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, 2001
OR
[x] 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: (888) 877-0600
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.01 par value
------------------------------------
Class B Common Stock, $.01 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, 2002, 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
$27,175,970.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 6,031,892 shares of Class A
Common Stock and 2,981,870 shares of Class B Common Stock were outstanding on
March 15, 2002.
DOCUMENTS INCORPORATED BY REFERENCE:
i. Portions of the Registrant's annual report to stockholders for the
fiscal year ended December 31, 2001 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 18, 2002 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..............................................................................................30
Item 3. Legal Proceedings.......................................................................................30
Item 4. Submission of Matters to a Vote of Security Holders.....................................................31
Executive Officers of the Company.......................................................................31
PART II.................................................................................................................32
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...............................32
Item 6. Selected Financial Data.................................................................................32
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................................................32
Item 8. Financial Statements and Supplementary Data.............................................................32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................................................32
PART III................................................................................................................33
Item 10. Directors and Executive Officers of the Registrant......................................................33
Item 11. Executive Compensation..................................................................................33
Item 12. Security Ownership of Certain Beneficial Owners and Management..........................................33
Item 13. Certain Relationships and Related Transactions..........................................................33
PART IV.................................................................................................................34
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........................................34
-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 14 mid-Atlantic
and southeastern states. As used in this Report, "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"), Pioneer Insurance Company ("Pioneer Ohio") and Southern Heritage
Insurance Company ("Southern Heritage"). To reduce expenses and enhance
operating efficiencies, during 2001 two of DGI's former insurance company
subsidiaries, Delaware Atlantic Insurance Company ("Delaware Atlantic") and
Pioneer Insurance Company, a New York company ("Pioneer New York"), merged into
Atlantic States. Except as otherwise noted, all financial information included
in this Report for Atlantic States includes the financial information of those
former subsidiaries through the dates of the mergers.
Donegal Mutual Insurance Company (the "Mutual Company") currently owns
63.7% of the outstanding Class A Common Stock and 62.1% of the outstanding Class
B Common Stock of the 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 2001
- ---------------- -------- ----------- -------------
Southern Insurance Company of Virginia 1988 $ 1,128,843 $15,213,371
Delaware Atlantic Insurance Company(1) 1995 2,824,398 --
Pioneer Insurance Company (Ohio) 1997 4,499,273 4,941,980
Southern Heritage Insurance Company 1998 32,002,540 17,226,133
Pioneer Insurance Company (New York)(1) 2001 1,917,723 --
- ----------------
(1) Merged into Atlantic States in 2001.
-1-
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 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 2 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 2 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. On August 1,
2001, Delaware Atlantic merged into Atlantic States.
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. The Company plans to
merge Pioneer Ohio into Atlantic States in 2002 upon the receipt of regulatory
approval, which is expected prior to June 30, 2002.
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. The Company plans to merge Southern
Heritage into Southern upon the receipt of regulatory approval, which is
expected prior to June 30, 2002.
-2-
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 acquisition has been accounted for as a
reorganization of entities under common control, similar to a pooling of
interest, as both Pioneer New York and the Company are under the common
management of the Mutual Company. Accordingly, the Company's financial
statements have been restated to include Pioneer New York as a consolidated
subsidiary. On September 30, 2001, Pioneer New York merged into Atlantic States.
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. Province Bank opened for business in September 2000, and its
deposits are insured by the Savings Association Insurance Fund of the Federal
Deposit Insurance Corporation. Donegal Financial's capital stock is owned 55% by
the Mutual Company and 45% by the Company.
Effective as of the close of business on April 19, 2001, the Company:
(a) effected a one-for-three reverse stock split of its previously authorized
Common Stock and redesignated that Common Stock as Class B Common Stock; and (b)
declared a dividend of two shares of Class A Common Stock payable on each share
of Class B Common Stock then outstanding. As a result of the reverse stock split
and the stock dividend, each person who held shares of the Company's previously
authorized Common Stock as of the close of business on April 19, 2001 thereafter
continued to hold, exclusive of any fractional interest in a share of Class B
Common Stock, the same number of shares of the Company's capital stock,
two-thirds of which were shares of Class A Common Stock and one-third of which
were shares of Class B Common Stock. Except as otherwise required by law, each
share of Class A Common Stock is entitled one-tenth of a vote with respect to
each matter submitted to the stockholders of the Company for approval and each
share of Class B Common Stock is entitled to one vote with respect to each
matter submitted to the stockholders of the Company for approval. The Class A
Common Stock and the Class B Common Stock vote together as a single class unless
otherwise required by law. A slightly higher dividend is paid on the Class A
Common Stock than on the Class B Common Stock. All share information set forth
in this Report for periods after April 19, 2001 reflects these transactions.
(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.
-3-
(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. As of March 12, 2002, the
Mutual Company owned 63.5% of DGI's Class A Common Stock and 62.1% of DGI's
Class B Common Stock.
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, Southern, Southern
Heritage and Pioneer Ohio. Expenses are allocated to the Company, Southern,
Southern Heritage and Pioneer Ohio according to a time allocation and estimated
usage agreement, and to Atlantic States in 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
$29,298,569 in 2001.
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 $801,083 in 2001.
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 is included in the pooled business. Pursuant to
amendments to the pooling agreement since its commencement on 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, subject to approval by the Coordinating Committee
discussed below. 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'
-4-
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.
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 one of the Mutual Company's buildings 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 eight directors are directors of the Mutual Company and two 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. Under the Company's and the Mutual Company's
By-laws, any new agreement between the Company and the Mutual Company and any
proposed change in any existing agreement between the Company and the Mutual
Company must first be submitted for approval by the respective Boards of
Directors of the Company and the Mutual Company and, if approved, submitted to
the Coordinating Committee for approval. The proposed new agreement or change in
an existing agreement will receive Coordinating Committee approval only if both
of the Company's Coordinating Committee members conclude the new agreement or
change in an existing agreement is fair to the Company and its stockholders and
if both of the
-5-
Mutual Company's members conclude the agreement is fair and equitable to the
Mutual Company and its policyholders. The decisions of the Coordinating
Committee are binding on the Company and the Mutual Company. The purpose of this
provision is to protect the interests of the stockholders of the Company and the
interests of the policyholders of 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
that 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 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 incentive 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 underwriting
profitability.
o A goal of expanding operations in current and adjacent states.
o A goal of obtaining sufficient rate increases in both
commercial and personal lines to improve underwriting results
while maintaining the existing book of business and preserving
the Company's ability to write new business.
-6-
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, 2001, 2000 and 1999:
Year Ended December 31,
-----------------------------------------
2001 2000 1999
---- ---- ----
Net Premiums Written:
Commercial.................................................. 36.9% 37.2% 35.1%
Personal.................................................... 63.1 62.8 64.9
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.
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.
-7-
The following table sets forth the combined ratios of DGI, prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") 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 $1.6 million.
Year Ended December 31,
-----------------------------------------
2001 2000 1999
---- ---- ----
GAAP combined ratio.............................................. 103.8% 101.8% 106.5%
------ ------ ------
Statutory operating ratios:
Loss ratio.................................................. 70.5 68.8 68.8
Expense ratio............................................... 31.4 30.9 37.2
Dividend ratio.............................................. 1.0 0.9 0.9
------ ------ ------
Statutory combined ratio......................................... 102.9% 100.6% 106.9%
====== ====== ======
Industry statutory combined ratio(1)............................. 118.0% 110.5% 107.5%
====== ====== ======
- -------------
(1) Source: A.M. Best Company
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 2001, 2000 and 1999, the Company
incurred assessments totaling $1,286,578, $813,000 and $726,000, respectively,
from the Pennsylvania Insurance Guaranty Association relating to the
insolvencies of two medical malpractice insurers and Reliance Insurance Company.
