Donegal (DGICA) - 2019 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements The company presents its unaudited consolidated financial statements for the three and six months ended June 30, 2019 Consolidated Balance Sheets Total assets grew to $1.90 billion, driven by investments, with stockholders' equity increasing to $437.9 million Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 (Unaudited) | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $1,901,282 | $1,832,078 | | Total Investments | $1,075,428 | $1,030,798 | | Cash | $35,946 | $52,594 | | Total Liabilities | $1,463,429 | $1,433,208 | | Unpaid losses and loss expenses | $845,282 | $814,665 | | Unearned premiums | $535,999 | $506,529 | | Total Stockholders' Equity | $437,854 | $398,870 | Consolidated Statements of Income (Loss) The company achieved a significant turnaround to a net income of $27.8 million for the six-month period Three Months Ended June 30 (in thousands, except per share data) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Total Revenues | $198,789 | $195,790 | | Total Expenses | $193,251 | $197,123 | | Income (Loss) Before Tax | $5,538 | $(1,333) | | Net Income (Loss) | $4,788 | $(790) | | Diluted EPS (Class A) | $0.17 | $(0.03) | Six Months Ended June 30 (in thousands, except per share data) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Total Revenues | $413,503 | $385,118 | | Total Expenses | $381,120 | $414,987 | | Income (Loss) Before Tax | $32,383 | $(29,868) | | Net Income (Loss) | $27,812 | $(18,968) | | Diluted EPS (Class A) | $0.99 | $(0.68) | Consolidated Statements of Cash Flows Net cash from operations was $21.2 million for the first half of 2019, with an overall decrease in cash of $16.6 million Cash Flow Summary - Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $21,191 | $36,132 | | Net Cash from Investing Activities | $(6,615) | $(15,152) | | Net Cash from Financing Activities | $(31,225) | $(5,161) | | Net (Decrease) Increase in Cash | $(16,649) | $15,819 | Notes to Consolidated Financial Statements Key disclosures include the $12.7 million gain from the DFSC sale and favorable loss reserve development - On March 8, 2019, the company sold its 48.2% stake in Donegal Financial Services Corporation (DFSC), resulting in a pre-tax gain of $12.7 million in the first quarter of 2019[40][42] - The company's insurance subsidiaries and Donegal Mutual implemented a combined third-party reinsurance program effective January 1, 2019, with key retentions of $1.0 million for property and $2.0 million for casualty losses[55] - For the first six months of 2019, the company recognized a $6.9 million decrease (favorable development) in its liability for losses and loss expenses from prior years, a sharp contrast to the $26.2 million increase (adverse development) in H1 2018[91] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the improved financial results to a lower loss ratio and the gain from the DFSC sale Critical Accounting Policies and Estimates The liability for unpaid losses and loss expenses is identified as the most significant accounting estimate - The liability for unpaid losses and loss expenses is the company's most critical accounting estimate, where a 1% change in these net reserves would affect pre-tax operating results by approximately $4.9 million[107][111] Results of Operations Net income reached $27.8 million in H1 2019, with the combined ratio improving significantly to 100.7% GAAP Combined Ratios | Period | 2019 | 2018 | Change (bps) | | :--- | :--- | :--- | :--- | | Three Months Ended June 30 | 102.0% | 105.6% | -360 | | Loss ratio | 69.7% | 73.1% | -340 | | Expense ratio | 31.3% | 31.8% | -50 | | Six Months Ended June 30 | 100.7% | 112.4% | -1170 | | Loss ratio | 67.6% | 79.6% | -1200 | | Expense ratio | 32.0% | 32.1% | -10 | - For the first half of 2019, net premiums written increased 1.7% to $397.7 million, driven by a 13.1% increase in commercial lines offset by a 9.3% decrease in personal lines[139][141] - Net income for H1 2019 was $27.8 million, or $0.99 per Class A share, a significant improvement from a net loss of $19.0 million, or ($0.68) per Class A share, in H1 2018, positively impacted by a $12.7 million gain on the sale of DFSC[143][149] Liquidity and Capital Resources The company maintains strong liquidity through operating cash flows and access to a $30.0 million credit facility - Operating activities provided net cash flow of $21.2 million in the first six months of 2019, and the company has access to an undrawn $30.0 million line of credit[152][153] - The board declared quarterly cash dividends of 14.5 cents per Class A share and 12.75 cents per Class B share, with $30.9 million available for further distribution from insurance subsidiaries in 2019 without prior regulatory approval[159] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes to its market risk exposure from year-end 2018 - There have been no material changes to the company's quantitative or qualitative market risk exposure between December 31, 2018, and June 30, 2019[168] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2019 - Management, including the CEO and CFO, concluded that as of June 30, 2019, the company's disclosure controls and procedures were effective[169] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[170] PART II OTHER INFORMATION Item 1. Legal Proceedings The company reports no material legal proceedings during the period - None[174] Item 1A. Risk Factors No material changes to risk factors from the 2018 Annual Report on Form 10-K are reported - There have been no material changes in risk factors from those disclosed in the 2018 Annual Report on Form 10-K[175] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities or related use of proceeds - None[176] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including required certifications