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Donegal Group Inc. Announces Third Quarter and First Nine Months of 2019 Results

/EIN News/ -- MARIETTA, Pa., Oct. 30, 2019 (GLOBE NEWSWIRE) -- Donegal Group Inc. (NASDAQ:DGICA) and (NASDAQ:DGICB) today reported its financial results for the third quarter and first nine months of 2019.

The Company will hold a conference call to discuss these results on Thursday, October 31, 2019 at 11:00AM 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 $5.2 million, or 18 cents per diluted Class A share, for the third quarter of 2019, compared to $1.2 million, or 4 cents per diluted Class A share, for the third quarter of 2018
  • Net income of $33.0 million, or $1.17 per diluted Class A share, for the first nine months of 2019, compared to a net loss of $17.8 million, or 64 cents per Class A share, for the first nine months of 2018
  • Net premiums earned of $189.8 million for the third quarter of 2019 increased 1.2% compared to the prior-year third quarter
  • Net premiums written1 of $183.9 million for the third quarter of 2019 decreased 0.4% compared to the prior-year third quarter
  • Combined ratio of 100.6% for the third quarter of 2019, compared to 105.2% for the prior-year third quarter
  • Book value per share of $15.46 at September 30, 2019, compared to $14.05 at year-end 2018
       
  Three Months Ended September 30,   Nine Months Ended September 30,
    2019       2018     % Change     2019     2018     % Change
   
  (dollars in thousands, except per share amounts)
                       
Income Statement Data                      
Net premiums earned $   189,821     $   187,662     1.2 %   $   566,658   $   555,140     2.1 %
Investment income, net     7,390         6,620     11.6         21,728       19,341     12.3  
Net investment (losses) gains     (369 )       3,464      NM         19,294       4,062     375.0  
Total revenues     198,010         199,904       (0.9 )       611,513       585,022     4.5  
Net income (loss)     5,186         1,206       330.0         32,998       (17,762 )   NM  
Non-GAAP operating income (loss)1     5,708         (917 )    NM         16,561       (19,025 )   NM  
                         
Per Share Data                        
Net income (loss) – Class A (diluted) $   0.18     $   0.04     350.0 %   $   1.17   $   (0.64 )   NM  
Net income (loss) – Class B     0.16         0.04     300.0         1.06       (0.59 )   NM  
Non-GAAP operating income (loss) – Class A (diluted)     0.20         (0.03 )    NM         0.59       (0.68 )   NM  
Non-GAAP operating income (loss) – Class B     0.18         (0.03 )    NM         0.53       (0.63 )   NM  
Book value     15.46         14.68     5.3         15.46       14.68     5.3 %
                       
                       

1The “Definitions of Non-GAAP Financial 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”).

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 third quarter of 2019, adding to the solid results we reported for the first half of the year. Donegal Group generated net income of $0.18 per diluted Class A share for the third quarter of 2019, a significant increase compared to the results for the comparable period in 2018.”

Mr. Burke continued, “We continue to see favorable market opportunities to grow our commercial business segment, observing positive trends in each of our lines. For the third quarter of 2019, we achieved 13.2% growth in our commercial lines net premiums written compared to the prior-year quarter, with commercial premiums accounting for 51.4% of our quarterly net premiums written. That growth resulted from a combination of new business accounts, renewal pricing increases and reduced reinsurance premiums.

“Our personal line net premiums written during the third quarter of 2019 decreased 11.6% as we continue to focus on improving profitability within that segment. We have previously outlined our strategic plans, which include reducing our exposures in certain unprofitable personal lines markets while implementing renewal price increases and tightening our underwriting guidelines. We continue to make progress toward our goal of obtaining a profitable balance of commercial and personal lines business.”

Jeffrey D. Miller, Executive Vice President and Chief Financial Officer, commented on the third quarter underwriting results, “Our commercial lines insurance segment generated a statutory combined ratio1 of 97.9% during the third quarter of 2019, driven primarily by favorable performance in our commercial multi-peril and workers’ compensation lines of business. While weather-related loss activity was lower than our historical average for the third quarter, the performance of our personal lines insurance segment continued to fall short of our targeted level of underwriting profitability. Our expense ratio was relatively stable at 30.5% for the third quarter of 2019. Overall, our combined ratio was 100.6% for the third quarter of 2019, compared to 105.2% for the prior-year quarter. We remain focused on strategic and tactical initiatives to position our book of business to deliver solid profitability over time.”

