Donegal Group Inc. Announces Second Quarter and First Half 2016 Results

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MARIETTA, Pa., July 26, 2016 (GLOBE NEWSWIRE) — Donegal Group Inc. (NASDAQ:DGICA) (NASDAQ:DGICB) today reported its financial results for the second quarter of 2016.  Highlights included:

  • Net income increased 32.8% to $8.6 million, or 32 cents per diluted Class A share, for the second quarter of 2016, compared to net income of $6.5 million, or 24 cents per diluted Class A share, for the second quarter of 2015
  • Net premiums written increased 7.7% to $178.2 million for the second quarter of 2016, reflecting organic growth in both personal and commercial lines
  • Statutory combined ratio1 of 95.0% for the second quarter of 2016, compared to 96.4% for the prior-year second quarter
  • Statutory combined ratio of 93.6% for the first half of 2016, compared to 96.6% for the first half of 2015
  • Annualized return on average equity of 7.9% for the second quarter of 2016, compared to 6.0% for the prior-year second quarter
  • Book value per share of $16.62 at June 30, 2016, compared to $15.66 at year-end 2015
                       
  Three Months Ended June 30,   Six Months Ended June 30,
    2016       2015     % Change     2016       2015     % Change
  (dollars in thousands, except per share amounts)
                       
Income Statement Data                      
Net premiums earned $   161,943     $   150,458       7.6 %   $   320,418     $   296,988       7.9 %
Investment income, net     5,344         5,157       3.6         10,890         10,106       7.8  
Realized gains     715         390       83.3         1,186         1,437       -17.5  
Total revenues     169,847         158,017       7.5         335,916         312,789       7.4  
Net income     8,585         6,465       32.8         20,434         13,319       53.4  
Operating income1     8,120         6,211       30.7         19,663         12,385       58.8  
Annualized return on average equity   7.9 %     6.0 %   1.9 pts     9.6 %     6.2 %   3.4 pts
                       
Per Share Data                      
Net income  – Class A (diluted) $   0.32     $   0.24       33.3 %   $   0.78     $   0.49       59.2 %
Net income  – Class B     0.30         0.21       42.9         0.72         0.45       60.0  
Operating income – Class A (diluted)     0.31         0.23       34.8         0.75         0.45       66.7  
Operating income – Class B     0.28         0.21       33.3         0.69         0.41       68.3  
Book value     16.62         15.62       6.4         16.62         15.62       6.4  
                       
                       

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 a strong second quarter and first half of 2016 highlighted by significant increases in net income, earnings per share, and return on average equity. We are continuing to achieve solid underwriting performance by executing on our strategy of providing a strong regional market presence for each of our lines of business.  Our focus on bottom-line execution has helped to drive improvements in our loss and expense ratios over the past several quarters, and we attribute our GAAP combined ratio of 97.0% for the second quarter of 2016 to that ongoing focus.”

Mr. Burke concluded, “Donegal Group achieved net premiums written growth of 7.7% during the second quarter of 2016, driven predominantly by double-digit growth in our commercial lines business segment.  Our homeowners net premiums written remained relatively comparable to the prior-year second quarter due to the effect of reinsurance reinstatement premiums we paid following a catastrophe loss event that impacted one of our subsidiaries during the second quarter of 2016.  We reported growth in all of our lines of business during the first half of 2016.  We attribute that achievement to our strong relationships with our independent agents located throughout the 21 states in which we write business, along with modest rate increases in certain lines.  We expect our continuing technology enhancements, such as the expanded use of predictive modeling and the implementation of our new policy rating and billing systems, to support additional growth opportunities.  We remain committed to our regional focus, working closely with our independent agents, adhering to sound underwriting discipline and delivering best-in-class customer service.”

Donald H. Nikolaus, Chairman, further remarked, “We continue to strive to outperform the property and casualty insurance industry in terms of service, profitability and book value growth over the long term.  At June 30, 2016, our book value per share increased to the highest amount in our history at $16.62, compared to $15.66 at December 31, 2015.  Our favorable earnings during the first half of 2016, as well as an increase in unrealized gains within our available-for-sale fixed-maturity and equity investment portfolios, contributed to the increase in our book value at June 30, 2016.”

