DONEGAL GROUP INC
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
OR
| o | 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, Marietta, Pennsylvania | 17547 | |
| (Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code: (888) 877-0600
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
| Class A Common Stock, $.01 par value | The NASDAQ Global Select Market | |
| Class B Common Stock, $.01 par value | The NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer as defined in Rule
405 of the Securities Act: Yes
o
. No
þ
.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. Yes
o
. No
þ
.
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
þ
. No
o
.
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
o
. No
o
.
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 we incorporate by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
non-accelerated filer, or a smaller reporting company. See definition of “large accelerated
filer,” “accelerated filer” or “smaller reporting company” in Rule 12b-2 of the Exchange Act (check
one):
| Large accelerated filer o | Accelerated filer þ |
Non-accelerated filer
o
(Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company. Yes
o
. No
þ
.
State the aggregate market value of the voting and non-voting common equity held by non-affiliates
computed by reference to the price at which the common equity was last sold, or the average bid and
asked price of such common equity, as of the last business day of the registrant’s most recently
completed second fiscal quarter. $157,257,918.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as
of the latest practicable date: 20,013,067 shares of Class A common stock and 5,576,775 shares of
Class B common stock outstanding on March 4, 2011.
DOCUMENTS INCORPORATED BY REFERENCE:
| 1. | The registrant incorporates by reference portions of the registrant’s annual report to stockholders for the fiscal year ended December 31, 2010 into Parts I, II and IV of this report. |
| 2. | The registrant incorporates by reference portions of the registrant’s proxy statement relating to registrant’s annual meeting of stockholders to be held April 21, 2011 into Part III of this report. |
DONEGAL GROUP INC.
INDEX TO FORM 10-K REPORT
INDEX TO FORM 10-K REPORT
| Page | ||||||
| PART I |
|
|||||
| Item 1. |
Business
|
1 | ||||
| Item 1A. |
Risk Factors
|
34 | ||||
| Item 1B. |
Unresolved Staff Comments
|
48 | ||||
| Item 2. |
Properties
|
48 | ||||
| Item 3. |
Legal Proceedings
|
49 | ||||
| Item 4. |
Reserved
|
49 | ||||
|
|
||||||
| PART II |
|
|||||
| Item 5. |
Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
50 | ||||
| Item 6. |
Selected Financial Data
|
51 | ||||
| Item 7. |
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
51 | ||||
| Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk
|
51 | ||||
| Item 8. |
Financial Statements and Supplementary Data
|
53 | ||||
| Item 9. |
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
|
53 | ||||
| Item 9A. |
Controls and Procedures
|
53 | ||||
| Item 9B. |
Other Information
|
54 | ||||
|
|
||||||
| PART III |
|
|||||
| Item 10. |
Directors, Executive Officers and Corporate Governance
of the Registrant
|
55 | ||||
| Item 11. |
Executive Compensation
|
55 | ||||
| Item 12. |
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
|
55 | ||||
| Item 13. |
Certain Relationships and Related Transactions and
Director Independence
|
55 | ||||
| Item 14. |
Principal Accountant Fees and Services
|
55 | ||||
|
|
||||||
| PART IV |
|
|||||
| Item 15. |
Exhibits and Financial Statement Schedules
|
56 | ||||
(i)
PART I
Item 1
.
Business
.
(a)
General Development of Business
.
We are an insurance holding company whose insurance subsidiaries offer personal and commercial
lines of property and casualty insurance to businesses and individuals in 22 Mid-Atlantic,
Midwestern, New England and Southern states. Our insurance subsidiaries provide their
policyholders with a selection of insurance products at competitive rates, while pursuing
profitability through adherence to a strict underwriting discipline. At December 31, 2010, we had
total assets of $1.2 billion and stockholders’ equity of $380.1 million. Our net income was $11.5
million for the year ended December 31, 2010 compared to $18.8 million for the year ended December
31, 2009.
Donegal Mutual Insurance Company, or Donegal Mutual, owns approximately 42.0% of our Class A
common stock and approximately 75.0% of our Class B common stock. Donegal Mutual’s stock ownership
in the aggregate represents approximately two-thirds of the voting power of our outstanding common
stock. Our insurance subsidiaries and Donegal Mutual have interrelated operations. While each
company maintains its separate corporate existence, our insurance subsidiaries and Donegal Mutual
conduct business together as the Donegal Insurance Group. As such, Donegal Mutual and our
insurance subsidiaries have the same business philosophy, the same management, the same employees
and the same facilities and offer the same types of insurance products. The terms “we,” “us” and
“our,” where the context permits, includes Donegal Mutual, us and our insurance subsidiaries.
Our growth strategies include the acquisition of insurance companies and other financial
institutions including banks to expand our business in a given region or to commence operations in
a new region. We and Donegal Mutual have the ability to employ a number of acquisition and
affiliation methods. Our prior acquisitions and affiliations have taken one of the following
forms:
| • | a purchase of all of the outstanding stock of a stock insurance company; |
| • | a purchase of a book of business; |
| • | a quota-share reinsurance transaction; or |
| • | a two-step acquisition of a mutual insurance company in which: |
| • | as the first step, Donegal Mutual purchases a surplus note from the mutual insurance company, Donegal Mutual enters into a services agreement with the mutual insurance company and Donegal Mutual’s |
-1-
| designees become a majority of the members of the board of directors of the mutual insurance company. |
| • | as the second step, the mutual insurance company enters into a quota-share reinsurance agreement with Donegal Mutual or demutualizes, or converts, into a stock insurance company. Upon the demutualization or conversion, we purchase the surplus note from Donegal Mutual and exchange it for all of the stock of the stock insurance company resulting from the conversion. |
We believe that our ability to make direct acquisitions of stock insurance companies and to
make indirect acquisitions of mutual insurance companies through a sponsored conversion or a
quota-share reinsurance agreement provides us with flexibility that is a competitive advantage in
seeking acquisitions. We also believe we have demonstrated our ability to acquire control of an
underperforming insurance company, reunderwrite its book of business, reduce its cost structure and
return it to sustained profitability.
While Donegal Mutual and we generally engage in preliminary discussions with potential direct
or indirect acquisition candidates on an almost continuous basis and are so engaged at the date of
this Form 10-K Report, neither Donegal Mutual nor we make any public disclosure regarding a
proposed acquisition until Donegal Mutual or we have entered into a definitive acquisition
agreement.
We acquired all of the outstanding capital stock of Michigan Insurance Company, a
Michigan-domiciled property and casualty insurance company, or MICO, effective as of December 1,
2010 when DGI Acquisition Corp., or DAC, our wholly owned subsidiary, merged with and into MICO
with MICO as the surviving corporation. In the merger, all of the outstanding capital stock of
MICO converted into the right to receive an aggregate merger consideration payable entirely in cash
equal to 122% of the stockholders’ equity of MICO as of November 30, 2010 determined in accordance
with generally accepted accounting principles, or GAAP, or approximately $42 million. As part of
the transaction, Donegal Mutual purchased a surplus note of MICO in the principal amount of $5.0
million, and Donegal Mutual and MICO entered into a 25% quota-share reinsurance agreement. Upon
the merger, eight of our designees became directors of MICO along with the president of MICO. We
maintain control of MICO through our ownership of all of the outstanding capital stock of MICO and
because our designees represent a majority of the members of MICO’s board of directors.
(b)
Financial Information About Industry Segments
.
We have three segments, our investment portfolio, our personal lines of insurance and our
commercial lines of insurance. We set forth financial information about these segments
-2-
in note 20 to our consolidated financial statements we incorporate by reference in this Form
10-K Report.
(c)
Narrative Description of Business
.
Who We Are
We are an insurance holding company whose insurance subsidiaries offer personal and commercial
lines of property and casualty insurance to small businesses and individuals in 22 Mid-Atlantic,
Midwestern, New England and Southern states. Our insurance subsidiaries provide their
policyholders with a selection of insurance products at competitive rates, while pursuing
profitability by adhering to a strict underwriting discipline.
Our insurance subsidiaries derive a substantial portion of their insurance business from
smaller to mid-sized regional communities. We believe this focus provides our insurance
subsidiaries with competitive advantages in terms of local market knowledge, marketing,
underwriting, claims servicing and policyholder service. At the same time, we believe our
insurance subsidiaries have cost advantages over many smaller regional insurers because of the
centralized accounting, administrative, data processing, investment and other services available to
our insurance subsidiaries on a cost-effective basis because of economies of scale.
Our pending acquisition of Union National Financial Corporation, or UNFC, and its wholly owned
subsidiary, Union National Community Bank, or UNCB, in Lancaster, Pennsylvania is currently
awaiting the approval of the Office of Thrift Supervision, or the OTS. At December 31, 2010, UNFC
had, on a consolidated basis, assets of $448.0 million, loans of $320.5 million and stockholders’
equity of $29.0 million and ten branches in Lancaster County, Pennsylvania. We expect to complete
the acquisition of UNCB prior to June 30, 2011.
Strategy
The annual net earned premiums of our insurance subsidiaries have increased from $196.8
million in 2003 to $378.0 million in 2010, a compound annual growth rate of 10%. Over the same
time period, our insurance subsidiaries have achieved a combined ratio more favorable than that of
the property and casualty insurance industry as a whole. Our insurance subsidiaries seek to
increase their annual net earned premiums and enhance their profitability by:
| • | Achieving underwriting profitability. |
Our insurance subsidiaries focus on achieving a combined ratio of less than 100%. Adverse
weather, declining economic activity and a soft insurance market in our marketing
-3-
areas in 2009 and 2010 have negatively affected the ability of our insurance subsidiaries to
attain a combined ratio of less than 100% in those years, but we remain committed to achieving
consistent underwriting profitability. We believe that underwriting profitability is a fundamental
component of our long-term financial strength because it allows our insurance subsidiaries to
generate profits without relying on their investment income. Our insurance subsidiaries seek to
enhance their underwriting results by:
| • | carefully selecting the product lines they underwrite; |
| • | carefully selecting the individual risks they underwrite; |
| • | minimizing their individual exposure to catastrophe-prone areas; and |
| • | evaluating their claims history on a regular basis to ensure the adequacy of their underwriting guidelines and product pricing. |
Our insurance subsidiaries have no material exposures to asbestos and environmental
liabilities. Our insurance subsidiaries seek to provide more than one policy to a given personal
or commercial customer because this “account selling” strategy diversifies our risk and has
historically improved our underwriting results. Finally, our insurance subsidiaries use
reinsurance to manage their exposure and limit their maximum net loss from large single risks or
risks in concentrated areas. Our insurance subsidiaries believe these practices are key factors in
their ability to maintain a combined ratio that has been traditionally more favorable than the
combined ratio of the property and casualty insurance industry.
The combined ratio of our insurance subsidiaries and that of the property and casualty
insurance industry for the years 2006 through 2010 are shown in the following table:
| 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||
|
Our GAAP combined ratio
|
89.0 | % | 91.3 | % | 97.2 | % | 102.2 | % | 104.7 | % | ||||||||||
|
Our SAP combined ratio
|
87.4 | 90.2 | 95.1 | 101.1 | 102.9 | |||||||||||||||
|
Industry SAP combined ratio
(1)
|
92.4 | 95.6 | 104.7 | 101.2 | 103.0 | |||||||||||||||
| (1) | As reported or projected by A.M. Best. |
| • | Pursuing profitable growth by organic expansion within the traditional operating territories of our insurance subsidiaries through developing and maintaining quality agency representation. |
We believe that continued expansion of our insurance subsidiaries within their existing
markets will be a key source of their continued premium growth and that maintaining an effective
and growing network of independent agencies is integral to their expansion. Our insurance
subsidiaries seek to be among the top three insurers within each of the independent agencies for
the lines of business our insurance subsidiaries write by
-4-
providing a consistent, competitive and stable market for their products. We believe that the
consistency of their product offerings enables our insurance subsidiaries to compete effectively
for agents with other insurers whose product offerings fluctuate based on industry conditions. Our
insurance subsidiaries offer a competitive compensation program to their independent agents that
rewards them for producing profitable growth for our insurance subsidiaries. Our insurance
subsidiaries provide their independent agents with ongoing support to enable them to better attract
and service customers, including:
| • | fully automated underwriting and policy issuance systems for both personal, commercial and farm lines of insurance; | ||
| • | training programs; | ||
| • | marketing support; | ||
| • | availability of a service center that provides comprehensive service for our personal lines policyholders; and | ||
| • | field visitations by marketing and underwriting personnel and senior management of our insurance subsidiaries. |
Finally, our insurance subsidiaries appoint independent agencies with a strong underwriting and
growth track record. We believe that our insurance subsidiaries, by carefully selecting,
motivating and supporting their independent agencies, will drive continued long-term growth.
| • | Acquiring property and casualty insurance companies to augment the organic growth of our insurance subsidiaries in existing markets and to expand into new geographic regions. |
We have completed six acquisitions of property and casualty insurance companies or assumed
their business by quota-share reinsurance since 1995. We intend to continue our growth by pursuing
affiliations and acquisitions that meet our criteria. Our primary criteria include:
| • | Location in regions where our insurance subsidiaries are currently conducting business or that offer an attractive opportunity to conduct profitable business; | ||
| • | A mix of business similar to the mix of business of our insurance subsidiaries; | ||
| • | Premium volume up to $100.0 million; and |
-5-
| • | Fair and reasonable transaction terms. |
We believe that our interrelationship with Donegal Mutual assists us in pursuing affiliations
with and subsequent acquisitions of mutual insurance companies because, through Donegal Mutual, we
understand the concerns and issues that mutual insurance companies face. In particular, we have
had success affiliating with underperforming mutual insurance companies and acquiring them
following their conversion to a stock company by utilizing our strengths and financial position to
improve their operations significantly. We evaluate a number of areas for operational synergies
when considering acquisitions, including product underwriting, expenses, the cost of reinsurance
and technology.
| • | Focusing on expense controls and utilization of technology to increase the operating efficiency of our insurance subsidiaries. |
Our insurance subsidiaries maintain stringent expense controls under direct supervision of
their senior management. We centralize many processing and administrative activities of our
insurance subsidiaries to realize operating synergies and better control expenses. Our insurance
subsidiaries utilize technology to automate much of their underwriting and to facilitate agency and
policyholder communications on an efficient and cost-effective basis. We operate on a paperless
basis. As a result of our focus on expense control, our insurance subsidiaries have reduced their
expense ratio from 36.6% in 1999 to 32.0% in 2010. Our insurance subsidiaries have also increased
their annual premium per employee, a measure of efficiency that our insurance subsidiaries use to
evaluate their operations, from approximately $470,000 in 1999 to approximately $791,000 in 2010.
Our insurance subsidiaries maintain technology comparable to that of the largest of their
competitors. “Ease of doing business” is an increasingly important component of an insurer’s value
to an independent agency. Our insurance subsidiaries provide a fully automated personal lines
underwriting and policy issuance system called “WritePro
®
.” WritePro
®
is a
web-based user interface that substantially eases data entry and facilitates the quoting and
issuance of policies for the independent agents of our insurance subsidiaries. Our insurance
subsidiaries also provide a similar commercial business system called “WriteBiz
®
.”
WriteBiz
®
is a web-based user interface that provides the independent agents of our
insurance subsidiaries with an online ability to quote and issue commercial automobile, workers’
compensation, business owners and tradesman policies automatically. WriteFarm
®
is a
web-based user interface that provides the independent agents of our insurance subsidiaries with an
online ability to quote and issue farm policies automatically. As a result, applications of the
independent agents for our insurance subsidiaries can become policies without further re-entry of
information. These systems download the policy information to the policy management systems of the
independent agents of our insurance subsidiaries.
| • | Providing responsive and friendly customer and agent service to enable our insurance subsidiaries to attract new policyholders and retain existing policyholders. |
-6-
We believe that excellent policyholder service is important in attracting new policyholders
and retaining existing policyholders. Our insurance subsidiaries work closely with their
independent agents to provide a consistently responsive level of claims service, underwriting and
customer support. Our insurance subsidiaries seek to respond expeditiously and effectively to
address customer and independent agent inquiries, including:
| • | Availability of a state-of-the-art customer call center for claims reporting; | ||
| • | Availability of a secure website for access to policy information and documents, payment processing and other features; | ||
| • | Quick replies to information requests and policy submissions; and | ||
| • | Prompt responses to and processing of claims. |
Our insurance subsidiaries periodically conduct policyholder surveys to evaluate the
effectiveness of their service to policyholders. The management of our insurance subsidiaries
meets frequently with the personnel of the independent insurance agents our insurance subsidiaries
appoint to seek service improvement recommendations, react to service issues and better understand
local market conditions.
| • | Maintaining premium rate adequacy to enhance the underwriting results of our insurance subsidiaries, while maintaining their existing book of business and preserving their ability to write new business. |
Our insurance subsidiaries seek discipline in their pricing by effecting rate increases to
maintain or improve their underwriting profitability without unduly affecting their customer
retention. In addition to appropriate pricing, our insurance subsidiaries seek to ensure that
their premium rates are adequate relative to the amount of risk they insure. Our insurance
subsidiaries review loss trends on a periodic basis to identify changes in the frequency and
severity of their claims and to assess the adequacy of their rates and underwriting standards. Our
insurance subsidiaries also carefully monitor and audit the information they use to price their
policies for the purpose of enabling them to receive an adequate level of premiums for their risk.
