Donegal Group Inc. Announces First Quarter 2014 Results

Donegal Group Inc. Announces First Quarter 2014 Results  MARIETTA, Pa., April 25, 2014 (GLOBE NEWSWIRE) -- 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 ratio^1 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                                                                                        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            NM^2 Total revenues            140,339           133,873          4.8 Net (loss) income        (634)             6,475            NM Operating (loss) income^1 (576)             5,591            NM                                                              Per Share Data                                                Net (loss) income– Class $(0.02)          $0.25           NM A (diluted) Net (loss) income– Class (0.02)            0.23             NM B Operating (loss) income– (0.02)            0.22             NM Class A (diluted) Operating (loss) income– (0.02)            0.20             NM Class B Book value                15.18             15.72            -3.4                                                              ^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.                                               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.                                                                           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%                                                 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.                                                                                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%                                              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 ratio^1 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.                                                                                                                 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        $61,366  7.6%   $62,279  7.9% agencies Obligations of states and political        375,185   46.7  385,982   48.7 subdivisions 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                                                                              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:                                                                                               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)       58                   (884)        NM (after tax) Operating (loss) income       $(576)              $5,591      NM                                                                 Per Share Reconciliation of Net Income to Operating               Income Net (loss) income – Class A   $(0.02)             $0.25       NM (diluted) Realized losses (gains)       --                  (0.03)       NM (after tax) Operating (loss) income –     $(0.02)             $0.22       NM Class A                                                                 Net (loss) income – Class B   $(0.02)             $0.23       NM Realized losses (gains)       --                  (0.03)       NM (after tax) Operating (loss) income–     $(0.02)             $0.20       NM Class B                                                                  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.                                                               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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