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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2003
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.
| Delaware | 23-2424711 | |
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(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
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| 1195 River Road, Marietta, Pennsylvania | 17547 | |
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| (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
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 [ ].
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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]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ]. No [X].
On June 30, 2003, the aggregate market value (based on the closing sales prices on that date) of the voting stock held by non-affiliates of the Registrant was $41,317,014.
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date: 9,809,352 shares of Class A Common Stock and 3,011,049 shares of Class B Common Stock were outstanding on February 20, 2004.
DOCUMENTS INCORPORATED BY REFERENCE:
| 1. | Portions of the Registrant’s annual report to stockholders for the fiscal year ended December 31, 2003 are incorporated by reference into Parts I, II and IV of this report. | |||
| 2. | Portions of the Registrant’s proxy statement relating to the annual meeting of stockholders to be held April 15, 2004 are incorporated by reference into Part III of this report. | |||
DONEGAL GROUP INC.
INDEX TO FORM 10-K REPORT
(i)
Table of Contents
PART I
Item 1. Business.
General Development of Business.
We are a property and casualty insurance holding company whose insurance
subsidiaries offer personal and commercial lines of insurance to businesses and
individuals in 14 Mid-Atlantic and Southeastern states. We provide our
policyholders with a selection of insurance products at competitive rates,
while pursuing profitability through adherence to a strict underwriting
discipline. At December 31, 2003, we had total assets of $602.0 million and
stockholders’ equity of $208.6 million. Our net income was $18.3 million for
the year ended December 31, 2003 compared to $12.0 million for the year ended
December 31, 2002.
Donegal Mutual Insurance Company (the “Mutual Company”) owns approximately
42% of our Class A common stock and approximately 62% of our Class B common
stock. The operations of our insurance subsidiaries are interrelated with the
operations of the Mutual Company and, while maintaining the separate corporate
existence of each company, our insurance subsidiaries and the Mutual Company
conduct business together as the Donegal Insurance Group. As such, we share
the same business philosophy, management, employees and facilities as the
Mutual Company and offer the same types of insurance products.
Our growth strategy includes the acquisition of other insurance companies
to expand our business in a given region or to commence operations in a new
region. Our prior acquisitions have either taken the form of:
We believe that our ability to make direct acquisitions or to structure
acquisitions through Mutual Company surplus note transactions provides us with
flexibility that is a competitive advantage in seeking acquisitions. We also
believe we have demonstrated our ability to acquire control of a troubled
insurance company, reunderwrite its book of business, reduce its cost structure
and return it to profitability. When the Mutual
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Company makes a surplus note
investment in another company, the financial results of that company are not
consolidated with our financial results or those of the Mutual Company, and
neither we nor the Mutual Company are responsible for the insurance obligations
of that company.
Unless otherwise specifically stated, all information in this Form 10-K
Annual Report is as of December 31, 2003.
Le Mars Insurance Company (“Le Mars”)
In June 2002, the Mutual Company consummated an affiliation with Le Mars.
As part of this affiliation, the Mutual Company entered into a management
agreement with Le Mars and acquired control of Le Mars through the appointment
of five Mutual Company designees to Le Mars’ nine-member board of directors.
At the time of the affiliation, the Mutual Company made a $4.0 million
investment in Le Mars’ surplus and was issued a surplus note, which we refer to
as the Le Mars Surplus Note.
On August 11, 2003, Le Mars’ board of directors adopted a plan of
conversion to convert to a stock insurance company. The plan of conversion was
approved by the policyholders of Le Mars on October 6, 2003, and, on October 7,
2003, the Insurance Commissioner of Iowa held a public hearing regarding
approval of the plan of conversion. Following the November 2003 regulatory
approval of the plan of conversion, we acquired Le Mars as of January 1, 2004
for approximately $12.6 million in cash.
Le Mars, which was organized under the laws of Iowa in 1901, operates as a
property and casualty insurer in Iowa, Nebraska, Oklahoma and South Dakota.
Personal lines coverages represent a majority of Le Mars’ premiums written,
with the balance coming from farmowners and mercantile and service businesses.
Le Mars’ largest lines of business are private passenger automobile liability
and physical damage; its other principal lines are homeowners and commercial
multi-peril. Le Mars had net premiums earned of $20.5 million in 2002 and
$17.9 million in 2003. The statutory surplus and total admitted assets on a
statutory basis of Le Mars as of December 31, 2003 were $12.0 million and $37.0
million, respectively.
The Peninsula Insurance Group (“Peninsula”)
On January 6, 2004, we purchased Peninsula Indemnity Company and The
Peninsula Insurance Company, both of which are organized under Maryland law,
with
headquarters in Salisbury, Maryland from Folksamerica Holding Company,
Inc., a part of the White Mountains Insurance Group, Ltd., for a price in cash
equal to 107.5% of Peninsula’s GAAP stockholders’ equity as of the closing of
the acquisition, or approximately $23.3 million.
Peninsula specializes in private passenger automobile coverages.
Peninsula also writes homeowners, commercial multi-peril, workers’ compensation
and commercial automobile coverages. Peninsula operates primarily in Maryland,
Delaware and Virginia. For the years ended December 31, 2002 and 2003,
Peninsula had net premiums earned of $29.7 million and $32.7 million,
respectively. Peninsula’s stockholders’ equity and total admitted
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assets on a
statutory basis as of December 31, 2003 were $19.5 million and $52.6 million,
respectively. The Peninsula companies have an A.M. Best rating of A
(Excellent).
On December 1, 2003, we completed an underwritten public offering of
3,450,000 shares of our Class A common stock, resulting in net proceeds of $59
million to us.
Financial Information About Industry Segments.
The Company has three segments, which consist of its investment function,
its personal lines of insurance and its commercial lines of insurance.
Financial information about these segments is set forth in Note 17 to the
Consolidated Financial Statements incorporated by reference herein.
Narrative Description of Business.
Who We Are
We are a property and casualty insurance holding company whose insurance
subsidiaries offer personal and commercial lines of insurance to small
businesses and individuals in 14 Mid-Atlantic and Southeastern states. We
provide our policyholders with a selection of insurance products at competitive
rates, while pursuing profitability through adherence to a strict underwriting
discipline.
We derive a substantial portion of our insurance business from smaller to
mid-sized regional communities. We believe this focus provides us with
competitive advantages in terms of local market knowledge, marketing,
underwriting, claims servicing and policyholder service. At the same time, we
believe we have cost advantages over many regional insurers because of our
centralized accounting, administrative, investment, data processing and other
services.
Strategy
Our annual premiums earned have increased from $117.5 million in 1998 to
$196.8 million in 2003, a compound annual growth rate of 10.9%. Over the same
time period,
our combined ratio has consistently been more favorable than that of the
property and casualty insurance industry as a whole. We seek to grow our
business and enhance our profitability by:
We focus on achieving a combined ratio of less than 100%, and believe that
underwriting profitability is a fundamental component of our long-term
financial strength because it allows us to generate profits without relying on
our investment income. We seek to enhance our underwriting results by
carefully selecting the product lines we underwrite, minimizing our exposure to
catastrophe-prone areas and continually evaluating our claims history to ensure
the adequacy of our underwriting guidelines and product pricing. For our
personal lines products, we insure standard and preferred risks primarily in
private passenger automobile and homeowners lines. We have no exposure to
asbestos, and limited exposure
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to other environmental liabilities. We seek to
provide more than one policy to a given personal or commercial customer because
this “account selling” strategy diversifies our risk and has historically
improved our underwriting results. Finally, we use reinsurance to manage our
exposure and limit our maximum net loss from large single risks or risks in
concentrated areas. We believe these practices are key factors in our ability
to maintain a combined ratio that has been traditionally more favorable than
the combined ratio of the property and casualty insurance industry.
Our combined ratio and that of our industry for the years 1998 through
2003 are shown in the following table:
We believe that continued expansion within our existing markets will be a
key source of our continued premium growth, and maintaining an effective and
growing network of independent agents is integral to our expansion. We seek to
be among the top three insurers within each of our agencies for the lines of
business we write by providing a consistent, competitive and stable market for
our products. We believe that the consistency of our product offerings enables
us to compete effectively for agents with other insurers whose product
offerings fluctuate based on industry conditions. We offer our agents a
competitive compensation program that rewards them for pursuing profitable
growth on our
behalf, and we provide them with ongoing support that enables them to
better attract and service customers, including Internet-based information
systems, training programs, marketing support and field visitations by our
marketing personnel and senior management. Finally, we appoint agencies with a
strong underwriting and growth track record. We believe that by carefully
selecting, motivating and supporting our agency force, we will be able to drive
continued long-term growth.
We have completed six acquisitions of property and casualty insurance
companies since 1995. We believe we have an opportunity to continue our growth
by selectively pursuing affiliations and acquisitions that meet our criteria.
Our criteria include:
-4-
We believe that our affiliation with the Mutual Company assists us in
pursuing affiliations with and subsequent acquisitions of other mutual
companies because we have a strong understanding of the concerns and issues
that mutual companies face. In particular, we have had success affiliating
with and acquiring undercapitalized mutual companies by utilizing our strengths
and financial position to improve their operations significantly
post-affiliation. We generally evaluate a number of areas for operational
improvement when considering acquisitions, including product underwriting,
expenses, the cost of reinsurance and technology.
We maintain stringent expense controls with direct involvement by our
senior management. We consolidate all processing and administrative activities
at our home office to realize operating synergies and better control expenses.
We utilize technology to automate much of our underwriting to facilitate agency
and policyholder communications on an efficient and cost-effective basis. In
2002, we completed a reorganization begun in 2001 that streamlined our
operations and allowed us to operate more efficiently. As a result of our
focus on expense control, we have reduced our expense ratio from 35.9% for 1998
to 30.2% for 2003. We have also increased our annual premium per employee, a
measure of efficiency
that we use to evaluate our operations, from approximately $470,000 in
1998 to approximately $700,000 in 2003.
We believe that excellent policyholder service is important to attracting
new policyholders and retaining existing policyholders. We work closely with
our agency force to provide a consistently responsive level of claims service,
underwriting and customer support. We seek to respond expeditiously and
effectively to address customer and agent inquiries, including working to:
As a part of our focus on customer service, we conduct policyholder
service surveys to evaluate the effectiveness of our support programs, and our
management meets frequently with agency personnel to seek service improvement
recommendations, react to service issues and better understand local market
conditions.
-5-
We are committed to maintaining discipline in our pricing by pursuing rate
increases to maintain or improve our underwriting profitability without unduly
affecting our ability to attract and retain customers. In addition to pursuing
appropriate pricing, we take numerous actions to ensure that our premium rates
are adequate relative to our level of underwriting risk. We review loss trends
on a periodic basis to identify changes in the frequency and severity of our
claims and to assess the adequacy of our rates and underwriting standards. We
also carefully monitor and audit the key information that we use to price our
policies, enabling us to receive an adequate level of premiums for our risk.
For example, we inspect and perform loss control surveys on most of the risks
we insure to determine adequacy of insurance to value, assess property
conditions and identify any liability exposures. We audit the payroll data of
our workers’ compensation customers to verify that the assumptions we used to
price a particular policy were accurate. By aggressively pursuing appropriate
rate increases and thoroughly understanding the risks we insure, we are able to
support our strategy of achieving consistent underwriting profitability.
Our Organizational Structure
We conduct most of our operations through our five insurance subsidiaries.
We also own 47.5% of Donegal Financial Services Corporation (“DFSC”), a
registered savings
and loan holding company that owns Province Bank, a federal savings bank
that began operations in 2000. The Mutual Company owns the remaining 52.5% of
DFSC. While not yet profitable nor material to our operations, we believe
Province Bank, with total assets of $50.4 million at December 31, 2003, will
complement our product offerings. The following chart depicts our
organizational structure, including our principal subsidiaries.
-6-
Atlantic States, our largest insurance subsidiary, and the Mutual Company
have a pooling agreement under which both companies are allocated a specified
percentage of their combined underwriting results, excluding certain
intercompany reinsurance assumed by the Mutual Company from our insurance
subsidiaries. Under the terms of the pooling agreement, Atlantic States cedes
its underwriting results to the Mutual Company. The Mutual Company in turn
pools its underwriting results with the underwriting results of Atlantic
States. The pooled underwriting results are then allocated 70% to Atlantic
States and 30% to the Mutual Company. Pursuant to amendments to the pooling
agreement since its commencement on October 1, 1986, the participation of
Atlantic States in the underwriting results of the pool has gradually
increased.
