Filed pursuant to Rules 424(b)(3) and 424(c)
Registration No. 333-63102
DONEGAL GROUP INC.
2001 AGENCY STOCK PURCHASE PLAN
PROSPECTUS SUPPLEMENT
TO PROSPECTUS DATED APRIL 12, 2002
On August 14, 2003, Donegal Group Inc. (the "Company") filed with the
Securities and Exchange Commission a Form 10-Q Quarterly Report for the quarter
ended June 30, 2003, a copy of which, without exhibits, is attached to this
Prospectus Supplement.
This Prospectus Supplement should be read in conjunction with the
Company's Prospectus dated April 12, 2002.
The date of this Prospectus Supplement is September 12, 2003.
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-2424711
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1195 RIVER ROAD, P.O. BOX 302, MARIETTA, PA 17547-0302
------------------------------------------------------
(Address of principal executive offices) (Zip code)
(717) 426-1931
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x . No .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 6,303,749 shares of
Class A Common Stock, $0.01 par value, and 3,000,119 shares of Class B Common
Stock, $0.01 par value, outstanding on July 31, 2003.
Part 1. Financial Information
Item 1. Financial Statements.
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 DEC. 31, 2002
------------- -------------
UNAUDITED)
ASSETS
Investments
Fixed maturities
Held to maturity, at amortized cost $106,780,904 $ 86,701,556
Available for sale, at market value 186,684,612 194,731,660
Equity securities, available for sale, at market 22,638,130 21,836,460
Short-term investments, at cost, which
approximates market 45,352,263 29,029,418
-------------- ------------
Total investments 361,455,909 332,299,094
Cash 2,325,997 1,124,604
Accrued investment income 3,598,588 3,815,449
Premiums receivable 29,153,913 26,286,482
Reinsurance receivable 78,865,210 83,207,272
Deferred policy acquisition costs 15,520,953 14,567,070
Federal income tax receivable 227,921 --
Deferred federal income taxes 6,510,732 6,955,707
Prepaid reinsurance premiums 31,803,291 27,853,996
Property and equipment, net 4,263,789 4,430,394
Accounts receivable-- securities -- 146,507
Due from affiliate 1,776,477 --
Other 930,174 531,589
-------------- ------------
Total assets $536,432,954 $501,218,164
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Losses and loss expenses $209,649,451 $210,691,752
Unearned premiums 132,113,381 121,002,447
Accrued expenses 6,195,006 6,583,825
Reinsurance balances payable 1,460,688 1,100,443
Federal income taxes payable -- 357,547
Cash dividend declared to stockholders -- 887,315
Borrowings under line of credit 12,800,000 19,800,000
Subordinate debt 15,000,000 --
Accounts payable-- securities 9,009,113 2,121,619
Due to affiliate 4,441,311 4,080,415
Other 1,892,204 1,409,951
-------------- ------------
Total liabilities 392,561,154 368,035,314
-------------- ------------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value, authorized
2,000,000 shares; none issued
Class A common stock, $.01 par value, authorized
30,000,000 shares, issued 6,369,829 and 6,269,093
shares and outstanding 6,288,305 and 6,187,569 shares 63,698 62,691
Class B common stock, $.01 par value, authorized
10,000,000 shares, issued 3,037,549 and 3,024,742
shares and outstanding 2,996,787 and 2,983,980 shares 30,375 30,247
Additional paid-in capital 62,748,296 60,651,751
Accumulated other comprehensive income 6,321,664 4,911,953
Retained earnings 75,599,515 68,417,956
Treasury stock (891,748) (891,748)
-------------- ------------
Total stockholders' equity 143,871,800 133,182,850
-------------- ------------
Total liabilities and stockholders' equity $536,432,954 $501,218,164
============== ============
See accompanying notes to consolidated financial statements.
