Donegal Group Inc. Announces 2017 Fourth Quarter and Full Year Results

[End Subhead]
[Start Distributor]
GlobeNewswire 23-Feb-2018 8:00 AM
[End Distributor]
MARIETTA, Pa., Feb. 23, 2018 (GLOBE NEWSWIRE) -- Donegal Group Inc. (NASDAQ:DGICA) (NASDAQ:DGICB) today reported its financial results for the fourth quarter and full year of 2017. Significant items included:
Fourth Quarter:
Income tax expense for the fourth quarter of 2017 included $4.8 million, or 17 cents per diluted Class A share, related to the Companys revaluation of its net deferred tax assets pursuant to the provisions of the Tax Cuts and Jobs Act (the TCJA) that was enacted in December of 2017
Net income, excluding the above-mentioned TCJA impact, was $2.0 million, or 7 cents per diluted Class A share, for the fourth quarter of 2017, compared to $5.6 million, or 21 cents per diluted Class A share, for the fourth quarter of 2016
Net premiums earned of $181.1 million for the fourth quarter of 2017 increased 7.2% compared to the fourth quarter of 2016
Net premiums written1 of $171.4 million for the fourth quarter of 2017 increased 5.9% compared to the fourth quarter of 2016 as a result of organic growth in both personal and commercial lines
Combined ratio of 104.8% for the fourth quarter of 2017, compared to 100.5% for the prior-year fourth quarter
Full Year:
Net income, excluding the above-mentioned TCJA impact, was $11.9 million, or 43 cents per diluted Class A share, for the full year of 2017, compared to $30.8 million, or $1.16 per diluted Class A share, for the full year of 2016
Net premiums earned of $702.5 million for the full year of 2017 increased 7.1% compared to the full year of 2016
Net premiums written of $729.1 million for the full year of 2017 increased 6.9% compared to the full year of 2016
Combined ratio of 103.0% for the full year of 2017, compared to 98.1% for the full year of 2016
Book value per share of $15.95 at December 31, 2017, compared to $16.21 at year-end 2016
[Start Table]
Three Months Ended December 31, Year Ended December 31,
2017 2016 % Change 2017 2016 % Change

(dollars in thousands, except per share amounts)

Income Statement Data
Net premiums earned $ 181,060 $ 168,977 7.2 % $ 702,515 $ 656,205 7.1 %
Investment income, net 6,142 6,161 -0.3 23,527 22,633 3.9
Net realized investment gains 1,498 321 366.7 5,705 2,525 125.9
Total revenues 190,759 177,196 7.7 739,027 688,423 7.4
Net (loss) income (2,779 ) 5,554 NM2 7,116 30,801 -76.9
Operating income1 986 5,345 -81.6 8,103 29,160 -72.2
Annualized return on average equity -2.5 % 5.0 % -7.5 pts 1.6 % 7.3 % -5.7 pts

Per Share Data
Net (loss) income Class A (diluted) $ (0.10 ) $ 0.21 NM $ 0.26 $ 1.16 -77.6 %
Net (loss) income Class B (0.10 ) 0.18 NM 0.22 1.06 -79.2
Operating income Class A (diluted) 0.04 0.20 -80.0 % 0.30 1.10 -72.7
Operating income Class B 0.03 0.18 -83.3 0.26 1.00 -74.0
Book value 15.95 16.21 -1.6 15.95 16.21 -1.6

