Donegal Group Inc. (Nasdaq:DGICA) (Nasdaq:DGICB) today reported its
financial results for the first quarter of 2014.
- Net loss of $634,414, or 2 cents per diluted Class A share, for
the first quarter of 2014, compared to net income of $6.5 million,
or 25 cents per diluted Class A share, for the first quarter of
2013
- First quarter pre-tax results affected adversely by record
winter weather-related losses of $15.3 million
- Statutory combined ratio1 of 103.2% for first quarter as total
weather-related loss ratio rose 6.9 percentage points over
prior-year first quarter
- 9.1% increase in net premiums written to $144.6 million,
reflecting strong organic growth in commercial lines and the
continued impact of premium rate increases
- Book value per share of $15.18 at March 31, 2014, compared to
$15.02 at year-end 2013
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|
Three Months
Ended March 31, |
|
2014 |
2013 |
% Change |
|
(dollars in thousands, except
per share amounts) |
|
|
|
|
Income Statement Data |
|
|
|
Net premiums earned |
$ 133,548 |
$ 124,702 |
7.1% |
Investment income, net |
4,616 |
4,815 |
-4.1 |
Realized (losses) gains |
(89) |
1,341 |
NM2 |
Total revenues |
140,339 |
133,873 |
4.8 |
Net (loss) income |
(634) |
6,475 |
NM |
Operating (loss) income1 |
(576) |
5,591 |
NM |
|
|
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|
Per Share Data |
|
|
|
Net (loss) income – Class A
(diluted) |
$ (0.02) |
$ 0.25 |
NM |
Net (loss) income – Class B |
(0.02) |
0.23 |
NM |
Operating (loss) income – Class A
(diluted) |
(0.02) |
0.22 |
NM |
Operating (loss) income – Class B |
(0.02) |
0.20 |
NM |
Book value |
15.18 |
15.72 |
-3.4 |
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1The "Definitions of
Non-GAAP and Operating Measures" section of this release defines
and reconciles data that the Company prepares on an accounting
basis other than U.S. generally accepted accounting principles
("GAAP"). |
2Not meaningful. |
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|
Donald H. Nikolaus, President and Chief Executive Officer,
noted, "The losses many of our policyholders experienced as a
result of the severe winter weather events of early 2014 across our
operating regions masked our overall strategic progress. Donegal
Group made significant progress toward its long-term strategic
objectives in 2013. That momentum has carried into 2014, as our
underlying results for the first quarter reflected the ongoing
benefits of the rate and underwriting actions we have taken in
recent years.
"The Donegal Insurance Group claims personnel worked diligently
with our independent agents and outside adjusters to deliver the
quality claims service that our policyholders expect and deserve. A
large percentage of those claims have already been settled, and we
extend our appreciation for the extra efforts of many individuals
who helped to service the substantial volume of claims," Mr.
Nikolaus added.
Mr. Nikolaus continued, "Market conditions within our operating
regions continue to be favorable, as commercial lines renewal
premium increases that remain in the 5 to 7 percent range
demonstrate. We are also seeing solid new business growth in both
commercial and personal lines of business, reflecting both the
improving economic climate as well as the strength of our
relationships with our independent agencies."
"In this environment, we continue to implement our strategic
plan and expect 2014 to show additional and measurable progress
toward our established long-term corporate goals of increasing
profits, building our financial strength and enhancing the value of
our stockholders' investment," Mr. Nikolaus concluded.
At March 31, 2014, the Company's book value per share was
$15.18, compared to $15.02 at December 31, 2013. The higher book
value per share at March 31, 2014 reflected net unrealized gains in
the fair value of the Company's available-for-sale fixed-maturity
securities portfolio due to decreased market interest rates during
the quarter. During the first quarter of 2014, the Company
repurchased 846 Class A shares at an average cost of $14.22 per
share.
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 Southeastern states (Alabama,
Georgia, North Carolina, South Carolina, Tennessee, Virginia and
West Virginia) and eight Midwestern states (Indiana, Iowa,
Michigan, Nebraska, Ohio, Oklahoma, South Dakota and Wisconsin).
