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

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 Officer Phone: (717) 426-1931 E-mail: investors@donegalgroup.com

Source:DONEGAL GROUP