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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 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, Marietta, Pennsylvania 17547
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (717) 426-1931
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
(Title of class)
Indicate by check mark whether the 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
On March 15, 2001, the aggregate market value (based on the closing sales price
on that date) of the voting stock held by non-affiliates of the Registrant was
$33,698,644.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 8,902,015 shares of Common
Stock outstanding on March 15, 2001.
DOCUMENTS INCORPORATED BY REFERENCE:
i. Portions of the Registrant's annual report to stockholders for the fiscal
year ended December 31, 2000 are incorporated by reference into Parts I, II
and IV of this report.
ii. Portions of the Registrant's proxy statement relating to the annual meeting
of stockholders to be held April 19, 2001 are incorporated by reference
into Part III of this report.
DONEGAL GROUP INC.
INDEX TO FORM 10-K REPORT
Page
PART I.........................................................................................1
Item 1. Business...........................................................................1
Item 2. Properties........................................................................23
Item 3. Legal Proceedings.................................................................24
Item 4. Submission of Matters to a Vote of Security Holders...............................24
Executive Officers of the Company.................................................24
PART II.......................................................................................25
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.........25
Item 6. Selected Financial Data...........................................................25
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................25
Item 8. Financial Statements and Supplementary Data.......................................25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................................25
PART III......................................................................................26
Item 10. Directors and Executive Officers of the Registrant................................26
Item 11. Executive Compensation............................................................26
Item 12. Security Ownership of Certain Beneficial Owners and Management....................26
Item 13. Certain Relationships and Related Transactions....................................26
PART IV.......................................................................................27
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................27
-i-
PART I
Item 1. Business.
(a) General Development of Business.
Donegal Group Inc. is an insurance holding company formed in August 1986,
which is headquartered in Pennsylvania and engages, through its subsidiaries, in
the property and casualty insurance business in 15 mid-Atlantic and southeastern
states. As used herein, "DGI" or the "Company" refers to Donegal Group Inc. and
its insurance subsidiaries, Atlantic States Insurance Company ("Atlantic
States"), Southern Insurance Company of Virginia ("Southern"), Delaware Atlantic
Insurance Company ("Delaware Atlantic"), Pioneer Insurance Company ("Pioneer
Ohio"), Southern Heritage Insurance Company ("Southern Heritage") and Pioneer
Insurance Company ("Pioneer New York"). DGI is currently 62.2% owned by Donegal
Mutual Insurance Company (the "Mutual Company"). DGI and its subsidiaries and
the Mutual Company underwrite a broad line of personal and commercial coverages,
consisting of private passenger and commercial automobile, homeowners,
commercial multi-peril, workers' compensation and other lines of insurance.
The Company's strategy is to seek growth both internally and through
acquisitions. Since the formation of the Company and Atlantic States in 1986,
the Company has completed the following acquisitions:
Net Premiums
Net Premiums Written Year
Written Year Ended
Year Prior to December 31,
Company Acquired Acquired Acquisition 2000
- ---------------- -------- ----------- ------------
Southern Insurance Company of Virginia 1988 $ 1,128,843 $14,814,884
Delaware Atlantic Insurance Company 1995 2,824,398 6,179,670
Pioneer Insurance Company (Ohio) 1997 4,499,273 4,697,082
Southern Heritage Insurance Company 1998 32,002,540 15,879,768
Pioneer Insurance Company (New York) 2001 1,917,723 1,917,723
The Company evaluates other acquisition candidates on a continuing basis.
However, there can be no assurance as to whether or when the Company will effect
any additional acquisitions.
Atlantic States, which DGI organized in September 1986, participates in an
underwriting pool whereby it cedes to the Mutual Company the premiums, losses
and loss expenses from all of its insurance business and assumes from the Mutual
Company a specified portion of the pooled business, which also includes
substantially all of the Mutual
-1-
Company's property and casualty insurance business. Effective as of October 1,
1986, DGI entered into a pooling agreement with the Mutual Company whereby
Atlantic States assumed 35% of the pooled business written or in force on or
after October 1, 1986, with the Mutual Company remaining solely responsible for
any losses in the pooled business with dates of loss on or before the close of
business on September 30, 1986. Pursuant to amendments to the pooling agreement
subsequent to October 1, 1986, the Mutual Company has increased the percentage
of retrocessions of the pooled business to Atlantic States, and, since July 1,
2000, 70% of the pooled business has been retroceded to Atlantic States. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 hereof and Note 3 to the Consolidated Financial
Statements incorporated by reference herein.
On December 29, 1988, DGI acquired all of the outstanding capital stock of
Southern in exchange for a $3,000,000 equity contribution to Southern. Since
January 1, 1991, Southern has ceded to the Mutual Company 50% of its direct
premiums written and 50% has been retained by Southern. Because the Mutual
Company places substantially all of the business assumed from Southern in the
pool, in which DGI has a 70% allocation, DGI's results of operations include
approximately 85% of the business written by Southern. See Note 3 to the
Consolidated Financial Statements incorporated by reference herein.
As of December 31, 1995, the Company acquired all of the outstanding
capital stock of Delaware Atlantic pursuant to a Stock Purchase Agreement dated
as of December 21, 1995 between the Company and the Mutual Company.
As of March 31, 1997, the Company acquired all of the outstanding capital
stock of Pioneer Ohio pursuant to a Stock Purchase Agreement dated as of April
7, 1997 between the Company and the Mutual Company.
On November 17, 1998, DGI purchased all of the outstanding capital stock of
Southern Heritage, a Georgia-domiciled property and casualty insurance company,
from Southern Heritage Limited Partnership for a purchase price, as finally
settled, of $18,824,950 in cash.
As of January 1, 2001, DGI purchased all of the outstanding capital stock
of Pioneer New York from the Mutual Company pursuant to a Stock Purchase
Agreement dated as of July 20, 2000.
The Mutual Company is currently a party to retrocessional reinsurance
contracts with each of the Company's subsidiaries, Southern, Delaware Atlantic,
Pioneer Ohio, Southern Heritage and Pioneer New York, whereby the Mutual Company
reinsures each such subsidiary in respect of 100% of the net liability that may
accrue to such subsidiary from its insurance operations and retrocedes 100% of
the net liability back to such subsidiary, with the exception of Pioneer New
York, as to which it retrocedes, effective January 1, 2000, 90% of the net
liability, and each such subsidiary assumes the retroceded liability.
-2-
DGI and the Mutual Company jointly own Donegal Financial Services
Corporation ("Donegal Financial"), the holding company for Province Bank FSB
("Province Bank"), a federal savings bank headquartered in Marietta,
Pennsylvania, the deposits of which are insured by the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation. In connection with
the initial capitalization of Province Bank, which opened for business in
September 2000, the Mutual Company purchased 55%, for $3,575,000, and the
Company purchased 45%, for $2,925,000, of the capital stock of Donegal
Financial. The Company provided additional cash, in the amount of $117,000, to
Donegal Financial subsequent to September 2000.
Unless otherwise stated, all information in this report gives retroactive
effect to the four-for-three split of the Company's Common Stock effected
through a stock dividend of one share of Common Stock for each three shares
outstanding, which was paid on June 25, 1998 to stockholders of record on June
10, 1998.
(b) Financial Information about Industry Segments.
The Company has three segments, which consist of the investment function,
the personal lines of insurance and the commercial lines of insurance. Financial
information about these segments is set forth in Note 17 to the Consolidated
Financial Statements incorporated by reference herein.
(c) Narrative Description of Business.
Relationship with the Mutual Company
DGI's insurance operations are interrelated with the insurance operations
of the Mutual Company and, because of the percentage of the pooled business
assumed by DGI, DGI's results of operations are dependent to a material extent
upon the success of the Mutual Company. In addition, various reinsurance
agreements exist between the Company's insurance subsidiaries and the Mutual
Company. The Mutual Company is responsible for underwriting and marketing the
pooled business and provides facilities, employees and services required to
conduct the business of DGI on a cost-allocated basis. The Mutual Company owned
62.2% of DGI as of March 15, 2001.
Through the pool and through its insurance subsidiaries, DGI writes
personal and commercial property and casualty insurance lines, including
automobile, homeowners, commercial multi-peril, workers' compensation and other
lines of business.
The Mutual Company provides all personnel for the Company and certain of
its insurance subsidiaries, including Atlantic States, Delaware Atlantic,
Southern and Pioneer Ohio. Expenses are allocated to the Company, Delaware
Atlantic, Southern and Pioneer Ohio according to a time allocation and estimated
usage agreement, and to Atlantic States in
-3-
relation to the relative participation of the Mutual Company and Atlantic States
in the pooling agreement described herein. Expenses allocated to the Company
under such agreement were $26,677,399 in 2000.
The Mutual Company leases office equipment and automobiles from the
Company, under a lease dated January 1, 2000. The Mutual Company made lease
payments to the Company of $836,997 in 2000.
Under the terms of the intercompany pooling agreement, Atlantic States
cedes to the Mutual Company the premiums, losses and loss expenses on all of its
insurance business. Substantially all of the Mutual Company's property and
casualty insurance business written or in force on or after October 1, 1986 is
included in the pooled business, with the Mutual Company remaining solely
responsible for any losses in the pooled business with dates of loss on or
before the close of business on September 30, 1986. Pursuant to amendments to
the pooling agreement subsequent to October 1, 1986, the Mutual Company has
increased the percentage of retrocessions of the pooled business to Atlantic
States, and, as most recently amended, effective as of July 1, 2000, 70% of the
pooled business has been retroceded to Atlantic States. All premiums, losses,
loss expenses and other underwriting expenses are prorated among the parties on
the basis of their participation in the pool. The pooling agreement may be
amended or terminated at the end of any calendar year by agreement of the
parties. The allocations of pool participation percentages between the Mutual
Company and Atlantic States are based on the pool participants' relative amounts
of capital and surplus, expectations of future relative amounts of capital and
surplus and the ability of the Company to raise capital for Atlantic States. The
Company does not currently anticipate a further increase in Atlantic States'
percentage of participation in the pool, nor does the Company intend to
terminate the participation of Atlantic States in the pooling agreement.
