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Donegal Group Inc. Announces Significantly Improved Fourth Quarter and Full Year 2015 Results

MARIETTA, Pa., Feb. 19, 2016 (GLOBE NEWSWIRE) -- Donegal Group Inc. (NASDAQ:DGICA) and (NASDAQ:DGICB) today reported its financial results for the fourth quarter and full year of 2015. Significant developments include:

  • Net income and operating income1 for the fourth quarter of 2015 increased by more than 70% over amounts for the fourth quarter of 2014, largely due to lower non-weather losses in the 2015 period
  • Net income and operating income for the full year of 2015 increased by approximately 84% and 105%, respectively, from the levels for the full year of 2014, largely due to improved underwriting results in 2015
  • Statutory combined ratio1 of 98.9% for the fourth quarter of 2015, improved from 101.8% for the prior-year fourth quarter
  • Statutory combined ratio of 97.4% for the full year of 2015, improved from 100.5% for the prior year
  • Net premiums written increased 9.1% and 8.6% for the fourth quarter and full year of 2015, respectively, primarily reflecting growth in commercial lines
  • Book value per share of $15.66 at December 31, 2015, compared to $15.40 at year-end 2014

Three Months Ended December 31, Year Ended December 31,
2015 2014 %
Change
2015 2014 %
Change
(dollars in thousands, except per share amounts)
Income Statement Data
Net premiums earned$155,557 $144,211 7.9% $605,641 $556,498 8.8%
Investment income, net 5,444 4,815 13.1 20,950 18,344 14.2
Realized gains 1,251 837 49.5 1,934 3,134 -38.3
Total revenues 163,796 151,591 8.1 636,387 586,548 8.5
Net income 7,764 4,486 73.1 26,770 14,539 84.1
Operating income1 6,950 3,934 76.7 25,513 12,471 104.6
Per Share Data
Net income – Class A (diluted)$0.28 $0.17 64.7% $0.98 $0.55 78.2%
Operating income – Class A (diluted) 0.25 0.15 66.7 0.93 0.47 97.9
Book value 15.66 15.40 1.7 15.66 15.40 1.7
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 achieved strong performance across nearly all lines of business in 2015, with full-year earnings nearly double the prior-year amount. The favorable results reinforce our commitment to Donegal’s regional business approach and conservative underwriting philosophy, while also confirming that we are making meaningful progress toward our long-term objective of outperforming the property and casualty insurance industry in terms of service, profitability and book value growth.

“Within our 21-state operating territory, we offer a steadfast commitment to our independent insurance agents and policyholders that Donegal will be there when it matters most. We believe that commitment was integral to our continued expansion in 2015, with organic growth across all regions representing the majority of the increase in our net premiums written for the year. We believe that commitment will be the key to our future growth and success as well. Throughout 2015, growth in our net premiums written also reflected additional net writings from our Michigan Insurance Company (“MICO”) subsidiary. Those additional writings resulted from our decision to terminate MICO’s external quota-share reinsurance agreement effective January 1, 2015,” Mr. Burke added.

Mr. Burke noted, “We are continuing to obtain low-single-digit premium increases, on average, as commercial accounts renew their policies with Donegal. We recognize that our emphasis on supporting our agency relationships is essential to increasing the flow of their best new commercial business to us. Agents routinely express their appreciation for Donegal’s competitive products, best-in-class technology, prompt claim handling and customer service tailored to fit their specific needs and the characteristics of our regional markets.

“Our agents also serve as an important resource for their personal lines customers in making purchasing and insurance coverage decisions. We believe our highly acclaimed agency technology tools, comprehensive coverages and expanding use of predictive modeling have positioned us well to provide competitive homeowner and automobile insurance products within the regions we serve,” Mr. Burke noted.

Donald H. Nikolaus, Chairman, further remarked, “The Donegal Insurance Group, which includes Donegal Mutual Insurance Company and the insurance subsidiaries of Donegal Group, marked an important milestone in 2015, as its total direct premiums written eclipsed $800 million. This accomplishment reflects our competitive market position within our operating regions. We believe the Donegal Insurance Group is well-positioned to continue its expansion, which in turn will help Donegal Group to deliver on its long-term commitment to enhance stockholder value.”

Mr. Nikolaus added, “At December 31, 2015, our book value per share increased to $15.66, compared to $15.40 at December 31, 2014. The increase in book value per share reflected our positive earnings for the full year of 2015.”

