FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
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 number 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) (Zip code)
(717) 426-1931
--------------
(Registrant's telephone number, including area code)
N/A
---
(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. .
- -
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 6,097,805 shares of Class A
Common Stock, $0.01 par value and 2,982,314 shares of Class B Common Stock,
$0.01 par value, outstanding on July 31, 2002.
Part 1. Financial Information
Item 1. Financial Statements.
------------------------------
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 DEC. 31, 2001
------------- -------------
(Unaudited)
ASSETS
------
Investments
Fixed maturities
Held to maturity, at amortized cost $ 79,078,178 $ 85,322,965
Available for sale, at market value 182,294,132 173,718,844
Equity securities, available for sale, at market 19,929,888 17,517,346
Short-term investments, at cost, which
approximates market 23,906,574 24,074,200
------------- --------------
Total investments 305,208,772 300,633,355
Cash 1,882,099 4,075,288
Accrued investment income 3,785,202 3,765,076
Premiums receivable 28,009,278 24,143,531
Reinsurance receivable 69,787,883 67,853,174
Deferred policy acquisition costs 14,930,615 13,604,215
Federal income tax receivable -- 292,618
Deferred federal income taxes 7,668,154 7,474,730
Prepaid reinsurance premiums 27,017,495 29,593,467
Property and equipment, net 4,657,313 4,568,652
Accounts receivable - securities -- 50,023
Due from affiliate 4,572,795 --
Other 551,461 578,243
------------- --------------
Total assets $ 468,071,067 $ 456,632,372
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
Losses and loss expenses $ 188,044,921 $ 179,839,905
Unearned premiums 119,907,984 114,079,264
Accrued expenses 5,836,547 7,186,107
Reinsurance balances payable 1,073,569 839,156
Federal income taxes payable 465,436 --
Cash dividend declared to stockholders -- 869,877
Borrowings under line of credit 19,800,000 27,600,000
Accounts payable - securities 255,500 --
Due to affiliate 4,441,311 4,015,074
Other 1,795,819 1,274,640
Total liabilities ------------- --------------
341,621,087 335,704,023
------------- --------------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value, authorized
2,000,000 shares; none issued
Class A common stock, $.01 par value, authorized
30,000,000 shares, issued 6,168,809 and 6,097,214
shares and outstanding 6,087,285 and 6,015,690 shares 61,688 60,972
Class B common stock, $.01 par value, authorized
10,000,000 shares, issued 3,023,076 and 3,021,965
shares and outstanding 2,982,314 and 2,981,203 shares 30,231 30,220
Additional paid-in capital 59,615,073 58,887,715
Accumulated other comprehensive income 3,199,285 2,861,765
Retained earnings 64,435,451 59,979,425
Treasury stock (891,748) (891,748)
------------- --------------
Total stockholders' equity 126,449,980 120,928,349
------------- --------------
Total liabilities and stockholders' equity $ 468,071,067 $ 456,632,372
============= ==============
See accompanying notes to consolidated financial statements.
1
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
SIX MONTHS ENDED JUNE 30,
--------------------------------------
2002 2001
---- ----
REVENUES:
Net premiums earned $ 91,562,772 $ 81,692,892
Investment income, net of investment expenses 7,440,586 8,277,895
Realized gain 187,259 113,839
Lease income 389,086 399,616
Service charge income 1,191,146 804,753
------------ -------------
Total revenues 100,770,849 91,288,995
------------ -------------
EXPENSES:
Net losses and loss expenses 63,433,588 54,089,873
Amortization of deferred policy
acquisition costs 14,730,000 13,171,000
Other underwriting expenses 13,301,150 13,199,417
Policy dividends 571,366 716,702
Interest 620,808 1,392,001
Other expenses 713,577 1,077,715
------------ -------------
Total expenses 93,370,489 83,646,708
------------ -------------
Income before income taxes 7,400,360 7,642,287
Income taxes 2,040,810 1,990,423
------------ -------------
Net income $ 5,359,550 $ 5,651,864
============ =============
Earnings per common share
Basic $ 0.59 $ 0.63
============ =============
Diluted $ 0.59 $ 0.63
============ =============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
SIX MONTHS ENDED JUNE 30,
--------------------------------------
2002 2001
---- ----
Net income $ 5,359,550 $ 5,651,864
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gain during the period,
net of income tax 461,111 1,371,342
Reclassification adjustment, net
of income tax (123,591) (75,134)
------------ -------------
Other comprehensive income 337,520 1,296,208
------------ -------------
Comprehensive income $ 5,697,070 $ 6,948,072
============ =============
See accompanying notes to consolidated financial statements.
