Donegal Group Inc. Announces Second Quarter and First Half 2020 Results


MARIETTA, Pa., July 27, 2020 (GLOBE NEWSWIRE) -- Donegal Group Inc. (NASDAQ: DGICA) and (NASDAQ:DGICB) today reported its financial results for the second quarter and first half of 2020.

The Company will hold a conference call to discuss these results on Tuesday, July 28, 2020 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.

Significant items include:

  • Net income of $22.7 million, or 79 cents per diluted Class A share, for the second quarter of 2020, compared to $4.8 million, or 17 cents per diluted Class A share, for the second quarter of 2019
  • Net income of $26.4 million, or 92 cents per diluted Class A share, for the first six months of 2020, compared to $27.8 million, or 99 cents per diluted Class A share, for the first six months of 2019
  • Net investment gains of $6.5 million for the second quarter of 2020, primarily related to unrealized gains in the fair value of equity securities held at June 30, 2020, compared to net investment gains of $1.6 million for the second quarter of 2019
  • Net premiums earned of $184.4 million for the second quarter of 2020 decreased 2.3% compared to the second quarter of 2019
  • Net premiums written1 of $193.7 million for the second quarter of 2020 decreased 2.1% compared to the second quarter of 2019
  • Combined ratio of 92.3% for the second quarter of 2020, compared to 102.0% for the second quarter of 2019
  • Book value per share of $16.77 at June 30, 2020, compared to $15.67 at year-end 2019
            
 Three Months Ended June 30, Six Months Ended June 30,
  2020  2019 % Change  2020   2019 % Change
  
 (dollars in thousands, except per share amounts)
            
Income Statement Data           
Net premiums earned$184,374 $188,763 -2.3% $371,627  $376,837 -1.4%
Investment income, net 7,172  7,290 -1.6   14,548   14,338 1.5 
Net investment gains (losses) 6,486  1,566 314.2   (4,209)  19,663 NM2 
Total revenues 198,900  198,789 0.1   383,811   413,503 -7.2 
Net income 22,679  4,789 373.6   26,410   27,812 -5.0 
Non-GAAP operating income1 17,555  3,551 394.4   29,896   10,853 175.5 
            
Per Share Data           
Net income – Class A (diluted)$0.79 $0.17 364.7% $0.92  $0.99 -7.1%
Net income – Class B 0.72  0.15 380.0   0.84   0.90 -6.7 
Non-GAAP operating income – Class A (diluted) 0.61  0.13 369.2   1.04   0.39 166.7 
Non-GAAP operating income – Class B 0.55  0.11 400.0   0.95   0.35 171.4 
Book value 16.77  15.34 9.3   16.77   15.34 9.3 
            
            

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, “I want to first thank all of the dedicated employees at Donegal who have shown amazing resilience and maintained an outstanding level of professionalism in serving our agents and policyholders as we continue to navigate through unprecedented challenges the COVID-19 pandemic has presented to all of us. Over 90 percent of our team members began working from home in late March, and I am pleased that we have been successful in maintaining our core operations and essential functions. Our relationships with our independent agents are the cornerstone of our business. We quickly adapted to ensure our ability to meet the needs of our agents and policyholders, and we look forward to the time when we can resume personal interactions to further enhance those relationships. While much uncertainty remains with respect to the ultimate impact of the pandemic on our business, our agents are providing a steady flow of new commercial business accounts and we do not currently anticipate significant insured losses directly related to COVID-19.  We are proactively addressing challenges as they arise and believe that the positive momentum we gained in 2019 and the first half of 2020 will help carry us through the remainder of 2020 and beyond.”