Mr. Burke concluded, “Our net income for the first nine months 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 $15.46 at September 30, 2019, compared to $14.05 at December 31, 2018. We remain committed to our goal of generating consistent favorable returns to fund dividends to our stockholders and increase our book value 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 September 30,   Nine Months Ended September 30,
    2019     2018   % Change     2019     2018   % Change
   
  (dollars in thousands)
                       
Net Premiums Earned                      
Personal lines $   91,497   $   103,410    (11.5 %)   $   282,065   $   304,111    (7.2 %)
Commercial lines     98,324       84,252   16.7         284,593       251,029     13.4  
Total net premiums earned $   189,821   $   187,662   1.2 %   $   566,658   $   555,140   2.1 %
                       
Net Premiums Written                      
Personal lines:                      
Automobile $   51,991   $   62,502    (16.8 %)   $   164,214   $   193,919    (15.3 %)
Homeowners     32,461       34,562     (6.1 )       90,174       96,149     (6.2 )
Other     4,930       4,009     23.0         15,568       10,203     52.6  
Total personal lines     89,382       101,073     (11.6 )       269,956       300,271     (10.1 )
Commercial lines:                      
Automobile     28,702       25,242     13.7         94,249       83,345     13.1  
Workers' compensation     25,875       25,039     3.3         88,291       84,735     4.2  
Commercial multi-peril     32,708       28,049     16.6         106,002       89,944     17.9  
Other     7,203       5,115     40.8         23,090       17,428     32.5  
Total commercial lines     94,488       83,445     13.2         311,632       275,452     13.1  
Total net premiums written $   183,870   $   184,518    (0.4 %)   $   581,588   $   575,723   1.0 %
                       

Net Premiums Written

The 0.4% decrease in net premiums written for the third quarter of 2019 compared to the third quarter of 2018, as shown in the table above, represents 13.2% growth in commercial lines net premiums written, offset by an 11.6% decrease in personal lines net premiums written for the reasons we describe below. The $648,000 decline in net premiums written for the third quarter of 2019 compared to the third quarter of 2018 included:

  • $11.0 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.
  • $11.7 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 nine months ended September 30, 2019 and 2018:

  Three Months Ended   Nine Months Ended
  September 30,   September 30,
  2019     2018     2019     2018  
               
GAAP Combined Ratios (Total Lines)              
Loss ratio (non-weather) 61.6 %   63.7 %   60.8 %   68.5 %
Loss ratio (weather-related) 7.3      11.3      7.2      9.5   
Expense ratio 30.5      29.6      31.5      31.3   
Dividend ratio 1.2      0.6      1.2      0.6   
Combined ratio 100.6 %   105.2 %   100.7 %   109.9 %
               
Statutory Combined Ratios              
Personal lines:              
Automobile 103.3 %   115.8 %   103.9 %   114.5 %
Homeowners 109.4      110.3      106.0      112.0   
Other 73.6      63.5      77.7      94.9   
Total personal lines 103.9      111.5      103.3      113.0   
Commercial lines:              
Automobile 113.9      114.6      114.3      133.7   
Workers' compensation 85.4      83.6      82.0      86.6   
Commercial multi-peril 98.7      96.0      94.4      101.2   
Other 76.6      94.2      79.3      64.9   
Total commercial lines 97.9      97.6      95.8      104.5   
Total lines 100.8 %   105.2 %   99.5 %   109.0 %
               
               

Loss Ratio

For the third quarter of 2019, the loss ratio decreased to 68.9%, compared to 75.0% for the third quarter of 2018. Weather-related losses of approximately $13.9 million for the third quarter of 2019, or 7.3 percentage points of the loss ratio, decreased from $21.2 million, or 11.3 percentage points of the loss ratio, for the third quarter of 2018. Weather-related loss activity for the third quarter of 2019 was lower than our previous five-year average of $15.3 million for third quarter weather-related losses.

Large fire losses, which we define as individual fire losses in excess of $50,000, for the third quarter of 2019 were $7.8 million, or 4.1 percentage points of the loss ratio. That amount represented an increase compared to the large fire losses of $4.7 million for the third quarter of 2018, or 2.5 percentage points of the loss ratio. Both homeowners and commercial fire losses increased in the third quarter of 2019.

Net development of reserves for losses incurred in prior accident years did not have a material impact on the loss ratio for the third quarter of 2019. Our insurance subsidiaries experienced favorable development in workers’ compensation losses, partially offset by modest unfavorable development in commercial multi-peril losses for the third quarter of 2019. Development of reserves for losses incurred in prior accident years added 1.4 percentage points to the loss ratio for the third quarter of 2018.