For example, our insurance subsidiaries inspect substantially all commercial lines risks and a
substantial number of personal lines property risks before they commit to insure them to determine
the adequacy of the insured amount to the value of the insured property, assess property conditions
and identify any liability exposures. Our insurance subsidiaries audit the payroll data of their
workers’ compensation customers to verify that the assumptions used to price a particular policy
were accurate. By implementing appropriate rate increases and understanding the risks our
insurance subsidiaries agree to insure, they are able to achieve their strategy of achieving
consistent underwriting profitability.
-7-
Our Organizational Structure
We have seven insurance subsidiaries: Atlantic States Insurance Company, or Atlantic States,
Southern Insurance Company of Virginia, or Southern, Le Mars Insurance Company, or Le Mars, The
Peninsula Insurance Company and its wholly owned subsidiary, Peninsula Indemnity Company, or
collectively, the Peninsula Group, Sheboygan Falls Insurance Company, or Sheboygan, and MICO. In
addition, we benefit from Donegal Mutual’s 100% quota-share reinsurance agreement with Southern
Mutual Insurance Company, or Southern Mutual, and Donegal Mutual’s placement of its assumed
business from Southern Mutual into the pooling agreement. We also own 48.2% of Donegal Financial
Services Corporation, or DFSC, a registered savings and loan holding company that owns Province
Bank FSB, or Province Bank, a federal savings bank that began operations in 2000. Donegal Mutual
owns the remaining 51.8% of DFSC. Upon DFSC’s acquisition of UNFC, on a pro forma basis as of
December 31, 2010, Province Bank would have total assets of approximately $571.0 million, loans of
approximately $371.0 million and stockholders equity of $67.0 million at December 31, 2010. We
believe the combined banks will complement the product offerings of our insurance subsidiaries.
The following chart summarizes our organizational structure and includes all of our property and
casualty insurance subsidiaries and Southern Mutual:
| (1) | Because of the different relative voting power of our Class A common stock and our Class B common stock, our public stockholders hold approximately 33.6% of the aggregate voting power of our Class A common stock and Class B common stock and Donegal Mutual holds approximately 66.4% of the aggregate voting power of our Class A common stock and Class B common stock. |
-8-
In the mid-1980s, Donegal Mutual recognized its need, as a mutual insurance company, to
develop additional sources of capital and surplus to remain competitive and to have the capacity to
expand its business and assure its long-term viability. Donegal Mutual determined to implement a
downstream holding company structure as one of its strategic responses. Accordingly, in 1986,
Donegal Mutual formed us as a downstream holding company. Initially, Donegal Mutual owned all of
our outstanding capital stock. We in turn formed Atlantic States as our wholly owned subsidiary.
We subsequently effected a public offering to provide the surplus necessary to support the business
Atlantic States began to receive on October 1, 1986 as its share under a proportional reinsurance
agreement, or pooling agreement, between Donegal Mutual and Atlantic States that became effective
on that date.
Under this pooling agreement, Donegal Mutual and Atlantic States pool substantially all of
their respective premiums, losses and loss expenses. Donegal Mutual then cedes 80% of the pooled
business to Atlantic States.
As the capital of Atlantic States has increased, its underwriting capacity has increased
proportionately. Therefore, as we originally planned in the mid-1980s, Atlantic States has
successfully raised the capital necessary to support the growth of its direct business as well as
accept increases in its allocation of business from the underwriting pool, which has increased from
an initial allocation of 35% in 1986 to an 80% allocation since March 1, 2008. The size of the
underwriting pool has increased substantially. We do not anticipate any further changes in the
pooling agreement between Atlantic States and Donegal Mutual in the foreseeable future, including
any change in the percentage participation of Atlantic States in the underwriting pool.
Since we established our downstream holding company structure in 1986, Donegal Mutual and our
insurance subsidiaries have conducted business together while retaining their separate legal and
corporate existences. As such, Donegal Mutual and our insurance subsidiaries share the same
business philosophies, the same management, the same employees, the same facilities and we offer
the same types of insurance products.
In addition, as the Donegal Insurance Group, Donegal Mutual and our insurance subsidiaries
share a combined business plan to achieve market penetration and underwriting profitability
objectives. The products Donegal Mutual and our insurance subsidiaries offer are generally
complementary, which permits the Donegal Insurance Group to offer a broader range of products to a
given market and to expand the Donegal Insurance Group’s ability to service an entire personal
lines or commercial lines account. Distinctions within the products of Donegal Mutual and our
insurance subsidiaries often generally relate to specific risk profiles targeted within similar
classes of business, such as preferred tier versus standard tier products, but we and Donegal
Mutual do not allocate all of the standard risk gradients to one company. As a result, the
underwriting profitability of the business the individual
-9-
companies write directly will vary.
However, since the underwriting pool homogenizes the risk characteristics of all business Donegal
Mutual and Atlantic States write directly, Donegal Mutual and Atlantic States share the
underwriting results in proportion to their respective participation in the pool. We receive 80%
of the underwriting results of the pool because Atlantic States has an 80% participation in the
pool. The business Atlantic States derives from the pool represents the predominant percentage of
our total revenues.
The following chart depicts the underwriting pool as effective since March 1, 2008:
Donegal Mutual provides facilities, personnel and other services to us and our insurance
subsidiaries. Donegal Mutual allocates certain related expenses to Atlantic States in relation to
the relative participation of Donegal Mutual and Atlantic States in the pooling agreement. Our
insurance subsidiaries other than Atlantic States reimburse Donegal Mutual for their respective
personnel costs and bear their proportionate share of information services costs based on their
respective percentage of the total written premiums of the Donegal
Insurance Group. Charges for these services totaled $64.0 million, $60.2 million and $56.8
million for 2010, 2009 and 2008, respectively.
We and Donegal Mutual have maintained a coordinating committee since our formation in 1986.
The coordinating committee consists of two members of our board of directors, neither of whom is a
member of Donegal Mutual’s board of directors, and two members of Donegal Mutual’s board of
directors, neither of whom is a member of our board of directors. The purpose of the coordinating
committee is to establish and maintain a process for an annual evaluation of the transactions
between Donegal Mutual, our insurance
-10-
subsidiaries and us. The coordinating committee considers
the fairness of each intercompany transaction to Donegal Mutual and its policyholders and to us and
our stockholders.
A new agreement or any change to a previously approved agreement must receive coordinating
committee approval. The coordinating committee approval process for a new agreement between
Donegal Mutual and us or one of our insurance subsidiaries or a change in such an agreement is as
follows:
| • | both of our members on the coordinating committee must determine that the new agreement or the change in an existing agreement is fair and equitable to us and in the best interests of our stockholders; |
| • | both of Donegal Mutual’s members on the coordinating committee must determine that the new agreement or the change in an existing agreement is fair and equitable to Donegal Mutual and its policyholders; |
| • | the new agreement or the change in an existing agreement must be approved by our board of directors; and |
| • | the new agreement or the change in an existing agreement must be approved by the Donegal Mutual board of directors. |
The coordinating committee also meets annually to review each existing agreement between
Donegal Mutual and us or our insurance subsidiaries, including a number of reinsurance agreements
between Donegal Mutual and our insurance subsidiaries. The purpose of this annual review is to
examine the results of the reinsurance agreements over the past year and over a five-year period
and to determine if the results of the existing agreements remain fair and equitable to us and our
stockholders and fair and equitable to Donegal Mutual and its policyholders or if Donegal Mutual
and we should mutually agree to certain adjustments. In the case of these reinsurance agreements,
the adjustments typically relate to the reinsurance premiums, losses and reinstatement premiums.
These agreements are ongoing in nature and will continue in effect throughout 2011 in the ordinary
course of business.
Our members on the coordinating committee, as of the date of this Form 10-K Annual Report, are
Robert S. Bolinger and John J. Lyons. Donegal Mutual’s members on the coordinating committee as of
such date are Dennis J. Bixenman and John E. Hiestand. Reference is made to our proxy statement
for our annual meeting of stockholders on April 21, 2011 for further information about the members
of the coordinating committee.
We believe our relationships with Donegal Mutual offer us and our insurance subsidiaries a
number of competitive advantages, including the following:
-11-
| • | Facilitating the stable management, consistent underwriting discipline, external growth and long-term profitability of our insurance subsidiaries; |
| • | Creating operational and expense synergies given the combined resources and operating efficiencies of Donegal Mutual, us and our insurance subsidiaries; |
| • | Enhancing our opportunities to expand by acquisition because of the ability of Donegal Mutual to acquire control of other mutual insurance companies and thereafter demutualize them and then sell them to us at a price that is based on a fairness opinion; |
| • | Producing more uniform and stable underwriting results for our insurance subsidiaries that we, over extended periods of time, could achieve without the relationship between Donegal Mutual and our insurance subsidiaries; and |
| • | Providing Atlantic States with a significantly larger underwriting capacity because of the underwriting pool Donegal Mutual and Atlantic States have maintained since 1986. |
Acquisitions
The following table highlights our history of acquisitions and affiliations since 1988:
| Year | ||||||||
| State of | Control | Method of | ||||||
| Company Name | Domicile | Acquired(2) | Acquisition/Affiliation | |||||
|
|
||||||||
|
Southern Mutual Insurance
Company and now Southern Insurance Company of Virginia |
Virginia | 1984 | Surplus note investment by Donegal Mutual in 1984; demutualization in 1988; acquisition of stock by us in 1988. | |||||
|
|
||||||||
|
Pioneer Mutual Insurance
Company and then Pioneer Insurance Company (1) |
Ohio | 1992 | Surplus note investment by Donegal Mutual in 1992; demutualization in 1993; acquisition of stock by us in 1997. | |||||
|
|
||||||||
|
Delaware Mutual Insurance
Company and then Delaware Atlantic Insurance Company (1) |
Delaware | 1993 | Surplus note investment by Donegal Mutual in 1993; demutualization in 1994; acquisition of stock by us in | |||||
-12-
| Year | ||||||||
| State of | Control | Method of | ||||||
| Company Name | Domicile | Acquired(2) | Acquisition/Affiliation | |||||
|
|
||||||||
|
|
1995. | |||||||
|
|
||||||||
|
Pioneer Mutual Insurance
Company and then Pioneer Insurance Company (1) |
New York | 1995 | Surplus note investment by Donegal Mutual in 1995; demutualization in 1998; acquisition of stock by us in 2001. | |||||
|
|
||||||||
|
Southern Heritage Insurance
Company (1) |
Georgia | 1998 | Purchase of stock by us in 1998. | |||||
|
|
||||||||
|
Le Mars Mutual Insurance
Company of Iowa and now Le Mars Insurance Company |
Iowa | 2002 | Surplus note investment by Donegal Mutual in 2002; demutualization in 2004; acquisition of stock by us in 2004. | |||||
|
|
||||||||
|
Peninsula Insurance Group
|
Maryland | 2004 | Purchase of stock by us in 2004. | |||||
|
|
||||||||
|
Sheboygan Falls Mutual
Insurance Company and now Sheboygan Falls Insurance Company |
Wisconsin | 2007 | Contribution note investment by Donegal Mutual in 2007; demutualization in 2008; acquisition of stock by us in 2008. | |||||
|
|
||||||||
|
Southern Mutual Insurance
Company (2) |
Georgia | 2009 | Surplus note investment by Donegal Mutual and quota-share reinsurance in 2009. | |||||
|
|
||||||||
|
Michigan Insurance Company
|
Michigan | 2010 | Purchase of stock by us and surplus note investment by Donegal Mutual in 2010. | |||||
| (1) | To reduce administrative and compliance costs and expenses, these subsidiaries subsequently merged into one of our existing insurance subsidiaries. | |
| (2) | Control acquired by Donegal Mutual. |
-13-
Distribution
Our insurance subsidiaries market their products primarily in the Mid-Atlantic, Midwestern,
New England and Southern regions through approximately 2,200 independent insurance agencies. At
December 31, 2010, the Donegal Insurance Group actively wrote business in 22 states (Alabama,
Delaware, Georgia, Indiana, Iowa, Maine, Maryland, Michigan, Nebraska, New Hampshire, New York,
North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Vermont,
Virginia, West Virginia and Wisconsin). We believe the relationships of our insurance subsidiaries
with their independent agents are valuable in identifying, obtaining and retaining profitable
business. Our insurance subsidiaries maintain a stringent agency selection procedure that
emphasizes appointing agencies with proven marketing strategies for the development of profitable
business, and our insurance subsidiaries only appoint agencies with a strong underwriting history
and potential growth capabilities. Our insurance subsidiaries also regularly evaluate the
independent agencies that represent them based on their profitability and performance in relation
to the objectives of our insurance subsidiaries. Our insurance subsidiaries seek to be among the
top three insurers within each of their agencies for the lines of business they write.
The following table sets forth the percentage of direct premiums our insurance subsidiaries
write, including 80% of the direct premiums Donegal Mutual and Atlantic States write, in each of
the states where they conducted a significant portion of their business in 2010:
|
Pennsylvania
|
45.1 | % | ||
|
Maryland
|
11.4 | |||
|
Virginia
|
10.3 | |||
|
Georgia
|
6.9 | |||
|
Delaware
|
6.3 | |||
|
Ohio
|
3.7 | |||
|
Iowa
|
3.3 | |||
|
Wisconsin
|
2.8 | |||
|
Michigan
|
1.9 | * | ||
|
Tennessee
|
1.7 | |||
|
Nebraska
|
1.7 | |||
|
South Dakota
|
1.4 | |||
|
Other
|
3.5 | |||
|
|
||||
|
Total
|
100.0 | % | ||
|
|
| * | Michigan represents the direct premiums MICO wrote following our acquisition of it on December 1, 2010. |
-14-
We believe our insurance subsidiaries employ a number of policies and procedures that enable
them to attract, retain and motivate their independent agents. The consistency, competitiveness
and stability of the product offerings of our insurance subsidiaries assist them in competing
effectively for independent agents with other insurers whose product offerings may fluctuate based
upon industry conditions. Our insurance subsidiaries have a competitive profit sharing plan for
their independent agents consistent with applicable state laws and regulations, under which the
independent agents may earn additional commissions based upon the volume of premiums produced and
the profitability of the business our insurance subsidiaries receive from that agency. Our
insurance subsidiaries provide their independent agents ongoing support that better enables the
agents to attract and retain customers, including:
| • | fully automated underwriting and policy issuance systems for both personal and commercial lines; |
| • | training programs; |
| • | marketing support; |
| • | the availability of a service center that provides comprehensive service for our personal lines policyholders; and |
| • | field visitations from marketing and underwriting personnel and senior management of our insurance subsidiaries. |
Finally, our insurance subsidiaries encourage their independent agents to focus on “account
selling,” or serving all of a particular insured’s property and casualty insurance needs, which our
insurance subsidiaries believe generally results in more favorable loss experience than covering a
single risk for an individual insured.
Products
The personal lines our insurance subsidiaries write consist primarily of private passenger
automobile and homeowners insurance. The commercial lines our insurance subsidiaries write consist
primarily of commercial automobile, commercial multi-peril and workers’ compensation insurance. We
describe these lines of insurance in greater detail below:
Personal
| • | Private passenger automobile — policies that provide protection against liability for bodily injury and property damage arising from automobile accidents, and protection against loss from damage to automobiles owned by the insured. |
-15-
| • | 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. |
Commercial
| • | Commercial automobile — policies that provide protection against liability for bodily injury and property damage arising from automobile accidents, and protection against loss from damage to automobiles owned by the insured. |
| • | Commercial multi-peril — policies that provide protection to businesses against many perils, usually combining liability and physical damage coverages. |
| • | Workers’ compensation — policies employers purchase to provide benefits to employees for injuries sustained during employment. The workers’ compensation laws of each state determine the extent of the coverage we provide. |
The following table sets forth the net premiums written of our insurance subsidiaries by line
of insurance for the periods indicated:
| Year Ended December 31, | ||||||||||||||||||||||||
| (dollars in thousands) | 2008 | 2009 | 2010 | |||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||
|
Net Premiums Written:
|
||||||||||||||||||||||||
|
Personal lines:
|
||||||||||||||||||||||||
|
Automobile
|
$ | 154,091 | 42.2 | % | $ | 161,932 | 44.6 | % | $ | 171,497 | 43.8 | % | ||||||||||||
|
Homeowners
|
72,195 | 19.8 | 77,420 | 21.3 | 83,415 | 21.3 | ||||||||||||||||||
|
Other
|
13,254 | 3.6 | 13,135 | 3.6 | 13,135 | 3.4 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total personal lines
|
$ | 239,540 | 65.6 | $ | 252,487 | 69.5 | $ | 268,047 | 68.5 | |||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Commercial lines:
|
||||||||||||||||||||||||
|
Automobile
|
$ | 35,959 | 9.9 | $ | 34,054 | 9.4 | $ | 37,094 | 9.5 | |||||||||||||||
|
Workers’ compensation
|
36,459 | 10.0 | 28,921 | 8.0 | 34,920 | 8.9 | ||||||||||||||||||
|
Commercial multi-peril
|
49,004 | 13.4 | 44,000 | 12.1 | 47,411 | 12.1 | ||||||||||||||||||
|
Other
|
3,979 | 1.1 | 3,767 | 1.0 | 4,050 | 1.0 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total commercial lines
|
$ | 125,401 | 34.4 | $ | 110,742 | 30.5 | 123,475 | 31.5 | ||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total business
|
$ | 364,941 | 100.0 | % | $ | 363,229 | 100.0 | % | $ | 391,522 | 100.0 | % | ||||||||||||
|
|
||||||||||||||||||||||||
Underwriting
The personal lines and commercial lines underwriting departments of our insurance subsidiaries
evaluate and select those risks that they believe will enable our insurance subsidiaries to achieve
an underwriting profit. The underwriting departments have
-16-
significant interaction with the
independent agents regarding the underwriting philosophy and the underwriting guidelines of our
insurance subsidiaries. Our underwriting personnel also assist the research and development
department in the development of quality products at competitive prices to promote growth and
profitability.
