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Donegal Group Inc. Announces Second Quarter and First Half 2019 Results

MARIETTA, Pa., July 29, 2019 (GLOBE NEWSWIRE) -- Donegal Group Inc. (DGICA) and (DGICB) today reported its financial results for the second quarter and first half of 2019. The Company will host a conference call to discuss these results on Tuesday, July 30, 2019 at 11:00 A.M. Eastern Time. You may listen to the webcast of this conference call by accessing the event link at http://investors.donegalgroup.com. A replay of the conference call will also be available via the Company’s website.

Significant financial highlights included:

  • Net income of $4.8 million, or 17 cents per Class A share, for the second quarter of 2019, compared to a net loss of $790,000, or 3 cents per Class A share, for the second quarter of 2018
  • Net income of $27.8 million, or 99 cents per diluted Class A share, for the first six months of 2019, compared to a net loss of $19.0 million, or 68 cents per Class A share, for the first six months of 2018
  • Net premiums earned of $188.8 million for the second quarter of 2019 increased 1.6% compared to the second quarter of 2018
  • Net premiums written1 of $197.8 million for the second quarter of 2019 increased 0.9% compared to the second quarter of 2018
  • Combined ratio of 102.0% for the second quarter of 2019, compared to 105.6% for the second quarter of 2018
  • Book value per share of $15.34 at June 30, 2019, compared to $14.05 at year-end 2018
                       
  Three Months Ended June 30,   Six Months Ended June 30,
    2019       2018     % Change     2019       2018     % Change
   
  (dollars in thousands, except per share amounts)
                       
Income Statement Data                  
Net premiums earned $ 188,763     $ 185,714     1.6 %   $ 376,837     $ 367,479     2.5 %
Investment income, net   7,290       6,342     14.9       14,338       12,721     12.7  
Net investment gains   1,566       1,517     3.2       19,663       599     NM  
Total revenues   198,789       195,790     1.5       413,503       385,118     7.4  
Net income (loss)   4,789       (790 )   NM       27,812       (18,968 )   NM  
Non-GAAP operating income (loss)1   3,551       (536 )   NM       10,853       (18,108 )   NM  
                           
Per Share Data                        
Net income (loss) – Class A (diluted) $ 0.17     $ (0.03 )   NM     $ 0.99     $ (0.68 )   NM  
Net income (loss) – Class B   0.15       (0.03 )   NM       0.90       (0.63 )   NM  
Non-GAAP operating income (loss) – Class A (diluted)   0.13       (0.02 )   NM       0.39       (0.65 )   NM  
Non-GAAP operating income (loss) – Class B   0.11       (0.02 )   NM       0.35       (0.60 )   NM  
Book value   15.34       14.85     3.3 %     15.34       14.85     3.3 %
                       
1The “Definitions of Non-GAAP and Operating Measures” section of this release defines and reconciles data that we prepare on an accounting basis other than U.S. generally accepted accounting principles (“GAAP”).
2Not meaningful.
 

Management Commentary

Kevin G. Burke, President and Chief Executive Officer of Donegal Group Inc., noted, “We were pleased with the improvement in our results for the second quarter of 2019. The improvement represented a continuation of the favorable operating metrics Donegal Group reported in the first quarter of 2019. Net income of $0.17 per diluted Class A share for the second quarter of 2019 and net income of $0.99 per diluted Class A share for the first half of 2019 improved significantly compared to the results we reported for the comparable periods in 2018. We attribute our 2019 performance to a number of different factors, the most notable being strong underwriting performance within our commercial lines business segment.”

Mr. Burke continued, “We continue to shift our overall mix of business to a higher proportion of commercial business, where we see greater opportunities for profitable growth for the foreseeable future. Net premiums written within our commercial segment grew 13.5% for the second quarter of 2019 and comprised approximately 52.3% of our total writings. We attribute this growth to new commercial accounts our insurance subsidiaries have written throughout their operating regions, a continuation of renewal premium increases that averaged 2.1% and lower reinsurance premiums. Renewal premium increases, excluding workers’ compensation, averaged 4.6% for the second quarter of 2019. Our commercial multi-peril and workers' compensation lines generated profitable results, and we have continued to implement commercial automobile rate increases to improve results in that line.