Mr. Burke continued, “Net income for the second quarter of 2020 represented a continuation of the solid underwriting performance we reported in the first quarter, with the 92.3% combined ratio for the second quarter of 2020 comparing favorably to the 102.0% combined ratio for the prior-year quarter and 97.0% for the first quarter of 2020. Our commercial lines segment continued to operate at a profitable level, with a statutory combined ratio1 of 93.5% for the second quarter of 2020. Our personal lines segment generated a statutory combined ratio of 88.1% for the second quarter of 2020, which was a significant improvement from 108.5% for the prior-year quarter. More specifically, the statutory combined ratio for our personal automobile line of business improved from 107.2% in the prior-year quarter to 76.1% for the second quarter of 2020, primarily reflecting a marked reduction in personal auto claim frequency that resulted from lower driving activity in April and May of 2020.  Personal automobile claim counts trended higher as driving activity returned to higher levels during the month of June, and we do not expect the favorable automobile loss experience to carry into the third quarter. In addition to the favorable underwriting performance, the market value of our equity securities improved during the second quarter of 2020, driving net investment gains of $6.5 million, compared to $1.6 million in the prior-year quarter.”

Jeffrey D. Miller, Executive Vice President and Chief Financial Officer of Donegal Group Inc., commented on the second quarter results, “Net premiums written continued to be characterized by an increase in commercial lines activity and a decline in personal lines activity.  Overall net premiums written declined slightly as an 8.7% reduction in personal lines net premiums written offset 4.0% growth in commercial lines net premiums written. The loss ratio was 57.1% for the second quarter of 2020, compared to 69.7% for the prior-year quarter, with the decrease largely due to lower frequency of automobile claims.  The expense ratio for the second quarter of 2020 increased to 34.3% from 31.3%, due primarily to our establishment during the second quarter of 2020 of $1.6 million in reserves for potential credit losses related to uncollectible premiums due to the effect of COVID-19 economic disruption.  The expense ratio also reflected an increase in technology systems-related expenses, higher commercial growth-based incentive costs for our agents and increased underwriting-based incentive costs for our agents and employees.”

Mr. Burke concluded, “Our net income along with unrealized gains within our available-for-sale fixed-maturity portfolio related to a decline in market interest rates during the first half of 2020 contributed to an increase in our book value per share to $16.77 at June 30, 2020, which represented a 7.0% increase compared to our book value per share of $15.67 at December 31, 2019.”

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,
  2020  2019 % Change  2020  2019 % Change
  
 (dollars in thousands)
            
Net Premiums Earned           
Commercial lines$101,870 $94,788 7.5% $203,645 $186,269 9.3%
Personal lines 82,504  93,975 -12.2   167,982  190,568 -11.9 
Total net premiums earned$184,374 $188,763 -2.3% $371,627 $376,837 -1.4%
            
Net Premiums Written           
Commercial lines:           
Automobile$34,518 $31,245 10.5% $72,911 $65,547 11.2%
Workers' compensation 26,693  29,024 -8.0   60,862  62,416 -2.5 
Commercial multi-peril 37,814  35,454 6.7   78,241  73,294 6.7 
Other 8,583  7,740 10.9   17,293  15,887 8.9 
Total commercial lines 107,608  103,463 4.0   229,307  217,144 5.6 
Personal lines:           
Automobile 49,048  56,197 -12.7   96,816  112,223 -13.7 
Homeowners 31,482  32,685 -3.7   55,259  57,713 -4.3 
Other 5,565  5,458 2.0   10,558  10,638 -0.8 
Total personal lines 86,095  94,340 -8.7   162,633  180,574 -9.9 
Total net premiums written$193,703 $197,803 -2.1% $391,940 $397,718 -1.5%
            
            

Net Premiums Written

The 2.1% decrease in net premiums written for the second quarter of 2020 compared to the second quarter of 2019, as shown in the table above, represents an 8.7% decline in personal lines net premiums written, offset by 4.0% growth in commercial lines net premiums written. The $4.1 million decrease in net premiums written for the second quarter of 2020 compared to the second quarter of 2019 included:

  • $4.1 million increase in commercial lines premiums that we attribute primarily to new commercial accounts our insurance subsidiaries have written throughout their operating regions and a continuation of renewal premium increases.
  • $8.2 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, partially offset by premium rate increases our insurance subsidiaries have implemented over the past four quarters.

