Attached files
| file | filename |
|---|---|
| 8-K/A - FORM 8-K/A - DONEGAL GROUP INC | w81666e8vkza.htm |
| EX-99.3 - EX-99.3 - DONEGAL GROUP INC | w81666exv99w3.htm |
| EX-99.4 - EX-99.4 - DONEGAL GROUP INC | w81666exv99w4.htm |
EXHIBIT 99.5
SELECTED CONSOLIDATED UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following tables show information about DGI’s consolidated financial condition and results
of operations, including per share data, after giving effect to the acquisition by DGI of Michigan
Insurance Company, or MICO. The tables set forth the information as if the acquisition had become
effective on January 1, 2009. As a result, the pro forma condensed consolidated balance sheet as
September 30, 2010 indicates the estimated impact of the acquisition 21 months after the effective
date of the acquisition had DGI included MICO’s financial information and results during that
period in its consolidated financial statements. We call this information pro forma financial
information in the 8-K/A report.
The pro forma financial information includes adjustments to record the assets and liabilities
of MICO at their estimated fair values as of January 1, 2009. DGI will determine fair value
adjustments as of the acquisition effective date of December 1, 2010. The final fair value
adjustments could differ significantly from these estimates. DGI’s financial information for the
interim period ended September 30, 2010 is unaudited. You should read the pro forma financial
information in conjunction with the historical financial statements, including the notes thereto,
of DGI that DGI has filed with the Securities and Exchange Commission, or SEC.
In December 2007, the Financial Accounting Standards Board issued revised guidance under ASC
805, “Business Combinations,” effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. ASC 805 retains the fundamental requirements in
prior guidance that the acquisition method of accounting be used for all business combinations and
for an acquirer to be identified for each business combination.
This new guidance revises the definition of the acquisition date as the date the acquirer
obtains control of the acquiree. This date is typically the closing date and is the date DGI will
use to measure the fair value of the consideration it paid for MICO. In addition, the new guidance
nullifies Emerging Issues Task Force No. 95-3, “Recognition of Liabilities in Connection with a
Purchase Business Combination,” and requires the recognition of costs associated with restructuring
or exit activities that do not meet the recognition criteria in ASC 420, “Exit or Disposal Cost
Obligations,” as of the acquisition date as post-combination costs when those criteria are met.
The pro forma financial information, while helpful in illustrating the combined financial
condition of DGI upon the acquisition of MICO, does not reflect the impact of possible revenue
enhancements, expense efficiencies and asset dispositions, among other possibilities, and
post-acquisition integration costs that may occur as a result of the acquisition and, accordingly,
does not attempt to predict future results. The pro forma financial information also does not
necessarily reflect what the combined historical results of operations of DGI would have been had
MICO been a wholly owned subsidiary during these periods.
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SELECTED CONSOLIDATED UNAUDITED PRO FORMA FINANCIAL INFORMATION
Condensed Consolidated Balance Sheet
| As of September 30, 2010 | ||||||||||||
| MICO | ||||||||||||
| DGI, | Pro Forma | Pro Forma | ||||||||||
| As Reported | Adjustments | Combined | ||||||||||
| (in thousands) | ||||||||||||
Assets |
||||||||||||
Investments |
||||||||||||
Fixed maturities |
$ | 629,282 | $ | 77,536 | $ | 706,818 | ||||||
Equity securities |
12,715 | 8,239 | 20,954 | |||||||||
Investments in affiliates |
9,184 | — | 9,184 | |||||||||
Short-term investments |
28,631 | — | 28,631 | |||||||||
Total investments |
679,812 | 85,775 | 765,587 | |||||||||
Cash |
12,729 | 641 | 13,370 | |||||||||
Premiums receivable |
71,951 | 29,561 | 101,512 | |||||||||
Reinsurance receivable |
95,515 | 78,209 | 173,724 | |||||||||
Other |
116,095 | 40,172 | 156,267 | |||||||||
Total assets |
$ | 976,102 | $ | 234,358 | $ | 1,210,460 | ||||||
Liabilities and Stockholders’ Equity |
||||||||||||
Liabilities |
||||||||||||
Losses and loss expenses |
$ | 278,636 | $ | 109,261 | $ | 387,897 | ||||||
Unearned premiums |
268,150 | 60,315 | 328,465 | |||||||||
Borrowings under line of credit |
— | 32,500 | 32,500 | |||||||||
Other |
34,540 | 34,236 | 68,776 | |||||||||
Total liabilities |
