SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _________________ to _________________ Commission file number 0-15341 DONEGAL GROUP INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 23-2424711 - ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1195 River Road, Marietta, Pennsylvania 17547 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (717) 426-1931 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00 par value ----------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X . No ____. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] On March 15, 1996, the aggregate market value (based on the closing sales price on that date) of the voting stock held by non-affiliates of the Registrant was $32,732,254. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: 4,276,944 shares of Common Stock outstanding on March 15, 1996. DOCUMENTS INCORPORATED BY REFERENCE: 1. Portions of the Registrant's annual report to stockholders for the fiscal year ended December 31, 1995 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 18, 1996 are incorporated by reference into Part III of this report.
DONEGAL GROUP INC. INDEX TO FORM 10-K REPORT Page ---- I. PART I. Item 1. Business.............................................. 3 Item 2. Properties............................................ 23 Item 3. Legal Proceedings..................................... 23 Item 4. Submission of Matters to a Vote of Security Holders..................................... 24 II. PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................... 25 Item 6. Selected Financial Data............................... 25 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 25 Item 8. Financial Statements and Supplementary Data................................................. 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................. 25 III. PART III. Item 10. Directors and Executive Officers of the Registrant........................................... 26 Item 11. Executive Compensation................................ 26 Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 26 Item 13. Certain Relationships and Related Transactions......................................... 26 IV. PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 27
PART I Item 1. Business. (a) General Development of Business. Donegal Group Inc. is a regional insurance holding company formed in August 1986 which is headquartered in Pennsylvania and engages, through its subsidiaries, in the property and casualty insurance business. As used herein, "DGI" or the "Company" refers to Donegal Group Inc. and its subsidiaries, Atlantic States Insurance Company ("Atlantic States"), Southern Insurance Company of Virginia ("Southern"), Delaware American Insurance Company ("Delaware American") and Atlantic Insurance Services, Inc. ("AIS"). DGI is currently 58.6% owned by Donegal Mutual Insurance Company (the "Mutual Company"). The Mutual Company's principal subsidiary is Pioneer Insurance Company ("Pioneer"). DGI and the Mutual Company and their subsidiaries underwrite a broad line of personal and commercial coverages, consisting of private passenger and commercial automobile, homeowners, commercial multi-peril, workers' compensation and other lines of insurance. Atlantic States, which DGI organized in September 1986, participates in an underwriting pool whereby it cedes to the Mutual Company the premiums, losses and loss expenses from all of its insurance business and assumes from the Mutual Company a specified portion of the pooled business, which also includes substantially all of the Mutual Company's property and casualty insurance business. Effective as of October 1, 1986, DGI entered into a pooling agreement with the Mutual Company whereby Atlantic States assumed 35% of the pooled business written or in force on or after October 1, 1986. Effective October 1, 1988, the pooling agreement was amended to provide for the assumption by Atlantic States of 50% of the pooled business written or in force on or after October 1, 1988. Effective January 1, 1993, the pooling agreement was further amended to provide for the assumption by Atlantic States of 60% of the pooled business written or in force on or after January 1, 1993. As of December 21, 1995, the pooling agreement was further amended to provide for the assumption by Atlantic States, effective January 1, 1996, of 65% of the pooled business written or in force on or after January 1, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 hereof and Note 2 to the Consolidated Financial Statements incorporated by reference herein. On December 29, 1988, DGI acquired all of the outstanding capital stock of Southern in exchange for a $3,000,000 equity contribution to Southern. As of March 31, 1993, the Mutual Company converted Pioneer Mutual Insurance Company into Pioneer, which writes property and casualty insurance in Ohio, and acquired all of Pioneer's capital stock. Pioneer does not currently participate in the pooling agreement. In connection with the Pioneer transaction, the Mutual Company was admitted in Ohio and began active marketing of its insurance products in Ohio in the fourth quarter of 1993. On October 1, 1986, the Mutual Company and Southern's predecessor, Southern Mutual Insurance Company, entered into a reinsurance agreement whereby such predecessor ceded to the Mutual Company 80% of its -3-
direct premiums written and retained 20%. Effective January 1, 1991, this percentage was changed to 50% ceded to the Mutual Company and 50% retained by Southern. Because the Mutual Company places substantially all of the business assumed from Southern in the pool, from which the Company has a 65% allocation, the Company's results of operations include approximately 80% of the business written by Southern. See Note 2 to the Consolidated Financial Statements incorporated by reference herein. In January 1994, the Company organized a new subsidiary, AIS, which began business in that same month. AIS is an insurance services organization currently providing inspection and policy auditing information on a fee for service basis to its affiliates and the insurance industry. In December 1994, the Superintendent of Insurance of the State of Ohio issued an order permitting the sale by the Mutual Company to the Company of all of the outstanding capital stock of Pioneer at the independently determined fair market value thereof at the date of sale. It is anticipated that this sale will occur on or before December 31, 1996. Pioneer and the Mutual Company are parties to an excess of loss reinsurance agreement whereby the Mutual Company reinsures Pioneer for losses in excess of $100,000 up to a limit of $150,000, and a property catastrophe excess of loss reinsurance agreement whereby the Mutual Company reinsures Pioneer for catastrophe losses in excess of $200,000 up to a limit of $1,800,000. As of the close of business on December 31, 1995, DGI acquired all of the outstanding capital stock of Delaware American pursuant to a Stock Purchase Agreement between DGI and the Mutual Company dated as of December 21, 1995. This transaction was accounted for a an "as if pooling-of-interests," and as such DGI's financial statements have been restated to include Delaware American as a Consolidated Subsidiary from January 1, 1994 to the present. Under current accounting principles, for amounts that are treated as "retroactive" reinsurance, Delaware American is required to defer income statement recognition of a recovery related to adverse development, if any, of any such business into future accounting periods while recognizing the entire adverse developments, if any, in the current period. However, Delaware American would take the recovery into income over the estimated settlement period. Although this accounting treatment could affect Delaware American's financial statements in any given period, Delaware American would not sustain economic loss and there would be no impact on Delaware American's cumulative results of operations or surplus after the recovery is fully recognized. In connection with the transaction, Delaware American entered into an aggregate excess of loss reinsurance agreement whereby the Mutual Company reinsures Delaware American against any loss from: (a) any adverse development in Delaware American's loss reserve and loss adjustment expense reserve at December 31, 1996 compared to the amount of such reserves at December 31, 1995 in respect of all policy years ended on or before December 31, 1995 and (b) all losses and loss adjustment expenses incurred by Delaware American during the month of December 1995 by reason of the fact that Delaware American's loss and loss adjustment expense ratio as finally determined for the month of December 1995 exceeds the lesser of Delaware American's loss and loss adjustment expense ratio as finally determined for the period January 1, 1995 through November 30, 1995 or 60% and (c) all losses and loss adjustment expenses incurred by Delaware American during the year ending December 31, 1996 by reason of the fact that Delaware American's loss and loss adjustment expense ratio as finally determined for the year ending December 31, 1996 exceeds the lesser of Delaware American's loss and loss adjustment expense ratio as finally determined for the year ended December 31, 1995 or 60%, it being understood that any calculations made for the year ending December 31, 1996 will be adjusted to reflect any recoveries by Delaware American under the loss development section of the aggregate excess of loss reinsurance agreement. -4-
