Slide 1: Investor Presentation May 2017
NASDAQ: DGICA/DGICB There when it matters most. www.donegalgroup.com Investor Presentation | May 2017
Slide 2: Safe Harbor
SAFE HARBOR The Company bases all statements made in this presentation that are not historic facts on its 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
Slide 3: What is Donegal Group?
WHAT IS DONEGAL GROUP? Insurance holding company with mutual affiliate pursuing an effective strategy in regional insurance markets • Regional property and casualty insurance group NASDAQ: DGICA/DGICB Corporate Headquarters Marietta, Pennsylvania – 21 Mid-Atlantic, Midwestern, New England and Southe
Slide 4: Structure Provides Stability to Pursue Successful Long-Term Business Strategy
STRUCTURE PROVIDES STABILITY TO PURSUE SUCCESSFUL LONG-TERM BUSINESS STRATEGY Public Donegal Mutual • Outperform industry in service, stockholders Insurance Company profitability and book value growth • Drive revenues with organic growth Donegal Group Inc. and opportunistic affiliations • Focus on m
Slide 5: Objective: Steady Growth and Profitability
OBJECTIVE: STEADY GROWTH AND PROFITABILITY Change in Net Written Premiums GAAP Combined Ratio DGI CAGR: 7.7% Peer CAGR: 5.1% DGI Avg: 98.6% Peer Avg: 99.5% 20% 115% 110% 15% 105% 10% 100% 95% 5% 90% 0% 85% -5% 80% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2005 2006 2007 2008 2009 2
Slide 6: Q1 Financial Results: Three Months Ended 3/31/2017
Q1 FINANCIAL RESULTS: THREE MONTHS ENDED 3/31/2017 • 8.5% increase in net written premiums 8.5% increase for 2016 – Represents a combination of 9.6% growth in commercial lines net premiums written and 7.4% growth in personal lines net premiums written • 99.6% statutory combined ratio* – Continuing b
Slide 7: Drive Revenues with Organic Growth and Opportunistic Affiliations
DRIVE REVENUES WITH ORGANIC GROWTH AND OPPORTUNISTIC AFFILIATIONS $682 Michigan $629 Sheboygan $579 Peninsula $533 Le Mars $496 Southern $454 Atlantic States $392 $365 $363 $314 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 USD in millions December 2008 December 2010 2012 through 2015 Acquired S
Slide 8: Underwriting Profitability to Enhance Margins
UNDERWRITING PROFITABILITY TO ENHANCE MARGINS Personal Lines Loss Ratio Commercial Lines Loss Ratio 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 Donegal SNL P&C Industry (Aggregate) www.donegalgroup.com 8
Slide 9: Maintain Multifaceted Regional Growth Strategy
MAINTAIN MULTIFACETED REGIONAL GROWTH STRATEGY • Net premiums written of $682 million for the full year 2016 - across 21 states in four operating regions – $868 million in annual direct premiums written for insurance group* • 10 M&A transactions since 1988 • Acquisition criteria: – Serving attractiv
Slide 10: Strategic Efforts to Balance Business Mix
STRATEGIC EFFORTS TO BALANCE BUSINESS MIX Net Written Premiums in First Quarter 2017 by Line of Business • Commercial lines = 50.3% of NWP Homeowners – Commercial lines renewal premium Workers' Comp 14% Other Personal increases in 3-5% range 3% 18% – Ongoing emphasis on new business growth in all re
Slide 11: Emphasize Growth in Commercial Lines
EMPHASIZE GROWTH IN COMMERCIAL LINES • 94.4% statutory combined ratio for the three months 100.0% ended 3/31/17 95.0% • Expand core Donegal products in newer regions 90.0% • Growth focus on accounts with premiums in $10,000 to 85.0% $75,000 range 80.0% • Expand appetite within classes and lines alre