1
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
SIX MONTHS ENDED JUNE 30,
2003 2002
------------ ------------
REVENUES
Net premiums earned $ 96,362,570 $ 91,562,772
Investment income, net of investment expenses 6,680,228 7,440,586
Realized investment gains 85,890 187,259
Lease income 413,732 389,086
Service charge income 1,263,967 1,191,146
Other income 205,850 --
------------ ------------
Total revenues 105,012,237 100,770,849
------------ ------------
EXPENSES
Net losses and loss expenses 61,508,981 $ 63,433,588
Amortization of deferred policy acquisition costs 14,987,000 14,730,000
Other underwriting expenses 14,292,423 13,301,150
Policy dividends 469,157 571,366
Interest 521,531 620,808
Other expenses 675,228 713,577
------------ ------------
Total expenses 92,454,320 93,370,489
------------ ------------
Income before income taxes 12,557,917 7,400,360
Income taxes 3,444,532 2,040,810
------------ ------------
Net income $ 9,113,385 $ 5,359,550
============ ============
Earnings per common share
Basic $ 0.99 $ 0.59
============ ============
Diluted $ 0.97 $ 0.59
============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
SIX MONTHS ENDED JUNE 30,
2003 2002
---------- ----------
Net income $9,113,385 $5,359,550
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gain during the period,
net of income tax 1,465,540 461,111
Reclassification adjustment, net of income tax (55,829) (123,591)
------------ ------------
Other comprehensive income 1,409,711 337,520
------------ ------------
Comprehensive income $10,523,096 $5,697,070
============ ============
See accompanying notes to consolidated financial statements.
2
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED JUNE 30,
2003 2002
----------- -----------
REVENUES:
Net premiums earned $48,433,689 $46,110,512
Investment income, net of investment expenses 3,315,710 3,710,282
Realized investment gains 216,370 60,481
Lease income 211,115 194,124
Service charge income 649,934 661,404
----------- -----------
Total revenues 52,826,818 50,736,803
----------- -----------
EXPENSES:
Net losses and loss expenses 29,658,466 $32,136,019
Amortization of deferred policy acquisition costs 7,545,000 7,345,000
Other underwriting expenses 7,269,206 6,188,900
Policy dividends 227,314 105,187
Interest 306,790 295,984
Other expenses 344,652 211,154
----------- -----------
Total expenses 45,351,428 46,282,244
----------- -----------
Income before income taxes 7,475,390 4,454,559
Income taxes 2,206,437 1,275,725
----------- -----------
Net income $ 5,268,953 $ 3,178,834
=========== ===========
Earnings per common share
Basic $0.57 $0.35
=========== ===========
Diluted $0.56 $0.35
=========== ===========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS ENDED JUNE 30,
2003 2002
---------- ----------
Net income $5,268,953 $3,178,834
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gain during the period,
net of income tax 1,566,233 1,704,527
Reclassification adjustment, net of income tax (140,641) (39,918)
----------- -----------
Other comprehensive income 1,425,592 1,664,609
----------- -----------
Comprehensive income $ 6,694,545 $ 4,843,443
=========== ===========
See accompanying notes to consolidated financial statements.
3
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
SIX MONTHS ENDED JUNE 30, 2003
CLASS A SHARES CLASS B SHARES CLASS A AMOUNT CLASS B AMOUNT
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 6,269,093 3,024,742 $62,691 $30,247
Issuance of common stock 100,736 12,807 1,007 128
Net income
Cash dividends
Grant of stock options
Exercise of stock options
Other comprehensive income
------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2003 6,369,829 3,037,549 $63,698 $30,375
------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER TOTAL
PAID-IN COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
CAPITAL INCOME EARNINGS STOCK EQUITY
-------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $60,651,751 $4,911,953 $68,417,956 $(891,748) $133,182,850
Issuance of common stock 1,077,286 1,078,421
Net income 9,113,385 9,113,385
Cash dividends (990,218) (990,218)
Grant of stock options 941,608 (941,608) --
Exercise of stock options 77,651 77,651
Other comprehensive income 1,409,711 1,409,711
-------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2003 $62,748,296 $6,321,664 $75,599,515 $(891,748) $143,871,800
-------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
4
DONEGAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,113,385 $ 5,359,550
------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 794,070 584,401
Realized investment gains (85,890) (187,259)
Changes in assets and liabilities:
Losses and loss expenses (1,042,301) 8,205,016
Unearned premiums 11,110,934 5,828,720
Premiums receivable (2,867,431) (3,865,747)
Deferred policy acquisition costs (953,883) (1,326,400)
Deferred income taxes (386,069) (367,290)
Reinsurance receivable 4,342,062 (1,934,709)
Prepaid reinsurance premiums (3,949,295) 2,575,972
