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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, 1995. or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange 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: 4,184,614 shares of Common Stock, $1.00 par value, outstanding on July 31, 1995. Part I. Financial Information Item 1. Financial Statements. Donegal Group Inc. And Subsidiaries Consolidated Balance Sheet Assets June 30, 1995 December 31, 1994 ------------- ----------------- (Unaudited) Investments Fixed maturities Held to maturity, at amortized cost $ 77,555,218 $ 65,451,109 Available for sale, at market value and at the lower of amortized cost or market value 45,363,797 41,370,321 Equity securities, available for sale at market 5,243,584 4,190,316 Short-term investments, at cost, which approximate market 14,106,979 24,640,509 -------------- -------------- Total Investments 142,269,578 135,652,255 Cash 725,844 1,263,764 Accrued investment income 2,114,004 1,912,835 Premiums receivable 10,284,404 8,882,053 Reinsurance receivable 23,871,627 21,295,593 Deferred policy acquisition costs 6,095,209 5,551,869 Deferred federal income taxes 3,457,568 3,734,826 Current income taxes 115,300 -- Prepaid reinsurance premiums 12,249,164 10,802,519 Property and equipment, net 1,624,051 1,591,766 Accounts receivable - securities -- 212,655 Due from affiliate 1,264,022 591,707 Other 391,532 554,468 -------------- -------------- Total Assets $ 204,462,303 $ 192,046,310 ============== ============== Liabilities and Stockholders' Equity Liabilities Losses and loss expenses $ 86,301,706 $ 79,962,961 Unearned premiums 49,143,337 44,512,189 Accrued expenses 1,005,586 1,134,064 Current income taxes -- 123,687 Reinsurance balances payable 579,881 562,626 Cash dividend declared to stockholders -- 369,335 Accounts payable - securities 339,879 4,213,830 Other 277,805 165,827 -------------- -------------- Total Liabilities 137,648,194 131,044,519 -------------- -------------- 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 4,242,724 and 4,162,770 shares and outstanding 4,177,676 and 4,097,722 shares 4,242,724 4,162,770 Additional paid-in capital 33,176,721 32,411,677 Net unrealized gain (losses) on investments 115,662 (821,535) Retained earnings 30,098,782 26,068,659 Treasury stock (819,780) (819,780) -------------- -------------- Total Stockholders' Equity 66,814,109 61,001,791 -------------- -------------- Total Liabilities and Stockholders' Equity $ 204,462,303 $ 192,046,310 ============== ============== See accompanying notes to consolidated financial statements. -1-
Donegal Group Inc. and Subsidiaries Consolidated Statement of Income (Unaudited) For the three months ended June 30, 1995 and 1994 Three Months Ended June 30, 1995 1994 ---- ---- Revenues: Premiums earned $ 27,233,374 $ 23,936,073 Premiums ceded (6,787,195) (5,871,976) ------------ ------------ Net premiums earned 20,446,179 18,064,097 Investment income, net of investment expenses 2,121,382 1,730,994 Realized gain (loss) 190,191 (308,134) Lease income 122,553 116,093 Service charge income 371,604 204,494 ------------ ----------- Total Revenues 23,251,909 19,807,544 ------------ ----------- Expenses: Losses and loss expenses 18,289,014 15,034,547 Reinsurance recoveries (4,597,411) (3,520,254) ------------ ----------- Net losses and loss expenses 13,691,603 11,514,293 Amortization of deferred policy acquisition costs 3,440,000 3,010,000 Other underwriting expenses 2,513,161 2,208,111 Policy dividends 324,625 221,268 Other expenses 324,855 188,326 ------------ ----------- Total Expenses 20,294,244 17,141,998 ------------ ----------- Income before income taxes 2,957,665 2,665,546 Income taxes 694,201 718,508 ------------ ----------- Net income $ 2,263,464 $ 1,947,038 ============ ============ Earnings per common share $ .53 $ .47 ============ ============ See accompanying notes to consolidated financial statements. -2-
