FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT of 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________.
Commission file number 0-15341
-------
Donegal Group Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2424711
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1195 River Road, P.O. Box 302, Marietta, PA 17547-0302
(Address of principal executive offices) (Zip code)
(717) 426-1931
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x . No. .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 6,152,298 shares of
Class A Common Stock, $0.01 par value and 2,983,314 shares of Class B Common
Stock, $0.01 par value, outstanding on October 31, 2002.
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2002 2001
---- ----
Revenues:
- ---------
Net premiums earned $ 46,792,748 $ 42,598,703
Investment income, net of investment expenses 3,623,262 3,710,452
Net realized investment losses (201,190) (562,301)
Lease income 200,574 199,948
Service charge income 670,023 419,184
------------ ------------
Total revenues 51,085,417 46,365,986
------------ ------------
EXPENSES:
Net losses and loss expenses 32,423,893 $ 30,026,448
Amortization of deferred policy acquisition costs 7,365,000 6,997,000
Other underwriting expenses 6,511,832 6,944,584
Policy dividends 280,375 465,779
Interest 249,271 465,726
Other expenses 158,583 339,871
------------ ------------
Total expenses 46,988,954 45,239,408
------------ ------------
Income before income taxes 4,096,463 1,126,578
Income taxes 1,080,787 103,156
------------ ------------
Net income $ 3,015,676 $ 1,023,422
============ ============
Earnings per common share
Basic $ 0.33 $ 0.11
============ ============
Diluted $ 0.33 $ 0.11
============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2002 2001
---- ----
Net income $3,015,676 $1,023,422
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gain during the period,
net of income tax 1,846,413 2,172,740
Reclassification adjustment, net of income tax 132,785 371,119
---------- ----------
Other comprehensive income 1,979,198 2,543,859
---------- ----------
Comprehensive income $4,994,874 $3,567,281
========== ==========
See accompanying notes to consolidated financial statements.
2
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2002
ACCUMULATED
ADDITIONAL OTHER
PAID-IN COMPREHENSIVE
CLASS A SHARES CLASS B SHARES CLASS A AMOUNT CLASS B AMOUNT CAPITAL INCOME
-------------- -------------- -------------- -------------- -------- -------
Balance, December 31, 2001 6,097,214 3,021,965 $ 60,972 $ 30,220 $ 58,887,715 $ 2,861,765
Issuance of common stock 116,725 1,166 1,133,174
Net income
Cash dividends
Grant of stock options 26,657
Exercise of stock options 2,222 1,111 23 11 29,054
Other comprehensive income 2,316,718
--------- --------- -------- ----------- ------------ ------------
Balance, September 30, 2002 6,216,161 3,023,076 $ 62,161 $ 30,231 $ 60,076,600 $ 5,178,483
========= ========= ======== =========== ============ ============
TOTAL
RETAINED TREASURY STOCKHOLDERS'
EARNINGS STOCK EQUITY
-------- ------ ------
Balance, December 31, 2001 $ 59,979,425 $ (891,748) $ 120,928,349
Issuance of common stock 1,134,340
Net income 8,375,226 8,375,226
Cash dividends (1,755,129) (1,755,129)
Grant of stock options (26,657) --
Exercise of stock options 29,088
Other comprehensive income 2,316,718
------------ ------------- -------------
Balance, September 30, 2002 $ 66,572,865 $ (891,748) $ 131,028,592
============ ============= =============
See accompanying notes to consolidated financial statements.