The insurance subsidiaries of Donegal Group and Donegal Mutual
Insurance Company conduct business together as the Donegal
Insurance Group.
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Three Months
Ended March 31, |
|
2014 |
2013 |
% Change |
|
(dollars in thousands) |
|
|
|
|
Net Premiums Written |
|
|
|
Personal lines: |
|
|
|
Automobile |
$ 50,556 |
$ 48,622 |
4.0% |
Homeowners |
22,915 |
21,855 |
4.9 |
Other |
3,770 |
3,370 |
11.9 |
Total personal lines |
77,241 |
73,847 |
4.6 |
Commercial lines: |
|
|
|
Automobile |
17,260 |
15,463 |
11.6 |
Workers' compensation |
26,578 |
23,211 |
14.5 |
Commercial multi-peril |
22,078 |
19,694 |
12.1 |
Other |
1,425 |
251 |
NM |
Total commercial lines |
67,341 |
58,619 |
14.9 |
Total net premiums written |
$ 144,582 |
$ 132,466 |
9.1% |
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|
The Company's net premiums written increased 9.1% for the first
quarter of 2014 compared to the first quarter of 2013. This
increase represented the combination of 14.9% growth in commercial
lines writings and 4.6% growth in personal lines writings. The
$12.1 million growth in net premiums written for the first quarter
of 2014 compared to the first quarter of 2013 included:
- $2.7 million, or 2.1% of total net premiums written, related to
a change in the Michigan Insurance Company ("MICO") quota-share
reinsurance agreement that continued to increase the amount of
business MICO retained. The Company acquired MICO in December
2010.
- $7.1 million in commercial lines premiums, excluding the MICO
reinsurance change, that the Company attributed primarily to
premium rate increases and new commercial accounts the Company's
insurance subsidiaries have written throughout their operating
regions.
- $2.3 million in personal lines premiums, excluding the MICO
reinsurance change. The increase reflected modest new business
premium, premium rate increases the Company has implemented over
the past four quarters, offset by higher reinsurance reinstatement
premiums.
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|
|
|
Three Months
Ended |
|
March
31, |
|
2014 |
2013 |
|
|
|
Statutory Combined
Ratios |
|
|
Personal Lines: |
|
|
Automobile |
97.9% |
104.2% |
Homeowners |
109.8 |
89.1 |
Other |
121.5 |
82.5 |
Total personal lines |
102.7 |
98.1 |
Commercial Lines: |
|
|
Automobile |
100.0 |
102.7 |
Workers' compensation |
97.6 |
101.6 |
Commercial multi-peril |
119.3 |
98.5 |
Other |
NM |
NM |
Total commercial lines |
104.3 |
98.4 |
Total lines |
103.2% |
98.0% |
|
|
|
GAAP Combined Ratios (Total
Lines) |
|
|
Loss ratio (non-weather) |
61.7% |
64.1% |
Loss ratio (weather-related) |
11.4 |
4.5 |
Expense ratio |
31.3 |
30.7 |
Dividend ratio |
0.3 |
0.4 |
Combined ratio |
104.7% |
99.7% |
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|
|
For the first quarter of 2014, the Company's statutory loss
ratio increased to 73.6%, compared to 68.9% for the first quarter
of 2013. Weather-related losses of $15.3 million for the first
quarter of 2014, which equated to 11.4 percentage points of the
Company's loss ratio, far exceeded the $5.6 million, or 4.5
percentage points of the Company's loss ratio, for the first
quarter of 2013. Weather-related loss activity in the first quarter
of 2014 was more than double the Company's five-year average for
first-quarter weather losses of $6.9 million. Severe winter
weather, including extended periods of sub-freezing temperatures
across a large portion of the country and accumulations of snow and
ice from multiple weather systems, accounted for the increase in
claim activity.