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 June 30,   Six Months Ended June 30,
    2016       2015     % Change     2016       2015     % Change
  (dollars in thousands)
                       
Net Premiums Written                      
Personal lines:                      
Automobile $   59,043     $   55,635       6.1 %   $   114,097     $   107,972       5.7 %
Homeowners     33,354         33,395         (0.1 )       59,236         57,805         2.5  
Other     5,261         4,852         8.4         9,612         9,048         6.2  
Total personal lines     97,658         93,882         4.0         182,945         174,825         4.6  
Commercial lines:                      
Automobile     23,118         20,005         15.6         46,029         40,128         14.7  
Workers’ compensation     28,203         25,259         11.7         59,233         53,989         9.7  
Commercial multi-peril     26,618         24,342         9.4         55,071         49,377         11.5  
Other     2,638         2,068         27.6         5,032         3,884         29.6  
Total commercial lines     80,577         71,674         12.4         165,365         147,378         12.2  
Total net premiums written $   178,235     $   165,556       7.7 %   $   348,310     $   322,203       8.1 %
                       
                       

The 7.7% increase in the Company’s net premiums written for the second quarter of 2016 compared to the second quarter of 2015, as shown in the table above, represents the combination of 12.4% growth in commercial lines net premiums written and 4.0% growth in personal lines net premiums written. The $12.7 million growth in net premiums written for the second quarter of 2016 compared to the second quarter of 2015 included:

  • $8.9 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.
  • $3.8 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 following table presents comparative details with respect to our statutory and GAAP combined ratios for the three and six months ended June 30, 2016 and 2015:

               
  Three Months Ended   Six Months Ended
  June 30,   June 30,
    2016       2015       2016       2015  
               
Statutory Combined Ratios              
Personal Lines:              
Automobile   102.0 %     101.7 %     100.9 %     100.6 %
Homeowners   98.7       98.3       94.8       98.5  
Other   88.8       78.0       85.5       83.3  
Total personal lines   100.2       99.4       98.0       98.9  
Commercial Lines:              
Automobile   106.5       98.2       104.2        99.8  
Workers’ compensation   82.7       100.5       84.5        94.2  
Commercial multi-peril   85.9       85.4       85.3        93.8  
Total commercial lines   88.5       92.4       88.2        93.7  
Total lines   95.0 %     96.4 %     93.6 %     96.6 %
               
GAAP Combined Ratios (Total Lines)            
Loss ratio (non-weather)   56.8 %     59.1 %     56.3 %     59.2 %
Loss ratio (weather-related)   6.9       5.9       5.7       6.0  
Expense ratio   32.8       33.3       33.0       33.0  
Dividend ratio   0.5       0.4       0.5       0.5  
Combined ratio   97.0 %     98.7 %     95.5 %     98.7 %
               
               

Jeffrey D. Miller, Executive Vice President and Chief Financial Officer, commented, “Donegal Group’s improved statutory combined ratio of 95.0% for the second quarter of 2016 was driven by improvement in our core loss ratio.  While we incurred a higher amount of weather-related losses during the second quarter of 2016 compared to the prior-year second quarter, those losses were in line with our previous five-year average for the second quarter.  Our workers’ compensation line of business performed exceptionally well during the period, which helped to offset an increase in our commercial automobile combined ratio.  That increase resulted primarily from an increase in claims frequency during the second quarter of 2016.  We believe the uptick was a seasonal anomaly, as our first half of 2016 commercial automobile frequency statistics compared favorably to our commercial automobile frequency statistics for the past several years.  We continue to focus on improving the profitability of our commercial automobile line of business, and we recently filed rate increases for that line in all of the states in which we conduct business.”

For the second quarter of 2016, the Company’s statutory loss ratio decreased to 63.8%, compared to 65.1% for the second quarter of 2015.  Weather-related losses of $11.2 million for the second quarter of 2016, which equate to 6.9 percentage points of the Company’s loss ratio, increased from the $8.9 million, or 5.9 percentage points of the Company’s loss ratio, for the second quarter of 2015. Weather-related loss activity for the second quarter of 2016 compared favorably to the Company’s five-year average of $12.4 million for second-quarter weather-related losses.

Large fire losses, which the Company defines as individual fire losses in excess of $50,000, were $3.7 million for the second quarter of 2016, or 2.3 percentage points of the Company’s loss ratio.  That amount was substantially lower than the large fire losses of $5.9 million, or 3.9 percentage points of the Company’s loss ratio, for the second quarter of 2015. Similar to its experience for the first quarter of 2016, the Company noted significant decreases in commercial fire loss frequency and severity as well as a lower incidence of large homeowners fire losses compared to the prior-year second quarter. 