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,
2015 2014 % Change 2015 2014 % Change
(dollars in thousands)
Net Premiums Written
Personal lines:
Automobile$51,048 $48,498 5.3% $214,610 $204,174 5.1%
Homeowners 28,522 27,434 4.0 119,541 113,576 5.3
Other 4,413 4,143 6.5 18,176 16,989 7.0
Total personal lines 83,983 80,075 4.9 352,327 334,739 5.3
Commercial lines:
Automobile 18,032 15,007 20.2 76,729 65,552 17.1
Workers' compensation 21,842 19,134 14.2 98,079 88,739 10.5
Commercial multi-peril 22,052 19,550 12.8 94,219 83,413 13.0
Other 1,804 1,578 14.3 7,483 6,758 10.7
Total commercial lines 63,730 55,269 15.3 276,510 244,462 13.1
Total net premiums written$147,713 $135,344 9.1% $628,837 $579,201 8.6%

The Company’s net premiums written increased 9.1% for the fourth quarter of 2015 compared to the fourth quarter of 2014. This increase represented the combination of 15.3% growth in commercial lines net premiums written and 4.9% growth in personal lines net premiums written. The $12.4 million growth in net premiums written for the fourth quarter of 2015 compared to the fourth quarter of 2014 included:

  • $4.3 million, or 3.2% of total net premiums written, related to the termination at the beginning of 2015 of the MICO external quota-share reinsurance agreement that increased the amount of business MICO retained.
  • $5.8 million in commercial lines premiums, in addition to the MICO reinsurance change, that the Company attributes primarily to premium rate and exposure increases as well as new commercial accounts the Company’s insurance subsidiaries have written throughout their operating regions.
  • $2.3 million in personal lines premiums, in addition to the MICO reinsurance change, that the Company attributes primarily to premium rate increases the Company has implemented over the past year and lower reinsurance reinstatement premiums resulting from catastrophic loss events.

For the full year of 2015, the Company's net premiums written increased 8.6% compared to the comparable prior-year period. This increase included $19.6 million, or 3.4% of total net premiums written, related to the aforementioned termination of the MICO quota-share reinsurance agreement.

Three Months Ended Year Ended
December 31, December 31,
2015
2014
2015
2014
Statutory Combined Ratios
Personal Lines:
Automobile 117.0% 116.0% 104.3% 102.8%
Homeowners 85.6 93.4 97.6 97.8
Other 76.0 79.9 82.7 99.5
Total personal lines 104.2 106.5 100.9 101.0
Commercial Lines:
Automobile 119.3 123.9 109.5 115.0
Workers' compensation 83.7 86.6 87.6 91.1
Commercial multi-peril 84.1 88.7 90.8 102.9
Total commercial lines 92.0 95.1 92.8 99.8
Total lines 98.9% 101.8% 97.4% 100.5%
GAAP Combined Ratios (Total Lines)
Loss ratio (non-weather) 62.9% 67.8% 59.7% 62.3%
Loss ratio (weather-related) 2.9 2.8 6.1 7.5
Expense ratio 32.2 30.4 32.6 31.4
Dividend ratio 0.9 0.6 0.6 0.5
Combined ratio 98.9% 101.6% 99.0% 101.7%

Jeffrey D. Miller, Executive Vice President and Chief Financial Officer, commented, “We were pleased to achieve solid core underwriting results for 2015, as our 97.4% full-year statutory combined ratio demonstrates. Weather losses for the full year were modestly below our previous five-year average level. The benefits of our multi-year focus on underwriting initiatives and rate adequacy were seen most clearly in our favorable full-year 2015 combined ratios for workers’ compensation and commercial multi-peril, our largest commercial lines of business, and also in our solid full-year 2015 homeowners combined ratio within our personal lines segment.”

Mr. Miller added, “For both our commercial lines and personal lines of business, our agents market multiple insurance products together as a package to service a policyholder’s entire account. With that emphasis as an 'account writer,' we generally evaluate the profitability of each segment as a whole. Nevertheless, we continue to monitor, and take steps to improve, the profitability of our personal and commercial automobile lines of business, which have underperformed our other lines of business.”

Weather-related losses of $4.5 million for the fourth quarter of 2015 contributed 2.9 percentage points to the Company’s loss ratio, compared to the $4.0 million of weather-related losses, or 2.8 percentage points of the Company’s loss ratio, for the fourth quarter of 2014. Weather-related loss activity in the fourth quarter of 2015 was lower than the Company's five-year average for fourth-quarter weather losses of $5.9 million. For the full year of 2015, weather-related losses were $36.9 million, which represented an improvement from the $41.8 million of weather-related losses the Company incurred for the full year of 2014.