“Our commercial lines growth was offset partially by a 10.0% reduction in net premiums written within our personal lines segment. The decline in personal lines net written premiums largely reflected the impact of underwriting actions our insurance subsidiaries have taken to slow new business growth and improve profitability and the impact of our exit from the personal lines markets in seven unprofitable states. Those factors were partially mitigated by rate increases that averaged 5.9% for the quarter and lower reinsurance premiums. We remain committed to maintaining a balanced mix of commercial and personal lines products at pricing levels that we expect will allow us to remain profitable through fluctuating market cycles.”

Jeffrey D. Miller, Executive Vice President and Chief Financial Officer of Donegal Group Inc., commented on the second quarter underwriting results, “We were pleased that our commercial lines insurance segment generated a statutory combined ratio1 of 92.9% during the second quarter of 2019, driven primarily by our commercial multi-peril and workers’ compensation lines of business. That performance was offset by underwriting losses within our personal lines insurance segment, although both our homeowners and personal automobile lines of business showed improvement from the prior-year period. Our expense ratio was relatively stable at 31.3% for the second quarter of 2019. Overall, our combined ratio was 102.0% for the second quarter of 2019, compared to 105.6% for the prior-year quarter. While we were pleased with the incremental improvement, our results for the second quarter of 2019 did not reflect our targeted level of underwriting profitability.”

Mr. Burke concluded, “Our net income during the first half of 2019, which included a gain on the March 2019 sale of Donegal Financial Services Corporation, and unrealized gains within our available-for-sale fixed-maturity portfolio during the period contributed to an increase in our book value to $15.34 at June 30, 2019, compared to $14.05 at December 31, 2018. We are focused on improving our financial performance, utilizing technology to improve our operational efficiency, strategically modernizing our business, and enhancing our market position to compete effectively. Our goal remains to generate consistent favorable returns for our stockholders over the long term.”

Insurance Operations
Donegal Group is an insurance holding company whose insurance subsidiaries offer personal and commercial property and casualty lines of insurance in three Mid-Atlantic states (Delaware, Maryland and Pennsylvania), three New England states (Maine, New Hampshire and Vermont), six Southern states (Alabama, Georgia, North Carolina, South Carolina, Tennessee and Virginia) and eight Midwestern states (Illinois, Indiana, Iowa, Michigan, Nebraska, Ohio, South Dakota and Wisconsin). Donegal Mutual Insurance Company and the insurance subsidiaries of Donegal Group conduct business together as the Donegal Insurance Group. 

 
  Three Months Ended June 30,   Six Months Ended June 30,
    2019     2018   % Change     2019     2018   % Change
   
  (dollars in thousands)
                       
Net Premiums Earned                    
Personal lines $ 93,975   $ 101,162   (7.1 %)   $ 190,568   $ 200,701   (5.0 %)
Commercial lines   94,788     84,552   12.1       186,269     166,778   11.7  
Total net premiums earned $ 188,763   $ 185,714   1.6 %   $ 376,837   $ 367,479   2.5 %
                       
Net Premiums Written                  
Personal lines:                    
Automobile $ 56,197   $ 66,511   (15.5 %)   $ 112,223   $ 131,417   (14.6 %)
Homeowners   32,685     35,030   (6.7 )     57,713     61,587   (6.3 )
Other   5,458     3,265   67.2       10,638     6,194   71.7  
Total personal lines   94,340     104,806   (10.0 )     180,574     199,198   (9.3 )
Commercial lines:                    
Automobile   31,245     27,857   12.2       65,547     58,103   12.8  
Workers' compensation   29,024     26,566   9.3       62,416     59,696   4.6  
Commercial multi-peril   35,454     29,710   19.3       73,294     61,895   18.4  
Other   7,740     7,010   10.4       15,887     12,313   29.0  
Total commercial lines   103,463     91,143   13.5       217,144     192,007   13.1  
Total net premiums written $ 197,803   $ 195,949   0.9 %   $ 397,718   $ 391,205   1.7 %
 

Net Premiums Written

The 0.9% increase in net premiums written for the second quarter of 2019 compared to the second quarter of 2018, as shown in the table above, represents 13.5% growth in commercial lines net premiums written, offset by a 10.0% decline in personal lines net premiums written for the reasons we describe below. The $1.9 million growth in net premiums written for the second quarter of 2019 compared to the second quarter of 2018 included:

  • $12.3 million increase in commercial lines premiums that we attribute primarily to new commercial accounts our insurance subsidiaries have written throughout their operating regions, a continuation of renewal premium increases and lower reinsurance premiums.
  • $10.4 million decline in personal lines premiums that we attribute to net attrition as a result of underwriting measures our insurance subsidiaries implemented to slow new policy growth and to increase pricing on renewal policies, as well as the non-renewal of unprofitable personal lines business in seven states, partially offset by premium rate increases our insurance subsidiaries have implemented over the past four quarters and lower reinsurance premiums.