2
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED JUNE 30,
--------------------------------------
2002 2001
---- ----
REVENUES:
Net premiums earned $ 46,110,512 $ 41,651,990
Investment income, net of investment expenses 3,710,282 4,236,709
Realized gain (loss) 60,481 (6,968)
Lease income 194,124 198,925
Service charge income 661,404 416,313
------------ -------------
Total revenues 50,736,803 46,496,969
------------ -------------
EXPENSES:
Net losses and loss expenses 32,136,019 27,931,189
Amortization of deferred policy acquisition costs 7,345,000 6,668,000
Other underwriting expenses 6,188,900 6,694,388
Policy dividends 105,187 317,322
Interest 295,984 579,387
Other expenses 211,154 682,378
------------ -------------
Total expenses 46,282,244 42,872,664
------------ -------------
Income before income taxes 4,454,559 3,624,305
Income taxes 1,275,725 927,036
------------ -------------
Net income $ 3,178,834 $ 2,697,269
============ =============
Earnings per common share
Basic $ 0.35 $ 0.30
============ =============
Diluted $ 0.35 $ 0.30
============ =============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS ENDED JUNE 30,
--------------------------------------
2002 2001
---- ----
Net income $ 3,178,834 $ 2,697,269
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities:
Unrealized holding gain (loss)
during the period, net of income tax 1,704,527 (543,813)
Reclassification adjustment, net
of income tax (39,918) 4,599
------------ -------------
Other comprehensive income (loss) 1,664,609 (539,214)
------------ -------------
Comprehensive income $ 4,843,443 $ 2,158,055
============ =============
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, 2002
Accumulated
Additional Other Total
Class A Class B Class A Class B Paid-In Comprehensive Retained Treasury Stockholders'
Shares Shares Amount Amount Capital Income Earnings Stock Equity
------ ------ ------ ------ ------- ------ -------- ----- ------
Balance,
December 31,
2001 6,097,214 3,021,965 $ 60,972 $ 30,220 $ 58,887,715 $ 2,861,765 $ 59,979,425 $ (891,748) $ 120,928,349
Issuance of
common stock 69,373 693 671,647 672,340
Net income 5,359,550 5,359,550
Cash dividends (876,867) (876,867)
Grant of
stock options 26,657 (26,657) --
Exercise of
stock options 2,222 1,111 23 11 29,054 29,088
Other
comprehensive
income 337,520 337,520
-------------------------------------------------------------------------------------------------------------------
Balance,
June 30,
2002 6,168,809 3,023,076 $ 61,688 $ 30,231 $ 59,615,073 $ 3,199,285 $ 64,435,451 $ (891,748) $ 126,449,980
===================================================================================================================
See accompanying notes to consolidated financial statements.