[End Table]
1See the Definitions of Non-GAAP and Operating Measures section of this release, which defines data that the Company prepares on an accounting basis other than U.S. generally accepted accounting principles (GAAP) and reconciles such data to GAAP measures.
2Not meaningful.
Management Commentary
Kevin G. Burke, President and Chief Executive Officer of Donegal Group Inc., stated, We achieved a 7.1% increase in net premiums earned for the full year of 2017, which contributed to a 7.4% increase in our total revenues. However, throughout the fourth quarter of 2017, we continued to experience higher-than-expected losses within our personal and commercial automobile lines of business, primarily related to increases in claim severity in certain geographic markets. We have already implemented actions, and are taking additional measures, intended to reduce future losses and to increase our premium rates to levels that we expect will result in improved profitability of our automobile lines of business going forward. As we stated throughout 2017, we continue to strive for improved profitability by expanding our utilization of predictive analytical tools and implementing rate increases for those lines in all of the states in which we conduct business.
Mr. Burke continued, In spite of the challenges we faced in our automobile lines and the impact of unusually severe weather events, we achieved net income for the full year of 2017 of $11.9 million, excluding the $4.8 million income tax expense impact of the December tax law change. Excellent workers compensation results during the year helped to offset the underperformance in our commercial automobile line of business.
Mr. Burke concluded, In the coming quarters, the actions we have taken to increase premium rates will begin to add to our revenues, and we will continue to file for rate increases and manage our diversified product lines to achieve solid underwriting performance.
Jeffrey D. Miller, Executive Vice President and Chief Financial Officer, added, Our workers compensation statutory combined ratio1 was 80.7% for fourth quarter of 2017, compared to 79.6% for the fourth quarter of 2016. Large losses in our workers compensation line of business, which we define as individual losses in excess of $50,000, increased $5.5 million compared to the fourth quarter of 2016. That increase in loss severity was related to a handful of unusual claims and was partially offset by $4.0 million of favorable loss reserve development that resulted from bulk reserve releases and favorable settlements of claims incurred in prior years.
Mr. Miller concluded, At December 31, 2017, our book value per share was $15.95, compared to $16.21 at December 31, 2016. The bulk of the decrease relates to the additional income tax expense related to the December 2017 tax law change, which reduced our book value per share by 17 cents. We expect to recoup that impact quickly through reduced income tax expense beginning in 2018.
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 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.
[Start Table]
Three Months Ended December 31, Year Ended December 31,
2017 2016 % Change 2017 2016 % Change

(dollars in thousands)

Net Premiums Earned
Personal lines $ 99,106 $ 92,308 7.4 % $ 384,124 $ 361,131 6.4 %
Commercial lines 81,954 76,669 6.9 318,391 295,074 7.9
Total net premiums earned $ 181,060 $ 168,977 7.2 % $ 702,515 $ 656,205 7.1 %

Net Premiums Written
Personal lines:
Automobile $ 61,435 $ 55,875 10.0 % $ 255,297 $ 229,789 11.1 %
Homeowners 29,904 29,422 1.6 125,054 122,811 1.8
Other 4,765 4,690 1.6 19,672 19,057 3.2
Total personal lines 96,104 89,987 6.8 400,023 371,657 7.6
Commercial lines:
Automobile 23,430 20,625 13.6 99,333 87,849 13.1
Workers' compensation 23,891 24,848 (3.9 ) 109,884 108,349 1.4
Commercial multi-peril 25,961 24,225 7.2 110,313 104,728 5.3
Other 2,002 2,091 (4.3 ) 9,586 9,451 1.4
Total commercial lines 75,284 71,789 4.9 329,116 310,377 6.0
Total net premiums written $ 171,388 $ 161,776 5.9 % $ 729,139 $ 682,034 6.9 %

[End Table]
The 5.9% increase in the Companys net premiums written for the fourth quarter of 2017 compared to the fourth quarter of 2016, as shown in the table above, represents the combination of 4.9% growth in commercial lines net premiums written and 6.8% growth in personal lines net premiums written. The $9.6 million growth in net premiums written for the fourth quarter of 2017 compared to the fourth quarter of 2016 included:
$3.5 million in commercial lines premiums that the Company attributes primarily to new commercial accounts the Companys insurance subsidiaries have written throughout their operating regions and a continuation of modest renewal premium increases.
$6.1 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.
For the full year of 2017, the Company's net premiums written increased 6.9% compared to the full year of 2016.
The Company evaluates the performance of its commercial lines and personal lines segments primarily based upon the underwriting results of its insurance subsidiaries as determined under statutory accounting practices. The following table presents comparative details with respect to the Companys GAAP and statutory combined ratios for the three months and full years ended December 31, 2017 and 2016:
[Start Table]
Three Months Ended Year Ended
December 31, December 31,
2017 2016 2017 2016