The underwriting pool is intended to produce a more uniform and stable
underwriting result from year to year for the participants in the pool than they
would experience individually and to spread the risk of loss among all the
participants. Each company participating in the pool has at its disposal the
capacity of the entire pool, rather than being limited to policy exposures of a
size commensurate with its own capital and surplus. The additional capacity
exists because such policy exposures are spread among the pool participants,
each of which has its own capital and surplus.
In addition to the underwriting pool, through the retrocessional
reinsurance agreements with each of the Company's subsidiaries, Southern,
Delaware Atlantic, Pioneer Ohio, Southern Heritage and Pioneer New York, the
Mutual Company reinsures each such subsidiary in respect of 100% of the net
liability that may accrue to such subsidiary from its insurance operations and
retrocedes 100% of the net liability back to such subsidiary, with the exception
of Pioneer New York, as to which it retrocedes, effective January 1, 2000, 90%
of the net liability, and each such subsidiary assumes the retroceded liability.
-4-
DGI and the Mutual Company jointly own Donegal Financial, the holding
company for Province Bank, a federal savings bank headquartered in Pennsylvania,
the deposits of which are insured by the Savings Association Insurance Fund of
the Federal Deposit Insurance Corporation. In connection with the initial
capitalization of Province Bank, which opened for business in September 2000,
the Mutual Company purchased 55%, for $3,575,000, and the Company purchased 45%,
for $2,925,000, of the capital stock of Donegal Financial. The Company provided
additional cash, in the amount of $117,000, to Donegal Financial subsequent to
September 2000.
The Mutual Company and Province Bank are parties to a lease dated September
1, 2000 whereby Province Bank leases from the Mutual Company 3,600 square feet
of a building located in Marietta, Pennsylvania for an annual rent based on an
independent appraisal. The Mutual Company and Province Bank are also parties to
an Administrative Services Agreement dated September 1, 2000 whereby the Mutual
Company is obligated to provide various human resource services, principally
payroll and employee benefits administration, administrative support, facility
and equipment maintenance services and purchasing, to Province Bank, subject to
the overall limitation that the costs to be charged by the Mutual Company may
not exceed the costs of independent vendors for similar services and further
subject to annual maximum cost limitations specified in the Administrative
Services Agreement.
All of the Company's officers are officers of the Mutual Company, five of
the Company's seven directors are directors of the Mutual Company and three of
the Company's executive officers are directors of the Mutual Company. The
Company and the Mutual Company maintain a Coordinating Committee, which consists
of two outside directors from each of the Company and the Mutual Company, none
of whom holds seats on both Boards, to review and evaluate the pooling agreement
between the Company and the Mutual Company and to be responsible for matters
involving actual or potential conflicts of interest between the Company and the
Mutual Company. The decisions of the Coordinating Committee are binding on the
Company and the Mutual Company. The Company's Coordinating Committee members
must conclude that intercompany transactions are fair and equitable to the
Company. The purpose of this provision is to protect the interests of the
stockholders of the Company other than the Mutual Company. The Coordinating
Committee meets on an as-needed basis.
DGI's Business Strategy
DGI, in conjunction with the Mutual Company, has multiple strategies which
the management of DGI believes have resulted in underwriting results that are
favorable when compared to those of the property and casualty insurance industry
in general over the past five years. The principal strategies comprise the
following:
o A regional company concept designed to provide the advantages of local
marketing, underwriting and claims servicing with the economies of
-5-
scale from centralized accounting, administrative, investment, data
processing and other services.
o An underwriting program and product mix designed to produce a
Company-wide underwriting profit, i.e., a combined ratio of less than
100%, from careful risk selection and adequate pricing.
o A goal of a closely balanced ratio between commercial business and
personal business.
o An agent selection process that focuses on appointing agencies with
proven market strategies for the development of profitable business
and an agent compensation plan providing for additional commissions
based upon premium volume and profitability and the right to
participate in the Company's Agency Stock Purchase Plan.
o A continuing effort to attract and retain qualified employees who
receive incentive compensation based upon historical results.
o A goal of expanding operations in current and adjacent states.
Property and Casualty Insurance Products and Services
The following table indicates the percentage of DGI's net premiums written
represented by commercial lines and by personal lines for the years ended
December 31, 2000, 1999 and 1998:
Year Ended December 31,
--------------------------
2000 1999 1999
---- ---- ----
Net Premiums Written:
Commercial.................................. 37.6% 35.6% 38.2%
Personal.................................... 62.4% 64.4% 61.8%
The commercial lines consist primarily of automobile, multi-peril and
workers' compensation insurance. The personal lines consist primarily of
automobile and homeowners insurance. These types of insurance are described in
greater detail below:
Commercial
o Commercial automobile -- policies that provide protection against
liability for bodily injury and property damage arising from
automobile accidents, and provide protection against loss from damage
to automobiles owned by the insured.
-6-
o Workers' compensation -- policies purchased by employers to provide
benefits to employees for injuries sustained during employment. The
extent of coverage is established by the workers' compensation laws of
each state.
o Commercial multi-peril -- policies that provide protection to
businesses against many perils, usually combining liability and
physical damage coverages.
Personal
o Private passenger automobile -- policies that provide protection
against liability for bodily injury and property damage arising from
automobile accidents, and provide protection against loss from damage
to automobiles owned by the insured.
o Homeowners -- policies that provide coverage for damage to residences
and their contents from a broad range of perils, including, fire,
lightning, windstorm and theft. These policies also cover liability of
the insured arising from injury to other persons or their property
while on the insured's property and under other specified conditions.
The following table sets forth the combined ratios of DGI, prepared in
accordance with generally accepted accounting principles and statutory
accounting principles prescribed or permitted by state insurance authorities.
The combined ratio is a traditional measure of underwriting profitability. When
the combined ratio is under 100%, underwriting results are generally considered
profitable. Conversely, when the combined ratio is over 100%, underwriting
results are generally considered unprofitable. The combined ratio does not
reflect investment income, federal income taxes or other non-operating income or
expense. DGI's operating income depends on income from both underwriting
operations and investments. DGI's combined ratio for 1999 was adversely impacted
by restructuring charges of approximately $2.2 million.
Year Ended December 31,
-------------------------------
2000 1999 1998
------ ------ ------
GAAP combined ratio ........................ 101.5% 106.5% 99.8%
------ ------ ------
Statutory operating ratios:
Loss ratio ............................... 69.1 68.8 64.0
Expense ratio ............................ 30.5 37.1 35.4
Dividend ratio ........................... 0.9 0.9 1.4
------ ------ ------
Statutory combined ratio ................... 100.5% 106.8% 100.8%
====== ====== ======
Industry statutory combined ratio(1) ....... 110.5% 107.5% 105.6%
====== ====== ======
- ----------
(1) Source: A.M. Best Co.
-7-
DGI is required to participate in involuntary insurance programs for
automobile insurance, as well as other property and casualty insurance lines, in
states in which DGI operates. These programs include joint underwriting
associations, assigned risk plans, fair access to insurance requirements (FAIR)
plans, reinsurance facilities and windstorm plans. Legislation establishing
these programs requires all companies that write lines covered by these programs
to provide coverage (either directly or through reinsurance) for insureds who
cannot obtain insurance in the voluntary market. The legislation creating these
programs usually allocates a pro rata portion of risks attributable to such
insureds to each company on the basis of direct premiums written or the number
of automobiles insured. Generally, state law requires participation in such
programs as a condition to doing business. The loss ratio on insurance written
under involuntary programs has traditionally been greater than the loss ratio on
insurance in the voluntary market. During 1998, 1999 and 2000, the Company
received assessments totaling $1.3 million, $726,000 and $813,000, respectively,
from the Pennsylvania Insurance Guaranty Association relating to the insolvency
of two medical malpractice insurers.
The following table sets forth the net premiums written and combined ratios
by line of insurance for the business of DGI, prepared in accordance with
statutory accounting practices prescribed or permitted by state insurance
authorities, for the periods indicated.
Year Ended December 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(dollars in thousands)
Net Premiums Written:
Commercial:
Automobile ......................... $ 15,112 $ 12,608 $ 11,120
Workers' compensation .............. 21,174 17,519 15,446
Commercial multi-peril ............. 21,668 18,872 17,046
Other .............................. 1,597 1,433 1,473
---------- ---------- ----------
Total commercial ................. 59,551 50,432 45,085
---------- ---------- ----------
Personal:
Automobile ......................... 64,288 60,716 46,609
Homeowners ......................... 28,823 25,573 21,737
Other .............................. 5,542 5,135 4,724
---------- ---------- ----------
Total personal ................... 98,653 91,424 73,070
---------- ---------- ----------
Total business ....................... $ 158,204 $ 141,856 $ 118,155
========== ========== ==========
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Year Ended December 31,
----------------------------------
2000 1999 1998
------ ------ ------
(dollars in thousands)
Statutory Combined Ratios:
Commercial:
Automobile ......................... 99.9% 113.8% 118.2%
Workers' compensation .............. 91.9 96.7 80.4
Commercial multi-peril ............. 102.3 95.7 85.6
Other .............................. 39.0 80.6 71.1
------ ------ ------
Total commercial ................. 96.2 100.0 91.3
------ ------ ------
Personal:
Automobile ......................... 99.5 106.8 104.2
Homeowners ......................... 110.9 123.9 115.7
Other .............................. 104.1 87.1 91.2
------ ------ ------
Total personal ................... 103.1 110.6 106.7
------ ------ ------
Total business ....................... 100.5% 106.8% 100.8%
====== ====== ======
Property and Casualty Underwriting
The underwriting department is responsible for the establishment of
underwriting and risk selection guidelines and criteria for the various
insurance products written by DGI. The underwriting department, in conjunction
with the marketing representatives, works closely with DGI's independent
insurance agents to insure a comprehensive knowledge on the part of the agents
of DGI's underwriting requirements and risk selection process.
