MARIETTA, Pa., Feb. 17, 2017 (GLOBE NEWSWIRE) — Donegal Group Inc. (NASDAQ:DGICA) (NASDAQ:DGICB) today reported its financial results for the fourth quarter and full year of 2016. Significant developments include:

  • Net income and operating income1 for the full year of 2016 increased by 46.7% and 47.8%, respectively, from comparable amounts for the full year of 2015, largely due to improved underwriting results in 2016
  • Net income and operating income for the fourth quarter of 2016 increased over amounts for the fourth quarter of 2015, primarily due to expenses the Company incurred in the prior-year quarter that related to the premium it paid when it repurchased 2.0 million shares of Class A common stock
  • Net premiums written increased 8.5% and 9.5% for the full year and fourth quarter of 2016, respectively, from comparable amounts for the prior-year periods, primarily reflecting growth in the Company’s commercial lines of business
  • Statutory combined ratio1 of 96.8% for the full year of 2016, improved from 97.4% for the prior year; statutory combined ratio of 100.4% for the fourth quarter of 2016, an increase from 98.9% for the prior-year fourth quarter
  • Return on average equity of 7.3% for the full year of 2016, compared to 5.1% for the prior year
  • Book value per share of $16.21 at December 31, 2016, compared to $15.66 at December 31, 2015
                         
  Three Months Ended December 31,   Year Ended December 31,  
    2016       2015     % Change     2016       2015     % Change  
  (dollars in thousands, except per share amounts)  
                         
Income Statement Data                        
Net premiums earned $   168,977     $   155,557     8.6 %   $   656,205     $   605,641     8.3 %  
Investment income, net     6,161         5,444     13.2          22,633         20,950     8.0     
Net realized investment gains      321         1,251     NM2       2,525         1,934     30.6     
Total revenues     177,196         163,796     8.2          688,423         636,387     8.2     
Net income     5,554         1,984     179.9          30,801         20,990     46.7     
Operating income     5,345         1,170     356.8          29,160         19,733     47.8     
Annualized return on average equity   5.0 %     1.9 %   3.1 pts     7.3 %     5.1 %   2.2 pts  
                         
Per Share Data                        
Net income – Class A (diluted) $   0.21     $   0.07     200.0 %   $   1.16     $   0.77     50.6 %  
Net income – Class B     0.18         0.06     200.0          1.06         0.69     53.6     
Operating income – Class A (diluted)     0.20         0.04     400.0          1.10         0.72     52.8     
Operating income – Class B     0.18         0.03     500.0          1.00         0.65     53.8     
Book value     16.21         15.66     3.5          16.21         15.66     3.5     
                         
                         

1The “Definitions of Non-GAAP and Operating Measures” section of this release defines and reconciles data that the Company prepares on an accounting basis other than U.S. generally accepted accounting principles (“GAAP”).

2Not meaningful.

Management Commentary

Kevin G. Burke, President and Chief Executive Officer of Donegal Group Inc., stated, “Donegal Group reported strong fourth quarter and full year of 2016 underwriting results, highlighted by increases in both net income and operating income, with annual earnings per diluted Class A share increasing by 50.6% compared to the prior year.  We achieved a 9.5% increase in net premiums written for the fourth quarter of 2016 and an 8.5% increase for the full year of 2016, marking the seventh consecutive year in which we achieved growth in net premiums written of at least 7.0% over the previous year.  Our ability to maintain a consistent, healthy rate of growth has provided opportunities to achieve our operating objectives while maintaining a stable capital base.  We are winning market share through cultivating strong relationships with our independent agents in the regions in which Donegal Group writes business currently, and we are exploring potential new geographies in which our focused regional model would allow us to enter new markets effectively.  Donegal Mutual Insurance Company has devoted considerable resources to enhancing our shared technical capabilities in the form of predictive modeling tools, which will lead to improved underwriting performance over time, and a new billing platform, which will support our future growth.”