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The following chart depicts our underwriting 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 have been based on
their approximate relative amounts of capital and surplus, expectations of
future relative amounts of capital and surplus and our ability to raise capital
for Atlantic States. We do not currently anticipate a further increase in
Atlantic States’ percentage of participation in the pool, nor do we intend to
terminate the participation of Atlantic States in the pooling agreement.
The Mutual Company provides facilities, personnel and other services to
us, and the related expenses are allocated between Atlantic States and the
Mutual Company in relation to their relative participation in the pooling
agreement. Southern reimburses the Mutual Company for its personnel costs and
bears its proportionate share of information services costs based on its
percentage of total written premiums of the Donegal Insurance Group. Expenses
allocated to us under such agreements were $33.0 million in 2003.
Subsequent to receipt of approval by our board and the board of the Mutual
Company, all agreements and all changes to existing agreements between the
Mutual Company and us are subject to approval by a coordinating committee that
is comprised of two of our board members who do not serve on the Mutual
Company’s board and two board members of the Mutual Company who do not serve on
our board. In order to approve an agreement or a change in an agreement, our
members on the coordinating committee must conclude that the agreement or
change is fair to us and our stockholders, and the Mutual Company’s members on
the coordinating committee must conclude that the agreement or change is fair
to the Mutual Company and its policyholders.
We believe our relationship with the Mutual Company offers us a number of
competitive advantages, including:
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Acquisitions
The following table highlights our acquisition history since 1988:
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We generally maintain the home office of an acquired company as part of
our strategy to provide local marketing, underwriting and claims servicing even
if the acquired company is merged into another subsidiary.
Distribution
Our insurance products are marketed primarily in the Mid-Atlantic and
Southeast regions through approximately 1,200 insurance agencies that are
comprised of approximately 6,800 agents. At December 31, 2003, the Donegal
Insurance Group was licensed to do business in 15 states and operated in 14
states (Alabama, Arkansas, Connecticut, Delaware, Georgia, Louisiana, Maryland,
New York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee and
Virginia). We believe our relationships with our independent agents are
valuable in identifying, obtaining and retaining profitable business. We
maintain a stringent agency selection procedure that emphasizes appointing
agencies with proven marketing strategies for the development of profitable
business and we appoint only agencies with a strong underwriting and growth
track record. We also regularly evaluate our agencies based on their
profitability and performance in relation to our objectives. We seek to be
among the top three insurers within each of our agencies for the lines of
business we write.
The following table sets forth the percentage of our share of 2003 direct
premiums written in each of the states where we conducted business in 2003:
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We believe we have developed a number of policies and procedures that
enable us to attract, retain and motivate our agents. The consistency,
competitiveness and stability of our product offerings assists us in competing
effectively for agents with other insurers whose product offerings may
fluctuate based upon industry conditions. We have developed a competitive
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. We provide our agents ongoing support that enables
them to better attract and retain customers, including Internet-based
information systems, training programs, marketing support and field visitations
by our marketing personnel and senior management. Finally, we encourage our
independent agencies to focus on “account selling”, or serving all of a
particular insured’s property and casualty insurance needs, which we believe
generally results in more favorable loss experience than covering a single risk
for an individual insured.
Products
Our personal lines of business consist primarily of automobile and
homeowners insurance. Our commercial lines of business consist primarily of
commercial automobile, commercial multi-peril and workers’ compensation
insurance. These types of insurance are described in greater detail below:
Personal
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Commercial
The following table sets forth the net premiums written by line of
insurance for our business for the periods indicated:
Underwriting
Our underwriting department, which is divided into personal lines
underwriting and commercial lines underwriting, evaluates and selects those
risks that we believe will enable us to achieve an underwriting profit. Our
underwriting department has significant
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interaction with our independent agents
regarding our underwriting philosophy and underwriting guidelines and assists
our research and development department in the development of quality products
at competitive prices to promote growth and profitability.
In order to achieve underwriting profitability on a consistent basis, we:
We also review our existing policies and accounts to determine whether
those risks continue to meet our underwriting guidelines. If a given policy or
account no longer meets our underwriting guidelines, we will take appropriate
action regarding that policy or account, including raising premium rates or
non-renewing the policy to the extent permitted by applicable law.
As part of our effort to maintain acceptable underwriting results, we
conduct annual reviews of agencies that have failed to meet our underwriting
profitability criteria. Our review process includes an analysis of the
underwriting and reunderwriting practices of the agency, the completeness and
accuracy of the applications submitted by the agency, the adequacy of the
training of the agency’s staff and the agency’s record of adherence to our
underwriting guidelines and service standards. Based on the results of this
review process, our marketing and underwriting personnel develop, together with
the agency, a plan to improve its underwriting profitability. We monitor the
agency’s compliance with the plan, and take other measures as required in our
judgment, including the termination of agencies that are unable to achieve
acceptable underwriting profitability to the extent permitted by applicable
law.
Claims
The management of claims is a critical component of our philosophy of
underwriting profitability and is fundamental to our successful operations and
our dedication to excellent service.
Our claims department rigorously manages claims to assure that legitimate
claims are settled quickly and fairly and that questionable claims are
identified for defense. In the majority of cases, claims are adjusted by our
own personnel, whom we believe are experienced in our industry and who know our
service philosophy. We provide various means of claims reporting on a 24-hour,
seven day a week basis, including toll-free numbers and Internet reporting
through our website. We strive to respond to notifications of claims promptly,
generally within the day reported. We believe that by responding promptly to
claims, we provide quality customer service and minimize the ultimate cost of
the claims. We engage independent adjusters as needed to handle claims in
areas in which the volume of
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claims is not sufficient to justify our hiring of
internal claims adjusters. We also employ private investigators, structural
experts and various outside legal counsel to supplement our in-house staff and
assist us in the investigation of claims. We have a special investigative unit
staffed by former law enforcement officers that attempts to identify and
prevent fraud and abuse and to control questionable claims.
Our claims department management develops and implements policies and
procedures for the establishment of adequate claim reserves. The management
and staff of our claims department resolve policy coverage issues, manage and
process reinsurance recoveries and handle salvage and subrogation matters. Our
litigation and personal injury sections manage all claims litigation, and all
branch office claims above $35,000 require home office review and settlement
authorization. Claims adjusters are given reserving and settlement authority
based upon their experience and demonstrated abilities. Larger or more
complicated claims require consultation and approval of senior department
management.
Our field office staff is supported by home office technical, litigation,
material damage, subrogation and medical audit personnel who provide
specialized claims support.
Liabilities for Losses and Loss Expenses
Liabilities for losses and loss expenses are estimates at a given point in
time of what an insurer expects to pay to claimants, based on facts and
circumstances then known, and it can be expected that the insurer’s ultimate
liability for losses and loss expenses will exceed or be less than such
estimates. Our estimates of liabilities for losses and loss expenses are based
on estimates of future trends and claims severity, judicial theories of
liability and other factors. However, during the loss adjustment period, we
may learn additional facts regarding individual claims, and consequently it
often becomes necessary to refine and adjust our estimates of our liability.
We reflect any adjustments to our liabilities for losses and loss expenses in
our operating results in the period in which the changes in estimates are made.
We maintain 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. We base the
amount of liability for reported losses primarily upon a case-by-case
evaluation of the type of risk involved, knowledge of the circumstances
surrounding each claim and the insurance policy provisions relating to the type
of loss. We determine the amount of our liability for unreported claims and
loss expenses on the basis of historical information by line of insurance. We
account for inflation in the reserving function through analysis of costs and
trends and reviews of historical reserving results. We closely monitor our
liabilities and recompute them periodically using new information on reported
claims and a variety of statistical techniques. Our 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 our loss and loss expense reserves and have an adverse effect on our
results of operations and financial condition. As is the case for
substantially all property and casualty insurance companies, we have found it
necessary in the past to revise our estimated future liabilities for losses and
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loss expenses, and further adjustments could be required in the future. On the
basis of our internal procedures, which analyze, among other things, our
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, we believe that
adequate provision has been made for our liability for losses and loss
expenses.
Differences between liabilities reported in our financial statements
prepared on the basis of GAAP and our insurance subsidiaries’ financial
statements prepared on a statutory accounting basis (“SAP”) result from
anticipating salvage and subrogation
recoveries for GAAP but not for SAP. These differences amounted to $8.2
million, $7.3 million and $7.2 million at December 31, 2001, 2002 and 2003,
respectively.
The following table sets forth a reconciliation of our beginning and
ending net liability for unpaid losses and loss expenses for the periods
indicated:
We recognized an increase (decrease) in the liability of losses and loss
expenses for prior years of $8.0 million, $6.8 million and $(450,110) in 2001,
2002 and 2003, respectively. These developments are primarily attributable to
variations from expected claim severity in the private passenger and commercial
automobile liability, workers’ compensation and commercial multiple peril lines
of business.
The following table sets forth the development of our liability for net
unpaid losses and loss expenses from 1993 to 2003, with supplemental loss data
for 2002 and 2003. Loss data in the table includes business we are allocated
from the Mutual Company as part of the pooling agreement.
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“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 “Net 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 1993 liability has developed a redundancy
after nine years, in that reestimated net losses and loss expenses are expected
to be $12.8 million less than the estimated liability initially established in
1993 of $52.8 million.
The “Cumulative (excess) deficiency” shows the cumulative excess or
deficiency at December 31, 2003 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 means
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 1994 column indicates that as of December 31, 2003 payments equal to $49.3
million of the currently reestimated ultimate liability for net losses and loss
expenses of $49.5 million had been made.
During 2000, 2001 and 2002, we experienced deficiencies in reserves for
certain prior years. These deficiencies were primarily related to the workers’
compensation, private passenger automobile, commercial automobile and
commercial multiple-peril lines of business.
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Technology
The Mutual Company owns our technology systems, and we use them pursuant
to an intercompany agreement. Our technology systems consist of an integrated
central processing computer, a series of server-based computer networks and
various communications systems that allow our home office and branch offices to
utilize the same systems for the processing of business. The Mutual Company
maintains backup facilities and systems through a contract with a leading
provider of computer disaster recovery sites, and these backup facilities and
systems are tested on a regular basis. Atlantic States and Southern bear their
proportionate share of information services expenses based on their percentages
of the total net written premiums of the Donegal Insurance Group.
Our business strategy depends on the use, development and implementation
of integrated technology systems. These systems enable us to provide a high
level of service to our agents and policyholders by processing our business in
a timely and efficient manner, communicating and sharing data with our agents,
providing a variety of methods for the payment of premiums and allowing for the
accumulation and analysis of information for our management.
We believe the implementation of our various technology systems has
resulted in improved service to our agents and customers and increased
efficiencies in the processing of our business, resulting in lower operating
costs. Two of the key components of our integrated system are our agency
interface system and our imaging system. Our agency interface system provides
us with a high level of data sharing both to, and from, our agents’ systems and
also provides our agents with an integrated means of processing new business.
Our imaging system reduces our need to handle paper files, while providing
greater access to the same information by a variety of personnel.
Third Party Reinsurance
We and the Mutual Company use several different reinsurers, all of which,
consistent with our requirements, have an A.M. Best rating of A- (Excellent) or
better or, with respect to foreign reinsurers, have a financial condition that,
in the opinion of our management, is equivalent to a company with at least an
A- rating.
The external reinsurance we and the Mutual Company purchase includes:
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.
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Our principal third party reinsurance agreement in 2003 was a multi-line
per risk excess of loss treaty with GMAC Re Corporation, Dorinco Reinsurance
Company and Erie Insurance Group that provides coverage up to $1.0 million for
both property and liability losses.
For property insurance, we also have excess of loss treaties that provide
for additional coverage over the multi-line treaty up to $2.5 million per
occurrence. For liability insurance, we have excess of loss treaties that
provide for additional coverage over the multi-line treaty up to $40.0 million
per occurrence. For workers’ compensation insurance, we have excess of loss
treaties that provide for additional coverage over the multi-line treaty up to
$5.0 million on any one life.