Slide 12: Focus on Personal Lines Profitability
FOCUS ON PERSONAL LINES PROFITABILITY • 99.6% statutory combined ratio for the three months ended 3/31/17 • Focus on the preferred and superior risk markets • Underwriting initiatives: – Modest rate increases in virtually every jurisdiction – Expand use of predictive modeling – Property inspections
Slide 13: Organic Growth Centered on Relationships with ~2,400 Independent Agencies
ORGANIC GROWTH CENTERED ON RELATIONSHIPS WITH ~2,400 INDEPENDENT AGENCIES • Ongoing objectives: • Continuing focus on commercial lines growth: – Achieve top-three ranking within appointed – Emphasize expanded commercial lines products agencies in lines of business we write and capabilities in curren
Slide 14: Support Agents with Best-in-Class Technology
SUPPORT AGENTS WITH BEST-IN-CLASS TECHNOLOGY ClaimsCenter BillingCenter ImageRight Call Center Service Center www.donegalgroup.com 14
Slide 15: Drive Increased Efficiency with Automation
DRIVE INCREASED EFFICIENCY WITH AUTOMATION Direct Premiums per Employee • Current infrastructure can $1,100 support premium growth (USD in 000s) $1,000 • Premiums per employee rising $900 due to technology systems $800 • Claims system allows more rapid $700 and efficient claims handling $600 • Mutua
Slide 16: Enhance Underwriting Profitability to Improve Operating Margins
ENHANCE UNDERWRITING PROFITABILITY TO IMPROVE OPERATING MARGINS • Sustain pricing discipline and conservative underwriting • Manage exposure to catastrophe/unusual weather events – Reinsurance coverage in excess of a 200-year event • Link employee incentive compensation directly to underwriting perf
Slide 17: Employ Sophisticated Pricing and Actuarial Tools
EMPLOY SOPHISTICATED PRICING AND ACTUARIAL TOOLS • Predictive modeling tools enhance our ability to appropriately price our products – Sophisticated predictive modeling algorithms for pricing/tiering risks – Territorial segmentation and analysis of environmental factors that affect loss experience –
Slide 18: Maintain Emphasis on Reserve Adequacy
MAINTAIN EMPHASIS ON RESERVE ADEQUACY • Reserves at $347.5 million at YE 2016 Established Reserves at Year-end – Midpoint of actuarial range Reserve Range at 12/31/2016 Low $318.6 million – Conservative reinsurance program limits High $379.0 million volatility Selected at midpoint • Emphasis on fast
Slide 19: Maintain Conservative Investment Mix
MAINTAIN CONSERVATIVE INVESTMENT MIX $922.3 Million in Invested Assets* (at March 31, 2017) • 93.6% of portfolio invested in Mortgage fixed maturities Backed Corporate Securities (MBS) – Effective duration = 4.4 years 21% 29% – Tax equivalent yield = 2.9% Treasury and Agency • Emphasis on quality 11
Slide 20: Donegal Financial Services Corporation
DONEGAL FINANCIAL SERVICES CORPORATION Bank Investment = 5% of Invested Assets • DFSC owns 100% of Union Community Bank – Serves Lancaster County (location of Donegal headquarters) with 15 branch offices • Expanded via acquisition in 2011 – Added scale to banking operation – Enhanced value of histor
Slide 21: Union Community Bank
UNION COMMUNITY BANK 48% owned by Donegal Group Inc. Q1 2017 financial results: – $541.8 million in assets at 3/31/2017 – $607,000 in Q1 2017 net income Excellent capital ratios at March 31, 2017: Tier 1 capital to average total assets 15.62% Tier 1 capital to risk-weighted assets 20.43% Risk-based
Slide 22: Donegal Mutual's Pending Acquisition of Mountain States Insurance Group
