Donegal Group Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Donegal is a property and casualty insurer writing personal and commercial lines through independent agents, and holds a 48.2% interest in Donegal Financial Services Corporation (DFSC). Its insurance subsidiary Atlantic States shares pooled underwriting results with Donegal Mutual, 80% and 20%, respectively.
Financial performance
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total revenue | $166.1 million | $154.8 million; up 7.3% |
| Net premiums earned | $158.5 million | $146.5 million; up 8.2% |
| Net premiums written | $170.1 million | $156.6 million; up 8.6% |
| Income before tax | $16.0 million | $9.0 million |
| Net income | $11.85 million | $6.85 million |
| EPS | Class A: $0.46 basic and diluted; Class B: $0.42 | Class A: $0.26 basic, $0.25 diluted; Class B: $0.23 |
| Combined ratio | 94.0% | 98.8% |
| Operating cash flow | $12.25 million | $9.33 million |
- Commercial and personal statutory combined ratios were 88.0% and 95.6%, respectively, versus 95.1% and 98.4% a year earlier. Commercial automobile remained above 100% at 101.8%; personal automobile was 99.8%.
- Net investment income rose to $5.55 million from $4.95 million, while realized investment gains declined to $0.47 million from $1.05 million. Equity in DFSC earnings fell to $35,000 from $527,000.
- At March 31, total assets were $1.564 billion, investments $913.2 million, cash $32.4 million and stockholders’ equity $426.2 million. Total liabilities were $1.138 billion.
- Reported borrowings were $81.0 million: $46.0 million under the parent’s revolving credit facility and $35.0 million of Atlantic States FHLB advances. The parent had $14.0 million of remaining capacity; Atlantic States reported $3.1 million available under its FHLB facility. The M&T borrowing rate was 2.68%; FHLB advances carried 0.58%.
- Investing activities used $5.49 million and financing activities used $2.47 million. Cash increased by $4.29 million during the quarter. Cash dividends paid were $3.43 million.
Changes, outlook and risks
- Underwriting improved, with the combined ratio declining 4.8 percentage points. Management attributed premium growth to rate increases and increased commercial writings; improved loss experience, particularly in commercial multi-peril and homeowners, contributed to the lower loss ratio. Underwriting expenses rose, which management attributed partly to higher underwriting-based incentives.
- No earnings or full-year financial guidance was provided. Management cautioned that first-quarter results are not necessarily indicative of full-year results.
- Loss reserves remain a significant estimation risk. Management noted rising average outstanding claim amounts, litigation trends, medical costs and slower settlement rates. A 1% change in net loss and loss expense reserve estimates would affect pretax results by approximately $3.2 million.
- Reinsurance, catastrophe losses, investment valuation and credit risk, interest rates, competition, regulation, and adverse legal or economic developments are among the disclosed risks. The company reported no material changes in market-risk exposure or risk factors during the quarter.
- No investment impairment losses were recognized. Unrealized investment declines were assessed as temporary. Available-for-sale unrealized gains contributed to other comprehensive income of $3.96 million.
- A material weakness relating to accounting controls for a significant December 2015 share repurchase had been identified and corrected before issuance of the 2015 financial statements. Management reported remediation during Q1 2016 and concluded the weakness was remediated as of March 31, 2016; disclosure controls were considered effective.
- On April 21, 2016, the board declared quarterly dividends of $0.1375 per Class A share and $0.12 per Class B share, payable May 16, 2016. Insurance-subsidiary dividends to the parent are subject to regulatory and statutory-capital limits.
Important facts for investors to verify
- Whether the improved loss experience and 94.0% combined ratio persist, particularly in commercial automobile and personal automobile.
- Reserve development, claim severity and settlement trends, and the adequacy and collectability of reinsurance recoverables.
- Premium growth quality, including the contribution of rate increases versus new commercial business and the effect on retention and profitability.
- DFSC’s sharply lower contribution to earnings and the performance of the investment portfolio.
- Borrowing costs, facility availability, insurance-subsidiary dividend capacity and compliance with debt covenants and regulatory capital requirements.
- Whether the remediation of the share-repurchase accounting control weakness operates effectively in subsequent periods.