We have property catastrophe coverage through a series of layered treaties
up to aggregate losses of $80.0 million for the Donegal Insurance Group for any
single event. This coverage is provided through as many as twenty reinsurers on
any one treaty with no reinsurer taking more than 20.0% of any one contract.
On both property and casualty insurance, we and the Mutual Company
purchase facultative reinsurance to cover exposures from losses that exceed the
limits provided by our respective treaty reinsurance.
Competition
The property and casualty insurance industry is highly competitive on the
basis of both price and service. There are numerous companies competing for
business in the geographic areas where we operate, many of which are
substantially larger and have greater financial resources than we do, and no
single company dominates. In addition, because our insurance products and
those of the Mutual Company are marketed exclusively through independent
insurance agencies, most of which represent more than one insurance company, we
face competition within agencies as well as competition to retain qualified
independent agencies.
Investments
Our return on invested assets is an important element of our financial
results, and our investment strategy is to generate sufficient after-tax income
on invested assets while minimizing credit risk through investments in
high-quality securities. As a result, we seek to
invest a high percentage of our funds in a diversified, highly rated and
readily marketable group of fixed-maturity instruments. Our fixed-maturity
portfolio consists of both taxable and tax-exempt securities. We maintain a
sufficient portion of our portfolio in short-term securities, such as
investments in commercial paper, to provide liquidity for the payment of claims
and operation of our business and maintain a small percentage of our portfolio
in equity securities.
At December 31, 2003, all of our debt securities were rated investment
grade with the exception of one unrated obligation of $252,500 and the
investment portfolio did not contain any mortgage loans or any non-performing
assets.
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The following table shows the composition of our debt securities
investment portfolio (at carrying value), excluding short-term investments, by
rating as of December 31, 2003:
We invest in both taxable and tax-exempt securities as part of our
strategy to maximize after-tax income. Our strategy considers, among other
factors, the alternative minimum tax. Tax-exempt securities made up
approximately 30.9%, 41.0% and 41.6% of our debt securities investment
portfolio at December 31, 2001, 2002 and 2003, respectively.
The following table shows the classification of our investments (at
carrying value) at December 31, 2001, 2002 and 2003:
-20-
The following table sets forth the maturities (at carrying value) in our
fixed maturity and short-term investment portfolio at December 31, 2001,
December 31, 2002 and December 31, 2003:
-21-
As shown above, we held investments in mortgage-backed securities having a
carrying value of $25.9 million at December 31, 2003. Our mortgage-backed
securities consist primarily of investments in governmental agency balloon
pools with stated maturities of five and seven years. The stated maturities of
these investments limits our exposure to extension risk should interest rates
rise and prepayments decline. We perform an analysis of the underlying loans
when evaluating a mortgage-backed security for purchase, and we select those
securities that we believe will provide a return that properly reflects the
prepayment risk associated with the underlying loans.
Our investment results for the years ended December 31, 2001, 2002 and
2003 are shown in the following table:
A.M. Best Rating
Currently, the A.M. Best rating of Atlantic States, Southern and the
Mutual Company is A (Excellent), based upon their respective current financial
condition and historical statutory results of operations and retrocessional
agreements. We believe that our A.M. Best rating is an important factor in
marketing our products to our agents and
customers. A.M. 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. A.M.
Best’s classifications are A++ and A+ (Superior), A and A- (Excellent), B++ and
B+ (Very Good), B and B- (Good), C++ and C+ (Fair), C and C- (Marginal), D
(Below Minimum Standards) and E and F (Liquidation). A.M. Best’s ratings are
based upon factors relevant to policyholders and are not directed toward the
protection of investors. According to A.M. Best, an “Excellent” rating is
assigned to those companies that, in A.M. 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
-22-
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 that 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 (“NAIC”) has established a risk-based
capital system for assessing the adequacy of statutory capital and surplus that
augments the states’ current fixed dollar minimum capital requirements for
insurance companies. At December 31, 2003, our insurance subsidiaries and the
Mutual Company each exceeded the minimum levels of statutory capital required
by the risk-based capital rules. There can be no assurance that the statutory
capital requirements applicable to our insurance subsidiaries or the Mutual
Company will not increase in the future.
Generally, every state has guaranty fund laws under which insurers
licensed to do business in the state 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. Atlantic States, Southern and the Mutual Company
have made accruals for their portion of assessments related to such
insolvencies based upon the most current information furnished by the guaranty
associations. During 2001, 2002 and 2003, we incurred assessments totaling
$1.3 million, $486,000 and $217,000, respectively, from the Pennsylvania
Insurance Guaranty Association primarily relating to the insolvencies of three
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 our insurance
subsidiaries or the Mutual Company 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.
The Pennsylvania Insurance Holding Companies Act requires that all
transactions within a holding company system to which an insurer is a party
must be fair and reasonable and that any charges or fees for services performed
must be reasonable. Any management agreement, service agreement, cost sharing
arrangement and reinsurance
-23-
agreement must be filed with the Pennsylvania
Insurance Department and is subject to Department review. The pooling
agreement and other intercompany reinsurance agreements were accordingly filed
with the Pennsylvania Insurance Department. The Pennsylvania Insurance
Department has never provided any notification of disapproval to any member of
the Mutual Company or us.
Approval of the applicable insurance commissioner is also 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 creates a
rebuttable presumption of a change in control. Pursuant to an order issued in
April 2003, the Pennsylvania Insurance Department approved the Mutual Company’s
ownership of up to 70% of our outstanding Class A common stock and up to 100%
of our outstanding Class B common stock. Insurance holding company 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.
We are required to participate in involuntary insurance programs for
automobile insurance, as well as other property and casualty insurance lines,
in states in
which we operate. 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 in the particular state. 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 written in the voluntary market.
Our 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 us 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 the end of
the preceding year or the net income excluding realized capital gains of the
subsidiary for the preceding year. As of December 31, 2003, the amount of
dividends Atlantic States and Southern could pay us during 2004 without the
prior approval of the various insurance commissioners was $13.3 million and
$4.1 million, respectively.
The Mutual Company
The Mutual Company was organized in 1889. At December 31, 2003, the
Mutual Company had admitted assets of $214.6 million and policyholders’ surplus
of $84.9 million. At December 31, 2003, the Mutual Company had no debt and, of
its total liabilities of
-24-
$129.7 million, reserves for net losses and loss
expenses accounted for $62.3 million and unearned premiums accounted for $33.3
million. Of the Mutual Company’s investment portfolio of $135.5 million at
December 31, 2003, investment-grade bonds accounted for $24.4 million and
mortgages accounted for $4.2 million. At December 31, 2003, the Mutual Company
owned 4,139,792 shares, or approximately 42%, of our Class A common stock,
which were carried on the Mutual Company’s books at $56.7 million, and
1,852,088 shares, or approximately 62%, of our Class B common stock, which were
carried on the Mutual Company’s books at $25.4 million. The foregoing
financial information is presented on the statutory basis of accounting
required by the NAIC Accounting Practices and Procedures Manual. The Mutual
Company does not, nor is it required to, prepare financial statements in
accordance with GAAP.
Donegal Financial Services Corporation
Because of our and the Mutual Company’s ownership of DFSC, both we and the
Mutual Company are regulated as unitary savings and loan holding companies. As
such, both we and the Mutual Company are subject to regulation by the Office of
Thrift Supervision, or the OTS, under the holding company provisions of the
federal Home Owners’ Loan Act, or HOLA. As a federally chartered and insured
stock savings association, Province Bank is subject to regulation and
supervision by the OTS, which is the primary federal regulator of savings
associations, and by the Federal Deposit Insurance Corporation, in its role as
federal deposit insurer. The primary purpose of the statutory and regulatory
scheme is to protect depositors, the financial institutions and the financial
system as a whole rather than the shareholders of financial institutions or
their holding companies.
Transactions between a savings association and its “affiliates” are
subject to quantitative and qualitative restrictions under Sections 23A and 23B
of the Federal Reserve Act. Affiliates of a savings association include, among
other entities, the savings association’s holding company and non-banking
companies that are under common control with the savings association. These
affiliate restrictions apply to transactions between DFSC and Province Bank, on
the one hand, and us and our insurance subsidiaries, on the other hand. These
restrictions also apply to transactions among DFSC, Province Bank and the
Mutual Company.
Cautionary Statement Regarding Forward-Looking Statements
This annual report and the documents incorporated by reference into this
annual report contain “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements include
certain discussions relating to underwriting, premium and investment income
volume, business strategies, reserves, profitability and business relationships
and our other business activities during 2004 and beyond. In some cases, you
can identify forward-looking statements by terms such as “may,” “will,”
“should,” “could,” “would,” “expect,” “plan,” “intend,” “anticipate,”
“believe,” “estimate,” “objective,” “project,” “predict,” “potential,” “goal”
and similar expressions. These forward-looking statements reflect our current
views about future events, are based on our current assumptions and are subject
to known and unknown risks and uncertainties that may cause our results,
performance or achievements to differ materially from those
-25-
anticipated in or
implied by those statements. Many of the factors that will determine future
events or achievements are beyond our ability to control or predict. Such
factors may include those described under “Risk Factors.” The forward-looking
statements contained in this annual report reflect our views and assumptions
only as of the date of this annual report. Except as required by law, we do
not intend to, and assume no responsibility for, updating any forward-looking
statements. We qualify all of our forward-looking statements by these
cautionary statements.
Risk Factors
Risks Relating to Us and Our Business
Our operations are interrelated with those of the Mutual Company, which is
our controlling stockholder, and potential conflicts exist between the best
interests of our stockholders and the best interests of the policyholders of
the Mutual Company.
The Mutual Company, which currently owns shares of our common stock
generally entitling it to cast approximately 57% of the aggregate votes
eligible to be cast by our stockholders at any meeting of stockholders,
controls the election of the members of our board of directors, and four of the
seven members of our board of directors are also members of the board of
directors of the Mutual Company. These directors have a fiduciary duty to our
stockholders, and also have a fiduciary duty to the policyholders of the Mutual
Company. Our executive officers have the same positions with both the Mutual
Company and us, and therefore have competing fiduciary duties. Certain
potential and actual conflicts of interest arise from these separate fiduciary
duties. Among these conflicts of interest are:
As a consequence, we and the Mutual Company have established a
coordinating committee that consists of two of our directors who are not
directors of the Mutual Company and two directors of the Mutual Company who are
not members of our board of directors. Under our by-laws and those of the
Mutual Company, any new agreement or transaction between the Mutual Company and
us, as well as any proposed change to an existing agreement between the Mutual
Company and us, must first be submitted to the Mutual Company’s and our boards
of directors for approval. If approved by both boards of directors, the
proposed agreement or transaction, or the change in an existing agreement, must
receive the approval of the coordinating committee. Coordinating committee
approval is granted only if both of our coordinating committee members conclude
-26-
that the new agreement or transaction or proposed change in an existing
agreement is fair and equitable to us and our stockholders and both of the
Mutual Company’s coordinating
committee members conclude that the new agreement or transaction or
proposed change in an existing agreement is fair and equitable to the Mutual
Company and its policyholders.
The Mutual Company has the ability to determine the outcome of all matters
submitted for approval by our stockholders. The price of our Class A common
stock may be adversely affected because of the Mutual Company’s ownership of
our Class A common stock and Class B common stock or by the difference in
voting power between our Class A common stock and Class B common stock.
Each share of our Class A common stock has one-tenth of a vote per share
and generally can vote as a separate class only on matters pertaining to the
rights of holders of Class A common stock. Voting control of the Company is
vested in the Mutual Company. The Mutual Company owns approximately 42% of our
outstanding Class A common stock and approximately 62% of our outstanding Class
B common stock and controls approximately 57% of the votes that may be cast on
any matter submitted to a vote of our stockholders. The Mutual Company has
sufficient voting control to:
The interests of the Mutual Company may conflict with the interests of our
other stockholders. In addition, the voting power of the Mutual Company may
have a negative effect on the price of our Class A common stock.
Our results of operations could suffer if the Mutual Company were to
experience unusually severe or frequent losses or were not able to price its
premiums adequately.
