Donegal Group Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. Donegal is a property-and-casualty insurer operating through independent agents, with personal and commercial insurance businesses and a 48.2% interest in Donegal Financial Services Corporation (DFSC). The interim financial statements are unaudited.
Key financial results
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Total revenue | $154.8 million | $140.3 million; up 10.3% |
| Net premiums earned | $146.5 million | $133.5 million; up 9.7% |
| Net premiums written | $156.6 million | $144.6 million; up 8.3% |
| Net investment income | $4.9 million | $4.6 million |
| Net realized investment gains (losses) | $1.0 million gain | $88,532 loss |
| Income (loss) before tax | $9.0 million | $0.8 million loss |
| Net income (loss) | $6.9 million | $0.6 million loss |
| Class A diluted EPS | $0.25 | $0.02 loss; Class B EPS was $0.23 versus $0.02 loss |
| Operating cash flow | $9.3 million provided | $5.3 million used |
Underwriting and balance sheet
- The insurers’ combined ratio improved to 98.8% from 104.7%; a ratio below 100% generally indicates underwriting profitability. The statutory combined ratio was 96.9%, versus 103.2%.
- The GAAP loss ratio fell to 65.5% from 73.1%; the expense ratio rose to 32.7% from 31.3%. Prior-year reserve development was modestly favorable by approximately $606,000, compared with $430,000 favorable in Q1 2014.
- At March 31, total assets were $1.495 billion, total liabilities $1.070 billion, and stockholders’ equity $425.5 million. Total investments were $852.4 million and cash was $27.9 million.
- Borrowings totaled $55.0 million: $40.0 million under the M&T revolving line and $15.0 million of Atlantic States’ FHLB advances. The M&T facility had $20.0 million of additional availability; its outstanding balance carried a 2.43% rate. The company reported compliance with its credit covenants.
- Cash declined $7.7 million during the quarter, to $27.9 million, as investing cash outflow of $17.4 million exceeded operating and financing inflows. Cash dividends paid were $3.5 million.
Material changes and management commentary
- Premium growth reflected rate increases and increased commercial-lines writings, as well as MICO’s termination of its third-party quota-share reinsurance agreement effective January 1, 2015. The reinsurance change increased reported net written premiums but also changed the amount of risk retained.
- Commercial-lines written premiums increased 12.4%; personal-lines written premiums increased 4.8%. Management attributed improved loss experience in part to lower workers’ compensation, commercial multi-peril and homeowners loss ratios.
- Management said operating cash flow improved mainly because claim payments were lower than in the prior-year quarter. It described liquidity as supported by operating cash flows, investment income and maturities, and marketable investments.
- The board declared, after quarter-end, quarterly dividends of $0.135 per Class A share and $0.1175 per Class B share, payable May 15, 2015 to holders of record May 1.
Outlook, risks and unusual items
- The filing provides no specific earnings or premium guidance. Management cautioned that first-quarter results are not necessarily indicative of full-year 2015 results.
- Key uncertainties include adequacy of loss reserves, claims severity and litigation trends, medical costs, catastrophic weather, reinsurance availability and cost, interest rates, investment values, competition and regulatory or legal changes. A 1% change in estimated loss reserves, net of reinsurance, would affect pretax results by approximately $3.0 million.
- Net realized investment gains were $1.0 million, principally from strategic sales; the company reported no investment impairment losses in either comparative quarter. It considered unrealized losses on 16 equity and 69 debt securities temporary.
- The company disclosed no material change in risk factors from its 2014 Form 10-K and no material change in market-risk exposure. No legal proceedings were reported. It stated disclosure controls were effective and that there had been no material change in internal control over financial reporting.
- Stock-based compensation expense increased to $682,473 from $180,415. The company had $3.9 million of unrecognized compensation expense, expected to be recognized over a weighted-average 1.5 years.
Most important facts for investors to verify
- Whether premium growth—particularly growth associated with MICO’s quota-share termination—translates into sustainable, adequately priced underwriting results.
- Whether the improved combined ratio and lower claims experience persist, and whether reserve estimates remain adequate given claims severity and litigation trends.
- The contribution of investment gains to reported earnings and the sensitivity of portfolio values and investment income to market and interest-rate changes.
- Liquidity and financing capacity, including the $55.0 million of borrowings, the revolving facility’s maturity and covenants, and regulatory limits on insurance-subsidiary dividends.
- The filing’s reported figures and share-class EPS allocation, including the post-quarter dividend declaration; the filing does not provide a quantified full-year outlook.