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, 1998 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: 8,132,759 shares of Common Stock, $1.00 par value, outstanding on July 31, 1998.

Part I. Financial Information Item 1. Financial Statements. Donegal Group Inc. And Subsidiaries Consolidated Balance Sheet Assets June 30, 1998 December 31, 1997 ------------- ----------------- Investments (Unaudited) Fixed maturities Held to maturity, at amortized cost $ 113,012,794 $ 117,246,205 Available for sale, at market value 63,681,171 57,731,251 Equity securities, available for sale at market 13,696,428 7,274,562 Short-term investments, at cost, which approximates market 13,663,713 22,712,787 Other investments, at cost, which approximates market 1,000,000 -- ------------- ------------- Total Investments 205,054,106 204,964,805 Cash 1,826,116 3,413,315 Accrued investment income 2,837,984 2,741,207 Premiums receivable 12,952,084 11,244,628 Reinsurance receivable 43,428,769 40,953,032 Deferred policy acquisition costs 9,109,754 8,448,060 Federal income tax receivable 459,059 56,454 Deferred federal income taxes 3,090,040 3,302,043 Prepaid reinsurance premiums 23,410,314 22,882,283 Property and equipment, net 5,058,747 4,938,524 Accounts receivable - securities -- 456,493 Due from affiliate 471,627 141,313 Other 1,270,007 562,348 ------------- ------------- Total Assets $ 308,968,607 $ 304,104,505 ============= ============= Liabilities and Stockholders' Equity - ------------------------------------ Liabilities Losses and loss expenses $ 122,566,123 $ 118,112,390 Unearned premiums 74,728,962 71,367,691 Accrued expenses 2,310,911 3,214,767 Reinsurance balances payable 664,316 735,009 Cash dividend declared to stockholders -- 604,054 Line of credit 5,000,000 10,500,000 Accounts payable - securities -- 2,499,059 Other 611,826 283,098 Due to affiliate - Pioneer acquisition 5,191,774 5,191,774 ------------- ------------- Total Liabilities 211,073,912 212,507,842 ------------- ------------- Stockholders' Equity Preferred stock, $1.00 par value, authorized 1,000,000 shares; none issued Common stock, $1.00 par value, authorized 15,000,000 shares, issued 8,245,868 and 6,122,431 shares and outstanding 8,123,580 and 6,030,715 shares 8,245,868 6,122,431 Additional paid-in capital 40,187,679 38,932,117 Accumulated other comprehensive income 1,455,560 1,011,417 Retained earnings 48,897,344 46,422,454 Treasury stock (891,756) (891,756) Total Stockholders' Equity 97,894,695 91,596,663 ------------- ------------- Total Liabilities and Stockholders' Equity $ 308,968,607 $ 304,104,505 ============= ============= 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, 1998 and 1997 Three Months Ended June 30, ---------------------------- 1998 1997 ---- ---- Revenues: Premiums earned $41,260,309 $39,721,921 Premiums ceded 13,682,052 12,898,416 ----------- ----------- Net premiums earned 27,578,257 26,823,505 Investment income, net of investment expenses 2,768,139 2,881,771 Realized gain 35,442 35,527 Lease income 188,120 154,396 Service charge income 453,068 358,661 ----------- ----------- Total Revenues 31,023,026 30,253,860 ----------- ----------- Expenses: Losses and loss expenses 28,433,598 25,799,082 Reinsurance recoveries 9,208,460 8,469,679 ----------- ----------- Net losses and loss expenses 19,225,138 17,329,403 Amortization of deferred policy acquisition costs 5,025,000 4,251,000 Other underwriting expenses 3,450,366 4,605,054 Policy dividends 342,266 308,070 Interest 200,556 277,938 Other expenses 401,243 376,348 ----------- ----------- Total Expenses 28,644,569 27,147,813 ----------- ----------- Income before income taxes 2,378,457 3,106,047 Income taxes 485,025 705,450 ----------- ----------- Net income $ 1,893,432 $ 2,400,597 =========== =========== Earnings per common share Basic $ .22 $ .30* =========== =========== Diluted $ .22 $ .30* =========== =========== Statement of Comprehensive Income (Unaudited) Three Months Ended June 30, ---------------------------- 1998 1997 ---- ---- Net Income $ 1,893,432 $ 2,400,597 Other comprehensive income, net of tax Unrealized gains on securities: Unrealized holding gain arising during the period 142,285 641,902 Less: Reclassification adustment for losses included in Net income (308) (4,307) ----------- ----------- Other comprehensive income 141,977 637,595 ----------- ----------- Comprehensive income $ 2,035,409 $ 3,038,192 =========== =========== * Restated 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, 1998 and 1997 Six Months Ended June 30, ------------------------------ 1998 1997 ---- ---- Revenues: Premiums earned $81,739,088 $78,763,105 Premiums ceded 26,956,287 25,535,267 ----------- ----------- Net premiums earned 54,782,801 53,227,838 Investment income, net of investment expenses 5,613,406 5,726,754 Realized gain 347,235 73,354 Lease income 371,184 296,848 Service charge income 804,544 752,437 ----------- ----------- Total Revenues 61,919,170 60,077,231 ----------- ----------- Expenses: Losses and loss expenses 53,360,594 49,706,729 Reinsurance recoveries 18,333,551 15,464,783 ----------- ----------- Net losses and loss expenses 35,027,043 34,241,946 Amortization of deferred policy acquisition costs 9,725,000 8,730,000 Other underwriting expenses 8,147,317 8,717,870 Policy dividends 820,124 741,769 Interest 383,615 442,925 Other expenses 823,052 773,813 ----------- ----------- Total Expenses 54,926,151 53,648,323 ----------- ----------- Income before income taxes 6,993,019 6,428,908 Income taxes 1,782,934 1,465,878 ----------- ----------- Net income $ 5,210,085 $ 4,963,030 =========== =========== Earnings per common share Basic $ .62* $ .63 Diluted $ .62* $ .62 Statement of Comprehensive Income (Unaudited) Six Months Ended June 30, ----------------------------- 1998 1997 ---- ---- Net Income $ 5,210,085 $ 4,963,030 Other comprehensive income, net of tax Unrealized gains (losses) on securities: Unrealized holding gain arising during the period 486,787 128 Less: Reclassification adustment for losses included in Net income (41,644) (717) ----------- ----------- Other comprehensive income (loss) 444,143 (589) ----------- ----------- Comprehensive income $ 5,654,228 $ 4,962,441 =========== =========== - ----------- * Restated See accompanying notes to consolidated financial statements. -3-