(b) Financial Information about Industry Segments. The Company is of the opinion that all of its operations are within one industry segment and that no information as to industry segments is required pursuant to Statement of Financial Accounting Standards No. 14 or Regulation S-K. (c) Narrative Description of Business. Relationship with the Mutual Company DGI's operations are interrelated with the operations of the Mutual Company and, because of the percentage of the pooled business assumed by DGI, DGI's results of operations are largely dependent upon the success of the Mutual Company. In addition, various reinsurance agreements exist between the Company and the Mutual Company. The Mutual Company is responsible for underwriting and marketing the pooled business and provides facilities, employees and services required to conduct the business of DGI on a cost allocated basis. The Mutual Company owned 58.6% of DGI as of March 15, 1996. Through the pool, DGI writes personal and commercial property and casualty insurance lines, including automobile, homeowners, commercial multi-peril, workers' compensation and other lines of business. The insurance agencies under contract with the Mutual Company serve as representatives for the pool participants. Under the terms of the intercompany pooling agreement, which took effect on October 1, 1986, Atlantic States cedes to the Mutual Company the premiums, losses and loss expenses on all of its insurance business. Substantially all of the Mutual Company's property and casualty insurance business, including the business reinsured from Southern, written or in force on or after October 1, 1986 is also included in the pooled business. The Mutual Company retroceded 35% of the pooled business to Atlantic States and retained 65% until October 1, 1988 when Atlantic States assumed 50% of the pooled business written or in force on or after October 1, 1988. Effective January 1, 1993, Atlantic States assumed 60% of the pooled business written or in force on or after January 1, 1993, and effective January 1, 1996, Atlantic States assumed 65% of the pooled business written or in force on or after January 1, 1996. All premiums, losses, loss expenses, other underwriting expenses and policy dividends are prorated among the parties on the basis of their participation in the pool. The pooling agreement may be amended or terminated at the end of any calendar year by agreement of the parties. The Company does not intend to terminate its participation in the pooling agreement. The allocations of pool participation percentages between the Mutual Company and the Company are based on the pool participants' relative amounts of capital and surplus and expectations of future relative amounts of capital and surplus. The pooling agreement does not legally discharge Atlantic States from its primary liability for the full amount of the policies ceded. However, it makes the Mutual Company liable to Atlantic States to the extent of the business ceded. -5-
All of DGI's officers are officers of the Mutual Company, and five of DGI's seven directors are directors of the Mutual Company. A Coordinating Committee, which consists of two outside directors from each of DGI and the Mutual Company, none of whom hold seats on both Boards, reviews and approves changes in the pooling agreement and is responsible for matters involving actual or potential conflicts of interest. The decisions of the Coordinating Committee are binding on the two companies. DGI's members must conclude that intercompany transactions are fair and reasonable in order for such transactions to be approved. The underwriting pool is intended to produce a more uniform and stable underwriting result from year to year for the companies in the pool than they would experience individually and to spread the risk of loss among all the participants. Each company participating in the pool has at its disposal the capacity of the entire pool, rather than being limited to policy exposures of a size commensurate with its own capital and surplus. The additional capacity exists because such policy exposures are spread among the pool participants which each have their own capital and surplus. DGI's Business Strategy DGI, in conjunction with the Mutual Company, has multiple strategies which the management of DGI believes have resulted in underwriting results that are favorable when compared to those of the property and casualty insurance industry in general over the past five years. The principal strategies comprise the following: o A regional company concept designed to provide the advantages of local marketing, underwriting and claims servicing with the economies of scale from centralized accounting, administrative, investment, data processing and other services. o An underwriting program and product mix designed to produce a Company-wide underwriting profit, i.e., a combined ratio of less than 100%, from careful risk selection and adequate pricing. o A goal of a closely balanced ratio between commercial business and personal business. o An agent selection process that focuses on appointing agencies with proven market strategies for the development of profitable business and an agent compensation plan providing for additional commissions based upon premium volume and profitability. o Gradual expansion into adjacent states, including Indiana, Ohio, New York and North Carolina. o A continuing effort to attract and retain qualified employees who receive incentive compensation based upon historical results. -6-
Property and Casualty Insurance Products and Services The following table indicates the percentage of DGI's net premiums written represented by commercial lines and by personal lines for the years ended December 31, 1995, 1994 and 1993: Year Ended December 31, ---------------------------------------- 1995 1994 1993 ---- ---- ---- Net Premiums Written: Commercial...................... 46.8% 43.6% 43.2% Personal........................ 53.2 56.4 56.8 The commercial lines consist primarily of automobile, multi-peril and workers' compensation insurance. The personal lines consist primarily of automobile and homeowners insurance. These types of insurance are described in greater detail below: Commercial o Commercial automobile -- policies that provide protection against liability for bodily injury and property damage arising from automobile accidents, and provide protection against loss from damage to automobiles owned by the insured. o Workers' compensation -- policies purchased by employers to provide benefits to employees for injuries sustained during employment. The extent of coverage is established by the workers' compensation laws of each state. o Commercial multi-peril -- policies that provide protection to businesses against many perils, usually combining liability and physical damage coverages. Personal o Private passenger automobile -- policies that provide protection against liability for bodily injury and property damage arising from automobile accidents, and provide protection against loss from damage to automobiles owned by the insured. o Homeowners -- policies that provide coverage for damage to residences and their contents from a broad range of perils, including, fire, lightning, windstorm and theft. These policies also cover liability of the insured arising from injury to other persons or their property while on the insured's property and under other specified conditions. -7-
The following table sets forth the combined ratios of DGI, prepared in accordance with generally accepted accounting principles and statutory accounting principles prescribed or permitted by state insurance authorities. The combined ratio is a traditional measure of underwriting profitability. When the combined ratio is under 100%, underwriting results are generally considered profitable. Conversely, when the combined ratio is over 100%, underwriting results are generally considered unprofitable. The combined ratio does not reflect investment income, federal income taxes or other non-operating income or expense. DGI's operating income depends on income from both underwriting operations and investments. Year Ended December 31, ------------------------------------- 1995 1994 1993 ---- ---- ---- GAAP Combined Ratio................. 97.3% 101.7% 99.1% Statutory operating ratios: Loss ratio........................ 65.6 68.9 67.4 Expense ratio..................... 31.6 31.3 29.3 Dividend ratio.................... 1.2 1.7 1.5 ----- ----- ----- Statutory combined ratio.......... 98.4 101.9 98.2 Industry statutory combined ratio(1).......................... 105.0 109.6 106.9 - ---------- (1) Source: Best's Aggregates & Averages Property-Casualty, 1993; Insurance Information Institute, 1995 and 1994. DGI is required to participate in involuntary insurance programs for automobile insurance, as well as other property and casualty insurance lines, in states in which DGI operates. These programs include joint underwriting associations, assigned risk plans, fair access to insurance requirements ("FAIR") plans, reinsurance facilities and windstorm plans. Legislation establishing these programs requires all companies that write lines covered by these programs to provide coverage (either directly or through reinsurance) for insureds who cannot obtain insurance in the voluntary market. The legislation creating these programs usually allocates a pro rata portion of risks attributable to such insureds to each company on the basis of direct premiums written or the number of automobiles insured. Generally, state law requires participation in such programs as a condition to doing business. The loss ratio on insurance written under involuntary programs has traditionally been greater than the loss ratio on insurance in the voluntary market. The impact of these involuntary programs on DGI has been immaterial. -8-
The following table sets forth the net premiums written and combined ratios by line of insurance for the business of DGI, prepared in accordance with statutory accounting practices prescribed or permitted by state insurance authorities, for the periods indicated. Year Ended December 31, ------------------------------------------ 1995 1994 1993 ------- ------- ------- (in thousands) Net Premiums Written: Commercial: Automobile...................... $ 8,306 $ 6,133 $ 5,279 Workers' compensation........... 17,607 15,110 15,098 Commercial multi-peril.......... 14,598 11,028 10,326 Other........................... 2,422 2,251 1,958 ------- ------- ------- Total commercial .............. 42,933 34,522 32,661 ------- ------- ------- Personal: Automobile...................... 31,060 29,263 29,243 Homeowners...................... 14,932 12,850 11,214 Other........................... 2,746 2,598 2,476 ------- ------- ------- Total personal................ 48,738 44,711 42,933 ------- ------- ------- Total business.................... $91,671 $79,233 $75,594 ======= ======= ======= Statutory Combined Ratios: Commercial: Automobile...................... 92.9% 116.1% 104.0% Workers' compensation........... 76.9 80.0 96.8 Commercial multi-peril.......... 110.0 95.0 90.7 Other........................... 88.2 92.4 98.7 Total commercial.............. 91.6% 92.0% 95.8% Personal: Automobile...................... 98.7% 92.3% 92.4% Homeowners...................... 118.7 147.5 120.1 Other........................... 90.8 111.4 102.0 Total personal................ 104.1% 109.3% 99.9% Total business.................... 98.4% 101.9% 98.2% Property and Casualty Underwriting The underwriting department is responsible for the establishment of underwriting and risk selection guidelines and criteria for the various insurance products written by DGI. The underwriting department, in conjunction with the marketing representatives, works closely with DGI's independent agents to insure a comprehensive knowledge on the part of the agents of DGI's underwriting requirements and risk selection process. DGI's underwriting and pricing strategy is designed to produce an underwriting profit resulting in a Company-wide combined ratio below 100%. DGI and the Mutual Company have a conservative underwriting philosophy, which, in the opinion of management, is one of the prime reasons for DGI's favorable loss ratios relative to the property and casualty insurance industry over the last five years. -9-