GAAP Combined Ratios (Total Lines)
Loss ratio (non-weather) 69.0 % 62.8 % 61.1 % 58.8 %
Loss ratio (weather-related) 3.0 4.3 8.3 5.7
Expense ratio 31.9 32.4 32.9 33.0
Dividend ratio 0.9 1.0 0.7 0.6
Combined ratio 104.8 % 100.5 % 103.0 % 98.1 %

Statutory Combined Ratios
Personal lines:
Automobile 119.2 % 118.5 % 109.3 % 106.7 %
Homeowners 94.2 91.0 109.9 95.5
Other 79.4 84.1 90.8 86.3
Total personal lines 109.3 107.5 108.5 101.8
Commercial lines:
Automobile 127.7 122.9 115.0 110.8
Workers' compensation 80.7 79.6 79.0 83.8
Commercial multi-peril 96.9 85.3 96.7 87.7
Total commercial lines 98.8 91.9 93.6 90.7
Total lines 104.6 % 100.4 % 101.7 % 96.8 %

[End Table]
Donegal Groups combined ratio was 104.8% for the fourth quarter of 2017, compared to 100.5% for the fourth quarter of 2016. The increase related primarily to increases in loss severity in the Companys casualty lines of business.
For the fourth quarter of 2017, the Companys loss ratio increased to 72.0%, compared to 67.1% for the fourth quarter of 2016. Weather-related losses totaled approximately $5.4 million, or 3.0 percentage points of the Companys loss ratio, decreasing from the $7.4 million of weather-related losses, or 4.3 percentage points of the Companys loss ratio, for the fourth quarter of 2016. Weather-related losses for the fourth quarter of 2017 were in line with the previous five-year average for fourth quarter weather-related losses of $5.0 million.
Large fire losses, which the Company defines as individual fire losses in excess of $50,000, were $7.7 million for the fourth quarter of 2017, compared to $7.4 million for the fourth quarter of 2016. Large fire losses represented 4.3 percentage points of the Companys loss ratio for the fourth quarter of 2017, compared to 4.4 percentage points of the Companys loss ratio for the fourth quarter of 2016.
Unfavorable net development of reserves for losses incurred in prior accident years did not have a material impact on the Company's loss ratios for the fourth quarters and full years of 2017 and 2016. Favorable development of workers compensation loss reserves partially offset unfavorable development of commercial multi-peril, personal automobile and commercial automobile loss reserves.
The Companys expense ratio was 31.9% for the fourth quarter of 2017, compared to 32.4% for the fourth quarter of 2016. The decrease in the Company's expense ratio reflected lower underwriting-based incentive costs for the fourth quarter of 2017 compared to the fourth quarter of 2016. The Companys expense ratio was 32.9% for the full year of 2017, in line with the 33.0% expense ratio for the full year of 2016.
Investment Operations Donegal Groups 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 90.0% of its consolidated investment portfolio in diversified, highly rated and marketable fixed-maturity securities at December 31, 2017.
[Start Table]
December 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 $ 115,786 11.5 % $ 99,970 10.6 %
Obligations of states and political subdivisions 269,698 26.8 308,876 32.7
Corporate securities 213,764 21.2 179,011 18.9
Mortgage-backed securities 306,353 30.5 263,319 27.8
Total fixed maturities 905,601 90.0 851,176 90.0
Equity securities, at fair value 50,445 5.0 47,088 5.0
Investments in affiliates 38,774 3.9 37,885 4.0
Short-term investments, at cost 11,050 1.1 9,371 1.0
Total investments $ 1,005,870 100.0 % $ 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) 5.2 4.5

[End Table]
Net investment income of $6.1 million for the fourth quarter of 2017 was comparable to $6.2 million in net investment income for the fourth quarter of 2016. The change in net investment income reflected primarily an increase in average invested assets relative to the prior-year fourth quarter, offset by an increase in expenses the Company allocated to the investment function.
Netrealized investment gains were $1.5 million for the fourth quarter of 2017, compared to $321,042 for the fourth quarter of 2016.
Definitions of Non-GAAP and Operating Measures The Company prepares its consolidated financial statements on the basis of GAAP. The Companys 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 net premiums written, operating income and statutory combined ratio.
Net premiums written and operating income are non-GAAP financial measures investors in insurance companies commonly use. The Company defines net premiums written as the amount of full-term premiums the Company records for policies effective within a given period less premiums the Company cedes to reinsurers. The Company defines operating income as net income excluding after-tax net realized investment gains or losses. The Company also excluded from its calculation of non-GAAP operating income for the fourth quarter and year ended December 31, 2017 the deferred income tax expense that resulted from the December 2017 enactment of the TCJA. Because the Companys calculation of operating income may differ from similar measures other companies use, investors should exercise caution when comparing the Companys measure of operating income to the measure of other companies.
The following table provides a reconciliation of the Company's net premiums earned to the Company's net premiums written for the periods indicated:
[Start Table]
Three Months Ended December 31, Year Ended December 31,
2017 2016 % Change 2017 2016 % Change