In order to achieve underwriting profitability on a consistent basis, our insurance
subsidiaries:
| • | assess and select quality standard and preferred risks; |
| • | adhere to disciplined underwriting and reunderwriting guidelines; |
| • | inspect substantially all commercial lines risks and a substantial number of personal lines property risks; and |
| • | utilize various types of risk management and loss control services. |
Our insurance subsidiaries also review their existing policies and accounts to determine
whether those risks continue to meet their underwriting guidelines. If a given policy or account
no longer meets those underwriting guidelines, our insurance subsidiaries will take appropriate
action regarding that policy or account, including raising premium rates or non-renewing the policy
to the extent applicable law permits.
As part of the effort of our insurance subsidiaries to maintain acceptable underwriting
results, they conduct annual reviews of agencies that have failed to meet their underwriting
profitability criteria. The review process includes an analysis of the underwriting and
reunderwriting practices of the agency, the completeness and accuracy of the applications the
agency has submitted, the adequacy of the training of the agency’s staff and the agency’s record of
adherence to the underwriting guidelines and service standards of our insurance subsidiaries.
Based on the results of this review process, the marketing and underwriting personnel of our
insurance subsidiaries develop, together with the agency, a plan to improve its underwriting
profitability. Our insurance subsidiaries monitor the agency’s compliance with the plan, and take
other measures as required in the judgment of our insurance subsidiaries, including the termination
of agencies that are unable to achieve acceptable underwriting profitability to the extent
applicable law permits.
Claims
The management of claims is a critical component of the philosophy of our insurance
subsidiaries to achieve underwriting profitability on a consistent basis and is fundamental to the
successful operations of our insurance subsidiaries and their dedication to excellent service.
-17-
The claims departments of our insurance subsidiaries rigorously manage claims to assure that
they settle legitimate claims quickly and fairly and that they identify questionable claims for
defense. In the majority of cases, the personnel of our insurance subsidiaries, who have
significant experience in the property and casualty insurance industry and know the service
philosophy of our insurance subsidiaries, adjust claims. Our insurance subsidiaries provide
various means of claims reporting on 24-hours a day, seven-day a week basis, including toll-free
numbers and electronic reporting through our website. Our insurance subsidiaries strive to respond
to notifications of claims promptly, generally within the day reported. Our insurance subsidiaries
believe that, by responding promptly to claims, they provide quality customer service and minimize
the ultimate cost of the claims. Our insurance subsidiaries engage independent adjusters as needed
to handle claims in areas in which the volume of claims is not sufficient to justify our hiring of
internal claims adjusters. Our insurance subsidiaries also employ private adjusters and
investigators, structural experts and various outside legal counsel to supplement our in-house
staff and to assist in the investigation of claims. Our insurance subsidiaries have a special
investigative unit staffed by former law enforcement officers that attempts to identify and prevent
fraud and abuse and to control questionable claims.
The management of the claims departments of our insurance subsidiaries develops and implements
policies and procedures for the establishment of adequate claim reserves. Our insurance
subsidiaries employ an actuarial staff that regularly reviews their reserves for incurred but not
reported claims. The management and staff of the claims departments
resolve policy coverage issues, manage and process reinsurance recoveries and handle salvage
and subrogation matters. The litigation and personal injury sections of our insurance subsidiaries
manage all claims litigation, and branch office claims above certain thresholds require home office
review and settlement authorization. Our insurance subsidiaries provide their claims adjusters
reserving and settlement authority based upon their experience and demonstrated abilities. Larger
or more complicated claims require consultation and approval of senior department management.
The field office staff of our insurance subsidiaries receives support from home office
technical, litigation, material damage, subrogation and medical audit personnel.
Liabilities for Losses and Loss Expenses
Liabilities for losses and loss expenses are estimates at a given point in time of the amounts
an insurer expects to pay with respect to policyholder claims based on facts and circumstances then
known. At the time of establishing its estimates, an insurer recognizes that its ultimate
liability for losses and loss expenses will exceed or be less than such estimates. Our insurance
subsidiaries base their estimates of liabilities for losses and loss expenses on assumptions as to
future loss trends and expected claims severity, judicial theories of liability and other factors.
However, during the loss adjustment period, our
-18-
insurance subsidiaries may learn additional facts
regarding individual claims, and, consequently, it often becomes necessary for our insurance
subsidiaries to refine and adjust their estimates of liability. We reflect any adjustments to our
insurance subsidiaries’ liabilities for losses and loss expenses in our operating results in the
period in which our insurance subsidiaries record the changes in their estimates.
Our insurance subsidiaries maintain liabilities for the payment of losses and loss expenses
with respect to both reported and unreported claims. Our insurance subsidiaries establish these
liabilities for the purpose of covering the ultimate costs of settling all losses, including
investigation and litigation costs. Our insurance subsidiaries base the amount of their liability
for reported losses primarily upon a case-by-case evaluation of the type of risk involved,
knowledge of the circumstances surrounding each claim and the insurance policy provisions relating
to the type of loss their policyholder incurred. Our insurance subsidiaries determine the amount
of their liability for unreported claims and loss expenses on the basis of historical information
by line of insurance. Our insurance subsidiaries account for inflation in the reserving function
through analysis of costs and trends and reviews of historical reserving results. Our insurance
subsidiaries closely monitor their liabilities and recompute them periodically using new
information on reported claims and a variety of statistical techniques. Our insurance subsidiaries
do not discount their liabilities for losses.
Reserve estimates can change over time because of unexpected changes in assumptions related to
our insurance subsidiaries’ external environment and, to a lesser extent, assumptions as to our
insurance subsidiaries’ internal operations. For example, our
insurance subsidiaries have experienced a decrease in claims frequency on workers’
compensation claims during the past several years while claims severity has gradually increased.
These trend changes give rise to greater uncertainty as to the pattern of future loss settlements
on workers’ compensation claims. Related uncertainties regarding future trends include the cost of
medical technologies and procedures and changes in the utilization of medical procedures.
Assumptions related to our insurance subsidiaries’ external environment include the absence of
significant changes in tort law and legal decisions that increase liability exposure, consistency
in judicial interpretations of insurance coverage and policy provisions and the rate of loss cost
inflation. Internal assumptions include consistency in the recording of premium and loss
statistics, consistency in the recording of claims, payment and case reserving methodology,
accurate measurement of the impact of rate changes and changes in policy provisions, consistency in
the quality and characteristics of business written within a given line of business and consistency
in reinsurance coverage and the collectability of reinsured losses, among other items. To the
extent our insurance subsidiaries determine that underlying factors impacting their assumptions
have changed, our insurance subsidiaries attempt to make appropriate adjustments for such changes
in their reserves. Accordingly, our insurance subsidiaries’ ultimate liability for unpaid losses
and loss expenses will likely differ from the amount recorded at December 31, 2010. For every 1%
change in our insurance subsidiaries’ loss and loss expense reserves, net of reinsurance
-19-
recoverable, the effect on our pre-tax results of operations would be approximately $2.2 million.
The establishment of appropriate liabilities is an inherently uncertain process, and we can
provide no assurance that our insurance subsidiaries’ ultimate liability will not exceed our
insurance subsidiaries’ loss and loss expense reserves and have an adverse effect on our results of
operations and financial condition. Furthermore, we cannot predict the timing, frequency and
extent of adjustments to our insurance subsidiaries’ estimated future liabilities, since the
historical conditions and events that serve as a basis for our insurance subsidiaries’ estimates of
ultimate claim costs may change. As is the case for substantially all property and casualty
insurance companies, our insurance subsidiaries have found it necessary in the past to increase
their estimated future liabilities for losses and loss expenses in certain periods, and, in other
periods their estimates have exceeded their actual liabilities. Changes in our insurance
subsidiaries’ estimate of their liability for losses and loss expenses generally reflect actual
payments and the evaluation of information received since the prior reporting date. Our insurance
subsidiaries recognized a (decrease) increase in their liability for losses and loss expenses of
prior years of $(2.9) million, $9.8 million and $2.7 million in 2010, 2009 and 2008, respectively.
Our insurance subsidiaries made no significant changes in their reserving philosophy, key reserving
assumptions or claims management personnel, and there have been no significant offsetting changes
in estimates that increased or decreased their loss and loss expense reserves in those years. The
majority of the 2010 loss development related to decreases in the liability for losses and loss
expenses of prior years for Atlantic States and the Peninsula Group. The 2010 development
represented 1.6% of our December 31, 2009 net
carried reserves and resulted primarily from less-than-expected severity in the private
passenger automobile liability and homeowners lines of business in accident years prior to 2009.
The 2009 development represented 6.0% of our December 31, 2008 net carried reserves and resulted
primarily from higher-than-expected severity in the private passenger automobile liability,
homeowners and workers’ compensation lines of business in accident year 2008. The 2008 development
represented 1.2% of our December 31, 2007 net carried reserves and resulted primarily from
higher-than-expected severity in the private passenger automobile liability line of business in
accident year 2007.
Excluding the impact of isolated catastrophic weather events, our insurance subsidiaries have
noted stable amounts in the number of claims incurred and slight downward trends in the number of
claims outstanding at period ends relative to their premium base in recent years across most of
their lines of business. However, the amount of the average claim outstanding has increased
gradually over the past several years as the property and casualty insurance industry has
experienced increased litigation trends and economic conditions that have extended the estimated
length of disabilities and contributed to increased medical loss costs and a general slowing of
settlement rates in litigated claims. Our insurance subsidiaries could be required to make further
adjustments to their estimates in the future. However, on the basis of our insurance subsidiaries’
internal procedures which
-20-
analyze, among other things, their prior assumptions, their experience
with similar cases and historical trends such as reserving patterns, loss payments, pending levels
of unpaid claims and product mix, as well as court decisions, economic conditions and public
attitudes, we believe that our insurance subsidiaries have made adequate provision for their
liability for losses and loss expenses.
Differences between liabilities reported in our financial statements prepared on a GAAP basis
and our insurance subsidiaries’ financial statements prepared on a statutory accounting basis, or
SAP, result from anticipating salvage and subrogation recoveries for GAAP but not for SAP. These
differences amounted to $8.7 million, $9.2 million and $10.0 million at December 31, 2008, 2009 and
2010, respectively.
The following table sets forth a reconciliation of the beginning and ending GAAP net liability
of our insurance subsidiaries for unpaid losses and loss expenses for the periods indicated:
| Year Ended December 31, | ||||||||||||
| (in thousands) | 2008 | 2009 | 2010 | |||||||||
|
Gross liability for unpaid losses and loss expenses
at beginning of year
|
$ | 226,432 | $ | 239,809 | $ | 263,599 | ||||||
|
Less reinsurance recoverable
|
76,280 | 78,502 | 83,337 | |||||||||
|
|
||||||||||||
|
Net liability for unpaid losses and loss expenses
at beginning of year
|
150,152 | 161,307 | $ | 180,262 | ||||||||
|
Acquisition of Sheboygan
|
2,173 | — | — | |||||||||
|
Acquisition of Michigan
|
— | — | 26,960 | |||||||||
|
Provision for net losses and loss expenses for
claims incurred in the current year
|
221,617 | 241,012 | 277,194 | |||||||||
|
Change in provision for estimated net losses and
loss expenses for claims incurred in prior years
|
2,684 | 9,823 | (2,885 | ) | ||||||||
|
|
||||||||||||
|
Total incurred
|
224,301 | 250,835 | 274,309 | |||||||||
|
Net losses and loss payments for claims
incurred during:
|
||||||||||||
|
The current year
|
143,369 | 152,293 | 179,069 | |||||||||
|
Prior years
|
71,950 | 79,587 | 84,565 | |||||||||
|
|
||||||||||||
|
Total paid
|
215,319 | 231,880 | 263,634 | |||||||||
|
Net liability for unpaid losses and loss expenses
at end of year
|
161,307 | 180,262 | 217,897 | |||||||||
|
Plus reinsurance recoverable
|
78,502 | 83,337 | 165,422 | |||||||||
|
|
||||||||||||
|
Gross liability for unpaid losses and loss expenses
at end of year
|
$ | 239,809 | $ | 263,599 | $ | 383,319 | ||||||
|
|
||||||||||||
The following table sets forth the development of the liability for net unpaid losses and
loss expenses of our insurance subsidiaries from 2000 to 2010. Loss data in the table includes
business ceded to Atlantic States from the underwriting pool.
-21-
“Net liability at end of year for unpaid losses and loss expenses” sets forth the estimated
liability for net unpaid losses and loss expenses recorded at the balance sheet date for each of
the indicated years. This liability represents the estimated amount of net losses and loss
expenses for claims arising in the current and all prior years that are unpaid at the balance sheet
date, including losses incurred but not reported.
The “Net liability reestimated as of” portion of the table shows the reestimated amount of the
previously recorded liability based on experience for each succeeding year. The estimate increases
or decreases as payments are made and more information becomes known about the severity of the
remaining unpaid claims. For example, the 2005 liability has developed a redundancy after five
years because we expect the reestimated net losses and loss expenses to be $22.9 million less than
the estimated liability we initially established in 2005 of $173.0 million.
The “Cumulative (excess) deficiency” shows the cumulative excess or deficiency at December 31,
2010 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 our insurance subsidiaries reevaluated the liability at
less than the original estimate. A deficiency in liability means that the liability established in
prior years was less than actual net losses and loss expenses or our insurance subsidiaries
reevaluated the liability at more than the original estimate.
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 2005 column indicates that as of December 31, 2010 payments
equal to $139.9 million of the currently reestimated ultimate liability for net losses and loss
expenses of $150.1 million had been made.
Amounts shown in the 2004
column of the table include
information for Le Mars and
the Peninsula Group for all
accident years prior to 2004.
Amounts shown in the 2008
column of the table include
information for Sheboygan for
all accident years prior to
2008. Amounts shown in the
2010 column of the table
include information for MICO
for the month of December
2010.
-22-
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||||||||||||||||
|
Net liability at end of
year for unpaid losses
and loss expenses
|
$ | 102,709 | $ | 114,544 | $ | 131,108 | $ | 138,896 | $ | 171,431 | $ | 173,009 | $ | 163,312 | $ | 150,152 | $ | 161,307 | $ | 180,262 | $ | 217,896 | ||||||||||||||||||||||
|
Net liability
reestimated as of:
|
||||||||||||||||||||||||||||||||||||||||||||
|
One year later
|
110,744 | 121,378 | 130,658 | 136,434 | 162,049 | 159,393 | 153,299 | 152,836 | 171,130 | 177,377 | ||||||||||||||||||||||||||||||||||
|
Two years later
|
112,140 | 120,548 | 128,562 | 130,030 | 152,292 | 153,894 | 150,934 | 154,435 | 167,446 | |||||||||||||||||||||||||||||||||||
|
Three years later
|
110,673 | 118,263 | 124,707 | 123,399 | 148,612 | 151,792 | 150,078 | 152,315 | ||||||||||||||||||||||||||||||||||||
|
Four years later
|
108,766 | 114,885 | 119,817 | 120,917 | 147,280 | 150,183 | 148,745 | |||||||||||||||||||||||||||||||||||||
|
Five years later
|
107,561 | 113,070 | 118,445 | 119,968 | 145,874 | 150,087 | ||||||||||||||||||||||||||||||||||||||
|
Six years later
|
106,950 | 112,614 | 118,605 | 119,731 | 146,101 | |||||||||||||||||||||||||||||||||||||||
|
Seven years later
|
106,298 | 112,921 | 118,905 | 120,425 | ||||||||||||||||||||||||||||||||||||||||
|
Eight years later
|
106,835 | 113,350 | 119,635 | |||||||||||||||||||||||||||||||||||||||||
|
Nine years later
|
107,474 | 113,862 | ||||||||||||||||||||||||||||||||||||||||||
|
Ten years later
|
107,882 | |||||||||||||||||||||||||||||||||||||||||||
|
Cumulative (excess) deficiency
|
5,173 | (682 | ) | (11,473 | ) | (18,471 | ) | (25,330 | ) | (22,922 | ) | (14,567 | ) | 2,163 | 6,139 | (2,885 | ) | |||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
Cumulative amount of
liability paid through:
|
||||||||||||||||||||||||||||||||||||||||||||
|
One year later
|
$ | 43,053 | $ | 45,048 | $ | 46,268 | $ | 51,965 | $ | 67,229 | $ | 71,718 | 72,499 | 71,950 | 79,592 | 84,565 | ||||||||||||||||||||||||||||
|
Two years later
|
67,689 | 70,077 | 74,693 | 81,183 | 102,658 | 107,599 | 104,890 | 105,576 | 116,035 | |||||||||||||||||||||||||||||||||||
|
Three years later
|
82,268 | 87,198 | 93,288 | 99,910 | 123,236 | 125,926 | 121,711 | 124,659 | ||||||||||||||||||||||||||||||||||||
|
Four years later
|
92,127 | 97,450 | 105,143 | 109,964 | 133,844 | 133,805 | 132,698 | |||||||||||||||||||||||||||||||||||||
|
Five years later
|
98,007 | 104,551 | 111,523 | 113,684 | 136,377 | 139,935 | ||||||||||||||||||||||||||||||||||||||
|
Six years later
|
101,664 | 108,136 | 114,145 | 114,499 | 139,847 | |||||||||||||||||||||||||||||||||||||||
|
Seven years later
|
103,767 | 110,193 | 114,641 | 116,727 | ||||||||||||||||||||||||||||||||||||||||
|
Eight years later
|
105,046 | 110,447 | 116,663 | |||||||||||||||||||||||||||||||||||||||||
|
Nine years later
|
104,990 | 111,797 | ||||||||||||||||||||||||||||||||||||||||||
|
Ten years later
|
105,865 | |||||||||||||||||||||||||||||||||||||||||||
| Year Ended December 31 | ||||||||||||||||||||||||||||||||||||
| 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||
|
Gross liability at end of year
|
$ | 210,692 | $ | 217,914 | $ | 267,190 | $ | 265,730 | $ | 259,022 | $ | 226,432 | $ | 239,809 | $ | 263,599 | $ | 383,317 | ||||||||||||||||||
|
Reinsurance recoverable
|
79,584 | 79,018 | 95,759 | 92,721 | 95,710 | 76,280 | 78,502 | 83,337 | 165,421 | |||||||||||||||||||||||||||
|
Net liability at end of year
|
131,108 | 138,896 | 171,431 | 173,009 | 163,312 | 150,152 | 161,307 | 180,262 | 217,896 | |||||||||||||||||||||||||||
|
Gross reestimated liability
|
209,355 | 210,005 | 239,839 | 240,998 | 239,810 | 232,995 | 253,221 | 264,836 | ||||||||||||||||||||||||||||
|
Reestimated recoverable
|
89,720 | 89,580 | 93,738 | 90,911 | 91,065 | 80,680 | 85,775 | 87,459 | ||||||||||||||||||||||||||||
|
Net reestimated liability
|
119,635 | 120,425 | 146,101 | 150,087 | 148,745 | 152,315 | 167,446 | 177,377 | ||||||||||||||||||||||||||||
|
Gross cumulative deficiency (excess)
|
(1,337 | ) | (7,909 | ) | (27,351 | ) | (24,732 | ) | (19,212 | ) | 6,563 | 13,412 | 1,237 | |||||||||||||||||||||||
-23-
Technology
Donegal Mutual owns the majority of the technology systems our insurance subsidiaries use.