3
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2002 2001
----- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,375,226 $ 6,675,286
------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 898,350 839,380
Realized investment loss 13,931 448,462
Changes in assets and liabilities:
Losses and loss expenses 17,204,081 15,139,625
Unearned premiums 9,392,067 17,250,969
Premiums receivable (3,173,917) (7,103,343)
Deferred policy acquisition costs (1,442,805) (1,555,147)
Deferred income taxes (781,528) (569,391)
Reinsurance receivable (5,450,622) (9,656,435)
Prepaid reinsurance premiums 1,050,029 (6,712,215)
Accrued investment income 272,591 311,166
Due to affiliate (1,508,039) (260,353)
Reinsurance balances payable 229,633 (360,339)
Current income taxes 887,019 353,445
Other, net (444,894) (116,544)
------------ ------------
Net adjustments 17,145,896 8,009,280
------------ ------------
Net cash provided by operating activities 25,521,122 14,684,566
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed maturities
Held to maturity (28,117,044) (36,895,097)
Available for sale (50,953,675) (53,380,298)
Purchase of equity securities, available for sale (11,251,602) (10,046,952)
Maturity of fixed maturities
Held to maturity 28,917,827 40,209,398
Available for sale 38,528,033 36,307,020
Sale of fixed maturities
Held to maturity 415,000 --
Available for sale 461,965 12,275,464
Sale of equity securities, available for sale 9,243,147 5,770,980
Net purchase of property and equipment (482,379) (140,233)
Net sale (purchase) of short-term investments (440,410) 2,630,069
------------ ------------
Net cash used in investing activities (13,679,138) (3,269,649)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (2,625,006) (2,526,762)
Issuance of common stock 1,163,428 1,157,497
Line of credit, net (7,800,000) (11,800,000)
------------ ------------
Net cash used in financing activities (9,261,578) (13,169,265)
------------ ------------
Net increase (decrease) in cash 2,580,406 (1,754,348)
Cash at beginning of period 4,075,288 5,182,988
------------ ------------
Cash at end of period $ 6,655,694 $ 3,428,640
============ ============
Cash paid during period - Interest $ 584,185 $ 2,426,292
Net cash paid during period - Taxes $ 3,390,000 $ 2,325,000
See accompanying notes to consolidated financial statements.
4
DONEGAL GROUP INC. AND SUBSIDIARIES
(Unaudited)
Summary Notes to Consolidated Financial Statements
1. ORGANIZATION
Donegal Group Inc. (the "Company") was organized as a regional insurance
holding company by Donegal Mutual Insurance Company (the "Mutual Company") on
August 26, 1986 and operates in the Mid-Atlantic and Southern states through its
wholly owned insurance subsidiaries, Atlantic States Insurance Company
("Atlantic States") and Southern Insurance Company of Virginia ("Southern")
(collectively, the "Insurance Subsidiaries"). The Company has three operating
segments: the investment function, the personal lines of insurance and the
commercial lines of insurance. Products offered in the personal lines of
insurance consist primarily of homeowners and private passenger automobile
policies. Products offered in the commercial lines of insurance consist
primarily of commercial automobile, commercial multiple peril and workers'
compensation policies. The Insurance Subsidiaries are subject to regulation by
Insurance Departments in those states in which they operate and undergo periodic
examinations by those departments. The Insurance Subsidiaries are also subject
to competition from other insurance companies in their operating areas. Atlantic
States participates in an inter-company pooling arrangement with the Mutual
Company and assumes 70% of the pooled business. At September 30, 2002, the
Mutual Company held 63% of the outstanding Class A and Class B common stock of
the Company.
Prior to 2002, Southern ceded 50% of its business to the Mutual Company.
On January 1, 2002, the Mutual Company and Southern terminated their quota share
agreement, under which Southern ceded 50% of its direct business, less
reinsurance, to the Mutual Company. As a result of this termination, the
Company's prepaid reinsurance premiums decreased $7,310,471, unearned premiums
decreased $5,117,330, and deferred policy acquisition costs increased $714,853.
The Mutual Company transferred $1,478,288 in cash to the Company related to this
termination. The Company did not recognize a gain or loss on this transaction.
During 2000, the Company acquired 45% of the outstanding stock of Donegal
Financial Services Corporation ("DFSC"), a bank holding company, for $3,042,000
in cash. The remaining 55% of the outstanding stock of DFSC is owned by the
Mutual Company.