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, 2020 and 2019:

        
 Three Months Ended Six Months Ended
 June 30, June 30,
 2020  2019  2020  2019 
        
GAAP Combined Ratios (Total Lines)      
Loss ratio (non-weather)47.0% 60.7% 53.0% 60.5%
Loss ratio (weather-related)10.1  9.0  6.9  7.1 
Expense ratio34.3  31.3  33.8  32.0 
Dividend ratio0.9  1.0  1.0  1.1 
Combined ratio92.3% 102.0% 94.7% 100.7%
        
Statutory Combined Ratios       
Commercial lines:       
Automobile104.4% 112.7% 110.8% 114.5%
Workers' compensation80.9  71.7  85.5  80.2 
Commercial multi-peril95.8  93.2  92.4  92.1 
Other80.6  95.1  72.4  80.9 
Total commercial lines93.5  92.9  94.7  94.6 
Personal lines:       
Automobile76.1  107.2  88.4  104.2 
Homeowners109.5  113.6  100.1  104.4 
Other78.6  89.2  72.6  79.9 
Total personal lines88.1  108.5  91.5  103.1 
Total lines91.0% 100.7% 93.3% 98.9%
        
        

For the second quarter of 2020, the loss ratio decreased to 57.1%, compared to 69.7% for the second quarter of 2019. The decrease in the loss ratio was largely attributable to reduced frequency of personal automobile claims as a result of lower driving activity during the second quarter of 2020. Weather-related losses of $18.7 million for the second quarter of 2020, or 10.1 percentage points of the loss ratio, increased from $17.0 million for the second quarter of 2019, or 9.0 percentage points of the loss ratio. Weather-related loss activity for the second quarter of 2020 was higher than our five-year average of $15.1 million for second-quarter weather-related losses and primarily impacted our homeowners line of business.

Large fire losses, which we define as individual fire losses in excess of $50,000, for the second quarter of 2020 were $7.4 million, or 4.0 percentage points of the loss ratio. That amount was higher than the large fire losses of $6.2 million, or 3.3 percentage points of the loss ratio, for the second quarter of 2019, with the increase primarily related to the impact of large commercial property fires.

Net development of reserves for losses incurred in prior accident years of $6.6 million decreased the loss ratio for the second quarter of 2020 by 3.6 percentage points, compared to $2.9 million that decreased the loss ratio for the second quarter of 2019 by 1.5 percentage points. Our insurance subsidiaries experienced the majority of the favorable development for the second quarter of 2020 in their workers’ compensation and personal automobile lines of business, along with modest favorable development in their other major lines of business.

The expense ratio was 34.3% for the second quarter of 2020, compared to 31.3% for the second quarter of 2019. Relative to the prior-year quarter, the increase in the expense ratio reflected $1.6 million in reserves we established during the second quarter of 2020 for potential credit losses related to uncollectible premiums due to the effect of COVID-19 economic disruption, an increase in technology systems-related expenses, higher commercial growth incentive costs for our agents and increased underwriting-based incentive costs for our agents and employees.

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 91.3% of our consolidated investment portfolio in diversified, highly rated and marketable fixed-maturity securities at June 30, 2020.

        
 June 30, 2020 December 31, 2019
 Amount % Amount %
  
 (dollars in thousands)
Fixed maturities, at carrying value:       
U.S. Treasury securities and obligations of U.S.       
government corporations and agencies$89,220  7.5% $102,281  9.2%
Obligations of states and political subdivisions 315,216  26.4   261,431  23.5 
Corporate securities 377,811  31.6   315,641  28.4 
Mortgage-backed securities 307,427  25.8   361,693  32.6 
Total fixed maturities 1,089,674  91.3   1,041,046  93.7 
Equity securities, at fair value 52,703  4.4   55,477  5.0 
Short-term investments, at cost 51,342  4.3   14,030  1.3 
Total investments$1,193,719  100.0% $1,110,553  100.0%
        
Average investment yield 2.4%    2.8%  
Average tax-equivalent investment yield 2.6%    2.9%  
Average fixed-maturity duration (years) 4.0     4.2   
        
        

Short-term investments at June 30, 2020 increased by $37.3 million from the year-end 2019 balance, primarily reflecting contingent liquidity funding that Atlantic States Insurance Company, our largest insurance subsidiary, obtained in March 2020 for added security in light of uncertainty surrounding the economic impact of the COVID-19 pandemic. Atlantic States Insurance Company issued $50.0 million of debt to the Federal Home Loan Bank of Pittsburgh in exchange for a cash advance in the same amount. The debt carries a fixed interest rate of 0.83% and is due in March 2021.