Development of reserves for losses incurred in prior accident years added 2.3 percentage points to the Company’s loss ratio for the second quarter of 2016, compared to 2.6 percentage points to the Company’s loss ratio for the second quarter of 2015. For the six-month periods ended June 30, 2016 and 2015, development of reserves for losses incurred in prior accident years added 1.2 and 1.1 percentage points, respectively, to the Company’s loss ratios.

The Company’s statutory expense ratio1 was 30.7% for the second quarter of 2016, compared to 30.9% for the second quarter of 2015.  The Company’s other underwriting expenses reflected the benefit of premium tax credits in the amount of $2.8 million that Michigan Insurance Company recognized following legislative resolution of an unintended result of a 2012 Michigan legislative change that made certain premium tax credits available to insurance companies doing business in that state.  That benefit was offset by increased underwriting-based incentive costs for the second quarter of 2016.

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 90% of its consolidated investment portfolio in diversified, highly rated and marketable fixed-maturity securities at June 30, 2016.

               
  June 30, 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 $   95,303       10.2 %   $   88,383       9.8 %
Obligations of states and political subdivisions     322,057       34.6         355,671       39.5  
Corporate securities     167,670       18.0         138,119       15.3  
Mortgage-backed securities     253,246       27.2         229,479       25.5  
Total fixed maturities     838,276       90.0         811,652       90.1  
Equity securities, at fair value     44,607       4.8         37,261       4.1  
Investments in affiliates     39,869       4.3         38,477       4.3  
Short-term investments, at cost     9,389       0.9         13,432       1.5  
Total investments $   932,141       100.0 %   $   900,822       100.0 %
               
Average investment yield   2.4 %         2.4 %    
Average tax-equivalent investment yield   3.0 %         3.1 %    
Average fixed-maturity duration (years)     4.0             4.4      
               
               

Net investment income of $5.3 million for the second quarter of 2016 increased 3.6% compared to $5.2 million in net investment income for the second quarter of 2015. The increase in net investment income reflected primarily an increase in average invested assets relative to the prior-year second quarter.

Net realized investment gains were $715,177 for the second quarter of 2016, compared to $390,461 for the second quarter of 2015.

The Company had no impairments in its investment portfolio that it considered to be other than temporary during the second quarters of 2016 or 2015.

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 June 30,   Six Months Ended June 30,
    2016       2015     % Change     2016       2015     % Change
  (dollars in thousands, except per share amounts)
                       
Reconciliation of Net Income                      
to Operating Income                      
Net income  $   8,585     $   6,465       32.8 %   $   20,434     $   13,319       53.4 %
Realized gains (after tax)     (465 )       (254 )     83.1 %       (771 )       (934 )     -17.5 %
Operating income $   8,120     $   6,211       30.7 %   $   19,663     $   12,385       58.8 %
                       
Per Share Reconciliation of Net                      
Income to Operating Income                      
Net income – Class A (diluted) $   0.32     $   0.24       33.3 %   $   0.78     $   0.49       59.2 %
Realized gains (after tax)     (0.01 )       (0.01 )     0.0 %       (0.03 )       (0.04 )     -25.0 %
Operating income – Class A $   0.31     $   0.23       34.8 %   $   0.75     $   0.45       66.7 %
                       
Net income – Class B $   0.30     $   0.21       42.9 %   $   0.72     $   0.45       60.0 %
Realized gains (after tax)     (0.02 )       –        0.0 %       (0.03 )       (0.04 )     -25.0 %
Operating income – Class B $   0.28     $   0.21       33.3 %   $   0.69     $   0.41       68.3 %
                       
                       

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 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 Tuesday, July 26, 2016, 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 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 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 June 30,
        2016       2015  
           
Net premiums earned     $   161,943     $   150,458  
Investment income, net of expenses         5,344         5,157  
Net realized investment gains         715         390  
Lease income         173         190  
Installment payment fees         1,367         1,480  
Equity in earnings of DFSC         305         342  
 Total revenues     169,847         158,017  
           