Mr. Burke continued, “The underwriting performance of our insurance subsidiaries was strong throughout 2016, with improvement in our statutory combined ratio to 96.8% from 97.4% in the prior year.  We achieved particularly favorable results in our commercial lines segment.  Our workers’ compensation line of business, which is focused primarily on small business and artisan contractors, generated a 79.6% combined ratio for the fourth quarter of 2016 and an 83.8% combined ratio for the full year of 2016.  Our excellent commercial lines results for the fourth quarter of 2016 offset slightly higher-than-expected losses in both frequency and severity in our personal automobile line of business.  While we attribute much of our fourth quarter loss ratio increases in this line to seasonal factors such as increased driving and adverse weather conditions, we continue to focus on improving our performance in this line through ongoing rate increases and underwriting adjustments.  We believe that these measures will begin to contribute steady improvements in the underwriting performance of our personal automobile line of business in 2017.”

Donald H. Nikolaus, Chairman of Donegal Group Inc., stated, “Our balance sheet remains strong, with our book value per share increasing to $16.21 at December 31, 2016, compared to $15.66 at December 31, 2015.  The increase in book value per share reflected our strong operating results throughout 2016, including contributions from increased investment income and net realized investment gains, offset by cash dividend payments to our stockholders.  We remain committed to the pursuit of profitable growth, solid underwriting performance, increased return on stockholders’ equity and active capital management to enhance the long-term value of our stockholders’ investment in Donegal Group.”

Insurance Operations

Donegal Group is an insurance holding company whose insurance subsidiaries offer personal and commercial property and casualty lines of insurance in four Mid-Atlantic states (Delaware, Maryland, New York and Pennsylvania), three New England states (Maine, New Hampshire and Vermont), seven Southeastern states (Alabama, Georgia, North Carolina, South Carolina, Tennessee, Virginia and West Virginia) and seven Midwestern states (Indiana, Iowa, Michigan, Nebraska, Ohio, South Dakota and Wisconsin). The insurance subsidiaries of Donegal Group and Donegal Mutual Insurance Company conduct business together as the Donegal Insurance Group.

                         
  Three Months Ended December 31,   Year Ended December 31,  
    2016     2015   % Change     2016     2015   % Change  
  (dollars in thousands)  
                         
Net Premiums Written                        
Personal lines:                        
Automobile $   55,875   $   51,048   9.5 %   $   229,789   $   214,610   7.1 %  
Homeowners     29,422       28,522     3.2          122,811       119,541     2.7     
Other     4,690       4,413     6.3          19,057       18,176     4.8     
Total personal lines     89,987       83,983     7.1          371,657       352,327     5.5     
Commercial lines:                        
Automobile     20,625       18,032     14.4          87,849       76,729     14.5     
Workers’ compensation     24,848       21,842     13.8          108,349       98,079     10.5     
Commercial multi-peril     24,225       22,052     9.9          104,728       94,219     11.2     
Other     2,091       1,804     15.9          9,451       7,483     26.3     
Total commercial lines     71,789       63,730     12.6          310,377       276,510     12.2     
Total net premiums written $   161,776   $   147,713   9.5 %   $   682,034   $   628,837   8.5 %  
                         
                         

The 9.5% increase in the Company’s net premiums written for the fourth quarter of 2016 compared to the fourth quarter of 2015 represented the combination of 12.6% growth in commercial lines net premiums written and 7.1% growth in personal lines net premiums written. The $14.1 million growth in net premiums written for the fourth quarter of 2016 compared to the fourth quarter of 2015 included:

  • $8.1 million in commercial lines premiums that the Company attributes primarily to new commercial accounts the Company’s insurance subsidiaries have written throughout their operating regions and a continuation of modest renewal premium increases.
  • $6.0 million in personal lines premiums that the Company attributes primarily to a combination of new policy growth and premium rate increases the Company has implemented over the past four quarters.

For the full year of 2016, the Company’s net premiums written increased 8.5% compared to the prior year.