Large fire losses of $10.1 million for the first quarter of
2014, or 7.6 percentage points of the Company's loss ratio,
exceeded the $8.1 million, or 6.5 percentage points of the
Company's loss ratio, the Company incurred for the first quarter of
2013. The Company attributes the increase in large fire losses to
the extreme winter temperatures in early 2014. Development of
reserves for losses incurred in prior accident years was negligible
for the first quarters of 2014 and 2013.
Kevin G. Burke, Executive Vice President and Chief Operating
Officer, commented, "The weather conditions and events in the first
quarter of 2014 contributed to a significant number of homeowners
and commercial property claims, affecting the comparability of our
year-over-year performance. Had we experienced an average level of
weather-related and large fire losses, our underwriting results in
our property lines of business would have fallen well within our
expectations. We were pleased that our casualty lines of business
were profitable despite an increased frequency of weather-related
automobile accidents during the quarter."
The Company's statutory expense ratio1 was 29.3% for the first
quarter of 2014, in line with 28.7% for the first quarter of
2013.
Investment Operations
Donegal Group's investment strategy is to generate an
appropriate amount of after-tax income on its invested assets while
minimizing credit risk through investment in high-quality
securities. As a result, the Company had invested 90.5% of its
consolidated investment portfolio in diversified, highly rated and
marketable fixed-maturity securities at March 31, 2014.
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March 31,
2014 |
December 31,
2013 |
|
Amount |
% |
Amount |
% |
|
(dollars in
thousands) |
Fixed maturities, at carrying value: |
|
|
|
|
U.S. Treasury securities and obligations
of U.S. government corporations and agencies |
$ 61,366 |
7.6% |
$ 62,279 |
7.9% |
Obligations of states and political
subdivisions |
375,185 |
46.7 |
385,982 |
48.7 |
Corporate securities |
114,187 |
14.2 |
55,547 |
7.0 |
Mortgage-backed securities |
177,150 |
22.0 |
140,214 |
17.7 |
Total fixed maturities |
727,888 |
90.5 |
644,022 |
81.3 |
Equity securities, at fair value |
22,298 |
2.8 |
12,423 |
1.6 |
Investments in affiliates |
37,117 |
4.6 |
35,685 |
4.5 |
Short-term investments, at cost |
16,367 |
2.1 |
99,678 |
12.6 |
Total investments |
$ 803,670 |
100.0% |
$ 791,808 |
100.0% |
|
|
|
|
|
Average investment yield |
2.3% |
|
2.4% |
|
Average tax-equivalent investment yield |
3.2% |
|
3.3% |
|
Average fixed-maturity duration (years) |
4.9 |
|
4.5 |
|
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|
Net investment income of $4.6 million for the first quarter of
2014 decreased 4.1% compared to $4.8 million in net investment
income for the first quarter of 2013. The decrease in net
investment income reflected a lower average investment yield within
the Company's fixed-maturity securities compared to the first
quarter of 2013. Net realized investment losses were $88,532 for
the first quarter of 2014, compared to net realized investment
gains of $1.3 million for the first quarter of 2013. The Company
had no impairments in its investment portfolio that it considered
to be other than temporary during the first quarters of 2014 or
2013.
Jeffrey D. Miller, Executive Vice President and Chief Financial
Officer, in commenting on the Company's investment operations,
noted, "Reinvestment of funds we held in short-term investments at
year-end 2013 resulted in a modest increase in the duration of our
overall investment portfolio during the first quarter. We expect
those investments in corporate fixed-maturity securities and, to a
lesser extent, dividend-paying equity securities, to enhance our
future investment income."
The Company owns 48.2% of the outstanding stock of Donegal
Financial Services Corporation ("DFSC"), which owns all of the
outstanding capital stock of Union Community Bank. The Company
accounts for its investment in DFSC using the equity method of
accounting. The Company's equity in the earnings of DFSC was
$409,000 for the first quarter of 2014, compared to $1.1 million
for the first quarter of 2013. Donegal Mutual Insurance Company
owns the remaining 51.8% of the outstanding stock of DFSC.