Our insurance subsidiary, Atlantic States, participates in a pooling
agreement with the Mutual Company, under which the parties share the
underwriting results on substantially all of the property and casualty
insurance business written by both companies. Under the terms of the pooling
agreement, Atlantic States has a 70% share of the results of the pool and the
Mutual Company has a 30% share of the results of the pool. The allocation of
pool participation percentages between the Mutual Company and Atlantic States
has been established based on the pool participants’ relative amounts of
capital and surplus, expectations of future relative amounts of capital and
surplus and our ability to raise capital for Atlantic States. We do not expect
the allocation to change in the foreseeable future.
Because of the pooled business allocated to us, our insurance operations
are interrelated with the insurance operations of the Mutual Company, and our
results of operations are dependent, in part, upon the underwriting results of
the Mutual Company. Although the underwriting pool is intended to produce a
more uniform and stable
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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
the participants, if the Mutual Company experiences unusually severe or
frequent losses or does not adequately price its premiums, our business,
financial condition and results of operations could suffer.
We currently conduct business in a limited number of states, with a
concentration of business in Pennsylvania and Virginia. Any single catastrophe
occurrence or other condition affecting losses in these states could adversely
affect our results of operations.
We conduct business in states located primarily in the Mid-Atlantic and
Southeastern portions of the United States. A substantial portion of our
business is private passenger and commercial automobile, homeowners and
workers’ compensation insurance in Pennsylvania and Virginia. While we
actively manage our exposure to catastrophes through our underwriting process
and the purchase of reinsurance, a single catastrophe occurrence, destructive
weather pattern, general economic trend, terrorist attack, regulatory
development or other condition affecting one or more of the states in which we
conduct substantial business could materially adversely affect our business,
financial condition and results of operations. Common catastrophic events
include hurricanes, earthquakes, tornadoes, wind and hail storms, fires,
explosions and severe winter storms.
Our business, financial condition and results of operations may be
adversely affected if the independent agents that market our products do not
maintain their current levels of premium writing, fail to comply with
established underwriting guidelines or otherwise inappropriately market our
products.
We market our insurance products solely through a network of approximately
1,200 independent insurance agencies, with approximately 6,800 agents. Our
agency force is one of the most important components of our competitive
profile. As a result, we are materially dependent upon these independent
agents, each of whom has the authority to bind us to insurance contracts. To
the extent that these independent agents’ marketing efforts cannot be
maintained at their current levels of volume and quality or they bind us to
unacceptable insurance risks, fail to comply with our established underwriting
guidelines or otherwise inappropriately market our products, our business,
financial condition and results of operations will suffer.
Our business may not continue to grow and may be materially adversely
affected if we cannot retain existing, and attract new, independent agents or
if insurance consumers increase their use of other insurance delivery systems.
The continued growth of our business will depend materially upon our
ability to retain existing, and attract new, independent agents. If
independent agencies find it easier to do business with our competitors, it
would be difficult for us to retain our existing business or attract new
business. While we believe we maintain good relationships with our
independent agents, we cannot be certain that these independent agents
will continue to sell our products to the consumers they represent. Some of
the factors that could adversely affect our ability to retain existing, and
attract new, independent agents include:
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While we sell insurance solely through our network of independent agents,
many of our competitors sell insurance through a variety of delivery methods,
including independent agents, captive agencies, the Internet and direct sales.
To the extent that individuals represented by our independent agents change
their delivery system preference, our business, financial condition and results
of operations may be adversely affected.
We are dependent on dividends from our insurance subsidiaries for the
payment of our operating expenses, our debt service and dividends to
stockholders; however, our insurance subsidiaries may be unable to pay
dividends to us.
As a holding company, we rely primarily on dividends from our insurance
subsidiaries as a source of funds to meet our corporate obligations. Payment
of dividends by our insurance subsidiaries is subject to regulatory
restrictions and depends on the surplus of our 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. The maximum amount of dividends
that Atlantic States and Southern, our insurance subsidiaries during 2003, can
pay us in 2004 without prior regulatory approval is approximately $17.4
million. In addition, state insurance regulators have broad discretion to
limit the payment of dividends by our insurance subsidiaries in the future.
The ability of our insurance subsidiaries to pay dividends to us may be further
constrained by business and regulatory considerations, such as the impact of
dividends on surplus that could affect our ratings, competitive position, the
amount of premiums that we can write and our ability to pay future dividends.
If the A.M. Best rating assigned to the Mutual Company or our insurance
subsidiaries is significantly downgraded, our competitive position would be
adversely affected.
Industry ratings are a factor in establishing the competitive position of
insurance companies. Our insurance subsidiaries and the Mutual Company are
rated by A.M. Best, an industry-accepted source of insurance company financial
strength ratings. A.M. Best ratings are specifically designed to provide an
independent opinion of an insurance company’s financial health and its ability
to meet ongoing obligations to policyholders. We believe that the financial
strength rating of A.M. Best is material to our insurance operations.
Currently, the Mutual Company, Atlantic States and Southern each have an A
(Excellent)
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rating from A.M. Best. If the Mutual Company or any of our
insurance subsidiaries were to be downgraded by A.M. Best, it would adversely
affect our competitive position and make it more difficult for us to market our
products and retain our existing policyholders.
Our strategy to grow in part through acquisitions of smaller insurance
companies exposes us to a number of risks that could adversely affect our
results of operations and financial condition.
The acquisition of smaller and undercapitalized insurance companies
involves a number of risks that could adversely affect our results of
operations and financial condition. The risks associated with the acquisition
of this type of company include:
If we cannot obtain sufficient capital to fund our organic growth and
acquisitions, we may not be able to expand our business.
Our strategy is to expand our business through organic growth and through
strategic acquisitions of regional insurance companies. We will require
additional capital in the future to support this objective. If we are unable
to obtain sufficient capital on satisfactory terms and conditions, we may not
be able to expand our business or make future acquisitions. Our ability to
obtain additional financing will depend on a number of factors, many of which
are beyond our control. For example, we may not be able to obtain additional
financing because we may already have substantial debt at the time or because
we do not
have sufficient cash flow to service or repay our existing or additional
debt. In addition, any equity capital we obtain in the future could be
dilutive to our existing stockholders.
Many of our competitors are financially stronger than we are and may be
able to offer lower-priced products with which we may be unable to compete.
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. We compete 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 we are, have substantially greater financial,
technical and
-30-
operating resources and have equal or higher ratings from A.M.
Best. In addition, our competition may become increasingly better capitalized
in the future as the traditional barriers between insurance companies, banks
and other financial institutions erode and as the property and casualty
insurance industry continues to consolidate.
The greater capitalization of many of our competitors enables them to
operate with lower profit margins and, therefore, allows them to market their
products more aggressively, take advantage more quickly of new marketing
opportunities and offer lower premium rates. We may not be able to maintain
our current competitive position in the markets in which we operate if our
competitors offer prices on products that are lower than the prices we can
offer. Moreover, if our competitors lower the price of their products and we
meet their pricing, our profit margins and revenues may be reduced and our
ratios of claims and expenses to premiums may increase, which may materially
adversely affect our business, financial condition and results of operations.
Because our investment portfolio is made up primarily of fixed-income
securities, our investment income and the fair value of our investment
portfolio could suffer as a result of a number of factors.
We invest the premiums we receive from our policyholders and maintain an
investment portfolio that consists primarily of fixed-income securities. The
management of our investment portfolio is an important component of our
profitability because a significant portion of our operating income is
generated from the income we receive on our invested assets. The quality
and/or yield of our portfolio may be affected by a number of factors, including
the general economic and business environment, changes in the credit quality of
the issuers of the fixed-income securities we own, changes in market conditions
and regulatory changes. The fixed-income securities we own are issued
primarily by domestic entities and are backed either by the credit or
collateral of the underlying issuer. Factors such as an economic downturn, a
regulatory change pertaining to a particular issuer’s industry, a
significant deterioration in the cash flows of the issuer or a change in
the issuer’s marketplace may adversely affect our ability to collect principal
and interest from the issuer.
Our investments are also subject to risk resulting from interest rate
fluctuations. Increasing interest rates or a widening in the spread between
interest rates available on United States Treasury securities and corporate
debt or asset-backed securities, for example, will typically have an adverse
impact on the market values of the fixed-rate securities in our investment
portfolio. If interest rates decline, we generally achieve a lower overall
rate of return on investments of cash generated from our operations. In
addition, in the event that investments are called or mature in a declining
interest rate environment, we may be unable to reinvest the proceeds in
securities with comparable interest rates. Changes in interest rates may
reduce both our profitability and our return on invested capital.
We are dependent on our key personnel, and the loss of any member of our
senior management could negatively affect the implementation of our business
strategy and achievement of our growth objectives.
The loss of, or failure to attract, key personnel could significantly
impede our financial plans, growth, marketing and other objectives. Our
success depends to a
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substantial extent on the ability and experience of our
senior management. We believe that our future success will depend in large
part on our ability to attract and retain additional skilled and qualified
personnel and to expand, train and manage our employees. We may not be
successful in doing so, because the competition for experienced personnel in
the insurance industry is intense. We do not have employment agreements with
our key personnel, all of whom are employed by the Mutual Company.
Recently enacted and proposed changes in securities laws and regulations
are likely to increase our costs.
The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), which became law in
July 2002, required changes in our corporate governance, public disclosure and
compliance practices. Sarbanes-Oxley also required the Securities and Exchange
Commission (the “SEC”), to promulgate new rules on a variety of corporate
governance and disclosure subjects. In addition to final rules and rule
proposals already made, the Nasdaq National Market
SM
(“Nasdaq”) has adopted
revisions to its requirements for companies listed on Nasdaq, like us. We
expect these developments to increase our legal and financial compliance costs.
We also expect these developments to make it more difficult and more
expensive for us to obtain director and officer liability insurance, and we may
be required to accept reduced coverage or incur substantially higher costs to
obtain coverage. These developments could make it more difficult for us to
attract and retain additional members of
our board of directors, particularly to serve on our audit committee, and
additional executive officers.
The reinsurance agreements on which we rely do not relieve us from
liability to our policyholders, and we face a risk of non-payment from our
reinsurers and the non-availability of reinsurance in the future.
We rely on reinsurance agreements to limit our maximum net loss from large
single risks or risks in concentrated areas, and to increase our capacity to
write insurance. Although the reinsurance we maintain provides that the
reinsurer is liable to us, our reinsurance does not relieve us from liability
to our policyholders. To the extent that a reinsurer may be unable to pay
losses for which it is liable to us under the terms of its reinsurance
agreement with us, we remain liable for such losses. As of December 31, 2003,
we had approximately $16.0 million of reinsurance receivables from third party
reinsurers for paid and unpaid losses for which we believe we are entitled to
reimbursement. The insolvency or inability to make timely payments by our
reinsurers under the terms of our reinsurance agreements would adversely affect
our results of operations.
In addition, we face a risk of the non-availability of reinsurance or an
increase in reinsurance costs that could adversely affect our ability to write
business or our results of operations. Market conditions beyond our control,
such as the amount of surplus in the reinsurance market and natural and
man-made catastrophes, affect the availability and cost of the reinsurance we
purchase. We cannot assure you that reinsurance will remain available to us to
the same extent and on substantially the same terms and rates as it is
currently available. If we are unable to maintain our current level of
reinsurance or purchase new
-32-
reinsurance protection in amounts that we consider
sufficient, we would either have to be willing to accept an increase in our net
retention or reduce our insurance writings, and our business, financial
condition and results of operations could be adversely affected.
Risks Relating to the Property and Casualty Insurance Industry
We face significant exposure to terrorism.
As a result of the September 11, 2001 terrorist attacks, the insurance
industry has been compelled to re-examine policy terms and conditions and to
address the potential for future threats of terrorist attacks and resulting
losses. Our personal and commercial property and casualty insurance policies
are not priced to cover the risk of terrorist attacks and losses such as those
suffered in the World Trade Center terrorist attack. Therefore, we have
exposure to terrorism under the lines of insurance products that we offer. The
Terrorism Risk Insurance Act of 2002 may reduce the impact of future losses as
a result of terrorism in connection with commercial insurance products we
offer; however, because of the uncertainty regarding the application of the
Terrorism Risk Insurance Act, the amount of losses we may be required to retain
as a result of terrorism may result in a material adverse
effect on our business, financial condition and results of operations.