(dollars in thousands)

Reconciliation of Net Premiums
Earned to Net Premiums Written
Net premiums earned $ 181,060 $ 168,977 7.2 % $ 702,515 $ 656,205 7.1 %
Change in net unearned premiums (9,672 ) (7,201 ) 34.3 % 26,624 25,829 3.1 %
Net premiums written $ 171,388 $ 161,776 5.9 % $ 729,139 $ 682,034 6.9 %

[End Table]
The following table provides a reconciliation of the Company's net (loss) income to the Company's operating income for the periods indicated:
[Start Table]
Three Months Ended December 31, Year Ended December 31,
2017 2016 % Change 2017 2016 % Change

(dollars in thousands, except per share amounts)

Reconciliation of Net (Loss) Income
to Operating Income
Net (loss) income $ (2,779 ) $ 5,554 NM $ 7,116 $ 30,801 -76.9 %
Realized gains (after tax) (988 ) (209 ) 372.7 % (3,766 ) (1,641 ) 129.5 %
Effect of the TCJA at enactment 4,753 - NM 4,753 - NM
Operating income $ 986 $ 5,345 -81.6 % $ 8,103 $ 29,160 -72.2 %

Per Share Reconciliation of Net
(Loss) Income to Operating Income
Net (loss) income Class A (diluted) $ (0.10 ) $ 0.21 NM $ 0.26 $ 1.16 -77.6 %
Realized gains (after tax) (0.03 ) (0.01 ) 200.0 % (0.13 ) (0.06 ) 116.7 %
Effect of the TCJA at enactment 0.17 - NM 0.17 - NM
Operating income Class A $ 0.04 $ 0.20 -80.0 % $ 0.30 $ 1.10 -72.7 %

Net (loss) income Class B $ (0.10 ) $ 0.18 NM $ 0.22 $ 1.06 -79.2 %
Realized gains (after tax) (0.03 ) - NM (0.12 ) (0.06 ) 100.0 %
Effect of the TCJA at enactment 0.16 - NM 0.16 - NM
Operating income Class B $ 0.03 $ 0.18 -83.3 % $ 0.26 $ 1.00 -74.0 %

[End Table]
The statutory combined ratio is a standard non-GAAP measurement of underwriting profitability that is based upon amounts determined under SAP. The statutory combined ratio is the sum of:
the statutory loss ratio, which is the ratio of calendar-year incurred losses and loss expenses to premiums earned;
the statutory expense ratio, which is the ratio of expenses incurred for net commissions, premium taxes and underwriting expenses to premiums written; and
the statutory dividend ratio, which is the ratio of dividends to holders of workers compensation policies to premiums earned.
The statutory combined ratio does not reflect investment income, federal income taxes or other non-operating income or expense. A statutory combined ratio of less than 100% generally indicates underwriting profitability.
Conference Call and Webcast
The Company will hold a conference call and webcast on Friday, February 23, 2018, beginning at 11:00 A.M. Eastern Time. You may listen via the Internet by accessing the webcast link on the Companys website at http://investors.donegalgroup.com. A replay of the conference call will also be available via the Companys website.
About the Company
Donegal Group is an insurance holding company. The Companys 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: 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.
For Further Information:Jeffrey D. Miller, Executive Vice President & Chief Financial OfficerPhone: (717) 426-1931E-mail: investors@donegalgroup.com
[Start Table]
Donegal Group Inc.
Consolidated Statements of Income
(unaudited; in thousands, except share data)