Donegal Group Inc. and Subsidiaries Consolidated Statement of Income (Unaudited) For the six months ended June 30, 1995 and 1994 Six Months Ended June 30, 1995 1994 ---- ---- Revenues: Premiums earned $ 53,392,825 $ 46,533,113 Premiums ceded (13,453,727) (11,404,256) ------------ ------------ Net premiums earned 39,939,098 35,128,857 Investment income, net of investment expenses 4,208,374 3,521,245 Realized gain (loss) 214,297 (34,487) Lease income 241,274 230,145 Service charge income 678,634 358,480 ------------ ------------ Total Revenues 45,281,677 39,204,240 ------------ ------------ Expenses: Losses and loss expenses 33,670,457 33,219,316 Reinsurance recoveries (7,904,116) (8,223,528) ------------ ------------ Net losses and loss expenses 25,766,341 24,995,788 ------------ ------------ Amortization of deferred policy acquisition costs 6,598,000 5,835,000 Other underwriting expenses 5,683,747 4,712,362 Policy dividends 633,816 483,190 Other expenses 628,390 367,793 ------------ ------------ Total Expenses 39,310,294 36,394,133 ------------ ------------ Income before income taxes 5,971,383 2,810,107 Income taxes 1,529,737 565,600 ------------ ------------ Net income $ 4,441,646 $ 2,244,507 ============ ============ Earnings per common share $ 1.05 $ .54 ============ ============ 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, 1995 Common Stock Net Unreal- Total ------------ Additonal ized Gains Stock- Paid-In (Losses) on Retained Treasury holders' Shares Amount Capital Investments Earnings Stock Equity ------ ------ ------- ----------- -------- ----- ------ Balance, January 1, 1995 4,162,770 $4,162,770 $32,411,677 $ (821,535) $26,068,659 $(819,780) $61,001,791 Net Income 4,441,646 4,441,646 Unrealized gain on investments 937,197 937,197 Dividends Paid (411,523) (411,523) Issuance of Common Stock 79,954 79,954 765,044 844,998 --------- ---------- ----------- ----------- ----------- --------- ---------- Balance, June 30, 1995 4,242,724 $4,242,724 $33,176,721 $ 115,662 $30,098,782 $(819,780) $66,814,109 ========= ========== =========== ========== =========== ========= =========== See accompanying notes to financial statements. -4-
DONEGAL GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) For the six months ended June 30, 1995 and 1994 Six months ended June 30, 1995 1994 ---- ---- Cash Flows from Operating Activities: Net income $ 4,441,646 $ 2,244,507 Adjustments to reconcile net income to net cash provided by operating activities: Liabilities for losses and loss expenses 6,338,745 7,941,338 Depreciation and amortization 110,746 149,294 Realized investment (gain) loss (214,297) 34,487 Changes in Assets and Liabilities: Unearned premiums 4,631,148 3,551,013 Premiums receivable (1,402,351) (1,396,401) Deferred acquisition costs (543,340) (319,155) Deferred income taxes (205,539) (229,592) Reinsurance receivable (2,576,034) (6,178,808) Prepaid reinsurance premiums (1,446,645) (1,488,535) Accrued investment income (201,169) 192,985 Due from affiliate (672,315) 227,836 Accounts payable reinsurance 17,255 1,083,179 Current income taxes payable (238,987) 649,433 Other, net 146,436 (371,961) ------------ ---------- Net adjustments 3,743,653 3,845,113 ------------ ---------- Net cash provided by operating activities 8,185,299 6,089,620 ------------ ---------- Cash flows from investing activities: Purchase of fixed maturities Held to maturity (11,811,318) (4,388,465) Available for sale (8,602,670) (10,969,994) Purchase of equity securities, available for sale (3,998,350) (5,380,857) Sale of fixed maturities Held to maturity --- 1,346,375 Available for sale 2,621,843 13,904,427 Maturity of fixed maturities - held to maturity 2,266,416 8,690,154 Maturity of fixed maturities - available for sale 533,334 199,291 Sale of equity securities, available for sale 3,813,240 5,489,155 Purchase of property and equipment (179,554) (87,192) Purchase of intangible asset --- (115,000) Net sales of short-term investments 6,569,700 (14,093,484) ------------ ---------- Net cash used in investing activities (8,787,359) (5,405,590) ------------ ---------- Cash flows from financing activities: Expenses of subsidiary formation --- (16,625) Cash dividends paid (780,858) (695,680) Issuance of common stock 844,998 55,401 Net cash provided by (used in) financing activities 64,140 (656,904) ------------ ---------- Net decrease in cash (537,920) 27,126 Cash at beginning of year 1,263,764 1,192,124 ------------ ---------- Cash at end of quarter $ 725,844 $ 1,219,250 ============ ============ Cash paid during period - Interest 0 0 - Income Taxes $ 1,973,000 $ 146,000 See accompanying notes to consolidated financial statements. -5-
Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Donegal Group Inc. ("DGI" or the "Company") is a regional insurance holding company doing business in Pennsylvania, Maryland, Delaware, Virginia and Ohio through its wholly owned subsidiaries, Atlantic States Insurance Company ("Atlantic"), Southern Insurance Company of Virginia ("Southern") and Atlantic Insurance Services, Inc. ("AIS"). The Company's major lines of business in 1994 and their percentages of total net earned premiums were Automobile Liability (30.7%), Automobile Physical Damage (16.2%) Homeowners (13.8%), Commercial Multiple Peril (13.8%) and Workers' Compensation (19.9%). Atlantic and Southern are subject to regulation by Insurance Departments in those states in which they operate and undergo periodic examination by those departments. They 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 59% of the outstanding common shares of the Company as of June 30, 1995. In connection with the formation of the Company and Atlantic States, as of October 1, 1986, Atlantic States and the Mutual Company entered into a pooling agreement which provides for the allocation of premiums, losses, loss settlement expenses and underwriting expenses. The Company is not liable for any losses occurring prior to the date of the pooling agreement. The Company's participation in the pool was 35% from October 1, 1986 to September 30, 1988, 50% from October 1, 1988 to December 31, 1992 and since January 1, 1993 has been 60%. On December 29, 1988, the Company converted Southern Mutual Insurance Company into Southern Insurance Company of Virginia, which writes property and casualty insurance in Virginia, and acquired all of Southern's outstanding capital stock. Pursuant to a reinsurance agreement, Southern cedes 50% of its direct premiums written less certain reinsurance to the Mutual Company and retains the remaining 50%. Because the Mutual Company places substantially all of the business assumed from Southern into the pool, from which the Company has a 60% allocation, the company's results of operations include approximately 80% of the business written by Southern. In January 1994, the Company formed Atlantic Insurance Services, Inc. which primarily provides risk inspection services for the property-casualty insurance industry. The Company's results of operations are affected by the conditions that affect all property and casualty insurance companies, such as competition, catastrophic events, regulation, general economic conditions and the investment environment. Underwriting results vary by line of business and from period to period principally due to changes in claims experience. Because the Company's premium volume in various lines of business is small, small changes in the number of incurred claims can significantly affect the results of operations from that line of business in a given fiscal period. -6-
DONEGAL GROUP INC. AND SUBSIDIA (Unaudited) Summary Notes to Consolidated Financial Statements 1 - Organization 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 Pennsylvania, Maryland, Delaware, Virginia and Ohio through its wholly owned stock insurance companies, Atlantic States Insurance Company ("Atlantic States"), Southern Insurance Company of Virginia ("Southern") and Atlantic Insurance Services, Inc. ("AIS"). The Company's major lines of business are Automobile Liability, Automobile Physical Damage, Homeowners, Commercial Multiple Peril and Workers' Compensation. Atlantic and Southern are subject to regulation by Insurance Departments in those states in which they operate and undergo periodic examination by those departments. They are also subject to competition from other insurance carriers in their operating areas. Atlantic States engages in the insurance business primarily through an intercompany pooling arrangement with the Mutual Company. Southern was acquired by the Company on December 31, 1988 pursuant to a plan of conversion from a mutual to a stock company and cedes 50% of its business to the Mutual Company, 80% prior to 1991. At June 30, 1995 the Mutual Company held 59% of the outstanding common stock of the Company. 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 of Registrant, are necessary to a fair presentation of Registrant's financial position, results of operations and changes in financial position for the interim period included herein. The results of operations for the six months ended June 30, 1995, are not necessarily indicative of results of operations to be expected for the twelve months ended December 31, 1995. These financial statements should be read in conjunction with the financial statements and notes thereto contained in Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. -7-
