authorized 10,000,000 shares, issued 8,833,411 and 8,574,210 shares and outstanding 8,711,123 and 8,451,922 shares 8,833,411 8,574,210 Additional paid-in capital 44,993,241 43,536,748 Accumulated other comprehensive loss (2,138,806) (2,073,989) Retained earnings 57,203,585 54,269,399 Treasury stock (891,756) (891,756) ------------- ------------ Total Stockholders' Equity 107,999,675 103,414,612 ------------- ------------ Total Liabilities and Stockholders' Equity $412,253,342 $399,732,657 ============ ============ See accompanying notes to consolidated financial statements. -1-

Donegal Group Inc. and Subsidiaries Consolidated Statement of Income (Unaudited) Three Months Ended June 30, 2000 1999 ------------ ------------ Revenues: Premiums earned $ 54,582,537 $ 52,653,705 Premiums ceded 18,559,888 16,823,890 ------------ ------------ Net premiums earned 36,022,649 35,829,815 Investment income, net of investment expenses 3,798,470 3,155,817 Realized gains 391,117 32,345 Lease income 208,222 205,224 Service charge income 381,142 564,786 ------------ ------------ Total Revenues 40,801,600 39,787,987 ------------ ------------ Expenses: Losses and loss expenses 36,790,924 36,505,254 Reinsurance recoveries 12,185,174 12,342,954 ------------ ------------ 24,605,750 24,162,300 Amortization of deferred policy acquisition costs 6,117,000 7,325,000 Other underwriting expenses 5,519,476 5,763,127 Policy dividends 234,273 298,636 Interest 757,778 263,487 Other expenses 294,120 478,571 ------------ ------------ Total Expenses 37,528,397 38,291,121 ------------ ------------ Income before income taxes 3,273,203 1,496,866 Income tax 802,803 196,130 ------------ ------------ Net income $ 2,470,400 $ 1,300,736 ============ ============ Earnings per common share Basic $ 0.28 $ 0.16 ============ ============ Diluted $ 0.28 $ 0.16 ============ ============ Statement of Comprehensive Income (Unaudited) Three Months Ended June 30, 2000 1999 ------------ ------------ Net Income $ 2,470,400 $ 1,300,736 ------------ ------------ Other comprehensive loss, net of tax Unrealized gains on securities: Unrealized holding gain (loss) during the period 492,943 (1,419,048) Less: Reclassification adjustment for gains included in net income, net of income tax (258,138) (21,348) ------------ ------------ Other comprehensive income (loss) 234,805 (1,440,396) ------------ ------------ Comprehensive income (loss) $ 2,705,205 $ (139,660) ============ ============ See accompanying notes to consolidated financial statements. -2-

Donegal Group Inc. and Subsidiaries Consolidated Statement of Income (Unaudited) Six Months Ended June 30, 2000 1999 ------------ ------------ Revenues: Premiums earned $107,876,185 $104,489,888 Premiums ceded 36,268,443 32,566,102 ------------ ------------ Net premiums earned 71,607,742 71,923,786 Investment income, net of investment expenses 7,675,839 6,525,078 Realized gain 109,207 15,415 Lease income 414,994 404,361 Service charge income 739,352 1,031,337 ------------ ------------ Total Revenues 80,547,134 79,897,977 ------------ ------------ Expenses: Losses and loss expenses 74,718,250 73,106,709 Reinsurance recoveries 24,574,508 24,492,758 ------------ ------------ 50,143,742 48,613,951 Amortization of deferred policy acquisition costs 12,188,000 13,356,000 Other underwriting expenses 10,540,088 11,520,884 Policy dividends 587,235 630,012 Interest 1,580,988 694,431 Other expenses 568,007 860,958 ------------ ------------ Total Expenses 75,608,060 75,676,236 ------------ ------------ Income before income taxes 4,939,074 4,221,741 Income taxes 1,218,440 769,638 ------------ ------------ Net income $ 3,720,634 $ 3,452,103 ============ ============ Earnings per common share Basic $ 0.43 $ 0.42 ============ ============ Diluted $ 0.43 $ 0.42 ============ ============ Consolidated Statement of Comprehensive Income (Unaudited) Six Months Ended June 30, 2000 1999 ------------ ------------ Net Income $ 3,720,634 $ 3,452,103 ------------ ------------ Other comprehensive loss, net of tax Unrealized gains on securities: Unrealized holding gain (loss) during the period 7,260 (2,209,513) Less: Reclassification adjustment for gains included in net income, net of income tax (72,077) (10,174) ------------ ------------ Other comprehensive loss (64,817) (2,219,687) ------------ ------------ Comprehensive income $ 3,655,817 $ 1,232,416 ============ ============ See accompanying notes to consolidated financial statements. -3-