The technology systems consist primarily of an integrated central processing computer, a series of
server-based computer networks and various communications systems that allow the home office of our
insurance subsidiaries and their branch offices to utilize the same systems for the processing of
business. Donegal Mutual maintains backup facilities and systems at the office of one of our
insurance subsidiaries and through a contract with a leading provider of computer disaster recovery
sites and tests these backup facilities and systems on a regular basis. Our insurance subsidiaries
bear their proportionate share of information services expenses based on their respective
percentage of the total net written premiums of the Donegal Insurance Group.
The business strategy of our insurance subsidiaries depends on the use, development and
implementation of integrated technology systems. These systems enable our insurance subsidiaries
to provide a high level of service to agents and policyholders by processing business in a timely
and efficient manner, communicating and sharing data with agents, providing a variety of methods
for the payment of premiums and allowing for the accumulation and analysis of information for the
management of our insurance subsidiaries.
We believe the availability and use of these technology systems has resulted in improved
service to agents and policyholders, increased efficiencies in processing the business of our
insurance subsidiaries and lower operating costs. Four key components of these integrated
technology systems are the agency interface system, the WritePro
®
, WriteBiz
®
and WriteFarm
®
systems, a claims processing system and an imaging system. The agency
interface system provides our insurance subsidiaries with a high level of data sharing both to and
from agents’ systems and also provides agents with an integrated means of processing new business.
The WritePro
®
, WriteBiz
®
and WriteFarm
®
systems are fully
automated underwriting and policy issuance systems that provide agents with the ability to generate
underwritten quotes and automatically issue policies that meet the underwriting guidelines of our
insurance subsidiaries with limited or no intervention by their personnel. The claims processing
system allows our insurance subsidiaries to process claims efficiently and in an automated
environment. The imaging system eliminates the need to handle paper files, while providing greater
access to the same information by a variety of personnel.
Third-Party Reinsurance
Our insurance subsidiaries and Donegal Mutual purchase certain third-party reinsurance on a
combined basis. Le Mars, the Peninsula Group, Sheboygan and MICO also have separate reinsurance
programs that provide certain coverage that is commensurate with their relative size and exposures.
Our insurance subsidiaries use several different reinsurers,
all of which, consistent with the requirements of our insurance subsidiaries and Donegal
-24-
Mutual, have an A.M. Best rating of A- (Excellent) or better or, with respect to foreign
reinsurers, have a financial condition that, in the opinion of our management, is equivalent to a
company with at least an A- rating from A.M. Best.
The external reinsurance our insurance subsidiaries and Donegal Mutual purchase includes:
| • | “excess of loss reinsurance,” under which their losses are automatically reinsured, through a series of contracts, over a set retention (generally $750,000 for 2010 and 2011); and | ||
| • | “catastrophic reinsurance,” under which they recover, through a series of contracts, 100% of an accumulation of many losses resulting from a single event, including natural disasters, over a set retention (generally $3.0 million for 2010 and $5.0 million for 2011). |
The amount of coverage each of these types of reinsurance provides depends upon the amount,
nature, size and location of the risk being reinsured.
In 2010, the principal third-party reinsurance agreement that our insurance subsidiaries
maintained was a multi-line per risk excess of loss reinsurance agreement that provided 100%
coverage up to $1.0 million for both property and liability losses over the set retention.
For property insurance, our insurance subsidiaries also have excess of loss treaties that
provide for additional coverage over the multi-line treaty of $4.0 million per loss ($2.5 million
for 2010). For liability insurance, our insurance subsidiaries have excess of loss treaties that
provide for additional coverage over the multi-line treaty of $39.0 million per occurrence. For
workers’ compensation insurance, our insurance subsidiaries have excess of loss treaties that
provide for additional coverage over the multi-line treaty of $9.0 million on any one life.
Our insurance subsidiaries and Donegal Mutual have property catastrophe coverage through a
series of layered treaties up to aggregate losses of $95.0 million ($97.0 million for 2010) for any
single event over the set retention.
Our insurance subsidiaries and Donegal Mutual also purchase facultative reinsurance to cover
exposures from property and casualty losses that exceed the limits provided by their respective
treaty reinsurance.
Competition
The property and casualty insurance industry is highly competitive on the basis of both price
and service. Numerous companies compete for business in the geographic areas where our insurance
subsidiaries operate. Many of these other insurance companies have
-25-
substantially larger and have
greater financial resources than those of our insurance subsidiaries. In addition, because our
insurance subsidiaries and Donegal Mutual market their respective insurance products exclusively
through independent insurance agencies, most of which represent more than one insurance company,
our insurance subsidiaries face competition within agencies as well as competition to retain
qualified independent agents.
Investments
Return on invested assets is an important element of the financial results of our insurance
subsidiaries. The investment strategy of our insurance subsidiaries is to generate an appropriate
amount of after-tax income on invested assets while minimizing credit risk through investments in
high-quality securities. As a result, our insurance subsidiaries seek to invest a high percentage
of their assets in diversified, highly rated and marketable fixed-maturity instruments. The
fixed-maturity portfolios of our insurance subsidiaries consist of both taxable and tax-exempt
securities. Our insurance subsidiaries maintain a portion of their portfolios in short-term
securities, such as investments in commercial paper, to provide liquidity for the payment of claims
and operation of their businesses. Our insurance subsidiaries maintain a negligible percentage
(less than 1.5% at December 31, 2010) of their portfolios in equity securities.
At December 31, 2010, 99.0% of all debt securities our insurance subsidiaries held had an
investment-grade rating. The investment portfolios of our insurance subsidiaries did not contain
any mortgage loans or any non-performing assets at December 31, 2010.
The following table shows the composition of the debt securities (at carrying value) in the
investment portfolios of our insurance subsidiaries, excluding short-term investments, by rating as
of December 31, 2010:
| (dollars in thousands) | December 31, 2010 | |||||||
| Rating (1) | Amount | Percent | ||||||
|
U.S. Treasury and U.S. agency securities
(2)
|
$ | 148,789 | 22.3 | % | ||||
|
Aaa or AAA
|
78,088 | 11.7 | ||||||
|
Aa or AA
|
360,503 | 53.9 | ||||||
|
A
|
74,433 | 11.1 | ||||||
|
BBB
|
6,059 | 1.0 | ||||||
|
BB
|
250 | — | ||||||
|
B
|
491 | — | ||||||
|
|
||||||||
|
Total
|
$ | 668,613 | 100.0 | % | ||||
|
|
||||||||
| (1) | Ratings assigned by Moody’s Investors Services, Inc. or Standard & Poor’s Corporation. | |
| (2) | Includes residential mortgage-backed securities of $90.4 million. |
-26-
Our insurance subsidiaries invest in both taxable and tax-exempt securities as part of
their strategy to maximize after-tax income. This strategy considers, among other factors, the
alternative minimum tax. Tax-exempt securities made up approximately 75.8%, 71.0% and 67.2% of the
debt securities in the combined investment portfolios of our insurance subsidiaries at December 31,
2008, 2009 and 2010, respectively.
The following table shows the classification of our investments and the investments of our
insurance subsidiaries (at carrying value) at December 31, 2008, 2009 and 2010:
| December 31, | ||||||||||||||||||||||||
| 2008 | 2009 | 2010 | ||||||||||||||||||||||
| Percent | Percent | Percent | ||||||||||||||||||||||
| of | of | of | ||||||||||||||||||||||
| (dollars in thousands) | Amount | Total | Amount | Total | Amount | Total | ||||||||||||||||||
|
Fixed maturities(1):
|
||||||||||||||||||||||||
|
Held to maturity:
|
||||||||||||||||||||||||
|
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
|
$ | 8,517 | 1.4 | % | $ | 2,000 | 0.3 | % | $ | 1,000 | 0.1 | % | ||||||||||||
|
Obligations of states and
political subdivisions
|
76,451 | 12.1 | 61,736 | 9.3 | 59,852 | 8.2 | ||||||||||||||||||
|
Corporate securities
|
8,341 | 1.3 | 6,243 | 0.9 | 3,247 | 0.5 | ||||||||||||||||||
|
Residential mortgage-backed securities
|
6,569 | 1.0 | 3,828 | 0.6 | 667 | 0.1 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total held to maturity
|
99,878 | 15.8 | 73,807 | 11.1 | 64,766 | 8.9 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Available for sale:
|
||||||||||||||||||||||||
|
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
|
6,630 | 1.0 | 40,630 | 6.1 | 57,316 | 7.9 | ||||||||||||||||||
|
Obligations of states and
political subdivisions
|
337,003 | 53.3 | 358,367 | 53.7 | 389,629 | 53.5 | ||||||||||||||||||
|
Corporate securities
|
23,936 | 3.8 | 27,766 | 4.2 | 67,095 | 9.2 | ||||||||||||||||||
|
Residential mortgage-backed securities
|
78,247 | 12.4 | 90,941 | 13.6 | 89,807 | 12.3 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total available for sale
|
445,816 | 70.5 | 517,704 | 77.6 | 603,847 | 82.9 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total fixed maturities
|
545,694 | 86.3 | 591,511 | 88.7 | 668,613 | 91.8 | ||||||||||||||||||
|
Equity securities(2)
|
5,895 | 0.9 | 9,915 | 1.5 | 10,161 | 1.4 | ||||||||||||||||||
|
Investments in affiliates(3)
|
8,594 | 1.4 | 9,309 | 1.4 | 8,992 | 1.2 | ||||||||||||||||||
|
Short-term investments(4)
|
71,953 | 11.4 | 56,100 | 8.4 | 40,776 | 5.6 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total investments
|
$ | 632,136 | 100.0 | % | $ | 666,835 | 100.0 | % | $ | 728,542 | 100.0 | % | ||||||||||||
|
|
||||||||||||||||||||||||
| (1) | See notes 1 and 5 to our consolidated financial statements that we incorporate by reference in this Form 10-K Report. We value fixed maturities classified as held to maturity at amortized cost; we value those fixed maturities classified as available for sale at fair value. Total fair value of fixed maturities classified as held to maturity was $101.5 million at December 31, 2008, $77.0 million at December 31, 2009 and $67.8 million at December 31, 2010. The amortized cost of fixed maturities classified as available for sale was $449.0 million at December 31, 2008, $503.7 million at December 31, 2009 and $601.3 million at December 31, 2010. | |
| (2) | We value equity securities at fair value. Total cost of equity securities was $2.9 million at December 31, 2008, $3.8 million at December 31, 2009 and $2.5 million at December 31, 2010. | |
| (3) | We value investments in affiliates at cost, adjusted for our share of earnings and losses of our affiliates as well as changes in equity of our affiliates due to unrealized gains and losses. |
-27-
| (4) | We value short-term investments at cost, which approximates fair value. |
The following table sets forth the maturities (at carrying value) in fixed maturity and
short-term investment portfolios of our insurance subsidiaries at December 31, 2008, December 31,
2009 and December 31, 2010:
| December 31, | ||||||||||||||||||||||||
| 2008 | 2009 | 2010 | ||||||||||||||||||||||
| Percent | Percent | Percent | ||||||||||||||||||||||
| of | of | of | ||||||||||||||||||||||
| (dollars in thousands) | Amount | Total | Amount | Total | Amount | Total | ||||||||||||||||||
|
Due in(1):
|
||||||||||||||||||||||||
|
One year or less
|
$ | 14,008 | 2.6 | % | $ | 16,410 | 2.8 | % | $ | 12,968 | 1.9 | % | ||||||||||||
|
Over one year through three years
|
33,772 | 6.2 | 35,007 | 5.9 | 54,028 | 8.1 | ||||||||||||||||||
|
Over three years through five years
|
44,579 | 8.2 | 46,392 | 7.8 | 66,720 | 10.0 | ||||||||||||||||||
|
Over five years through ten years
|
174,130 | 31.9 | 166,352 | 28.1 | 201,523 | 30.1 | ||||||||||||||||||
|
Over ten years through fifteen years
|
89,889 | 16.5 | 121,308 | 20.5 | 147,512 | 22.1 | ||||||||||||||||||
|
Over fifteen years
|
104,500 | 19.1 | 111,273 | 18.9 | 95,389 | 14.3 | ||||||||||||||||||
|
Residential mortgage-backed securities
|
84,816 | 15.5 | 94,769 | 16.0 | 90,473 | 13.5 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
$ | 545,694 | 100.0 | % | $ | 591,511 | 100.0 | % | $ | 668,613 | 100.0 | % | ||||||||||||
|
|
||||||||||||||||||||||||
| (1) | Based on stated maturity dates with no prepayment assumptions. Actual maturities will differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. |
As shown above, our insurance subsidiaries held investments in residential
mortgage-backed securities having a carrying value of $90.5 million at December 31, 2010. The
mortgage-backed securities consist primarily of investments in governmental agency balloon pools
with stated maturities between one and 24 years. The stated maturities of these investments limit
the exposure of our insurance subsidiaries to extension risk should interest rates rise and
prepayments decline. Our insurance subsidiaries perform an analysis of the underlying loans when
evaluating a residential mortgage-backed security for purchase, and they select those securities
that they believe will provide a return that properly reflects the prepayment risk associated with
the underlying loans.
-28-
The following table sets forth the investment results of our insurance subsidiaries for the
years ended December 31, 2008, 2009 and 2010:
| Year Ended December 31, | ||||||||||||
| (dollars in thousands) | 2008 | 2009 | 2010 | |||||||||
|
Invested assets(1)
|
$ | 619,003 | $ | 649,486 | $ | 697,689 | ||||||
|
Investment income(2)
|
22,756 | 20,631 | 19,950 | |||||||||
|
Average yield
|
3.7 | % | 3.2 | % | 2.9 | % | ||||||
|
Average tax-equivalent yield
|
4.9 | 4.4 | 4.0 | |||||||||
| (1) | Average of the aggregate invested amounts at the beginning and end of the period. | |
| (2) | Investment income is net of investment expenses and does not include realized investment gains or losses or provision for income taxes. |
A.M. Best Rating
Donegal Mutual and our insurance subsidiaries have an A.M. Best rating of A (Excellent), based
upon their respective current financial condition and historical statutory results of operations.
We believe that the A.M. Best rating of Donegal Mutual and our insurance subsidiaries is an
important factor in their marketing of their products to their agents and customers. A.M. Best’s
ratings are industry ratings based on a comparative analysis of the financial condition and
operating performance of insurance companies. A.M. Best’s classifications are A++ and A+
(Superior), A and A- (Excellent), B++ and B+ (Very Good), B and B- (Good), C++ and C+ (Fair), C and
C- (Marginal), D (Below Minimum Standards) and E and F (Liquidation). A.M. Best bases its ratings
upon factors relevant to the payment of claims of policyholders and are not directed toward the
protection of investors in insurance companies. According to A.M. Best, the “Excellent” rating
that the Donegal Insurance Group maintains is assigned to those companies that, in A.M. Best’s
opinion, have an excellent ability to meet their ongoing obligations to policyholders.
Regulation
The supervision and regulation of insurance companies consists primarily of the laws and
regulations of the various states in which the insurance companies transact business, with the
primary regulatory authority being the insurance regulatory authorities in the state of domicile of
the insurance company. Such supervision and regulation relate to numerous aspects of an insurance
company’s business and financial condition. The primary purpose of such supervision and regulation
is the protection of policyholders. The authority of the state insurance departments includes the
establishment of standards of solvency that insurers must meet and maintain, the licensing of
insurers and insurance agents to do business, the nature of, and limitations on, investments,
premium rates for property and casualty insurance, the provisions that insurers must make for
current losses and future liabilities, the deposit of securities for the benefit of policyholders,
the approval of policy forms, notice
-29-
requirements for the cancellation of policies and the approval
of certain changes in control. State insurance departments also conduct periodic examinations of
the affairs of insurance companies and require the filing of annual and other reports relating to
the financial condition of insurance companies.