Underwriting Performance

We evaluate the performance of our commercial lines and personal lines segments primarily based upon the underwriting results of our insurance subsidiaries as determined under statutory accounting practices. The following table presents comparative details with respect to the GAAP and statutory combined ratios for the three and six months ended June 30, 2019 and 2018:

  Three Months Ended   Six Months Ended
  June 30,   June 30,
  2019   2018   2019   2018
               
GAAP Combined Ratios (Total Lines)        
Loss ratio (non-weather) 60.7 %   63.6 %   60.5 %   71.3 %
Loss ratio (weather-related) 9.0     9.5     7.1     8.3  
Expense ratio 31.3     31.8     32.0     32.1  
Dividend ratio 1.0     0.7     1.1     0.7  
Combined ratio 102.0 %   105.6 %   100.7 %   112.4 %
               
Statutory Combined Ratios          
Personal lines:            
Automobile 107.2 %   109.7 %   104.2 %   113.8 %
Homeowners 113.6     113.9     104.4     112.8  
Other 89.2     104.9     79.9     119.5  
Total personal lines 108.5     111.0     103.1     113.6  
Commercial lines:            
Automobile 112.7     116.0     114.5     143.5  
Workers' compensation 71.7     92.9     80.2     88.1  
Commercial multi-peril 93.2     91.2     92.1     103.8  
Other 95.1     67.1     80.9     54.5  
Total commercial lines 92.9     97.3     94.6     108.0  
Total lines 100.7 %   104.5 %   98.9 %   111.0 %
               

For the second quarter of 2019, the loss ratio decreased to 69.7%, compared to 73.1% for the second quarter of 2018. Weather-related losses of $17.0 million for the second quarter of 2019, or 9.0 percentage points of the loss ratio, decreased from $17.7 million for the second quarter of 2018, or 9.5 percentage points of the loss ratio. Weather-related loss activity for the second quarter of 2019 was higher than our five-year average of $14.0 million for second-quarter weather-related losses.

Large fire losses, which we define as individual fire losses in excess of $50,000, for the second quarter of 2019 were $6.2 million, or 3.3 percentage points of the loss ratio. That amount was modestly lower than the large fire losses of $6.7 million, or 3.6 percentage points of the loss ratio, for the second quarter of 2018.

Net development of reserves for losses incurred in prior accident years decreased the loss ratio for the second quarter of 2019 by 1.5 percentage points, compared to virtually no impact for the second quarter of 2018. Our insurance subsidiaries experienced favorable development in workers’ compensation losses, partially offset by modest unfavorable development in several other lines of business for the second quarter of 2019.

The expense ratio was 31.3% for the second quarter of 2019, in line with the 31.8% expense ratio for the second quarter of 2018.

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, we had invested 93.4% of our consolidated investment portfolio in diversified, highly rated and marketable fixed-maturity securities at June 30, 2019.

  June 30, 2019   December 31, 2018
  Amount   %   Amount   %
   
  (dollars in thousands)
Fixed maturities, at carrying value:          
U.S. Treasury securities and obligations of U.S.        
government corporations and agencies $ 120,708     11.2 %   $ 120,432     11.7 %
Obligations of states and political subdivisions   233,081     21.7       234,508     22.8  
Corporate securities   291,846     27.1       264,843     25.7  
Mortgage-backed securities   358,573     33.4       309,574     30.0  
Total fixed maturities   1,004,208     93.4       929,357     90.2  
Equity securities, at fair value   46,767     4.3       43,667     4.2  
Investments in affiliates   -     0.0       41,026     4.0  
Short-term investments, at cost   24,453     2.3       16,749     1.6  
Total investments $ 1,075,428     100.0 %   $ 1,030,799     100.0 %
               
Average investment yield   2.7 %         2.6 %    
Average tax-equivalent investment yield   2.8 %         2.8 %    
Average fixed-maturity duration (years)   4.0           4.4      
               

Net investment income of $7.3 million for the second quarter of 2019 increased 14.9% compared to $6.3 million in net investment income for the second quarter of 2018. The increase in net investment income reflected primarily an increase in average invested assets relative to the prior-year second quarter.