Results of Operations - Three Months Ended June 30, 1995 to Three Months Ended June 30, 1994 Revenues for the three months ended June 30, 1995 were $23,251,909, an increase of $3,444,365, or 17.4%, over the same period of 1994. An increase in net premiums earned of $2,382,082, or 13.2% represented most of this change. The company s retained share of direct premiums written increased 10.1% in the second quarter of 1995 compared to the second quarter of 1994. In the second quarter 1994, the Company incurred additional ceded reinsurance premiums of approximately $400,000. These additional ceded premiums were reinstatement premiums related to catastrophe reinsurance recoveries resulting from claims incurred due to severe weather which hit the northeastern part of the United States in the first three months of 1994. Investment income for the second quarter 1995 was $2,121,382 an increase of $390,388, or 22.6%, over the second quarter 1994. An increase in the average invested assets of $14,306,118, or 11.4%, to $139,724,060 and an increase in the average return on investments to an annualized rate of 6.1% for the second quarter of 1995 compared to 5.5% for the second quarter of 1994, accounted for the change. Realized investment gains, which resulted from the normal turnover of the Company s investment portfolio, increased to $190,191 in the second quarter of this year, compared to a loss of ($308,134) for the second quarter of 1994. The GAAP combined ratio of insurance operations in the second quarter of 1995 was 97.7% compared to 93.9% for the same period in 1994. 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). An increase in the loss ratio from 63.7% in the second quarter of 1994 to 67.0% in the second quarter of 1995, accounted for most of the change. The expense ratio increased from 28.9% to 29.1% in the second quarter of 1995 due primarily to additional incentive expenses for employees and agents related to the higher levels of profitability for the year to date. The dividend ratio increased slightly from 1.2% for the second quarter of 1994 to 1.6% for the second quarter of 1995 due primarily to higher levels of profitability in 1995. Federal income taxes for the second quarter of 1995 represented 23.5% of pre-tax income compared to 26.9% for the second quarter of 1994. A tax benefit resulting from the exercise of options by employees accounted for the majority of this difference. The effective tax rates incurred are less than the statutory federal rate of 34% due primarily to tax exempt investment income from municipal bonds. -8-
Results of Operations - Six Months Ended June 30, 1995 to Six Months Ended June 30, 1994 Revenues for the six months ended June 30, 1995 were $45,281,677, an increase of $6,077,437, or 15.5%, over the same period of 1994. An increase in net premiums earned of $4,810,241, or 13.7% represented most of this change. The company s retained share of direct premiums written increased 12.4% in the first six months of 1995 compared to the same period of 1994. In the six months ended June 30, 1994, the Company incurred additional ceded reinsurance premiums of approximately $1,000,000. These additional ceded premiums were reinstatement premiums related to catastrophe reinsurance recoveries resulting from claims incurred due to severe weather which hit the northeastern part of the United States in the first three months of 1994. Investment income for the first six months of 1995 was $4,208,374 an increase of $687,129, or 19.5%, over the first six months of 1994. An increase in the average invested assets of $15,307,229, or 12.4%, to $138,960,916 and an increase in the average return on investments to an annualized rate of 6.1% for the first six months of 1995 compared to 5.7% for the first six months of 1994, accounted for the change. Realized investment gains, which resulted from the normal turnover of the Company s investment portfolio, increased to $214,297 through June 30 of this year, compared to a loss of ($34,487) for the first six months of 1994. The GAAP combined ratio of insurance operations in the first six months of 1995 was 96.9% compared to 102.6% for the same period in 1994. 