MARIETTA, Pa., April 19, 2017 (GLOBE NEWSWIRE) — Donegal Group Inc. (NASDAQ:DGICA) (NASDAQ:DGICB) today reported its financial results for the first quarter of 2017.  Significant items included:

  • Net income of $5.1 million, or 18 cents per diluted Class A share, for the first quarter of 2017, compared to $11.8 million, or 46 cents per diluted Class A share, for the first quarter of 2016
  • 8.5% increase in net premiums written to $184.5 million, reflecting organic growth in both personal and commercial lines
  • Statutory combined ratio1 of 99.6% for the first quarter of 2017, compared to 92.1% for the first quarter of 2016
  • Book value per share of $16.43 at March 31, 2017, compared to $16.21 at year-end 2016
  Three Months Ended March 31,
    2017       2016     % Change
  (dollars in thousands, except per share amounts)
           
Income Statement Data          
Net premiums earned $ 169,156     $ 158,475     6.7 %
Investment income, net   5,755       5,547     3.8  
Net realized investment gains   2,549       471     441.2  
Total revenues   178,971       166,069     7.8  
Net income   5,105       11,849     -56.9  
Operating income   3,448       11,543     -70.1  
Annualized return on average equity   4.6 %     11.4 %   -6.8 pts
           
Per Share Data          
Net income – Class A (diluted) $ 0.18     $ 0.46     -60.9 %
Net income – Class B   0.17       0.42     -59.5  
Operating income – Class A (diluted)   0.12       0.44     -72.7  
Operating income – Class B   0.12       0.41     -70.7  
Book value   16.43       16.29     0.9  
           

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”).

Kevin G. Burke, President and Chief Executive Officer of Donegal Group Inc., noted, “Donegal Group reported strong organic growth, a higher return from our investment portfolio, and profitable operations in the first quarter of 2017, despite higher-than-expected losses related to severe storm activity in several of our marketing regions.  Our net premiums written increased by 8.5% compared to the prior-year first quarter. This increase reflected a continuation of strong growth in our commercial lines.  We achieved this growth in spite of reinsurance reinstatement premiums that reduced net premiums written for our homeowners line of business and our commercial multi-peril line of business by 4.5% and 2.5%, respectively, during the first quarter.  We strive to leverage our position as a trusted and well-recognized regional insurer to win market share, while we price our products appropriately in light of the current conditions within our industry.  We continue to implement appropriate premium rate increases that respond to increasing loss cost trends in our personal and commercial auto lines, with the expectation that these premium rate increases will contribute to higher premiums written and increased underwriting profitability over time.”  

Mr. Burke continued, “We work with our independent agents who know their local markets well to integrate technology tools in every facet of our underwriting process, particularly for our auto products.  Companies, such as us, that have invested in telematics and predictive analytics to collect and evaluate information regarding specific risk characteristics in their underwriting processes have a clear advantage over those insurance carriers that are now just beginning to implement such practices.  We continue to further develop, refine and implement technology tools that will further enhance our underwriting and risk selection processes.  We remain dedicated to providing “best-in-class” technology that will enhance our services to our customers and our trusted network of independent agents.”

Mr. Burke concluded, “While a higher level of storm activity impacted our underwriting results in several of our marketing areas in the first quarter of 2017, we believe that the strength of our brand and our proven business strategies provide us with sustainable competitive advantages that will enable us to deliver higher returns in the future.”

Donald H. Nikolaus, Chairman of Donegal Group Inc., remarked, “We have a commitment to deliver underwriting results that outperform the insurance industry and that, combined with solid investment returns, will help to deliver superior book value appreciation over time.  At March 31, 2017, our book value per share increased to $16.43, compared to $16.21 at December 31, 2016. Our net income during the first quarter of 2017, as well as a modest increase in unrealized gains within our available-for-sale fixed-maturity and equity investment portfolios during the first quarter, contributed to the increase in our book value at March 31, 2017.”

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 Southern 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).

  Three Months Ended March 31,
    2017     2016   % Change
  (dollars in thousands)
           
Net Premiums Written          
Personal lines:          
Automobile $ 61,292   $ 55,054   11.3 %
Homeowners   25,591     25,882   -1.1  
Other   4,728     4,351   8.7  
Total personal lines   91,611     85,287   7.4  
Commercial lines:          
Automobile   26,835     22,911   17.1  
Workers’ compensation   33,484     31,030   7.9  
Commercial multi-peril   30,030     28,453   5.5  
Other   2,541     2,394   6.1  
Total commercial lines   92,890     84,788   9.6  
Total net premiums written $ 184,501   $ 170,075   8.5 %
           

The 8.5% increase in the Company’s net premiums written for the first quarter of 2017 compared to the first quarter of 2016, as shown in the table above, represents the combination of 9.6% growth in commercial lines net premiums written and 7.4% growth in personal lines net premiums written. The $14.4 million growth in net premiums written for the first quarter of 2017 compared to the first quarter of 2016 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.
  • $6.3 million in personal lines premiums that the Company attributes to a combination of new policy growth and premium rate increases the Company has implemented over the past four quarters, partially offset by higher reinsurance reinstatement premiums.