-8-
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,
-------------------------------------------------------
2001 2000 1999
---- ---- ----
(dollars in thousands)
Net Premiums Written:
Commercial:
Automobile ......................................... $16,527 $15,112 $12,608
Workers' compensation .............................. 22,979 21,174 17,519
Commercial multi-peril ............................. 24,174 21,722 18,949
Other .............................................. 1,725 1,597 1,433
-------- -------- --------
Total commercial ............................... 65,405 59,605 50,509
-------- -------- --------
Personal:
Automobile ......................................... 74,396 65,528 61,894
Homeowners ......................................... 31,431 29,413 26,290
Other .............................................. 5,796 5,576 5,179
-------- -------- --------
Total personal ................................. 111,623 100,517 93,363
-------- -------- --------
Total business .......................................... $177,028 $160,122 $143,872
======== ======== ========
Statutory Combined Ratios:
Commercial:
Automobile ......................................... 108.9% 99.9% 113.8%
Workers' compensation .............................. 109.9 91.9 96.7
Commercial multi-peril ............................. 96.2 102.2 95.9
Other .............................................. 77.0 39.0 80.6
-------- -------- --------
Total commercial ............................... 103.7 96.2 100.0
-------- -------- --------
Personal:
Automobile ......................................... 104.5 100.3 106.8
Homeowners ......................................... 101.6 110.9 123.3
Other .............................................. 86.8 103.5 88.0
-------- -------- --------
Total personal ................................. 102.7 103.6 109.9
-------- -------- --------
Total business .......................................... 102.9% 100.6% 106.9%
========= ========= =========
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.
-9-
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.
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 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 its
subsidiaries and the Mutual Company, are marketed through approximately 1,500
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 Plans 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.
-10-
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. 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.
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 period in which the changes in estimates 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-
-11-
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.
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 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 $8,197,948,
$8,042,860 and $7,736,942 at December 31, 2001, 2000 and 1999, 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,
------------------------------
2001 2000 1999
---- ---- ----
(in thousands)
Gross liability for unpaid losses and loss expenses
at beginning of year ......................... $156,476 $144,180 $136,727
Less reinsurance recoverable ...................... 53,767 44,946 40,712
-------- -------- --------
Net liability for unpaid losses and loss expenses
at beginning of year ......................... 102,709 99,234 96,015
Provision for net losses and loss expenses for
claims incurred in the current year .......... 110,143 103,671 100,573
Change in provision for estimated net losses
and loss expenses for claims incurred in
prior years .................................. 8,035 712 (493)
-------- -------- ---------
Total incurred .................................... 118,178 104,383 100,080
-12-
Year Ended December 31,
------------------------------
2001 2000 1999
---- ---- ----
(in thousands)
Net losses and loss payments for claims
incurred during:
The current year .................................. 63,290 61,848 59,434
Prior years ....................................... 43,053 39,060 37,427
-------- -------- --------
Total paid ........................................ 106,343 100,908 96,861
Net liability for unpaid losses and loss expenses
at end of year ............................... 114,544 102,709 99,234
Plus reinsurance recoverable ...................... 65,296 53,767 44,946
-------- -------- --------
Gross liability for unpaid losses and loss expenses
at end of year ............................... $179,840 $156,476 $144,180
======== ======== ========
The following table sets forth the development of the liability for net
unpaid losses and loss expenses for DGI on a GAAP basis from 1991 to 2001, with
supplemental loss data for 2000 and 2001. Loss data in the table includes
business assumed from the Mutual Company as part of the pooling arrangement.
"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 1992 liability has developed an excess after
nine years, in that reestimated net losses and loss expenses are expected to be
$7.8 million less than the estimated liability initially established in 1992 of
$44.3 million.
The "Cumulative excess" shows the cumulative excess at December 31,
2001 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
1992 column indicates that as of
-13-
December 31, 2001 payments equal to $37.0 million of the currently reestimated
ultimate liability for net losses and loss expenses of $36.5 million had been
made.
During the past several years, the Company has experienced a period
during which redundancies in its loss and loss expense reserves have declined.
In the most recent two years, the Company has experienced deficiencies in these
reserves. These deficiencies were primarily related to the workers' compensation
and commercial automobile lines of business. During 2001, the Company addressed
the deficiencies in these two lines of business by strengthening both case basis
and bulk reserves.
-14-
Year Ended December 31
-----------------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
(in thousands)
Net liability at end of
year for unpaid losses
and loss expenses ......................... $36,194 $44,339 $52,790 $63,317 $75,372
Net liability
reestimated as of:
One year later ........................... 37,514 45,408 50,583 60,227 72,380
Two years later .......................... 37,765 42,752 48,132 56,656 70,451
Three years later ........................ 35,446 40,693 44,956 54,571 66,936
Four years later ......................... 33,931 38,375 42,157 51,825 64,356
Five years later ......................... 32,907 37,096 41,050 50,493 63,095
Six years later .......................... 32,234 36,682 40,572 49,593 62,323
Seven years later ........................ 31,976 36,730 39,991 49,504
Eight years later ........................ 31,685 36,437 40,113
Nine years later ......................... 31,543 36,515
Ten years later .......................... 31,549
Cumulative (excess) deficiency ............. $(4,645) $(7,824) $(12,677) $(13,813) $(13,049)
======= ======= ======== ======== ========
Cumulative amount of
liability paid through:
One year later ........................... $13,519 $16,579 $16,126 $19,401 $24,485
Two years later .......................... 20,942 24,546 25,393 30,354 37,981
Three years later ........................ 25,308 29,385 32,079 38,684 47,027
Four years later ......................... 27,826 32,925 36,726 43,655 53,276
Five years later ......................... 29,605 34,757 39,122 46,331 56,869
Six years later .......................... 30,719 35,739 40,440 47,802 58,286
Seven years later ........................ 31,173 36,518 40,903 48,520
Eight years later ........................ 31,412 36,809 41,152
Nine years later ......................... 31,585 37,000
Ten years later .......................... 31,737
[RESTUBBED]
Year Ended December 31
--------------------------------------------------------------------
1996 1997 1998 1999 2000 2001
-------- -------- -------- -------- -------- --------
(in thousands)
Net liability at end of
year for unpaid losses
and loss expenses ......................... $78,889 $80,256 $96,015 $99,234 $102,709 $114,544
Net liability
reestimated as of:
One year later ........................... 77,400 77,459 95,556 100,076 110,744
Two years later .......................... 73,438 76,613 95,315 103,943
Three years later ........................ 71,816 74,851 94,830
Four years later ......................... 69,378 73,456
Five years later ......................... 69,485
Six years later ..........................
Seven years later ........................
Eight years later ........................
Nine years later .........................
Ten years later ..........................
Cumulative (excess) deficiency ............. $(9,404) $(6,800) $(1,185) $4,709 $8,035
======= ======= ======= ====== ======
Cumulative amount of
liability paid through:
One year later ........................... $27,229 $27,803 $37,427 $39,060 $43,053
Two years later .......................... 41,532 46,954 57,347 60,622
Three years later ........................ 53,555 58,883 69,973
Four years later ......................... 59,995 65,898
Five years later ......................... 63,048
Six years later ..........................
Seven years later ........................
Eight years later ........................
Nine years later .........................
Ten years later ..........................