DGI's underwriting and pricing strategy is designed to produce an
underwriting profit resulting in a Company-wide combined ratio below 100%. DGI
and the Mutual Company have a conservative underwriting philosophy, which, in
the opinion of management, is one of the prime reasons for DGI's favorable loss
ratios relative to the property and casualty insurance industry over the last
five years, with the exception of 1999, when DGI's loss ratio was adversely
impacted by restructuring charges.
The underwriting department has over time initiated risk inspection
procedures and underwriting analyses on a per risk and class of business basis.
It has also automated underwriting processing utilizing technology such as bar
coding. Management has established monitoring and auditing processes to verify
compliance with underwriting requirements and procedures.
The underwriting department and the research and development department are
responsible for the development of new insurance products and enhancements of
existing
-9-
products. Underwriting profitability is enhanced by the creation of niche
products focused on classes of business which traditionally have provided
underwriting profits.
Marketing
DGI's insurance products, together with the products of the Mutual Company
and their respective subsidiaries, are marketed through approximately 3,300
independent insurance agents associated with approximately 1,200 insurance
agencies. Business is written by either DGI or the Mutual Company depending upon
geographic location, agency license and product. Management has developed an
agency appointment procedure that focuses on appointing agencies with proven
marketing strategies for the development of profitable business. DGI regularly
evaluates its agency force and continues to strive to obtain and retain a
significant position within each agency relative to the amount of business
similar to that of DGI placed by the agency with other insurers. DGI and the
Mutual Company have developed a successful contingent commission plan for agents
under which additional commissions are payable based upon the volume of premiums
produced and the profitability of the business of the agency written by DGI and
the Mutual Company. Management believes the contingent commission program and
the Company's Agency Stock Purchase Plan have enhanced the ability of DGI and
the Mutual Company to write profitable business.
DGI has granted certain agents the authority to bind insurance within
underwriting and pricing limits specified by DGI without the prior approval of
DGI. However, DGI generally reviews all coverages placed by its agents and,
subject to applicable insurance regulations, may cancel the coverage if it is
inconsistent with DGI's guidelines.
DGI believes that its regional structure enables it to compete effectively
with large national companies. This regional structure permits DGI to take
advantage of its knowledge of local operating territories and the opportunity to
form strong, long-term relationships with the agents that represent DGI and the
Mutual Company.
DGI and the Mutual Company have developed comprehensive growth strategies
for each of the commercial and personal lines of insurance business. DGI has
focused on the small-to medium-sized commercial insurance markets, which have
traditionally been a more stable and profitable segment of the property and
casualty insurance business than the large commercial insurance markets, which
have become increasingly competitive in the past several years. Commercial lines
marketing is characterized by account selling, in which multiple lines of
insurance are offered to a single policyholder.
DGI believes that competitive and comprehensive products targeted to
selected classes of personal lines business, along with excellent service to
agents and policyholders, provides a foundation for growth and profitability. As
is customary in the industry, insureds are encouraged to place both their
homeowners and personal automobile insurance with DGI or the Mutual Company and
are offered a discount for doing so.
-10-
Claims
The claims department develops and implements policies and procedures for
the establishment of claim reserves and the timely resolution and payment of
claims. The management and staff of the claims department resolve policy
coverage issues, manage and process reinsurance recoveries and handle salvage
and subrogation matters.
Insurance claims are normally investigated and adjusted by internal claims
adjusters and supervisory personnel. Independent adjusters are employed as
needed to handle claims in territories in which the volume of claims is not
sufficient to justify hiring internal claims adjusters. The litigation and
personal injury sections manage all claims litigation, and all claims above
$25,000 require home office review and settlement authorization.
Field office staffs are supported by home office technical, litigation,
material damage, subrogation and medical audit personnel who provide specialized
claims support. An investigative unit attempts to prevent fraud and abuse and to
control losses.
Liabilities for Losses and Loss Expenses
Liabilities for losses and loss expenses are estimates at a given point in
time of what the insurer expects to pay to claimants, based on facts and
circumstances then known, and it can be expected that the ultimate liability
will exceed or be less than such estimates. Liabilities are based on estimates
of future trends and claims severity, judicial theories of liability and other
factors. However, during the loss adjustment period, additional facts regarding
individual claims may become known, and consequently it often becomes necessary
to refine and adjust the estimates of liability. Any adjustments are reflected
in operating results in the year in which the changes are made.
DGI maintains liabilities for the eventual payment of losses and loss
expenses with respect to both reported and unreported claims. Liabilities for
loss expenses are intended to cover the ultimate costs of settling all losses,
including investigation and litigation costs from such losses. The amount of
liability for reported losses is primarily based upon a case-by-case evaluation
of the type of risk involved and knowledge of the circumstances surrounding each
claim and the insurance policy provisions relating to the type of loss. The
amount of liability for unreported claims and loss expenses is determined on the
basis of historical information by line of insurance. Inflation is implicitly
provided for in the reserving function through analysis of costs, trends and
reviews of historical reserving results. Liabilities are closely monitored and
are recomputed periodically by the Company and the Mutual Company using new
information on reported claims and a variety of statistical techniques.
Liabilities for losses are not discounted.
-11-
The establishment of appropriate liabilities is an inherently uncertain
process, and there can be no assurance that the ultimate liability will not
exceed DGI's loss and loss expense reserves and have an adverse effect on DGI's
results of operations and financial condition. As is the case for virtually all
property and casualty insurance companies, DGI has found it necessary in the
past to revise estimated future liabilities for losses and loss expenses and
further adjustments could be required in the future. However, on the basis of
DGI's internal procedures, which analyze, among other things, DGI's experience
with similar cases and historical trends such as reserving patterns, loss
payments, pending levels of unpaid claims and product mix, as well as court
decisions, economic conditions and public attitudes, management of DGI believes
that adequate provision has been made for DGI's liability for losses and loss
expenses.
Differences between liabilities reported in DGI's financial statements
prepared on the basis of generally accepted accounting principles ("GAAP") and
financial statements prepared on a statutory accounting basis result from
reducing statutory liabilities for anticipated salvage and subrogation
recoveries. These differences amounted to $8,042,860, $7,736,942 and $7,963,559
at December 31, 2000, 1999 and 1998, respectively.
The following tables set forth a reconciliation of the beginning and ending
net liability for unpaid losses and loss expenses for the periods indicated on a
GAAP basis for the Company.
Year Ended December 31,
-------------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Net liability for unpaid losses and loss expenses
at beginning of year .......................... $ 97,494 $ 93,863 $ 77,474
Net liabilities of acquired company ............. -- -- 14,967
-------- -------- --------
Net beginning balance as adjusted ............... 97,494 93,863 92,441
Provision for net losses and loss expenses for
claims incurred in the current year ........... 102,222 99,659 75,463
Decrease in provision for estimated net losses
and loss expenses for claims incurred in
prior years ................................... 920 (454) (2,296)
-------- -------- --------
Total incurred .................................. 103,142 99,205 73,167
Net losses and loss payments for claims
incurred during:
The current year ................................ 60,865 58,906 44,389
Prior years ..................................... 38,477 36,668 27,356
-------- -------- --------
Total paid ...................................... 99,342 95,574 71,745
Net liability for unpaid losses and loss expenses
at end of year ................................ $101,294 $ 97,494 $ 93,863
======== ======== ========
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The following table sets forth the development of the liability for net
unpaid losses and loss expenses for DGI on a GAAP basis from 1990 to 2000, with
supplemental loss data for 2000 and 1999.
"Net liability at end of year for unpaid losses and loss expenses" sets
forth the estimated liability for net unpaid losses and loss expenses recorded
at the balance sheet date for each of the indicated years. This liability
represents the estimated amount of net losses and loss expenses for claims
arising in the current and all prior years that are unpaid at the balance sheet
date including losses incurred but not reported.
The "Liability reestimated as of" portion of the table shows the
reestimated amount of the previously recorded liability based on experience for
each succeeding year. The estimate is increased or decreased as payments are
made and more information becomes known about the severity of the remaining
unpaid claims. For example, the 1991 liability has developed an excess after
nine years, in that reestimated net losses and loss expenses are expected to be
$4.7 million less than the estimated liability initially established in 1991 of
$36.2 million.
The "Cumulative excess" shows the cumulative excess at December 31, 2000 of
the liability estimate shown on the top line of the corresponding column. An
excess in liability means that the liability established in prior years exceeded
actual net losses and loss expenses or were reevaluated at less than the
original amount. A deficiency in liability would mean that the liability
established in prior years was less than actual net losses and loss expenses or
were reevaluated at more than the original amount.
The "Cumulative amount of liability paid through" portion of the table
shows the cumulative net losses and loss expense payments made in succeeding
years for net losses incurred prior to the balance sheet date. For example, the
1991 column indicates that as of December 31, 2000 payments equal to $31.6
million of the currently reestimated ultimate liability for net losses and loss
expenses of $31.5 million had been made.