In addition to state-imposed insurance laws and regulations, the National Association of
Insurance Commissioners, or the NAIC, has established a risk-based capital system for assessing the
adequacy of statutory capital and surplus that augments the states’ current fixed dollar minimum
capital requirements for insurance companies. At December 31, 2010, our insurance subsidiaries and
Donegal Mutual each exceeded the minimum levels of statutory capital the risk-based capital rules
require by a substantial margin.
Generally, every state has guaranty fund laws under which insurers licensed to do business in
that state can be assessed on the basis of premiums written by the insurer in that state in order
to fund policyholder liabilities of insolvent insurance companies. Under these laws in general, an
insurer is subject to assessment, depending upon its market share of a given line of business, to
assist in the payment of policyholder claims against insolvent insurers. Our insurance
subsidiaries and Donegal Mutual have made accruals for their portion of assessments related to such
insolvencies based upon the most current information furnished by the guaranty associations.
We are part of an insurance holding company system of which Donegal Mutual is the ultimate
controlling person. All of the states in which our insurance companies and Donegal Mutual maintain
a domicile have legislation that regulates insurance holding company systems. Each insurance
company in the insurance holding company system must register with the insurance supervisory agency
of its state of domicile and furnish information concerning the operations of companies within the
insurance 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 in which our subsidiaries and Donegal Mutual maintain a domicile may examine our
insurance subsidiaries or Donegal Mutual at any time, require disclosure of material transactions
by the holding company with another member of the insurance holding company system and require
prior notice or prior approval of certain transactions, such as “extraordinary dividends” from the
insurance subsidiaries to the holding company. We have insurance subsidiaries domiciled in
Pennsylvania, Maryland, Virginia, Iowa, Wisconsin and Michigan.
The Pennsylvania Insurance Holding Companies Act, which generally applies to Donegal Mutual,
us and our insurance subsidiaries, requires that all transactions within an insurance holding
company system to which an insurer is a party must be fair and reasonable and that any charges or
fees for services performed must be reasonable. Any management agreement, service agreement, cost
sharing arrangement and reinsurance agreement must be filed with the Pennsylvania Insurance
Department, or the Department, and is subject to Department review. We have filed the pooling
agreement between Donegal Mutual and
-30-
Atlantic States that established the underwriting pool and the
reinsurance agreements between Donegal Mutual and our insurance subsidiaries with the Department.
Approval of the applicable insurance commissioner is also required prior to consummation of
transactions affecting the control of an insurer. In virtually all states, including Pennsylvania,
Iowa, Maryland, Virginia, Wisconsin and Michigan, where our insurance subsidiaries have states of
domicile, the acquisition of 10% or more of the outstanding capital stock of an insurer or its
holding company or the intent to acquire such an interest creates a rebuttable presumption of a
change in control. Pursuant to an order issued in April 2003, the Department approved Donegal
Mutual’s ownership of up to 70% of
our outstanding Class A common stock and up to 100% of our outstanding Class B common stock.
Our insurance subsidiaries have the legal obligation under state insurance laws to participate
in involuntary insurance programs for automobile insurance, as well as other property and casualty
insurance lines, in the states in which they conduct business. These programs include joint
underwriting associations, assigned risk plans, fair access to insurance requirements plans,
reinsurance facilities, windstorm plans and tornado 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 are unable to 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 the direct premiums it has written in
that state or the number of automobiles it insures in that state. Generally, state law requires
participation in these programs as a condition to obtaining a certificate of authority. Our loss
ratio on insurance we write under these involuntary programs has traditionally been significantly
greater than our loss ratio on insurance we voluntarily write in those states.
The insurance laws of the respective states of domicile of our insurance subsidiaries restrict
the amount of dividends or other distributions our insurance subsidiaries may pay to us without the
prior approval of the insurance regulatory authorities of that state. Generally, the maximum
amount that an insurance subsidiary may pay to us 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 December 31 of the preceding fiscal year or
the net income of that subsidiary for its preceding fiscal year. As of December 31, 2010, the
amount of dividends our insurance subsidiaries could pay us during 2011, without the prior approval
of their domiciliary insurance commissioners, was:
-31-
| Name of Insurance Subsidiary | Ordinary Dividend Amount | |||
|
|
||||
|
Atlantic States
|
$ | 19.2 million | ||
|
Southern
|
None | |||
|
Le Mars
|
2.6 million | |||
|
Peninsula Group
|
4.2 million | |||
|
Sheboygan
|
None | |||
|
MICO
|
3.7 million | |||
|
|
||||
|
Total
|
$ | 29.7 million | ||
|
|
||||
Donegal Mutual
Donegal Mutual organized as a mutual fire insurance company in Pennsylvania in 1889. At
December 31, 2010, Donegal Mutual had admitted assets of $338.4 million and policyholders’ surplus
of $178.8 million. At December 31, 2010, Donegal Mutual had total liabilities of $159.7 million,
including debt of $13.0 million, reserves for net losses and loss expenses of $41.8 million and
unearned premiums of $31.3 million. Donegal Mutual’s investment portfolio of $217.6 million at
December 31, 2010 consisted primarily of investment-grade bonds of $15.2 million and its investment
in our common stock. At December 31, 2010, Donegal Mutual owned 8,355,184 shares, or approximately
42% of our Class A common stock, which Donegal Mutual carried on its books at $112.0 million, and
4,198,339 shares, or approximately 75%, of our Class B common stock which Donegal Mutual carried on
its books at $56.3 million. We present Donegal Mutual’s financial information in accordance with
SAP as required by the NAIC Accounting Practices and Procedures Manual. Donegal Mutual does not,
nor is it required to, prepare financial statements in accordance with GAAP.
Donegal Financial Services Corporation
Because Donegal Mutual and we together own all of the outstanding capital stock of DFSC, the
OTS, regulates Donegal Mutual and us as unitary savings and loan holding companies. As a result,
Donegal Mutual and we are subject to regulation by the OTS under the holding company provisions of
the federal Home Owners’ Loan Act. Province Bank, as a federally chartered and insured stock
savings association, is subject to regulation and supervision by the OTS and by the Federal Deposit
Insurance Corporation. The primary purpose of the federal statutory and regulatory supervision of
financial institutions is to protect depositors, the financial institutions and the financial
system as a whole rather than the shareholders of financial institutions or their holding
companies.
Sections 23A and 23B of the Federal Reserve Act impart quantitative and qualitative
restrictions on transactions between a savings association and its “affiliates.” Affiliates of a
savings association include, among other entities, the savings association’s holding company and
non-banking companies under common control with the savings association such as
-32-
Donegal Mutual and
us. These restrictions on transactions with affiliates apply to transactions between DFSC and
Province Bank, on the one hand, Donegal Mutual and us and our insurance subsidiaries, on the other
hand. These restrictions also apply to transactions among DFSC, Province Bank and Donegal Mutual.
Cautionary Statement Regarding Forward-Looking Statements
This Form 10-K Annual Report and the documents we incorporate by reference in this Form 10-K
Annual Report contain “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements include certain discussions relating to
underwriting, premium and investment income volumes, business strategies, reserves, profitability
and business relationships and our other business activities during 2010 and beyond. In some
cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,”
“could,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “objective,”
“project,” “predict,” “potential,” “goal” and other expressions of similar import. These
forward-looking statements reflect our current views about future events, our current assumptions
and are subject to known and unknown risks and uncertainties that may cause our results,
performance or achievements to differ materially from those we anticipate or imply by our
forward-looking statements. We cannot control or predict many of the factors that could determine
our future financial conditions or results of operations. Such factors may include those we
describe under “Risk Factors.” The forward-looking statements contained in this annual report
reflect our views and assumptions only as of the date of this Form 10-K Report. Except as required
by law, we do not intend to update, and we assume no responsibility for updating, any
forward-looking statements we have made. We qualify all of our forward-looking statements by these
cautionary statements.
Available Information
You may obtain our Annual Reports on Form 10-K, including this Form 10-K Annual Report, our
quarterly reports on Form 10-Q, our current reports on Form 8-K and our other filings pursuant to
the Securities Exchange Act of 1934, or the Exchange Act, without charge by viewing our website,
www.donegalgroup.com. You may also view our Code of Business Conduct and Ethics and the charters
of our executive committee, our audit committee, our compensation committee and our nominating
committee on our website. Upon request to our corporate secretary, we will also provide printed
copies of any of these documents to you without charge. We have provided the address of our
website solely for the information of investors. We do not intend the reference to our website
address to be an active link or to otherwise incorporate the contents of our website into this Form
10-K Annual Report.
-33-
Item 1A
.
Risk Factors
.
Risk Factors
Risks Relating to Us and Our Business
Donegal Mutual is our controlling stockholder, and it and its directors and executive officers
have potential conflicts of interest between the best interests of our stockholders and the best
interests of the policyholders of Donegal Mutual.
Donegal Mutual controls the election of all of the members of our board of directors.
Following our 2011 annual meeting of stockholders, six of the 11 members of our board of directors
will also be directors of Donegal Mutual. Donegal Mutual and we have the same executive officers.
These common directors and executive officers have a fiduciary duty to our stockholders and also
have a fiduciary duty to the policyholders of Donegal Mutual. Among the potential conflicts of
interest that could arise from these separate fiduciary duties are the following:
| • | We and Donegal Mutual periodically review the percentage participation of Atlantic States and Donegal Mutual in the underwriting pool that Donegal Mutual and we have maintained since 1986; | ||
| • | Our insurance subsidiaries and Donegal Mutual annually review and then establish the terms of certain reinsurance agreements between them with the objective over the long-term of having an approximately equal balance between payments and recoveries; | ||
| • | We and Donegal Mutual periodically allocate certain shared expenses among ourselves and our insurance subsidiaries in accordance with various inter-company expense-sharing agreements; and | ||
| • | Our insurance subsidiaries may enter into other transactions or contractual relationships with Donegal Mutual, including, for example, our purchases from time to time from Donegal Mutual of the surplus note of a mutual insurance company that will convert into a stock insurance company and ultimately become one of our wholly owned subsidiaries. |
Donegal Mutual has sufficient voting power to determine the outcome of all matters submitted
to our stockholders for approval.
Each share of our Class A common stock has one-tenth of a vote per share and votes as a single
class with our Class B common stock, which has one vote per share except for
matters that would uniquely affect the rights of holders of our Class A common stock. Donegal
Mutual has the right to vote approximately 66% of the aggregate voting power of
-34-
our Class A common
stock and our Class B common stock and has sufficient voting control to:
| • | elect all of the members of our board of directors, who determine our management and policies; and | ||
| • | control the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including mergers or other acquisition proposals and the sale of all or substantially all of our assets, in each case regardless of how our other stockholders vote their shares. |
The interests of Donegal Mutual in maintaining this greater than majority control of us may
have an adverse effect on the price of our Class A common stock and our Class B common stock
because of the absence of any potential “takeover” premium and may be inconsistent with the
interests of our stockholders other than Donegal Mutual.
Donegal Mutual’s voting control, certain provisions of our certificate of incorporation and
by-laws and certain provisions of Delaware law make it remote that anyone could acquire control of
us unless Donegal Mutual were in favor of the acquisition of control.
Donegal Mutual’s voting control, certain anti-takeover provisions in our certificate of
incorporation and by-laws and certain provisions of the Delaware General Corporation Law or the
DGCL, could delay or prevent the removal of members of our board of directors and could make a
merger, tender offer or proxy contest involving us to be expensive as well as unlikely to succeed,
even if such events were in the best interests of our stockholders other than Donegal Mutual.
These factors could also discourage a third party from attempting to acquire control of us. In
particular, our certificate of incorporation and by-laws include the following anti-takeover
provisions:
| • | our board of directors is classified into three classes, so that our stockholders elect only one-third of the members of our board of directors each year; | ||
| • | our stockholders may remove our directors only for cause; | ||
| • | our stockholders may not take stockholder action except at an annual or special meeting of our stockholders; | ||
| • | the request of stockholders holding at least 20% of the aggregate voting power of our Class A common stock and our Class B common stock is required to call a special meeting of our stockholders; | ||
| • | our bylaws require that stockholders provide us with advance notice to us to nominate candidates for election to our board of directors or to make a stockholder proposal at a stockholders’ meeting; |
-35-
| • | we do not permit cumulative voting rights in the election of our directors; | ||
| • | our certificate of incorporation does not provide for pre-emptive rights in connection with the securities we issue; and | ||
| • | our board of directors may issue, without stockholder approval unless otherwise required by law, preferred stock with such terms as our board of directors may determine. |
Moreover, the DGCL contains certain provisions that prohibit certain business combination
transactions with an interested stockholder under certain circumstances.
We have authorized preferred stock that we could issue without stockholder approval to make it
more difficult for a third party to acquire us.
We have 2,000,000 authorized shares of preferred stock that we could issue in one or more
series without further stockholder approval, unless DGCL otherwise requires, and upon such terms
and conditions, and having such rights, privileges and preferences, as our board of directors may
determine our potential issuance of preferred stock and that may make it difficult for a third
party to acquire control of us.
Because we are an insurance holding company, no person can acquire or seek to acquire a 10% or
greater interest in us without first obtaining approval of the insurance commissioners of the
states of domicile of our insurance subsidiaries.
We own insurance subsidiaries domiciled in the states of Pennsylvania, Maryland, Virginia,
Iowa, Wisconsin and Michigan, and Donegal Mutual controls an insurance company domiciled in
Georgia. The insurance laws of each of these states provide that no person can acquire or seek to
acquire a 10% or greater interest in us without first filing specified information with the
insurance commissioner of that state and obtaining the prior approval of the proposed acquisition
of a 10% or greater interest in us by the state insurance commissioner based on statutory standards
designed to protect the safety and soundness of the insurance holding company and its subsidiary.
Our insurance subsidiaries currently conduct business in a limited number of states, with a
concentration of business in Pennsylvania, Maryland and Virginia. Any single catastrophe
occurrence or other condition affecting losses in these states could adversely affect the results
of operations of our insurance subsidiaries.
Our insurance subsidiaries conduct business in 22 states located primarily in the
Mid-Atlantic, Midwestern, New England and Southern states. A substantial portion of their business
consists of private passenger and commercial automobile, homeowners and workers’ compensation
insurance in Pennsylvania, Maryland and Virginia. While our insurance subsidiaries and Donegal
Mutual actively manage our respective exposure to
-36-
catastrophes through their underwriting process
and the purchase of reinsurance, a single catastrophic occurrence, destructive weather pattern,
general economic trend, terrorist attack, regulatory development or other condition affecting one
or more of the states in which our insurance subsidiaries conduct substantial business could
materially adversely affect their business, financial condition and results of operations. Common
catastrophic events include hurricanes, earthquakes, tornadoes, wind and hail storms, fires,
explosions and severe winter storms.
If the independent agents who market the products of our insurance subsidiaries do not
maintain their current levels of premium writing with us, fail to comply with established
underwriting guidelines of our insurance subsidiaries or otherwise inappropriately market the
products of our insurance subsidiaries, the business, financial condition and results of operations
of our insurance subsidiaries could be adversely affected.
Our insurance subsidiaries market their insurance products solely through a network of
approximately 2,200 independent insurance agencies. This agency force is one of the most important
components of the competitive profile of our insurance subsidiaries. As a result, our insurance
subsidiaries depend to a material extent upon the independent agents they use, each of whom has the
authority to bind our insurance subsidiaries to insurance policies. To the extent that our
independent agents’ marketing efforts cannot maintain their current levels of volume and quality or
they bind our insurance subsidiaries to unacceptable insurance risks, fail to comply with the
established underwriting guidelines of our insurance subsidiaries or otherwise inappropriately
market the products of our insurance subsidiaries, the business, financial condition and results of
operations of our insurance subsidiaries could suffer.
The business of our insurance subsidiaries may not continue to grow and may be materially
adversely affected if they cannot retain existing, and attract new, independent agents or if
insurance consumers increase their use of insurance marketing systems other than independent
agents.
Our ability to retain existing and to attract new independent agents is essential to the
continued growth of the business of our insurance subsidiaries. If independent agents find it
easier to do business with the competitors of our insurance subsidiaries, our insurance
subsidiaries could find it difficult to retain their existing business or to attract new business.
While our insurance subsidiaries believe they maintain good relationships with the independent
agents they appoint, our insurance subsidiaries cannot be certain that these
independent agents will continue to sell the products of our insurance subsidiaries to the
consumers these independent agents represent. Some of the factors that could adversely affect the
ability of our insurance subsidiaries to retain existing and attract new independent agents
include:
| • | the significant competition among insurance companies to attract independent agents; |
-37-
| • | the intense and time-consuming process of selecting new independent agents; | ||
| • | the insistence of our insurance subsidiaries that independent agents adhere to consistent underwriting standards; and | ||
| • | the ability of our insurance subsidiaries to pay competitive and attractive commissions, bonuses and other incentives to independent agents. |
While our insurance subsidiaries sell insurance to policyholders solely through their network
of independent agencies, many competitors of our insurance subsidiaries sell insurance through a
variety of delivery methods, including independent agencies, captive agencies, the Internet and
direct sales. To the extent that these policyholders change their marketing system preference, the
business, financial condition and results of operations of our insurance subsidiaries may be
adversely affected.
We are dependent on dividends from our insurance subsidiaries for the payment of our operating
expenses, our debt service and dividends to our stockholders; however, there are regulatory
restrictions and business considerations that regulate the amount of dividends our insurance
subsidiaries may pay to us.