Year Ended December 31
--------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998 1999 2000 2001
--------- --------- --------- --------- --------- --------- --------- ---------
(in thousands)
Gross liability at end of year ........ $88,484 $108,118 $113,346 $115,801 $136,727 $144,180 $156,476 $179,840
Reinsurance recoverable ............... 25,167 32,746 34,457 35,545 40,712 44,946 53,767 65,296
Net liability at end of year .......... 63,317 75,372 78,889 80,256 96,015 99,234 102,709 114,544
Gross reestimated liability - latest... 65,646 84,074 101,365 106,188 129,473 153,953 166,312
Reestimated recoverable - latest ...... 16,142 21,751 31,880 32,732 34,643 50,010 55,568
Net reestimated liability - latest .... 49,504 62,323 69,485 73,456 94,830 103,943 110,744
Gross cumulative deficiency (excess)... (22,838) (24,044) (11,981) (9,613) (7,254) 9,773 9,836
-15-
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 ($300,000 for 2001), and "catastrophic
reinsurance," under which the reinsured recovers 95% of an accumulation of many
losses resulting from a single event, including natural disasters (for 2001,
$3,000,000 retention). DGI's principal reinsurance agreement in 2001, other than
that with the Mutual Company, was an excess of loss treaty in which the
reinsurers were Dorinco Reinsurance Company and Erie Insurance Group.
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. Atlantic States, Southern, Pioneer Ohio and
Southern Heritage each have a catastrophe reinsurance agreement with the Mutual
Company that limits the maximum liability under any one catastrophic occurrence
to $400,000, $300,000, $200,000 and $400,000, respectively, and $1,000,000 for a
catastrophe involving more than one of the companies. The Mutual Company and
Pioneer Ohio are parties to an excess of loss reinsurance agreement in which the
Mutual Company assumes up to $250,000 of losses in excess of $50,000. The Mutual
Company and Southern are parties to an excess of loss reinsurance agreement in
which the Mutual Company assumes up to $50,000 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. The Mutual Company and Southern
Heritage are parties to an excess of loss reinsurance agreement in which the
Mutual Company assumes up to $175,000 of losses in excess of $125,000. Southern,
Pioneer Ohio and Southern Heritage each have agreements with the Mutual Company,
under which they cede, and then reassume back, 100% of their business net of
reinsurance. The purpose of the agreements is to provide these subsidiaries with
the same A.M. Best rating (currently "A") as the Mutual Company, which these
subsidiaries could not achieve without these agreements in place.
-16-
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, 2001, all debt securities were rated
investment grade with the exception of one unrated obligation of $252,000, and
the investment portfolio did not contain any mortgage loans or any
non-performing assets.
-17-
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, 2001:
December 31, 2001
-------------------------
Rating(1) Amount Percent
- --------- ------ -------
(dollars in thousands)
U.S. Treasury and U.S. agency
securities(2) .............................. $116,185 44.85%
Aaa or AAA .................................... 54,497 21.04
Aa or AA ...................................... 46,480 17.94
A ............................................. 41,267 15.93
BBB ........................................... 361 .14
Not rated(3) .................................. 252 .10
-------- -------
Total .................................... $259,042 100.00%
======== ========
- ---------
(1) Ratings assigned by Moody's Investors Services, Inc. or Standard &
Poor's Corporation.
(2) Includes mortgage-backed securities of $23,400,708.
(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 30.9%, 33.0% and 36.4% of the total investment portfolio at
December 31, 2001, 2000 and 1999, respectively.
-18-
The following table shows the classification of the investments (at
carrying value) of DGI and its subsidiaries at December 31, 2001, 2000 and 1999.
December 31,
--------------------------------------------------------------------
2001 2000 1999
-------------------- ----------------- ------------------
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 ........... $23,809 7.9% $38,779 13.4% $38,976 14.5%
Canadian government
obligation ............. 499 0.2 499 0.2 498 0.2
Obligations of states and
political subdivisions . 24,982 8.3 66,831 23.1 67,824 25.3
Corporate securities .... 27,423 9.1 21,621 7.5 16,019 6.0
Mortgage-backed
securities ............. 8,610 2.9 15,452 5.3 16,322 6.1
-------- ----- ------- ----- -------- -----
Total held to
maturity ............... 85,323 28.4 143,182 49.5 139,639 52.1
-------- ----- ------- ----- -------- -----
Available for sale:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies ........... 68,975 23.0 67,901 23.5 62,444 23.3
Obligations of states and
political subdivisions . 55,147 18.3 18,256 6.3 20,408 7.6
Corporate securities .... 34,807 11.6 22,908 7.9 15,247 5.7
Mortgage-backed
securities ............. 14,790 4.9 5,546 1.9 4,401 1.6
-------- ----- ------- ----- -------- -----
Total available
for sale .............. 173,719 57.8 114,611 39.6 102,500 38.2
-------- ----- ------- ----- -------- -----
Total fixed
maturities ............ 259,042 86.2 257,793 89.1 242,139 90.3
Equity securities(2) .... 17,517 5.8 12,112 4.2 9,283 3.5
Short-term
investments(3) ........ 24,074 8.0 19,440 6.7 16,589 6.2
-------- ----- ------- ----- -------- -----
Total investments ....... $300,633 100.0% $289,345 100.0% $268,011 100.0%
======== ====== ======== ====== ======== ======
-19-
(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 3
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 $86,939,393
at December 31, 2001, $144,662,436 at December 31, 2000 and
$137,361,494 at December 31, 1999. The amortized cost of fixed
maturities available for sale was $170,269,584 at December 31, 2001,
$114,524,472 at December 31, 2000 and $105,955,784 at December 31,
1999.
(2) Equity securities are valued at fair value. Total cost of equity
securities was $16,630,618 at December 31, 2001, $12,500,558 at
December 31, 2000 and $9,067,428 at December 31, 1999.
(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,
2001, December 31, 2000 and December 31, 1999.
December 31,
---------------------------------------------------------------------------------------
2001 2000 1999
---------------------- ----------------------- ----------------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(dollars in thousands)
Due in(1):
One year or less.............. $37,120 13.1% $37,731 13.6% $35,606 13.8%
Over one year
through three years........ 44,845 15.8 35,426 12.8 28,201 10.9
Over three years
through five years......... 69,585 24.6 41,995 15.1 31,882 12.3
Over five years
through ten years.......... 96,642 34.1 112,396 40.6 105,533 40.8
Over ten years
through fifteen years 7,573 2.7 22,243 8.0 30,658 11.8
Over fifteen years............ 3,950 1.4 6,445 2.3 6,125 2.4
Mortgage-backed
securities................... 23,401 8.3 20,997 7.6 20,723 8.0
-------- ----- -------- ----- -------- ------
$283,116 100.0% $277,233 100.0% $258,728 100.0%
======== ====== ======== ====== ======== ======
- ----------------
-20-
(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 $23.4 million at December 31, 2001.
Included in these investments are collateralized mortgage obligations ("CMOs")
with a carrying value of $7.5 million at December 31, 2001. The Company has
attempted to reduce the prepayment risks associated with mortgage-backed
securities by investing approximately 99.9%, as of December 31, 2001, 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, 2001, 2000 and 1999 are shown in the following table:
Year Ended December 31,
-------------------------------------------------------
2001 2000 1999
---- ---- ----
(dollars in thousands)
Invested assets(1)................................ $294,989 $278,678 $264,759
Investment income(2).............................. 15,886 16,395 13,591
Average yield..................................... 5.3% 5.9% 5.1%
- ----------------
(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, Pioneer Ohio and Southern Heritage is "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 companies as determined by their publicly available
reports. Best's classifications are A++ and A+ (Superior), A and A- (Excellent),
B++ and B+
-21-
(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 relate
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 that 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, the
National Association of Insurance Commissioners (the "NAIC") has established 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, 2001, 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, Delaware,
Connecticut and New York), the Mutual Company (Pennsylvania, Ohio, Maryland, New
York, Virginia, Delaware and North Carolina), Southern (Virginia and
Pennsylvania), Pioneer Ohio (Ohio and Pennsylvania) and Southern Heritage
(Alabama, Arkansas, Georgia, Illinois, Louisiana, Mississippi, North Carolina,
South Carolina, Tennessee and Virginia) 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 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, Pioneer Ohio and Southern Heritage have made
-22-
accruals for their portion of assessments related to such insolvencies based
upon the most current information furnished by the guaranty associations. During
2001, 2000 and 1999, the Company incurred assessments totaling $1,286,578,
$813,000 and $726,000, respectively, from the Pennsylvania Insurance Guaranty
Association relating to the insolvencies of two medical malpractice insurers and
Reliance Insurance Company.