The Terrorism Risk Insurance Act is scheduled to expire on December 31, 2005,
so it will not provide coverage beyond that time unless it is extended. The
Terrorism Risk Insurance Act does not cover the personal insurance products we
offer, and state regulators have not approved exclusions for acts of terrorism
in our personal insurance products. Therefore we could incur large unexpected
losses from the personal insurance policies that we issue, which could have a
material adverse effect on our business, financial condition and results of
operations.
Industry trends, such as increased litigation against the insurance
industry and individual insurers, the willingness of courts to expand covered
causes of loss, rising jury awards, increasing medical costs and the escalation
of loss severity may contribute to increased costs and to the deterioration of
our reserves.
Loss severity in our industry has continued to increase in recent years,
principally driven by larger court judgments and increasing medical costs. In
addition, many legal actions and proceedings have been brought on behalf of
classes of complainants, which can increase the size of judgments. The
propensity of policyholders and third party claimants to litigate and the
willingness of courts to expand causes of loss and the size of awards may
render our loss reserves inadequate for current and future losses if we become
subject to litigation.
Loss or significant restriction of the use of credit scoring in the
pricing and underwriting of our personal insurance products could reduce our
future profitability.
We use credit scoring as a factor in making risk selection and pricing
decisions where allowed by state law for our personal insurance products.
Recently, some consumer groups and regulators have questioned whether the use
of credit scoring unfairly discriminates against people with low incomes,
minority groups and the elderly. These consumer groups and regulators are
calling for the prohibition or restriction on the use of credit scoring in
underwriting and pricing. Laws or regulations enacted in a number of states
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that significantly curtail the use of credit scoring in the underwriting
process could reduce our future profitability.
Changes in applicable insurance laws or regulations or changes in the way
regulators administer those laws or regulations could materially adversely
change our operating environment and increase our exposure to loss or put us at
a competitive disadvantage.
Property and casualty insurers are subject to extensive supervision in the
states in which they do business. This regulatory oversight includes, by way
of example, matters relating to licensing and examination, rate setting, market
conduct, policy forms, limitations on the nature and amount of certain
investments, claims practices, mandated participation in involuntary markets
and guaranty funds, reserve adequacy, insurer solvency, transactions between
affiliates, the amount of dividends that may be paid and restrictions on
underwriting standards. Such regulation and supervision are primarily for
the benefit and protection of policyholders and not for the benefit of
stockholders. For instance, we are subject to involuntary participation in
specified markets in various states in which we operate, and the rate levels we
are permitted to charge do not always correspond with our underlying costs
associated with the coverage we have issued.
The NAIC and state insurance regulators are re-examining existing laws and
regulations, specifically focusing on insurance company investments, issues
relating to the solvency of insurance companies, risk-based capital guidelines,
restrictions on terms and conditions included in insurance policies, certain
methods of accounting, reserves for unearned premiums, losses and other
purposes, interpretations of existing laws and the development of new laws.
Changes in state laws and regulations, as well as changes in the way state
regulators view related party transactions in particular, could materially
change our operating environment and have an adverse effect on our business.
The state insurance regulatory framework recently has come under increased
federal scrutiny. Congress is considering legislation that would create an
optional federal charter for insurers. Federal chartering has the potential to
create an uneven playing field for insurers by subjecting federally-chartered
and state-chartered insurers to different regulatory requirements. Federal
chartering also raises the specter of a matrix of regulation and costly
duplicative, or conflicting, federal and state requirements. In addition, if
federal legislation repeals the partial exemption for the insurance industry
from federal antitrust laws, it would make it extremely difficult for insurers
to compile and share loss data and predict future loss costs, which is an
important part of cost-based pricing for insurers. If the ability to collect
this data were removed, then the predictability of future loss costs, and
hence, the reliability of our pricing, would be greatly undermined.
If certain state regulators, legislators and special interest groups are
successful in attempts to reduce, freeze or set rates for insurance policies,
especially automobile policies, at levels that do not, in our management’s
view, correspond with underlying costs, our results of operations will be
adversely affected.
From time to time, the automobile insurance industry in particular has
been under pressure from certain state regulators, legislators and special
interest groups to
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reduce, freeze or set rates at levels that do not, in the
view of our management, correspond with underlying costs, including initiatives
to roll back automobile and other personal lines rates. This activity may in
the future adversely affect the profitability of our automobile insurance line
of business in various states because increasing costs of litigation and
medical treatment, combined with rising automobile repair costs, continue to
increase our cost of providing automobile insurance coverage that we may not be
able to offset by increasing the rates for our automobile insurance products.
Adverse legislative and regulatory activity constraining our ability to price
automobile insurance coverage adequately may occur in the future. The
impact of the automobile insurance regulatory environment on our results
of operations in the future is not predictable.
We are subject to assessments, based on our market share in a given line
of business, to assist in the payment of unpaid claims and related costs of
insolvent insurance companies; these assessments could significantly affect our
financial condition.
We are obligated to pay assessments under the guaranty fund laws of the
various states in which we are licensed. Generally, under these laws, we are
subject to assessment, depending upon our market share of a given line of
insurance business, to assist in the payment of unpaid claims and related costs
of insolvent insurance companies in those states. The number and magnitude of
future insurance company failures in the states in which we conduct business
cannot be predicted, but resulting assessments could significantly affect our
business, financial condition and results of operations. We are currently
being assessed at the maximum level permitted by Pennsylvania law for several
of our lines of business, and we expect that we will continue to be assessed by
Pennsylvania at the maximum level for these business lines for a number of
years.
We must establish premium rates and loss and loss expense reserves from
forecasts of the ultimate costs expected to arise from risks underwritten
during the policy period, and our profitability could be adversely affected to
the extent our premium rates or reserves are too low.
One of the distinguishing features of the property and casualty insurance
industry is that its products are priced before its costs are known, as premium
rates are generally determined before losses are reported. Accordingly, we
must establish premium rates from forecasts of the ultimate costs we expect to
arise from risks we have underwritten during the policy period, and our premium
rates may not be adequate to cover the ultimate losses incurred. Further, we
must establish reserves for losses and loss expenses based upon estimates
involving actuarial and statistical projections at a given time of what we
expect to be our ultimate liability, and it is possible that our ultimate
liability will exceed these estimates because of the future development of
known losses, the existence of losses that have occurred but are currently
unreported and larger than historical settlements on pending and unreported
claims. The process of estimating reserves is inherently judgmental and can be
influenced by factors that are subject to variation. If the premium rates or
reserves we establish are not sufficient, our business, financial condition and
results of operations may be adversely impacted.
The cyclical nature of the property and casualty insurance industry may
reduce our revenues and profit margins.
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The property and casualty insurance industry is highly cyclical, and
individual lines of business experience their own cycles within the overall
insurance industry cycle. Premium rate levels are related to the availability
of insurance coverage, which varies
according to the level of surplus in the insurance 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 we find it necessary to reduce premiums or limit premium
increases due to these competitive pressures on pricing, we may experience a
reduction in our profit margins and revenues, an increase in our ratios of
losses and expenses to premiums and, therefore, lower profitability.
Risks Relating to Our Class A Common Stock
The price of our Class A common stock may be adversely affected by its low
trading volume.
Our Class A common stock has limited trading liquidity. Reported average
daily trading volume in our Class A common stock for the year ended December
31, 2003, was approximately 15,000 shares. This limited trading liquidity
subjects our shares of Class A common stock to greater price volatility.
The market price of our Class A common stock may be adversely affected by
future sales of a substantial number of shares of our Class A common stock or
Class B common stock or the availability of such shares for sale.
The sale, or the availability for sale, of a significant number of shares
of our Class A common stock or Class B common stock could adversely affect the
prevailing market prices of our Class A common stock and could impair our
ability to raise capital through future sales of our equity securities. As of
February 20, 2004, we had outstanding 9,809,352 shares of our Class A common
stock and 3,011,049 shares of our Class B common stock. Apart from the shares
held by the Mutual Company, all of our outstanding shares of Class A common
stock and Class B common stock are freely tradeable without restrictions under
the Securities Act. Sales of a substantial number of shares of our Class A
common stock or Class B common stock by the Mutual Company could cause the
price of our Class A common stock to fall.
The Mutual Company’s ownership of our stock, provisions of our certificate
of incorporation and by-laws and certain state laws make it unlikely anyone
could acquire control of us unless the Mutual Company were in favor of the
change of control.
The Mutual Company’s ownership of our Class A common stock and Class B
common stock, certain provisions of our certificate of incorporation and
by-laws and the insurance laws and regulations of Pennsylvania and Virginia
could delay or prevent the removal of members of our board of directors and
could make more difficult a merger, tender offer or proxy contest involving us
to succeed, even if such events were beneficial to the interest of our
stockholders other than the Mutual Company. These factors could also
discourage a third party from attempting to acquire control of us. The
classification of our
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board of directors could also have the effect of delaying
or preventing a change in control of us.
In addition, we have authorized 2,000,000 shares of series preferred stock
that we could issue without further stockholder approval and upon such terms
and conditions, and having such rights, privileges and preferences, as our
board of directors may determine and that may make it difficult for a third
party to acquire control of us. We have no current plans to issue any
preferred stock. Moreover, the Delaware General Corporation Law contains
certain provisions that prohibit certain business combination transactions
under certain circumstances. In addition, state insurance laws and regulations
generally prohibit any persons from acquiring a 10% or greater interest in an
insurance company without the prior approval of the state insurance
commissioner of the state where the insurer is domiciled.
Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports are available without
charge on our website, www.donegalgroup.com, as soon as reasonably practicable
after they are filed electronically with the SEC. Our Code of Business Conduct
and Ethics, and the charters of our Audit Committee and our Nominating
Committee are available on our website. Upon request to our Corporate
Secretary, printed copies are also available. We are providing the address to
our Internet site solely for the information of investors. We do not intend
the reference to our website address to be an active link or to otherwise
incorporate the contents of the website into this report.
Item 2. Properties.
We and Atlantic States share headquarters with the Mutual Company in a
building owned by the Mutual Company. The Mutual Company charges us for an
appropriate portion of the building expenses under an inter-company allocation
agreement that is consistent with the terms of the pooling agreement. The
headquarters of the Mutual Company has approximately 172,600 square feet of
office space. Southern owns a facility of approximately 10,000 square feet in
Glen Allen, Virginia. Le Mars owns a facility of approximately 25,500 square
feet in Le Mars, Iowa and Peninsula owns a facility of approximately 14,600
square feet in Salisbury, Maryland.
Item 3. Legal Proceedings.
We are a party to numerous lawsuits arising in the ordinary course of our
insurance business. We believe that the resolution of these lawsuits will not
have a material adverse effect on our financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of holders of our Class A common stock
or Class B common stock during the fourth quarter of 2003.
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Executive Officers of the Company
The following table sets forth information regarding the executive
officers of the companies that comprise the Donegal Insurance Group, each of
whom has served with us for more than 15 years:
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•
a purchase of the stock of an existing stock insurance company; or
•
a two-step acquisition of an existing mutual insurance company as follows:
•
First, a surplus note in the target
mutual insurance company is purchased, a management
agreement with the target mutual insurance company is
entered into and our designees are appointed as a
majority of the target mutual insurance company’s board
of directors.
•
Second, the mutual insurance company is
demutualized. We acquire the stock of the resulting
stock insurance company after the company has been
restructured and its book of business has been
reunderwritten to our satisfaction.
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•
Achieving underwriting profitability.
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1998
1999
2000
2001
2002
2003
100.1
%
106.5
%
101.8
%
103.8
%
99.6
%
95.0
%
106.0
108.1
110.4
115.9
107.4
101.1
(1)
As reported by A.M. Best.
•
Pursuing profitable growth by organic expansion within our
traditional operating territories through developing and maintaining
quality agency representation.
•
Acquiring property and casualty insurance companies to augment
our organic growth in existing markets and to expand into new
geographic regions.
•
Location in regions where we are currently
conducting business or would like to conduct business;
•
A mix of business similar to our business;
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•
Targeted premium volume between $20.0 million and $80.0 million; and
•
Transaction terms that are fair and reasonable to us.
•
Focusing on expense controls and utilization of technology to
increase our operating efficiency.
•
Providing responsive and friendly customer and agent service to
enable us to attract new policyholders and retain existing
policyholders.