The underwriting department has over time initiated risk inspection procedures and underwriting analysis on a per risk and class of business basis. It has also automated underwriting processing utilizing technology such as bar coding. Management has established monitoring and auditing processes to verify compliance with underwriting requirements and procedures. The underwriting department and the research and development section are responsible for the development of new insurance products and enhancements. Underwriting profitability is enhanced by the creation of niche products focused on classes of business which traditionally have provided underwriting profits. Marketing DGI's insurance products, together with the products of the Mutual Company and their respective subsidiaries, are marketed through approximately 2,300 independent insurance agents associated with approximately 700 insurance agencies. Business is written by either DGI or the Mutual Company depending upon geographic location, agency license and product. Management has developed an agency appointment procedure that focuses on appointing agencies with proven marketing strategies for the development of profitable business. DGI regularly evaluates its agency force and continues to strive to obtain and retain a significant position within each agency relative to the amount of business similar to that of DGI placed by the agency with other insurers. DGI and the Mutual Company have developed a successful contingent commission plan for agents under which additional commissions are payable based upon the volume of premiums produced and the profitability of the business of the agency written by DGI and the Mutual Company. Management believes the contingent commission program has enhanced the ability of DGI and the Mutual Company to write profitable business. DGI has granted certain agents the authority to bind insurance within underwriting and pricing limits specified by DGI without the prior approval of DGI. However, DGI generally reviews all coverages placed by its agents and, subject to applicable insurance regulations, may cancel the coverage if it is inconsistent with DGI's guidelines. DGI believes that its regional structure enables it to compete effectively with large national companies. This regional structure permits DGI to take advantage of its knowledge of local operating territories and the opportunity to form strong, long-term relationships with the agents that represent DGI and the Mutual Company. DGI and the Mutual Company have developed comprehensive growth strategies for each of the commercial and personal lines of insurance business. DGI has focused on the small- to medium-sized commercial insurance markets, which have traditionally been a stable and profitable segment of the property and casualty insurance business. Commercial lines marketing is characterized by account selling, in which multiple lines of insurance are offered to a single policyholder. -10-
DGI believes that competitive and comprehensive products targeted to selected classes of personal lines business, along with excellent service to agents and policyholders, will provide growth with profitability. As is customary in the industry, insureds are encouraged to place both their homeowners and personal automobile insurance with DGI or the Mutual Company and are offered a discount for doing so. Claims The claims department develops and implements policies and procedures for the establishment of claim reserves and the timely resolution and payment of claims. The management and staff of the department resolve policy coverage issues, manage and process reinsurance recoveries and handle salvage and subrogation matters. Insurance claims are normally investigated and adjusted by internal claims adjusters and supervisory personnel. Independent adjusters are employed as needed to handle claims in territories in which the volume of claims is not sufficient to justify hiring internal claims adjusters. The litigation and personal injury sections manage all claims litigation, and all claims above $25,000 require home office review and settlement authorization. Field office staffs are supported by home office technical, litigation, material damage, subrogation and medical audit personnel who provide specialized claims support. An investigative unit attempts to prevent fraud and abuse and to control losses. Liabilities for Losses and Loss Expenses Liabilities for losses and loss expenses are estimates at a given point in time of what the insurer expects to pay to claimants, based on facts and circumstances then known, and it can be expected that the ultimate liability will exceed or be less than such estimates. Liabilities are based on estimates of future trends and claims severity, judicial theories of liability and other factors. However, during the loss adjustment period, additional facts regarding individual claims may become known, and consequently it often becomes necessary to refine and adjust the estimates of liability. Any adjustments are reflected in operating results in the year in which the changes are made. DGI maintains liabilities for the eventual payment of losses and loss expenses with respect to both reported and unreported claims. Liabilities for loss expenses are intended to cover the ultimate costs of settling all losses, including investigation and litigation costs from such losses. The amount of liability for reported losses is primarily based upon a case-by-case evaluation of the type of risk involved and knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss. The amount of liability for unreported claims and loss expenses is determined on the basis of historical information by line of insurance. Inflation is implicitly provided for in the reserving function through analysis of costs, trends and reviews of historical reserving results. Liabilities are closely monitored and -11-
are recomputed periodically by the Company and the Mutual Company using new information on reported claims and a variety of statistical techniques. Liabilities for losses are not discounted. The establishment of appropriate liabilities is an inherently uncertain process, and there can be no assurance that the ultimate liability will not exceed DGI's loss and loss expenses and have an adverse effect on DGI's results of operations and financial condition. As is the case for virtually all property and casualty insurance companies, DGI has found it necessary in the past to revise in non-material amounts estimated future liabilities for losses and loss expenses, and further adjustments could be required in the future. However, on the basis of DGI's internal procedures, which analyze, among other things, DGI's experience with similar cases and historical trends such as reserving patterns, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions and public attitudes, management of DGI believes that adequate provision has been made for DGI's liability for loss and loss expenses. Differences between liabilities reported in DGI's financial statements prepared on the basis of generally accepted accounting principles and financial statements prepared on a statutory accounting basis result from reducing statutory liabilities for anticipated salvage and subrogation recoveries. These differences amounted to $3,880,621, $2,730,112 and $2,159,614 at December 31, 1995, 1994 and 1993, respectively. -12-
The following tables set forth a reconciliation of the beginning and ending net liability for unpaid losses and loss expenses for the periods indicated on a GAAP basis for the Company. Year Ended December 31, ----------------------------------------- 1995 1994 1993 ------- ------- ------- (in thousands) Net liability for unpaid losses and loss expenses at beginning of year.................... $62,577 $52,298 $43,449 ------- ------- ------- Acquisition of Delaware American...... 5,670 ------- ------- ------- New balance beginning of year......... 62,577 57,968 43,449 ------- ------- ------- Provision for net losses and loss expenses for claims incurred in the current year......... 58,354 55,941 45,451 Increase (decrease) in provision for estimated net losses and loss expenses for claims incurred in prior years.............. (2,947) (3,084) 1,264 ------- ------- ------- Total incurred........................ 55,407 52,857 46,715 Net losses and loss payments for claims incurred during: The current year..................... 28,834 30,544 21,779 Prior years.......................... 19,009 17,704 16,087 ------- ------- ------- Total paid............................ 47,943 48,248 37,866 Net liability for unpaid losses and loss expenses at end of year.......................... $70,040 $62,577 $52,298 ======= ======= ======= The following table sets forth the development of the liability for net unpaid losses and loss expenses for DGI on a GAAP basis from 1987 (the first full year of DGI's operations) to 1995, with supplemental loss data for 1995 and 1994. "Net liability at end of year for unpaid losses and loss expenses" sets forth the estimated liability for net unpaid losses and loss expenses recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of net losses and loss expenses for claims arising in the current and all prior years that are unpaid at the balance sheet date including losses incurred but not reported. The "Liability reestimated as of" portion of the table shows the reestimated amount of the previously recorded liability based on experience for each succeeding year. The estimate is increased or decreased as payments are made and more information becomes known about the severity of the remaining unpaid claims. For example, the 1990 liability has developed a deficiency after five years, in that reestimated net losses and loss expenses are expected -13-
