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Section 1: 8-K (FORM 8-K)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________

Form 8-K
_____________________

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event Reported): July 29, 2019  

Donegal Group Inc.
(Exact Name of Registrant as Specified in Charter)

DE0-1534123-2424711
(State or Other Jurisdiction of Incorporation)(Commission File Number)(I.R.S. Employer Identification Number)

 

1195 RIVER RD, MARIETTA, PA 17547
(Address of Principal Executive Offices) (Zip Code)

717-426-1931
(Registrant's telephone number, including area code)


(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 [   ]  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 [   ]  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 [   ]  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 [   ]  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2). Emerging growth company [   ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class  Trading Symbols  Name of Each Exchange on Which Registered
Class A Common Stock, $.01 par value  DGICA  The NASDAQ Global Select Market
Class B Common Stock, $.01 par value  DGICB  The NASDAQ Global Select Market

 

 
 

Item 2.02. Results of Operations and Financial Condition.

On July 29, 2019, the Registrant issued a press release, a copy of which is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

Item 9.01. Financial Statements and Exhibits.

Exhibit 99.1. Press release dated July 29, 2019


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 Donegal Group Inc.
   
  
Date: July 29, 2019By: /s/ Jeffrey D. Miller        
  Jeffrey D. Miller
  Executive Vice President & Chief Financial Officer
  


EXHIBIT INDEX

 

Exhibit Number Description
  
99.1 Press Release dated July 29, 2019

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Section 2: EX-99.1 (PRESS RELEASE)

EdgarFiling

EXHIBIT 99.1

Donegal Group Inc. Announces Second Quarter and First Half 2019 Results

MARIETTA, Pa., July 29, 2019 (GLOBE NEWSWIRE) -- Donegal Group Inc. (NASDAQ: DGICA) and (NASDAQ:DGICB) today reported its financial results for the second quarter and first half of 2019. The Company will host a conference call to discuss these results on Tuesday, July 30, 2019 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. A replay of the conference call will also be available via the Company’s website.

Significant financial highlights included:

            
 Three Months Ended June 30, Six Months Ended June 30,
  2019   2018  % Change  2019   2018  % Change
  
 (dollars in thousands, except per share amounts)
            
Income Statement Data         
Net premiums earned$188,763  $185,714  1.6% $376,837  $367,479  2.5%
Investment income, net 7,290   6,342  14.9   14,338   12,721  12.7 
Net investment gains 1,566   1,517  3.2   19,663   599  NM 
Total revenues 198,789   195,790  1.5   413,503   385,118  7.4 
Net income (loss) 4,789   (790) NM   27,812   (18,968) NM 
Non-GAAP operating income (loss)1 3,551   (536) NM   10,853   (18,108) NM 
              
Per Share Data            
Net income (loss) – Class A (diluted)$0.17  $(0.03) NM  $0.99  $(0.68) NM 
Net income (loss) – Class B 0.15   (0.03) NM   0.90   (0.63) NM 
Non-GAAP operating income (loss) – Class A (diluted) 0.13   (0.02) NM   0.39   (0.65) NM 
Non-GAAP operating income (loss) – Class B 0.11   (0.02) NM   0.35   (0.60) NM 
Book value 15.34   14.85  3.3%  15.34   14.85  3.3%
            
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, “We were pleased with the improvement in our results for the second quarter of 2019. The improvement represented a continuation of the favorable operating metrics Donegal Group reported in the first quarter of 2019. Net income of $0.17 per diluted Class A share for the second quarter of 2019 and net income of $0.99 per diluted Class A share for the first half of 2019 improved significantly compared to the results we reported for the comparable periods in 2018. We attribute our 2019 performance to a number of different factors, the most notable being strong underwriting performance within our commercial lines business segment.”