As a holding company, we rely primarily on dividends from our insurance subsidiaries as a
source of funds to meet our corporate obligations and to pay dividends to our stockholders. The
amount of dividends our insurance subsidiaries can pay to us is subject to regulatory restrictions
and depends on the amount of surplus our subsidiaries maintain. From time to time, the NAIC and
various state insurance regulators consider modifying the method of determining the amount of
dividends that an insurance company may pay without prior regulatory approval. The maximum amount
of ordinary dividends that our insurance subsidiaries can pay to us in 2011 without prior
regulatory approval is approximately $29.7 million. Other business and regulatory considerations,
such as the impact of dividends on surplus that could affect the ratings, competitive conditions,
the investment results of our subsidiaries and the amount of premiums that our insurance
subsidiaries can write could also adversely impact the ability of our insurance subsidiaries to pay
dividends to us.
If A.M. Best downgrades the rating it has assigned to Donegal Mutual or our insurance
subsidiaries, it would adversely affect their competitive position.
Industry ratings are a factor in establishing and maintaining the competitive position of
insurance companies. A.M. Best, an industry-accepted source of insurance company financial
strength ratings, rates Donegal Mutual and our insurance subsidiaries. A.M. Best ratings provide
an independent opinion of an insurance company’s financial health and its ability to meet its
obligations to its policyholders. We believe that the financial strength rating of A.M. Best is
material to the operations of Donegal Mutual and our insurance
-38-
subsidiaries. Currently, Donegal
Mutual and our insurance subsidiaries each have an A (Excellent) rating from A.M. Best. If A.M.
Best were to downgrade the rating of Donegal Mutual or any of our insurance subsidiaries, it would
adversely affect the competitive position of Donegal Mutual and our insurance subsidiaries and make
it more difficult for them to market their products and retain their existing policyholders.
Our strategy to grow in part through acquisitions of smaller insurance companies exposes us to
risks that could adversely affect our results of operations and financial condition.
The affiliation with and acquisition of smaller and other undercapitalized insurance companies
involves risks that could adversely affect our results of operations and financial condition. The
risks associated with these affiliations and acquisitions include:
| • | the potential inadequacy of reserves for loss and loss expenses; | ||
| • | the need to supplement management with additional experienced personnel; | ||
| • | conditions imposed by regulatory agencies that make the realization of cost-savings through integration of operations more difficult; | ||
| • | a need for additional capital that was not anticipated at the time of the acquisition; and | ||
| • | the use of more of our management’s time than we originally anticipated. |
If we cannot obtain sufficient capital to fund the organic growth of our insurance
subsidiaries and to make acquisitions, we may not be able to expand our business.
Our strategy is to expand our business through the organic growth of our insurance
subsidiaries and through our strategic acquisitions of regional insurance companies. Our insurance
subsidiaries will require additional capital in the future to support this strategy. If we cannot
obtain sufficient capital on satisfactory terms and conditions, we may not be able to expand the
business of our insurance subsidiaries or to make future acquisitions. Our
ability to obtain additional financing will depend on a number of factors, many of which are
beyond our control. For example, we may not be able to obtain additional debt or equity financing
because we or our insurance subsidiaries may already have substantial debt at the time, because we
or our insurance subsidiaries do not have sufficient cash flow to service or repay our existing or
additional debt or because financial institutions are not making financing available. In addition,
any equity capital we obtain in the future could be dilutive to our existing stockholders.
Many of the competitors of our insurance subsidiaries have greater financial strength than our
insurance subsidiaries, and these competitors may be able to offer their products at lower prices
than our insurance subsidiaries can afford to do.
-39-
The property and casualty insurance industry is intensely competitive. Competition can
be based on many factors, including:
| • | the perceived financial strength of the insurer; | ||
| • | premium rates; | ||
| • | policy terms and conditions; | ||
| • | policyholder service; | ||
| • | reputation; and | ||
| • | experience. |
Our insurance subsidiaries compete with many regional and national property and casualty
insurance companies, including direct sellers of insurance products, insurers having their own
agency organizations and other insurers represented by independent agents. Many of these insurers
have greater capital than our insurance subsidiaries, have substantially greater financial,
technical and operating resources and have equal or higher ratings from A.M. Best than our
insurance subsidiaries. In addition, our competition may become increasingly better capitalized in
the future as the traditional barriers between insurance companies and other financial institutions
erode and as the property and casualty insurance industry continues to consolidate.
The greater capitalization of many of the competitors of our insurance subsidiaries enables
them to operate with lower profit margins and, therefore, allows them to market their products more
aggressively, to take advantage more quickly of new marketing opportunities and to offer lower
premium rates. Our insurance subsidiaries may not be able to maintain their current competitive
position in the markets in which they operate if their competitors offer prices on products that
are lower than the prices our insurance subsidiaries are prepared to offer. Moreover, if these
competitors lower the price of their products and our insurance subsidiaries meet their pricing,
the profit margins and revenues of our insurance subsidiaries may decrease and their ratios of
claims and expenses to premiums may increase. All of these factors could materially adversely
affect the financial condition and results of operations of our insurance subsidiaries.
Because the investment portfolios of our insurance subsidiaries consist primarily of
fixed-income securities, their investment income and the fair value of their investment portfolios
could decrease as a result of a number of factors.
Our insurance subsidiaries invest the premiums they receive from their policyholders and
maintain investment portfolios that consist primarily of fixed-income securities. The management
of these investment portfolios is an important component of the profitability of
-40-
our insurance subsidiaries and a significant portion of the operating income of our insurance subsidiaries
generate derives from the income they receive on their invested assets. A number of factors offset
the quality and/or yield of their portfolios, including the general economic and business
environment, government monetary policy, changes in the credit quality of the issuers of the
fixed-income securities our insurance subsidiaries own, changes in market conditions and regulatory
changes. The fixed-income securities our insurance subsidiaries own consist primarily of
securities issued by domestic entities that are backed either by the credit or collateral of the
underlying issuer. Factors such as an economic downturn, disruption in the credit market or the
availability of credit, a regulatory change pertaining to a particular issuer’s industry, a
significant deterioration in the cash flows of the issuer or a change in the issuer’s marketplace
may adversely affect the ability of our insurance subsidiaries to collect principal and interest
from the issuer.
The investments of our insurance subsidiaries are also subject to risk resulting from interest
rate fluctuations. Increasing interest rates or a widening in the spread between interest rates
available on U.S. Treasury securities and corporate debt or asset-backed securities, for example,
will typically have an adverse impact on the market values of fixed-rate securities. If interest
rates decline, as was the case in 2010 and which is currently continuing, our insurance
subsidiaries would generally have a lower overall rate of return on investments of cash their
operations generate. In addition, in the event of the call or maturity of investments in a
declining interest rate environment, our insurance subsidiaries may not be able to reinvest the
proceeds in securities with comparable interest rates. Changes in interest rates may reduce both
the profitability and the return on the invested capital of our insurance subsidiaries.
We and our insurance subsidiaries depend on key personnel. The loss of any member of their
senior management or our executive management could negatively affect the implementation of their
business strategies and achievement of their growth objectives.
The loss of, or failure to attract, key personnel could significantly impede the financial
plans, growth, marketing and other objectives of us and our insurance subsidiaries. Their
continued success depends to a substantial extent on the ability and experience of their senior
management. Our insurance subsidiaries and we believe that our future success is dependent on our
ability to attract and retain additional skilled and qualified personnel and to expand, train and
manage our employees. We and our insurance subsidiaries may be unable to do so because of the
intense competition for experienced personnel in the insurance industry. With limited exceptions, we and our
insurance subsidiaries do not have employment agreements with our key personnel.
The reinsurance agreements on which our insurance subsidiaries rely do not relieve our
insurance subsidiaries from their primary liability to their policyholders, and our insurance
subsidiaries face a risk of non-payment from their reinsurers as well as the non-availability of
reinsurance in the future.
-41-
Our insurance subsidiaries rely on reinsurance agreements to limit their maximum net loss from
large single catastrophic risks or excess of loss risks in areas where our insurance subsidiaries
may have a concentration of policyholders. Reinsurance also enables our insurance subsidiaries to
increase their capacity to write insurance because it has the effect of leveraging the surplus of
our insurance subsidiaries. Although the reinsurance our insurance subsidiaries maintain provides
that the reinsurer is liable to them for any reinsured losses, the reinsurance does not relieve our
insurance subsidiaries from their primary liability to their policyholders if the reinsurer fails
to pay our insurance subsidiaries. To the extent that a reinsurer is unable to pay losses for
which it is liable to our insurance subsidiaries, our insurance subsidiaries remain liable for such
losses. As of December 31, 2010, our insurance subsidiaries had approximately $100.5 million of
reinsurance receivables from third-party reinsurers relating to paid and unpaid losses. Any
insolvency or inability of these reinsurers to make timely payments to our insurance subsidiaries
under the terms of their reinsurance agreements would adversely affect the results of operations of
our insurance subsidiaries.
In addition, our insurance subsidiaries face a risk of the non-availability of reinsurance or
an increase in reinsurance costs that could adversely affect their ability to write business or
their results of operations. Market conditions beyond the control of our insurance subsidiaries,
such as the amount of surplus in the reinsurance market and the frequency and severity of natural
and man-made catastrophes, affect both the availability and the cost of the reinsurance our
insurance subsidiaries purchase. If our insurance subsidiaries can not maintain their current
level of reinsurance or purchase new reinsurance protection in amounts that our insurance
subsidiaries consider sufficient, our insurance subsidiaries would either have to be willing to
accept an increase in their net risk retention or reduce their insurance writings which would
adversely affect them.
Risks Relating to the Property and Casualty Insurance Industry
Industry trends, such as increased litigation against the insurance industry and individual
insurers, the willingness of courts to expand covered causes of loss, rising jury awards, escalating medical costs and increasing loss severity may contribute to increased
costs and to the deterioration of the reserves of our insurance subsidiaries.
Loss severity in the property and casualty insurance industry has increased in recent years,
principally driven by larger court judgments and increasing medical costs. In addition, many
classes of complainants have brought legal actions and proceedings that tend to increase the size
of judgments. The propensity of policyholders and third-party claimants to litigate and the
willingness of courts to expand causes of loss and the size of awards to eliminate exclusions and
to increase coverage limits may make the loss reserves of our insurance subsidiaries inadequate for
current and future losses.
-42-
Loss or significant restriction of the use of credit scoring in the pricing and underwriting
of the personal lines insurance products by our insurance subsidiaries could adversely affect their
future profitability.
Our insurance subsidiaries use credit scoring as a factor in making risk selection and pricing
decisions where allowed by state law for personal lines insurance products. Recently, some
consumer groups and regulators have questioned whether the use of credit scoring unfairly
discriminates against people with low incomes, minority groups and the elderly. These consumer
groups and regulators often call for the prohibition or restriction on the use of credit scoring in
underwriting and pricing. Laws or regulations enacted in a number of states that significantly
curtail the use of credit scoring in the underwriting process could reduce the future profitability
of our insurance subsidiaries.
Changes in applicable insurance laws or regulations or changes in the way regulators
administer those laws or regulations could adversely affect the operating environment of our
insurance subsidiaries and increase their exposure to loss or put them at a competitive
disadvantage.
Property and casualty insurers are subject to extensive supervision in their domiciliary
states and in the states in which they do business. This regulatory oversight includes matters
relating to:
| • | licensing and examination; | ||
| • | approval of premium rates; | ||
| • | market conduct; | ||
| • | policy forms; | ||
| • | limitations on the nature and amount of certain investments; | ||
| • | claims practices; | ||
| • | mandated participation in involuntary markets and guaranty funds; | ||
| • | reserve adequacy; | ||
| • | insurer solvency; | ||
| • | transactions between affiliates; | ||
| • | the amount of dividends that insurers may pay; and | ||
| • | restrictions on underwriting standards. |
-43-
Such regulation and supervision are primarily for the benefit and protection of policyholders
rather than stockholders. For instance, our insurance subsidiaries are subject to involuntary
participation in specified markets in various states in which they operate, and the premium rates
our insurance subsidiaries may charge do not always correspond with the underlying costs of
providing that coverage.
The NAIC and state insurance regulators are re-examining existing laws and regulations,
specifically focusing on:
| • | insurance company investments; | ||
| • | issues relating to the solvency of insurance companies; | ||
| • | risk-based capital guidelines; | ||
| • | restrictions on the terms and conditions included in insurance policies; | ||
| • | certain methods of accounting; | ||
| • | reserves for unearned premiums, losses and other purposes; | ||
| • | the values at which insurance companies may carry investment securities and the definition of other-than-temporary impairment; | ||
| • | interpretations of existing laws and the development of new laws. Changes in state laws and regulations, as well as changes in the way state regulators view related-party transactions in particular, could change the operating environment of our insurance subsidiaries and have an adverse effect on their business. |
The state insurance regulatory framework has recently come under increased federal scrutiny
partly as a result of the substantial emergency funding the federal government provided AIG and
other distressed financial institutions. Congress is considering proposals that it should create
an optional federal charter for insurers. Federal chartering has the potential to create an uneven
playing field for insurers by subjecting federally-chartered and state-chartered insurers to
different regulatory requirements. Federal chartering also raises the possibility of duplicative
or conflicting federal and state requirements. In addition, if federal legislation repeals the
partial exemption for the insurance industry from federal antitrust laws, our ability to collect
and share loss cost data with the industry could adversely affect the results of operations of our
insurance subsidiaries.
Insurance companies are subject to assessments, based on their market share in a given line of
business, to assist in the payment of unpaid claims and related costs of insolvent insurance
companies. Such assessments could adversely affect the financial condition of our insurance
subsidiaries.
-44-
Our insurance subsidiaries must pay assessments pursuant to the guaranty fund laws of the
various states in which they conduct business. Generally, under these laws, our insurance
subsidiaries can be assessed, depending upon the market share of our insurance subsidiaries in a
given line of insurance business, to assist in the payment of unpaid claims and related costs of
insolvent insurance companies in those states. We cannot predict the number and magnitude of
future insurance company failures in the states in which our insurance subsidiaries conduct
business, but future assessments could adversely affect the business, financial condition and
results of operations of our insurance subsidiaries.
Our insurance subsidiaries must establish premium rates and loss and loss expense reserves
from forecasts of the ultimate costs they expect will arise from risks underwritten during the
policy period, and the profitability of our insurance subsidiaries could be adversely affected if
their premium rates or reserves are insufficient to satisfy their ultimate costs.
One of the distinguishing features of the property and casualty insurance industry is that it
prices its products before it knows its costs since insurers generally establish their premium
rates before they know the amount of losses they will incur. Accordingly, our insurance
subsidiaries establish premium rates from forecasts of the ultimate costs they expect to arise from
risks they have underwritten during the policy period. These premium rates may not be sufficient
to cover the ultimate losses incurred. Further, our insurance subsidiaries must establish reserves
for losses and loss expenses as balance sheet liabilities based upon estimates involving actuarial
and statistical projections at a given time of what our insurance subsidiaries expect their ultimate liability to be. Significant periods of time often elapse from the occurrence of an
insured loss to the reporting of the loss and the payment of that loss. It is possible that their
ultimate liability could exceed these estimates because of the future development of known losses,
the existence of losses that have occurred but are currently unreported and larger than historical
settlements on pending and unreported claims. The process of estimating reserves is inherently
judgmental and can be influenced by variable factors including:
| • | trends in claim frequency and severity; | ||
| • | changes in operations; | ||
| • | emerging economic and social trends; | ||
| • | inflation; and | ||
| • | changes in the regulatory and litigation environments. |
If our insurance subsidiaries have insufficient premium rates or reserves, insurance
regulatory authorities may require increases to these reserves. An increase in reserves results in
an increase in losses and a reduction in net income for the period in which the deficiency
-45-
in reserves exists. Accordingly, if an increase in reserves is not sufficient, it may adversely
impact their business, liquidity, financial condition and results of operations.
The financial results of our insurance subsidiaries depend primarily on the ability to
underwrite risks effectively and to charge adequate rates to policyholders.
The financial condition, cash flows and results of operations of our insurance subsidiaries
depend on their ability to underwrite and set rates accurately for a full spectrum of risks, across
a number of lines of insurance. Rate adequacy is necessary to generate sufficient premium to pay
losses, loss adjustment expenses and underwriting expenses and to earn a profit.
The ability to underwrite and set rates effectively is subject to a number of risks and
uncertainties, including:
| • | the availability of sufficient, reliable data; | ||
| • | the ability to conduct a complete and accurate analysis of available data; | ||
| • | the ability to recognize in a timely manner changes in trends and to project both the severity and frequency of losses with reasonable accuracy; | ||
| • | uncertainties generally inherent in estimates and assumptions; | ||
| • | the ability to project changes in certain operating expense levels with reasonable certainty; | ||
| • | the development, selection and application of appropriate rating formulae or other pricing methodologies; | ||
| • | the use of modeling tools to assist with correctly and consistently achieving the intended results in underwriting and pricing ; | ||
| • | the ability to innovate with new pricing strategies, and the success of those innovations on implementation; | ||
| • | the ability to secure regulatory approval of premium rates on an adequate and timely basis; | ||
| • | the ability to predict policyholder retention accurately; | ||
| • | unanticipated court decisions, legislation or regulatory action; | ||
| • | unanticipated changes in our claim settlement practices; |
-46-
| • | changing driving patterns for auto exposures; changing weather patterns for property exposures; | ||
| • | changes in the medical sector of the economy; | ||
| • | unanticipated changes in auto repair costs, auto parts prices and used car prices; | ||
| • | impact of inflation and other factors on the cost of construction materials and labor; | ||
| • | the ability to monitor property concentration in catastrophe-prone areas, such as hurricane, earthquake and wind/hail regions; and | ||
| • | the general state of the economy in the states in which we operate. |
Such risks may result in the premium rates of our insurance subsidiaries being based on
inadequate or inaccurate data or inappropriate assumptions or methodologies, and may cause our
estimates of future changes in the frequency or severity of claims to be incorrect. As a result,
our insurance subsidiaries could underprice risks, which would negatively affect our margins, or we could overprice risks, which could reduce our
volume and competitiveness. In either event, underpricing or overpricing risks could adversely
impact their operating results, financial condition and cash flows.