The Company renewed the majority of its reinsurance programs effective January 1, 2017 with no substantive changes to its reinsurance premium rates or coverage levels for 2017 compared to 2016.

The following table presents comparative details with respect to our GAAP and statutory combined ratios for the three months ended March 31, 2017 and 2016:

  Three Months Ended
  March 31,
  2017     2016  
       
GAAP Combined Ratios (Total Lines)      
Loss ratio (non-weather) 59.3 %   55.9 %
Loss ratio (weather-related) 8.4     4.4  
Expense ratio 33.2     33.2  
Dividend ratio 0.5     0.5  
Combined ratio 101.4 %   94.0 %
       
Statutory Combined Ratios      
Personal Lines:      
Automobile 104.7 %   99.8 %
Homeowners 106.1     91.0  
Other 89.6     82.2  
Total personal lines 104.0     95.6  
Commercial Lines:      
Automobile 107.0     101.8  
Workers’ compensation 80.8     86.5  
Commercial multi-peril 105.9     84.7  
Total commercial lines 94.4     88.0  
Total lines 99.6 %   92.1 %
       

Jeffrey D. Miller, Executive Vice President and Chief Financial Officer of Donegal Group Inc., commented, “We were pleased with the performance of our workers’ compensation line of business, which produced an excellent 80.8% statutory combined ratio for the first quarter of 2017.  Weather-related losses adversely impacted our underwriting results for our homeowners and commercial multi-peril lines of business during the first quarter of 2017, primarily attributable to numerous wind and hail events in our Mid-Atlantic, Midwestern and Southern regions. None of these weather-related events caused insured losses that exceeded our $5.0 million external catastrophe reinsurance retention amount, but the cumulative impact of numerous smaller storm systems was far greater than our historical first-quarter average for weather-related losses.  Intercompany catastrophe reinsurance with Donegal Mutual Insurance Company capped the financial impact of losses from two of these wind and hail events and resulted in reinsurance reinstatement premiums of $2.0 million during the first quarter of 2017.”

For the first quarter of 2017, the Company’s statutory loss ratio1 increased to 67.9%, compared to 60.2% for the first quarter of 2016.  Weather-related losses of $14.3 million for the first quarter of 2017, or 8.4 percentage points of the Company’s loss ratio, increased from the $6.9 million, or 4.4 percentage points of the Company’s loss ratio, for the first quarter of 2016. Weather-related loss activity for the first quarter of 2017 significantly exceeded the Company’s five-year average of $8.3 million for first-quarter weather-related losses. 

Large fire losses, which the Company defines as individual fire losses in excess of $50,000, for the first quarter of 2017 were $5.9 million, or 3.5 percentage points of the Company’s loss ratio.  That amount was in line with the large fire losses of $5.8 million, or 3.7 percentage points of the Company’s loss ratio, for the first quarter of 2016.

The Company’s statutory expense ratio1 was 31.1% for the first quarter of 2017, compared to 31.3% for the first quarter of 2016.  The decrease in the Company’s statutory expense ratio reflected lower underwriting-based incentive costs for the first quarter of 2017.

Investment Operations

Donegal Group’s investment strategy is to generate an appropriate amount of after-tax income on its invested assets while minimizing credit risk through investment in high-quality securities. As a result, the Company had invested 89.8% of its consolidated investment portfolio in diversified, highly rated and marketable fixed-maturity securities at March 31, 2017.

  March 31, 2017   December 31, 2016
  Amount   %   Amount   %
  (dollars in thousands)
Fixed maturities, at carrying value:              
U.S. Treasury securities and obligations of U.S.              
government corporations and agencies $ 102,081     10.6 %   $ 99,970     10.6 %
Obligations of states and political subdivisions   303,806     31.6       308,876     32.7  
Corporate securities   193,323     20.1       179,011     18.9  
Mortgage-backed securities   264,255     27.5       263,319     27.8  
Total fixed maturities   863,465     89.8       851,176     90.0  
Equity securities, at fair value   48,601     5.1       47,088     5.0  
Investments in affiliates   38,186     4.0       37,885     4.0  
Short-term investments, at cost   10,268     1.1       9,371     1.0  
Total investments $ 960,520     100.0 %   $ 945,520     100.0 %
               
Average investment yield   2.4 %         2.5 %    
Average tax-equivalent investment yield   2.9 %         3.0 %    
Average fixed-maturity duration (years)   4.4           4.5      
               

Net investment income of $5.8 million for the first quarter of 2017 increased 3.8% compared to $5.5 million in net investment income for the first quarter of 2016. The increase in net investment income reflected primarily an increase in average invested assets relative to the prior-year first quarter. Net realized investment gains, primarily from sales of equity securities, were $2.5 million for the first quarter of 2017, compared to $470,941 for the first quarter of 2016. The Company had no impairments in its investment portfolio that it considered to be other than temporary during the first quarter of 2017 or 2016.