DONEGAL GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) FOR THE THREE MONTHS ENDED JUNE 30, 2000 Common Stock -------------------------- Accumulated Total Additional Other Com- Stock- Paid-In prehensive Retained Treasury holders' Shares Amount Capital Loss Earnings Stock Equity --------- ----------- ------------ ------------ ------------ --------- ------------- Balance, December 31, 1999 8,574,210 $ 8,574,210 $ 43,536,748 $ (2,073,989) $ 54,269,399 $(891,756) $ 103,414,612 Issuance of Common Stock 259,201 259,201 1,456,493 1,715,694 Net Income 3,720,634 3,720,634 Cash Dividend (786,448) (786,448) Other Comprehensive Loss (64,817) (64,817) ------------ ------------- Balance, June 30, 2000 8,833,411 $ 8,833,411 $ 44,993,241 $ (2,138,806) $ 57,203,585 $(891,756) $ 107,999,675 ========= =========== ============ ============ ============ ========= ============= See accompanying notes to consolidated financial statements. -4-

DONEGAL GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Six Months Ended June 30, 2000 1999 ------------ ------------ Cash flows from operating activities: Net income $ 3,720,634 $ 3,452,103 ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 459,357 545,699 Realized investment gain (109,207) (15,415) Changes in assets and liabilities: Losses and loss expenses 2,559,767 2,326,730 Unearned premiums 8,641,797 7,430,128 Premiums receivable (3,497,909) (3,146,764) Deferred policy acquisition costs (567,704) (426,936) Deferred income taxes 323,613 (171,058) Reinsurance receivable (707,251) (1,975,318) Prepaid reinsurance premiums (4,695,438) (4,548,994) Accrued investment income (163,729) (400,732) Due from affiliate (101,842) 1,182,782 Reinsurance balances payable (268,192) (337,913) Current income taxes 79,941 3,200 Other, net (904,820) (422,928) ------------ ------------ Net adjustments 1,048,383 42,481 ------------ ------------ Net cash provided by operating activities 4,769,017 3,494,584 ------------ ------------ Cash flows from investing activities: Purchase of fixed maturities Held to maturity (5,810,028) (8,727,038) Available for sale (12,694,530) (13,639,230) Purchase of equity securities, available for sale (13,470,191) (7,162,651) Maturity of fixed maturities Held to maturity 6,175,468 10,150,310 Available for sale 4,700,000 10,154,868 Sale of fixed maturities, available for sale 496,250 -- Sale of equity maturities, available for sale 9,440,407 967,504 Purchase of property and equipment (139,168) (789,563) Net sales of short-term investments 4,103,500 22,697,512 ------------ ------------ Net cash provided by (used in) investing activities (7,198,292) 13,651,712 ------------ ------------ Cash flows from financing activities: Cash dividends paid (1,547,121) (1,442,326) Issuance of common stock 1,715,694 1,263,673 Line of credit, net -- (22,500,000) ------------ ------------ Net cash provided by (used in) financing activities 168,573 (22,678,653) ------------ ------------ Net decrease in cash (2,260,702) (5,532,357) Cash at beginning of period 3,922,403 8,227,042 ------------ ------------ Cash at end of period $ 1,661,701 $ 2,694,685 ============ ============ Cash paid during period - Interest $ 1,102,693 $ 700,279 Net cash received during period - Income taxes $ 810,456 $ 595,380 See accompanying notes to consolidated financial statements. -5-

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") 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 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 assumed 65% of the pooled business. Effective July 1, 2000 the pooling arrangement was amended changing Atlantic States' portion of the pooled business to 70%. Southern cedes 50% of its business to the Mutual Company. At June 30, 2000, the Mutual Company held 62% of the outstanding common stock of the Company. The Company and Donegal Mutual have been granted approval from the Federal Office of Thrift Supervision to form a savings bank. The bank will be 40% owned by the Company and 60% by Donegal Mutual and will require that the Company contribute approximately $2.8 million in start up capital. It is currently anticipated that the thrift will be formed in and open for business in the third quarter of this year. 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 and six months ended June 30, 2000, are not necessarily indicative of results of operations to be expected for the twelve months ended December 31, 2000. As interim period financial statements, these financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. As such, 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, 1999. -6-

