Donegal Group Inc. — 2023 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2023; it does not provide standalone fourth-quarter results. Donegal is a property-and-casualty insurance holding company operating through subsidiaries and affiliates in 23 states, primarily through independent agents. Its main businesses are commercial and personal insurance. Donegal Mutual controls approximately 71% of combined voting power and participates in a major reinsurance pooling arrangement with the Company.
Financial performance
| Metric | 2023 | 2022 |
|---|---|---|
| Total revenue | $927.3 million | $848.2 million |
| Net premiums earned | $882.1 million | $822.5 million |
| Net premiums written | $895.7 million | $843.5 million |
| Net investment income | $40.9 million | $34.0 million |
| Net investment gains (losses) | $3.2 million | ($10.2 million) |
| Income (loss) before tax | $5.1 million | ($3.6 million) |
| Net income (loss) | $4.4 million | ($2.0 million) |
| Diluted EPS, Class A / Class B | $0.14 / $0.11 | ($0.06) / ($0.07) |
| Operating cash flow | $28.6 million | $67.1 million |
| GAAP combined ratio | 104.4% | 103.3% |
- Net premiums written rose 6.2%. Personal lines increased 17.5% to $367.3 million, mainly from renewal rate increases and policy retention; commercial lines declined 0.5% to $528.4 million.
- The combined ratio above 100% indicates an underwriting loss. The SAP combined ratio was 104.2%, versus 103.3% in 2022. Commercial lines’ SAP combined ratio improved to 101.6% from 103.7%; personal lines worsened to 108.2% from 102.8%.
- The loss ratio increased to 69.1% from 68.6%, and the expense ratio rose to 34.7% from 34.1%. Favorable prior-year reserve development contributed $16.7 million, less than the $44.8 million benefit in 2022.
- Investment yield increased to 3.1% from 2.6%. The reported return to net income also reflected the swing from 2022 investment losses to 2023 investment gains.
- Stockholders’ equity was $479.7 million, down from $483.6 million; book value per share declined to $14.39 from $14.79. Dividends declared were $22.2 million, exceeding net income.
Financial position and liquidity
- At year-end, total assets were $2.27 billion, total liabilities $1.79 billion, and stockholders’ equity $479.7 million. Investments totaled $1.327 billion; 95.2% of debt securities were investment grade.
- Cash was $23.8 million and short-term investments were $32.3 million. Operating cash flow fell to $28.6 million, primarily due to higher claim-payment outflows.
- Borrowings were $35.0 million, an FHLB advance at 1.74% due August 2024. The Company had no borrowings on its $20.0 million M&T line of credit and could draw up to that amount.
- Gross loss and loss expense reserves were $1.126 billion, with $689.1 million net of reinsurance. Reinsurance recoverables were $437.0 million. Management estimates that a 1% change in net reserves would affect pretax results by approximately $6.9 million.
- Insurance subsidiaries had approximately $39.6 million of ordinary dividends available to the parent in 2024 without prior regulatory approval. Actual distributions remain subject to regulatory and business considerations.
Changes, outlook, and risks
- Management plans to continue personal-lines rate increases and manage exposures in 2024 to improve profitability. The Company has exited new commercial business and begun non-renewing existing commercial accounts in Georgia and Alabama, where it did not expect to meet profitability targets.
- Management expects to place greater emphasis on profitable commercial growth over time, while maintaining a profitable personal-lines book. It did not provide specific earnings, premium, or combined-ratio guidance.
- The multi-year systems modernization continued with two major releases in 2023. Remaining lines and legacy policy conversions are expected over the next two years. Allocated modernization costs are expected to peak at about 1.25 percentage points of the expense ratio in 2024, then gradually decline; $40.9 million of remaining system costs were to be allocated to subsidiaries over five years.
- Key risks include claim severity and social inflation, reserve-estimation uncertainty, weather catastrophes and climate-related exposure, reinsurance availability and counterparty risk, interest-rate and investment-credit risk, and competition. The company also depends on Donegal Mutual for shared services, technology, and pooling; its controlling ownership creates potential conflicts of interest.
- In 2023 the Company adopted expected-credit-loss accounting, reducing opening retained earnings by $1.9 million after tax; management said the adoption did not significantly affect results or cash flows. KPMG issued unqualified opinions on the financial statements and internal control; the audit identified loss reserves as a critical audit matter.
Important facts for investors to verify
- Whether rate increases and underwriting actions can improve personal-lines results and bring the combined ratio below 100%.
- Whether the favorable reserve development continues, and how actual loss emergence compares with the $689.1 million net reserve estimate and actuarial range.
- Whether claim severity, inflation, litigation, and weather losses remain elevated, and whether reinsurance protection is adequate and collectible.
- Whether technology modernization stays within expected timing and cost, including the forecast 2024 expense-ratio impact.
- How the August 2024 FHLB maturity is funded and whether subsidiary dividends support parent-company obligations and shareholder dividends.
- How investment income and unrealized fixed-maturity losses respond to interest-rate and credit-market changes.
- How affiliate pooling, expense allocations, and Donegal Mutual’s voting control affect the Company and minority shareholders.