4
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
--------------------------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,359,550 $ 5,651,864
------------ -------------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 584,401 564,508
Realized investment gain (187,259) (113,839)
Changes in assets and liabilities:
Losses and loss expenses 8,205,016 5,004,810
Unearned premiums 5,828,720 9,375,528
Premiums receivable (3,865,747) (5,594,205)
Deferred policy acquisition costs (1,326,400) (844,910)
Deferred income taxes (367,290) (297,391)
Reinsurance receivable (1,934,709) (2,917,784)
Prepaid reinsurance premiums 2,575,972 (2,939,417)
Accrued investment income (20,126) 2,397
Due to affiliate (4,146,558) (921,430)
Reinsurance balances payable 234,413 (595,270)
Current income taxes 758,054 457,921
Other, net (801,600) (1,037,432)
------------ -------------
Net adjustments 5,536,887 143,486
------------ -------------
Net cash provided by operating activities 10,896,437 5,795,350
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed maturities
Held to maturity (12,342,915) (13,659,750)
Available for sale (30,890,279) (25,623,643)
Purchase of equity securities, available for sale (4,322,178) (6,742,189)
Maturity of fixed maturities
Held to maturity 18,076,142 16,304,164
Available for sale 22,759,398 22,506,453
Sale of fixed maturities
Held to maturity 415,000 --
Available for sale 461,965 4,271,591
Sale of equity securities, available for sale 1,886,265 5,180,419
Net purchase of property and equipment (455,334) (79,785)
Net sales of short-term investments 167,626 3,953,502
------------ -------------
Net cash provided by (used in)
investing activities (4,244,310) 6,110,762
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (1,746,744) (1,661,212)
Issuance of common stock 701,428 801,652
Line of credit, net (7,800,000) (11,800,000)
------------ -------------
Net cash used in financing activities (8,845,316) (12,659,560)
------------ -------------
Net decrease in cash (2,193,189) (753,448)
Cash at beginning of period 4,075,288 5,182,988
------------ -------------
Cash at end of period $ 1,882,099 $ 4,429,540
============ =============
Cash paid during period - Interest $ 97,093 $ 2,045,457
Net cash paid during period - Taxes $ 1,640,000 $ 1,825,000
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") and Southern Insurance Company of Virginia ("Southern")
(collectively, the "Insurance Subsidiaries"). The Company has three operating
segments: the investment function, the personal lines of insurance and the
commercial lines of insurance. Products offered in the personal lines of
insurance consist primarily of homeowners and private passenger automobile
policies. Products offered in the commercial lines of insurance consist
primarily of commercial automobile, commercial multiple peril and workers'
compensation policies. The Insurance Subsidiaries are subject to regulation by
Insurance Departments in those states in which they operate and undergo periodic
examinations by those departments. The Insurance Subsidiaries are also subject
to competition from other insurance companies in their operating areas. Atlantic
States participates in an inter-company pooling arrangement with the Mutual
Company and assumes 70% of the pooled business. Prior to 2002, Southern ceded
50% of its business to the Mutual Company. At June 30, 2002, the Mutual Company
held 63% of the outstanding Class A and Class B common stock of the Company.
On January 1, 2002, the Mutual Company and Southern terminated their quota
share agreement, under which Southern ceded 50% of its direct business, less
reinsurance, to the Mutual Company. As a result of this termination, the
Company's prepaid reinsurance premiums decreased $7,310,471, unearned premiums
decreased $5,117,330, and deferred policy acquisition costs increased $714,853.
The Mutual Company transferred $1,478,288 in cash to the Company related to this
termination. The Company did not recognize a gain or loss on this transaction.
During 2000, the Company acquired 45% of the outstanding stock of Donegal
Financial Services Corporation ("DFSC"), a bank holding company, for $3,042,000
in cash. The remaining 55% of the outstanding stock of DFSC is owned by the
Mutual Company.
The Company has streamlined its corporate structure by merging a number of
its subsidiaries together. Delaware Atlantic Insurance Company ("Delaware"),
Pioneer Insurance Company, New York, (Pioneer-New York) and Pioneer Insurance
Company, Ohio (Pioneer-Ohio), previously wholly owned subsidiaries, were merged
into Atlantic States on August 1, 2001, September 30, 2001 and May 8, 2002,
respectively. Southern Heritage Insurance Company (Southern Heritage),
previously a wholly owned subsidiary, was merged into Southern on April 30,
2002. The mergers were accounted for as a reorganization of entities under
common control as they were all within the consolidated group. The mergers had
no financial impact on the consolidated entity.