The expense ratio was 30.5% for the third quarter of 2019, compared to 29.6% for the third quarter of 2018. The Company attributes this increase to higher underwriting-based incentive costs for the third quarter of 2019 compared to the prior-year quarter.

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 94.4% of our consolidated investment portfolio in diversified, highly rated and marketable fixed-maturity securities at September 30, 2019.

  September 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 $   110,930     10.3 %   $   120,432     11.7 %
Obligations of states and political subdivisions     240,741     22.3         234,508     22.8  
Corporate securities     302,435     28.0         264,843     25.7  
Mortgage-backed securities     363,884     33.8         309,574     30.0  
Total fixed maturities     1,017,990     94.4         929,357     90.2  
Equity securities, at fair value     52,099     4.8         43,667     4.2  
Investments in affiliates     -      0.0         41,026     4.0  
Short-term investments, at cost     8,626     0.8         16,749     1.6  
Total investments $   1,078,715     100.0 %   $   1,030,799     100.0 %
               
Average investment yield   2.7 %         2.6 %    
Average tax-equivalent investment yield   2.9 %         2.8 %    
Average fixed-maturity duration (years)     4.1             4.4      
               
               

Net investment income of $7.4 million for the third quarter of 2019 increased 11.6% compared to $6.6 million in net investment income for the third quarter of 2018. The increase in net investment income primarily reflected an increase in average invested assets compared to the prior-year third quarter.

Net investment losses of $369,000 for the third quarter of 2019 were primarily related to unrealized losses in the fair value of equity securities held at September 30, 2019. That amount compared to net investment gains of $3.5 million for the third quarter of 2018.

Net investment gains of $19.3 million for the first nine months of 2019 included $12.7 million from the March 2019 sale of Donegal Financial Services Corporation and $5.5 million related to unrealized gains in the fair value of equity securities held at September 30, 2019. Net investment gains of $4.1 million for the first nine months of 2018 resulted primarily from unrealized gains within our equity securities portfolio.

Definitions of Non-GAAP Financial 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 September 30,   Nine Months Ended September 30,
    2019       2018     % Change     2019     2018   % Change
   
  (dollars in thousands)
                       
Reconciliation of Net Premiums                      
Earned to Net Premiums Written                      
Net premiums earned $   189,821     $   187,662     1.2 %   $   566,658   $   555,140   2.1 %
Change in net unearned premiums     (5,951 )       (3,144 )   89.3         14,930       20,583   (27.5 )
Net premiums written $   183,870     $   184,518      (0.4 %)   $   581,588   $   575,723   1.0 %
                       
                       

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

  Three Months Ended September 30,   Nine Months Ended September 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) $   5,186   $   1,206     330.0 %   $   32,998     $   (17,762 )   NM  
Investment losses (gains) (after tax)     292       (2,286 )   NM         (16,667 )       (2,681 )   521.7 %
Restructuring charge (after tax)     -        -        -          -          1,255     NM  
Other, net     230       163     41.1          230         163     41.1   
Non-GAAP operating income (loss) $   5,708   $   (917 )   NM     $   16,561     $   (19,025 )   NM  
                       
Per Share Reconciliation of Net Income (Loss)                      
to Non-GAAP Operating Income (Loss)                      
Net income (loss) – Class A (diluted) $   0.18   $   0.04     350.0 %   $   1.17     $   (0.64 )   NM  
Investment losses (gains) (after tax)     0.01       (0.08 )   NM         (0.59 )       (0.09 )   555.6 %
Restructuring charge (after tax)     -        -        -          -          0.04     NM  
Other, net     0.01       0.01       -          0.01         0.01       -   
Non-GAAP operating income (loss) – Class A $   0.20   $   (0.03 )   NM     $   0.59     $   (0.68 )   NM  
                       
Net income (loss)  – Class B $   0.16   $   0.04     300.0 %   $   1.06     $   (0.59 )   NM  
Investment losses (gains) (after tax)     0.01       (0.07 )   NM         (0.54 )       (0.08 )   575.0 %
Restructuring charge (after tax)     -        -        -          -          0.04     NM  
Other, net     0.01       -      NM         0.01         -      NM  
Non-GAAP operating income (loss) – Class B $   0.18   $   (0.03 )   NM     $   0.53     $   (0.63 )   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 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 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. 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 growing profitably in commercial lines, 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 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 September 30,
      2019       2018
         