Mr. Burke continued, “We continue to shift our overall mix of business to a higher proportion of commercial business, where we see greater opportunities for profitable growth for the foreseeable future. Net premiums written within our commercial segment grew 13.5% for the second quarter of 2019 and comprised approximately 52.3% of our total writings. We attribute this growth to new commercial accounts our insurance subsidiaries have written throughout their operating regions, a continuation of renewal premium increases that averaged 2.1% and lower reinsurance premiums. Renewal premium increases, excluding workers’ compensation, averaged 4.6% for the second quarter of 2019. Our commercial multi-peril and workers' compensation lines generated profitable results, and we have continued to implement commercial automobile rate increases to improve results in that line.

“Our commercial lines growth was offset partially by a 10.0% reduction in net premiums written within our personal lines segment. The decline in personal lines net written premiums largely reflected the impact of underwriting actions our insurance subsidiaries have taken to slow new business growth and improve profitability and the impact of our exit from the personal lines markets in seven unprofitable states. Those factors were partially mitigated by rate increases that averaged 5.9% for the quarter and lower reinsurance premiums. We remain committed to maintaining a balanced mix of commercial and personal lines products at pricing levels that we expect will allow us to remain profitable through fluctuating market cycles.”

Jeffrey D. Miller, Executive Vice President and Chief Financial Officer of Donegal Group Inc., commented on the second quarter underwriting results, “We were pleased that our commercial lines insurance segment generated a statutory combined ratio1 of 92.9% during the second quarter of 2019, driven primarily by our commercial multi-peril and workers’ compensation lines of business. That performance was offset by underwriting losses within our personal lines insurance segment, although both our homeowners and personal automobile lines of business showed improvement from the prior-year period. Our expense ratio was relatively stable at 31.3% for the second quarter of 2019. Overall, our combined ratio was 102.0% for the second quarter of 2019, compared to 105.6% for the prior-year quarter. While we were pleased with the incremental improvement, our results for the second quarter of 2019 did not reflect our targeted level of underwriting profitability.”

Mr. Burke concluded, “Our net income during the first half of 2019, which included a gain on the March 2019 sale of Donegal Financial Services Corporation, and unrealized gains within our available-for-sale fixed-maturity portfolio during the period contributed to an increase in our book value to $15.34 at June 30, 2019, compared to $14.05 at December 31, 2018. We are focused on improving our financial performance, utilizing technology to improve our operational efficiency, strategically modernizing our business, and enhancing our market position to compete effectively. Our goal remains to generate consistent favorable returns for our stockholders over the long term.”

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,
  2019  2018 % Change  2019  2018 % Change
  
 (dollars in thousands)
            
Net Premiums Earned          
Personal lines$93,975 $101,162 (7.1%) $190,568 $200,701 (5.0%)
Commercial lines 94,788  84,552 12.1   186,269  166,778 11.7 
Total net premiums earned$188,763 $185,714 1.6% $376,837 $367,479 2.5%
            
Net Premiums Written         
Personal lines:          
Automobile$56,197 $66,511 (15.5%) $112,223 $131,417 (14.6%)
Homeowners 32,685  35,030 (6.7)  57,713  61,587 (6.3)
Other 5,458  3,265 67.2   10,638  6,194 71.7 
Total personal lines 94,340  104,806 (10.0)  180,574  199,198 (9.3)
Commercial lines:          
Automobile 31,245  27,857 12.2   65,547  58,103 12.8 
Workers' compensation 29,024  26,566 9.3   62,416  59,696 4.6 
Commercial multi-peril 35,454  29,710 19.3   73,294  61,895 18.4 
Other 7,740  7,010 10.4   15,887  12,313 29.0 
Total commercial lines 103,463  91,143 13.5   217,144  192,007 13.1 
Total net premiums written$197,803 $195,949 0.9% $397,718 $391,205 1.7%
 

Net Premiums Written

The 0.9% increase in net premiums written for the second quarter of 2019 compared to the second quarter of 2018, as shown in the table above, represents 13.5% growth in commercial lines net premiums written, offset by a 10.0% decline in personal lines net premiums written for the reasons we describe below. The $1.9 million growth in net premiums written for the second quarter of 2019 compared to the second quarter of 2018 included:

