Donegal Group Inc. (Nasdaq:DGICA) (Nasdaq:DGICB) today reported its
financial results for the first quarter of 2012:
- Net income of $8.0 million for the first quarter of 2012, or
almost four times the net income for the prior-year quarter,
reflecting favorable underwriting results and net realized
investment gains
- Operating income1 of $6.5 million for 2012, an increase from
$2.0 million for the prior-year quarter
- 8.1% increase in net premiums written, reflecting benefits of
acquisition growth, organic growth and rate increases
- 96.9% first quarter statutory combined ratio,1 improved from
99.1% for the prior-year quarter
- Book value per share of $15.28 at March 31, 2012, compared to
$15.01 at December 31, 2011
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|
|
Three Months
Ended March 31, |
|
2012 |
2011 |
% Change |
|
(dollars in thousands, except
per share amounts) |
Income Statement
Data |
|
Net premiums earned |
$ 114,692 |
$ 103,795 |
10.5% |
Investment income, net |
5,090 |
5,230 |
-2.7 |
Realized gains |
2,310 |
373 |
519.3 |
Total revenues |
125,348 |
111,583 |
12.3 |
Net income |
8,010 |
2,206 |
263.1 |
Operating income |
6,509 |
1,960 |
232.1 |
|
|
|
|
Per Share
Data |
|
|
Net income – Class A (diluted) |
$ 0.31 |
$ 0.09 |
244.4% |
Net income – Class B |
0.29 |
0.08 |
262.5 |
Operating income – Class A (diluted) |
0.26 |
0.08 |
225.0 |
Operating income – Class B |
0.24 |
0.07 |
242.9 |
Book value |
15.28 |
14.96 |
2.1 |
|
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|
|
1The "Definitions of Non-GAAP and Operating Measures" section of
this release defines and reconciles data that the Company has not
prepared in accordance with U.S. generally accepted accounting
principles ("GAAP").
Donald H. Nikolaus, President and Chief Executive Officer of
Donegal Group Inc., noted, "Our first quarter results represented a
significant improvement, as we reported our highest level of
quarterly earnings we have achieved over the past three
years. Favorable underwriting results and realized investment
gains contributed to our improved results. We attribute the
slight decline in our investment income for the quarter to lower
prevailing yields on investments."
Mr. Nikolaus added, "Our premium revenues rose due to growth in
premiums we acquired, 11.2% organic growth in our commercial lines
of business and the benefits of personal lines premium rate
increases we implemented throughout 2011. The commercial lines
organic growth represents a continuation of a trend that began in
2011. We believe this trend reflects the success of our
efforts to increase our share of business within our existing
independent agencies and to introduce commercial products in
regions where we have acquired personal lines companies in the past
several years. Further, we are seeing clear signs that the
insurance market conditions in our operating regions are improving
with rates stabilizing or firming across virtually all lines of
business."
Mr. Nikolaus continued, "We reported an underwriting profit for
the first quarter of 2012, as our underwriting results have begun
to reflect the various initiatives we implemented during the past
year, including re-inspection programs, re-underwriting of accounts
with elevated loss ratios and increases in deductible
requirements. We also benefited from mild winter weather
conditions in our operating areas and a lower number of large fire
losses during the quarter. We remain focused on underwriting
profitability as our primary operating objective for 2012."
"With our first quarter of 2012 results beginning to demonstrate
the positive impact of our underwriting initiatives, we believe
that Donegal Group is well positioned to execute its long-term
strategy of pursuing consolidation and acquisition opportunities,
complementing those transactions with prudent organic growth and
diversification and translating those initiatives into higher book
value. We believe those strategies will help us to achieve our
long-term objective to outperform the property and casualty
insurance industry in terms of service, profitability and book
value growth," Mr. Nikolaus concluded.
At March 31, 2012, the Company's book value per share was
$15.28, up from $15.01 at December 31, 2011 and $14.96 at March 31,
2011. The Company attributes the increase in book value from
year-end to the first quarter's positive operating results.
Insurance Operations
Donegal Group is an insurance holding company with insurance
subsidiaries offering 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 conduct business
together with Donegal Mutual Insurance Company as the Donegal
Insurance Group.