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 June 30: 2000 Basic $2,470,400 8,680,348 $ .28 Effect of stock options -- -- -- ---------- --------- ----- Diluted $2,470,400 8,680,348 $ .28 ---------- --------- ----- 1999 Basic $1,300,736 8,292,407 $ .16 Effect of stock options -- -- -- ---------- --------- ----- Diluted $1,300,736 8,292,407 $ .16 ---------- --------- ----- Six Months Ended June 30: 2000 Basic $3,720,634 8,626,365 $ .43 Effect of stock options -- -- -- ---------- --------- ----- Diluted $3,720,634 8,626,365 $ .43 ---------- --------- ----- 1999 Basic $3,452,103 8,264,995 $ .42 Effect of stock options -- -- -- ---------- --------- ----- Diluted $3,452,103 8,264,995 $ .42 ---------- --------- ----- The following options to purchase shares of common stock were not included in the computation of diluted earnings per share because the exercise price of the options was greater than the average market price: For The Three Months For The Six Months Ended June 30, Ended June 30, 2000 1999 2000 1999 ---------- --------- --------- --------- Number of Options 1,425,281 1,011,116 1,425,281 1,011,116 -7-

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 June 30 2000 1999 - ----------------------------------------------------------------------------------- ($ in thousands) - ----------------------------------------------------------------------------------- Revenues: Premiums earned: Commercial lines $12,903 $11,797 Personal lines 23,120 24,033 - ---------------------------------------------------------------------------------- Total net premiums earned 36,023 35,830 - ---------------------------------------------------------------------------------- Net investment income 3,799 3,156 Realized investment Gains 391 32 Other 588 770 - ---------------------------------------------------------------------------------- Total revenues $40,801 $39,788 ================================================================================== Income before income taxes: Underwriting income (loss) Commercial lines $ 995 $ 416 Personal lines (2,158) (2,791) - ---------------------------------------------------------------------------------- SAP underwriting loss (1,163) (2,375) GAAP adjustments 709 656 - ---------------------------------------------------------------------------------- GAAP underwriting loss (454) (1,719) Net investment income 3,799 3,156 Realized investment losses 391 32 Other (463) 28 - ---------------------------------------------------------------------------------- Income before income taxes $ 3,273 $ 1,497 ================================================================================== -8-

Six Months Ended June 30 2000 1999 - ------------------------------------------------------------------------------------- ($ in thousands) - ------------------------------------------------------------------------------------- Revenues: Premiums earned: Commercial lines $25,302 $23,182 Personal lines 46,306 48,742 - ------------------------------------------------------------------------------------- Total net premiums earned 71,608 71,924 - ------------------------------------------------------------------------------------- Net investment income 7,676 6,525 Realized investment Gains 109 15 Other 1,154 1,434 - ------------------------------------------------------------------------------------- Total revenues $80,547 $79,898 ===================================================================================== Income before income taxes: Underwriting income (loss) Commercial lines $ 100 $ (205) Personal lines (2,628) (2,169) - ------------------------------------------------------------------------------------- SAP underwriting loss (2,528) (2,374) GAAP adjustments 677 177 - ------------------------------------------------------------------------------------- GAAP underwriting loss (1,851) (2,197) Net investment income 7,676 6,525 Realized investment losses 109 15 Other (995) (121) - ------------------------------------------------------------------------------------- Income before income taxes $ 4,939 $ 4,222 ===================================================================================== -9-

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 ----------- --------- ------------- ---------- BALANCE AT 12/31/99 $ 368,000 $ 441,000 $ 73,000 $ 882,000 CASH PAYMENTS (317,000) (88,000) (73,000) (478,000) BALANCE AT 6/30/00 $ 51,000 $ 353,000 $ -- $ 404,000 -10-

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations -Three Months Ended June 30, 2000 to Three Months Ended June 30, 1999 Revenues for the three months ended June 30, 2000 were $40,801,600 an increase of $1,013,613 or 2.5%, over the same period of 1999. An increase in investment income of $642,653, or 20.4% coupled with an increase in realized gains of $358,772 represented most of this change. in investment income. An increase in the annualized average return on investments from 5.3% in the second quarter of 1999 to 5.8% in the second quarter of 2000 and an increase in average invested assets from $238.6 million in the second quarter of 1999 to $260.0 million in the second quarter of 2000, accounted for most of the change. Net premiums earned increased $192,834 or 0.5%. Premiums earned of Southern Heritage Insurance Company decreased $1.7 million as part of the reunderwriting of its book of business. This decrease was more than offset by an increase of $1.9 million, or 5.4% in the earned premiums of the Company's other subsidiaries. The realized losses in the second quarter of both 2000 and 1999 resulted from the normal turnover of the Company's investment portfolio. The GAAP combined ratio of insurance operations in the second quarter of 2000 was 101.3% compared to 104.8% for the same period in 1999. 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 second quarter of 2000 was 68.3% compared to 67.4% for the same period of 1999. The loss ratio increase resulted primarily from an increase in frequency related to catastrophe type losses in the second quarter of 2000. The increase in the loss ratio was more than offset by an improvement in the expense ratio for the second quarter of 2000 to 32.3% compared to 36.5% for the second quarter of 1999. The improvement in the expense ratio resulted primarily from the Company's previously announced restructuring plan that was implemented at the end of the third quarter of 1999. The dividend ratio remained virtually unchanged at 0.7% for the second quarter of 2000 compared to 0.8% for the same period of 1999. Federal income taxes for the three months ended June 30, 2000 represented 24.5% of the income before income taxes compared to 13.1% for the same period of 1999. These rates vary from the expected rate of 34% primarily due to the effect of tax exempt investment income which represented a higher percentage of net income in second quarter of 1999 compared to the second quarter of 2000. -11-