Southern (and Delaware, Pioneer-Ohio, Southern Heritage and Pioneer-New
York prior to their mergers) has an agreement with the Mutual Company under
which it cedes, and then reassumes back, 100% of its business net of
reinsurance. The primary purpose of these agreements is to provide the
Subsidiaries with the same A. M. Best rating (currently "A") as the Mutual
Company, which they could not achieve without these agreements in place. These
agreements do not transfer insurance risk. While the Subsidiaries ceded and
reassumed amounts received from policyholders of $25,183,072 and $21,863,707 and
claims of $15,270,392 and $11,863,674 under these agreements in the six months
ended June 30, 2002 and 2001, respectively, the amounts are not reflected in the
consolidated financial statements. The aggregate liabilities ceded and reassumed
under this agreement were $40,428,819 and $44,321,246 at June 30, 2002 and
December 31, 2001, respectively.
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, that, in the opinion of management, are
necessary to a fair presentation of the Company's financial position, results of
operations and cash flow for the interim period included herein. The Company's
results of operations for the six months ended June 30, 2002, are not
necessarily indicative of its results of operations for the twelve months ending
December 31, 2002.
6
These financial statements should be read in conjunction with the financial
statements and notes thereto contained in the Company's Annual Report on Form
10-K for the year ended December 31, 2001.
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:
2002
----
Basic $3,178,834 9,059,477 $ .35
Effect of stock options -- 116,252 --
---------- --------- -----
Diluted $3,178,834 9,175,729 $ .35
========== ========== =====
2001
----
Basic $2,697,269 8,928,017 $ .30
Effect of stock options -- 167,955 --
---------- --------- -----
Diluted $2,697,269 9,095,972 $ .30
========== ========== =====
SIX MONTHS ENDED JUNE 30:
2002
----
Basic $5,359,550 9,044,899 $ .59
Effect of stock options -- 105,309 --
---------- --------- -----
Diluted $5,359,550 9,150,208 $ .59
========== ========== =====
2001
----
Basic $5,651,864 8,909,270 $ .63
Effect of stock options -- 133,194 --
---------- --------- -----
Diluted $5,651,864 9,042,464 $ .63
========== ========== =====
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,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
Number of Options 941,501 1,042,338 941,501 1,042,338
======= ========= ======= =========
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,
---------------------------
2002 2001
------------------------------------------------------------------------------
($ in thousands)
------------------------------------------------------------------------------
Revenues:
Premiums earned:
Commercial lines $16,278 $15,574
Personal lines 29,833 26,078
------------------------------------------------------------------------------
Total net premiums earned 46,111 41,652
------------------------------------------------------------------------------
Net investment income 3,710 4,237
Realized investment gain (loss) 60 (7)
Other 856 615
------------------------------------------------------------------------------
Total revenues $50,737 $46,497
==============================================================================
Income before income taxes:
Underwriting income (loss)
Commercial lines $ 1,475 $ (760)
Personal lines (1,656) (109)
------------------------------------------------------------------------------
SAP underwriting loss (181) (869)
GAAP adjustments 517 910
------------------------------------------------------------------------------
GAAP underwriting income 336 41
Net investment income 3,710 4,237
Realized investment gain (loss) 60 (7)
Other 349 (647)
------------------------------------------------------------------------------
Income before income taxes $ 4,455 $ 3,624
===============================================================================
SIX MONTHS ENDED JUNE 30,
---------------------------
2002 2001
------------------------------------------------------------------------------
($ in thousands)
------------------------------------------------------------------------------
Revenues:
Premiums earned:
Commercial lines $ 32,772 $30,583
Personal lines 58,791 51,110
------------------------------------------------------------------------------
Total net premiums earned 91,563 81,693
------------------------------------------------------------------------------
Net investment income 7,441 8,278
Realized investment gain 187 114
Other 1,580 1,204
------------------------------------------------------------------------------
Total revenues $100,771 $91,289
==============================================================================
Income before income taxes:
Underwriting income (loss)
Commercial lines $ 2,604 $ (430)
Personal lines (4,173) 51
------------------------------------------------------------------------------