The Company evaluates the performance of its major lines of insurance business using statutory combined ratios, as the Company defines in “Definitions of Non-GAAP and Operating Measures.” All combined ratios the Company presents for specific lines of business in this release represent statutory combined ratios. The following table presents comparative information with respect to the Company’s GAAP and statutory combined ratios for the three months and full years ended December 31, 2016 and 2015:

                         
  Three Months Ended   Year Ended          
  December 31,   December 31,          
  2016     2015     2016     2015            
                         
GAAP Combined Ratios (Total Lines)                        
Loss ratio (non-weather) 62.8 %   62.9 %   58.8 %   59.7 %          
Loss ratio (weather-related) 4.3      2.9      5.7      6.1             
Expense ratio 32.4      32.2      33.0      32.6             
Dividend ratio 1.0      0.9      0.6      0.6             
Combined ratio 100.5 %   98.9 %   98.1 %   99.0 %          
                         
Statutory Combined Ratios                        
Personal Lines:                        
Automobile 118.5 %   117.0 %   106.7 %   104.3 %          
Homeowners 91.0      85.6      95.5      97.6             
Other 84.1      76.0      86.3      82.7             
Total personal lines 107.5      104.2      101.8      100.9             
Commercial Lines:                        
Automobile 122.9      119.3      110.8      109.5             
Workers’ compensation 79.6      83.7      83.8      87.6             
Commercial multi-peril 85.3      84.1      87.7      90.8             
Total commercial lines 91.9      92.0      90.7      92.8             
Total lines 100.4 %   98.9 %   96.8 %   97.4 %          
                         

Jeffrey D. Miller, Executive Vice President and Chief Financial Officer of Donegal Group Inc., commented, “We were pleased to achieve solid core underwriting results for the full year of 2016, as our 96.8% statutory combined ratio demonstrates. Within our personal lines segment, we reported a solid 95.5% homeowners combined ratio for the full year of 2016.  Weather-related losses for the full year of 2016 were modestly below our previous five-year average level, although weather-related losses for the fourth quarter of 2016 increased over the prior-year period due to $1.2 million in claims resulting from the inland effects of Hurricane Matthew.  While our homeowners loss ratio for the fourth quarter of 2016 included 4.4 percentage points related to claims resulting from the Gatlinburg, Tennessee wildfires, we experienced a significant decrease in the incidence of large fire losses for the full year of 2016 in spite of an increase in the number of homeowners and commercial multi-peril policies in-force during the year.  We were also pleased with our favorable full-year 2016 combined ratios for workers’ compensation and commercial multi-peril, our largest commercial lines of business.  We continue to focus on improving the underwriting performance of our personal and commercial automobile lines of business.”

Weather-related losses of $7.4 million for the fourth quarter of 2016 contributed 4.3 percentage points to the Company’s loss ratio, compared to the $4.5 million of weather-related losses, or 2.9 percentage points of the Company’s loss ratio, for the fourth quarter of 2015 and exceeded the Company’s five-year average for fourth-quarter weather losses of $6.0 million. For the full year of 2016, weather-related losses were $37.1 million, comparable to the $36.9 million of weather-related losses the Company incurred for the full year of 2015.

Large fire losses, which the Company defines as individual fire losses in excess of $50,000, for the fourth quarter of 2016 were $7.4 million, or 4.4 percentage points of the Company’s loss ratio, higher than the $6.0 million of large fire losses, or 3.9 percentage points of the Company’s loss ratio, for the fourth quarter of 2015. The Company incurred large fire losses of $23.6 million for the full year of 2016, comparing favorably to the $29.5 million of large fire losses the Company incurred for the full year of 2015.

Net development of reserves for losses incurred in prior accident years for all lines of business had virtually no impact on the Company’s loss ratio for the fourth quarter of 2016, comparing favorably to an addition of 1.5 percentage points for the fourth quarter of 2015. Net development of reserves for losses incurred in prior accident years had virtually no impact to the Company’s loss ratio for the full year of 2016, compared to an addition of 1.2 percentage points for the full year of 2015.

The Company’s statutory expense ratio1 was 31.9% for the fourth quarter of 2016, compared to 32.0% for the fourth quarter of 2015.

Investment Operations 
Donegal Group’s investment strategy is to generate an appropriate amount of after-tax income from its invested assets while minimizing credit risk through investment in high-quality securities. As a result, the Company had 90.0% of its consolidated investment portfolio invested in diversified, highly rated and marketable fixed-maturity securities at December 31, 2016.

