Donegal (US:DGICA)2020-05-08 12:57Liability and Losses - Total liability for unpaid losses and loss expenses as of March 31, 2020, was $888,212,000, an increase from $869,674,000 as of December 31, 2019, representing a growth of approximately 2.5%[105] - The unpaid liability for commercial lines increased to $360,518,000 as of March 31, 2020, up from $346,823,000 at the end of 2019, indicating a rise of about 3.9%[105] - The total liability for unpaid losses and loss expenses includes both reported and unreported claims, with liabilities established to cover ultimate costs of settling all losses[98] - The establishment of appropriate liabilities for losses and loss expenses is inherently uncertain, with potential for adjustments based on new information and changing assumptions[100] - For every 1% change in loss and loss expense reserves, the effect on pre-tax results of operations would be approximately $5.2 million[99] - The average claim outstanding has gradually increased due to rising medical loss costs and increased litigation trends, contributing to greater uncertainty in future loss settlements[101] - The insurance subsidiaries have noted stable amounts in the number of claims incurred relative to their premium base, excluding severe weather events[101] Premiums and Income - The total net premiums written for the three months ended March 31, 2020, was $198,237,000, compared to $199,915,000 for the same period in 2019, reflecting a decrease of approximately 0.8%[111] - Net premiums earned for Q1 2020 were $187.3 million, a decrease of $820,464 or 0.4% from $188.1 million in Q1 2019[117] - Net premiums written for Q1 2020 were $198.2 million, a decrease of $1.7 million or 0.8% from $199.9 million in Q1 2019, with commercial lines increasing by $8.0 million or 7.1%[118] Ratios and Profitability - The statutory combined ratio, a measure of underwriting profitability, is calculated based on the statutory loss ratio, expense ratio, and dividend ratio, with a ratio below 100% indicating profitability[113] - The loss ratio for Q1 2020 was 62.6%, down from 65.5% in Q1 2019, with weather-related losses decreasing to $6.9 million from $9.7 million[121] - The combined ratio improved to 97.0% in Q1 2020 from 99.3% in Q1 2019, attributed to a decrease in the loss ratio[123] - The expense ratio for Q1 2020 was 33.4%, up from 32.6% in Q1 2019, due to higher underwriting-based incentive costs[122] - Net income for Q1 2020 was $3.7 million, or $0.13 per share, down from $23.0 million, or $0.82 per share, in Q1 2019[126] Investments - Net investment income increased to $7.4 million in Q1 2020 from $7.0 million in Q1 2019, primarily due to an increase in average invested assets[119] - Net investment losses for Q1 2020 were $10.7 million, compared to net gains of $18.1 million in Q1 2019, largely due to unrealized losses in equity securities[120] Dividends and Borrowings - The board declared quarterly cash dividends of 15.0 cents per share for Class A common stock and 13.25 cents for Class B common stock, payable on May 15, 2020[135] - The company had no outstanding borrowings under its line of credit as of March 31, 2020, with the ability to borrow up to $30.0 million[130] Risk Management - Market risk includes potential changes in the fair value of securities in the investment portfolio due to price and interest rate fluctuations, managed by aligning the average duration of the investment portfolio with liabilities[142] - No material changes in market risk exposure were reported from December 31, 2019, to March 31, 2020, aside from COVID-19 related fluctuations[143] Insurance Operations - The insurance subsidiaries utilize statutory accounting principles (SAP) for performance evaluation, focusing on net premiums written and statutory combined ratio[109] - The insurance subsidiaries provide property and casualty insurance coverages primarily billed directly to the insured, with a portion of commercial business billed through licensed insurance agents[139] - Atlantic States retains primary liability as the originating insurer, facing credit risk from business ceded to Donegal Mutual, supported by reinsurance agreements with major unaffiliated reinsurers[140] - Insurance premium rates are established without knowing the amount of unpaid losses, with efforts to anticipate inflation's impact on losses and expenses[141]