-13-
Year Ended December 31
--------------------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
------- ------- ------- -------- -------- -------- ------- ------- ------- ------- --------
(in thousands)
Net liability at end
of year for unpaid
losses and loss
expenses ........... $31,898 $36,194 $44,339 $ 52,790 $ 63,317 $ 71,155 $75,428 $77,474 $93,863 $97,494 $101,294
Net liability
reestimated as of:
One year later .... 32,923 37,514 45,408 50,583 60,227 68,348 74,044 75,178 93,409 98,397
Two years later ... 33,550 37,765 42,752 48,132 56,656 66,520 70,545 74,269 93,195
Three years later . 32,803 35,446 40,693 44,956 54,571 63,187 68,788 72,492
Four years later .. 31,004 33,931 38,375 42,157 51,825 60,457 66,351
Five years later .. 30,041 32,907 37,096 41,050 50,493 59,109
Six years later ... 29,595 32,234 36,682 40,572 49,593
Seven years later . 29,417 31,976 36,730 39,991
Eight years later . 29,175 31,685 36,437
Nine years later .. 29,058 31,543
Ten years later ... 29,000
Cumulative (excess)
deficiency ......... $(2,898) $(4,651) $(7,902) $(12,799) $(13,724) $(12,046) $(9,077) $(4,982) $ (668) $ 903
======= ======= ======= ======== ======== ======== ======= ======= ======= =======
Cumulative amount
of liability paid
through:
One year later .... $13,003 $13,519 $16,579 $ 16,126 $ 19,401 $ 23,479 $26,477 $27,356 $36,668 $38,477
Two years later ... 19,795 20,942 24,546 25,393 30,354 37,078 40,384 46,143 56,387
Three years later . 24,178 25,308 29,385 32,079 38,684 45,796 52,071 57,719
Four years later .. 26,413 27,826 32,925 36,726 43,655 51,771 58,205
Five years later .. 27,439 29,605 34,757 39,122 46,331 55,137
Six years later ... 28,157 30,719 35,739 40,440 47,802
Seven years later . 28,627 31,173 36,518 40,903
Eight years later . 28,841 31,412 36,809
Nine years later .. 28,948 31,585
Ten years later ... 29,046
Year Ended December 31
-------------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1998 1999 2000
------- ------- ------- -------- -------- -------- -------- --------
(in thousands)
Gross liability at end of year......... $70,093 $88,484 $98,894 $114,622 $118,112 $141,409 $149,979 $163,899
Reinsurance recoverable................ 17,303 25,167 27,739 39,194 40,638 47,546 52,485 62,605
Net liability at end of year........... 52,790 63,317 71,155 75,428 77,474 93,863 97,494 101,294
Gross reestimated liability - latest... 55,642 72,804 83,726 105,075 113,230 136,780 155,356
Reestimated recoverable - latest....... 15,651 23,211 24,617 38,724 40,738 43,585 56,959
Net reestimated liability - latest..... 39,991 49,593 59,109 66,351 72,492 93,195 98,397
Gross cumulative deficiency (excess)... (14,451) (15,680) (15,168) (9,547) (4,882) (4,629) 5,377
-14-
Reinsurance
DGI and the Mutual Company use several different reinsurers, all of which
have a Best rating of A- or better or, with respect to foreign reinsurers, have
a financial condition which, in the opinion of management, is equivalent to a
company with at least an A- rating.
The external reinsurance purchased by DGI and the Mutual Company includes
"excess treaty reinsurance," under which losses are automatically reinsured over
a set retention ($250,000 for 2000), and "catastrophic reinsurance," under which
the reinsured recovers 95% of an accumulation of many losses resulting from a
single event, including natural disasters (for 2000, $3,000,000 retention).
DGI's principal reinsurance agreement in 2000, other than that with the Mutual
Company, was an excess of loss treaty in which the reinsurers were Dorinco
Reinsurance Company and Swiss Re America. Reinsurance is also purchased on an
individual policy basis to reinsure losses that may occur from large risks,
specific risk types or specific locations. The amount of coverage provided under
each of these types of reinsurance depends upon the amount, nature, size and
location of the risk being reinsured. For property insurance, excess of loss
treaties provide for coverage up to $1,000,000. For liability insurance, excess
of loss treaties provide for coverage up to $30,000,000. Property catastrophe
contracts provide coverage up to $80,000,000 resulting from one event. On both
property and casualty insurance, DGI and the Mutual Company purchase facultative
reinsurance to cover exposures from losses that exceed the limits provided by
their respective treaty reinsurance. Atlantic States cedes to the Mutual Company
all of its insurance business and assumes from the Mutual Company 70% (65% prior
to July 1, 2000) of the Mutual Company's total pooled insurance business,
including that assumed from Atlantic States and substantially all of the
business assumed and retained by the Mutual Company from Southern and Delaware
Atlantic. Atlantic States, Southern, Delaware Atlantic, Pioneer Ohio, Southern
Heritage and Pioneer New York each have a catastrophe reinsurance agreement with
the Mutual Company which limits the maximum liability under any one catastrophic
occurrence to $400,000, $300,000, $300,000, $200,000, $400,000 and $400,000
respectively, and $1,000,000 for a catastrophe involving more than one of the
companies. The Mutual Company and Delaware Atlantic have an excess of loss
reinsurance agreement in which the Mutual Company assumes up to $200,000 of
losses in excess of $50,000. The Mutual Company and Pioneer Ohio have an excess
of loss reinsurance agreement in which the Mutual Company assumes up to $200,000
of losses in excess of $50,000. The Mutual Company and Southern have an excess
of loss reinsurance agreement in which the Mutual Company assumes up to $25,000
of losses in excess of $100,000 and a quota share agreement whereby Southern
cedes 50% of its direct business less certain reinsurance to the Mutual Company.
Effective January 1, 2001, the Mutual Company and Pioneer New York have an
aggregate excess of loss reinsurance agreement whereby the Company reinsures
Pioneer New York against any loss, adjusted on a quarterly basis recalculated at
the end of each calendar quarter, from: (a) any adverse development in Pioneer
New York's loss reserve and loss adjustment expense reserve at December 31, 2002
compared to the amount of such reserves at December 31, 2000 in respect of all
policy years ending on or before
-15-
December 31, 2000 and (b) all losses and loss adjustment expenses incurred by
Pioneer New York during the years ending December 31, 2001 and December 31, 2002
by reason of the fact that Pioneer New York's loss and loss adjustment expense
ratios for those periods exceeds 60%. Southern, Delaware Atlantic, Pioneer New
York, Pioneer Ohio and Southern Heritage each have retrocessional reinsurance
agreements with the Mutual Company, under which they cede, and then assume back,
100% of their business net of other reinsurance, except for Pioneer New York,
which assumes back 90% of its business.
Competition
The property and casualty insurance industry is highly competitive on the
basis of both price and service. There are numerous companies competing for this
business in the geographic areas where the Company operates, many of which are
substantially larger and have greater financial resources than DGI, and no
single company dominates. In addition, because the insurance products of DGI and
the Mutual Company are marketed exclusively through independent insurance
agencies, most of which represent more than one company, DGI faces competition
to retain qualified independent agencies, as well as competition within
agencies.
Investments
DGI's return on invested assets is an important element of its financial
results. Currently, the investment objective is to maintain a widely diversified
fixed maturities portfolio structured to maximize after-tax investment income
while minimizing credit risk through investments in high quality instruments. At
December 31, 2000, all debt securities were rated investment grade with the
exception of one unrated obligation of $240,000, and the investment portfolio
did not contain any mortgage loans or any non-performing assets.
-16-
The following table shows the composition of the debt securities investment
portfolio (at carrying value), excluding short-term investments, by rating as of
December 31, 2000:
December 31, 2000
----------------------------
Rating(1) Amount Percent
- --------- -------- -------
(dollars in thousands)
U.S. Treasury and U.S. agency
securities(2)................................ $122,597 48.7%
Aaa or AAA...................................... 56,278 22.3
Aa or AA........................................ 39,365 15.6
A .............................................. 33,184 13.2
BBB ............................................ 350 0.1
Not rated(3) ................................... 240 0.1
-------- ------
Total...................................... $252,014 100%
======== ======
- ----------
(1) Ratings assigned by Moody's Investors Services, Inc. or Standard & Poor's
Corporation.
(2) Includes mortgage-backed securities of $18.8 million.
(3) Represents one unrated obligation of The Lancaster County Hospital
Authority Mennonite Home Project which management of DGI believes to be
equivalent to investment grade securities with respect to repayment risk.
DGI invests in both taxable and tax-exempt securities as part of its
strategy to maximize after-tax income. Such strategy considers, among other
factors, the alternative minimum tax. Tax-exempt securities made up
approximately 33.7%, 37.3%, and 34.1% of the total investment portfolio at
December 31, 2000, 1999 and 1998, respectively.
-17-
The following table shows the classification of the investments (at
carrying value) of DGI and its subsidiaries at December 31, 2000, 1999 and 1998.
December 31,
--------------------------------------------------------------------------------
2000 1999 1998
---------------------- --------------------- ---------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ------- ------ ------- ------ -------
(dollars in thousands)
Fixed maturities(1):
Held to maturity:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies................... $37,072 13.1% $36,861 14.1% $32,891 12.9%
Canadian government
obligation..................... 499 0.2 498 0.2 -- --
Obligations of states and
political subdivisions......... 66,831 23.6 67,824 25.9 66,941 26.2
Corporate securities............ 21,320 7.5 15,819 6.1 9,131 3.6
Mortgage-backed
securities..................... 14,301 5.1 15,172 5.8 18,221 7.1
-------- ----- -------- ----- -------- ------
Total held to
maturity....................... 140,023 49.5 136,174 52.1 127,184 49.8
------- ---- ------- ---- ------- -------
Available for sale:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies................... 66,687 23.6 61,205 23.4 55,439 21.8
Obligations of states and
political subdivisions......... 18,057 6.4 20,223 7.7 19,957 7.8
Corporate securities............ 22,710 8.0 15,053 5.8 10,787 4.2
Mortgage-backed
securities..................... 4,537 1.6 3,563 1.4 4,342 1.7
---------- ----- --------- ----- ------- ------
Total available
for sale...................... 111,991 39.6 100,044 38.3 90,525 35.5
-------- ---- ------- ---- ------ --------
Total fixed
maturities.................... 252,014 89.1 236,218 90.4 217,709 85.3
Equity securities(2).......... 12,053 4.3 9,229 3.5 6,764 2.7
Short-term
investments(3)................ 18,584 6.6 15,995 6.1 30,522 12.0
--------- ------ --------- ------- -------- -------
Total investments............. $282,651 100.0% $261,442 100.0% $254,995 100.0%
======== ====== ======== ====== ======== ======
-18-
(1) The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting For Certain
Investments in Debt and Equity Securities." See Notes 1 and 4 to the
Consolidated Financial Statements incorporated by reference herein. Fixed
maturities held to maturity are valued at amortized cost; those fixed
maturities available for sale are valued at fair value. Total fair value of
fixed maturities held to maturity was $141,488,936 at December 31, 2000,
$133,995,994 at December 31, 1999 and $131,633,299 at December 31, 1998.
The amortized cost of fixed maturities available for sale was $111,905,848
at December 31, 2000, $103,419,994 at December 31, 1999 and $89,089,995 at
December 31, 1998.