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 July 2001, the Pennsylvania
Insurance Department has approved the Mutual Company's ownership of up to 65% of
the outstanding Class A Common Stock and up to 100% of the outstanding Class B
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, 2001, amounts available for payment of dividends in 2001 without
the prior approval of the various insurance commissioners were $8,612,490 from
Atlantic States, $1,086,348 from Southern, $552,447 from Pioneer Ohio and
$3,514,487 from 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
-23-
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 as of
January 1, 2001 is as follows: Atlantic States - $6,168,742 increase; Southern
Heritage - $1,083,354 increase; Pioneer Ohio - $313,638 increase; and Southern -
$1,171,204 increase.
THE MUTUAL COMPANY
The Mutual Company, which was organized in 1889, has a Best rating of A
(Excellent). At December 31, 2001, the Mutual Company had admitted assets of
$179,847,955 and policyholders' surplus of $72,447,287. At December 31, 2001,
the Mutual Company had no debt and, of its total liabilities of $107,400,668,
reserves for net losses and loss expenses accounted for $53,372,948 and unearned
premiums accounted for $27,296,097. Of the Mutual Company's investment portfolio
of $107,762,981 at December 31, 2001, investment-grade bonds accounted for
$31,924,796 and mortgages accounted for $7,924,146. At December 31, 2001, the
Mutual Company owned 3,833,089 shares, or 63.7%, of the Company's Class A Common
Stock, which were carried on the Mutual Company's books at $39,825,804, and
1,852,088 shares, or 62.1%, of the Company's Class B Common Stock, which were
carried on the Mutual Company's books at $19,243,194. The foregoing financial
information is presented on the statutory basis of accounting.
EMPLOYEES
The Company has no employees. As of December 31, 2001, the Mutual
Company had 437 employees. The Mutual Company's employees provide a variety of
services to DGI, Atlantic States, Southern, Southern Heritage and Pioneer Ohio,
as well as to the Mutual Company.
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in or incorporated by reference in this
Report are forward-looking in nature. These statements can be identified by the
use of forward-looking words such as "believes," "expects," "may," "will,"
"should," "intends," "plans" or "anticipates," or the negative thereof or
comparable terminology, or by discussions of strategy. The Company's business
and operations are subject to a variety of risks and uncertainties and,
consequently, the Company's actual results may materially differ from those
projected by any forward-looking statements. Certain of these risks and
uncertainties are discussed below under "Risk Factors."
-24-
RISK FACTORS
THE CYCLICAL NATURE OF THE PROPERTY AND CASUALTY INSURANCE INDUSTRY MAY
REDUCE THE COMPANY'S REVENUES AND PROFIT MARGINS.
The property and casualty insurance industry is highly cyclical, and
individual lines of business experience their own cycles within the overall
industry cycle. Premium rate levels are related to the availability of insurance
coverage, which varies according to the level of surplus in the industry. The
level of surplus in the industry varies with returns on invested capital and
regulatory barriers to withdrawal of surplus. Increases in surplus have
generally been accompanied by increased price competition among property and
casualty insurers. If the Company finds it necessary to reduce premiums or limit
premium increases due to these competitive pressures on pricing, the Company may
experience a reduction in profit margins and revenues, an increase in its ratios
of claims and expenses to premiums and, therefore, lower profitability.
Volatile and unpredictable developments also offset significantly the
cyclical trends in the industry and the industry's profitability. These
developments include natural disasters (such as storms, earthquakes, hurricanes,
floods and fires), fluctuations in interest rates and other changes in the
investment environment that affect the market prices of the Company's
investments and the income from those investments, inflationary pressures that
affect the size of losses and judicial decisions that affect its liabilities.
The occurrence of these developments may adversely affect the Company's business
and financial condition.
THE NATURE OF THE INSURANCE INDUSTRY LIMITS THE COMPANY'S ABILITY TO
CHANGE PRICES TO REFLECT RISKS AND TO ESTIMATE THE COMPANY'S RESERVES
ACCURATELY.
One of the distinguishing features of the property and casualty
industry is that its products generally are priced before its costs are known.
The Company's products are priced in this manner because premium rates usually
are determined at the time the policy is issued and before losses are reported.
Changes in statutory and case law can also dramatically affect the liabilities
associated with known risks after the insurance policy is issued. The number of
competitors and the similarity of products offered, as well as regulatory
constraints, limit the Company's ability to increase prices in response to
declines in profitability. The Company's reported profits and losses are also
determined, in part, by the establishment and adjustment of reserves reflecting
estimates made by management as to the amount of losses and loss adjustment
expenses that will ultimately be incurred in the settlement of claims. The
Company's ultimate liability for all losses and loss adjustment expenses
reserved at any given time will likely be greater or less than these estimates,
and material shortfalls in the estimates may have a material adverse effect on
the Company in future periods.
-25-
THE COMPANY COMPETES WITH MANY INSURERS THAT ARE FINANCIALLY STRONGER
THAN THE COMPANY.
The property and casualty insurance industry is intensely competitive.
Competition is based on many factors, including the perceived financial strength
of the insurer, premiums charged, policy terms and conditions, policyholder
service, reputation and experience. The Company competes with many regional and
national property and casualty insurance companies, including direct sellers of
insurance products, insurers having their own agency organizations and other
insurers represented by independent agents. Many of these insurers are better
capitalized than the Company, have substantially greater financial, technical
and operating resources and have equal or higher ratings from A.M. Best Company.
The superior capitalization of many of the Company's competitors
enables them to withstand lower profit margins and, therefore, to market their
products more aggressively, to take advantage more quickly of new marketing
opportunities and offer lower premium rates. Moreover, if the Company's
competitors price their premiums more aggressively and the Company meets their
pricing, the Company's profit margins and revenues may be reduced and its ratios
of claims and expenses to premiums may increase.
The Company's competition may become increasingly better capitalized in
the future as the traditional barriers between insurance companies and banks and
other financial institutions erode and as the property and casualty industry
continues to consolidate. The Company's ability to compete against its larger,
better capitalized competitors depends largely on its ability to provide
superior policyholder service and to maintain its historically strong
relationships with independent insurance agents, on whom the Company is entirely
dependent to generate premium volume.
There is no assurance that the Company will maintain its current
competitive position in the markets in which it operates, or that it will be
able to expand its operations into new markets. If it fails to do so, its
business could be materially adversely affected.
THE COMPANY IS A REGIONAL INSURANCE COMPANY THAT OFFERS INSURANCE
PRODUCTS IN A LIMITED NUMBER OF STATES.
The Company is headquartered in Pennsylvania and engages in the
insurance business in approximately 14 Middle Atlantic and Southern states. In
2001, the majority of the Company's direct premiums written, including those of
the Mutual Company and DGI's insurance subsidiaries, were geographically
dispersed as follows: 63.0% in Pennsylvania, 14.3% in Virginia and 5.9% in
Maryland. Any single catastrophic occurrence, destructive weather pattern,
general economic trend or other condition disproportionately affecting losses or
business conditions in these states could adversely affect the Company's results
of operations, although the Company and the Mutual Company maintain reinsurance
against catastrophic losses in excess of $3,000,000 per occurrence and the
Company's insurance subsidiaries maintain various catastrophe reinsurance
agreements with the Mutual Company that limit the maximum liability under any
one catastrophe.
-26-
THE REINSURANCE AGREEMENTS ON WHICH THE COMPANY RELIES DO NOT RELIEVE
THE COMPANY FROM LIABILITY TO ITS POLICYHOLDERS.