to be less than the estimated liability initially established in 1990 of $31,898,000 by $1,857,000. The "Cumulative deficiency (excess)" shows the cumulative deficiency or excess at December 31, 1995 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 1990 column indicates that as of December 31, 1995, payments equal to $27,439,000 of the currently reestimated ultimate liability for net losses and loss expenses of $30,041,000 had been made. -14-
<TABLE> <CAPTION> Year Ended December 31 --------------------------------------------------------------------------------------- 1987 1988 1989 1990 1991 1992 1993 1994* 1995 -------- -------- -------- -------- -------- -------- -------- -------- -------- (in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Net liability at end of year for unpaid losses and loss expenses............. $11,878 $20,734 $27,767 $31,898 $36,194 $43,449 $52,298 $62,577 $70,041 Net liability reestimated as of: One year later.............. 12,678 21,598 29,175 32,923 37,514 44,713 50,223 59,630 Two years later............. 12,949 20,475 28,861 33,550 37,765 42,053 47,820 Three years later........... 12,692 19,823 28,545 32,803 35,446 40,077 Four years later............ 12,160 19,296 27,717 31,004 33,931 Five years later............ 11,799 18,796 26,759 30,041 Six years later............. 11,857 18,457 26,180 Seven years later........... 11,782 18,189 Eight years later........... 11,722 Cumulative deficiency (excess).................... $ (156) $(2,545) $(1,587) $(1,857) $(2,263) $(3,372) $(4,478) $(2,947) ======== ======== ======== ======== ======== ======== ======== ======== Cumulative amount of liability paid through: One year later............... $ 5,891 $ 8,855 $11,401 $13,003 $13,519 $16,087 $15,947 $19,009 Two years later.............. 8,472 12,280 17,421 19,795 20,942 24,010 25,128 Three years later............ 9,988 14,912 20,986 24,178 25,308 28,802 Four years later............. 10,774 16,292 23,268 26,413 27,826 Five years later............. 11,209 17,201 24,331 27,439 Six years later.............. 11,388 17,706 24,909 Seven years later............ 11,484 17,782 Eight years later............ 11,544 </TABLE> * Restated for acquisition of Delaware American <TABLE> <CAPTION> Year Ended December 31, -------------------------- 1994 1995 ---- ---- (in thousands) <S> <C> <C> Gross liability at end of year........................ $87,744 $97,734 Reinsurance recoverable............................... 25,167 27,693 Net liability at end of year.......................... 62,577 70,041 Gross reestimated liability -- latest................. 85,313 Reestimated recoverable -- latest..................... 25,683 Net reestimated liability -- latest................... 59,630 Gross cumulative excess............................... 2,431 </TABLE> -15-
Reinsurance DGI and the Mutual Company use several different reinsurers, all of which have a Best rating of A or better or, with respect to foreign reinsurers, have a financial condition which, in the opinion of management, is equivalent to a company with at least an A- rating. The external reinsurance purchased by DGI and the Mutual Company includes "excess treaty reinsurance" under which losses are automatically reinsured over a set retention ($250,000 for 1995) and "catastrophic reinsurance" under which the reinsured recovers 90% of an accumulation of many losses resulting from a single event, including natural disasters (for 1995, $3,000,000 retention) DGI's principal reinsurance agreement, other than that with the Mutual Company, is an excess of loss treaty in which the reinsurers are Continental Casualty Company, Employers Reinsurance Corporation and Dorinco Reinsurance Company. Reinsurance is also purchased on an individual policy basis to reinsure losses that may occur from large risks, specific risk types or specific locations. The amount of coverage provided under each of these types of reinsurance depends upon the amount, nature, size and location of the risk being reinsured. For property insurance, excess of loss treaties provide for coverage up to $1,000,000. For liability insurance, excess of loss treaties provide for coverage up to $30,000,000. Property catastrophe contracts provide coverage up to $50,000,000 resulting from one event. On both property and casualty insurance, DGI and the Mutual Company purchase facultative reinsurance to cover exposures from losses that exceed the limits provided by their respective treaty reinsurance. In addition, the Company and the Mutual Company maintain various reinsurance agreements between themselves in addition to the pooling agreement. Atlantic States and the Mutual Company have a catastrophe reinsurance agreement which limits the maximum liability for losses from any one catastrophe occurrence to $400,000 for Atlantic States. Southern and the Mutual Company have an excess of loss reinsurance agreement in which the Mutual Company assumes up to $150,000 for losses in excess of $100,000. Southern and the Mutual Company also have a catastrophe reinsurance agreement which limits Southern's liability to $300,000 from any one catastrophe occurrence. Delaware American and the Mutual Company have an aggregate of loss reinsurance agreement whereby the Mutual Company reinsures Delaware American against adverse developments in Delaware American's loss reserve and loss adjustment reserves in 1996 compared to December 31, 1995 and all loss and loss adjustment expenses in December 1995 and all of 1996 to the extent that the loss and loss adjustment expense ratios for those periods exceed the lesser of the loss and loss adjustment expense ratios for January-November 1995 and January-December 1995, respectively, or 60%. Delaware American and the Mutual Company also have an excess of loss reinsurance agreement in which the Mutual Company assumes up to $200,000 for losses in excess of $50,000. Delaware American and the Mutual Company also have a Catastrophe Reinsurance Agreement which limits Delaware American's liability to $300,000 from any one catastrophe occurrence. Delaware American and the Mutual Company also have a reinsurance contract -16-
whereby Delaware American cedes 70% of its workers' compensation business to the Mutual Company. Competition The property and casualty insurance industry is highly competitive on the basis of both price and service. There are numerous companies competing for this business in the geographic areas where the Company operates, many of which are substantially larger and have greater financial resources than DGI, and no single company dominates. In addition, because the insurance products of DGI and the Mutual Company are marketed exclusively through independent insurance agencies, most of which represent more than one company, DGI faces competition to retain qualified independent agencies, as well as competition within agencies. Investments DGI's return on invested assets is an important element of its financial results. Currently, the investment objective is to maintain a widely diversified fixed maturities portfolio structured to maximize after-tax investment income while minimizing credit risk through investments in high quality instruments. At December 31, 1995, all debt securities were rated investment grade with the exception of one unrated obligation of $250,000, and the investment portfolio did not contain any real estate, any mortgage loans or any non-performing assets. The following table shows the composition of the debt securities investment portfolio (at carrying value), excluding short-term investments, by rating as of December 31, 1995: December 31, 1995 ------------------------------------ Rating(1) Amount Percent - -------------------- ----------- ------------ (dollars in thousands) U.S. Treasury and U.S. agency securities(2)................. $ 76,663 53.4% Aaa or AAA............................. 35,008 24.3 Aa or AA............................... 24,250 16.9 A...................................... 7,455 5.2 Not rated(3)........................... 250 0.2 -------- ----- Total.............................. $143,626 100.0% ======== ====== - ---------- (1) Ratings assigned by Moody's Investors Services, Inc. or Standard & Poor's Corporation. (2) Includes mortgage-backed securities of approximately $18,164,066. (3) Represents one unrated obligation of The Lancaster County Hospital Authority Mennonite Home Project, which management of DGI believes to be equivalent to investment grade securities with respect to repayment risk. -17-
DGI invests in both taxable and tax-exempt securities as part of its strategy to maximize after-tax income. Such strategy considers, among other factors, the alternative minimum tax. Tax-exempt securities made up approximately 38.5%, 26.4% and 35.6% of the total investment portfolio at December 31, 1995, 1994 and 1993, respectively. The following table shows the classification of the investments (at carrying value) of DGI and its subsidiaries at December 31, 1995, 1994 and 1993. <TABLE> <CAPTION> December 31 ------------------------------------------------------ 1995(1) 1994(1) 1993(2) ------------------ ------------------ ----------------- Percent Percent Percent of of of Amount Total Amount Total Amount Total -------- ----- -------- ------- -------- ------- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> Fixed maturities: Held to maturity: U.S. Treasury securities and obligations of U.S. government corporations and agencies.............. $ 19,676 12.2% $ 14,271 9.8% $ 13,052 10.8% Obligations of states and political subdivisions.... 52,081 32.3 32,110 22.1 28,297 23.4 Corporate securities....... 3,816 2.4 2,994 2.1 4,592 3.8 Mortgage-backed securities................ 16,406 10.1 20,783 14.2 17,476 14.4 -------- ----- -------- ----- -------- ----- Total held to maturity................ 91,979 57.0 70,158 48.2 63,417 52.4 -------- ----- -------- ----- -------- ----- Available for sale: U.S. treasury securities and obligations of U.S. government corporations and agencies.............. 35,421 21.9 33,429 22.9 16,032 13.2 Obligations of states and political subdivisions.... 10,120 6.3 6,357 4.4 14,828 12.3 Corporate securities....... 4,348 2.7 3,734 2.6 6,225 5.1 Mortgage-backed securities................ 1,758 1.1 202 0.1 --- -- -------- ----- -------- ----- -------- ---- Total available for sale................ 51,647 32.0 43,722 30.0 37,085 30.6 -------- ----- -------- ----- -------- ----- Total fixed maturities.............. 143,626 89.0 113,880 78.2 100,502 83.0 Equity securities(3)......... 3,264 2.0 4,202 2.9 3,823 3.2 Short-term investments(4).............. 14,498 9.0 27,485 18.9 16,704 13.8 -------- ----- -------- ----- -------- ----- Total investments............ $161,388 100.0% $145,567 100.0% $121,029 100.0% ======== ====== ======== ====== ======== ===== </TABLE> - ----------------- (1) The Company accounts for investments in accordance with State- ment of Financial Accounting Standards (SFAS) No. 115, "Account- ing For Certain Investments in Debt and Equity Securities". See Notes 1 and 3 to the Consolidated Financial Statements incorpo- -18-