SAP underwriting loss (1,569) (379)
GAAP adjustments 1,095 895
------------------------------------------------------------------------------
GAAP underwriting income (loss) (474) 516
Net investment income 7,441 8,278
Realized investment gain 187 114
Other 246 (1,266)
------------------------------------------------------------------------------
Income before income taxes $ 7,400 $ 7,642
===============================================================================
8
5 - INVESTMENTS
During the first quarter of 2002, the Company sold Halliburton Company
bonds that had been classified as held to maturity due to significant
deterioration in the issuer's credit worthiness. These bonds had an amortized
cost of $488,901, and the sale resulted in a realized loss of $73,901. There
were no other sales or transfers from the held to maturity portfolio.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-------------------------------------------------------------------------------
OF OPERATIONS
-------------
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO
THREE MONTHS ENDED JUNE 30, 2001
--------------------------------
Total revenues for the three months ended June 30, 2002 were $50,736,803,
which were $4,239,834, or 9.1%, greater than the same period in 2001. Net
premiums earned increased to $46,110,512, an increase of $4,458,522, or 10.7%,
over the second quarter of 2001. Direct premiums written of the combined pool of
Atlantic States and Donegal Mutual increased $6,666,644, or 12.1%, with Southern
posting an increase of 0.9% in direct premiums written. The Company reported net
realized investment gains of $60,481 in the second quarter of 2002 compared to a
loss of $6,968 for the same period of 2001. The realized gain in 2002 was net of
realized losses of $92,440 which resulted from changes in the market value of
securities that were determined to be other than temporary. The realized gain in
2001 was net of realized losses of $463,735 which resulted from changes in the
market value of securities that were determined to be other than temporary.
Investment income was $3,710,282, a decrease of $526,427, or 12.4%, from the
second quarter of 2001. An increase in average invested assets from $281.9
million in the second quarter of 2001 to $306.3 million in the second quarter of
2002 was more than offset by a decrease in the annualized average return on
investments from 6.0% in the second quarter of 2001 to 4.8% in the second
quarter of 2002 accounting for the decrease in investment income.
The GAAP combined ratio of insurance operations in the second quarter of
2002 was 99.3% compared to 99.9% for the same period in 2001. 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 2002 was 69.7% compared to
67.1% in the second quarter of 2001. The increase in loss ratio was due to
losses related to storm activity that totaled $1.1 million in the quarter. The
Company's expense ratio for the second quarter of 2002 was 29.4% compared to
32.1% for the second quarter of 2001. The dividend ratio decreased to 0.2%
compared to 0.8% in the second quarter of 2001 because of more stringent
qualification standards.
Federal income taxes for the second quarter of 2002 represented 28.6% of
income before income taxes compared to 25.6% for the same period of 2001. These
rates vary from the expected rate of 34% primarily due to the effect of
tax-exempt investment income.
RESULTS OF OPERATIONS -SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO
SIX MONTHS ENDED JUNE 30, 2001
------------------------------
Total revenues for the six months ended June 30, 2002 were $100,770,849,
which were $9,481,854, or 10.4%, greater than the same period in 2001. Net
premiums earned increased to $91,562,772, an increase of $9,869,880, or 12.1%,
over the first six months of 2001. Direct premiums written of the combined pool
of Atlantic States and Donegal Mutual increased $14,007,045, or 13.8%. This
increase was tempered somewhat by a 5.0% increase in the direct premiums written
of Southern. The Company reported net realized investment gains of $187,259 in
the first six months of 2002 compared to a gain of $113,839 for the same period
of 2001. The realized gain in 2002 was net of realized losses of $152,518 which
resulted from changes in the market value of securities that were determined to
be other than temporary. The realized gain in 2001 was net of realized losses of
$463,735 which resulted from changes in the market value of securities that were
determined to be other than temporary. Investment income was $7,440,586, a
decrease of $837,309, or 10.1%, from the first six months of 2001. An increase
in average invested assets from $282.9 million in the first six months of 2001
to $302.9 million in the first six months of 2002 was more than offset by a
decrease in the annualized average return on investments from 5.9% in the first
six months of 2001 to 4.9% in the first six months of 2002 accounting for the
decrease in investment income.