DONEGAL GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) FOR THE SIX MONTHS ENDED JUNE 30, 1998 Common Stock Accumulated Total -------------------- Additional Other Com- Stock- Paid-In prehensive Retained Treasury holders' Shares Amount Capital Income Earnings Stock Equity ------ ------ ------- ------ -------- ----- ------ Balance, December 31, 1997 6,122,431 $6,122,431 $38,932,117 $1,011,417 $46,422,454 $(891,756) $91,596,663 Issuance of Common Stock 61,970 61,970 1,255,562 1,317,532 Net Income 5,210,085 5,210,085 Other Comprehensive Income 444,143 444,143 Stock Dividend 2,061,467 2,061,467 (2,061,467) -- Cash Dividend (673,728) (673,728) --------- ---------- ----------- ---------- ----------- --------- ----------- Balance, June 30, 1998 8,245,868 $8,245,868 $40,187,679 $1,455,560 $48,897,344 $(891,756) $97,894,695 ========= ========== =========== ========== =========== ========= =========== See accompanying notes to consolidated financial statements. -4-

DONEGAL GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) For the six months ended June 30, 1998 and 1997 Six months ended June 30, ------------------------------- 1998 1997 ---- ---- Cash Flows from Operating Activities: Net income $ 5,210,085 $ 4,963,030 ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 217,046 178,538 Realized investment gain (347,235) (73,354) Changes in Assets and Liabilities: Losses and loss expenses 4,453,733 267,228 Unearned premiums 3,361,271 563,176 Premiums receivable (1,707,456) (15,611) Deferred policy acquisition costs (661,694) (72,796) Deferred federal income taxes (16,798) (110,876) Reinsurance receivable (2,475,737) 2,467,980 Prepaid reinsurance premiums (528,031) (515,112) Accrued investment income (96,777) (151,078) Due from affiliate (330,314) 967,333 Reinsurance balances payable (70,693) (50,622) Federal income taxes receivable (402,605) (795,418) Other, net (1,282,787) (1,697,586) ------------ ------------ Net adjustments 111,923 961,802 ------------ ------------ Net cash provided by operating activities 5,322,008 5,924,832 ------------ ------------ Cash flows from investing activities: Purchase of fixed maturities Held to maturity (9,004,828) (13,087,963) Available for sale (14,234,581) (10,183,672) Purchase of equity securities, available for sale (10,878,128) (3,015,732) Maturity of fixed maturities Held to maturity 13,307,736 4,484,420 Available for sale 5,248,065 3,594,999 Sale of fixed maturities - available for sale 535,765 4,010,313 Sale of equity securities, available for sale 5,893,013 1,538,232 Purchase of other investments (1,000,000) -- Purchase of property and equipment (365,073) (988,680) Net sales of short-term investments 9,049,074 6,507,482 ------------ ------------ Net cash used in investing activities (1,448,957) (7,140,601) ------------ ------------ Cash flows from financing activities: Cash dividends paid (1,277,782) (1,047,079) Issuance of common stock 1,317,532 398,077 Line of credit, net (5,500,000) -- ------------ ------------ Net cash provided by (used in) financing activities (5,460,250) (649,002) ------------ ------------ Net decrease in cash (1,587,199) (1,864,771) Cash at beginning of year 3,413,315 3,700,163 ------------ ------------ Cash at end of quarter $ 1,826,116 $ 1,835,392 ============ ============ Cash paid during period - Interest $ 58,143 $ 334,014 - Income taxes $ 2,202,337 $ 559,584 See accompanying notes to consolidated financial statements. -5-

DONEGAL GROUP INC. AND SUBSIDIARIES (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"), Delaware Atlantic Insurance Company ("Delaware"), Pioneer Insurance Company ("Pioneer") 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, Southern, Delaware and Pioneer 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. On December 29, 1995, the Company acquired all of the outstanding stock of Delaware. This transaction was accounted for as if it were a "Pooling of Interest," and as such, the Company's financial statements have been restated to include Delaware as a consolidated subsidiary from January 1, 1994 to the present. On March 31, 1997, the Company acquired all of the outstanding stock of Pioneer. This transaction was accounted for as if it were a "Pooling of Interest", and as such the Company's financial statements have been restated to include Pioneer as a consolidated subsidiary from January 1, 1994 to the present. At June 30, 1998, the Mutual Company held 58% 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 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 and for the six months ended June 30, 1998, are not necessarily indicative of results of operations to be expected for the twelve months ended December 31, 1998. On June 25, 1998, the Company issued a 4 for 3 stock split in the form of a 33 1/3% stock dividend to stockholders of record as of June 10, 1998. Per share information prior to June 25, 1998, has been restated for this change. 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, 1997. -6-

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 four wholly owned property-casualty insurance subsidiaries, Atlantic States Insurance Company ("Atlantic"), Southern Insurance Company of Virginia ("Southern"), Pioneer Insurance Company ("Pioneer") and Delaware Atlantic Insurance Company ("Delaware"). The Company's major lines of business in 1997 and their percentage of total net earned premiums were Automobile Liability (27.8%), Workers' Compensation (15.9%), Automobile Physical Damage (17.1%), Homeowners (17.6%), and Commercial Multiple Peril (15.6%). The subsidiaries are subject to regulation by Insurance Departments in those states in which they operate and undergo periodic examination by those departments. The subsidiaries are also subject to competition from other insurance carriers in their operating areas. DGI was formed in September 1986 by Donegal Mutual Insurance Company (the "Mutual Company"), which owns 58% of the outstanding common shares of the Company as of June 30, 1998. Atlantic States participates in an intercompany pooling arrangement with the Mutual Company and assumes 65% of the pooled business, 60% prior to January 1, 1996. Southern cedes 50% of its business to the Mutual Company and Delaware cedes 70% of its Workers' Compensation business to the Mutual Company. Because the Mutual Company places substantially all of the business assumed from Southern and Delaware into the pool, from which the Company has a 65% allocation, the Company's results of operations include approximately 80% of the business written by Southern and approximately 75% of the Workers' Compensation business written by Delaware. In addition to the Company's insurance subsidiaries, it also owns all of the outstanding stock of Atlantic Insurance Services, Inc. ("AIS"), an insurance services organization currently providing inspection and policy auditing information on a fee for service basis to its affiliates and the insurance industry. -7-

