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Donegal Group Estimates Catastrophe Loss, Sees Loss in Q2

Donegal Group Inc. DGICA DGICB has estimated a catastrophe loss of about $20.1 million in the second quarter of 2017. The insurer projects to incur loss between 7 and 9 cents per share in the same quarter.

The weather-related loss stemmed from severe wind and hail catastrophe events occurred in the second quarter. However, loss accumulations from these events did not exceed $5 million third-party catastrophe reinsurance retention of the company.  Notably, the company’s trailing five-year average for second-quarter weather-related losses is $10.5 million, far below what it expects to have incurred in second quarter of 2017.

Apart from weather-related losses, Donegal Group also incurred $7.6 million of large fire losses affecting the homeowners’ line of business significantly. The figure is visibly wider than $3.7 million incurred in the year-ago quarter.

The Zacks Consensus Estimate for the second quarter is currently pegged at a loss of 7 cents, representing the lower end of the company’s expectation. This reflects year-over-year decline of 122.58%.

The company is scheduled to report its second-quarter results today (Jul 19) before the market opens. However, our proven model does not conclusively show that the company is likely to beat on earnings this time. While a Zacks Rank #3 (Hold) increases the predictive power of ESP, an Earnings ESP of 0.00% makes the prediction difficult.

Being an insurer, Donegal Group is exposed to several catastrophe losses that in turn weigh on the underwriting results. In the first quarter, the company was hurt by higher-than-expected weather-related losses inducing combined ratio deterioration of 750 basis points.

Shares of Donegal Group have lost 14.02% year to date, underperforming the Property and Casualty Insurance industry’s gain of 5.08%. The company has also not witnessed any earnings momentum over the last 30 days.

Property and casualty insurer The Allstate Corp. ALL has estimated a catastrophe loss of $638 million during April and May. While Horace Mann Educators Corp. HMN has estimated to incur a pre-tax catastrophe loss between $31 million and $34 million for second-quarter 2017, Kemper Corporation KMPR has estimated to incur a pre-tax catastrophe loss between $32 million and $38 million.

The insurance industry has been building its capital reserve, courtesy benign catastrophe environment. We expect prudent underwriting standards to guard insurers from erosion of the same.

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