(2) Equity securities are valued at fair value. Total cost of equity securities
was $12,476,948 at December 31, 2000, $9,043,818 at December 31, 1999 and
$6,206,735 at December 31, 1998.
(3) Short-term investments are valued at cost, which approximates market.
The following table sets forth the maturities (at carrying value) in the
fixed maturity and short-term investment portfolio at December 31, 2000,
December 31, 1999 and December 31, 1998.
December 31,
--------------------------------------------------------------------------------
2000 1999 1998
---------------------- --------------------- ---------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ------- ------ ------- ------ -------
(dollars in thousands)
Due in:(1)
One year or less.............. $35,875 13.2% $34,007 13.5% $47,760 19.2%
Over one year
Through three years........... 34,219 12.6 27,107 10.8 31,964 12.9
Over three years
Through five years............ 40,883 15.1 30,878 12.2 23,139 9.3
Over five years
Through ten years............. 112,194 41.5 104,883 41.6 78,061 31.4
Over ten years
Through fifteen years......... 22,144 8.2 30,478 12.1 37,940 15.3
Over fifteen years............ 6,445 2.4 6,125 2.4 6,805 2.8
Mortgage-backed
securities................... 18,838 7.0 18,735 7.4 22,563 9.1
-------- ----- -------- ----- -------- -----
$270,598 100.0% $252,213 100.0% $248,232 100.0%
======== ====== ======== ====== ======== ======
- ----------
-19-
(1) Based on stated maturity dates with no prepayment assumptions. Actual
maturities will differ because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
As shown above, the Company held investments in mortgage-backed securities
having a carrying value of $18.8 million at December 31, 2000. Included in these
investments are collateralized mortgage obligations ("CMOs") with a carrying
value of $10 million at December 31, 2000. The Company has attempted to reduce
the prepayment risks associated with mortgage-backed securities by investing
approximately 99%, as of December 31, 2000, of the Company's holdings of CMOs in
planned amortization and very accurately defined tranches. Such investments are
designed to alleviate the risk of prepayment by providing predictable principal
prepayment schedules within a designated range of prepayments. If principal is
repaid earlier than originally anticipated, investment yields may decrease due
to reinvestment of the proceeds at current interest rates (which may be lower)
and capital gains or losses may be realized since the book value of securities
purchased at premiums or discounts may be different from the prepayment amount.
Investment results of DGI and its subsidiaries for the years ended December
31, 2000, 1999 and 1998 are shown in the following table:
Year Ended December 31,
-------------------------------------------------------------
2000 1999 1998
-------- -------- --------
(dollars in thousands)
Invested assets(1)................ $276,600 $264,293 $208,304
Investment income(2).............. 15,992 13,224 11,998
Average yield..................... 5.8% 5.0% 5.6%
- ----------------
(1) Average of the aggregate invested amounts at the beginning and end of the
period, including cash.
(2) Investment income is net of investment expenses and does not include
realized investment gains or losses or provision for income taxes.
A.M. Best Rating
Currently, the A.M. Best rating of the Mutual Company, Atlantic States,
Southern, Delaware Atlantic, Southern Heritage, Pioneer Ohio and Pioneer New
York was "A", based upon their respective current financial conditions and
historical statutory results of operations. Management believes that this Best
rating is an important factor in marketing DGI's products to its agents and
customers. Best's ratings are industry ratings based on a comparative analysis
of the financial condition and operating performance of insurance
-20-
companies as determined by their publicly available reports. Best's
classifications are A++ and A+ (Superior), A and A- (Excellent), B++ and B+
(Very Good), B and B- (Good), C++ and C+ (Fair), C and C- (Marginal), D (below
minimum standards) and E and F (Liquidation). Best's ratings are based upon
factors relevant to policyholders and are not directed toward the protection of
investors. According to Best, an "excellent" rating is assigned to those
companies which, in Best's opinion, have achieved excellent overall performance
when compared to the norms of the property and casualty insurance industry and
have generally demonstrated a strong ability to meet policyholder and other
contractual obligations.
Regulation
Insurance companies are subject to supervision and regulation in the states
in which they transact business. Such supervision and regulation relates to
numerous aspects of an insurance company's business and financial condition. The
primary purpose of such supervision and regulation is the protection of
policyholders. The extent of such regulation varies, but generally derives from
state statutes which delegate regulatory, supervisory and administrative
authority to state insurance departments. Accordingly, the authority of the
state insurance departments includes the establishment of standards of solvency
that must be met and maintained by insurers, the licensing to do business of
insurers and agents, the nature of and limitations on investments, premium rates
for property and casualty insurance, the provisions which insurers must make for
current losses and future liabilities, the deposit of securities for the benefit
of policyholders, the approval of policy forms, notice requirements for the
cancellation of policies and the approval of certain changes in control. State
insurance departments also conduct periodic examinations of the affairs of
insurance companies and require the filing of annual and other reports relating
to the financial condition of insurance companies.
In addition to state-imposed insurance laws and regulations, in December
1993 the National Association of Insurance Commissioners (the "NAIC") adopted a
risk-based capital system for assessing the adequacy of statutory capital and
surplus which augments the states' current fixed dollar minimum capital
requirements for insurance companies. At December 31, 2000, DGI's insurance
subsidiaries and the Mutual Company each exceeded the required levels of
capital. There can be no assurance that the capital requirements applicable to
DGI's insurance subsidiaries will not increase in the future.
The states in which Atlantic States (Pennsylvania, Maryland and Delaware),
the Mutual Company (Pennsylvania, Ohio, Maryland, New York, Virginia, Delaware
and North Carolina), Southern (Virginia and Pennsylvania), Delaware Atlantic
(Delaware, Maryland and Pennsylvania), Pioneer Ohio (Ohio and Pennsylvania),
Southern Heritage (Alabama, Arkansas, Georgia, Illinois, Louisiana, Mississippi,
North Carolina, South Carolina, Tennessee and Virginia) and Pioneer New York
(Connecticut and New York) are licensed to do business have guaranty fund laws
under which insurers doing business in such states can be assessed on the basis
of premiums written by the insurer in that state in order to fund policyholder
liabilities of insolvent insurance companies. Under these laws in general, an
-21-
insurer is subject to assessment, depending upon its market share of a given
line of business, to assist in the payment of policyholder claims against
insolvent insurers. The Mutual Company, Atlantic States, Southern, Delaware
Atlantic, Pioneer Ohio, Pioneer New York and Southern Heritage have made
accruals for their portion of assessments related to such insolvencies based
upon the most current information furnished by the guaranty associations. During
1998, 1999 and 2000, the Company received assessments totaling $1.3 million,
$726,000 and $813,000, respectively, from the Pennsylvania Insurance Guaranty
Association relating to the insolvency of two medical malpractice insurers.
Most states have enacted legislation that regulates insurance holding
company systems. Each insurance company in the holding company system is
required to register with the insurance supervisory agency of its state of
domicile and furnish information concerning the operations of companies within
the holding company system that may materially affect the operations, management
or financial condition of the insurers within the system. Pursuant to these
laws, the respective insurance departments may examine the Mutual Company, the
Company and the Company's insurance subsidiaries at any time, require disclosure
of material transactions by the holding company and require prior notice or
prior approval of certain transactions, such as "extraordinary dividends" from
the insurance subsidiaries to the holding company.
All transactions within the holding company system affecting the Mutual
Company and the Company's insurance subsidiaries must be fair and equitable.
Approval of the applicable insurance commissioner is required prior to
consummation of transactions affecting the control of an insurer. In some
states, including Pennsylvania, the acquisition of 10% or more of the
outstanding capital stock of an insurer or its holding company is presumed to be
a change in control. Pursuant to an order issued in October 1998, the
Pennsylvania Insurance Department has approved the Mutual Company's ownership of
up to 65% of the outstanding Common Stock of DGI. These laws also require notice
to the applicable insurance commissioner of certain material transactions
between an insurer and any person in its holding company system and, in some
states, certain of such transactions cannot be consummated without the prior
approval of the applicable insurance commissioner.
The Company's insurance subsidiaries are restricted by the insurance laws
of their respective states of domicile as to the amount of dividends or other
distributions they may pay to the Company without the prior approval of the
respective state regulatory authorities. Generally, the maximum amount that may
be paid by an insurance subsidiary during any year after notice to, but without
prior approval of, the insurance commissioners of these states is limited to a
stated percentage of that subsidiary's statutory capital and surplus as of a
certain date, or the net income or net investment income not including realized
capital gains of the subsidiary for the preceding year. As of December 31, 2000,
amounts available for payment of dividends in 2001 without the prior approval of
the various insurance commissioners were $5,414,419 from Atlantic States,
$908,259 from Southern, $323,992 from Delaware Atlantic, $581,132 from Pioneer
Ohio and $973,796 from
-22-
Southern Heritage. See Note 12 to the Consolidated Financial Statements
incorporated by reference herein.
The NAIC has adopted the Codification of Statutory Accounting Principles
with an effective date of January 1, 2001. The codified principles are intended
to provide a basis of accounting recognized and adhered to in the absence of
conflict with, or silence of, state statutes and regulations. The impact of the
codified principles on the statutory capital and surplus of the Company's
insurance subsidiaries is not expected to decrease statutory capital and surplus
as of January 1, 2001.
The Mutual Company
The Mutual Company, which was organized in 1889, has a Best rating of A
(Excellent). At December 31, 2000, the Mutual Company had admitted assets of
$151,103,813 and policyholders' surplus of $65,575,094. At December 31, 2000,
the Mutual Company had no debt and, of its total liabilities of $85,528,719,
reserves for net losses and loss expenses accounted for $48,177,588 and unearned
premiums accounted for $23,527,705. Of the Mutual Company's investment portfolio
of $105,382,513 at December 31, 2000, investment-grade bonds accounted for
$37,867,088, cash and short-term investments accounted for $(3,466,626) and
mortgages accounted for $9,812,323. At December 31, 2000, the Mutual Company
owned 5,511,128 shares of the Company's Common Stock, which were carried on the
Mutual Company's books at $47,340,593. The foregoing financial information is
presented on the statutory basis of accounting.