Accrued investment income 216,861 (20,126)
Due to affiliate (1,415,581) (4,146,558)
Reinsurance balances payable 360,245 234,413
Current income taxes (585,468) 758,054
Accrued expenses (388,819) (1,349,560)
Other, net 83,668 547,960
------------ ------------
Net adjustments 5,233,103 5,536,887
------------ ------------
Net cash provided by operating activities 14,346,488 10,896,437
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed maturities
Held to maturity (24,963,165) (12,342,915)
Available for sale (42,998,272) (30,890,279)
Purchase of equity securities, available for sale (8,240,320) (4,322,178)
Maturity of fixed maturities
Held to maturity 10,692,008 18,076,142
Available for sale 49,017,841 22,759,398
Sale of fixed maturities
Held to maturity -- 415,000
Available for sale 4,297,187 461,965
Sale of equity securities, available for sale 8,261,206 1,886,265
Net purchase of property and equipment (167,274) (455,334)
Net sale (purchase) of short-term investments (16,322,845) 167,626
------------ ------------
Net cash used in investing activities (20,423,634) (4,244,310)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (1,877,533) (1,746,744)
Issuance of common stock 1,156,072 701,428
Issuance of subordinate debt 15,000,000 --
Line of credit, net (7,000,000) (7,800,000)
------------ ------------
Net cash provided by (used in) financing activities 7,278,539 (8,845,316)
------------ ------------
Net increase (decrease) in cash 1,201,393 (2,193,189)
Cash at beginning of period 1,124,604 4,075,288
------------ ------------
Cash at end of period $ 2,325,997 $ 1,882,099
============ ============
Cash paid during period--Interest $ 368,581 $ 97,093
Net cash paid during period--Taxes $ 4,330,000 $ 1,640,000
See accompanying notes to consolidated financial statements.
5
DONEGAL GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
SUMMARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - ORGANIZATION
Donegal Group Inc. (the "Company") was organized as a regional insurance
holding company by Donegal Mutual Insurance Company (the "Mutual Company") on
August 26, 1986 and operates in the Mid-Atlantic and Southern states through its
wholly owned insurance subsidiaries, Atlantic States Insurance Company
("Atlantic States") and Southern Insurance Company of Virginia ("Southern")
(collectively, the "Insurance Subsidiaries"). The Company has three operating
segments: the investment function, the personal lines of insurance and the
commercial lines of insurance. Products offered in the personal lines of
insurance consist primarily of homeowners and private passenger automobile
policies. Products offered in the commercial lines of insurance consist
primarily of commercial automobile, commercial multiple peril and workers'
compensation policies. The Insurance Subsidiaries are subject to regulation by
Insurance Departments in those states in which they operate and undergo periodic
examinations by those departments. The Insurance Subsidiaries are also subject
to competition from other insurance companies in their operating areas. Atlantic
States participates in an inter-company pooling arrangement with the Mutual
Company and assumes 70% of the pooled business. At June 30, 2003, the Mutual
Company held approximately 66% of the outstanding Class A and approximately 62%
of the outstanding Class B common stock of the Company.
Prior to 2002, Southern ceded 50% of its business to the Mutual Company.
On January 1, 2002, the Mutual Company and Southern terminated their quota share
agreement, under which Southern ceded 50% of its direct business, less
reinsurance, to the Mutual Company. As a result of this termination, the
Company's prepaid reinsurance premiums decreased $7,310,471, unearned premiums
decreased $5,117,330, and deferred policy acquisition costs increased $714,853.
The Mutual Company transferred $1,478,288 in cash to the Company related to this
termination. The Company did not recognize a gain or loss on this transaction.
As of June 30, 2003 the Company owns 47.5% of the outstanding stock of
Donegal Financial Services Corporation ("DFSC"), a thrift holding company, which
it acquired for $3,042,000 in cash during 2000 and $3,500,000 of cash in June of
2003. The remaining 52.5% of the outstanding stock of DFSC is owned by the
Mutual Company.
The Company has streamlined its corporate structure by merging a number
of its subsidiaries. Delaware Atlantic Insurance Company ("Delaware"), Pioneer
Insurance Company, New York, ("Pioneer-New York") and Pioneer Insurance Company,
Ohio ("Pioneer-Ohio"), previously wholly owned subsidiaries, were merged into
Atlantic States on August 1, 2001, September 30, 2001 and May 8, 2002,
respectively. Southern Heritage Insurance Company ("Southern Heritage"),
previously a wholly owned subsidiary, was merged into Southern on April 30,
2002. The mergers were accounted for as reorganizations of entities under common
control as they were all within the consolidated group. The mergers had no
financial impact on the consolidated entity.