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). An improvement in the loss ratio from 71.2% in the first six months of 1994 to 64.5% in the first six months of 1995, accounted for most of the change. The expense ratio increased from 30.0% to 30.7% for the first six months ended June 30, 1995 due primarily to additional incentive expenses for employees and agents related to the higher levels of profitability for the year to date. The dividend ratio increased slightly from 1.4% for the first two quarters of 1994 to 1.6% for the first two quarters of 1995, due primarily to higher levels of profitability in 1995. Federal income taxes for the six months ended June 30, 1995 represented 25.6% of pre-tax income compared to 20.1% for the same period of 1994 due primarily to the net loss incurred for taxes in the first quarter of 1994, used in the second quarter of 1994. The effective tax rates incurred are less than the statutory federal rate of 34% due primarily to tax exempt investment income from municipal bonds. -9-
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 June 30, 1995, 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. The Company's principal source of cash with which to pay stockholder dividends is dividends from Atlantic States and Southern, 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. At December 31, 1994, amounts available for distribution as dividends to DGI without prior approval of the insurance regulatory authorities are $764,696 from Southern and $4,072,387 from Atlantic States. Unrealized gains resulting from fluctuations in the market value of investments available for sale reported in the balance sheet at market value were $115,662 at June 30, 1995, net of taxes. -10-
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. Impact of New Accounting Standards Accounting for Certain Investments in Debt and Equity Securities The Company adopted the SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities , effective January 1, 1994 on a prospective basis. The cumulative effect of adopting SFAS 115 resulted in a before tax unrealized gain of $1,908,207. The net increase to equity amounted to $1,259,417 after providing for taxes of $648,790. Adoption of this statement had no effect on the net income of the Company. SFAS 115 requires that investments in all debt securities and those equity securities with readily determinable market values be classified into three categories as follows: Held to Maturity Securities - Debt securities that the enterprise has the positive intent and ability to hold to maturity; reported at amortized costs. Trading Securities - Debt and equity securities that are bought and held principally for the purpose of selling them in the near term; reported at fair value, with unrealized gains and losses included in earnings. Available for Sale Securities - Debt and equity securities not classified as either held to maturity securities or trading securities; reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity (net of tax effects). No trading securities were identified at December 31, 1994 or June 30, 1995. -11-
Part II. Other Information Item 1. Legal Proceedings None. Item 2. Changes in Securities None. Item 3. Defaults upon Senior Securities None. 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) Exhibits EX-27 Financial Data Schedule (b) Reports on Form 8-K During the quarter ended June 30, 1995, Registrant did not file any reports on Form 8-K. -12-
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. Date: August 10, 1995 By: ______________________ Donald H. Nikolaus, President and Chief Executive Officer Date: August 10, 1995 By: ____________________ Ralph G. Spontak, Corporate Secretary, Senior Vice President and Chief Financial Officer -13-
7 3-MOS DEC-31-1995 JUN-30-1995 45,363,797 77,555,218 78,619,251 5,243,584 0 0 142,106,979 725,844 0 6,095,209 204,462,303 86,301,706 49,143,337 0 0 0 4,242,724 0 0 62,571,385 204,462,303 20,446,179 2,121,382 190,191 494,157 13,691,603 3,440,000 2,513,161 2,957,665 694,201 2,263,464 0 0 0 2,263,464 .53 .53 0 0 0 0 0 0 0