Donegal Group Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The company is a regional property-and-casualty insurance holding company operating through independent agents in 20 states, primarily in the Mid-Atlantic, Midwest, New England and South. This is an annual filing, not a standalone fourth-quarter report.
Financial results and condition
- Revenue and premiums: Total revenue was $812.5 million, up 5.3% from $771.8 million in 2018. Net premiums earned increased 2.0% to $756.1 million; net premiums written rose 1.2% to $752.6 million.
- Business mix: Commercial net premiums written increased 13.4% to $404.9 million, while personal lines fell 10.1% to $347.7 million. Commercial business represented 53.8% of written premiums, versus 47.0% in 2018.
- Profit: Net income was $47.2 million, or diluted EPS of $1.67 for Class A and $1.51 for Class B, compared with a $32.8 million net loss in 2018. Fourth-quarter net income was $14.2 million, versus a $15.0 million loss in fourth-quarter 2018.
- Underwriting and margins: The combined ratio improved to 99.5% from 110.1% (below 100% generally indicates underwriting profitability). The loss ratio declined to 67.0% from 77.8%; the expense ratio edged down to 31.3% from 31.6%. GAAP underwriting income was $3.7 million, compared with a $74.8 million loss in 2018. Commercial-line underwriting income was $8.4 million; personal lines recorded a $1.6 million underwriting loss.
- Cash flow and liquidity: Operating cash flow was $76.4 million, up from $63.8 million. Year-end cash was $49.3 million. The company had a $30 million unsecured revolving facility available, with no borrowings under it at year-end; it expired in July 2020. Insurance subsidiaries could pay approximately $39.9 million in ordinary dividends to the parent in 2020 without prior regulatory approval.
- Debt and capital: Total debt obligations were $40 million, down from $65 million: $35 million of FHLB advances due in 2024 at a fixed 1.74% rate and $5 million of subordinated debentures. Stockholders’ equity was $451.0 million, versus $398.9 million; book value per share was $15.67, versus $14.05.
- Investments: Total investments were $1.11 billion, up from $1.03 billion. The fixed-maturity portfolio was 99.8% investment grade; equity securities were 5.0% of investments. Net investment income rose 9.7% to $29.5 million; average yield was 2.8%, versus 2.6%.
Material changes and unusual items
- Results rebounded from 2018 as underwriting improved and prior-year reserves developed favorably by $12.9 million, compared with $35.6 million of unfavorable development in 2018. Weather losses declined to $46.1 million from $65.0 million.
- 2019 net investment gains of $22.0 million included a $12.7 million gain on the sale of Donegal Financial Services Corporation (DFSC) and $8.9 million of unrealized equity gains. The 2018 result included $4.8 million of net investment losses. The DFSC sale closed in March 2019; Donegal Group received approximately $41.4 million in cash and Northwest Bancshares stock consideration, plus a $14.1 million dividend from DFSC, and sold the stock during 2019.
- Personal-lines contraction reflects pricing and underwriting actions, including non-renewal of unprofitable business in seven states beginning in February 2019. Management said 2018–2019 corrective measures and strategic initiatives positioned the company for 2020 and beyond.
- Le Mars and Sheboygan Falls merged into Atlantic States effective December 1, 2019. The company also completed the Peninsula branch-office sale in January 2019, receiving $1.2 million net proceeds.
Outlook, risks and contingencies
- No specific numerical earnings or premium guidance is provided. Management’s stated priorities include underwriting profitability, disciplined pricing, commercial-lines growth, expense control, agency development and selective acquisitions.
- Key risks include reserve uncertainty and rising claim severity, litigation and medical costs, catastrophe and severe-weather losses, premium-rate adequacy, reinsurance availability and collectability, investment and interest-rate risks, and competition and technology execution.
- Net loss and loss expense reserves were $506.9 million; management estimated that a 1% change in net reserves would affect pretax results by approximately $5.1 million. Bodily-injury severity and settlement delays remain areas of uncertainty. In 2018, automobile reserve strengthening included $17.7 million for personal auto and $20.8 million for commercial auto.
- Third-party reinsurance receivables were approximately $141.0 million; MICO also had $70.4 million of receivables from the Michigan Catastrophic Claims Association. Reinsurance does not remove the insurers’ primary obligation to policyholders if a reinsurer fails to pay.
- Donegal Mutual controls approximately 71% of combined voting power, and the companies share management and operations. The filing identifies potential conflicts concerning pooling, reinsurance and shared expenses. A.M. Best affirmed the group’s A (Excellent) rating in March 2020 after revising the outlook to negative in February 2019.
- Donegal Mutual’s multiyear systems modernization could face cost, timing or performance challenges; workers’ compensation policies were scheduled to begin using new systems in 2020. The filing reports no significant cybersecurity breach known to management. Routine litigation was not expected to have a material adverse effect.
Most important facts to verify
- How sustainable the 2019 underwriting recovery is, especially given automobile combined ratios above 100% in both commercial and personal lines.
- Whether recent accident-year loss severity and reserve development remain favorable; review reserve triangles and reinsurance recoverables.
- How much reported earnings depended on the one-time DFSC gain and unrealized equity gains, versus recurring underwriting and investment income.
- Whether commercial growth can offset personal-lines contraction while maintaining pricing adequacy and agent retention.
- Renewal or replacement terms for the revolving credit facility, and the effect of regulated subsidiary dividends on parent-company cash needs.
- Progress, cost and operational impact of the systems modernization, and any change in the A.M. Best rating outlook.