Southern has (and Delaware, Pioneer-Ohio, Southern Heritage and
Pioneer-New York had prior to their mergers) an agreement with the Mutual
Company under which it cedes, and then reassumes back, 100% of its business net
of reinsurance. The primary purpose of these agreements is to assist Southern
and the former subsidiaries in maintaining the same A. M. Best rating (currently
"A") as the Mutual Company. These agreements do not transfer insurance risk.
While these subsidiaries ceded and reassumed amounts received from policyholders
of $23,178,704 and $25,183,072 and claims of $14,632,880 and $15,270,392 under
these agreements in the six months ended June 30, 2003 and 2002, respectively,
the amounts are not reflected in the consolidated financial statements. The
aggregate liabilities ceded and reassumed under these agreements were
$44,167,212 and $43,541,766 at June 30, 2003 and December 31, 2002,
respectively.
2 - BASIS OF PRESENTATION
The financial information for the interim periods included herein are
unaudited; however, such information reflects all adjustments, consisting only
of normal recurring adjustments, that, in the opinion of management, are
necessary to a fair presentation of the Company's financial position, results of
operations and cash flows for the interim periods included herein. The Company's
results of operations for the six months ended June 30, 2003 are not necessarily
indicative of its results of operations for the twelve months ending December
31, 2003.
6
These financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 2002
3 - EARNINGS PER SHARE
The computation of basic and diluted earnings per share is as follows:
WEIGHTED
AVERAGE EARNINGS
NET SHARES PER
INCOME OUTSTANDING SHARE
---------- ----------- ---------
THREE MONTHS ENDED JUNE 30:
2003
Basic $5,268,953 9,269,029 $ .57
Effect of stock options --- 155,021 (.01)
---------- --------- -----
Diluted $5,268,953 9,424,050 $ .56
========== ========= -----
2002
Basic $3,178,834 9,059,477 $ .35
Effect of stock options --- 116,252 ---
---------- --------- -----
Diluted $3,178,834 9,175,729 $ .35
========== ========= -----
SIX MONTHS ENDED JUNE 30:
2003
Basic $9,113,385 9,239,878 $ .99
Effect of stock options --- 137,736 (.02)
---------- --------- -----
Diluted $9,113,385 9,377,614 $ .97
========== ========= -----
2002
Basic $5,359,550 9,044,899 $ .59
Effect of stock options --- 105,309 ---
---------- --------- -----
Diluted $5,359,550 9,150,208 $ .59
=========== ========= -----
The following options to purchase shares of common stock were not
included in the computation of diluted earnings per share because the exercise
price of the options was greater than the average market price during the
relevant period:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------ --------------------------------
2003 2002 2003 2002
--------- ------- --------- --------
Number of Options 1,117,500 941,501 1,117,500 941,501
========= ======= ========= ========
4 - SEGMENT INFORMATION
The Company evaluates the performance of the personal lines and
commercial lines based upon underwriting results as determined under statutory
accounting practices (SAP), which is used by management to measure performance
for the total business of the Company. Financial data by segment is as follows:
7
THREE MONTHS ENDED JUNE 30,
2003 2002
------------ -----------
($ in thousands)
Revenues:
Premiums earned:
Commercial lines $ 17,338 $ 16,278
Personal lines 31,096 29,833
------------ -----------
Total net premiums earned 48,434 46,111
------------ -----------
Net investment income, net of investment expense 3,316 3,710
Realized investment gain 216 60
Other 861 856
------------ -----------
Total revenues $ 52,827 $ 50,737
============ ===========
Income before income taxes:
Underwriting income (loss)
Commercial lines $ 1,902 $ 1,475
Personal lines 1,329 (1,656)
------------ -----------
SAP underwriting income (loss) 3,231 (181)
GAAP adjustments 503 517
------------ -----------
GAAP underwriting income 3,734 336
Net investment income, net of investment expense 3,316 3,710
Realized investment gain 216 60
Other 209 349
------------ -----------
Income before income taxes $ 7,475 $ 4,455
============ ===========
SIX MONTHS ENDED JUNE 30,
2003 2002
------------ -----------
($ in thousands)
Revenues:
Premiums earned:
Commercial lines $ 34,643 $ 32,772
Personal lines 61,720 58,791
------------ -----------
Total net premiums earned 96,363 91,563
------------ -----------
Net investment income, net of investment expense 6,680 7,441
Realized investment gain 86 187
Other 1,883 1,580
------------ -----------
Total revenues $ 105,012 $ 100,771
============ ===========
Income before income taxes:
Underwriting income (loss)
Commercial lines $ 4,255 $ 2,604
Personal lines 191 (4,173)
------------ -----------
SAP underwriting income (loss) 4,446 (1,569)
GAAP adjustments 659 1,095
------------ -----------
GAAP underwriting income (loss) 5,105 (474)
Net investment income, net of investment expense 6,680 7,441
Realized investment gain 86 187
Other 687 246
------------ -----------
Income before income taxes $ 12,558 $ 7,400
============ ===========
5- SUBORDINATE DEBT
On May 15, 2003 the Company received $15,000,000 as proceeds from the
issuance of a floating rate junior subordinate debenture. The debenture matures
on May 15, 2033 and is callable by the Company, at par, after five years. The
debenture carries an interest rate equal to the three-month LIBOR rate plus
4.10% and is adjustable quarterly. At June 30, 2003 the interest rate on this
debenture was 5.41%, which rate will first be subject to adjustment on August
15, 2003.