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, 2019 and 2018:

 Three Months Ended Six Months Ended
 June 30, June 30,
 2019 2018 2019 2018
        
GAAP Combined Ratios (Total Lines)    
Loss ratio (non-weather)60.7% 63.6% 60.5% 71.3%
Loss ratio (weather-related)9.0  9.5  7.1  8.3 
Expense ratio31.3  31.8  32.0  32.1 
Dividend ratio1.0  0.7  1.1  0.7 
Combined ratio102.0% 105.6% 100.7% 112.4%
        
Statutory Combined Ratios     
Personal lines:      
Automobile107.2% 109.7% 104.2% 113.8%
Homeowners113.6  113.9  104.4  112.8 
Other89.2  104.9  79.9  119.5 
Total personal lines108.5  111.0  103.1  113.6 
Commercial lines:      
Automobile112.7  116.0  114.5  143.5 
Workers' compensation71.7  92.9  80.2  88.1 
Commercial multi-peril93.2  91.2  92.1  103.8 
Other95.1  67.1  80.9  54.5 
Total commercial lines92.9  97.3  94.6  108.0 
Total lines100.7% 104.5% 98.9% 111.0%
        

For the second quarter of 2019, the loss ratio decreased to 69.7%, compared to 73.1% for the second quarter of 2018. Weather-related losses of $17.0 million for the second quarter of 2019, or 9.0 percentage points of the loss ratio, decreased from $17.7 million for the second quarter of 2018, or 9.5 percentage points of the loss ratio. Weather-related loss activity for the second quarter of 2019 was higher than our five-year average of $14.0 million for second-quarter weather-related losses.

Large fire losses, which we define as individual fire losses in excess of $50,000, for the second quarter of 2019 were $6.2 million, or 3.3 percentage points of the loss ratio. That amount was modestly lower than the large fire losses of $6.7 million, or 3.6 percentage points of the loss ratio, for the second quarter of 2018.

Net development of reserves for losses incurred in prior accident years decreased the loss ratio for the second quarter of 2019 by 1.5 percentage points, compared to virtually no impact for the second quarter of 2018. Our insurance subsidiaries experienced favorable development in workers’ compensation losses, partially offset by modest unfavorable development in several other lines of business for the second quarter of 2019.

The expense ratio was 31.3% for the second quarter of 2019, in line with the 31.8% expense ratio for the second quarter of 2018.

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 93.4% of our consolidated investment portfolio in diversified, highly rated and marketable fixed-maturity securities at June 30, 2019.

 June 30, 2019 December 31, 2018
 Amount % Amount %
  
 (dollars in thousands)
Fixed maturities, at carrying value:     
U.S. Treasury securities and obligations of U.S.    
government corporations and agencies$120,708  11.2% $120,432  11.7%
Obligations of states and political subdivisions 233,081  21.7   234,508  22.8 
Corporate securities 291,846  27.1   264,843  25.7 
Mortgage-backed securities 358,573  33.4   309,574  30.0 
Total fixed maturities 1,004,208  93.4   929,357  90.2 
Equity securities, at fair value 46,767  4.3   43,667  4.2 
Investments in affiliates -  0.0   41,026  4.0 
Short-term investments, at cost 24,453  2.3   16,749  1.6 
Total investments$1,075,428  100.0% $1,030,799  100.0%
        
Average investment yield 2.7%    2.6%  
Average tax-equivalent investment yield 2.8%    2.8%  
Average fixed-maturity duration (years) 4.0     4.4   
        

Net investment income of $7.3 million for the second quarter of 2019 increased 14.9% compared to $6.3 million in net investment income for the second quarter of 2018. The increase in net investment income reflected primarily an increase in average invested assets relative to the prior-year second quarter.