Net investment gains of $1.6 million for the second quarter of 2019 were primarily related to unrealized gains in the fair value of equity securities held at June 30, 2019. That amount was comparable to net investment gains of $1.5 million for the second quarter of 2018.

Net investment gains of $19.7 million for the first six months of 2019 included $12.7 million from the March 2019 sale of Donegal Financial Services Corporation and $6.1 million related to unrealized gains in the fair value of equity securities held at June 30, 2019.

Definitions of Non-GAAP and Operating Measures
We prepare our consolidated financial statements on the basis of GAAP. Our 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, we also utilize certain non-GAAP financial measures that we believe provide value in managing our business and for comparison to the financial results of our peers. These non-GAAP measures are net premiums written, operating income or loss and statutory combined ratio.

Net premiums written and operating income or loss are non-GAAP financial measures investors in insurance companies commonly use. We define net premiums written as the amount of full-term premiums our insurance subsidiaries record for policies effective within a given period less premiums our insurance subsidiaries cede to reinsurers. We define operating income or loss as net income or loss excluding after-tax net investment gains or losses, after-tax restructuring charges and other significant non-recurring items. Because our calculation of operating income or loss may differ from similar measures other companies use, investors should exercise caution when comparing our measure of operating income or loss to the measure of other companies.

The following table provides a reconciliation of net premiums earned to net premiums written for the periods indicated:

  Three Months Ended June 30,   Six Months Ended June 30,
   
2019
    2018   % Change     2019     2018   % Change
   
  (dollars in thousands)
Reconciliation of Net Premiums                  
Earned to Net Premiums Written                  
Net premiums earned $ 188,763   $ 185,714   1.6 %   $ 376,837   $ 367,479   2.5 %
Change in net unearned premiums   9,040     10,235   (11.7 )     20,881     23,726   (12.0 )
Net premiums written $ 197,803   $ 195,949   0.9 %   $ 397,718   $ 391,205   1.7 %
                       
                       

The following table provides a reconciliation of net income (loss) to operating income (loss) for the periods indicated:

  Three Months Ended June 30,   Six Months Ended June 30,
   
2019
      2018     % Change     2019       2018     % Change
   
  (dollars in thousands, except per share amounts)
                       
Reconciliation of Net Income (Loss)                
to Non-GAAP Operating Income (Loss)                
Net income (loss) $   4,788     $   (790 )   NM     $   27,812     $   (18,968 )   NM
Investment gains (after tax)     (1,237 )       (1,001 )   23.6 %       (16,959 )       (395 )   NM
Restructuring charge (after tax)     -          1,255     NM         -          1,255     NM
Non-GAAP operating income (loss) $   3,551     $   (536 )   NM     $   10,853     $   (18,108 )   NM
                       
Per Share Reconciliation of Net Income (Loss)              
to Non-GAAP Operating Income (Loss)                 
Net income (loss) – Class A (diluted) $   0.17     $   (0.03 )   NM     $   0.99     $   (0.68 )   NM
Investment gains (after tax)     (0.04 )       (0.04 )   0.0 %       (0.60 )       (0.02 )   NM
Restructuring charge (after tax)     -          0.05     NM         -          0.05     NM
Non-GAAP operating income (loss) – Class A $   0.13     $   (0.02 )   NM     $   0.39     $   (0.65 )   NM
                         
Net income (loss)  – Class B $   0.15     $   (0.03 )   NM     $   0.90     $   (0.63 )   NM
Investment gains (after tax)     (0.04 )       (0.03 )   33.3 %       (0.55 )       (0.01 )   NM
Restructuring charge (after tax)     -          0.04     NM         -          0.04     NM
Non-GAAP operating income (loss) – Class B $   0.11     $   (0.02 )   NM     $   0.35     $   (0.60 )   NM
                       

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.

About Donegal Group Inc.

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. Our Class A common stock and Class B common stock trade on the NASDAQ Global Select Market under the symbols DGICA and DGICB, respectively. We are focused on several primary strategies, including improving our financial performance, utilizing technology to improve our operational efficiency, strategically modernizing our business in order to achieve operational excellence and enhancing our market position to compete effectively.