8
6- STOCK-BASED COMPENSATION PLANS
The Company accounts for Stock-based compensation plans under the
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. During 2001 the company
adopted an Equity Incentive Plan for key employees that made 1,500,000 shares of
Class A common stock available. The plan provides for the granting of awards by
the Board of Directors in the form of stock options, stock appreciation rights,
restricted stock or any combination of the above. During 2001 the Company also
adopted an Equity incentive plan for Directors that made 200,000 shares of Class
A common stock available. Awards may be made in the form of stock options, and
the plan additionally provides for the issuance of 175 shares of restricted
stock to each director on the first business day of January in each year. No
stock-based employee compensation is reflected in income, except for expense
associated with restricted stock issued, as all options granted under those
plans had an exercise price equal to, or greater than, the market value of the
underlying common stock on the date of the grant. The following table
illustrates the effect on net income and earnings per share as if the Company
had applied the provisions of statement of Financial Accounting Standards (SFAS)
No. 123 (as amended by SFAS No. 148), "Accounting for Stock-Based Compensation."
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands, except per share data)
Net income, as reported $ 5,269 $ 3,179 $ 9,113 $ 5,360
Less:
Total stock-based
employee compensation
expense determined
under fair value
based method for
all awards, net of
related tax effects (91) (50) (104) (123)
------- --------- ------- -------
Pro form net income $ 5,178 $ 3,129 $ 9,009 $ 5,237
======= ======== ======= =======
Basic earnings
per share:
As reported $ .57 $ .35 $ .99 $ .59
Pro forma $ .56 $ .35 $ .98 $ .58
Diluted earnings
per share:
As reported $ .56 $ .35 $ .97 $ .59
Pro forma $ .55 $ .34 $ .96 $ .57
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS -THREE MONTHS ENDED JUNE 30, 2003 COMPARED
TO THREE MONTHS ENDED JUNE 30, 2002
Total revenues for the three months ended June 30, 2003 were $52,826,818,
which were $2,090,015, or 4.1%, greater than the same period in 2002. Net
9
premiums earned increased to $48,433,689, an increase of $2,323,177, or 5.0%,
over the second quarter of 2002. Direct premiums written of the combined pool of
Atlantic States and the Mutual Company increased $3,877,494, or 6.3%, in the
second quarter of 2003 compared to the second quarter of 2002. A 4.9% decrease
in the direct written premiums of Southern accounted for a majority of the
remaining change in premiums. The Company reported net realized investment gains
of $216,370 in the second quarter of 2003, compared to net realized investment
gains of $60,481 for the same period of 2002. The realized gain in 2003 was net
of realized losses of $14,225 that resulted from changes in the market value of
securities that were determined to be other than temporary. The realized gain in
2002 was net of realized losses of $92,440 that resulted from changes in the
market value of securities that were determined to be other than temporary.
Investment income was $3,315,710, a decrease of $394,572, or 10.6%, from the
second quarter of 2002. An increase in average invested assets from $306.3
million in the second quarter of 2002 to $352.0 million in the second quarter of
2003 was more than offset by a decrease in the annualized average return on
investments from 4.8% in the second quarter of 2002 to 3.8% in the second
quarter of 2003, accounting for the decrease in investment income.