The Company has streamlined its corporate structure by merging a number
of its subsidiaries. Delaware Atlantic Insurance Company ("Delaware"), Pioneer
Insurance Company, New York, ("Pioneer-New York") and Pioneer Insurance Company,
Ohio ("Pioneer-Ohio"), previously wholly owned subsidiaries, were merged into
Atlantic States on August 1, 2001, September 30, 2001 and May 8, 2002,
respectively. Southern Heritage Insurance Company ("Southern Heritage"),
previously a wholly owned subsidiary, was merged into Southern on April 30,
2002. The mergers were accounted for as a reorganization of entities under
common control as they were all within the consolidated group. The mergers had
no financial impact on the consolidated entity.
Southern has (and Delaware, Pioneer-Ohio, Southern Heritage and
Pioneer-New York had prior to their mergers) an agreement with the Mutual
Company under which it cedes, and then reassumes back, 100% of its business net
of reinsurance. The primary purpose of these agreements is to assist these
subsidiaries in maintaining the same A. M. Best rating (currently "A") as the
Mutual Company. These agreements do not transfer insurance risk. While these
subsidiaries ceded and reassumed amounts received from policyholders of
$36,796,527 and $31,932,359 and claims of $23,320,493 and $18,050,106 under
these agreements in the nine months ended September 30, 2002 and 2001,
respectively, the amounts are not reflected in the consolidated financial
statements. The aggregate liabilities ceded and reassumed under these agreements
were $43,325,319 and $44,321,246 at September 30, 2002 and December 31, 2001,
respectively.
2. BASIS OF PRESENTATION
The financial information for the interim periods included herein are
unaudited; however, such information reflects all adjustments, consisting only
of normal recurring adjustments, that, in the opinion of management, are
necessary to a fair presentation of the Company's financial position, results of
operations and cash flow for the interim periods included herein. The Company's
results of operations for the nine months ended September 30, 2002, are not
necessarily indicative of its results of operations for the twelve months ending
December 31, 2002.
5
These financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 2001.
3. Earnings Per Share
The computation of basic and diluted earnings per share is as follows:
Weighted
Average Earnings
Net Shares Per
Income Outstanding Share
------ ----------- --------
Three Months Ended September 30:
2002
Basic $3,015,676 9,098,935 $ .33
Effect of stock options --- 98,998 ---
----------- ----------- --------
Diluted $3,015,676 9,197,933 $ .33
=========== ========== ----
2001
Basic $1,023,422 8,963,207 $ .11
Effect of stock options --- 172,497 ---
--------------- ------------- -------
Diluted $1,023,422 9,135,704 $ .11
=========== ========== ----
Nine Months Ended September 30:
2002
Basic $8,375,226 9,063,109 $ .92
Effect of stock options --- 103,205 .01
------------ ---------- -----
Diluted $8,375,226 9,166,314 $ .91
============ ========== -----
2001
Basic $6,675,286 8,927,446 $ .75
Effect of stock options --- 1 46,295 .01
----------- ---------- -----
Diluted $6,675,286 9,073,741 $ .74
=========== ========== -----
The following options to purchase shares of common stock were not
included in the computation of diluted earnings per share because the exercise
price of the options was greater than the average market price during the
relevant period:
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Number of Options 941,501 1,042,338 941,501 1,042,338
======= ========= ======= =========
6
4. Segment Information
The Company evaluates the performance of the personal lines and
commercial lines based upon underwriting results as determined under statutory
accounting practices (SAP), which is used by management to measure performance
for the total business of the Company. Financial data by segment is as follows:
Three Months Ended September 30,
2002 2001
---- ----
($ in thousands)
Revenues:
Premiums earned:
Commercial lines $ 16,473 $ 16,078
Personal lines 30,319 26,521
---------- ----------
Total net premiums earned 46,792 42,599