•
Quickly reply to information requests and policy submissions; and
•
Promptly respond to and process claims.
•
Maintaining premium rate adequacy to enhance our underwriting
results, while maintaining our existing book of business and
preserving our ability to write new business.
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(1)
Because of the different relative voting power of our Class A common
stock and our Class B common stock, our public stockholders hold
approximately 43% of the aggregate voting power.
(2)
Because of the different relative voting power of our Class A common
stock and our Class B common stock, the Mutual Company holds
approximately 57% of the aggregate voting power.
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•
Facilitating our stable management, consistent
underwriting discipline, external growth and long-term
profitability.
•
Creating operational and expense synergies given
the combined resources and operating efficiencies of the Mutual
Company and us.
•
Enhancing our ability to affiliate with and
eventually acquire other mutual insurance companies.
•
Producing a more uniform and stable underwriting
result from year to year than we could achieve on our own.
•
Giving Atlantic States the benefit of the
underwriting capacity of the entire pool, rather than being
limited by the amount of its own capital and surplus.
Year
Insurance Company
Acquired
Method of
Acquired
State
by Us
Acquisition
Virginia
1988
Surplus note investment
by the Mutual Company in
1984; demutualization in
1988; acquisition of
stock by us in 1988.
Delaware
1995
Surplus note investment
by the Mutual Company in
1993; demutualization in
1994; acquisition of
stock by us in 1995.
Ohio
1997
Surplus note investment
by the Mutual Company in
1992; demutualization in
1993; acquisition of
stock by us in 1997.
Georgia
1998
Stock purchase in 1998.
New York
2001
Surplus note investment
by the Mutual Company in
1995; demutualization in
1998; acquisition of
stock by us in 2001.
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Year
Insurance Company
Acquired
Method of
Acquired
State
by Us
Acquisition
Iowa
2004
Surplus note investment
by the Mutual Company in
2002; demutualization
approved; acquisition of
stock by us as of
January 1, 2004.
Maryland
2004
Stock purchase on
January 6, 2004.
(1)
To reduce administrative and compliance costs and expenses, the designated
entities were merged into one of our existing insurance subsidiaries.
58.3
%
14.6
6.3
5.7
5.1
4.3
1.7
1.4
2.6
100.0
%
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•
Private passenger automobile – policies that
provide protection against liability for bodily injury and
property damage arising from automobile accidents, and
protection against loss from damage to automobiles owned by the
insured.
•
Homeowners — policies that provide coverage for
damage to residences and their contents from a broad range of
perils, including, fire, lightning,
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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.
•
Commercial multi-peril – policies that provide
protection to businesses against many perils, usually combining
liability and physical damage coverages.
•
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.
•
Commercial automobile – policies that provide
protection against liability for bodily injury and property
damage arising from automobile accidents, and protection
against loss from damage to automobiles owned by the insured.
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•
assess and select quality standard and preferred risks;
•
adhere to disciplined underwriting and reunderwriting guidelines;
•
inspect substantially all commercial lines risks
and a substantial number of personal lines risks; and
•
utilize various types of risk management and loss
control services.
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Year Ended December 31,
(in thousands)
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
$
52,790
$
63,317
$
75,372
$
78,889
$
80,256
$
96,015
$
99,234
$
102,709
$
114,544
$
131,108
$
138,896
50,583
60,227
72,380
77,400
77,459
95,556
100,076
110,744
121,378
130,658
48,132
56,656
70,451
73,438
76,613
95,315
103,943
112,140
120,548
44,956
54,571
66,936
71,816
74,851
94,830
104,073
110,673
42,157
51,825
64,356
69,378
73,456
94,354
101,880
41,050
50,493
63,095
69,485
73,103
93,258
40,572
49,593
62,323
69,949
72,706
39,991
49,504
62,534
69,415
40,113
49,758
62,067
40,131
49,539
40,016
$
(12,774
)
$
(13,778
)
$
(13,305
)
$
(9,474
)
$
(7,550
)
$
(2,757
)
$
2,646
$
7,964
$
6,004
$
(450
)
$
16,126
$
19,401
$
24,485
$
27,229
$
27,803
$
37,427
$
39,060
$
43,053
$
45,048
$
46,268
25,393
30,354
37,981
41,532
46,954
57,347
60,622
67,689
70,077
32,079
38,684
47,027
53,555
58,883
69,973
76,811
82,268
36,726
43,655
53,276
59,995
65,898
78,757
85,453
39,122
46,331
56,869
63,048
70,642
83,038
40,440
47,802
58,286
65,595
72,801
40,903
48,520
59,160
66,976
41,152
48,925
59,802
39,877
49,288
40,110
Year Ended December 31
1995
1996
1997
1998
1999
2000
2001
2002
2003
(in thousands)
$
108,118
$
113,346
$
115,801
$
136,727
$
144,180
$
156,476
$
179,840
$
210,692
$
217,914
32,746
34,457
35,545
40,712
44,946
53,767
65,296
79,584
79,018
75,372
78,889
80,256
96,015
99,234
102,709
114,544
131,108
138,896
83,265
101,136
104,328
127,657
154,481
172,905
195,097
214,635
21,198
31,721
31,622
34,399
52,601
62,232
74,549
83,977
62,067
69,415
72,706
93,258
101,880
110,673
120,548
130,658
(24,853
)
(12,210
)
(11,473
)
(9,070
)
10,301
16,429
15,257
3,943
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•
“excess of loss reinsurance,” under which our
losses are automatically reinsured, through a series of
contracts, over a set retention ($300,000 for 2003), and
•
“catastrophic reinsurance,” under which we recover,
through a series of contracts, between 95% and 100% of an
accumulation of many losses
resulting from a single event, including natural disasters
($3.0 million retention for 2003).
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(1)
Ratings assigned by Moody’s Investors Services, Inc. or Standard & Poor’s Corporation.
(2)
Includes mortgage-backed securities of $25,882,579.
(3)
Represents one unrated obligation of The
Lancaster County Hospital Authority Mennonite Home Project that our
management believes to be equivalent to investment grade securities with respect to repayment risk.
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(1)
We account for our 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 classified as held to maturity are
valued at amortized cost; those fixed maturities classified as available for sale are valued at fair value.
Total fair value of fixed maturities classified as held to maturity was $86.9 million at December 31, 2001, $89.8
million at December 31, 2002 and $116.1 million at December 31, 2003. The amortized cost of fixed maturities
classified as available for sale was $170.3 million at December 31, 2001, $187.5 million at December 31, 2002 and
$192.1 million at December 31, 2003.
(2)
Equity securities are valued at fair value. Total cost of equity securities was $16.6 million at December 31,
2001, $21.6 million at December 31, 2002 and $29.6 million at December 31, 2003.
(3)
Short-term investments are valued at cost, which approximates market.
(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.
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Year Ended December 31,
(dollars in thousands)
2001
2002
2003
$
294,989
$
316,466
$
376,788
15,886
14,581
13,316
5.3
%
4.6
%
3.5
%
(1)
Average of the aggregate invested amounts at the beginning and end of the period.
(2)
Investment income is net of investment expenses and does not include realized investment gains or
losses or provision for income taxes.
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•
We and the Mutual Company periodically review the
percentage participation rate of Atlantic States in the
underwriting pool.
•
We and the Mutual Company must annually establish
the terms of certain inter-company reinsurance agreements.
•
We and the Mutual Company must make judgments about
the allocation of shared expenses between the Mutual Company
and us in accordance with various inter-company expense-sharing
agreements.
•
We may enter into other transactions and
contractual relationships with the Mutual Company and its
subsidiaries.
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•
elect a majority of our board of directors, who in
turn determines our management and policies; and
•
control the outcome of any corporate transaction or
other matter submitted to our stockholders for approval,
including mergers, consolidations and the sale of all or
substantially all of our assets.
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•
the significant competition among our competitors
to attract independent agents;
•
our intense and time-consuming process to select a
new independent agent;
•
our stringent criteria that require independent
agents to adhere to consistent underwriting standards; and
•
our ability to pay competitive and attractive
commissions, bonuses and other incentives to independent agents
as compensation for selling our products.
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•
the inadequacy of reserves for loss and loss expenses;
•
the need to supplement management with additional experienced personnel;
•
conditions imposed by regulatory agencies that make
the realization of cost-savings through integration of
operations more difficult;
•
a need for additional capital that was not
anticipated at the time of the acquisition; and
•
the use of more of our management’s time than was
originally anticipated.
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Name
Age
Position
61
President and Chief Executive Officer of the
Mutual Company since 1981; President and
Chief Executive Officer of the Company since
1986.
51
Senior Vice President of the Mutual Company
and the Company since 1991; Chief Financial
Officer of the Mutual Company since 1983 and
of the Company since 1986 and Secretary of
the Mutual Company and the Company since
1988.
50
Senior Vice President, Claims, of the Mutual
Company since 1997; Vice President, Claims,
of the Mutual Company from 1992 to 1997 and
Manager, Casualty Claims, of the Mutual
Company from 1985 to 1992.
59
Senior Vice President, Underwriting, of the
Mutual Company since 1997, Vice President,
Commercial Underwriting, of the Mutual
Company from 1992 to 1997 and Manager,
Commercial Underwriting of the Mutual
Company from 1983 to 1992.
43
Treasurer of the Mutual Company and the
Company since 1993; Controller of the Mutual
Company and the Company from 1988 to 1993.
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PART II
The response to this Item is incorporated in part by reference to page 32
of our Annual Report to Stockholders for the year ended December 31, 2003,
which is included as Exhibit (13) to this Form 10-K Report. As of February 20,
2004, we had approximately 633 holders of record of our Class A common stock
and 478 holders of record of our Class B common stock. We declared dividends
of $0.43 per share on our Class A common stock and $0.39 per share on our
Class B common stock in 2003 and $.40 per share on our Class A common stock and
$.36 per share on our Class B common stock in 2002.
During the year ended December 31, 2003, we did not repurchase any of our
Class A common stock or Class B common stock. During 2004, we may repurchase
shares of our Class B common stock from time to time in open market
transactions in accordance with SEC Rule 10b-18 or in private transactions.
Item 6. Selected Financial Data.
The response to this Item is incorporated by reference to page 8 of our
Annual Report to Stockholders for the year ended December 31, 2003, which is
included as Exhibit (13) to this Form 10-K Report.
The response to this Item is incorporated by reference to pages 10 through
15 of our Annual Report to Stockholders for the year ended December 31, 2003,
which is included as Exhibit (13) to this Form 10-K Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to the impact of interest rate changes, changes in market
values of investments and to credit risk.
In the normal course of business, we employ established policies and
procedures to manage our exposure to changes in interest rates, fluctuations in
the fair market value of our debt and equity securities and credit risk. We
seek to mitigate these risks by various actions described below.
Interest Rate Risk
Our exposure to market risk for a change in interest rates is concentrated
in our investment portfolio. We monitor this exposure through periodic reviews
of asset and liability
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positions. Estimates of cash flows and the impact of
interest rate fluctuations relating to our investment portfolio are monitored
regularly. Generally, we do not hedge our exposure to interest rate risk
because we have the capacity to, and do, hold fixed maturity investments to
maturity.
Principal cash flows and related weighted-average interest rates by
expected maturity dates for financial instruments sensitive to interest rates
are as follows:
Actual cash flows from investments may differ from those stated as a
result of calls and prepayments.
Equity Price Risk
Our portfolio of marketable equity securities, which is carried on the
consolidated balance sheets at estimated fair value, has exposure to price
risk, the risk of potential loss in estimated fair value resulting from an
adverse change in prices. Our objective is to earn competitive relative
returns by investing in a diverse portfolio of high-quality, liquid securities.
Credit Risk
Our objective is to earn competitive returns by investing in a diversified
portfolio of securities. Our portfolio of fixed-maturity securities and, to a
lesser extent, our short-term investments are subject to credit risk. This
risk is defined as the potential loss in
market value resulting from adverse changes in the borrower’s ability to
repay the debt. We manage this risk by performing up front underwriting
analysis and through regular reviews by our investment staff. The fixed
maturity investments are also maintained between minimum and maximum
percentages of invested assets.
We provide property and liability insurance coverages through independent
insurance agencies located throughout our operating areas. The majority of
this business is
-40-
billed directly to the insured, although a portion of our
commercial business is billed through our agents, who are extended credit in
the normal course of business.