The GAAP combined ratio of insurance operations in the second quarter of
2003 was 92.3% compared to 99.3% for the same period in 2002. The GAAP combined
ratio is the sum of the ratios of incurred losses and loss adjusting expenses to
premiums earned (loss ratio), policyholders' dividends to premiums earned
(dividend ratio) and underwriting expenses to premiums earned (expense ratio).
The Company's loss ratio in the second quarter of 2003 was 61.2% compared to
69.7% in the second quarter of 2002. The commercial loss ratio decreased
significantly to 57.2% in the second quarter of 2003 compared to 62.7% in the
second quarter of 2002 with Commercial Multi-peril showing the largest
improvement decreasing from 53.6% in the second quarter of 2002 to 41.0% in the
second quarter of 2003. The personal lines loss ratio showed an improvement
going from 74.0% in the second quarter of 2002 to 63.2% in the second quarter of
2003. The Company's expense ratio for the second quarter of 2003 was 30.6%
compared to 29.4% for the second quarter of 2002. The dividend ratio increased
slightly to 0.5% for the second quarter of 2003 compared to 0.2% in the second
quarter of 2002.
Federal income taxes for the second quarter of 2003 represented 29.5% of
income before income taxes compared to 28.6% for the same period of 2002. The
increase in the effective tax rate was due to tax-exempt investment income
representing a smaller portion of income before taxes in 2003 compared to 2002.
RESULTS OF OPERATIONS -SIX MONTHS ENDED JUNE 30, 2003 COMPARED
TO SIX MONTHS ENDED JUNE 30, 2002
Total revenues for the six months ended June 30, 2003 were $105,012,237,
which were $4,241,388, or 4.2%, greater than the same period in 2002. Net
premiums earned increased to $96,362,570, an increase of $4,799,798, or 5.2%,
over the first six months of 2002. The premiums written of the combined pool of
Atlantic States and the Mutual Company increased $10,860,551, or 9.4%, in the
first half of 2003 compared to the first half of 2002. A 1.0% decrease in the
direct written premiums of Southern accounted for a majority of the remaining
change in premiums. The Company reported net realized investment gains of
$85,890 in the first six months of 2003, compared to net realized investment
gains of $187,259 for the same period of 2002. The realized gain in 2003 was net
of realized losses of $267,724 that resulted from changes in the market value of
securities that were determined to be other than temporary. The realized gain in
2002 was net of realized losses of $152,518 that resulted from changes in the
market value of securities that were determined to be other than temporary.
Investment income was $6,680,228, a decrease of $760,358, or 10.2%, from the
first six months of 2002. An increase in average invested assets from $302.9
million in the first half of 2002 to $346.9 million in the first half of 2003
was more than offset by a decrease in the annualized average return on
investments from 4.9% in the first six months of 2002 to 3.9% in the first half
of 2003, accounting for the decrease in investment income.
The GAAP combined ratio of insurance operations in the six months ended
June 30, 2003 was 94.7% compared to 100.5% for the same period in 2002. The GAAP
combined ratio is the sum of the ratios of incurred losses and loss adjusting
expenses to premiums earned (loss ratio), policyholders' dividends to premiums
earned (dividend ratio) and underwriting expenses to premiums earned (expense
ratio). The Company's loss ratio in the first half of 2003 was 63.8% compared to
69.3% in the first half of 2002. The commercial loss ratio decreased
significantly to 54.9% in the first six months of 2003 compared to 60.2% in the
first half of 2002 with Commercial Multi-peril showing the largest improvement
decreasing from 57.4% in the first six months of 2002 to 49.1% in the first six
months of 2003. The personal lines loss ratio showed an improvement going from
74.5% in the first half of 2002 to 68.7% in the first half of 2003. The
Company's expense ratio for the first six months of 2003 was 30.4% compared to
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30.6% for the first six months of 2002. The dividend ratio decreased slightly to
0.5% for the first two quarters of 2003 compared to 0.6% in the first two
quarters of 2002.
Federal income taxes for the first half of 2003 represented 27.4% of
income before income taxes compared to 27.6% for the same period of 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates sufficient funds from its operations and maintains
a high degree of liquidity in its investment portfolio. The primary source of
funds to meet the demands of claim settlements and operating expenses are
premium collections, investment income and maturing investments. The Company had
no significant commitments for capital expenditures as of June 30, 2003.
In investing funds made available from operations, the Company maintains
securities maturities consistent with its projected cash needs for the payment
of claims and expenses. The Company maintains a portion of its investment
portfolio in relatively short-term and highly liquid assets to ensure the
availability of funds.