Results of Operations - Three Months Ended June 30, 1998 to Three Months Ended June 30, 1997 - ----------------------------------- Revenues for the three months ended June 30, 1998 were $31,023,026 an increase of $769,166 or 2.5%, over the same period of 1997. An increase in net premiums earned of $754,752 or 2.8%, represented most of this change. Investment income for the second quarter fell $113,632 or 3.9% due to a decrease in the annualized average return on investments from 5.8% in the second quarter 1997 to 5.4% in the second quarter 1998, offset by an increase in average invested assets from $197.2 million in the second quarter 1997 to $205.0 million in the second quarter 1998. Realized investment gains, which resulted from normal turnover of the Company's investment portfolio, were $35,442 in the second quarter 1998 compared to $35,527 for the same period of 1997. The GAAP combined ratio of insurance operations in the second quarter of 1998 was 101.7% compared to 98.8% for the same period in 1997. 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 was impacted by an unusual series of thunderstorms and tornadoes that hit the northeast part of the United States throughout the month of June, 1998. As a result of claims from these storms, the Company's loss ratio in the second quarter of 1998 was 69.7% compared to 64.6% in the second quarter of 1997. The increase in the loss ratio was somewhat offset by a decrease in the expense ratio to 30.7% in the second quarter of 1998 compared to 33.0% in the second quarter of 1997. This improvement was primarily due to decreases in incentive plans for employees and contingent commissions for agents due to the higher loss ratios. The dividend ratio changed little ending up at 1.3% for the second quarter of 1998 compared to 1.2% for the same period of 1997. Federal income taxes for the second quarter represented 20.4% of income before income taxes compared to 22.7% for the same period of 1997. Decreased underwriting profits, due to the storm activity, resulted in tax free investment income representing a larger portion of income than in 1997 decreasing the effective tax rate. -8-

Results of Operations - Six Months Ended June 30, 1998 to Six Months Ended June 30, 1997 - --------------------------------- Revenues for the six months ended June 30, 1998 were $61,919,170 an increase of $1,841,939 or 3.1%, over the same period of 1997. An increase in net premiums earned of $1,554,963 represented most of this change. Investment income for the first six months fell $113,348 or 2.0% due to a decrease in the annualized average return on investments from 5.8% for the first six months of 1997 to 5.4% for the first six months of 1998, offset by an increase in average invested assets from $197.1 million in 1997 to $207.6 million in the first six months of 1998. Realized investment gains, which resulted from normal turnover of the Company's investment portfolio, were $347,235 in the six months ended June 30, 1998 compared to $73,354 for the same period of 1997. The GAAP combined ratio of insurance operations for the six months ended June 30, 1998 was 98.1% compared to 98.5% for the same period in 1997. 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 was impacted by an unusual series of thunderstorms and tornadoes that hit the northeast part of the United States throughout the month of June, 1998 but had been favorably effected by the mild winter weather in the same part of the country in the first quarter. As a result, the Company's loss ratio for the first six months of 1998 was 63.9% compared to 64.3% for the first six months of 1997. The expense ratio for the six months ended June 30, 1998 was 32.6%, almost identical to the 32.8% expense ratio for the same period of 1997. The dividend ratio changed little ending up at 1.5% for the period compared to 1.4% for the first six months of 1997. Federal income taxes for the first six months of 1998 represented 25.5% of income before income taxes compared to 22.8% for the same period of 1997. Tax savings from the acquisition of Pioneer last year accounted for the difference. -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, 1998, the Company had announced it has entered into an agreement to purchase all of the outstanding shares of Southern Heritage Insurance Company, Tucker, Georgia, for $21 million in cash. The acquisition is pending regulatory approval. The Company has requested an amendment to its credit agreement with Fleet Bank to expand the credit available under that agreement from $20 million to $40 million to fund the acquisition. 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, 1998, pursuant to a credit agreement dated December 29, 1995, with Fleet National Bank of Connecticut, the Company had unsecured borrowings of $5.0 million. Per the terms of the credit agreement, the Company may borrow up to $20 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, 1998, the interest rate on the outstanding balance was 7.60625%. 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 December 29, commencing December 29, 1999, the credit line will be reduced by $4 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 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 and Delaware are subject to Risk Based Capital (RBC) requirements effective for 1994. At December 31, 1997, all four Companies' capital was substantially above the RBC requirements. At December 31, 1997, amounts available for distribution as dividends to Donegal Group without prior approval of the insurance regulatory authorities are $7,349,284 from Atlantic States, $703,688 from Southern, $542,799 from Pioneer and $1,070,463 from Delaware. -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. Year 2000 Issues - ---------------- The year 2000 issue (i.e. the ability of computer systems to properly process information which contains dates beginning with January 1, 2000 and thereafter) affects virtually all companies. All computer systems used for processing of business for the Company are owned and operated by the Mutual Company. Certain of these computer systems utilized by the Mutual Company to process information use only two digits to identify a year. Because of this, the year 2000 would be represented in the system as "00" and would in most cases be interpreted by the computer as "1900" rather than "2000", resulting in processing errors. The ability to process information in a timely and accurate manner is vital to the Company's property and casualty insurance business. The Company recognizes that the systems used to process its business must be able to accurately identify and process information containing year 2000 dates by the end of 1998. The Mutual Company has a vigorous and comprehensive project underway to ensure compliance in time to meet this deadline. This project was initiated as part of a review of the main application systems in 1995. The Mutual Company is taking the steps it deems appropriate to meet this challenge, including migrating to the most current version of vendors' software, which improves functionality in addition to being year 2000 compliant, replacing existing software with new software systems and rewriting existing computer programs. The goal of this project is to be substantially year 2000 compliant by the end of 1998. Impact of New Accounting Standards - ---------------------------------- Accounting for Derivative Instruments and Hedging Activities In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999, with earlier adoption permitted. Insurance Related Assessments In December 1997, the AICPA Accounting Standards Executive Committee issued Statement of Position (SOP) 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments. The accounting guidance of this SOP focuses on the timing of recognition and measurement of liabilities for insurance-related assessments. The SOP is effective for fiscal years beginning after December 15, 1998. The Company believes that they are in compliance with the provisions of this SOP and no impact on the Company's financial reporting is expected. -11-