The Company relies on reinsurance agreements to limit its maximum net
loss from large single risks or risks in concentrated areas, and to increase its
capacity to write insurance. Each reinsurance agreement satisfies all applicable
regulatory requirements. Reinsurance, however, does not relieve the Company from
liability to its policyholders. To the extent that a reinsurer may be unable to
pay losses for which it is liable under the terms of its reinsurance agreement
with the Company, the Company remains liable for such losses. However, in an
effort to reduce the risk of non-payment, the Company requires all of its
reinsurers to have an A.M. Best rating of A or better or, with respect to
foreign reinsurers, to have a financial condition that, in the opinion of the
Company's management, is equivalent to a company with at least an A rating. If
the Company's reinsurers incur losses from their reinsurance arrangements with
the Company, it is probable that the reinsurance premiums payable by the Company
in the future could increase.
THE COMPANY IS SUBJECT TO EXTENSIVE STATE INSURANCE REGULATION.
The Company is subject to the laws and regulations of the states in
which it conducts business. These laws and regulations address many aspects of
the Company's business and financial condition, including licensure, the payment
of dividends, the establishment of premium rates, the settlement of claims, the
transfer of control and the requirement that the Company participate in assigned
risk pools. Certain of the following laws and regulations could have a material
adverse effect on the Company's results of operations:
O state insurance regulations that require the Company to file
proposed premium rates in advance of premium rate increases;
O state insurance regulations that mandate required levels of
statutory surplus;
O private rating organization review of the Company's levels of
statutory surplus and claims-paying ability; and
O NAIC and state insurance department review of the Company's
risk-based capital levels.
Changes in the level of regulation of the insurance industry and laws
or regulations themselves or interpretations by regulatory authorities could
also have a material adverse effect on the Company's operations. Specific
regulatory developments that could have a material adverse effect on the
Company's operations include the potential repeal of the McCarran-Ferguson Act,
which exempts insurance companies from a variety of federal regulatory
requirements, possible rate rollback regulation and legislation to control
premiums, policy terminations and other policy terms.
-27-
THE MUTUAL COMPANY IS THE COMPANY'S LARGEST SHAREHOLDER AND PROVIDES IT
WITH FACILITIES AND SERVICES.
The Mutual Company currently owns approximately 63.7% of the Company's
outstanding Class A Common Stock and 62.1% of the Company's outstanding Class B
Common Stock. Accordingly, the Mutual Company controls the election of members
of the Company's Board of Directors. Although the Mutual Company could exercise
its control in ways that are contrary to the interests of the Company's
stockholders other than the Mutual Company, the Company and the Mutual Company
have established a Coordinating Committee consisting of two outside directors
from each company who do not also serve as directors of the other company. Under
the Company's and the Mutual Company's By-laws, any new agreement between the
Company and the Mutual Company and any proposed change in any existing agreement
between the Company and the Mutual Company must first be submitted for approval
by the respective Boards of Directors of the Company and the Mutual Company and,
if approved, submitted to the Coordinating Committee for approval. The proposed
new agreement or change in an existing agreement will receive Coordinating
Committee approval only if both of the Company's Coordinating Committee members
conclude the new agreement or change in an existing agreement is fair to the
Company and its stockholders and if both of the Mutual Company's members
conclude the agreement is fair and equitable to the Mutual Company and its
policyholders. The decisions of the Coordinating Committee are binding on the
Company and the Mutual Company. The purpose of this provision is to protect the
interests of the stockholders of the Company and the interests of the
policyholders of the Mutual Company.
The Company is dependent upon the Mutual Company for the retention of
agents and the underwriting of insurance, the servicing of policyholder claims
and all other aspects of the Company's operations. All of the Company's officers
are officers and employees of the Mutual Company. The Mutual Company also
provides all of the facilities and data processing and administrative services
required to conduct the Company's business, for which the Company pays a pro
rata portion of the cost.
BECAUSE THE COMPANY PARTICIPATES IN AN INSURANCE POOLING ARRANGEMENT
WITH THE MUTUAL COMPANY, THE COMPANY'S RESULTS OF OPERATIONS ARE DEPENDENT UPON
THE FINANCIAL SUCCESS OF THE MUTUAL COMPANY.
The Company's insurance subsidiary, Atlantic States, participates in an
intercompany pooling arrangement with the Mutual Company, under which the
parties share the premiums earned and underwriting results on substantially all
of the property and casualty insurance business written by both companies. Under
the terms of the intercompany pooling agreement, Atlantic States cedes all of
its insurance business to the Mutual Company and assumes from the Mutual Company
70% of the total pooled insurance business of the Mutual Company and Atlantic
States. 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 Company's ability to raise capital for Atlantic States.
-28-
Because of the pooled business the Company assumes, the Company's
insurance operations are interrelated with the insurance operations of the
Mutual Company and the Company's results of operations are dependent upon the
financial success of the Mutual Company. Although 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, if the Mutual Company
experiences unusually severe or frequent losses or does not adequately price its
premiums, the Company's results of operations could suffer. The Company's
results of operations also may suffer if the Mutual Company did not participate
in the pooling arrangement because the pool participants would then be limited
to policy exposures of a size commensurate with their own capital and surplus
instead of having at their disposal the capacity of the entire pool.
THE COMPANY'S BUSINESS DEPENDS IN PART ON THE MARKETING EFFORTS OF
INDEPENDENT INSURANCE AGENTS, AND IT IS POSSIBLE THAT THESE AGENTS MAY NOT
MARKET THE COMPANY'S PRODUCTS SUCCESSFULLY OR SELL THE COMPANY'S PRODUCTS WITHIN
THE GUIDELINES THE COMPANY SPECIFIES.
The Company markets and sells almost all of its insurance products
through independent, non-exclusive insurance agents. These agents are not
obligated to promote the Company's insurance products exclusively and they also
sell competitors' insurance products. The Company's business depends in part on
the marketing efforts of these agents, and the Company's must offer insurance
products and services that meet the requirements of these independent agencies.
If these agencies do not market the Company's products successfully or give
priority to other insurers, the Company's business may be adversely impacted.
The Company also grants certain agents the authority to bind insurance
without the Company's prior approval within underwriting and pricing limits that
the Company specifies. However, the Company generally reviews all coverages
placed by its agents and may cancel the coverage if it is inconsistent with the
Company's guidelines and permissible to cancel under applicable insurance
regulations. If the Company is unable to cancel the coverage placed by an agent
prior to a claim being placed by the insured, the Company's risk may be
increased and its profitability may suffer.
THE COMPANY'S ESTABLISHED RESERVES FOR LOSSES AND LOSS ADJUSTMENT
EXPENSES ARE BASED ON ESTIMATES, AND IT IS POSSIBLE THAT THE COMPANY'S ULTIMATE
LIABILITY WILL EXCEED THESE ESTIMATES.
The Company establishes reserves for losses and loss adjustment
expenses based on estimates of amounts needed to pay reported and unreported
claims and related loss adjustment expenses. These estimates are based on facts
and circumstances then known to the Company. Reserves are based on estimates of
future trends and claims severity, judicial theories of liability and other
factors.
-29-
The establishment of appropriate reserves is an inherently uncertain
process, and there can be no assurance that the ultimate liability will not
exceed the Company's loss and loss adjustment expense reserves and have an
adverse effect on the Company's results of operations and financial condition.
As is the case for most property and casualty insurance companies, the Company
has found it necessary in the past to revise estimated liabilities as reflected
in the Company's loss and loss adjustment expense reserves, and further
adjustments could be required in the future. However, the Company's management
believes that adequate provision has been made for the Company's loss and loss
adjustment expense reserves. This belief is based on the Company's internal
procedures, which analyze the Company'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.
THE COMPANY IS DEPENDENT ON DIVIDENDS FROM ITS SUBSIDIARIES FOR THE
PAYMENT OF ITS OPERATING EXPENSES, ITS DEBT SERVICE AND DIVIDENDS TO
STOCKHOLDERS.