Net investment income of $7.2 million for the second quarter of 2020 decreased 1.6% compared to $7.3 million in net investment income for the second quarter of 2019. The decrease in net investment income reflected primarily a decrease in average investment yield relative to the prior-year second quarter.

Net investment gains were $6.5 million for the second quarter of 2020, compared to net investment gains of $1.6 million for the second quarter of 2019. Net investment gains for both quarterly periods were primarily related to unrealized gains in the fair value of equity securities held at the end of the respective periods.

Net investment losses of $4.2 million for the first six months of 2020 were primarily related to realized losses on sales of equity securities and unrealized losses in the fair value of equity securities held at June 30, 2020 compared to the fair value at of equity securities held at December 31, 2019. 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, with the remainder primarily 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,
  2020  2019 % Change  2020  2019 % Change
  
 (dollars in thousands)
            
Reconciliation of Net Premiums           
Earned to Net Premiums Written           
Net premiums earned$184,374 $188,763 -2.3% $371,627 $376,837 -1.4%
Change in net unearned premiums 9,329  9,040 3.2   20,313  20,881 -2.7 
Net premiums written$193,703 $197,803 -2.1% $391,940 $397,718 -1.5%
            
            

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

            
 Three Months Ended June 30, Six Months Ended June 30,
  2020   2019  % Change  2020  2019  % Change
  
 (dollars in thousands, except per share amounts)
            
Reconciliation of Net Income           
to Non-GAAP Operating Income           
Net income$22,679  $4,789  373.6% $26,410 $27,812  -5.0%
Investment (gains) losses (after tax) (5,124)  (1,238) 313.9   3,325  (16,959) NM 
Other, net -   -  NM   161  -  NM 
Non-GAAP operating income$17,555  $3,551  394.4% $29,896 $10,853  175.5%
            
Per Share Reconciliation of Net Income           
to Non-GAAP Operating Income           
Net income – Class A (diluted)$0.79  $0.17  364.7% $0.92 $0.99  -7.1%
Investment (gains) losses (after tax) (0.18)  (0.04) 350.0   0.11  (0.60) NM 
Other, net -   -  NM   0.01  -  NM 
Non-GAAP operating income – Class A$0.61  $0.13  369.2% $1.04 $0.39  166.7%
            
Net income – Class B$0.72  $0.15  380.0% $0.84 $0.90  -6.7%
Investment (gains) losses (after tax) (0.17)  (0.04) 325.0   0.10  (0.55) NM 
Other, net -   -  NM   0.01  -  NM 
Non-GAAP operating income – Class B$0.55  $0.11  400.0% $0.95 $0.35  171.4%
            
            

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

We will hold a conference call and webcast on Tuesday, July 28, 2020, beginning at 11:00 A.M. Eastern Time. You may listen via the Internet by accessing the webcast link on our website at http://investors.donegalgroup.com. A replay of the conference call will also be available via our website.

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 growing profitably in commercial lines, improving our financial performance, leveraging technology to transform our business, strategically modernizing our business in order to achieve operational excellence and competing effectively to enhance our market position.

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 attract new business, retain existing business and collect balances due to us as a result of the prolonged economic challenges resulting from the COVID-19 pandemic and related business shutdown, 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 including those related to COVID-19 business interruption coverage and exclusions, changes in regulatory requirements and other risks we describe in the periodic reports we file with the Securities and Exchange Commission. You should not place undue reliance on any such forward-looking statements. We disclaim any obligation to update such statements or to announce publicly the results of any revisions that we may make to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Donegal Group Inc.
Consolidated Statements of Income
(unaudited; in thousands, except share data)
      