Employees
As of December 31, 2000, the Mutual Company had 430 employees. The Mutual
Company's employees provide a variety of services to DGI, Atlantic States,
Delaware Atlantic, Southern, Southern Heritage, Pioneer New York and Pioneer
Ohio, as well as to the Mutual Company and its subsidiaries.
Item 2. Properties.
DGI, Atlantic States and Delaware Atlantic share headquarters with the
Mutual Company's headquarters in a building owned by the Mutual Company. The
Mutual Company charges DGI for an appropriate portion of the building expenses
under an intercompany allocation agreement which is consistent with the terms of
the pooling agreement. The headquarters of the Mutual Company has approximately
163,500 square feet of office space. Southern has a facility of approximately
10,000 square feet in Glen Allen, Virginia, which it owns. Pioneer Ohio has a
facility of approximately 10,000 square feet in Greenville, Ohio, which it owns.
Southern Heritage has a facility of approximately 14,000 square feet in Duluth,
Georgia, which it leases. Pioneer New York has a facility of approximately
10,000 square feet in Greenville, New York, which it owns. Province Bank leases
approximately 3,600 square feet of a building located in Marietta, Pennsylvania
owned
-23-
by the Mutual Company. The Mutual Company charges Province Bank an annual rent
based on an independent appraisal.
Item 3. Legal Proceedings.
DGI is a party to numerous lawsuits arising in the ordinary course of
its insurance business. DGI believes that the resolution of these lawsuits will
not have a material adverse effect on its financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of holders of the Company's Common
Stock during the fourth quarter of 2000.
Executive Officers of the Company
Name Age Position
---- --- --------
Donald H. Nikolaus 58 President and Chief Executive Officer since 1981
Ralph G. Spontak 48 Senior Vice President since 1991; Chief Financial Officer and Vice
President since 1983; Secretary since 1988
Cyril J. Greenya 56 Senior Vice President - Commercial Underwriting since 1997; Vice
President - Commercial Underwriting for five years prior thereto;
Manager - Commercial Underwriting for nine years prior thereto
Robert G. Shenk 48 Senior Vice President - Claims since 1997; Vice President - Claims for
five years prior thereto
William H. Shupert 74 Senior Vice President - Underwriting since 1991; Vice President -
Underwriting for 18 years prior thereto
Daniel J. Wagner 40 Treasurer since 1993; Controller for five years prior thereto
James B. Price 65 Senior Vice President - Claims since 1997; Vice President - Claims for
five years prior thereto.
-24-
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.
The response to this Item is incorporated in part by reference to page
31 of the Company's Annual Report to Stockholders for the year ended December
31, 2000, which is included as Exhibit (13) to this Form 10-K Report. As of
March 15, 2001, the Company had approximately 649 holders of record of its
Common Stock. The Company declared dividends of $.36 per share in 2000 and $.36
per share in 1999.
Item 6. Selected Financial Data.
The response to this Item is incorporated by reference to page 1 of
the Company's Annual Report to Stockholders for the year ended December 31,
2000, which is included as Exhibit (13) to this Form 10-K Report.
Item 7. Management's Discussion and Analysis of Financial Condition
and Result of Operations.
The response to this Item is incorporated by reference to pages 10
through 12 of the Company's Annual Report to Stockholders for the year ended
December 31, 2000, which is included as Exhibit (13) to this Form 10-K Report.
Item 8. Financial Statements and Supplementary Data.
The response to this Item is incorporated by reference to pages 13
through 28 of the Company's Annual Report to Stockholders for the year ended
December 31, 2000, which is included as Exhibit (13) to this Form 10-K Report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
-25-
PART III
Item 10. Directors and Executive Officers of the Registrant.
The response to this Item with respect to the Company's directors is
incorporated by reference to pages 7 through 9 of the Company's proxy statement
relating to the Company's annual meeting of stockholders to be held April 19,
2001. The response to this Item with respect to the Company's executive officers
is incorporated by reference to Part I of this Form 10-K Report.
Item 11. Executive Compensation.
The response to this Item is incorporated by reference to pages 9
through 12 of the Company's proxy statement relating to the Company's annual
meeting of stockholders to be held April 19, 2001, except for the Report of
Compensation Committee, the Performance Graph and the Report of the Audit
Committee which are not incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners
and Management.
The response to this Item is incorporated by reference to pages 3
through 5 of the Company's proxy statement relating to the Company's annual
meeting of stockholders to be held April 19, 2001.
Item 13. Certain Relationships and Related Transactions.
The response to this Item is incorporated by reference to pages 3
through 7 and page 14 of the Company's proxy statement relating to the Company's
annual meeting of stockholders to be held April 19, 2001.
-26-
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.
(a) Financial statements, financial statement schedules and exhibits
filed:
(1) Consolidated Financial Statements
Page*
----
Report of Independent Auditors
Donegal Group Inc. and Subsidiaries:
Consolidated Balance Sheets as of
December 31, 2000 and 1999................................................................... 13
Consolidated Statements of Income and
Comprehensive Income for the three years ended
December 31, 2000, 1999 and 1998............................................................. 14
Consolidated Statements of Stockholders'
Equity for the three years ended
December 31, 2000, 1999 and 1998............................................................. 15
Consolidated Statement of Cash Flow
for the three years ended
December 31, 2000, 1999 and 1998............................................................. 16
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Page
Donegal Group Inc. and Subsidiaries
Independent Auditors' Consent and Report on Schedules Exhibit 23
Schedule I. Summary of Investments - Other
Than Investments in Related Parties.................................... 33
Schedule II. Condensed Financial Information of Parent Company...................... 34
Schedule III. Supplementary Insurance Information.................................... 37
Schedule IV. Reinsurance............................................................ 39
Schedule VI. Supplemental Insurance Information Concerning Property
and Casualty Subsidiaries.............................................. 40
All other schedules have been omitted since they are not required, not
applicable or the information is included in the financial statements or notes
thereto.
- -------------
-27-
* Refers to the respective page of Donegal Group Inc.'s 2000 Annual
Report to Stockholders. The Consolidated Financial Statements and Notes to
Consolidated Financial Statements and Auditor's Report thereon on pages 13
through 28 are incorporated herein by reference. With the exception of the
portions of such Annual Report specifically incorporated by reference in this
Item and Items 5, 6, 7 and 8 hereof, such Annual Report shall not be deemed
filed as part of this Form 10-K Report or otherwise subject to the liabilities
of Section 18 of the Securities Exchange Act of 1934.
(3) Exhibits
Exhibit No. Description of Exhibits Reference
----------- ----------------------- ---------
(3)(i) Certificate of Incorporation of Registrant, as amended (m)
(3)(ii) Amended and Restated By-laws of Registrant (a)
Management Contracts and Compensatory Plans or Arrangements
-----------------------------------------------------------
(10)(A) Donegal Group Inc. Agency Stock Purchase Plan (k)
(10)(B) Donegal Group Inc. Amended and Restated 1996 Equity Incentive Plan (d)
(10)(C) Donegal Group Inc. Amended and Restated 1996 Equity Incentive Plan for
Directors (j)
(10)(D) Donegal Group Inc. Executive Restoration Plan (c)
(10)(E) Donegal Mutual Insurance Company 401(k) Plan (m)
(10)(F) Amendment No. 1 effective January 1, 2000 to Donegal Mutual Insurance Company
401(k) Plan (m)
(10)(G) Donegal Group Inc. 2001 Equity Incentive Plan for Employees Filed herewith
(10)(H) Donegal Group Inc. 2001 Equity Incentive Plan for Directors Filed herewith
(10)(I) Donegal Group Inc. 2001 Employee Stock Purchase Plan Filed herewith
(10)(J) Donegal Group Inc. 2001 Agency Stock Purchase Plan Filed herewith
Other Material Contracts
------------------------
(10)(K) Tax Sharing Agreement dated September 29, 1986 between Donegal Group Inc. and
Atlantic States Insurance Company (b)
(10)(L) Services Allocation Agreement dated September 29, 1986 between Donegal Mutual
Insurance Company, Donegal Group, Inc. and Atlantic States Insurance Company (b)
(10)(M) Proportional Reinsurance Agreement dated September 29, 1986 between Donegal
Mutual Insurance Company and Atlantic States Insurance Company (b)
-28-
Exhibit No. Description of Exhibits Reference
----------- ----------------------- ---------
(10)(N) Amendment dated October 1, 1988 to Proportional Reinsurance Agreement between
Donegal Mutual Insurance Company and Atlantic States Insurance Company (e)
(10)(O) Multi-Line Excess of Loss Reinsurance Agreement effective January 1, 1993
between Donegal Mutual Insurance Company, Southern Insurance Company of
Virginia, Atlantic States Insurance Company and Pioneer Mutual Insurance
Company, and Christiana General Insurance Corporation of New York, Cologne
Reinsurance Company of America, Continental Casualty Company, Employers
Reinsurance Corporation and Munich American Reinsurance Company (g)
(10)(P) Amendment dated July 16, 1992 to Proportional Reinsurance Agreement between
Donegal Mutual Insurance Company and Atlantic States Insurance Company (f)
(10)(Q) Amendment dated as of December 21, 1995 to Proportional Reinsurance Agreement
between Donegal Mutual Insurance Company and Atlantic States Insurance Company (h)
(10)(R) Stock Purchase Agreement dated as of December 21, 1995 between Donegal Mutual
Insurance Company and Donegal Group Inc. (h)
(10)(S) Donegal Group Inc. 1996 Employee Stock Purchase Plan (i)
(10)(T) Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal
Mutual Insurance Company and Pioneer Insurance Company (c)
(10)(U) Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal
Mutual Insurance Company and Delaware American Insurance Company (c)
(10)(V) Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal
Mutual Insurance Company and Southern Insurance Company of Virginia (c)
(10)(W) Reinsurance and Retrocession Agreement effective January 1, 2000 between
Donegal Mutual Insurance Company and Southern Heritage Insurance Company (m)
(10)(X) Property Catastrophe Excess of Loss Reinsurance Agreement effective
January 1, 2000 between Donegal Mutual Insurance Company and Southern Heritage
Insurance Company (m)
-29-
Exhibit No. Description of Exhibits Reference
----------- ----------------------- ---------
(10)(Y) Stock Purchase Agreement dated as of May 14, 1998 between Donegal Group Inc.