Net investment gains of $1.6 million for the second quarter of 2019 were primarily related to unrealized gains in the fair value of equity securities held at June 30, 2019. That amount was comparable to net investment gains of $1.5 million for the second quarter of 2018.

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 and $6.1 million 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,
  
2019
  2018 % Change  2019  2018 % Change
  
 (dollars in thousands)
Reconciliation of Net Premiums         
Earned to Net Premiums Written         
Net premiums earned$188,763 $185,714 1.6% $376,837 $367,479 2.5%
Change in net unearned premiums 9,040  10,235 (11.7)  20,881  23,726 (12.0)
Net premiums written$197,803 $195,949 0.9% $397,718 $391,205 1.7%
            
            

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

 Three Months Ended June 30, Six Months Ended June 30,
  
2019
   2018  % Change  2019   2018  % Change
  
 (dollars in thousands, except per share amounts)
            
Reconciliation of Net Income (Loss)        
to Non-GAAP Operating Income (Loss)        
Net income (loss)$  4,788  $  (790) NM  $  27,812  $  (18,968) NM
Investment gains (after tax)   (1,237)    (1,001) 23.6%    (16,959)    (395) NM
Restructuring charge (after tax)   -      1,255  NM     -      1,255  NM
Non-GAAP operating income (loss)$  3,551  $  (536) NM  $  10,853  $  (18,108) NM
            
Per Share Reconciliation of Net Income (Loss)       
to Non-GAAP Operating Income (Loss)         
Net income (loss) – Class A (diluted)$  0.17  $  (0.03) NM  $  0.99  $  (0.68) NM
Investment gains (after tax)   (0.04)    (0.04) 0.0%    (0.60)    (0.02) NM
Restructuring charge (after tax)   -      0.05  NM     -      0.05  NM
Non-GAAP operating income (loss) – Class A$  0.13  $  (0.02) NM  $  0.39  $  (0.65) NM
             
Net income (loss)  – Class B$  0.15  $  (0.03) NM  $  0.90  $  (0.63) NM
Investment gains (after tax)   (0.04)    (0.03) 33.3%    (0.55)    (0.01) NM
Restructuring charge (after tax)   -      0.04  NM     -      0.04  NM
Non-GAAP operating income (loss) – Class B$  0.11  $  (0.02) NM  $  0.35  $  (0.60) NM
            

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 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.

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 improving our financial performance, utilizing technology to improve our operational efficiency, strategically modernizing our business in order to achieve operational excellence and enhancing our market position to compete effectively.

Safe Harbor

We base all statements contained in this release that are not historic facts on our current expectations. These statements are forward-looking in nature (as defined in the Private Securities Litigation Reform Act of 1995) and involve a number of risks and uncertainties. Actual results could vary materially. Factors that could cause actual results to vary materially include: adverse and catastrophic weather events, our ability to maintain profitable operations, the adequacy of the loss and loss expense reserves of our insurance subsidiaries, business and economic conditions in the areas in which our insurance subsidiaries operate, interest rates, competition from various insurance and other financial businesses, terrorism, the availability and cost of reinsurance, legal and judicial developments, changes in regulatory requirements, our ability to integrate and manage successfully the insurance companies we may acquire from time to time and other risks we describe 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 June 30,
  2019  2018 
    
Net premiums earned$188,763 $185,714 
Investment income, net of expenses 7,290  6,342 
Net investment gains 1,566  1,517 
Lease income 112  123 
Installment payment fees 1,058  1,306 
Equity in earnings of DFSC -  788 
Total revenues 198,789  195,790 
    
Net losses and loss expenses 131,507  135,754 
Amortization of deferred acquisition costs 30,925  30,579 
Other underwriting expenses 28,208  28,492 
Policyholder dividends 1,969  1,214 
Interest 303  566 
Other expenses, net 339  518 
Total expenses 193,251  197,123 
    
Income (loss) before income tax expense (benefit) 5,538  (1,333)
Income tax expense (benefit) 749  (543)
    