581,326 | 236,312 | 817,638 | |||||||||
Stockholders’ Equity |
||||||||||||
Stockholders’ equity |
394,776 | (1,954 | ) | 392,822 | ||||||||
Total liabilities and stockholders’ equity |
$ | 976,102 | $ | 234,358 | $ | 1,210,460 | ||||||
See Notes to Selected Consolidated Unaudited Pro Forma Financial Information
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SELECTED CONSOLIDATED UNAUDITED PRO FORMA FINANCIAL INFORMATION
Consolidated Statement of Income
| For the Nine Months Ended | ||||||||||||
| September 30, 2010 | ||||||||||||
| MICO | ||||||||||||
| DGI, | Pro Forma | Pro Forma | ||||||||||
| As Reported | Adjustments | Combined | ||||||||||
| (in thousands, except per share data) | ||||||||||||
Revenues: |
||||||||||||
Net premiums earned |
$ | 279,323 | $ | 35,996 | $ | 315,319 | ||||||
Investment income, net of investment expenses |
14,608 | 1,192 | 15,800 | |||||||||
Realized gain |
4,447 | — | 4,447 | |||||||||
Other income |
4,748 | 1,223 | 5,971 | |||||||||
Total revenues |
303,126 | 38,411 | 341,537 | |||||||||
Expenses: |
||||||||||||
Net losses and loss expenses |
203,893 | 23,830 | 227,723 | |||||||||
Amortization of deferred policy acquisition costs |
48,549 | — | 48,549 | |||||||||
Other underwriting expenses |
40,835 | 11,936 | 52,771 | |||||||||
Other expenses |
2,668 | 685 | 3,353 | |||||||||
Total expenses |
295,945 | 36,451 | 332,396 | |||||||||
Income before income taxes |
7,181 | 1,960 | 9,141 | |||||||||
Income taxes |
297 | 461 | 758 | |||||||||
Net income |
$ | 6,884 | $ | 1,499 | $ | 8,383 | ||||||
Earnings per common share: |
||||||||||||
Class A common stock — basic and diluted |
$ | 0.28 | $ | 0.06 | $ | 0.34 | ||||||
Class B common stock — basic and diluted |
$ | 0.25 | $ | 0.05 | $ | 0.30 | ||||||
See Notes to Selected Consolidated Unaudited Pro Forma Financial Information
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SELECTED CONSOLIDATED UNAUDITED PRO FORMA FINANCIAL INFORMATION
Consolidated Statement of Income
| For the Year Ended December 31, 2009 | ||||||||||||
| MICO | ||||||||||||
| DGI, | Pro Forma | Pro Forma | ||||||||||
| As Reported | Adjustments | Combined | ||||||||||
| (in thousands, except per share data) | ||||||||||||
Revenues: |
||||||||||||
Net premiums earned |
$ | 355,025 | $ | 34,014 | $ | 389,039 | ||||||
Investment income, net of investment expenses |
20,631 | 1,912 | 22,543 | |||||||||
Realized gain |
4,479 | — | 4,479 | |||||||||
Other income |
6,598 | 525 | 7,123 | |||||||||
Total revenues |
386,733 | 36,451 | 423,184 | |||||||||
Expenses: |
||||||||||||
Net losses and loss expenses |
250,835 | 24,607 | 275,442 | |||||||||
Amortization of deferred policy acquisition costs |
60,292 | — | 60,292 | |||||||||
Other underwriting expenses |
50,843 | 15,925 | 66,768 | |||||||||
Other expenses |
4,086 | 1,364 | 5,450 | |||||||||
Total expenses |
366,056 | 41,896 | 407,952 | |||||||||
Income before income taxes (benefit) |
20,677 | (5,445 | ) | 15,232 | ||||||||
Income taxes (benefit) |
1,847 | (1,993 | ) | (146 | ) | |||||||
Net income (loss) |
$ | 18,830 | $ | (3,452 | ) | $ | 15,378 | |||||
Earnings (loss) per common share: |
||||||||||||
Class A common stock — basic and diluted |
$ | 0.76 | $ | (0.14 | ) | $ | 0.62 | |||||
Class B common stock — basic and diluted |
$ | 0.68 | $ | (0.13 | ) | $ | 0.55 | |||||
See Notes to Selected Consolidated Unaudited Pro Forma Financial Information
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NOTES TO SELECTED CONSOLIDATED UNAUDITED PRO FORMA FINANCIAL INFORMATION
Note 1 — Basis of Pro Forma Presentation
DGI will account for the acquisition of MICO under the acquisition method of accounting;
accordingly, DGI will allocate the cost of acquiring MICO to the assets acquired, including
identifiable intangible assets, and liabilities assumed from MICO at their respective fair values
on December 1, 2010. The estimated purchase price of $32.7 million for MICO is based upon the
stockholders’ equity of MICO as of January 1, 2009 for purposes of this pro forma financial
information. The actual transaction was effective on December 1, 2010 with an expected purchase
price of approximately $42.0 million. DGI is continuing its analysis of the fair value adjustments
that will be required and their related tax impact. The pro forma financial information includes
estimated adjustments to record MICO’s assets and liabilities at their respective fair values and
represents DGI’s estimates based on available information. You should read this pro forma
financial information in conjunction with the historical financial statements, including the notes
thereto, of DGI that DGI has filed with the SEC.