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Three Months
Ended March 31, |
|
2012 |
2011 |
% Change |
|
(dollars in thousands) |
Net Premiums Written |
|
|
|
Personal lines: |
|
|
|
Automobile |
$ 48,010 |
$ 46,289 |
3.7% |
Homeowners |
20,232 |
19,438 |
4.1 |
Other |
3,639 |
3,388 |
7.4 |
Total personal lines |
71,881 |
69,115 |
4.0 |
Commercial lines: |
|
|
|
Automobile |
12,860 |
11,331 |
13.5 |
Workers' compensation |
18,653 |
14,951 |
24.8 |
Commercial multi-peril |
16,425 |
15,249 |
7.7 |
Other |
1,500 |
1,544 |
(2.8) |
Total commercial lines |
49,438 |
43,075 |
14.8 |
Total net premiums written |
$ 121,319 |
$ 112,190 |
8.1% |
|
|
|
|
The Company's net premiums written increased 8.1% in the first
quarter of 2012, reflecting the 14.8% increase in commercial lines
writings and 4.0% increase in personal lines writings. The
$9.1 million increase in net premiums written for the quarter
included:
- $2.7 million, or 2.4% of total net premiums written, related to
a reduction in Michigan Insurance Company's ("MICO") quota-share
reinsurance agreement with external reinsurers. MICO is an
insurance subsidiary the Company acquired in December 2010. As a
result of the favorable results MICO achieved in 2011, the Company
executed a change to the MICO quota-share reinsurance agreement,
effective January 1, 2012, to reduce the percentage of premiums
MICO cedes to external reinsurers from 50% in 2011 to 40% in 2012
and thus increase the amount of premiums MICO retains.
- $4.8 million in commercial lines premiums, excluding the MICO
quota-share reinsurance change, that were primarily attributable to
new commercial accounts the Company's insurance subsidiaries wrote
across their operating regions.
- $1.6 million in personal lines premiums, excluding the MICO
quota-share reinsurance change, that primarily reflected the impact
of premium rate increases implemented throughout 2011.
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|
Three Months
Ended |
|
March
31, |
|
2012 |
2011 |
Statutory Combined
Ratios |
|
|
Personal Lines: |
|
|
Automobile |
106.9% |
101.9% |
Homeowners |
95.5 |
105.4 |
Other |
77.3 |
82.0 |
Total personal lines |
101.6 |
101.8 |
Commercial Lines: |
|
|
Automobile |
92.9 |
91.5 |
Workers' compensation |
93.7 |
95.8 |
Commercial multi-peril |
88.2 |
102.2 |
Other |
28.2 |
40.0 |
Total commercial lines |
88.8 |
94.3 |
Total lines |
96.9% |
99.1% |
|
|
|
GAAP Combined Ratios (Total
Lines) |
|
|
Loss ratio (non-weather) |
62.3% |
63.2% |
Loss ratio (weather-related) |
4.5 |
7.2 |
Expense ratio |
32.4 |
33.2 |
Dividend ratio |
0.2 |
0.2 |
Combined ratio |
99.4% |
103.8% |
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|
Mr. Nikolaus commented, "Although we incurred approximately $2.7
million of catastrophe losses from localized wind and hail events
in Michigan, Tennessee and Virginia in the first quarter of 2012,
our total weather-related losses of approximately $5.1 million for
the quarter compared favorably to weather-related losses of
approximately $7.5 million for the first quarter of 2011 and our
prior-five-year average for first quarter weather-related losses of
$6.6 million."
Net premiums earned for the first quarter of 2012 rose 10.5%,
due primarily to increases in net premiums written during 2011 and
2012. Net premiums earned for the first quarter of 2011
reflected a $1.8 million reduction related to MICO acquisition
accounting.
The Company's statutory combined ratio was 96.9% for the first
quarter of 2012, compared to 99.1% for the first quarter of
2011. The Company's statutory loss ratio1 of 66.4%
for the first quarter of 2012 compared favorably to the Company's
69.4% statutory loss ratio for the first quarter of 2011. The
improvement resulted from less severe winter weather claim activity
and fewer large fire losses. Development of reserves for losses
incurred in prior accident years was immaterial for the first
quarter of 2012.
The Company's statutory expense ratio1 increased modestly to
30.3% for the first quarter of 2012, compared to 29.5% for the
first quarter of 2011. The increase reflected higher
underwriting-based incentive costs in the 2012 period as a result
of improved underwriting profitability. The Company's other
underwriting expenses for the prior year first quarter included
approximately $700,000 related to MICO acquisition accounting, and
the Company's GAAP expense ratio for the prior year first quarter
reflected this additional expense.
