Donegal Group Inc. — Q3 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2023, with comparisons to the corresponding 2022 periods. Donegal Group writes personal and commercial property-and-casualty insurance through independent agents, alongside Donegal Mutual under a pooling arrangement. Its insurance subsidiaries’ results are shared with Donegal Mutual through the pool; the company reports commercial lines, personal lines and investment operations.
Financial and operating results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net premiums earned | $224.4 million | $206.1 million | $655.9 million | $609.5 million |
| Total revenue | $233.9 million | $212.8 million | $687.9 million | $624.8 million |
| Net investment income | $10.5 million | $8.6 million | $30.1 million | $24.6 million |
| Net income (loss) | $(0.8) million | $(10.4) million | $6.4 million | $(5.4) million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $26.0 million | $49.9 million |
| Combined ratio | 104.5% | 109.6% | 103.5% | 103.5% |
Premiums earned grew 8.9% in Q3 and 7.6% year to date. Net premiums written rose 6.3% in Q3 and 6.2% year to date; personal lines grew 17.7% and 17.2%, respectively, while commercial lines declined 1.8% in Q3 and 0.2% year to date. The 9-month statutory combined ratio was 102.9% (102.8% in 2022); a ratio above 100% indicates an underwriting loss. GAAP underwriting loss for the first nine months was $23.0 million.
For the first nine months, net investment gains were $0.9 million, compared with net investment losses of $10.8 million in 2022. Q3 investment losses were $1.2 million versus $2.4 million. The company reported comprehensive loss of $5.0 million for the first nine months, including $11.4 million of other comprehensive loss, primarily unrealized securities losses.
At September 30, total assets were $2.26 billion, total liabilities $1.79 billion, and stockholders’ equity $473.3 million, down from $483.6 million at year-end 2022. Cash was $23.7 million and investments totaled $1.31 billion. Debt included a $35.0 million FHLB advance at 1.74%, due August 2024; $4.5 million of additional FHLB borrowing capacity was reported. The company had no borrowings on its separate $20.0 million M&T credit line. Operating cash flow was lower year over year; investing activities used $17.9 million and financing activities used $9.5 million in the first nine months.
Material changes and management commentary
- Q3’s net loss narrowed substantially year over year, while the nine-month period moved from a loss to net income. Higher earned premiums and investment income contributed; the Q3 combined ratio improved to 104.5% from 109.6%.
- Q3 weather-related losses were $25.7 million, or 11.5 points of the loss ratio, above the company’s five-year Q3 average of 9.3 points and its highest quarterly impact in five years. Nine-month weather losses were $59.5 million, above the prior-year period and its five-year average.
- Favorable prior-year reserve development was $15.8 million for the first nine months, versus $30.6 million in 2022. Management attributed 2023 development mainly to lower-than-expected loss emergence or severity in commercial auto, personal auto and homeowners. Q3 favorable development was approximately $7.3 million.
- Management cited elevated labor, repair-part and material costs, rising claim severity, slower settlements and longer repair times. It also noted social inflation, litigation trends and weather as sources of uncertainty. Each 1% change in net loss reserves would affect pretax results by approximately $6.8 million.
- Technology and systems-modernization costs contributed to a slightly higher expense ratio. Commercial premium reductions reflect planned attrition in states targeted for exit or improved profitability and lower new business; personal growth reflects renewal increases and policy retention.
- In 2023, the company adopted expected-credit-loss accounting guidance, reducing retained earnings by $1.9 million after tax at adoption. At September 30, allowances included $1.4 million for held-to-maturity securities and $1.6 million for reinsurance receivables.
Outlook, risks and other matters
The filing provides no numerical earnings or premium guidance. Management said nine-month results are not necessarily indicative of full-year results. Key stated risks include inadequate pricing or underwriting performance, catastrophic weather, reserve uncertainty, inflation and litigation, reinsurance availability and collectability, investment-market and interest-rate movements, regulation, competition, and information-technology execution. Management reported no material change in market-risk exposure and no material change to the risk factors from the 2022 Form 10-K. No legal proceedings were reported.
On October 19, 2023, the board declared quarterly dividends of $0.17 per Class A share and $0.1525 per Class B share, payable November 15. Insurance subsidiaries paid $6.0 million in dividends to the parent during the first nine months; approximately $40.4 million was available for distribution without prior regulatory approval, subject to applicable restrictions. Donegal Mutual—not Donegal Group under its own repurchase program—purchased 185,017 Class A shares in August and September for an average $14.76 per share.
Important facts for investors to verify
- Whether recent rate increases and underwriting actions can bring combined ratios below 100%, particularly in personal auto, homeowners and commercial multi-peril.
- Whether reserve releases continue to support earnings and how claims inflation, litigation and slower settlements affect ultimate losses.
- Whether weather losses, reinsurance costs and reinsurance-receivable credit exposure remain manageable.
- The investment portfolio’s exposure to interest-rate and valuation changes: fixed maturities had substantial unrealized losses, including $166.7 million on securities in loss positions for more than 12 months.
- The filing’s cover page marks “No” for filing all required reports during the preceding 12 months; verify the status and context of that disclosure.