and Southern Heritage Limited Partnership (l)
(10)(Z) Amendment dated November 17, 1998 to Stock Purchase Agreement dated as of
May 14, 1998 between Donegal Group Inc. and Southern Heritage Limited Partnership (l)
(10)(AA) Amended and Restated Credit Agreement dated as of July 27, 1998 among Donegal
Group Inc., the banks and other financial institutions from time to time
party thereto and Fleet National Bank, as Agent (l)
(10)(BB) First Amendment and Waiver to the Amended and Restated Credit Agreement dated
as of December 31, 1999 (m)
(10)(CC) Stock Purchase Agreement dated as of July 20, 2000 between Donegal Mutual
Insurance Company and Donegal Group Inc. Filed herewith
(10)(DD) Amendment dated as of April 20, 2000 to Proportional Reinsurance Agreement
between Donegal Mutual Insurance Company and Atlantic States Insurance Company (n)
(10)(EE) Lease Agreement dated as of September 1, 2000 between Donegal Mutual Insurance
Company and Province Bank FSB Filed herewith
(10)(FF) Aggregate Excess of Loss Reinsurance Agreement dated as of January 1, 2001
between Donegal Mutual Insurance Company and Pioneer Insurance Company Filed herewith
(13) 2000 Annual Report to Stockholders (electronic filing contains only those
portions incorporated by reference into this Form 10-K Report) Filed herewith
(20) Proxy Statement relating to the Annual Meeting of Stockholders to be held on
April 19, 2001, provided, however, that the Report of
the Compensation Committee, the Performance Graph and
the Report of the Audit Committee shall not be deemed
filed as part of this Form 10-K Report (o)
(21) Subsidiaries of Registrant Filed herewith
(23) Consent of Independent Auditors Filed herewith
- ------------------
(a) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-Q Report for the quarter ended
September 30, 1998.
-30-
(b) Such exhibit is hereby incorporated by reference to the like-described
exhibits in Registrant's Form S-1 Registration Statement No. 33-8533
declared effective October 29, 1986.
(c) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1996.
(d) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1998.
(e) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1988.
(f) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1992.
(g) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-2 Registration Statement No. 33-67346
declared effective September 29, 1993.
(h) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated December 21, 1995.
(i) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-8 Registration Statement No. 333-1287 filed
February 29, 1996.
(j) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1997.
(k) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-2 Registration Statement No. 333-06787
declared effective August 1, 1996.
(l) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated November 17, 1998.
(m) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrants' Form 10-K Report for the year ended December 31,
1999.
(n) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated June 19, 2000.
(o) Such exhibit is hereby incorporated by reference to the Registrant's
definitive proxy statement filed March 29, 2001.
-31-
(b) Reports on Form 8-K:
None.
-32-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE I -- SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
($ in thousands)
December 31, 2000
Amount at Which
Fair Shown in the
Cost Value Balance Sheet
-------------------------------------------------------------
Fixed Maturities:
Held to maturity:
United States government and
Governmental agencies and
authorities including obligations
of states and political subdivision $103,903 $105,425 $103,903
Canadian government obligation 499 510 499
All other corporate bonds 21,320 21,346 21,320
Mortgage-backed securities 14,301 14,208 14,301
-------- --------- --------
Total fixed maturities
Held to maturity 140,023 141,489 140,023
------- ------- -------
Available for sale:
United States government and
Governmental agencies and
Authorities including obligations
of states and political subdivision 84,562 84,744 84,744
All other corporate bonds 22,703 22,710 22,710
Mortgage-backed securities 4,641 4,537 4,537
--------- ------- -------
Total fixed maturities
Available for sale 111,906 111,991 111,991
------- ------- -------
Total fixed maturities 251,929 253,480 252,014
------- ------- -------
Equity Securities:
Preferred stocks
Public utilities 228 231 231
Banks 4,159 4,066 4,066
Industrial and miscellaneous 1,365 1,325 1,325
------- ------- -------
Total preferred stocks 5,752 5,622 5,622
------- ------- -------
Common stocks
Banks and insurance companies 2,866 3,554 3,554
Industrial and miscellaneous 3,859 2,877 2,877
------- ------- -------
Total common stocks 6,725 6,431 6,431
------- ------- -------
Total equity securities 12,477 12,053 12,053
------ ------ ------
Short-term investments 18,584 18,584 18,584
--------- --------- ----------
Total investments $282,990 $284,117 $282,651
======== ======== ========
-33-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Condensed Balance Sheets
($ in thousands)
December 31, 2000 and 1999
ASSETS
2000 1999
-------- --------
Investment in subsidiaries (equity method) $150,774 $138,702
Cash 2,381 371
Property and equipment 1,997 2,232
Other 715 750
-------- --------
Total assets $155,867 $142,055
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
2000 1999
-------- --------
Cash dividends declared to stockholders $ 797 $761
Line of credit 40,000 37,000
Other 1,325 879
-------- --------
Total liabilities 42,122 38,640
-------- --------
Stockholders' equity 113,745 103,415
-------- --------
Total liabilities and stockholders' equity $155,867 $142,055
======== ========
-34-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
(Continued)
Condensed Statements of Income
($ in thousands)
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
---------------------------------------------
Revenues
Dividends-subsidiary $3,900 $820 $1,000
Lease income 837 819 754
Investment income 29 46 22
------ ----- ------
Total revenues 4,766 1,685 1,776
Expenses
Operating expenses 1,165 938 718
Interest 3,304 2,463 1,293
------ ----- ------
Total expenses 4,469 3,401 2,011
------ ----- ------
Income (loss) before income
tax benefit and equity in
undistributed net income of
subsidiaries 297 (1,716) (235)
Income tax benefit (1,226) (807) (413)
------ ----- ------
Income (loss) before equity in
undistributed net income of
subsidiaries 1,523 (909) 178
Equity in undistributed net
income of subsidiaries 7,364 7,566 8,840
------ ----- ------
Net income $8,887 $6,657 $9,018
====== ====== ======
-35-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II -- CONDENSED INFORMATION OF PARENT COMPANY
Condensed Statements of Cash Flows
($ in thousands)
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
-----------------------------------------------
Cash flows from operating activities:
Net income $8,887 $6,657 $9,018
------ ------ ------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in undistributed net income of
Subsidiaries (7,364) (7,566) (8,840)
Other 1,123 2,365 (921)
------ ------ ------
Net adjustments (6,241) (5,201) (9,761)
------ ------ ------
Net cash provided by (used in) operating
activities 2,646 1,456 (743)
------ ------ ------
Cash flows from investing activities:
Net purchase of property and equipment (262) (426) (564)
Capital contribution to subsidiaries --- --- (2,000)
Sale of subsidiary --- 100 ---
Acquisition of Donegal Financial 3,042 --- ---
Acquisition of Southern Heritage --- --- (18,028)
Other 38 (426) (5,613)
------ ------ ------
Net cash used in investing activities (3,266) (752) (26,205)
------ ------ ------
Cash flows from financing activities:
Cash dividends paid (3,127) (2,946) (2,664)
Issuance of common stock 2,757 2,514 2,481
Line of credit, net 3,000 (500) 27,000
------ ------ ------
Net cash provided by (used in) financing
activities 2,630 (932) 26,817
------ ------ ------
Net change in cash 2,010 (228) (131)
Cash beginning 371 599 730
------ ------ ------
Cash ending $2,381 $371 $599
====== ==== ====
-36-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
($ in thousands)
Years Ended December 31, 2000, 1999 and 1998
Amortization
of Deferred
Net Net Net Losses Policy Other Net
Earned Investment And Loss Acquisition Underwriting Premiums
Segment Premiums Income Expense Costs Expenses Written
------- ----------------------------------------------------------------------------------------
Year Ended
December 31, 2000
-----------------
Personal Lines $ 95,199 $ -- $ 66,751 $15,849 $ 14,340 $ 98,653
Commercial Lines 54,515 -- 36,391 9,076 8,212 59,551
Investments -- 15,992 -- -- -- --
-------- -------- -------- ------- -------- --------
$149,714 $ 15,992 $103,142 $24,925 $ 22,552 $158,204
======== ======== ======== ======= ======== ========
Year Ended
December 31, 1999
-----------------
Personal Lines $ 96,167 $ -- $ 67,582 $16,448 $ 19,801 $ 91,424
Commercial Lines 47,707 -- 31,623 8,160 8,234 50,432
Investments -- 13,224 -- -- -- --
-------- -------- -------- ------- -------- --------
$143,874 $ 13,224 $ 99,205 $24,608 $ 28,035 $141,856
======== ======== ======== ======= ======== ========
Year Ended
December 31, 1998
-----------------
Personal Lines $ 71,676 $ -- $ 49,141 $12,614 $ 14,052 $ 73,070
Commercial Lines 44,493 -- 24,026 6,876 7,660 45,084
Investments -- 11,998 -- -- -- --
-------- -------- -------- ------- -------- --------
$116,169 $ 11,998 $ 73,167 $19,490 $ 21,712 $118,154
======== ======== ======== ======= ======== ========
-37-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION, CONTINUED
($ in thousands)
At December 31,
--------------------------------------------------------------
Deferred Liability Other Policy
Policy For Losses Claims and
Acquisition And Loss Unearned Benefits
Segment Costs Expenses Premiums Payable
------- ------------ ---------- -------- ------------
2000
----
Personal Lines $ 6,533 $ 80,647 $ 60,329 $--
Commercial Lines 5,487 83,252 50,672 --
Investments -- -- -- --
-------- -------- -------- ----
$ 12,020 $163,899 $111,001 $--
======== ======== ======== ====
1999
----
Personal Lines $ 6,936 $ 79,085 $ 60,886 $--
Commercial Lines 4,267 70,894 36,771 --
Investments -- -- -- --
-------- -------- -------- ----
$ 11,203 $149,979 $ 97,657 $--
======== ======== ======== ====
-38-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE IV -- REINSURANCE
Ceded Assumed Percentage