DGI may revise the pro forma adjustments included in these tables as additional information
becomes available and as DGI performs additional analyses. Accordingly, the final acquisition
accounting adjustments may be materially different from the pro forma adjustments. Increases or
decreases in the fair value of MICO’s net assets (particularly changes in fair value of
investments), commitments, contracts and other items may change the amount of the purchase price
DGI allocates to goodwill and other assets and liabilities and may impact the statement of income
due to adjustments in the amortization of the adjusted assets or liabilities.
The pro forma financial information presented in these pro forma statements does not necessarily
indicate the results of operations or the combined financial position that would have resulted had
the acquisition been completed at January 1, 2009, does not reflect the impact of possible revenue
enhancements, expense efficiencies or asset dispositions, and is not indicative of the results of
operations in future periods or the future financial position of DGI.
Note 2 — Pro Forma Adjustments
The pro forma financial information for the acquisition of MICO includes the pro forma balance
sheet as of September 30, 2010 and the pro forma income statements for the nine months ended
September 30, 2010 and the year ended December 31, 2009 assuming DGI acquired MICO on January 1,
2009.
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The allocation of the purchase price follows (in thousands):
Cash from DGI |
$ | 32,682 | ||
Total cost of acquisition |
32,682 | |||
MICO net assets acquired: |
||||
Shareholders’ equity |
26,789 | |||
Estimated adjustments to reflect assets acquired and liabilities assumed at fair value: |
||||
Total fair value adjustments |
4,195 | |||
Associated deferred income taxes |
(1,509 | ) | ||
Fair value adjustment to net assets acquired, net of tax |
2,686 | |||
Total net assets acquired |
29,475 | |||
Goodwill resulting from the acquisition |
$ | 3,207 | ||
The significant pro forma adjustments included in the pro forma financial information are as
follows:
| (1) | The significant fair value adjustments to MICO’s assets and liabilities are as follows: |
| (A) | Adjustment to eliminate MICO’s deferred acquisition costs and unearned commission income and record MICO’s obligations and rights under unexpired insurance and reinsurance contracts at fair value. DGI estimated the fair value adjustments by applying a ceding commission rate of 31% to MICO’s unearned premiums and prepaid reinsurance premiums for a net reduction of MICO’s obligations in the amount of $3.8 million. DGI will amortize the fair value adjustments over the estimated remaining term of MICO’s in force policies as a reduction in net premiums earned. Because MICO’s policies carry terms of one year or less, the fair value adjustments will be fully amortized within one year of the effective date of the acquisition. | ||
| (B) | Adjustment to record MICO’s software assets at fair value. DGI will amortize the adjustment over the estimated remaining life of MICO’s software assets on a straight-line basis. | ||
| (C) | Adjustment to eliminate MICO’s historical stockholders’ equity. | ||
| (D) | Adjustment to record the tax effect of the pro forma adjustments using DGI’s statutory tax rate. |
| (2) | Adjustment to reflect anticipated borrowings under DGI’s line of credit facility in the amount of $32.5 million. |
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| (3) | Adjustment to record interest expense related to borrowings under DGI’s line of credit based on average interest rates of 2.28% and 2.88% for the nine months ended September 30, 2010 and the year ended December 31, 2009, respectively. These rates were based on the average six-month LIBOR rates in effect for the respective periods and include a margin pursuant to the terms of DGI’s line of credit facility. | |
| (4) | Adjustment to record income tax benefit related to DGI’s interest expense using DGI’s statutory tax rate. | |
| (5) | Adjustment to record estimated impact of MICO’s 25% quota share reinsurance agreement with Donegal Mutual Insurance Company effective for all business MICO will write from and after the effective date of the acquisition. Donegal Mutual Insurance Company will include its assumed business from MICO in its pooling agreement with Atlantic States Insurance Company. As a result, 80% of the assumed business will be included in DGI’s consolidated financial results. | |
| (6) | Adjustment to reverse costs associated with the acquisition of MICO that DGI incurred during 2010. | |
| (7) | Adjustment to record goodwill related to the acquisition of MICO. Upon completion of its analysis, DGI plans to segregate a trademark intangible from the amount it has estimated as goodwill in the pro forma financial information. DGI anticipates that the trademark intangible will have an indefinite life. |
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