Our insurance subsidiaries maintain reinsurance agreements in place with
the Mutual Company and with a number of other major unaffiliated authorized
reinsurers.
Item 8. Financial Statements and Supplementary Data.
The response to this Item is incorporated by reference to pages 16 through
31 of our Annual Report to Stockholders for the year ended December 31, 2003,
which is included as Exhibit (13) to this Form 10-K Report.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) as of the end of the period covered by this report. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, our disclosure controls and
procedures are effective in recording, processing, summarizing and reporting,
on a timely basis, information required to be disclosed by us in the reports
that we file or submit under the Exchange Act.
Internal Control over Financial Reporting
There have not been any changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fourth quarter of 2003 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
-41-
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
Item 7.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
Table of Contents
Table of Contents
Item 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Table of Contents
PART III
Item 10. Directors and Executive Officers of the Registrant.
The response to this Item with respect to our directors is incorporated by
reference to pages 4 through 6 and pages 9 through 16 of our proxy statement
relating to our annual meeting of stockholders to be held April 15, 2004. The
response to this Item with respect to our executive officers is incorporated by
reference to Part I of this Form 10-K Report.
We have adopted a Code of Ethics, the full text of which is included as
Exhibit 14 to this Form 10-K Report.
Item 11. Executive Compensation.
The response to this Item is incorporated by reference to pages 16 through
21 of our proxy statement relating to our annual meeting of stockholders to be
held April 15, 2004, except for the Report of the Compensation Committee, the
Performance Graph and the Report of the Audit Committee, which are not
incorporated herein by reference.
The response to this Item is incorporated by reference to pages 4 through
6 of our proxy statement relating to our annual meeting of stockholders to be
held April 15, 2004.
The following table sets forth information regarding our equity
compensation plans:
Equity Compensation Plan Information
-42-
Item 13. Certain Relationships and Related Transactions.
The response to this Item is incorporated by reference to pages 17 and 18
of our proxy statement relating to our annual meeting of stockholders to be
held April 15, 2004.
Item 14. Principal Accountant Fees and Services.
The response to this Item is incorporated by reference to pages 22 through
24 of our proxy statement relating to our annual meeting of stockholders to be
held April 15, 2004.
-43-
Item 12.
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
Number of securities
(class) remaining
available for future
Number of securities
issuance under equity
(class) to be issued
Weighted-average
compensation plans
upon exercise of
exercise price of
(excluding securities
outstanding options,
outstanding options,
reflected
Plan category
warrants and rights
warrants and rights
in column (a))
(a)
(b)
(c)
1,353,728
(Class A)
$
12.05
(Class A)
577,975
(Class A)
125,624
(Class B)
8.14
(Class B)
—
(Class B)
—
—
—
1,479,352
$
11.72
577,975
Table of Contents
Table of Contents
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
Financial statements, financial statement schedules and exhibits filed:
Consolidated Financial Statements
Financial Statement Schedules
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.
-44-
Exhibits
-45-
-46-
-47-
-48-
Reports on Form 8-K:
On October 17, 2003, the Company filed a Current Report on Form 8-K in
connection with the Company’s release of financial results for the quarter and
nine months ended September 30, 2003.
On November 3, 2003, the Company filed a Current Report on Form 8-K in
connection with the Company’s execution of a stock purchase agreement to
acquire all of the outstanding common stock of The Peninsula Insurance Company
and Peninsula Indemnity Company; the approval by the policyholders of Le Mars
Mutual Insurance Company of Iowa of its conversion; the October 31, 2003 filing
by the Company of a Form S-2 registration statement relating to the Company’s
public offering of 3,450,000 shares of its Class A common stock and the receipt
by the Company of a commitment letter from Manufacturers and Traders Trust
Company relating to a $35.0 million line of credit, which would be used to
repay the Company’s outstanding line of credit with Fleet National Bank.
On December 1, 2003, the Company filed a Current Report on Form 8-K in
connection with the Company’s execution of a Credit Agreement with
Manufacturers and Traders Trust Company relating to a four-year $35.0 million
unsecured, revolving line of credit and the repayment of the Company’s
outstanding line of credit with Fleet National Bank and the announcement of the
effectiveness of the Company’s Form S-2 Registration Statement relating to the
public offering of 3,450,000 shares of the Company’s Class A common stock and
the pricing of the shares being offered.
-49-
Page*
31
16
17
18
19
20
Page
Exhibit 23
S-1
S-2
S-5
S-7
S-8
* Refers to pages of our 2003 Annual Report to Stockholders. The Consolidated
Financial Statements and Notes to Consolidated Financial Statements and
Auditor’s Report thereon on pages 16 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 Exchange Act.
Table of Contents
Exhibit No.
Description of Exhibits
Reference
Certificate of Incorporation of Registrant, as amended.
(a)
Amended and Restated By-laws of Registrant.
(b)
Amended and Restated By-laws of Registrant as of March 19,
2004
Filed herewith
Management Contracts and Compensatory Plans or Arrangements
Donegal Group Inc. Amended and Restated 1996 Equity
Incentive Plan.
(c)
Donegal Group Inc. 2001 Equity Incentive Plan for Employees.
(d)
Donegal Group Inc. 2001 Equity Incentive Plan for Directors.
(d)
Donegal Group Inc. 2001 Employee Stock Purchase Plan, as
amended.
(e)
Donegal Group Inc. Second Amended and Restated 2001 Agency Stock
Purchase Plan.
(f)
Donegal Mutual Insurance Company 401(k) Plan.
(g)
Amendment No. 1 effective January 1, 2000 to Donegal Mutual
Insurance Company 401(k) Plan.
(g)
Amendment No. 2 effective January 6, 2000 to Donegal Mutual
Insurance Company 401(k) Plan.
(b)
Amendment No. 3 effective July 23, 2001 to Donegal Mutual
Insurance Company 401(k) Plan.
(b)
Amendment No. 4 effective January 1, 2002 to Donegal Mutual
Insurance Company 401(k) Plan.
(b)
Amendment No. 5 effective December 31, 2001 to Donegal
Mutual Insurance Company 401(k) Plan.
(b)
Amendment No. 6 effective July 1, 2002 to Donegal Mutual
Insurance Company 401(k) Plan.
(r)
Donegal Mutual Insurance Company Executive Restoration Plan.
(h)
Table of Contents
Table of Contents
Exhibit No.
Description of Exhibits
Reference
Amendment dated as of April 20, 2000 to Proportional
Reinsurance Agreement between Donegal Mutual Insurance
Company and Atlantic States Insurance Company.
(n)
Lease Agreement dated as of September 1, 2000 between
Donegal Mutual Insurance Company and Province Bank FSB.
(d)
Aggregate Excess of Loss Reinsurance Agreement dated as of
January 1, 2001 between Donegal Mutual Insurance Company
and Atlantic States Insurance Company (as
successor-in-interest to Pioneer Insurance Company).
(d)
Stock Purchase Agreement dated as of October 28, 2003
between Donegal Group Inc. and Folksamerica Holding
Company, Inc.
(p)
Credit Agreement dated as of November 25, 2003 between
Donegal Group Inc. and Manufacturers and Traders Trust
Company
(q)
2003 Annual Report to Stockholders (electronic filing
contains only those portions incorporated by reference into
this Form 10-K Report).
Filed herewith
Code of Ethics
Filed herewith
Proxy Statement relating to the Annual Meeting of
Stockholders to be held on April 15, 2004; provided,
however, that the Report of the Compensation Committee, the
Performance Graph and the Report of the Audit Committee
shall not be deemed filed as part of this Form 10-K Report.
(o)
Subsidiaries of Registrant.
Filed herewith
Consent of Independent Auditors.
Filed herewith
Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive
Officer
Filed herewith
Table of Contents
Exhibit No.
Description of Exhibits
Reference
Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial
Officer
Filed herewith
Section 1350 Certification of Chief Executive Officer
Filed herewith
Section 1350 Certification of Chief Financial Officer
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, 2001.
(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, 1998.
(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, 2000.
(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/A Registration Statement No. 333-63102 filed
December 21, 2001.
(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.
(k)
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.
(l)
Such exhibit is hereby incorporated by reference to the like-described exhibit in Registrant’s Form
8-K Report dated December 21, 1995.
Table of Contents
(m)
Such exhibit is hereby incorporated by reference to the like-described exhibit in Registrant’s Form
8-K Report dated November 17, 1998.
(n)
Such exhibit is hereby incorporated by reference to the like-described exhibit in Registrant’s Form
8-K Report dated May 31, 2000.
(o)
Such exhibit is hereby incorporated by reference to the Registrant’s definitive proxy statement filed
March 25, 2004.
(p)
Such exhibit is hereby incorporated by reference to the like-described exhibits in Registrant’s Form
8-K Report dated October 28, 2003.
(q)
Such exhibit is hereby incorporated by reference to the like-described exhibit in Registrant’s Form
8-K Report dated November 24, 2003.
(r)
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, 2002.
Table of Contents
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.
Date: March 26, 2004
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.
-50-
-51-
DONEGAL GROUP INC.