Large fire losses, which the Company defines as individual fire losses in excess of $50,000, for the fourth quarter of 2015 were $6.0 million, or 3.9 percentage points of the Company’s loss ratio, lower than the $7.1 million of large fire losses, or 4.9 percentage points of the Company’s loss ratio, for the fourth quarter of 2014. The Company incurred large fire losses of $29.5 million for the full year of 2015, comparing favorably to the $32.8 million of large fire losses the Company incurred for the full year of 2014.

Net development of reserves for losses incurred in prior accident years for all lines of business added 1.5 percentage points to the Company’s loss ratio for the fourth quarter of 2015, comparing favorably to 4.8 percentage points for the fourth quarter of 2014. Net development of reserves for losses incurred in prior accident years added 1.2 percentage points to the Company's loss ratio for the full year of 2015, compared to 2.6 percentage points for the full year of 2014.

The Company’s statutory expense ratio1 was 32.0% for the fourth quarter of 2015, compared to 30.1% for the fourth quarter of 2014. The increase in the Company's statutory expense ratio reflected higher underwriting-based incentive costs that resulted from more favorable underwriting results for the fourth quarter of 2015 compared to the prior-year fourth quarter.

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 90.1% of its consolidated investment portfolio invested in diversified, highly rated and marketable fixed-maturity securities at December 31, 2015.

December 31, 2015 December 31, 2014
Amount % Amount %
(dollars in thousands)
Fixed maturities, at carrying value:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies$93,403 10.4% $74,878 9.0%
Obligations of states and political subdivisions 355,671 39.5 377,241 45.3
Corporate securities 138,119 15.3 106,171 12.7
Mortgage-backed securities 224,459 24.9 184,252 22.1
Total fixed maturities 811,652 90.1 742,542 89.1
Equity securities, at fair value 37,261 4.1 30,822 3.7
Investments in affiliates 38,477 4.3 39,284 4.7
Short-term investments, at cost 13,432 1.5 20,293 2.5
Total investments$900,822 100.0% $832,941 100.0%
Average investment yield 2.4% 2.3%
Average tax-equivalent investment yield 3.1% 3.1%
Average fixed-maturity duration (years) 4.4 4.1

Net investment income of $5.4 million for the fourth quarter of 2015 increased 13.1% compared to $4.8 million in net investment income for the fourth quarter of 2014. The increase in net investment income reflected primarily an increase in average invested assets and a decreased allocation of expenses to our investment operations for the fourth quarter of 2015 compared to the prior-year period. Net realized investment gains were $1.3 million for the fourth quarter of 2015, compared to $837,172 for the fourth quarter of 2014. The Company had no impairments in its investment portfolio that it considered to be other than temporary during the full years of 2015 or 2014.

Mr. Miller, in commenting on the Company’s investment operations, noted, “For the full year of 2015, our invested assets rose by $67.9 million, contributing to the growth in our investment income during the year. We attribute the increase in invested assets largely to our top-line premium growth. Our portfolio consists primarily of highly rated fixed-maturity securities. We are investing 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 maintain our average investment yield in the continuing low interest rate environment.”

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 immaterial for the fourth quarters of 2015 and 2014. For the full years of 2015 and 2014, the Company’s equity in the earnings of DFSC was $1.3 million and $1.2 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,
2015 2014 % Change 2015 2014 % Change
(dollars in thousands, except per share amounts)
Reconciliation of Net Income
to Operating Income
Net income$ 7,764 $ 4,486 73.1% $ 26,770 $ 14,539 84.1%
Realized gains (after tax) (814) (552) 47.5% (1,257) (2,068) -39.2%
Operating income$ 6,950 $ 3,934 76.7% $ 25,513 $ 12,471 104.6%
Per Share Reconciliation of Net
Income to Operating Income
Net income – Class A (diluted)$ 0.28 $ 0.17 64.7% $ 0.98 $ 0.55 78.2%
Realized gains (after tax) (0.03) (0.02) 50.0% (0.05) (0.08) -37.5%
Operating income – Class A$ 0.25 $ 0.15 66.7% $ 0.93 $ 0.47 97.9%
Net income – Class B$ 0.25 $ 0.15 66.7% $ 0.88 $ 0.49 79.6%
Realized gains (after tax) (0.02) (0.02) 0.0% (0.04) (0.07) -42.9%
Operating income – Class B$ 0.23 $ 0.13 76.9% $ 0.84 $ 0.42 100.0%

