Donegal Group Inc. — Q1 2022 Form 10-Q
Business context and period. Property-and-casualty insurer writing commercial and personal lines through independent agents. Results cover the three months ended March 31, 2022, compared with Q1 2021; balance-sheet comparisons are against December 31, 2021. The filing is unaudited. Donegal Mutual controls approximately 70% of the company’s voting power and shares management and operations with the insurance subsidiaries, including through a pooling arrangement.
Financial performance
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Total revenues | $207.6 million | $198.0 million; up 4.9% |
| Net premiums earned | $199.2 million | $187.3 million; up 6.4% |
| Net premiums written | $218.4 million | $215.9 million; up 1.2% |
| Net investment income | $7.9 million | $7.5 million |
| Net investment gains (losses) | $(0.1) million | $2.5 million |
| Income before tax | $16.2 million | $12.8 million |
| Net income | $13.1 million | $10.5 million |
| Diluted EPS, Class A / Class B | $0.43 / $0.39 | $0.35 / $0.32 |
| Operating cash flow | $20.7 million | $29.9 million |
Underwriting and margins. The GAAP combined ratio improved to 95.8% from 98.5% (below 100% generally indicates underwriting profitability). The GAAP loss ratio was 59.2%, versus 63.7%, while the expense ratio increased to 35.8% from 34.1%. GAAP underwriting income was $8.4 million, versus $2.8 million. Under statutory accounting, the total combined ratio improved to 94.1% from 96.5%; commercial lines were 93.5% versus 99.3%, while personal lines were 94.8% versus 92.6%. Net income was approximately 6.3% of revenue, compared with approximately 5.3%.
Balance sheet and liquidity. At March 31, total assets were $2.241 billion, total investments $1.271 billion, cash $56.1 million and stockholders’ equity $524.3 million. Equity declined from $531.0 million at year-end, principally alongside a $20.6 million after-tax other comprehensive loss from unrealized securities losses. Total liabilities were $1.716 billion. Borrowings included a $35 million FHLB advance at a fixed 1.74%, due August 2024; no borrowings were outstanding on the separate M&T line, which had $20 million of capacity. Operating cash flow remained positive but decreased year over year. The company reported no material capital expenditure commitments.
Material changes and management commentary
- Premiums earned increased primarily because Mountain States Insurance Group business entered the underwriting pool beginning with 2021-effective policies, alongside retention and renewal premium increases. Commercial lines premiums earned rose to $124.3 million from $109.2 million; personal lines declined to $74.9 million from $78.0 million.
- Q1 2022 prior-year reserve development reduced incurred losses by $16.5 million, versus $8.2 million in Q1 2021. Management attributed the favorable development mainly to lower-than-expected loss emergence or severity across most lines. Current-year incurred losses were $134.4 million, compared with $127.4 million.
- Weather losses were $8.0 million, or 4.0 points of the loss ratio, versus $6.8 million, or 3.7 points; Q1 2022 weather losses were below the company’s stated five-year first-quarter average of $10.3 million. Large homeowner fire losses rose to $6.2 million from $2.9 million.
- Higher agent and employee incentive costs and increased allocations of technology-modernization expenses contributed to the higher expense ratio. Interest expense decreased to $0.2 million from $0.3 million.
- The company recognized a $20.6 million other comprehensive loss, primarily reflecting unrealized holding losses on securities. Available-for-sale fixed maturities had a $16.9 million excess of amortized cost over fair value at quarter-end. Management classified the identified fixed-maturity unrealized losses as temporary and reported no investment impairment losses.
- The company received an $18.1 million Michigan Catastrophic Claims Association payment in March and subsequently paid the corresponding refunds to Michigan policyholders; the related receivable and payable were cleared from the year-end balance sheet.
Outlook, risks and contingencies
The filing provides no specific earnings or premium guidance. Management cautions that interim results are not necessarily indicative of full-year results. Key risks include reserve estimation uncertainty, claims severity and settlement delays, social and economic inflation, rising automobile and property repair costs, labor availability, litigation trends, severe weather, reinsurance availability and cost, investment-market fluctuations, and technology-system execution. Management estimates that a 1% change in net loss and loss expense reserves would affect pretax results by approximately $6.3 million. It also states that reserve assumptions may change and ultimate liabilities may differ from recorded amounts. The 2022 expected-credit-loss accounting standard was still under evaluation and is scheduled to apply to the company after December 15, 2022.
The board declared Q2 cash dividends of 16.50 cents per Class A share and 14.75 cents per Class B share, payable May 16, 2022. Insurance-subsidiary dividends are subject to regulatory and statutory-capital limits. No legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether favorable reserve development persists, and how claim severity, inflation and slower settlements affect future reserves and underwriting margins.
- Whether commercial-line growth and personal-line performance continue, including the effect of pricing, retention and the Mountain States pool contribution.
- Whether higher technology and incentive expenses continue to pressure the expense ratio.
- How rising interest rates and market movements affect investment values, accumulated other comprehensive income and capital; confirm that temporary unrealized losses do not become credit impairments or realized losses.
- Liquidity and capital resources, including the $35 million FHLB advance, available credit facilities, and the insurance subsidiaries’ capacity to upstream dividends while meeting regulatory requirements.
- The eventual impact of the expected-credit-loss accounting standard and the effectiveness and cost of the multi-year systems modernization.