Computer Software Development Costs On March 4, 1998, the AICPA Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This SOP requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. This SOP also requires that costs related to the preliminary project stage and the post-implementation/operations stage in an internal-use computer software development project be expensed as incurred. SOP 98-1 is effective for financial statements issued for fiscal years beginning after December 15, 1998. The Company believes that they are in compliance with the provisions of this SOP and no material impact of the Company's financial reporting is expected. -12-

Part II. Other Information -------------------------- Item 1. Legal Proceedings ----------------- None. Item 2. Changes in Securities --------------------- Amendment of Certificate of Incorporation Exhibit 3(i) Item 3. Defaults upon Senior Securities ------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None. Item 5. Other Information ----------------- Any stockholder who, in accordance with and subject to the provisions of the proxy rules of the Securities and Exchange Commission, wishes to submit a proposal for inclusion in the Company's proxy statement for its 1999 Annual Meeting of Stockholders must deliver such proposal in writing to the Company's Secretary at the Company's principal executive offices at 1195 River Road, Marietta, Pennsylvania 17547, not later than November 23, 1998. Pursuant to new amendments to Rule 14a-4(c) of the Securities Exchange Act of 1934, if a stockholder who intends to present a proposal at the 1999 Annual Meeting of Stockholders does not notify the Company of such proposal on or before February 7, 1999, then management proxies will be allowed to use their discretionary voting authority to vote on the proposal when the proposal is raised at the Annual Meeting, even though there is no discussion of the proposal in the 1999 proxy statement. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) EX-27 Financial Data Schedule (b) Reports on Form 8-K During the quarter ended June 30, 1998 - None -13-

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 14, 1998 By: ----------------------------------- Donald H. Nikolaus, President and Chief Executive Officer Date: August 14, 1998 By: ----------------------------------- Ralph G. Spontak, Corporate Secretary, Senior Vice President and Chief Financial Officer -14-

7 6-MOS DEC-31-1998 JUN-30-1998 63,681,171 113,012,794 116,588,112 13,663,713 0 2,496,510 205,054,106 1,826,116 0 9,109,754 308,968,607 122,566,123 74,728,962 0 0 5,000,000 0 0 8,245,868 97,894,695 308,968,607 54,782,801 5,613,406 347,235 1,175,728 35,027,043 9,725,000 8,147,317 6,993,019 1,782,934 5,210,085 0 0 0 5,210,085 .63 .62 77,474 36,830 (1,803) 22,014 11,350 79,137 (1,803)