                         
  December 31, 2016   December 31, 2015          
  Amount   %   Amount   %          
  (dollars in thousands)          
Fixed maturities, at carrying value:                        
U.S. Treasury securities and obligations of U.S.                        
  government corporations and agencies $   99,970     10.6 %   $   88,383     9.8 %          
  Obligations of states and political subdivisions     308,876     32.7          355,671     39.5             
  Corporate securities     179,011     18.9          138,119     15.3             
  Mortgage-backed securities     263,319     27.8          229,479     25.5             
Total fixed maturities     851,176     90.0          811,652     90.1             
Equity securities, at fair value     47,088     5.0          37,261     4.1             
Investments in affiliates     37,885     4.0          38,477     4.3             
Short-term investments, at cost     9,371     1.0          13,432     1.5             
Total investments $   945,520     100.0 %   $   900,822     100.0 %          
                         
Average investment yield   2.5 %         2.4 %              
Average tax-equivalent investment yield   3.0 %         3.1 %              
Average fixed-maturity duration (years)     4.5             4.4                
                         
                         

Net investment income of $6.2 million for the fourth quarter of 2016 increased 13.2% compared to $5.4 million in net investment income for the fourth quarter of 2015. The increase reflected primarily an increase in average invested assets compared to the prior-year period. Net realized investment gains were $321,042 for the fourth quarter of 2016, compared to $1.3 million for the fourth quarter of 2015. The Company had no impairments in its investment portfolio that it considered to be other than temporary during the full years of 2016 or 2015.

Mr. Miller noted, “For the full year of 2016, our invested assets rose by $44.7 million, contributing to the growth in investment income during the year.  We attribute the increase in invested assets largely to top-line premium growth, with new money investments helping us to maintain a stable 2.5% average net investment yield for 2016. We are continuing to invest new funds and proceeds of called and maturing securities in corporate and mortgage-backed fixed maturities and, to a lesser extent, dividend-paying equity securities, as we strive to preserve and increase invested capital to support our premium growth.”

The Company owns 48.2% of the outstanding stock of Donegal Financial Services Corporation (“DFSC”). DFSC owns all of the outstanding stock of Union Community Bank. The Company accounts for its investment in DFSC using the equity method of accounting. The Company’s equity in the earnings of DFSC was $387,499 for the fourth quarter of 2016 and immaterial for the fourth quarter of 2015. For the full years of 2016 and 2015, the Company’s equity in the earnings of DFSC was $1.1 million and $1.3 million, respectively. Donegal Mutual Insurance Company owns the remaining 51.8% of the outstanding stock of DFSC.

Definitions of Non-GAAP and Operating Measures

The Company prepares its consolidated financial statements on the basis of GAAP. The Company’s insurance subsidiaries also prepare financial statements based on the statutory accounting principles state insurance regulators prescribe or permit (“SAP”). In addition to using GAAP-based performance measurements, the Company also utilizes certain non-GAAP financial measures that it believes provide value in managing its business and for comparison to the financial results of the insurance companies the Company regards as its peers. These non-GAAP measures are operating income (loss) and statutory combined ratio.

Operating income (loss) is a non-GAAP financial measure investors in insurance companies commonly use. The Company defines operating income (loss) as net income (loss) excluding after-tax net realized investment gains or losses. Because the Company’s calculation of operating income (loss) may differ from similar measures other companies use, investors should exercise caution when comparing the Company’s measure of operating income (loss) to the measures other companies report.

The following table provides a reconciliation of the Company’s net income to the Company’s operating income for the periods indicated:

                         
  Three Months Ended December 31,   Year Ended December 31,  
    2016       2015     % Change     2016       2015     % Change  
  (dollars in thousands, except per share amounts)  
                         
Reconciliation of Net Income                        
to Operating Income                        
Net income  $   5,554     $   1,984     179.9 %   $   30,801     $   20,990     46.7 %  
Realized gains (after tax)     (209 )       (814 )   NM       (1,641 )       (1,257 )   NM  
Operating income $   5,345     $   1,170     356.8 %   $   29,160     $   19,733     47.8 %  
                         