As a holding company, the Company relies primarily on its subsidiaries
for dividends and other permitted payments to meet its obligations for corporate
expenses. Payment of dividends by the Company's subsidiaries is subject to
regulatory restrictions and depends on the surplus of the subsidiaries. From
time to time, the NAIC and various state insurance regulators consider modifying
the method of determining the amount of dividends that may be paid by an
insurance company without prior regulatory approval.
Item 2. Properties.
- ------ ----------
DGI and Atlantic States 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. Atlantic States has a facility of approximately 6,200
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 by the Mutual Company. The Mutual Company charges Province Bank 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.
-30-
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
No matter was submitted to a vote of holders of the Company's Class A
Common Stock and/or Class B Common Stock during the fourth quarter of 2001.
Executive Officers of the Company
- ---------------------------------
The following table sets forth information regarding the persons who
served as executive officers of DGI on March 15, 2002:
Name Age Position
---- --- --------
Donald H. Nikolaus 59 President and Chief Executive Officer since 1981
Ralph G. Spontak 49 Senior Vice President since 1991; Chief Financial Officer and Vice
President since 1983; Secretary since 1988
Cyril J. Greenya 57 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 49 Senior Vice President - Claims since 1997; Vice President - Claims for
five years prior thereto
Daniel J. Wagner 41 Treasurer since 1993; Controller for five years prior thereto
-31-
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
32 of the Company's Annual Report to Stockholders for the year ended December
31, 2001, which is included as Exhibit (13) to this Form 10-K Report. As of
March 15, 2002, the Company had approximately 586 holders of record of its Class
A Common Stock and 532 holders of record of its Class B Common Stock. The
Company declared dividends of $.40 per share on its Class A Common Stock and
$.36 per share on its Class B Common Stock in 2001 and $.36 per share on its
Common Stock in 2000.
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, 2001,
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 14 of the Company's Annual Report to Stockholders for the year ended
December 31, 2001, 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 15
through 31 of the Company's Annual Report to Stockholders for the year ended
December 31, 2001, 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.
-32-
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 10 of the Company's proxy statement
relating to the Company's annual meeting of stockholders to be held April 18,
2002. 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 18, 2002, 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 4 of the Company's proxy statement relating to the Company's annual
meeting of stockholders to be held April 18, 2002.
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
The response to this Item is incorporated by reference to pages 3
through 9 and page 15 of the Company's proxy statement relating to the Company's
annual meeting of stockholders to be held April 18, 2002.
-33-
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.............................................................. 31
Donegal Group Inc. and Subsidiaries:
Consolidated Balance Sheets as of
December 31, 2001 and 2000.............................................................. 15
Consolidated Statements of Income and
Comprehensive Income for the three years ended
December 31, 2001, 2000 and 1999........................................................ 16
Consolidated Statements of Stockholders'
Equity for the three years ended
December 31, 2001, 2000 and 1999........................................................ 17
Consolidated Statements of Cash Flows
for the three years ended
December 31, 2001, 2000 and 1999........................................................ 18
Notes to Consolidated Financial Statements.................................................. 19
(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................................ 40
Schedule II. Condensed Financial Information of Parent
Company......................................................... 41
Schedule III. Supplementary Insurance Information................................ 44
Schedule IV. Reinsurance........................................................ 46
Schedule VI. Supplemental Insurance Information Concerning
Property and Casualty Subsidiaries.............................. 47
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.
- -------------
* Refers to the respective page of Donegal Group Inc.'s 2001 Annual
Report to Stockholders. The Consolidated Financial Statements and Notes to
Consolidated Financial
-34-
Statements and Auditor's Report thereon on pages 15 through 31 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 (a)
(3)(ii) Amended and Restated By-laws of Registrant Filed herewith
Management Contracts and Compensatory Plans or Arrangements
-----------------------------------------------------------
(10)(A) Donegal Group Inc. Amended and Restated 1996 Equity Incentive Plan (b)
(10)(B) Donegal Group Inc. 2001 Equity Incentive Plan for Employees (c)
(10)(C) Donegal Group Inc. Amended and Restated 1996 Equity Incentive Plan for Directors (d)
(10)(D) Donegal Group Inc. 2001 Equity Incentive Plan for Directors (c)
(10)(E) Donegal Group Inc. 2001 Employee Stock Purchase Plan, as amended (e)
(10)(F) Donegal Group Inc. Amended and Restated 2001 Agency Stock Purchase Plan (f)
(10)(G) Donegal Mutual Insurance Company 401(k) Plan (g)
(10)(H) Amendment No. 1 effective January 1, 2000 to Donegal Mutual Insurance Company
401(k) Plan (g)
(10)(I) Amendment No. 2 effective January 6, 2000 to Donegal Mutual Insurance Company Filed herewith
401(k) Plan
(10)(J) Amendment No. 3 effective July 23, 2001 to Donegal Mutual Insurance Company 401(k) Filed herewith
Plan
-35-
Exhibit No. Description of Exhibits Reference
----------- ----------------------- ---------
(10)(K) Amendment No. 4 effective January 1, 2002 to Donegal Mutual Insurance Company Filed herewith
401(k) Plan
(10)(L) Amendment No. 5 effective December 31, 2001 to Donegal Mutual Insurance Company Filed herewith
401(k) Plan
(10)(M) Donegal Mutual Insurance Company Executive Restoration Plan (h)
Other Material Contracts
------------------------
(10)(N) Tax Sharing Agreement dated September 29, 1986 between Donegal Group Inc. and
Atlantic States Insurance Company (i)
(10)(O) Services Allocation Agreement dated September 29, 1986 between Donegal Mutual
Insurance Company, Donegal Group Inc. and Atlantic States Insurance Company (i)
(10)(P) Proportional Reinsurance Agreement dated September 29, 1986 between Donegal Mutual
Insurance Company and Atlantic States Insurance Company (i)
(10)(Q) Amendment dated October 1, 1988 to Proportional Reinsurance Agreement between
Donegal Mutual Insurance Company and Atlantic States Insurance Company (j)
(10)(R) 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 (k)
(10)(S) Amendment dated July 16, 1992 to Proportional Reinsurance Agreement between Donegal
Mutual Insurance Company and Atlantic States Insurance Company (l)
(10)(T) Amendment dated as of December 21, 1995 to Proportional Reinsurance Agreement
between Donegal Mutual Insurance Company and Atlantic States Insurance Company (m)
-36-
Exhibit No. Description of Exhibits Reference
----------- ----------------------- ---------
(10)(U) Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal Mutual
Insurance Company and Pioneer Insurance Company (h)
(10)(V) Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal Mutual
Insurance Company and Southern Insurance Company of Virginia (h)
(10)(W) Reinsurance and Retrocession Agreement effective January 1, 2000 between Donegal
Mutual Insurance Company and Southern Heritage Insurance Company (g)
(10)(X) Property and Catastrophe Excess of Loss Reinsurance Agreement effective January 1,
2000 between Donegal Mutual Insurance Company and Southern Heritage Insurance
Company (g)
(10)(Y) 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 (n)
(10)(Z) First Amendment and Waiver to the Amended and Restated Credit Agreement dated as
of December 31, 1999 (g)
(10)(AA) Amendment dated as of April 20, 2000 to Proportional Reinsurance Agreement between
Donegal Mutual Insurance Company and Atlantic States Insurance Company (o)
(10)(BB) Lease Agreement dated as of September 1, 2000 between Donegal Mutual Insurance
Company and Province Bank FSB (c)
(10)(CC) Aggregate Excess of Loss Reinsurance Agreement dated as of January 1, 2001 between
Donegal Mutual Insurance Company and Pioneer Insurance Company (c)
(13) 2001 Annual Report to Stockholders (electronic filing contains only those portions Filed herewith
incorporated by reference into this Form 10-K Report)
-37-
Exhibit No. Description of Exhibits Reference
----------- ----------------------- ---------
(20) Proxy Statement relating to the Annual Meeting of Stockholders to be held on
April 18, 2002, 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 (p)
(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 S-3 Registration Statement No. 333-59828
filed April 30, 2001.