DONEGAL MUTUAL'S PENDING ACQUISITION OF MOUNTAIN STATES INSURANCE GROUP Entering the Southwest – In December 2016, Donegal Mutual entered into an agreement whereby Mountain States Mutual Casualty Company would merge with and into Donegal Mutual. Mountain States Mutual . . . – is based in Albuquerque
Slide 23: Long-Term Growth Strategy
LONG-TERM GROWTH STRATEGY • Maximize benefits of regional business approach • Outperform industry in service, profitability and book value growth • Drive revenues with organic growth and opportunistic affiliations • Focus on margin enhancements and investment contributions www.donegalgroup.com 23
Slide 24: Strong Capital + Solid Plan to Drive Results
STRONG CAPITAL + SOLID PLAN TO DRIVE RESULTS Book Value Plus Cumulative Dividends • Rated A (Excellent) by A.M. Best – Debt-to-cash/investments of approximately 7.4% 20.00 – Premium-to-surplus of approximately 1.6-to-1 15.00 • Dividend yield of 3.3% for Class A 10.00 shares 5.00 • Authorization for
Slide 25: Valuation vs. Peers (at 5/2/2017)
VALUATION VS. PEERS (AT 5/2/2017) Price to Tangible Book Value (MRY) 200.0 180.0 160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 HALL DGICA EMCI HMN UFCS KMPR Average THG NAVG AFG CINF SAFT SIGI Price to Tangible Book Value (MRQ) 200.0 150.0 100.0 50.0 0.0 HALL DGICA EMCI HMN UFCS KMPR Average THG N
Slide 26: Favorable Operating Performance vs. Peer Group
FAVORABLE OPERATING PERFORMANCE VS. PEER GROUP Net Written Premium Growth Return on Average Equity 9.0% 9.0% 8.0% 8.0% 7.0% 7.0% 6.0% 6.0% 5.0% 5.0% 4.0% 4.0% 3.0% 3.0% 2.0% 2.0% 1.0% 1.0% 0.0% 0.0% NWP Growth 2016 NWP Growth MRQ ROAE 2016 ROAE MRQ Donegal Peer Group Average Donegal Peer Group Avera
Slide 27: Key Takeaways
KEY TAKEAWAYS • Well-established regional insurance carrier with a diverse book of business of both personal and commercial lines • Organic top-line growth exceeding that of our peer group • Strength of brand and proven business strategies provide competitive advantages that enables the Company to d
Slide 28: Supplemental Information
SUPPLEMENTAL INFORMATION www.donegalgroup.com 28
Slide 29: Structure Provides Flexibility and Capacity
STRUCTURE PROVIDES FLEXIBILITY AND CAPACITY Public 46.7%(1) 53.3%(1) Donegal Mutual Stockholders Insurance Company Donegal Group Inc. 48.2% 51.8% 20% Donegal Financial Services Corporation POOLING 100% AGREEMENT Reinsurance 100% Union Community Bank 80% 100% 100% 100% 100% 100% 100% Sheboygan Southe
Slide 30: History of Contributing Affiliations
HISTORY OF CONTRIBUTING AFFILIATIONS Le Mars Peninsula Sheboygan Southern Mutual Michigan Year Acquired 2004 2004 2008 2009 2010 Company Type Mutual Stock Mutual Mutual Stock Primary Product Line Personal Niche Personal Personal Pers./Comm. Georgia/ Geographic Focus Midwest Mid-Atlantic Wisconsin Mi
Slide 31: Net Premiums Written by Line of Business
NET PREMIUMS WRITTEN BY LINE OF BUSINESS (USD in millions) Q1 17 Q4 16 Q3 16 Q2 16 Q1 16 Q4 15 Q3 15 Q2 15 Q1 15 Q4 14 Q3 14 Q2 14 Q1 14 Q4 13 Personal lines: Automobile $61.3 $55.9 $59.8 $59.0 $55.1 $51.0 $55.6 $55.6 $52.3 $48.5 $53.2 $52.0 $50.5 $46.7 Homeowners 25.6 29.4 34.2 33.4 25.9 28.5 33.2
Slide 32: Combined Ratio Analyses
COMBINED RATIO ANALYSES (in percentages) Q1 17 Q4 16 Q3 16 Q2 16 Q1 16 Q4 15 Q3 15 Q2 15 Q1 15 Q4 14 Q3 14 Q2 14 Q1 14 Q4 13 Stat combined ratios: Personal lines 104.0 107.5 103.6 100.2 95.6 104.2 101.4 99.4 98.4 106.5 95.2 99.5 102.7 99.3 Commercial lines 94.4 91.9 94.3 88.5 88.0 92.0 92.0 92.4 95.