Net losses and loss expenses         103,194         97,839  
Amortization of deferred acquisition costs         26,554         24,826  
Other underwriting expenses         26,579         25,203  
Policyholder dividends         755         688  
Interest         404         390  
Other expenses         315         678  
 Total expenses     157,801         149,624  
           
Income before income tax expense         12,046         8,393  
Income tax expense         3,461         1,928  
           
Net income     $   8,585     $   6,465  
           
Net income per common share:          
 Class A – basic  $   0.33     $   0.24  
 Class A – diluted $   0.32     $   0.24  
 Class B – basic and diluted $   0.30     $   0.21  
           
Supplementary Financial Analysts’ Data          
           
Weighted-average number of shares          
 outstanding:      
 Class A – basic     20,746,193         22,002,187  
 Class A – diluted     21,322,432         22,378,472  
 Class B – basic and diluted     5,576,775         5,576,775  
           
Net premiums written     $   178,235     $   165,556  
           
Book value per common share          
 at end of period $   16.62     $   15.62  
           
Annualized return on average equity       7.9 %     6.0 %

 

Donegal Group Inc.
Consolidated Statements of Income
(unaudited; in thousands, except share data)
           
      Six Months Ended June 30,
        2016       2015  
           
Net premiums earned     $   320,418     $   296,988  
Investment income, net of expenses     10,890         10,106  
Net realized investment gains       1,186         1,437  
Lease income         351         390  
Installment payment fees       2,730         3,000  
Equity in earnings of DFSC       341         868  
 Total revenues     335,916         312,789  
           
Net losses and loss expenses       198,772         193,779  
Amortization of deferred acquisition costs     52,510         48,836  
Other underwriting expenses       53,217         49,036  
Policyholder dividends         1,587         1,606  
Interest         812         721  
Other expenses         953         1,403  
 Total expenses     307,851         295,381  
           
Income before income tax expense       28,065         17,408  
Income tax expense         7,631         4,089  
           
Net income     $   20,434     $   13,319  
           
Net income per common share:        
 Class A – basic  $   0.79     $   0.50  
 Class A – diluted $   0.78     $   0.49  
 Class B – basic and diluted $   0.72     $   0.45  
           
Supplementary Financial Analysts’ Data      
           
Weighted-average number of shares      
 outstanding:      
 Class A – basic     20,645,467         21,769,110  
 Class A – diluted     21,068,986         22,247,476  
 Class B – basic and diluted     5,576,775         5,576,775  
           
Net premiums written     $   348,310     $   322,203  
           
Book value per common share        
 at end of period $   16.62     $   15.62  
           
Annualized return on average equity   9.6 %     6.2 %
           

 

Donegal Group Inc.
Consolidated Balance Sheets
(in thousands)
           
      June 30,   December 31,
        2016       2015  
      (unaudited)    
           
ASSETS
Investments:          
 Fixed maturities:      
 Held to maturity, at amortized cost $   328,167     $   310,259  
 Available for sale, at fair value     510,109         501,393  
 Equity securities, at fair value     44,607         37,261  
 Investments in affiliates     39,869         38,477  
 Short-term investments, at cost     9,389         13,432  
  Total investments     932,141         900,822  
Cash         29,697         28,139  
Premiums receivable       159,991         141,267  
Reinsurance receivable       258,140         259,728  
Deferred policy acquisition costs     56,344         52,108  
Prepaid reinsurance premiums       127,155         113,523  
Other assets         36,782         42,247  
 Total assets $   1,600,250     $   1,537,834  
           
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:          
 Losses and loss expenses $   577,165     $   578,205  
 Unearned premiums     471,018         429,493  
 Accrued expenses     19,168         22,460  
 Borrowings under lines of credit     77,500         81,000  
 Subordinated debentures     5,000         5,000  
 Other liabilities     10,532         13,288  
 Total liabilities     1,160,383         1,129,446  
Stockholders’ equity:        
 Class A common stock     239         235  
 Class B common stock     56         56  
 Additional paid-in capital     227,074         219,525  
 Accumulated other comprehensive income     8,109         774  
 Retained earnings     245,615         229,024  
 Treasury stock     (41,226 )       (41,226 )
 Total stockholders’ equity     439,867         408,388  
 Total liabilities and stockholders’ equity $   1,600,250     $   1,537,834  
           
For Further Information:Jeffrey D. Miller, Executive Vice President & Chief Financial OfficerPhone: (717) 426-1931E-mail: investors@donegalgroup.com

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