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 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 its peers. These non-GAAP measures are operating income and statutory combined ratio.

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

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 March 31,
    2017       2016     % Change
  (dollars in thousands, except per share amounts)
           
Reconciliation of Net Income          
to Operating Income          
Net income $   5,105     $   11,849     -56.9 %
Realized gains (after tax)     (1,657 )       (306 )   441.5 %
Operating income $   3,448     $   11,543     -70.1 %
           
Per Share Reconciliation of Net          
Income to Operating Income          
Net income – Class A (diluted) $   0.18     $   0.46     -60.9 %
Realized gains (after tax)     (0.06 )       (0.02 )   200.0 %
Operating income – Class A $   0.12     $   0.44     -72.7 %
           
Net income – Class B $   0.17     $   0.42     -59.5 %
Realized gains (after tax)     (0.05 )       (0.01 )   400.0 %
Operating income – Class B $   0.12     $   0.41     -70.7 %
           

The 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, excluding anticipated salvage and subrogation recoveries, 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 Wednesday, April 19, 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 website.

About the Company

Donegal Group is an insurance holding company. The insurance subsidiaries of Donegal Group and Donegal Mutual Insurance Company conduct business together as the Donegal Insurance Group. 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 over the last three decades. 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 book value 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 (“UCB”). The Company accounts for its investment in DFSC using the equity method of accounting. Donegal Mutual Insurance Company owns the remaining 51.8% of the outstanding stock of DFSC.

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, 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 March 31,
        2017       2016  
           
Net premiums earned $ 169,156     $ 158,475  
Investment income, net of expenses   5,755       5,547  
Net realized investment gains   2,549       471  
Lease income   142       178  
Installment payment fees   1,136       1,363  
Equity in earnings of DFSC   233       35  
  Total revenues   178,971       166,069  
           
Net losses and loss expenses   114,433       95,578  
Amortization of deferred acquisition costs   27,683       25,956  
Other underwriting expenses   28,489       26,638  
Policyholder dividends   834       832  
Interest     364       408  
Other expenses   443       638  
  Total expenses   172,246       150,050  
           
Income before income tax expense   6,725       16,019  
Income tax expense   1,620       4,170  
           
Net income $ 5,105     $ 11,849  
           
Net income per common share:      
  Class A – basic $ 0.19     $ 0.46  
  Class A – diluted $ 0.18     $ 0.46  
  Class B – basic and diluted $ 0.17     $ 0.42  
           
Supplementary Financial Analysts’ Data      
           
Weighted-average number of shares      
  outstanding:      
  Class A – basic   21,544,864       20,544,741  
  Class A – diluted   22,625,578       20,815,540  
  Class B – basic and diluted   5,576,775       5,576,775  
           
Net premiums written $ 184,501     $ 170,075  
           
Book value per common share      
  at end of period $ 16.43     $ 16.29  
           
Annualized return on average equity   4.6 %     11.4 %

Donegal Group Inc.
Consolidated Balance Sheets
(in thousands)
           
      March 31,   December 31,
        2017       2016  
      (unaudited)    
           
ASSETS
Investments:      
  Fixed maturities:      
    Held to maturity, at amortized cost $ 352,296     $ 336,101  
    Available for sale, at fair value   511,169       515,075  
  Equity securities, at fair value   48,601       47,088  
  Investments in affiliates   38,186       37,885  
  Short-term investments, at cost   10,268       9,371  
    Total investments   960,520       945,520  
Cash     33,656       24,587  
Premiums receivable   169,303       159,390  
Reinsurance receivable   269,804       263,028  
Deferred policy acquisition costs   58,364       56,309  
Prepaid reinsurance premiums   131,682       124,256  
Other assets   39,864       50,041  
    Total assets $ 1,663,193     $ 1,623,131  
           
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:        
  Losses and loss expenses $ 620,849     $ 606,665  
  Unearned premiums   488,827       466,055  
  Accrued expenses   19,071       28,247  
  Borrowings under lines of credit   69,000       69,000  
  Subordinated debentures   5,000       5,000  
  Other liabilities   13,735       9,549  
    Total liabilities   1,216,482       1,184,516  
Stockholders’ equity:      
  Class A common stock   246       245  
  Class B common stock   56       56  
  Additional paid-in capital   239,690       236,852  
  Accumulated other comprehensive loss   (1,907 )     (2,254 )
  Retained earnings   249,852       244,942  
  Treasury stock   (41,226 )     (41,226 )
    Total stockholders’ equity   446,711       438,615  
    Total liabilities and stockholders’ equity $ 1,663,193     $ 1,623,131  

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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