Per Share Reconciliation of Net                        
Income to Operating Income                        
Net income – Class A (diluted) $   0.21     $   0.07     200.0 %   $   1.16     $   0.77     50.6 %  
Realized gains (after tax)     (0.01 )       (0.03 )   NM       (0.06 )       (0.05 )   NM  
Operating income – Class A $   0.20     $   0.04     400.0 %   $   1.10     $   0.72     52.8 %  
                         
Net income – Class B $   0.18     $   0.06     200.0 %   $   1.06     $   0.69     53.6 %  
Realized gains (after tax)     –          (0.03 )   NM       (0.06 )       (0.04 )   NM  
Operating income – Class B $   0.18     $   0.03     500.0 %   $   1.00     $   0.65     53.8 %  
                         
                         

Statutory combined ratio is a non-GAAP standard measurement of underwriting profitability that is based upon amounts determined under SAP. The statutory combined ratio is the sum of:

  • the statutory loss ratio, which is the ratio of calendar-year incurred losses and loss expenses to premiums earned;
  • the statutory expense ratio, which is the ratio of expenses incurred for net commissions, premium taxes and underwriting expenses to premiums written; and
  • the statutory dividend ratio, which is the ratio of dividends to holders of workers’ compensation policies to premiums earned.

The statutory combined ratio does not reflect investment income, federal income taxes or other non-operating income or expense. A statutory combined ratio of less than 100% generally indicates underwriting profitability.

Conference Call and Webcast

The Company will hold a conference call and webcast on Friday, February 17, 2017, beginning at 11:00 A.M. Eastern Time. You may listen via the Internet by accessing the webcast link on the Company’s web site at http://investors.donegalgroup.com. A replay of the conference call will also be available via the Company’s web site.

About the Company

Donegal Group is an insurance holding company. The Company’s Class A common stock and Class B common stock trade on the NASDAQ Global Select Market under the symbols DGICA and DGICB, respectively. As an effective acquirer of small to medium-sized “main street” property and casualty insurers, Donegal Group has grown profitably since its formation in 1986. The Company continues to seek opportunities for growth while striving to achieve its longstanding goal of outperforming the property and casualty insurance industry in terms of service, profitability and growth in book value.

Safe Harbor

We base all statements contained in this release that are not historic facts on our current expectations. These statements are forward-looking in nature (as defined in the Private Securities Litigation Reform Act of 1995) and involve a number of risks and uncertainties. Actual results could vary materially. Factors that could cause actual results to vary materially include: our ability to maintain profitable operations, the adequacy of the loss and loss expense reserves of our insurance subsidiaries, business and economic conditions in the areas in which our insurance subsidiaries operate, interest rates, competition from various insurance and other financial businesses, acts of terrorism, the availability and cost of reinsurance, adverse and catastrophic weather events, legal and judicial developments, changes in regulatory requirements, our ability to integrate and manage successfully the insurance companies we may acquire from time to time and other risks we describe from time to time in the periodic reports we file with the Securities and Exchange Commission. You should not place undue reliance on any such forward-looking statements. We disclaim any obligation to update such statements or to announce publicly the results of any revisions that we may make to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Donegal Group Inc.
Consolidated Statements of Income
(unaudited; in thousands, except share data)
           
      Quarter Ended December 31,
        2016       2015  
           
Net premiums earned $   168,977     $   155,557  
Investment income, net of expenses     6,161         5,444  
Net realized investment gains     321         1,251  
Lease income     156         182  
Installment payment fees     1,193         1,361  
Equity in earnings of DFSC     388         1  
  Total revenues     177,196         163,796  
           
Net losses and loss expenses     113,369         102,354  
Amortization of deferred acquisition costs     27,842         25,641  
Other underwriting expenses     26,902         24,517  
Policyholder dividends     1,644         1,371  
Interest       371         203  
Premium paid on purchase of treasury stock     –          5,780  
Other expenses     233         747  
  Total expenses     170,361         160,613  
           
Income before income tax expense     6,835         3,183  
Income tax expense     1,281         1,199  
           