   Quarter Ended June 30,
    2020  2019
      
Net premiums earned$184,374 $188,763
Investment income, net of expenses 7,172  7,290
Net investment gains 6,486  1,566
Lease income 109  112
Installment payment fees 759  1,058
 Total revenues 198,900  198,789
      
Net losses and loss expenses 105,349  131,507
Amortization of deferred acquisition costs 29,634  30,925
Other underwriting expenses 33,567  28,208
Policyholder dividends 1,684  1,969
Interest  428  303
Other expenses, net 250  339
 Total expenses 170,912  193,251
      
Income before income tax expense 27,988  5,538
Income tax expense 5,309  749
      
Net income$22,679 $4,789
      
Net income per common share:   
 Class A - basic$0.80 $0.17
 Class A - diluted$0.79 $0.17
 Class B - basic and diluted$0.72 $0.15
      
Supplementary Financial Analysts' Data   
      
Weighted-average number of shares   
 outstanding:   
 Class A - basic 23,450,856  22,932,894
 Class A - diluted 23,649,768  23,132,683
 Class B - basic and diluted 5,576,775  5,576,775
      
Net premiums written$193,703 $197,803
      
Book value per common share   
 at end of period$16.77 $15.34
      


Donegal Group Inc.
Consolidated Statements of Income
(unaudited; in thousands, except share data)
      
   Six Months Ended June 30,
    2020   2019
      
Net premiums earned$371,627  $376,837
Investment income, net of expenses 14,548   14,338
Net investment (losses) gains (4,209)  19,663
Lease income 218   223
Installment payment fees 1,627   2,147
Equity in earnings of DFSC -   295
 Total revenues 383,811   413,503
      
Net losses and loss expenses 222,596   254,618
Amortization of deferred acquisition costs 59,571   61,517
Other underwriting expenses 66,165   58,893
Policyholder dividends 3,526   4,319
Interest  652   869
Other expenses, net 810   904
 Total expenses 353,320   381,120
      
Income before income tax expense 30,491   32,383
Income tax expense 4,081   4,571
      
Net income$26,410  $27,812
      
Net income per common share:   
 Class A - basic$0.93  $1.00
 Class A - diluted$0.92  $0.99
 Class B - basic and diluted$0.84  $0.90
      
Supplementary Financial Analysts' Data   
      
Weighted-average number of shares   
 outstanding:   
 Class A - basic 23,355,621   22,891,535
 Class A - diluted 23,548,806   23,027,205
 Class B - basic and diluted 5,576,775   5,576,775
      
Net premiums written$391,940  $397,718
      
Book value per common share   
 at end of period$16.77  $15.34
      


Donegal Group Inc.
Consolidated Balance Sheets
(in thousands)
      
   June 30, December 31,
    2020   2019 
   (unaudited)  
      
ASSETS
Investments:   
 Fixed maturities:   
  Held to maturity, at amortized cost$519,732  $476,094 
  Available for sale, at fair value 569,942   564,952 
 Equity securities, at fair value 52,703   55,477 
 Short-term investments, at cost 51,342   14,030 
  Total investments 1,193,719   1,110,553 
Cash  71,777   49,319 
Premiums receivable 187,450   165,733 
Reinsurance receivable 379,341   367,021 
Deferred policy acquisition costs 62,151   59,285 
Prepaid reinsurance premiums 174,959   142,476 
Other assets 26,750   28,774 
  Total assets$2,096,147  $1,923,161 
      
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:   
 Losses and loss expenses$901,824  $869,674 
 Unearned premiums 562,944   510,147 
 Accrued expenses 23,448   28,454 
 Borrowings under lines of credit 85,000   35,000 
 Subordinated debentures 5,000   5,000 
 Other liabilities 30,072   23,870 
  Total liabilities 1,608,288   1,472,145 
Stockholders' equity:   
 Class A common stock 265   262 
 Class B common stock 56   56 
 Additional paid-in capital 273,176   268,152 
 Accumulated other comprehensive income 10,367   504 
 Retained earnings 245,221   223,268 
 Treasury stock (41,226)  (41,226)
  Total stockholders' equity 487,859   451,016 
  Total liabilities and stockholders' equity$2,096,147  $1,923,161 
      

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



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