Gross To Other from Other Net Assumed
Amount Companies Companies Amount To Net
----------- ----------- ------------ ------------ ----------
Year Ended
December 31, 2000
-----------------
Property and casualty premiums $93,302,656 $75,784,740 $132,195,646 $149,713,562 88%
=========== =========== ============ ============ ==
Year Ended
December 31, 1999
-----------------
Property and casualty premiums $91,996,926 $67,487,819 $119,364,863 $143,873,970 83%
=========== =========== ============ ============ ==
Year Ended
December 31, 1998
-----------------
Property and casualty premiums $61,173,134 $56,338,098 $111,333,956 $116,168,992 96%
=========== =========== ============ ============ ==
-39-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE VI -- SUPPLEMENTARY INSURANCE INFORMATION
CONCERNING PROPERTY AND CASUALTY SUBSIDIARIES
Discount,
Deferred Liability if any,
Policy For Losses Deducted
Acquisition And Loss From Unearned
Costs Expenses Reserves Premiums
----------- ------------ ------------ ------------
At December 31,
2000 $12,020,257 $163,899,270 $-- $111,000,905
=========== ============ === ============
1999 $11,203,302 $149,979,141 $-- $ 97,657,020
=========== ============ === ============
1998 $11,334,301 $141,409,008 $-- $ 94,722,785
=========== ============ === ============
(continued)
-40-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE VI - SUPPLEMENTARY INSURANCE INFORMATION
CONCERNING PROPERTY AND CASUALTY SUBSIDIARIES, CONTINUED
Years ended December 31, 2000, 1999 and 1998
Losses and Loss
Expenses Related to
-----------------------------------
Amortization
of Deferred Net
Net Policy Paid Losses Net
Earned Investment Current Prior Acquisition And Loss Premiums
Premiums Income Year Years Costs Expenses Written
------------ ----------- ------------ ----------- ----------- ----------- ------------
Year Ended
December 31, 2000 $149,713,562 $15,992,495 $102,222,144 $ 919,761 $24,925,000 $99,342,386 $158,204,697
============ =========== ============ =========== =========== =========== ============
Year Ended
December 31, 1999 $143,873,970 $13,223,537 $ 99,659,002 $ (454,000) $24,608,000 $95,574,426 $141,856,479
============ =========== ============ =========== =========== =========== ============
Year Ended
December 31, 1998 $116,168,992 $11,997,661 $ 75,463,085 $(2,296,000) $19,490,000 $71,744,736 $118,153,817
============ =========== ============ =========== =========== =========== ============
-41-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 28, 2001 By: /s/ Donald H. Nikolaus
------------------------------
Donald H. Nikolaus, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
s/Donald H. Nikolaus
- ------------------------------------ President and a Director March 28, 2001
Donald H. Nikolaus (principal executive officer)
s/Ralph G. Spontak
- ------------------------------------ Senior Vice President, Chief Financial March 28, 2001
Ralph G. Spontak Officer and Secretary (principal
financial and accounting officer)
s/Robert S. Bolinger
- --------------------------- Director March 28, 2001
Robert S. Bolinger
- ------------------------------------ Director March , 2001
Thomas J. Finley
s/Patricia A. Gilmartin
- --------------------------- Director March 28, 2001
Patricia A. Gilmartin
s/Philip H. Glatfelter
- --------------------------- Director March 28, 2001
Philip H. Glatfelter
s/C. Edwin Ireland
- ------------------------------------ Director March 28, 2001
C. Edwin Ireland
- ------------------------------------ Director March , 2001
R. Richard Sherbahn
-42-
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit No. Description of Exhibits Reference
----------- ----------------------- ---------
(3)(i) Certificate of Incorporation of Registrant, as amended (m)
(3)(ii) Amended and Restated By-laws of Registrant (a)
Management Contracts and Compensatory Plans or Arrangements
- -----------------------------------------------------------
(10)(A) Donegal Group Inc. Agency Stock Purchase Plan (k)
(10)(B) Donegal Group Inc. Amended and Restated 1996 Equity Incentive Plan (d)
(10)(C) Donegal Group Inc. Amended and Restated 1996 Equity Incentive Plan for
Directors (j)
(10)(D) Donegal Group Inc. Executive Restoration Plan (c)
(10)(E) Donegal Mutual Insurance Company 401(k) Plan (m)
(10)(F) Amendment No. 1 effective January 1, 2000 to Donegal Mutual Insurance Company
401(k) Plan (m)
(10)(G) Donegal Group Inc. 2001 Equity Incentive Plan for Employees Filed herewith
(10)(H) Donegal Group Inc. 2001 Equity Incentive Plan for Directors Filed herewith
(10)(I) Donegal Group Inc. 2001 Employee Stock Purchase Plan Filed herewith
(10)(J) Donegal Group Inc. 2001 Agency Stock Purchase Plan Filed herewith
Other Material Contracts
- ------------------------
(10)(K) Tax Sharing Agreement dated September 29, 1986 between Donegal Group Inc. and
Atlantic States Insurance Company (b)
(10)(L) Services Allocation Agreement dated September 29, 1986 between Donegal Mutual
Insurance Company, Donegal Group, Inc. and Atlantic States Insurance Company (b)
(10)(M) Proportional Reinsurance Agreement dated September 29, 1986 between Donegal
Mutual Insurance Company and Atlantic States Insurance Company (b)
(10)(N) Amendment dated October 1, 1988 to Proportional Reinsurance Agreement between
Donegal Mutual Insurance Company and Atlantic States Insurance Company (e)
-43-
Exhibit No. Description of Exhibits Reference
----------- ----------------------- ---------
(10)(O) Multi-Line Excess of Loss Reinsurance Agreement effective January 1, 1993
between Donegal Mutual Insurance Company, Southern Insurance Company of
Virginia, Atlantic States Insurance Company and Pioneer Mutual Insurance
Company, and Christiana General Insurance Corporation of New York, Cologne
Reinsurance Company of America, Continental Casualty Company, Employers
Reinsurance Corporation and Munich American Reinsurance Company (g)
(10)(P) Amendment dated July 16, 1992 to Proportional Reinsurance Agreement between
Donegal Mutual Insurance Company and Atlantic States Insurance Company (f)
(10)(Q) Amendment dated as of December 21, 1995 to Proportional Reinsurance Agreement
between Donegal Mutual Insurance Company and Atlantic States Insurance Company (h)
(10)(R) Stock Purchase Agreement dated as of December 21, 1995 between Donegal Mutual
Insurance Company and Donegal Group Inc. (h)
(10)(S) Donegal Group Inc. 1996 Employee Stock Purchase Plan (i)
(10)(T) Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal
Mutual Insurance Company and Pioneer Insurance Company (c)
(10)(U) Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal
Mutual Insurance Company and Delaware American Insurance Company (c)
(10)(V) Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal
Mutual Insurance Company and Southern Insurance Company of Virginia (c)
(10)(W) Reinsurance and Retrocession Agreement effective January 1, 2000 between
Donegal Mutual Insurance Company and Southern Heritage Insurance Company (m)
(10)(X) Property Catastrophe Excess of Loss Reinsurance Agreement effective
January 1, 2000 between Donegal Mutual Insurance Company and Southern Heritage
Insurance Company (m)
(10)(Y) Stock Purchase Agreement dated as of May 14, 1998 between Donegal Group Inc.
and Southern Heritage Limited Partnership (l)
(10)(Z) Amendment dated November 17, 1998 to Stock Purchase Agreement dated as of
May 14, 1998 between Donegal Group Inc. and Southern Heritage Limited
Partnership (l)
-44-
Exhibit No. Description of Exhibits Reference
----------- ----------------------- ---------
(10)(AA) Amended and Restated Credit Agreement dated as of July 27, 1998 among Donegal
Group Inc., the banks and other financial institutions from time to time
party thereto and Fleet National Bank, as Agent (l)
(10)(BB) First Amendment and Waiver to the Amended and Restated Credit Agreement dated
as of December 31, 1999 (m)
(10)(CC) Stock Purchase Agreement dated as of July 20, 2000 between Donegal Mutual
Insurance Company and Donegal Group Inc. Filed herewith
(10)(DD) Amendment dated as of April 20, 2000 to Proportional Reinsurance Agreement
between Donegal Mutual Insurance Company and Atlantic States Insurance Company (n)
(10)(EE) Lease Agreement dated as of September 1, 2000 between Donegal Mutual
Insurance Company and Province Bank FSB. Filed herewith
(10)(FF) Aggregate Excess of Loss Reinsurance Agreement dated as of January 1, 2001
between Donegal Mutual Insurance Company and Pioneer Insurance Company Filed herewith
(13) 2000 Annual Report to Stockholders (electronic filing contains only those
portions incorporated by reference into this Form 10-K Report) Filed herewith
(20) Proxy Statement relating to the Annual Meeting of
Stockholders to be held on April 19, 2001, provided,
however, that the Report of the Compensation Committee,
the Performance Graph and the Report of the Audit
Committee shall not be deemed filed as part of this Form
10-K Report (o)
(21) Subsidiaries of Registrant Filed herewith
(23) Consent of Independent Auditors Filed herewith
- ------------------
(a) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-Q Report for the quarter ended
September 30, 1998.
(b) Such exhibit is hereby incorporated by reference to the like-described
exhibits in Registrant's Form S-1 Registration Statement No. 33-8533
declared effective October 29, 1986.
(c) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1996.
-45-
(d) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1998.
(e) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1988.
(f) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1992.
(g) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-2 Registration Statement No. 33-67346
declared effective September 29, 1993.
(h) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated December 21, 1995.
(i) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-8 Registration Statement No. 333-1287 filed
February 29, 1996.
(j) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1997.
(k) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-2 Registration Statement No. 333-06787
declared effective August 1, 1996.
(l) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated November 17, 1998.
(m) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 10-K Report for the year ended December 31,
1999.
(n) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated June 19, 2000.
(o) Such exhibit is hereby incorporated by reference to the Registrant's
definitive proxy statement filed March 29, 2001.
-46-