(b) 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.
(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, 2000.
(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, 1997.
(e) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-8 Registration Statement No. 333-62974
filed June 14, 2001.
(f) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-2 Registration Statement No. 333-63102
declared effective February 8, 2002.
(g) 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.
(h) 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.
-38-
(i) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-1 Registration Statement No. 33-8533
declared effective October 29, 1986.
(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, 1988.
(k) 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.
(l) 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.
(m) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated December 21, 1995.
(n) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated November 17, 1998.
(o) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated May 31, 2000.
(p) Such exhibit is hereby incorporated by reference to the Registrant's
definitive proxy statement filed March 22, 2002.
(b) Reports on Form 8-K:
None.
-39-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
-----------------------------------------
($ in thousands)
December 31, 2001
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 subdivisions $ 48,791 $ 49,736 $ 48,791
Canadian government obligation 499 535 499
All other corporate bonds 27,423 27,962 27,423
Mortgage-backed securities 8,610 8,706 8,610
------- ------- -------
Total fixed maturities
held to maturity 85,323 86,939 85,323
------- ------- -------
Available for sale:
United States government and
Governmental agencies and
authorities including obligations
of states and political subdivisions 121,432 124,122 124,122
All other corporate bonds 34,094 34,807 34,807
Mortgage-backed securities 14,744 14,790 14,790
------- ------- -------
Total fixed maturities
available for sale 170,270 173,719 173,719
------- ------- -------
Total fixed maturities 255,593 260,658 259,042
------- ------- -------
Equity Securities:
Preferred stocks
Public utilities 227 256 256
Banks 7,201 7,222 7,222
Industrial and miscellaneous 1,677 1,722 1,722
------- ------- -------
Total preferred stocks 9,105 9,200 9,200
------- ------- -------
Common stocks
Banks and insurance companies 3,978 4,822 4,822
Industrial and miscellaneous 3,548 3,495 3,495
------- ------- -------
Total common stocks 7,526 8,317 8,317
------- ------- -------
Total equity securities 16,631 17,517 17,517
------- ------- -------
Short-term investments 24,074 24,074 24,074
------- ------- -------
Total investments $296,298 $302,249 $300,633
======== ======== ========
-40-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
---------------------------------------------------------------
Condensed Balance Sheets
($ in thousands)
December 31, 2001 and 2000
ASSETS
2001 2000
-------- --------
Investment in subsidiaries (equity method) $152,089 $155,600
Cash 403 2,381
Property and equipment 1,623 1,997
Other 264 715
-------- --------
Total assets $154,379 $160,693
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
2001 2000
-------- --------
Cash dividends declared to stockholders $ 870 $ 797
Line of credit 27,600 40,000
Due to affiliate 4,441 4,441
Other 540 1,325
-------- --------
Total liabilities 33,451 46,563
-------- --------
Stockholders' equity 120,928 114,130
-------- --------
Total liabilities and stockholders' equity $154,379 $160,693
======== ========
-41-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
---------------------------------------------------------------
(Continued)
Condensed Statements of Income
($ in thousands)
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
------ ------ ------
Revenues
Dividends-subsidiary $14,419 $3,900 $820
Other 824 866 865
------- ------ -----
Total revenues 15,243 4,766 1,685
Expenses
Operating expenses 1,761 1,165 938
Interest 2,288 3,304 2,463
----- ----- -----
Total expenses 4,049 4,469 3,401
----- ----- -----
Income (loss) before income
tax benefit and equity in
undistributed net income of
subsidiaries 11,194 297 (1,716)
Income tax benefit (1,067) (1,226) (807)
------- ------- -----
Income (loss) before equity in
undistributed net income
(loss) of subsidiaries 12,261 1,523 (909)
------ ----- -----
Equity in undistributed net
income (loss) of subsidiaries (6,443) 7,314 7,704
------- ----- -----
Net income $5,818 $8,837 $6,795
====== ====== ======
-42-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED INFORMATION OF PARENT COMPANY
-----------------------------------------------------
Condensed Statements of Cash Flows
($ in thousands)
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net income $5,818 $8,837 $6,795
------ ------ ------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed net (income) loss of
subsidiaries 6,443 (7,314) (7,704)
Other 252 1,123 2,365
------ ------ ------
Net adjustments 6,695 (6,191) (5,339)
------ ------- -------
Net cash provided by operating activities 12,513 2,646 1,456
------ ------ ------
Cash flows from investing activities:
Net purchase of property and equipment (122) (262) (426)
Sale of subsidiary -- -- 100
Investment in Donegal Financial -- (3,042) --
Other 38 38 (426)
------ ------ -------
Net cash used in investing activities (84) (3,266) (752)
------- ------- -------
Cash flows from financing activities:
Cash dividends paid (3,394) (3,127) (2,946)
Issuance of common stock 1,387 2,757 2,514
Line of credit, net (12,400) 3,000 (500)
-------- ------ -------
Net cash provided by (used in) financing
activities (14,407) 2,630 (932)
-------- ------ -------
Net change in cash (1,978) 2,010 (228)
Cash beginning 2,381 371 599
------ ------ ------
Cash ending $403 $2,381 $371
====== ====== ======
-43-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
--------------------------------------------------
($ in thousands)
Years Ended December 31, 2001, 2000 and 1999
Amortization
Net Net Net Losses of Deferred Other Net
Earned Investment And Loss Policy Underwriting Premiums
Segment Premiums Income Expense Acquisition Costs Expenses Written
------- -------- -------- -------- ----------------- ----------- --------
Year Ended
December 31, 2001
- -----------------
Personal lines $104,893 $ --- $72,534 $17,002 $16,881 $111,623
Commercial lines 62,877 --- 45,644 10,192 10,119 65,405
Investments --- 15,886 --- --- --- ---
-------- ------- -------- ------- ------- --------
$167,770 $15,886 $118,178 $27,194 $27,000 $177,028
======== ======= ======== ======= ======= ========
Year Ended
December 31, 2000
- -----------------
Personal lines $97,065 $ --- $68,003 $16,206 $14,950 $100,517
Commercial lines 54,581 --- 36,380 9,113 8,406 59,605
Investments --- 16,395 --- --- --- ---
-------- ------- -------- ------- ------- --------
$151,646 $16,395 $104,383 $25,319 $23,356 $160,122
======== ======= ======== ======= ======= ========
Year Ended
December 31, 1999
- -----------------
Personal lines $97,713 $ --- $68,400 $16,741 $19,237 $93,363
Commercial lines 47,804 --- 31,681 8,190 9,412 50,509
Investments --- 13,591 --- --- --- ---
-------- ------- -------- ------- ------- --------
$145,517 $13,591 $100,081 $24,931 $28,649 $143,872
======== ======= ======== ======= ======= ========
-44-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION, CONTINUED
-------------------------------------------------------------
($ in thousands)
At December 31,
---------------------------------------------------------------------------------------
Deferred Liability Other Policy
Policy For Losses Claims and
Acquisition And Loss Unearned Benefits
Segment Costs Expenses Premiums Payable
------- ----------- -------- -------- -----------
2001
----
Personal lines $8,394 $84,726 $70,388 $ --
Commercial lines 5,210 95,114 43,691 --
Investments -- -- -- --
------- -------- -------- ----
$13,604 $179,840 $114,079 $ --
======= ======== ======== ====
2000
----
Personal lines $6,759 $77,546 $54,992 $ --
Commercial lines 5,525 78,930 44,948 --
Investments -- -- -- --
------- -------- ------- ----
$12,284 $156,476 $99,940 $ --
======= ======== ======= ====
-45-
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, 2001
-----------------
Property and casualty premiums $105,214,059 $61,249,516 $123,805,311 $167,769,854 74%