On May 15, 2003 the Company received $15,000,000 as proceeds from the
issuance of a floating rate junior subordinate debenture. The debenture matures
on May 15, 2033 and is callable by the Company, at par, after five years. The
debenture carries an interest rate equal to the three-month LIBOR rate plus
4.10% and is adjustable quarterly. At June 30, 2003 the interest rate on this
debenture was 5.41%, which rate will first be subject to adjustment on August
15, 2003.
As of June 30, 2003, under a credit agreement dated December 29, 1995,
and amended as of July 27, 1998, with Fleet National Bank of Connecticut ("the
Bank"), the Company had unsecured borrowings of $12.8 million. Per the terms of
the credit agreement, the Company may borrow up to $24 million at interest rates
equal to the Bank's then current prime rate or the then current London interbank
eurodollar bank rate plus 1.70%. At June 30, 2003, the interest rate on the
outstanding balances was 2.97% on an outstanding eurodollar balances of $4.8
million and 2.69% on an outstanding eurodollar balances of $8.0 million. In
addition, the Company pays a non-use fee at a rate of 3/10 of 1% per annum on
the average daily unused portion of the Bank's commitment. Each July 27th the
credit line is reduced by $8 million and is $24 million as of June 30, 2003. Any
outstanding loan in excess of the remaining credit line, after such reduction,
will then be payable.
The Company's principal source of cash with which to pay stockholder
dividends is dividends from Atlantic States and Southern. Atlantic States and
Southern are required by law to maintain certain minimum surplus on a statutory
basis, and are subject to regulations under which payment of dividends from
statutory surplus is restricted and may require prior approval of their
domiciliary insurance regulatory authorities. Atlantic States and Southern are
subject to Risk-Based Capital (RBC) requirements. At December 31, 2002 each
Atlantic States' and Southern's capital was substantially above the RBC
requirements. In 2003 amounts available for distribution as dividends to the
Company without prior approval of their domiciliary insurance regulatory
authorities were $10,646,804 from Atlantic States and $2,493,398 from Southern.
CREDIT RISK
The Company provides property and liability insurance coverages through
independent insurance agencies located throughout its operating area. The
majority of this business is billed directly to the insured, although a portion
of the Company's commercial business is billed through its agents who are
extended credit in the normal course of business.
The Company's subsidiaries have reinsurance agreements in place with the
Mutual Company and with a number of other major unaffiliated authorized
reinsurers.
IMPACT OF INFLATION
Property and casualty insurance premium rates are established before the
amount of losses and loss settlement expenses, or the extent to which inflation
may impact such expenses, are known. Consequently, the Company attempts, in
establishing rates, to anticipate the potential impact of inflation.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's market risk generally represents the risk of gain or loss
that may result from the potential change in the fair value of the Company's
investment portfolio as a result of fluctuations in prices and interest rates
and, to a lesser extent, its debt obligations. The Company attempts to manage
its interest rate risk by maintaining an appropriate relationship between the
average duration of the investment portfolio and the approximate duration of its
liabilities, i.e., policy claims and debt obligations.
The Company has maintained approximately the same duration of its
investment portfolio to its liabilities from December 31, 2002 to June 30, 2003.
In addition, the Company has maintained approximately the same investment mix
during this period.
There have been no material changes to the Company's quantitative or
qualitative market risk exposure from December 31, 2002 through June 30, 2003.
ITEM 4. CONTROL AND PROCEDURES
The Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Company's controls and procedures pursuant to Rule 13a-15 under the Securities
Exchange Act of 1934, as amended, as of the end of the period covered by this
report. Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company (including the Company's consolidated subsidiaries) in the Company's
periodic filings with the Securities and Exchange Commission is recorded,
processed, summarized and reported, within the time periods specified in the
Commission's rules and forms. There has been no change in the Company's internal
control over financial reporting during the quarter covered by this report that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
NONE.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In April 2003, the Company formed a wholly owned Connecticut statutory
trust, DGI Statutory Trust I (the "Trust"), which issued $15 million aggregate
principal amount of trust preferred securities on May 15, 2003. The Company owns
all of the $464,000 aggregate principal amount of the common securities of the
Trust. The proceeds from the issuance of the common securities and the trust
preferred securities were used by the Trust to purchase $15.464 million of
floating rate junior subordinated deferrable interest debentures of the Company,
which pay interest at a floating rate adjustable quarterly equal to the
three-month LIBOR plus 410 basis points. The interest rate for the initial
period ending August 15, 2003 is 5.41125%. Prior to May 15, 2008, the interest
rate may not exceed 12.5%. The proceeds are being used by the Company for
working capital purposes, including potential acquisitions and to support the
growth of the Company's insurance subsidiaries.