---------- ----------
Net investment income 3,623 3,710
Realized investment loss (201) (562)
Other 871 619
---------- ----------
Total revenues $ 51,085 $ 46,366
========== ==========
Income before income taxes:
Underwriting income (loss)
Commercial lines $ 1,944 $ (113)
Personal lines (1,116) 2,394)
---------- ----------
SAP underwriting income (loss) 828 (2,507)
GAAP adjustments (616) 672
---------- ----------
GAAP underwriting income (loss) 212 (1,835)
Net investment income 3,623 3,710
Realized investment loss (201) (562)
Other 463 (186)
---------- ---------
Income before income taxes $ 4,097 $ 1,127
========== ==========
Nine Months Ended September 30,
2002 2001
---- ----
($ in thousands)
Revenues:
Premiums earned:
Commercial lines $ 49,245 $ 46,661
Personal lines 89,110 77,631
---------- ----------
Total net premiums earned 138,355 124,292
---------- ----------
Net investment income 11,064 1,988
Realized investment loss (14) (448)
Other 2,451 1,823
---------- ----------
Total revenues $ 151,856 $ 137,655
========== ==========
Income before income taxes:
Underwriting income (loss)
Commercial lines $ 4,548 $ (543)
Personal lines (5,289) (2,343)
---------- ----------
SAP underwriting loss (741) (2,886)
GAAP adjustments 479 1,567
---------- ----------
GAAP underwriting loss (262) (1,319)
Net investment income 11,064 11,988
Realized investment loss (14) (448)
Other 709 (1,452)
---------- ----------
Income before income taxes $ 11,497 $ 8,769
========== ==========
5. Investments
During the first quarter of 2002, the Company sold Halliburton Company
bonds that had been classified as held to maturity due to significant
deterioration in the issuer's credit worthiness. These bonds had an amortized
cost of $488,901, and the sale resulted in a realized loss of $73,901. There
were no other sales or transfers from the held to maturity portfolio.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS -THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED
TO THREE MONTHS ENDED SEPTEMBER 30, 2001
Total revenues for the three months ended September 30, 2002 were
$51,085,417, which were $4,719,431, or 10.2%, greater than the same period in
2001. Net premiums earned increased to $46,792,748, an increase of $4,194,045,
or 9.8%, over the third quarter of 2001. Direct premiums written of the combined
pool of Atlantic States and the Mutual Company increased $3,466,860, or 6.4%,
with Southern posting an increase of 0.4% in direct premiums written. The
Company reported a net realized investment loss of $201,190 in the third quarter
of 2002, compared to a loss of $562,301 for the same period of 2001. The
realized loss in 2002 included realized losses of $226,244 which resulted from
changes in the market value of securities that were determined to be other than
temporary. The realized loss in 2001 included realized losses of $604,235 which
resulted from changes in the market value of securities that were determined to
be other than temporary. Investment income was $3,623,262, a decrease of
$87,190, or 2.3%, from the third quarter of 2001. An increase in average
invested assets from $290.5 million in the third quarter of 2001 to $312.3
million in the third quarter of 2002 was more than offset by a decrease in the
annualized average return on investments from 5.1% in the third quarter of 2001
to 4.7% in the third quarter of 2002 accounting for the decrease in investment
income.
The GAAP combined ratio of insurance operations in the third quarter of
2002 was 99.5% compared to 104.3% for the same period in 2001. The GAAP combined
ratio is the sum of the ratios of incurred losses and loss adjusting expenses to
premiums earned (loss ratio), policyholders' dividends to premiums earned
(dividend ratio) and underwriting expenses to premiums earned (expense ratio).
The Company's loss ratio in the third quarter of 2002 was 69.3% compared to
70.5% in the third quarter of 2001. The Company's expense ratio for the third
quarter of 2002 was 29.6% compared to 32.7% for the third quarter of 2001. The
dividend ratio decreased to 0.6% for the third quarter of 2002 compared to 1.1%
in the third quarter of 2001 because of more stringent qualification standards.