rated by reference herein. Fixed maturities held to maturity are valued at amortized cost; those fixed maturities available for sale are valued at fair value. Total fair value of fixed maturities held to maturity was $95,357,840 at December 31, 1995. The amortized cost of fixed maturities available for sale was $50,714,887 at December 31, 1995. (2) Effective December 31, 1993, in anticipation of adopting SFAS No. 115, the Company specifically identified those fixed maturi- ties as to which it has both the ability and intent to hold to maturity and classified them as "Held to maturity." See Notes 1 and 3 to the Consolidated Financial Statements incorporated by reference herein. Fixed maturities held to maturity were valued at amortized cost; those fixed maturities available for sale were valued at the lower of aggregate amortized cost or fair value. Total fair value of fixed maturities was $111,006,515 at December 31, 1994 and $106,486,367 at December 31, 1993. (3) Equity securities are valued at market. Total cost of equity securities was $2,954,487 at December 31, 1995, $4,897,115 at December 31, 1994 and $3,439,488 at December 31, 1993. (4) Short-term investments are valued at cost, which approximates market. The following table sets forth the maturities (at carrying value) in the fixed maturity and short-term investment portfolio at December 31, 1995, December 31, 1994 and December 31, 1993. <TABLE> <CAPTION> December 31 --------------------------------------------------------- 1995 1994 1993 ------------------- ------------------ ----------------- Percent Percent Percent of of of Amount Total Amount Total Amount Total -------- ------- -------- ------- -------- ------- (dollars in thousands) <S> <C> <C> <C> <C> <C> <C> Due in:(1) One year or less........ $ 34,493 21.8% $ 35,803 25.3 $ 19,208 16.4% Over one year through three years.... 19,546 12.4 34,204 24.2 9,062 7.7 Over three years through five years..... 9,559 6.0 5,346 3.8 10,121 8.6 Over five years through ten years...... 35,005 22.1 9,846 7.0 18,712 16.0 Over ten years through fifteen years.................. 39,172 24.8 29,665 21.0 31,606 27.0 Over fifteen years...... 2,185 1.4 5,968 4.2 11,021 9.4 Mortgage-backed securities............. 18,164 11.5 20,534 14.5 17,476 14.9 -------- ----- -------- ----- -------- ----- $158,124 100.0% $141,366 100.0% $117,206 100.0% ======== ====== ======== ====== ======== ===== </TABLE> - ---------- (1) Based on stated maturity dates with no prepayment assumptions. Actual maturities will differ because borrowers may have the -19-
right to call or prepay obligations with or without call or prepayment penalties. As shown above, the Company held investments in mortgage-backed securities having a carrying value of $18,164,066 at December 31, 1995. Included in these investments are collateralized mortgage obligations ("CMOs") with a carrying value of $17,682,497 at December 31, 1995. The Company has attempted to reduce the prepayment risks associated with mortgage-backed securities by investing approximately 99.5%, as of December 31, 1995, of the Company's holdings of CMOs in planned amortization and very accurately defined tranches. Such investments are designed to alleviate the risk of prepayment by providing predictable principal prepayment schedules within a designated range of prepayments. If principal is repaid earlier than originally anticipated, investment yields may decrease due to reinvestment of these funds at lower current interest rates and capital gains or losses may be realized since the book value of securities purchased at premiums or discounts may be different from the prepayment amount. Investment results of DGI and its subsidiaries for the years ended December 31, 1995, 1994 and 1993 are shown in the following table: Year Ended December 31, -------------------------------------------- 1995 1994 1993 ---- ---- ---- (dollars in thousands) Invested assets(1)........... $155,093 $134,636 $108,472 Investment income(2)......... $ 9,270 $ 7,778 $ 6,478 Average yield................ 6.0% 5.8% 6.0% - ---------------- (1) Average of the aggregate invested amounts at the beginning and end of the period, including cash. (2) Investment income is net of investment expenses and does not include realized investment gains or losses or provision for income taxes. A.M. Best Rating In 1995, the Best rating of the Mutual Company, Atlantic States, Southern and Delaware American was "A", based upon their respective current financial conditions and historical statutory results of operations. Management believes that this Best rating is an important factor in marketing DGI's products to its agents and customers. Best's ratings are industry ratings based on a comparative analysis of the financial condition and operating performance of insurance companies as determined by their publicly available reports. Best's classifications are A++ and A+ (Superior), A and A-(Excellent), B++ and B+ (Very Good), B and B- (Good), C++ and C+ (Fair), C and C- (Marginal), D (below minimum standards) and E and F (Liquidation). Best's ratings are based upon factors relevant to policyholders and are not directed toward the protection of inves- -20-
tors. According to Best, an "excellent" rating is assigned to those companies which, in Best's opinion, have achieved excellent overall performance when compared to the norms of the property and casualty insurance industry and have generally demonstrated a strong ability to meet policyholder and other contractual obligations. Regulation Insurance companies are subject to supervision and regulation in the states in which they transact business. Such supervision and regulation relates 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 which delegate regulatory, supervisory and administrative authority to state insurance departments. Accordingly, the authority of the state insurance departments includes the establishment of standards of solvency which must be met and maintained by insurers, the licensing to do business of insurers and agents, the nature of and limitations on investments, premium rates for property and casualty insurance, the provisions which insurers must make for current losses and future liabilities, the deposit of securities for the benefit of policyholders, the approval of policy forms, notice requirements for the cancellation of policies and the approval of certain changes in control. State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies. In addition to state-imposed insurance laws and regulations, in December 1993 the National Association of Insurance Commissioners (the "NAIC") adopted a new risk-based capital system for assessing the adequacy of statutory capital and surplus effective in 1994 which augments the states' current fixed dollar minimum capital requirements for insurance companies. At December 31, 1995, DGI exceeded the required levels of capital. There can be no assurance that the capital requirements applicable to DGI's business will not increase in the future. The states in which Atlantic States (Pennsylvania, Maryland and Delaware), the Mutual Company (Pennsylvania, Ohio, Maryland, New York, Virginia and Delaware), Southern (Virginia) and Delaware American (Delaware, Maryland and Pennsylvania) do business have guaranty fund laws under which insurers doing business in such states can be assessed on the basis of premiums written by the insurer in that state in order to fund policyholder liabilities of insolvent insurance companies. Under these laws in general, an insurer is subject to assessment, depending upon its market share of a given line of business, to assist in the payment of policyholder claims against insolvent insurers. The Mutual Company, Atlantic States, Southern and Delaware American have made accruals for their portion of assessments related to such insolvencies based upon the most current information furnished by the guaranty associations. During the five years ended December 31, 1995, the amount of such insolvency assess- -21-
