Donegal Group Inc. — Q3 2014 Form 10-Q
Business and period: Property-and-casualty insurer reporting the quarter and nine months ended September 30, 2014, compared with the same 2013 periods. Its insurance subsidiaries write personal and commercial coverage through independent agents; Donegal also owns 48.2% of Donegal Financial Services Corporation (DFSC). Atlantic States shares pooled underwriting results with Donegal Mutual, 80%/20%, respectively.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net premiums earned | $142.1 million | $130.6 million | $412.3 million | $382.3 million |
| Total revenue | $149.1 million | $138.3 million | $435.0 million | $407.7 million |
| Income before tax | $10.6 million | $9.5 million | $12.1 million | $20.5 million |
| Net income | $8.7 million | $7.7 million | $10.1 million | $16.8 million |
| Class A diluted EPS | $0.33 | $0.30 | $0.38 | $0.65 |
| Operating cash flow | Not separately stated | Not separately stated | $25.9 million | $32.5 million |
- Underwriting: The GAAP combined ratio was 96.8% in Q3 versus 97.6% a year earlier, but 101.8% for the first nine months versus 100.1%. A ratio above 100% generally indicates an underwriting loss. Statutory combined ratios were 95.0% and 100.0%, respectively, for those periods.
- Premium growth: Net premiums written rose 8.2% in Q3 to $147.8 million and 8.3% year to date to $443.9 million. Growth reflected rate increases, more commercial business and MICO reducing its external quota-share reinsurance from 30% to 20%.
- Losses and investment income: Nine-month net losses and loss expenses increased to $286.5 million from $259.9 million. Net investment income declined to $13.5 million from $14.1 million; realized investment gains declined to $2.3 million from $2.9 million. DFSC equity earnings fell to $1.2 million from $2.5 million.
- Balance sheet at September 30: Total assets were $1.458 billion, investments $825.9 million, cash $31.0 million and stockholders’ equity $414.9 million. Total liabilities were $1.043 billion, including unpaid losses and loss expenses of $520.1 million and unearned premiums of $422.8 million.
- Debt and liquidity: Borrowings totaled $56.0 million: $41.0 million under the renewed $60 million M&T revolving line and $15.0 million of Atlantic States’ FHLB advances. The M&T line runs to July 2017; $19.0 million remained available. The reported rate on M&T borrowings was 2.41%; the FHLB advance rate was 0.32%. Cash from operations was positive, though lower year over year. Insurance subsidiaries paid $7.5 million in dividends to the parent during the first nine months.
Changes, outlook and risks
- Q3 net income improved year over year, while nine-month net income fell about 40%, largely alongside higher losses and lower DFSC earnings and investment income. Nine-month underwriting results weakened, with commercial lines reporting a statutory underwriting loss of $8.8 million and personal lines a loss of $5.5 million.
- Weather-related losses were $37.8 million in the first nine months, versus $24.5 million in 2013. Prior-year reserve development was unfavorable by about $7.6 million year to date, compared with $9.6 million unfavorable in 2013; Q3 development was $2.0 million unfavorable versus $3.1 million.
- Management provided no specific earnings or premium guidance. It said interim results are not necessarily indicative of full-year results. The board declared October 2014 quarterly dividends of 13.15 cents per Class A share and 11.60 cents per Class B share.
- Key exposures include reserve-estimation uncertainty, litigation and medical-cost trends, severe weather, reinsurance availability and collectability, investment-market and interest-rate risk, competition, and insurance regulation. Management estimated that a 1% change in loss reserves net of reinsurance would affect pretax results by approximately $2.8 million. The company reported no material change in risk factors from its 2013 Form 10-K, no legal proceedings, and effective disclosure controls.
- Management considered identified unrealized investment losses temporary and recorded no investment impairment losses in the first nine months. Fair values can be less certain in illiquid markets. The filing also notes a 2013 reclassification of fixed maturities from available-for-sale to held-to-maturity.
Investor facts to verify
- Whether the deterioration in year-to-date underwriting performance persists, particularly in commercial automobile and commercial multi-peril.
- Subsequent loss development and the adequacy of reserves, including the stated sensitivity to reserve changes.
- Whether weather losses, premium-rate actions and the MICO reinsurance change explain premium and loss trends on a sustainable basis.
- Liquidity, debt levels and the availability of dividends from regulated insurance subsidiaries; also review the credit-line covenants and maturities.
- Investment portfolio valuation and credit exposure, including the held-to-maturity classification and municipal-bond concentrations.