Federal income taxes for the third quarter of 2002 represented 26.4% of
income before income taxes compared to 9.2% for the same period of 2001. The
increase in the effective tax rate was due to the poor underwriting results
during the third quarter of 2001 which resulted in tax-exempt investment income
representing a much larger percentage of net income than in the third quarter of
2002. These rates varied from the expected rate of 34% primarily due to the
effect of tax-exempt investment income.
RESULTS OF OPERATIONS -NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED
TO NINE MONTHS ENDED SEPTEMBER 30, 2001
Total revenues for the nine months ended September 30, 2002 were
$151,856,266, which were $14,201,285, or 10.3%, greater than the same period in
2001. Net premiums earned increased to $138,355,520, an increase of $14,063,925,
or 11.3%, over the first nine months of 2001. Direct premiums written of the
combined pool of Atlantic States and the Mutual Company increased $17,473,905,
or 11.2%. This increase was tempered somewhat by a 3.5% increase in the direct
premiums written of Southern. The Company reported a net realized investment
loss of $13,931 in the first nine months of 2002 compared to a loss of $448,462
for the same period of 2001. The realized loss in 2002 included realized losses
of $358,574 which resulted from changes in the market value of securities that
were determined to be other than temporary. The realized loss in 2001 included
realized losses of $1,067,970 which resulted from changes in the market value of
securities that were determined to be other than temporary. Investment income
for the third quarter of 2002 was $11,063,848, a decrease of $924,499, or 7.7%,
from the first nine months of 2001. An increase in average invested assets from
$296.9 million in the first nine months of 2001 to $310.0 million in the first
nine months of 2002 was more than offset by a decrease in the annualized average
return on investments from 5.3% in the first nine months of 2001 to 4.8% in the
first nine months of 2002 accounting for the decrease in investment income.
The GAAP combined ratio of insurance operations in the first nine months
of 2002 was 100.2% compared to 101.1% for the same period in 2001. The GAAP
combined ratio is the sum of the ratios of incurred losses and loss adjusting
expenses to premiums earned (loss ratio), policyholders' dividends to premiums
earned (dividend ratio) and underwriting expenses to premiums earned (expense
ratio). The Company's loss ratio in the first nine months of 2002 was 69.3%
compared to 67.7% in the first nine months of 2001. The increase in loss ratio
was due to higher losses in personal lines during the first quarter of 2002 and
storm related losses of $1.1 million in the second quarter of 2002 that were
somewhat offset by a lower loss ratio in commercial lines during the third
quarter. The Company's expense ratio for the first nine months of 2002 was
30.3%, compared to 32.4% for the first nine months of 2001. The dividend ratio
decreased to 0.6% for the first three quarters of 2002 from 1.0% in the first
three quarters of 2001.
9
Federal income taxes for the first nine months of 2002 represented 27.2%
of income before income taxes compared to 23.9% for the same period of 2001.
These rates varied from the expected rate of 34% primarily due to the effect of
tax-exempt investment income.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates sufficient funds from its operations and maintains
a high degree of liquidity in its investment portfolio. The primary source of
funds to meet the demands of claim settlements and operating expenses are
premium collections, investment income and maturing investments. The Company had
no significant commitments for capital expenditures as of September 30, 2002.
In investing funds made available from operations, the Company maintains
securities maturities consistent with its projected cash needs for the payment
of claims and expenses. The Company maintains a portion of its investment
portfolio in relatively short-term and highly liquid assets to ensure the
availability of funds.
As of September 30, 2002, under a credit agreement dated December 29,
1995, and amended as of July 27, 1998, with Fleet National Bank of Connecticut
("the Bank"), the Company had unsecured borrowings of $19.8 million. Per the
terms of the credit agreement, the Company may borrow up to $24 million at
interest rates equal to the Bank's then current prime rate or the then current
London interbank eurodollar bank rate plus 1.70%. At September 30, 2002, the
interest rate on the outstanding balances was 3.55% on outstanding eurodollar
balances of $19.8 million. In addition, the Company pays a non-use fee at a rate
of 3/10 of 1% per annum on the average daily unused portion of the Bank's
commitment. Each July 27th the credit line is reduced by $8 million and is
currently $24 million. Any outstanding loan in excess of the remaining credit
line, after such reduction, will then be payable.