ments paid by Atlantic States, Southern, the Mutual Company and Delaware American was not material. The property and casualty insurance industry has recently received a considerable amount of publicity because of rising insurance costs and the unavailability of insurance. New regulations and legislation are being proposed to limit damage awards, to control plaintiffs' counsel fees, to bring the industry under regulation by the federal government and to control premiums, policy terminations and other policy terms. It is not possible to predict whether, in what form or in what jurisdictions any of these proposals might be adopted or the effect, if any, on the Company. Most states have enacted legislation that regulates insurance holding company systems. Each insurance company in the holding company system is required to register with the insurance supervisory agency of its state of domicile and furnish information concerning the operations of companies within the holding company system that may materially affect the operations, management or financial condition of the insurers within the system. Pursuant to these laws, the respective insurance departments may examine the Mutual Company, the Company and their respective insurance subsidiaries at any time, require disclosure of material transactions by the holding company and require prior approval of certain transactions, such as "extraordinary dividends" from the insurance subsidiaries to the holding company. All transactions within the holding company system affecting the Mutual Company and the Company's insurance subsidiaries must be fair and equitable. Approval of the applicable insurance commissioner is required prior to consummation of transactions affecting the control of an insurer. In some states, including Pennsylvania, the acquisition of 10% or more of the outstanding capital stock of an insurer or its holding company is presumed to be a change in control. These laws also require notice to the applicable insurance commissioner of certain material transactions between an insurer and any person in its holding company system and, in some states, certain of such transactions cannot be consummated without the prior approval of the applicable insurance commissioner. The Company's insurance subsidiaries are restricted by the insurance laws of their respective states of domicile as to the amount of dividends or other distributions they may pay to the Company without the prior approval of the respective state regulatory authorities. Generally, the maximum amount that may be paid by an insurance subsidiary during any year after notice to, but without prior approval of the insurance commissioners of these states is limited to a stated percentage of that subsidiary's statutory capital and surplus as of a certain date, or the net income or net investment income not including realized capital gains of the subsidiary for the preceding year. As of December 31, 1995, amounts available for payment of dividends in 1996 without the prior approval of the various insurance commissioners were $5,224,905 from Atlantic States, $638,042 from Southern and $569,563 from Delaware American. See Note -22-
11 to the Consolidated Financial Statements incorporated by reference herein. The Mutual Company The Mutual Company, which was organized in 1889, has a Best rating of A (Excellent). At December 31, 1995, the Mutual Company had admitted assets of $159 million and policyholders' surplus of $72.5 million. At December 31, 1995, the Mutual Company had no debt and, of its total liabilities of $86.9 million, reserves for net losses and loss expenses accounted for $49.5 million and unearned premiums accounted for $23.4 million. Of the Mutual Company's investment portfolio of $136 million at December 31, 1995, investment-grade bonds accounted for $55 million, cash and short-term investments accounted for $8 million and mortgages accounted for $7 million. At December 31, 1995, the Mutual Company owned 2,507,633 shares of the Company's Common Stock, which were carried on the Mutual Company's books at $47 million. The foregoing financial information is presented on the statutory basis of accounting. Employees As of December 31, 1995, the Mutual Company had 339 employees. The Mutual Company's employees provide a variety of services to DGI, Atlantic States, Delaware American and Southern as well as to the Mutual Company and its subsidiaries. Item 2. Properties. DGI shares headquarters with the Mutual Company in a building owned by the Mutual Company. The Mutual Company charges DGI for an appropriate portion of the building expenses under an inter-company allocation agreement which is consistent with the terms of the pooling agreement. The headquarters of the Mutual Company have approximately 82,000 square feet of office space, with an additional 40,000 square feet of office space currently under construction. The Mutual Company has a branch office of approximately 1,600 square feet in Pittsburgh, Pennsylvania, which it leases. Southern has a facility of approximately 10,000 square feet in Glen Allen, Virginia which it leases. Delaware American has a facility of approximately 4,000 square feet in New Castle, Delaware which it leases. Item 3. Legal Proceedings. DGI is a party to numerous lawsuits arising in the ordinary course of its insurance business. DGI believes that the resolution of these lawsuits will not have a material adverse effect on its financial condition or results of operations. -23-
Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of holders of the Company's Common Stock during the fourth quarter of 1995. Executive Officers of the Company Name Age Position ---- --- -------- Donald H. Nikolaus 53 President and Chief Executive Officer since 1981 William H. Shupert 69 Senior Vice President - Underwriting since 1991; Vice President - Underwriting for 18 years prior thereto Ralph G. Spontak 43 Senior Vice President since 1991; Chief Financial Officer since 1983; Vice President since 1983; Secretary since 1988; KMG Main Hurdman for nine years to 1983 Frank J. Wood 62 Vice President - Marketing since 1988; Manager - Marketing for one year prior thereto Daniel J. Wagner 35 Treasurer since 1993; Controller for five years prior thereto -24-
PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. The answer to this Item is incorporated in part by reference to page 25 of the Company's Annual Report to Stockholders for the year ended December 31, 1995, which is included as Exhibit (13) to this Form 10-K Report. As of March 15, 1996, the Company had approximately 372 holders of record of its Common Stock. The Company declared dividends of $.36 per share in 1994 and $.40 per share in 1995. Item 6. Selected Financial Data. The answer to this Item is incorporated by reference to page 1 of the Company's Annual Report to Stockholders for the year ended December 31, 1995, which is included as Exhibit (13) to this Form 10-K Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The answer to this Item is incorporated by reference to pages 7 through 9 of the Company's Annual Report to Stockholders for the year ended December 31, 1995, which is included as Exhibit (13) to this Form 10-K Report. Item 8. Financial Statements and Supplementary Data. The answer to this Item is incorporated by reference to pages 10 through 23 of the Company's Annual Report to Stockholders for the year ended December 31, 1995, which is included as Exhibit (13) to this Form 10-K Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. -25-
PART III Item 10. Directors and Executive Officers of the Company. The answer to this Item with respect to the Company's directors is incorporated by reference to pages 5 through 7 of the Company's proxy statement relating to the Company's annual meeting of stockholders to be held April 18, 1996. The response to this Item with respect to the Company's executive officers is incorporated by reference to Part I of this Form 10-K Report. Item 11. Executive Compensation. The answer to this Item is incorporated by reference to pages 7 through 12 of the Company's proxy statement relating to the Company's annual meeting of stockholders to be held April 18, 1996, except for the Compensation Committee Report and the Performance Graph, which are not incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The answer to this Item is incorporated by reference to pages 2 through 3 of the Company's proxy statement relating to the Company's annual meeting of stockholders to be held April 18, 1996. Item 13. Certain Relationships and Related Transactions. The answer to this Item is incorporated by reference to pages 3 through 5 and page 13 of the Company's proxy statement relating to the Company's annual meeting of stockholders to be held April 18, 1996. -26-
PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) Financial statements, financial statement schedules and exhibits filed: (1) Consolidated Financial Statements Page* ---- Report of Independent Auditors................................. 23 Donegal Group Inc. and Subsidiaries: Consolidated Balance Sheets as of December 31, 1995 and 1994................................ 10 Consolidated Statements of Income for the three years ended December 31, 1995, 1994 and 1993.......................... 11 Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1995, 1994 and 1993.......................... 12 Consolidated Statements of Cash Flows for the three years ended December 31, 1995, 1994 and 1993.......................... 13 Notes to Consolidated Financial Statements..................... 14-23 (2) Financial Statement Schedules Page ---- Donegal Group Inc. and Subsidiaries: Report of Independent Auditors on Schedules.................... 33 Schedule I. Summary of Investments - Other than Investments in Related Parties....................................... 34 Schedule II. Condensed Financial Information of Parent Company............................. 35-37 Schedule III. Supplementary Insurance Information................................... 38-39 Schedule IV. Reinsurance................................... 40 Schedule VI. Supplemental Insurance Information Concerning Property and Casualty Subsidiary.................................... 41-42 All other schedules have been omitted since they are not required, not applicable or the information is included in the financial statements or notes thereto. - ------------------ * Refers to the respective page of Donegal Group Inc.'s 1995 Annual Report to Stockholders. The Consolidated Financial Statements and Notes to Consolidated Financial Statements and Auditor's Report thereon on pages 10 through 23 are incorporated herein by reference. -27-
With the exception of the portions of such Annual Report specifically incorporated by reference in this Item and Items 5, 6, 7 and 8, such Annual Report shall not be deemed filed as part of this Form 10-K Report or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934. (3) Exhibits Exhibit No. Description of Exhibits Reference - ----------- --------------------------------------- --------- (3)(i) Certificate of Incorporation of (a) Registrant (3)(ii) Amended and Restated By-laws of (e) Registrant (4) Form of Registrant's Common Stock (a) Certificate Management Contracts and Compensatory Plans or Arrangements (10)(A) Donegal Mutual Insurance Company (a) Money Purchase Pension Plan and Trust dated March 12, 1985 (10)(B) Donegal Mutual Insurance Company (a) Profit Sharing Plan and Trust dated March 12, 1985 (10)(C) Donegal Group Inc. Key Executive (b) Incentive Bonus Plan dated September 29, 1986 (10)(D) Donegal Group Inc. Employee Stock (b) Purchase Plan, as amended (10)(E) Donegal Group Inc. Equity Incentive (b) Plan, as amended (10)(F) Donegal Group Inc. 1996 Equity filed herewith Incentive Plan. Other Material Contracts (10)(G) Tax Sharing Agreement dated (a) September 29, 1986 between Donegal Group Inc. and Atlantic States Insurance Company (10)(H) Services Allocation Agreement dated (a) September 29, 1986 between Donegal Mutual Insurance Company, Donegal Group Inc. and Atlantic States Insurance Company -28-
