Donegal Group Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparative figures are for Q1 2018 unless otherwise noted. Donegal is a property-and-casualty insurer operating through independent agents, with personal-lines, commercial-lines and investment segments. Figures below are unaudited.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $214.7 million | $189.3 million |
| Net premiums earned | $188.1 million | $181.8 million; up 3.5% |
| Net premiums written | $199.9 million | $195.3 million; up 2.4% |
| Net income (loss) | $23.0 million | $(18.2) million |
| EPS, Class A / Class B | $0.82 / $0.75 | $(0.66) / $(0.60) |
| Net cash from operating activities | $11.5 million | $11.6 million |
- Underwriting and margins: The GAAP combined ratio improved to 99.3% from 119.3%; the statutory combined ratio improved to 97.1% from 117.6%. GAAP underwriting income was $1.3 million, versus a $35.1 million loss. The expense ratio was essentially flat at 32.6%, compared with 32.5%.
- Line trends: Commercial-lines premiums earned were $91.5 million, up from $82.2 million; personal-lines premiums earned were $96.6 million, down from $99.5 million. Commercial-lines net written premiums rose 12.7%; personal-lines net written premiums fell 8.6%.
- Investment income and unusual gains: Net investment income increased to $7.0 million from $6.4 million. Net investment gains were $18.1 million, versus a $0.9 million loss, including a $12.7 million gain on the sale of Donegal Financial Services Corporation (DFSC) and approximately $6.0 million of equity-related gains.
- Losses and reserves: Net losses and loss expenses were $123.1 million, down from $156.6 million. Weather losses were $9.7 million, versus $13.7 million. Prior-year reserves developed favorably by $4.0 million, compared with $26.7 million of adverse development in Q1 2018.
- Balance sheet and liquidity: At March 31, total assets were $1.865 billion, total liabilities $1.436 billion and stockholders’ equity $429.2 million. Cash was $44.6 million; investments totaled $1.048 billion. Operating cash flow was $11.5 million. Cash declined $8.0 million during the quarter.
- Debt and available credit: The balance sheet reported $35.0 million of borrowings, down from $60.0 million at year-end; the company repaid $25.0 million during the quarter. The filing identifies $35.0 million of FHLB advances at 2.76%, with approximately $3.1 million of additional FHLB borrowing capacity. A new $30.0 million unsecured M&T revolving facility was undrawn at quarter-end and expires in July 2020. The company also had $5.0 million of subordinated debentures bearing 5.00% interest.
Changes, outlook and risks
- DFSC sale: Donegal and Donegal Mutual sold DFSC on March 8, 2019. Donegal received approximately $14.1 million in a pre-sale dividend and sale consideration valued at approximately $41.4 million, including cash and Northwest Bancshares stock; Donegal sold the stock during the quarter. The transaction generated the $12.7 million gain included in reported results.
- Management commentary: Premium growth reflected commercial rate increases, new commercial accounts and lower reinsurance premiums. Personal-lines contraction reflected underwriting actions, non-renewals of unprofitable business in seven states beginning in February 2019, and other factors; rate increases and lower reinsurance premiums partly offset the decline.
- Reserving risk: Management cautions that ultimate claims may differ from estimates. It cited rising average claim severity, litigation trends and slower reporting of liability claims as sources of uncertainty. A 1% change in net loss and loss-expense reserves would affect pretax results by approximately $4.9 million.
- Reinsurance: A consolidated third-party program took effect January 1, 2019. It includes excess-of-loss coverage above $1.0 million property and $2.0 million casualty retentions, and catastrophe coverage subject to a $10.0 million retention and $1.2 million annual aggregate deductible, up to $190.0 million per occurrence. Reinsurance collectability and catastrophe exposure remain relevant risks.
- Guidance and other disclosures: The filing provides no specific earnings or premium guidance. Management states Q1 results are not necessarily indicative of full-year results. It reported no material changes in risk factors or market-risk exposure, no legal proceedings, and effective disclosure controls.
- Capital returns: The board declared post-quarter dividends of $0.145 per Class A share and $0.1275 per Class B share, payable May 15, 2019. Insurance-subsidiary dividends are subject to regulatory and statutory-capital restrictions.
Key facts for investors to verify
- How much of the $23.0 million quarterly profit is attributable to the one-time DFSC sale gain and equity-security gains, rather than recurring underwriting and investment income.
- Whether improved loss ratios and favorable reserve development persist, particularly given the filing’s discussion of auto-claim severity, litigation and reporting delays.
- Whether commercial growth can offset planned personal-lines contraction while maintaining underwriting profitability.
- The nature, maturity and cost of the $35.0 million FHLB borrowing, and the company’s ongoing liquidity and access to credit.
- The assumptions behind loss reserves and reinsurance recoverables, including the adequacy and collectability of coverage after catastrophe losses.