The Company's principal source of cash with which to pay stockholder
dividends is dividends from Atlantic States and Southern. Atlantic States and
Southern are required by law to maintain certain minimum surplus on a statutory
basis, and are subject to regulations under which payment of dividends from
statutory surplus is restricted and may require prior approval of their
domiciliary insurance regulatory authorities. Atlantic States and Southern are
subject to Risk-Based Capital (RBC) requirements. At December 31, 2001, each
Atlantic States' and Southern's capital was substantially above the RBC
requirements. In 2002, amounts available for distribution as dividends to the
Company without prior approval of their domiciliary insurance regulatory
authorities were $9,164,937 from Atlantic States and $4,600,835 from Southern.
CREDIT RISK
The Company provides property and liability insurance coverages through
the independent agency systems located throughout its operating area. The
majority of this business is billed directly to the insured, although a portion
of the Company's commercial business is billed through its agents who are
extended credit in the normal course of business.
The Company's subsidiaries have reinsurance agreements in place with the
Mutual Company and with a number of other major unaffiliated authorized
reinsurers.
IMPACT OF INFLATION
Property and casualty insurance premium rates are established before the
amount of losses and loss settlement expenses, or the extent to which inflation
may impact such expenses, are known. Consequently, the Company attempts, in
establishing rates, to anticipate the potential impact of inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
SFAS No. 146 addresses the timing and amount of costs recognized as a result of
restructuring and similar activities. The Company will apply SFAF No. 146 to
activities initiated after December 31, 2002. The adoption of SFAS No. 146 is
not expected to have a material impact on the Company's consolidated statements
of income or balance sheet.
10
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's market risk generally represents the risk of gain or loss
that may result from the potential change in the fair value of the Company's
investment portfolio as a result of fluctuations in prices and interest rates
and, to a lesser extent, its debt obligations. The Company attempts to manage
its interest rate risk by maintaining an appropriate relationship between the
average duration of the investment portfolio and the approximate duration of its
liabilities, i.e., policy claims and debt obligations.
The Company has maintained approximately the same duration of its
investment portfolio to its liabilities from December 31, 2001 to September 30,
2002. In addition, the Company has maintained approximately the same investment
mix during this period.
There have been no material changes to the Company's quantitative or
qualitative market risk exposure from December 31, 2001 through September 30,
2002.
11
Item 4. Control and Procedures
Within 90 days prior to the date of filing of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including its Chief Executive Officer and its Chief
Financial Officer, of the design and operation of the Company's disclosure
controls and procedures. Based on this evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective for gathering, analyzing and disclosing
the information the Company is required to disclose in the reports it files
under the Securities Exchange Act of 1934, within the time periods specified in
the SEC's rules and forms. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date of this evaluation.
12
Part II. Other Information
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Description
Exhibit 99.1 Statement of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350 of
Title 18 of the United States Code
Exhibit 99.2 Statement of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 of
Title 18 of the United States Code
(b) Reports on Form 8-K:
None.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DONEGAL GROUP INC.
November , 2002 By:__________________________
Donald H. Nikolaus, President
and Chief Executive Officer
November , 2002 By:_____________________________________
Ralph G. Spontak, Senior Vice President,
Chief Financial Officer and Secretary
14
CERTIFICATION
I, Donald H. Nikolaus, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Donegal
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November , 2002
-------------------------------------
Donald H. Nikolaus
President and Chief Executive Officer
15
CERTIFICATION
I, Ralph G. Spontak, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Donegal
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date; and
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November , 2002
-------------------------
Ralph G. Spontak
Senior Vice President and
Chief Financial Officer
16