(10)(I) Proportional Reinsurance Agreement (a) dated September 29, 1986 between Donegal Mutual Insurance Company and Atlantic States Insurance Company (10)(J) Amendment dated October 1, 1988 to (c) Proportional Reinsurance Agreement between Donegal Mutual Insurance Company and Atlantic States Insurance Company (10)(K) Multi-Line Excess of Loss Reinsurance (e) Agreement effective January 1, 1993 between Donegal Mutual Insurance Company, Southern Insurance Company of Virginia, Atlantic States Insurance Company and Pioneer Mutual Insurance Company, and Christiana General Insurance Corporation of New York, Cologne Reinsurance Company of America, Continental Casualty Company, Employers Reinsurance Corporation and Munich American Reinsurance Company (10)(L) Amendment dated July 16, 1992 to Propor- (d) tional Reinsurance Agreement between Donegal Mutual Insurance Company and Atlantic States Insurance Company (10)(M) Amendment dated as of December 21, 1995 (f) to Proportional Reinsurance Agreement between Donegal Mutual Insurance Company and Atlantic States Insurance Company (10)(N) Credit Agreement dated as of December 29, (f) 1995 between Donegal Group Inc. and Fleet National Bank of Connecticut (10)(O) Stock Purchase Agreement dated as of (f) December 21, 1995 between Donegal Mutual Insurance Company and Donegal Group Inc. (10)(P) Donegal Group Inc. 1996 Employee Stock (g) Purchase Plan. (13) 1995 Annual Report to Stockholders filed herewith (electronic filing contains only those portions incorporated by reference into this Form 10-K report). (20) Proxy Statement relating to the filed herewith Annual Meeting of Stockholders to be held on April 18, 1996 (21) Subsidiaries of Registrant filed herewith -29-
(23) Consent of Independent Auditors Certified filed herewith (27) Financial Data Schedule filed herewith (28)(A) Analysis of Losses and Loss Expenses -- P Schedule P of the 1995 Annual Statement of Donegal Mutual Insurance Company (28)(B) Analysis of Losses and Loss Expenses -- P Schedule P of the 1995 Annual Statement of Atlantic States Insurance Company (28)(C) Analysis of Losses and Loss Expenses -- P Schedule P of the 1995 Annual Statement of Southern Insurance Company of Virginia (28)(D) Analysis Losses and Loss Expenses -- P Schedule P of the 1995 Annual Statement of Delaware American Insurance Company - ------------------ (a) Such exhibit is hereby incorporated by reference to the like-described exhibits in Registrant's Form S-1 Registration Statement No. 33-8533 declared effective October 29, 1986. (b) Such exhibit is hereby incorporated by reference to the like-described exhibits in Registrant's Form 10-K Report for the year ended December 31, 1986. (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, 1988. (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, 1992. (e) Such exhibit is hereby incorporated by reference to the like-described exhibit in Registrant's Form S-2 Registration Statement No. 33-67346 declared effective September 29, 1993. (f) Such exhibit is hereby incorporated by reference to the like-described exhibit in Registrant's Form 8-K Report dated December 21, 1995. (g) Such exhibit is hereby incorporated by reference to the like-described exhibit in Registrant's Form S-8 Registration Statement No. 333-1287 filed February 29, 1996. (b) Reports on Form 8-K: -30-
During the quarter ended December 31, 1995, Registrant filed a report on Form 8-K dated December 21, 1995 in which information was reported under Item 5 (Other Events). -31-
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DONEGAL GROUP INC. Date: March 29, 1996 By: /s/Donald H. Nikolaus -------------------------------- Donald H. Nikolaus, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signature Title Date - ---------------------------- ----------------------- --------------- /s/Donald H. Nikolaus President and a March 29, 1996 - ---------------------------- Director (principal Donald H. Nikolaus executive officer) /s/Ralph G. Spontak Senior Vice President March 29, 1996 - ---------------------------- and Secretary (principal Ralph G. Spontak financial and accounting officer) /s/Robert S. Bolinger Director March 29, 1996 - ---------------------------- Robert S. Bolinger - ---------------------------- Director March , 1996 Thomas J. Finley, Jr. /s/Patricia A. Gilmartin Director March 29, 1996 - ---------------------------- Patricia A. Gilmartin /s/Philip H. Glatfelter, II Director March 29, 1996 - ---------------------------- Philip H. Glatfelter, II /s/C. Edwin Ireland Director March 29, 1996 - ---------------------------- C. Edwin Ireland /s/R. Richard Sherbahn Director March 29, 1996 - ---------------------------- R. Richard Sherbahn -32-
Independent Auditors' Report The Stockholders and Board of Directors Donegal Group Inc. Under the date of February 23, 1996, we reported on the consolidated balance sheets of Donegal Group Inc. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995, as contained in the 1995 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1995. In connection with our audits of the aformentioned consolidated financial statements, we also audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Note 1 to the financial statements, the Company adopted the provisions of Statement of Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" as of January 1, 1994. KPMG Peat Marwick LLP Harrisburg, Pennsylvania February 23, 1996 -33-
DONEGAL GROUP INC. AND SUBSIDIARIES SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1995 Amount at Which Fair Shown in the Cost Value Balance Sheet ------------ ------------ --------------- Fixed Maturities: Held to maturity: United States government and governmental agencies and authorities including obligations of states and political subdivisions....... $ 71,756,284 $ 74,525,605 $ 71,756,284 All other corporate bonds..... 3,816,309 4,195,000 3,816,309 Mortgage-backed securities.... 16,406,529 16,637,235 16,406,529 ------------ ------------ ------------ Total fixed maturities held to maturity............ 91,979,122 95,357,840 91,979,122 ------------ ------------ ------------ Available for sale: United States government and governmental agencies and authorities including obligations of states and political subdivisions....... 44,690,339 45,541,193 45,541,193 All other corporate bonds..... 4,299,597 4,348,000 4,348,000 Mortgage-backed securities.... 1,724,951 1,757,537 1,757,537 ------------ ------------ ------------ Total fixed maturities available for sale.......... 50,714,887 51,646,730 51,646,730 ------------ ------------ ------------ Total fixed maturities................ 142,694,009 147,004,570 143,625,852 ------------ ------------ ------------ Equity Securities: Preferred stocks Public utilities............... 562,500 598,750 598,750 Banks.......................... 625,000 646,875 646,875 Industrial and miscellaneous ................ 1,126,500 1,093,125 1,093,125 ------------ ------------ ------------ Total preferred stocks...... 2,314,000 2,338,750 2,338,750 ------------ ------------ ------------ Common stocks Public utilities............... 131,516 121,250 121,250 Banks.......................... 53,525 358,628 358,628 Industrial and miscellaneous................. 455,446 445,250 445,250 ------------ ------------ ------------ Total common stocks.......... 640,487 925,128 925,128 ------------ ------------ ------------ Total equity securities..... 2,954,487 3,263,878 3,263,878 ------------ ------------ ------------ Short-term investments........... 14,498,579 14,498,579 14,498,579 ------------ ------------ ------------ Total investments.............. $160,147,075 $164,767,027 $161,388,309 ============ ============ ============ -34-
DONEGAL GROUP INC. AND SUBSIDIARIES SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY Condensed Balance Sheets ($ in thousands) December 31, 1995 and 1994 ASSETS 1995 1994* -------- ------- Investment in subsidiaries (equity method) $75,236 $59,346 Short-term investments, at cost, which approximates market 1,117 373 Cash 147 194 Property and equipment 1,355 1,339 Current income taxes 341 9 Loan costs 280 Other receivables 4 ------- ------- Total assets $78,480 $61,261 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994 -------- -------- Cash dividends declared to stockholders $ 428 $ 369 Accounts payable and accrued expenses 317 92 Deferred income taxes 250 235 Payable to affiliates 202 Line of credit 5,000 ------- ------- Total liabilities 6,197 696 Stockholders' equity Preferred stock, $1.00 par value, authorized 1,000,000 shares, none issued Common stock, $1.00 par value, authorized 10,000,000 shares, issued 4,326,362 and 4,162,770 shares and outstanding 4,261,314 and 4,097,722 shares 4,327 4,163 Additional paid-in capital 35,018 33,459 Net unrealized gains (losses) on investments 819 (998) Retained earnings, including equity in undistributed net income of subsidiaries ($37,202 and $28,631) 32,939 24,761 Treasury stock at cost (820) (820) ------- ------- Total stockholders' equity 72,283 60,565 ------- ------- Total liabilities and stockholders' equity $78,480 $61,261 ======= ======= * Restated -35-
DONEGAL GROUP INC. AND SUBSIDIARIES SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY Condensed Statements of Income ($ in thousands) Years ended December 31, 1995, 1994 and 1993 1995 1994* 1993 -------- -------- -------- Revenues Dividends-subsidiary $ 900 $ 900 $ 500 Lease income 491 463 403 Investment income 13 12 23 ------- ------ ------ Total revenues 1,404 1,375 926 ------- ------ ------ Expenses Operating expenses 411 418 369 Interest 4 10 307 ------- ------ ------ Total expenses 415 428 676 ------- ------ ------ Income before income tax benefit and equity in undistributed net income of subsidiaries 989 947 250 Income tax (benefit) (298) 16 (79) -------- ------ ------- Income before equity in undistributed net income of subsidiaries 1,287 931 329 Equity in undistributed net income of subsidiaries 8,571 4,109 6,053 ------- ------ ------ Net income $ 9,858 $5,040 $6,382 ======= ====== ====== * Restated -36-