Net income (loss)$4,789 $(790)
    
Net income (loss) per common share:  
Class A - basic and diluted$0.17 $(0.03)
Class B - basic and diluted$0.15 $(0.03)
    
Supplementary Financial Analysts' Data  
    
Weighted-average number of shares outstanding:   
Class A - basic 22,932,894  22,685,964 
Class A - diluted 23,132,683  22,887,365 
Class B - basic and diluted 5,576,775  5,576,775 
    
Net premiums written$197,803 $195,949 
    
Book value per common share at end of period$15.34 $14.85 
    

 

Donegal Group Inc.
Consolidated Statements of Income
(unaudited; in thousands, except share data)
    
 Six Months Ended June 30,
  2019  2018 
    
Net premiums earned$376,837 $367,479 
Investment income, net of expenses 14,338  12,721 
Net investment gains 19,663  599 
Lease income 223  246 
Installment payment fees 2,147  2,653 
Equity in earnings of DFSC 295  1,420 
Total revenues 413,503  385,118 
    
Net losses and loss expenses 254,618  292,337 
Amortization of deferred acquisition costs 61,517  60,244 
Other underwriting expenses 58,893  57,815 
Policyholder dividends 4,319  2,516 
Interest 869  1,030 
Other expenses, net 904  1,044 
Total expenses 381,120  414,986 
    
Income (loss) before income tax expense (benefit) 32,383  (29,868)
Income tax expense (benefit) 4,571  (10,900)
    
Net income (loss)$27,812 $(18,968)
    
Net income (loss) per common share:  
Class A - basic$1.00 $(0.68)
Class A - diluted$0.99 $(0.68)
Class B - basic and diluted$0.90 $(0.63)
    
Supplementary Financial Analysts' Data  
    
Weighted-average number of shares outstanding:  
Class A - basic 22,891,535  22,650,899 
Class A - diluted 23,027,205  23,139,596 
Class B - basic and diluted 5,576,775  5,576,775 
    
Net premiums written$397,718 $391,205 
    
Book value per common share at end of period$15.34 $14.85 
    

 

Donegal Group Inc.
Consolidated Balance Sheets
(in thousands)
    
 June 30, December 31,
  2019   2018 
 (unaudited)  
    
ASSETS       
Investments:   
Fixed maturities:   
Held to maturity, at amortized cost$434,458  $402,799 
Available for sale, at fair value 569,750   526,558 
Equity securities, at fair value 46,767   43,667 
Investments in affiliates -   41,026 
Short-term investments, at cost 24,453   16,749 
Total investments 1,075,428   1,030,799 
Cash 35,946   52,594 
Premiums receivable 176,258   156,702 
Reinsurance receivable 357,629   343,369 
Deferred policy acquisition costs 64,274   60,615 
Prepaid reinsurance premiums 143,969   135,380 
Other assets 47,779   52,619 
Total assets$1,901,283  $1,832,078 
    
LIABILITIES AND STOCKHOLDERS' EQUITY       
Liabilities:   
Losses and loss expenses$845,282  $814,665 
Unearned premiums 535,999   506,529 
Accrued expenses 25,180   25,442 
Borrowings under lines of credit 35,000   60,000 
Subordinated debentures 5,000   5,000 
Other liabilities 16,968   21,572 
Total liabilities 1,463,429   1,433,208 
Stockholders' equity:   
Class A common stock 260   258 
Class B common stock 56   56 
Additional paid-in capital 264,320   261,259 
Accumulated other comprehensive loss (1,837)  (14,228)
Retained earnings 216,281   192,751 
Treasury stock (41,226)  (41,226)
Total stockholders' equity 437,854   398,870 
Total liabilities and stockholders' equity$1,901,283  $1,832,078 
    

For Further Information:
Jeffrey D. Miller, Executive Vice President & Chief Financial Officer
Phone: (717) 426-1931
E-mail: [email protected]

 

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