Results of Operations - Six Months Ended June 30, 2000 to Six Months Ended June 30, 1999 Revenues for the six months ended June 30, 2000 were $80,547,134 an increase of $649,157 or 0.8%, over the same period of 1999. An increase in investment income of $1,150,761, or 17.6%, offset by a decrease in service charge income of $291,985 and a decrease in net premiums earned of $316,044, accounted for the change. An increase in the annualized average return on investments from 5.3% in the first six months of 1999 to 5.8% in the first six months of 2000 and an increase in average invested assets from $246.7 million in the first six months of 1999 to $264.3 million in the first six months of 2000, accounted for the change in investment income. Premiums earned of Southern Heritage Insurance Company decreased $4.1 million as part of the reunderwriting of its book of business. This decrease was mostly offset by an increase of $3.8 million, or 6.5% in the earned premiums of the Company's other subsidiaries. The GAAP combined ratio of insurance operations in the first six of 2000 was 102.6% compared to 103.1% for the same period in 1999. 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 six months of 2000 was 70.0% compared to 67.6% for the same period of 1999. The loss ratio increase resulted primarily from an increase in frequency related to catastrophe type losses in the second quarter of 2000 and from deterioration in results from private passenger automobile and workers' compensation lines of business during the first quarter of 2000. The increase in the loss ratio was more than offset by an improvement in the expense ratio for the first six months of 2000 to 31.7% compared to 34.6% for the same period of 1999. The improvement in the expense ratio resulted primarily from the Company's previously announced restructuring plan that was implemented at the end of the third quarter in 1999. The dividend ratio remained virtually unchanged at 0.8% for the first half of 2000 compared to 0.9% for the same period of 1999. Federal income taxes for the six months ended June 30, 2000 represented 24.7% of the income before income taxes compared to 18.2% for the same period of 1999. These rates vary from the expected rate of 34% primarily due to the effect of tax exempt investment income which represented a higher percentage of net income in first half of 1999 compared to the first half of 2000. -12-

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 will be required to contribute $2.8 million in capital as part of the formation of a thrift for which it and Donegal Mutual have been granted approval from the Federal Office of Thrift Supervision. The capital contribution will take place in the third quarter of this year. 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 June 30, 2000, 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 June 30, 2000, the interest rates on the outstanding balances were 7.9% on an outstanding eurodollar balance of $22.0 million and 8.1% 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, 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, Southern Heritage and Delaware are subject to Risk Based Capital (RBC) requirements. At December 31, 1999, each of the five Companies' capital was substantially above the RBC requirements. At December 31, 1999, amounts available for distribution as dividends to Donegal Group without prior approval of the insurance regulatory authorities are $6,851,802 from Atlantic States, $184,285 from Southern, $567,793 from Pioneer, $956,381 from Delaware and $1,650,842 from Southern Heritage. -13-

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. -14-

Part II. Other Information Item 1. Legal Proceedings. None. Item 2. Changes in Securities. 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, 1999 to June 30, 2000. In addition, the Company has maintained approximately the investment mix during this period. There have been no material changes to the Company's quantitative or qualitative market risk exposure from December 31, 1999 through June 30, 2000. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) EX -27 Financial Data Schedule (b) Reports on 8-K: A form 8-K was filed on June 19, 2000 reporting the changes in the pooling agreement between Atlantic States Insurance Company and Donegal Mutual Insurance Company. -15-

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. August 11, 2000 By:____________________________________ Donald H. Nikolaus, President and Chief Executive Officer August 11, 2000 By:___________________________________________ Ralph G. Spontak, Senior Vice President, Chief Financial Officer and Secretary -16-

7 3-MOS DEC-31-2000 JUN-30-2000 105,264,515 136,587,402 134,454,830 13,377,106 0 2,432,053 267,120,780 1,661,701 0 11,771,006 412,253,342 152,538,908 106,298,817 0 0 37,000,000 0 0 8,833,411 99,166,264 412,253,342 71,607,742 7,675,839 109,207 1,154,346 50,143,742 12,188,000 10,540,088 4,939,074 1,218,440 3,720,634 0 0 0 3,720,634 .43 .43 97,494 51,929 (1,785) 30,595 17,858 99,185 (1,785)