Net income $   5,554     $   1,984  
           
Net income per common share:      
  Class A – basic and diluted $   0.21     $   0.07  
  Class B – basic and diluted $   0.18     $   0.06  
           
Supplementary Financial Analysts’ Data      
           
Weighted-average number of shares      
  outstanding:      
  Class A – basic     21,294,986         22,194,507  
  Class A – diluted     22,065,480         22,388,042  
  Class B – basic and diluted     5,576,775         5,576,775  
           
Net premiums written $   161,776     $   147,713  
           
Book value per common share      
  at end of period $   16.21     $   15.66  
           
Annualized return on average equity   5.0 %     1.9 %
           

Donegal Group Inc.
Consolidated Statements of Income
(unaudited; in thousands, except share data)
           
      Year Ended December 31,
        2016       2015  
           
Net premiums earned $   656,205     $   605,641  
Investment income, net of expenses     22,633         20,950  
Net realized investment gains     2,525         1,934  
Lease income     671         750  
Installment payment fees     5,303         5,835  
Equity in earnings of DFSC     1,086         1,277  
  Total revenues     688,423         636,387  
           
Net losses and loss expenses     423,316         398,367  
Amortization of deferred acquisition costs     107,876         99,513  
Other underwriting expenses     108,459         97,710  
Policyholder dividends     4,373         3,863  
Interest       1,658         1,111  
Premium paid on purchase of treasury stock     –          5,780  
Other expenses     1,413         2,451  
  Total expenses     647,095         608,795  
           
Income before income tax expense     41,328         27,592  
Income tax expense     10,527         6,602  
           
Net income $   30,801     $   20,990  
           
Net income per common share:      
  Class A – basic  $   1.19     $   0.78  
  Class A – diluted $   1.16     $   0.77  
  Class B – basic and diluted $   1.06     $   0.69  
           
Supplementary Financial Analysts’ Data      
           
Weighted-average number of shares      
  outstanding:      
  Class A – basic     20,917,429         22,045,999  
  Class A – diluted     21,530,142         22,394,121  
  Class B – basic and diluted     5,576,775         5,576,775  
           
Net premiums written $   682,034     $   628,837  
           
Book value per common share      
  at end of period $   16.21     $   15.66  
           
Annualized return on average equity   7.3 %     5.1 %
           

Donegal Group Inc.
Consolidated Balance Sheets
(in thousands)
           
      December 31,   December 31,
        2016       2015  
           
           
ASSETS
Investments:      
  Fixed maturities:      
    Held to maturity, at amortized cost $   336,101     $   310,259  
    Available for sale, at fair value     515,075         501,393  
  Equity securities, at fair value     47,088         37,261  
  Investments in affiliates     37,885         38,477  
  Short-term investments, at cost     9,371         13,432  
      Total investments     945,520         900,822  
Cash       24,587         28,139  
Premiums receivable     159,390         141,267  
Reinsurance receivable     263,028         259,728  
Deferred policy acquisition costs     56,309         52,108  
Prepaid reinsurance premiums     124,256         113,523  
Other assets     50,041         42,247  
    Total assets $   1,623,131     $   1,537,834  
           
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:        
  Losses and loss expenses $   606,665     $   578,205  
  Unearned premiums     466,055         429,493  
  Accrued expenses     28,247         22,460  
  Borrowings under lines of credit     69,000         81,000  
  Subordinated debentures     5,000         5,000  
  Other liabilities     9,549         13,288  
    Total liabilities     1,184,516         1,129,446  
Stockholders’ equity:      
  Class A common stock     245         235  
  Class B common stock     56         56  
  Additional paid-in capital     236,852         219,525  
  Accumulated other comprehensive (loss) income     (2,254 )       774  
  Retained earnings     244,942         229,024  
  Treasury stock     (41,226 )       (41,226 )
    Total stockholders’ equity     438,615         408,388  
    Total liabilities and stockholders’ equity $   1,623,131     $   1,537,834  

 

CONTACT: For Further Information:
Jeffrey D. Miller, Executive Vice President & Chief Financial Officer 
Phone: (717) 426-1931
E-mail: investors@donegalgroup.com
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