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 93.0% of its
consolidated portfolio in diversified, highly rated and marketable
fixed-maturity investments at March 31, 2012.
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March 31,
2012 |
December 31,
2011 |
|
Amount |
% |
Amount |
% |
|
(dollars in thousands) |
Fixed maturities, at carrying value: |
|
|
|
|
U.S. Treasury securities and obligations
of U.S. government corporations and agencies |
$ 80,158 |
10.2% |
$ 61,978 |
7.9% |
Obligations of states and political
subdivisions |
449,848 |
57.5 |
455,843 |
58.0 |
Corporate securities |
72,189 |
9.2 |
64,363 |
8.2 |
Residential mortgage-backed
securities |
125,879 |
16.1 |
122,904 |
15.7 |
Total fixed maturities |
728,074 |
93.0 |
705,088 |
89.8 |
Equity securities, at fair value |
4,392 |
0.6 |
7,438 |
0.9 |
Investments in affiliates |
33,189 |
4.2 |
32,322 |
4.1 |
Short-term investments, at cost |
16,826 |
2.2 |
40,461 |
5.2 |
Total investments |
$ 782,481 |
100.0% |
$ 785,309 |
100.0% |
|
|
|
|
|
Average fixed-maturity yield |
2.6% |
|
2.8% |
|
Average tax-equivalent fixed-maturity
yield |
3.6% |
|
3.8% |
|
Average fixed-maturity duration (years) |
4.8 |
|
4.5 |
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|
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|
Net investment income decreased by 2.7% for the first quarter of
2012, reflecting lower average investment yields on the Company's
invested assets. Net realized investment gains were $2.3
million for the first quarter of 2012, compared to $373,073 for the
first quarter of 2011. The Company had no impairments it
considered to be other than temporary in its investment portfolio
in the first quarter of 2012 or 2011.
Commenting on the Company's investment operations, Mr. Nikolaus
said, "Our investment income continues to demonstrate our strict
adherence to a conservative investment policy. We invested a
portion of our short-term investment holdings into higher-yielding
fixed-income securities during the first quarter of 2012."
Mr. Nikolaus added, "Our net income for the first quarter of
2012 also included the benefit of $1.2 million in earnings from our
equity investment in Donegal Financial Services Corporation, which
owns Union Community Bank, a federal savings bank with 13 branch
offices in Lancaster County, Pennsylvania, and $533.2 million in
assets at December 31, 2011. Union Community Bank is the
successor bank to the merger of Province Bank and Union National
Community Bank in May 2011."
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 prescribed or permitted by state insurance
regulators. In addition to using GAAP-based performance
measurements, the Company also utilizes certain non-GAAP financial
measures that it believes are valuable in managing its business and
for comparison to its peers. These non-GAAP measures are
operating income (loss) and statutory combined ratio.
Operating income (loss) is a non-GAAP financial measure commonly
used by insurance investors. The Company defines operating income
(loss) as net income (loss) excluding after-tax net realized
investment gains or losses. Because the Company's calculation may
differ from similar measures used by other companies, investors
should exercise caution when comparing the Company's measure of
operating income (loss) to that of other companies.
The following table provides a reconciliation of net income to
operating income:
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|
|
|
|
Three Months
Ended March 31, |
|
2012 |
2011 |
% Change |
|
(dollars in thousands, except
per share amounts) |
Reconciliation of Net Income to
Operating Income |
|
|
|
Net income |
$ 8,010 |
$ 2,206 |
263.1% |
Realized gains (after tax) |
(1,501) |
(246) |
510.2% |
Operating income |
$ 6,509 |
$ 1,960 |
232.1% |
|
|
|
|
Per Share Reconciliation of Net
Income to Operating Income |
|
|
|
Net income – Class A (diluted) |
$ 0.31 |
$ 0.09 |
244.4% |
Realized gains (after tax) |
(0.05) |
(0.01) |
400.0% |
Operating income – Class A |
$ 0.26 |
$ 0.08 |
225.0% |
|
|
|
|
Net income – Class B |
0.29 |
$ 0.08 |
262.5% |
Realized gains (after tax) |
(0.05) |
(0.01) |
400.0% |
Operating income – Class B |
$ 0.24 |
$ 0.07 |
242.9% |
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|
Statutory combined ratio is a non-GAAP standard measurement of
underwriting profitability that is based upon amounts determined
under statutory accounting. 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 policyholders 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
The Company will hold a conference call and webcast on
Wednesday, April 18, 2012, beginning at 11:00 A.M. Eastern Time.