DONEGAL GROUP INC. AND SUBSIDIARIES SCHEDULE II - CONDENSED INFORMATION OF PARENT COMPANY Condensed Statements of Cash Flows ($ in thousands) Years ended December 31, 1995, 1994 and 1993 1995 1994* 1993 -------- -------- -------- Cash flows from operating activities: Net income $ 9,858 $ 5,040 $ 6,382 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries (8,571) (4,109) (6,053) Increase (decrease) in accounts payable and accrued expenses 225 22 3 Depreciation and amortization 264 257 222 Increase in deferred income tax 15 21 46 Increase in current income tax receivable (332) (2) --- ------- ------- ------- Increase in other receivables (284) --- --- Net adjustments (8,683) (3,811) (5,782) ------- ------- ------- Net cash provided by operating activities 1,175 1,229 600 ------- ------- ------- Cash flows from investing activities: Net sales (purchases) of short-term investments (744) 447 (820) Net purchase of property and equipment (279) (110) (449) Capital contribution to subsidiaries --- --- (9,500) Net purchases of long-term investments --- (200) --- Acquisition of Delaware American (5,300) --- --- ------- ------- ------- Net cash provided by (used in) investing activities (6,323) 137 (10,769) ------- ------- ------- Cash flows from financing activities: Short-term bank borrowings --- --- --- Repayment of short-term bank borrowings --- --- (4,500) Cash dividends paid (1,622) (1,433) (1,011) Issuance of common stock 125 16,369 Purchase of treasury stock 1,723 --- (820) Line of credit 5,000 --- --- ------- ------- ------- Net cash provided by (used in) financing activities 5,101 (1,308) 10,038 ------- ------- ------- Net change in cash (47) 58 (131) Cash beginning 194 136 267 ------- ------- ------- Cash ending $ 147 $ 194 $ 136 ======= ======= ======= * Restated -37-
DONEGAL GROUP INC. AND SUBSIDIARIES SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION <TABLE> <CAPTION> Amortization Net of Deferred Net Net Losses Policy Other Net Earned Investment and Loss Acquisition Underwriting Premiums Segment Premiums Income Expenses Costs Expenses Written ------- -------- ---------- -------- ------------ ------------ ------- <S> <C> <C> <C> <C> <C> <C> Year Ended December 31, 1995 - ----------------- Property and casualty $86,277,852 $ 9,256,960 $55,407,254 $14,412,000 $13,049,188 $91,671,128 Parent --- 12,924 --- --- --- --- ----------- ----------- ----------- ----------- ----------- ----------- $86,277,852 $ 9,269,884 $55,407,254 $14,412,000 $13,049,188 $91,671,128 =========== =========== =========== =========== =========== =========== Year Ended December 31, 1994* - ------------------ Property and casualty $77,232,889 $ 7,765,950 $52,857,302 $12,055,000 $12,278,473 $79,233,963 Parent --- 12,214 --- --- --- --- ----------- ----------- ----------- ----------- ----------- ----------- $77,232,889 $ 7,778,164 $52,857,302 $12,055,000 $12,278,473 $79,233,963 =========== =========== =========== =========== =========== =========== Year Ended December 31, 1993 - ----------------- Property and casualty $69,415,874 $ 6,455,071 $46,714,826 $11,475,000 $ 9,545,102 $75,594,469 Parent --- 23,283 --- --- --- --- ----------- ----------- ----------- ----------- ----------- ----------- $69,415,874 $ 6,478,354 $46,714,826 $11,475,000 $ 9,545,102 $75,594,469 =========== =========== =========== =========== =========== =========== </TABLE> * Restated -38-
DONEGAL GROUP INC. AND SUBSIDIARIES SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION At December 31, -------------------------------------------------------- Deferred Liability Other Policy Policy for Losses Claims and Acquisition and Loss Unearned Benefits Segment Costs Expenses Premiums Payable ------- ----------- ---------- -------- ----------- 1995 ---- Property and casualty $ 6,902,218 $97,733,851 $54,377,239 $ --- 1994* ----- Property and casualty $ 5,551,869 $87,743,937 $46,755,095 $ --- * Restated -39-
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, 1995 - ----------------- Property and casualty premiums $40,552,497 $29,099,448 $74,824,803 $86,277,852 87% =========== =========== =========== =========== ==== Year Ended December 31, 1994* - ------------------ Property and casualty premiums $35,275,866 $24,365,441 $66,322,464 $77,232,889 86% =========== =========== =========== =========== ==== Year Ended December 31, 1993 - ----------------- Property and casualty premiums $27,954,300 $21,447,088 $62,908,662 $69,415,874 91% =========== =========== =========== =========== ==== * Restated -40-
DONEGAL GROUP INC. AND SUBSIDIARIES SCHEDULE VI - SUPPLEMENTARY INSURANCE INFORMATION CONCERNING PROPERTY AND CASUALTY SUBSIDIARIES Discount, Deferred Liability if any, Policy for Losses Deducted Acquisition and Loss From Unearned Costs Expenses Reserves Premiums ----------- ----------- ----------- ----------- At December 31, 1995 $ 6,902,218 $97,733,851 $ --- $54,377,239 =========== =========== =========== =========== 1994* $ 5,551,869 $87,743,937 $ --- $46,755,095 =========== =========== =========== =========== * Restated -41-
DONEGAL GROUP INC. AND SUBSIDIARIES SCHEDULE VI - SUPPLEMENTARY INSURANCE INFORMATION CONCERNING PROPERTY AND CASUALTY SUBSIDIARIES <TABLE> <CAPTION> Losses and Loss Expenses Related to Amortization ---------------------- of Deferred Net Net (1) (2) Policy Paid Losses Net Earned Investment Current Prior Acquisition and Loss Premiums Premiums Income Year Years Costs Expenses Written -------- ---------- ------- --------- ------------ ------------ ------- <S> <C> <C> <C> <C> <C> <C> <C> Year Ended December 31, 1995 $86,277,852 $ 9,256,960 $58,354,254 $(2,947,000) $14,412,000 $47,943,360 $91,671,128 =========== =========== =========== ============ =========== =========== =========== Year Ended December 31, 1994* $77,232,889 $ 7,765,950 $55,941,502 $(3,084,000) $12,055,000 $48,248,316 $79,233,963 =========== =========== =========== ============ =========== =========== =========== Year Ended December 31, 1993 $69,415,874 $ 6,455,071 $45,451,826 $ 1,263,000 $11,475,000 $37,865,913 $75,594,469 =========== =========== =========== =========== =========== =========== =========== </TABLE> * Restated -42-
EXHIBIT INDEX (Pursuant to Item 601 of Regulation S-K) Exhibit No. Description of Exhibits Reference - ----------- ----------------------- --------- (3)(i) Certificate of Incorporation of (a) Registrant (3)(ii) Amended and Restated By-laws of (e) Registrant (4) Form of Registrant's Common Stock (a) Certificate Management Contracts and Compensatory Plans or Arrangements (10)(A) Donegal Mutual Insurance Company (a) Money Purchase Pension Plan and Trust dated March 12, 1985 (10)(B) Donegal Mutual Insurance Company (a) Profit Sharing Plan and Trust dated March 12, 1985 (10)(C) Donegal Group Inc. Key Executive (b) Incentive Bonus Plan dated September 29, 1986 (10)(D) Donegal Group Inc. Employee Stock (b) Purchase Plan, as amended (10)(E) Donegal Group Inc. Equity Incentive (b) Plan, as amended (10)(F) Donegal Group Inc. 1996 Equity filed herewith Incentive Plan Other Material Contracts (10)(G) Tax Sharing Agreement dated (a) September 29, 1986 between Donegal Group Inc. and Atlantic States Insurance Company (10)(H) Services Allocation Agreement dated (a) September 29, 1986 between Donegal Mutual Insurance Company, Donegal Group Inc. and Atlantic States Insurance Company -43-
(10)(I) Proportional Reinsurance Agreement (a) dated September 29, 1986 between Donegal Mutual Insurance Company and Atlantic States Insurance Company (10)(J) Amendment dated October 1, 1988 to (c) Proportional Reinsurance Agreement between Donegal Mutual Insurance Company and Atlantic States Insurance Company (10)(K) Multi-Line Excess of Loss Reinsurance (e) Agreement effective January 1, 1993 between Donegal Mutual Insurance Company, Southern Insurance Company of Virginia, Atlantic States Insurance Company and Pioneer Mutual Insurance Company, and Christiana General Insurance Corporation of New York, Cologne Reinsurance Company of America, Continental Casualty Company, Employers Reinsurance Corporation and Munich American Reinsurance Company (10)(L) Amendment dated July 16, 1992 to Propor- (d) tional Reinsurance Agreement between Donegal Mutual Insurance Company and Atlantic States Insurance Company (10)(M) Amendment dated as of December 21, 1995 (f) to Proportional Reinsurance Agreement between Donegal Mutual Insurance Company and Atlantic States Insurance Company (10)(N) Credit Agreement dated as of December 29, (f) 1995 between Donegal Group Inc. and Fleet National Bank of Connecticut (10)(O) Stock Purchase Agreement dated as of (f) December 21, 1995 between Donegal Mutual Insurance Company and Donegal Group Inc. (10)(P) Donegal Group Inc. 1996 Employee Stock (g) Purchase Plan. (13) 1995 Annual Report to Stockholders filed herewith (electronic filing contains only those portions incorporated by reference into this Form 10-K report.) (20) Proxy Statement relating to the Annual filed herewith Meeting of Stockholders to be held on April 18, 1996 (21) Subsidiaries of Registrant filed herewith -44-
(23) Consent of Independent Auditors filed herewith (27) Financial Data Schedule filed herewith (28)(A) Analysis of Losses and Loss P Expenses -- Schedule P of the 1995 Annual Statement of Donegal Mutual Insurance Company (28)(B) Analysis of Losses and Loss P Expenses -- Schedule P of the 1995 Annual Statement of Atlantic States Insurance Company (28)(C) Analysis of Losses and Loss Expenses -- P Schedule P of the 1995 Annual Statement of Southern Insurance Company of Virginia (28)(D) Analysis Losses and Loss Expenses -- P Schedule P of the 1995 Annual Statement of Delaware American Insurance Company - ------------------ (a) Such exhibit is hereby incorporated by reference to the like- described exhibits in Registrant's Form S-1 Registration Statement No. 33-8533 declared effective October 29, 1986. (b) Such exhibit is hereby incorporated by reference to the like-described exhibits in Registrant's Form 10-K Report for the year ended December 31, 1986. (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, 1988. (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, 1992. (e) Such exhibit is hereby incorporated by reference to the like- described exhibit in Registrant's Form S-2 Registration Statement No. 33-67346 declared effective September 29, 1993. (f) Such exhibit is hereby incorporated by reference to the like-described exhibit in Registrant's Form 8-K Report dated December 21, 1995. (g) Such exhibit is hereby incorporated by reference to the like- described exhibit in Registrant's Form S-8 Registration Statement No. 333-1287 filed on February 29, 1996. -45-