Net premiums earned $   189,821     $   187,662
Investment income, net of expenses     7,390         6,620
Net investment (losses) gains     (369 )       3,464
Lease income     110         120
Installment payment fees     1,058         1,305
Equity in earnings of DFSC     -          733
  Total revenues     198,010         199,904
         
Net losses and loss expenses     130,743         140,726
Amortization of deferred acquisition costs     31,304         31,110
Other underwriting expenses     26,517         24,529
Policyholder dividends     2,447         1,050
Interest     443         652
Other expenses, net     251         560
  Total expenses     191,705         198,627
         
Income before income tax expense     6,305         1,277
Income tax expense     1,119         71
         
Net income $   5,186     $   1,206
         
Net income per common share:      
  Class A - basic $   0.19     $   0.04
  Class A - diluted $   0.18     $   0.04
  Class B - basic and diluted $   0.16     $   0.04
         
Supplementary Financial Analysts' Data      
         
Weighted-average number of shares      
  outstanding:      
  Class A - basic     23,015,383         22,717,333
  Class A - diluted     23,291,609         22,894,773
  Class B - basic and diluted     5,576,775         5,576,775
         
Net premiums written $   183,870     $   184,518
         
Book value per common share      
  at end of period $   15.46     $   14.68
         


Donegal Group Inc.
Consolidated Statements of Income
(unaudited; in thousands, except share data)
         
    Nine Months Ended September 30,
      2019     2018  
         
Net premiums earned $   566,658   $   555,140  
Investment income, net of expenses     21,728       19,341  
Net investment gains     19,294       4,062  
Lease income     334       366  
Installment payment fees     3,204       3,960  
Equity in earnings of DFSC     295       2,153  
  Total revenues     611,513       585,022  
         
Net losses and loss expenses     385,361       433,063  
Amortization of deferred acquisition costs     92,821       91,354  
Other underwriting expenses     85,410       82,344  
Policyholder dividends     6,766       3,566  
Interest     1,312       1,682  
Other expenses, net     1,156       1,604  
  Total expenses     572,826       613,613  
         
Income (loss) before income tax expense (benefit)     38,687       (28,591 )
Income tax expense (benefit)     5,689       (10,829 )
         
Net income (loss) $   32,998   $   (17,762 )
         
Net income (loss) per common share:      
  Class A - basic $   1.18   $   (0.64 )
  Class A - diluted $   1.17   $   (0.64 )
  Class B - basic and diluted $   1.06   $   (0.59 )
         
Supplementary Financial Analysts' Data      
         
Weighted-average number of shares      
  outstanding:      
  Class A - basic     22,933,279       22,673,287  
  Class A - diluted     23,115,784       23,057,629  
  Class B - basic and diluted     5,576,775       5,576,775  
         
Net premiums written $   581,588   $   575,723  
         
Book value per common share      
  at end of period $   15.46   $   14.68  
         


Donegal Group Inc.
Consolidated Balance Sheets
(in thousands)
           
      September 30,   December 31,
        2019       2018  
      (unaudited)    
           
ASSETS
Investments:      
  Fixed maturities:      
    Held to maturity, at amortized cost $   458,889     $   402,799  
    Available for sale, at fair value     559,101         526,558  
  Equity securities, at fair value     52,099         43,667  
  Investments in affiliates     -          41,026  
  Short-term investments, at cost     8,626         16,749  
      Total investments     1,078,715         1,030,799  
Cash       55,269         52,594  
Premiums receivable     173,750         156,702  
Reinsurance receivable     362,367         343,369  
Deferred policy acquisition costs     63,686         60,615  
Prepaid reinsurance premiums     141,958         135,380  
Other assets     45,340         52,619  
    Total assets $   1,921,085     $   1,832,078  
           
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:        
  Losses and loss expenses $   864,534     $   814,665  
  Unearned premiums     528,037         506,529  
  Accrued expenses     26,965         25,442  
  Borrowings under lines of credit     35,000         60,000  
  Subordinated debentures     5,000         5,000  
  Other liabilities     18,997         21,572  
    Total liabilities     1,478,533         1,433,208  
Stockholders' equity:      
  Class A common stock     261         258  
  Class B common stock     56         56  
  Additional paid-in capital     265,680         261,259  
  Accumulated other comprehensive income (loss)     418         (14,228 )
  Retained earnings     217,363         192,751  
  Treasury stock     (41,226 )       (41,226 )
    Total stockholders' equity     442,552         398,870  
    Total liabilities and stockholders' equity $   1,921,085     $   1,832,078  
           

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