You may listen via the Internet by accessing the webcast link in
the Investors area of the Company's web site at
www.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 NASDAQ 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 past 25
years. The Company continues to seek opportunities for growth while
striving to achieve its longstanding goal of outperforming the
industry in terms of service and profitability.
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,
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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Donegal Group Inc. |
Consolidated Statements of
Income |
(unaudited; in thousands,
except share data) |
|
|
|
|
Quarter Ended March
31, |
|
2012 |
2011 |
|
|
|
Net premiums earned |
$ 114,692 |
$ 103,795 |
Investment income, net of expenses |
5,090 |
5,230 |
Net realized investment gains |
2,310 |
373 |
Lease income |
247 |
232 |
Installment payment fees |
1,835 |
1,834 |
Equity income |
1,174 |
119 |
Total revenues |
125,348 |
111,583 |
|
|
|
Net losses and loss expenses |
76,609 |
73,080 |
Amortization of deferred acquisition
costs |
17,881 |
16,992 |
Other underwriting expenses |
19,247 |
17,447 |
Policyholder dividends |
289 |
207 |
Interest |
571 |
443 |
Other expenses |
903 |
818 |
Total expenses |
115,500 |
108,987 |
|
|
|
Income before income tax expense |
9,848 |
2,596 |
Income tax expense |
1,838 |
390 |
|
|
|
Net income |
$ 8,010 |
$ 2,206 |
|
|
|
Net income per common share: |
|
|
Class A - basic |
$ 0.32 |
$ 0.09 |
Class A - diluted |
$ 0.31 |
$ 0.09 |
Class B - basic and
diluted |
$ 0.29 |
$ 0.08 |
|
|
|
Supplementary Financial Analysts' Data |
|
|
|
|
|
Weighted-average number of shares
outstanding: |
|
|
Class A - basic |
19,996,285 |
20,012,648 |
Class A - diluted |
20,361,121 |
20,012,648 |
Class B - basic and
diluted |
5,576,775 |
5,576,775 |
|
|
|
Net written premiums |
$ 121,319 |
$ 112,190 |
|
|
|
Book value per common share at end of
period |
$ 15.28 |
$ 14.96 |
|
|
|
|
|
|
Donegal Group Inc. |
Consolidated Balance
Sheets |
(in thousands) |
|
|
|
|
March 31, |
December 31, |
|
2012 |
2011 |
|
(unaudited) |
|
|
|
|
ASSETS |
Investments: |
|
|
Fixed maturities: |
|
|
Held to
maturity, at amortized cost |
$ 56,384 |
$ 58,490 |
Available
for sale, at fair value |
671,690 |
646,598 |
Equity securities, at fair value |
4,392 |
7,438 |
Investments in affiliates |
33,189 |
32,322 |
Short-term investments, at cost |
16,826 |
40,461 |
Total investments |
782,481 |
785,309 |
Cash |
15,986 |
13,245 |
Premiums receivable |
110,775 |
104,715 |
Reinsurance receivable |
195,544 |
209,824 |
Deferred policy acquisition costs |
37,264 |
36,425 |
Prepaid reinsurance premiums |
108,904 |
106,450 |
Other assets |
30,722 |
34,825 |
Total
assets |
$ 1,281,676 |
$ 1,290,793 |
|
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY |
Liabilities: |
|
|
Losses and loss expenses |
$ 430,650 |
$ 442,408 |
Unearned premiums |
346,018 |
336,937 |
Accrued expenses |
17,857 |
20,957 |
Borrowings under line of credit |
54,500 |
54,500 |
Subordinated debentures |
20,465 |
20,465 |
Other liabilities |
21,260 |
32,075 |
Total
liabilities |
890,750 |
907,342 |
Stockholders' equity: |
|
|
Class A common stock |
208 |
208 |
Class B common stock |
56 |
56 |
Additional paid-in capital |
171,403 |
170,837 |
Accumulated other comprehensive
income |
22,452 |
23,533 |
Retained earnings |
207,595 |
199,605 |
Treasury stock, at cost |
(10,788) |
(10,788) |
Total
stockholders' equity |
390,926 |
383,451 |
Total
liabilities and stockholders' equity |
$ 1,281,676 |
$ 1,290,793 |
CONTACT: Jeffrey D. Miller
Senior Vice President & Chief Financial Officer
Phone: (717) 426-1931
E-mail: jeffmiller@donegalgroup.com
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