Quarter Ended December 31,
2017 2016

Net premiums earned $ 181,060 $ 168,977
Investment income, net of expenses 6,142 6,161
Net realized investment gains 1,498 321
Lease income 117 156
Installment payment fees 1,344 1,193
Equity in earnings of DFSC 598 388
Total revenues 190,759 177,196

Net losses and loss expenses 130,442 113,369
Amortization of deferred acquisition costs 29,674 27,842
Other underwriting expenses 28,000 26,902
Policyholder dividends 1,592 1,644
Interest 381 371
Other expenses 396 233
Total expenses 190,485 170,361

Income before income tax expense 274 6,835
Income tax expense 3,053 1,281

Net (loss) income $ (2,779 ) $ 5,554

Net (loss) income per common share:
Class A - basic and diluted $ (0.10 ) $ 0.21
Class B - basic and diluted $ (0.10 ) $ 0.18

Supplementary Financial Analysts' Data

Weighted-average number of shares
outstanding:
Class A - basic 22,183,787 21,294,986
Class A - diluted 23,224,404 22,065,480
Class B - basic and diluted 5,576,775 5,576,775

Net premiums written $ 171,388 $ 161,776

Book value per common share
at end of period $ 15.95 $ 16.21

Annualized return on average equity -2.5 % 5.0 %

[End Table]

[Start Table]
Donegal Group Inc.
Consolidated Statements of Income
(unaudited; in thousands, except share data)

Year Ended December 31,
2017 2016

Net premiums earned $ 702,515 $ 656,205
Investment income, net of expenses 23,527 22,633
Net realized investment gains 5,705 2,525
Lease income 501 671
Installment payment fees 5,157 5,303
Equity in earnings of DFSC 1,622 1,086
Total revenues 739,027 688,423

Net losses and loss expenses 487,268 423,316
Amortization of deferred acquisition costs 115,065 107,876
Other underwriting expenses 116,538 108,459
Policyholder dividends 5,015 4,373
Interest 1,594 1,658
Other expenses 1,433 1,413
Total expenses 726,913 647,095

Income before income tax expense 12,114 41,328
Income tax expense 4,998 10,527

Net income $ 7,116 $ 30,801

Net income per common share:
Class A - basic $ 0.27 $ 1.19
Class A - diluted $ 0.26 $ 1.16
Class B - basic and diluted $ 0.22 $ 1.06

Supplementary Financial Analysts' Data

Weighted-average number of shares
outstanding:
Class A - basic 21,798,948 20,917,429
Class A - diluted 22,642,442 21,530,142
Class B - basic and diluted 5,576,775 5,576,775

Net premiums written $ 729,139 $ 682,034

Book value per common share
at end of period $ 15.95 $ 16.21

Annualized return on average equity 1.6 % 7.3 %

[End Table]
[Start Table]
Consolidated Balance Sheets
(in thousands)

December 31, December 31,
2017 2016
(unaudited)

ASSETS
Investments:
Fixed maturities:
Held to maturity, at amortized cost $ 366,655 $ 336,101
Available for sale, at fair value 538,946 515,075
Equity securities, at fair value 50,445 47,088
Investments in affiliates 38,774 37,885
Short-term investments, at cost 11,050 9,371
Total investments 1,005,870 945,520
Cash 37,833 24,587
Premiums receivable 160,406 159,390
Reinsurance receivable 298,343 263,028
Deferred policy acquisition costs 60,290 56,309
Prepaid reinsurance premiums 135,033 124,256
Other assets 40,145 50,041
Total assets $ 1,737,920 $ 1,623,131

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Losses and loss expenses $ 676,672 $ 606,665
Unearned premiums 503,457 466,055
Accrued expenses 28,034 28,247
Borrowings under lines of credit 59,000 69,000
Subordinated debentures 5,000 5,000
Other liabilities 17,061 9,549
Total liabilities 1,289,224 1,184,516
Stockholders' equity:
Class A common stock 256 245
Class B common stock 56 56
Additional paid-in capital 255,401 236,852
Accumulated other comprehensive loss (2,684 ) (2,254 )
Retained earnings 236,893 244,942
Treasury stock (41,226 ) (41,226 )
Total stockholders' equity 448,696 438,615
Total liabilities and stockholders' equity $ 1,737,920 $ 1,623,131

[End Table]