By:
/s/ Donald H. Nikolaus
Donald H. Nikolaus, President
Signature
Title
Date
President and a Director
March 26, 2004
(principal executive officer)
Senior Vice President, Chief
March 26, 2004
Financial Officer and
Secretary (principal financial
and accounting officer)
Director
March 26, 2004
Director
March 26, 2004
Director
March 26, 2004
Director
March 26, 2004
Table of Contents
Signature
Title
Date
Director
March 26, 2004
Table of Contents
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE I – SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
($ in thousands)
December 31, 2003
| Amount at Which | ||||||||||||
| Fair | Shown in the | |||||||||||
|
Cost
|
Value
|
Balance Sheet
|
||||||||||
|
Fixed Maturities:
|
||||||||||||
|
Held to maturity:
|
||||||||||||
|
United States government and
governmental agencies and
authorities
|
$ | 29,131 | $ | 28,828 | $ | 29,131 | ||||||
|
Obligations of states and political
subdivisions
|
45,188 | 46,244 | 45,188 | |||||||||
|
Canadian government obligation
|
499 | 525 | 499 | |||||||||
|
All other corporate bonds
|
25,192 | 27,278 | 25,192 | |||||||||
|
Mortgage-backed securities
|
13,041 | 13,258 | 13,041 | |||||||||
|
|
|
|
|
|||||||||
|
Total fixed maturities
held to maturity
|
113,051 | 116,133 | 113,051 | |||||||||
|
|
|
|
|
|||||||||
|
Available for sale:
|
||||||||||||
|
United States government and
governmental agencies and
authorities
|
69,481 | 70,507 | 70,507 | |||||||||
|
Obligations of states and political
subdivisions
|
81,105 | 84,386 | 84,386 | |||||||||
|
All other corporate bonds
|
28,767 | 30,699 | 30,699 | |||||||||
|
Mortgage-backed securities
|
12,744 | 12,841 | 12,841 | |||||||||
|
|
|
|
|
|||||||||
|
Total fixed maturities
available for sale
|
192,097 | 198,433 | 198,433 | |||||||||
|
|
|
|
|
|||||||||
|
Total fixed maturities
|
305,148 | 314,566 | 311,484 | |||||||||
|
|
|
|
|
|||||||||
|
Equity Securities:
|
||||||||||||
|
Preferred stocks:
|
||||||||||||
|
Public utilities
|
102 | 126 | 126 | |||||||||
|
Banks
|
8,617 | 9,000 | 9,000 | |||||||||
|
Industrial and miscellaneous
|
1,450 | 1,504 | 1,504 | |||||||||
|
|
|
|
|
|||||||||
|
Total preferred stocks
|
10,169 | 10,630 | 10,630 | |||||||||
|
|
|
|
|
|||||||||
|
Common stocks:
|
||||||||||||
|
Banks and insurance companies
|
7,098 | 7,529 | 7,529 | |||||||||
|
Industrial and miscellaneous
|
12,377 | 13,289 | 13,289 | |||||||||
|
|
|
|
|
|||||||||
|
Total common stocks
|
19,475 | 20,818 | 20,818 | |||||||||
|
|
|
|
|
|||||||||
|
Total equity securities
|
29,644 | 31,448 | 31,448 | |||||||||
|
|
|
|
|
|||||||||
|
Short-term investments
|
78,344 | 78,344 | 78,344 | |||||||||
|
|
|
|
|
|||||||||
|
Total investments
|
$ | 413,136 | $ | 424,358 | $ | 421,276 | ||||||
|
|
|
|
|
|||||||||
S- 1
Table of Contents
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Condensed Balance Sheets
($ in thousands)
December 31, 2003 and 2002
|
2003
|
2002
|
|||||||
|
ASSETS
|
||||||||
|
Fixed-maturity investments
|
$ | 1,987 | $ | — | ||||
|
Investment in subsidiaries (equity method)
|
183,402 | 156,684 | ||||||
|
Short-term investments
|
47,559 | — | ||||||
|
Cash
|
365 | 604 | ||||||
|
Property and equipment
|
1,579 | 1,640 | ||||||
|
Other
|
1,345 | 99 | ||||||
|
|
|
|
||||||
|
Total assets
|
$ | 236,237 | $ | 159,027 | ||||
|
|
|
|
||||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Cash dividends declared to stockholders
|
$ | 1,379 | $ | 887 | ||||
|
Line of credit
|
— | 19,800 | ||||||
|
Subordinated debentures
|
25,774 | — | ||||||
|
Due to affiliate
|
— | 4,441 | ||||||
|
Other
|
435 | 716 | ||||||
|
|
|
|
||||||
|
Total liabilities
|
27,588 | 25,844 | ||||||
|
|
|
|
||||||
|
Stockholders’ equity
|
208,649 | 133,183 | ||||||
|
|
|
|
||||||
|
Total liabilities and stockholders’ equity
|
$ | 236,237 | $ | 159,027 | ||||
|
|
|
|
||||||
S-2
Table of Contents
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
(Continued)
Condensed Statements of Income and Comprehensive Income
($ in thousands)
Years Ended December 31, 2003, 2002 and 2001
|
2003
|
2002
|
2001
|
||||||||||
|
Statements of Income
|
||||||||||||
|
Revenues
|
||||||||||||
|
Dividends from subsidiaries
|
$ | 7,000 | $ | 10,400 | $ | 14,419 | ||||||
|
Other
|
1,034 | 797 | 824 | |||||||||
|
|
|
|
|
|||||||||
|
Total revenues
|
8,034 | 11,197 | 15,243 | |||||||||
|
|
|
|
|
|||||||||
|
Expenses
|
||||||||||||
|
Operating expenses
|
1,345 | 1,057 | 1,761 | |||||||||
|
Interest
|
1,320 | 1,139 | 2,288 | |||||||||
|
|
|
|
|
|||||||||
|
Total expenses
|
2,665 | 2,196 | 4,049 | |||||||||
|
|
|
|
|
|||||||||
|
Income before income tax benefit
and equity in undistributed net
income (loss) of subsidiaries
|
5,369 | 9,001 | 11,194 | |||||||||
|
Income tax benefit
|
(634 | ) | (435 | ) | (1,067 | ) | ||||||
|
|
|
|
|
|||||||||
|
Income before equity in
undistributed net income (loss)
of subsidiaries
|
6,003 | 9,436 | 12,261 | |||||||||
|
Equity in undistributed
net income (loss) of subsidiaries
|
12,291 | 2,567 | (6,443 | ) | ||||||||
|
|
|
|
|
|||||||||
|
Net income
|
$ | 18,294 | $ | 12,003 | $ | 5,818 | ||||||
|
|
|
|
|
|||||||||
|
Statements of Comprehensive Income
|
||||||||||||
|
Net income
|
$ | 18,294 | $ | 12,003 | $ | 5,818 | ||||||
|
|
|
|
|
|||||||||
|
Other comprehensive income, net of tax
|
||||||||||||
|
Unrealized gain (loss) — parent
|
(42 | ) | 15 | 26 | ||||||||
|
Unrealized gain — subsidiaries
|
421 | 2,035 | 3,035 | |||||||||
|
|
|
|
|
|||||||||
|
Other comprehensive income
|
379 | 2,050 | 3,061 | |||||||||
|
|
|
|
|
|||||||||
|
Comprehensive income
|
$ | 18,673 | $ | 14,053 | $ | 8,879 | ||||||
|
|
|
|
|
|||||||||
S-3
Table of Contents
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
(Continued)
Condensed Statements of Cash Flows
($ in thousands)
Years Ended December 31, 2003, 2002 and 2001
|
2003
|
2002
|
2001
|
||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income
|
$ | 18,294 | $ | 12,003 | $ | 5,818 | ||||||
|
|
|
|
|
|||||||||
|
Adjustments:
|
||||||||||||
|
Equity in undistributed net loss
(income)
of subsidiaries
|
(12,291 | ) | (2,567 | ) | 6,443 | |||||||
|
Other
|
(4,316 | ) | 788 | 252 | ||||||||
|
|
|
|
|
|||||||||
|
Net adjustments
|
(16,607 | ) | (1,779 | ) | 6,695 | |||||||
|
|
|
|
|
|||||||||
|
Net cash provided
|
1,687 | 10,224 | 12,513 | |||||||||
|
|
|
|
|
|||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Net purchase of fixed maturities
|
(1,938 | ) | — | — | ||||||||
|
Net purchase of short-term investments
|
(47,559 | ) | — | — | ||||||||
|
Net purchase of property and equipment
|
(433 | ) | (480 | ) | (122 | ) | ||||||
|
Investment in subsidiaries
|
(14,274 | ) | — | — | ||||||||
|
Other
|
(981 | ) | 38 | 38 | ||||||||
|
|
|
|
|
|||||||||
|
Net cash used
|
(65,185 | ) | (442 | ) | (84 | ) | ||||||
|
|
|
|
|
|||||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Cash dividends paid
|
(3,868 | ) | (3,509 | ) | (3,394 | ) | ||||||
|
Issuance of common stock
|
61,153 | 1,728 | 1,387 | |||||||||
|
Issuance of subordinated debentures
|
25,774 | — | — | |||||||||
|
Line of credit, net
|
(19,800 | ) | (7,800 | ) | (12,400 | ) | ||||||
|
|
|
|
|
|||||||||
|
Net cash provided
|
63,259 | (9,581 | ) | (14,407 | ) | |||||||
|
|
|
|
|
|||||||||
|
Net change in cash
|
(239 | ) | 201 | (1,978 | ) | |||||||
|
Cash at beginning of year
|
604 | 403 | 2,381 | |||||||||
|
|
|
|
|
|||||||||
|
Cash at end of year
|
$ | 365 | $ | 604 | $ | 403 | ||||||
|
|
|
|
|
|||||||||
S-4
Table of Contents
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III – SUPPLEMENTARY INSURANCE INFORMATION
($ in thousands)
Years Ended December 31, 2003, 2002 and 2001
| Amortization | ||||||||||||||||||||||||
| Net | Net | Net Losses | of Deferred | Other | Net | |||||||||||||||||||
| Earned | Investment | And Loss | Policy | Underwriting | Premiums | |||||||||||||||||||
|
Segment
|
Premiums
|
Income
|
Expenses
|
Acquisition Costs
|
Expenses
|
Written
|
||||||||||||||||||
|
Year Ended
December 31, 2003
|
||||||||||||||||||||||||
|
Personal lines
|
$ | 125,322 | $ | — | $ | 85,057 | $ | 19,639 | $ | 18,268 | $ | 130,386 | ||||||||||||
|
Commercial lines
|
71,471 | — | 41,186 | 11,200 | 10,418 | 76,595 | ||||||||||||||||||
|
Investments
|
— | 13,316 | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
|
$ | 196,793 | $ | 13,316 | $ | 126,243 | $ | 30,839 | $ | 28,686 | $ | 206,981 | ||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Year Ended
December 31, 2002
|
||||||||||||||||||||||||
|
Personal lines
|
$ | 119,838 | $ | — | $ | 87,790 | $ | 19,005 | $ | 16,335 | $ | 125,777 | ||||||||||||
|
Commercial lines
|
66,003 | — | 41,478 | 10,468 | 8,997 | 68,727 | ||||||||||||||||||
|
Investments
|
— | 14,581 | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
|
$ | 185,841 | $ | 14,581 | $ | 129,268 | $ | 29,473 | $ | 25,332 | $ | 194,504 | ||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
|
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 | ||||||||||||
|
|
|
|
|
|
|
|
||||||||||||||||||
S-5
Table of Contents
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
|
||||||||||||
|
2003
|
||||||||||||||||
|
Personal lines
|
$ | 9,897 | $ | 110,700 | $ | 81,757 | $ | — | ||||||||
|
Commercial lines
|
6,327 | 107,214 | 52,271 | — | ||||||||||||
|
Investments
|
— | — | — | — | ||||||||||||
|
|
|
|
|
|
||||||||||||
|
|
$ | 16,224 | $ | 217,914 | $ | 134,028 | $ | — | ||||||||
|
|
|
|
|
|
||||||||||||
|
2002
|
||||||||||||||||
|
Personal lines
|
$ | 9,423 | $ | 106,096 | $ | 78,273 | $ | — | ||||||||
|
Commercial lines
|
5,144 | 104,596 | 42,729 | — | ||||||||||||
|
Investments
|
— | — | — | — | ||||||||||||
|
|
|
|
|
|
||||||||||||
|
|
$ | 14,567 | $ | 210,692 | $ | 121,002 | $ | — | ||||||||
|
|
|
|
|
|
||||||||||||
S-6
Table of Contents
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, 2003
|
||||||||||||||||||||
|
Property and casualty premiums
|
$ | 114,154,202 | $ | 70,429,560 | $ | 153,068,054 | $ | 196,792,696 | 78 | % | ||||||||||
|
|
|
|
|
|
|
|||||||||||||||
|
Year Ended
December 31, 2002
|
||||||||||||||||||||
|
Property and casualty premiums
|
$ | 110,412,498 | $ | 58,817,518 | $ | 134,246,213 | $ | 185,841,193 | 72 | % | ||||||||||
|
|
|
|
|
|
|
|||||||||||||||
|
Year Ended
December 31, 2001
|
||||||||||||||||||||
|
Property and casualty premiums
|
$ | 105,214,059 | $ | 64,220,420 | $ | 126,776,215 | $ | 167,769,854 | 76 | % | ||||||||||
|
|
|
|
|
|
|
|||||||||||||||
S-7
Table of Contents
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 | |||||||||||||
|
At December 31,
|
Costs
|
Expenses
|
Reserves
|
Premiums
|
||||||||||||
|
2003
|
$ | 16,223,765 | $ | 217,914,057 | $ | — | $ | 134,028,035 | ||||||||
|
|
|
|
|
|
||||||||||||
|
2002
|
$ | 14,567,070 | $ | 210,691,752 | $ | — | $ | 121,002,447 | ||||||||
|
|
|
|
|
|
||||||||||||
|
2001
|
$ | 13,604,215 | $ | 179,839,905 | $ | — | $ | 114,079,264 | ||||||||
|
|
|
|
|
|
||||||||||||
(continued)
S- 8
Table of Contents
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE VI - SUPPLEMENTARY INSURANCE INFORMATION
CONCERNING PROPERTY AND CASUALTY SUBSIDIARIES, CONTINUED
Years ended December 31, 2002, 2001 and 2000
| Losses and Loss | Amortization | |||||||||||||||||||||||||||
| Expenses Related to | of Deferred | Net | ||||||||||||||||||||||||||
| Net |
|
Policy | Paid Losses | Net | ||||||||||||||||||||||||
| Earned | Investment | Current | Prior | Acquisition | and Loss | Premiums | ||||||||||||||||||||||
|
Premiums
|
Income
|
Year
|
Years
|
Cost
|
Expenses
|
Written
|
||||||||||||||||||||||
|
Year Ended
December 31, 2003
|
$ | 196,792,696 | $ | 13,315,936 | $ | 126,693,421 | $ | (450,110 | ) | $ | 30,839,000 | $ | 118,455,674 | $ | 206,980,626 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Year Ended
December 31, 2002
|
$ | 185,841,193 | $ | 14,581,252 | $ | 122,433,653 | $ | 6,834,033 | $ | 29,473,000 | $ | 112,703,368 | $ | 194,503,847 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
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 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
S-9