============ =========== ============ ============ ==
Year Ended
December 31, 2000
-----------------
Property and casualty premiums $95,671,588 $52,375,211 $108,349,822 $151,646,199 71%
=========== =========== ============ ============ ==
Year Ended
December 31, 1999
-----------------
Property and casualty premiums $93,399,834 $46,837,108 $98,954,731 $145,517,457 68%
=========== =========== =========== ============ ==
-46-
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,
2001 $13,604,215 $179,839,905 $-- $114,079,264
=========== ============ === ============
2000 $12,284,214 $156,476,124 $-- $99,940,381
=========== ============ === ===========
1999 $11,445,572 $144,180,006 $-- $88,307,928
=========== ============ === ===========
(continued)
-47-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE VI - SUPPLEMENTARY INSURANCE INFORMATION
CONCERNING PROPERTY AND CASUALTY SUBSIDIARIES, CONTINUED
Years ended December 31, 2001, 2000 and 1999
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, 2001 $167,769,854 $15,885,544 $110,142,467 $8,035,082 $27,194,000 $106,342,848 $177,027,654
============ =========== ============ ========== =========== ============ ============
Year Ended
December 31, 2000 $151,646,199 $16,394,747 $103,671,401 $711,775 $25,319,000 $100,907,860 $160,122,420
============ =========== ============ ======== =========== ============ ============
Year Ended
December 31, 1999 $145,517,457 $13,590,695 $100,573,192 $(492,576) $24,931,000 $96,861,295 $143,872,389
============ =========== ============ ========= =========== =========== ============
-48-
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, 2002 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, 2002
- ---------------------------- (principal executive officer)
Donald H. Nikolaus
/s/Ralph G. Spontak Senior Vice President, Chief March 28, 2002
- --------------------------- Financial Officer and
Ralph G. Spontak Secretary (principal financial
and accounting officer)
/s/Robert S. Bolinger Director March 28, 2002
- ---------------------------
Robert S. Bolinger
/s/Thomas J. Finley Director March 28, 2002
- ---------------------------
Thomas J. Finley
/s/Patricia A. Gilmartin Director March 28, 2002
- ---------------------------
Patricia A. Gilmartin
/s/Philip H. Glatfelter Director March 28, 2002
- ---------------------------
Philip H. Glatfelter
/s/John J. Lyons Director March 28, 2002
- ---------------------------
John J. Lyons
/s/C. Edwin Ireland Director March 28, 2002
- ---------------------------
C. Edwin Ireland
/s/R. Richard Sherbahn Director March 28, 2002
- ---------------------------
R. Richard Sherbahn
-49-
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 (a)
(3)(ii) Amended and Restated By-laws of Registrant Filed herewith
Management Contracts and Compensatory Plans or Arrangements
-----------------------------------------------------------
(10)(A) Donegal Group Inc. Amended and Restated 1996 Equity Incentive Plan (b)
(10)(B) Donegal Group Inc. 2001 Equity Incentive Plan for Employees (c)
(10)(C) Donegal Group Inc. Amended and Restated 1996 Equity Incentive Plan for Directors (d)
(10)(D) Donegal Group Inc. 2001 Equity Incentive Plan for Directors (c)
(10)(E) Donegal Group Inc. 2001 Employee Stock Purchase Plan, as amended (e)
(10)(F) Donegal Group Inc. Amended and Restated 2001 Agency Stock Purchase Plan (f)
(10)(G) Donegal Mutual Insurance Company 401(k) Plan (g)
(10)(H) Amendment No. 1 effective January 1, 2000 to Donegal Mutual Insurance Company (g)
401(k) Plan
(10)(I) Amendment No. 2 effective January 6, 2000 to Donegal Mutual Insurance Company Filed herewith
401(k) Plan
(10)(J) Amendment No. 3 effective July 23, 2001 to Donegal Mutual Insurance Company 401(k) Filed herewith
Plan
(10)(K) Amendment No. 4 effective January 1, 2002 to Donegal Mutual Insurance Company Filed herewith
401(k) Plan
(10)(L) Amendment No. 5 effective December 31, 2001 to Donegal Mutual Insurance Company Filed herewith
401(k) Plan
-50-
Exhibit No. Description of Exhibits Reference
----------- ----------------------- ---------
(10)(M) Donegal Mutual Insurance Company Executive Restoration Plan (h)
Other Material Contracts
------------------------
(10)(N) Tax Sharing Agreement dated September 29, 1986 between Donegal Group Inc. and
Atlantic States Insurance Company (i)
(10)(O) Services Allocation Agreement dated September 29, 1986 between Donegal Mutual
Insurance Company, Donegal Group Inc. and Atlantic States Insurance Company (i)
(10)(P) Proportional Reinsurance Agreement dated September 29, 1986 between Donegal Mutual
Insurance Company and Atlantic States Insurance Company (i)
(10)(Q) Amendment dated October 1, 1988 to Proportional Reinsurance Agreement between
Donegal Mutual Insurance Company and Atlantic States Insurance Company (j)
(10)(R) 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 (k)
(10)(S) Amendment dated July 16, 1992 to Proportional Reinsurance Agreement between Donegal
Mutual Insurance Company and Atlantic States Insurance Company (l)
(10)(T) Amendment dated as of December 21, 1995 to Proportional Reinsurance Agreement
between Donegal Mutual Insurance Company and Atlantic States Insurance Company (m)
(10)(U) Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal Mutual
Insurance Company and Pioneer Insurance Company (h)
-51-
Exhibit No. Description of Exhibits Reference
----------- ----------------------- ---------
(10)(V) Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal Mutual
Insurance Company and Southern Insurance Company of Virginia (h)
(10)(W) Reinsurance and Retrocession Agreement effective January 1, 2000 between Donegal
Mutual Insurance Company and Southern Heritage Insurance Company (g)
(10)(X) Property and Catastrophe Excess of Loss Reinsurance Agreement effective January 1,
2000 between Donegal Mutual Insurance Company and Southern Heritage Insurance
Company (g)
(10)(Y) 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 (n)
(10)(Z) First Amendment and Waiver to the Amended and Restated Credit Agreement dated as
of December 31, 1999 (g)
(10)(AA) Amendment dated as of April 20, 2000 to Proportional Reinsurance Agreement between
Donegal Mutual Insurance Company and Atlantic States Insurance Company (o)
(10)(BB) Lease Agreement dated as of September 1, 2000 between Donegal Mutual Insurance
Company and Province Bank FSB (c)
(10)(CC) Aggregate Excess of Loss Reinsurance Agreement dated as of January 1, 2001 between
Donegal Mutual Insurance Company and Pioneer Insurance Company (c)
(13) 2001 Annual Report to Stockholders (electronic filing contains only those portions Filed herewith
incorporated by reference into this Form 10-K Report)
(20) Proxy Statement relating to the Annual Meeting of Stockholders to be held
on April 18, 2002, 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 (p)
-52-
Exhibit No. Description of Exhibits Reference
----------- ----------------------- ---------
(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 S-3 Registration Statement No. 333-59828
filed April 30, 2001.
(b) 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.
(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, 2000.
(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, 1997.
(e) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-8 Registration Statement No. 333-62974
filed June 14, 2001.
(f) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-2 Registration Statement No. 333-63102
declared effective February 8, 2002.
(g) 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.
(h) 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.
(i) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form S-1 Registration Statement No. 33-8533
declared effective October 29, 1986.
(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, 1988.
-53-
(k) 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.
(l) 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.
(m) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated December 21, 1995.
(n) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated November 17, 1998.
(o) Such exhibit is hereby incorporated by reference to the like-described
exhibit in Registrant's Form 8-K Report dated May 31, 2000.
(p) Such exhibit is hereby incorporated by reference to the Registrant's
definitive proxy statement filed March 22, 2002.
-54-