Donegal Group Inc. Announces First Quarter 2017 Results

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% -6.8pts
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 ratio33.2 33.2
Dividend ratio0.5 0.5
Combined ratio101.4% 94.0%
Statutory Combined Ratios
Personal Lines:
Automobile104.7% 99.8%
Homeowners106.1 91.0
Other89.6 82.2
Total personal lines104.0 95.6
Commercial Lines:
Automobile107.0 101.8
Workers' compensation80.8 86.5
Commercial multi-peril105.9 84.7
Total commercial lines94.4 88.0
Total lines99.6% 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 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
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
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
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

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