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: adverse and catastrophic weather events, 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, 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 June 30,
    2019     2018  
       
Net premiums earned $ 188,763   $ 185,714  
Investment income, net of expenses   7,290     6,342  
Net investment gains   1,566     1,517  
Lease income   112     123  
Installment payment fees   1,058     1,306  
Equity in earnings of DFSC   -     788  
Total revenues   198,789     195,790  
       
Net losses and loss expenses   131,507     135,754  
Amortization of deferred acquisition costs   30,925     30,579  
Other underwriting expenses   28,208     28,492  
Policyholder dividends   1,969     1,214  
Interest   303     566  
Other expenses, net   339     518  
Total expenses   193,251     197,123  
       
Income (loss) before income tax expense (benefit)   5,538     (1,333 )
Income tax expense (benefit)   749     (543 )
       
Net income (loss) $ 4,789   $ (790 )
       
Net income (loss) per common share:    
Class A - basic and diluted $ 0.17   $ (0.03 )
Class B - basic and diluted $ 0.15   $ (0.03 )
       
Supplementary Financial Analysts' Data    
       
Weighted-average number of shares outstanding:      
Class A - basic   22,932,894     22,685,964  
Class A - diluted   23,132,683     22,887,365  
Class B - basic and diluted   5,576,775     5,576,775  
       
Net premiums written $ 197,803   $ 195,949  
       
Book value per common share at end of period $ 15.34   $ 14.85  
       

 

Donegal Group Inc.
Consolidated Statements of Income
(unaudited; in thousands, except share data)
       
  Six Months Ended June 30,
    2019     2018  
       
Net premiums earned $ 376,837   $ 367,479  
Investment income, net of expenses   14,338     12,721  
Net investment gains   19,663     599  
Lease income   223     246  
Installment payment fees   2,147     2,653  
Equity in earnings of DFSC   295     1,420  
Total revenues   413,503     385,118  
       
Net losses and loss expenses   254,618     292,337  
Amortization of deferred acquisition costs   61,517     60,244  
Other underwriting expenses   58,893     57,815  
Policyholder dividends   4,319     2,516  
Interest   869     1,030  
Other expenses, net   904     1,044  
Total expenses   381,120     414,986  
       
Income (loss) before income tax expense (benefit)   32,383     (29,868 )
Income tax expense (benefit)   4,571     (10,900 )
       
Net income (loss) $ 27,812   $ (18,968 )
       
Net income (loss) per common share:    
Class A - basic $ 1.00   $ (0.68 )
Class A - diluted $ 0.99   $ (0.68 )
Class B - basic and diluted $ 0.90   $ (0.63 )
       
Supplementary Financial Analysts' Data    
       
Weighted-average number of shares outstanding:    
Class A - basic   22,891,535     22,650,899  
Class A - diluted   23,027,205     23,139,596  
Class B - basic and diluted   5,576,775     5,576,775  
       
Net premiums written $ 397,718   $ 391,205  
       
Book value per common share at end of period $ 15.34   $ 14.85  
       

 

Donegal Group Inc.
Consolidated Balance Sheets
(in thousands)
       
  June 30,   December 31,
    2019       2018  
  (unaudited)    
       
ASSETS              
Investments:      
Fixed maturities:      
Held to maturity, at amortized cost $ 434,458     $ 402,799  
Available for sale, at fair value   569,750       526,558  
Equity securities, at fair value   46,767       43,667  
Investments in affiliates   -       41,026  
Short-term investments, at cost   24,453       16,749  
Total investments   1,075,428       1,030,799  
Cash   35,946       52,594  
Premiums receivable   176,258       156,702  
Reinsurance receivable   357,629       343,369  
Deferred policy acquisition costs   64,274       60,615  
Prepaid reinsurance premiums   143,969       135,380  
Other assets   47,779       52,619  
Total assets $ 1,901,283     $ 1,832,078  
       
LIABILITIES AND STOCKHOLDERS' EQUITY              
Liabilities:      
Losses and loss expenses $ 845,282     $ 814,665  
Unearned premiums   535,999       506,529  
Accrued expenses   25,180       25,442  
Borrowings under lines of credit   35,000       60,000  
Subordinated debentures   5,000       5,000  
Other liabilities   16,968       21,572  
Total liabilities   1,463,429       1,433,208  
Stockholders' equity:      
Class A common stock   260       258  
Class B common stock   56       56  
Additional paid-in capital   264,320       261,259  
Accumulated other comprehensive loss   (1,837 )     (14,228 )
Retained earnings   216,281       192,751  
Treasury stock   (41,226 )     (41,226 )
Total stockholders' equity   437,854       398,870  
Total liabilities and stockholders' equity $ 1,901,283     $ 1,832,078  
       

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