The cyclical nature of the property and casualty insurance industry may reduce the revenues
and profit margins of our insurance subsidiaries.
The property and casualty insurance industry is highly cyclical with respect to both
individual lines of business and the overall insurance industry. Premium rate levels relate to the
availability of insurance coverage, which varies according to the level of surplus available in the
insurance industry. The level of surplus in the industry varies with returns on invested capital
and regulatory barriers to withdrawal of surplus. Increases in surplus may result in increased
price competition among property and casualty insurers. If our insurance subsidiaries find it
necessary to reduce premiums or limit premium increases due to these competitive pressures on
pricing, our insurance subsidiaries may experience a reduction in their profit margins and
revenues, an increase in their ratios of losses and expenses to premiums and, therefore, lower
profitability.
Risks Relating to Our Class A Common Stock
The price of our Class A common stock may be adversely affected by its low trading volume.
Our Class A common stock has limited liquidity. Reported average daily trading volume in our
Class A common stock for the year ended December 31, 2010 was
-47-
approximately 30,414 shares. This limited liquidity could subject our shares of Class A common stock to greater price volatility.
Donegal Mutual’s ownership of our stock, anti-takeover provisions of our certificate of
incorporation and by-laws and certain state laws make it unlikely anyone could acquire control of
us unless Donegal Mutual were in favor of the acquisition of control.
Donegal Mutual’s ownership of our Class A common stock and Class B common stock, certain
anti-takeover provisions of our certificate of incorporation and by-laws, certain provisions of
Delaware law and the insurance laws and regulations of Pennsylvania, Maryland, Michigan, Iowa,
Virginia, Wisconsin and Georgia could delay or prevent the removal of members of our board of
directors and could make it more difficult for a merger, tender offer or proxy contest involving us
to succeed, even if our stockholders other than Donegal Mutual believed any of such events would be
beneficial to them. These factors could also discourage a third party from attempting to acquire control of us. The classification of our board of directors could also have the
effect of delaying or preventing a change in our control.
In addition, we have 2,000,000 authorized shares of preferred stock that we could issue in one
or more series without stockholder approval, to the extent applicable law permits, and upon such
terms and conditions, and having such rights, privileges and preferences, as our board of directors
may determine. Our ability to issue preferred stock could make it difficult for a third party to
acquire us. We have no current plans to issue any preferred stock.
Moreover, the DGCL contains certain provisions that prohibit certain business combination
transactions under certain circumstances. In addition, state insurance laws and regulations
generally prohibit any person from acquiring, or seeking to acquire, a 10% or greater interest in
an insurance company without the prior approval of the state insurance commissioner of the state of
domicile of the insurer.
Item 1B
.
Unresolved Staff Comments
.
We have no unresolved written comments from the SEC staff regarding our filings under the
Exchange Act.
Item 2
.
Properties
.
We and our insurance subsidiaries share administrative headquarters with Donegal Mutual in a
building in Marietta, Pennsylvania that Donegal Mutual owns. Donegal Mutual charges us and our
insurance subsidiaries for an appropriate portion of the building expenses under an inter-company
allocation agreement. The Marietta headquarters has approximately 230,000 square feet of office
space. Southern owns a facility of approximately 10,000 square feet in Glen Allen, Virginia. Le
Mars owns a facility of approximately 25,500 square feet in Le
-48-
Mars, Iowa, the Peninsula Group owns
a facility of approximately 14,600 square feet in Salisbury, Maryland and Sheboygan owns a facility
of approximately 8,800 square feet in Sheboygan Falls, Wisconsin.
Item 3
.
Legal Proceedings
.
Our insurance subsidiaries are parties to routine litigation that arises in the ordinary
course of their insurance business. We believe that the resolution of these lawsuits will not have
a material adverse effect on the financial condition or results of operations of our insurance
subsidiaries.
Item 4
.
Reserved
.
Not applicable.
Executive Officers of the Company
The following table sets forth information regarding the executive officers of Donegal Mutual
and us, each of whom has served with us for more than 10 years:
| Name | Age | Position | ||||
|
Donald H. Nikolaus
|
68 | President and Chief Executive Officer of Donegal Mutual since 1981; President and Chief Executive Officer of us since 1986. | ||||
|
Robert G. Shenk
|
57 | Senior Vice President, Claims, of Donegal Mutual and us since 1997; other positions from 1986 to 1997. | ||||
|
Cyril J. Greenya
|
66 | Senior Vice President and Chief Underwriting Officer, of Donegal Mutual and us since 2005, Senior Vice President, Underwriting of Donegal Mutual from 1997 to 2005; other positions from 1986 to 2005. | ||||
|
Daniel J. Wagner
|
50 | Senior Vice President and Treasurer of Donegal Mutual and us since 2005; Vice President and Treasurer of Donegal Mutual and us from 2000 to 2005; other positions from 1993 to 2005. | ||||
|
Jeffrey D. Miller
|
46 | Senior Vice President and Chief Financial Officer of Donegal Mutual and us since 2005; Vice President and Controller of Donegal Mutual and us from 2000 to 2005; other positions from 1995 to 2005. | ||||
-49-
PART II
| Item 5 . | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . |
We incorporate the response to this Item in part by reference to page 44 of our Annual Report
to Stockholders for the year ended December 31, 2010, or our 2010 Annual Report. We include our 2010 Annual Report as Exhibit (13) to this Form 10-K Report.
As of March 4, 2011, we had approximately 1,247 holders of record of our Class A common stock
and approximately 393 holders of record of our Class B common stock.
We declared dividends of $0.45 per share on our Class A common stock and $0.40 per share on
our Class B common stock in 2009 and $0.46 per share on our Class A common stock and $0.41 per
share on our Class B common stock in 2010.
Between October 1, 2010 and December 31, 2010, we and Donegal Mutual purchased shares of our
Class A common stock and Class B common stock as set forth in the table below.
| (d) Maximum | ||||||||
| Number (or | ||||||||
| (c) Total Number of | Approximate Dollar | |||||||
| Shares (or Units) | Value) of Shares | |||||||
| Purchased as Part | (or Units) that May | |||||||
| (a) Total Number of | (b) Average Price | of Publicly | Yet Be Purchased | |||||
| Shares (or Units) | Paid per Share | Announced Plans | Under the Plans | |||||
| Period | Purchased | (or Unit) | of Programs | or Programs(1) | ||||
|
|
||||||||
|
Month #1
|
Class A — — | Class A — $— | Class A — — | |||||
|
October 1-31, 2010
|
Class B — 5,450 | Class B — $20.00 | Class B — 5,450 | |||||
|
|
||||||||
|
Month #2
|
Class A — — | Class A — $— | Class A — — | |||||
|
November 1-30, 2010
|
Class B — 2,616 | Class B — $20.00 | Class B — 2,616 | |||||
|
|
||||||||
|
Month #3
|
Class A — — | Class A — $— | Class A — — | |||||
|
December 1-31, 2010
|
Class B — 301 | Class B — $17.26 | Class B — 301 | |||||
|
|
||||||||
|
Total
|
Class A — — | Class A — $— | Class A — — | |||||
|
|
Class B — 8,367 | Class B — $19.90 | Class B — 8,367 |
| (1) | Donegal Mutual purchased these shares pursuant to its announcement on August 17, 2004 that it will, at its discretion, purchase shares of our Class A common stock and Class B common stock at market prices prevailing from time to time in the open market subject to the provisions of SEC Rule 10b-18 and in privately negotiated transactions. Such announcement did not stipulate a maximum number of shares that may be purchased under this stock repurchase program. |
-50-
Our performance graph is included on page 43 of our 2010 Annual Report.
Item 6
.
Selected Financial Data
.
We incorporate the response to this Item by reference to page 8 of our 2010 Annual Report.
| Item 7 . | Management’s Discussion and Analysis of Financial Condition and Results of Operations . |
We incorporate the response to this Item by reference to pages 10 through 19 of our 2010
Annual Report.
Item 7A
.
Quantitative and Qualitative Disclosures About Market Risk
.
We have exposure to the impact of changes in interest rates, changes in fair values of
investments and credit risk because each them maintains a substantial investment portfolio in
relation to its total assets.
In the normal course of business, we and our insurance subsidiaries employ established
policies and procedures to manage and mitigate exposure to changes in interest rates, fluctuations
in the fair market value of debt and equity securities and credit risk.
Interest Rate Risk
Our insurance subsidiaries monitor interest rate exposure through regular reviews of their
respective asset and liability positions. Our insurance subsidiaries regularly monitor their cash
flow estimates and the impact of interest rate fluctuations on their investment portfolio. Our
insurance subsidiaries generally do not hedge their exposure to interest rate risk because each of
them has the capacity to, and does, hold fixed-maturity investments to maturity.
The following table presents the principal cash flows and related weighted-average interest
rates by expected maturity dates for financial instruments sensitive to interest rates of our
insurance subsidiaries:
-51-
| As of December 31, 2010 | ||||||||
| Weighted-average | ||||||||
| (amounts in thousands) | Principal cash flows | interest rate | ||||||
|
Fixed maturities and short-term investments:
|
||||||||
|
2011
|
$ | 53,551 | 1.14 | % | ||||
|
2012
|
24,891 | 4.10 | ||||||
|
2013
|
27,004 | 4.02 | ||||||
|
2014
|
25,261 | 3.94 | ||||||
|
2015
|
42,080 | 4.08 | ||||||
|
Thereafter
|
523,954 | 4.42 | ||||||
|
|
||||||||
|
Total
|
$ | 696,741 | ||||||
|
|
||||||||
|
Fair value
|
$ | 712,431 | ||||||
|
|
||||||||
|
|
||||||||
|
Debt:
|
||||||||
|
2011
|
$ | 617 | 0.50 | % | ||||
|
2013
|
$ | 35,000 | 2.25 | |||||
|
Thereafter
|
$ | 20,465 | 4.35 | |||||
|
|
||||||||
|
Total
|
$ | 56,082 | ||||||
|
|
||||||||
|
Fair Value
|
$ | 56,082 | ||||||
|
|
||||||||
The actual cash flows of our insurance subsidiaries and Donegal Mutual from investments
may differ from those indicated above because of calls and prepayments.
Equity Price Risk
Our insurance subsidiaries carry their portfolios of marketable equity securities on their
consolidated balance sheets at estimated fair value. These securities have exposure to equity
price risk. We define equity price risk as the risk of potential loss in the estimated fair value
of these securities resulting from an adverse change in prices of these securities. Our insurance
subsidiaries seek to mitigate equity price risk and exposure by earning competitive relative
returns on diverse portfolios of high-quality and liquid securities.
Credit Risk
The fixed-maturity securities portfolios our insurance subsidiaries maintain and, to a lesser
extent, their short-term investments of our insurance subsidiaries are subject to credit risk. We
define credit risk as the potential loss in market value resulting from adverse changes in a
borrower’s ability to repay its debt. Our insurance subsidiaries seek to manage this risk through
pre-investment underwriting analysis and regular reviews by our internal investment staff. Each of
our insurance subsidiaries seeks to limit its credit risk by limiting the amount of its
fixed-maturity investments in the securities of any one issuer.
Our insurance subsidiaries provide property and casualty insurance coverages through
independent insurance agencies located throughout the states in which Donegal Mutual and our
insurance subsidiaries conduct business. Our insurance subsidiaries bill the majority of this
business directly to the policyholder, although our insurance subsidiaries bill
-52-
a portion of their commercial business through the agents of our insurance subsidiaries. Our insurance subsidiaries
extend credit to agents in the normal course of their business.
Our insurance subsidiaries place reinsurance with Donegal Mutual and with major unaffiliated
authorized reinsurers. Although our insurance subsidiaries as a matter of law retain ultimate
responsibility to our policyholders if a reinsurer fails for any reason to pay an insurance risk we
have ceded, we do not regard this legal conclusion as a material risk because each of our insurance
subsidiaries has an A.M. Best rating of A.
Item 8
.
Financial Statements and Supplementary Data
.
We incorporate the response to this Item by reference to pages 8 through 43 of our 2010 Annual
Report.
| Item 9 . | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . |
None.
Item 9A
.
Controls and Procedures
.
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial
Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2010 covered by
this Form 10-K Report. Based on such evaluation, our Chief Executive Officer and our Chief
Financial Officer have concluded that, as of December 31, 2010, our disclosure controls and
procedures are effective in recording, processing, summarizing and reporting, on a timely basis,
information we are required to disclose in the reports that we file or submit under the Exchange
Act and our disclosure controls and procedures are also effective to ensure that information we
disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to
our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required
disclosure.
Internal Control over Financial Reporting
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we include a report of our
management’s assessment of the design and effectiveness of our internal control over financial
reporting as part of our 2010 Annual Report. KPMG LLP, an independent registered public accounting
firm, audited the effectiveness of our internal control over financial reporting as of December 31,
2010 based on criteria established by Internal Control —
-53-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission which we incorporate by reference
in the Form 10-K Report. We include the report of KPMG LLP dated March 14, 2011 as part of our
2010 Annual Report.
Changes in Internal Control over Financial Reporting
We did not make any changes to our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2010
that have materially affected, or are reasonably likely to affect materially, our internal control
over financial reporting.
Item 9B
.
Other Information
.
None.
-54-
PART III
| Item 10 . | Directors, Executive Officers and Corporate Governance of the Registrant . |
We incorporate the response to this Item by reference to our proxy statement we will file with
the SEC on or about March 18, 2011 relating to our annual meeting of stockholders that we will hold
on April 21, 2011, or our Proxy Statement. We respond to this Item with respect to our executive
officers by reference to Part I of this Form 10-K Report.
We incorporate the full text of our Code of Business Conduct and Ethics by reference to
Exhibit 14 to this Form 10-K Report.
| Item 11 . | Executive Compensation . |
We incorporate the response to this Item by reference to our Proxy Statement. Neither the
Report of our Compensation Committee nor the Report of our Audit Committee included in our Proxy
Statement shall constitute or be deemed to constitute a filing with the SEC under the Securities
Act or the Exchange Act or be deemed incorporated by reference into any filing we make under the
Securities Act or the Exchange Act, except to the extent we specifically incorporate the Report of
Our Compensation Committee or the Report of Our Audit Company by reference.
| Item 12 . | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . |
We incorporate the response to this Item by reference to our Proxy Statement.
| Item 13 . | Certain Relationships and Related Transactions and Director Independence . |
We incorporate the response to this Item by reference to our Proxy Statement.
| Item 14 . | Principal Accountant Fees and Services . |
We incorporate the response to this Item by reference to our Proxy Statement.
-55-
PART IV
| Item 15 . | Exhibits and Financial Statement Schedule . |
(a) Financial statements, financial statement schedule and exhibits filed:
(a) Consolidated Financial Statements
| Page* | ||
|
|
||
|
Reports of Independent Registered Public Accounting Firm
|
40, 42 | |
|
|
||
|
Donegal Group Inc. and Subsidiaries:
|
||
|
|
||
|
Consolidated Balance Sheets as of December 31, 2010 and 2009
|
20 | |
|
|
||
|
Consolidated Statements of Income and Comprehensive Income
for each of the years in the three-year period ended December 31,
2010, 2009 and 2008
|
21 | |
|
|
||
|
Consolidated Statements of Stockholders’ Equity for each of the
years in the three-year period ended December 31, 2010, 2009
and 2008
|
22 | |
|
|
||
|
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2010, 2009 and 2008
|
23 | |
|
|
||
|
Notes to Consolidated Financial Statements
|
24 | |
|
|
||
|
Report and Consent of Independent Registered Public
Accounting Firm
|
Exhibit 23 |
(b) Financial Statement Schedule
| Page | ||
|
|
||
|
Donegal Group Inc. and Subsidiaries
|
||
|
|
||
|
Schedule III — Supplementary Insurance Information
|
S-1 |
We have omitted all other schedules since they are not required, not applicable or the
information is included in the financial statements or notes to the financial statements.
| * | Refers to pages of our 2010 Annual Report to Stockholders. We incorporate by reference to pages 20 through 42 of our 2010 Annual Report, our Consolidated Financial Statements, Notes to Consolidated Financial Statements, Report of Independent Registered Public Accounting Firm on consolidated financial statements, Management’s Report on |
-56-
Internal Control over Financial Reporting and Report of Independent Registered Public Accounting
Firm on Internal Control Over Financial Reporting. With the exception of the portions of our 2010
Annual Report we incorporate by reference in our response to this Item 15(b) and incorporate by
reference Items 5, 6, 7 and 8 of this Form 10-K Report, our 2010 Annual Report shall not be deemed
filed as part of this Form 10-K Report or otherwise subject to the liabilities of Section 18 of the
Exchange Act.