The trust preferred securities accrue and pay quarterly distributions based
on the liquidation value of $1,000 per capital security at a floating rate
adjustable quarterly equal to the three-month LIBOR plus 410 basis points. The
rate for determining distributions during the initial period ending August 15,
2003 is 5.41125%. Prior to May 15, 2008, the rate for determining distributions
may not exceed 12.5%. The Company has entered into contractual arrangements
which, taken collectively, constitute a full and unconditional guarantee on a
subordinated basis by the Company of the obligations of the Trust under the
trust preferred securities. The Company's guarantee, however, does not apply if
the Company does not make payments on the debentures and, as a result, the Trust
does not have sufficient funds to make payments. The debentures represent the
sole asset of the Trust.
The trust preferred securities are redeemable upon maturity of the
debentures on May 15, 2033, or upon earlier redemption of the debentures as
provided in the indenture. The Company has the right to redeem the debentures
purchased by the Trust in whole or in part, on or after May 15, 2008. As
specified in the indenture, if the debentures are redeemed on or after May 15,
2008 and prior to maturity, the redemption price will be the principal amount
and any accrued but unpaid interest. In addition, the Company may redeem, at any
time (and possibly before May 15, 2008), within 120 days following the
occurrence of a change in banking, tax, investment company or other laws or
regulations that results in specified changes in the treatment of the trust
preferred securities for tax or regulatory capital purposes or under the
Investment Company Act of 1940. If the debentures are redeemed prior to May 15,
2008, the redemption price will be equal to 107.5% of the principal amount plus
any accrued and unpaid interest.
FTN Financial Capital Markets and Keefe, Bruyette & Woods, Inc. served as
placement agents in connection with the issuance of the trust preferred
securities and debentures and each were compensated $225,000 for their services.
Since the trust preferred securities and debentures were issued to institutional
investors, the securities were exempt from registration under Rule 506 of the
Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Annual Stockholders meeting held April 17, 2003.
Directors elected at meeting:
Donald H. Nikolaus
Votes for 3,238,525
Votes withheld 20,099
ITEM 5. OTHER INFORMATION.
NONE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description
----------- -----------
Exhibit 10 (DD) Amended and Restated Declaration
of Trust of DGI Statutory Trust I dated
May 15, 2003 by and among Donegal Group
Inc., as sponsor, U.S. Bank National
Association, as institutional trustee,
and Jeffrey D. Miller, Ralph G. Spontak
and Daniel J. Wagner, as administrators
Exhibit 10(EE) Guarantee Agreement dated May 15,
2003 by and between Donegal Group Inc.,
as guarantor, and U.S. Bank National
Association, as guarantee trustee
Exhibit 10(FF) Indenture dated May 15, 2003
between Donegal Group Inc., as issuer,
and U.S. Bank National Association, as
debenture trustee
Exhibit 10(GG) Placement Agreement dated April
25, 2003, among Donegal Group Inc. and
its financing subsidiary, DGI Statutory
Trust I, together as offerors, and FTN
Financial Capital Markets and Keefe,
Bruyette & Woods, Inc., as placement
agents
Exhibit 10(HH) Subscription Agreement dated May
15, 2003 among Donegal Group Inc. and
DGI Statutory Trust I, together as
offerors, and I-Preferred Term
Securities II, Ltd., as purchaser
Exhibit 31.1 Certification of Chief Executive Officer
Exhibit 31.2 Certification of Chief Financial Officer
Exhibit 32.1 Statement of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350 of
Title 18 of the United States Code
Exhibit 32.2 Statement of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 of
Title 18 of the United States Code
(b) Reports on Form 8-K:
On April 16, 2003, the Company filed a report on form
8-K including as an exhibit the Company's first quarter
2003 earnings press release.
On July 22, 2003, the Company filed a report on form 8-K
including as an exhibit the Company's second quarter 2003
earnings press release.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DONEGAL GROUP INC.
AUGUST , 2003 BY:_______________________________________
Donald H. Nikolaus, President
and Chief Executive Officer
AUGUST , 2003 BY:_______________________________________
Ralph G. Spontak, Senior Vice President,
Chief Financial Officer and Secretary
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