The GAAP combined ratio of insurance operations in the first six months of
2002 was 100.5% compared to 99.4% for the same period in 2001. 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 half of 2002 was 69.3% compared to 66.2%
in the first half of 2001. The increase in loss ratio was due to higher losses
in personal lines during the first quarter and storm related losses of $1.1
million in the second quarter. The Company's expense ratio for the first six
months of 2002 was 30.6% compared to 32.3% for the first six months of 2001. The
dividend ratio decreased to 0.6% for the first half of 2002 from 0.9% in the
first half of 2001.
9
Federal income taxes for the first six months of 2002 represented 27.6% of
income before income taxes compared to 26.0% for the same period of 2001. These
rates vary from the expected rate of 34% primarily due to the effect of
tax-exempt investment income.
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 income and maturing investments. The Company had
no significant commitments for capital expenditures as of June 30, 2002.
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, 2002, under a credit agreement dated December 29, 1995, and
amended as of July 27, 1998, with Fleet National Bank of Connecticut ("the
Bank"), the Company had unsecured borrowings of $19.8 million. Per the terms of
the credit agreement, the Company may borrow up to $32 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, 2002, the interest rates on the
outstanding balances were 3.6625% on an outstanding eurodollar balance of $4.8
million and 3.6375% on an outstanding eurodollar rate balance of $15.0 million.
In addition, the Company pays 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 is reduced by $8 million and is
currently $24 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 and Southern. Atlantic States and
Southern 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 and Southern are
subject to Risk Based Capital (RBC) requirements. At December 31, 2001, each of
the Companies' capital was substantially above the RBC requirements. In 2002,
amounts available for distribution as dividends to the Company without prior
approval of the insurance regulatory authorities are $9,164,937 from Atlantic
States and $4,600,835 from Southern.
CREDIT RISK
-----------
The Company provides property and liability insurance 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 the Company'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 unaffiliated authorized
reinsurers.
IMPACT OF INFLATION
-------------------
Property and casualty insurance premium rates 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.
10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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, 2001 to June 30, 2002.
In addition, the Company has maintained approximately the same investment mix
during this period.
There have been no material changes to the Company's quantitative or
qualitative market risk exposure from December 31, 2001 through June 30, 2002.
11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
------ -----------------
NONE.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
------ ------------------------------------------
NONE.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
------ -------------------------------
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
------ ---------------------------------------------------
Annual Stockholders meeting held April 18, 2002.
Directors elected at meeting:
Robert S. Bolinger
Votes for 3,191,615
Votes withheld 22,527
Patricia A. Gilmartin
Votes for 3,191,615
Votes withheld 22,527
Philip H. Glatfelter, II
Votes for 3,191,760
Votes withheld 22,382
Directors Continuing:
Thomas J. Finley, Jr.
C. Edwin Ireland
John J. Lyons
Donald H. Nikolaus
R. Richard Sherbahn
Election of KPMG LLP as Auditors for 2002:
Votes for 3,196,611
Against 16,565
Abstain 968
12
ITEM 5. OTHER INFORMATION.
------ ------------------
NONE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
------ --------------------------------
(a) Exhibits
Exhibit No. Description
---------- -----------
Exhibit 99.1 Statement of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350 of
Title 18 of the United States Code
Exhibit 99.2 Statement of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 of
Title 18 of the United States Code
(b) Reports on Form 8-K:
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.
AUGUST 14, 2002 BY:
----------------------------------------
Donald H. Nikolaus, President
and Chief Executive Officer
AUGUST 14, 2002 BY:
----------------------------------------
Ralph G. Spontak, Senior Vice President,
Chief Financial Officer and Secretary
14