(c) Exhibits
| Exhibit No. | Description of Exhibits | Reference | ||||
| (3)(i) | Certificate of Incorporation of Donegal Group Inc., as amended. | (a) | ||||
| (3)(ii) | Amended and Restated By-laws of Donegal Group Inc. | (r) | ||||
| Management Contracts and Compensatory Plans or Arrangements | ||||||
| (10)(B) | Donegal Group Inc. 2001 Equity Incentive Plan for Employees. | (c) | ||||
| (10)(C) | Donegal Group Inc. 2001 Equity Incentive Plan for Directors. | (c) | ||||
| (10)(D) | Donegal Group Inc. 2001 Employee Stock Purchase Plan, as amended. | (d) | ||||
| (10)(E) | Donegal Group Inc. Amended and Restated 2001 Agency Stock Purchase Plan. | (e) | ||||
| (10)(F) | Donegal Mutual Insurance Company 401(k) Plan. | (f) | ||||
| (10)(G) | Amendment No. 1 effective January 1, 2000 to Donegal Mutual Insurance Company 401(k) Plan. | (f) | ||||
| (10)(H) | Amendment No. 2 effective January 6, 2000 to Donegal Mutual Insurance Company 401(k) Plan. | (b) | ||||
| (10)(I) | Amendment No. 3 effective July 23, 2001 to Donegal Mutual Insurance Company 401(k) Plan. | (b) | ||||
| (10)(J) | Amendment No. 4 effective January 1, 2002 to Donegal Mutual Insurance Company 401(k) Plan. | (b) | ||||
| (10)(K) | Amendment No. 5 effective December 31, 2001 to Donegal Mutual Insurance Company 401(k) Plan. | (b) | ||||
-57-
| Exhibit No. | Description of Exhibits | Reference | ||||
| (10)(L) | Amendment No. 6 effective July 1, 2002 to Donegal Mutual Insurance Company 401(k) Plan. | (p) | ||||
| (10)(M) | Donegal Group Inc. 2007 Equity Incentive Plan for Employees. | (s) | ||||
| (10)(N) | Donegal Group Inc. 2007 Equity Incentive Plan for Directors. | (s) | ||||
| (10)(O) | Donegal Group Inc. Incentive Compensation Program. | (u) | ||||
| Other Material Contracts | ||||||
| (10)(O) | Amended and Restated Tax Sharing Agreement dated as of October 19, 2006 among Donegal Group Inc., Atlantic States Insurance Company, Southern Insurance Company of Virginia, Le Mars Insurance Company, The Peninsula Insurance Company and Peninsula Indemnity Company. | (p) | ||||
| (10)(P) | Amended and Restated Services Allocation Agreement dated July 20, 2006 among Donegal Group Inc., Atlantic States Insurance Company, Southern Insurance Company, Le Mars Insurance Company, The Peninsula Insurance Company, Peninsula Indemnity Company and Donegal Mutual Insurance Company. | (b) | ||||
| (10)(Q) | Proportional Reinsurance Agreement dated September 29, 1986 between Donegal Mutual Insurance Company and Atlantic States Insurance Company. | (h) | ||||
| (10)(R) | Amendment dated October 1, 1988 to Proportional Reinsurance Agreement between Donegal Mutual Insurance Company and Atlantic States Insurance Company. | (i) | ||||
| (10)(S) | Amendment dated July 16, 1992 to Proportional Reinsurance Agreement between Donegal Mutual Insurance Company and Atlantic States Insurance Company. | (j) | ||||
| (10)(T) | Amendment dated as of December 21, 1995 to Proportional Reinsurance Agreement between Donegal Mutual Insurance Company and Atlantic States Insurance Company. | (k) | ||||
| (10)(U) | Reinsurance and Retrocession Agreement dated May 21, 1996 between Donegal Mutual Insurance Company and Southern Insurance Company of Virginia. | (g) | ||||
| (10)(V) | Amendment dated as of April 20, 2000 to Proportional | (l) | ||||
-58-
| Exhibit No. | Description of Exhibits | Reference | ||||
| Reinsurance Agreement between Donegal Mutual Insurance Company and Atlantic States Insurance Company. | ||||||
| (10)(W) | Lease Agreement dated as of September 1, 2000 between Donegal Mutual Insurance Company and Province Bank FSB. | (c) | ||||
| (10)(X) | Plan of Conversion of Le Mars Mutual Insurance Company of Iowa adopted August 11, 2003. | (n) | ||||
| (10)(Y) | Stock Purchase Agreement dated as of October 28, 2003 between Donegal Group Inc. and Folksamerica Holding Company, Inc. | (m) | ||||
| (10)(Z) | Credit Agreement dated as of November 25, 2003 between Donegal Group Inc. and Manufacturers and Traders Trust Company. | (n) | ||||
| (10)(AA) | First Amendment to Credit Agreement dated as of July 20, 2006 between Donegal Group Inc. and Manufacturers and Traders Trust Company. | (b) | ||||
| (10)(BB) | Amended and Restated Services Allocation Agreement dated October 19, 2006 among Donegal Group Inc., Atlantic States Insurance Company, Southern Insurance Company of Virginia, Le Mars Insurance Company, The Peninsula Insurance Company, Peninsula Indemnity Company and Donegal Mutual Insurance Company. | (q) | ||||
| (10)(CC) | Amendment dated as of February 11, 2008 to Proportional Reinsurance Agreement between Donegal Mutual Insurance Company and Atlantic States Insurance Company. | (t) | ||||
| (10)(DD) | Contribution Note Purchase Agreement dated as of December 27, 2006 between Donegal Mutual Insurance Company and Sheboygan Falls Mutual Insurance Company. | (v) | ||||
-59-
| Exhibit No. | Description of Exhibits | Reference | ||||
| (10)(EE) | Plan of Conversion of Sheboygan Falls Mutual Insurance Company adopted October 14, 2008. | (v) | ||||
| (10)(FF) | Surplus Note Purchase Agreement dated as of September 8, 2009 between Donegal Mutual Insurance Company and Southern Mutual Insurance Company. | (w) | ||||
| (10)(GG) | Quota-share Reinsurance Agreement dated as of October 30, 2009 but effective as of 11:59 p.m. on October 31, 2009 between Donegal Mutual Insurance Company and Southern Mutual Insurance Company. | (w) | ||||
| (10)(HH) | Services and Affiliation Agreement dated as of October 30, 2009 between Donegal Mutual Insurance Company and Southern Mutual Insurance Company. | (w) | ||||
| (10)(II) | Technology License Agreement dated as of October 30, 2009 between Donegal Mutual Insurance Company and Southern Mutual Insurance Company. | (w) | ||||
| (10)(JJ) | Amended and Restated Proportional Reinsurance Agreement dated March 1, 2010 between Donegal Mutual Insurance Company and Atlantic States Insurance Company. | (w) | ||||
| (10)(KK) | Agreement and Plan of Merger dated as of April 19, 2010, and as amended as of May 20, 2010, among Donegal Acquisition Inc., Donegal Financial Services Corporation, Donegal Group Inc. and Union National Financial Corporation; amended dated as of September 1, 23010; amended dated December 8, 2010. | (x) | ||||
| (10)(LL) | Amended and Restated Agreement and Plan of Merger dated as of December 6, 2010 among Michigan Insurance Company, West Bend Mutual Insurance Company, Donegal Group Inc. and DGI Acquisition Corp. | (y) | ||||
| (10)(MM) | Surplus Note Purchase Agreement dated as of July 15, 2010 between Donegal Mutual Insurance Company and West Bend Mutual Insurance Company. | Filed herewith | ||||
| (10)(NN) | Amended and Restated Tax Sharing Agreement dated December 1, 2010 among Donegal Group, Inc., Atlantic States Insurance Company, Southern Insurance Company of Virginia, Le Mars Insurance Company, The Peninsula | Filed herewith | ||||
-60-
| Exhibit No. | Description of Exhibits | Reference | ||||
| Insurance Company, Peninsula Indemnity Company and Michigan Insurance Company. | ||||||
| (10)(OO) | Amended and Restated Services Allocation Agreement dated as of December 1, 2010 among Donegal Group Inc., Atlantic States Insurance Company, Southern Insurance Company of Virginia, Le Mars Insurance Company, The Peninsula Insurance Company, Peninsula Indemnity Company and Michigan Insurance Company. | Filed herewith | ||||
| (10)(PP) | Quota-share Reinsurance Agreement dated as of December 1, 2010 between Donegal Mutual Insurance Company and Michigan Insurance Company. | Filed herewith | ||||
| (10)(QQ) | Donegal Group Inc. 2011 Employee Stock Purchase Plan. | Filed herewith | ||||
| (10)(RR) | Donegal Group Inc. 2011 Equity Incentive Plan for Employees. | Filed herewith | ||||
| (10)(SS) | Donegal Group Inc. 2011 Agency Stock Purchase Plan. | Filed herewith | ||||
| (10)(TT) | Donegal Group Inc. 2011 Equity Incentive Plan for Directors. | Filed herewith | ||||
| (13) | 2010 Annual Report to Stockholders (electronic filing contains only those portions incorporated by reference into this Form 10-K Report). |
Filed
herewith |
||||
| (14) | Code of Business Conduct and Ethics | (o) | ||||
| (21) | Subsidiaries of Registrant. |
Filed
herewith |
||||
| (23) | Report and Consent of Independent Registered Public Accounting Firm | Filed herewith | ||||
| (31.1) | Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer | Filed herewith | ||||
| (31.2) | Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer | Filed herewith | ||||
| (32.1) | Section 1350 Certification of Chief Executive Officer | Filed herewith | ||||
-61-
| Exhibit No. | Description of Exhibits | Reference | ||||
| (32.2) | Section 1350 Certification of Chief Financial Officer | Filed herewith | ||||
| (a) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form S-3 Registration Statement No. 333-59828 filed April 30, 2001. | |
| (b) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Report for the year ended December 31, 2001. | |
| (c) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Report for the year ended December 31, 2000. | |
| (d) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form S-8 Registration Statement No. 333-62974 filed June 14, 2001. | |
| (e) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form S-2 Registration Statement No. 333-63102 declared effective February 8, 2002. | |
| (f) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Report for the year ended December 31, 1999. | |
| (g) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Report for the year ended December 31, 1996. | |
| (h) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form S-1 Registration Statement No. 33-8533 declared effective October 29, 1986. | |
| (i) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Report for the year ended December 31, 1988. | |
| (j) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Report for the year ended December 31, 1992. | |
| (k) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 8-K Report dated December 21, 1995. | |
| (l) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 8-K Report dated May 31, 2000. | |
| (m) | We incorporate such exhibit by reference to the like-described exhibits in Registrant’s Form 8-K Report dated November 3, 2003. | |
| (n) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 8-K Report dated December 1, 2003. | |
| (o) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Annual Report for the year ended December 31, 2003. |
-62-
| (p) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 8-K Report dated October 23, 2006. | |
| (q) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-Q Quarterly Report for the quarter ended September 30, 2006. | |
| (r) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 8-K Report dated December 22, 2006. | |
| (s) | We incorporate such exhibit by reference to the like-numbered exhibit in Registrant’s Form 8-K Report dated April 20, 2007. | |
| (t) | We incorporate such exhibit by reference to the like-numbered exhibit in Registrant’s Form 8-K Report dated February 13, 2008. | |
| (u) | We incorporate such exhibit by reference to the description of such plan in Registrant’s definitive proxy statement for its Annual Meeting of Stockholders to be held on April 21, 2011. | |
| (v) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Annual Report for the year ended December 31, 2009. | |
| (w) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 10-K Annual Report for the year ended December 31, 2010. | |
| (x) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form S-4 registration statement filed June 25, 2010, Registrant’s Form 8-K Report dated September 1, 2010 and Registrant’s Form 8-K Report dated December 8, 2010. | |
| (y) | We incorporate such exhibit by reference to the like-described exhibit in Registrant’s Form 8-K dated December 8, 2010. |
-63-
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.
|
||||
| By: | /s/ Donald H. Nikolaus | |||
| Donald H. Nikolaus, President | ||||
Date: March 14, 2011
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 Director
(principal executive officer) |
March 14, 2011 | ||
|
|
||||
|
/s/ Jeffrey D. Miller
|
Senior Vice President and Chief Financial Officer (principal financial and accounting officer) | March 14, 2011 | ||
|
|
||||
|
/s/ Robert S. Bolinger
|
Director | March 14, 2011 | ||
|
|
||||
|
/s/ Philip A. Garcia
|
Director | March 14, 2011 |
-64-
| Signature | Title | Date | ||
|
|
||||
|
/s/ Patricia A. Gilmartin
|
Director | March 14, 2011 | ||
|
|
||||
|
/s/ Philip H. Glatfelter, II
|
Director | March 14, 2011 | ||
|
|
||||
|
/s/ Kevin M. Kraft, Sr.
|
Director | March 14, 2011 | ||
|
|
||||
|
/s/ John J. Lyons
|
Director | March 14, 2011 | ||
|
|
||||
|
/s/ Jon M. Mahan
|
Director | March 14, 2011 | ||
|
|
||||
|
/s/ S. Trezevant Moore, Jr.
|
Director | March 14, 2011 | ||
|
|
||||
|
/s/ R. Richard Sherbahn
|
Director | March 14, 2011 | ||
|
|
||||
|
/s/ Richard D. Wampler, II
|
Director | March 14, 2011 |
-65-
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III — SUPPLEMENTARY INSURANCE INFORMATION
($ in thousands)
SCHEDULE III — SUPPLEMENTARY INSURANCE INFORMATION
($ in thousands)
Years Ended December 31, 2010, 2009 and 2008
| Amortization | ||||||||||||||||||||||||
| Net | Net | Net Losses | of Deferred | Other | Net | |||||||||||||||||||
| Earned | Investment | And Loss | Policy | Underwriting | Premiums | |||||||||||||||||||
| Segment | Premiums | Income | Expenses | Acquisition Costs | Expenses | Written | ||||||||||||||||||
|
Year Ended
December 31, 2010
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Personal lines
|
$ | 260,469 | $ | — | $ | 196,008 | $ | 45,719 | $ | 37,596 | $ | 268,047 | ||||||||||||
|
Commercial lines
|
117,561 | — | 78,301 | 20,635 | 16,969 | 123,475 | ||||||||||||||||||
|
Investments
|
— | 19,950 | — | — | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
$ | 378,030 | $ | 19,950 | $ | 274,309 | $ | 66,354 | $ | 54,565 | $ | 391,522 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Year Ended
December 31, 2009
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Personal lines
|
$ | 241,844 | $ | — | $ | 178,040 | $ | 41,071 | $ | 34,634 | $ | 252,487 | ||||||||||||
|
Commercial lines
|
113,181 | — | 72,795 | 19,221 | 16,209 | 110,742 | ||||||||||||||||||
|
Investments
|
— | 20,631 | — | — | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
$ | 355,025 | $ | 20,631 | $ | 250,835 | $ | 60,292 | $ | 50,843 | $ | 363,229 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Year Ended
December 31, 2008
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Personal lines
|
$ | 225,024 | $ | — | $ | 155,573 | $ | 37,821 | $ | 34,482 | $ | 239,540 | ||||||||||||
|
Commercial lines
|
121,551 | — | 68,728 | 20,429 | 18,626 | 125,401 | ||||||||||||||||||
|
Investments
|
— | 22,756 | — | — | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
$ | 346,575 | $ | 22,756 | $ | 224,301 | $ | 58,250 | $ | 53,108 | $ | 364,941 | ||||||||||||
|
|
||||||||||||||||||||||||
S-1
DONEGAL GROUP INC. AND SUBSIDIARIES
SCHEDULE III — SUPPLEMENTARY INSURANCE INFORMATION, CONTINUED
($ in thousands)
SCHEDULE III — SUPPLEMENTARY INSURANCE INFORMATION, CONTINUED
($ in thousands)
| At December 31, | ||||||||||||||||
| Deferred | Liability | Other Policy | ||||||||||||||
| Policy | For Losses | Claims and | ||||||||||||||
| Acquisition | And Loss | Unearned | Benefits | |||||||||||||
| Segment | Costs | Expenses | Premiums | Payable | ||||||||||||
|
2010
|
||||||||||||||||
|
Personal lines
|
$ | 22,872 | $ | 184,760 | $ | 197,389 | $ | — | ||||||||
|
Commercial lines
|
11,574 | 198,559 | 99,883 | — | ||||||||||||
|
Investments
|
— | — | — | — | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 34,446 | $ | 383,319 | $ | 297,272 | $ | — | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
2009
|
||||||||||||||||
|
Personal lines
|
$ | 22,925 | $ | 130,745 | $ | 168,791 | $ | — | ||||||||
|
Commercial lines
|
9,919 | 132,854 | 73,030 | — | ||||||||||||
|
Investments
|
— | — | — | — | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 32,844 | $ | 263,599 | $ | 241,821 | $ | — | ||||||||
|
|
||||||||||||||||
See accompanying Report and Consent of Independent Registered Public Accounting Firm.
S-2
TABLE OF CONTENTS
Part IItem 1 . BusinessItem 1A . Risk FactorsItem 1B . Unresolved Staff CommentsItem 2 . PropertiesItem 3 . Legal ProceedingsItem 4 . ReservedPart IIItem 5 . Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6 . Selected Financial DataItem 7 . Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A . Quantitative and Qualitative Disclosures About Market RiskItem 8 . Financial Statements and Supplementary DataItem 9 . Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A . Controls and ProceduresItem 9B . Other InformationPart IIIItem 10 . Directors, Executive Officers and Corporate Governance Of The RegistrantItem 11 . Executive CompensationItem 12 . Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13 . Certain Relationships and Related Transactions and Director IndependenceItem 14 . Principal Accountant Fees and ServicesPart IVItem 15 . Exhibits and Financial Statement Schedule