Definitions of Non-GAAP and Operating
Measures
The Company prepares its consolidated financial statements on
the basis of GAAP. The Company's insurance subsidiaries also
prepare financial statements based on statutory accounting
principles state insurance regulators prescribe or permit ("SAP").
In addition to using GAAP-based performance measurements, the
Company also utilizes certain non-GAAP financial measures that it
believes provide value in managing its business and for comparison
to the financial results of its peers. These non-GAAP measures are
operating income (loss) and statutory combined ratio.
Operating income (loss) is a non-GAAP financial measure
investors in insurance companies commonly use. The Company defines
operating income (loss) as net income (loss) excluding after-tax
net realized investment gains or losses. Because the Company's
calculation of operating income (loss) may differ from similar
measures other companies use, investors should exercise caution
when comparing the Company's measure of operating income (loss) to
the measure of other companies.
The following table provides a reconciliation of the Company's
net income to the Company's operating income for the periods
indicated:
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|
|
Three Months
Ended March 31, |
|
2014 |
2013 |
% Change |
|
(dollars in thousands, except
per share amounts) |
|
|
|
|
|
Reconciliation of Net
(loss) Income to Operating (loss) Income |
|
|
Net (loss) income |
$ (634) |
$ 6,475 |
NM |
Realized losses (gains) (after tax) |
58 |
(884) |
NM |
Operating (loss) income |
$ (576) |
$ 5,591 |
NM |
|
|
|
|
Per Share Reconciliation
of Net Income to Operating Income |
|
|
Net (loss) income – Class A (diluted) |
$ (0.02) |
$ 0.25 |
NM |
Realized losses (gains) (after tax) |
-- |
(0.03) |
NM |
Operating (loss) income – Class A |
$ (0.02) |
$ 0.22 |
NM |
|
|
|
|
Net (loss) income – Class B |
$ (0.02) |
$ 0.23 |
NM |
Realized losses (gains) (after tax) |
-- |
(0.03) |
NM |
Operating (loss) income – Class B |
$ (0.02) |
$ 0.20 |
NM |
|
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|
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.
Conference Call and Webcast
The Company will hold a conference call and webcast on Friday,
April 25, 2014, beginning at 10:00 A.M. Eastern Time. You may
listen via the Internet by accessing the webcast link on the
Company's web site at http://investors.donegalgroup.com. A replay
of the conference call will also be available via the Company's web
site.
About the Company
Donegal Group is an insurance holding company. The Company's
Class A common stock and Class B common stock trade on the NASDAQ
Global Select Market under the symbols DGICA and DGICB,
respectively. As an effective acquirer of small to medium-sized
"main street" property and casualty insurers, Donegal Group has
grown profitably since its formation in 1986. 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 growth in
book value.
As Forbes reported, Donegal Group Inc. was named to a list of
the Most Trustworthy Financial Companies for 2014, ranking the
Company among firms that have consistently demonstrated transparent
and conservative accounting practices and solid corporate
governance and management. A reprint of the Forbes article is
available as a "Featured Report" on the Company's web site.
Safe Harbor
We base all statements contained in this release that are not
historic facts on our current expectations. These statements are
forward-looking in nature (as defined in the Private Securities
Litigation Reform Act of 1995) and involve a number of risks and
uncertainties. Actual results could vary materially. Factors that
could cause actual results to vary materially include: our ability
to maintain profitable operations, the adequacy of the loss and
loss expense reserves of our insurance subsidiaries, business and
economic conditions in the areas in which we operate, interest
rates, competition from various insurance and other financial
businesses, terrorism, the availability and cost of reinsurance,
adverse and catastrophic weather events, legal and judicial
developments, changes in regulatory requirements, our ability to
integrate and manage successfully the 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.