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 19, 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 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,
2015 2014
Net premiums earned$ 155,557 $ 144,211
Investment income, net of expenses 5,444 4,815
Net realized investment gains 1,251 837
Lease income 182 212
Installment payment fees 1,361 1,508
Equity in earnings of DFSC 1 8
Total revenues 163,796 151,591
Net losses and loss expenses 102,354 101,877
Amortization of deferred acquisition costs 25,641 23,913
Other underwriting expenses 24,517 19,859
Policyholder dividends 1,371 860
Interest 203 340
Other expenses 747 600
Total expenses 154,833 147,449
Income before income tax expense (benefit) 8,963 4,142
Income tax expense (benefit) 1,199 (344)
Net income$ 7,764 $ 4,486
Net income per common share:
Class A - basic$ 0.29 $ 0.17
Class A - diluted$ 0.28 $ 0.17
Class B - basic and diluted$ 0.25 $ 0.15
Supplementary Financial Analysts' Data
Weighted-average number of shares
outstanding:
Class A - basic 22,194,507 21,383,054
Class A - diluted 22,388,042 21,946,147
Class B - basic and diluted 5,576,775 5,576,775
Net premiums written$ 147,713 $ 135,344
Book value per common share
at end of period$ 15.66 $ 15.40
Annualized return on average equity 7.3% 4.3%


Donegal Group Inc.
Consolidated Statements of Income
(unaudited; in thousands, except share data)
Year Ended December 31,
2015 2014
Net premiums earned$ 605,641 $ 556,498
Investment income, net of expenses 20,950 18,344
Net realized investment gains 1,934 3,134
Lease income 750 856
Installment payment fees 5,835 6,473
Equity in earnings of DFSC 1,277 1,243
Total revenues 636,387 586,548
Net losses and loss expenses 398,367 388,401
Amortization of deferred acquisition costs 99,513 90,146
Other underwriting expenses 97,710 84,659
Policyholder dividends 3,863 2,796
Interest 1,111 1,517
Other expenses 2,451 2,746
Total expenses 603,015 570,265
Income before income tax expense 33,372 16,283
Income tax expense 6,602 1,744
Net income$ 26,770 $ 14,539
Net income per common share:
Class A - basic$ 0.99 $ 0.56
Class A - diluted$ 0.98 $ 0.55
Class B - basic and diluted$ 0.88 $ 0.49
Supplementary Financial Analysts' Data
Weighted-average number of shares
outstanding:
Class A - basic 22,045,999 21,099,861
Class A - diluted 22,394,121 21,564,456
Class B - basic and diluted 5,576,775 5,576,775
Net premiums written$ 628,837 $ 579,201
Book value per common share
at end of period$ 15.66 $ 15.40
Return on average equity 6.5% 3.6%


Donegal Group Inc.
Consolidated Balance Sheets
(in thousands)
December 31, December 31,
2015 2014
(unaudited)
ASSETS
Investments:
Fixed maturities:
Held to maturity, at amortized cost$ 310,259 $ 307,392
Available for sale, at fair value 501,393 435,150
Equity securities, at fair value 37,261 30,822
Investments in affiliates 38,477 39,284
Short-term investments, at cost 13,432 20,293
Total investments 900,822 832,941
Cash 28,139 35,579
Premiums receivable 141,267 133,307
Reinsurance receivable 259,728 253,636
Deferred policy acquisition costs 52,108 48,299
Prepaid reinsurance premiums 113,523 115,872
Other assets 42,247 39,021
Total assets$ 1,537,834 $ 1,458,655
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Losses and loss expenses$ 578,205 $ 538,258
Unearned premiums 429,493 408,646
Accrued expenses 22,460 19,430
Borrowings under lines of credit 81,000 53,500
Subordinated debentures 5,000 5,000
Other liabilities 13,288 17,686
Total liabilities 1,129,446 1,042,520
Stockholders' equity:
Class A common stock 235 224
Class B common stock 56 56
Additional paid-in capital 219,525 200,349
Accumulated other comprehensive income 774 5,354
Retained earnings 234,804 223,254
Treasury stock, at cost (47,006) (13,102)
Total stockholders' equity 408,388 416,135
Total liabilities and stockholders' equity$ 1,537,834 $ 1,458,655

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

Source:DONEGAL GROUP