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|
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Donegal Group Inc. |
|
|
Consolidated Statements of Income |
|
|
(unaudited; in thousands, except share
data) |
|
|
|
|
|
|
Quarter Ended March
31, |
|
2014 |
2013 |
|
|
|
Net premiums earned |
$ 133,548 |
$ 124,702 |
Investment income, net of expenses |
4,616 |
4,815 |
Net realized investment (losses) gains |
(89) |
1,341 |
Lease income |
213 |
216 |
Installment payment fees |
1,642 |
1,710 |
Equity in earnings of DFSC |
409 |
1,089 |
Total revenues |
140,339 |
133,873 |
|
|
|
Net losses and loss expenses |
97,632 |
85,533 |
Amortization of deferred acquisition
costs |
21,319 |
19,560 |
Other underwriting expenses |
20,459 |
18,752 |
Policyholder dividends |
395 |
475 |
Interest |
365 |
487 |
Other expenses |
962 |
983 |
Total expenses |
141,132 |
125,790 |
|
|
|
(Loss) income before income tax (benefit)
expense |
(793) |
8,083 |
Income tax (benefit) expense |
(159) |
1,608 |
|
|
|
Net (loss) income |
$ (634) |
$ 6,475 |
|
|
|
Net (loss) income per common share: |
|
|
Class A - basic |
$ (0.02) |
$ 0.26 |
Class A - diluted |
$ (0.02) |
$ 0.25 |
Class B - basic and diluted |
$ (0.02) |
$ 0.23 |
|
|
|
Supplementary Financial Analysts' Data |
|
|
|
|
|
Weighted-average number of shares
outstanding: |
|
|
Class A - basic |
20,873,043 |
20,066,755 |
Class A - diluted |
21,253,229 |
20,358,232 |
Class B - basic and diluted |
5,576,775 |
5,576,775 |
|
|
|
Net written premiums |
$ 144,582 |
$ 132,466 |
|
|
|
Book value per common share at end of
period |
$ 15.18 |
$ 15.72 |
|
|
|
Annualized return on average equity |
-0.6% |
6.4% |
|
|
|
|
|
|
Donegal Group Inc. |
Consolidated Balance
Sheets |
(in thousands) |
|
|
|
|
March 31, |
December 31, |
|
2014 |
2013 |
|
(unaudited) |
|
|
|
|
ASSETS |
Investments: |
|
|
Fixed maturities: |
|
|
Held to maturity, at
amortized cost |
$ 296,360 |
$ 240,370 |
Available for sale, at fair
value |
431,528 |
403,652 |
Equity securities, at fair value |
22,298 |
12,423 |
Investments in affiliates |
37,117 |
35,685 |
Short-term investments, at cost |
16,367 |
99,678 |
Total
investments |
803,670 |
791,808 |
Cash |
17,153 |
27,636 |
Premiums receivable |
133,343 |
123,905 |
Reinsurance receivable |
252,080 |
244,239 |
Deferred policy acquisition costs |
45,407 |
43,628 |
Prepaid reinsurance premiums |
116,693 |
112,664 |
Other assets |
39,979 |
41,531 |
Total assets |
$ 1,408,325 |
$ 1,385,411 |
|
|
|
LIABILITIES AND
STOCKHOLDERS' EQUITY |
Liabilities: |
|
|
Losses and loss expenses |
$ 510,122 |
$ 495,619 |
Unearned premiums |
397,798 |
382,735 |
Accrued expenses |
14,622 |
19,265 |
Borrowings under line of credit |
61,000 |
58,000 |
Subordinated debentures |
5,000 |
5,000 |
Other liabilities |
18,198 |
27,915 |
Total liabilities |
1,006,740 |
988,534 |
Stockholders' equity: |
|
|
Class A common stock |
218 |
218 |
Class B common stock |
56 |
56 |
Additional paid-in capital |
190,343 |
189,116 |
Accumulated other comprehensive income
(loss) |
1,937 |
(2,313) |
Retained earnings |
222,133 |
222,889 |
Treasury stock, at cost |
(13,102) |
(13,089) |
Total stockholders'
equity |
401,585 |
396,877 |
Total liabilities and
stockholders' equity |
$ 1,408,325 |
$ 1,385,411 |
|
|
|
CONTACT: 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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